<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 COMMISSION FILE NO. 0-12386
INCOMNET, INC.
--------------
(Exact name of registrant as specified in its Charter)
California 95-2871296
---------- ----------
(State of Incorporation) (IRS Employer Identification No.)
2801 Main Street, Irvine, CA 92614
----------------------------------
(Address of Principal Executive Offices)
(949) 224-7300
--------------
(Registrant's Telephone number, including area code)
21031 Ventura Blvd. #1100, Woodland Hills, CA 92614
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
--- ---
Number of shares of registrant's common stock outstanding as of
September 30, 1998...................................................20,000,000
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) September 30, December 31,
1998 1997
(unaudited)
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash & cash equivalents $ 1,331 $ 776
Accounts receivable, less allowance for doubtful accounts of
$2,830 at Sept. 30, 1998 and $2,764 at Dec. 31, 1997 9,204 13,850
Notes receivable -- 237
Notes receivable from employees & shareholders, net of reserves
of $816 at Sept. 30, 1998 and $378 at Dec. 31, 1997 -- 840
Inventories -- 315
Other current assets 557 876
--------- ----------
Total current assets 11,092 16,894
Property, plant and equipment, at cost, net (Note 8) 10,714 16,248
Goodwill, net 4,024 6,484
Investments and other assets 720 888
--------- ----------
Total assets $ 26,550 $40,514
========= ==========
</TABLE>
See accompanying "Notes to Consolidated Financial Statements."
2
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONT'D)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) September 30, December 31,
1998 1997
(unaudited)
---- ----
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $8,983 $ 9,792
Accrued expenses 6,621 7,366
Current portion of notes payable (Note 4) 8,719 9,383
Deferred income and other liabilities 4,155 1,989
--------- ----------
Total current liabilities 28,478 28,530
Long-term liabilities
Notes payable (Note 4) 1,481 2,855
Liabilities in excess of assets of Rapid Cast (Note 9) -- 3,600
Shareholders' equity/(deficit):
Preferred stock, no par value; 100,000 shares authorized;
2,045.1 shares issued and outstanding September 30, 1998 and
3,995 shares issued and outstanding at December 31, 1997
(liquidation preference of $2,134 at September 30, 1998) 1,676 3,758
Common stock, no par value; 20,000,000 shares
authorized; 20,000,000 shares issued and outstanding
at September 30, 1998 and 14,259,000 shares at
December 31, 1997 73,205 70,811
Treasury stock (5,492) (5,492)
Accumulated deficit (72,798) (63,548)
--------- ----------
Total shareholders' equity/(deficit) (3,409) 5,529
--------- ----------
Total liabilities & shareholders' equity/(deficit) $26,550 $ 40,514
========= ==========
</TABLE>
See accompanying "Notes to Consolidated Financial Statements."
3
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30,
<TABLE>
(DOLLARS IN THOUSANDS)
1998 1997
---- ----
<S> <C> <C>
SALES (Note 2) $ 12,931 $ 33,318
---------- ----------
OPERATING COSTS & EXPENSES:
Cost of sales 7,999 23,384
General & administrative 8,345 6,730
Depreciation & amortization 916 821
Bad debt expense 859 1,600
Impairment of long-lived assets (Note 8) 4,865 --
Other expense, net 1,712 11,238
---------- ----------
Total operating costs and expenses 24,696 43,773
Gain on sale of investment in Rapid Cast 2,700 --
Gain on reversal of liability in excess of assets of Rapid Cast (Note 9) 3,600 --
Loss on sale of AutoNETWORK (28) --
---------- ----------
Loss before income taxes (5,493) (10,455)
Income tax (benefits)/expense 48 (887)
---------- ----------
Net loss (5,541) $ (9,568)
========== ==========
BASIC AND DILUTED LOSS PER COMMON SHARE:
Net loss (Note 2) ($0.28) $ (0.70)
---------- ----------
Weighted average number of common shares outstanding 20,000,000 13,687,977
========== ==========
</TABLE>
See accompanying "Notes to Consolidated Financial Statements."
4
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
1998 1997
---- ----
<S> <C> <C>
SALES (Note 2) $ 47,982 $99,341
--------- ----------
OPERATING COSTS & EXPENSES:
Cost of sales 30,226 69,525
General & administrative 20,115 20,740
Depreciation & amortization 2,784 2,218
Bad debt expense 3,123 3,448
Impairment of long-lived assets (Note 8) 4,865 --
Other expense, net 2,453 11,297
---------- -----------
Total operating costs and expenses 63,566 107,228
Gain on sale of investment in Rapid Cast 2,700 --
Gain on reversal of liability in excess of assets of Rapid Cast (Note 9) 3,600 --
Gain on sale of AutoNETWORK 535 --
---------- -----------
Loss before income taxes (8,749) (7,887)
Income tax (benefits) (50) (679)
---------- -----------
Net loss $ (8,699) $ (7,208)
========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE:
Net loss $ (0.50) $ (0.53)
========== ===========
Weighted average number of common shares outstanding 17,504,000 13,687,977
========== ===========
</TABLE>
See accompanying "Notes to Consolidated Financial Statements."
5
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,699) $ (7,207)
Depreciation & amortization 2,784 2,524
Provisions for receivables, inventories and investments 833 --
Asset impairments 4,865 --
Disposal of assets 1,035 --
Sale of Rapid Cast stock (2,700) --
Sale of AutoNETWORK (535) --
Gain on reversal of liability in excess of assets of Rapid Cast (3,600) --
Other 110 --
--------- ----------
Net cash inflow/(outflow) from operating activities (5,907) (4,683)
CASH FLOWS FROM (INCREASE)/DECREASE
IN OPERATING ASSETS:
Accounts receivable 5,464 (5,777)
Notes receivable - current 265 (122)
Notes receivable - due from employees and shareholders -- (571)
Inventories 468 2,261
Other current assets 58 (1,486)
--------- ----------
Net cash inflow/(outflow) from changes in operating assets 6,255 (5,695)
CASH FLOWS FROM INCREASE/(DECREASE)
IN OPERATING LIABILITIES:
Accounts payable (808) (149)
Accrued expenses 2,039 (1,715)
Deferred income (707) (850)
--------- ----------
Net cash inflow/(outflow) from changes in operating liabilities 524 (2,714)
--------- ----------
Net cash inflow/(outflow) from operations 872 (13,092)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of plant and equipment (1,224) (3,725)
Goodwill from acquisition of GenSource -- (2,223)
Sale of Rapid Cast stock 1,500 --
Sale of AutoNETWORK 1,299 --
Liability in excess of assets of Rapid Cast -- 3,600
Investments and other assets 14 --
--------- ----------
Net cash inflow/(outflow) from investing activities $ 1,589 $ (2,348)
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable - current $ (1,531) $ --
Settlement of class action lawsuit -- 8,651
Sale of common stock, net 185 --
Preferred stock -- 1,343
Notes payable - long term (507) 4,391
Other - net (53) 10
--------- ----------
Net cash inflow/(outflow) from financing activities (1,906) 14,395
--------- ----------
Net cash inflow/(outflow) from investing and financing (317) 12,047
--------- ----------
Net increase/(decrease) in cash and cash equivalents 555 (1,045)
Cash at beginning of period 776 2,214
--------- ----------
Cash at end of period $1,331 $ 1,169
========= ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
The company recorded the following in connection with the
change in the method of accounting of Rapid Cast from the
consolidated to equity method
Accounts receivable $ (1,139)
Inventory (2,449)
Prepaid expenses and other (245)
Property and equipment - net (888)
Intangible assets (1,241)
Other assets (35)
Accounts payable 2,656
Accrued expenses 862
Notes payable 3,630
Cash received from Rapid Cast private placement 2,449
----------
$3,600
----------
----------
</TABLE>
See accompanying "Notes to Consolidated Financial Statements."
7
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
1. Management's Representation:
The management of Incomnet, Inc. (the "Company") has prepared the
consolidated financial statements included herein 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 pursuant to the regulations of the
SEC for presentation of interim period financial information in Form 10-Q.
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, except for non-recurring
items, including the gain on the sale of Rapid Cast stock, the gain on the
sale of AutoNETWORK, the gain on the reversal of the liability in excess of
assets of Rapid Cast, Inc. ("Rapid Cast"), and charges relating to asset
impairments. Management believes that the accompanying consolidated financial
statements present fairly the financial position of the Company and its
consolidated subsidiaries as of September 30, 1998, and the results of
operations for the three months and nine months ended September 30, 1998 and
1997, and cash flows for the nine months ended September 30, 1998 and 1997.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated audited financial statements and notes for
the three years ended December 31, 1997, included in the Company's Annual
Report on Form 10-K/A filed with the Securities and Exchange Commission on
April 30, 1998, as amended (the "1997 Annual Report"). The interim results
are not necessarily indicative of the results for a full year.
2. Summary of Significant Accounting Policies:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries, National
Telephone & Communications-TM-, Inc. ("NTC") and GenSource Corporation-TM-
("GenSource").
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. Long distance telephone service sales in the
three and nine months ended September 30, 1998 totaled $12.0 million and
$44.0 million, respectively, versus long distance telephone service sales of
$28.7 million and $83.5 million in the three and nine months ended September
30, 1997, respectively.
(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 account executive and training executive
renewals, and the Company's account executive and training executive
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 revenues when the cash is received. A portion of the revenues from
marketing related programs and materials is deferred and recognized over a
twelve-month period as the Company provides customer support to its
independent representatives. For the three and nine months ended September
30, 1998, marketing sales totaled $0.3 million and $1.5 million,
respectively, versus marketing sales of $3.6 million and $13.6 million for
the three and nine months ended September 30, 1997.
(3) Revenues from the Company's GenSource 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 accepted by customers. Revenues in the three and nine months
ended September 30, 1998 totaled $0.6 million and $2.1 million, respectively,
versus revenues of $0.6 million for the three months ended September 30,
1997. Since the Company acquired GenSource in May 1997, revenues for the five
months ended September 30, 1997 were $1.1 million. When maintenance or
custom programming fees are billed annually or received in advance, the
revenues are deferred and recognized when services are rendered.
8
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
CONCENTRATION OF CREDIT RISK - The Company sells its telephone, network
services and insurance-related software and related services to individuals
and small businesses throughout the United States and does not require
collateral. Reserves for uncollectible amounts are provided, which management
believes are sufficient.
COMPUTER HARDWARE, FURNITURE AND OFFICE EQUIPMENT - Computer hardware,
furniture and office equipment are stated at cost. Depreciation is provided
by the straight-line method over the assets' estimated useful lives of 3 to
10 years.
COMPUTER SOFTWARE - The Company capitalizes the costs associated with
purchasing, developing and enhancing its computer software. All software
costs are amortized using the straight-line method over the assets' estimated
useful lives of 3 to 10 years.
LEASEHOLD IMPROVEMENTS - All leasehold improvements are stated at cost and
are amortized using the straight-line method over the expected lease term.
The Company's new management is evaluating the utilization and carrying value
of $5.1 million of leasehold improvements at its headquarters in Irvine,
California. The Company expects to complete this evaluation in the 4th
Quarter of 1998.
NET LOSS PER SHARE - Net loss per common share, basic and diluted, is based
on the weighted average number of common shares outstanding. Common
equivalent shares have been excluded as their effect is anti-dilutive.
ACQUISITION AMORTIZATION - The excess of purchase price over net assets of
NTC have been recorded as an intangible asset and is being amortized by the
straight-line method over twenty years. In the three months ended September
30, 1998, the Company recorded a charge of $2.0 million associated with the
excess of purchase price over net assets of GenSource [see Note 8].
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.
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. In the three
months ended September 30, 1998, the Company recorded a charge of $4.9
million associated with the impairment of assets [see Note 8].
3. Funding of Marketing Commissions and Deferred Income:
The Company's subsidiary, NTC, maintains separate bank accounts for the
payment of marketing commissions. Funding of these accounts is adjusted
regularly to provide for management's estimates of required reserve balances.
NTC estimates the total commissions owed to active independent
representatives ("IR Earned Compensation") each week for all monies collected
that week due to the efforts of those active independent representatives.
All IR Earned Compensation is then paid to the independent representatives,
when due, directly out of the separate bank account.
4. Notes Payable:
Short-term and long-term notes payable consist of the following:
9
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
($ THOUSANDS)
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Short-term Notes Payable:
Notes payable to founding stockholders of GenSource,
interest at 8% $1,240 $ 373
Notes payable to bank for line of credit to NTC,
interest at prime plus 1.5%, due as current liability 6,911 8,440
Capitalized lease obligations 568 570
------- -------
Total Short-term portion of Notes Payable 8,719 9,383
------- -------
Long-term Notes Payable:
Notes payable to founding stockholders of GenSource,
interest at 8% 570 1,537
Capitalized lease obligations 911 1,318
------- -------
Total Long-term portion of Notes Payable 1,481 2,855
------- -------
Total Notes Payable $10,200 $12,238
======= =======
</TABLE>
Approximately $1.2 million in long-term notes owed to two former owners of
GenSource has been reclassified as short-term notes because the Company is in
default on paying the notes [see "Note 7. Commitments and Contingencies and
Item 1. Legal Proceedings - Lawsuit By Two Former Owners of GenSource
Corporation"]. Subsequent to September 30, 1998, NTC has made additional
payments on its notes payable to bank for line of credit, so that the remaining
balance as of November 13, 1998 is approximately $4.9 million.
5. Network Marketing Costs:
Marketing sales of $0.3 million and $1.5 million for the three and nine month
periods ended September 30, 1998, respectively, and $3.6 million and $13.6
million for the three and nine month periods ended September 30, 1997,
respectively, were generated by the sale of materials, training and support
services to assist NTC independent sales representatives in signing up new
retail customers and enrolling other representatives in the NTC program.
During the three and nine months ended September 30, 1998, NTC's net costs to
operate its network marketing program were $0.8 million and $2.3 million,
respectively, versus net costs of $0.7 million and $1.7 million for the three
and nine months ended September 30, 1997, respectively, as summarized below:
<TABLE>
<CAPTION>
3 Months Ended 3 Months Ended
($ MILLIONS) September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Marketing Sales $0.3 $ 3.6
------- -----
Cost of marketing sales 0.4 3.0
Operating expenses for support services 0.7 1.3
------- -----
Total marketing-related costs 1.1 4.3
------- -----
Net marketing cost $0.8 $ 0.7
===== =====
</TABLE>
10
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
% of total NTC (long distance &
marketing) sales 6.2% 2.2%
</TABLE>
<TABLE>
<CAPTION>
9 Months Ended 9 Months Ended
($ MILLIONS) September 30, 1998 September 30, 1997
------------------- ------------------
<S> <C> <C>
Marketing Sales $1.5 $ 13.6
------- -----
Cost of marketing sales 1.5 11.2
Operating expenses for support services 2.3 4.1
------- -----
Total marketing-related costs 3.8 15.3
------- -----
Net marketing cost $2.3 $ 1.7
===== =====
% of total NTC (long distance &
marketing) sales 4.8% 1.8%
</TABLE>
6. COMPENSATION OF INDEPENDENT SALES REPRESENTATIVES:
The Company's subsidiary, NTC, compensates its independent sales
representatives by an earned commission structure based upon signing up new
telephone customers and based upon the telephone usage generated by those
customers. In the three and nine months ended September 30, 1998, expenses
associated with commissions, bonuses and overrides paid to NTC's independent
representatives were $1.1 million and $3.9 million, respectively, versus
commissions, bonuses and overrides paid to NTC's independent representatives
of $4.4 million and $15.3 million, respectively, for the three months and
nine months ended September 30, 1997.
7. COMMITMENTS AND CONTINGENCIES:
LITIGATION - The Company is a defendant in a class action matter and related
lawsuits that were filed in 1995 and 1996 alleging securities violations with
respect to alleged false denial and non-disclosure of a Securities and
Exchange Commission investigation and alleged non-disclosure of purchases and
sales of the Company's stock by an affiliate of the former Chairman of the
Board. In October 1997, the Company reached a settlement of the class action
lawsuit and established a reserve of $8.65 million associated with the
settlement. In September 1998, the Company's new management renegotiated the
settlement on more favorable terms [see "Item 1. Legal Proceedings - Class
Action and Related Lawsuits"]. The proposed settlement has not received final
Court approval and, unless the Company receives additional financing, it may
be unable to make the payment required by the proposed settlement.
Accordingly, there are no assurances that the settlement will be completed as
proposed. As a result, no changes have been made to the reserve provided in
anticipation of the settlement. It does not appear that the Company or NTC
has any insurance in place to cover either the cost of the class action
matter and related lawsuits or other pending and threatened litigation or the
cost of their potential losses. The Company is unable to estimate the outcome
of its other lawsuits and is unable to predict a range of potential loss.
Accordingly, no amounts have been provided for these additional lawsuits in
the accompanying financial statements.
WORLDCOM CONTRACT - Since September 1995, the Company's subsidiary, NTC, has
had a carrier contract with WorldCom Network Services, Inc. ("WorldCom"). The
contract was renegotiated in October 1998 by the Company's new management.
The new contract has revised the former minimum purchase requirements in
excess of $1.1 billion and also revised wholesale rates. Under the new terms,
the Company has agreed to purchase $250 million in telephone service over a
three-year period, with the ability to extend the purchase requirement for an
additional two years if required. In February 1998, WorldCom extended credit
to NTC of up to $3 million at an
11
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
interest rate of 18% per annum by allowing NTC to deduct from payments owing
to WorldCom under terms of the old carrier contract. NTC is presently in
default on obligations to make payments of approximately $3.4 million. On
October 30, 1998, NTC and WorldCom entered into an agreement under which
WorldCom agreed to forbear from taking any action against NTC and also agreed
to reschedule the payment of amounts in default. Under the terms of the
forbearance agreement, WorldCom will have a first priority lien on NTC's
subscriber base and a second priority lien on accounts receivable as long as
the amount in default is outstanding. The forbearance and repayment schedule
are contingent upon the Company completing a $20 million secured financing
expected to be provided by Ironwood Telecom LLC ("Ironwood") by December 15,
1998 [see "Item 5. Other Information -Funding Commitment From Ironwood
Telecom"].
FIRST BANK LOAN - As of September 30, 1998, NTC was in default on a note to
First Bank & Trust of Newport Beach ("First Bank") of approximately $6.9
million. NTC has subsequently made several payments to First Bank that
reduced the note to approximately $4.9 million as of November 13, 1998. First
Bank has a first priority lien on the Company's accounts receivable until the
note is repaid. On October 30, 1998, the Company and First Bank reached an
agreement under which First Bank agreed to forbear from taking any action
against NTC until December 15, 1998. The forbearance and repayment schedule
are contingent upon the Company completing a $20 million secured financing
expected to be provided by Ironwood by December 15, 1998 [see "Item 5. Other
Information - Funding Commitment From Ironwood Telecom"].
NOTES TO FORMER OWNERS OF GENSOURCE CORPORATION -- In May 1997, the Company
entered into promissory notes to four former owners of GenSource associated
with the acquisition of GenSource in May 1997. The notes obligated the
Company to pay the four former owners an aggregate of $1.9 million over a
period of five years, plus interest of 8%, with payments commencing in May
1998. In June 1998, the Company defaulted on payments to two of the former
owners, who have filed a lawsuit against the Company seeking full payment of
their notes, which total approximately $1.2 million. The Company is presently
negotiating with the two former owners who have filed the lawsuit to resolve
the issue. There can be no assurances that there will be a favorable outcome
to these negotiations [see "Item 1. Legal Proceedings - Lawsuit From Former
Owners of GenSource"]. The Company is unable to estimate the outcome of this
lawsuit and is unable to predict a range of potential loss. Accordingly,
no amounts have been provided for this lawsuit in the accompanying financial
statements.
8. NON-RECURRING CHARGES:
In the three months ended September 30, 1998, the Company completed its
evaluation of the recoverability of certain long-lived assets at NTC and
GenSource. In connection with this evaluation, the Company has recorded a
$4.9 million non-cash write-down of the carrying value of certain long-lived
assets to their estimated fair value, consisting primarily of a write-off of
$1.6 million at NTC taken for leasehold improvements at one of its
facilities, and $3.2 million associated with GenSource, consisting primarily
of approximately $2.0 million of goodwill resulting from the Company's
acquisition of GenSource and $1.2 million of property, plant and equipment at
GenSource.
9. INVESTMENT IN UNCONSOLIDATED AFFILIATE:
In the three months ended September 30, 1998, the Company sold 4.5 million
shares of its investment in Rapid Cast for $2.7 million. Cash of $1.5 million
was received in August 1998 and cash of $1.1 million was received in October
1998. The remaining $0.1 million is to be received in November 1998. In 1997,
the basis for accounting for Rapid Cast was changed from the consolidation to
the equity method of accounting, when Incomnet's ownership interest
diminished from 51% to 33%. At that time, the liabilities of Rapid Cast
exceeded its assets, as recorded in the Company's consolidated balance sheet,
by approximately $3.6 million. Accordingly, this $3.6 million liability was
recorded in 1997. In the three months ended September 30, 1998, management
determined that it no longer believes that there would be any further
obligation of the Company to Rapid Cast and, in accordance with generally
accepted accounting principles for equity investments, the liability amount
of $3.6 million was reversed to income.
12
<PAGE>
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
10. YEAR 2000 COMPLIANCE:
The Company has completed a preliminary assessment for Year 2000 compliance
at its NTC and GenSource subsidiaries. The management of GenSource believes
that it has achieved Year 2000 compliance in its software products that are
currently offered for sale to its customers and has a plan in place to
achieve Year 2000 compliance for its internal operations. NTC has identified
the major applications and systems that must either be upgraded or replaced
in order to achieve Year 2000 compliance. A preliminary budget of $2.6
million has been established at NTC for the necessary changes [see "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Year 2000 Readiness Disclosure"]. The Company has recorded no
charge or reserve to achieve Year 2000 compliance and will recognize expense
associated with Year 2000 compliance as it occurs.
11. COMPREHENSIVE INCOME:
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"),
which establishes standards for reporting and displaying comprehensive income
and its components in the financial statements. For the three and nine month
periods ended September 30, 1998 and 1997, the Company did not have any
components of other comprehensive income as defined in SFAS 130.
12. SUBSEQUENT EVENTS:
FUNDING COMMITMENT FROM IRONWOOD TELECOM - On October 30, 1998, the Company
received a commitment letter from Ironwood to provide the Company with a
secured credit facility of $20 million less certain amounts to be loaned or
paid to third parties for the benefit of the Company. As part of the secured
credit facility, the Company has already received a bridge loan that is due
and payable on December 15, 1998 when the secured credit facility is expected
to be funded. Ironwood's commitment is subject to the completion of certain
conditions. If the secured financing is completed, the principal amount will
be due and payable on December 31, 2000 [see "Item 5. Other Information -
Funding Commitment From Ironwood Telecom."].
IRONWOOD LOAN TO CASEY; COHEN OPTION EXERCISE - In connection with the
exercise of an option to acquire preferred stock pursuant to a previous
agreement reached between the Company's Chairman, John P. Casey and certain
preferred stock owners on November 5, 1998, Ironwood loaned Mr. Casey
approximately $2.1 million, the proceeds of which were used to exercise the
option. The Company will either redeem the preferred stock on or before the
one-year anniversary of the date the Company's Articles of Incorporation are
amended to increase the number of authorized shares of common stock, if it is
financially able, or the preferred stock will be converted to common stock and
offered to the Company's shareholders on a pro-rata basis [see "Item 5. Other
Information - Ironwood Loan to Casey; Cohen Option Exercise"].
TRANSACTIONS WITH OTHER PREFERRED HOLDERS - On November 4, 1998, Ironwood
entered into transactions similar to the Casey Option transaction with five
others holders of preferred stock. Under these transactions, Ironwood paid
an aggregate amount of approximately $1.1 million to these five holders to
purchase shares of preferred stock convertible into an aggregate of
approximately 2.3 million shares of the Company's Common Stock or
approximately 7% of the Company's Common Stock on a fully diluted basis. The
Company will either redeem the preferred stock on or before the one-year
anniversary of the date the Company's Articles of Incorporation are amended
to increase the number of authorized shares of common stock, if it is
financially able, or the preferred stock will be converted to common stock and
offered to the Company's shareholders on a pro-rata basis [see "Item 5. Other
Information -Transactions with Other Preferred Holders"].
RENEGOTIATION OF SEVERANCE AGREEMENTS WITH FORMER MANAGEMENT; AMENDED EMPLOYMENT
AGREEMENT - On October 30, 1998 and November 1, 1998, the Company renegotiated
severance agreements with the Company's former President and Chief Executive
Officer, NTC's former President and Chief Executive Officer, NTC's former Senior
Vice President and Chief Financial Officer and with a present employee of the
Company. As a result of these negotiations, the Company's severance payments and
employment contractual commitments to those individuals were reduced [see "Item
5. Other Information -- Renegotiation of Severance Agreements With Former
Management; Amended Employment Agreement"].
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 and agency
regulation, inadequate capital, unexpected costs and operating deficits,
increases in general and administrative costs, lower sales and revenues than
forecast, loss of customers, loss of suppliers, technical problems with the
Company's products, failure to obtain new customers, litigation and
administrative proceedings involving the Company, including the pending class
action and related lawsuits, the possible acquisition of new businesses that
result in operating losses or that do not perform as anticipated, resulting
in unanticipated losses, inability of the Company to continue as a going
concern, adverse publicity and news coverage, inability to carry out
marketing and sales plans, loss of key executives, loss of independent sales
representatives, changes in interest rates, inflationary factors, default on
indebtedness and other specific risks that may be aluded to in this Quarterly
Report or in other reports issued by the Company. The inclusion of forward-
looking statements in this Quarterly Report 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.
GENERAL:
The Company has two subsidiaries, NTC and GenSource. NTC is engaged in the
business of providing discount long distance telephone communication services
to residential and commercial customers in the United States. GenSource is
in the business of developing and marketing software programs used to
administer insurance-related claims, such as workers' compensation and
short-term and long-term disability.
LOSSES AT NTC -- Beginning in August 1997, and continuing through the nine
months ended September 30, 1998, NTC has continued to experience declining
revenues due to losses in the number of telephone customers and the number of
active independent sales representatives. Those losses were the result of a
number of factors (the "NTC Loss Factors"), including the following:
- Sanctions imposed by the California Public Utilities Commission in the
first quarter of 1998 and related compliance obligations imposed under
a stipulation among NTC, the California Attorney General and the
Orange County District Attorney. The sanctions and compliance
obligations followed findings that NTC had engaged in unauthorized
switching of customers' interexchange carrier during 1997. The order
also required that several former senior executives and directors
leave the Company.
- NTC's failed attempt at a public offering of its common stock in
September 1997.
- The termination of the proposed sale of all or substantially all of
NTC's assets to a third party as previously disclosed in July 1998.
- The operational distraction caused by the Company's focus on the
failed IPO and sale of NTC,
14
<PAGE>
- The departure of Jerry Ballah, Christopher Mancuso and several key
independent sales representatives to form a competitive
telecommunications marketing company and their efforts to hire away
employees and to induce independent sales representatives and
telephone customers to leave NTC and join them in their new operations
[see "Item 1. Legal Proceedings - Lawsuit Against Jerry Ballah"].
- The financial difficulties at the Company and NTC as a result of the
above factors and the resulting issuance of a going concern opinion by
the Company's independent auditors in the 1997 Annual Report.
OPPOSITION TO THE SALE OF NTC; CASEY OPTION TO ACQUIRE PREFERRED STOCK -
During the second quarter of 1998, John P. Casey, a significant shareholder
of the Company, announced his opposition to the proposed sale of NTC. Mr.
Casey also announced that he was evaluating his options, including
replacement of a majority of the Company's then board members. By mid-July
1998, Mr. Casey owned 6.1 million shares of the Company's common stock,
representing 31% of the then outstanding shares, and acquired an option to
purchase 1,598 shares of preferred stock, or 78% of the Company's outstanding
convertible preferred stock (the "Cohen Preferred Stock"), from 13 holders
(collectively, the "Cohen Parties"). Mr. Casey attempted, but was not
successful, in obtaining the balance of the outstanding convertible preferred
stock (i.e., 445 shares or approximately 22% of the outstanding convertible
preferred stock (the "Other Preferred Shares")) from five additional owners
(the "Other Preferred Holders").
The Cohen Parties and the Other Preferred Holders (collectively, the "Preferred
Holders") had attempted to convert their preferred shares into common stock in
June 1998, when the Company's common stock price was in the range of $0.19 per
share. The Company did not have sufficient authorized common stock to effect
those conversions. If the Company had sufficient authorized common stock in
June 1998, the Preferred Holders would have received an aggregate of 11,387,806
shares of the Company's common stock, representing approximately 30% of the
Company's common stock on a fully diluted basis.
DEFAULTS ON NOTES TO FORMER OWNERS OF GENSOURCE -- In June 1998, the Company
defaulted on payments under promissory notes to two former owners of GenSource
and has not made any further payments to them under these notes. These two
noteholders have sued the Company seeking full payments under their notes of
$1.2 million [see "Item 1. Legal Proceedings - Lawsuit By Two Former Owners of
GenSource Corporation"].
NTC DEFAULTS - In August 1998, NTC received a notice from WorldCom, the
provider of NTC's telecommunications services, that WorldCom intended to
disconnect those services if certain conditions could not be satisfied and
defaults could not be cured. At the same time, NTC was in default on its
loan with its primary lender, First Bank. On August 27, 1998, WorldCom and
First Bank informed the Company and NTC that, as a condition to continuing
service and forbearance on amounts owed to them, they would require, among
other things, that the Company and its former Board of Directors enter into
an agreement with John Casey with respect to changing the composition of the
Company's Board of Directors.
THE BOARD CHANGE AGREEMENT - During August and September 1998, Mr. Casey
engaged in negotiations with the Company's board regarding a change in a
majority of the board members and management. Those negotiations resulted in a
Board Change Agreement that was consummated on September 29, 1998 (the "Board
Change Agreement") [see Item 5. Other Information - Change of Control of the
Company's Board of Directors and Chief Executive Officer"]. The Board Change
Agreement provided for the resignation of five of the Company's six directors
and the appointment of Mr. Casey and two of Mr. Casey's designees, John P. Hill,
Jr. and Michael A. Stein, as new directors. Howard Silverman agreed to continue
to serve as a director of the Company. Since the Board Change Agreement, the
new board appointed Denis Richard as the new President and Chief Executive
Officer of the Company and NTC. The new board appointed Mr. Richard and R.
Scott Eisenberg as additional board members.
15
<PAGE>
RECENT DEVELOPMENTS -- In the third quarter of 1998 and since the change in
composition of the Company's Board of Directors, the following improvements
have taken place in the Company's business activities and operations:
- On October 30, 1998, the Company received a commitment from Ironwood,
subject to certain conditions, to provide the Company with up to $20
million in a secured credit facility by December 15, 1998 [see "Item
5. Other Information - Funding Commitment From Ironwood Telecom"].
The proceeds from this financing principally will be used to satisfy
the Company's obligations to WorldCom and First Bank and pay
certain other accrued liabilities.
- In September 1998, the Company entered into a revised settlement
agreement in connection with its pending class action lawsuit on more
favorable terms than those proposed in the original settlement in
December 1997 [see "Item 1. Legal Proceedings. Class Action and
Related Lawsuits"]. This settlement is subject to final court
approval.
- In September 1998, the District Attorney of Orange County lifted a
restriction that required NTC to wait 24 hours before verifying that a
new customer wanted to sign up for NTC's telephone service. Lifting
this restriction has eliminated a major disadvantage that NTC had in
signing up new telephone customers.
- In July 1998, NTC settled a lawsuit with one of its leading former
representatives, who has rejoined the Company and is playing an
important role in the effort to revitalize NTC's network marketing
operations.
- In October 1998, NTC renegotiated its contract with WorldCom. The
renegotiation has resulted in a decrease of the "take or pay"
provisions of the contract from $1.1 billion to $250 million over a
three year period, with the ability to extend for two additional years
if necessary [see "Notes To Consolidated Financial Statements - Note
7. Commitments and Contingencies"]. The new contract also has resulted
in an immediate decrease in the Company's telephone rates, which have
been passed on to new customers through the introduction of new
marketing programs that management believes are among the most
competitive in the industry.
- NTC is taking steps to revitalize its network marketing organization,
including developing new telecommunications products that are more
competitive, working closer with its independent sales representatives
to help them better understand the products and services provided by
NTC, developing new commission and bonus programs that will make NTC
more competitive in attracting new independent sales representatives
and expanding its focus on recruiting representatives primarily from
Southern California to a nationwide focus. Management is hopeful that
the aggressive, new marketing plan will revitalize its recruiting
efforts for additional representatives.
- As a condition to obtaining financing from Ironwood, the Company has
renegotiated severance agreements with former executives of the
Company and NTC and with a present employee of the Company [see "Item
5. Other Information - Renegotiation of Severance Agreements With
Former Management; Amended Employment Agreement"]. These executives
have also agreed to terminate options to purchase stock from the
Company.
- John P. Casey and Ironwood purchased all of the outstanding
convertible preferred stock and associated rights from the Preferred
Holders under arrangements that require Mr. Casey and Ironwood to
hold the stock for approximately one year to enable the Company to
redeem such stock for a price representing no actual profit except,
in the case of Ironwood, for a carrying cost factor. That redemption
price is currently estimated at $3.9 million (the "Preferred Price").
The Company hopes to redeem the preferred stock, if financially able,
prior to expiration of the redemption period. Those transactions have
the effect of avoiding a dilution to the Company's shareholders of
more than 10 million shares, or approximately 28%, of the Company's
common stock on a fully-diluted basis. If the Company is not
financially able to redeem the preferred stock, Ironwood and Mr.
Casey are obligated to make the common
16
<PAGE>
stock underlying the Preferred Stock available for sale to
shareholders on a pro-rata basis at the Preferred Price [see
"Item 5. Other Information - Ironwood Loan to Casey; Cohen Option
Exercise and Transactions With Other Preferred Holders"].
- The Company is pursuing a variety of options in attempting to secure
additional sources of equity and debt financing to permit the Company
to meet its liquidity needs. The Company currently believes that it
will need to secure additional financing during the first quarter of
1999 to continue its operations [see "Liquidity and Capital Resources"
in this section].
LIQUIDITY AND CAPITAL RESOURCES:
Overall, the Company experienced positive cash flow of $0.6 million during
the nine months ended September 30, 1998, resulting from a cash inflow from
operations of $0.9 million and cash used in investing and financing
activities of $0.3 million. The Company, however, will need to raise
additional capital in 1998 and 1999 to repay obligations owing to WorldCom
and First Bank, to fund settlement costs related to pending litigation, to
pay off severance agreements to former management, to pay for costs incurred
associated with the change in the composition of the Company's Board of
Directors and to fund the cost of revitalizing the Company's business
operations.
SHORT-TERM FINANCING -- In September and October 1998, the Company sold 4.5
million shares of its holdings of 10.6 million shares of Rapid Cast, raising a
total of $2.7 million. The Company has no immediate plans to sell additonal
shares of Rapid Cast stock, although it may do so in the future to meet its
liquidity needs.
On November 4, 1998, the Company received a commitment from Ironwood Telecom
LLC to provide up to $20 million (less amounts loaned or paid to third
parties for the benefit of the Company) through a secured credit facility, a
portion of which the Company has already received in the form of a bridge
loan. The Company anticipates that the secured credit facility will be
funded on or before December 15, 1998 [see "Item 5. Other Information -
Funding Commitment From Ironwood Telecom"]. The funds from the secured credit
facility will be used principally to pay off WorldCom, First Bank and certain
other accrued liabilities. The remainder will be used to fund the Company's
operations. Completion of the secured credit facility is subject to a number
of conditions. No assurance can be given that the Company will be able to
complete the secured credit facility. If such facility is not completed, no
assurance can be given that the Company will be able to continue in operation
in the absence of such a facility.
LONG-TERM FINANCING - The secured credit facility to be provided by Ironwood
is designed to meet the Company's short-term financing needs. By the first
quarter of 1999, the Company anticipates that it will require additional
financing to revitalize its operations. To that end, the Company is taking
steps to arrange additional financing. Such financing may take the form of
either additional debt or equity. If the Company is successful in raising new
financing, the Company plans to use the proceeds to revitalize NTC's network
marketing organization, to develop new marketing channels and to introduce
new telecommunication products. The Company also anticipates selling its
remaining ownership of 6.1 million shares of Rapid Cast when appropriate,
although it presently has no specific plans to sell such shares.
There is no assurance that the Company and NTC will be able to raise
sufficient capital or financing to meet their needs through additional
sources of funding. There is no assurance that the Company will be able to
sell its shares in Rapid Cast, which is a privately held company.
Furthermore, there is no assurance that the Company will receive appropriate
financing to meet its needs even if NTC receives financing. Finally, there is
no assurance that the Company's revitalization plan will succeed even if the
Company obtains financing.
GENSOURCE CORPORATION - The Company is in default on promissory notes of
approximately $1.2 million to two former owners of GenSource. These former
owners have filed a lawsuit against the Company for failure to pay the notes
[see "Item 1. Legal Proceedings - Lawsuit By Two Former Owners of GenSource
Corporation"]. As part of ongoing discussions with these noteholders, the
Company is assessing various alternatives, including the possible disposition
of its interests in GenSource. In the nine months ended September 30, 1998, the
Company funded the development of GenSource's GenCOMP-TM- for Windows
workers' compensation claims administration software system. The development
of GenCOMP-TM- for Windows has been completed and the product is now actively
being sold by GenSource. The Company is negotiating with the former owners of
GenSource and with GenSource's management
17
<PAGE>
to determine the appropriate steps to resolve the situation regarding the
defaulted notes and the Company's commitment to GenSource as a subsidiary.
CAPITAL EXPENDITURES - The Company spent approximately $1.2 million in the
nine months ended September 30, 1998 for the acquisition of plant and
equipment at NTC and GenSource. To meets its capital needs for the future,
the Company believes that it will have to spend approximately $2.6 million in
the next 12 months to upgrade certain equipment and software used in its
operations. These upgrades will also assist the Company in meeting its Year
2000 compliance requirements. Because the Company presently does not have the
capital for such anticipated expenditures, it will have to receive loans to
finance these expenditures or to raise funds through the sale of equity
[see "Long-Term Financing" in this section].
YEAR 2000 READINESS DISCLOSURE -- Many existing computer systems and
applications use only two digits to identify a year in their respective date
fields without considering the impact of the upcoming change in the century.
These systems need to be corrected or replaced with systems that are Year
2000 ("Y2K") compliant.
GenSource has completed a preliminary assessment of its Y2K compliance.
Management of the Company's GenSource subsidiary, after completion of a Y2K
testing program, believes that it has achieved Y2K compliance in the software
products that are currently offered for sale to its customers and has taken
steps with its customers to have any required software patches or upgrades
installed on prior products sold. GenSource has also identified internal
systems that may require upgrades to be Y2K compliant and believes that such
related costs will not be material. GenSource has already contacted its key
software suppliers to receive information on their Y2K compliance plans. No
assurance can be given that a Y2K compliance problem will not be discovered
in the future relating to GenSource's current products, or to patches and
upgrades made on prior products sold.
The Company's NTC subsidiary has identified the major applications and
systems that must either be upgraded or replaced to better meet the needs of
NTC's operations and for Y2K compliance. These changes will result in a
combination of software and/or hardware upgrades or replacement. Several key
systems that must be addressed by NTC are: its internal financial system, the
billing and customer service system, the independent representative tracking
and commission system, the calling card system, the Local Exchange Carrier
("LEC") billing system, the internal corporate telephone exchange, the
security and HVAC systems at NTC's facilities, and other systems.
NTC has established a preliminary budget of $2.6 million for the necessary
changes identified to date. NTC has dedicated internal resources to the Y2K
problem and has acquired software upgrades to existing equipment. NTC is also
considering engaging an outside consulting firm to prepare a final assessment
and, possibly, to act as Y2K project manager. NTC has also begun discussions
with its key suppliers and vendors with respect to their own Y2K compliance
plans, including: WorldCom, its underlying carrier; USBI, a LEC billing
clearing house; and GTE and SBC Communications, with whom NTC has direct LEC
billing and collection agreements.
NTC intends to address its Y2K issues by upgrading or replacing its software
and hardware as required, as well as its non-information-technology systems.
However, there can be no assurance at this time that NTC will be able to make
any such changes, that any of NTC's systems or applications are or will be
Y2K compliant, that such upgrades will be completed on a timely basis at
reasonable costs, or that such upgrades will be able to anticipate and
correct all of the problems triggered by the actual impact of Y2K. There can
be no assurance, even if the Company and its subsidiaries achieve Y2K
compliance in their own products and services, that systems provided to the
Company by outside suppliers will be Y2K compliant. There also can be no
assurance that such impact will not result in a material disruption or have a
material adverse effect on the Company's business, results of operation or
financial condition.
The most likely worst case Y2K scenario at NTC which management has
identified to date is that, due to unanticipated Y2K compliance problems, NTC
may be unable to bill its customers, in full or in part, for services used.
Should this occur, it would result in a material loss of some or all gross
revenue to NTC for an indeterminable amount of time, which could cause NTC to
cease operations. The Company has not yet developed a contingency plan to
address this worst case Y2K scenario, but with new anticipated financing, the
Company plans to develop such a plan by September 1999.
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<PAGE>
CASH FLOW FROM OPERATIONS - The Company experienced $0.9 million in positive
cash flow from operations during the first nine months of 1998 compared to
$13.1 million in negative cash flow from operations during the prior year's
comparable period. This year-to-year increase in cash flow from operations
resulted primarily from (1) a net cash inflow of $6.3 million from changes in
operating assets, primarily $5.5 million from accounts receivable, which
decline in accounts receivable was caused by the NTC Loss Factors; (2) a net
cash inflow of $0.5 million from changes in operating liabilities, primarily
a cash inflow of $2.0 million from accrued expenses offset by cash outflows
of $0.8 million and $0.7 million, respectively, from accounts payable and
deferred income, which were caused by the NTC Loss Factors; and (3) a net
cash outflow of $5.9 million from other operating activities, primarily the
Company's net loss of $8.7 million, the sale of Rapid Cast stock of $2.7
million and the deferred gain from the write-off of Rapid Cast of $3.6
million, partially offset by asset impairment of $4.9 million, depreciation
and amortization of $2.8 million, and disposal of assets of $1.0 million.
CASH FLOW FROM INVESTING - The Company experienced a cash inflow from
investing activities of $ 1.6 million in the first nine months of 1998 as
compared with a negative cash flow of $2.3 million in the first nine months
of 1997. The positive cash flow in the first nine months of 1998 resulted
primarily from (1) a cash inflow of $1.3 million for the sale of the
Company's AutoNETWORK subsidiary in April 1998 and (2) a cash inflow of $1.5
million from the sale of 4.5 million shares of stock in Rapid Cast for $2.7
million in September 1998 versus a cash outflow of $1.2 million for the
acquisition of plant and equipment. The remaining $1.2 million for the sale
of Rapid Cast stock was booked as a receivable in September 1998, most of
which was received in October 1998.
CASH FLOW FROM FINANCING - The Company had negative cash flows from financing
activities of $1.9 million during the nine months ended September 30, 1998
compared with positive cash flow of $14.4 million during the nine months
ended September 30, 1997. The negative cash flow during the first nine
months of 1998 resulted primarily from repayments of short-term and long-term
debt, including a reduction in debt owed to First Bank from $8.4 million on
December 31, 1997 to $6.9 million on September 30, 1998 and a reduction in
long-term capital lease obligations from $1.3 million on December 31, 1997 to
$0.9 million on September 30, 1998.
LITIGATION - The Company is subject to pending litigation. Management is not
yet able to predict the impact of the pending litigation on its financial
condition and results of operations. Other pending litigation may have a
material adverse effect on the Company's financial condition and results of
operation [see "Part II. Item 1. Legal Proceedings"].
GOING CONCERN - As a result of the substantial net losses incurred by the
Company and its subsidiaries in 1997, and because its current liabilities
exceeded its current assets by $11.6 million on December 31, 1997, the
Company's independent certified public accountants stated in their report
included in the 1997 Annual report, that there is substantial doubt regarding
the Company's ability to continue as a going concern. Since current
liabilities exceeded current assets by $17.4 million as of September 30,
1998, the Company believes that its independent certified public accountants
would issue a similar going concern qualification regarding the Company's
financial condition if the accountants were engaged to review and report on
the Company's financial status.
RESULTS OF OPERATIONS:
SALES - Sales of $12.9 million in the third quarter ended September 30, 1998
decreased 61% versus sales of $33.3 million in the third quarter ended
September 30, 1997. For the nine months ended September 30, 1998, sales
decreased to $48.0 million from $99.3 million in the nine months ended
September 30, 1997, a decrease of 52%. This decrease was attributable to a
decrease in sales at NTC to $12.3 million in the three months ended September
30, 1998 from sales at NTC of $32.3 million in the three months ended
September 30, 1997. The decline in sales is primarily due to the NTC Loss
Factors which are discussed in more detail under "General" in this section.
For the nine months ended September 30, 1998, sales at NTC decreased to $45.4
million from $97.1 million in the nine months ended September 30, 1997, a
decrease of 53%. The following table summarizes the Company's sales
performance by subsidiary and segment during the comparable third quarters in
1998 and 1997:
19
<PAGE>
<TABLE>
<CAPTION>
$ in millions
----------------------
Subsidiary Segment 1998 1997
- - ------------ ----------------------------------------- ------- -------
<S> <C> <C> <C>
NTC Telephone (telecommunications services) $12.0 $ 28.7
NTC Telephone (marketing programs) 0.3 3.6
GenSource Software 0.6 0.6
AutoNETWORK Network -- 0.4
------ -------
Total Company Sales $12.9 $ 33.3
====== =======
</TABLE>
COST OF SALES - Total Company cost of sales decreased to $8.0 million or 62% of
sales during the quarter ended September 30, 1998 verses $23.4 million or 70% of
sales during the quarter ended September 30, 1997. For the nine months ended
September 30, 1998, cost of sales decreased to $30.2 million from $69.5 million
for the nine months ended September 30, 1997. The decrease in cost of sales
resulted largely from decreasing carrier costs associated with decreased
telephone service sales by NTC and decreasing commissions paid to NTC's
independent sales representatives.
The following table summarizes the Company's changes in three major cost
components for the three months ended September 30, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
($ in millions)
--------------------------
September September
30, 1998 30, 1997
----------- -----------
<S> <C> <C>
Commissions paid to NTC independent
sales representatives $ 1.1 $ 4.4
Carrier costs for NTC's long distance
telephone service 6.4 17.8
All other costs of sales 0.5 1.2
------- -------
Total Company Cost of Sales $ 8.0 $ 23.4
======= =======
</TABLE>
NTC's total commission expense decreased to $1.1 million in the third quarter
of 1998 compared to $4.4 million in the same quarter of 1997. The decrease in
commissions is directly related to the decline in NTC's telephone revenues to
$12.0 million and to the decline in NTC's marketing revenues to $0.3 million.
Representatives receive a percentage of long distance revenues in commissions
and receive bonuses when new independent sales representatives sign up a
certain number of new telephone customers. NTC's carrier costs to deliver
long distance telephone service to its telephone customers decreased to $6.4
million in the third quarter of 1998 compared to $17.8 million in the third
quarter of 1997. This decrease in carrier costs reflects a decline in sales.
In the third quarter of 1998, the gross margin for telecommunication services
was 47%, while in the third quarter of 1997, gross margin was 38%. The
increase in gross margin reflects improved margins on both domestic and
international rates.
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; and (2) GenSource's cost of producing
software products and related services.
GENERAL & ADMINISTRATIVE - Total general and administrative costs increased to
$8.3 million in the quarter ended September 30, 1998 or 64% of sales compared to
$6.7 million for the three months ended September 30, 1997 or 20% of sales.
General and administrative expenses were $20.1 million for the nine months ended
September 30, 1998 versus $20.7 million for the nine months ended September 30,
1997. General and administrative costs generally include the costs of employee
salaries, fringe benefits, supplies, and related support costs which are
required in order to provide such operating functions as customer service,
billing, marketing, product development, information systems, collections of
accounts receivable, and accounting. The increase in general and administrative
20
<PAGE>
costs in the current quarter were primarily attributable to expenses of
approximately $1.1 million incurred during the quarter by the Company associated
with the change in composition of the Company's Board of Directors [see "Item
5. Other Information - Change of Control of the Company's Board of Directors"]
and reserves of approximately $1.8 million for related expenses, including (1)
$1.1 million for legal and related expenses and (2) $0.2 million for the
severance agreement with the Company's former CEO.
Costs for salaries, fringe benefits, supplies and related support costs at
NTC decreased to $14.7 million in the nine months ended September 30, 1998
versus $19.5 million for the nine months ended September 30, 1997, a decrease
of 25%. In the three month ended September 30, 1998, salaries, fringe
benefits, supplies and related support costs at NTC decreased to $4.7 million
versus $6.5 million in the three months ended September 30, 1998, a decline
of 28%. This decrease reflects NTC's efforts to lower its overhead because of
decreasing sales.
DEPRECIATION & AMORTIZATION - Total Company depreciation and amortization
expense was $0.9 million in the third quarter ended September 30, 1998 versus
$0.8 million in the third quarter ended September 30, 1997. Depreciation and
amortization expense for the nine months ended June 30, 1998 was $2.8 million
versus $2.2 million for the nine months ended September 30, 1997. This
increase was caused by increased investment by NTC in computer hardware and
software, furniture and equipment, and leasehold improvements in 1997 prior
to a decline in its sales and by an increase in investment in computer
software and hardware by GenSource.
BAD DEBT EXPENSE - Total Company bad debt expense decreased to $0.9 million
in the third quarter of 1998 from $1.6 million in the third quarter of 1997,
a decrease of 44%. Bad debt expense for the nine months ended September 30,
1998 decreased to $3.1 million versus bad debt of $3.4 million for the nine
months ended September 30, 1997, a decrease of 8.8%. The decrease in bad
debt expense reflects declined level of telephone sales at NTC. Bad debt
expense in the third quarter of 1998 also includes $0.6 million associated
with the write-off of a loan to a former officer of NTC. As a percentage of
sales, bad debt expense for the nine months ended September 30, 1998 was 6.5%
of sales versus 3.5% of sales for the nine months ended September 30, 1997.
The increase in the percentage of bad debt expense in relationship to sales
is related primarily to the write-off of a loan to a former officer of NTC.
IMPAIRMENT OF LONG-LIVED ASSETS - In the three months ended September 30,
1998, the Company completed its evaluation of the recoverability of certain
long-lived assets at its NTC and GenSource subsidiaries. In connection with
this evaluation, the Company has recorded a $4.9 million non-cash write-down
of the carrying value of certain long-lived assets to their estimated fair
value. The write-offs include approximately $1.7 million at NTC, primarily
leasehold improvements at one of its facilities, and $3.2 million associated
with GenSource, consisting primarily of $2.0 million of goodwill resulting
from the Company's acquisition of GenSource and $1.2 million of property,
plant and equipment at GenSource.
OTHER EXPENSE - The Company's other expense was $1.7 million in the quarter
ended September 30, 1998 versus an expense of $11.2 million in the third
quarter of 1997. Other expense for the nine months ended September 30, 1998
was $2.5 million versus other expenses of $11.3 million for the nine months
ended September 30, 1997. Other expense in the third quarter ended September
30, 1998 consisted primarily of write downs of $1.1 million associated with
fixed assets and organization cost and interest expense of $0.5 million. For
the nine months ended September 30, 1998, other expense of $2.4 million
consisted primarily of $1.1 million associated with fixed assets and
organization cost, interest expense of $1.1 million and $0.2 million for a
legal settlement. For the nine months ended September 30, 1997, the $11.3
million in other expense was primarily related to a charge of $8.7 million
taken for the settlement of the class action lawsuit and $1.6 million for the
settlement of the civil consumer protection lawsuit against NTC.
OTHER - There were certain other non-recurring expenses in the quarter ended
September 30, 1998 that consisted primarily of a gain of $3.6 million
associated with the reversal of the liability in excess of assets related to
the Company's investment in Rapid Cast and a gain of $2.7 million associated
with the sale of Rapid Cast stock.
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NET LOSS - The Company had a net loss of $5.5 million for the three months
ended September 30, 1998 compared to a loss of $9.6 million for the three
months ended September 30, 1997. For the nine months ended September 30,
1998, the Company had a net loss of $8.7 million versus a net loss of $7.2
million in the nine months ended September 30, 1997. The net loss for the
nine months ended September 30, 1998 was due primarily to: (1) a charge of
$4.9 million associated with the impairment of assets at the Company's NTC
and GenSource subsidiaries; (2) a decline in sales at the Company's NTC
subsidiary that has resulted in operating losses at NTC; and (3) expenses
associated with the proposed sale of the Company's NTC subsidiary and the
change of in composition of the Company's Board of Directors [see "General" in
this section and "Item 5. Other Information - Change of Control of the
Company's Board of Directors"].
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION:
The investigation of the Company by the SEC has been settled with respect to
the Company and two former directors of the Company, Stephen A. Caswell and
Joel W. Greenberg. Mr. Caswell is presently employed by the Company. The
SEC's investigation with respect to the Company focused on press releases
issued by the Company on January 17 and 18, 1995, and September 6, 1995,
which the SEC alleged contained untrue statements of material fact, and a
report on Form 8-K issued by the Company on August 28, 1995, which the SEC
also alleged contained untrue statements of material fact. On May 14, 1998,
the Company, Mr. Caswell and Mr. Greenberg entered into an Offer of
Settlement and Order with the Securities and Exchange Commission pursuant to
which they agreed, without admitting or denying any wrongdoing, not to
violate Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-2,
13a-11 and 13a-13 thereunder of the Securities Exchange Act of 1934 as
amended. No civil penalties or other financial sanctions were imposed on any
of the parties. The final administrative order was entered by the SEC on July
30, 1998.
CLASS ACTION AND RELATED LAWSUITS:
The Company has been sued in a class action lawsuit entitled SANDRA GAYLES
ET AL., VS. SAM D. SCHWARTZ AND INCOMNET, INC., Case No. CV95-0399 AWT
(BQRx), initially filed in January 1995 in the United States District Court
for the Central District of California (the "Gayles Class Action Lawsuit").
The Gayles Class Action Lawsuit relates to claims alleging that the Company
violated certain sections of the federal securities laws because it did not
disclose and falsely denied the existence of the non-public investigation of
the Company commenced by the SEC in August 1994. The Gayles Class Action
Lawsuit also includes additional claims against Sam D. Schwartz, the
Company's former Chairman and Chief Executive Officer. The Gayles Class
Action Lawsuit is more fully described in the Company's 1997 Annual Report
under "Item 3. Legal Proceedings," which description is hereby incorporated
by this reference.
In September 1998, the Company entered into a new written settlement
agreement with the plaintiffs in the Gayles Class Action Lawsuit. The
settlement agreement is subject to court approval and satisfaction of certain
other conditions. The terms of the settlement include payment to the
plaintiffs of a total of $500,000, reimbursement of certain expenses up to a
maximum of $100,000 and issuance of a certain number of shares of the
Company's Common Stock based on a formula. The maximum number of shares of
Common Stock that will be issued in accordance with the formula under the
settlement agreement is 4,125,000, assuming a $1 per share trading price at
the time the formula is applied, and the minimum number of shares of Common
Stock that will be issued under the settlement agreement is 1,375,000 shares,
assuming a $3 per share trading price at the time the formula is applied.
Prior to completion of the settlement agreement and issuance of the shares in
accordance with that agreement, the Company's shareholders must approve an
amendment to the Company's Articles of Incorporation to increase the
authorized number of shares of Common Stock. It is anticipated that the
closing of the settlement agreement and issuance of shares will occur no
earlier than March 1999. No assurance can be given that the settlement
agreement will be consummated. Further, no assurance can be given that this
lawsuit will not have a material adverse impact on the business, financial
condition or results of operation of the Company.
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In a matter related to the claims alleged in the Gayles Class Action Lawsuit,
the Company was sued in an action entitled JAMES A. BELTZ, ET AL, VS. SAMUEL
D. SCHWARTZ AND RITA SCHWARTZ; INCOMNET, INC ET AL., filed in the United
States District Court, District of Minnesota in July 1997 and also filed as a
parallel action in the State Court of Minnesota (collectively, the "Beltz
Lawsuit"). The plaintiffs in the Beltz Lawsuit purportedly opted out of the
Gayles Class Action Lawsuit and brought similar claims against the Company
and its former Chairman and Chief Executive Officer, Mr. Schwartz. The Beltz
Lawsuit is more fully described in the Company's 1997 Annual Report under
"Item 3. Legal Proceedings," which description is hereby incorporated by this
reference. In addition, Mrs. Rita Schwartz has filed a lawsuit against the
Company alleging that she is entitled to reimbursement from the Company of
expenses she incurred in connection with the Beltz Lawsuit and the
above-described SEC investigation.
In September 1998, Mr. Caswell, Mr. Greenberg, Mr. Bodner and Mr. Huberfeld
were dismissed from the federal action in the Beltz Lawsuit, while the
Company was dismissed from all counts in the Beltz federal action except for
one count. The Company, Mr. Caswell, Mr. Greenberg, Mr. Huberfeld and Mr.
Bodner remain as defendants in the Beltz state court action. No assurance
can be given that the Beltz Lawsuit will not have a material adverse impact
on the business, financial condition or results of operation of the Company.
In another matter related to the claims alleged in the Gayles Class Action
Lawsuit, the Company was sued in an action entitled SILVA RUN WORLDWIDE
LIMITED VS. INCOMNET, INC., SAM D. SCHWARTZ ET AL., filed in the United
States District Court for the Southern District of New York in November 1996
(the "Silva Run Lawsuit"). In 1997, the claims against the Company and Mr.
Schwartz were transferred to the same court hearing the Gayles Class Action
lawsuit. The plaintiffs in the Silva Run Lawsuit purportedly opted out of the
Gayles Class Action Lawsuit and brought claims against the Company and Mr.
Schwartz based on alleged violations of the securities laws. The Silva Run
Lawsuit is more fully described in the Company's 1997 Annual Report under
"Item 3. Legal Proceedings," which description is hereby incorporated by
this reference.
On November 9, 1998, except for one breach of fiduciary duty claim, the court
dismissed all federal and state claims asserted by plaintiffs in the Silva
Run Lawsuit on the ground that the Silva Run plaintiffs had failed to
properly opt-out of the GAYLES Class Action Lawsuit.
In September 1998, Robert Zivitz and Nancy Zivitz, a former member of the
Company's Board of Directors filed a lawsuit against Sam D. Schwartz, Rita
Schwartz and Joel W. Greenberg, et al. in the United States District Court,
Northern District of Illinois. Mr. Schwartz is the former Chairman and Chief
Executive Officer of the Company, while Mrs. Schwartz and Mr. Greenberg are
former directors of the Company. The lawsuit alleges, among other things,
that defendants fraudulently promoted the Company's securities in 1995. The
Company is not named in the lawsuit. Mr. Schwartz, Mrs. Schwartz and Mr.
Greenberg have requested that the Company indemnify them from the claims
brought against them in this lawsuit and that the Company advance them legal
fees. The Company is presently reviewing the request for indemnification and
advancement of legal fees.
INCOMNET, INC. VS. SAM D. SCHWARTZ:
The Company filed a lawsuit in April 1997 in the Superior Court of California
in the County of Los Angeles against Sam D. Schwartz, the Company's former
Chairman and Chief Executive Officer, in an action entitled INCOMNET, INC.
VS. SAM D. SCHWARTZ (the "Schwartz Lawsuit"). The Schwartz Lawsuit is more
fully described in the Company's 1997 Annual Report under "Item 3. Legal
Proceedings," which description is hereby incorporated by this reference.
The Company claims in this lawsuit that Mr. Schwartz, among other things,
failed to disclose material information to the Company as required by law
that resulted in damages to the Company. The Company seeks to recover damages
from Mr. Schwartz in the amount of the losses incurred by the Company.
LAWSUITS BY FORMER INDEPENDENT SALES REPRESENTATIVES:
The Company is involved in three lawsuits by former independent sales
representatives filed in the Superior Court of California in the County of
Orange. The lawsuits allege that the Company and NTC breached various duties
and made material misrepresentations in its dealings with the plaintiffs
generally during the period from August 1993 to March 1998, and also allege
that the Company failed to pay certain commissions owed to the plaintiffs.
The lawsuits seek general damages, compensatory damages, special damages and
punitive damages. The Company believes that these claims are without merit
and plans to defend itself
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vigorously against the lawsuits. No assurance can be given that this lawsuit
will not have a material adverse impact on the business, financial condition
or results of operation of the Company.
LAWSUIT AGAINST JERRY BALLAH:
In July 1998, NTC sued a former consultant and others in the Orange County
Superior Court in a matter entitled NATIONAL TELEPHONE & COMMUNICATIONS, INC.
VS. JERRY BALLAH, WORLD TECHNOLOGIES MARKETING, INC., ET AL. (the "Ballah
Lawsuit"). The Ballah Lawsuit is more fully described under "Item 1. Legal
Proceedings" set forth in the Company's Form 10-Q for its fiscal quarter
ended June 30, 1998, as filed with the Securities & Exchange Commission on
August 14, 1998, which description is hereby incorporated by this reference.
In this lawsuit, NTC is asserting claims against Mr. Ballah and other
defendants for breach of contract, misappropriation of trade secrets,
intentional interference with business relationships, fraud and related
claims in connection with their start-up of a competing business and
solicitation of NTC's employees and independent sales representatives, as
well as the alleged diversion of NTC's telephone customers to businesses
owned or controlled by defendants. In a cross-complaint for damages, Mr.
Ballah alleges that NTC breached its consulting agreement with him and World
Technologies, Inc. ("World Tech") alleges that NTC breached an agreement
under which World Tech would become the exclusive network marketing company
for NTC.
On July 21, 1998, a stipulated restraining order was entered by the court
enjoining the defendants in the Ballah/Mancuso Lawsuit from directly or
indirectly attempting to induce any NTC employee or independent sales
representative to work or perform services for the defendants. NTC's motion
for preliminary injunction is currently scheduled for hearing in December
1998. NTC is subject to potential claims by Mr. Ballah [see "Part 1. Legal
Proceedings - Potential Lawsuits - Former Officers of NTC"].
LAWSUIT BY COMMUNICATIONS CONSULTING, INC.:
NTC has been sued in an action entitled COMMUNICATIONS CONSULTING, INC. VS.
NATIONAL TELEPHONE & COMMUNICATIONS, INC., filed June 1998 in the Superior
Court of California in the County of Orange (the "CCI Lawsuit"). The CCI
Lawsuit is more fully described under "Item 1. Legal Proceedings" set forth
in the Company's Form 10-Q for its fiscal quarter ended June 30, 1998, as
filed with the SEC on August 14, 1998, which description is hereby
incorporated by this reference. In the CCI Lawsuit, the plaintiff alleges
that NTC violated the terms of a consulting agreement entered into between
CCI and NTC on July 24, 1996. There has been no material change in the status
of this lawsuit.
LAWSUIT BY TWO FORMER OWNERS OF GENSOURCE CORPORATION:
On September 23, 1998, Jerry C. Buckley and Ralph Flygare, two former owners
of GenSource Corporation, filed a lawsuit entitled JERRY BUCKLEY, RALPH
FLYGARE ET AL VS. INCOMNET, INC., GENSOURCE CORPORATION AND MARK RICHARDSON,
in the Superior Court of the County of Los Angeles (the "GenSource Lawsuit").
In the GenSource Lawsuit, the plaintiffs allege that the Company defaulted on
payments under promissory notes between the Company and the plaintiffs, and
seek payment of approximately $1.2 million. The Company is presently
negotiating with the two former owners to resolve the claims alleged in the
lawsuit. There can be no assurances that there will be a favorable outcome to
these negotiations or that the lawsuit will not have a material adverse
impact on the business, financial condition or results of operations of the
Company.
POTENTIAL LAWSUITS:
From time to time, the Company is also involved in litigation arising from
the ordinary course of business, the ultimate resolution of which may or may
not have a material adverse effect on the business, financial condition or
results of operation of the Company.
On June 30, 1998, NTC terminated its employment agreement with Edward Jacobs
for cause. Mr. Jacobs has notified NTC that he intends to assert claims under
the employment agreement or other agreements between Mr. Jacobs and the
Company [see "Certain Relationships and Related Transactions - Settlement
Agreement With NTC
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Directors" in the Company's Proxy Statement, filed with the Securities and
Exchange Commission on November 19, 1997]. The Company believes that it has
adequate defenses against such potential claims and would defend itself
vigorously against such a lawsuit. There is no assurance that such a lawsuit
would not have a material adverse impact on the business, financial condition
or results of operation of the Company.
ITEM 2. CHANGES IN SECURITIES
On September 29, 1998, the Company granted: (1) 13 shares of a new class of
restricted convertible preferred stock to Denis Richard, the Company's
President and Chief Executive Officer, which is convertible into 1.3 million
shares of common stock (the "Richard Grant") [see "Item 5. Other Information -
Change of Control of the Company's Board of Directors; Appointment of New
Chief Executive Officer - Richard Employment Agreement"] and (2) an option to
purchase 75,000 shares of the Company's common stock at $2.00 per share
(i.e., the closing market price on September 29, 1998) to a consultant to the
Company (the "Consultant Option"). The shares of common stock issuable under
the Richard Grant and the Consultant Option are subject to approval of the
Company's shareholders of an increase in the number of authorized shares of
common stock (the "Stock Approval"). The Consultant Option may be exercised
at any time during the five-year period following Stock Approval.
On September 29 and October 2, 1998 the board approved the grant of an option
to purchase 10 shares of a new class of preferred stock to each of the
Company's new outside directors (the "Director Options"). The Director
Options vest over a two-year period. Each share of preferred stock is
convertible into 10,000 shares of common stock, subject to Stock Approval.
The exercise price for the Director Options was based on the closing price
for the Company's common stock at the time of the grants. In the case of
three directors that price is $2.1875 per share and in the case of the fourth
director that price is $2.25 per share. The options may be exercised over a
ten year period.
The Richard Grant, Consultant Option and Director Options were granted
pursuant to an exemption form registration under section 4(2) of the
Securities Act of 1933 on the basis that each of the recipients had the
appropriate investment intent and the offering was targeted to a select group
of officers, directors and one consultant.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NTC is in default on notes to WorldCom and First Bank & Trust and the Company
is in default on notes to two former owners of GenSource Corporation
[see Notes To Consolidated Financial Statement - Note 7. Commitments and
contingencies"]. The Company and NTC have reached agreement with WorldCom and
First Bank to repay amounts due, pending completion of a Term Loan to be
received from Ironwood Telecom LLC [see "Item 5. Other Information - Funding
Commitment From Ironwood Telecom"]. The Company is presently negotiating with
the former owners of GenSource regarding the repayment of their notes [see
"Item 1. Legal Proceedings - Lawsuit By Two Former Owners of GenSource
Corporation"].
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Item 4 is not applicable for the three months ended September 30, 1998.
ITEM 5. OTHER INFORMATION
CHANGE OF CONTROL OF THE COMPANY'S BOARD OF DIRECTORS; APPOINTMENT OF NEW CHIEF
EXECUTIVE OFFICER:
On September 30, 1998, the Company consummated a change in the composition of
the Company's Board of Directors in accordance with a Board Change Agreement
that was entered into on August 24, 1998 between John P. Casey and Incomnet's
former Board of Directors [see "Report on Form 8-K - Changes in Control of
Registrant, dated August 28, 1998 and filed with the Securities and Exchange
Commission on August 31, 1998]. A copy of the Board Change Agreement is attached
to the Form 8-K filed on August 31, 1998. The description of the Board Change
Agreement contained therein is hereby incorporated by reference into this
Quarterly Report on Form 10-Q.
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The Company's new Board of Directors consists of John P. Casey, Scott Eisenberg,
John Hill, Jr, Denis Richard, Dr. Howard Silverman and Michael A. Stein. Mr.
Casey is the Chairman of the Board. Denis Richard is the President and Chief
Executive Officer. As part of the Agreement, Richard Horowitz, Melvyn Reznick,
David Wilstein and Nancy Zivitz resigned from the Board of Directors. Melvyn
Reznick also resigned as President and Chief Executive Officer [see "Item 5.
Other Information - Renegotiation of Severance Agreements With Former
Management; Amended Employment Agreement"]. Mr. Casey is the largest shareholder
in the Company, owning approximately 31% of the outstanding shares of the
Company, not including shares of preferred Stock owned by Mr. Casey, which he is
required to hold for redemption or a rights offering. Mr. Richard was previously
Vice President, Law & Corporate Affairs of Teleglobe International Corporation,
and has over ten years of experience in the telecommunications industry.
RICHARD EMPLOYMENT AGREEMENT -- On September 29, 1998, the Company and NTC
entered into an employment agreement with Denis Richard (the "Richard
Employment Agreement"). The terms of the Richard Employment Agreement are
more fully described in the Company's Report on Form 8-K dated September 29,
1998, filed with the Securities and Exchange Commission on October 14, 1998
(the "October 1998 Form 8-K") under the caption "Item 5. Other Information --
Richard Employment Agreement". A copy of the Richard Employment Agreement is
attached to the October 1998 Form 8-K. The description of the Richard
Employment Agreement contained in, and the entire Richard Employment
Agreement attached to, the October 1998 Form 8-K is hereby incorporated by
reference into this Quarterly Report on Form 10-Q. The following summary of
the Richard Employment Agreement is qualified in its entirety by the full
text of that agreement contained in the October 1998 Form 8-K.
Under the Richard Employment Agreement, Mr. Richard agreed to serve as the
President and Chief Executive Officer of the Company and NTC. Mr. Richard is
also a director of Incomnet and the Chairman of the Board of NTC. During the
term of the agreement, which terminates on December 31, 2001, Mr. Richard
will receive an annual base salary of no less than $325,000. In addition,
Mr. Richard is entitled to receive a one-time signing bonus of $353,000 and
certain other fringe benefits. Mr. Richard is also entitled to certain
severance benefits if his employment is terminated without "Good Reason" as
defined in the Richard Employment Agreement.
Under the Richard Employment Agreement, the Company has agreed to issue to
Mr. Richard 13 shares of the Company's new series of Preferred Stock (the
"Richard Preferred Stock") as compensation to him, which will be convertible
into an aggregate of 1.3 million shares of the Company's Common Stock at
such time as the Company's Articles of Incorporation have been amended to
increase the authorized number of shares of the Company's Common Stock to
permit such conversion. The holder of the Richard Preferred Stock will be
entitled to vote with the holders of the Company's Common Stock on all
matters submitted to shareholders on an as-converted-to-Common basis (i.e.,
the right vote as if the shares of the Richard Preferred Stock were converted
into 1.3 million shares of Common Stock). Mr. Richard has certain rights to
require the Company to register the Common Stock issuable upon conversion of
the Richard Preferred Stock under the Securities Act of 1933, as amended,
following the first anniversary of the commencement of his employment with
the Company. The Company has a right of first refusal to purchase the shares
of the Richard Preferred Stock and the shares of the Company's Common Stock
issuable upon conversion thereof.
CASEY SERVICES AGREEMENT -- On September 29, 1998, the Company entered into
an agreement with Mr. Casey (the "Casey Services Agreement"). The terms of
the Casey Services Agreement are more fully described in the Company's
October 1998 Form 8-K under the caption "Item 5. Other Information -- Casey
Services Agreement". A copy of the Casey Services Agreement is attached to
the October 1998 Form 8-K. The description of the Casey Services Agreement
contained in, and the entire Casey Services Agreement attached to the October
1998 Form 8-K is hereby incorporated by reference into this Quarterly Report
on Form 10-Q. The following summary of the Casey Services Agreement is
qualified in its entirety by the full text of that agreement contained in the
October 1998 Form 8-K.
Under the Casey Services Agreement, Mr. Casey agreed to perform certain duties
as the Chairman of the Board of Directors of the Company. The term of the Casey
Services Agreement is three years ending on September 29, 2001. However, the
agreement does not obligate Mr. Casey to remain as Chairman of the Board nor
does it obligate the
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Company to retain Mr. Casey as Chairman of the Board. Under the Casey
Services Agreement, for so long as Mr. Casey acts as Chairman of the Board,
Mr. Casey will be entitled to a quarterly service fee based on a certain
formula derived from the fair market value of the Company's Common Stock at
the end of each fiscal quarter during the term of the agreement. Generally,
this formula will result in a $25,000 quarterly service fee payable to Mr.
Casey if the market price of the Common Stock is $4, and an additional
$25,000 for each additional $4 increase in the market price of the Common
Stock. The maximum fee Mr. Casey would be entitled to in any fiscal quarter
is $250,000. If Mr. Casey resigns or is not elected or otherwise retained by
the Company as Chairman of the Board during the term of the Casey Services
Agreement, he will not be entitled to any quarterly services fee after such
resignation or termination of services. Under the Casey Services Agreement,
Mr. Casey has waived any right to receive retainer fees, meeting fees or
other remuneration given to other directors of the Company.
DIRECTOR STOCK OPTION GRANTS -- On September 29, 1998, as part of the Change
of Control of the Company's Board of Directors, the new Board of Directors
granted an option to purchase 10 shares of a new series of the Company's
Preferred Stock to each non-employee director of the Company then in office
(i.e., options were granted to Mr. Hill, Dr. Silverman and Mr. Stein). On
October 2, 1998, the Board of Directors granted an option to purchase 10
shares of the Company's Preferred Stock to Mr. Eisenberg upon his appointment
to the Board of Directors (the options granted to Messrs. Hill, Eisenberg and
Stein and Dr. Silverman are referred to in this Current Report as the
"Nonemployee Director Options"). No options were granted to either Mr. Casey
or Mr. Richard.
The Nonemployee Director Options have a term of ten years and vest over a
two-year period. Each share of Preferred Stock will be convertible into
10,000 shares of the Company's Common Stock. Since all of the Company's
authorized Common Stock is currently issued and outstanding, the right to
convert the Preferred Stock into Common Stock is subject to the approval by
the Company's shareholders of an amendment to the Company's Articles of
Incorporation to increase the number of authorized shares of Common Stock
available for issuance.
For Mr. Hill, Dr. Silverman and Mr. Stein, the exercise price of each share
of Preferred Stock is $21,875, which represents $2.1875 per share of the
underlying Common Stock into which such Preferred Stock can be converted. The
exercise price for these options is based on the closing price per share of
the Company's Common Stock as reported by the Nasdaq Stock Market on the
second day following the announcement of the change in composition of the
Company's Board of Directors (October 1, 1998). For Mr. Eisenberg, the
exercise price of each share of Preferred Stock is $22,500, which represents
$2.25 per share of the underlying Common Stock into which such Preferred
Stock can be converted. The exercise price of Mr. Eisenberg's options is
based on the closing price per share of the Company's Common Stock as
reported by the Nasdaq Stock Market on the date of grant (October 2, 1998).
FUNDING COMMITMENT FROM IRONWOOD TELECOM:
On October 30, 1998, the Company received a commitment letter from Ironwood
Telecom LLC to provide the Company with a secured credit facility of $20
million, less the amount Ironwood would lend to Mr. Casey to exercise the option
to acquire the Cohen Preferred Stock (the "Casey Loan") and the amounts Ironwood
would pay to the Other Preferred Holders to acquire the Other Preferred Shares
for the benefit of the Company (the "Payments to Other Preferred Holders") [see
"Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation - The Change in Ownership of the Company's Common Stock"]. Under
the commitment letter, Ironwood agreed to provide an aggregate of $5 million by
November 4, 1998 and an additional net amount of $15 million by December 15,
1998 for these purposes. The amount provided to the Company on November 4, 1998
was in the form of a secured bridge loan (the "Bridge Loan"), and the amount to
be provided to the Company by December 15, 1998 will be in the form of a secured
term loan (the "Term Loan"), each of which is described below.
THE BRIDGE LOAN -- Ironwood loaned the Company approximately $2.3 million on
November 4, 1998 under the Bridge Loan (and loaned Mr. Casey approximately
$2.1 million under the Casey Loan and paid $600,000 to certain of the Other
Preferred Holders on or about the same date). The proceeds from the Bridge
Loan were used to make a partial payment of amounts in default owing by NTC
to WorldCom. The Bridge Loan accrues interest at the rate of 15% per annum
and principal and accrued interest is due on December 15, 1998. The Bridge
Loan is secured by the proceeds from any future sale of capital stock of
Rapid Cast currently owned by the Company as well as certain other assets of
the Company. For arranging the Bridge Loan and making the Casey Loan and
Payments to Other Preferred Holders for the benefit of the Company,
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Ironwood received an origination fee of $100,000 and warrants to purchase
500,000 shares of the Company's common stock at an exercise price of $1.00.
On November 16, 1998, Ironwood made an additional loan of $1 million to the
Company under the Bridge Loan, and Ironwood received warrants to purchase
100,000 shares of the Company's common stock at an exercise price of $1.00
relating to this loan. All of the warrants issued in connection with the
Bridge Loan have a five-year term. Completion of the Bridge Loan was
contingent upon satisfaction of a number of conditions, including (i)
renegotiation of severance and employment agreements with former management
on terms acceptable to Ironwood, (ii) reaching agreement with the Other
Preferred Holders on terms acceptable to Ironwood and (iii) reaching
agreement with WorldCom and First Bank to forbear taking action concerning
NTC defaults until at least December 15, 1998 on terms acceptable to
Ironwood. These conditions were satisfied prior to making the Bridge Loan.
THE TERM LOAN -- Upon satisfaction of certain conditions, Ironwood has agreed
to provide the Company with a Term Loan of $20 million, less the principal
amount of the Casey Loan and the Payments to Other Preferred Holders. The
Term Loan will bear interest at the rate of 12%, payable quarterly, and the
principal and any unpaid interest will be due on December 31, 2000. Proceeds
from the Term Loan will be used, among other things, to pay-off in full
amounts owing by NTC to First Bank, to make payments of all amounts in
default owing by NTC to WorldCom and for general corporate purposes. For
arranging the Term Loan, Ironwood will receive an origination fee of $400,000
and warrants in two tranches. The first tranche of warrants will entitle
Ironwood to purchase 2 million shares of the Company's Common Stock at an
exercise price of $1.00 per share. These warrants are exercisable
immediately and for a period of five years thereafter. The second tranche of
warrants will entitle Ironwood to purchase 1 million shares of the Company's
Common Stock at an exercise price of $2.25 per share. These warrants will be
exercisable on December 15, 1999 and for a period of five years thereafter.
The exercise price will be reduced and the number of warrants will be
increased on both tranches of warrants if the Company does not meet certain
performance targets in the fourth quarter of 1999 and 2000. The Term Loan
will be secured by substantially all of the assets of the Company and NTC.
Completion of the Term Loan is subject to several conditions, including the
dismissal or settlement of the Beltz and Silva Run lawsuits against the
Company on terms acceptable to Ironwood [see "Item 1. Legal Proceedings - Class
Action and Related Lawsuits"].
IRONWOOD LOAN TO CASEY; COHEN OPTION EXERCISE:
In connection with the exercise of an option (the "Cohen Option") to acquire
the Cohen Preferred Stock pursuant to a previous agreement reached between
Mr. Casey and the Cohen Parties, on November 5, 1998 Ironwood loaned Mr.
Casey approximately $2.125 million, the proceeds of which were used to
exercise the Cohen Option. The Casey Loan accrues interest at the rate of
18% per annum. Under the Board Change Agreement, Mr. Casey is obligated to
allow the Company to redeem the Cohen Preferred Stock at his acquisition cost
(approximately $2.4 million in the aggregate or $0.29 per share of Common
Stock after conversion) plus expenses, including the interest charged under
the Casey Loan. NTC has guaranteed the obligations of Mr. Casey under the
Casey Loan. If the Company is not able to redeem the Cohen Preferred Stock
by November 5, 1999, under the Board Change Agreement, these share will be
converted into Common Stock and offered for sale in a rights offering to the
Company's shareholders at a purchase price equal to Mr. Casey's acquisition
cost plus expenses. The Cohen Preferred Stock is convertible into approximately
8.5 million shares of the Company's Common Stock or 26% of the Company's Common
Stock on a fully diluted basis.
TRANSACTIONS WITH OTHER PREFERRED HOLDERS:
Ironwood entered into transactions similar to the Casey Option transaction
with five holders of Preferred Stock. Under these transactions, Ironwood
agreed to purchase shares of Preferred Stock convertible into an aggregate of
approximately 2.3 million shares of the Company's Common Stock or
approximately 7% of the Company's Common Stock on a fully diluted basis.
Ironwood paid an aggregate amount of approximately $1.1 million to these five
holders. Under the agreements between the Company and Ironwood, Ironwood is
obligated to allow the Company to redeem the Other Preferred Stock at its
acquisition cost (approximately $1.1 million in the aggregate or $0.51 per
share of Common Stock after conversion) plus expenses, including a carrying
charge of 18% per annum on the purchase price paid by Ironwood. If the
Company is not able to redeem the Other Preferred Stock by the one-year
anniversary of the date the Company's Articles of Incorporation are amended
to increase the number of authorized shares of common stock, under these
agreements, the Other Preferred Stock will be converted into Common Stock and
offered for sale in a rights offering to the Company's shareholders at a
purchase price equal to Ironwood's acquisition cost plus expenses. In
consideration for the settlement of certain claims against the Company, the
Company also issued warrants to purchase 244,870 shares of Common Stock to
two holders of Other Preferred
28
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Stock, exercisable at $1.00 per share. The Company has also granted to these
two holders registration rights which will require the Company to register
the Common Stock underlying these warrants under certain circumstances.
RENEGOTIATION OF SEVERANCE AGREEMENTS WITH FORMER MANAGEMENT; AMENDED EMPLOYMENT
AGREEMENT:
On September 29, 1998, the Company reached a severance agreement with its
former President and Chief Executive Officer (the "Former CEO") to settle the
terms of an employment agreement between the Company and the former CEO that
would have required the Company to pay an aggregate of $1.1 million over a
period of four years to fulfill terms of the contract. Under the terms of the
severance agreement, the former CEO agreed to voluntarily leave his position
at the Company in consideration for severance payments of up to $500,000 over
a two-year period and he retained approximately 337,000 stock options in the
Company. On November 2, 1998, the Company's new management renegotiated the
severance agreement with the Former CEO under which he agreed to reduce his
severance payments to $162,499, which will be paid in full on December 15,
1998. In addition, the Former CEO agreed to voluntarily terminate all of his
stock options, except for 50,000 stock options at an exercise price of $4.37
per share.
On July 1, 1998, NTC reached a severance agreement with its former President
and Chief Executive Officer (the "Former NTC CEO") to settle the terms of an
employment agreement between NTC and the former NTC CEO that would have
required NTC to pay an aggregate of $960,000 over a period of two years to
fulfill terms of the contract. Under terms of the severance agreement, the
former NTC CEO agreed to voluntarily leave his position at NTC in
consideration for severance payments of up to $240,000 over a one-year
period. On November 2, 1998, the Company's new management renegotiated the
severance agreement with the Former NTC CEO under which he agreed to reduce
his severance payments to $144,061, which will be paid in full on December
15, 1998. NTC has also agreed to pay the Former NTC CEO a lump sum of
$50,000, on or before July 1, 2000, if (1) the Company enters a merger in
which the Company or its shareholders retain less than 50% interest in the
new Company, (2) the Company sells substantially all of its assets or (3)
there is a public offering of the Company's common stock. In addition, the
Former NTC CEO agreed to terminate all of his stock options in NTC pursuant
to their terms in connection with his voluntary termination of employment
with NTC.
On July 1, 1998, NTC reached a severance agreement with its former Senior
Vice President and Chief Financial Officer (the "Former NTC CFO) to settle
the terms of an employment agreement between NTC and the former NTC CFO that
would have required NTC to pay an aggregate of $480,000 over a period of two
years to fulfill terms of the contract. Under terms of the severance
agreement, the former NTC CFO agreed to voluntarily leave his position at NTC
in consideration for severance payments of up to $120,000 over a one-year
period. On November 2, 1998, the Company's new management renegotiated the
severance agreement with the Former NTC CFO under which he agreed to reduce
his severance payments to $75,185, which will be paid in full on December 15,
1998. NTC has also agreed to pay the Former CFO a lump sum of $37,500, on or
before July 1, 2000, if (1) the Company enters a merger in which the Company
or its shareholders retain less than 50% interest in the new Company, (2) the
Company sells substantially all of its assets or (3) there is a public
offering of the Company's common stock. In addition, the Former NTC CFO
agreed to terminate all of his stock options in NTC pursuant to their terms
in connection with his voluntary termination of employment with NTC.
Under an Employment Agreement between the Company and Stephen A. Caswell, a
former officer of the Company and current employee (the "Caswell Employment
Agreement"), Mr. Caswell was entitled in October 1998 to severance in the
aggregate amount of approximately $260,000, if his employment was terminated
without cause. On October 30, 1998, the Company and Mr. Caswell agreed to
amend the Caswell Employment Agreement. Under terms of the amended Caswell
Employment Agreement, Mr. Caswell will continue to be employed by the Company
until April 30, 1999 at a rate of $10,000 per month, after which his
employment may be extended at the option of the Company for an additional 6
months or Mr. Caswell will receive a severance in the aggregate amount of
$30,000. Mr. Caswell also agreed to cancel all outstanding stock options
(90,000 option shares) he held in the Company.
LOAN BY THE COMPANY TO FORMER DIRECTOR:
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On November 5, 1996, the Company extended to a director of the Company a loan
of $265,000 at an interest rate of 10% per annum until January 15, 1997. The
loan was repaid in full, including interest, in July 1998 and the pledged
stock was returned to the director.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
<TABLE>
<C> <S>
3.1 Revised Bylaws of Incomnet, Inc., dated September 30, 1998.
10.1 Commitment Letter provided by Ironwood Capital LLC to Incomnet, Inc.,
dated October 30, 1998.
10.2 Bridge Loan and Security Agreement between Incomnet, Inc. and
Ironwood Telecom LLC, dated November 4, 1998.
10.3 Bridge Loan Note executed by Incomnet, Inc. in favor of Ironwood
Telecom LLC, dated November 4, 1998.
10.4 Warrant Agreement between Incomnet, Inc. and Ironwood Telecom LLC,
dated November 4, 1998.
10.5 Guaranty executed by National Telephone & Communications, Inc. in
favor of Ironwood Telecom LLC, dated November 4, 1998, relating to
Incomnet Inc.'s Bridge Loan Note.
10.6 Guaranty executed by National Telephone & Communications, Inc. and
Ironwood Telecom LLC, dated November 4, 1998, relating to Mr. Casey's
Secured Promissory Note.
10.7 Severance Agreement between Incomnet, Inc. and Melvyn Reznick,
dated September 29, 1998, and amendment thereto dated November 1,
1998.
10.8 Separation Agreement between Incomnet, Inc. and James Quandt, dated
July 1, 1998, and amendment thereto dated October 30, 1998.
10.9 Separation Agreement between Incomnet, Inc. and Victor Streufert,
dated July 1, 1998, and amendment thereto dated October 30, 1998.
10.10 Amendment to Employment Agreement between Incomnet, Inc. and Stephen
A. Caswell, dated October 29, 1998.
10.11 Settlement and Release Agreement Among Incomnet, Inc. and the Cohen
Parties, including Dr. Robert Cohen, Stefanie Rubin, Allyson Cohen,
Jeffrey Cohen, Jeffrey Rubin, Dr. Alan Cohen, Lenore Katz, Broadway
Partners and Meryl Cohen, custodian for Gabrielle Cohen, Erica Cohen,
Jaclyn Cohen and Nicole Cohen, dated November 5, 1998.
10.12 Settlement and Release Agreement Among Incomnet, Inc., Ironwood
Telecom LLC, Ellen Cohen and Martin Fabrikant, dated November 5, 1998.
10.13 Stock Purchase and Release Agreement Among Gary Kaplowitz, Alan
Rothstein, S&R Holdings, Ironwood Telecom LLC, Incomnet, Inc. and John
P. Casey, dated November 4, 1998.
10.14 Employment Agreement Between Incomnet, Inc. and Denis Richard, dated
September 29, 1998. Incorporated by reference as an exhibit to the
Company's Form 8-K, as filed with the Securities and Exchange
Commission on October 15, 1998.
10.15 Services Agreement Between Incomnet, Inc. and John P. Casey, dated
September 29, 1998. Incorporated by reference as an exhibit to the
Company's Form 8-K, as filed with the Securities and Exchange
Commission on October 15, 1998.
10.16 Board Change Agreement Among Incomnet, Inc., The Directors of
Incomnet, Inc. and John P. Casey, dated 28, 1998. Incorporated by
reference as an exhibit to the Company's Form 8-K, as filed with the
Securities and Exchange Commission on August 31, 1998.
10.17 Sublease Between National Telephone & Communications and Vision
Capital Services Corporation and Performance Capital Management, Inc.,
dated July 28, 1998.
</TABLE>
30
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27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K, FILED IN 1998:
<TABLE>
<C> <S>
20.1 Report on Form 8-K/A - Stock Purchase Agreements and Promissory Notes
Between Incomnet, Inc. and Jerry C. Buckley, Ralph Flygare, Robert
Reisbaum, E.V. Schmidt, Diane Orendorff and Nora Kenner Hoffberg,
dated April 25, 1997, filed with the Securities and Exchange
Commission on January 16, 1998.
20.2 Report on Form 8-K/A - Escrow Agreements Between Incomnet, Inc. and
Jerry C. Buckley, Ralph Flygare, Robert Reisbaum, and E.V. Schmidt,
dated April 25, 1997, filed with the Securities and Exchange
Commission on January 21, 1998.
20.3 Report on Form 8-K - Agreement To Sell The Assets of National
Telephone & Communications, Inc. (NTC) Between NTC and NTC
Acquisition, Inc., dated March 31, 1998, filed with the Securities and
Exchange Commission on April 9, 1998.
20.4 Report on Form 8-K - Conversion of Convertible Preferred Stock Into
The Company's Common Stock Shares, dated June 10 and June 11, 1998 and
filed with the Securities and Exchange Commission on June 17, 1998.
20.5 Report of Form 8-K - Changes in Control of Registrant, dated August
28, 1998 and filed with the Securities and Exchange Commission on
August 31, 1998.
20.6 Report on Form 8-K - Changes in Control of Registrant, dated September
29, 1998 and filed with the Securities and Exchange Commission on
October 15, 1998.
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INCOMNET, INC.
Date: November 16, 1998 /s/ Denis Richard
------------------- ------------------
President, Chief Executive Officer &
Interim Chief Accounting Officer
31
<PAGE>
Exhibit 3-1 -- Amended and Restated Bylaws of Incomnet, Inc. as of September
30, 1998
AMENDED AND RESTATED
BYLAWS
OF
INCOMNET, INC.
(As of September 30, 1998)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
ARTICLE I OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1. PRINCIPAL OFFICES. . . . . . . . . . . . . . . . . . . . . . 3
Section 2. OTHER OFFICES. . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE II MEETINGS OF SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . 3
Section 1. PLACE OF MEETINGS. . . . . . . . . . . . . . . . . . . . . . 3
Section 2. ANNUAL MEETINGS OF SHAREHOLDERS. . . . . . . . . . . . . . . 3
Section 3. SPECIAL MEETINGS . . . . . . . . . . . . . . . . . . . . . . 3
Section 4. NOTICE OF SHAREHOLDERS' MEETINGS.. . . . . . . . . . . . . . 3
Section 5. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE . . . . . . . . 4
Section 6. QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 7. ADJOURNED MEETING AND NOTICE THEREOF . . . . . . . . . . . . 4
Section 8. VOTING . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 9. WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDERS . . . . . 5
Section 10. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING . . 5
Section 11. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING, AND GIVING
CONSENTS. . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 12. PROXIES . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 13. INSPECTORS OF ELECTION. . . . . . . . . . . . . . . . . . . 6
ARTICLE III DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 1. POWERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 2. NUMBER OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . 8
Section 3. ELECTION AND TERM OF OFFICE OF DIRECTORS . . . . . . . . . . 8
Section 3A. NOMINATION OF DIRECTORS. . . . . . . . . . . . . . . . . . 9
Section 4. VACANCIES. . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 5. PLACE OF MEETINGS AND TELEPHONIC MEETINGS. . . . . . . . . . 9
Section 6. ANNUAL MEETINGS. . . . . . . . . . . . . . . . . . . . . . . 9
Section 7. OTHER REGULAR MEETINGS . . . . . . . . . . . . . . . . . . . 9
Section 8. SPECIAL MEETINGS . . . . . . . . . . . . . . . . . . . . . . 9
Section 9. DISPENSING WITH NOTICE . . . . . . . . . . . . . . . . . . . 9
Section 10. QUORUM. . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 11. ADJOURNMENT . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 12. NOTICE OF ADJOURNMENT . . . . . . . . . . . . . . . . . . . 10
Section 13. ACTION WITHOUT MEETING. . . . . . . . . . . . . . . . . . . 10
Section 14. FEES AND COMPENSATION OF DIRECTORS. . . . . . . . . . . . . 10
ARTICLE IV COMMITTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 1. COMMITTEES OF DIRECTORS. . . . . . . . . . . . . . . . . . . 10
Section 2. MEETINGS AND ACTION OF COMMITTEES. . . . . . . . . . . . . . 11
ARTICLE V OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
<PAGE>
Section 1. OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 2. ELECTION OF OFFICERS . . . . . . . . . . . . . . . . . . . . 11
Section 3. SUBORDINATE OFFICERS, ETC. . . . . . . . . . . . . . . . . . 11
Section 4. REMOVAL AND RESIGNATION OF OFFICERS. . . . . . . . . . . . . 11
Section 5. VACANCIES IN OFFICES . . . . . . . . . . . . . . . . . . . . 12
Section 6. CHAIRMAN OF THE BOARD. . . . . . . . . . . . . . . . . . . . 12
Section 7. PRESIDENT. . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 8. VICE PRESIDENTS. . . . . . . . . . . . . . . . . . . . . . . 12
Section 9. SECRETARY. . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 10. CHIEF FINANCIAL OFFICER . . . . . . . . . . . . . . . . . . 12
ARTICLE VI INDEMNIFICATION AND INSURANCE. . . . . . . . . . . . . . . . . . 13
ARTICLE VII RECORDS AND REPORTS . . . . . . . . . . . . . . . . . . . . . . 14
Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER . . . . . . . . 14
Section 2. MAINTENANCE AND INSPECTION OF BYLAWS . . . . . . . . . . . . 14
Section 3. MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. . . . 14
Section 4. INSPECTION BY DIRECTORS. . . . . . . . . . . . . . . . . . . 15
Section 5. ANNUAL REPORT TO SHAREHOLDERS. . . . . . . . . . . . . . . . 15
Section 6. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . 15
Section 7. ANNUAL STATEMENT OF GENERAL INFORMATION. . . . . . . . . . . 16
ARTICLE VIII GENERAL CORPORATE MATTERS. . . . . . . . . . . . . . . . . . . 16
Section 1. RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. . . . 16
Section 2. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. . . . . . . . . . 16
Section 3. CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED. . . . . . 16
Section 4. CERTIFICATES FOR SHARES. . . . . . . . . . . . . . . . . . . 16
Section 5. LOST CERTIFICATES. . . . . . . . . . . . . . . . . . . . . . 16
Section 6. REPRESENTATION OF SHARES OF OTHER CORPORATIONS . . . . . . . 17
ARTICLE IX AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 1. AMENDMENT BY SHAREHOLDERS. . . . . . . . . . . . . . . . . . 17
Section 2. AMENDMENT BY DIRECTORS . . . . . . . . . . . . . . . . . . . 17
ARTICLE X GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 1. GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . 17
Section 2. CONSTRUCTION AND DEFINITIONS . . . . . . . . . . . . . . . . 17
</TABLE>
2
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ARTICLE I
OFFICES
PRINCIPAL OFFICES. The Board of Directors shall fix the location of the
principal executive office of the corporation at any place within or outside the
State of California. If the principal executive office is located outside this
state, and the corporation has one or more business offices in this state, the
Board of Directors shall likewise fix and designate a principal business office
in the State of California.
OTHER OFFICES. The Board of Directors may at any time establish branch or
subordinate offices at any place or places where the corporation is qualified to
do business
ARTICLE II
MEETINGS OF SHAREHOLDERS
PLACE OF MEETINGS. Meetings of shareholders shall be held at any place within
or outside the State of California designated by the Board of Directors. In the
absence of any such designation, shareholders' meetings shall be held at the
principal executive office of the corporation.
ANNUAL MEETINGS OF SHAREHOLDERS. The annual meeting of shareholders shall be
held each year on a date and at a time designated by the Board of Directors. At
each annual meeting directors shall be elected and any other proper business may
be transacted.
SPECIAL MEETINGS. A special meeting of the shareholders may be called at any
time by the Board of Directors, or by the Chairman of the Board, or by the
President, or by one or more shareholders holding shares in the aggregate
entitled to cast not less than 10% of the votes at any such meeting.
If a special meeting is called by any person or persons other than the
Board of Directors, the request shall be in writing, specifying the time of such
meeting and the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the Chairman of the Board, the President, any
Vice President or the Secretary of the corporation. The officer receiving such
request forthwith shall cause notice to be given to the shareholders entitled to
vote, in accordance with the provisions of Sections 4 and 5 of this Article II,
that a meeting will be held at the time requested by the person or persons
calling the meeting, not less than thirty-five (35) nor more than sixty (60)
days after the receipt of the request. If the notice is not given within twenty
(20) days after receipt of the request, the person or persons requesting the
meeting may give the notice. Nothing contained in this paragraph of this
Section 3 shall be construed as limiting, fixing or affecting the time when a
meeting of shareholders called by action of the Board of Directors may be held.
NOTICE OF SHAREHOLDERS' MEETINGS. All notices of meetings of shareholders shall
be sent or otherwise given in accordance with Section 5 of this Article II not
less than ten (10) nor more than sixty (60) days before the date of the meeting
being noticed. The notice shall specify the place, date and hour of the meeting
and (i) in the case of a special meeting, the general nature of the business to
be transacted, or (ii) in the case of the annual meeting those matters which the
Board of Directors, at the time of giving the notice, intends to present for
action by the shareholders. The notice of any meeting at which directors are to
be elected shall include the name of any nominee or nominees which, at the time
of the notice, management intends to present for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect financial
interest, pursuant to Section 310 of the Corporations Code of California, (ii)
an amendment of the Articles of Incorporation, pursuant to Section 902 of such
Code, (iii) a
3
<PAGE>
reorganization of the corporation, pursuant to Section 1201 of such Code,
(iv) a voluntary dissolution of the corporation, pursuant to Section 1900 of
such Code, or (v) a distribution in dissolution other than in accordance with
the rights of outstanding preferred shares pursuant to Section 2007 of such
Code, the notice shall also state the general nature of such proposal.
MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any meeting of
shareholders shall be given either personally or by first-class mail or
telegraphic or other written communication, charges prepaid, addressed to the
shareholder at the address of such shareholder appearing on the books of the
corporation or given by the shareholder to the corporation for the purpose of
notice. If no such address appears on the corporation's books or has been so
given, notice shall be deemed to have been given if sent by first-class mail or
telegraphic or other written communication to the corporation's principal
executive office, or if published at least once in a newspaper of general
circulation in the county where such office is located. Notice shall be deemed
to have been given at the time when delivered personally or deposited in the
mail or sent by telegram or other means of written communication.
If any notice addressed to a shareholder at the address of such
shareholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the shareholder
at such address, all future notices or reports shall be deemed to have been duly
given without further mailing if the same shall be available to the shareholder
upon written demand of the shareholder at the principal executive office of the
corporation for a period of one year from the date of the giving of such notice.
An affidavit of the mailing or other means of giving any notice of any
shareholders' meeting shall be executed by the Secretary, Assistant Secretary or
any transfer agent of the corporation giving such notice, and shall be filed and
maintained in the minute book of the corporation.
QUORUM. The presence in person or by proxy of the holders of a majority of the
shares entitled to vote at any meeting of shareholders shall constitute a quorum
for the transaction of business. The shareholders present at a duly called or
held meeting at which a quorum is present may continue to do Business until
adjournment, notwithstanding the withdrawal of enough shareholders to leave less
than a quorum, if any action taken (other than adjournment) is approved by at
least a majority of the shares required to constitute a quorum.
ADJOURNED MEETING AND NOTICE THEREOF. Any shareholders' meeting, annual or
special, whether or not a quorum is present, may be adjourned from time to time
by the vote of the majority of the shares represented at such meeting, either in
person or by proxy, but in the absence of a quorum, no other business may be
transacted at such meeting, except as provided in Section 6 of this Article II.
When any meeting of shareholders, either annual or special, is
adjourned to another time or place, notice need not be given of the adjourned
meeting if the time and place thereof are announced at a meeting at which the
adjournment is taken, unless a new record date for the adjourned meeting is
fixed, or unless the adjournment is for more than forty-five (45) days from the
date set for the original meeting, in which case the Board of Directors shall
set a new record date. Notice of any such adjourned meeting, if required, shall
be given to each shareholder of record entitled to vote at the adjourned meeting
in accordance with the provisions of Sections 4 and 5 of this Article 11. At
any adjourned meeting the corporation may transact any business which might have
been transacted at the original meeting.
VOTING. The shareholders entitled to vote at any meeting of shareholders shall
be determined in accordance with the provisions of Section 11 of this Article
II, subject to the provisions of Sections 702 to 704, inclusive, of the
Corporations Code of California (relating to voting shares held by a fiduciary,
in the name of a corporation or in joint ownership). Such vote may be by voice
vote or by ballot; provided, however, that all elections for directors must be
by ballot upon demand by a shareholder at any election and before the voting
begins. Any shareholder entitled to vote on any matter (other than the election
of directors) may vote part of the shares in favor of the proposal and refrain
from voting the remaining shares or vote them against the proposal, but, if the
shareholder fails to specify the number of shares such shareholder is voting
affirmatively, it will be conclusively presumed that the shareholder's approving
vote is with respect to all shares such shareholder is entitled to vote. If a
quorum is present,
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the affirmative vote of the majority of the shares represented at the meeting
and voting on any matter (other than the election of directors), provided
that the shares voting affirmatively must also constitute at least a majority
of the required quorum, shall be the act of the shareholders, unless the vote
of a greater number or voting by classes is required by the California
General Corporation Law or the Articles of Incorporation.
At a shareholders' meeting involving the election of directors, no
shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a
number of votes greater than the number of the shareholder's shares) unless such
candidate or candidates' names have been placed in nomination prior to
commencement of the voting and a shareholder has given notice prior to
commencement of the voting of the shareholder's intention to cumulate votes. If
any shareholder has given such notice, then every shareholder entitled to vote
may cumulate such shareholder's votes for candidates in nomination and give one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which such shareholder's shares are
entitled, or distribute the shareholder's votes on the same principle among any
or all of the candidates, as the shareholder thinks fit. The candidates
receiving the highest number of votes, up to the number of directors to be
elected, shall be elected.
WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDERS. The transactions of any
meeting of shareholders, either annual or special, however called and noticed,
and wherever held, shall be as valid as though had at a meeting duly held after
regular call and notice, if a quorum be present either in person or by proxy,
and if, either before or after the meeting, each person entitled to vote, not
present in person or by proxy, signs a written waiver of notice or a consent to
a holding of the meeting, or an approval of the minutes thereof. The waiver of
notice or consent need not specify either the business to be transacted or the
purpose of any annual or special meeting of shareholders, except that if action
is taken or proposed to be taken for approval of any of those matters specified
in the second paragraph of Section 4 of this Article II, the waiver of notice or
consent shall state the general nature of such proposal. All such waivers,
consents or approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
Attendance of a person at a meeting shall also constitute a waiver of
notice of such meeting, except when the person objects, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened, and except that attendance at a meeting is not a waiver of
any right to object to the consideration of matters not included in the notice
of the meeting if such objection is expressly made at the meeting.
SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action which may
be taken at any annual or special meeting of shareholders may be taken without a
meeting and without prior notice, if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding shares having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted. In the case of election of directors, such consent shall be
effective only if signed by the holders of all outstanding shares entitled to
vote for the election of directors; provided, however, that a director may be
elected at any time to fill a vacancy not filled by the directors by the written
consent of the holders of a majority of the outstanding shares entitled to vote
for the election of directors. All such consents shall be filed with the
Secretary of the corporation and shall be maintained in the corporate records.
Any shareholder giving a written consent, or the shareholder's proxy holders, or
a transferee of the shares or a personal representative of the shareholder or
their respective proxy holder, may revoke the consent by a writing received by
the Secretary of the corporation prior to the time that written consents of the
number of shares required to authorize the proposed action have been filed with
the Secretary.
If the consents of all shareholders entitled to vote have not been
solicited in writing, and if the unanimous written consent of all such
shareholders shall not have been received, the Secretary shall give prompt
notice of the corporate action approved by the shareholders without a meeting.
Such notice shall be given in the manner specified in Section 5 of this Article
II. In the case of approval of (i) contracts or transactions in which a
director has a direct or indirect financial interest, pursuant to Section 310 of
the Corporations Code of California, (ii) indemnification of agents of the
corporation, pursuant to Section 317 of such Code, (iii) a reorganization of the
corporation, pursuant to Section 1201 of such Code, or (iv) a distribution in
dissolution other than in accordance with the rights of outstanding preferred
shares pursuant to Section 2007 of such Code, such notice shall be given at
least ten (10) days before the consummation of any such action authorized by any
such approval.
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RECORD DATE FOR SHAREHOLDER NOTICE, VOTING, AND GIVING CONSENTS. For purposes
of determining the shareholders entitled to notice of any meeting or to vote or
entitled to give consent to corporate action without a meeting, the Board of
Directors may fix, in advance, a record date, which shall not be more than sixty
(60) days nor less than ten (10) days prior to the date of any such meeting nor
more than sixty (60) days prior to such action without a meeting, and in such
case only shareholders of record at the close of business on the date so fixed
are entitled to notice and to vote or to give consents, as the case may be,
notwithstanding any transfer of any shares on the books of the corporation after
the record date fixed as aforesaid, except as otherwise provided in the
California General Corporation Law.
If the Board of Directors does not so fix a record date:
(a) The record date for determining shareholders entitled to
notice of or to vote at a meeting of shareholders shall be at the close of
business on the business day next preceding the day on which notice is
given or, if notice is waived, at the close of business on the business day
next preceding the day on which the meeting is held.
(b) The record date for determining shareholders entitled to
give consent to corporate action in writing without a meeting, (i) when no
prior action by the Board has been taken, shall be the day on which the
first written consent is given, or (ii) when prior action of the Board has
been taken, shall be at the close of business on the day on which the Board
adopts the resolution relating thereto, or the sixtieth (60th) day prior to
the date of such other action, whichever is later.
PROXIES. Every person entitled to vote for directors or on any other matter
shall have the right to do so either in person or by one or more agents
authorized by a written proxy signed by the person and filed with the Secretary
of the corporation. A proxy shall be deemed signed if the shareholder's name is
placed on the proxy (whether by manual signature, typewriting, telegraphic
transmission or otherwise) by the shareholder or the shareholder's attorney in
fact. A validly executed proxy which does not state that it is irrevocable
shall continue in full force and effect unless (i) revoked by the person
executing it, prior to the vote pursuant thereto, by a writing delivered to the
corporation stating that the proxy is revoked or by a subsequent proxy presented
to the meeting and executed by, or attendance at the meeting and voting in
person by, the person executing the proxy; or (ii) written notice of the death
or incapacity of the maker of such proxy is received by the corporation before
the vote pursuant thereto is counted; provided, however, that no such proxy
shall be valid after the expiration of eleven (11) months from the date of such
proxy, unless otherwise provided in the proxy. The revocability of a proxy that
states on its face that it is irrevocable shall be governed by the provisions of
Section 705(e) and (f) of the Corporations Code of California.
INSPECTORS OF ELECTION. Before any meeting of shareholders, the Board of
Directors may appoint any persons other than nominees for office to act as
inspectors of election at the meeting or its adjournment. If no inspectors of
election are so appointed, the chairman of the meeting may, and on the request
of any shareholder or a shareholder's proxy shall, appoint inspectors of
election at the meeting. The number of inspectors shall be either one (1) or
three (3). If inspectors are appointed at a meeting on the request of one or
more shareholders or proxies, the holders of a majority of shares or their
proxies present at the meeting shall determine whether one (1) or three (3)
inspectors are to be appointed. If any person appointed as inspector fails to
appear or fails or refuses to act, the chairman of the meeting may, and upon the
request of any shareholder or a shareholder's proxy shall, appoint a person to
fill such vacancy.
The duties of these inspectors shall be as follows:
20.3.1 Determine the number of shares outstanding and the
voting power of each, the shares represented at the meeting, the existence
of a quorum, and the authenticity, validity and effect of proxies;
20.3.2 Receive votes, ballots or consents;
20.3.3 Hear and determine all challenges and questions in any
way arising in connection with the right to vote;
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20.3.4 Count and tabulate all votes or consents;
20.3.5 Determine when the polls shall close;
20.3.6 Determine the result; and
20.3.7 Do any other acts that may be proper to conduct the
election or vote with fairness to all shareholders.
ARTICLE III
DIRECTORS
POWERS. Subject to the provisions of the California General Corporation Law and
any limitations in the Articles of Incorporation and these Bylaws relating to
action required to be approved by the shareholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the Board of Directors.
Without prejudice to such general powers, but subject to the same
limitations, it is hereby expressly declared that the directors shall have the
power and authority to:
20.3.8 Select and remove all officers, agents, and employees
of the corporation, prescribe such powers and duties for them as may not be
inconsistent with law, the Articles of Incorporation or these Bylaws, fix
their compensation, and require from them security for faithful service.
20.3.9 Change the principal executive office or the principal
business office in the State of California from one location to another;
cause the corporation to be qualified to do business in any other state,
territory, dependency, or foreign country and conduct business within or
outside the State of California; designate any place within or without the
State for the holding of any shareholders' meeting or meetings, including
annual meetings; adopt, make and use a corporate seal, and prescribe the
forms of certificates of stock, and alter the form of such seal and of such
certificates from time to time as in their judgment they may deem best,
provided that such forms shall at all times comply with the provisions of
law.
20.3.10 Authorize the issuance of shares of stock of the
corporation from time to time, upon such terms as may be lawful, in
consideration of money paid, labor done or services actually rendered,
debts or securities cancelled or tangible or intangible property actually
received.
20.3.11 Borrow money and incur indebtedness for the purposes of
the corporation, and cause to be executed and delivered therefor, in the
corporate name, promissory notes, bonds, debentures, deeds of trust,
mortgages, pledges, hypothecations, or other evidences of debt and
securities therefor.
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NUMBER OF DIRECTORS. The number of directors of the corporation shall be not
less than five (5) nor more than nine (9). The exact number of directors shall
be seven (7) until changed, within the limits specified above, by a Bylaw
amending this Section 2, duly adopted by the Board of Directors or by the
shareholders. Such indefinite number of directors may be changed, or a definite
number fixed without provision for an indefinite number, by a duly adopted
amendment to the Articles of Incorporation or by an amendment to this Bylaw duly
adopted by the vote or written consent of holders of a majority of the
outstanding shares entitled to vote; provided, however that an amendment
reducing the number or the minimum number of directors to a number less than
five cannot BE adopted if the votes cast against its adoption at a meeting of
the shareholders, or the shares not consenting in the case of action by written
consent, are equal to more than 16-2/3% of the outstanding shares entitled to
vote. No amendment may change the states maximum number of authorized directors
to a number greater than two times the stated minimum number of directors minus
one.
ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors shall be elected at each
annual meeting of the shareholders to hold office until the next annual meeting.
Each director, including a director elected to fill a vacancy, shall hold office
until the expiration of the term for which elected and until a successor has
been elected and qualified.
Section 3A. NOMINATION OF DIRECTORS. Only persons who are nominated in
accordance with the procedures set forth in this Section 3A shall be eligible
for election as, and to serve as, directors. Nominations of persons for
election to the Board of Directors may be made at a meeting of the stockholders
at which directors are to be elected (i) by or at the direction of the Board of
Directors or (ii) by any stockholder of the Corporation who is a stockholder of
record at the time of the giving of such stockholder's notice provided for in
this Section 3A, who shall be entitled to vote at such meeting in the election
of directors and who complies with the requirements of this Section 3A. Such
nominations, other than those made by or at the direction of the Board of
Directors. shall be preceded by timely advance notice in writing to the
Secretary of the Corporation. To be timely, a stockholders' notice shall be
delivered to, or mailed and received at, the principal executive offices of the
Corporation (i) with respect to an election to be held at the annual meeting of
the stockholders of the Corporation, not later than the close of business on the
90th day prior to the first anniversary of the preceding year's annual meeting;
PROVIDED, HOWEVER, that with respect to the annual meeting of stockholders to be
held in 1997 or in the event that the date of the annual meeting is more than 30
days before or more than 60 days after such anniversary date, notice by the
stockholder to be timely must be so delivered not later than the close of
business on the later of the 90th day prior to such annual meeting or the 10th
day following the day on which public announcement of the date of such meeting
is first made by the Corporation. and (ii) with respect to an election to be
held at a special meeting of stockholders of the Corporation for the election of
directors, not later than the close of business on the tenth day following the
day on which notice of the date of the special meeting was mailed to
stockholders of the Corporation or public disclosure of the date of the special
meeting was made, whichever first occurs.
Any such stockholder's notice to the Secretary of the Corporation
shall set forth (x) as to each person whom the stockholder proposes to nominate
for election or re-election as a director: (i) the name, age, business address
and residence address of such person, (ii) the principal occupation or
employment of such person, (iii) the number of shares of each class of capital
stock of the Corporation beneficially owned by such person, (iv) the written
consent of such person to having such person's name placed in nomination at the
meeting and to serve as a director if elected and (v) any other information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, pursuant to
Regulation 14A under the Securities Exchange Act, and (y) as to the stockholder
giving the notice, (i) the name and address, as they appear on the Corporation's
books, of such stockholder and (ii) the number of shares of each class of voting
stock of the Corporation which are then beneficially owned by such stockholder.
The presiding officer of the meeting of stockholders shall determine whether the
requirements of this Section 3A have been met with respect to any nomination or
intended nomination. If the presiding officer determines that any nomination
was not made in accordance with the requirements of this Section 3A, he shall so
declare at the meeting and the defective nomination shall be disregarded.
Notwithstanding the foregoing provisions of this Section 3A, a stockholder shall
also comply with all applicable requirements of the Exchange Act and the rules
and regulations thereunder with respect to the matters set forth in this Section
3A.
VACANCIES. Vacancies in the Board of Directors may be filled by a majority of
the remaining directors, though less than a quorum, or by a sole remaining
director, except that a vacancy created by the removal of a director by the
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vote or written consent of the shareholders or by court order may be filled
only by the vote of a majority of the shares represented and voting at a duly
held meeting at which a quorum is present, or by the written consent of
holders of all outstanding shares entitled to vote. Each director so elected
shall hold office until the next annual meeting of the shareholders and until
a successor has been elected and qualified.
A vacancy or vacancies in the Board of Directors shall be deemed to
exist in the case of the death, resignation or removal of any director, or if
the Board of Directors by resolution declares vacant the office of a director
who has been declared of unsound mind by an order of court or convicted of a
felony, or if the authorized number of directors be increased, or if the
shareholders fail, at any meeting of shareholders at which any director or
directors are elected, to elect the full authorized number of directors to be
voted for at that meeting.
The shareholders may elect a director or directors at any time to fill
any vacancy or vacancies not filled by the directors but any such election by
written consent shall require the consent of a majority of the outstanding
shares entitled to vote.
Any director may resign upon giving written notice to the Chairman of
the Board, the President, the Secretary or the Board of Directors. A
resignation shall be effective upon the giving of the notice, unless the notice
specifies a later time for its effectiveness. If the resignation of a director
is effective at a future time, the Board of Directors may elect a successor to
take office when the resignation becomes effective.
No reduction of the authorized number of directors shall have the
effect of removing any director prior to the expiration of his term of office.
PLACE OF MEETINGS AND TELEPHONIC MEETINGS. Regular meetings of the Board of
Directors may be held at any place within or without the State that has been
designated from time to time by resolution of the Board. In the absence of such
designation, regular meetings shall be held at the principal executive office of
the corporation. Special meetings of the Board shall be held at any place
within or without the State that has been designated in the notice of the
meeting or, if not stated in the notice or there is no notice, at the principal
executive office of the corporation. Any meeting, regular or special, may be
held by conference telephone or similar communication equipment, so long as all
directors participating in such meeting can hear one another, and all such
directors shall be deemed to be present in person at such meeting.
ANNUAL MEETINGS. Immediately following each annual meeting of shareholders, the
Board of Directors shall hold a regular meeting for the purpose of organization,
any desired election of officers and the transaction of other business. Notice
of this meeting shall not be required.
OTHER REGULAR MEETINGS. Other regular meetings of the Board of Directors shall
be held without call at such time as shall from time to time be fixed by the
Board of Directors. Such regular meetings may be held without notice.
SPECIAL MEETINGS. Special meetings of the Board of Directors for any purpose or
purposes may be called at any time by the Chairman of the Board or the President
or any Vice President or the Secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at his or her address as
it is shown upon the records of the corporation. In case such notice is mailed,
it shall be deposited in the United States mail at least four (4) days prior to
the time of the holding of the meeting. In case such notice is delivered
personally, or by telephone or telegram, it shall be delivered personally or by
telephone or to the telegraph company at least forty-eight (48) hours prior to
the time of the holding of the meeting. Any oral notice given personally or by
telephone may be communicated to either the director or to a person at the
office of the director who the person giving the notice has reason to believe
will promptly communicate it to the director. The notice need not specify the
purpose of the meeting nor the place if the meeting is to be held at the
principal executive office of the corporation.
DISPENSING WITH NOTICE. The transactions of any meeting of the Board of
Directors, however called and noticed or wherever held, shall be as valid as
though had at a meeting duly held after regular call and notice if a
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quorum be present and if, either before or after the meeting, each of the
directors not present signs a written waiver of notice, a consent to holding
the meeting or an approval of the minutes thereof. The waiver of notice or
consent need not specify the purpose of the meeting. All such waivers,
consents and approvals shall be filed with the corporate records or made a
part of the minutes of the meeting. Notice of a meeting need not be given to
any director who attends the meeting without protesting, prior thereto or at
its commencement, the lack of notice to such director.
QUORUM. A majority of the authorized number of directors shall constitute a
quorum for the transaction of business, except to adjourn as hereinafter
provided. Every act or decision done or made by a majority of the directors
present at a meeting duly held at which a quorum is present shall be regarded as
the act of the Board of Directors, subject to the provisions of Section 310 of
the Corporations Code of California (approval of contracts or transactions in
which a director has a direct or indirect material financial interest), Section
311 (appointment of committees), and Section 317(e) (indemnification of
directors). A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for such
meeting.
ADJOURNMENT. A majority of the directors present, whether or not constituting a
quorum, may adjourn any meeting to another time and place.
NOTICE OF ADJOURNMENT. Notice of the time and place of holding an adjourned
meeting need not be given, unless the meeting is adjourned for more than
twenty-four (24) hours, in which case notice of such time and place shall be
given prior to the time of the adjourned meeting, in the manner specified in
Section 8 of this Article III, to the directors who were not present at the time
of the adjournment.
ACTION WITHOUT MEETING. Any action required or permitted to be taken by the
Board of Directors may be taken without a meeting, if all members of the Board
shall individually or collectively consent in writing to such action. Such
action by written consent shall have the same force and effect as a unanimous
vote of the Board of Directors. Such written consent or consents shall be filed
with the minutes of the proceedings of the Board.
FEES AND COMPENSATION OF DIRECTORS. Directors and members of committees may
receive such compensation, if any, for their services, and such reimbursement of
expenses, as may be fixed or determined by resolution of the Board of Directors.
Nothing herein contained shall be construed to preclude any director from
serving the corporation in any other capacity as an officer, agent, employee, or
otherwise, and receiving compensation for such services.
ARTICLE IV
COMMITTEES
COMMITTEES OF DIRECTORS. The Board of Directors may, by resolution adopted by a
majority of the authorized number of directors, designate one or more
committees, each consisting of two or more directors, to serve at the pleasure
of the Board. The Board may designate one or more directors as alternate
members of any committee, who may replace any absent member at any meeting of
the committee. Any such committee, to the extent provided in the resolution of
the Board, shall have all the authority of the Board, except with respect to:
20.3.12 the approval of any action which, under the General
Corporation Law of California, also requires shareholders' approval or
approval of the outstanding shares;
20.3.13 the filling of vacancies on the Board of Directors or
in any committee;
20.3.14 the fixing of compensation of the directors for serving
on the Board or on any committee;
20.3.15 the amendment or repeal of Bylaws or the adoption of
new Bylaws;
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20.3.16 the amendment or repeal of any resolution of the Board
of Directors which by its express terms is not so amendable or repealable;
20.3.17 a distribution to the shareholders of the corporation,
except at a rate or in a periodic amount or within a price range determined
by the Board of Directors; or
20.3.18 the appointment of any other committees of the Board of
Directors or the members thereof.
ARTICLE V
OFFICERS
OFFICERS. The officers of the corporation shall be a President, a Secretary and
a Chief Financial Officer. The corporation may also have, at the discretion of
the Board of Directors, a Chairman of the Board, one or more Vice Presidents,
one or more Assistant Secretaries, one or more Assistant Treasurers, and such
other officers as may be appointed in accordance with the provisions of Section
3 of this Article V. Any number of offices may be held by the same person.
ELECTION OF OFFICERS. The officers of the corporation, except such officers as
may be appointed in accordance with the provisions of Section 3 of this Article
V, shall be chosen by the Board of Directors, and each shall serve at the
pleasure of the Board, subject to the rights, if any, of an officer under any
contract of employment.
SUBORDINATE OFFICERS, ETC. The Board of Directors may appoint, and may empower
the President to appoint, such other officers as the business of the corporation
may require, each of whom shall hold office for such period, have such authority
and perform such duties as are provided in the Bylaws or as the Board of
Directors may from time to time determine.
REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if any, of an
officer under any contract of employment, any officer may be removed, either
with or without cause, by the Board of Directors, at any regular or special
meeting thereof, or, except in case of an officer chosen by the Board of
Directors, by any officer upon whom such power of removal may be conferred by
the Board of Directors.
Any officer may resign at any time by giving written notice to the
corporation. Any such resignation shall take effect at the date of the receipt
of such notice or at any later time specified therein; and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective. Any such resignation is without prejudice to the rights, if
any, of the corporation under any contract to which the officer is a party.
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VACANCIES IN OFFICES. A vacancy in any office because of death, resignation,
removal, disqualification or any other cause shall be filled in the manner
prescribed in these Bylaws for regular appointments to such office.
CHAIRMAN OF THE BOARD. The Chairman of the Board, if such an officer be
elected, shall, if present, preside at all meetings of the Board of Directors
and exercise and perform such other powers and duties as may be from time to
time assigned to him by the Board of Directors or prescribed by the Bylaws. If
there is no President, the Chairman of the Board shall in addition be the Chief
Executive Officer of the corporation and shall have the powers and duties
prescribed in Section 7 of this Article V.
PRESIDENT. Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the Chairman of the Board, if there be such an officer,
the President shall be the Chief Executive Officer of the corporation and shall,
subject to the control of the Board of Directors, have general supervision,
direction and control of the business and the officers of the corporation. He
shall preside at all meetings of the shareholders and, in the absence of the
Chairman of the Board, or if there be none, at all meetings of the Board of
Directors. He shall have the general powers and duties of management usually
vested in the office of President of a corporation, and shall have such other
powers and duties as may be prescribed by the Board of Directors or the Bylaws.
VICE PRESIDENTS. In the absence or disability of the President, the Vice
Presidents, if any, in order of their rank as fixed by the Board of Directors
or, if not ranked, a Vice President designated by the Board of Directors, shall
perform all the duties of the President, and when so acting shall have all the
powers of, and be subject to all the restrictions upon, the President. The Vice
Presidents shall have such other powers and perform such other duties as from
time to time may be prescribed for them respectively by the Board of Directors
or the Bylaws, the President or the Chairman of the Board if there is no
President.
SECRETARY. The Secretary shall keep or cause to be kept, at the principal
executive office or such other place as the Board of Directors may order, a book
of minutes of all meetings and actions of directors, committees of directors and
shareholders, with the time and place of holding, whether regular or special,
and, if special, how authorized, the notice thereof given, the names of those
present at directors' and committee meetings, the number of shares present or
represented at shareholders' meetings, and the proceedings thereof.
The Secretary shall keep, or cause to be kept, at the principal
executive office or at the office of the corporation's transfer agent or
registrar, as determined by resolution of the Board of Directors, a share
register, or a duplicate share register, showing the names of all shareholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates issued for the same, and the number and date of
cancellation of every certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all meetings
of the shareholders and of the Board of Directors required by the Bylaws or by
law to be given, and he shall keep the seal of the corporation, if one be
adopted, in safe custody, and shall have such other powers and perform such
other duties as may be prescribed by the Board of Directors or by the Bylaws.
CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep and maintain,
or cause to be kept and maintained, adequate and correct books and records of
accounts of the properties and business transactions of the corporation,
including accounts of its assets, liabilities, receipts, disbursements, gains,
losses, capital, retained earnings and shares. The books of account shall be
open at all reasonable times to inspection by any director.
The Chief Financial Officer shall deposit all moneys and other
valuables in the name and to the credit of the corporation with such
depositories as may be designated by the Board of Directors. He shall disburse
the funds of the corporation as may be ordered by the Board of Directors, shall
render to the President and directors, whenever they request it, an account of
all of his transactions as Chief Financial Officer and of the financial
condition of the corporation, and shall have other powers and perform such other
duties as may be prescribed by the Board of Directors or the Bylaws.
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ARTICLE VI
INDEMNIFICATION AND INSURANCE
(a) RIGHT TO INDEMNIFICATION. Each person who was or is made a party to
or is threatened to be made a party to or is involuntarily involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "Proceeding"), by reason of the fact that he or
she, or a person of whom he or she is the legal representative, is or was a
director or officer of the corporation or is or was serving (during such
person's tenure as director or officer) at the request of the corporation, any
other corporation, partnership, joint venture, trust or other enterprise in any
capacity, whether the basis of a Proceeding is an alleged action in an official
capacity as a director or officer or in any other capacity while serving as a
director or officer, shall be indemnified and held harmless by the corporation
to the fullest extent authorized by California General Corporation Law, as the
same exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the corporation to provide
broader indemnification rights than said law permitted the corporation to
provide prior to such amendment), against all expenses, liability and loss
(including attorneys' fees, judgments, fines, or penalties and amounts to be
paid in settlement) reasonably incurred or suffered by such person in connection
therewith. The right to indemnification conferred in this Section shall be a
contract right and shall include the right to be paid by the corporation the
expenses incurred in defending a Proceeding in advance of its final disposition;
provided, however, that, if California General Corporation Law requires, the
payment of such expenses in advance of the final disposition of a Proceeding
shall be made only upon receipt by the corporation of an undertaking by or on
behalf of such director or officer to repay all amounts so advanced if it shall
ultimately be determined that such director or officer is not entitled to be
indemnified under this Section or otherwise. No amendment to or repealof this
Article VI shall apply to or have any effect on any right to indemnification
provided hereunder with respect to any acts or omissions occurring prior to such
amendment or repeal.
(b) RIGHT OF CLAIMANT TO BRING SUIT. If a claim for indemnity under
paragraph (a) of this Section is not paid in full by the corporation within
ninety days after a written claim has been received by the corporation, the
claimant may at any time thereafter bring suit against the corporation to
recover the unpaid amount of the claim and, if successful in whole or in part,
the claimant shall also be entitled to be paid the expense of prosecuting such
claim including reasonable attorneys' fees incurred in connection therewith. It
shall be a defense to any such action (other than an action brought to enforce a
claim for expenses incurred in defending a Proceeding in advance of its final
disposition where the required undertaking, if any is required, has been
tendered to the corporation) that the claimant has not met the standards of
conduct which make it permissible under California General Corporation Law for
the corporation to indemnify the claimant for the amount claimed, but the burden
of proving such defense shall be on the corporation. Neither the failure of the
corporation (including its Board of Directors, independent legal counsel, or its
shareholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in
California General Corporation Law, nor an actual determination by the
corporation (including its Board of Directors, independent legal counsel, or its
shareholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard of conduct.
(c) NON-EXCLUSIVITY OF RIGHTS. The rights conferred in this Section shall
not be exclusive of any other rights which any director, officer, employee or
agent may have or hereafter acquire under any statute, provision of the Articles
of Incorporation, bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, to the extent the additional rights to indemnification
are authorized in the Articles of Incorporation of the corporation.
(d) INSURANCE. In furtherance and not in limitation of the powers
conferred by statute:
(i) the corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the
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corporation would have the power to indemnify the person against
that expense, liability or loss under the California General
Corporation Law.
(ii) the corporation may create a trust fund, grant a security
interest and/or use other means (including, without limitation,
letters of credit, surety bonds and/or other similar arrangements), as
well as enter into contracts providing indemnification to the full
extent authorized or permitted by law and including as part thereof
provisions with respect to any or all of the foregoing to ensure the
payment of such amounts as may become necessary to effect
indemnification as provided therein, or elsewhere.
(e) Indemnification of Employees and Agents of the Corporation. The
corporation may, to the extent authorized from time to time by the Board of
Directors, grant rights to indemnification, including the right to be paid by
the corporation the expenses incurred in defending a Proceeding in advance of
its final disposition, to any employee or agent of the corporation to the
fullest extent of the provisions of this Section or otherwise with respect to
the indemnification and advancement of expenses of directors and officers of the
corporation.
ARTICLE VII
RECORDS AND REPORTS
MAINTENANCE AND INSPECTION OF SHARE REGISTER. The corporation shall keep at its
principal executive office, or at the office of its transfer agent or registrar,
if either be appointed and as determined by resolution of the Board of
Directors, a record of its shareholders, giving the names and addresses of all
shareholders and the number and class of shares held by each shareholder.
A shareholder or shareholders of the corporation holding at least five
percent (5%) in the aggregate of the outstanding voting shares of the
corporation may (i) inspect and copy the records of shareholders' names and
addresses and shareholdings during usual business hours upon five days' prior
written demand upon the corporation, and/or (ii) obtain from the transfer agent
of the corporation, upon written demand and upon the tender of such transfer
agent's usual charges for such list, a list of the shareholders' names and
addresses, who are entitled to vote for the election of directors, and their
shareholdings, as of the most recent record date for which such list has been
compiled or as of a date specified by the shareholder subsequent to the date of
demand. Such list shall be made available to such shareholder or shareholders
by the transfer agent on or before the later of five (5) days after the demand
is received or the date specified therein as the date as of which the list is to
be compiled. The record of shareholders shall also be open to inspection upon
the written demand of any shareholder or holder of a voting trust certificate,
at any time during usual business hours, for a purpose reasonably related to
such holder's interests as a shareholder or as the holder of a voting trust
certificate. Any inspection and copying under this Section 1 may be made in
person or by an agent or attorney of the shareholder or holder of a voting trust
certificate making such demand.
MAINTENANCE AND INSPECTION OF BYLAWS. The corporation shall keep at its
principal executive office, or if its principal executive office is not in the
State of California at its principal business office in this state, the original
or a copy of the Bylaws as amended to date, which shall be open to inspection by
the shareholders at all reasonable times during office hours. If the principal
executive office of the corporation is outside this state and the corporation
has no principal business office in this state, the Secretary shall, upon the
written request of any shareholder, furnish to such shareholder a copy of the
Bylaws as amended to date.
MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. The accounting books and
records and minutes of proceedings of the shareholders and the Board of
Directors and any committee or committees of the Board of Directors shall be
kept at such place or places designated by the Board of Directors, or, in the
absence of such designation, at the principal executive office of the
corporation. The minutes shall be kept in written form and the accounting books
and records shall be kept either in written form or in any other form capable
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of being converted into written form. Such minutes and accounting books and
records shall be open to inspection upon the written demand of any
shareholder or holder of a voting trust certificate, at any reasonable time
during usual business hours, for a purpose reasonably related to such
holder's interests as a shareholder or as the holder of a voting trust
certificate. Such inspection may be made in person or by an agent or
attorney, and shall include the right to copy and make extracts. The
foregoing rights of inspection shall extend to the records of each subsidiary
corporation of the corporation.
INSPECTION BY DIRECTORS. Every director shall have the absolute right at any
reasonable time to inspect all books, records and documents of every kind and
the physical properties of the corporation and each of its subsidiary
corporations. Such inspection by a director may be made in person or by agent
or attorney and the right of inspection includes the right to copy and make
extracts.
ANNUAL REPORT TO SHAREHOLDERS. The annual report to shareholders referred to in
Section 1501 of the General Corporation Law is expressly dispensed with, but
nothing herein shall be interpreted as prohibiting the Board of Directors from
issuing annual or other periodic reports to the shareholders of the corporations
as they deem appropriate.
FINANCIAL STATEMENTS. A copy of any annual financial statement and any income
statement of the corporation for each quarterly period of each fiscal year, and
any accompanying balance sheet of the corporation as of the end of each such
period, that has been prepared by the corporation shall be kept on file in the
principal executive office of the corporation for twelve (12) months and each
such statement shall be exhibited at all reasonable times to any shareholder
demanding an examination of any such statement or a copy shall be mailed to any
such shareholder.
If a shareholder or shareholders holding at least five percent (5%) of
the outstanding shares of any class of stock of the corporation make a written
request to the corporation for an income statement of the corporation for the
three-month, six-month or nine-month period of the current fiscal year ended
more than thirty (30) days prior to the date of the request, and a balance sheet
of the corporation as of the end of such period, the Chief Financial Officer
shall cause such statement to be prepared, if not already prepared, and shall
deliver personally or mail such statement or statements to the person making the
request within thirty (30) days after the receipt of such request. If the
corporation has not sent to the shareholders its annual report for the last
fiscal year, this report shall likewise be delivered or mailed to such
shareholder or shareholders within thirty (30) days after such request.
The corporation also shall, upon the written request of any
shareholder, mail to the shareholder a copy of the last annual, semi-annual or
quarterly income statement which it has prepared and a balance sheet as of the
end of such period.
The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report thereon, if any, of the independent
accountants engaged by the corporation or the certificate of an authorized
officer of the corporation that such financial statements were prepared without
audit from the books and records of the corporation.
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ANNUAL STATEMENT OF GENERAL INFORMATION. The corporation shall each year during
the calendar month in which its Articles of Incorporation were originally filed
with the California Secretary of State, or at any time during the immediately
preceding five (5) calendar months, file with the Secretary of State of the
State of California, on the prescribed form, a statement setting forth the
authorized number of directors, the names and complete business or residence
addresses of all incumbent directors, the names and complete business or
residence addresses of the Chief Executive Officer, Secretary and Chief
Financial Officer, the street address of its principal executive office or
principal business office in this state and the general type of business
constituting the principal business activity of the corporation, together with a
designation of the agent of the corporation for the purpose of service of
process, all in compliance with Section 1502 of the Corporations Code of
California.
ARTICLE VIII
GENERAL CORPORATE MATTERS
RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. For purposes of
determining the shareholders entitled to receive payment of any dividend or
other distribution or allotment of any rights or entitled to exercise any rights
in respect of any other lawful action, (other than action by shareholders by
written consent without a meeting) the Board of Directors may fix, in advance, a
record date, which shall not be more than sixty (60) days prior to any such
action, and in such case only shareholders of record on the date so fixed are
entitled to receive the dividend, distribution or allotment of rights or to
exercise the rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date fixed as aforesaid,
except as otherwise provided in the California General Corporation Law.
If the Board of Directors does not so fix a record date, the record
date for determining shareholders for any such purpose shall be at the close of
business on the day on which the Board adopts the resolution relating thereto,
or the sixtieth (60th) day prior to the date of such action, whichever is later.
CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks, drafts or other orders
for payment of money, notes or other evidences of indebtedness, issued in the
name of or payable to the corporation, shall be signed or endorsed by such
person or persons and in such manner as, from time to time, shall be determined
by resolution of the Board of Directors.
CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The Board of Directors,
except as otherwise provided in these Bylaws, may authorize any officer or
officers, agent or agents, to enter into any contract or execute any instrument
in the name of and on behalf of the corporation, and such authority may be
general or confined to specific instances; and, unless so authorized or ratified
by the Board of Directors or within the agency power of an officer, no '
officer, agent or employee shall have any power or authority to bind the
corporation by any contract or engagement or to pledge its credit or to render
it liable for any purpose or to any amount.
CERTIFICATES FOR SHARES. A certificate or certificates for shares of the
capital stock of the corporation shall be issued to each shareholder when any
such shares are fully paid, and the Board of Directors may authorize the
issuance of certificates or shares as partly paid provided that such
certificates shall state the amount of the consideration to be paid therefor and
the amount paid thereon. All certificates shall be signed in the name of the
corporation by the Chairman of the Board or the President or Vice President and
by the Chief Financial Officer or an Assistant Treasurer or the Secretary or any
Assistant Secretary, certifying the number of shares and the class or series of
shares owned by the shareholder. Any or all of the signatures on the
certificate may be facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the corporation with the same effect
as if such person were an officer, transfer agent or registrar at the date of
issue.
LOST CERTIFICATES. Except as hereinafter in this Section 5 provided, no new
certificates for shares shall be issued in lieu of an old certificate unless the
latter is surrendered to the corporation and canceled at the same time. The
Board of Directors may in case any share certificate or certificate for any
other security is lost, stolen or
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destroyed, authorize the issuance of a new certificate in lieu thereof, upon
such terms and conditions as the Board may require, including provision for
indemnification of the corporation secured by a bond or other adequate
security sufficient to protect the corporation against any claim that may be
made against it, including any expense or liability, on account of the
alleged loss, theft or destruction of such certificate or the issuance of
such new certificate.
REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The Chairman of the Board, the
President, or any Vice President, or any other person authorized by resolution
of the Board of Directors or by any of the foregoing designated officers, is
authorized to vote on behalf of the corporation any and all shares of any other
corporation or corporations, foreign or domestic, standing in the name of the
corporation. The authority herein granted to said officers to vote or represent
on behalf of the corporation any and all shares held by the corporation in any
other corporation or corporations may be exercised by any such officer in person
or by any person authorized to do so by proxy duly executed by said officer.
ARTICLE IX
AMENDMENTS
AMENDMENT BY SHAREHOLDERS. New Bylaws may be adopted or these Bylaws may be
amended or repealed by the vote or written consent of holders of a majority of
the outstanding shares entitled to vote; provided, however, that if the Articles
of Incorporation of the corporation set forth the number of authorized directors
of the corporation, the authorized number of directors may be changed only by an
amendment of the Articles of Incorporation.
AMENDMENT BY DIRECTORS. Subject to the rights of the shareholders as provided
in Section I of this Article IX, Bylaws, other than a Bylaw or an amendment
thereof changing the authorized number of directors, may be adopted, amended or
repealed by the Board of Directors.
ARTICLE X
GENERAL
GOVERNING LAW. This corporation is organized under the provisions of the
California General Corporation Law (Corporations Code Sections 100-2319) as in
effect on the date of filing of its original Articles of Incorporation, namely
January 31, 1974. Upon such filing the California Secretary of State assigned
the following corporation number to this corporation: 0697800. The corporate
affairs of this corporation shall be governed by and conducted in accordance
with the provisions of the California General Corporation Law, as the same
presently exist and are from time to time hereafter amended or superseded,
except in those instances where the Articles of Incorporation or Bylaws of this
corporation, now or through amendment hereafter, may adopt alternative rules
which are permissible under the California General Corporation Law. Any
provision (or portion thereof) in these Bylaws which is not permissible under
the California General Corporation Law or is inconsistent with the Articles of
Incorporation of this corporation (as they may from time to time be amended and
supplemented) is void, but the balance of these Bylaws shall nevertheless be
valid and effective.
CONSTRUCTION AND DEFINITIONS. Unless the context requires otherwise, the
general provisions, rules of construction, and definitions in the California
General Corporation Law shall govern the construction of these Bylaws. Without
limiting the generality of the foregoing, the singular number includes the
plural, the plural number includes the singular, and the term "person" includes
both a corporation and a natural person.
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Exhibit 10.1 - Commitment Letter provided by Ironwood Telecom LLC to
Incomnet, Inc., dated October 30, 1998
Ironwood Telecom
555 Zang Street
Suite 300
Lakewood, CO 80228
October 30, 1998
Incomnet, Inc.
2801 Main Street
Irvine, California 92614
Attention: Mr. Denis Richard
President and Chief Executive Officer
Re: Commitment to Fund
Dear Denis:
Set forth below are the terms and conditions upon which Ironwood Telecom
LLC ("Ironwood") is willing to commit to provide Incomnet, Inc. ("Incomnet")
with a secured credit facility. The facility has two tranches, referred to in
this letter as the "Bridge Loan" and the "Term Loan," under which Ironwood will
provide a total of $20 million in secured financing. If Incomnet agrees with
the terms and conditions set forth in this letter, it should countersign this
letter as provided below, after which this letter will constitute a binding
agreement enforceable against Ironwood and Incomnet in accordance with its terms
and conditions.
As part of its commitment to provide $20 million in secured financing,
Ironwood will make a loan (the "Casey Loan") to John P. Casey, for the benefit
of Incomnet, to facilitate the exercise of Casey's option to purchase
outstanding Preferred Stock of Incomnet (the "Cohen Preferred") from Dr. Robert
Cohen and certain other parties (the "Cohen Group"). Casey is obligated to
tender the Cohen Preferred to Incomnet for redemption at his acquisition cost
(including financing charges and legal fees) when Incomnet is legally permitted
to redeem such stock (and hold such stock for a one-year period pending
redemption), in accordance with the Board Change Agreement dated August 28,
1998, among Incomnet, Casey and certain other parties (the "Board Change
Agreement"). If Incomnet is not legally permitted to redeem the Cohen Preferred
prior to expiration of the one-year period Casey is obligated to hold the Cohen
Preferred awaiting redemption, then thereafter Casey is obligated to undertake a
rights offering and offer Incomnet's shareholders the opportunity to purchase
such stock on a pro rata basis at his acquisition cost (including financing
charges and legal fees), in accordance with the Board Change Agreement.
The Casey Loan will be secured by the Cohen Preferred and accrue interest
at the rate of 18% per annum (with a default rate of 21% per annum). Incomnet
and its subsidiary, National Telephone & Communications, Inc. ("NTC"), will
guarantee Casey's obligations under the Casey Loan. Principal and interest will
be due and payable on redemption of the Cohen Preferred or the closing of a
rights offering relating to such stock.
As part of its commitment to provide $20 million in secured financing,
Ironwood is willing to purchase outstanding Preferred Stock (the "Other
Preferred Stock") from certain holders other than the Cohen Group (the "Other
Preferred Holders"), for the benefit of Incomnet, and tender such stock for
redemption by Incomnet when Incomnet is legally permitted to redeem such stock,
or undertake a rights offering to Incomnet's shareholders, all on the same terms
Casey is obligated to do so under the Board Change Agreement. The redemption
price of the Other Preferred Stock (or price at which the stock will be offered
to shareholders in a rights offering) that will be payable to Ironwood will
equal the purchase price paid by Ironwood to acquire such stock, plus a
financing charge equal to 18% per annum and all legal and other costs associated
with such purchase, redemption and rights offering incurred by Ironwood.
FUNDING COMMITMENT; PREFERRED STOCK PURCHASE COMMITMENT
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Subject to the terms and conditions set forth herein, (i) Ironwood agrees
to fund the Bridge Loan to Incomnet, and Incomnet agrees to accept funds under
the Bridge Loan from Ironwood, on November 4, 1998, (ii) Ironwood agrees to fund
the Casey Loan to Casey on November 4, 1998, (iii) Ironwood agrees to fund the
Term Loan to Incomnet, and Incomnet agrees to accept funds under the Term Loan
from Ironwood, on December 15, 1998 and (iv) Ironwood agrees to purchase the
Other Preferred Stock on terms to be agreed upon among Incomnet, Ironwood and
the Other Preferred Holders, and tender such stock for redemption or offer such
stock in a rights offering to Incomnet's shareholders, on the same terms set
forth in the Board Change Agreement.
BRIDGE LOAN
Incomnet and Ironwood agree that the Bridge Loan shall have the following
terms:
Principal Amount: $5 million less the principal amount of the
Casey Loan and purchase price of Other
Preferred Stock
Interest Rate: 15% (Accrue only)
Default Rate: 18%
Maturity; Payment: Principal and Accrued Interest due on funding
of Term Loan (December 15, 1998)
Warrants: Warrants to purchase 500,000 shares of
Incomnet's Common Stock, at an exercise price
equal to the lesser of (i) 50% of the closing
price of Incomnet's Common Stock on the
Nasdaq Stock Market on October 29, 1998 and
(ii) $1.00; customary anti-dilution
protection for stock splits, stock dividends
and recapitalizations; S-3 demand/shelf
registration rights one-year after issuance,
with unlimited piggyback registration rights
(pari passu with other piggyback rights)
Origination Fee: $150,000 payable on closing of the Bridge
Loan
Collateral: Proceeds from any future sale of Rapid Cast,
Inc. stock owned by Incomnet (with the
delivery of stock certificates representing
those shares to be held in trust by
Ironwood); all bank and other accounts of
Incomnet, general intangibles of Incomnet and
any equipment or furniture of Incomnet; NTC
will guarantee Incomnet's obligations under
the Bridge Loan
Use of Proceeds: To be "downstreamed" to NTC; Payment by NTC
to WorldCom of current trade payables;
Thereafter, For NTC's General Corporate
Purposes
Other: Such other terms and conditions as may agreed
upon by Incomnet and Ironwood
TERM LOAN
Incomnet and Ironwood agree that the Term Loan shall have the following
terms:
Principal Amount: $20 million less principal amount of Casey
Loan and purchase price of Other Preferred
Stock
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Interest Rate: 12% (Payable Quarterly)
Default Rate: 15%
Maturity; Payment: Principal (and Accrued and Unpaid Interest)
due on December 31, 2000
Warrants: FIRST TRANCHE: Warrants to purchase 2 million
shares of Incomnet's Common Stock, at an
exercise price equal to the lesser of (i) 50%
of the closing price of Incomnet's Common
Stock on the Nasdaq Stock Market on
October 29, 1998 and (ii) $1.00, exercisable
immediately and for five years thereafter,
with the number of Warrants and the exercise
price subject to pro rata adjustment if NTC's
annualized fourth quarter 1999 gross revenue
is less than $98 million; customary
anti-dilution protection for stock splits,
stock dividends and recapitalizations; S-3
demand/shelf registration rights one-year
after issuance, with unlimited piggyback
registration rights (pari passu with other
piggyback rights)
SECOND TRANCHE: Warrants to purchase 1
million shares of Incomnet's Common Stock,
at an exercise price of $2.25 per share,
exercisable on first anniversary of issuance
and for five years thereafter, with the
number of Warrants and the exercise price
subject to pro rata adjustment if annualized
fourth quarter 2000 gross revenue target is
less than $222.9 million; customary
anti-dilution protection for stock splits,
stock dividends and recapitalizations; S-3
demand/shelf registration rights one-year
after issuance, with unlimited piggyback
registration rights (pari passu with other
piggyback rights)
Origination Fee: $350,000 payable on closing of the Term Loan
Collateral: Substantially all the assets of Incomnet
(excluding the capital stock of Rapid Cast,
Inc. and GenSource, but including the capital
stock of NTC owned by Incomnet);
substantially all the assets of NTC (provided
that WorldCom will have a lien on the
customer accounts of NTC and will release
such lien upon payment to WorldCom of certain
amounts and the change of credit terms
extended to NTC by WorldCom to net 30 days);
and proceeds from any future sale of Rapid
Cast, Inc. stock owned by Incomnet; NTC will
guarantee obligations under the Term Loan; at
Ironwood's option, Ironwood may elect to
utilize a portion of the amount which would
otherwise have constituted part of the Term
Loan to pay-off First Bank and WorldCom
directly in exchange for an assignment of all
of their rights against NTC under the
appropriate documents, such payoff advances
shall also be guaranteed by NTC
Use of Proceeds: To be "downstreamed" to Incomnet's
subsidiary, National Telephone &
Communications, Inc. ("NTC"); subject to the
terms set forth above regarding direct
payment to First Bank by Ironwood, pay-off of
First Bank by NTC; subject to the terms set
forth above regarding direct payment to
WorldCom
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by Ironwood, payment by NTC of balance of
amounts in default plus accrued interest
thereon owing to WorldCom (approximately
$1.65 million, $550,000 of which payable on
1/15/99, 2/15/99 and 3/15/99) subject to
the terms set forth above; thereafter For
NTC's General Corporate Purposes
Other: Such other terms and conditions as may agreed
upon by Incomnet and Ironwood
COVENANTS
Under both the Bridge Loan and the Term Loan, Incomnet will be required to
meet operating covenants relating to its (i) net worth and (ii) earnings before
interest, taxes, depreciation and amortization (EBITDA), both of which at such
levels to be agreed upon by the parties. Incomnet will also be prohibited under
the Bridge Loan and the Term Loan from undertaking certain actions without the
prior written consent of Ironwood, as are customary and reasonable for the type
of loan being made, including being prohibited from selling any Rapid Cast stock
owned by Incomnet without the prior written consent of Ironwood.
CONDITIONS
The Bridge Loan shall be conditioned upon the occurrence of the following
events: (i) the renegotiation of severance arrangements with former management
of Incomnet and NTC (Messrs. Reznick, Caswell, Quandt and Streufort) on terms
that are acceptable to Ironwood, and termination of stock options previously
granted to Messrs. Reznick, Caswell, Greenberg and Richardson; (ii) the
agreement of the Other Preferred Holders to sell the Other Preferred Stock to
Ironwood, on terms that are acceptable to Ironwood, such purchase to be made for
the benefit of Incomnet and obligate Ironwood to tender such stock for
redemption by Incomnet when Incomnet is legally permitted to redeem such stock,
or undertake a rights offering to Incomnet's shareholders, all on the same terms
Casey is obligated to do so under the Board Change Agreement; (iii) the
negotiation and preparation of definitive documents relating to the Bridge Loan
that are mutually acceptable to Ironwood and Incomnet; (iv) the consent of First
Bank and WorldCom to the terms of the Bridge Loan and the Term Loan and the
agreement of First Bank and WorldCom to forbear from taking any actions
concerning defaults by NTC until December 15, 1998; and (v) the agreement of
WorldCom to release its lien on NTC's customer accounts and any other assets of
NTC on December 15, 1998 (or as soon thereafter as the following conditions are
met) if (A) payment has been made of all amounts in default and interest thereon
(approximately $3.3 million) and (B) NTC changes WorldCom's vendor credit terms
to net 30 days.
The Term Loan shall be conditioned upon the occurrence of the following
events: (i) funding of the Bridge Loan; (ii) the dismissal or settlement of
claims brought by the two groups of shareholders (the "Beltz Group" and the
"Silva Run Group") who opted out of the class action entitled SANDRA GAYLES ET.
AL V. SAM D. SCHWARTZ AND INCOMNET, INC. (CASE NO. CV95-0399 AWT (BQRX) (the
"Class Action Lawsuit"), on terms that are acceptable to Ironwood; and (iii) the
absence of a breach by plaintiffs in the Class Action Lawsuit under the
settlement agreement relating to that action that would cause Ironwood to
conclude, in its reasonable judgment, that the settlement agreement will not
close on the terms set forth therein; and (iv) the negotiation and preparation
of definitive documents relating to the Term Loan that are mutually acceptable
to Ironwood and Incomnet.
GOVERNING LAW
This Agreement and any definitive documents evidencing the Bridge Loan or
the Term Loan shall be deemed for all purposes to have been made in the State of
Colorado and shall be governed by and interpreted in accordance with the laws of
such state, except that no doctrine of choice of law shall be used to apply the
laws of any other state or jurisdiction.
If Incomnet agrees with the terms and conditions set forth in this letter,
please so signify by signing below and returning the countersigned copy to
Ironwood, after which this letter will constitute a binding agreement
enforceable against Ironwood and Incomnet in accordance with its terms and
conditions.
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Very truly yours,
/s/ Donald V. Berlanti
----------------------
ACKNOWLEDGED AND AGREED:
INCOMNET, INC.
By: /s/ Denis Richard
-------------------
President and Chief Executive Officer
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EXHIBIT 10.2 - BRIDGE LOAN AND SECURITY AGREEMENT BETWEEN INCOMNET, INC. AND
IRONWOOD TELECOM LLC, DATED NOVEMBER 4, 1998.
BRIDGE LOAN AND SECURITY AGREEMENT
DATED NOVEMBER 4, 1998
BETWEEN
INCOMNET, INC.
AND
IRONWOOD TELECOM LLC
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TABLE OF CONTENTS
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1. DEFINITIONS AND TERMS . . . . . . . . . . . . . . . 1
1.1. Definitions. . . . . . . . . . . . . . . . . 1
1.2. Accounting Terms.. . . . . . . . . . . . . . 5
1.3. Other Terms. . . . . . . . . . . . . . . . . 6
2. LOANS.. . . . . . . . . . . . . . . . . . . . . . . 6
2.1. Term Loan. . . . . . . . . . . . . . . . . . 6
3. INTEREST AND OTHER CHARGES. . . . . . . . . . . . . 6
3.1. Interest.. . . . . . . . . . . . . . . . . . 6
3.2. Maximum Interest Rate. . . . . . . . . . . . 6
3.3. Origination Fee. . . . . . . . . . . . . . . 6
4. PAYMENTS AND PREPAYMENTS. . . . . . . . . . . . . . 7
4.1. Repayment of Bridge Loan.. . . . . . . . . . 7
4.2. Voluntary Prepayments of Bridge Loan . . . . 7
4.3. Place and Form of Payments; Extension
of Time. . . . . . . . . . . . . . . . . . . 7
4.4. Application and Reversal of Payments.. . . . 7
4.5. Indemnity for Returned Payments. . . . . . . 7
5. LENDER'S BOOKS AND RECORDS; QUARTERLY STATEMENTS. . 7
6. COLLATERAL. . . . . . . . . . . . . . . . . . . . . 8
6.1. Grant of Security Interest.. . . . . . . . . 8
6.2. Perfection and Protection of Security
Interest. . . . . . . . . . . . . . . . . . 8
6.3. Location of Collateral.. . . . . . . . . . . 9
6.4. Title to, Liens on, and Sale and Use of,
Collateral. . . . . . . . . . . . . . . . . 9
6.5. Access and Examination.. . . . . . . . . . . 9
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6.6. Insurance. . . . . . . . . . . . . . . . . . 9
6.7. Equipment. . . . . . . . . . . . . . . . . . 10
6.8. Documents, Instruments, and Chattel Paper. . 10
6.9. Right to Cure. . . . . . . . . . . . . . . . 10
6.10. Lender's Rights, Duties and Liabilities.. . 11
7. BOOKS AND RECORDS; FINANCIAL INFORMATION; NOTICES . 11
7.1. Books and Records. . . . . . . . . . . . . . 11
7.2. Financial Information. . . . . . . . . . . . 11
7.3. Notices to the Lender. . . . . . . . . . . . 11
8. GENERAL WARRANTIES AND REPRESENTATIONS. . . . . . . 12
8.1. Authorization, Validity, and Enforceability
of this Agreement and the Loan Documents. . 12
8.2. Validity and Priority of Security Interest.. 13
8.3. Organization and Qualification.. . . . . . . 13
8.4. Corporate Name; Prior Transactions.. . . . . 13
8.5. Subsidiaries and Affiliates. . . . . . . . . 13
8.6. Use of Proceeds. . . . . . . . . . . . . . . 13
8.7. Public Disclosure. . . . . . . . . . . . . . 13
9. AFFIRMATIVE AND NEGATIVE COVENANTS. . . . . . . . . 14
9.1. Taxes and Other Obligations. . . . . . . . . 14
9.2. Corporate Existence and Good Standing. . . . 14
9.3. Maintenance of Property and Insurance. . . . 14
9.4. Mergers, Consolidations, Acquisitions,
or Sales . . . . . . . . . . . . . . . . . . 14
9.5. Transactions Affecting Collateral or
Obligations. . . . . . . . . . . . . . . . . 14
9.6. Guaranties.. . . . . . . . . . . . . . . . . 14
9.7. Debt.. . . . . . . . . . . . . . . . . . . . 15
9.8. Prepayment.. . . . . . . . . . . . . . . . . 15
9.9. Transactions with Affiliates.. . . . . . . . 15
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9.10. Liens. . . . . . . . . . . . . . . . . . . . . . 15
9.11. Restricted Investments. . . . . . . . . . . . . . 15
9.12. EBITDA. . . . . . . . . . . . . . . . . . . . . . 15
9.13. Equity Sales. . . . . . . . . . . . . . . . . . . 15
9.14. Further Assurances. . . . . . . . . . . . . . . . 15
10. CLOSING; CONDITIONS TO CLOSING . . . . . . . . . . . . . 16
10.1. Representations and Warranties; Covenants;
Events . . . . . . . . . . . . . . . . . . . . . 16
10.2. Delivery of Documents . . . . . . . . . . . . . . 16
10.3. Warrant to Purchase Common Stock. . . . . . . . . 16
11. DEFAULT; REMEDIES. . . . . . . . . . . . . . . . . . . . 16
11.1. Events of Default.. . . . . . . . . . . . . . . . 16
11.2. Remedies. . . . . . . . . . . . . . . . . . . . . 17
12. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . 18
12.1. Cumulative Remedies; No Prior Recourse to
Collateral . . . . . . . . . . . . . . . . . . . 18
12.2. No Implied Waivers. . . . . . . . . . . . . . . . 18
12.3. Severability. . . . . . . . . . . . . . . . . . . 19
12.4. Governing Law.. . . . . . . . . . . . . . . . . . 19
12.5. Consent to Jurisdiction and Venue; Service
of Process. . . . . . . . . . . . . . . . . . . .19
12.6. Waivers.. . . . . . . . . . . . . . . . . . . . . 19
12.7. Survival of Representations and Warranties. . . . 19
12.8. Indemnification.. . . . . . . . . . . . . . . . . 19
12.9. Other Security and Guaranties.. . . . . . . . . . 20
12.10. Notices. . . . . . . . . . . . . . . . . . . . . 20
12.11. Waiver of Notices. . . . . . . . . . . . . . . . 21
12.12. Binding Effect; Assignment; Disclosure.. . . . . 21
12.13. Modification.. . . . . . . . . . . . . . . . . . 21
12.14. Counterparts.. . . . . . . . . . . . . . . . . . 21
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12.15. Captions.. . . . . . . . . . . . . . . . . . . . 21
12.16. Right of Set-Off.. . . . . . . . . . . . . . . . 22
12.17. Fees and Expenses. . . . . . . . . . . . . . . . 22
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EXHIBITS
Exhibit A - Bridge Loan Note (Section 2.1.1)
Exhibit B - Form of Warrant (Section 2.1.1)
Exhibit C - Location of Collateral (Section 6.3)
Exhibit D - Fictitious Names; Names of Acquired Persons (Section 8.4)
Exhibit E - Subsidiaries (Section 8.5)
Exhibit F - Form of UCC-1 (Section 21.2)
Exhibit G - Registration Rights Agreement (Section 10.3)
Exhibit H - Permitted Liens (Section 1.1)
Exhibit I - Permitted Debt (Section 9.7)
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THIS BRIDGE LOAN AND SECURITY AGREEMENT (THE "AGREEMENT") IS
MADE AND ENTERED INTO AS OF NOVEMBER 4, 1998, BY AND BETWEEN INCOMNET, INC., A
CALIFORNIA CORPORATION (THE "BORROWER"), AND IRONWOOD TELECOM LLC, A COLORADO
LIMITED LIABILITY COMPANY (THE "LENDER").
BACKGROUND
The Lender has agreed to make to the Borrower, and the
Borrower has agreed to accept from the Lender, a secured term loan (the "Bridge
Loan") in the aggregate principal amount of $1,785,470 on the terms and
conditions set forth below. The proceeds of the Bridge Loan are to be used for
(i) capital contributions to the Borrower's subsidiary National Telephone &
Communications, Inc. ("NTC"), (ii) payment of NTC's current trade payables and
(iii) for NTC's general corporate purposes. The Bridge Loan will be made
pursuant to the Lender's commitment to fund dated October 30, 1998 pursuant to
which the Lender is committed, subject to certain terms and conditions to
(a) make the Bridge Loan, (b) make a secured term loan to Mr. John P. Casey for
the benefit of the Borrower to finance Mr. Casey's purchase of the outstanding
preferred stock of the Borrower and (c) make a secured term loan (the "Term
Loan") to the Borrower on or before December 15, 1998 in the amount of
$20,000,000 (less the principal amount of the loan to Mr. Casey and certain
other payments the Lender has agreed to make or may elect to make for the
benefit of the Borrower) for the purpose of paying off in full all principal of
and interest on the Bridge Loan and other corporate purposes.
AGREEMENT
In consideration of the mutual conditions and agreements set
forth in this Agreement, and for good and valuable consideration, the receipt of
which is hereby acknowledged, the Borrower and the Lenders hereby agree as
follows:
1. DEFINITIONS AND TERMS.
1.1. DEFINITIONS.
As used herein:
"AFFILIATE" means a Person (a) which, directly or indirectly,
controls, is controlled by or is under common control with, the Borrower; (b)
which beneficially owns or holds, directly or indirectly, five percent or more
of any class of voting stock of the Borrower; or (c) five percent or more of any
class of the voting stock (or if such Person is not a corporation, five percent
or more of the equity interest) of which is beneficially owned or held, directly
or indirectly, by the Borrower. The term control (including the terms
"controlled by" and "under common control with") means the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of the Person in question.
"BRIDGE LOAN NOTE" has the meaning specified in Section 2.1.1.
"BUSINESS DAY" means any day that is not a Saturday, Sunday,
or a day on which banks in Los Angeles, California or Denver, Colorado, are
required or permitted to close.
"CLOSING DATE" means the date of this Agreement, being the
date first above written.
"CODE" means the Internal Revenue Code of 1986, as amended
from time to time.
"COLLATERAL" has the meaning given to such term in Section
6.1.1.
"CONTRACT RIGHTS" means, collectively, all of the Borrower's
rights and remedies under, and all moneys and claims for money due or to become
due to the Borrower under all material contracts and agreements to which the
Borrower is a party and any and all amendments, supplements, extensions, and
renewals thereof.
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"DEBT" means all liabilities, obligations and indebtedness of
the Borrower to any Person, of any kind or nature, now or hereafter owing,
arising, due or payable, howsoever evidenced, created, incurred, acquired or
owing, whether primary, secondary, direct, contingent, fixed or otherwise.
Without in any way limiting the generality of the foregoing, Debt shall
specifically include the following: (i) the Borrower's liabilities and
obligations to trade creditors; (ii) all Obligations; (iii) all obligations and
liabilities of any Person secured by any Lien on the Borrower's Property, even
though the Borrower shall not have assumed or become liable for the payment
thereof; PROVIDED, HOWEVER, that all such obligations and liabilities which are
limited in recourse to such Property shall be included in Debt only to the
extent of the book value of such Property as would be shown on a balance sheet
of the Borrower prepared in accordance with GAAP; (iv) all obligations and
liabilities created or arising under any Capital Lease or conditional sale or
other title retention agreement with respect to Property used or acquired by the
Borrower, even if the rights and remedies of the lessor, seller or lender
thereunder are limited to repossession of such Property; PROVIDED, HOWEVER, that
all such obligations and liabilities which are limited in recourse to such
Property shall be included in Debt only to the extent of the book value of such
Property as would be shown on a balance sheet of the Borrower prepared in
accordance with GAAP; (v) all accrued pension fund and other employee benefit
plan obligations and liabilities; (vi) all obligations and liabilities under
Guaranties; and (vii) deferred taxes.
"EBITDA" means in any fiscal period, Borrower's consolidated
net income (other than extraordinary or non-recurring items of Borrower for such
period), plus (i) the amount of all interest expense, income tax expense,
depreciation expense, and amortization expense of Borrower for such period, on a
consolidated basis, and plus or minus (as the case may be) (ii) any other
non-cash charges which have been added or subtracted, as the case may be, in
calculating Borrower's consolidated net income for such period.
"EQUIPMENT" means all of the Borrower's now owned and
hereafter acquired machinery, equipment, furniture, furnishings, fixtures, and
other tangible personal property (except Inventory), including, without
limitation, data processing hardware and software, motor vehicles, aircraft,
dies, tools, jigs, and office equipment, as well as all of such types of
property leased by the Borrower and all of the Borrower's rights and interests
with respect thereto under such leases (including, without limitation, options
to purchase); together with all present and future additions and accessions
thereto, replacements therefor, component and auxiliary parts and supplies used
or to be used in connection therewith, and all substitutes for any of the
foregoing, and all manuals, drawings, instructions, warranties and rights with
respect thereto wherever any of the foregoing is located.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time.
"EVENT" means any event or condition which, with notice, the
passage of time, the happening of any other condition or event, or any
combination thereof, would constitute an Event of Default.
"EVENT OF DEFAULT" has the meaning given to such term in
Section 11.1.
"FISCAL YEAR" means the Borrower's fiscal year for financial
accounting purposes. The current Fiscal Year of the Borrower will end on
December 31, 1998.
"GAAP" means at any particular time generally accepted
accounting principles as in effect at such time.
"GENERAL INTANGIBLES" means all general intangibles of
Borrower, whether now owned or hereafter created or acquired by Borrower,
including, without limitation, all choses in action, causes of action, corporate
or other business records, deposit accounts, investment property, inventions,
designs, drawings, blueprints, patents, patent applications, trademarks and the
goodwill of the business symbolized thereby, names, trade names, trade secrets,
goodwill, copyrights, registrations, licenses, franchises, customer lists,
security and other deposits, rights in all litigation presently or hereafter
pending for any cause or claim (whether in contract, tort or otherwise), and all
judgments now or hereafter arising therefrom, all claims of Borrower against the
Lender, rights to purchase or sell real or personal property, rights as a
licensor or licensee of any kind, royalties, telephone numbers, proprietary
information, purchase orders, and all insurance policies and claims (including
without limitation life insurance, key
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man insurance, credit insurance, liability insurance, property insurance and
other insurance), tax refunds and claims, computer programs, discs, tapes and
tape files, claims under guaranties, security interests or other security
held by or granted to Borrower, all rights to indemnification and all other
intangible property of every kind and nature (other than Receivables).
"GUARANTY" by any Person means all obligations of such Person
which in any manner directly or indirectly guarantee the payment or performance
of any indebtedness or other obligation of any other Person (the "guaranteed
obligations"), or assure or in effect assure the holder of the guaranteed
obligations against loss in respect thereof, including, without limitation, any
such obligations incurred through an agreement, (a) to purchase the guaranteed
obligations or any Property constituting security therefor or (b) to advance or
supply funds for the purchase or payment of the guaranteed obligations or to
maintain a working capital or other balance sheet condition.
"INTERCOMPANY ACCOUNTS" means all assets and liabilities,
however arising, which are due to the Borrower from, which are due from the
Borrower to, or which otherwise arise from any transaction by the Borrower with,
any Affiliate.
"INVENTORY" means all of the Borrower's now owned and
hereafter acquired inventory, goods, merchandise, and other personal property,
wherever located, to be furnished under any contract of service or held for sale
or lease, all raw materials, work-in-process, finished goods, returned and
repossessed goods, and materials and supplies of any kind, nature or description
which are or might be used or consumed in the Borrower's business or used in
connection with the manufacture, packing, shipping, advertising, selling or
finishing of such inventory, goods, merchandise and other personal property, and
all documents of title or other documents representing them.
"IRS" means the Internal Revenue Service or any successor
agency.
"LIEN" means: any interest in property securing an obligation
owed to, or a claim by, a Person other than the owner of the Property, whether
such interest is based on the common law, statute, or contract, and includes,
without limitation, a security interest, charge, claim, or lien arising from a
mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment, deposit
arrangement, agreement, or conditional sale, or a lease, consignment or bailment
for security purposes, or any reservation, exception, encroachment, easement,
right-of-way, condition, restrictment, lease or other title exception or
encumbrance affecting Property.
"LOAN DOCUMENTS" means this Agreement, the Bridge Loan Note,
the Warrant, and all other agreements, instruments, and documents heretofore,
now or hereafter evidencing, securing, guaranteeing or otherwise relating to the
Obligations, the Collateral, the Security Interest, or any other aspect of the
transactions contemplated by this Agreement.
"MATERIAL ADVERSE CHANGE" means a material and adverse change
in the Property, business, operations or condition (financial or otherwise) of
the Borrower and its Subsidiaries taken as a whole.
"NTC" means National Telephone & Communications, Inc., a
Delaware corporation.
"OBLIGATIONS" means all present and future loans, advances,
liabilities, obligations, covenants, duties, and Debts owing by the Borrower to
the Lender, whether or not arising under this Agreement, whether or not
evidenced by any note or other instrument or document, whether arising from an
extension of credit, opening of a letter of credit, acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment from others, and any participation by
the Lender in the Borrower's debts owing to others), absolute or contingent, due
or to become due, primary or secondary, as principal or guarantor, and
including, without limitation, all interest, charges, expenses, fees, attorneys'
fees, filing fees and any other sums chargeable to the Borrower hereunder, under
another Loan Document, or under any other agreement or instrument with the
Lender.
"PBGC" means the Pension Benefit Guaranty Corporation or any
Person succeeding to the functions thereof.
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"PERMITTED LIENS" means: (a) Liens for taxes not yet payable
or Liens for taxes being contested in good faith and by proper proceedings
diligently pursued, provided that a reserve or other appropriate provision, if
any, as shall be required by GAAP shall have been made therefor and that a stay
of enforcement of any such Lien is in effect; (b) Liens in favor of the Lender;
(c) Liens upon Equipment granted in connection with the acquisition of such
Equipment by the Borrower after the date hereof; (d) reservations, exceptions,
encroachments, easements, rights of way, covenants, conditions, restrictions,
leases and other similar title exceptions or encumbrances affecting the Real
Property, PROVIDED that they do not in the aggregate materially detract from the
value of said Properties or materially interfere with their use in the ordinary
conduct of the Borrower's business; (e) deposits under workmen's compensation,
unemployment insurance, social security and other similar laws; (f) liens
relating to statutory obligations with respect to surety and appeal bonds,
performance bonds and other obligations of a like nature incurred in the
ordinary course of business; and (g) Liens described on Exhibit "H".
"PERSON" means any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated organization, association,
corporation, Public Authority, or any other entity.
"PLAN" means any pension or other employee benefit plan which
is subject to Title IV of ERISA, and which is: (a) a plan maintained by the
Borrower or any Related Company; (b) a plan to which the Borrower or any Related
Company contributes or is required to contribute; (c) a plan to which the
Borrower or any Related Company was required to make contributions at any time
during the five (5) calendar years preceding the date of this Agreement; or (d)
any other plan with respect to which the Borrower or any Related Company has
incurred or may incur liability, including contingent liability, under Title IV
of ERISA, either to such plan or to the PBGC.
"PREMISES" means all of Borrower's rights, title, and interest
in the real property now owned or leased or hereafter acquired, including all
rights and easements in connection therewith and all buildings and improvements
now or hereafter constructed thereon.
"PROCEEDS" means all products and proceeds, including rentals,
of any Collateral, and all proceeds of such proceeds and products, including,
without limitation, all cash and credit balances, all Payments under any
indemnity, warranty, or guaranty payable with respect to any Collateral, all
awards for taking by eminent domain, all proceeds of fire or other insurance,
and all money and other Property obtained as a result of any claims against
third parties or any legal action or proceeding with respect to Collateral.
"PROPERTY" means any interest in any kind of property or
asset, whether real, personal or mixed, or tangible or intangible.
"PUBLIC AUTHORITY" means the government of any country or
sovereign state, or of any state, province, municipality, or other political
subdivision thereof, or any department, agency, public corporation or other
instrumentality of any of the foregoing.
"REAL PROPERTY" means all of the Borrower's rights, title, and
interest, other than leasehold interests, in real property now owned or
hereafter acquired by the Borrower, including all rights and easements in
connection therewith and all buildings and improvements now or hereafter
constructed thereon.
"RECEIVABLES" means all of the Borrower's now owned and
hereafter arising or acquired: accounts (whether or not earned by performance),
including accounts owed to the Borrower by any of its Subsidiaries or
Affiliates, together with all interest, late charges, penalties, collection
fees, and other sums which shall be due and payable in connection with any
account; proceeds of any letters of credit naming the Borrower as beneficiary;
contract rights, chattel instruments, documents, general intangibles (including,
without limitation, choices in action, causes of action, tax refunds, tax refund
claims, Reversions and other amounts payable to the Borrower from pension and
employee benefit plans, rights and claims against shippers and carriers, rights
to indemnification and business interruption insurance), and all forms of
obligations owing to the Borrower (including, without limitation, obligations
owing to the Borrower by Subsidiaries and Affiliates); guarantees and other
security for any of the foregoing; and rights of stoppage in transit, replevin,
and reclamation; and other rights or remedies of an unpaid vendor, lienor, or
secured party.
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"RELATED COMPANY" means any member of any controlled group of
corporations (as defined in Section 414 of the Code) of which the Borrower is a
part, or any trade or business (whether or not incorporated) which together with
the Borrower would be treated as a single employer under Section 4001 of ERISA.
"REPORTABLE EVENT" shall have the meaning assigned to that
term in Title IV of ERISA, including, without limitation, a reportable event
described in Section 4043 of ERISA or the regulations thereunder, a withdrawal
from a Plan described in Section 4063 of ERISA, or a cessation of operations
described in Section 4062(e) of ERISA.
"RESTRICTED INVESTMENT" means any acquisition of Property by
the Borrower or any of its Subsidiaries in exchange for cash or other Property,
whether in the form of an acquisition of stock, indebtedness or other
obligation, or by loan, advance, capital contribution, or otherwise, except the
following: (a) Property to be used in the business of the Borrower; (b) current
assets arising from the sale or lease of goods or rendition of services in the
ordinary course of business of the Borrower; (c) direct obligations of the
United States of America, or any agency thereof, or obligations guaranteed by
the United States of America, provided that such obligations mature within one
(1) year from the date of acquisition thereof; (d) certificates of deposit
maturing within one (1) year from the date of acquisition, bankers' acceptances,
Eurodollar bank deposits, or overnight bank deposits, in each case issued by,
created by, or with a bank or trust company organized under the laws of the
United States or any state thereof having capital and surplus aggregating at
least $100,000,000; and (e) Commercial paper given the highest rating by a
national credit rating agency and maturing not more than two hundred seventy
(270) days from the date of creation thereof; and (f) investments in any of
Borrower's Subsidiaries (by capital contribution or otherwise) or purchase or
repurchase of any stock or indebtedness, or any Property, of any of Borrower's
Subsidiaries.
"REVERSIONS" means any funds which may become due to the
Borrower in connection with the termination of any Plan or other employee
benefit plan.
"SECURITY INTEREST" means, collectively, the Liens granted to
the Lender in the Collateral pursuant to this Agreement, the other Loan
Documents, or any other agreement.
"SUBSIDIARY" means any present or future corporation of which
the Borrower owns, directly or indirectly, more than 50% of the voting stock.
"TERM LOAN" has the meaning specified in the Background
section of this Agreement.
"TERMINATION EVENT" means: (a) a Reportable Event with
respect to a Plan described in Section 4043 of ERISA and the regulations issued
thereunder (other than a Reportable Event not subject to the provision for
thirty (30) days' notice to the PBGC under such regulations); (b) the withdrawal
of the Borrower or any Related Company from a Plan during a plan year in which
it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA; (c)
the filing of a notice of intent to terminate a Plan or the treatment of a Plan
amendment as a termination under Section 4041 of ERISA; (d) the institution of
proceedings by the PBGC to terminate or have a trustee appointed to administer a
Plan; (e) any other event or condition which might constitute grounds under
Section 4042 of ERISA for the termination of, or the appointment of a trustee to
administer, any Plan; or (f) the partial or complete withdrawal of the Borrower
or any Related Company from a Multiemployer Plan.
"UCC" means the Uniform Commercial Code (or any successor
statute) of the State of California or of any other state the laws of which are
required by Section 9-103 thereof to be applied in connection with the issue of
perfection of security interests, as such statutes are in effect during the term
hereof.
1.2. ACCOUNTING TERMS.
Any accounting term used in this Agreement shall have, unless
otherwise specifically provided herein, the meaning customarily given in
accordance with GAAP, and all financial computations hereunder shall be
computed, unless otherwise specifically provided herein, in accordance with GAAP
as consistently applied.
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1.3. OTHER TERMS.
All other undefined terms contained in this Agreement
shall, unless the context indicates otherwise, have the meanings provided for
by the UCC to the extent the same are used or defined therein. Wherever
appropriate in the context, terms used herein in the singular also include
the plural, and vice versa, and each masculine, feminine, or neuter pronoun
shall also include the other genders.
2. LOANS.
2.1. TERM LOAN.
2.1.1. The Lender will make a term loan (the "Bridge
Loan") to the Borrower in the principal amount of One Million Eight Five
Thousand Four Hundred Seventy Dollars ($1,785,470). The proceeds of the
Bridge Loan will be disbursed to the Borrower on the Closing Date. The
Bridge Loan will be repayable in accordance with the terms of the promissory
note (the "Bridge Loan Note") which will be authorized, issued and delivered
by Borrower to Lender, in the form attached as Exhibit "A" and made a part
hereof. On the Closing Date, the Borrower shall issue the Warrant in the
form of Exhibit "B" to the Lender.
3. INTEREST AND OTHER CHARGES.
3.1. INTEREST.
3.1.1. INTEREST FORMULA.
The Borrower shall pay to the Lender interest on the unpaid
principal balance of the Bridge Loan at a per annum rate equal to 15%.
Interest charges shall be computed on the basis of a year of 360 days and
actual days elapsed and shall be payable to the Lender on the earlier of
December 15, 1998 and the date of repayment in full of the principal amount
of the Bridge Loan.
3.1.2. DEFAULT INTEREST RATES.
If any Event of Default occurs, then, from the date such
Event of Default occurs and until it is cured, or until all Obligations are
paid and performed in full, whichever first occurs, the Borrower shall pay
interest on the unpaid principal balance of the Bridge Loan at a per annum
rate equal to 3% plus the rate of interest otherwise specified herein as
applicable to such loan (the "Default Rate").
3.2. MAXIMUM INTEREST RATE.
In no event shall the interest rate and other charges
hereunder exceed the highest rate permissible under any law which a court of
competent jurisdiction shall, in a final determination, deem applicable
hereto. If a court determines that the Lender has received interest and other
charges hereunder in excess of the highest rate applicable hereto, such
excess shall be deemed to have been received on account of, and shall
automatically be applied to reduce, the Obligations, other than interest, in
the inverse order of maturity, and the provisions hereof shall be deemed
amended to provide for the highest permissible rate. If there are no
Obligations outstanding, the Lender shall refund to the Borrower such excess.
3.3. ORIGINATION FEE.
On the Closing Date, the Borrower shall pay to the Lender
an Origination Fee in the amount of $100,000.
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4. PAYMENTS AND PREPAYMENTS.
4.1. REPAYMENT OF BRIDGE LOAN.
The Borrower shall repay the principal of the Bridge Loan in
full on the earlier of December 15, 1998 and the closing date of the Term Loan.
4.2. VOLUNTARY PREPAYMENTS OF BRIDGE LOAN.
4.2.1. The Borrower may prepay the principal of the
Bridge Loan in whole or in part at any time and from time to time, upon at
least two (2) Business Days' prior written notice to the Lenders. All
prepayments of the principal of the Bridge Loan shall be accompanied by the
payment of all accrued but unpaid interest on the prepaid principal amount of
the Bridge Loan to the date of prepayment.
4.2.2. Any prepayment under this section of less than all
of the outstanding principal of the Bridge Loan shall be applied, first, to
accrued but unpaid interest on the Bridge Loan and, second, to the principal
amount of the Bridge Loan to be prepaid.
4.3. PLACE AND FORM OF PAYMENTS; EXTENSION OF TIME.
All payments of principal, interest, and other sums due to
the Lender shall be made at Lender's address set forth in the Bridge Loan
Note held by the Lender. Except for Proceeds received directly by the
Lender, all such payment shall be made in immediately available funds. If
any payment of principal, interest, or other sum to be made hereunder becomes
due and payable on a day other than a Business Day, the due date of such
payment shall be extended to the next succeeding Business Day and interest
thereon shall be payable at the applicable interest rate during such
extension.
4.4. APPLICATION AND REVERSAL OF PAYMENTS.
The Lender shall have the continuing and exclusive right to
apply and reverse and reapply any and all Proceeds of Collateral and payments
that the Lender receives to any portion of the Obligations.
4.5. INDEMNITY FOR RETURNED PAYMENTS.
If after receipt of any payment of, or Proceeds applied to
the payment of, all or any part of the Obligations, the Lender is for any
reason required to surrender such payment or Proceeds to any Person, because
such payment or Proceeds is invalidated, declared fraudulent, set aside,
determined to be void or voidable as a preference, or a diversion of trust
funds, or for any other reason, then: the Obligations or part thereof
intended to be satisfied shall be revived and continue and this Agreement
shall continue in full force as if such payment or Proceeds had not been
received by the Lender and the Borrower shall be liable to pay to the Lender,
and hereby does indemnify the Lender and holds the Lender harmless for the
amount of such payment or Proceeds surrendered. The provisions of this
section shall be effective notwithstanding any contrary action which may have
been taken by the Lender in reliance upon such payment or Proceeds, and any
such contrary action so taken shall be without prejudice to the Lender's
rights under this Agreement and shall be deemed to have been conditioned upon
such payment or Proceeds having become final and irrevocable. The provisions
of this section shall survive the termination of this Agreement.
5. LENDER'S BOOKS AND RECORDS; QUARTERLY STATEMENTS.
The Borrower agrees that the books and records of the
Lender showing the Obligations and the transactions pursuant to this
Agreement and the other Loan Documents shall be admissible in any action or
proceeding arising therefrom, and shall constitute prima facie proof thereof,
irrespective of whether any Obligation is also evidenced by a promissory note
or other instrument. The Lender will provide to the Borrower a quarterly
statement of Loans, payments, and other transactions pursuant to this
Agreement. Such statement shall be deemed
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correct, accurate, and binding on the Borrower and as an account stated
(except for reversals and reapplications of payments made as provided in
Section 4.5 and corrections of errors discovered by the Lender), unless the
Borrower notifies the Lender in writing to the contrary within thirty (30)
days after such statement is rendered. In the event a timely written notice
of objections is given by the Borrower, only the items to which exception is
expressly made will be considered to be disputed by the Borrower.
6. COLLATERAL.
6.1. GRANT OF SECURITY INTEREST.
6.1.1. As security for the Obligations, the Borrower
hereby grants to the Lender a continuing security interest in, lien on, and
assignment of: (i) all Contract Rights, Equipment, General Intangibles,
Inventory, Receivables and Proceeds, wherever located and whether now
existing or hereafter arising or acquired; (ii) all proceeds of the sale of
any equity securities of Rapid Cast, Inc. of which the Borrower is the owner
(beneficial or otherwise), (iii) all moneys, securities and other property
and the Proceeds thereof, now or hereafter held or received by, or in transit
to, the Lender from or for the Borrower, whether for safekeeping, pledge,
custody, transmission, collection or otherwise, including, without
limitation, all of the Borrower's deposit accounts, credits, and balances
with any bank and all claims of the Borrower against any bank at any time
existing and all claims of the Borrower's deposit accounts with any financial
institution with which the Borrower maintains deposits; (iv) all of
Borrower's deposit accounts with any financial institutions with which
Borrower maintains deposits; and (v) all books, records and other Property
relating to or referring to any of the foregoing, including, without
limitation, all books, records, ledger cards, data processing records,
computer software and other Property and general intangibles at any time
evidencing or relating to the Equipment, General Tangibles, Proceeds, and
other property referred to above (all of the foregoing, together with the
Premises and all other Property in which the Lender may at any time be
granted a Lien, being herein collectively referred to as the "COLLATERAL").
The Lender shall have all of the rights of a secured party with respect to
the Collateral under the UCC and other applicable laws.
6.1.2. All Obligations shall constitute a single loan
secured by the Collateral. The Lender may except as otherwise provided in
the Loan Documents, in its sole discretion, (i) exchange, waive, or release
any of the Collateral, (ii) apply Collateral and direct the order or manner
of sale thereof as the Lender may determine, and (iii) settle, compromise,
collect, or otherwise liquidate any Collateral in any manner, all without
affecting the Obligations or the Lender's right to take any other action
with respect to any other Collateral.
6.2. PERFECTION AND PROTECTION OF SECURITY INTEREST.
6.2.1. The Borrower shall, at its expense, perform all
steps requested by the Lender at any time to perfect, maintain, protect, and
enforce the Security Interest, including, without limitation: (i) executing
and filing financing or continuation statements, and amendments thereof, in
form and substance satisfactory to the Lender; (ii) delivering to the Lender
the originals of all instruments, documents, and chattel paper, and all other
Collateral of which the Lender determines it should have physical possession
in order to perfect and protect the Security Interest therein, duly endorsed
or assigned to the Lender without restriction; (iii) placing notations on the
Borrower's books of account to disclose the Security Interest; (iv)
delivering to the Lender all letters of credit on which the Borrower is named
beneficiary; and (v) taking such other steps as are deemed necessary by the
Lender to maintain the Security Interest.
6.2.2. The Lender may file, without the Borrower's
signature, one or more financing statements disclosing the Security Interest.
The Borrower agrees that a carbon, photographic, photostatic, or other
reproduction of this Agreement or of a financing statement is sufficient as a
financing statement. If any Collateral is at any time in the possession or
control of any warehouseman, bailee or any of the Borrower's agents or
processors, then the Borrower shall notify the Lender thereof and shall
notify such Person of the Security Interest in such Collateral and, upon the
Lender's request, instruct such Person to hold all such Collateral for the
Lender's account subject to the Lender's instructions. If at any time any
Collateral is located on any Premises that are not owned by the Borrower,
then the Borrower shall obtain written waivers, in form and substance
satisfactory to the Lender, of all present and future Liens to which the
owner or lessor or any mortgagee of such Premises may be entitled to assert
against the Collateral. From time to time, the Borrower shall, upon the
Lender's request, execute and deliver
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confirmatory written instruments pledging the Collateral to the Lender but
the Borrower's failure to do so shall not affect or limit the Security
Interest. So long as this Agreement is in effect, and until all Obligations
have been fully satisfied, the Security Interest shall continue in full force
and effect in all Collateral. Concurrently herewith the Borrower shall
deliver to the Lender certificates representing the Rapid Cast, Inc. equity
securities, the sales proceeds of which are pledged as security for the
Obligations pursuant to Section 6.1. The Lender shall hold these
certificates as security for the Borrower's covenant not to sell the
securities represented by such certificates without the prior consent of the
Lender.
6.3. LOCATION OF COLLATERAL.
The Borrower represents and warrants to the Lender that:
(a) Exhibit "C" hereto is a correct and complete list of the Borrower's chief
executive office, the location of its books and records, the locations of the
Collateral, and the locations of all of its other places of business; and (b)
Exhibit "C" correctly identifies any of such facilities and locations that
are not owned by the Borrower and sets forth the names of the owners and
lessors of, and, to the best of the Borrower's knowledge, the holders of any
mortgages on such facilities and locations. The Borrower agrees that it will
not maintain any Collateral at any location other than those listed on
Exhibit "C", and that it will not otherwise change or add to any of such
locations, unless it gives the Lender at least thirty (30) days' prior
written notice and executes such financing statements and other documents
that the Lender requests in connection therewith.
6.4. TITLE TO, LIENS ON, AND SALE AND USE OF, COLLATERAL.
The Borrower represents, warrants and covenants to the
Lender that: (i) all Collateral is and will continue to be owned by the
Borrower free and clear of all Liens whatsoever, except for the Security
Interest and other Permitted Liens; (ii) the Security Interest will not be
subject to any prior Lien except Permitted Liens, if any; (iii) the Borrower
will use, store, and maintain the Collateral with all reasonable care and
will use the Collateral for lawful purposes only; (iv) the Borrower will not,
without the Lender's prior written approval, sell, or dispose of, or permit
the sale or disposition of any Collateral except in the ordinary course of
business; and (v) the Borrower will not, without the Lender's prior written
approval, sell, dispose of, transfer or assign any equity securities of Rapid
Cast, Inc., now or hereafter owned by the Borrower (beneficially or
otherwise). The inclusion of Proceeds in the Collateral shall not be deemed
the Lender's consent to any sale or other disposition of the Collateral
except as expressly permitted herein.
6.5. ACCESS AND EXAMINATION.
The Lender shall at all reasonable times have access to,
examine, audit, make extracts from and inspect the Borrower's records, files,
and books of account and the Collateral and may discuss the Borrower's
affairs with the Borrower's officers and management. The Borrower shall
deliver to the Lender any instrument necessary for the Lender to obtain
records from any service bureau maintaining records for the Borrower. The
Lender may, at any time when an Event of Default exists, and at the
Borrower's expense, make copies of all of the Borrower's books and records,
or require the Borrower to deliver such copies to the Lender. The Lender
may, without expense to the Lender, use such of the Borrower's personnel,
supplies, and premises as may be reasonably necessary for maintaining or
enforcing the Security Interest.
6.6. INSURANCE.
6.6.1. The Borrower shall insure the Collateral against
loss or damage by fire with extended coverage, theft, burglary, pilferage,
loss in transit, and such other hazards as the Lender shall specify, in
amounts, under policies and by insurers acceptable to the Lender. The
Borrower shall also maintain flood insurance, in the event of a designation
of the area in which any Real Property is located as "flood prone" or a
"flood risk area," as defined by the Flood Disaster Protection Act of 1973,
in an amount to be reasonably determined by the Lender, and shall comply with
the additional requirements of the National Flood Insurance Program as set
forth therein. The Borrower shall cause the Lender to be named in each such
policy as secured party or mortgagee and loss payee or additional insured, in
a manner acceptable to the Lender. Each policy of insurance shall contain a
clause or endorsement requiring the insurer to give not less than thirty (30)
days' prior written notice to the Lender in the
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event of cancellation of the policy for any reason whatsoever and a clause or
endorsement stating that the interest of the Lender shall not be impaired or
invalidated by any act or neglect of the Borrower or the owner of any
Premises where Collateral is located nor by the use of such Premises for
purposes more hazardous than are permitted by such policy. All premiums for
such insurance shall be paid by the Borrower when due, and certificates of
insurance and, if requested, photocopies of the policies shall be delivered
to the Lender. If the Borrower fails to procure such insurance or to pay the
premiums therefor when due, the Lender may (but shall not be required to) do
so and charge the costs thereof to the Borrower's loan account. The Borrower
shall promptly notify the Lender of any loss, damage, or destruction to the
Collateral or arising from its use, whether or not covered by insurance.
6.6.2. The Lender is hereby authorized to collect all
insurance proceeds directly. After deducting from such proceeds the
expenses, if any, incurred by the Lender in the collection or handling
thereof, the Lender may apply such proceeds to the reduction of the
Obligations, in such order as the Lender determines, or, at the Lender's
option, may permit or require the Borrower to use such money, or any part
thereof, to replace, repair, restore or rebuild the Collateral in a diligent
and expeditious manner with materials and workmanship of substantially the
same quality as existed before the loss, damage or destruction.
6.7. EQUIPMENT.
The Borrower represents and warrants to the Lender that all
of the Equipment is and will be used or held for use in the Borrower's
business. The Borrower shall keep and maintain the Equipment in good
operating condition and repair (ordinary wear and tear excepted) and shall
make all necessary replacements thereof. The Borrower shall promptly inform
the Lender of any material additions to or deletions from the Equipment. The
Borrower shall not permit any Equipment to become a fixture to real property
or an accession to other personal property, unless the Lender has a valid,
perfected, and first priority Security Interest in such real or personal
property. The Borrower shall not, without the Lender's prior written
consent, sell, lease as a lessor, or otherwise dispose of any of the
Equipment; PROVIDED, HOWEVER, that the Borrower may dispose of obsolete or
unusable Equipment having an orderly liquidation value no greater than
$1000.00 individually, and $10,000.00 in the aggregate in any Fiscal Year,
without the Lender's consent, subject to the conditions set forth below. In
the event any of the Equipment is sold, transferred or otherwise disposed of
with the Lender's prior written consent or as otherwise permitted hereby
and: (i) such sale, transfer or disposition is effected without replacement
of such Equipment, or such Equipment is replaced by Equipment leased by the
Borrower, or by Equipment purchased by the Borrower subject to a lien or
other right constituting a Permitted Lien, then the Borrower shall deliver
all of the cash proceeds of any such sale, transfer or disposition to the
Lender, which proceeds shall be applied to the repayment of the Obligations;
or (ii) such sale, transfer or disposition is made in connection with the
purchase by the Borrower of replacement Equipment (other than subject to a
Permitted Lien), then the Borrower shall use the proceeds of such sale,
transfer or disposition to finance the purchase by the Borrower of
replacement Equipment and shall deliver to the Lender written evidence of the
use of the proceeds for such purchase. All replacement Equipment purchased
by the Borrower shall be free and clear of all liens, claims and
encumbrances, except for the Security Interest and other Permitted Liens.
6.8. DOCUMENTS, INSTRUMENTS, AND CHATTEL PAPER.
The Borrower represents and warrants to the Lender that:
(a) all documents, instruments, and chattel paper describing, evidencing, or
constituting Collateral, and all signatures and endorsements thereon, are and
will be complete, valid, and genuine, and (b) all are and will be owned by
the Borrower free and clear of all Liens other than Permitted Liens.
6.9. RIGHT TO CURE.
The Lender may, in its sole discretion, pay any amount or
do any act required of the Borrower hereunder in order to preserve, protect,
maintain or enforce the Obligations, the Collateral or the Security Interest,
and which the Borrower fails to pay or do, including, without limitation,
payment of any judgment against the Borrower, any insurance premium, any
warehouse charge, processing charge, any landlord's claim, and any other
Lien upon the Collateral. All payments that the Lender makes under this
section and all out-of-pocket costs and expenses that the Lender pays or
incurs in connection with any action taken by it hereunder shall be charged
to the
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Borrower's loan account. Any payment made or other action taken by the
Lender under this section shall be without prejudice to any right to assert
an Event of Default hereunder and to proceed accordingly. Lender and the
Lender's designees as the Borrower's attorney, shall have the power: (a) to
endorse the Borrower's name on any checks, notes, acceptances, money orders,
or other forms of payment or security that come into the Lender's possession;
(b) to sign the Borrower's name on any document of title relating to any
Collateral; and (c) to do all things necessary to carry out this Agreement.
The Borrower ratifies and approves all acts of such attorney. Neither the
Lender nor the attorney will be liable for any acts or omissions or for any
error of judgment or mistake of fact or law. This power, being coupled with
an interest, is irrevocable until this Agreement has been terminated and the
Obligations have been fully satisfied.
6.10. LENDER'S RIGHTS, DUTIES AND LIABILITIES.
The Borrower assumes all responsibility and liability
arising from or relating to the use, sale, or other disposition of the
Collateral. Neither the Lender nor any of its officers, directors, employees,
or agents shall be liable or responsible in any way for the safekeeping of
any of the Collateral, or for any act or failure to act with respect to the
Collateral, or for any diminution in the value thereof, all of which shall be
at the Borrower's sole risk. The Obligations shall not be affected by any
failure to the Lender to take any steps to perfect the Security Interest or
to collect or realize upon the Collateral, nor shall loss of or damage to the
Collateral.
7. BOOKS AND RECORDS; FINANCIAL INFORMATION; NOTICES.
7.1. BOOKS AND RECORDS.
The Borrower shall maintain, at all times, correct and
complete books, records and accounts in which complete, correct and timely
entries are made of its transactions in accordance with GAAP. The Borrower
shall, by means of appropriate entries, reflect in such accounts and in all
financial statements proper liabilities and reserves for all taxes and proper
provision for depreciation and amortization of Property and bad debts, all in
accordance with GAAP. The Borrower shall maintain at all times books and
records pertaining to the Collateral in such detail, form, and scope as the
Lender shall reasonably require.
7.2. FINANCIAL INFORMATION.
The Borrower shall promptly furnish to the Lender all such
financial information as the Lender shall reasonably request, and notify its
auditors and accountants that the Lender is authorized to obtain such
information directly from them. Without limiting the foregoing, the Borrower
and its Subsidiaries will furnish to the Lender:
7.2.1. Promptly upon their becoming available, copies of
each proxy statement, financial statement, and report which the Borrower
sends to its shareholders;
7.2.2. Promptly after filing with the PBGC and the IRS a
copy of each annual report or other filing filed with respect to each Plan of
the Borrower or any Related Company; and
7.2.3. Such additional information as the Lender may from
time to time reasonably request regarding the financial and business affairs
of the Borrower or any Subsidiary.
7.3. NOTICES TO THE LENDER.
The Borrower shall notify the Lender in writing of the
following matters at the following times:
7.3.1. Immediately after becoming aware of the existence
of any Event of Default;
7.3.2. Within two (2) days after becoming aware that the
holder of any capital stock of the Borrower or of any Debt has given notice
or taken any action with respect to a claimed default;
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7.3.3. Within two (2) days after becoming aware of any
material adverse change in the Borrower's Property, business, operations, or
condition (financial or otherwise);
7.3.4. Within two (2) days after becoming aware of any
pending or threatened action, proceeding, or counterclaim by any Person, or
any pending or threatened investigation by a Public Authority, which may
materially and adversely affect the Collateral, the repayment of the
Obligations, the Lender's rights under the Loan Documents, or the Borrower's
Property, business, operations, or condition (financial or otherwise);
7.3.5. Within two (2) days after becoming aware of any
pending or threatened strike, work stoppage, material unfair labor practice
claim, or other material labor dispute affecting the Borrower or any of its
Subsidiaries;
7.3.6. Within two (2) days after becoming aware of any
violation of any law, statute, regulation, or ordinance of a Public Authority
applicable to the Borrower, which may materially and adversely affect the
Collateral, the repayment of the Obligations, the Lender's rights under the
Loan Documents, or the Borrower's Property, business, operations, or
condition (financial or otherwise);
7.3.7. Immediately after becoming aware of any
Termination Event with respect to a Plan, or any other Reportable Event with
respect to a Plan, accompanied by any materials required to be filed with the
PBGC with respect thereto; immediately after the Borrower's receipt of any
notice concerning the imposition of any withdrawal liability under Section
4042 of ERISA with respect to a Plan; immediately upon the establishment of
any Plan not existing at the Closing Date or the commencement of
contributions by the Borrower to any Plan to which the Borrower was not
contributing at the Closing Date; and immediately upon becoming aware of any
other event or condition regarding a Plan or the Borrower's or a Related
Company's compliance with ERISA which may materially and adversely affect the
Borrower's Property, business, operation, or condition (financial or
otherwise); and
7.3.8. Thirty (30) days prior to the Borrower changing
its name.
Each notice given under this section shall describe the subject
matter thereof in reasonable detail and shall set forth the action that the
Borrower has taken or proposes to take with respect thereto.
8. GENERAL WARRANTIES AND REPRESENTATIONS.
The Borrower continuously warrants and represents to the
Lender, at all times during the term of this Agreement and until all
Obligations have been satisfied, that, except as hereafter disclosed to and
accepted by the Lender in writing:
8.1. AUTHORIZATION, VALIDITY, AND ENFORCEABILITY OF THIS
AGREEMENT AND THE LOAN DOCUMENTS.
The Borrower has the corporate power and authority to
execute, deliver and perform this Agreement and the other Loan Documents, to
incur the Obligations, and to grant the Security Interest. The Borrower has
taken all necessary corporate action (including, without limitation,
obtaining approval of its stockholders) to authorize its execution, delivery,
and performance of this Agreement and the other Loan Documents. No consent,
approval, or authorization of, or filing with, any Public Authority, and no
consent of any other Person, is required in connection with the Borrower's
execution, delivery, and performance of this Agreement and the other Loan
Documents, except for those already duly obtained. This Agreement and the
other Loan Documents have been duly executed and delivered by the Borrower
and constitute legal, valid and binding obligations of the Borrower,
enforceable against it in accordance with their respective terms, without
defense, setoff, or counterclaim. The Borrower's execution, delivery, and
performance of this Agreement and the other Loan Documents do not and will
not conflict with, or constitute a violation or breach of, or constitute a
default under, or result in the creation or imposition of any Lien upon the
Property of the Borrower or any of its Subsidiaries (except as contemplated
by this Agreement and the other Loan Documents) by reason of the terms of (a)
any mortgage, lease, agreement, or instrument to which the Borrower or any of
its Subsidiaries is a party or which is binding upon the Borrower or any of
its Subsidiaries, (b) any judgment, law, statute, rule or governmental
regulation applicable to
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the Borrower or any of its Subsidiaries, or (c) the Certificate or Articles
of Incorporation or By-Laws of the Borrower or any of its Subsidiaries.
8.2. VALIDITY AND PRIORITY OF SECURITY INTEREST.
The provisions of this Agreement and the other Loan
Documents create legal and valid Liens on all the Collateral in the Lender's
favor, and when all proper filings, recordings, and other actions necessary
to perfect such Liens have been made or taken, such Liens will constitute
perfected and continuing Liens on all the Collateral except for Permitted
Liens securing all the Obligations, and will be enforceable against the
Borrower and all third parties.
8.3. ORGANIZATION AND QUALIFICATION.
The Borrower: (a) is duly incorporated and organized and
validly existing in good standing under the laws of the State of California;
(b) is qualified to do business as a foreign corporation and is in good
standing in the States of Arizona, Nevada, Oregon and Washington, which are
the only states in which qualification is necessary in order for it to own or
lease its Property and conduct its business; and (c) has all requisite power
and authority to conduct its business and to own its Property, including, but
not limited to, all governmental permits, licenses and authorizations needed
to conduct its business.
8.4. CORPORATE NAME; PRIOR TRANSACTIONS.
The Borrower has not, during the past five (5) years, been
known by or used any other corporate or fictitious name, or been a party to
any merger or consolidation, or acquired all or substantially all of the
assets of any Person, or acquired any of its Property out of the ordinary
course of business, except as set forth on Exhibit "D".
8.5. SUBSIDIARIES AND AFFILIATES.
Exhibit "E" is a correct and complete list of the name and
relationship to the Borrower of each and all of the Borrower's Subsidiaries
and other Affiliates. Each Subsidiary and Affiliate is (a) duly incorporated
and organized and validly existing in good standing under the laws of its
state of incorporation set forth on Exhibit "E" and (b) qualified to do
business as a foreign corporation and in good standing in the states set
forth opposite its name on Exhibit "E", which are the only states in which
such qualification is necessary in order for it to own or lease its Property
and conduct its business.
8.6. USE OF PROCEEDS.
8.6.1. None of the transactions contemplated in this
Agreement (including, without limitation, the use of certain proceeds from
such Loans) will violate or result in the violation of Section 7 of the
Securities Exchange Act of 1934, as amended, or any regulations issued
pursuant thereto, including, without limitation, Regulations G, T, U and X of
the Board of Governors of the Federal Reserve System ("Federal Reserve
Board"), 12 C.F.R., Chapter II. The Borrower does not own or intend to carry
or purchase any "margin stock" within the meaning of said Regulation G. None
of the proceeds of the Loans will be used, directly or indirectly, to
purchase or carry (or refinance any borrowing, the proceeds of which were
used to purchase or carry) any "margin stock" within the meaning of the
Securities Exchange Act of 1934, as amended.
8.6.2. The Borrower will use the proceeds of the Bridge
Loan for no purposes other than (i) to pay the Origination Fee to the Lender
pursuant to Section 3.3; (ii) to make payments to certain shareholders; and
(iii) to make capital contributions to NTC. The Borrower shall cause NTC to
use the proceeds from such capital contributions to pay current trade
payables of NTC and for NTC's general corporate purposes.
8.7. PUBLIC DISCLOSURE.
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To the Borrower's knowledge, at the time of filing, no
document filed by the Borrower with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934, as amended, contains any
untrue statement of a material fact or omits to state any material fact
necessary in order to make the statements contained herein or therein not
misleading.
9. AFFIRMATIVE AND NEGATIVE COVENANTS.
The Borrower covenants that, so long as any of the
Obligations remains outstanding or this Agreement is in effect:
9.1. TAXES AND OTHER OBLIGATIONS.
The Borrower shall: (a) file when due all tax returns and
other reports which it is required to file, pay when due all taxes, fees,
assessments and other governmental charges against it or upon its Property,
income, and franchises, make all required withholding and other tax deposits,
and establish adequate reserves for the payment of all such items, and shall
provide to the Lender, upon request, satisfactory evidence of its timely
compliance with the foregoing; and (b) pay when due all Debt owed by it and
perform and discharge in a timely manner all other obligations undertaken by
it; provided, however, that the Borrower need not pay any tax, fee,
assessment, governmental charge, or Debt, or perform or discharge any other
obligation, that it is contesting in good faith by appropriate proceedings
diligently pursued and with respect to which prior notice has been given to
the Lender and reserves satisfactory to the Lender have been provided or a
bond satisfactory to the Lender has been posted.
9.2. CORPORATE EXISTENCE AND GOOD STANDING.
The Borrower and each of its Subsidiaries shall maintain
its corporate existence and its qualification and good standing in all states
necessary to conduct its business and own its Property, and shall obtain and
maintain all licenses, permits, franchises and governmental authorizations
necessary to conduct its business and own its Property.
9.3. MAINTENANCE OF PROPERTY AND INSURANCE.
The Borrower and each of its Subsidiaries shall: (a)
maintain all of its Property necessary and useful in its business in good
operating condition and repair, ordinary wear and tear excepted; and (b)
maintain with financially sound and reputable insurers such other insurance
with respect to its Property and business against casualties and
contingencies of such types (including, without limitation, business
interruption, environmental liability, public liability, product liability,
and larceny, embezzlement or other criminal misappropriation) and in such
amounts as is customary for Persons of established reputation engaged in the
same or a similar business and similarly situated, naming the Lender, at its
request, as additional insured under each such policy.
9.4. MERGERS, CONSOLIDATIONS, ACQUISITIONS, OR SALES.
Except with the prior written consent of the Lender,
neither the Borrower nor any of its Subsidiaries shall enter into any
transaction of merger, reorganization, or consolidation, or transfer, sell,
assign, lease, or otherwise dispose of all or any part of its Property other
than in the ordinary course of business, or windup, liquidate or dissolve, or
agree to do any of the foregoing.
9.5. TRANSACTIONS AFFECTING COLLATERAL OR OBLIGATIONS.
Neither the Borrower nor any of the Subsidiaries shall
enter into any transaction which materially and adversely affects the
Collateral or the Borrower's ability to repay the Obligations.
9.6. GUARANTIES.
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Neither the Borrower nor any of the Subsidiaries shall
make, issue, or become liable on any Guaranty, except Guaranties in favor of
the Lender.
9.7. DEBT.
Neither the Borrower nor any of the Subsidiaries shall
incur or maintain any Debt, other than: (a) the Obligations; (b) trade
payables and other contractual obligations to suppliers and customers
incurred in the ordinary course of business; (c) Debt incurred to finance the
purchase of equipment; (d) other Debt set forth on Exhibit "I"; and (e)
intercompany accounts.
9.8. PREPAYMENT.
Neither the Borrower nor any of the Subsidiaries shall
voluntarily prepay any Debt, except the Obligations in accordance with their
terms.
9.9. TRANSACTIONS WITH AFFILIATES.
Except as set forth below, or, as otherwise contemplated
under this Agreement, neither the Borrower nor any of the Subsidiaries shall:
sell, transfer, distribute, or pay any money or Property to any Affiliate,
or lend or advance money or Property to any Affiliate, or invest in (by
capital contribution or otherwise) or purchase or repurchase any stock or
indebtedness, or any Property, of any Affiliate, or become liable on any
Guaranty of the indebtedness, dividends, or other obligations of any
Affiliate. Notwithstanding the foregoing: the Borrower may (i) pay
compensation to employees, (ii) invest in any of its Subsidiaries (by capital
contribution or otherwise), (iii) purchase or repurchase any stock or
indebtedness, or any Property, of any of its Subsidiaries, (iv) provide the
Guaranty by NTC of the obligations of John P. Casey ("Casey") under the
Secured Promissory Note issued by Casey to the Lender on the date hereof or
(v) make the possible redemption by Borrower of stock owned by Casey and
Lender; and if no Event of Default has occurred and is continuing, the
Borrower and its Subsidiaries may engage in transactions with Affiliates in
the normal course of business, in amounts and upon terms fully disclosed to
the Lender, provided that such terms are no less favorable to the Borrower or
the Subsidiary, as the case may be, than those which would be obtainable in a
comparable arm's length transaction with a third party who is not an
Affiliate.
9.10. LIENS.
Neither the Borrower nor any of the Subsidiaries shall
create, incur, assume, or permit to exist any Lien on any Property now owned
or hereafter acquired by any of them, except Permitted Liens.
9.11. RESTRICTED INVESTMENTS.
Neither the Borrower nor any of the Subsidiaries shall make
any Restricted Investment.
9.12. EBITDA.
The Borrower shall not permit EBITDA for any fiscal month
to be less than -$800,000.
9.13. EQUITY SALES.
The Borrower shall not sell any equity securities or grant
any option or other rights to purchase or acquire any equity securities
without the prior consent of the Lender.
9.14. FURTHER ASSURANCES.
The Borrower shall execute and deliver, or cause to be
executed and delivered, to the Lender such documents and agreements, and
shall take or cause to be taken such actions, as the Lender may, from time to
time, request, to carry out the terms and conditions of this Agreement and
the other Loan Documents.
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10. CLOSING; CONDITIONS TO CLOSING.
The Lender will not be obligated to make the Bridge Loan,
unless the following conditions precedent have been satisfied as determined
by the Lender:
10.1. REPRESENTATIONS AND WARRANTIES; COVENANTS; EVENTS.
The Borrower's representations and warranties contained in
this Agreement and the other Loan Documents shall be correct and complete as
of the Closing Date; the Borrower shall have performed and complied with all
covenants, agreements, and conditions contained herein and in the other Loan
Documents which are required to have been performed or complied with on or
before the Closing Date; and there shall exist no Event or Event of Default
on the Closing Date.
10.2. DELIVERY OF DOCUMENTS.
The Borrower shall have delivered, or cause to be
delivered, to the Lender (i) the Bridge Loan Note in the form of Exhibit "A"
and (ii) a UCC-1 financing statement in the form of Exhibit "F".
10.3. WARRANT TO PURCHASE COMMON STOCK.
The Borrower shall have issued to the Lender the Warrant to
Purchase Common Stock in the form of Exhibit "B" hereto. The Borrower and
the Lender shall have entered into a Registration Right Agreement
substantially in the form of Exhibit G hereto.
11. DEFAULT; REMEDIES.
11.1. EVENTS OF DEFAULT.
It shall constitute an event of default ("EVENT OF
DEFAULT") if any one or more of the following shall occur for any reason:
11.1.1. any failure to make payment of principal, interest
or fees on any of the Obligations when due;
11.1.2. any representation or warranty made by the
Borrower in this Agreement, any of the other Loan Documents, or any
certificate furnished by the Borrower or any of its Subsidiaries at any time
to the Lender shall prove to be untrue in any material respect as of the date
when made or furnished;
11.1.3. default shall occur in the observance or
performance of any of the covenants and agreements contained in this
Agreement, the Bridge Loan Note, any other Loan Document, or any other
agreement entered into at any time to which the Borrower or any of its
Subsidiaries and the Lender are party, or if any such agreement or document
shall terminate (other than in accordance with its terms or the terms hereof
or with the written consent of the Lender) or become void or unenforceable
without the written consent of the Lender;
11.1.4. any default by the Borrower or NTC under any
material agreement or instrument (other than an agreement, or instrument
evidencing the lending of money or requiring the payment of money), and such
default continues for ten (10) days after such breach first occurs; provided,
however, that such grace period shall not apply, and an Event of Default
shall exist promptly upon such breach, if such breach may not, in the
Lender's reasonable determination, be cured by the Borrower during such ten
(10) day grace period;
11.1.5. other than the defaults on obligations to
WorldCom, Inc., First Bank & Trust, Milbank, Tweed Hadley & McCloy, the
Federal Universal Service Fund, and Denis Richard and with respect to the pay
phone surcharge, existing on the date hereof, any default by the Borrower or
NTC in any payment of principal or of interest on any indebtedness (other
than the Obligations) for borrowed money beyond any period of grace provided
with
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respect thereto or in the performance of any other agreement, term or
condition contained in any agreement under which any such obligation is
created if the effect of such default is to cause, or permit the holder or
holders of such obligation to cause, such obligation to become due prior to
its stated maturity;
11.1.6. the Borrower or NTC shall make a general
assignment for benefit of creditors; or any proceeding shall be instituted by
the Borrower seeking to adjudicate it a bankrupt or insolvent, or seeking
liquidation, winding up, reorganization, arrangement, adjustment, protection
relief, or composition of it or its debts under law relating to bankruptcy,
insolvency or reorganization or relief of debtors, or seeking entry of an
order for relief or the appointment of a receiver, trustee, or other similar
official for it or for any substantial part of its property or the Borrower
or NTC, as the case may be, shall take any corporate action to authorize any
of the actions set forth above in this subsection;
11.1.7. an involuntary petition shall be filed or an
action or proceeding otherwise commenced against the Borrower or NTC seeking
reorganization, arrangement or readjustment of the Borrower's or NTC's debts
or for any other relief under the Federal Bankruptcy Code, as amended, or
under any other bankruptcy or insolvency act or law, state or federal, now or
hereafter existing and remain undismissed or unvacated for a period of thirty
(30) days;
11.1.8. a receiver, assignee, liquidator, trustee or
similar officer for the Borrower or NTC or for all or any part of their
Property shall be appointed involuntarily;
11.1.9. the Borrower or NTC shall file a certificate of
dissolution under applicable state law or shall be liquidated, dissolved or
wound-up or shall commence or have commenced against it any action or
proceeding for dissolution, winding-up or liquidation, or shall take any
corporate action in furtherance thereof; Borrower or NTC shall be
nationalized, expropriated or condemned, seized or otherwise appropriated, or
custody or control of such Property or of the Borrower or NTC shall be
assumed by any Public Authority or any court of competent jurisdiction at the
instance of any Public Authority, except where contested in good faith by
proper proceedings diligently pursued where a stay of enforcement is in
effect;
11.1.10. any guaranty of the Obligations shall be
terminated, revoked or declared void or invalid;
11.1.11. one or more final judgments for the payment of
money shall be rendered against the Borrower or NTC and the Borrower or NTC
shall fail to discharge the same within thirty (30) days from the date of
notice of entry thereof or to appeal therefrom;
11.1.12. any loss, theft, damage or destruction of any
item or items of Collateral occurs which: (i) materially and adversely
affects the operation of the Borrower's business; or (ii) is material in
amount and is not adequately covered by insurance;
11.1.13. Borrower ceases to control NTC (the term control
having the meaning given to it in the definition of Affiliate herein);
11.1.14. any event or condition shall occur or exist with
respect to a Plan that could, in the Lender's reasonable judgment, subject
the Borrower or any of its Subsidiaries to any tax, penalty or other
liabilities under ERISA or the Code in the aggregate material in relation to
the business, operations, Property or financial or other condition of the
Borrower and its Subsidiaries, taken as a whole;
11.1.15. the Borrower or NTC shall generally not pay its
debts as debts become due or shall admit its inability to pay its debts
generally;
11.1.16. a Material Adverse Change shall occur.
11.2. REMEDIES.
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11.2.1. If an Event of Default exists, the Lender may,
without notice to or demand on the Borrower, do one or more of the following
at any time or times and in any order: (i) terminate this Agreement; (ii)
declare any or all Obligations to be immediately due and payable (provided,
however, that upon the occurrence of any Event of Default described in
Sections 9.1.4, 9.1.5, 9.1.6 or 9.1.7, all Obligations shall automatically
become immediately due and payable without any action by the Lender); and
(iii) pursue its other rights and remedies under the Loan Documents and
applicable law.
11.2.2. If an Event of Default exists: (i) the Lender
shall have, in addition to all other rights, the rights and remedies of a
secured party under the UCC; (ii) the Lender may, at any time, take
possession of the Collateral and make it available to the Lender at a place
or places reasonably convenient to the Lender; and (iii) the Lender may sell
and deliver any Collateral at public or private sales, for cash, upon credit
or otherwise, at such prices and upon such terms as the Lender deems
advisable, in its sole discretion, and may, if the Lender deems it
reasonable, postpone or adjourn any sale of the Collateral by an announcement
at the time and place of sale or such postponed or adjourned sale without
giving a new notice of sale. Without in any way requiring notice to be given
in the following manner, the Borrower agrees that any notice by the Lender of
sale, disposition or other intended action hereunder or in connection
herewith, whether required by the UCC or otherwise, shall constitute
reasonable notice to the Borrower if such notice is mailed by registered or
certified mail, return receipt requested, postage prepaid, or is delivered
personally against receipt, at least five (5) days prior to such action to
the Borrower's address specified in or pursuant to Section 10.5. If any
Collateral is sold on terms other than payment in full at the time of sale,
no credit shall be given against the Obligations until the Lender receives
payment, and if the buyer defaults in payment, the Lender may resell the
Collateral without further notice to the Borrower. In the event the Lender
seeks to take possession of all or any portion of the Collateral by judicial
process, the Borrower irrevocably waives: (a) the posting of any bond,
surety or security with respect thereto which might otherwise be required;
(b) any demand for possession prior to the commencement of any suit or action
to recover the Collateral; and (c) any requirement that the Lender retain
possession and not dispose of any Collateral until after trial or final
judgment. The Borrower agrees that the Lender has no obligation to preserve
rights to the Collateral or marshal any Collateral for the benefit of any
Person. The Lender is hereby granted a license or other right to use, without
charge, the Borrower's and NTC's labels, patents, copyrights, name, trade
secrets, trade names, trademarks, and advertising matter, or any similar
property, in completing production of, advertising or selling any Collateral,
and the Borrower's rights under all licenses and all franchise agreements
shall inure to the Lender's benefit. The proceeds of sale shall be applied
first to all expenses of sale, including attorneys' fees, and second, in
whatever order the Lender elects, to all Obligations. The Lender shall
return any excess to the Borrower and the Borrower shall remain liable for
any deficiency.
11.2.3. If an Event of Default occurs, the Borrower hereby
waives all rights to notice and hearing prior to the exercise by the Lender
of the Lender's rights to repossess the Collateral without judicial process
or to replevy, attach or levy upon the Collateral without notice or hearing.
12. MISCELLANEOUS.
12.1. CUMULATIVE REMEDIES; NO PRIOR RECOURSE TO COLLATERAL.
The enumeration herein of the Lender's rights and remedies
is not intended to be exclusive, and such rights and remedies are in addition
to and not by way of limitation of any other rights or remedies that the
Lender may have under the UCC or other applicable law. The Lender shall have
the right, in its sole discretion, to determine which rights and remedies are
to be exercised and in which order. The exercise of one right or remedy
shall not preclude the exercise of any others, all of which shall be
cumulative. To the extent permitted by law, the Lender may, without
limitation, proceed directly against the Borrower to collect the Obligations
without any prior recourse to the Collateral.
12.2. NO IMPLIED WAIVERS.
No act, failure or delay by the Lender shall constitute a
waiver of any of its rights and remedies. No single or partial waiver by the
Lender of any provision of this Agreement, or any other Loan Document, or of
breach or default hereunder or thereunder, or of any right or remedy which
the Lender may have, shall operate as a
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waiver of any other provision, breach, default, right or remedy or of the
same provision, breach, default, right or remedy on a future occasion. No
waiver by the Lender shall affect its right to require strict performance of
this Agreement except as to the matter waived.
12.3. SEVERABILITY.
Any provision of this Agreement which is prohibited or
invalid under applicable law of any jurisdiction shall be ineffective to the
extent of such prohibition or unenforceability, without invalidating the
remainder of this Agreement, and any such prohibition or unenforceability in
any jurisdiction shall not invalidate or render unenforceable such provision
in any other jurisdiction.
12.4. GOVERNING LAW.
This Agreement shall be deemed to have been made in the
State of Colorado and shall be governed by and interpreted in accordance with
the laws of such state, except that no doctrine of choice of law shall be
used to apply the laws of any other state or jurisdiction and except to the
extent that the law of the location of the Collateral would govern, and in
that case that law shall govern with respect to issues concerning perfection
and remedies available with respect to the Collateral located there only.
12.5. CONSENT TO JURISDICTION AND VENUE; SERVICE OF PROCESS.
The Borrower agrees that, in addition to any other courts
that may have jurisdiction under applicable laws, any action or proceeding to
enforce or arising out of this Agreement or any of the other Loan Documents
may be commenced in the state court of original jurisdiction of the State of
Colorado for Jefferson County, or in the United States District Court for
Colorado, and the Borrower consents and submits in advance to such
jurisdiction, agrees that venue will be proper in such courts on any such
matter and irrevocably waives, and agrees not to plead or claim, any
objection that it may ever have to the venue of any such action or proceeding
in any such court or that such action or proceeding was brought in an
inconvenient court. The Borrower hereby waives personal service of process
and agrees that a summons and complaint commencing an action or proceeding in
any such court shall be properly served and shall confer personal
jurisdiction if served by registered or certified mail to the Borrower.
Should the Borrower fail to appear or answer any summons, complaint, process
or papers so served within thirty (30) days after the mailing or other
service thereof, it shall be deemed in default and an order or judgment may
be entered against it as demanded or prayed for in such summons, complaint,
process or papers. The choice of forum set forth in this section shall not
be deemed to preclude the enforcement of any judgment obtained in such forum,
or the taking of any action under this Agreement to enforce the same, in any
appropriate jurisdiction.
12.6. WAIVERS.
THE BORROWER HEREBY WAIVES TRIAL BY JURY, RIGHTS OF SETOFF,
AND THE RIGHT TO INTERPOSE COUNTERCLAIMS IN ANY LITIGATION IN ANY COURT WITH
RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF THIS AGREEMENT, THE OTHER
LOAN DOCUMENTS, THE OBLIGATIONS OR THE COLLATERAL, OR ANY INSTRUMENT OR
DOCUMENT DELIVERED PURSUANT HERETO OR THERETO, OR ANY OTHER CLAIM OR DISPUTE
HOWSOEVER ARISING, BETWEEN THE BORROWER AND THE LENDER. THE BORROWER CONFIRMS
THAT THE FOREGOING WAIVERS ARE INFORMED AND FREELY MADE.
12.7. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
All of the Borrower's representations and warranties
contained in this Agreement shall survive the execution, delivery, and
acceptance thereof by the parties, notwithstanding any investigation by the
Lender or its agents.
12.8. INDEMNIFICATION.
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The Borrower hereby indemnifies, defends and holds the
Lender, and its directors, officers, agents, employees and counsel, harmless
from and against any and all losses, claims, damages, liabilities, expenses,
deficiencies, judgments or penalties imposed on, incurred by or asserted
against any of them, whether direct, indirect or consequential, arising out
of or by reason of any litigation, investigations, claims, or proceedings
(whether based on any federal, state or local laws or other statutes or
regulations, including, without limitation, securities, environmental, or
commercial laws and regulations, under common law or at equitable cause, or
on contract or otherwise) commenced or threatened, which arise out of or in
any way based upon the negotiation, preparation, execution, delivery,
enforcement, performance or administration of this Agreement, any other Loan
Document, or any undertaking or proceeding related to any of the transactions
contemplated hereby or any act, omission to act, event or transaction related
or attendant thereto, including, without limitation, amounts paid in
settlement, court costs, and the fees and expenses of counsel reasonably
incurred in connection with any such litigation, investigation, claim or
proceeding. Without limiting the foregoing, if, by reason of any suit or
proceeding of any kind, nature, or description against the Borrower, or by
the Borrower or any other party against the Lender, which in the Lender's
sole discretion makes it advisable for the Lender to seek counsel for
protection and preservation of its liens and security assets, or to defend
its own interest, such expenses and counsel fees shall be allowed to the
Lender. To the extent that the undertaking to indemnify, pay and hold
harmless set forth in this section may be unenforceable because it is
violative of any law or public policy, the Borrower shall contribute the
maximum portion which it is permitted to pay and satisfy under applicable
law, to the payment and satisfaction of all indemnified matters incurrd by
the Lender. The foregoing indemnity shall survive the payment of the
Obligations and the termination of this Agreement. All of the foregoing costs
and expenses shall be part of the Obligations and secured by the Collateral.
12.9. OTHER SECURITY AND GUARANTIES.
The Lender may, without notice or demand and without
affecting the Borrower's obligations hereunder, from time to time: (a) take
from any Person and hold collateral (other than the Collateral) for the
payment of all or any part of the Obligations and exchange, enforce or
release such collateral or any part thereof; and (b) accept and hold any
endorsement or guaranty of payment of all or any part of the Obligations and
release any such endorser or guarantor, or any Person who has given any Lien
in any other collateral as security for the payment of all or any part of the
Obligations, or any other Person in any way obligated to pay all or any part
of the Obligations.
12.10. NOTICES.
All notices, demands and requests that either party is
required or elects to give to the other shall be in writing, shall be
delivered personally against receipt, or sent by recognized overnight courier
service, or mailed by registered or certified mail, return receipt requested,
postage prepaid, or sent by telex or telecopy, and shall be addressed to the
party to be notified as follows:
If to the
Lender: Ironwood Telecom LLC
555 Zang Street, Suite 300
Lakewood, Colorado 80228
Attention: Mr. John P. Hill
Telecopier: (303) 985-5875
with a copy to: Howrey & Simon
1299 Pennsylvania Ave., N.W.
Washington, D.C. 20004-2402
Attention: Roger A. Klein, Esquire
Telecopier: (202) 383-6610
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If to the
Borrower: Incomnet, Inc.
2801 Main Street
Irvine, California 92614
Attention: Mr. Denis Richard
Telecopier: (949) 224-7474
with a copy to: Heller Ehrman White & McAuliffe
601 South Figueroa Street, 40th Floor
Los Angeles, California 90017
Attention: Paul H. Greiner, Esquire
Telecopier: (213) 614-1868
or to such other address as each party may designate for itself by like notice.
Any such notice, demand, or request shall be deemed given when received if
personally delivered or sent by overnight courier, or when deposited in the
United States mails, postage paid, if sent by registered or certified mail, or
when answerback received, if sent by telex or telecopier.
12.11. WAIVER OF NOTICES.
Unless otherwise expressly provided herein, the Borrower
waives presentment, protest and notice of demand or dishonor and protest as to
any instrument, as well as any and all other notices to which it might otherwise
be entitled. No notice to or demand on the Borrower which the Lender may elect
to give shall entitle the Borrower to any further notice or demand in the same,
similar or other circumstances.
12.12. BINDING EFFECT; ASSIGNMENT; DISCLOSURE.
The provisions of this Agreement shall be binding upon and
inure to the benefit of the respective representatives, successors and
assigns of the parties hereto; provided, however, that no interest herein may
be assigned by the Borrower without the prior written consent of the Lender.
The rights and benefits of the Lender hereunder shall, if the Lender so
agrees, inure to any party acquiring any interest in the Obligations or any
part thereof. The Borrower agrees that the Lender may use the Borrower's
name in advertising and promotional materials and in conjunction therewith
disclose the general terms of this Agreement.
12.13. MODIFICATION.
This Agreement is intended by the Borrower and the Lender
to be the final, complete, and exclusive expression of the agreement between
them. This Agreement supersedes any and all prior and contemporaneous oral or
written agreements relating to the subject matter hereof. No modification,
rescission, waiver, release, or amendment of any provision of this Agreement
shall be made, except by a written agreement signed by the Borrower and a
duly authorized officer of the Lender.
12.14. COUNTERPARTS.
This Agreement may be executed in any number of
counterparts, and by the Lender and the Borrower in separate counterparts,
each of which shall be an original, but all of which shall together
constitute one and the same agreement.
12.15. CAPTIONS.
The captions contained in this Agreement are for
convenience only, are without substantive meaning and should not be construed
to modify, enlarge, or restrict any provision.
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12.16. RIGHT OF SET-OFF.
Whenever an Event of Default exists, the Lender is hereby
authorized at any time, and from time to time, to set off and apply any and
all deposits (general or special, time or demand, provisional or final) at
any time held and other indebtedness at any time owing by the Lender or any
affiliate of the Lender to or for the credit or the account of the Borrower
against any and all of the Obligations, whether or not then due and payable.
The Lender agrees promptly to notify the Borrower after any such set-off and
application made by the Lender, provided that the failure to give such notice
shall not affect the validity of such set-off and application.
12.17. FEES AND EXPENSES.
The Borrower shall pay to the Lender on demand all costs
and expenses that the Lender pays or incurs in connection with the
negotiation, preparation, consummation, administration, enforcement, and
termination of this Agreement, including, without limitation reasonable
attorneys' and paralegals' fees and disbursements of counsel to the Lender.
IN WITNESS WHEREOF, the parties have entered into this
Agreement on the date first above written.
INCOMNET, INC.
By /s/ DENIS RICHARD
----------------------------------------
Title: President and Chief Executive Officer
----------------------------------------
IRONWOOD TELECOM LLC
By /s/ DONALD V. BERLANTI
----------------------------------------
Title
----------------------------------
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EXHIBIT 10.3 - BRIDGE LOAN NOTE EXECUTED BY INCOMNET, INC. IN FAVOR OF
IRONWOOD TELECOM, LLC, DATED NOVEMBER 4, 1998
BRIDGE LOAN NOTE
$2,275,210.00 November 4, 1998
FOR VALUE RECEIVED, the undersigned, Incomnet, Inc., a California corporation
(the "Borrower"), HEREBY UNCONDITIONALLY PROMISES TO PAY to the order of
Ironwood Telecom, LLC, a Colorado limited liability company (the "Lender"), the
principal sum of TWO MILLION TWO HUNDRED SEVENTY FIVE THOUSAND TWO HUNDRED
TEN DOLLARS ($2,275,210.00) (the "Principal Amount") plus all accrued and
unpaid interest and fees thereon on the Maturity Date (defined below).
1. PAYMENTS
1.1. As set forth above, the Principal Amount
and all accrued and unpaid interest and
fees thereon shall be due and payable on
the Maturity Date. As used herein,
"Maturity Date" means the earlier of (i)
December 15, 1998 and (ii) closing date
of a secured term loan by the Lender to
the Borrower in the principal amount of
$20,000,000.00 (less the principal amount
of the loan to Mr. John P. Casey made on
the dare hereof and certain other
payments the Lender has agreed to make
for the benefit of the Borrower).
1.2. The Borrower shall pay to the Lender
interest on the unpaid Principal Amount
at a per annum rate equal to 15%.
Interest charges shall be computed on the
basis of a year of 360 days and actual
days elapsed and shall be payable to the
Lender on the Maturity Date.
1.3. If any Event of Default occurs, then,
from the date such Event of Default
occurs and until it is cured, or until
all Obligations are paid and performed in
full, whichever first occurs, the
Borrower shall pay interest on the unpaid
Principal Amount at a per annum rate
equal to 3% plus the rate of interest
otherwise specified herein as applicable
to such loan.
1.4. In no event shall the interest rate and
other charges hereunder exceed the
highest rate permissible under any law
which a court of competent jurisdiction
shall, in a final determination, deem
applicable hereto. If a court determines
that the Lender has received interest and
other charges hereunder in excess of the
highest rate applicable hereto, such
excess shall be deemed to have been
received on account of, and shall
automatically be applied to reduce, the
Principal Amount, in the inverse order of
maturity, and the provisions hereof shall
be deemed amended to provide for the
highest permissible rate. If there is no
Principal Amount outstanding, the Lender
shall refund to the Borrower such excess.
1.5. The Borrower may prepay the Principal
Amount in whole or in part at any time
and from time to time, upon at least two
(2) Business Days' prior written notice
to the Lender. All prepayments of the
principal of the Principal Amount shall
be accompanied by the payment of all
accrued but unpaid interest on the
prepaid principal amount of the Principal
Amount to the date of prepayment. Any
prepayment under this section of less
than all of the
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outstanding Principal Amount shall be
applied, first, to accrued but unpaid
interest on the Principal Amount and,
second, to the Principal Amount to be
prepaid.
1.6. All payments of principal, interest, and
other sums due to the Lender shall be
made at the following address:
Ironwood Telecom LLC
555 Zang Street, Suite 300
Lakewood, Colorado 80228
Attention: John P. Hill
or such other address or bank account as may be designated by the Lender in
writing from time to time.
1.7. This Bridge Loan Note is the Bridge Loan
Note referred to in the Bridge Loan and
Security Agreement, dated the date
hereof, between the Borrower and the
Lender (the "Bridge Loan Agreement").
All terms and conditions set forth in the
Bridge Loan Agreement are incorporated
herein and made a part hereof. The
Bridge Loan Agreement is secured by
certain collateral more specifically
described in the Bridge Loan Agreement.
All capitalized terms not otherwise
defined herein shall have the meaning
given such term in the Bridge Loan
Agreement.
2. EVENTS OF DEFAULT
Upon and after the occurrence of an Event of Default, the
Lender shall have all of the rights and remedies set forth in Section 11.2 of
the Bridge loan Agreement.
3. FEES AND COSTS
The Borrower shall pay to the Lender on demand all costs and
expenses that the Lender pays or incurs in connection with the negotiation,
preparation, consummation, administration, enforcement, and termination of this
Agreement, including, without limitation reasonable attorneys' and paralegals'
fees and disbursements of counsel to the Lender.
4. GOVERNING LAW
THIS PROMISSORY NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAW OF THE STATE OF COLORADO. EXCEPT THAT NO DOCTRINE OF CHOICE OF
LAW SHALL BE USED OT APPLY THE LAWS OF ANY OTHER STATE OR JURISDICTION.
INCOMNET, INC.
By: /s/ Denis Richard
Its: PRESIDENT AND CHIEF EXECUTIVE OFFICER
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EXHIBIT 10.4 - WARRANT AGREEMENT BETWEEN INCOMNET, INC. AND
IRONWOOD TELECOM LLC, DATED NOVEMBER 4, 1998
WARRANT AGREEMENT
This WARRANT AGREEMENT (this "Agreement") is made and entered into as of
November 4, 1998, by and between Incomnet, Inc., a California corporation
(the "Company"), and Ironwood Telecom LLC, a Colorado limited liability
company (the "Investor").
BACKGROUND
The Company is authorized to issue one class of Common Stock and three classes
of Preferred Stock. Pursuant to this Agreement, the Company shall issue 500,000
warrants to the Investor entitling the Investor to purchase an aggregate of
500,000 shares of Common Stock of the Company representing not less than 2% of
the outstanding shares of Common Stock of the Company.
Concurrently herewith the Company and the Investor are entering into a Bridge
Loan and Security Agreement pursuant to which the Investor has agreed to make a
secured term loan to the Company in the original principal amount of $3,000,000.
Issuance of the warrants described herein is a condition to the effectiveness of
the Investor's obligations under such Bridge Loan and Security Agreement.
AGREEMENT
NOW, THEREFORE, the Company and the Investor agree as follows:
1. DEFINITIONS
1.1. CERTAIN DEFINED TERMS.
The following terms used in this Agreement have the following
meanings:
"ACCREDITED INVESTOR" has the meaning given to that term in Section 501(a) of
Regulation D promulgated under the Act.
"ACT" means the Securities Act of 1933, as amended from time to time, or any
successor statute.
"BRIDGE LOAN" has the meaning given to that term in the Bridge Loan and Security
Agreement.
"BRIDGE LOAN AND SECURITY AGREEMENT" means the Bridge Loan and Security
Agreement, dated the date hereof, between the Company and the Investor.
"BRIDGE LOAN NOTE" has the meaning given to that term in the Bridge Loan and
Security Agreement.
"CHARTER DOCUMENTS" of a Person means the articles or certificate of
incorporation, the by-laws and any other charter documents of such Person,
including without limitation any certificate of designation, as amended or
restated and as in effect as of the Closing Date.
"COMMON STOCK" means the Company's Common Stock, no par value.
"CLOSING DATE" means the date on which the proceeds of the Bridge Loan Note are
disbursed in accordance with the Bridge Loan and Security Agreement.
"CODE" means the Internal Revenue Code of 1986, as amended from time to time, or
any successor statute.
"COMMISSION" means the Securities and Exchange Commission or any other federal
agency at the time administering the Act.
"CURRENT EXERCISE PRICE" means the Exercise Price immediately before the
occurrence of any event which, pursuant to Article 4, causes an adjustment to
the Exercise Price.
"DISTRIBUTION" means any transfer of cash or property by a Person to the
Investor without consideration, whether by way of dividend or otherwise, or the
purchase or redemption by such Person of its shares for cash or other property.
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"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time
to time, or any successor statute.
"EXERCISE PRICE" means the price of $1.00 per share, adjusted from time to time
as provided in Article 4.
"EXPIRATION DATE" means 5:00 p.m., Los Angeles time, on November 4, 2003,
subject to extensions pursuant to Section 2.1.
"PERSON" means and includes natural persons, corporations, limited partnerships,
general partnerships, joint stock companies, joint ventures, associations,
companies, trusts, banks, trust companies, land trusts, business trusts and
other organizations, whether or not legal entities, and governments and agencies
and political subdivisions thereof.
"SUBSIDIARY" of any Person means a corporation of which more than fifty percent
(50%) of the outstanding shares of capital stock of each class having ordinary
voting power is owned by such Person, by one or more Subsidiaries of such
Person, or by such Person and one or more of its Subsidiaries.
"TRANSFER" means the sale, pledge, assignment or other transfer of the Warrants
or the Warrant Shares, in whole or in part, and of the rights of the Investors
under this Agreement.
"WARRANT CERTIFICATE" means the certificate representing the Warrants,
registered in the name of the Investor, substantially in the form of EXHIBIT A.
"WARRANTS" means the warrants issued pursuant to this Agreement, which, when
exercised, give the Investor the right to obtain one share of Common Stock per
warrant, subject to adjustment as provided herein.
"WARRANT SHARES" means the shares of Common Stock acquired or acquirable upon
exercise of the Warrants, any shares of Common Stock issued as (or issuable upon
the conversion or exercise of any warrant, right or other security which is
issued as) a dividend or other distribution with respect to, or in exchange for
or in replacement of, such shares of Common Stock and any other interest in the
Company that has been or may be acquired upon exercise of the Warrants;
provided, however, that a Warrant Share will no longer be a Warrant Share when
such share is sold to a Person acquiring such share from a selling Investor in a
sale by such Investor pursuant to a registered public offering or an offering
made to the public that is exempted from registration by rule or regulation of
the Commission, including Rules 144 and 144A under the Act or any successor rule
or regulation.
1.2. INTERPRETATION
Unless the context of this Agreement clearly requires
otherwise, references to the plural include the singular, to the singular
include the plural, and to the part include the whole. The term "including" is
not limiting and the term "or" has the inclusive meaning represented by the term
"and/or." The words "hereof," "herein," "hereunder," and similar terms in this
Agreement refer to this Agreement as a whole and not to any particular provision
of this Agreement. References to "Articles," "Sections," "Subsections,"
"Exhibits," and "Schedules" are to Articles, Sections, Subsections, Exhibits and
Schedules, respectively, of this Agreement, unless otherwise specifically
provided. Terms defined herein may be used in the singular or the plural. Any
capitalized terms used herein which are not specifically defined herein have the
meaning given to them in the Loan Agreement.
2. THE WARRANTS
2.1. ISSUANCE OF WARRANTS
On the Closing Date, in consideration of the purchase by the
Investor of the Bridge Loan Note, the Company shall issue to the Investor Five
Hundred Thousand (500,000) Warrants and shall deliver to the Investor a Warrant
Certificate representing such Warrants.
2.2. EXECUTION OF WARRANT CERTIFICATES
Warrant Certificates may be signed on behalf of the Company by
any person authorized by the Company to do so. Any person who, on the actual
date of the execution of a Warrant Certificate, is authorized by
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the Company to sign the Warrant Certificate, may sign on the Company's behalf
even if such person was not authorized to do so on the Closing Date.
2.3. REGISTRATION
The Company may deem and treat the registered Investor of a
Warrant Certificate as the absolute owner for all purposes, notwithstanding any
notation of ownership or other writing thereon made by anyone.
2.4. TRANSFERS
The Warrants may not be Transferred without the prior written
consent of the Company.
2.5. EXCHANGES
At the option of the Investor, any Warrant Certificate may be
exchanged when surrendered at the principal office of the Company for one or
more Warrant Certificates representing in the aggregate a Warrant or Warrants to
acquire a like number and kind of shares of Common Stock in the Company by the
Investor. Warrant Certificates surrendered for exchange shall be canceled by
the Company.
2.6. MUTILATED OR MISSING WARRANT CERTIFICATES
If any of the Warrant Certificates shall be mutilated, lost,
stolen or destroyed, the Company shall issue, in exchange and substitution for
and upon cancellation of such Warrant Certificate, a new Warrant Certificate
representing an equivalent number of Warrants, but only upon receipt of evidence
of such loss, theft or destruction reasonably satisfactory to the Company or, if
requested by the Company, upon receipt of a duly executed indemnification
agreement reasonably satisfactory to the Company; provided, however, that the
Investor shall not be required to deliver an indemnity bond.
2.7. TERM AND EXERCISABILITY OF WARRANTS
The Warrants shall be exercisable, in whole or in part, at any
time and from time to time in number described in Section 2.1 and in the manner
provided in Section 2.8; provided, however, that at the Expiration Date (as
reset from time to time pursuant to Section 2.1) any unexercised Warrants shall
become void and all rights of the Investor as a Investor of the Warrants shall
cease.
2.8. MANNER OF EXERCISE OF WARRANTS
Subject to the provisions of this Agreement, the Investor
shall have the right to purchase from the Company, and the Company shall issue
and sell to such Investor, one share of Common Stock for each Warrant exercised,
upon surrender to the Company at its principal office of the Warrant Certificate
representing such Warrant, together with a Form of Warrant Subscription in
substantially the form of EXHIBIT A-2 completed and signed, and upon payment to
the Company of the Exercise Price in lawful money of the United States of
America.
2.9. ISSUANCE OF SHARES UPON EXERCISE
Upon exercise of a Warrant, the Company shall issue and cause
to be delivered to the Investor, registered in such name or names as the
Investor may designate, a certificate representing the share or shares of Common
Stock issuable upon the exercise of such Warrant. The Warrants shall be
exercisable, at the election of the Investor thereof, either as an entirety or
for part only of the number of Warrants specified in the Warrant Certificate
representing such Warrants. If less than all of the Warrants evidenced by a
Warrant Certificate are exercised at any time prior to the Expiration Date, a
new Warrant Certificate or Certificates shall be issued by the Company, to the
Investor representing the remaining unexercised number of Warrants evidenced by
the Warrant Certificate so surrendered. All Warrant Certificates surrendered
upon exercise of Warrants shall be canceled by the Company.
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2.10. PAYMENT OF FEES, EXPENSES AND TAXES
The Investor shall pay all expenses and taxes imposed by law
or any governmental agency, including any documentary stamp taxes, attributable
to the issuance of Warrant Shares upon the exercise of Warrant.
The Borrower shall pay to the Lender on demand all costs and
expenses that the Lender pays or incurs in connection with the negotiation,
preparation, consummation, administration, enforcement, and termination of this
Warrant Agreement, including, without limitation reasonable attorneys' and
paralegals' fees and disbursements of counsel to the Lender.
2.11. RESERVATION OF SHARES
The Company covenants and agrees that, so long as any Warrants remain
outstanding, the Company shall at all times have authorized and reserved a
number of shares of Common Stock sufficient to provide for the exercise of the
Warrants.
2.12. FRACTIONAL SHARES
The Company need not issue fractional shares upon the exercise of Warrants but
in lieu thereof may pay to the Investor the Fair Value of such fractional
shares; provided, however, that in the event that the Company undertakes a
reduction in the number of shares of Common Stock outstanding, it shall be
required to issue fractional shares to the Investor which exercises all or any
part of its Warrants.
3. REPRESENTATIONS AND WARRANTIES
3.1. BY THE COMPANY
The Company represents and warrants to the Investor as follows:
3.1.1. LEGAL STATUS
The Company and its Subsidiaries are corporations duly formed
and existing under the laws of the state where organized.
3.1.2. VALID ISSUE.
All shares of Common Stock, which may be issued upon exercise
of the Warrants are duly authorized and, upon issuance in accordance with the
provisions of this Agreement, shall be validly issued, fully paid and
nonassessable and free from all taxes, liens, charges and security interests.
3.1.3. AUTHORITY; NO CONFLICTS.
This Agreement, and any instrument or agreement required
hereunder, are within the Company's powers, have been duly authorized, and do
not conflict with any of its Charter Documents.
3.1.4. BINDING AND ENFORCEABLE.
This Agreement is a legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, subject,
as to enforcement, (i) to bankruptcy, insolvency, reorganization, arrangement,
moratorium and other laws of general applicability relating to or affecting
creditors' rights and (ii) to general principles of equity, whether such
enforcement is considered in a proceeding at law or in equity.
3.1.5. CONFLICT.
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This Agreement does not conflict with any law, agreement, or
obligation by which the Company or any of its Subsidiaries is bound.
3.2. SECURITIES LAW REPRESENTATIONS OF THE INVESTOR
The Investor represents, warrants and acknowledges to the Company as follows:
3.2.1. INVESTMENT.
The Warrants issued to the Investor, and the Warrant Shares to
be issued to the Investor upon exercise of the Warrants, are being acquired for
investment for the Investor's own account, not as a nominee or agent, and not
with a view to or for sale in connection with the distribution thereof. The
Investor has not been contacted concerning the acquisition of the Warrants or
Warrant Shares by means of any advertisement.
3.2.2. SOPHISTICATION.
The Investor has such knowledge and experience in financial
and business matters as to be capable of evaluating the merits and risks of the
Investor's investment in the Warrants and the Warrant Shares; the Investor has
the ability to bear the economic risks of such investment; the Investor has the
capacity to protect its own interests in connection with the transactions
contemplated by this Agreement; and the Investor has had an opportunity to ask
questions of management of the Company and to obtain such financial and other
information from the Company as the Investor deems necessary or appropriate in
connection with evaluating the merits of the investment in the Warrants and the
Warrant Shares. The Investor acknowledges that the Warrants have not been and
will not be registered under the Act and may not be transferred except in
compliance with the Act and with the prior consent of the Company.
3.2.3. TRANSFER RESTRICTIONS.
There are no more than 10 members of the Investor and each
member will agree to appropriate restrictions.
4. ANTI-DILUTION PROTECTION
4.1. STOCK SPLITS, CONSOLIDATIONS, DIVIDENDS AND DISTRIBUTIONS
If the outstanding shares of Common Stock are subdivided into a greater number
of shares of Common Stock or if the Company makes a dividend in the form of
stock or other Distribution of its stock to stock Investors, the Current
Exercise Price shall, simultaneously with the effectiveness of such subdivision,
dividend or Distribution, be proportionately reduced, and conversely, if the
outstanding shares of Common Stock shall be combined into a smaller number of
shares of Common Stock, the Current Exercise Price shall, simultaneously with
the effectiveness of such combination, be proportionately increased.
4.2. SUCCESSIVE CHANGES
The provisions of this Article shall apply to successive dividends or other
Distributions, subdivisions and combinations on or of shares of Common Stock
after the date of this Agreement.
4.3. ADJUSTMENT OF SHARES ISSUABLE UPON EXERCISE OF WARRANTS
Upon each adjustment of the Exercise Price as a result of the calculations made
pursuant to this Article 4, each Warrant outstanding prior to the making of the
adjustment in the Exercise Price shall thereafter be treated as that number of
Warrants, and shall evidence the right to purchase, at the adjusted Exercise
Price, that number of shares of Common Stock (calculated to the nearest
hundredths), obtained by (i) multiplying the number of shares of Common Stock
purchasable upon exercise of a Warrant prior to adjustment by the Exercise Price
in effect prior to
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adjustment, and (ii) dividing the product so obtained by the Exercise Price
in effect after such adjustment of the Exercise Price.
4.4. NOTICE OF ADJUSTMENT TO INVESTORS
Upon the occurrence of each adjustment or readjustment of the Exercise Price,
the Company shall compute such adjustment or readjustment in accordance with the
terms hereof. The Company shall furnish the Investor with a certificate signed
by the Company's chief financial officer setting forth in reasonable detail
(i) the Exercise Price after such adjustment or readjustment, (ii) the method of
calculation and the facts upon which such calculation is based and (iii) the
number of shares of Common Stock purchasable upon exercise of a Warrant after
such adjustment or readjustment.
5. MISCELLANEOUS
5.1. NOTICES
In order to be effective, any notice or other communication required or
permitted hereunder shall be in the form, and transmitted in the manner,
required under the Secured Promissory Note.
5.2. SUCCESSORS AND ASSIGNS
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns, except that the Investor may
not Transfer any of the Warrants without the prior written consent of the
Company.
5.3. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the laws of
the State of Colorado applicable to contracts entered into and to be performed
wholly within Colorado by Colorado residents.
5.4. CONSENT TO JURISDICTION
The Company hereby consents to the non-exclusive jurisdiction, venue and forum
of any state or federal court in Colorado with respect to any action, whether
commenced by the Investor or any other Person, which, in whole or in part, in
any way arises under or relates to this Agreement.
5.5. EXECUTION IN COUNTERPARTS
This Agreement may be executed in any number of counterparts and by different
parties hereto in separate counterparts, each of which, when so executed, shall
be deemed to be an original and all of which, when taken together, shall
constitute but one and the same agreement.
5.6. REMEDIES
In the event of a breach by the Company of this Agreement, any Investor injured
by such breach, in addition to being entitled to exercise all rights granted by
law, including recovery of damages, shall be entitled to specific performance of
its rights under this Agreement. The Company agrees that monetary damages would
not be adequate compensation for any loss incurred by reason of a breach of this
Agreement by the Company and hereby waives the defense in any action for
specific performance that a remedy at law would be adequate.
5.7. INCORPORATION OF EXHIBITS AND SCHEDULES BY REFERENCE
All Exhibits and Schedules to this Agreement are incorporated herein by this
reference.
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5.8. ENTIRE AGREEMENT; AMENDMENT
This Agreement (including the Exhibits, Schedules and the
parts of the Bridge Loan and Security Agreement incorporated by reference
herein) is issued pursuant to the letter agreement, dated October 30, 1998,
between the Company and the Investor and constitutes the entire agreement
between the Company and the Investor with respect to the subject matter hereof,
superseding all prior or contemporaneous negotiations, communications,
discussions and correspondence concerning the subject matter hereof. This
Agreement may be modified or amended or any provision hereof may be waived only
with the written consent of the Company and the Investor.
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EXHIBIT 10.5 - GUARANTY EXECUTED BY NATIONAL TELEPHONE & COMMUNICATIONS, INC.
IN FAVOR OF IRONWOOD TELECOM LLC, DATED NOVEMBER 4, 1998
GUARANTY
This Guaranty (the "Guaranty") is made and entered into as of November
4, 1998, (the "Effective Date"), by National Telephone & Communications, Inc., a
Delaware corporation ("Guarantor"), in favor of Ironwood Telecom LLC, a Colorado
limited liability company ("Lender"). This Guaranty is executed and delivered
in connection with a Bridge Loan Note in the original principal amount of
$3,000,000 also dated as of the Effective Date (the "Bridge Loan Note") and
secured by the Loan and Security Agreement dated as of the Effective Date (the
"Loan Agreement") given to Lender by Incomnet, Inc., a California corporation
("Borrower"). The Bridge Loan Note, Guaranty, and Loan Agreement are
collectively referred to as the Loan Documents.
Guarantor, for the benefit of Lender, agrees as set forth below.
1. DEFINITIONS.
Any capitalized term not otherwise defined in this Guaranty shall have
the meaning given to the term in the Loan Agreement.
2. GUARANTY.
Guarantor unconditionally guaranties to Lender the timely (whether as
scheduled or upon acceleration) payment and performance by Borrower of the
following (the "Guarantied Obligations"):
2.1. The principal, interest and other charges or amounts
due under the Bridge Loan Note and the other Loan Documents (whether by
acceleration or otherwise) and all renewals, extensions, modifications and
rearrangements of any of the Loan Documents;
2.2. The other obligations set forth in or arising out of
the Bridge Loan Note and the other Loan Documents;
2.3. Any of the forgoing arising out of or in connection
with any renewal, extension or other modification of the Bridge Loan Note or any
of the other Loan Documents;
2.4. Any of the foregoing arising after Borrower has
commenced or become subject to any proceeding under the Bankruptcy Code,
including any advances made to Borrower, any interest that accrues after the
filing of the bankruptcy petition (even if the interest cannot be collected in
the proceeding under the Bankruptcy Code), and attorneys fees.
If Borrower fails to pay or perform any of the Guarantied Obligations, Guarantor
will immediately pay or perform the obligation upon the written request of the
Lender.
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3. LENDER'S DIRECT RIGHTS.
3.1. This is a guaranty of payment and performance and is not a
guaranty of collection.
3.2. In the event that Borrower fails timely to pay or perform
under the Bridge Loan Note or any of the other Guarantied
Obligations, Lender may enforce its rights under this Guaranty
without first seeking to obtain payment or performance from:
3.2.1. Borrower;
3.2.2. Any other guarantor;
3.2.3. Any collateral Lender may hold for the Bridge Loan
Note or any of the other Loan Documents or any
guaranty of the Bridge Loan Note or any of the other
Loan Documents, including this one; or
3.2.4. Exercise of any other remedy or right that Lender may
have.
3.3. In the event Borrower becomes subject to a voluntary or
involuntary proceeding under the Bankruptcy Code, Lender may
immediately pursue its rights under this Guaranty, even though
Lender may be stayed from accelerating or collecting the
Guarantied Obligations as against Borrower.
4. CONTINUING GUARANTY.
This is a continuing guaranty of the Guarantied Obligations and may not
be terminated.
5. NO NOTICE REQUIRED.
Lender does not have to notify Guarantor of any of the following events
and Guarantor will not be released or exonerated from its obligations under this
Guaranty if it is not notified of these events:
5.1. Borrower's failure to pay timely any amount owed under the
Bridge Loan Note or any of the other Loan Documents or to pay
or perform any of the other Guarantied Obligations;
5.2. Borrower's failure to perform any other obligation under the
Bridge Loan Note, Loan Agreement, or any other Loan Document;
5.3. Any sale or other disposition of any collateral for the Bridge
Loan Note, for the other Guarantied Obligations, or for any
guaranty of the Bridge Loan Note or any of the Guarantied
Obligations;
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5.4. Lender's acceptance of this Guaranty;
5.5. Any renewal, extension or other modification of the Bridge
Loan Note, any other Loan Document, or any of the other
Guarantied Obligations; or
5.6. All other notices to which it might be entitled.
6. GUARANTOR'S ADDITIONAL WAIVERS.
Guarantor waives any right it may have to any of the following acts:
6.1. Demand;
6.2. Presentment;
6.3. Diligence;
6.4. Protest;
6.5. Notice of dishonor; and
6.6. Any other notice to which it may be entitled.
7. NO RELEASE OF GUARANTOR.
Lender may do any of the following, by action or inaction, without
releasing or exonerating Guarantor from any of its obligations under this
Guaranty:
7.1. Renew, extend or otherwise modify or alter the Bridge Loan
Note, the Loan Agreement, any other Loan Document or any of
the other Guarantied Obligations;
7.2. Release Borrower from any of the Guarantied Obligations;
7.3. Sell, release, subordinate, impair, waive or otherwise fail to
obtain or perfect a security interest in, or realize upon, any
collateral for the Bridge Loan Note, any of the other
Guarantied Obligations, or any other guaranty of the Bridge
Loan Note;
7.4. Advance additional funds in its discretion for purposes
related to the purposes set forth in the Loan Agreement;
7.5. From time to time and without first requiring performance on
the part of Borrower and without being required to exhaust any
or all security held by Lender, to look to and require
performance by Guarantor of any obligation on the part of
Guarantor to be performed pursuant to the terms hereof, by
action at law or in equity or both, and further to collect in
any such action its costs and expenses, including reasonable
attorneys' fees incurred in enforcing its rights hereunder;
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7.6. Foreclose on any collateral for the Bridge Loan Note or a
guaranty of the Bridge Loan Note in a manner that diminishes,
impairs or precludes the right of Guarantor to enjoy any
rights of subrogation against Borrower or any other guarantor,
or to obtain reimbursement, performance, or indemnification
for payment or performance under this Guaranty;
7.7. Make an election under Bankruptcy Code Section 1111(b)(2);
7.8. Permit or suffer the creation of secured or unsecured credit
or debt under Bankruptcy Code Section 364;
7.9. Permit or suffer the disallowance, avoidance or subordination
of any of the Guarantied Obligations or collateral for any of
the Guarantied Obligations;
7.10. Fail to exercise any right or remedy it may have with respect
to the payment or performance of the Bridge Loan Note, any of
the other Loan Documents or any of the other Guarantied
Obligations; or
7.11. Fail to obtain a guaranty, other assurance of payment, or
credit enhancement from any other person.
8. NO SUBROGATION, ETC.
Guarantor waives and shall not seek to exercise any of the following
rights that it may have against Borrower, any other guarantor, or any collateral
provided by Borrower or any other guarantor, for any amounts paid by it, or acts
performed by it, under this Guaranty:
8.1. Subrogation;
8.2. Reimbursement;
8.3. Performance;
8.4. Indemnification (including any rights to indemnification set
forth in this Guaranty).
9. SUBORDINATION OF GUARANTOR.
9.1. SUBORDINATION OF CLAIMS.
All principal and interest on all existing and future indebtedness,
liabilities, and obligations of Borrower to Guarantor, whether fixed or
contingent, matured or unmatured, and liquidated or unliquidated (the
"Subordinated Debt") shall at all times be subordinated in right of payment to
the payment and performance of the Bridge Loan Note, the other Loan Documents
and the other Guarantied Obligations.
9.2. PAYMENTS.
Upon the occurrence of any default, event of default or Event of
Default under any of the Loan Documents, Guarantor will not accept any payments
on any of the Subordinated Debt. If no default, event of default or Event of
Default has occurred under any of the Loan Documents and Guarantor receives any
payment on the Subordinated Debt, it will hold such payment in trust for the
benefit of Lender; if any default, event of default or Event of Default has
occurred under any of the Loan Documents and Guarantor receives any payment on
the Subordinated Debt, it
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shall immediately deliver such payment to Lender, but, in either event,
without otherwise reducing or affecting in any manner the liability of
Guarantor under the other provisions of this Guaranty.
9.3. ATTORNEY-IN-FACT.
Guarantor appoints Lender Guarantor's attorney-in-fact to file claims,
and receive payments, on behalf of Guarantor with respect to any of the
Subordinated Debt in any proceeding by or against Borrower under the Bankruptcy
Code (including Chapters 7 or 11), any assignment for the benefit of Lenders
made by Borrower, or in any other reorganization or insolvency proceeding.
10. MISCELLANEOUS.
10.1. REVIVAL OF DEBT.
Guarantor's obligations under this Guaranty shall again include amount
returned by Lender in the event that Lender must return any amount paid by
Borrower or any other guarantor of the Bridge Loan Note or of any of the other
Guarantied Obligations because of the application of:
10.1.1. the Bankruptcy Code;
10.1.2. any fraudulent transfer law; or
10.1.3. any law respecting preferences.
10.2. NO MARSHALLING.
Lender has no obligation to marshall any assets in favor of Guarantor,
or against or in payment of:
10.2.1. the Bridge Loan Note,
10.2.2. any of the other Guarantied Obligations, or
10.2.3. any other obligation owed to Lender by Guarantor,
Borrower, or any other person.
10.3. FEES AND COSTS.
Guarantor will pay all of Lender's fees and costs incurred in enforcing
this Guaranty, including Lender's reasonable attorneys' fees.
10.4. ASSIGNMENT.
Guarantor may not assign his obligations or liabilities under this
Guaranty. Subject to the preceding sentence, this Guaranty shall be binding
upon the parties hereto and their respective heirs, executors, successors,
representatives and assigns and shall inure to the benefit of the parties hereto
and their respective successors and assigns. Lender may assign its rights under
this Guaranty.
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10.5. APPLICABLE LAW.
The law of the state of Colorado will apply to the interpretation and
enforcement of this Guaranty except that no doctrine of choice of law shall be
and to apply the laws of any other state or jurisdiction.
10.6. INDEMNIFICATION BY BORROWER.
Borrower will indemnify Guarantor against, and hold it harmless from,
all payments which Guarantor may at any time be required to make to Lender under
this Guaranty.
10.7. INTEGRATION.
This Guaranty is the entire agreement of Borrower and Guarantor with
respect to the subject matter of this Guaranty.
10.8. RIGHTS CUMULATIVE.
All of Lender's rights under this Guaranty are cumulative. The
exercise of any one right does not exclude the exercise of any other right given
in this Guaranty or any other right of Lender not set forth in this Guaranty.
10.9. RULES OF CONSTRUCTION.
The following rules shall apply in interpreting the meaning of this
Guaranty:
10.9.1. "Includes" and "including" are not limiting;
10.9.2. "Or" is not exclusive; and
10.9.3. "All" includes "any" and "any" includes "all."
10.10. SEVERABILITY.
If any provision of this Guaranty is unenforceable, or otherwise
invalid, the remaining provisions of this Guaranty shall be enforced to the
fullest possible extent.
10.11. NOTICES.
Lender may give any notice to Guarantor at the following address, until
changed in writing by notice given by Borrower:
National Telephone & Communications, Inc.
2801 Main Street
Irvine, California 92614
Telecopy: (949) 251-8085
Attention: Mr. Denis Richard
6
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10.12. JOINT AND SEVERAL LIABILITY.
The obligations hereunder of the persons and/or entities constituting
Guarantor under this Guaranty are joint and several.
10.13. HEADINGS; NUMBER; GENDER.
Section headings used in this Guaranty are for convenience only. They
are not a part of this Guaranty and shall not be used in construing it.
Wherever appropriate in this Guaranty, the singular shall be deemed to also
refer to the plural, and the plural to the singular, and pronouns of certain
genders shall be deemed to include either or both of the other genders.
10.14. REVIEW OF DOCUMENTS.
Guarantor acknowledges that he has copies of and is fully familiar with
each and every Loan Document.
10.15. COUNTERPARTS.
This Guaranty may be executed in counterparts, each of which shall be
deemed an original, but all of which, when taken together, shall be deemed one
and the same agreement.
10.16. ACKNOWLEDGMENT OF WAIVERS.
Guarantor acknowledges that certain provisions of this Guaranty operate
as waivers of rights that Guarantor would otherwise have under applicable law.
IN WITNESS WHEREOF, the undersigned have executed this Guaranty as of the date
first above written.
"Guarantor"
NATIONAL TELEPHONE & COMMUNICATIONS, INC.
By: /s/ DENIS RICHARD
--------------------------------------
Denis Richard
President and Chief Executive Officer
7
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AGREEMENT OF BORROWER
Incomnet, Inc., a California corporation, hereby agrees to indemnify
National Telephone & Communications, Inc. as set forth in Section 10.6 to the
foregoing Guaranty.
INCOMNET, INC.,
a California corporation
By: /s/ DENIS RICHARD
--------------------------------------
Denis Richard
President and Chief Executive Officer
8
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EXHIBIT 10.6 - GUARANTY EXECUTED BY NATIONAL TELEPHONE & COMMUNICATIONS, INC.
IN FAVOR OF IRONWOOD TELECOM LLC, DATED NOVEMBER 4, 1998,
RELATING TO MR. CASEY'S SECURED PROMISSORY NOTE
GUARANTY
This Guaranty (the "Guaranty") is made and entered into as of November
4, 1998, (the "Effective Date"), by National Telephone & Communications, Inc., a
Delaware corporation ("Guarantor"), in favor of Ironwood Telecom LLC, a Colorado
limited liability company ("Lender"). This Guaranty is executed and delivered
in connection with a Secured Promissory Note in the original principal amount of
$2,124,790 also dated as of the Effective Date (the "Secured Promissory Note")
and secured by the Stock Pledge Agreement dated as of the Effective Date (the
"Loan Agreement") given to Lender by John P. Casey ("Borrower"). The Secured
Promissory Note, Guaranty, and Loan Agreement are collectively referred to as
the Loan Documents.
Guarantor, for the benefit of Lender, agrees as set forth below.
1. DEFINITIONS.
Any capitalized term not otherwise defined in this Guaranty shall have
the meaning given to the term in the Loan Agreement.
2. GUARANTY.
Guarantor unconditionally guaranties to Lender the timely (whether as
scheduled or upon acceleration) payment and performance by Borrower of the
following (the "Guarantied Obligations"):
2.1.1. The principal, interest and other charges or amounts
due under the Secured Promissory Note and the other Loan Documents (whether by
acceleration or otherwise) and all renewals, extensions, modifications and
rearrangements of any of the Loan Documents;
2.1.2. The other obligations set forth in or arising out of
the Secured Promissory Note and the other Loan Documents;
2.1.3. Any of the forgoing arising out of or in connection
with any renewal, extension or other modification of the Secured Promissory Note
or any of the other Loan Documents;
2.1.4. Any of the foregoing arising after Borrower has
commenced or become subject to any proceeding under the Bankruptcy Code,
including any advances made to Borrower, any interest that accrues after the
filing of the bankruptcy petition (even if the interest cannot be collected in
the proceeding under the Bankruptcy Code), and attorneys fees.
If Borrower fails to pay or perform any of the Guarantied Obligations, Guarantor
will immediately pay or perform the obligation upon the written request of the
Lender.
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3. LENDER'S DIRECT RIGHTS.
3.1. This is a guaranty of payment and performance and is not a
guaranty of collection.
3.2. In the event that Borrower fails timely to pay or perform
under the Secured Promissory Note or any of the other
Guarantied Obligations, Lender may enforce its rights under
this Guaranty without first seeking to obtain payment or
performance from:
3.2.1. Borrower;
3.2.2. Any other guarantor;
3.2.3. Any collateral Lender may hold for the Secured
Promissory Note or any of the other Loan Documents or any guaranty of the
Secured Promissory Note or any of the other Loan Documents, including this one;
or
3.2.4. Exercise of any other remedy or right that Lender may
have.
3.3. In the event Borrower becomes subject to a voluntary or
involuntary proceeding under the Bankruptcy Code, Lender may
immediately pursue its rights under this Guaranty, even though
Lender may be stayed from accelerating or collecting the
Guarantied Obligations as against Borrower.
4. CONTINUING GUARANTY.
This is a continuing guaranty of the Guarantied Obligations and may not
be terminated.
5. NO NOTICE REQUIRED.
Lender does not have to notify Guarantor of any of the following events
and Guarantor will not be released or exonerated from its obligations under this
Guaranty if it is not notified of these events:
5.1. Borrower's failure to pay timely any amount owed under the
Secured Promissory Note or any of the other Loan Documents or
to pay or perform any of the other Guarantied Obligations;
5.2. Borrower's failure to perform any other obligation under the
Secured Promissory Note, Loan Agreement, or any other Loan
Document;
5.3. Any sale or other disposition of any collateral for the
Secured Promissory Note, for the other Guarantied Obligations,
or for any guaranty of the Secured Promissory Note or any of
the Guarantied Obligations;
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5.4. Lender's acceptance of this Guaranty;
5.5. Any renewal, extension or other modification of the Secured
Promissory Note, any other Loan Document, or any of the other
Guarantied Obligations; or
5.6. All other notices to which it might be entitled.
6. GUARANTOR'S ADDITIONAL WAIVERS.
Guarantor waives any right it may have to any of the following acts:
6.1. Demand;
6.2. Presentment;
6.3. Diligence;
6.4. Protest;
6.5. Notice of dishonor; and
6.6. Any other notice to which it may be entitled.
7. NO RELEASE OF GUARANTOR.
Lender may do any of the following, by action or inaction, without
releasing or exonerating Guarantor from any of its obligations under this
Guaranty:
7.1. Renew, extend or otherwise modify or alter the Secured
Promissory Note, the Loan Agreement, any other Loan Document
or any of the other Guarantied Obligations;
7.2. Release Borrower from any of the Guarantied Obligations;
7.3. Sell, release, subordinate, impair, waive or otherwise fail to
obtain or perfect a security interest in, or realize upon, any
collateral for the Secured Promissory Note, any of the other
Guarantied Obligations, or any other guaranty of the Secured
Promissory Note;
7.4. Advance additional funds in its discretion for purposes
related to the purposes set forth in the Loan Agreement;
7.5. From time to time and without first requiring performance on
the part of Borrower and without being required to exhaust any
or all security held by Lender, to look to and require
performance by Guarantor of any obligation on the part of
Guarantor to be performed pursuant to the terms hereof, by
action at law or in equity or both, and further to collect in
any such action its costs and expenses, including reasonable
attorneys' fees incurred in enforcing its rights hereunder;
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7.6. Foreclose on any collateral for the Secured Promissory Note or
a guaranty of the Secured Promissory Note in a manner that
diminishes, impairs or precludes the right of Guarantor to
enjoy any rights of subrogation against Borrower or any other
guarantor, or to obtain reimbursement, performance, or
indemnification for payment or performance under this
Guaranty;
7.7. Make an election under Bankruptcy Code Section 1111(b)(2);
7.8. Permit or suffer the creation of secured or unsecured credit
or debt under Bankruptcy Code Section 364;
7.9. Permit or suffer the disallowance, avoidance or subordination
of any of the Guarantied Obligations or collateral for any of
the Guarantied Obligations;
7.10. Fail to exercise any right or remedy it may have with respect
to the payment or performance of the Secured Promissory Note,
any of the other Loan Documents or any of the other Guarantied
Obligations; or
7.11. Fail to obtain a guaranty, other assurance of payment, or
credit enhancement from any other person;
8. NO SUBROGATION, ETC.
Guarantor waives and shall not seek to exercise any of the following
rights that it may have against Borrower, any other guarantor, or any collateral
provided by Borrower or any other guarantor, for any amounts paid by it, or acts
performed by it, under this Guaranty:
8.1. Subrogation;
8.2. Reimbursement;
8.3. Performance;
8.4. Indemnification (including any rights to indemnification set
forth in this Guaranty).
9. SUBORDINATION OF GUARANTOR.
9.1. SUBORDINATION OF CLAIMS.
All principal and interest on all existing and future indebtedness,
liabilities, and obligations of Borrower to Guarantor, whether fixed or
contingent, matured or unmatured, and liquidated or unliquidated (the
"Subordinated Debt") shall at all times be subordinated in right of payment to
the payment and performance of the Secured Promissory Note, the other Loan
Documents and the other Guarantied Obligations.
9.2. PAYMENTS.
Upon the occurrence of any default, event of default or Event of
Default under any of the Loan Documents, Guarantor will not accept any payments
on any of the Subordinated Debt. If no default, event of default or Event of
Default has occurred under any of the Loan Documents and Guarantor receives any
payment on the Subordinated Debt, it will hold such payment in trust for the
benefit of Lender; if any default, event of default or Event of Default has
occurred under any of the Loan Documents and Guarantor receives any payment on
the Subordinated Debt, it
4
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shall immediately deliver such payment to Lender, but, in either event,
without otherwise reducing or affecting in any manner the liability of
Guarantor under the other provisions of this Guaranty.
9.3. ATTORNEY-IN-FACT.
Guarantor appoints Lender Guarantor's attorney-in-fact to file claims,
and receive payments, on behalf of Guarantor with respect to any of the
Subordinated Debt in any proceeding by or against Borrower under the Bankruptcy
Code (including Chapters 7 or 11), any assignment for the benefit of Lenders
made by Borrower, or in any other reorganization or insolvency proceeding.
10. MISCELLANEOUS.
10.1. REVIVAL OF DEBT.
Guarantor's obligations under this Guaranty shall again include amount
returned by Lender in the event that Lender must return any amount paid by
Borrower or any other guarantor of the Secured Promissory Note or of any of the
other Guarantied Obligations because of the application of:
10.1.1. the Bankruptcy Code;
10.1.2. any fraudulent transfer law; or
10.1.3. any law respecting preferences.
10.2. NO MARSHALLING.
Lender has no obligation to marshall any assets in favor of Guarantor,
or against or in payment of:
10.2.1. the Secured Promissory Note,
10.2.2. any of the other Guarantied Obligations, or
10.2.3. any other obligation owed to Lender by Guarantor,
Borrower, or any other person.
10.3. FEES AND COSTS.
Guarantor will pay all of Lender's fees and costs incurred in enforcing
this Guaranty, including Lender's reasonable attorneys' fees.
10.4. ASSIGNMENT.
Guarantor may not assign his obligations or liabilities under this
Guaranty. Subject to the preceding sentence, this Guaranty shall be binding
upon the parties hereto and their respective heirs, executors, successors,
representatives and assigns and shall inure to the benefit of the parties hereto
and their respective successors and assigns. Lender may assign its rights under
this Guaranty.
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10.5. APPLICABLE LAW.
The law of the state of Colorado will apply to the interpretation and
enforcement of this Guaranty except that no doctrine of choice of law shall be
and to apply the laws of any other state or jurisdiction.
10.6. INDEMNIFICATION BY BORROWER.
Borrower will indemnify Guarantor against, and hold it harmless from,
all payments which Guarantor may at any time be required to make to Lender under
this Guaranty.
10.7. INTEGRATION.
This Guaranty is the entire agreement of Borrower and Guarantor with
respect to the subject matter of this Guaranty.
10.8. RIGHTS CUMULATIVE.
All of Lender's rights under this Guaranty are cumulative. The
exercise of any one right does not exclude the exercise of any other right given
in this Guaranty or any other right of Lender not set forth in this Guaranty.
10.9. RULES OF CONSTRUCTION.
The following rules shall apply in interpreting the meaning of this
Guaranty:
10.9.1. "Includes" and "including" are not limiting;
10.9.2. "Or" is not exclusive; and
10.9.3. "All" includes "any" and "any" includes "all."
10.10. SEVERABILITY.
If any provision of this Guaranty is unenforceable, or otherwise
invalid, the remaining provisions of this Guaranty shall be enforced to the
fullest possible extent.
10.11. NOTICES.
Lender may give any notice to Guarantor at the following address, until
changed in writing by notice given by Borrower:
National Telephone & Communications, Inc.
2801 Main Street
Irvine, California 92614
Telecopy: (949) 251-8085
Attention: Mr. Denis Richard
6
<PAGE>
10.12. JOINT AND SEVERAL LIABILITY.
The obligations hereunder of the persons and/or entities constituting
Guarantor under this Guaranty are joint and several.
10.13. HEADINGS; NUMBER; GENDER.
Section headings used in this Guaranty are for convenience only. They
are not a part of this Guaranty and shall not be used in construing it.
Wherever appropriate in this Guaranty, the singular shall be deemed to also
refer to the plural, and the plural to the singular, and pronouns of certain
genders shall be deemed to include either or both of the other genders.
10.14. REVIEW OF DOCUMENTS.
Guarantor acknowledges that he has copies of and is fully familiar with
each and every Loan Document.
10.15. COUNTERPARTS.
This Guaranty may be executed in counterparts, each of which shall be
deemed an original, but all of which, when taken together, shall be deemed one
and the same agreement.
10.16. ACKNOWLEDGMENT OF WAIVERS.
Guarantor acknowledges that certain provisions of this Guaranty operate
as waivers of rights that Guarantor would otherwise have under applicable law.
IN WITNESS WHEREOF, the undersigned have executed this Guaranty as of the date
first above written.
"Guarantor"
NATIONAL TELEPHONE & COMMUNICATIONS, INC.
By: /s/ DENIS RICHARD
-----------------
Denis Richard
President and Chief Executive Officer
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AGREEMENT OF BORROWER
John P. Casey hereby agrees to indemnify National Telephone &
Communications, Inc. as set forth in Section 10.6 to the foregoing Guaranty.
/s/ JOHN P. CASEY
---------------------------
John P. Casey
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EXHIBIT 10.7 -- SEVERANCE AGREEMENT BETWEEN INCOMNET, INC. AND
MELVYN REZNICK, DATED SEPTEMBER 29, 1998, AND
AMENDMENT THERETO DATED NOVEMBER 1, 1998.
INCOMNET, INC.
2801 Main Street
Irvine, California 92614
November 1, 1998
BY FACSIMILE
Mr. Melvyn Reznick
Dear Mr. Reznick:
This letter, when executed by you, will constitute our agreement as to the
amended terms of your settlement arrangements with Incomnet, Inc., National
Telephone & Communications, Inc. and GenSource Corporation (collectively, the
"Company"), which, with the exception of paragraph 6 below, shall become
effective upon the indefeasible payment to Melvyn Reznick of all of the sums set
forth in paragraph 1 below.
1. In lieu of the settlement payments otherwise due and owing to you under
Section 3 of your settlement agreement with the Company dated August 31,
1998, as amended on September 29, 1998 (the "Settlement Agreement"), you
shall be entitled to receive your monthly severance payment of $20,833.33
during the months of October, November and December 1998 and, on or before
December 15, 1998, you shall receive a lump sum payment of $100,000. All
of the foregoing payments shall be made no later than December 15, 1998.
2. All benefits, including health, automobile allowance and insurance, as
outlined in the Severance Agreement, shall be terminated as of December 31,
1998. You will have the opportunity to continue your health insurance
coverage consistent with the requirements under COBRA.
3. All stock options set forth in Section 5 of the Settlement Agreement, as
amended, shall terminate as of December 15, 1998, except those stock
options (the "Continuing Options") to purchase 50,000 shares of Incomnet,
Inc.'s Common Stock initially granted on November 30, 1995, at an exercise
price of $4.37 per share, expiring on September 1, 2003, shall remain in
full force and effect on the same terms as established when those stock
options were granted; provided, however, that if, in the judgment of the
Company you do not cooperate with the Company or its representatives, or
are otherwise unavailable to assist the Company or its representatives, in
connection with preparing for or giving deposition testimony relating to
any litigation or other proceeding involving the Company, then, the Company
may unilaterally terminate the Continuing Options upon written notice to
you informing you of such termination of the Continuing Options.
4. The consulting services contemplated by Section 6 of the Settlement
Agreement shall terminate as of December 31, 1998. In lieu thereof, you
shall be entitled to receive $100 per hour, plus reimbursement of expenses
for time spent by you in preparing for or giving deposition or trial
testimony in connection with any litigation or other proceeding relating to
the Company.
5. If the Company defaults on its payment obligations under this letter
agreement, you shall be entitled to receive all payments and options under
the Settlement Agreement.
6. Except as expressly set forth herein, the provisions of the Settlement
Agreement, including without limitation the release and indemnity
provisions thereof, shall remain in full force and effect, unaffected by
the terms and conditions of our agreement set forth in this letter.
If the terms outlined by this arrangement are acceptable, please sign in
the space provided below and return the signed copy to me by facsimile. My fax
number is (949) 224-7474. This offer terminates at 5:00 p.m. on November 1,
1998.
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Very truly yours,
/s/ Denis Richard
-----------------
President and Chief Executive Officer
AGREED AND ACCEPTED
/s/ Melvyn Reznick
- - ------------------
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SETTLEMENT AGREEMENT
This Settlement Agreement (the "Agreement") is made as of this 31st day of
August 1998 by and between Incomnet, Inc., a California corporation (the
"Company"), National Telephone 8 Communications, Inc., a Delaware corporation
("NTC"), GenSource Corporation, a California corporation ("GenSource"), and
Melvyn Reznick, an individual ("Reznick"), with respect to the following facts:
RECITALS
A. Reznick is the Chief Executive Officer, President and Chairman of the
Board of Directors of the Company. Reznick has been the Chief Executive Officer,
President and a director of the Company since November 1995, and has been the
Chairman of the Board of Directors of the Company since May 1996. Reznick was
also a director of NTC from May 9, 1996 until June 30, 1998, and has been an
officer and director of GenSource since May 1997.
B. The Company and Reznick are parties to that certain Employment Agreement
dated as of November 27, 1995, as amended by that certain Amendment to
Employment Agreement dated September 3, 1996 and as further amended by that
certain Amendment to Employment Agreement dated June 5, 1997 (collectively, the
"Employment Agreement"), which Employment Agreement sets forth the terms and
conditions of Reznick's employment by the Company.
C. The Company and Reznick desire to terminate the Employment Agreement and
Reznick's position as an officer and director of the Company, and GenSource and
Reznick desire to terminate Reznick's position as an officer and director of
GenSource, upon the terms and conditions more fully set forth herein. The
Company has requested that Reznick remain an employee of the Company through the
Effective Date (defined below).
D. This Agreement does not constitute an admission of wrongdoing or breach
of the Employment Agreement by any of the parties hereto.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, THE PARTIES HERETO AGREE AS FOLLOWS:
1. TERMINATION OF EMPLOYMENT AGREEMENT AND WITHDRAWAL AS OFFICER AND
DIRECTOR
Subject to the terms and conditions of this Agreement, the Company and
Reznick agree that, effective October 1, 1998 (the "Effective Date), except as
expressly provided herein, the Employment Agreement shall be deemed terminated
and, as of the Effective Date, Reznick shall cease to serve in any capacity as
an officer, director or employee of the Company and
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<PAGE>
GenSource. Notwithstanding anything else herein to the contrary, Reznick agrees
to withdraw as a director and Chairman of the Board of Directors and CEO of the
Company and as an officer and director of GenSource prior to October 1, 1998
upon a change of control of the Company's Board of Directors.
2. CONTINUED EFFECTIVENESS OF EMPLOYMENT AGREEMENT UNTIL EFFECTIVE DATE
Until the Effective Date, the Employment Agreement shall remain in
full force and effect and the Company shall continue to timely perform all of
its obligations thereunder including, without limitation, the payment of
compensation, benefits, expense reimbursements and allowances. On the Effective
Date, the Company shall pay to Reznick all accrued compensation, benefits and
reimbursements due to Reznick as of the Effective Date including, without
limitation, all accrued vacation pay.
3. SETTLEMENT PAYMENTS
The Company covenants to pay to Reznick (or to his beneficiaries,
heirs, successors or assigns in the event of Reznick's death or incapacity)
settlement payments as follows: (a) for the period from October 1, 1998 to
September 30, 2000, the Company will pay to Reznick annual compensation at the
rate of $250,000 per year, payable in equal installments on the 15" and the last
day of each month less withholding for federal, state or local taxes, and (b)
for the period from October 1, 1998 to September 30, 2000, the Company will pay
to Reznick a monthly automobile allowance equal to $650, subject to mitigation
as described below, payable in equal installments on the 15th and the last day
of each month without any withholding for federal, state or local taxes;
provided, however, that to the extent Reznick actually receives employment,
consulting or severance compensation from a source other than the Company,
whether or not said source is affiliated with Reznick or if Reznick is self
employed, during the period from October 1, 1999 to September 30, 2000 (the
"Second Period"), that compensation shall be credited against, and shall reduce
the compensation payable by the Company pursuant to Section 3(a) above during
the Second Period as and when such compensation is actually received by Reznick;
and provided further that to the extent that, during the Second Period, Reznick
actually receives an automobile allowance or mileage reimbursement from a source
other than the Company, whether for ongoing employment or consulting work, or in
connection with another severance arrangement, said reimbursements shall be
credited against, and shall reduce the reimbursement payable by the Company
pursuant to Section 3(b) above during the Second Period as and when such
reimbursements are actually received by Reznick. Reznick will be entitled to the
severance compensation set forth in Section 3(a) above for the period from
October 1, 1998 to September 30, 1999 regardless of whether, during that period,
Reznick is employed by another emploer or receiving employment, consulting or
severance compensation from another source, and regardless of whether or not
said source is an affiliate of Reznick; provided, however, that Reznick
covenants to use his best efforts to find other employment to mitigate during
the Second Period.
4. INSURANCE BENEFITS
In addition to the severance payments provided in Section 3 of this
Agreement, the Company agrees to reimburse Reznick through September 30, 2000
for the cost he incurs to maintain and pay for the existing health insurance
policies covering Reznick and his family for which the Company presently
reimburses Reznick; provided, however, that the reimbursement will not exceed
$2,064 per year, and provided further, that Reznick will not be entitled to be
reimbursed for said health coverage by the Company at any time that Reznick is
receiving health insurance coverage at another party's expense, whether or not
said party is an affiliate of Reznick.
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5. STOCK OPTIONS
Reznick will be entitled to retain and exercise all vested stock
options (the "Retained Stock Options") which he holds as of October 1, 1998 to
purchase the common stock of the Company, and to exercise them in accordance
with their existing terms and conditions including termination dates (subject to
the effect of future stock splits, reverse stock splits, business combinations
and similar transactions involving the Company), during the exercise periods in
effect as of October 1, 1998. After October 1, 1998, Reznick will not be
entitled to retain or to be granted any stock options to purchase the common
stock of the Company which have not vested by said date, nor shall he be
entitled to retain or to exercise any stock options to purchase the common stock
or any convertible securities of NTC or GenSource, whether vested or unvested.
Reznick hereby tenders to NTC all stock options to purchase the common stock of
NTC for cancellation, and they shall be deemed canceled on the Effective Date of
this Agreement. The Company covenants to register the shares of stock underlying
the Retained Stock Options with the Securities and Exchange Commission ("SEC")
on the next registration statement on Form S-S filed by the Company with the SEC
pursuant to the Securities Act of 1933, as amended, and to maintain the
effectiveness of said registration statement during the entire term of Reznick's
Retained Stock Options. The following table summarizes the Retained Stock
Options which are vested as of September 1,1998:
<TABLE>
<CAPTION>
Number Exercise Price Per Share Date of Expiration
------ ------------------------ ------------------
<S> <C> <C> <C>
25,000 $4.87 2/28/2001
100,000 4.37 4/05/2001
25,000 4.87 5/31/2001
25,000 4.87 8/31/2001
25,000 4.87 11/30/2001
25,000 4.37 2/28/2002
25,000 4.37 2/28/2002
50,000 4.87 9/01/2003
37,500 4.87 9/29/2003
--------
337,500
</TABLE>
(See Amendment attached)
The Retained Stock Options shall continue to be governed by the 1996
Incomnet, Inc. Stock Option Plan for Directors, Officers and Key Consultants of
Incomnet, Inc. and its Subsidiaries (the "Plan"), and the related Stock Option
Agreements, which shall remain in full force and effect with respect to the
Retained Stock Options, except that the dates of expiration of the Retained
Stock Options shall be as set forth in Section 5 of this Agreement. In the event
that the Plan is discontinued for any reason, the Retained Stock Options shall
remain in full force and effect in accordance with their original terms and
conditions, as amended by the Employment Agreement and this Agreement.
6. CONSULTING SERVICES
As partial consideration for the compensation payable to Reznick
pursuant to Section 3 of this Agreement, Reznick agrees to provide consulting
services to the Company, Rapid Cast, Inc., NTC and GenSource on an "as-needed"
basis as reasonably requested and with
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<PAGE>
reasonable notice by the Company, as follows: (1) during the period from October
1, 1998 until September 30, 1999 ("First Period"), Reznick will provide
consulting services to the Company for a period of up to 40 hours per month
during reasonable business hours on a noncumulative basis, and (2) during the
Second Period, Reznick will provide consulting services to the Company for a
period of up to 10 hours per month during reasonable hours on a noncumulative
basis, whether or not Reznick is entitled to receive any settlement payments
pursuant to Section 3 of this Agreement. Reznick shall be entitled to receive
the payments provided for in Section 3 of this Agreement (subject to the
limitations in Section 3 of this Agreement) irrespective of the number of
consulting hours actually performed by Reznick during the First Period or the
Second Period, unless Reznick is in material default with respect to his
obligation to provide consulting services under Section 6 of this Agreement. If
the consulting hours exceed 40 hours or 10 hours per month, as the case may be,
during the above-referenced respective periods, then the Company will compensate
Reznick as an independent consultant at the rate of $150 per hour. To the extent
that the Company requests less than 40 hours per month of consulting services
from Reznick during the First Period and less than 10 hours per month of
consulting services from Reznick during the Second Period, then the Company will
not be entitled to accumulate those unused hours, and Reznick will not in any
event be obligated to provide more than 40 hours per month of consulting
services for the Company during the First Period and more than 10 hours per
month of consulting services for the Company during the Second Period. The
consulting services will include, at the sole discretion of the Company's Board
of Directors, having Reznick remain on the Board of Directors of Rapid Cast,
Inc. (subject to the continued effectiveness of a reasonably acceptable
directors' and officers' liability insurance policy provided by Rapid Cast,
Inc.), if requested by the Company and permitted by Rapid Cast, Inc. Reznick
will also assist the Company, GenSource, Rapid Cast, Inc. and NTC in any
litigation matters including, but not limited to, assisting with preparation for
trial, depositions, and serving as a witness in judicial or administrative
proceedings. The Company will also reimburse Reznick for the reasonable
verifiable expenses incurred by him in performing said consulting services,
consistent with the Company's then existing policy relating to expense
reimbursements.
7. INDEMNIFICATION OF REZNICK FOR ACTIONS BY THIRD PARTIES
A. The Company hereby agrees to indemnify and hold Reznick harmless
from any liability, claims, damages, losses, expenses, judgments or settlements
actually incurred by him, including but not limited to reasonable attorneys'
fees and costs actually incurred by him resulting from Reznick being made a
party to, or being threatened to be made a party to, any present or future
proceeding (other than an action by, or in the right of the Company, which is
addressed in Section 8A of this Agreement), relating to actions Reznick has
taken which were within the scope of his employment and authority as the Chief
Executive Officer and Chairman of the Board of Directors or agent of the
Company, provided that Reznick acted in good faith and in a manner he reasonably
believed to be in the best interest of the Company and, in the case of a
criminal proceeding, had no reasonable cause to believe his conduct was
unlawful; and provided further, that the conduct is within the scope of the
indemnification permitted by Sections 204 and 317 of the California Corporations
Code. As part of this indemnification agreement, the Company agrees to reimburse
Reznick for reasonable legal fees and costs to Reznick as they are incurred for
any actions for which the Company is obligated to indemnify Reznick pursuant to
the terms of this Agreement. If the Company provides a defense for Reznick at
its expense pursuant to Section 7A of this Agreement and there is no actual or
potential conflict of interest, then Reznick may not seek
- 4 -
<PAGE>
indemnification from the Company for the fees or costs of any separate counsel
which he may engage. If there is an actual or reasonable likelihood of an actual
conflict of interest under those circumstances, then Reznick may retain separate
counsel and the Company will reimburse Reznick for the reasonable legal fees and
costs incurred by Reznick in such actions if they are covered by the Company's
indemnification obligation under this Agreement.
B. NTC hereby agrees to indemnify and hold Reznick harmless from any
liability, claims, damages, losses, expenses, judgments or settlements actually
incurred by him, including but not limited to reasonable attorneys' fees and
costs actually incurred by him resulting from Reznick being made a party to, or
being threatened to be made a party to, any present or future proceeding (other
than an action by, or in the right of NTC, which is addressed in Section 8B of
this Agreement), relating to actions Reznick has taken which were within the
scope of his authority as a director or agent of NTC, provided that Reznick
acted in good faith and in a manner he reasonably believed to be in the best
interest of NTC and, in the case of a criminal proceeding, had no reasonable
cause to believe his conduct was unlawful; and provided further, that the
conduct is within the scope of the indemnification permitted by Sections 204 and
317 of the California Corporations Code. As part of this indemnification
agreement, NTC agrees to reimburse Reznick for reasonable legal fees and costs
to Reznick as they are incurred for any actions of which NTC is obligated to
indemnify Reznick pursuant to the terms of this Agreement. If NTC provides a
defense for Reznick at its expense pursuant to Section 7B of this Agreement and
there is no actual or potential conflict of interest, then Reznick may not seek
indemnification from NTC for the fees or costs or any separate counsel which he
may engage. If there is an actual or reasonable likelihood of an actual conflict
of interest under those circumstances, then Reznick may retain separate counsel
and NTC will reimburse Reznick for the reasonable legal fees and costs incurred
by Reznick in such actions if they are covered by NTC's indemnification
obligation under this Agreement.
C. GenSource hereby agrees to indemnify and hold Reznick harmless from
any liability, claims, damages, losses, expenses, judgments or settlements
actually incurred by him, including but not limited to reasonable attorneys'
fees and costs actually incurred by him resulting from Reznick being made a
party to, or being threatened to be made a party to, any present or future
proceeding (other than an action by, or in the right of GenSource, which is
addressed in Section 8C of this Agreement), relating to actions Reznick has
taken which were within the scope of his authority as an officer, director or
agent of GenSource, provided that Reznick acted in good faith and in a manner he
reasonably believed to be in the best interest of GenSource and, in the case of
a criminal proceeding, had no reasonable cause to believe his conduct was
unlawful; and provided further, that the conduct is within the scope of the
indemnification permitted by Sections 204 and 317 of the California Corporations
Code. As part of this indemnification agreement, GenSource agrees to reimburse
Reznick for reasonable legal fees and costs to Reznick as they are incurred for
any actions of which GenSource is obligated to indemnify Reznick pursuant to the
terms of this Agreement. If GenSource provides a defense for Reznick at its
expense pursuant to Section 7C of this Agreement and there is no actual or
potential conflict of interest, then Reznick may not seek indemnification from
GenSource for the fees of costs or any separate counsel which he may engage. If
there is an actual or reasonable likelihood of an actual conflict of interest
under those circumstances, then Reznick may retain separate counsel and
GenSource will reimburse Reznick for the reasonable legal fees and costs
incurred by Reznick in such actions if they are covered by GenSource's
indemnification obligation under this Agreement.
-5-
<PAGE>
8. INDEMNIFICATION OF REZNICK FOR ACTIONS IN THE RIGHT OF THE COMPANY,
NTC OR GENSOURCE
A. The Company hereby agrees to indemnify and hold Reznick harmless
from any liability, claims, damages, losses, expenses, judgments or settlements
actually incurred by him, including but not limited to reasonable attorneys'
fees and costs actually incurred by him resulting from Reznick being made a
party to, or being threatened to be made a party to, any proceeding by or in the
right of the Company to procure a judgment in its favor by reason of any action
taken by Reznick as an officer, director or agent of the Company, provided that
Reznick acted in good faith in a manner he believed to be in the best interests
of the Company and its shareholders; provided, that such indemnification will be
coextensive with and not beyond the scope of the indemnification permitted by
Sections 204 and 317 of the California Corporations Code, and in particular will
not be (i) for acts or omissions that involve intentional misconduct or a
knowing and culpable violation of law, (ii) for acts or omissions that Reznick
believed to be contrary to the best interests of the Company or its shareholders
or that involve the absence of good faith on the part of Reznick, (iii) for any
transaction from which Reznick derived an improper personal benefit, (iv) for
acts or omissions that show a reckless disregard by Reznick of his duties to the
Company or its shareholders in circumstances in which Reznick was aware, or
should have been aware, in the ordinary course of performing his duties, of a
risk of serious injury to the Company or its shareholders, (v) for acts or
omissions that constitute an unexcused pattern of inattention that amounts to an
abdication of Reznick's duty to the Company or its shareholders, (vi) for any
violation by Reznick of Section 310 of the California Corporations Code or (vii)
for any violation by Reznick of Section 316 of the California Corporations Code.
As part of this indemnification agreement, the Company agrees to reimburse
Reznick for reasonable legal fees and costs as they are incurred for any actions
for whic the Company is obligated to indemnify Reznick pursuant to the terms of
this Agreement.
B. NTC hereby agrees to indemnify and hold Reznick harmless from any
liability, claims, damages, losses, expenses, judgments or settlements actually
incurred by him, including but not limited to reasonable attorneys' fees and
costs actually incurred by him, resulting from Reznick being made a party to, or
being threatened to be made a party to, any proceeding by or in the right of NTC
to procure a judgment in its favor by reason of any action taken by Reznick as a
director or agent of NTC, provided that Reznick acted in good faith in a manner
he reasonably believed to be in the best interests of NTC and its shareholders;
provided, that such indemnification will be coextensive with and not beyond the
scope of the indemnification permitted by Sections 204 and 317 of the California
Corporations Code, and in particular will not be (i) for acts or omissions that
involved intentional misconduct or a knowing and culpable violation of law, (ii)
for acts or omissions that Reznick believed to be contrary to the best interests
of the Company or its shareholders or that involve the absence of good faith on
the part of Reznick, (iii) for any transaction from which Reznick derived an
improper personal benefit, (iv) for acts of omissions that show a reckless
disregard by Reznick of his duties to NTC or its shareholders in circumstances
in which Reznick was aware, or should have been aware, in the ordinary course of
performing his duties, of a risk of serious injury to NTC or its shareholders,
(v) for acts or omissions that constitute an unexcused pattern of inattention
that amounts to an abdication of Reznick's duty to NTC or its shareholders, (vi)
for any violation by Reznick of Section 310 of the California Corporations Code
or (vii) for any violation by Reznick of Section 316 of the California
Corporations Code. As part of this indemnification agreement, NTC agrees to
reimburse Reznick for reasonable legal fees and
-6-
<PAGE>
costs as they are incurred for any actions for which NTC is obligated to
indemnify Reznick pursuant to the terms of this Agreement.
C. GenSource hereby agrees to indemnify and hold Reznick harmless from
any liability, claims, damages, losses, expenses, judgments or settlements
actually incurred by him, including but not limited to reasonable attorneys'
fees and costs actually incurred by him, resulting from Reznick being made a
party to, or being threatened to be made a party to, any proceeding by or in the
right of GenSource to procure a judgment in its favor by reason of any action
taken by Reznick as a director or agent of GenSource, provided that Reznick
acted in good faith in a manner he reasonably believed to be in the best
interests of GenSource and its shareholders; provided, that such indemnification
will be coextensive with and not beyond the scope of the indemnification
permitted by Sections 204 and 317 of the California Corporations Code, and in
particular will not be (i) for acts or omissions that involved intentional
misconduct or a knowing and culpable violation of law, (ii) for acts or
omissions that Reznick believed to be contrary to the best interests of the
Company or its shareholders or that involve the absence of good faith on the
part of Reznick, (iii) for any transaction from which Reznick derived an
improper personal benefit, (iv) for acts of omissions that show a reckless
disregard by Reznick of his duties to GenSource or its shareholders in
circumstances in which Reznick was aware, or should have been aware, in the
ordinary course of performing his duties, of a risk of serious injury to
GenSource or its shareholders, (v) for acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of Reznick's duty
to GenSource or its shareholders, (vi) for any violation by Reznick of Section
310 of the California Corporations Code or (vii) for any violation by Reznick of
Section 316 of the California Corporations Code. As part of this indemnification
agreement, GenSource agrees to reimburse Reznick for reasonable legal fees and
costs as they are incurred for any actions for which GenSource is obligated to
indemnify Reznick pursuant to the terms of this Agreement.
9. REIMBURSEMENT
In the event that it is determined that Reznick is not entitled to
indemnification by the Company, NTC or GenSource, as the case may be, pursuant
to Sections 7 or 8 of this Agreement, then Reznick is obligated to reimburse the
Company, NTC or GenSource, as the case may be, for all amounts paid by the
Company, NTC or GenSource, as the case may be, on behalf of Reznick pursuant to
the indemnification provisions of this Agreement. In the event that Reznick is
successful on the merits in the defense of any proceeding referred to in
Sections 7 or 8 of this Agreement, or any related claim, issue or matter, then
the Company, NTC or GenSource, as the case may be, will indemnify and hold
Reznick harmless from all fees, costs and expenses actually incurred by him in
connection with the defense of any such proceeding, claim, issue or matter which
have not otherwise already been advanced to Reznick by the Company in accordance
with this Agreement. Notwithstanding the foregoing, the obligations of the
Company, NTC or GenSource to pay legal fees and costs on behalf of Reznick
pursuant to Sections 7 and 8 above shall not be contingent or dependent upon the
successful defense of any proceeding covered by the indemnification provisions
set forth in those sections.
-7-
<PAGE>
10. MUTUAL GENERAL RELEASE
A. Effective immediately with the Effective Date, Reznick and the
Company each hereby fully and forever releases and discharges each other and
such party's past, present and future officers, directors, employees, successors
and predecessors from any and all claims, demands, obligations, losses, or
causes of action of any nature relating to the Company, the Employment
Agreement, Reznick's employment with the Company, Reznick's position as a
director of the Company, whether based in tort, contract or any other theory of
recovery, and whether for compensatory or punitive damages, that now exist or
may hereafter accrue based on actions occurring prior to the effective date of
this release; provided, however, that this release by each party will not extend
to a breach of this Agreement by a party to this Agreement or obligations
expressly preserved by this Agreement. The Company and Reznick agree that this
release shall not be considered admissions by any party of any liability. The
Company and Reznick warrant that no promise or inducement has been offered
except as herein set forth. The parties to this Agreement are of legal age and
legally competent to execute this release and accept full responsibility
therefor. The parties hereto further agree that all rights under Section 1542 of
the Civil Code of California, and any similar law of any state or territory of
the United States or other jurisdiction, are hereby expressly waived. Said
Section reads as follows.
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE
TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE
MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR."
The Company and Reznick declare that the terms of this full and final
release of all claims by the parties to this Agreement have been completely read
by the undersigned and are fully understood and voluntarily accepted for the
purpose of making a full and final compromise and settlement. Each party to this
Agreement has consulted with its own legal counsel who has reviewed this
Agreement and advised each respective party of the meaning and effect of the
Agreement.
Notwithstanding anything herein to the contrary, upon a material
default under this Agreement by the Company, Reznick shall be entitled to assert
and pursue any and all claims against the Company which he may have under this
Agreement, under his Employment Agreement, or related to any position he held
with the Company, including, without limitation, any and all claims that the
Employment Agreement has been improperly terminated by the Company and that
Reznick is entitled to assert a claim therefor based on Section 15 of the
Employment Agreement. A material default shall expressly include the failure by
the Company to make any payment under Section 3 of this Agreement within ten
(10) days of the date upon which such payment is due under this Agreement.
The Company and Reznick agree that if, except as expressly permitted
by this Agreement, they hereafter commence, join in, or in any manner seek
relief through any suit arising out of, based upon, or related to any of the
claims released hereunder by said party or in any manner assert against the
other party any of the claims released hereunder, said party will pay to the
releasees against whom such claim(s) are asserted, in addition to any other
damages caused thereby, all attorneys' fees incurred by such releasees in
defending or otherwise
-8-
<PAGE>
responding to said suit or claim.
The Company and Reznick represent and warrant to each other that there
has been no assignment or other transfer of any interest in any of the claims
within the scope of the release set forth in this Section 10A, and each party
agrees to indemnify and hold each other party harmless from any liability,
claims, demands, damages, costs, or expenses and attorneys' fees incurred as a
result of any person asserting any such assignment or transfer of any rights or
any claims under any such assignment or transfer.
B. Effective immediately with the Effective Date, Reznick and NTC each
hereby fully and forever releases and discharges each other and such party's
past, present and future officers, directors, employees, successors and
predecessors from any and all claims, demands, obligations, losses, or causes of
action of any nature relating to NTC and Reznick's position as a director of
NTC, whether based in tort, contract or any other theory of recovery, and
whether for compensatory or punitive damages, that now exist or may hereafter
accrue based on actions occurring prior to the effective date of this release;
provided, however, that this release by each party will not extend to a breach
of this Agreement by a party to this Agreement or obligations expressly
preserved by this Agreement. NTC and Reznick agree that this release shall not
be considered admissions by any party of any liability. NTC and Reznick warrant
that no promise or inducement has been offered except as herein set forth. The
parties to this Agreement are of legal age and legally competent to execute this
release and accept full responsibility therefor. The parties hereto further
agree that all rights under Section 1542 of the Civil Code of California, and
any similar law of any state or territory of the United States or other
jurisdiction, are hereby expressly waived. Said Section reads as follows.
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECTED HIS SETTLEMENT WITH THE DEBTOR."
NTC and Reznick declare that the terms of this full and final release
of all claims by the parties to this Agreement have been completely read by the
undersigned and are fully understood and voluntarily accepted for the purpose of
making a full and final compromise and settlement. Each party to this Agreement
has consulted with its own legal counsel who has reviewed this Agreement and
advised each respective party of the meaning and effect of the Agreement.
Notwithstanding anything herein to the contrary, upon a material
default under this Agreement by NTC, Reznick shall be entitled to assert and
pursue any and all claims against NTC which he may have under this Agreement or
related to any position he held with NTC.
NTC and Reznick agree that if, except as expressly permitted by this
Agreement, they hereafter commence, join in, or in any manner seek relief
through any suit arising out of, based upon, or related to any of the claims
released hereunder by said party or in any manner assert against the other party
any of the claims released hereunder, said party will pay to the releasees
against whom such claim(s) are asserted, in addition to any other damages caused
thereby, all attorneys' fees incurred by such releasees in defending or
otherwise responding to said
-9-
<PAGE>
suit or claim.
NTC and Reznick represent and warrant to each other that there has
been no assignment or other transfer of any interest in any of the claims within
the scope of the release set forth in this Section 10B, and each party agrees to
indemnify and hold each other party harmless from any liability, claims,
demands, damages, costs, or expenses and attorneys' fees incurred as a result of
any person asserting any such assignment or transfer of any rights or any claims
under any such assignment or transfer.
C. Effective immediately with the Effective Date, Reznick and
GenSource each hereby fully and forever releases and discharges each other and
such party's past, present and future officers, directors, employees, successors
and predecessors from any and all claims, demands, obligations, losses, or
causes of action of any nature relating to GenSource or Reznick's position as a
director of GenSource, whether based in tort, contract or any other theory of
recovery, and whether for compensatory or punitive damages, that now exist or
may hereafter accrue based on actions occurring prior to the effective date of
this release; provided, however, that this release by each party will not extend
to a breach of this Agreement by a party to this Agreement or obligations
expressly preserved by this Agreement. GenSource and Reznick agree that this
release shall not be considered admissions by any party of any liability.
GenSource and Reznick warrant that no promise or inducement has been offered
except as herein set forth. The parties to this Agreement are of legal age and
legally competent to execute this release and accept full responsibility
therefor. The parties hereto further agree that all rights under Section 1542 of
the Civil Code of California, and any similar law of any state or territory of
the United States or other jurisdiction, are hereby expressly waived. Said
Section reads as follows.
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECTED HIS SETTLEMENT WITH THE DEBTOR."
GenSource and Reznick declare that the terms of this full and final
release of all claims by the parties to this Agreement have been completely read
by the undersigned and are fully understood and voluntarily accepted for the
purpose of making a full and final compromise and settlement. Each party to this
Agreement has consulted with its own legal counsel who has reviewed this
Agreement and advised each respective party of the meaning and effect of the
Agreement.
Notwithstanding anything herein to the contrary, upon a material
default under this Agreement by GenSource, Reznick shall be entitled to assert
and pursue any and all claims against GenSource, which he may have under this
Agreement, or related to any position he held with GenSource.
GenSource and Reznick agree that if, except as expressly permitted by
this Agreement, they hereafter commence, join in, or in any manner seek relief
through any suit arising out of, based upon, or related to any of the claims
released hereunder by said party or in any manner assert against the other party
any of the claims released hereunder, said party will pay to the releasees
against whom such claim(s) are asserted, in addition to any other damages caused
thereby, all attorneys' fees incurred by such releasees in defending or
otherwise responding to said suit or claim.
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<PAGE>
GenSource and Reznick represent and warrant to each other that there
has been no assignment or other transfer of any interest in any of the claims
within the scope of the release set forth in this Section 10C, and each party
agrees to indemnify and hold each other party harmless from any liability,
claims, demands, damages, costs, or expenses and attorneys' fees incurred as a
result of any person asserting any such assignment or transfer of any rights or
any claims under any such assignment or transfer.
11. PUBLIC ANNOUNCEMENTS
Except for disclosures required by the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended, including, but not
limited to, disclosure required on Form 8-K, Form 10-Q, or Form 10-K, the
GenSource agrees not to make any public announcement regarding the resignation
of Reznick as an officer and director of the GenSource until a copy of the
announcement is provided to Reznick. Reznick will not have the right to prohibit
such public announcement.
12. NOTICE
Notice will deemed to be given by one party to the other parties of
this Agreement upon personal delivery by messenger, air courier, express mail or
certified registered mail, return receipt requested, or upon facsimile or
telegram, or three days after mailing by first class mail by the party giving
the notice, addressed to the parties as follows, or to any other address or
facsimile numbers provided to the parties in writing in accordance with this
Agreement by the party making the change:
IF TO THE COMPANY: Incomnet, Inc.
20501 Ventura Boulevard, Suite 265
Woodland Hills, California 91364-2313
Attention: President
Facsimile No. (818) 587-5691
IF TO NTC: National Telephone & Communications, Inc.
2801 Main Street
Irvine, California 92065
Attention: President
Facsimile No. (949) 224-7474
IF TO GENSOURCE: GenSource Corporation
25572 Avenue Stanford
Valencia, California 91355-1102
Attention: President
Facsimile No. (805) 294-1310
IF TO REZNICK: Melvyn Reznick
____________________________
____________________________
Facsimile No. ______________
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<PAGE>
13. WAIVERS
If any party shall at any time waive any rights hereunder resulting
from any breach by the other party of any of the provisions of this Agreement,
such waiver is not to be construed as a continuing waiver of other breaches of
the same or other provisions of this Agreement. Resort to any remedies referred
to herein shall not be construed as a waiver of any other rights and remedies to
which such party is entitled under this Agreement or otherwise.
14. SUCCESSORS AND ASSIGNS
Each covenant and representation of this Agreement shall inure to the
benefit of and be binding upon each of the parties, their personal
representatives, assigns and other successors in interest.
15. ATTORNEY'S FEES
In the event that any party must resort to legal action in order to
enforce the provisions of this Agreement or to defend such action, the
prevailing party shall be entitled to receive reimbursement from the
nonprevailing party for all reasonable attorney's fees and all other costs
incurred in commencing or defending such action, or in enforcing this Agreement,
including but not limited to post judgement costs.
16. ENTIRE AND SOLE AGREEMENT
This Agreement constitutes the entire agreement between the parties
and supersedes all agreements, representations, warranties, statements, promises
and undertakings, whether oral or written, with respect to the subject matter of
this Agreement. This Agreement may be modified only by a written agreement
signed by all parties.
17. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the laws of the State of California applicable to contracts entered into and
performed entirely in the State of California and without regard to conflicts of
law. The venue for any legal proceedings under this Agreement will be in the
appropriate forum in the County of Los Angeles, State of California.
18. BINDING ARBITRATION
Any dispute under this Agreement will be resolved by binding
arbitration conducted in accordance with the rules and procedures of the
American Arbitration Association as they are then in effect in the County of Los
Angeles, State of California. In order to select an arbitrator, each party to
the dispute will select an arbitrator of its choice, and those selected
arbitrators will then select by mutual agreement a single arbitrator for the
proceeding. The decision of the arbitrator shall be final and binding on the
parties to this Agreement, and judgment thereon may be entered in the Superior
Court for the County of Los Angeles or any other court having jurisdiction. The
Company will advance the arbitrator's fees; however, all costs of the
arbitration proceeding to enforce this Agreement, including attorneys' fees and
witness expenses, shall be paid by the party
- 12 -
<PAGE>
against whom the arbitrator rules. It is expressly agreed that the parties to
any such arbitration may take discovery as contemplated and provided for by
California Code of Civil Procedure Section 1283.05. Notwithstanding anything
herein to the contrary, the parties hereto shall not be required to submit a
claim to arbitration if the claim is for temporary or preliminary equitable or
injunctive relief that could not practicably be heard in a timely fashion
through the arbitration process.
19. RIGHTS CUMULATIVE
All rights and remedies under this Agreement are cumulative, and none
is intended to be exclusive of another. No delay or omission in insisting upon
the strict observance of performance of any provision of this Agreement, or in
exercising any right or remedy, shall be construed as a waiver or relinquishment
of such provision, nor shall it impair such right or remedy. Every right and
remedy may be exercised from time to time and as often as deemed expedient.
20. CAPTIONS
The paragraph and other headings contained in this Agreement are for
reference purposes only, and shall not limit or otherwise affect the meaning
hereof.
21. LEGAL HOLIDAYS
In the case where the date on which any action required to be taken,
document required to be delivered or payment required to be made is not a
business day in Los Angeles, California, such action, delivery or payment need
not be made on that date, but may be made on the next succeeding business day.
22. COUNTERPARTS
This Agreement may be executed simultaneously in any number of
counterparts, each of which counterparts shall be deemed to be an original, and
such counterparts shall constitute but one and the same instrument.
23. PARTIES
This Agreement shall inure solely to the benefit of and shall be
binding upon the parties hereto and their respective successors, legal
representatives and assigns, and no other person shall have or be construed to
have any equitable right, remedy or claim under or in respect of or by virtue of
this Agreement or any provision contained herein.
24. AUTHORITY
Each signatory to this Agreement does hereby represent and warrant
that he has the authority to execute this Agreement on behalf of the party to
this Agreement for whom he is executing this Agreement.
- 13 -
<PAGE>
25. DIRECTOR AND OFFICER INSURANCE COVERAGE
The Company and NTC shall, to the extent that such policies are
available for and applicable to former officers and directors, maintain in force
for a period of not less than two (2) years following the Effective Date, the
director and officer insurance coverage on substantially the same terms as
currently in effect, and at the present levels of coverage, provided such
coverage is available at commercially reasonable rates.
THE COMPANY: INCOMNET, INC.
By: /s/ Mark J. Richardson
----------------------------------------------
Mark . Richarson, Corporate Secretary
NTC: NATIONAL TELEPHONE & COMMUNICATIONS, INC.*
By /s/ Michael Keebaugh
----------------------------------------------
Michael Keebaugh, Executive Vice President
GenSource: GENSOURCE CORPORATION**
By
----------------------------------------------
Eric Hoffberg, President
Reznick: /s/ Melvyn Reznick
-------------------------------------------------
Melvyn Reznick
*With respect only to the stock option, release, indemnification and insurance
provisions in Sections 5, 7B, 8B, 10B and 25 of this Agreement.
**With respect only to the termination, release and indemnification provisions
in Sections 1, 7C, 8C and 10C of this Agreement.
- 14 -
<PAGE>
25. DIRECTOR AND OFFICER INSURANCE COVERAGE
The Company and NTC shall, to the extent that such policies are
available for and applicable to former officers and directors, maintain in force
for a period of not less than two (2) years following the Effective Date, the
director and officer insurance coverage on substantially the same terms as
currently in effect, and at the present levels of coverage, provided such
coverage is available at commercially reasonable rates.
THE COMPANY: INCOMNET, INC.
By: /s/ Mark J. Richardson
----------------------------------------------
Mark . Richarson, Corporate Secretary
NTC: NATIONAL TELEPHONE & COMMUNICATIONS, INC.*
By
----------------------------------------------
Michael Keebaugh, Executive Vice President
GENSOURCE: GENSOURCE CORPORATION**
By /s/ Eric Hoffberg
----------------------------------------------
Eric Hoffberg, President
REZNICK: /s/ Melvyn Reznick
-------------------------------------------------
Melvyn Reznick
*With respect only to the stock option, release, indemnification and insurance
provisions in Sections 5, 7B, 8B, 10B and 25 of this Agreement.
**With respect only to the termination, release and indemnification provisions
in Sections 1, 7C, 8C and 10C of this Agreement.
- 14 -
<PAGE>
It has been a sincere pleasure working with you over the past few years. You are
a true asset to the Company and I know that you will perform admirably in your
new position at NTC. I hope the future will not only be considerably more
productive and far less troublesome than the past but that it will also be
supremely profitable for all concerned.
Sincerely,
/s/ Melvyn Reznick
Melvyn Reznick
Enclosures: Settlement Agreement and Amendment to Settlement Agreement
Payroll receipts of 8/14/98 and 8/31/98
<PAGE>
AMENDMENT TO SETTLEMENT AGREEMENT
This Amendment to Settlement Agreement is made as of this 29th day of
September, 1998 by and between Incomnet, Inc., a California corporation (the
"Company"), and Melvyn Reznick, an individual ("Reznick"), with respect to the
following facts:
RECITALS
A. The sale of an additional 2,000,000 shares of Rapid Cast, Inc. by the
Company was completed on September 29, 1998.
B. As a result of the sale, 37,050 additional stock options granted to
Reznick have vested in accordance with his employment agreement with
the Company.
C. The Company and Reznick entered into a Settlement Agreement, dated as
of August 31, 1998 (the "Original Settlement Agreement"), and wish to
amend it by this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, THE PARTIES HERETO AGREE AS FOLLOWS:
1. The following options are added to Section 5 of the Original
Settlement Agreement:
<TABLE>
<CAPTION>
Number Exercise Price Per Share Date of Expiration
------ ------------------------ ------------------
<S> <C> <C>
37,050 $4.87 9/29/2003
</TABLE>
2. Except as modified herein, the Original Settlement Agreement remains
in full force and effect.
THE COMPANY: INCOMNET, INC.
By: /s/ Mark J. Richardson
-------------------------------------------
Mark J. Richardson, Corporate Secretary
REZNICK:
By: /s/ Melvyn Reznick
-------------------------------------------
Melvyn Reznick
<PAGE>
EXHIBIT 10.8 -- SEPARATION AGREEMENT BETWEEN INCOMNET, INC. AND
JAMES R. QUANDT, DATED JULY 1, 1998, AND
AMENDMENT THERETO DATED OCTOBER 30, 1998
NATIONAL TELEPHONE & COMMUNICATIONS, INC.
2801 Main Street
Irvine, California 92614
October 30, 1998
BY FACSIMILE
Mr. James R. Quandt
17 Cherry Hills Drive
Coto De Caza, California 92679
Dear Mr. Quandt:
This letter, when countersigned by you, will constitute an agreement
between you and the Company as to the revised terms of your separation
arrangements with National Telephone & Communications, Inc. (the "Company").
1. In lieu of the severance payments provided under Section 2 of your
Confidential Separation Agreement, entered into as of July 1, 1998 (the
"Separation Agreement"), you shall receive a lump sum payment of $105,538 on or
before December 15, 1998.
2. Section 2 of the Separation Agreement will be amended to provide
that all payments in respect of medical coverage shall terminate December 15,
1998 although, you shall be entitled, to the extent you have made timely
elections, to make payments for continuing medical coverage under COBRA.
3. In lieu of the $100,000 bonus provided for under Section 7 of your
Separation Agreement, the Company shall pay to you a lump sun of $50,000 but
only in the event that one of the following occur on or before July 1, 2000:
(i) a merger to which the Company is a party and in which Incomnet, Inc. or its
shareholders retain less than 50% interest in the Company, (ii) a sale of
substantially all of the Company's assets, or (iii) a public offering of the
Company's Common Stock.
4. If the Company defaults on its payment obligations set forth herein,
you shall be entitled to all rights under the Separation Agreement.
Please acknowledge your agreement to the terms set forth in this letter by
signing below where indicated and return it to me by facsimile. This offer
expires at 5:00 p.m. on October 30, 1998.
Very truly yours,
/s/ Denis Richard
-----------------
President and Chief Executive Officer
AGREED AND ACCEPTED
/s/ James R. Quandt
- - -------------------
1
<PAGE>
CONFIDENTIAL SEPARATION AGREEMENT
THIS CONFIDENTIAL SEPARATION AGREEMENT ("Agreement") is made
and entered into as of July 1, 1998, (the "Date of this Agreement") by and
between James R. Quandt ("Employee") and National Telephone & Communications,
Inc., a California corporation (the "Company") (collectively, the "Parties").
RECITALS
A. Employee is currently employed by the Company as President and
Chief Executive Officer, pursuant to an Agreement dated June 25, 1997, (the
"Employment Agreement").
B. Under the terms of the Employment Agreement, Employee is entitled
to resign for "Good Cause" and receive substantial payments in the event of a
change in control of the Company or its parent, Incomnet, or in the event of
his termination by the Company, other than for cause.
C. Employee and the Company desire to specify the terms of Employee's
continuing his employment with the Company and separation therefrom, without
subjecting the Company to liability under the Employment Agreement for
termination by the Company other than for cause, or termination by the
Employee for "Good Cause."
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals, the
mutual promises contained herein, and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto agree as follows:
<PAGE>
1. TERM OF EMPLOYMENT. Employee shall continue his employment with
the Company through August 31, 1998. Employee shall continue to receive all
compensation and benefits in accordance with the terms of the Employment
Agreement through August 31, 1998. Neither party may terminate the employment
relationship during that period, except that in the event that a new Chief
Executive Officer is retained prior to that date, Employee may terminate
employment at his option. After August 31, 1998 (unless Employee has elected
to terminate his employment if a new Chief Executive Officer is retained
prior to that date), Employee shall continue to be employed on an "at-will"
basis which means that either party may terminate the employment relationship
at any time, with or without cause and with or without notice.
2. SEVERANCE PAYMENT. After the termination of employment, the
Company shall pay Employee $20,000 monthly for a period of 12 months, payable
on a bi-weekly basis, commencing on the last regular Company payday of the
month following the month in which Employee's employment is terminated. So
long as Employee makes a timely election, the Company shall also make
Employee's payments for continuing his current medical coverage under COBRA
upon termination of his employment for the lesser of 6 months or the date on
which Employee is eligible for coverage under a subsequent employer's medical
care plan.
3. RELEASES. Concurrently with the execution of this Agreement,
Employee will execute a release of all claims against the Company in the form
attached hereto as Exhibit "A." This Agreement shall be null and void in its
entirety if Employee fails to execute a release of all claims in the form
attached hereto as Exhibit "A." Said release shall be null and void in its
entirety in the event the Company fails to make any payment required under
Section 2 above after the Company has received written notice of its alleged
failure to make any such payment and has failed thereafter to make such
payment within fifteen business days. Concurrently with the execution of this
Agreement, the Company shall execute a release of claims in the form
2
<PAGE>
attached hereto as Exhibit "B." In the event that the Company fails timely to
execute the release in the form attached hereto as Exhibit "B," this Agreement
shall be null and void in its entirety.
4. SEVERABILITY. The provisions of this Agreement are severable,
and if any part of it is found to be unenforceable, the other paragraphs
shall remain fully valid and enforceable.
5. ATTORNEYS' FEES. The Company shall reimburse Employee up to
$7,500.00 for attorneys' fees incurred in connection with the negotiations
and drafting of this Agreement. Payment shall be made within thirty (30) days
of the receipt of a bill(s) for such services. This amount shall be reduced
by any amount paid on behalf of Victor Streufert in connection with the
negotiation and drafting of his separation agreement.
6. INDEMNIFICATION. The Company shall defend and indemnify Employee
in connection with any and all claims arising out of or related to his
service as an employee, officer or director of the Company, to the fullest
extent permitted under and subject to any conditions required by applicable
law; and the Company shall take any and all actions necessary to permit such
indemnification. With respect to any claim for which the Company has in
effect Director and Officer Insurance coverage which actually provides
coverage for such claim to Employee, the Company's obligation hereunder shall
be satisfied to the extent such coverage reimburses Employee for or pays for
Employee's defense or liability in connection with such claim; however, any
uncovered amount shall be paid by the Company. Any obligation of the Company
to indemnify Employee is conditioned upon Employee's reasonable cooperation
with the Company in the defense of any matter subject to this
indemnification. Employee's duty to cooperate with the Company in the defense
of any claims asserted against the Company shall exist both during and
following Employee's employment by the Company. Employee shall, upon
reasonable notice, and subject to Employee's other professional commitments
or employment obligations, furnish such information and assistance to the
Company as may
3
<PAGE>
reasonably be required by the Company in connection with any litigation or
governmental investigation in which it or any of its subsidiaries or
affiliates, is, or may become, a party. If Employee is a party in any action,
Employee shall not be entitled to any additional compensation for furnishing
such information and assistance pursuant to this Article. If Employee is not
a party in any such action and is no longer an Employee of the Company or
receiving compensation from the Company pursuant to Section 8 of this
Agreement or otherwise, Employee shall be paid a reasonable consulting fee
for his services. The Company shall maintain in force for a period of not
less than two (2) years following the date of Employee's termination of
employment, Director and Officer Insurance coverage on substantially the same
terms as currently in force, and at the present levels of coverage, provided
coverage is available at commercially reasonable rates.
7. BONUS. In the event that the Company or a successor in interest
makes a public offering of securities, is acquired, or all or substantially
all of its assets are acquired within two years of July 1, 1998, within
thirty (30) days of such event Employee shall be paid $100,000 by the Company.
8. CONTINUING SERVICE. For a period of six (6) months following his
termination of employment, Employee shall be available by telephone not more
than 2 hours per week to consult with the Company concerning his knowledge of
the Company's business or operations during his period of Employment. Unused
hours from one week shall not roll over to any subsequent period. The failure
of the Company to utilize any or all of the hours Employee is available per
week shall not excuse or reduce the amount due hereunder. Employee shall be
paid $1,600 per month for such services, payable an the last day of the month
in which such services are rendered. The Company may terminate this
consulting arrangement prior to the end of the six (6) month period upon
written notice to Employee. Employee shall serve as a director of the Company
through December 31, 1998 if the Company so desires, provided that current
levels of
4
<PAGE>
director and officer insurance is maintained. In the event such insurance is
not maintained, Employee shall have no obligation to continue to serve as a
director. Employee shall be paid a fee equal to the fee paid to outside
directors as of June 1, 1998.
9. NO ADMISSION. Nothing contained in this Agreement shall be
construed in any way as an admission by the Company or Employee that it or he
has acted wrongfully with respect to the other or with respect to any other
person, and the Company or Employee specifically disclaims any liability to,
or wrongful acts against the other, on the part of itself or its or his
representatives, affiliates, associates, employees or agents.
10. NO CLAIMS. Employee and the Company represent and agree that he
and it have not filed any notices, complaints, charges or lawsuits of any
kind whatsoever against the other with any court, any governmental agency or
any other regulatory body, and will not do so at any time hereafter with
regard to any matter related to or arising out of Employee's employment by
the Company or its affiliates, or his resignation thereof; provided, however,
that the foregoing shall not preclude or limit Employee or the Company in any
way from enforcing his or its rights under this Agreement or from taking any
actions required by law to be taken by him or it, nor shall this Agreement
prohibit Employee from seeking unemployment compensation which the Company
will not contest, provided the claim is lawful.
11. ARBITRATION. Except for claims for temporary or preliminary
equitable or injunctive relief that could not practicably be heard in a
timely fashion through this arbitration process, the parties hereby agree to
submit any claim or dispute arising out of the terms of this Agreement
(including exhibits) and/or any dispute relating in any way to Employee's
employment with the Company to private and confidential arbitration by a
single neutral arbitrator. Subject to the terms of this paragraph, the
arbitration proceedings shall be governed by the then current JAMS Employment
Arbitration Rules, and shall take place in Orange County, California. The
arbitrator shall be selected as follows: JAMS shall provide the parties with
a list
5
<PAGE>
of eleven (11) arbitrators drawn from its panel of employment dispute
arbitrators; each party may strike all names on the list it deems
unacceptable. If only one common name remains on the lists of all parties,
that individual shall be designated as the arbitrator. If more than one
common name remains on the lists of all parties, the parties shall strike
names alternately from the list of common names until only one remains. The
party who did not initiate the claim shall strike first. If no common name
exists on the lists of the parties, then the parties shall strike alternately
from a second list, with the party initiating the claim striking first, until
only one name remains. That person shall be designated as the arbitrator. The
decision of the arbitrator shall be final and binding on all parties to this
Agreement, and judgment thereon may be entered in any court having
jurisdiction. The Company will advance the arbitrator's fee; however, all
costs of the arbitration proceeding or litigation to enforce this Agreement,
including attorneys' fees and witness expenses, shall be paid by the party
against whom the arbitrator or court rules. Except for claims for temporary
or preliminary equitable or injunctive relief that could not practicably be
heard in a timely fashion through this arbitration process, this arbitration
procedure is intended to be the exclusive method of resolving any claim
relating to the obligations set forth in this Agreement (including Exhibits
"A" and "B").
12. ENTIRE AGREEMENT. This Agreement represents the sole and entire
agreement among the parties and supersedes all prior agreements,
negotiations, and discussions between the parties hereto and/or their
respective counsel with respect to the subject matters covered hereby,
including without limitation, any obligations of the Company to Employee and
Employee to the Company under the Employment Agreement; provided, however,
that in the event the Company fails to make timely payments of the amounts
set forth in Section 2 hereof, and Employee's release has become null and
void as provided in Section 3 hereof, Employee shall be entitled to seek
recovery under paragraphs 11.3 and 11.4 of the Employment Agreement in
accordance with the terms thereof. Any amendment to this Agreement must be in
writing,
6
<PAGE>
signed by duly authorized representatives of the parties, and stating the
intent of the parties to amend this Agreement. This Agreement shall not
supersede the Indemnification Agreement dated September 12, 1997, which shall
survive this Agreement.
13. ASSIGNMENT/SUCCESSORS. This Agreement shall be binding upon the
Company's successors. Neither party may assign his or its rights or
responsibilities under this Agreement unless such assignment has been
approved by the other party, which approval shall not unreasonably be
withheld.
14. CHOICE OF LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California.
15. NOT READ AGAINST DRAFTER. Because both parties have had an
opportunity to be represented by counsel and this Agreement was negotiated at
arms length, the usual presumption that an agreement be interpreted against
the drafter shall not apply.
16. NOTICES. All notices required to be given under this Agreement
shall be made by certified mail and directed to the addresses below or such
other address as specified in writing by the person to receive such notice:
If to the Company: National Telephone & Communications, Inc.
2801 Main Street
Irvine, California 92614
With a copy to: Dale DeForge, Esq.
2801 Main Street
Irvine, California 92614
If to Employee: James R. Quandt
7
<PAGE>
With a copy to: Joseph B. Farrell, Esq.
Latham & Watkins
650 Town Center Drive, 20th Floor
Costa Mesa, California 92626
Such notice shall be deemed received three (3) days after it is sent.
WHEREOF, the parties hereto have each executed this Agreement as of
the date first above written.
/s/ James R. Quandt
-----------------------------------------
James R. Quandt
National Telephone & Communications, Inc.
By: /s/ Michael L. Tenzer
--------------------------------------
Michael L. Tenzer
Director NTC, Inc.
8
<PAGE>
GENERAL RELEASE
For a valuable consideration, the receipt and adequacy of which are
hereby acknowledged, James R. Quandt ("Employee") (collectively the
"Parties") does hereby release and forever discharge the "Releasees" herein,
consisting of National Telephone & Communication, Inc. (the "Company") its
parents, subsidiaries, and affiliates, and each of their parents,
subsidiaries, affiliates, associates, owners, stockholders, predecessors,
successors, heirs, assigns, agents, directors, officers, partners, employees,
representatives, lawyers, and all persons acting by, through, under, or in
concert with them, or any of them, of and from any and all manner of action
or actions, causes or causes of action, in law or in equity, suits, debts,
liens, contracts, agreements, promises, liabilities, claims, demands,
damages, losses, costs or expenses, of any nature whatsoever, known or unknown,
fixed or contingent (hereinafter called "Claims"), which he now has or may
hereafter have against the Releasees by reason of any and all acts,
omissions, events or facts occurring or existing prior to the date hereof,
except as expressly provided herein. The Claims released hereunder include,
without limitation, any alleged breach of any employment agreement; any
alleged breach of any covenant of good faith and fair dealing, express or
implied; any alleged torts or other alleged legal restrictions relating to
the Employee's employment and the termination thereof; and any alleged
violation of any federal, state or local statute or ordinance including,
without limitation, Title VII of the Civil Rights Act of 1964, as amended,
the federal Age Discrimination in Employment Act of 1967, as amended, and the
California Fair Employment and Housing Act. This Release shall also not apply
to Employee's right to retirement and/or employee welfare benefits that have
vested and accrued prior to his separation from employment with the Company.
IN ACCORDANCE WITH THE OLDER WORKERS BENEFIT PROTECTION ACT OF
1990, EMPLOYEE IS HEREBY ADVISED AS FOLLOWS:
Employee agrees and expressly acknowledges that this Agreement
includes a waiver and release of all claims which Employee has or may
have under the Age Discrimination in Employment Act of 1967, as amended,
29 U.S.C. Section 621, ET SEQ. ("ADEA"). The following terms and conditions
apply to and are part of the waiver and release of the ADEA claims under
this Agreement:
(a) That this paragraph and this Agreement are written in a manner
calculated to be understood by Employee.
(b) The waiver and release of claims under the ADEA contained in
this Agreement do not cover rights or claims that may arise after the
date on which Employee signs this Agreement.
(c) This Agreement provides in Section 7 for consideration in
addition to anything of value to which Employee is already entitled.
1
EXHIBIT "A"
<PAGE>
(d) Employee is advised to consult an attorney before signing this
Agreement.
(e) Employee is granted twenty-one (21) days after Employee is
presented with this Agreement to decide whether or not to sign this
Agreement. If Employee executes this Agreement prior to the expiration
of such period, Employee does so voluntarily and after having had the
opportunity to consult with an attorney.
(f) Employee will have the right to revoke the waiver and release
of claims under the ADEA within seven (7) days of signing this
Agreement. Section 7 of this Agreement provides the consideration for
the waiver and release of any claims Employee may have under the ADEA
and accordingly Section 7 shall not become effective or enforceable
unless and until that revocation period has expired without there having
a revocation. ALL OTHER PROVISIONS OF THIS AGREEMENT SHALL BECOME
EFFECTIVE IMMEDIATELY UPON ITS EXECUTION.
In order to revoke this Release, Employee shall notify the
Company's Vice President of Human Resources in writing that Employee
wishes to revoke this Release. The writing must be delivered to the
offices of the Company on or before the seventh (7) day following
Employee's execution of this Release.
EMPLOYEE ACKNOWLEDGES THAT HE IS FAMILIAR WITH THE PROVISIONS OF
CALIFORNIA CIVIL CODE SECTION 1542, WHICH PROVIDES AS FOLLOWS:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH, IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECTED HIS SETTLEMENT WITH THE DEBTOR."
EMPLOYEE BEING AWARE OF SAID CODE SECTION, HEREBY EXPRESSLY WAIVES ANY RIGHTS
HE MAY HAVE THEREUNDER, AS WELL AS UNDER ANY OTHER STATUTES OR COMMON LAW
PRINCIPLES OF SIMILAR EFFECT.
Employee represents and warrants to the Releasees that there has
been no assignment or other transfer of any interest in any Claim which he
may have against such Releasees, or any of them, and he agrees to indemnify
and hold the Releasees harmless from any liability, claims, demands, damages,
costs, expenses and attorneys' fees incurred as a result of any person
asserting any such assignment or transfer of any rights or Claims under any
such assignment or transfer.
2
EXHIBIT "A"
<PAGE>
Employee agrees that if he hereafter commences, joins in, or in any
manner seeks relief through any suit arising out of, based upon, or relating
to any of the Claims released hereunder or in any manner asserts against the
Releasees any of the Claims released hereunder, then he will pay to the
Releasees against whom such claim(s) is asserted, in addition to any other
damages caused thereby, all attorneys' fees incurred by such Releasees in
defending or otherwise responding to said suit or Claim.
Employee understands and agrees that neither the payment of money
nor the execution of this Release shall constitute or be construed as an
admission of any liability whatsoever by the Releasees.
/s/ James R. Quandt 7-8-98
------------------------------ ------------
James R. Quandt Date
National Telephone & Communications, Inc.
/s/ Michael L. Tenzer 7/12/98
------------------------------ ------------
By: Michael L. Tenzer Date
Director, NTC Inc.
3
EXHIBIT "A"
<PAGE>
GENERAL RELEASE
For a valuable consideration, the receipt and adequacy of which are
hereby acknowledged, National Telephone & Communications, Inc. (the
"Company"), does hereby release and forever discharge the "Releasees" herein,
consisting of James R. Quandt ("Employee"), his successors, heirs, assigns,
agents, partners, employees, representatives, lawyers, and all persons acting
by, through, under, or in concert with them, or any of them, of and from any
and all manner of action or actions, causes or causes of action, in law or in
equity, suits, debts, liens, contracts, agreements, promises, liabilities,
claims, demands, damages, losses, costs or expenses, of any nature
whatsoever, known or unknown, fixed or contingent (hereinafter called
"Claims"), which it now has or may hereafter have against the Releasees by
reason of any and all acts, omissions, events or facts occurring or existing
prior to the date hereof, except as expressly provided herein. The Claims
released hereunder include, without limitation, any alleged breach of any
employment agreement; any alleged breach of any covenant of good faith and
fair dealing, express or implied; any alleged torts or other alleged legal
restrictions relating to the Employee's employment and the termination
thereof; and any alleged violation of any federal, state or local statute or
ordinance.
THE COMPANY ACKNOWLEDGES THAT IT IS FAMILIAR WITH THE PROVISIONS OF
CALIFORNIA CIVIL CODE SECTION 1542, WHICH PROVIDES AS FOLLOWS:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN ITS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH, IF KNOWN BY IT MUST HAVE MATERIALLY
AFFECTED ITS SETTLEMENT WITH THE DEBTOR."
THE COMPANY BEING AWARE OF SAID CODE SECTION, HEREBY EXPRESSLY WAIVES ANY
RIGHTS IT MAY HAVE THEREUNDER, AS WELL AS UNDER ANY OTHER STATUTES OR COMMON
LAW PRINCIPLES OF SIMILAR EFFECT.
The Company represents and warrants to the Releasees that there has
been no assignment or other transfer of any interest in any Claim which it
may have against such Releasees, or any of them, and it agrees to indemnify
and hold the Releasees harmless from any liability, claims, demands, damages,
costs, expenses and attorneys' fees incurred as a result of any person
asserting any such assignment or transfer of any rights or Claims under any
such assignment or transfer.
1
EXHIBIT "B"
<PAGE>
The Company agrees that if it hereafter commences, joins in, or in
any manner seeks relief through any suit arising out of, based upon, or
relating to any of the Claims released hereunder or in any manner asserts
against the Releasees any of the Claims released hereunder, then it will pay
to the Releasees against whom such claim(s) is asserted, in addition to any
other damages caused thereby, all attorneys' fees incurred by such Releasees
in defending or otherwise responding to said suit or Claim.
The Company understands and agrees that neither the payment of
money nor the execution of this Release shall constitute or be construed as
an admission of any liability whatsoever by the Releasees.
/s/ James R. Quandt 7-8-98
------------------------------ ------------
James R. Quandt Date
National Telephone & Communications, Inc.
/s/ Michael L. Tenzer 7/12/98
------------------------------ ------------
By: Michael L. Tenzer Date
Director, NTC
2
EXHIBIT "B"
<PAGE>
EXHIBIT 10.9 -- SEPARATION AGREEMENT BETWEEN INCOMNET, INC. AND
VICTOR C. STREUFERT, DATED JULY 1, 1998 AND
AMENDMENT THERETO DATED OCTOBER 30, 1998
NATIONAL TELEPHONE & COMMUNICATIONS, INC.
2801 Main Street
Irvine, California 92614
October 30, 1998
BY FACSIMILE:
Mr. Victor C. Streufert
5 San Miguel
Coto De Caza, California 92679
Dear Mr. Streufert:
This letter, when countersigned by you, will constitute an agreement
between you and the Company as to the revised terms of your separation
arrangements with National Telephone & Communications, Inc. (the "Company").
1. In lieu of the severance payments provided under Section 2 of your
Confidential Separation Agreement, entered into as of July 1, 1998 (the
"Separation Agreement"), you shall receive a lump sum payment of $52,016 on or
before December 15, 1998.
2. The provisions in Section 2 of the Separation Agreement relating to
the continuation of medical coverage under COBRA shall remain in full force and
effect.
3. In lieu of the $75,000 bonus provided for under Section 7 of your
Separation Agreement, the Company shall pay to you a lump sun of $37, 500 but
only in the event that one of the following occur on or before July 1, 2000:
(i) a merger to which the Company is a party and in which Incomnet, Inc. or its
shareholders retain less than 50% interest in the Company, (ii) a sale of
substantially all of the Company's assets, or (iii) a public offering of the
Company's Common Stock.
4. All your obligations to provide continuing services under paragraph
8 of Separation Agreement shall terminate on December 15, 1998.
5. All your obligations to refrain from competing against the Company
set forth in Section 12.0 of your Amended and Restated Employment Agreement
dated June 25, 1997, shall terminate on December 15, 1998.
6. If the Company defaults on its payment obligations set forth herein,
you shall be entitled to all rights under the Separation Agreement.
Please acknowledge your agreement to the terms set forth in this letter by
signing below where indicated and return it to me by facsimile. This offer
expires at 5:00 p.m. on October 30, 1998. You may fax your acceptance to the
undersigned at (949) 224-7474.
Very truly yours,
/s/ Denis Richard
-----------------
President and Chief Executive Officer
AGREED AND ACCEPTED
/s/ Victor C. Streufert
- - -----------------------
Victor C. Streufert
<PAGE>
CONFIDENTIAL SEPARATION AGREEMENT
THIS CONFIDENTIAL SEPARATION AGREEMENT ("Agreement") is made and
entered into as of July 1, 1998, (the "Date of this Agreement") by and between
Victor C. Streufert ("Employee") and National Telephone & Communications, Inc.,
a California corporation (the "Company") (collectively, the "Parties").
RECITALS
A. Employee is currently employed by the Company as Chief Financial
Officer, pursuant to an Agreement dated June 25, 1997, (the "Employment
Agreement").
B. Under the terms of the Employment Agreement, Employee is entitled to
resign for "Good Cause" and receive substantial payments in the event of a
change in control of the Company or its parent, Incomnet, or in the event of his
termination by the Company, other than for cause.
C. Employee and the Company desire to specify the terms of Employee's
continuing his employment with the Company and separation therefrom, without
subjecting the Company to liability under the Employment Agreement for
termination by the Company other than for cause, or termination by the Employee
for "Good Cause."
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual
promises contained herein, and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto agree
as follows:
<PAGE>
1. TERM OF EMPLOYMENT. Employee shall continue his employment with
the Company through July 31, 1998. Employee shall continue to receive all
compensation and benefits in accordance with the terms of the Employment
Agreement through July 31, 1998. Neither party may terminate the employment
relationship during that period, except that in the event that a new Chief
Financial Officer is retained prior to that date, Employee may terminate
employment at his option. After August 31, 1998 (unless Employee has elected
to terminate his employment if a new Chief Financial Officer is retained
prior to that date), Employee shall continue to be employed on an "at-will"
basis which means that either party may terminate the employment relationship
at any time, with or without cause and with or without notice.
2. SEVERANCE PAYMENT. After the termination of employment, the
Company shall pay Employee $10,000 monthly for a period of 12 months, payable
on a bi-weekly basis, commencing on the last regular Company payday of the
month following the month in which Employee's employment is terminated. So
long as Employee makes a timely election, the Company shall also make
Employee's payments for continuing his current medical coverage under COBRA
upon termination of his employment for the lesser of 6 months or the date on
which Employee is eligible for coverage under a subsequent employer's medical
care plan.
3. RELEASES. Concurrently with the execution of this Agreement,
Employee will execute a release of all claims against the Company in the form
attached hereto as Exhibit "A." This Agreement shall be null and void in its
entirety if Employee fails to execute a release of all claims in the form
attached hereto as Exhibit "A." Said release shall be null and void in its
entirety in the event the Company fails to make any payment required under
Section 2 above after the Company has received written notice of its alleged
failure to make any such payment and has failed thereafter to make such
payment within fifteen business days. Concurrently with the execution of this
Agreement, the Company shall execute a release of claims in the form
2
<PAGE>
attached hereto as Exhibit "B." In the event that the Company fails timely to
execute the release in the form attached hereto as Exhibit "B," this Agreement
shall be null and void in its entirety.
4. SEVERABILITY. The provisions of this Agreement are severable,
and if any part of it is found to be unenforceable, the other paragraphs
shall remain fully valid and enforceable.
5. ATTORNEYS' FEES. The Company shall reimburse Employee up to
$7,500.00 for attorneys' fees incurred in connection with the negotiations
and drafting of this Agreement. Payment shall be made within thirty (30) days
of the receipt of a bill(s) for such services. This amount shall be reduced
by any amount paid on behalf of James Quandt in connection with the
negotiation and drafting of his separation agreement.
6. INDEMNIFICATION. The Company shall defend and indemnify Employee
in connection with any and all claims arising out of or related to his
service as an employee, officer or director of the Company, to the fullest
extent permitted under and subject to any conditions required by applicable
law; and the Company shall take any and all actions necessary to permit such
indemnification. With respect to any claim for which the Company has in
effect Director and Officer Insurance coverage which actually provides
coverage for such claim to Employee, the Company's obligation hereunder shall
be satisfied to the extent such coverage reimburses Employee for or pays for
Employee's defense or liability in connection with such claim; however, any
uncovered amount shall be paid by the Company. Any obligation of the Company
to indemnify Employee is conditioned upon Employee's reasonable cooperation
with the Company in the defense of any matter subject to this
indemnification. Employee's duty to cooperate with the Company in the defense
of any claims asserted against the Company shall exist both during and
following Employee's employment by the Company. Employee shall, upon
reasonable notice, and subject to Employee's other professional commitments
or employment obligations, furnish such information and assistance to the
Company as may
3
<PAGE>
reasonably be required by the Company in connection with any litigation or
governmental investigation in which it or any of its subsidiaries or
affiliates, is, or may become, a party. If Employee is a party in any action,
Employee shall not be entitled to any additional compensation for furnishing
such information and assistance pursuant to this Article. If Employee is not
a party in any such action and is no longer an Employee of the Company or
receiving compensation from the Company pursuant to Section 8 of this
Agreement or otherwise, Employee shall be paid a reasonable consulting fee
for his services. The Company shall maintain in force for a period of not
less than two (2) years following the date of Employee's termination of
employment, Director and Officer Insurance coverage on substantially the same
terms as currently in force, and at the present levels of coverage, provided
coverage is available at commercially reasonable rates.
7. BONUS. In the event that the Company or a successor in interest
makes a public offering of securities, is acquired, or all or substantially
all of its assets are acquired within two years of July 1, 1998, within
thirty (30) days of such event Employee shall be paid $75,000 by the Company.
8. CONTINUING SERVICE. For a period of six (6) months following his
termination of employment, Employee shall be available by telephone not more
than 2 hours per week to consult with the Company concerning his knowledge of
the Company's business or operations during his period of Employment. Unused
hours from one week shall not roll over to any subsequent period. The failure
of the Company to utilize any or all of the hours Employee is available per
week shall not excuse or reduce the amount due hereunder. Employee shall be
paid $1,200 per month for such services, payable on the last day of the month
in which such services are rendered. The Company may terminate this
consulting arrangement prior to the end of the six (6) month period upon
written notice to Employee.
4
<PAGE>
9. NO ADMISSION. Nothing contained in this Agreement shall be
construed in any way as an admission by the Company or Employee that it or he
has acted wrongfully with respect to the other or with respect to any other
person, and the Company or Employee specifically disclaims any liability to,
or wrongful acts against the other, on the part of itself or its or his
representatives, affiliates, associates, employees or agents.
10. NO CLAIMS. Employee and the Company represent and agree that he
and it have not filed any notices, complaints, charges or lawsuits of any
kind whatsoever against the other with any court, any governmental agency or
any other regulatory body, and will not do so at any time hereafter with
regard to any matter related to or arising out of Employee's employment by
the Company or its affiliates, or his resignation thereof; provided, however,
that the foregoing shall not preclude or limit Employee or the Company in any
way from enforcing his or its rights under this Agreement or from taking any
actions required by law to be taken by him or it, nor shall this Agreement
prohibit Employee from seeking unemployment compensation which the Company
will not contest, provided the claim is lawful.
11. ARBITRATION. Except for claims for temporary or preliminary
equitable or injunctive relief that could not practicably be heard in a
timely fashion through this arbitration process, the parties hereby agree to
submit any claim or dispute arising out of the terms of this Agreement
(including exhibits) and/or any dispute relating in any way to Employee's
employment with the Company to private and confidential arbitration by a
single neutral arbitrator. Subject to the terms of this paragraph, the
arbitration proceedings shall be governed by the then current JAMS Employment
Arbitration Rules, and shall take place in Orange County, California. The
arbitrator shall be selected as follows: JAMS shall provide the parties with
a list of eleven (11) arbitrators drawn from its panel of employment dispute
arbitrators; each party may strike all names on the list it deems
unacceptable. If only one common name remains on the lists of all parties,
that individual shall be designated as the arbitrator. If more than one common
5
<PAGE>
name remains on the lists of all parties, the parties shall strike names
alternately from the list of common names until only one remains. The party
who did not initiate the claim shall strike first. If no common name exists
on the lists of the parties, then the parties shall strike alternately from
a second list, with the party initiating the claim striking first, until only
one name remains. That person shall be designated as the arbitrator. The
decision of the arbitrator shall be final and binding on all parties to this
Agreement, and judgment thereon may be entered in any court having
jurisdiction. The Company will advance the arbitrator's fee; however, all
costs of the arbitration proceeding or litigation to enforce this Agreement,
including attorneys' fees and witness expenses, shall be paid by the party
against whom the arbitrator or court rules. Except for claims for temporary
or preliminary equitable or injunctive relief that could not practicably be
heard in a timely fashion through this arbitration process, this arbitration
procedure is intended to be the exclusive method of resolving any claim
relating to the obligations set forth in this Agreement (including Exhibits
"A" and "B").
12. ENTIRE AGREEMENT. This Agreement represents the sole and entire
agreement among the parties and supersedes all prior agreements,
negotiations, and discussions between the parties hereto and/or their
respective counsel with respect to the subject matters covered hereby,
including without limitation, any obligations of the Company to Employee and
Employee to the Company under the Employment Agreement; provided, however,
that in the event the Company fails to make timely payments of the amounts
set forth in Section 2 hereof, and Employee's release has become null and
void as provided in Section 3 hereof, Employee shall be entitled to seek
recovery under paragraphs 10.3 and 10.4 of the Employment Agreement in
accordance with the terms thereof. Any amendment to this Agreement must be in
writing, signed by duly authorized representatives of the parties, and
stating the intent of the parties to amend this Agreement. This Agreement
shall not supersede the Indemnification Agreement dated September 12, 1997,
which shall survive this Agreement.
6
<PAGE>
13. ASSIGNMENT/SUCCESSORS. This Agreement shall be binding upon the
Company's successors. Neither party may assign his or its rights or
responsibilities under this Agreement unless such assignment has been
approved by the other party, which approval shall not unreasonably be
withheld.
14. CHOICE OF LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California.
15. NOT READ AGAINST DRAFTER. Because both parties have had an
opportunity to be represented by counsel and this Agreement was negotiated at
arms length, the usual presumption that an agreement be interpreted against
the drafter shall not apply.
16. NOTICES. All notices required to be given under this Agreement
shall be made by certified mail and directed to the addresses below or such
other address as specified in writing by the person to receive such notice:
If to the Company: National Telephone & Communications, Inc.
2801 Main Street
Irvine, California 92614
With a copy to: Dale DeForge, Esq.
2801 Main Street
Irvine, California 92614
If to Employee: Victor C. Streufert
With a copy to: Joseph B. Farrell, Esq.
Latham & Watkins
650 Town Center Drive, 20th Floor
Costa Mesa, California 92626
7
<PAGE>
Such notice shall be deemed received three (3) days after it is sent.
WHEREOF, the parties hereto have each executed this Agreement as of
the date first above written.
/s/ Victor C. Struefert
------------------------------------------
Victor C. Streufert
National Telephone & Communications, Inc.
By: /s/ Michael L. Tenzer
---------------------------------------
Michael L. Tenzer
Director, NTC
8
<PAGE>
GENERAL RELEASE
For a valuable consideration, the receipt and adequacy of which are
hereby acknowledged, Victor C. Streufert ("Employee") (collectively the
"Parties") does hereby release and forever discharge the "Releasees" herein,
consisting of National Telephone & Communication, Inc. (the "Company") its
parents, subsidiaries, and affiliates, and each of their parents, subsidiaries,
affiliates, associates, owners, stockholders, predecessors, successors, heirs,
assigns, agents, directors, officers, partners, employees, representatives,
lawyers, and all persons acting by, through, under, or in concert with them, or
any of them, of and from any and all manner of action or actions, causes or
causes of action, in law or in equity, suits, debts, liens, contracts,
agreements, promises, liabilities, claims, demands, damages, losses, costs or
expenses, of any nature whatsoever, known or unknown, fixed or contingent
(hereinafter called "Claims"), which he now has or may hereafter have against
the Releasees by reason of any and all acts, omissions, events or facts
occurring or existing prior to the date hereof, except as expressly provided
herein. The Claims released hereunder include, without limitation, any alleged
breach of any employment agreement; any alleged breach of any covenant of good
faith and fair dealing, express or implied; any alleged torts or other alleged
legal restrictions relating to the Employee's employment and the termination
thereof; and any alleged violation of any federal, state or local statute or
ordinance including, without limitation, Title VII of the Civil Rights Act of
1964, as amended, the federal Age Discrimination in Employment Act of 1967, as
amended, and the California Fair Employment and Housing Act. This Release shall
also not apply to Employee's right to retirement and/or employee welfare
benefits that have vested and accrued prior to his separation from employment
with the Company.
IN ACCORDANCE WITH THE OLDER WORKERS BENEFIT PROTECTION ACT OF 1990,
EMPLOYEE IS HEREBY ADVISED AS FOLLOWS:
Employee agrees and expressly acknowledges that this Agreement
includes a waiver and release of all claims which Employee has or may have
under the Age Discrimination in Employment Act of 1967, as amended, 29
U.S.C. Section 621, ET SEQ. ("ADEA"). The following terms and conditions
apply to and are part of the waiver and release of the ADEA claims under
this Agreement:
(a) That this paragraph and this Agreement are written in a manner
calculated to be understood by Employee.
(b) The waiver and release of claims under the ADEA contained in this
Agreement do not cover rights or claims that may arise after the date on
which Employee signs this Agreement.
1
EXHIBIT "A"
<PAGE>
(c) This Agreement provides in Section 7 for consideration in addition
to anything of value to which Employee is already entitled.
(d) Employee is advised to consult an attorney before signing this
Agreement.
(e) Employee is granted twenty-one (21) days after Employee is
presented with this Agreement to decide whether or not to sign this
Agreement. If Employee executes this Agreement prior to the expiration of
such period, Employee does so voluntarily and after having had the
opportunity to consult with an attorney.
(f) Employee will have the right to revoke the waiver and release of
claims under the ADEA within seven (7) days of signing this Agreement.
Section 7 of this Agreement provides the consideration for the waiver and
release of any claims Employee may have under the ADEA and accordingly
Section 7 shall not become effective or enforceable unless and until that
revocation period has expired without there having a revocation. ALL OTHER
PROVISIONS OF THIS AGREEMENT SHALL BECOME EFFECTIVE IMMEDIATELY UPON ITS
EXECUTION.
In order to revoke this Release, Employee shall notify the Company's
Vice President of Human Resources in writing that Employee wishes to revoke
this Release. The writing must be delivered to the offices of the Company
on or before the seventh (7) day following Employee's execution of this
Release.
EMPLOYEE ACKNOWLEDGES THAT HE IS FAMILIAR WITH THE PROVISIONS OF
CALIFORNIA CIVIL CODE SECTION 1542, WHICH PROVIDES AS FOLLOWS:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH, IF KNOWN BY HIM MUST HAVE
MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR."
EMPLOYEE BEING AWARE OF SAID CODE SECTION, HEREBY EXPRESSLY WAIVES ANY RIGHTS HE
MAY HAVE THEREUNDER, AS WELL AS UNDER ANY OTHER STATUTES OR COMMON LAW
PRINCIPLES OF SIMILAR EFFECT.
Employee represents and warrants to the Releasees that there has been
no assignment or other transfer of any interest in any Claim which he may have
against such Releasees, or any of them, and he agrees to indemnify and hold the
Releasees harmless from any liability, claims, demands, damages, costs, expenses
and attorneys' fees incurred as a result of
2
EXHIBIT "A"
<PAGE>
any person asserting any such assignment or transfer of any rights or Claims
under any such assignment or transfer.
Employee agrees that if he hereafter commences, joins in, or in any
manner seeks relief through any suit arising out of, based upon, or relating
to any of the Claims released hereunder or in any manner asserts against the
Releasees any of the Claims released hereunder, then he will pay to the
Releasees against whom such claim(s) is asserted, in addition to any other
damages caused thereby, all attorneys' fees incurred by such Releasees in
defending or otherwise responding to said suit or Claim.
Employee understands and agrees that neither the payment of money nor
the execution of this Release shall constitute or be construed as an admission
of any liability whatsoever by the Releasees.
/s/ Victor C. Streufert 7/8/98
---------------------------------- -----------
Victor C. Streufert Date
National Telephone & Communication, Inc.
/s/ Michael L. Tenzer 7/12/98
---------------------------------- -----------
By: Michael L. Tenzer Date
Director NTC, Inc.
3
EXHIBIT "A"
<PAGE>
GENERAL RELEASE
---------------
For a valuable consideration, the receipt and adequacy of which are
hereby acknowledged, National Telephone & Communications, Inc. (the
"Company"), does hereby release and forever discharge the "Releasees" herein,
consisting of Victor C. Streufert ("Employee"), his successors, heirs,
assigns, agents, partners, employees, representatives, lawyers, and all
persons acting by, through, under, or in concert with them, or any of them,
of and from any and all manner of action or actions, causes or causes of
action, in law or in equity, suits, debts, liens, contracts, agreements,
promises, liabilities, claims, demands, damages, losses, costs or expenses,
of any nature whatsoever, known or unknown, fixed or contingent (hereinafter
called "Claims"), which it now has or may hereafter have against the
Releasees by reason of any and all acts, omissions, events or facts occurring
or existing prior to the date hereof, except as expressly provided herein.
The Claims released hereunder include, without limitation, any alleged breach
of any employment agreement; any alleged breach of any covenant of good faith
and fair dealing, express or implied; any alleged torts or other alleged
legal restrictions relating to the Employee's employment and the termination
thereof; and any alleged violation of any federal, state or local statute or
ordinance.
THE COMPANY ACKNOWLEDGES THAT IT IS FAMILIAR WITH THE PROVISIONS OF
CALIFORNIA CIVIL CODE SECTION 1542, WHICH PROVIDES AS FOLLOWS:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN ITS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH, IF KNOWN BY IT MUST HAVE MATERIALLY
AFFECTED ITS SETTLEMENT WITH THE DEBTOR."
THE COMPANY BEING AWARE OF SAID CODE SECTION, HEREBY EXPRESSLY WAIVES ANY RIGHTS
IT MAY HAVE THEREUNDER, AS WELL AS UNDER ANY OTHER STATUTES OR COMMON LAW
PRINCIPLES OF SIMILAR EFFECT.
The Company represents and warrants to the Releasees that there has
been no assignment or other transfer of any interest in any Claim which it may
have against such Releasees, or any of them, and it agrees to indemnify and hold
the Releasees harmless from any liability, claims, demands, damages, costs,
expenses and attorneys' fees incurred as a result of any person asserting any
such assignment or transfer of any rights or Claims under any such assignment or
transfer.
1
EXHIBIT "B"
<PAGE>
The Company agrees that if it hereafter commences, joins in, or in any
manner seeks relief through any suit arising out of, based upon, or relating to
any of the Claims released hereunder or in any manner asserts against the
Releasees any of the Claims released hereunder, then it will pay to the
Releasees against whom such claim(s) is asserted, in addition to any other
damages caused thereby, all attorney's fees incurred by such Releasees in
defending or otherwise responding to said suit or Claim.
The Company understands and agrees that neither the payment of money nor
the execution of this Release shall constitute or be construed as an admission
of any liability whatsoever by the Releasees.
/s/ Victor C. Streufert 7/8/98
---------------------------------- -----------
Victor C. Streufert Date
National Telephone & Communication, Inc.
/s/ Michael L. Tenzer 7/12/98
---------------------------------- -----------
By: Michael L. Tenzer Date
Director NTC, Inc.
2
EXHIBIT "B"
<PAGE>
EXHIBIT 10.10 -- AMENDMENT TO EMPLOYMENT AGREEMENT BETWEEN INCOMNET, INC.
AND STEPHEN A. CASWELL
INCOMNET, INC.
2801 Main Street
Irvine, CA 92614
October 29, 1998
Mr. Stephen A. Caswell
1893 Sunnydale Avenue
Simi Valley, California 93065
Dear Mr. Caswell:
This letter, when executed by you, will constitute our agreement as to the
amended terms of your employment arrangements with Incomnet, Inc. (the
"Company").
1. In lieu of amounts otherwise due and owing to you under Sections 6 and 7 of
your Employment Agreement dated June 5, 1997 (the "Employment Agreement"),
the Company shall pay to you a salary of $10,000 per month and continue
your existing benefits through April 30, 1999. All stock options currently
outstanding shall be cancelled as of the date hereof.
2. Your office will be located at home. You agree however to work out of
Incomnet's Irvine office at least three days per week. The Company will
reimburse you for reasonable expenses including housing near it's
headquarters, if for any reason (such as weather, work load, timing of
deliverables, etc.) it becomes impractical (in the reasonable opinion of
both the Company and yourself) for you to travel to Irvine or if it becomes
necessary for you to spend more than three days a week at the headquarters.
We will require your approval (not to be unreasonably withheld) to extend
beyond three days per week your presence at the headquarters.
3. In lieu of the severance and termination rights and obligations under
Sections 13 and 14 of the Employment Agreement, by notice on or before
April 20, 1999 the Company may elect to extend your employment arrangements
for an additional six months with a salary of $10,000 per month. At the
end of such six month period, all salary, bonus and benefit payments and
obligations shall cease and no severance payment shall be owed to you. If,
however, as of April 20, 1999, the Company has not extended your employment
for an additional six months, then the Company shall pay to you severance
in the amount of $10,000 per month for the months of May, June and
July 1999. Upon receipt of such payments, no further amounts of salary,
bonus, severance or benefits shall be due and owing to you.
4. If, for any reason, you desire to terminate your employment arrangement
with the Company, no severance or compensation payments will be due and
owing by the Company other than accrued salary and vacation payments
through the date of termination by you.
5. If the Company defaults on its payment obligations set forth in this
letter, you shall be entitled to all payments set fort under Sections 6, 7,
13 and 14 of your Employment Agreement.
If the terms of this arrangement as outlined above are acceptable, please
sign in the space provided below. This offer terminates at 5:00 p.m. on October
30, 1998.
Very truly yours,
/s/ Denis Richard
-----------------
President and Chief Executive Officer
AGREED AND ACCEPTED
<PAGE>
Stephen A. Caswell
October 29, 1998
Page 2
/s/ Stephen A. Caswell
- - ----------------------
Stephen A. Caswell
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<PAGE>
EXHIBIT 10.11 -- SETTLEMENT AND RELEASE AGREEMENT BETWEEN INCOMNET, INC. AND
THE COHEN PARTIES, INCLUDING DR. ROBERT COHEN, STEFANIE
RUBIN, ALLYSON COHEN, JEFFREY COHEN, JEFFREY RUBIN, DR. ALAN
COHEN, LENORE KATZ, BROADWAY PARTNERS AND MERYL COHEN,
CUSTODIAN FOR GABRIELLE COHEN, ERICA COHEN, JACLYN COHEN AND
NICOLE COHEN.
SETTLEMENT AND RELEASE AGREEMENT
THIS SETTLEMENT AND RELEASE AGREEMENT (the "SETTLEMENT AGREEMENT") is
entered into this 5th day of November, 1998, by and among Dr. Robert Cohen, an
individual, Stefanie Rubin, an individual, Allyson Cohen, an individual, Jeffrey
Cohen, an individual, Jeffrey Rubin, an individual, Dr. Alan Cohen, an
individual, Lenore Katz, an individual, Broadway Partners, a general
partnership, and Meryl Cohen, an individual and as custodian for Gabrielle
Cohen, Jaclyn Cohen, Erica Cohen and Nicole Cohen (collectively the "COHEN
PARTIES"), and Incomnet, Inc., a California corporation (the "COMPANY").
R E C I T A L S
WHEREAS, the Company has granted to the Cohen Parties warrants to purchase
the Company's common stock, options to purchase preferred stock, various rights
under an agreement dated January 21, 1997 and certain registration rights
(collectively, the "OLD SECURITIES RIGHTS");
WHEREAS, the Company and the Cohen Parties desire to clarify and to settle
all rights of the Cohen Parties in respect of securities of the Company and
registration rights relating thereto by replacing the Old Securities Rights with
the rights and obligations set forth in this Settlement Agreement (the "NEW
SECURITIES RIGHTS");
WHEREAS, the Company deems it to be in the best interests of all
shareholders to obtain certainty and to document the outstanding rights of the
Cohen Parties by replacing the Old Securities Rights with the New Securities
Rights set forth in this Settlement Agreement;
NOW, THEREFORE, for good and valuable consideration the receipt and
sufficiency of which are hereby acknowledged by the parties, the parties hereby
agree as follows:
1. WARRANTS
A list of all warrants currently held by the Cohen Parties is set forth on
EXHIBIT A hereto (the "WARRANTS"). The agreements evidencing the Warrants are
set forth in EXHIBIT B hereto (the "WARRANT AGREEMENTS"). Dr. Robert Cohen
agrees that the Warrant Agreement in his name for 16,666 shares at an exercise
price of $3.50 per share should have been in the name of Lenore Katz as
specified on EXHIBIT A and is hereby deemed to be in the name of Lenore Katz.
Jeffrey Rubin agrees that the Warrant Agreement in his name for 10,000 shares at
an exercise price of $3.50 per share should have been in the name of Stefanie
Rubin as specified on EXHIBIT A and is hereby deemed to be in the name of
Stefanie Rubin. The Warrant Agreements shall continue to govern the terms of
the Warrants except as modified by Section 2 of this Settlement Agreement.
2. EXERCISE PERIOD FOR THE WARRANTS
The last date on which each of the Warrants may be exercised shall be the
later of:
(i) the date on which the Company's common stock ("COMMON STOCK")
underlying such Warrant has been registered under an effective registration
statement for a period of 120 days (whether or not consecutive), provided,
however, (i) such 120-day period does not commence unless and until the Company
has amended its Articles of Incorporation to increase the number of authorized
shares of Common Stock to allow for issuance of a sufficient number of shares of
Common Stock underlying the Warrants; (ii) such 120-day period shall be tolled
for the number of days that the Cohen Party holding such Warrant is restricted
or prohibited by the Company, any underwriter or by law from selling their
Registrable Securities or the registration statement covering the Registrable
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Securities is not effective; and (iii) such 120-day period shall be tolled until
the closing price for the Company's Common Stock is greater than the Warrant
exercise price for 20 trading days (each, a "Pricing Day") (of which at least
five Pricing Days must be consecutive trading days); or
(ii) 11:59 p.m. (Pacific Time) on the last exercise date as set forth
in EXHIBIT A hereto for such Warrant.
3. OPTIONS TO PURCHASE PREFERRED STOCK
Stefanie Rubin currently holds an option to purchase 200 shares of the
Company's Series B Preferred Stock (the "SERIES B OPTION") and an option to
purchase 250 shares of a new class of Preferred Stock of the Company designated
as Series C Preferred Stock (the "SERIES C OPTION"). Stefanie Rubin shall sell
to the Company and the Company shall purchase the Series B and Series C Options
from Stefanie Rubin for an aggregate purchase price of $85,000 payable on or
before November 5, 1998 (the "OPTION PAYMENT"). The Option Payment shall be
delivered to Robert Matlin of Camhy Karlinsky & Stein LLP and, upon receipt of
such payment, the Series B and Series C Options shall terminate and Stefanie
Rubin shall have no further rights in respect of such Series B and Series C
Options.
4. REDEMPTION OF WARRANTS
In the event that at the next meeting of the Company's shareholders, which
is expected to occur no later than April 30, 1999 (the "SHAREHOLDERS MEETING"),
the shareholders do not approve an increase in the number of authorized shares
of Common Stock that is sufficient to permit the exercise of the Warrants, the
holders of the Warrants shall be entitled to have the Company redeem all or any
part of their Warrants, at the holders' sole option, at any time during the 120
days following the earlier of April 30, 1999 or the Shareholders Meeting (the
"REDEMPTION PERIOD"). The holders of the Warrant shall elect to redeem by
sending a notice to the Company's President (the "REDEMPTION NOTICE"). To be
effective, the Redemption Notice must be received by the Company's President by
personal delivery, facsimile, overnight delivery service or certified mail
during the Redemption Period. The Redemption Notice shall be deemed received on
the day of delivery if sent by personal delivery or facsimile sent prior to 5:00
p.m. (Pacific Time), the next business day following deposit with an overnight
delivery service or facsimile sent after 5:00 p.m. (Pacific Time) and on the
date of receipt if sent by certified mail.
In the event that the Company's shareholders do not approve an increase in
the number of authorized shares of Common Stock sufficient enough to cover the
Common Stock underlying the Warrants at the next Shareholders Meeting, the
Company shall proceed at each subsequent annual and special meeting to include a
proposal to increase the number of authorized shares of Common Stock until such
approval is obtained.
The redemption price for the Warrants shall be the difference between the
Warrant exercise price set forth in EXHIBIT A and the average closing price for
the Company's Common Stock during the 20 trading days prior to the date of
receipt of the Redemption Notice (the "REDEMPTION PRICE").
The Company shall not be obligated to redeem the Warrants if it is not
permitted to do so under applicable law, including applicable provisions of the
California Corporations Code, and the Redemption Period shall be tolled until
the Company is legally permitted to complete the redemption. If the Company is
legally permitted to redeem some, but not all of the Warrants tendered for
redemption, the Company shall redeem such Warrants in the order of receipt of
the Redemption Notices. To the extent that the Company cannot redeem all
Warrants that are the subject of a Redemption Notice on a single date, the
Company shall redeem such Warrants on a pro-rata basis among the tendering
holders and the Company shall extend the Redemption Period on the balance of the
Warrants tendered for redemption until the date that the Company is permitted to
redeem the balance of the Warrants. In any event, the Redemption Price shall be
the price as calculated on the date of receipt of the Redemption Notice.
5. REGISTRATION RIGHTS.
The Cohen Parties owning Warrants shall have the registration rights set
forth below in respect of the Warrants and shares of Common Stock underlying
the Warrants (the "REGISTRABLE SECURITIES"). These registration rights are
granted to the holders of the Warrants
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and may not be transferred to any other person without the prior written
consent of the Company unless such transfer is to another member of the Cohen
Parties.
(a) SHELF REGISTRATION. (i) At the Company's election or (ii) upon
the written request of the holders of not less than 50% of the Registrable
Securities at any time following August 5, 1999 and provided that the Company is
eligible to use Form S-3 (or a comparable form permitting substantial
incorporation by reference), the Company shall file a "shelf" registration
statement on any appropriate form pursuant to Rule 415 (or similar rule that may
be adopted by the SEC) under the Securities Act (a "SHELF REGISTRATION") for all
of the then Registrable Securities, subject to the request of any holder to
exclude any Registrable Securities as provided below. Within ten (10) days
after receipt of a request for a Shelf Registration, the Company shall give
written notice of such registration (i) to all holders of Registrable Securities
in the event of an election by the Company or (ii) to all non-requesting holders
of Registrable Securities in the event of a request by the holders. The Company
shall exclude from such registration all Registrable Securities with respect to
which the Company received written requests for exclusion therefrom within
fifteen (15) days after the receipt of the notice by the applicable holder.
The Company hereby agrees to file such Shelf Registration as promptly
as practicable, but not later than forty-five (45) days following the request
therefor and thereafter to use its best efforts to cause such Shelf Registration
to become effective as soon as possible. The Company further agrees to keep the
Shelf Registration continuously effective for a period of 120 days following the
date that the Securities and Exchange Commission ("SEC") declares the Shelf
Registration effective, or such shorter period as shall terminate on the date on
which all the Registrable Securities covered by the Shelf Registration have been
sold pursuant to such Shelf Registration. If the Shelf Registration is not
effective at any time during such 120-day period, the Company shall use its best
efforts to make it effective as soon as possible. The Company shall only be
obligated to file one Shelf Registration and the tolling of the exercise period
for all Warrants under Section 2 of this Settlement Agreement on account of
Section 2(i)shall terminate upon the conclusion of the 120 day registration
period regardless of whether all Underlying Common were included in such
registration unless such failure to be included was at the Company's election.
The Company further agrees to supplement or make amendments to the
Shelf Registration, if required by the rules, regulations or instructions
applicable to the registration form utilized by the Company or by the Securities
Act or rules and regulations thereunder for shelf registration or requested by
the holders of a majority of the Registrable Securities covered by such
registration or any underwriter of the Registrable Securities.
If the holders of a majority of the Registrable Securities being
registered so elect, the offering of Registrable Securities pursuant to a Shelf
Registration shall be in the form of a registration in which the Registrable
Securities are sold to an underwriter (an "UNDERWRITTEN OFFERING"). If the
managing underwriter or underwriters of such offering advise the Company and the
holders of Registrable Securities in writing that in their opinion the number of
shares of Registrable Securities requested to be included in such offering is
too large and would materially and adversely affect the success of such
offering, the Company will include in such offering the aggregate number of
Registrable Securities which in the opinion of such managing underwriter or
underwriters can be sold without any such material adverse effect and the amount
to be offered for the accounts of all of such holders shall be reduced pro rata
(according to the Registrable Securities beneficially owned by such holders) to
the extent necessary to reduce the total amount of securities to be included in
such offering to the amount recommended by such managing underwriter or
underwriters. To the extent that the underwriter excludes any Registrable
Securities, the holders of such Registrable Securities shall not lose any other
registration rights. Unless the holders of a majority of the Registrable
Securities to be included in such offering shall consent in writing, no other
party, including the Company, shall be permitted to offer securities in any such
offering.
(b) DEMAND REGISTRATION. If all of the Registrable Securities have
not been registered before May 5, 2001, then at any time after May 5, 2001, the
holders of not less than 50% of the Registrable Securities may make a written
request (the "DEMAND NOTICE") for registration under the Securities Act (a
"DEMAND REGISTRATION") of the Registrable Securities held by them; PROVIDED,
HOWEVER, that in lieu of making such Demand Registration, the Company may, at
its election, by notice to the holders of such Registrable Securities, redeem
the Warrants for cash in an amount equal to the difference between (i) the fair
market value of the Registrable Securities and (ii) the exercise price for such
Warrants as set forth in EXHIBIT A. For purposes of this Settlement Agreement,
the fair market value of the Registrable Securities shall be determined as
follows:
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(i) if the security is listed on any established stock exchange or
a national market system, including, without limitation, the National Market
System or the SmallCap Market of the National Association of Securities Dealers
Automated Quotation System, its fair market value shall be the average closing
sales price (or the closing bid if no sales were reported) for the 20 trading
days prior to the date of receipt of the Demand Notice as reported in THE WALL
STREET JOURNAL or similar publication;
(ii) if the security is regularly quoted by a recognized securities
dealer but selling prices are not reported, its fair market value shall be the
average of the mean between the high bid and low asked prices for the security
for the 20 trading days prior to the date of receipt of the Demand Notice; or
(iii) in the absence of an established market for the security, the
fair market value shall be determined in good faith by the Company's Board of
Directors, with reference to the Company's net worth, prospective earning power,
dividend-paying capacity and other relevant factors, including the goodwill of
the Company, the economic outlook in the Company's industry, the Company's
position in the industry and its management and the values of stock of other
corporations in the same or a similar line of business (all of such factors
determined as of the date of the Demand Notice).
Within ten (10) days after receipt of each Demand Notice, the Company
shall give written notice of such registration request to all non-requesting
holders of Registrable Securities and shall, subject to the provisions of the
following paragraph, include in such registration all Registrable Securities
with respect to which the Company received written requests for inclusion
therein within fifteen (15) days after the receipt of the notice of such demand
registration request by the applicable holder. Both the Demand Notice and any
request to have Registrable Securities included in a Demand Registration will
specify the number of shares of Registrable Securities proposed to be sold and
will also specify the intended method of disposition thereof. Unless the
holders of a majority of the Registrable Securities to be included in such
registration shall consent in writing, no other party, including the Company,
shall be permitted to offer securities under any such Demand Registration. The
Company shall not be obligated to effect more than one Demand Registration under
this Section 5(b), PROVIDED, HOWEVER, that if the Shelf Registration is declared
effective by the SEC in accordance with Section 5(a), then the Company shall not
be obligated to effect any Demand Registrations under this Section 5(b) unless a
holder of Registrable Securities was excluded from the Shelf Registration.
A registration requested pursuant to this Section 5(b) will not be
deemed to have been effected unless the Registration Statement relating thereto
has become effective under the Securities Act; provided, however , that if,
after such Registration Statement has become effective, the offering of the
Registrable Securities pursuant to such registration is interfered with by any
stop order, injunction or other order or requirement of the SEC or other
governmental agency or court, such registration will be deemed not to have been
effected. Holders of a majority of the Registrable Securities with respect to
which registration has been requested pursuant to this Section 5(b) may, at any
time prior to the effective date of the Registration Statement relating to such
registration, revoke such request with respect to their Registrable Securities
by providing a written notice to the Company revoking such request; PROVIDED,
HOWEVER, that the Company shall have no further obligation to register such
Registrable Securities that are the subject of a revocation pursuant to Section
5(b), but all other registration rights under Section 5(c) shall remain in
effect.
If the holders of a majority of the Registrable Securities being
registered so elect, the offering of Registrable Securities pursuant to a Demand
Registration shall be in the form of an Underwritten Offering. If the managing
underwriter or underwriters of such offering advise the Company and the holders
of Registrable Securities in writing that in their opinion the number of shares
of Registrable Securities requested to be included in such offering is
sufficiently large to materially and adversely affect the success of such
offering, the Company will include in such registration the aggregate number of
Registrable Securities which in the opinion of such managing underwriter or
underwriters can be sold without any such material adverse effect, and the
amount of Registrable Securities to be offered for the accounts of all of such
holders shall be reduced pro rata (according to the Registrable Securities
beneficially owned by such holders) to the extent necessary to reduce the total
amount of securities to be included in such offering to the amount recommended
by such managing underwriter or underwriters.
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(c) INCIDENTAL REGISTRATION. If at any time prior to the date that
all Registrable Securities have been registered (and provided that the Company
has not already registered the Registrable Securities for 120 days), the Company
proposes to file a registration statement under the Securities Act (other than
in connection with the Shelf Registration, or a Registration Statement on Form
S-4 or S-8, or any form substituting therefor) with respect to an offering of
any class of security by the Company for its own account or for the account of
any of its security holders, then the Company shall give written notice of such
proposed filing to the holders of the Registrable Securities as soon as
practicable (but in no event less than thirty days before the anticipated filing
date), and such notice shall offer such holders the opportunity to register such
number of Registrable Securities as each such holder may request. Each holder
of Registrable Securities desiring to have its Registrable Securities registered
under this subsection 5(c) shall so advise the Company in writing within 20 days
after the date of receipt of such notice from the Company (which request shall
set forth the number of Registrable Securities for which registration is
requested). The Company shall include in such Registration Statement all such
Registrable Securities so requested to be included therein, and, if such
registration is an Underwritten Registration, the Company shall use its best
efforts to cause the managing underwriter or underwriters to permit the
Registrable Securities requested to be included in the Registration Statement
for such offering to be included (on the same terms and conditions as similar
securities of the Company included therein to the extent appropriate); provided,
however, that if the managing underwriter or underwriters of such offering
deliver a written opinion to the holders of such Registrable Securities that the
total number of securities that the Company, the holders of Registrable
Securities, or such other persons propose to include in suc offering is such
that the success of the offering would be materially and adversely affected by
inclusion of the securities requested to be included, then the amount of
securities to be offered for the accounts of the Company, the holders of
Registrable Securities and other holders registering securities pursuant to
registration rights shall be allocated as follows:
(i) if such registration has been initiated by the Company as a
primary offering, FIRST to the securities sought to be included by the Company,
and SECOND to the Registrable Securities sought to be included by the holders
thereof and the securities sought to be included by other holders of
registration rights, pro rata, on the basis of the number of securities owned by
each such holder; and
(ii) if such registration has been initiated by another holder of
registration rights, FIRST to the securities sought to be included by such
demanding holder, SECOND to the securities sought to be included by the Company,
and third to the Registrable Securities sought to be included by the holders
thereof and to all other securities sought to be included by other holders of
registration rights, pro rata, on the basis of the number of securities owned by
each such holder.
6. HOLD-BACK AGREEMENTS.
(a) RESTRICTIONS ON PUBLIC SALE BY HOLDER OF REGISTRABLE
SECURITIES. Each holder of Registrable Securities whose Registrable Securities
are covered by a Registration Statement filed pursuant to Section 5 hereof
agrees, if requested in writing by the managing underwriters in an Underwritten
Offering, not to effect any public sale or distribution of securities of the
Company of the same class as the securities included in such Registration
Statement, including a sale pursuant to Rule 144 under the Securities Act
(except as part of such Underwritten Registration), during the 10-day period
prior to the filing of a Registration Statement with respect to such
Underwritten Offering, and during the 90-day period beginning on the closing
date of each Underwritten Offering made pursuant to such Registration Statement
(the "Block-Out Period"), to the extent timely notified in writing by the
Company or the managing underwriters.
(b) RESTRICTIONS ON SALE OF SECURITIES BY THE COMPANY. The Company
agrees not to effect any public sale or distribution of any securities similar
to those being registered, or any securities convertible into or exchangeable or
exercisable for such securities (except pursuant to a registration statement on
Form S-4 or S-8, or any substitute form that may be adopted by the SEC) during
the ten days prior to the filing of a registration statement with respect to
such Underwritten Offering, and during the 90-day period beginning on the
effective date of any Registration Statement (except as part of such
registration statement (x) where the holders of a majority of the shares of
Registrable Securities to be included in such registration statement consent or
(y) where holders of Registrable Securities are participating in such
registration statement pursuant to Section 5(c) hereof, such registration
statement was filed by the Company with respect to the sale of securities by the
Company, and no holder
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is simultaneously participating in a registration statement pursuant to
Section 5(b) hereof) or the commencement of a public distribution of
Registrable Securities pursuant to such registration statement.
7. REGISTRATION PROCEDURES.
In connection with the Company's registration obligations pursuant to
Section 5 hereof, the Company will use its best efforts to effect such
registration to permit the sale of such Registrable Securities in accordance
with the intended method or methods of distribution thereof, and pursuant
thereto the Company will as expeditiously as possible:
(a) prepare and file with the SEC, as soon as practicable, a
Registration Statement relating to the applicable registration on any
appropriate form under the Securities Act, which forms shall be available for
the sale of the Registrable Securities in accordance with the intended method or
methods of distribution thereof and shall include all financial statements of
the Company, and use its best efforts to cause such Registration Statement to
become effective; provided that before filing a Registration Statement or
Prospectus or any amendments or supplements thereto, including documents
incorporated by reference after the initial filing of the Registration
Statement, the Company will furnish one counsel selected by the holders of a
majority of the shares of Registrable Securities covered by such registration
statement, and the underwriters, if any, copies of all such documents proposed
to be filed, which documents will be subject to the review of such counsel and
underwriters, and the Company will not file any Registration Statement or
amendment thereto or any prospectus or any supplement thereto (including such
documents incorporated by reference) to which such counsel or the underwriters,
if any, shall reasonably object;
(b) prepare and file with the SEC such amendments and
post-effective amendments to the Registration Statement as may be necessary to
keep the Registration Statement effective for the applicable period, or such
shorter period which will terminate when all Registrable Securities covered by
such Registration Statement have been sold; cause the Prospectus to be
supplemented by any required prospectus supplement, and as so supplemented to be
filed pursuant to Rule 424 under the Securities Act; and comply with the
provisions of all securities covered by such Registration Statement during the
applicable period in accordance with the intended method or methods of
distribution by the sellers thereof set forth in such Registration Statement or
supplement to the prospectus; the Company shall not be deemed to have used its
best efforts to keep a Registration Statement effective during the applicable
period if it voluntarily takes any action that would result in the holders of
the Registrable Securities covered thereby not being able to sell such
Registrable Securities during that period unless such action is required under
applicable law; provided that the foregoing shall not apply to actions taken by
the Company in good faith and for valid business reasons, including without
limitation the acquisition or divestiture of assets, so long as the Company
promptly thereafter complies with the requirements of Section 7(l) hereof, if
applicable;
(c) notify the selling holders of Registrable Securities and the
managing underwriters, if any, promptly, and confirm such advice in writing, (1)
when the Prospectus or any Prospectus supplement or post-effective amendment has
been filed, and, with respect to the Registration Statement or any
post-effective amendment, when the same has become effective, (2) of any request
by the SEC for amendments or supplements to the Registration Statement or the
Prospectus or for additional information, (3) of the issuance by the SEC of any
stop order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose, (4) if at any time the
representations and warranties of the Company contemplated by paragraph (n)
below cease to be true and correct, (5) of the receipt by the Company of any
notification with respect to the suspension of the qualification of the
Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose and (6) of the happening of any
event which makes any statement made in the Registration Statement, the
Prospectus or any document incorporated therein by reference untrue or which
requires the making of any changes in the Registration Statement, the Prospectus
or any document incorporated therein by reference in order to make the
statements therein not misleading;
(d) make every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of the Registration Statement at the earliest
possible moment;
(e) if reasonably requested by the managing underwriter or
underwriters or a holder of Registrable Securities being sold in connection with
an Underwritten Offering, promptly incorporate in a Prospectus supplement or
post-effective amendment such information as the managing underwriters and the
holders of a
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majority in number of the Registrable Securities being sold agree should be
included therein relating to the sale of the Registrable Securities,
including, without limitation, information with respect to the number of
Registrable Securities being sold to such underwriters, the purchase price
being paid therefor by such underwriters and with respect to any other terms
of the Underwritten (or best efforts underwritten) Offering of the Registrable
Securities to be sold in such offering; and make all required filings of such
prospectus supplement or post-effective amendment as soon as notified of the
matters to be incorporated in such prospectus supplement or post-effective
amendment;
(f) promptly prior to the filing of any document which is to be
incorporated by reference into the Registration Statement or the prospectus
(after initial filing of the Registration Statement), make available
representatives of the Company for discussion of such document and make such
changes in such document prior to the filing thereof as counsel for such selling
holders or underwriters may reasonably request;
(g) furnish to each selling holder of Registrable Securities and
each managing underwriter, without charge, at least one signed copy of the
Registration Statement and any post-effective amendment thereto, including
financial statements and schedules, all documents incorporated therein by
reference and all exhibits (including those incorporated by reference);
(h) deliver to each selling holder of Registrable Securities and
the underwriters, if any, without charge, as many copies of the prospectus
(including each preliminary prospectus) and any amendment or supplement thereto
as such Persons may reasonably request; the Company consents to the use of the
prospectus or any amendment or supplement thereto by each of the selling holders
of Registrable Securities and the underwriters, if any, in connection with the
offering and sale of the Registrable Securities covered by the prospectus or any
amendment or supplement thereto;
(i) prior to any public offering of Registrable Securities,
register or qualify or cooperate with the selling holders of Registrable
Securities, the underwriters, if any, and their respective counsel in connection
with the registration or qualification of such Registrable Securities for offer
and sale under the securities or blue sky laws of such jurisdictions as any
seller or underwriter reasonably requests in writing and do any and all other
acts or things necessary or advisable to enable the disposition in such
jurisdictions of the Registrable Securities covered by the Registration
Statement;
(j) cooperate with the selling holders of Registrable Securities
and the managing underwriters, if any, to facilitate the timely preparation and
delivery of certificates representing Registrable Securities to be sold and not
bearing any restrictive legends; and enable such Registrable Securities to be in
such denominations and registered in such names as the managing underwriters may
request at least two business days prior to any sale of Registrable Securities
to the underwriters;
(k) cause the Registrable Securities covered by the applicable
Registration Statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to enable the seller or
sellers thereof or the underwriters, if any, to consummate the disposition of
such Registrable Securities;
(1) upon the occurrence of any event contemplated by Section
7(c)(6) above, prepare a supplement or post-effective amendment to the
Registration Statement or the related prospectus or any document incorporated
therein by reference or file any other required document so that, as thereafter
delivered to the purchasers of the Registrable Securities, the prospectus will
not contain an untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein not misleading;
(m) cause all Registrable Securities covered by the Registration
Statement to be listed on each securities exchange on which similar securities
issued by the Company are then listed;
(n) enter into such agreements (including an underwriting
agreement) and take all such other actions in connection therewith in order to
expedite or facilitate the disposition of such Registrable Securities and in
connection therewith, whether or not an underwriting agreement is entered into
and whether or not the registration is an Underwritten Registration, (1) make
such representations and warranties to the holders of such Registrable
Securities and the underwriters, if any, in form, substance and scope as are
customarily made by issuers to
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underwriters in primary underwritten offerings; (2) obtain opinions of counsel
to the Company and updates thereof (which counsel and opinions (in form, scope
and substance) shall be reasonably satisfactory to the managing underwriters,
if any, and the holders of a majority of the Registrable Securities included
in such registration, covering the matters customarily covered in opinions
requested in Underwritten Offerings and such other matters as may be
reasonably requested by such holders and underwriters); (3) obtain "cold
comfort" letters and updates thereof from the Company's independent certified
public accountants addressed to the selling holders of Registrable Securities
and the underwriters, if any, such letters to be in customary form and
covering matters of the type customarily covered in "cold comfort" letters by
underwriters in connection with primary Underwritten Offerings; (4) if an
underwriting agreement is entered into, the same shall set forth in full the
indemnification provisions and procedures of Section 9 hereof with respect to
all parties to be indemnified pursuant to said Section; and (5) the Company
shall deliver such documents and certificates as may be requested by the
holders of a majority of the Registrable Securities being sold and the
managing underwriters, if any, to evidence compliance with clause (1) above
and with any customary conditions contained in the underwriting agreement or
other agreement entered into by the Company. The above shall be done at each
closing under such underwriting or similar agreement or as and to the extent
required thereunder;
(o) make available for inspection by a representative of the
holders of the Registrable Securities, any underwriter participating in any
disposition pursuant to such registration, and any attorney or accountant
retained by the sellers or underwriter, all financial and other records,
pertinent corporate documents and properties of the Company and cause the
Company's officers, directors and employees to supply all information reasonably
requested by any such representative, underwriter, attorney or accountant in
connection with such registration; provided that any records, information or
documents that are designated by the Company in writing as confidential shall be
kept confidential by such Persons unless disclosure of such records, information
or documents is required by court or administrative order;
(p) otherwise use its best efforts to comply with all applicable
rules and regulations of the SEC, and make available to its security holders, as
soon as reasonably practicable, an earnings statement covering a period of 12
months, beginning within three months after the effective date of the
registration statement, which earnings statement shall satisfy the provisions of
section 11(a) of the Securities Act; and
(q) cooperate with each seller of Registrable Securities and each
underwriter participating in the disposition of such Registrable Securities and
their respective counsel in connection with any filings required to be made with
the National Association of Securities Dealers, Inc. (the "NASD").
The Company may require each seller of Registrable Securities as to
which any registration is being effected to furnish to the Company such
information regarding the distribution of such securities as the Company may
from time to time reasonably request in writing.
Each holder of Registrable Securities agrees by acquisition of such
Registrable Securities that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 7(l) hereof, such holder
will forthwith discontinue disposition of Registrable Securities until such
holder's receipt of the copies of the supplemented or amended prospectus
contemplated by Section 7(l) hereof, or until it is advised in writing (the
"ADVICE") by the Company that the use of the prospectus may be resumed, and has
received copies of any additional or supplemental filings which are incorporated
by reference in the prospectus, and, if so directed by the Company such holder
will deliver to the Company (at the Company's expense), all copies, other than
permanent file copies then in such holder's possession, of the prospectus
covering such Registrable Securities current at the time of receipt of such
notice. In the event the Company shall give any such notice, the time periods
regarding the effectiveness of Registration Statements set forth in Section 5
hereof and Section 7(b) hereof shall be extended by the number of days during
the period from and including the date of the giving of such notice pursuant to
Section 7(c)(6) hereof to the date when the selling holders of Registrable
Securities covered by such registration statement shall receive copies of the
supplemented or amended prospectus contemplated by Section 7(l) hereof or the
Advice.
8. REGISTRATION EXPENSES.
All expenses incident to the Company's performance of or compliance with
this Settlement Agreement, including without limitation: all registration and
filing fees; fees with respect to filings required to be made with the NASD;
fees and expenses of compliance with
8
<PAGE>
securities or blue sky laws (including fees and disbursements of counsel for
the underwriters of Registrable Securities in connection with blue sky
qualifications of the Registrable Securities and determination of their
eligibility for investment under the laws of such jurisdictions as the
managing underwriters or holders of a majority of the Registrable Securities
being sold may designate); printing expenses, messenger, telephone and
delivery expenses; fees and disbursements of counsel for the Company and
customary fees and expenses for independent certified public accountants
retained by the Company (including the expenses of any comfort letters or
costs associated with the delivery by independent certified public
accountants of a comfort letter or comfort letters requested pursuant to
Section 7(n) hereof); securities acts liability insurance, if the Company so
desires; all internal expenses of the Company (including, without limitation,
all salaries and expenses of its officers and employees performing legal or
accounting duties); the expense of any annual audit; the fees and expenses
incurred in connection with the listing of the securities to be registered on
each securities exchange on which similar securities issued by the Company
are then listed; and the fees and expenses of any person, including special
experts, retained by the Company (all such expenses being herein called
"REGISTRATION EXPENSES") will be borne by the Company regardless of whether
the Registration Statement becomes effective. The Company shall not have any
obligation to pay any underwriting discounts, commissions or similar fees
attributable to the sale of Registrable Securities, or any legal fees and
expenses of counsel to the holders of Registrable Securities.
9. INDEMNIFICATION: CONTRIBUTION.
(a) INDEMNIFICATION BY THE COMPANY. The Company agrees to
indemnify and hold harmless each holder of Registrable Securities and its
partners, and their respective partners, officers, directors, employees and
agents, and each person who controls such person (within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act) against all losses,
claims, damages, liabilities and expenses arising out of or based upon any
untrue or alleged untrue statement of a material fact contained in any
Registration Statement, prospectus or preliminary prospectus or any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
the same are caused by or contained in any information furnished in writing to
the Company by the holders of Registrable Securities expressly for use therein.
The Company will also indemnify underwriters, selling brokers, dealer managers
and similar securities industry professionals participating in the distribution,
their officers and directors and each person who controls such persons (within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act) to the same extent as provided above with respect to the indemnification of
the holders of Registrable Securities, if requested.
(b) INDEMNIFICATION BY HOLDER OF REGISTRABLE SECURITIES. Each
holder of Registrable Securities agrees to indemnify and hold harmless the
Company and its directors, officers, employees and agents, and each person who
controls the Company (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) against any losses, claims, damages, liabilities
and expenses resulting from any untrue statement of a material fact or any
omission of a material fact required to be stated in the Registration Statement
or prospectus or preliminary prospectus or necessary to make the statements
therein not misleading, to the extent, but only to the extent, that such untrue
statement or omission is contained in any information or affidavit so furnished
in writing by such holder to the Company specifically for inclusion in such
Registration Statement or prospectus. In no event shall the liability of any
selling holder of Registrable Securities hereunder be greater in amount than the
dollar amount of the proceeds received by such holder upon the sale of the
Registrable Securities giving rise to such indemnification obligation. The
Company shall be entitled to receive indemnities from underwriters, selling
brokers, dealer managers and similar securities industry professionals
participating in the distribution, to the same extent as provided above with
respect to information so furnished in writing by such persons specifically for
inclusion in any prospectus or Registration Statement.
(c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. Any Person entitled to
indemnification hereunder will (i) give prompt notice to the indemnifying party
of any claim with respect to which it seeks indemnification and (ii) permit such
indemnifying party to assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party; provided, however , that any person
entitled to indemnification hereunder shall have the right to employ separate
counsel and to participate in the defense of such claim, but the fees and
expenses of such counsel shall be at the expense of such person unless (a) the
indemnifying party has agreed to
9
<PAGE>
pay such fees or expenses, (b) the indemnifying party shall have failed to
assume the defense of such claim and employ counsel reasonably satisfactory to
such person or (c) based upon written advice of counsel to such person, there
shall be one or more defenses available to such person that are not available
to the indemnifying party or there shall exist conflicts of interest pursuant
to applicable rules of professional conduct between such person and the
indemnifying party (in which case, if the person notifies the indemnifying
party in writing that such person elects to employ separate counsel at the
expense of the indemnifying party, the indemnifying party shall not have the
right to assume the defense of such claim on behalf of such person), in each
of which events the fees and expenses of such counsel shall be at the expense
of the indemnifying party. The indemnifying party will not be subject to any
liability for any settlement made without its consent (but such consent will
not be unreasonably withheld), but if settled with its written consent, or if
there be a final judgment for the plaintiff in any such action or proceeding,
the indemnifying party shall indemnify and hold harmless the indemnified
parties from and against any loss or liability (to the extent stated above) by
reason of such settlement or judgment. No indemnified party will be required
to consent to entry of any judgment or enter into any settleent which does not
include as an unconditional term thereof the giving by the claimant or
plaintiff to such indemnified party of a release from all liability in respect
to such claim or litigation.
(d) CONTRIBUTION. If for any reason the indemnification provided
for in the preceding clauses (a) and (b) is unavailable to an indemnified party
or insufficient to hold it harmless as contemplated by the preceding clauses (a)
and (b), then the indemnifying party shall contribute to the amount paid or
payable by the indemnified party as a result of such loss, claim, damage or
liability in such proportion as is appropriate to reflect not only the relative
benefits received by the indemnified party and the indemnifying party, but also
the relative fault of the indemnified party and the indemnifying party, as well
as any other relevant equitable considerations, provided, that no holder of
Registrable Securities shall be required to contribute an amount greater than
the dollar amount of the proceeds received by such holder with respect to the
sale of the Registrable Securities giving rise to such indemnification
obligation. The relative fault of the Company on the one hand and of the
selling holders on the other shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by such party, and the parties' relative intent, knowledge, access to
information, and opportunity to correct or prevent such statement or omission.
No person guilty of fraudulent misrepresentation (within the meaning of Section
10(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentations.
10. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS.
(a) If any of the Registrable Securities covered by the Shelf
Registration are to be sold in an Underwritten Offering, the investment banker
or investment bankers and manager or managers that will administer the offering
will be selected by the holders of a majority of the Registrable Securities
included in such offering; provided that such investment bankers and managers
must be reasonably satisfactory to the Company.
(b) No Person may participate in any underwritten registration
hereunder unless such person (i) agrees to sell such person's securities on the
basis provided in any underwriting arrangements approved by the persons entitled
hereunder to approve such arrangements and (ii) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents required under the terms of such underwriting arrangements.
Nothing in this Section 10 shall be construed to create any additional rights
regarding the registration of Registrable Securities in any Person otherwise
than as set forth herein.
11. EFFECT OF AGREEMENT
This Settlement Agreement supersedes all prior oral or written agreements
relating to the Old Securities Rights, including but not limited that certain
agreement dated January 27, 1997, by and between the Company and Jeff Rubin, a
copy of which is attached to this Settlement Agreement as EXHIBIT C. The Cohen
Parties and the Company agree that other than the Preferred Stock that is being
transferred on November 5, 1998 pursuant to the agreement between the Cohen
Parties and John P. Casey dated as of July 15, 1998, as extended, and as set
forth in this Settlement Agreement, the Cohen Parties, as of the date of this
Settlement Agreement: (i) do not own and are not entitled to be granted any
options, warrants, Preferred Stock or convertible securities of the Company,
(ii) are not entitled to be issued any additional securities in the Company,
(iii) are not entitled to registration rights in
10
<PAGE>
respect of any of the Company's securities and (iv) are not owed any fees or
other compensation by the Company, GenSource Corporation or National Telephone
& Communications, Inc.
12. RELEASE OF CLAIMS
Upon the execution of this Settlement Agreement and receipt of the Option
Payment as set forth in Section 3 hereof, the Cohen Parties fully and forever
release and discharge the Company and any of its past, present and future
affiliates, employees, officers, directors, shareholders, attorneys,
accountants, successors and predecessors from any and all claims, demands,
obligations, losses, damages or cause of action of any nature relating to the
Old Securities Rights (other than for a breach of this Settlement Agreement by
the Company), whether based in tort, contract or any other theory of recovery,
and whether for compensatory or punitive damages, that now exist or may
hereafter accrue based and actions occurring prior to the effective date of this
release. The Cohen Parties agree that this release shall not be considered an
admission by any party of any liability or wrongdoing. The Cohen Parties
warrant that no promises or inducement has been offered except as set forth
herein. The Cohen Parties are of legal age (or are represented by a guardian
who is of legal age) and are legally competent (or their legal guardian is
legally competent) to execute this release and accept full responsibility
therefor. The Cohen Parties declare that the terms of this full and final
release of claims have been completely read by the Cohen Parties and are fully
understood and voluntarily accepted for the purpose of making a full and final
compromise and settlement. The Cohen Parties hereby represent and warrant that
they have not assigned and will not assign any of their above referenced
released claims to any third party. The Cohen Parties acknowledge that they are
familiar with Section 1542 of the California Civil Code, which reads as follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR
AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY
HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH
THE DEBTOR."
The Cohen Parties acknowledge that they are releasing unknown claims and
waive all rights they have or may have under California Civil Code Section 1542
or any other statute or common law principles of similar effect. However, the
Cohen Parties are not waiving any rights or claims that may arise out of acts or
events that may occur after the date of this Settlement Agreement or which do
not arise out of or relate to the Old Securities Rights.
13. WAIVERS
If any party shall at any time waive any rights thereunder resulting from
any breach by the other party of any of the provisions of this Settlement
Agreement, such waiver is not to be construed as a continuing waiver of other
breaches of the same or other provisions of this Settlement Agreement. Resort
to any remedies referred to herein shall not be construed as a waiver of any
other rights and remedies to which such party is entitled under this Settlement
Agreement or otherwise.
14. SUCCESSORS AND ASSIGNS
Each covenant and representation of this Settlement Agreement shall inure
to the benefit of and be binding upon each of the parties, their personal
representatives, assigns and other successors in interest.
15. ENTIRE AGREEMENT
This Settlement Agreement constitutes the entire agreement between the
parties and supersedes all other agreements, representations, warranties,
statements, promises and undertakings, whether oral or written, with respect to
the subject matter of this Settlement Agreement. This Settlement Agreement may
be modified only by a written agreement signed by all parties.
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<PAGE>
16. GOVERNING LAW
This Settlement Agreement shall be governed by and construed in accordance
with the laws of the State of California, and the venue for any action hereunder
shall be in the appropriate forum in the County of Los Angeles, State of
California.
17. COUNTERPARTS
This Settlement Agreement may be executed simultaneously in any number of
counterparts and by facsimile, each of which counterparts shall be deemed to be
an original, and such counterparts shall constitute but one and the same
instrument.
18. ATTORNEYS' FEES AND COSTS
In the event that either party must resort to legal action in order to
enforce the provisions of this Settlement Agreement or to defend such action,
the prevailing party shall be entitled to receive reimbursement from the
nonprevailing party for all reasonable attorneys' fees' and all other costs
incurred in commencing or defending such action, or in enforcing this Settlement
Agreement, including but not limited to post judgment costs.
19. FURTHER ACTS
The parties to this Settlement Agreement hereby agree to execute any other
documents and take any further actions which are reasonably necessary or
appropriate in order to implement the transactions contemplated by this
Settlement Agreement.
20. TIME OF ESSENCE
Time is of the essence in the performance of the obligations under this
Settlement Agreement.
21. AUTHORIZED SIGNATURES
Each party to this Settlement Agreement hereby represents that the person
signing below are duly authorized to execute this Settlement Agreement on behalf
of their respective party.
IN WITNESS WHEREOF, this Settlement Agreement has been entered into as of the
date first above written.
THE "COMPANY"
INCOMNET, INC.,
a California corporation
By: /s/ Denis Richard
-----------------
Denis Richard, President
"COHEN PARTIES":
Robert Cohen
By: /s/ Dr. Robert Cohen
--------------------
Dr. Robert Cohen
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<PAGE>
Stefanie Rubin
By: /s/ Dr. Robert Cohen
--------------------
Dr. Robert Cohen, Attorney-in-Fact
Allyson Cohen
By: /s/ Dr. Robert Cohen
--------------------
Dr. Robert Cohen, Attorney-in-Fact
Jeffrey Cohen
By: /s/ Dr. Robert Cohen
--------------------
Dr. Robert Cohen, Attorney-in-Fact
Jeffrey Rubin
By: /s/ Dr. Robert Cohen
--------------------
Dr. Robert Cohen, Attorney-in-Fact
Alan Cohen
By: /s/ Dr. Robert Cohen
--------------------
Dr. Robert Cohen, Attorney-in-Fact
Lenore Katz
By: /s/ Dr. Robert Cohen
--------------------
Dr. Robert Cohen, Attorney-in-Fact
BROADWAY PARTNERS
Jeffrey Cohen, Partner
By: /s/ Dr. Robert Cohen
--------------------
Dr. Robert Cohen, Attorney-in-Fact
Meryl Cohen
By: /s/ Dr. Robert Cohen
--------------------
Dr. Robert Cohen, Attorney-in-Fact
Meryl Cohen as custodian for Gabrielle Cohen
By: /s/ Dr. Robert Cohen
--------------------
Dr. Robert Cohen, Attorney-in-Fact
Meryl Cohen as custodian for Jaclyn Cohen
By: /s/ Dr. Robert Cohen
--------------------
Dr. Robert Cohen, Attorney-in-Fact
Meryl Cohen as custodian for Erica Cohen
By: /s/ Dr. Robert Cohen
--------------------
Dr. Robert Cohen, Attorney-in-Fact
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<PAGE>
Meryl Cohen as custodian for Nicole Cohen
By: /s/ Dr. Robert Cohen
--------------------
Dr. Robert Cohen, Attorney-in-Fact
14
<PAGE>
EXHIBIT A
WARRANTS
<TABLE>
<CAPTION>
Number of Original
Number of Underlying Exercise Exercise
Name of Warrantholder Warrants Shares Price Period
--------------------- --------- ---------- -------- --------
<S> <C> <C> <C> <C>
Dr. Robert Cohen 100,000 100,000 $3.75 12/9/96 - 12/9/99
Dr. Alan Cohen 100,000 100,000 $3.75 12/9/96 - 12/9/99
Jeffrey Cohen 50,000 50,000 $3.75 12/9/96 - 12/9/99
Stefanie Rubin 10,000 10,000 $3.75 12/9/96 - 12/9/99
Lenore Katz 10,000 10,000 $3.75 12/9/96 - 12/9/99
Allyson Cohen 50,000 50,000 $3.75 12/9/96 - 12/9/99
Broadway Partners 40,000 40,000 $3.75 12/9/96 - 12/9/99
Stefanie Rubin 16,667 16,667 $3.50 7/29/97 - 7/29/99
Lenore Katz 16,666 16,666 $3.50 7/29/97 - 7/29/99
Stefanie Rubin 55,000 55,000 $2.00 11/3/97 - 11/3/99
Jeff Rubin 6,000 6,000 $1.09 1/20/98 - 1/21/2001
Dr. Robert Cohen 6,000 6,000 $1.09 1/20/98 - 1/21/2001
Dr. Alan Cohen 6,000 6,000 $1.09 1/20/98 - 1/21/2001
------- -------
Total 466,333 466,333
</TABLE>
15
<PAGE>
EXHIBIT 10.12 -- SETTLEMENT AND RELEASE AGREEMENT AMONGST INCOMNET, INC.,
IRONWOOD TELECOM LLC, ELLEN COHEN AND MARTIN FABRIKANT,
DATED NOVEMBER 5, 1998.
SETTLEMENT AGREEMENT
This Settlement Agreement ("SETTLEMENT AGREEMENT") is made and entered into
as of November 5, 1998, by and among Ellen Cohen, an individual ("COHEN"),
Martin Fabrikant, an individual ("FABRIKANT") (collectively the "PREFERRED
HOLDERS"), Ironwood Telecom LLC, a Colorado limited liability company ("LENDER")
and Incomnet, Inc., a California corporation (the "COMPANY").
R E C I T A L S
WHEREAS, on June 10, 1998, Fabrikant notified the Company of his election
to convert all of the Company's Series A Preferred Stock then owned by him into
shares of the Company's common stock ("COMMON STOCK");
WHEREAS, on June 11, 1998, Cohen notified the Company of her election to
convert all of the Company's Series B Preferred Stock then owned by her into
Common Stock;
WHEREAS, shortly after receiving the notices of election to convert by the
Preferred Holders on June 10 and June 11, 1998, the Company informed the
Preferred Holders that the Company had insufficient authorized Common Stock to
effect all of the conversions of the Series A and B Preferred tendered by the
Preferred Holders (the "UNCONVERTIBLE PREFERRED");
WHEREAS, on or about June 18, 1998, Cohen and Fabrikant rescinded their
elections to convert their Unconvertible Preferred due to the Company's failure
to have a sufficient number of authorized shares of Common Stock to accommodate
the conversion and with a reservation of all rights;
WHEREAS, on September 29, 1998 the Company closed the Board Change
Agreement entered into on August 28, 1998 among the Company, John P. Casey and
the then members of the Company's Board which resulted in changes in the
membership of the Company's Board of Directors and management;
WHEREAS, the Company's new management is in the process of obtaining new
financing by Lender and Lender is requiring as a condition to the Company
obtaining new financing that this Settlement Agreement be entered into;
WHEREAS, the Company desires to resolve the status of the attempted
conversions in June, 1998 and obtain financing from the Lender; and
WHEREAS, the Preferred Holders desire to settle their claims in respect of
the Unconvertible Preferred.
NOW, THEREFORE, in consideration of the foregoing and intending to be
legally bound, the parties agree as follows:
1. Cash Payments and Warrants to Preferred Holders.
On November 5, 1998 (i) Lender shall pay to each of the Preferred
Holders the "cash payment" amount set forth opposite such Preferred Holder's
name on EXHIBIT A hereto (the "CASH PAYMENT"); (ii) the Company shall issue to
the Preferred Holders the Warrants also listed on EXHIBIT A hereto (the
"WARRANTS"); and (iii) the Company shall execute a warrant agreement with each
Preferred Holder in the form of EXHIBIT B hereto (the
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<PAGE>
"WARRANT AGREEMENT") in exchange for a transfer by each of the Preferred
Holders to Lender of all of the Preferred Holders' right, title and interest
in respect of such Preferred Holders' Unconvertible Preferred, including such
Preferred Holders' rights, if any, to receive Common Stock in respect of the
Unconvertible Preferred and any claims in respect of the Company's inability
to deliver Common Stock upon the tender of a conversion notice in June, 1998
(the "PREFERRED STOCK RIGHTS"). Each of the Preferred Holders shall deliver a
certificate representing their Unconvertible Preferred Shares with an
assignment of such certificate to Lender on or before November 5, 1998. In
accordance with the terms of the Warrant Agreement, each Warrant shall
entitle the holder to purchase one (1) share of Common Stock at an exercise
price of $1.00 per share. The Warrants may be exercised at any time during
the five-year period after a meeting of the Company's shareholders at which
shareholders approve an increase in the authorized number of shares of Common
Stock to permit the issuance of common stock underlying the Warrants. The
Cash Payment shall be delivered by wire transfer to Camhy Karlinsky & Stein
LLP to the attention of Robert S. Matlin (the "Camhy Firm") and the Camhy
Firm shall be responsible for distributing the Cash Payments to the Preferred
Holders.
2. Assignment by Lender.
Lender hereby assigns the Preferred Stock Rights to the Company on
condition that (a) the Company is financially able to redeem the Preferred Stock
Rights, (b) the Company reimburses Lender for the amount of the Cash Payment
plus interest on the amount of the Cash Payment at an annualized rate of 18%
plus reasonable out of pocket legal and other costs associated with entering
into this Settlement Agreement (collectively, the "LENDER REIMBURSEMENT
PAYMENT"). For purposes of determining whether the Company is financially able
to redeem the Preferred Stock Rights, the Company must have cash on hand
necessary to undertake such a transaction taking into account the other cash
requirements of the Company and its subsidiaries and also meet all requirements
under applicable law, including, if applicable, section 500 et seq. of the
California General Corporation's Law and any applicable contractual
restrictions.
If the Company is not financially able to redeem the Preferred Stock Rights
during the two-year period following the date of this Settlement Agreement,
Lender shall tender the Preferred Stock Rights to the Company and the Company
shall convert the Preferred Stock Rights into 1,359,265 shares of Common Stock
(the "SETTLEMENT COMMON STOCK"). As soon as practicable thereafter, Lender
agrees to offer such Settlement Common Stock to all shareholders on a pro rata
basis. The aggregate price for the Settlement Common Stock shall be the sum of
all costs attributable to the offering of the Settlement Common Stock, including
SEC registration fees, state securities fees, attorneys and accounting fees and
the Lender Reimbursement Payment. To the extent that the Settlement Common
Stock is undersubscribed for during the initial round of the offering, Lender
shall be obligated in such offering to make a second round offer on a pro rata
basis to the subscribing record holders. If the offering is not fully
subscribed after the second round, Lender shall be entitled to offer the balance
of the Settlement Common Stock to the parties designated by it, including itself
and its affiliates, in its sole discretion.
Lender shall have no obligations or liabilities to the Preferred Holders,
except to make the Cash Payments and to perform in accordance with the terms of
Sections 1 and 2 of this Settlement Agreement.
3. Releases.
Effective upon receipt of Cash Payment, delivery of the Warrant Agreements
and a signed copy of this Settlement Agreement, each of the Preferred Holders
agrees to forever release and discharge the Company and any of its past,
present, and future affiliates, employees, officers, directors, shareholders,
attorneys, accountants, successors and predecessor from any and all claims,
demands, obligations, losses, damages or causes of action of any nature relating
to their respective Preferred Stock Rights (other than for a breach of this
Agreement or the Warrant Agreement by the Company), whether based in tort,
contract or other theory of recovery, and whether for compensatory or punitive
damages, that now exist or may hereafter accrue based on actions occurring prior
to the effective date of this release. The parties agree that this release
shall not be considered an admission by any party of any liability or
wrongdoing. The parties warrant that no promise or inducement has been offered
except as set forth herein. The Preferred Holders are of legal age and legally
competent to execute this release and accept full responsibility therefor. The
Preferred Holders declare that the terms of this full and final release of
claims have been completely read by them and are fully understood and
voluntarily accepted for purposes of making a full and
2
<PAGE>
final compromise and settlement. The Preferred Holders hereby represent and
warrant that they have not assigned and will not assign any of their
above-referenced released claims to any third parties.
Effective upon receipt of the stock certificates representing the
Unconvertible Preferred Shares, endorsed for transfer to Lender, and a signed
copy of this Settlement Agreement by each of the Preferred Holders, the Company
agrees to forever release and discharge the Preferred Holders from any and all
claims, demands, obligations, losses, damages or causes of action of any nature
relating to their respective ownership, purchase and sale of Common Stock and
Series A and Series B Preferred Stock of the Company (and Common Stock
underlying such Preferred Stock) (other than for breach of this Settlement
Agreement), whether based on tort, contract or other theory of recovery, and
whether for compensatory or punitive damages, that now exist or may hereafter
accrue based on actions occurring prior to the effective date of this release.
The Company agrees that this release will not be considered an admission by any
party of any liability or wrongdoing. The Company warrants that no promise or
inducement has been offered except as set forth herein. The Company declares
that the terms of this full and final release of claims has been completely read
by it and is fully understood and voluntarily accepted for purposes of making a
full and final compromise and settlement.
4. Waiver of Section 1542 of the California Civil Code.
The parties further agree that in connection with the foregoing releases,
that the rights under Section 1542 of the Civil Code of California, any similar
law of any state or territory of the United States or any other jurisdiction,
are hereby expressly waived. That section reads as follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT
THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM
MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
DEBTOR."
5. Registration Rights.
The Preferred Holders shall have the registration rights set forth below in
respect of the shares of Common Stock underlying the Warrants (the "REGISTRABLE
SECURITIES"). These registration rights are granted to the Preferred Holders
and may not be transferred to any other person without the prior written consent
of the Company which will not be unreasonably withheld, except that, such
registration rights may be transferred to any affiliate of the Preferred
Holders, the "COHEN PARTIES" (as defined in the Settlement and Release Agreement
dated November 5, 1998 between the Company and the Cohen Parties) or any
affiliates of the Cohen Parties.
(a) SHELF REGISTRATION. (i) At the Company's election or (ii) upon
the written request of the holders of not less than 50% of the Registrable
Securities at any time following August 5, 1999 and provided that the Company is
eligible to use Form S-3 (or a comparable form permitting substantial
incorporation by reference), the Company shall file a "shelf" registration
statement on any appropriate form pursuant to Rule 415 (or similar rule that may
be adopted by the SEC) under the Securities Act (a "SHELF REGISTRATION") for all
of the then Registrable Securities, subject to the request of any holder to
exclude any Registrable Securities as provided below. Within ten (10) days
after receipt of a request for a Shelf Registration, the Company shall give
written notice of such registration request to all non-requesting holders of
Registrable Securities. The Company shall exclude from such registration all
Registrable Securities with respect to which the Company received written
requests for exclusion therefrom within fifteen (15) days after the receipt of
the notice by the applicable holder.
The Company hereby agrees to file such Shelf Registration as promptly
as practicable but not later than forty-five (45) days following the request
therefor and thereafter to use its best efforts to cause such Shelf Registration
to become effective as soon as possible. The Company further agrees to keep the
Shelf Registration continuously effective for a period of 120 days following the
date that the Securities and Exchange Commission ("SEC") declares the Shelf
Registration effective, or such shorter period as shall terminate on the date on
which all the Registrable Securities covered by the Shelf Registration have been
sold pursuant to such Shelf Registration. The
3
<PAGE>
Company shall only be obligated to file one Shelf Registration. If the Shelf
Registration is not effective at any time during such 120-day period, the
Company shall use its best efforts to make it effective as soon as possible.
The Company shall have no further obligation to register such Registrable
Securities once the Company has offered to register the Registrable
Securities on a Shelf Registration
The Company further agrees to supplement or make amendments to the
Shelf Registration, if required by the rules, regulations or instructions
applicable to the registration form utilized by the Company or by the Securities
Act or rules and regulations thereunder for shelf registration or requested by
the holders of a majority of the Registrable Securities covered by such
registration or any underwriter of the Registrable Securities.
If the holders of a majority of the Registrable Securities being
registered so elect, the offering of Registrable Securities pursuant to a Shelf
Registration shall be in the form of a registration in which the Registrable
Securities are sold to an underwriter (an "UNDERWRITTEN OFFERING"). If the
managing underwriter or underwriters of such offering advise the Company and the
holders of Registrable Securities in writing that in their opinion the number of
shares of Registrable Securities requested to be included in such offering is
sufficiently large to materially and adversely affect the success of such
offering, the Company will include in such offering the aggregate number of
Registrable Securities which in the opinion of such managing underwriter or
underwriters can be sold without any such material adverse effect and the amount
to be offered for the accounts of all of such holders shall be reduced pro rata
(according to the Registrable Securities beneficially owned by such holders) to
the extent necessary to reduce the total amount of securities to be included in
such offering to the amount recommended by such managing underwriter or
underwriters. To the extent that the underwriter excludes any Registrable
Securities, the holders of such Registrable Securities shall not loose any other
registration rights. Unless the holders of a majority of the Registrable
Securities to be included in such offering shall consent in writing, no other
party, including the Company, shall be permitted to offer securities in any such
offering.
(b) DEMAND REGISTRATION. If all of the Registrable Securities have
not been registered before May 5, 2001, then at any time after May 5, 2001, the
holders of not less than 50% of the Registrable Securities may make a written
request (the "DEMAND NOTICE") for registration under the Securities Act (a
"DEMAND REGISTRATION") of the Registrable Securities held by them; PROVIDED,
HOWEVER, that in lieu of making such Demand Registration, the Company may, at
its election, by notice to the holders of such Registrable Securities, redeem
the Warrants for cash in an amount equal to the difference between (i) the fair
market value of the Registrable Securities and (ii) the exercise price for such
Warrants. For purposes of this Agreement, the fair market value of the
Registrable Securities shall be determined as follows:
(i) if the security is listed on any established stock exchange or
a national market system, including, without limitation, the National Market
System or the SmallCap Market of the National Association of Securities Dealers
Automated Quotation System, its fair market value shall be the average closing
sales price (or the closing bid if no sales were reported) for the 20 trading
days prior to the date of receipt of the Demand Notice as reported in THE WALL
STREET JOURNAL or similar publication;
(ii) if the security is regularly quoted by a recognized securities
dealer but selling prices are not reported, its fair market value shall be the
average of the mean between the high bid and low asked prices for the security
for the 20 trading days prior to the date of receipt of the Demand Notice; or
(iii) in the absence of an established market for the security,
the fair market value shall be determined in good faith by the Company's
Board of Directors, with reference to the Company's net worth, prospective
earning power, dividend-paying capacity and other relevant factors, including
the goodwill of the Company, the economic outlook in the Company's industry,
the Company's position in the industry and its management and the values of
stock of other corporations in the same or a similar line of business (all of
such factors determined as of the date of the Demand Notice).
Within ten (10) days after receipt of each Demand Notice, the Company
shall give written notice of such registration request to the non-requesting
holder of Registrable Securities and shall, subject to the provisions of the
following paragraph, include in such registration all Registrable Securities
with respect to which the Company received written requests for inclusion
therein within fifteen (15) days after the receipt of the notice of such demand
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registration request by the applicable holder. Both the Demand Notice and any
request to have Registrable Securities included in a Demand Registration will
specify the number of shares of Registrable Securities proposed to be sold and
will also specify the intended method of disposition thereof. Unless the
holders of a majority of the Registrable Securities to be included in such
registration shall consent in writing, no other party, including the Company,
shall be permitted to offer securities under any such Demand Registration. The
Company shall not be obligated to effect more than one Demand Registration under
this Section 5(b), PROVIDED, HOWEVER, that if the Shelf Registration is declared
effective by the SEC in accordance with Section 5(a), then the Company shall not
be obligated to effect any Demand Registrations under this Section 5(b) unless a
holder of Registrable Securities was excluded from participating in the Shelf
Registration.
A registration requested pursuant to this Section 5(b) will not be
deemed to have been effected unless the Registration Statement relating thereto
has become effective under the Securities Act; provided, however, that if,
after such Registration Statement has become effective, the offering of the
Registrable Securities pursuant to such registration is interfered with by any
stop order, injunction or other order or requirement of the SEC or other
governmental agency or court, such registration will be deemed not to have been
effected. Holders of a majority of the Registrable Securities with respect to
which registration has been requested pursuant to this Section 5(b) may, at any
time prior to the effective date of the Registration Statement relating to such
registration, revoke such request with respect to their Registrable Securities
by providing a written notice to the Company revoking such request; PROVIDED,
HOWEVER, that the Company shall have no further obligation to register such
Registrable Securities that are the subject of a revocation pursuant to Section
5(b), but all other registration rights under Section 5(c) shall remain in
effect.
If the holders of a majority of the Registrable Securities being
registered so elect, the offering of Registrable Securities pursuant to a Demand
Registration shall be in the form of an Underwritten Offering. If the managing
underwriter or underwriters of such offering advise the Company and the holders
of Registrable Securities in writing that in their opinion the number of shares
of Registrable Securities requested to be included in such offering is
sufficiently large to materially and adversely affect the success of such
offering, the Company will include in such registration the aggregate number of
Registrable Securities which in the opinion of such managing underwriter or
underwriters can be sold without any such material adverse effect, and the
amount of Registrable Securities to be offered for the accounts of all of such
holders shall be reduced pro rata (according to the Registrable Securities
beneficially owned by such holders) to the extent necessary to reduce the total
amount of securities to be included in such offering to the amount recommended
by such managing underwriter or underwriters.
(c) INCIDENTAL REGISTRATION. If at any time prior to the date that
all Registrable Securities have been registered (and provided that the Company
has not already registered the Registrable Securities for 120 days), the Company
proposes to file a registration statement under the Securities Act (other than
in connection with the Shelf Registration or a Registration Statement on Form
S-4 or S-8, or any form substituting therefor) with respect to an offering of
any class of security by the Company for its own account or for the account of
any of its security holders, then the Company shall give written notice of such
proposed filing to the holders of the Registrable Securities as soon as
practicable (but in no event less than thirty days before the anticipated filing
date), and such notice shall offer such holders the opportunity to register such
number of Registrable Securities as each such holder may request. Each holder
of Registrable Securities desiring to have its Registrable Securities registered
under this subsection 5(c) shall so advise the Company in writing within 20 days
after the date of receipt of such notice from the Company (which request shall
set forth the number of Registrable Securities for which registration is
requested). The Company shall include in such Registration Statement all such
Registrable Securities so requested to be included therein, and, if such
registration is an Underwritten Registration, the Company shall use its best
efforts to cause the managing underwriter or underwriters to permit the
Registrable Securities requested to be included in the Registration Statement
for such offering to be included (on the same terms and conditions as similar
securities of the Company included therein to the extent appropriate); provided,
however, that if the managing underwriter or underwriters of such offering
deliver a written opinion to the holders of such Registrable Securities that the
total number of securities that the Company, the holders of Registrable
Securities, or such other persons propose to include in suchoffering is such
that the success of the offering would be materially and adversely affected by
inclusion of the securities requested to be included, then the amount of
securities to be offered for the accounts of the Company, the holders of
Registrable Securities and other holders registering securities pursuant to
registration rights shall be allocated as follows:
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(i) if such registration has been initiated by the Company as a
primary offering, FIRST to the securities sought to be included by the Company,
and SECOND to the Registrable Securities sought to be included by the Preferred
Holders and the securities sought to be included by other holders of
registration rights, pro rata, on the basis of the number of securities owned by
each such holder; and
(ii) if such registration has been initiated by another holder of
registration rights, FIRST to the securities sought to be included by such other
holder, SECOND to the securities sought to be included by the Company, and THIRD
to the Registrable Securities sought to be included by the Preferred Holders and
to all other securities sought to be included by other holders of registration
rights, pro rata, on the basis of the number of securities owned by each such
holder.
6. Hold-Back Agreements.
(a) RESTRICTIONS ON PUBLIC SALE BY HOLDER OF REGISTRABLE
SECURITIES. Each holder of Registrable Securities whose Registrable Securities
are covered by a Registration Statement filed pursuant to Section 5 hereof
agrees, if requested in writing by the managing underwriters in an Underwritten
Offering, not to effect any public sale or distribution of securities of the
Company of the same class as the securities included in such Registration
Statement, including a sale pursuant to Rule 144 under the Securities Act
(except as part of such Underwritten Registration), during the 10-day period
prior to the filing of a Registration Statement with respect to such
Underwritten Offering, and during the 90-day period beginning on the closing
date of each Underwritten Offering made pursuant to such Registration Statement,
to the extent timely notified in writing by the Company or the managing
underwriters.
(b) RESTRICTIONS ON SALE OF SECURITIES BY THE COMPANY. The Company
agrees not to effect any public sale or distribution of any securities similar
to those being registered, or any securities convertible into or exchangeable or
exercisable for such securities (except pursuant to a registration statement on
Form S-4 or S-8, or any substitute form that may be adopted by the SEC) during
the ten days prior to the filing of a registration statement with respect to
such Underwritten Offering, and during the 90-day period beginning on the
effective date of any Registration Statement (except as part of such
registration statement (x) where the holders of a majority of the shares of
Registrable Securities to be included in such registration statement consent or
(y) where holders of Registrable Securities are participating in such
registration statement pursuant to Section 5(c) hereof, such registration
statement was filed by the Company with respect to the sale of securities by the
Company, and no holder is simultaneously participating in a registration
statement pursuant to Section 5(b) hereof) or the commencement of a public
distribution of Registrable Securities pursuant to such registration statement.
7. Registration Procedures.
In connection with the Company's registration obligations pursuant to
Section 5 hereof, the Company will use its best efforts to effect such
registration to permit the sale of such Registrable Securities in accordance
with the intended method or methods of distribution thereof, and pursuant
thereto the Company will as expeditiously as possible:
(a) prepare and file with the SEC, as soon as practicable, a
Registration Statement relating to the applicable registration on any
appropriate form under the Securities Act, which forms shall be available for
the sale of the Registrable Securities in accordance with the intended method or
methods of distribution thereof and shall include all financial statements of
the Company, and use its best efforts to cause such Registration Statement to
become effective; provided that before filing a Registration Statement or
Prospectus or any amendments or supplements thereto, including documents
incorporated by reference after the initial filing of the Registration
Statement, the Company will furnish one counsel selected by the holders of a
majority of the shares of Registrable Securities covered by such registration
statement, and the underwriters, if any, copies of all such documents proposed
to be filed, which documents will be subject to the review of such counsel and
underwriters, and the Company will not file any Registration Statement or
amendment thereto or any prospectus or any supplement thereto (including such
documents incorporated by reference) to which such counsel or the underwriters,
if any, shall reasonably object;
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(b) prepare and file with the SEC such amendments and
post-effective amendments to the Registration Statement as may be necessary to
keep the Registration Statement effective for the applicable period, or such
shorter period which will terminate when all Registrable Securities covered by
such Registration Statement have been sold; cause the Prospectus to be
supplemented by any required prospectus supplement, and as so supplemented to be
filed pursuant to Rule 424 under the Securities Act; and comply with the
provisions of all securities covered by such Registration Statement during the
applicable period in accordance with the intended method or methods of
distribution by the sellers thereof set forth in such Registration Statement or
supplement to the prospectus; the Company shall not be deemed to have used its
best efforts to keep a Registration Statement effective during the applicable
period if it voluntarily takes any action that would result in selling holders
of the Registrable Securities covered thereby not being able to sell such
Registrable Securities during that period unless such action is required under
applicable law; provided that the foregoing shall not apply to actions taken by
the Company in good faith and for valid business reasons, including without
limitation the acquisition or divestiture of assets, so long as the Company
promptly thereafter complies with the requirements of Section 7(l) hereof, if
applicable;
(c) notify the selling holders of Registrable Securities and the
managing underwriters, if any, promptly, and confirm such advice in writing, (1)
when the prospectus or any prospectus supplement or post-effective amendment has
been filed, and, with respect to the Registration Statement or any
post-effective amendment, when the same has become effective, (2) of any request
by the SEC for amendments or supplements to the registration statement or the
prospectus or for additional information, (3) of the issuance by the SEC of any
stop order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose, (4) if at any time the
representations and warranties of the Company contemplated by paragraph (n)
below cease to be true and correct, (5) of the receipt by the Company of any
notification with respect to the suspension of the qualification of the
Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose and (6) of the happening of any
event which makes any statement made in the Registration Statement, the
prospectus or any document incorporated therein by reference untrue or which
requires the making of any changes in the Registration Statement, the Prospectus
or any document incorporated therein by reference in order to make the
statements therein not misleading;
(d) make every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of the Registration Statement at the earliest
possible moment;
(e) if reasonably requested by the managing underwriter or
underwriters or a holder of Registrable Securities being sold in connection with
an Underwritten Offering, promptly incorporate in a prospectus supplement or
post-effective amendment such information as the managing underwriters and the
holders of a majority in number of the Registrable Securities being sold agree
should be included therein relating to the sale of the Registrable Securities,
including, without limitation, information with respect to the number of
Registrable Securities being sold to such underwriters, the purchase price being
paid therefor by such underwriters and with respect to any other terms of the
Underwritten (or best efforts underwritten) Offering of the Registrable
Securities to be sold in such offering; and make all required filings of such
prospectus supplement or post-effective amendment as soon as notified of the
matters to be incorporated in such prospectus supplement or post-effective
amendment;
(f) promptly prior to the filing of any document which is to be
incorporated by reference into the Registration Statement or the prospectus
(after initial filing of the Registration Statement), make available
representatives of the Company for discussion of such document and make such
changes in such document prior to the filing thereof as counsel for such selling
holders or underwriters may reasonably request;
(g) furnish to each selling holder of Registrable Securities and
each managing underwriter, without charge, at least one signed copy of the
Registration Statement and any post-effective amendment thereto, including
financial statements and schedules, all documents incorporated therein by
reference and all exhibits (including those incorporated by reference);
(h) deliver to each selling holder of Registrable Securities and
the underwriters, if any, without charge, as many copies of the prospectus
(including each preliminary prospectus) and any amendment or supplement thereto
as such Persons may reasonably request; the Company consents to the use of the
prospectus or any amendment or supplement thereto by each of the selling holders
of Registrable Securities and the underwriters,
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<PAGE>
if any, in connection with the offering and sale of the Registrable
Securities covered by the prospectus or any amendment or supplement thereto;
(i) prior to any public offering of Registrable Securities,
register or qualify or cooperate with the selling holders of Registrable
Securities, the underwriters, if any, and their respective counsel in connection
with the registration or qualification of such Registrable Securities for offer
and sale under the securities or blue sky laws of such jurisdictions as any
seller or underwriter reasonably requests in writing and do any and all other
acts or things necessary or advisable to enable the disposition in such
jurisdictions of the Registrable Securities covered by the Registration
Statement;
(j) cooperate with the selling holders of Registrable Securities
and the managing underwriters, if any, to facilitate the timely preparation and
delivery of certificates representing Registrable Securities to be sold and not
bearing any restrictive legends; and enable such Registrable Securities to be in
such denominations and registered in such names as the managing underwriters may
request at least two business days prior to any sale of Registrable Securities
to the underwriters;
(k) cause the Registrable Securities covered by the applicable
Registration Statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to enable the seller or
sellers thereof or the underwriters, if any, to consummate the disposition of
such Registrable Securities;
(1) upon the occurrence of any event contemplated by Section 7c)
(6) above, prepare a supplement or post-effective amendment to the Registration
Statement or the related prospectus or any document incorporated therein by
reference or file any other required document so that, as thereafter delivered
to the purchasers of the Registrable Securities, the prospectus will not contain
an untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading;
(m) cause all Registrable Securities covered by the Registration
Statement to be listed on each securities exchange on which similar securities
issued by the Company are then listed;
(n) enter into such agreements (including an underwriting
agreement) and take all such other actions in connection therewith in order to
expedite or facilitate the disposition of such Registrable Securities and in
connection therewith, whether or not an underwriting agreement is entered into
and whether or not the registration is an Underwritten Registration, (1) make
such representations and warranties to the holders of such Registrable
Securities and the underwriters, if any, in form, substance and scope as are
customarily made by issuers to underwriters in primary underwritten offerings;
(2) obtain opinions of counsel to the Company and updates thereof (which counsel
and opinions (in form, scope and substance) shall be reasonably satisfactory to
the managing underwriters, if any, and the holders of a majority of the
Registrable Securities included in such registration, covering the matters
customarily covered in opinions requested in Underwritten Offerings and such
other matters as may be reasonably requested by such holders and underwriters);
(3) obtain "cold comfort" letters and updates thereof from the Company's
independent certified public accountants addressed to the selling holders of
Registrable Securities and the underwriters, if any, such letters to be in
customary form and covering matters of the type customarily covered in "cold
comfort" letters by underwriters in connection with primary Underwritten
Offerings; (4) if an underwriting agreement is entered into, the same shall set
forth in full the indemnification provisions and procedures of Section 9 hereof
with respect to all parties to be indemnified pursuant to said Section; and (5)
the Company shall deliver such documents and certificates as may be requested by
the holders of a majority of the Registrable Securities being sold and the
managing underwriters, if any, to evidence compliance with clause (1) above and
with any customary conditions contained in the underwriting agreement or other
agreement entered into by the Company. The above shall be done at each closing
under such underwriting or similar agreement or as and to the extent required
thereunder;
(o) make available for inspection by a representative of the
holders of the Registrable Securities, any underwriter participating in any
disposition pursuant to such registration, and any attorney or accountant
retained by the sellers or underwriter, all financial and other records,
pertinent corporate documents and properties of the Company and cause the
Company's officers, directors and employees to supply all information reasonably
requested by any such representative, underwriter, attorney or accountant in
connection with such
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registration; provided that any records, information or documents that are
designated by the Company in writing as confidential shall be kept
confidential by such Persons unless disclosure of such records, information
or documents is required by court or administrative order;
(p) otherwise use its best efforts to comply with all applicable
rules and regulations of the SEC, and make available to its security holders, as
soon as reasonably practicable, an earnings statement covering a period of 12
months, beginning within three months after the effective date of the
registration statement, which earnings statement shall satisfy the provisions of
section 11(a) of the Securities Act; and
(q) cooperate with each seller of Registrable Securities and each
underwriter participating in the disposition of such Registrable Securities and
their respective counsel in connection with any filings required to be made with
the National Association of Securities Dealers, Inc. (the "NASD").
The Company may require each seller of Registrable Securities as to which
any registration is being effected to furnish to the Company such information
regarding the distribution of such securities as the Company may from time to
time reasonably request in writing.
Each holder of Registrable Securities agrees by acquisition of such
Registrable Securities that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 7(l) hereof, such holder
will forthwith discontinue disposition of Registrable Securities until such
holder's receipt of the copies of the supplemented or amended prospectus
contemplated by Section 7(l) hereof, or until it is advised in writing (the
"ADVICE") by the Company that the use of the prospectus may be resumed, and has
received copies of any additional or supplemental filings which are incorporated
by reference in the prospectus, and, if so directed by the Company such holder
will deliver to the Company, (at the Company's expense), all copies, other than
permanent file copies then in such holder's possession, of the prospectus
covering such Registrable Securities current at the time of receipt of such
notice. In the event the Company shall give any such notice, the time periods
regarding the effectiveness of Registration Statements set forth in Section 5
hereof and Section 7(b) hereof shall be extended by the number of days during
the period from and including the date of the giving of such notice pursuant to
Section 7(c)(6) hereof to the date when the selling holders of Registrable
Securities covered by such registration statement shall receive copies of the
supplemented or amended prospectus contemplated by Section 7(l) hereof or the
Advice.
8. Registration Expenses.
All expenses incident to the Company's performance of or compliance with
this Settlement Agreement, including without limitation: all registration and
filing fees; fees with respect to filings required to be made with the NASD;
fees and expenses of compliance with securities or blue sky laws (including fees
and disbursements of counsel for the underwriters of Registrable Securities in
connection with blue sky qualifications of the Registrable Securities and
determination of their eligibility for investment under the laws of such
jurisdictions as the managing underwriters or holders of a majority of the
Registrable Securities being sold may designate); printing expenses, messenger,
telephone and delivery expenses; fees and disbursements of counsel for the
Company and customary fees and expenses for independent certified public
accountants retained by the Company (including the expenses of any comfort
letters or costs associated with the delivery by independent certified public
accountants of a comfort letter or comfort letters requested pursuant to Section
7(n) hereof); securities acts liability insurance, if the Company so desires;
all internal expenses of the Company (including, without limitation, all
salaries and expenses of its officers and employees performing legal or
accounting duties); the expense of any annual audit; the fees and expenses
incurred in connection with the listing of the securities to be registered on
each securities exchange on which similar securities issued by the Company are
then listed; and the fees and expenses of any person, including special experts,
retained by the Company (all such expenses being herein called "REGISTRATION
EXPENSES") will be borne by the Company regardless of whether the Registration
Statement becomes effective. The Company shall not have any obligation to pay
any underwriting discounts, commissions or similar fees attributable to the sale
of Registrable Securities, or any legal fees and expenses of counsel to the
holders of Registrable Securities.
9. Indemnification: Contribution.
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(a) INDEMNIFICATION BY THE COMPANY. The Company agrees to
indemnify and hold harmless each holder of Registrable Securities against all
losses, claims, damages, liabilities and expenses arising out of or based upon
any untrue or alleged untrue statement of a material fact contained in any
Registration Statement, prospectus or preliminary prospectus or any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
the same are caused by or contained in any information furnished in writing to
the Company by the holders of Registrable Securities expressly for use therein.
The Company will also indemnify underwriters, selling brokers, dealer managers
and similar securities industry professionals participating in the distribution,
their officers and directors and each person who controls such persons (within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act) to the same extent as provided above with respect to the indemnification of
the holders of Registrable Securities, if requested.
(b) INDEMNIFICATION BY HOLDER OF REGISTRABLE SECURITIES. Each
holder of Registrable Securities agrees to indemnify and hold harmless the
Company and its directors, officers, employees and agents, and each person who
controls the Company (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) against any losses, claims, damages, liabilities
and expenses resulting from any untrue statement of a material fact or any
omission of a material fact required to be stated in the Registration Statement
or prospectus or preliminary prospectus or necessary to make the statements
therein not misleading, to the extent, but only to the extent, that such untrue
statement or omission is contained in any information or affidavit so furnished
in writing by such holder to the Company specifically for inclusion in such
Registration Statement or prospectus. In no event shall the liability of any
selling holder of Registrable Securities hereunder be greater in amount than the
dollar amount of the proceeds received by such holder upon the sale of the
Registrable Securities giving rise to such indemnification obligation. The
Company shall be entitled to receive indemnities from underwriters, selling
brokers, dealer managers and similar securities industry professionals
participating in the distribution, to the same extent as provided above with
respect to information so furnished in writing by such persons specifically for
inclusion in any prospectus or Registration Statement.
(c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. Any Person entitled to
indemnification hereunder will (i) give prompt notice to the indemnifying party
of any claim with respect to which it seeks indemnification and (ii) permit such
indemnifying party to assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party; provided, however, that any person
entitled to indemnification hereunder shall have the right to employ separate
counsel and to participate in the defense of such claim, but the fees and
expenses of such counsel shall be at the expense of such person unless (a) the
indemnifying party has agreed to pay such fees or expenses, (b) the indemnifying
party shall have failed to assume the defense of such claim and employ counsel
reasonably satisfactory to such person or (c) based upon written advice of
counsel to such person, there shall be one or more defenses available to such
person that are not available to the indemnifying party or there shall exist
conflicts of interest pursuant to applicable rules of professional conduct
between such person and the indemnifying party (in which case, if the person
notifies the indemnifying party in writing that such person elects to employ
separate counsel at the expense of the indemnifying party, the indemnifying
party shall not have the right to assume the defense of such claim on behalf of
such person), in each of which events the fees and expenses of such counsel
shall be at the expense of the indemnifying party. The indemnifying party will
not be subject to any liability for any settlement made without its consent (but
such consent will not be unreasonably withheld), but if settled with its written
consent, or if there be a final judgment for the plaintiff in any such action or
proceeding, the indemnifying party shall indemnify and hold harmless the
indemnified parties from and against any loss or liability (to the extent stated
above) by reason of such settlement or judgment. No indemnified party will be
required to consent to entry of any judgment or enter into any settleent which
does not include as an unconditional term thereof the giving by the claimant or
plaintiff to such indemnified party of a release from all liability in respect
to such claim or litigation.
(d) CONTRIBUTION. If for any reason the indemnification provided
for in the preceding clauses (a) and (b) is unavailable to an indemnified party
or insufficient to hold it harmless as contemplated by the preceding clauses (a)
and (b), then the indemnifying party shall contribute to the amount paid or
payable by the indemnified party as a result of such loss, claim, damage or
liability in such proportion as is appropriate to reflect not only the relative
benefits received by the indemnified party and the indemnifying party, but also
the relative fault of the indemnified party and the indemnifying party, as well
as any other relevant equitable considerations, provided, that no holder of
Registrable Securities shall be required to contribute an amount greater than
the dollar amount of the
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proceeds received by such holder with respect to the sale of the Registrable
Securities giving rise to such indemnification obligation. The relative
fault of the Company on the one hand and of the selling holders on the other
shall be determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by such
party, and the parties' relative intent, knowledge, access to information,
and opportunity to correct or prevent such statement or omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 10(f)
of the Securities Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentations.
10. Participation in Underwritten Registrations.
(a) If any of the Registrable Securities covered by the Shelf
Registration are to be sold in an Underwritten Offering, the investment banker
or investment bankers and manager or managers that will administer the offering
will be selected by the holders of a majority of the Registrable Securities
included in such offering; provided that such investment bankers and managers
must be reasonably satisfactory to the Company.
(b) No Preferred Holder may participate in any underwritten
registration hereunder unless such person (i) agrees to sell such person's
securities on the basis provided in any underwriting arrangements approved by
the persons entitled hereunder to approve such arrangements and (ii) completes
and executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents required under the terms of such underwriting
arrangements. Nothing in this Section 10 shall be construed to create any
additional rights regarding the registration of Registrable Securities in any
person otherwise than as set forth herein
11. Representations and Warranties by Preferred Holders.
The Preferred Holders represent and warrant to Lenders and the Company that
they are the sole, true, lawful, record and beneficial owners of their
Unconvertible Preferred Shares listed opposite their names on EXHIBIT A hereto,
free and clear of all encumbrances and without restrictions on voting rights or
rights of disposition other than pursuant to this Settlement Agreement. Each
Preferred Holder's Unconvertible Preferred Shares are such Preferred Holder's
sole and separate property and the execution of a spousal consent to the
transactions contemplated by this Settlement Agreement is not required. There
are no legends or encumbrances on the Unconvertible Preferred Shares other than
the standard Securities Act legend. The Unconvertible Preferred Shares are all
of the shares of preferred stock of the Company owned by the Preferred Holders.
Except for this Settlement Agreement, each of the Preferred Holders has not
entered into any contract relating to the issuance, sale, or transfer of any of
the Unconvertible Preferred Shares or rights relating thereto. The Preferred
Holders will each convey to Lender good and valid title to the Unconvertible
Preferred Shares, free and clear of all liens, claims, charges, encumbrances and
security interests.
12. Successors and Assigns.
Each covenant and representation of this Settlement Agreement shall inure
to the benefit and be binding upon each of the parties, their personal
representatives, assigns and other successors in interest.
13. Entire and Sole Agreement.
This Settlement Agreement constitutes the entire agreement between the
parties and supersedes all other agreements, representations, warranties,
statements, promises and undertakings whether oral or written with respect to
the subject matter of this Settlement Agreement. This Settlement Agreement may
be modified only by written agreement signed by all parties.
14. Governing Law.
11
<PAGE>
This Settlement Agreement shall be governed by and construed in accordance
with the laws of the State of California and the venue for any action hereunder
shall be in the appropriate form in the County of Los Angeles, State of
California.
12
<PAGE>
15. Counterparts.
This Settlement Agreement may be executed simultaneously in any number of
counterparts and by facsimile, each of which counterpart shall be deemed to be
an original and such counterpart shall constitute one and the same instrument.
16. Attorneys' Fees and Costs.
In the event that either party must resort to legal action in order to
enforce the provisions of this Settlement Agreement or to defend such action,
the prevailing party shall be entitled to receive reimbursement from the
nonprevailing party for all reasonable attorneys' fees' and all other costs
incurred in commencing or defending such action, or in enforcing this Settlement
Agreement, including but not limited to post judgment costs.
17. Further Acts of the Parties.
The parties to this Settlement Agreement hereby agree to execute any other
documents and to take further actions which are reasonably necessary and
appropriate in order to implement the transactions contemplated by this
Settlement Agreement.
18. Time of the Essence.
Time is of the essence in the performance of the obligations under this
Settlement Agreement.
19. Authorized Signatures.
Each of the parties to this Settlement Agreement hereby represents that the
person signing below are authorized to execute this Settlement Agreement on
behalf of their respective party.
IN WITNESS WHEREOF, this Settlement Agreement has been entered into as of
the date first written above.
"COMPANY"
Incomnet, Inc.
By: /s/ Denis Richard
--------------------------------
Denis Richard, President and
Chief Executive Officer
"LENDER"
Ironwood Telecom LLC
By: /s/ Daniel V. Berlanti
--------------------------------
Its: Member
"PREFERRED HOLDERS"
13
<PAGE>
By: /s/ Ellen Cohen
---------------
Ellen Cohen
By: /s/ Martin Fabrikant
--------------------
Martin Fabrikant
14
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
Unconvertible Cash Number of
Preferred Holder Preferred Shares Payment Warrants
- - ---------------- ---------------- --------- ---------
<S> <C> <C> <C>
Ellen Cohen 168.03 $336,060 168,030
Series B
Martin Fabrikant 76.840 $153,680 76,840
Series A
</TABLE>
15
<PAGE>
EXHIBIT B
FORM OF WARRANT AGREEMENT
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY
NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A
REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT
OR AN EXEMPTION FROM SUCH REGISTRATION.
No. WA-A -1 Warrant to Purchase [XXXXX] Shares of
Common Stock (subject to adjustment)
WARRANT TO PURCHASE COMMON STOCK
OF
INCOMNET, INC.
This certifies that, for value received, [NAME] and her registered assigns
("Holder") is entitled, subject to the terms set forth below, to purchase from
INCOMNET, INC., a California corporation (the "Company"), [XXXXX] shares of the
Common Stock of the Company, on the date the Company's Articles of Incorporation
are amended to provide for a sufficient number of authorized shares of Common
Stock to allow for the issuance of the number of shares of Common Stock
underlying this Warrant (the date of such amendment, the "Initial Exercise
Date"), upon surrender hereof, at the principal office of the Company referred
to below, with the Notice of Exercise form attached hereto (the "Notice of
Exercise") duly executed, and simultaneous payment therefor in lawful money of
the United States as hereinafter provided, at the Exercise Price as set forth in
Section 2 below. The number, character and Exercise Price of such shares of
Common Stock are subject to adjustment as provided below. The term "Warrant" as
used herein shall include this Warrant and any warrants delivered in
substitution or exchange therefor as provided herein.
This Warrant is issued in connection with the transactions described in
Section 1 of Settlement Agreement dated as of November 5, 1998 (the "Settlement
Agreement"), between the Company, the Holder and the other party identified
therein.
1. Term of Warrant. Subject to the terms and conditions set forth
herein, this Warrant shall be exercisable, in whole or in part, during the term
commencing on the Initial Exercise Date and ending at 5:00 p.m., Pacific
Standard Time, on the five-year anniversary of the Initial Exercise Date, and
shall be void thereafter.
2. Exercise Price. The Exercise Price at which this Warrant may be
exercised shall be $1.00 per share of Common Stock, as adjusted from time to
time pursuant to Section 11 hereof.
3. Exercise of Warrant.
3.1 Notice of Exercise. The purchase rights represented by this
Warrant are exercisable by the holder in whole or in part, but not for less than
10,000 shares at a time (or such lesser number of shares which may then
constitute the maximum number purchasable; such number being subject to
adjustment as provided in Section 11 below), at any time, or from time to time,
during the term hereof as described in Section 1 above, by the surrender of this
Warrant and the Notice of Exercise duly completed and executed on behalf of the
Holder, at the office of the Company (or such other office or agency of the
Company as it may designate by notice in writing to the Holder at the address of
the Holder appearing on the books of the Company), upon payment in cash or by
check acceptable to the Company of the purchase price of the shares to be
purchased.
16
<PAGE>
3.2 Issuance of Stock. This Warrant shall be deemed to have been
exercised immediately prior to the close of business on the date of its
surrender for exercise as provided above, and the person entitled to receive the
shares of Common Stock issuable upon such exercise shall be treated for all
purposes as the holder of record of such shares as of the close of business on
such date. As promptly as practicable on or after such date and in any event
within ten (10) days thereafter, the Company at its expense shall issue and
deliver to the person or persons entitled to receive the same a certificate or
certificates for the number of shares issuable upon such exercise. In the event
that this Warrant is exercised in part, the Company at its expense will execute
and deliver a new Warrant of like tenor exercisable for the number of shares for
which this Warrant may then be exercised.
4. No Fractional Shares or Scrip. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant. In lieu of any fractional share to which the Holder would otherwise be
entitled, the Company shall make a cash payment equal to the Exercise Price
multiplied by such fraction.
5. Replacement of Warrant. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and substance to the Company
or, in the case of mutilation, on surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor and amount.
6. Rights of Shareholders. Subject to Sections 9 and 11 of this Warrant,
the Holder shall not be entitled to vote or receive dividends or be deemed the
holder of Common Stock or any other securities of the Company that may at any
time be issuable on the exercise hereof for any purpose, nor shall anything
contained herein be construed to confer upon the Holder, as such, any of the
rights of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to shareholders at any meeting thereof,
or to give or withhold consent to any corporate action or to receive notice of
meetings, or to receive dividends or subscription rights or otherwise until the
Warrant shall have been exercised as provided herein.
7. Transfer of Warrant.
7.1 Warrant Register. The Company will maintain a register (the
"Warrant Register") containing the names and addresses of the Holder or Holders.
Any Holder of this Warrant or any portion thereof may change his or her address
as shown on the Warrant Register by written notice to the Company requesting
such change. Any notice or written communication required or permitted to be
given to the Holder may be delivered or given by mail to such Holder as shown on
the Warrant Register and at the address shown on the Warrant Register. Until
this Warrant is transferred on the Warrant Register of the Company, the Company
may treat the Holder as shown on the Warrant Register as the absolute owner of
this Warrant for all purposes, notwithstanding any notice to the contrary.
7.2 Warrant Agent. The Company may, by written notice to the Holder,
appoint an agent for the purpose of maintaining the Warrant Register referred to
in Section 7(a) above, issuing the Common Stock or other securities then
issuable upon the exercise of this Warrant, exchanging this Warrant, replacing
this Warrant, or any or all of the foregoing. Thereafter, any such
registration, issuance, exchange, or replacement, as the case may be, shall be
made at the office of such agent.
7.3 Transferability and Non-Negotiability of Warrant. This Warrant
may not be transferred or assigned in whole or in part without compliance with
all applicable federal and state securities laws by the transferor and the
transferee (including the delivery of investment representation letters and
legal opinions reasonably satisfactory to the Company, if such are requested by
the Company), provided, however, that this Warrant may not be transferred in
part unless such transfer is to a transferee who pursuant to such transfer
receives
17
<PAGE>
the right to purchase at least 10,000 shares hereunder. Subject to the
provisions of this Warrant with respect to compliance with the Securities Act
of 1933, as amended (the "Act"), title to this Warrant may be transferred by
endorsement (by the Holder executing the Assignment Form attached hereto (the
"Assignment Form") and delivery in the same manner as a negotiable instrument
transferable by endorsement and delivery.
7.4 Exchange of Warrant Upon a Transfer. On surrender of this
Warrant for exchange, properly endorsed on the Assignment Form and subject to
the provisions of this Warrant with respect to compliance with the Act and with
the limitations on assignments and transfers and contained in this Section 7,
the Company at its expense shall issue to or on the order of the Holder a new
warrant or warrants of like tenor, in the name of the Holder or as the Holder
(on payment by the Holder of any applicable transfer taxes) may direct, for the
number of shares issuable upon exercise hereof.
7.5 Compliance with Securities Laws.
(i) The Holder of this Warrant, by acceptance hereof,
acknowledges that this Warrant and the shares of Common Stock or Common
Stock to be issued upon exercise hereof are being acquired solely for
the Holder's own account and not as a nominee for any other party, and
for investment, and that the Holder will not offer, sell or otherwise
dispose of this Warrant or any shares of Common Stock to be issued upon
exercise hereof except under circumstances that will not result in a
violation of the Act or any state securities laws. Upon exercise of
this Warrant, the Holder shall, if requested by the Company, confirm in
writing, in a form satisfactory to the Company, that the shares of
Common Stock so purchased are being acquired solely for the Holder's own
account and not as a nominee for any other party, for investment, and
not with a view toward distribution or resale.
(ii) This Warrant and all shares of Common Stock issued upon
exercise hereof shall be stamped or imprinted with a legend in
substantially the following form (in addition to any legend required by
state securities laws):
THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH
SECURITIES AND ANY SECURITIES OR SHARES ISSUED HEREUNDER OR THEREUNDER
MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
EXEMPTION THEREFROM UNDER SAID ACT. COPIES OF THE AGREEMENT COVERING
THE PURCHASE OF THESE SECURITIES AND RESTRICTING THEIR TRANSFER OR SALE
MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OR
RECORD HEREOF TO THE SECRETARY OF THE COMPANY AT THE PRINCIPAL EXECUTIVE
OFFICES OF THE COMPANY.
8. Reservation of Stock. The Company covenants that during the term this
Warrant is exercisable, the Company will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of Common Stock upon the exercise of this Warrant and, from time to time, will
take all steps necessary to amend its Articles of Incorporation (the "Articles")
to provide sufficient reserves of shares of Common Stock issuable upon exercise
of this Warrant; provided, however, that as of the November 5, 1998 the Company
does not have any shares of Common Stock available for issuance upon the
exercise of this Warrant, and the Holder hereby acknowledges that she
understands that shares of Common Stock are so unavailable; provided, further,
that the Company hereby covenants and agrees to request that its shareholders
approve of a proposal at the next annual meeting of shareholders to amend the
Articles to increase the Company's authorized Common Stock in sufficient number
to provide for the issuance of all securities of the Company outstanding as of
the Initial Exercise Date exercisable or convertible into Common Stock. The
Company further covenants that all shares that may be issued upon the exercise
of rights represented by this Warrant, upon exercise of the rights represented
by this Warrant and payment of the Exercise Price, all as set forth herein, will
be free from all taxes, liens and charges in respect of the issue thereof (other
than taxes in respect of any transfer occurring contemporaneously or otherwise
specified herein).
18
<PAGE>
The Company agrees that its issuance of this Warrant shall constitute full
authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for shares of
Common Stock upon the exercise of this Warrant.
9. Notices. Upon the written request of the holder, whenever the
Exercise Price or number of shares purchasable hereunder shall be adjusted
pursuant to Section 11 hereof, the Company shall issue a certificate signed by
its Chief Financial Officer setting forth, in reasonable detail, the event
requiring the adjustment, the amount of the adjustment, the method by which such
adjustment was calculated, and the Exercise Price and number of shares
purchasable hereunder after giving effect to such adjustment, and shall cause a
copy of such certificate to be mailed (by first-class mail, postage prepaid) to
the Holder of this Warrant. All notices and requests required under this
Warrant shall be in writing and shall be deemed to have been given for all
purposes (a) upon personal delivery, (b) one day after being sent, when sent by
professional overnight courier service from and to locations within the
continental United States, (c) five days after posting when sent by registered
or certified mail, or (d) on the date of transmission (if transmitted during
normal business hours otherwise on the next succeeding business day) when sent
by telegram, telegraph, telex or telecopier, addressed to the Holder at his or
her addresses set forth on the Warrant Register, and addressed to the Company at
2801 Main Street, Irvine, California 92614, Telecopier No. (949) 224-7474. The
Holder or the Company may from time to time by notice in writing delivered as
provided herein, designate a different mailing address to which such notices or
requests shall thereafter be delivered.
10. Amendments.
10.1 Amendment. Any term of this Warrant may be amended with the
written consent of the Company and the Holder. Any amendment effected in
accordance with this Section 10 shall be binding upon the Company and each
future holder of this Warrant.
10.2 Waiver. No waivers of, or exceptions to, any term, condition or
provision of this Warrant, in any one or more instances, shall be deemed to be,
or construed as, a further or continuing waiver of any such term, condition or
provision.
11. Adjustments. The Exercise Price and the number of shares purchasable
hereunder are subject to adjustment from time to time as follows:
11.1 Merger, Sale of Assets, etc. If at any time while this Warrant,
or any portion thereof, is outstanding and unexpired there shall be (i) a
reorganization (other than a combination, reclassification, exchange or
subdivision of shares otherwise provided for herein), (ii) a merger or
consolidation of the Company with or into another corporation in which the
Company is not the surviving entity, or a reverse triangular merger in which the
Company is the surviving entity but the shares of the Company's capital stock
outstanding immediately prior to the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash, or
otherwise, or (iii) a sale or transfer of the Company's properties and assets
as, or substantially as, an entirety to any other person, then, as a part of
such reorganization, merger, consolidation, sale or transfer, lawful provision
shall be made so that the holder of this Warrant shall thereafter be entitled to
receive upon exercise of this Warrant, during the period specified herein and
upon payment of the Exercise Price then in effect, the number of shares of stock
or other securities or property of the successor corporation resulting from such
reorganization, merger, consolidation, sale or transfer that a holder of the
shares deliverable upon exercise of this Warrant would have been entitled to
receive in such reorganization, consolidation, merger, sale or transfer if this
Warrant had been exercised immediately before such reorganization, merger,
consolidation, sale or transfer, all subject to further adjustment as provided
in this Section 11. The foregoing provisions of this Section 11.1 shall
similarly apply to successive reorganizations, consolidations, mergers, sales
and transfers and to the stock or securities of any other corporation that are
at the time receivable upon the exercise of this Warrant. If the per-share
consideration payable to the holder hereof for shares in connection with any
such transaction is in a form other than cash or marketable securities, then the
value of such consideration shall be determined in good faith by the Company's
Board of Directors. In all
19
<PAGE>
events, appropriate adjustment (as determined in good faith by the Company's
Board of Directors) shall be made in the application of the provisions of
this Warrant with respect to the rights and interests of the Holder after the
transaction, to the end that the provisions of this Warrant shall be
applicable after that event, as near as reasonably may be, in relation to any
shares or other property deliverable after that event upon exercise of this
Warrant.
11.2 Reclassification, etc. If the Company, at any time while this
Warrant, or any portion thereof, remains outstanding and unexpired by
reclassification of securities or otherwise, shall change any of the securities
as to which purchase rights under this Warrant exist into the same or a
different number of securities of any other class or classes, this Warrant shall
thereafter represent the right to acquire such number and kind of securities as
would have been issuable as the result of such change with respect to the
securities that were subject to the purchase rights under this Warrant
immediately prior to such reclassification or other change and the Exercise
Price therefor shall be appropriately adjusted, all subject to further
adjustment as provided in this Section 11.
11.3 Split, Subdivision or Combination of Shares. If the Company at
any time while this Warrant, or any portion thereof, remains outstanding and
unexpired shall split, subdivide or combine the securities as to which purchase
rights under this Warrant exist, into a different number of securities of the
same class, the Exercise Price for such securities shall be proportionately
decreased in the case of a split or subdivision or proportionately increased in
the case of a combination.
11.4 Adjustments for Dividends in Stock or Other Securities or
Property. If while this Warrant, or any portion hereof, remains outstanding and
unexpired the holders of the securities as to which purchase rights under this
Warrant exist at the time shall have received, or, on or after the record date
fixed for the determination of eligible shareholders, shall have become entitled
to receive, without payment therefor, other or additional stock or other
securities or property (other than cash) of the Company by way of dividend, then
and in each case, this Warrant shall represent the right to acquire, in addition
to the number of shares of the security receivable upon exercise of this
Warrant, and without payment of any additional consideration therefor, the
amount of such other or additional stock or other securities or property (other
than cash) of the Company that such holder would hold on the date of such
exercise had it been the holder of record of the security receivable upon
exercise of this Warrant on the date hereof and had thereafter, during the
period from the date hereof to and including the date of such exercise, retained
such shares and/or all other additional stock available by it as aforesaid
during such period, giving effect to all adjustments called for during such
period by the provisions of this Section 11.
11.5 Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment pursuant to this Section 11, the Company shall, upon
the written request, at any time, of any Holder of this Warrant, furnish or
cause to be furnished to such Holder a like certificate setting forth: (i)
adjustments and readjustments in accordance with the terms hereof; (ii) the
Exercise Price at the time in effect; and (iii) the number of shares and the
amount, if any, of other property that at the time would be received upon the
exercise of the Warrant.
12. Registration Rights. Upon exercise of this Warrant, the Holder shall
have and be entitled to exercise, together with all other holders of
"Registrable Securities" (as defined in the Settlement Agreement among Ellen
Cohen, Martin Fabrikant, Ironwood Telecom LLC and the Company dated November 5,
1998 (the "Settlement Agreement")) possessing registration rights under the
Settlement Agreement, the rights of registration granted under the Settlement
Agreement to Registrable Securities (with respect to the shares issued on
exercise of this Warrant). By its receipt of this Warrant, Holder agrees to be
bound by the Settlement Agreement upon exercise of this Warrant as a party
thereto.
13. Miscellaneous.
20
<PAGE>
(a) Attorneys' Fees. In any action at law or in equity to enforce
any of the provisions or rights under this Warrant, the unsuccessful party to
such litigation, as determined by the court in a final judgment or decree, shall
pay the successful party all costs, expenses and reasonable attorneys' fees
incurred by the successful party (including, without limitation, costs, expenses
and fees on any appeal).
(b) Governing Law; Venue. This Warrant and the legal relations
between the Holder and the Company shall be governed by and construed in
accordance with the laws of the State of California applicable to contracts made
and performed in such State and without regard to conflicts of law doctrines of
any other State or country. In the event of any action at law or equity to
enforce any of the provisions or rights under this Agreement, the parties agree
that the proper venue for such action is Los Angeles, California and that the
parties may bring such an action to enforce their respective rights under this
Agreement only in a court located within the County of Los Angeles, State of
California. The parties further agree that such court shall have personal
jurisdiction over each of the parties to this Agreement.
IN WITNESS WHEREOF, INCOMNET, INC. has caused this Warrant to be executed
by its officers thereunto duly authorized.
Dated: November 5, 1998 INCOMNET, INC.
By: /s/ Denis Richard
-----------------
Denis Richard
President and Chief Executive Officer
ATTEST:
By: /s/ Michael Keebaugh
--------------------
Michael Keebaugh
Assistant Secretary
21
<PAGE>
NOTICE OF EXERCISE
To: INCOMNET, INC.
(1) The undersigned hereby elects to purchase ______ shares of Common
Stock of INCOMNET, INC., pursuant to the terms of the attached Warrant, and
tenders herewith payment of the purchase price for such shares in full.
(2) In exercising this Warrant, the undersigned hereby confirms and
acknowledges that the shares of Common Stock or the Common Stock are being
acquired solely for the account of the undersigned and not as a nominee for any
other party, and for investment, and that the undersigned will not offer, sell
or otherwise dispose of any such shares of Common Stock or Common Stock except
under circumstances that will not result in a violation of the Securities Act of
1933, as amended, or any state securities laws.
(3) Please issue a certificate or certificates representing those shares
of Common Stock in the name of the undersigned or in such other name as is
specified below:
-----------------------------------------
(Name)
-----------------------------------------
(Name)
(4) Please issue a new Warrant for the unexercised portion of the attached
Warrant in the name of the undersigned or in such other name as is specified
below:
-----------------------------------------
(Name)
- - ------------------------- -----------------------------------------
(Date) (Signature)
22
<PAGE>
ASSIGNMENT FORM
FOR VALUE RECEIVED, the undersigned registered owner of this Warrant hereby
sells, assigns and transfers unto the Assignee named below all of the rights of
the undersigned under the within Warrant, with respect to the number of shares
of Common Stock (or Common Stock) set forth below:
NAME OF ASSIGNEE ADDRESS NO. OF SHARES
and does hereby irrevocably constitute and appoint ________________________ as
Attorney-in-Fact to make such transfer on the books of INCOMNET, INC.,
maintained for the purpose, with full power of substitution in the premises.
The undersigned also represents that, by assignment hereof, the Assignee
acknowledges that this Warrant and the shares of stock to be issued upon
exercise hereof or conversion thereof are being acquired for investment and
that the Assignee will not offer, sell or otherwise dispose of this Warrant
or any shares of stock to be issued upon exercise hereof or conversion
thereof except under circumstances which will not result in a violation of
the Securities Act of 1933, as amended, or any state securities laws.
Further, the Assignee has acknowledged that upon exercise of this Warrant,
the Assignee shall, if requested by the Company, confirm in writing, in a
form satisfactory to the Company, that the shares of stock so purchased are
being acquired for investment and not with a view toward distribution or
resale.
Dated:
-------------------
-------------------------------------
Signature of Holder
ATTEST:
- - -------------------------------
Signature of Assignee
23
<PAGE>
EXHIBIT 10.13 -- STOCK PURCHASE AND RELEASE AGREEMENT AMONG GARY KAPLOWITZ,
ALAN ROTHSTEIN, S&R HOLDINGS, IRONWOOD TELECOM LLC AND
JOHN P. CASEY
INCOMNET, INC.
2801 Main Street
Irvine, California 92614
November 4, 1998
BY FACSIMILE
Gary Kaplowitz
Alan Rothstein
S&R Holdings
Ironwood Telecom LLC
John P. Casey
Re: STOCK PURCHASE AND RELEASE AGREEMENT
Gentlemen:
As you know, Gary Kaplowitz ("Kaplowitz"), Alan Rothstein ("Rothstein")
and S&R Holdings ("S&R Holdings" and with Kaplowitz and Rothstein, the
"Preferred Holders") acquired a certain number of Series B Preferred Stock
("Preferred Stock") of Incomnet, Inc. ("Company") on or about July 29, 1997.
The Preferred Stock is convertible into shares of the Company's Common Stock.
On June 10, 1998, the Preferred Holders notified the Company of their election
to convert all of the Preferred Stock then owned by them which, based on the
conversion price on the date of the notice, would have entitled them to receive
an aggregate of 1,568,571 shares of Common Stock (for Kaplowitz - 81.390 shares
of Preferred Stock convertible into 632,044 shares of Common Stock; for
Rothstein - 81.390 shares of Preferred Stock convertible into 632,044 shares of
Common Stock; for S&R - 39.243 shares of Preferred Stock convertible into
304,483 shares of Common Stock). Shortly after receiving the notices of
election to convert by the Preferred Holders on June 10, 1998, the Company
informed the Preferred Holders that the Company had insufficient authorized
Common Stock to effect the conversion of the Preferred Holders' Stock.
Except for 77.277 shares of Preferred Stock and the rights relating
thereto to be issued 600,000 shares of Common Stock when a sufficient authorized
number of shares become available (which the Preferred Holders will retain, the
"Retained Shares"), the Preferred Holders will sell and transfer all of their
Preferred Stock and all rights relating thereto (an aggregate of 124.746 shares
of Preferred Stock convertible into 968,571 shares of Common Stock, the
"Ironwood Shares") to Ironwood Telecom LLC ("Ironwood") for $600,000 in cash.
In connection with the prior conversion of the Retained Shares, the
Company agrees to issue 600,000 shares of Common Stock to the Preferred Holders
upon tender of the stock certificates representing the Retained Shares, within
five business days following the approval of its shareholders to amend the
Company's Articles of Incorporation to increase the authorized Common Stock of
the Company (the "Amendment Proposal"). Since these shares were privately
placed without registration under the Securities Act of 1933 (the "Securities
Act"), the certificates issued to the Preferred Holders evidencing the Retained
Shares will contain a restrictive legend that they may be sold only if
registered or pursuant to an exemption from registration under the Securities
Act. The Company will consider the Retained Shares as being issued on July 29,
1997. Therefore, the one-year holding period under Rule 144 of the Securities
Act will have been met and the Preferred Holders may sell the Retained Shares in
accordance with the exemption from the Securities Act registration requirements
provided under Rule 144. Upon delivery of a broker's certification or other
documents reasonably requested by the Company or its counsel, the Company shall
cause to be delivered to its transfer agent a Rule 144 legal opinion
satisfactory to the transfer agent.
Approval by shareholders of the Amendment Proposal is anticipated to be
obtained at the Company's annual meeting scheduled for March or April 1999. The
Company is aware of agreements between shareholders
<PAGE>
November 4, 1998
Page 2
who own approximately 35% of the outstanding voting stock of the Company and
third parties which require those shareholders to vote in favor of a proposal
to increase the authorized number of shares of Common Stock at the next
annual meeting. The Preferred Holders agree to vote in favor of the
Amendment Proposal, if legally permitted, and that Ironwood is the intended
beneficiary of the Preferred Holders' agreement to vote in favor of that
proposal.
To effect the sale and transfer of the Ironwood Shares by the Preferred
Holders to Ironwood, the Preferred Holders agree to execute a general assignment
and an assignment separate from certificate relating to the Ironwood Shares, to
be delivered and effective upon receipt of the $600,000.
The Company shall deliver to the Preferred Holders within 10 business
days of this letter a copy of the unanimous written consent of the Company's
Board of Directors signed by each director approving of the transactions
contemplated in this letter.
In addition, the Preferred Holders, the Company, Ironwood and John P.
Casey (a shareholder of the Company, "Casey"), agree to enter into mutual
releases relating to claims they may have against each other in connection with
the Preferred Stock. The terms of the mutual releases will be set forth in
another document.
If the Preferred Holders, Ironwood and Casey agree with the terms and
conditions set forth in this letter, please so signify by signing below and
returning the countersigned copy to the Company, after which this letter will
constitute a binding agreement enforceable against the Company, the Preferred
Holders, Ironwood and Casey, in accordance with its terms and conditions. This
letter may be countersigned in counterparts by the parties but will constitute
one agreement among all parties
Very truly yours,
/s/ DENIS RICHARD
--------------------------------------
Denis Richard
President and Chief Executive Officer
ACKNOWLEDGED AND AGREED:
/s/ GARY KAPLOWITZ IRONWOOD TELECOM LLC
- - ----------------------------
GARY KAPLOWITZ
/s/ ALAN ROTHSTEIN By: /s/ DONALD V. BERLANTI
- - ---------------------------- ---------------------------------
ALAN ROTHSTEIN Donald V. Berlanti
Member
S&R HOLDINGS LLC
By: /s/ STEVEN SHAPERO /s/ JOHN P. CASEY
---------------------- ---------------------------------
Steven L. Shapero JOHN P. CASEY
Managing Partner
2
<PAGE>
Exhibit 10.17
[LOGO] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD SUBLEASE
(LONG-FORM TO BE USED WITH PRE-1996 AIR LEASES)
1. PARTIES. This Sublease, dated, for reference purposes only, July
28, 1998, is made by and between NATIONAL TELEPHONE & COMMUNICATIONS, INC., a
Delaware corporation ("SUBLESSOR") and VISION CAPITAL SERVICES CORPORATION, a
California corporation and PERFORMANCE CAPITAL MANAGEMENT, INC., a California
corporation (jointly and severally "SUBLESSEE").
2. PREMISES. Sublessor hereby subleases to Sublessee and Sublessee
hereby subleases from Sublessor for the term, at the rental, and upon all of
the conditions set forth herein, that certain real property, including all
improvements therein, and commonly known by the street address of 2811 E.
Main Street, Irvine located in the County of Orange, State of California and
generally described as (describe briefly the nature of the property) an
industrial building containing approximately 18,320 rentable square feet as
more particularly described in Exhibit A hereto ("Premises").
3. TERM.
3.1 TERM. The term of this Sublease shall be for approximately
forty-four (44) months commencing on September 10, 1998 and ending on April
30, 2002 unless sooner terminated pursuant to any provision hereof.
3.2 (See Addendum)
4. RENT.
4.1 BASE RENT. Sublessee shall pay to Sublessor as Base Rent for
the Premises equal monthly payments of $20,152.00 in advance, on the first
day of each month of the term hereof. Sublessee shall pay Sublessor upon the
execution hereof $40,304.00 as Base Rent for September, 1998 and September,
2000. Base Rent for any period during the term hereof which is for less than
one month shall be a pro rata portion of the monthly installment.
4.2 RENT DEFINED. All monetary obligations of Sublessee to
Sublessor under the terms of this Sublease (except for the Security Deposit)
are deemed to be rent ("RENT"). Rent shall be payable in lawful money of the
United States to Sublessor at the address stated herein or to such other
persons or at such other places as Sublessor may designate in writing.
5. SECURITY DEPOSIT. Sublessee shall deposit with Sublessor upon
execution hereof $22,167.20 as security for Sublessee's faithful performance
of Sublessee's obligations hereunder. If Sublessee fails to pay Rent or other
changes due hereunder, or otherwise defaults with respect to any provision of
this Sublease, Sublessor may use, apply or retain all or any portion of said
deposit for the payment of any Rent or other charge in default or for the
payment of any other sum to which Sublessor may become obligated by reason of
Sublessee's default, or to compensate Sublessor for any loss or damage which
Sublessor may suffer thereby. If Sublessor so uses or applies all or any
portion of said deposit, Sublessee shall within ten days after written demand
therefore forward to Sublessor an amount sufficient to restore said Deposit
to the full amount provided for herein and Sublessee's failure to do so shall
be a material breach of this Sublease. Sublessor shall not be required to
keep said Deposit separate from its general accounts. If Sublessee performs
all of Sublessee's obligations hereunder, said Deposit, or so much thereof as
has not therefore been applied by Sublessor, shall be returned, without
payment of interest to Sublessee (or at Sublessor's option, to the last
assignee, if any, of Sublessee's interest hereunder) at the expiration of the
term hereof, and after Sublessee has vacated the Premises. No trust
relationship is created herein between Sublessor and Sublessee with respect
to said Security Deposit.
6. USE.
6.1 AGREED USE. The Premises shall be used and occupied only for
general office use and for no other purpose.
6.2 (See Addendum)
Page 1 of 4
<PAGE>
6.3 ACCEPTANCE OF PREMISES. Sublessee acknowledges that:
(a) it has been advised by Brokers to satisfy itself with respect
to the condition of the Premises (including but not limited to the electrical,
HVAC and fire sprinkler systems, security, environmental aspects, and
compliance with *), and their suitability for Sublessee's intended use,
(b) Sublessee has made such investigation as it deems necessary
with reference to such matters and assumes all responsibility therefor as the
same relate to its occupancy of the Premises, and
(c) neither Sublessor, Sublessor's agents, nor any Broker has made
any oral or written representations or warranties with respect to said
matters other than as set forth in this Sublease.
7. MASTER LEASE
7.1 Sublessor is the lessee of the Premises by virtue of a lease,
hereinafter the "MASTER LEASE", a copy of which is attached hereto marked
Exhibit 1, wherein The Carter Family Investment Partnership L.P., A California
Limited Partnership is the lessor, hereinafter the "MASTER LESSOR".
7.2 This Sublease is and shall be at all times subject and
subordinate to the Master Lease.
7.3 The terms, conditions and respective obligations of Sublessor
and Sublessee to each other under this Sublease shall be the terms and
conditions of the Master Lease except for those provisions of the Master
Lease which are directly contradicted by this Sublease in which event the
terms of this Sublease document shall control over the Master Lease.
Therefore, for the purposes of this Sublease, wherever in the Master Lease
the word "Lessor" is used it shall be deemed to mean the Sublessor herein and
wherever in the Master lease the word "Lessee" is used it shall be deemed to
mean the Sublessee herein.
7.4 During the term of this Sublease and for all periods
subsequent for obligations which have arisen prior to the termination of this
Sublease, Sublessee does hereby expressly assume and agree to perform and
comply with, for the benefit of Sublessor and Master Lessor, each and every
obligation of Sublessor under the Master Lease except for the following
paragraphs which are excluded therefrom: 1.5, 1.7, 5, Lease Addendum Items 1,
5, 6, 18, 32, 38, and Exhibit B.
7.5 The obligations that Sublessee has assumed under paragraph 7.4
hereof are hereinafter referred to as the "SUBLESSEE'S ASSUMED OBLIGATIONS".
The obligations that sublessee has not assumed under paragraph 7.4 hereof are
hereinafter referred to as the "SUBLESSOR'S REMAINING OBLIGATIONS".
7.6 Sublessee shall hold Sublessor free and harmless from all
liability, judgments, costs, damages, claims or demands, including reasonable
attorneys fees, arising out of Sublessee's failure to comply with or perform
Sublessee's Assumed Obligations.
7.7 Sublessor agrees to maintain the Master Lease during the
entire term of this Sublease, subject, however, to any earlier termination of
the Master Lease without the fault of the Sublessor, and to comply with or
perform Sublessor's Remaining Obligations and to hold Sublessee free and
harmless from all liability, judgments, costs, damages, claims or demands
arising out of Sublessor's failure to comply with or perform Sublessor's
Remaining Obligations.
7.8 Sublessor represents to Sublessee that the Master Lease is in
full force and effect and that to Sublessor's actual knowledge no default
exists on the part of any Party to the Master Lease.
8. ASSIGNMENT OF SUBLEASE AND DEFAULT.
8.1 Sublessor hereby assigns and transfers to Master Lessor the
Sublessor's interest in this Sublease, subject however to the provisions of
Paragraph 8.2 hereof.
8.2 Master Lessor, by executing this document, agrees that until a
Default shall occur in the performance of Sublessor's Obligations under the
Master Lease, that Sublessor may receive, collect and enjoy the Rent accruing
under this Sublease. However, if Sublessor shall Default in the performance
of its obligations to Master Lessor then Master Lessor may, at its option,
receive and collect, directly from Sublessee, all Rent owing and to be owed
under this Sublease. Master Lessor shall not, by reason of this assignment of
the Sublease nor by reason of the collection of the Rent from the Sublessee,
be deemed liable to Sublessee for any failure of the Sublessor to perform and
comply with Sublessor's Remaining Obligations.
Page 2 of 4
<PAGE>
8.3 Sublessor hereby irrevocably authorizes and directs Sublessee
upon receipt of any written notices from the Master Lessor stating that a
Default exists in the performance of Sublessor's obligations under the Master
Lease, to pay to Master Lessor the Rent due and to become due under the
Sublease. Sublessor agrees that Sublessee shall have the right to rely upon
any such statement and request from Master Lessor, and that Sublessee shall
pay such Rent to Master Lessor without any obligation or right to inquire as
to whether such Default exists and notwithstanding any notice from or claim
from Sublessor to the contrary and Sublessor shall have no right or claim
against Sublessee for any such Rent so paid by Sublessee.
8.4 No changes or modifications shall be made to this Sublease
without the consent of Master Lessor.
9. CONSENT OF MASTER LESSOR. (See Addendum)
10. BROKERS
10.1 Sublessor shall pay to Cushman Realty Corporation a licensed
real estate broker, ("BROKER"), a fee as set forth in a separate agreement
between Sublessor and Broker.
11. ATTORNEY'S FEES. If any party or the Broker named herein brings an
action to enforce the terms hereof or to declare rights hereunder, the
prevailing party in any such action, on trial and appeal, shall be entitled
to his reasonable attorney's fees to be paid by the losing party as fixed by
the Court.
12. ADDITIONAL PROVISIONS. (See Addendum)
Page 3 of 4
<PAGE>
- - -------------------------------------------------------------------------------
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY REAL ESTATE BROKER AS TO THE
LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS SUBLEASE OR THE
TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS
SUBLEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF
THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE
POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PROPERTY, THE
STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND
THE SUITABILITY OF THE PREMISES FOR SUBLESSEE'S INTENDED USE.
WARNING: IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA,
CERTAIN PROVISIONS OF THE SUBLEASE MAY NEED TO BE REVISED TO COMPLY WITH THE
LAWS OF THE STATE IN WHICH THE PROPERTY IS LOCATED.
- - -------------------------------------------------------------------------------
NATIONAL TELEPHONE & COMMUNICATIONS,
Executed at: INC., a Delaware corporation
----------------------------
[ILLEGIBLE] By /s/ Victor Streufert
---------------------------- ----------------------------------
Address: By /s/ James Quandt
------------------------------- ----------------------------------
"Sublessor" (Corporate Seal)
VISION CAPITAL SERVICES CORPORATION,
Executed at: a California corporation
----------------------------
[ILLEGIBLE] By /s/ Vincent Galewick
---------------------------- ----------------------------------
Address: By /s/ Vincent Galewick
------------------------------- ----------------------------------
"Sublessee" (Corporate Seal)
PERFORMANCE CAPITAL MANAGEMENT, INC.,
Executed at: a California corporation
----------------------------
[ILLEGIBLE] By /s/ Vincent Galewick
---------------------------- ----------------------------------
Address: By /s/ Vincent Galewick
------------------------------- ----------------------------------
"Sublessee" (Corporate Seal)
NOTE: THESE FORMS ARE OFTEN MODIFIED TO MEET CHANGING REQUIREMENTS OF LAW AND
NEEDS OF THE INDUSTRY. ALWAYS WRITE OR CALL TO MAKE SURE YOU ARE UTILIZING
THE MOST CURRENT FORM: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 SO.
FLOWER ST., SUITE 600, LOS ANGELES, CA 90017, (213) 687-8777.
Page 4 of 4
<PAGE>
MASTER LEASE
EXHIBIT 1 TO STANDARD SUBLEASE
<PAGE>
FIRST AMENDMENT TO LEASE
This FIRST AMENDMENT TO LEASE ("First Amendment") is entered into as of
this 25th day of April, 1997, between THE CARTER FAMILY INVESTMENT
PARTNERSHIP, L.P., a California limited partnership ("Lessor") and NATIONAL
TELEPHONE & COMMUNICATIONS, INC., a Delaware corporation ("Lessee").
RECITALS:
WHEREAS, Lessor as the lessor entered into that certain Standard
Industrial/Commercial Single-Tenant Lease-Net dated April 18, 1997 (the
"Lease") with Lessee, as lessee, with respect to those certain premises more
particularly described in the Lease (the "Premises"); and
WHEREAS, Lessor and Lessee entered into the Lease as part of a series of
transactions required by the terms of a Memorandum of Agreement dated March
27, 1997 (the "Memorandum Agreement"); and
WHEREAS, the parties now desire to modify certain of the terms and
provisions of the Lease; and
WHEREAS, the parties now desire to modify the Lease as a consequence of
Lessee having waived certain conditions and covenants of the Memorandum
Agreement; and
WHEREAS, Lessor has borrowed the amount of $5,004,000 from Lessee, which
loan is secured by a first deed of trust ("NTC Loan") encumbering the
Premises and Lessee desires that the NTC Loan be discharged in whole or in
part with the proceeds of a new loan to be obtained from First Bank & Trust
Co. et al. in the amount of $5,000,000 to be secured by a first trust deed
encumbering the Premises ("First Bank Loan"); and
WHEREAS, Lessor is desirous of obtaining financing on terms different
from the First Bank Loan and Lessee desires to have the NTC Loan repaid as
soon as possible;
NOW, THEREFORE, in consideration of the mutual covenants herein conveyed
and the willingness of Lessor accepting the First Bank Loan to pay the NTC
Loan, the parties hereto agree as follows:
1. DEFINED TERMS: Defined terms herein which appear as defined terms in
the Lease shall have the meaning given to such terms in the Lease except as
herein provided.
2. ADDITIONAL INSURANCE. Lessee shall obtain earthquake and flood damage
insurance for the Premises in an amount equal to the full replacement value
of the Premises, but in no event less than the principal balance of the First
Bank Loan and the Lessee's Note. Lessee shall be relieved of the obligation
to maintain such insurance on the earlier of the date on which
<PAGE>
Lessor's obligations become "non-recourse" pursuant to the terms of the
First Bank Loan and the date on which Lessor obtains a non-recourse loan
with respect to the Premises. Except for the foregoing, all provisions
contained in Section 8 of the Lease shall continue in full force and
effect.
3. EXERCISE OF OPTION. The time by which Lessee must exercise any option
to extend the term of the Lease shall be twenty-four (24) months prior to
expiration of the Lease.
4. LEASE MODIFICATION FOR FINANCING. Provided that Lessee's obligations
or liability under the Lease are not increased in any material respect as a
result thereof, Lessee shall execute such reasonable modifications to the
Lease as may be required by any institutional lender making a non-recourse
loan to Lessor secured by a first trust deed encumbering the Premises having
a principal balance of $5,000,000. Any such institutional lender shall
provide Lessee with a non-disturbance agreement reasonably satisfactory to
Lessee in the event such lender requires that the Lease be subordinate to the
lien of such lender's deed of trust. If Lessee considers the requirements of
any such lender to be unreasonable, the reasonableness of such requirements
shall be submitted to arbitration in accordance with the terms of the Lease.
5. INCREASED SECURITY DEPOSIT. At the commencement of each extension,
Lessee shall increase its deposit to an amount equal to one month's Base Rent
for the first month of such extension term.
6. ESTOPPEL/RENT ACKNOWLEDGMENT. On May 1 of each calendar year, or such
time as any lender or Lessor may request, the parties will execute an
acknowledgement of the amount of monthly rent to be paid during the
succeeding twelve (12) calendar month period in accordance with the rent
formula set forth on EXHIBIT "B" of the Lease.
7. RESERVED.
8. RENT ABATEMENT. The rent abatement allowed pursuant to Item 15 of the
Addendum to the Lease shall be conditioned upon Lessor receiving insurance
for rental interruption which shall pay Lessor the amount of such abatement
unless the event giving rise to the right of abatement is the result of
Lessor's willful misconduct.
9. COOPERATION WITH LENDER. Lessee shall provide reasonable,
non-privileged information as a prospective lender of Lessor may reasonably
require as a condition of making such loan, including an inspection of the
Premises, and providing current financial information on Lessee. Lessee shall
provide such information reasonably requested by Lessor or a prospective
Lender making such request, but no later than twenty (20) days.
10. LATE CHARGES. Item 23 of the Lease Addendum referring to Paragraph
13.4 of the Lease shall be further amended to provide that in lieu of the
late charge imposed by said Paragraph, there shall be imposed a late charge
equal to One Thousand Two Hundred Fifty Dollars ($1,250) plus any penalty or
increased interest on the First Bank Loan, if any, charged by the Lender
solely as a result of a Base Rent payment not being made by Lessee when due
and Lessor's consequent failure to make timely payment to First Bank. The
parties acknowledge that Lessor is depending on the income stream from the
rent to pay debt service on the First Bank
-2-
<PAGE>
Loan, and that the amount of any late charge reflects the actual losses
sustained by Lessor as a result of the inability to timely make payment on
the First Bank Loan. Upon the termination (repayment) of the First Bank loan,
all references to First Bank or Lenders shall mean and refer to any lender
making any replacement loan (refinancing).
11. RIGHT OF FIRST REFUSAL. If Lessee exercises the right of first
refusal contained in Item 38 of the Addendum to the Lease, such exercise
shall be in writing and delivered to Lessor within such thirty (30) day
period and shall be subject to the following: the amount of any earnest money
deposit shall be delivered to Lessor upon the exercise of Lessee's right of
first refusal and Lessee shall waive any due diligence contingencies and/or
Seller's warranties concerning the condition of the Premises. Title shall be
transferred to Lessee in such condition as existed at the inception of the
Lease unless any additional exceptions to title are approved by Lessor.
12. NO VIOLATION OF LOAN. Lessee hereby agrees that the lease terms
pertaining to the use of casualty and condemnation proceeds shall be subject
to the terms and conditions of the First Bank Loan. Lessee will not commit
any act which would constitute a default under any deed of trust encumbering
the Premises which secures the loan of an institutional lender to Lessor.
13. SUPERSEDING AGREEMENT. This First Amendment shall modify the Lease
and supersede all terms and conditions contained therein. Furthermore, the
terms of the Lease and this First Amendment shall modify the agreement of
March 27, 1997 to the extent any terms are inconsistent therewith.
IN WITNESS WHEREOF, the parties hereto have executed this
first amendment on the 25th day of April, 1997 at Irvine, California.
LESSEE: NATIONAL TELEPHONE &
COMMUNICATIONS, INC., a Delaware corporation
By: /s/ Ed Jacobs
---------------------------------------
Ed Jacobs, Chairman of the Board
LESSOR: THE CARTER FAMILY INVESTMENT
PARTNERSHIP, L.P., a California limited
partnership
By: /s/ James C. Carter
---------------------------------------
James C. Carter, General Partner
-3-
<PAGE>
SECOND AMENDMENT TO LEASE AGREEMENT
-----------------------------------
This Second Amendment to Lease Agreement ("Amendment") is made this
__ day of November 1997 by and between The Carter Family Investment
Partnership L.P., a California Limited Partnership ("Lessor") and National
Telephone & Communications, Inc., a Delaware corporation ("Lessee").
1. DEFINITIONS: The definitions used in this Amendment shall have the
same meanings as those used in the Lease dated April 18,1997, as amended by
that certain First Amendment to Lease Agreement dated April 25, 1997.
2. COMMENCEMENT OF AGREEMENT: The provisions of this Amendment shall
become effective upon the funding of a loan to the Lessor from Allstate Life
Insurance Company ("Allstate").
3. BASE RENT: Exhibit B, Item (b) of the lease shall be deleted and
replaced with the following:
(b) Forty-Two Thousand Eight-Hundred Nineteen Dollars and Nine Cents
($42,819.09)
4. MODIFICATION; SURVIVAL. Any modification of the provisions of this
Amendment shall require the prior written consent of Allstate. The provisions of
this Amendment shall survive any acquisition by Allstate of the property of
which the Premises are a part, including, but not limited to acquisition by
judicial foreclosure, non-judicial foreclosure or deed-in-lieu of foreclosure.
5. SUPERSEDING PROVISIONS: In the event of a conflict between the
term(s) of this Amendment and the original terms of the Lease, such term(s)
of this Amendment shall control.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Second Amendment
to Lease Agreement on the date hereinabove stated at Irvine, California.
LESSEE: LESSOR:
National Telephone & Communications The Carter Family Investment Partnership
Inc., A Delaware Corporation L.P., a California Limited Partnership
By: /s/ Victor C. Streufert By: /s/ James C. Carter
------------------------------- ----------------------------------
Victor C. Streufert, Sr VP James C. Carter
Address: 8424 Paseo Del Ocaso
La Jolla, CA 92037
By:
-------------------------------
, Secretary
Address: 2801 East Main St.
Irvine, CA 92714
<PAGE>
ADDENDUM TO STANDARD SUBLEASE
-----------------------------
This ADDENDUM TO STANDARD SUBLEASE ("Addendum") is attached to,
incorporated into and amends and supplements that certain Standard Sublease (the
"Sublease") dated as of the 28th day of July, 1998 by and between NATIONAL
TELEPHONE & COMMUNICATIONS, INC., a Delaware corporation ("Sublessor"), and
VISION CAPITAL SERVICES CORPORATION, a California corporation, and PERFORMANCE
CAPITAL MANAGEMENT, INC., a California corporation (jointly and severally,
"Sublessee"). Sublessor and Sublessee agree that notwithstanding anything
contained in the Sublease to the contrary, the Sublease as modified by the
provisions set forth in this Addendum represents the full negotiated agreement
of the parties, and the provisions of this Addendum will be deemed to be a part
of the Sublease and will supersede any contrary or conflicting provision in the
Sublease and prevail and control for all purposes. This Addendum, together with
the Sublease itself, and all other Exhibits, Riders and Addenda attached thereto
represents the fully integrated and binding agreement of the parties. All
references in the Sublease and in this Addendum to "Sublease" are to be
construed to mean the Sublease as amended and supplemented by this Addendum. All
terms used in this Addendum, unless specifically defined in this Addendum, have
the same meaning as such terms have in the Sublease.
2. PREMISES. The Premises shall be delivered by Sublessor to Sublessee
in their present As-Is condition and initially shall be improved by Sublessee by
the demolition of certain demising walls as depicted on Schedule X attached
hereto and the repair of dry wall damaged by such removal and repainting and
installation of carpet (herein, the "Initial Tenant Improvements"). The Initial
Tenant Improvements installation shall be governed by the provisions of the Work
Letter Agreement attached and made a part hereof as EXHIBIT "C" the ("Work
Letter") (except that Paragraph 4 of the Work Letter shall not apply to the
Initial Tenant Improvements) and the provisions of the Master Lease governing
alterations and improvements. Any and all costs of the Initial Tenant
Improvements shall be borne solely by Sublessee. Sublessor shall have no
obligation whatsoever to improve the Premises in conjunction with this Sublease.
Any subsequent alterations shall be installed in accordance with the provisions
of the Work Letter, the Sublease and the Master Lease. Any alterations which do
not require the consent of the Master Lessor under the Master Lease shall also
not require the consent of Sublessor under the Sublease.
3.2 DELIVERY OF POSSESSION. Sublessor shall use commercially
reasonable efforts to deliver and Sublessee shall accept possession of the
Premises AS-IS, in broom clean condition on the date (the "Delivery Date") which
is the later of (a) the date Sublessor obtains Master Lessor's consent to this
Sublease or (b) August 10, 1998. From and after the Delivery Date, Sublessee
shall have the right to occupy the Premises for purposes of completing the
improvements described in the Work Letter. Such period of early occupancy shall
be subject in all respects to the terms and conditions of this Sublease and of
the Master Lease except for the payment of Rent.
4.2 RENT. As set forth in Section 12.5 hereinafter, Sublessee shall be
obligated to pay Sublessee's share of Operating Expenses for the Project. Such
amount shall be due and payable as Rent hereunder.
6.1 AGREED USE. Sublessee agrees that in no event shall any of the
Premises be used for offices for any telecommunications service company or
telecommunications services including, without limitation, paging and internet
services.
6.2 COMPLIANCE. Sublessee shall comply with the provisions of Section
6 of the Master Lease as said provision applies to the Premises, including,
without limitation the provisions of Title III of the Americans With
Disabilities Act of 1990, as same has been or may be amended hereafter (the
"ADA") as it pertains to Sublessee's use, occupancy, improvement and alteration
of the Premises. Sublessee hereby acknowledges: (a) that it has satisfied itself
with respect to the condition of the Premises (including but not limited to the
electrical and fire sprinkler systems, security, elevator access, environmental
aspects, seismic and earthquake requirements, and compliance with the ADA and
applicable zoning, municipal, county, state and federal laws, ordinances and
regulations and any covenants or restrictions of record and the present and
future suitability of the Premises for Sublessee's intended use; (b) that
Sublessee has made such investigation as it deems necessary with reference to
such matters, is satisfied with
<PAGE>
reference thereto, and assumes all responsibility therefore as the same
relate to Sublessee's occupancy and use of the Premises and/or the terms of
this Sublease; and (c) that neither Sublessor, nor any of Sublessor's agents,
has made any oral or written representations or warranties with respect to
said matters.
Notwithstanding any contrary provision hereinabove, Sublessor warrants
to its actual knowledge, without any independent investigation or inquiry, that
the Premises do not contain levels of Hazardous Substances (as defined in the
Master Lease) in violation of Applicable Requirements.
9. OMITTED.
--------
12.1 SIGNS. Subject to Sublessee obtaining all necessary governmental
permits and approvals and Master Lessor's approval (collectively, the
"Approvals"), Sublessee, at its sole cost and expense, shall have the exclusive
right to install and maintain upon the building throughout the Sublease term,
two (2) building-top signs on the exterior of the Premises plus a sign in the
lobby of the Premises behind the reception desk bearing either the name "VISION
CAPITAL SERVICES CORPORATION" or the name "PERFORMANCE CAPITAL MANAGEMENT, INC."
All costs of design, fabrication, acquisition, installation,
maintenance, repair and removal of Sublessee's signs, and all other costs
associated with such signs, including, without limitation, utility charges and
hook-up fees, and permits, shall be the sole responsibility of Sublessee. Upon
the expiration or earlier termination of this Sublease, Sublessee shall, at its
sole cost and expense, remove Sublessee's signs from the exterior and interior
of the Premises and shall cause the Premises to be restored to the condition
existing prior to the placement of Sublessee's signs.
The sign rights granted herein are personal to Vision Capital Services
Corporation and Performance Capital Management, Inc. (collectively, "Vision
Capital") and may not be assigned, voluntarily or involuntarily, by any person
or entity other than Vision Capital. The rights granted to Vision Capital
hereunder are not assignable separate and apart from the Sublease, nor may any
right granted herein be separated from the Sublease in any manner, either by
reservation or otherwise. Sublessee acknowledges that Sublessor has no control
over the placement of signs on the Premises and agrees that Sublessor shall have
no obligation to procure any one or all of the Approvals, Sublessee being solely
responsible therefor.
12.2 PARKING. Sublessee shall have the non-exclusive right in common
with Sublessor and other tenants of the Project to use up to a maximum of
ninety-one (91) parking spaces at no charge during the term of this Sublease. Of
such ninety one (91) spaces, twelve (12) spaces in the area facing Jamboree may
be reserved at Sublessee's election for Sublessee's exclusive use.
If Sublessee requires additional parking spaces and such spaces are
not designated for use by others and are therefore available for Sublessee's
use, Sublessee may rent such additional spaces as are available from time to
time and desired by Sublessee at the rate of $30.00 per stall per month. Such
parking fees shall be due and payable by Sublessee as additional rent
concurrently with Sublessee's monthly payments of Base Rent to Sublessor.
12.3 INSURANCE. Sublessee agrees that it shall name Sublessor and
Master Lessor as additional insureds on all insurance carried by Sublessee as
required under Section 8 of the Master Lease.
12.4 PROJECT. The Premises are part of that certain development
consisting of the parcel(s) of real property located at 2801-2811 Main Street,
Irvine, County of Orange, State of California, which are legally described on
EXHIBIT "B" hereto (the "Property"), and all buildings, improvements and
facilities, now or subsequently located on the Property from time to time,
including, without limitation, the three (3) buildings (including the Premises)
currently located on the Property (the "Project"). The aggregate rentable square
feet of the three (3) buildings (including the Premises) located within the
Project is approximately 64,730 rentable square feet.
-2-
<PAGE>
12.5 COMMON AREAS: OPERATING EXPENSES.
---------------------------------
12.5.1 DEFINITIONS; SUBLESSEE'S RIGHTS. During the Term of this
Sublease, Sublessee shall have the non-exclusive right to use, in common with
other tenants in the Project, and subject to the rules and regulations
referred to Paragraph 40 of the Master Lease, those portions of the Project
(the "Common Areas") not leased or designated for lease to tenants that are
provided for use in common by Sublessor, Sublessee and any other tenants of
the Project (or by the Sublessee's agents, employees, customers invitees,
guests or licensees of any such party), whether or not those areas are open
to the general public. The Common Areas shall include, without limitation,
the outdoor patio area at the southern end of the Project, any fixtures,
systems, decor, facilities and landscaping contained, maintained or used in
connection with those areas, and shall be deemed to include any city
sidewalks adjacent to the Project, any pedestrian walkway system, park or
other facilities located on the Property and open to the general public, the
parking areas, roadways, sidewalks, walkways, parkways, and driveways on the
Property.
12.5.2 SUBLESSOR'S RESERVED RIGHTS. Sublessor reserves the right from
time to time to use any of the Common Areas and to do any of the following, as
long as such acts do not unreasonably interfere with Sublessee's use of or
access to the Premises:
(a) construct or alter other buildings or improvements on the
Property;
(b) make any changes, additions, improvements, repairs or replacements
in or to the Project, the Common Areas and/or the Premises (if required to do so
by any law or regulation) and the fixtures and equipment thereof, including,
without limitation: (i) maintenance, replacement and relocation of pipes, ducts,
conduits, wires and meters; and (ii) changes in the location, size, shape and
number of driveways, entrances, stairways, elevators, loading and unloading
areas, ingress, egress, direction of traffic, landscaped areas and walkways and
parking spaces and parking areas;
(c) close temporarily any of the Common Areas while engaged in making
repairs, improvements or alterations to the Project or any portion thereof; and
(d) perform such other acts and make such other changes with respect
to the Project or Common Areas, as Sublessor may, in the exercise of good faith
business judgment, deem to be appropriate.
12.5.3 EXPENSES. In addition to the Base Rent required to be paid by
Sublessee hereunder, during each month during the term of this Sublease,
Sublessee shall pay to Sublessor as a reimbursement to Sublessor of "Operating
Expenses" associated with Sublessee's use and occupancy of the Premises, the
amount of $0.30 per month per square foot, such amount to be increased annually
by four percent (4%) per annum effective as of each anniversary of the
commencement of the Sublease.
12.5.4 DEFINITION OF OPERATING EXPENSES. As used in this Sublease, the
term "Operating Expenses" shall consist of all costs and expenses of operation
and maintenance of the Common Areas and the Property, as determined by standard
accounting practices, calculated assuming the Project is one hundred percent
(100%) occupied, including the following costs by way of illustration but not
limitation: (a) Real Property Taxes (as defined in the Master Lease) and any
taxes or assessments imposed in lieu thereof; (b) any and all assessments
imposed with respect to the Premises, Common Areas, and/or Property pursuant to
any covenants, conditions and restrictions affecting the Property; (c) water and
sewer charges and the costs of electricity, heating, ventilating, air
conditioning and other utilities for the Common Areas; (d) utilities surcharges
and any other costs, levies or assessments resulting from statutes or
regulations promulgated by any government authority in correction with the use
or occupancy of the Project or the Common Areas; (e) costs of insurance obtained
by Sublessor pursuant to this Sublease; (f) waste disposal services; (g) roof
maintenance; (h) costs incurred in the management of the Project and Common
Areas, including, without limitation: (1) supplies, (2) wages and salaries (and
payroll taxes and similar governmental charges related thereto) of employees
used in the operation and maintenance of the Property and Common Areas, and (3)
a management/administrative fee not to exceed five percent (5%) of the annual
gross receipts of the Project; (i) supplies, materials, equipment and tools; (j)
repair and maintenance of the elevators and the structural portions of the
Premises, including the plumbing, heating, ventilating, air-conditioning and
electrical systems; (k) maintenance, costs and upkeep of all Common Areas;
-3-
<PAGE>
(l) amortization on a straight-line basis over the useful life together with
interest at ten percent (10%) on the unamortized balance of all costs of a
capital nature (including, without limitation, capital improvements, capital
replacements, capital repairs, capital equipment and capital tools): (1)
reasonably intended to produce a reduction in operating charges or energy
consumption; or (2) required after the date of this Sublease under any
governmental law or regulation that was not applicable to the Project at the
time it was originally constructed; or (3) for repair or replacement of any
equipment needed to operate the Common Areas at the same quality levels as
prior to the replacement; (m) costs and expenses of gardening and
landscaping; (n) maintenance of signs (other than Sublessee's signs);
(o) personal property taxes levied on or attributable to personal property used
in connection with the Premises, the Common Areas and/or the Property; and
(p) costs and expenses of repairs, resurfacing, repairing, maintenance,
painting, lighting, cleaning, refuse removal, security and similar items,
including appropriate reserves.
12.6 FURNITURE. Sublessee shall lease for the Sublease term at the
rate of One Thousand Dollars ($1,000.00) per month, the furniture and other
personal property of Sublessor described on SCHEDULE 1 hereto (the "Furniture").
Such amount shall be due and payable as additional rent concurrently with
Sublessee's monthly payments of Base Rent hereunder. The Furniture is leased to
Sublessee on an AS-IS basis and shall be surrendered to Sublessor upon the
expiration or sooner termination of this Sublease in good condition, reasonable
wear and tear excepted.
12.7 RIGHT TO LEASE ADDITIONAL SPACE.
(a) Subject to the terms of this Section 12.7, throughout the Term of
the Sublease, Sublessee shall have a continuing right to lease ("Sublessee's
Right to Lease") any space in the building in the Project commonly known as 2801
Main Street (the "2801 Building") to the extent any such space becomes available
for lease to third parties (all such space being referred to herein as "First
Offer Space"). Sublessee's Right to Lease is subject and subordinate to the
rights of all other existing tenants of the 2801 Building with prior expansion
or lease rights relative to any such First Offer Space.
(b) Sublessor will give Sublessee written notice of the availability
of such First Offer Space setting forth the basic economic terms, including, but
not limited to, the Base Rent, and all other economic terms and conditions
(collectively, the "Economic Terms"), upon which Sublessor is willing to lease
the First Offer Space to Sublessee including the date the existing tenant or
occupant, if any, is expected to vacate such space ("Sublessor's Availability
Notice").
(c) Within five (5) business days after Sublessee's receipt of
Sublessor's Availability Notice, Sublessee must give Sublessor written notice
pursuant to which Sublessee shall elect to either: (i) lease such First Offer
Space upon the Economic Terms set forth in Sublessor's Availability Notice and
the same non-Economic Terms as set forth in the Sublease with respect to the
Premises; or (ii) refuse to lease such First Offer Space. Sublessee's failure to
timely choose either clause (i) or clause (ii) above will be deemed to be
Sublessee's choice of clause (ii) above.
(d) If Sublessee chooses (or is deemed to have chosen) clause (c)(ii)
above, Sublessee's Right to Lease such First Offer Space will be null and void.
If Sublessee exercises its Right to Lease as provided herein, the parties will
promptly thereafter execute an amendment to this Lease to include the First
Offer Space in the Premises and to document the lease terms thereof.
(e) As provided above, Sublessee's Right to Lease is subject to all
expansion and extension rights and other rights to lease, as applicable, which
Sublessor may have granted to other tenants prior to the date of this Sublease
or following any refusal by Sublessee to lease First Offer Space as set forth
above. Thus, Sublessor's Economic Terms will be delivered to Sublessee only
after Sublessor has appropriately notified and received negative responses from
all other tenants with rights in the First Offer Space superior to Sublessee's
rights, if any.
The Right to Lease granted herein is personal to the original
Sublessee executing this Sublease and any successor in interest to Sublessee
provided such successor has been approved by the Master Lessor if so required
and such successor has a net worth which is equal to or greater than the net
worth of Sublessee as of the date hereof (such a successor being described
herein as a "Permitted Successor"). The Right to Lease granted herein may be
-4-
<PAGE>
exercised only by the original Sublessee executing this Sublease or a
Permitted Successor while occupying the entire Premises and without the
intent of thereafter subletting the Premises and may not be exercised or be
assigned, voluntarily or involuntarily, by any person or entity other than
the original Sublessee executing this Sublease or a Permitted Successor.
Sublessee's Right to Lease is not assignable separate and apart from this
Sublease, nor may the Right to Lease be separated from this Sublease in any
manner, either by reservation or otherwise.
Sublessee will have no right to exercise its Right to Lease,
notwithstanding any provision of the grant hereinabove to the contrary, and
Sublessee's exercise of the Right to Lease may be nullified by Sublessor and
deemed of no further force or effect, if (i) Sublessee is in default of any
monetary obligation or material non-monetary obligation under the terms of this
Sublease or the Master Lease (or if Sublessee would be in such default under
this Sublease or the Master Lease but for the passage of time or the giving of
notice, or both) as of Sublessee's exercise of the Right to Lease or at any time
after the exercise thereof, or (ii) Landlord has given Tenant two (2) or more
notices of default, whether or not such defaults are subsequently cured, during
any twelve (12) consecutive month period of this Sublease.
12.8 ASSIGNMENT AND SUBLETTING. Notwithstanding any contrary provision
in the Master Lease, Sublessee shall have no right whatsoever to voluntarily or
by operation of law, assign, transfer, mortgage, pledge or otherwise transfer or
encumber or sublet all or any part of Sublessee's interest in the Premises
and/or this Sublease.
12.9 RENEWAL. Notwithstanding any contrary provision in the Master
Lease, including, without limitation, Item 1 of the Lease Addendum, Sublessee
shall have no option to extend the Sublease term.
IN WITNESS WHEREOF, the parties hereto have executed this Addendum as
of the day and year of execution of the Sublease.
SUBLESSEE: SUBLESSOR:
VISION CAPITAL SERVICES NATIONAL TELEPHONE &
CORPORATION, a California corporation COMMUNICATIONS, INC., a Delaware
corporation
By: /s/ Vincent Galewick
----------------------------------
Print Name: Vincent Galewick By: /s/ Vincent Galewick
--------------------- -----------------------------------
(Vice) President Print Name: Vincent Galewick
-----------------------
SVP CFO
By: /s/ Vincent Galewick
----------------------------------
Print Name: Vincent Galewick By: /s/ James Quandt
--------------------- -----------------------------------
(Assistant) Secretary Print Name: James Quandt
-----------------------
PRESIDENT & C.E.O.
PERFORMANCE CAPITAL
MANAGEMENT, INC., a California
corporation
By: /s/ Vincent Galewick
-----------------------------------
Print Name: Vincent Galewick
-----------------------
(Vice) President
By: /s/ Vincent Galewick
-----------------------------------
Print Name: Vincent Galewick
-----------------------
(Assistant) Secretary
-5-
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