<PAGE>
[LETTERHEAD]
TO OUR SHAREHOLDERS:
We are pleased to provide the enclosed Information Statement to the
holders of record of the common stock of INCOMNET, Inc. as of September 11,
1998 in connection with the Board Change Agreement that the Company has
entered into with Mr. John P. Casey, the Company's single largest
shareholder. The Board Change Agreement provides that, subject to the
satisfaction or waiver of certain conditions, Messrs. Melvyn H. Reznick (the
Chairman of the Company), Rolf Lesem, Richard M. Horowitz and David Wilstein
and Ms. Nancy S. Zivitz will resign from the Company's Board of Directors and
Mr. Casey and his two designees, John P. Hill, Jr. and Michael A. Stein,
will be appointed to serve as directors. If this change in the Board occurs
as contemplated, the Board of Directors of the Company will consist of
Messrs. Casey, Hill and Stein, as well as Dr. Howard Silverman, who is
currently a member of the Board of Directors.
The Board Change Agreement resulted from many weeks of discussions with
Mr. Casey, who currently owns approximately 30% of the outstanding shares of
the Company's common stock. Mr. Casey announced his opposition to the
proposed sale of substantially all of the assets of the Company's principal
subsidiary, National Telephone & Communications, and also expressed an
intention to explore various alternatives with respect to his investment,
including the possibility of seeking to acquire control of the Company. The
Company began discussions with Mr. Casey after the agreement to sell NTC was
terminated.
On August 19, 1998, the NTC received a notice from WorldCom Network
Services, the provider of NTC's telecommunications services, that it intended
to disconnect those services for certain purported defaults if certain
conditions were not satisfied. Subsequently, on August 27, 1998, WorldCom
Network Services and First Bank & Trust of Newport Beach, NTC's primary
lender, informed the Company and NTC that, as a condition to continued
service and forbearance on amounts owed to them, they would require, among
other things, that the Company and the Board of Directors enter into the
Board Change Agreement.
After careful consideration of these and other factors, the Board of
Directors determined that the Board Change Agreement and the change in the
Company's Board of Directors contemplated by that agreement were in the best
interests of the Company and its shareholders.
<PAGE>
The enclosed Information Statement describes the Board Change Agreement
in more detail and contains other important information, including
information about the current Board of Directors and the new designees, and
is being provided to you pursuant to Rule 14f-1 under the Securities Exchange
Act of 1934. Please read it carefully. HOWEVER, SHAREHOLDERS ARE NOT BEING
ASKED TO VOTE ON ANY MATTER AT THIS TIME AND NO PROXIES ARE BEING SOLICITED.
Mr. Casey has informed the Company that, if the Board change occurs, he
anticipates that the Company will hold a shareholders meeting within the next
few months to, among other things, elect directors. In addition, Mr. Casey
is seeking to obtain additional debt or equity financing for the Company and
its subsidiaries.
Finally, we would like to take this opportunity to thank our
shareholders, employees, service providers and other constituents for their
support and patience during a most difficult period for your Company. We
wish Mr. Casey and the new and continuing members of the Board and management
well in their efforts to seek to reinvigorate your Company.
INCOMNET, INC.
BY: THE BOARD OF DIRECTORS
/s/ MELVYN H. REZNICK
-----------------------------
Melvyn H. Reznick, Chairman
September 11, 1998
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<PAGE>
INCOMNET, INC.
20501 Ventura Boulevard, Suite 265
Woodland Hills, California 91364-2313
______________
INFORMATION STATEMENT PURSUANT TO SECTION 14(f)
OF THE SECURITIES EXCHANGE ACT OF 1934
NOTICE OF CHANGE IN THE MAJORITY OF DIRECTORS
September 11, 1998
______________
This Information Statement is being mailed on or about September 14,
1998 to the holders of record of the Common Stock, no par value per share, of
Incomnet, Inc., a California corporation (the "Company") as of the close of
business on September 11, 1998. This Information Statement is being
furnished in contemplation of a change in a majority of the members of the
Company's Board of Directors pursuant to an agreement (the "Board Change
Agreement") entered into as of August 28, 1998, by and among the Company, the
current members of the Board of Directors of the Company (collectively, the
"Current Board" or "Current Directors"), and John P. Casey, an individual
("Mr. Casey").
This Information Statement is required by Section 14(f) of the
Securities Exchange Act of 1934, as amended, and Rule 14f-1 thereunder. You
are urged to read this Information Statement carefully. You are not,
however, required to take any action in connection with the Information
Statement. SHAREHOLDERS ARE NOT BEING ASKED TO VOTE ON ANY MATTERS AT THIS
TIME AND NO PROXIES ARE BEING SOLICITED BY THIS NOTICE.
The information contained in this Information Statement was prepared by
the Company except for information concerning the New Directors (as defined
below) which was furnished to the Company by the New Directors. The New
Directors assume no responsibility for the accuracy or completeness of the
information prepared by the Company.
THE BOARD CHANGE AGREEMENT
Consummation of the Board Change Agreement is subject to a number of
conditions including some over which the parties have no control. No
assurance can be given that the conditions of the Board Change Agreement will
be satisfied or waived or that the Board Change Agreement will be
consummated. Certain terms of the Board Change Agreement are summarized
below and are qualified in their entirety by the Board Change Agreement, a
copy of which is attached hereto as Exhibit A:
1. Richard M. Horowitz, Rolf Lesem, Melvyn H. Reznick, David Wilstein and
Nancy S. Zivitz have agreed to resign as directors on the first
business day after the satisfaction or waiver of certain conditions
(the "Conditions") or such later date as Mr. Casey and the Current
Board agree (the "Effective Time"). Dr. Howard Silverman will remain
as a director. The Company has agreed, subject to the satisfaction or
waiver of the Conditions to which its obligations are subject, to
appoint Mr. Casey and his designees, John P. Hill, Jr. and Michael
A. Stein, as directors (collectively, the "New Directors") to fill
three of the five vacancies created by the resignations of Mr.
Horowitz, Mr. Lesem, Mr. Reznick, Mr. Wilstein
<PAGE>
and Mrs. Zivitz. The change in the composition of the members of
the Board is hereinafter referred to as the "Board Change." The
New Directors and Dr. Silverman are collectively referred to in
this Information Statement as the "New Board." Following the
Effective Time, the New Board may, but is not obligated to, appoint
additional members to the Board of Directors who may be identified
from time to time, all in accordance with the Company's
organizational documents.
2. The New Board will form and appoint members to an Audit Committee, a
Compensation Committee and a Disinterested Director Committee. The
Company and Mr. Casey will use commercially reasonable efforts to
cause the New Board to offer Dr. Silverman the opportunity to be a
member of each of these committees and the Executive Committee, if the
Company forms such a committee. The Disinterested Director Committee
will resolve any issues relating to transactions involving Mr. Casey
in his individual capacity.
3. The Company will nominate Dr. Silverman for reelection to the Board at
the next annual meeting of the Company's shareholders. There will be
no obligation of the Company to nominate Dr. Silverman for reelection
to the Board after the next annual meeting of the shareholders, or if
Dr. Silverman resigns from or is otherwise not a member of the Board
prior to the next annual meeting of the Company's shareholders.
4. The Conditions to the Board Change include the following: (i) a
settlement agreement must have been entered into in the class action
lawsuit known as Saundra Gayles vs. Incomnet, Inc. and Sam D. Schwartz
(the "Class Action Lawsuit"), (ii) the Company must have in place
directors and officers insurance coverage on terms acceptable to Mr.
Casey, (iii) the Management Incentive Agreement, dated January 28,
1997 (the "Autonomy Agreement"), between the Company and National
Telephone & Communications, Inc. a wholly-owned subsidiary of the
Company ("NTC"), must have been rescinded (this Condition has been
satisfied), (iv) the supermajority director vote provision in the
Company's Bylaws must have been rescinded (this Condition has been
satisfied), (v) the holders (collectively, the "Cohen Group") of the
1,598.2 outstanding shares of Series A and Series B Convertible
Preferred Stock of the Company which Mr. Casey currently has an option
to purchase must agree to approve an amendment to the Company's
Articles of Incorporation, as amended, providing for an increase in
the authorized number of shares of Common Stock to at least 50 million
(this Condition has been satisfied), (vi) Worldcom Network Services,
Inc. ("Worldcom"), NTC's telecommunications services provider, and
First Bank &Trust Company of Newport Beach ("First Bank"), NTC's
primary lender, shall have agreed to forebear their rights to
foreclose on assets of the Company and NTC given to them as collateral
and otherwise enforce their rights upon default under their respective
agreements with the Company on terms acceptable to Mr. Casey, and
(vii) the ten-day waiting period following the mailing of this
Information Statement pursuant to Rule 14f-1 must have elapsed.
5. Mr. Casey has agreed to utilize commercially reasonable efforts to
obtain additional equity or debt financing for the Company, provided
that Mr. Casey shall not be required to personally guarantee the
obligations of the Company or any of its subsidiaries or to loan money
to the Company or make additional equity investments in the Company or
any of its subsidiaries.
-2-
<PAGE>
6. Mr. Casey will assign to the Company his option (the "Cohen Option")
to purchase 1,598.2 outstanding shares of Preferred Stock owned by the
Cohen Group (the "Cohen Preferred Stock") for $2.3 million plus
accrued dividends and penalties, on condition that (i) the Company is
financially able to purchase or redeem the Cohen Preferred Stock at
the exercise price set forth in the Cohen Option agreement prior to
termination of the Cohen Option; (ii) the Cohen Group consents to the
assignment; (iii) the Company agrees to exercise the Cohen Option and
redeem the Cohen Preferred Stock prior to termination of the Cohen
Option; and (iv) the Company agrees to reimburse Mr. Casey for costs
and expenses associated with acquiring and assigning the Cohen Option
(including the Option price and Mr. Casey's closing costs and
reasonable legal fees relating thereto). The Cohen Option expires on
October 14, 1998. The Company has agreed to exercise that option if
it is financially able to do so, provided that all requirements of
applicable law and any applicable contractual restrictions are
satisfied.
If the Company is not financially able to redeem the Cohen Preferred
Stock on or before October 14, 1998, then Mr. Casey will exercise the
option and acquire the underlying Cohen Preferred Stock. For the
one-year period after the exercise of the option by Mr. Casey, the
Company will have the option to redeem the Cohen Preferred Stock for
Mr. Casey's purchase price plus carrying costs, and Mr. Casey will be
obligated to hold the Cohen Preferred Stock (without transferring or
converting it) during that one-year period. If the Company is not
financially able to redeem the Cohen Preferred Stock from Mr. Casey
during such one year period, then Mr. Casey will tender the Cohen
Preferred Stock for conversion and the Company will convert the Cohen
Preferred Stock into Common Stock (the "Cohen Common") at a conversion
price which approximates the conversion price per share when the
Cohen Preferred Stock was tendered for conversion by the Cohen Group
on June 10 and 11, 1998 (i.e., approximately $0.19 per share of
Common Stock). In such an event, Mr. Casey has agreed to register and
offer the Cohen Common to all of the Company's shareholders on a pro
rata basis for a purchase price equal to the sum of (i) the conversion
price paid by Mr. Casey (i.e., approximately $0.28 per share), (ii)
Mr. Casey's carrying costs and reasonable legal fees and costs
attributable to the purchase of the Cohen Preferred Stock and the
offering of the Cohen Common. To the extent that the Cohen Common is
not fully subscribed in the first offering, Mr. Casey has agreed to
offer the remaining Cohen Common to the subscribing shareholders on a
pro rata basis in a second offering, after which any remaining Cohen
Common could be retained by Mr. Casey or assigned by him in his sole
discretion.
7. The Company has agreed to solicit the approval of the Company's
shareholders to the proposed amendment to the Company's Articles of
Incorporation, as amended, to increase the number of authorized shares
of the Company's Common Stock to 50 million. Mr. Casey has agreed to
vote in favor of such amendment at any shareholders' meeting duly
called for that purpose.
8. The Company has agreed to reimburse Mr. Casey for any reasonable costs
and expenses (including reasonable attorneys' fees and costs), in
addition to the expense reimbursements already described, which are
incurred by him in connection with: (i) the settlement of the Class
Action Lawsuit, (ii) filings made with the Securities and Exchange
Commission ("SEC") or any other regulatory agency in connection with
the Board Change, (iii) preparation of this Information Statement,
(iv) obtaining directors' and officers' insurance coverage, (v)
negotiating and preparing
-3-
<PAGE>
the nonbinding term sheet dated August 21, 1998 relating to the
proposed Board Change and Board Change Agreement, (vi) any
negotiations with Worldcom or First Bank with respect to NTC, and
(vii) any negotiations by Mr. Casey with institutional investors
relating to additional equity or debt financing for the Company or
NTC.
Other than the costs and expenses relating to the Cohen Preferred
Stock and those matters described in clauses (i) through (vii) above,
(a) upon the approval of a majority of the Disinterested Director
Committee (and without requiring the approval of the Company's
shareholders), the Company will reimburse Mr. Casey up to $100,000 of
costs and expenses incurred by him on or after April 1, 1998 in
connection with due diligence concerning the Company and its proposal
to sell NTC, the attempt to prevent such sale and any related
documentation and his evaluation of his rights and alternatives as a
significant shareholder of the Company (collectively, the "Due
Diligence and Other Costs"), and (b) upon the approval of the majority
of the disinterested members of the New Board and the Company's
disinterested shareholders, the Company will reimburse Mr. Casey for
Due Diligence and Other Costs in excess of $100,000.
9. The Company has agreed that from the date of the Board Change
Agreement until the Board Change, the Company will not, and will cause
all of its subsidiaries not to, without the prior written consent of
Mr. Casey, (i) amend any of its or its subsidiaries organization
documents, (ii) initiate, solicit, encourage, negotiate with or
provide nonpublic information to, any third party in connection with
any extraordinary transactions (merger, sale of assets, sale of
securities, declaration of dividend, adoption of shareholders' rights
plan or other similar transaction) or agree to incur any material
liability (loans for borrowed money or settlement of litigation,
including but not limited to the Class Action Lawsuit), or (iii) cause
any increase or make any agreement to increase compensation payable to
directors, employees or consultants, or enter into severance or
termination arrangements affecting directors, employees or
consultants, or amend any employee plans or grant any options,
warrants or rights to purchase securities relating to the Company or
any of its subsidiaries. Notwithstanding the foregoing, the Company
or its subsidiaries may: (i) enter into a sublease at 2811 East Main
Street under the terms set forth in the term sheet, dated July 17,
1998, and (ii) obtain debt financing on terms substantially similar to
those previously proposed by a financial institution in July 1998. In
addition, Mr. Casey has agreed not to unreasonably withhold his
consent to any short-term financing arrangements into which the
Company or any of its subsidiaries may propose to enter pending the
Board Change.
10. At the Effective Time, the parties will release each other and certain
of their respective affiliates from Claims (as specifically defined
in the Board Change Agreement) which may arise from (i) the Board
Change, (ii) the proposed sale or recapitalization of NTC originally
contemplated in or about December 1997, including pursuant to the
Asset Purchase Agreement dated as of March 31, 1998 between NTC
Acquisition, Inc. and NTC, (iii) the proposed NTC debt financing with
a financial institution in July 1998, (iv) the sale of up to 2.5
million shares of Rapid Cast, Inc. ("RCI") at $.60 per share, (v) upon
the redemption of the Cohen Preferred Stock or the approval by the
Company's shareholders of the amendment to the Company's Articles of
Incorporation, as amended, increasing the authorized number of shares
of the Company's Common Stock to 50 million shares and subsequent
conversion of the Cohen Preferred Stock into shares of Common Stock
based on the conversion price when tendered for conversion on June 10
and 11,
-4-
<PAGE>
1998, the failure to have shares of Common Stock available for
issuance to the holders of the Cohen Preferred Stock upon their
attempted conversion of such stock into shares of Common Stock on June
10 and 11, 1998, or (vi) any action, failure to act, representation,
event, transaction, occurrence or other subject matter resulting from,
arising out of, relating to, connected in any way with, or alleged,
suggested or mentioned in connection with the foregoing matters. The
parties have also agreed to indemnify each other generally for any
losses they may incur as a result of the assertion of any released
Claims against them.
11. The Board Change Agreement may, by notice given prior to or at the
scheduled closing of the Board Change, be terminated: (i) by either
Mr. Casey or the Company if a material breach of the Board Change
Agreement has been committed by another party and such breach has not
been waived; (ii) by Mr. Casey or the Company if any of the respective
Conditions to their obligations is or becomes impossible to satisfy
(other than through their own failure to comply with their obligations
under the Board Change Agreement) and the applicable party has not
waived or does not waive such condition; (iii) by mutual consent of
Mr. Casey and the Company; or (iv) by either Mr. Casey or the Company
if the closing of the Board Change has not occurred (other than
through the failure of any party seeking to terminate the Board Change
Agreement to comply fully with its obligations under the Board Change
Agreement) on or before September 30, 1998 or such later date upon
which the parties may agree.
The Board Change Agreement resulted from many weeks of discussions with
Mr. Casey, who currently owns approximately 30% of the outstanding shares of the
Company's Common Stock. Mr. Casey announced his opposition to the proposed sale
of substantially all of the assets of NTC and also expressed an intention to
explore various alternatives with respect to his investment, including the
possibility of seeking to acquire control of the Company. The Company began
discussions with Mr. Casey after the agreement to sell NTC was terminated.
On August 19, 1998, NTC received notice from WorldCom that it intended to
disconnect NTC's telecommunications services for certain purported defaults if
certain conditions were not satisfied. Subsequently, on August 27, 1998,
WorldCom and First Bank informed the Company and NTC that, as a condition to
continued service and forebearance on amounts owed to them, they would require,
among other things, that the Company and the Current Board enter into the Board
Change Agreement. After careful consideration of these and other factors
(including, but not limited to, Mr. Casey's agreements with respect to the Cohen
Preferred Stock as described in paragraph 6, above) the Current Board determined
that the Board Change Agreement and the Board Change were in the best interests
of the Company and its shareholders.
OUTSTANDING SHARES AND VOTING RIGHTS
As of September 11, 1998, the Company had outstanding 20,000,000 shares of
Common Stock. Each share entitles the holder to one vote. The holders of
Common Stock have cumulative voting rights under the laws of the State of
California, which means the holders of a minority of the shares can elect a
certain number of the directors if a shareholder elects to cumulate his votes in
the election of directors. The holders of the outstanding Series A and Series B
Convertible Preferred Stock do not have voting rights by virtue of their
ownership of those shares.
-5-
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 4, 1998 including each
person known by the Company to be the beneficial owner of more than 5% of any
class of the Company's capital stock as of September 4, 1998. In addition, the
number of shares of the Company's Common Stock beneficially owned by each
Current Director and by each executive officer of the Company, and the number of
shares beneficially owned by the Current Directors and executive officers of the
Company as a group, as of September 4, 1998, are disclosed below in the second
table. The information was furnished to the Company by the identified
individuals in public reports. Except as indicated, each person listed below
has sole voting and investment power with respect to the shares set forth
opposite such person's name.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
<TABLE>
<CAPTION>
<S> <C> <C>
Name and Address Amount and Nature Percent of Common
of Beneficial Owner of Beneficial Ownership Stock Outstanding (4)
------------------- ----------------------- ---------------------
Robert Cohen (1) 2,827,637 14.1%
1500 Hempstead Turnpike
East Meadow, NY 11554
Stefanie Rubin (1) 2,358,654 11.8%
111 Deer Run
Rosslyn, NY 11577
Jeffrey Rubin (1) 6,000 .0003%
111 Deer Run
Rosslyn, NY 11577
Allyson Cohen (1) 576,316 2.9%
1500 Hempstead Turnpike
East Meadow, NY 11554
Jeffrey Cohen (1) 1,668,947 8.3%
1500 Hempstead Turnpike
East Meadow, NY 11554
Alan Cohen (1) 632,316 3.2%
1500 Hempstead Turnpike
East Meadow, NY 11554
Meryl Cohen (1) 526,316 2.6%
1500 Hempstead Turnpike
East Meadow, NY 11554
Meryl Cohen 263,158 1.3%
Custodian for Gabrielle Cohen (1)
1500 Hempstead Turnpike
East Meadow, NY 11554
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<PAGE>
<S> <C> <C>
Name and Address Amount and Nature Percent of Common
of Beneficial Owner of Beneficial Ownership Stock Outstanding (4)
------------------- ----------------------- ---------------------
Meryl Cohen, Custodian for 263,158 1.3%
Jaclyn Cohen (1)
1500 Hempstead Turnpike
East Meadow, NY 11554
Meryl Cohen, Custodian for 263,158 1.3%
Erica Cohen (1)
1500 Hempstead Turnpike
East Meadow, NY 11554
Meryl Cohen, Custodian for 263,158 1.3%
Nicole Cohen (1)
1500 Hempstead Turnpike
East Meadow, NY
Lenore Katz (1) 574,561 2.9%
1500 Hempstead Turnpike
East Meadow, NY 11554
Broadway Partners (1) 1,092,632 5.5%
1500 Hempstead Turnpike
East Meadow, NY 11554
John P. Casey (2) 6,137,504 30.7%
10220 River Road, #115
Potomac, MD 20854
Gary Kaplowitz (3) 867,727 4.3%
1233 Beech St., #3
Atlantic Beach, NY 11509
Allan P. Rothstein (3) 867,727 4.3%
1233 Beech St., #3
Atlantic Beach, NY 11509
</TABLE>
- ----------------------------------
(1) These parties filed a Schedule 13-D on June 19, 1998 as a group (the "Cohen
Group") and amended it on July 20, 1998 pursuant to which they disclosed
their shareholdings in the Company. In the Schedule 13-D, the Cohen Group
disclosed that they had entered into an Option Agreement with Mr. Casey
pursuant to which Mr. Casey acquired an option to purchase 1,598.2
outstanding shares of Series A and Series B Convertible Preferred Stock
from the Cohen Group for a total purchase price of $2,300,000 plus certain
cumulative unpaid dividends. Mr. Casey agreed to pay a non-refundable
option price of $300,000 to the Cohen Group for the option, payable
$150,000 upon execution of the Option Agreement and $150,000 on August 15,
1998. Mr. Casey has paid the full option price, which will be applied
towards the $2,300,000 purchase price for the Preferred Stock. Mr. Casey's
option expires on October 14, 1998. If he does not exercise the option by
that date, then the Cohen Group will retain the Cohen Preferred Stock.
For information with respect to certain
-7-
<PAGE>
provisions of the Board Change ment relating to the Cohen Option, see
paragraph number 6 in the above ry of the Board Change Agreement. The
shares indicated on the table he Cohen Group include shares of Common
Stock which could be acquired the conversion of the Cohen Preferred
Stock subject to the Option ment, assuming a conversion price of
approximately $0.19 per share and the authorized number of shares of the
Company's Common Stock is ased in order to permit such conversion.
These shares represent antially all of the shares of Common Stock
reported as being icially owned by the members of the Cohen Group.
(2) The shares indicated on the table for Mr. Casey do not include any shares
of Common Stock which could be acquired upon his exercise of the Cohen
Option and the subsequent conversion of the Cohen Preferred Stock, assuming
that the authorized number of shares of the Company's Common Stock is
increased in order to permit such conversion. The 6,137,504 shares of
Common Stock represented as beneficially owned by Mr. Casey include 102,000
shares which are owned by trusts and accounts for the benefit of Mr.
Casey's two minor children. Mr. Casey has shared voting and dispositive
power over those shares. While Mr. Casey disclaims the existence of the
formation of any group with the Cohen Group, Mr. Casey has agreed to vote
on any proposals concerning changes in the authorized Common Stock of the
Company as directed by the Cohen Group through August 14, 1999.
(3) Mr. Kaplowitz filed a Schedule 13-G on March 20, 1998 in which he stated
that he was acting as a member of a group that includes Allan P. Rothstein.
The shares indicated on the table for both individuals are as reported on
their Schedule 13-G dated March 20, 1998, and assumed the conversion of
their outstanding Series B Preferred Stock at a conversion price equal to
80% of the then-prevailing trading price of the Company's Common Stock.
The shares indicated in the table do not include an additional estimated
632,044 shares of Common Stock potentially issuable to each of them
pursuant to the conversion of their outstanding Series B Preferred Stock on
June 11, 1998 (they each had 450 shares of Series B Preferred Stock), which
shares could not be issued because the Company did not have sufficient
authorized but unissued Common Stock. Mr. Kaplowitz and Mr. Rothstein did
not rescind the conversion of their Series B Preferred Stock and are
awaiting the issuance of the Common Stock issuable to them if and when the
Company increases the number of its authorized shares of Common Stock.
(4) Assumes 20,000,000 shares of the Company's Common Stock outstanding. Does
not include 510,000 vested stock options issued to Current Directors and
executive officers of the Company, which are at exercise prices ranging
from $4.25 to $4.87 per share. Does not include 1,500,000 shares of stock
that have been reserved for the settlement of the Class Action Lawsuit.
This reserve does not necessarily reflect the terms upon which the
settlement of the Class Action Lawsuit, if any, may be effected. Does not
include 9,819,235 shares of Common Stock issuable pursuant to the
conversion of outstanding Preferred Stock which was rescinded, and for
which no authorized shares were left to issue upon the conversion on June
11, 1998. Does not include 1,568,571 shares of the Company's Common Stock
which would have been issuable upon the conversion of outstanding Series A
and Series B Convertible Preferred Stock on June 11, 1998, but for which no
authorized shares were available, and for which the conversions were not
rescinded. The number of shares of Common Stock into which these
outstanding shares of Preferred Stock are convertible is uncertain at this
time.
-8-
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
<TABLE>
<CAPTION>
Percent of Shares of
Name of Amount and Nature Common Stock
Beneficial Owner of Beneficial Ownership Outstanding (5)
- ---------------- ----------------------- ---------------------
<S> <C> <C>
Nancy S. Zivitz 202,300 (1) 1.0%
David Wilstein 537,179 2.7%
Richard M. Horowitz 332,400 1.7%
Rolf Lesem 98,000 0.5%
Melvyn H. Reznick 53,400 (2) 0.27%
Mark J. Richardson __ (3) 0%
Dr. Howard Silverman __ (4) 0%
Michael Keebaugh __ 0%
Debra Chuckas __ 0%
Eric Hoffberg __ 0%
All directors and 1,203,279 6.0%
officers as a
group (10 persons)
</TABLE>
- ------------------------------
(1) Does not include stock options or warrants to purchase 85,000 shares owned
by Mrs. Zivitz, a member of the Company's Board of Directors, 50,000 of
which have an exercise price of $4.37 per share and 35,000 of which have an
exercise price of $4.25 per share. The stock options are exercisable as
follows: 25,000 at any time until February 28, 2001, 25,000 at any time
until January 1, 2002, and 35,000 at any time until January 22, 2002. The
Company has been informed that Mrs. Zivitz has sold all of the shares of
the Company's Common Stock reported in the table.
(2) Does not include stock options to purchase 25,000 shares at an exercise
price of $4.87 per share, exercisable at any time until February 28, 2001,
stock options to purchase 25,000 shares at an exercise price of $4.87 per
share, exercisable at any time until May 31, 2001, stock options to
purchase 25,000 shares at an exercise price of $4.87 per share, exercisable
at any time until August 31, 2001, stock options to purchase 25,000 shares
at an exercise price of $4.87 per share, exercisable at any time until
November 30, 2001, and stock options to purchase 200,000 shares at an
exercise price of $4.37 per share, exercisable at any time until April 5,
2001, with respect to 100,000 of the optioned shares, February 28, 2002,
with respect to 25,000 of the optioned shares, May 31, 2002, with respect
to 25,000 of the optioned shares, and September 3, 2003 with respect to
50,000 of the optioned shares. Does not include stock options to purchase
150,000 shares at an exercise price of $4.87 per share, which do not vest
until RCI achieves certain financial performance goals, and stock options
to purchase 50,000 shares at an exercise price of $4.37 per share, which do
not vest until RCI becomes a public company. The unvested stock options
will expire as a result of the Settlement Agreement between the Company and
Mr. Reznick. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
(3) Does not include stock options to purchase 30,000 shares at an exercise
price of $4.37 per share, and stock options to purchase 20,000 shares at an
exercise price of $4.25 per share, exercisable at any time until February
28, 2001 and January 22, 2002, respectively.
(4) Does not include stock options to purchase 35,000 shares of the Company's
Common Stock at an exercise price of $4.25 per share, exercisable at any
time until January 22, 2002.
-9-
<PAGE>
(5) Assumes 20,000,000 shares of the Company's Common Stock outstanding. Does
not include 510,000 vested stock options issued to Current Directors and
executive officers of the Company, which are at exercise prices ranging
from $4.25 to $4.87 per share. Does not include 1,500,000 shares of stock
that have been reserved for the settlement of the Class Action Lawsuit.
This reserve does not necessarily reflect the terms upon which the
settlement of the Class Action Lawsuit, if any, may be effected. Does not
include 9,819,235 shares of Common Stock issuable pursuant to the
conversion of outstanding Preferred Stock which was rescinded, and for
which no authorized shares were left to issue upon the conversion on June
11, 1998. Does not include 1,568,571 shares of the Company's Common Stock
which would have been issuable upon the conversion of outstanding Series A
and Series B Convertible Preferred Stock on June 11, 1998, but for which no
authorized shares were available, and for which the conversions were not
rescinded. The number of shares of Common Stock into which these
outstanding shares of Preferred Stock are convertible is uncertain at this
time.
Following completion of the transactions contemplated by the Board Change
Agreement, the relative shareholdings of the Current Board and Mr. Casey will
remain unchanged, except to the extent that the Company redeems the Cohen
Preferred Stock or Mr. Casey exercises his option to purchase the Cohen
Preferred Stock, as contemplated by the Board Change Agreement. See paragraph 6
under "THE BOARD CHANGE AGREEMENT."
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
CURRENT DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors prior to the transactions contemplated by
the Board Change Agreement consists of six members, with one vacancy. The Board
is authorized to establish the number of directors in a range of five to nine.
As part of the transactions contemplated by the Board Change Agreement, the
number of members of the New Board after the Board Change are expected to be
four, although the New Board has the ability to appoint additional board members
within the current authorized range of five to nine members. After the Board
Change, the New Board is expected to amend the Bylaws to conform to the actual
number of directors on the New Board who will be appointed following the Board
Change.
Listed below are the Current Directors and executive officers of the
Company prior to the transactions contemplated by the Board Change Agreement,
followed by their business experience:
MELVYN H. REZNICK, 55, has been the President, Chief Executive Officer
and Chief Financial Officer of the Company since November 1995 and the
Chairman of the Board since May 9, 1996. He also serves as the Chief
Executive Officer, Chairman of the Board of Directors, and Chief
Financial Officer of GenSource Corporation ("GenSource") since its
acquisition by the Company on May 2, 1997. He has 30 years of experience
in engineering, manufacturing, management, marketing, real estate and
corporate development. Since 1978, he has been a partner in two real
estate companies, Property Research and Management Co. and PRM Realty.
Prior to entering the real estate industry, he was an engineer in the
aerospace industry. He has a Bachelor of Science and a Master of
Science in Mechanical Engineering from the Massachusetts Institute of
Technology and is a member of the Society of Sigma Xi. He is also an
active member of the National Association of Corporate Directors (NACD).
DR. HOWARD SILVERMAN, 57, joined the Company's Board in January 1997 to
fill a vacancy on the Board. He is presently an independent consultant
in the field of investment
-10-
<PAGE>
banking. From November 1996 to October 1997, he served as an investment
banking consultant with Andrew, Alexander, Wise & Co. (New York, New
York). From May 1995 to November 1996, Dr. Silverman served as Vice
President of Corporate Finance for Rickel & Associates. From 1991 until
he joined Rickel, he served as an independent consultant to development
stage and mid-sized operating companies. From 1985 to 1991, he was the
founder and Board Chairman of Vision Sciences, a company that developed,
manufactured and sold in-office lens casting systems. In 1968, Dr.
Silverman received a Doctor of Optometry from Illinois College of
Optometry and in 1965, he received a Chemical Engineering degree from
the College of the City of New York.
DAVID WILSTEIN, 70, joined the Company's Board in August 1997 to fill a
vacancy. He is the President and Chairman of the Realtech Group, a real
estate development and management firm in Los Angeles, California, which
he founded in 1968. He is also the Chairman of the Board of Aero
Products Research, a company that develops plastic products, and a
member of the Board of C.I. Systems, a company that develops
electro-optical test equipment. Mr. Wilstein has a Bachelor of Science
in Civil Engineering from the University of Pittsburgh.
NANCY S. ZIVITZ, 49, joined the Company's Board in November 1995. From
1987 to 1991, she was Senior Vice President of City National Bank in
Washington, D.C. where she was head of the Retail Banking Unit. From
1991 to the present, she has been involved in community service for such
organizations as the Coalition of Christians and Jews and the
Association of Professional Women. She has a Bachelor of Business
Administration from George Washington University.
ROLF LESEM, 66, was elected to the Board of Directors by shareholders at
the Company's Annual Meeting of the Shareholders on December 15, 1997.
He received his Bachelor's of Mechanical Engineering from Cooper Union
School of Engineering in 1953 and his Master's of Science in Mechanical
Engineering from Cornell University in 1955. He has also taken graduate
courses at UCLA. Mr. Lesem has spent his career as a mechanical
engineer in the aerospace industry. Since 1995, he has been involved in
the design of ruggedized handheld computing systems for Litton Data
Systems in Moorpark, California. In 1993 and 1994, Mr. Lesem was
involved in the design of photographic processing equipment for
Colourtronic in Chatsworth, California. From 1986 to 1993, he worked
for Teledyne Systems Co. in Northridge, California, designing air and
spacecraft subsystems.
MARK J. RICHARDSON, 45, has been the Corporate Secretary of the Company
since May 26, 1998. Mr. Richardson has been in the private practice of
law specializing in finance, transactions, corporations, limited
liability companies and partnerships since 1978, and has had his own law
firm since June 1993. Mr. Richardson earned a Bachelor of Science from
the University of Michigan School of Natural Resources and graduated
summa cum laude with Phi Beta Kappa honors in 1975. In 1978, Mr.
Richardson earned a Juris Doctor from the University of Michigan Law
School, graduating cum laude.
RICHARD M. HOROWITZ, 56, joined the Company's Board in August 1997 to
fill a vacancy. He has served as President of Management Brokers
Insurance Agency in Beverly Hills, California since 1974. He also
serves as Chairman of Leviathan Corporation, a computer sales,
consulting and software company, and Chairman of Dial 800, Inc., a
telecommunication company. Since 1990, he has been a member of the Board
of Directors of Trio-Tech International, a company that produces
environmental testing equipment. He has a Masters of Business
Administration from Pepperdine University.
-11-
<PAGE>
MICHAEL J. KEEBAUGH, 43, has been the Vice President of Operations of
NTC since March 1997. As Vice President of Operations, Mr. Keebaugh is
responsible for the NTC Call Center, facilities management, billing,
collections, and order processing, as well as the ongoing relationship
with key vendors. Prior to joining NTC, Mr. Keebaugh was the Vice
President of Operations for GE Capital Commercial Direct in Atlanta,
Georgia, and the Vice President of Operations for Mid Communication,
Inc. in Seattle, Washington. GE Capital Commercial Direct and Mid
Communication, Inc. are both long distance telephone service resale
companies. Prior to joining Mid Communication, Inc. in May 1995, Mr.
Keebaugh worked in a variety of management positions, including National
Customer Support Manager, for Sprint Communications in Overland Park,
Kansas. Mr. Keebaugh has a Bachelor of Science degree from Bowling
Green State University in Ohio.
DEBRA A. L. CHUCKAS, 38, is the Senior Vice President of Marketing
Support for NTC and has held a number of other marketing positions with
NTC since she joined that company in June 1993. As Senior Vice
President of Marketing Support, Ms. Chuckas directs the development and
implementation of long distance service marketing programs as well as
the ongoing support of NTC's independent sales representatives. Prior
to joining NTC, Ms. Chuckas held management positions in the retail
industry where she was responsible for the management of a women's
apparel chain. Ms. Chuckas has also held positions in the marketing,
communication and management fields in the hotel industry in Chicago and
New Orleans. Ms. Chuckas holds a Bachelors of Arts in Business
Administration from the University of Hawaii.
ERIC HOFFBERG, 43, has been employed at GenSource since January 1990
(formerly CIC until October 15, 1997 when its name was changed to
GenSource) and has more than 20 years of experience in the insurance
industry. From January 1991 to his promotion to President and Chief
Operating Officer upon the acquisition of GenSource by the Company, he
served as GenSource's Vice President of System Services. From January
1990 to December 1990, he served as the Director of Systems &
Programming for GenSource. Prior to joining GenSource, he worked as
Assistant Vice President & MIS Director for a subsidiary of Continental
Insurance from 1988 to 1990. Mr. Hoffberg is married to Nora Kenner, an
officer of GenSource. In 1976, he received a Bachelor of Arts in
Business Administration from Long Beach State University.
THE NEW DIRECTORS
The following information concerning the New Directors was provided by the
New Directors and the Company assumes no responsibility for the accuracy or
completeness of such information. The New Directors will take their positions
at the Effective Time.
Other than Mr. Casey, none of the New Directors or their associates
beneficially owns any equity securities or the right to acquire any equity
securities of the Company, or has been involved in any transaction with the
Company or any of its Current Directors or executive officers that is required
to be disclosed pursuant to the rules and regulations of the SEC. Each of the
New Directors is a United States citizen. None of the New Directors currently
holds positions with the Company or any of its subsidiaries. Each of the New
Directors has consented to be a director of the Company.
JOHN P. CASEY, 49, has been a director and Senior Vice President,
Financial Marketing for Meridian Investments, Inc., an NASD registered
broker-dealer ("Meridian"), since 1981. Meridian is a privately held
company and Mr. Casey believes that it is one of the largest originators
of tax credit equity in the United States. Mr. Casey is primarily
responsible for the design of financial marketing plans for Meridian.
It is contemplated that following the
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<PAGE>
Board Change, Mr. Casey will serve as Chairman of the Company. Since
1996, Mr. Casey has served as a director of Val-u-net and since 1997 he
has served as a director of 1-800-Database, which are privately held
companies involved in electronic commerce and internet technologies.
Mr. Casey also currently serves as a director of the Make-a-Wish
Foundation for the Mid-Atlantic region. Mr. Casey received a Bachelor
of Science degree in Political Science in 1971 from the University of
Massachusetts (Boston State College).
JOHN P. HILL, JR., 38, is the President of Quince Associates, a closely
held company with investments in real estate, retail convenience stores,
restaurants, technology and various other public and private companies.
Since 1989, he has also served as President of Trans Pacific Stores,
Ltd., a privately held operator of retail stores. Since 1997, Mr. Hill
has served as a director of Covol Technologies, Inc., a publicly traded
technology development company based in Utah. Prior to 1989, Mr. Hill
was the Chief Financial Officer for various privately held retail and
restaurant companies. Mr. Hill received a Bachelor of Science degree in
Accounting from the University of Maryland and became a certified public
accountant in 1984.
MICHAEL A. STEIN, 49, is the Executive Vice President and Chief
Financial Officer of Marriott International, Inc., a position to which
he was appointed in 1993. Mr. Stein is responsible for Marriott's
treasury, corporate and project finance, investor relations,
controllership, tax, risk management and internal audit functions.
Marriott is headquartered in Washington, D.C., and has approximately
129,000 employees. Mr. Stein joined Marriott in 1989 as its Vice
President, Finance and Chief Accounting Officer. Prior to joining
Marriott, Mr. Stein spent 18 years with Arthur Andersen LLP where he was
a partner. Mr. Stein graduated from the University of Maryland and is a
certified public accountant.
As explained above and in Mr. Casey's Schedule 13-D, as amended, Mr. Casey
beneficially owns 6,137,504 shares of Common Stock and an option to purchase
1,598.2 shares of Preferred Stock from the Cohen Group. Mr. Casey purchased
1,907,404 shares of his Common Stock using a credit facility ("Credit Facility")
provided by Trans Pacific Stores, Ltd., a Hawaiian corporation. The Credit
Facility is secured by a pledge of certain personal assets of Mr. Casey not
including any of Mr. Casey's shareholdings in the Company. The Credit Facility
bears a simple interest rate of 18% per annum and has no minimum periodic
payments and no prepayment penalties. The Credit Facility is due and payable in
full with accrued interest by no later than June 30, 1999, unless the parties
mutually agree upon an extension. As described above, John P. Hill, Jr., a New
Director, is President of Trans Pacific Stores, Ltd.
The Company understands that Mr. Casey and the New Board will seek the
appointment of new senior officers of the Company and NTC, including a new
Chief Executive Officer and Chief Financial Officer. To date, Mr.Casey has
not informed the Company as to the identity of any of these new officers.
COMMITTEES AND MEETINGS OF THE BOARD
During the fiscal year ended December 31, 1997, the Board of Directors held
14 regular meetings. All directors attended 100% of all meetings of the Board
and of each Committee of the Board of which the director was a member, except
that two directors missed one meeting each. The Current Directors do not
receive cash compensation for attending Board or Committee meetings and may
receive discretionary stock option grants. The Current Directors are reimbursed
for their expenses incurred in connection with meetings of the Board and its
Committees.
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<PAGE>
The Company has standing Executive, Audit and Compensation Committees.
The Company does not have a standing nominating committee, or any committees
performing similar functions. The members of each Committee are elected by
the Board at its annual organization meeting for a term of one year or until
the member's successor is duly elected.
The Executive Committee, as of September 11, 1998, was comprised of
Melvyn H. Reznick, David Wilstein and Rolf Lesem. The Executive Committee
functions as the liaison between the executive officers of the Company and
the Board. The Executive Committee provides oversight of management for the
Board. It evaluates reports by management and makes recommendations to the
Board from time to time. The Executive Committee is also authorized to act
on behalf of the Board in certain cases when specifically authorized to do so
by Board resolution.
The Audit Committee, as of September 11, 1998, was comprised of Nancy S.
Zivitz and is responsible for overseeing the work of the Company's
independent public accountants.
The Compensation Committee, as of September 11, 1998, was comprised of
Dr. Howard Silverman and Nancy S. Zivitz and administers the Company's
executive compensation programs and determines the compensation of senior
management.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors, executive officers, and persons who own
more than ten percent of a registered class of the Company's equity
securities, to file initial reports of ownership and reports of changes in
ownership with the Securities and Exchange Commission. Based on copies of
such reports furnished to the Company, there were no reportable untimely
filings under Forms 3, 4 or 5 by persons subject to Section 16(a) of the
Securities Exchange Act of 1934, as amended, during the last fiscal year.
EXECUTIVE COMPENSATION
The following summary compensation tables set forth the annual cash and
stock option compensation for the Company's Chief Executive Officer and its
other four most highly compensated executive officers serving as of December
31, 1997 and the compensation paid to them by the Company (including its
subsidiaries) for each of the last three completed fiscal years.
SUMMARY CASH COMPENSATION
<TABLE>
<CAPTION>
Name of Individual Position 1997 1996 1995
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
James R. Quandt (1) President, NTC $572,469 (2) $ -- $ --
- -------------------------------------------------------------------------------------------------------
Edward R. Jacobs (3) Chairman, NTC $484,157 (3) $405,471 (3) $292,499 (3)
- -------------------------------------------------------------------------------------------------------
Victor C. Streufert (4) Chief Financial Officer, $335,189 (5) $-- $--
NTC
- -------------------------------------------------------------------------------------------------------
Melvyn H. Reznick (6) President, Incomnet $250,000 $350,000 (7) $15,234 (8)
- -------------------------------------------------------------------------------------------------------
Louis Cheng Vice President, NTC $176,615 $-- $--
- -------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
(1) Mr. Quandt has entered into a settlement agreement with NTC pursuant to
which his employment with NTC terminated on August 31, 1998. Under the
settlement agreement, Mr. Quandt will receive six months of his annual
salary as severance pay to be paid over a 12-month period, and may receive
additional consideration for consulting services or as an incentive in the
event NTC becomes a public company or is acquired within two years of the
separation agreement.
(2) Consists of salary of $461,539 and a cash bonus of $122,707.
(3) All compensation was received as cash in the form of salary. Does not
include proceeds of loans made to Mr. Jacobs by NTC. Mr. Jacobs' employment
agreement with NTC was terminated for cause on June 30, 1998.
(4) Mr. Struefert has entered into a settlement agreement with NTC pursuant to
which his employment with NTC terminated on July 31, 1998. Under the
settlement agreement, Mr. Struefert will receive six months of his annual
salary as severance pay to be paid over a 12-month period, and may receive
additional consideration for consulting services or as an incentive in the
event NTC becomes a public company or is acquired within two years of the
separation agreement.
(5) Consists of a salary of $240,000 and a cash bonus of $75,000.
(6) Mr. Reznick has entered into a settlement agreement with the Company
pursuant to which Mr. Reznick will resign his positions with the Company
and GenSource. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS --
Settlement Agreement with Melvyn Reznick."
(7) Consists of a salary of $175,000 and a cash bonus of $175,000.
(8) Consists of cash compensation for one month of service based upon an annual
salary of $182,800 per year.
SUMMARY STOCK OPTION COMPENSATION
No stock options were granted by the Company in the fiscal year ending
December 31, 1997 nor during the eight months ended August 31, 1998. No stock
options were exercised by any holders of options to purchase the Company's
Common Stock during the fiscal year ending December 31, 1997 nor during the
eight months ended August 31, 1998. No executive officers, directors or key
consultants of the Company held unexercised options to purchase the Common Stock
of the Company on December 31, 1997 or on August 31, 1998 which have an exercise
price below the closing bid prices of the Company's Common Stock on the NASDAQ
Small Cap Market on those dates. The Company does not have any other long-term
incentive plans or pension plans for its executives officers and directors, and
no repricing of stock options previously granted to the Company's executive
officers, directors or key consultants occurred during the fiscal year ending
December 31, 1997 or the eight months ending August 31, 1998.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee, consisting solely of non-employee directors,
administers the Company's executive compensation programs and determines the
compensation of senior management. Part of this compensation, as described
above, is paid pursuant to employment agreements with Melvyn H. Reznick and
Stephen A. Caswell. In determining compensation for
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<PAGE>
senior management, the Committee seeks to evaluate the officer's performance
during the year, taking into consideration the Company's performance, the
officer's level of responsibility for such performance, the officer's
experience, any market or other conditions outside the officer's control that
may have affected performance, the achievement of any specified goals or
objectives relating to the officer's position, and other factors. Based on
its evaluation, the Committee may recommend increases or decreases in
standard senior management compensation, the award of bonus compensation, the
grant of stock options, or other incentives in appropriate circumstances. At
the meeting of the Board on December 15, 1997 which followed the annual
meeting of the shareholders of the Company on that date, the Compensation
Committee determined not to increase the compensation of any director,
officer or employee of the Company in light of the Company's financial
condition and results of operations.
By Order of the Compensation Committee
Dr. Howard Silverman and Nancy S. Zivitz
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Dr. Silverman and Mrs. Zivitz,
neither of whom is or were an officer or employee of the Company or any of its
subsidiaries. Except as follows, none of the members of the Compensation
Committee had any other relationships that would require disclosure by the
Company pursuant to Item 404 of Regulation S-K ("Certain Relationships and
Related Transactions"). On November 5, 1996, the Company extended to
Mrs. Zivitz and her husband, Clarence Robert Zivitz, a loan of $265,000 at an
interest rate of 10% per annum. The loan was secured by 201,800 shares of the
Company's Common Stock which was delivered to the Company by Mr. And
Mrs. Zivitz. On January 15, 1997, the note was extended until May 1, 1997. A
new note was signed on May 1, 1997 for $277,955 bearing interest at a rate of
10% per annum, due and payable in full on January 15, 1998. On July 24, 1998,
Mrs. Zivitz repaid the note in full in cash.
-16-
<PAGE>
PERFORMANCE GRAPH
The Company's Common Stock is traded on the NASDAQ Small Capital Market under
the trading symbol ICNT. As announced in a recent press release, the Company
has filed for an automatic stay of a proposed delisting of its securities from
the NASDAQ Small Cap Market because the Company does not satisfy the NASDAQ's
minimum listing criterion of at least $2 million in net tangible assets. The
NASDAQ Stock Market has not yet informed the Company of the date scheduled for
the hearing for the Company's appeal of the delisting notice. The following
chart shows a five year comparison of cumulative total returns for the Company's
Common Stock, the NASDAQ Composite Stock Index and the NASDAQ Telecommunications
Stock Index ("NASDAQ - Telecom"). The comparison shows the percentage increase
of the indices at of the end of each quarter from January 1, 1993 through
December 31, 1997, with each index beginning with a value of 100. The total
cumulative return on investment (percentage change in the year end stock price
plus reinvested dividends) for each of the periods for the Company's Common
Sock, the NASDAQ Composite Stock Index and the NASDAQ - Telecommunications Stock
Index is based on the stock price or composite index at the end of 1992.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dec 92 Mar 93 Jun 93 Sep 93 Dec 93 Mar-94 Jun-94 Sep-94 Dec-94
NASDAQ 100.0 101.9 103.8 112.5 114.1 109.4 104.3 112.9 111.6
NASDAQ Telecom 100.0 111.1 127.6 150.4 154.1 132.9 127.6 139.2 127.7
Incomnet 100.0 84.9 128.3 111.3 118.9 128.3 184.9 215.1 275.5
Mar-95 Jun-95 Sep-95 Dec-95 Mar-96 Jun-96 Sep-96 Dec-96
124.5 142.4 159.6 161.5 169.1 183.0 189.5 198.8
132.7 140.4 160.2 153.5 177.3 182.9 172.1 172.4
271.7 283.0 207.5 86.8 101.9 90.6 81.1 56.6
Mar-97 Jun-97 Sep-97 Dec-97
188.1 222.6 260.3 244.1
160.3 201.2 233.5 254.7
59.0 92.0 68.4 22.4
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NOTE RECEIVABLE FROM OFFICER
On November 15, 1995, the Company loaned $300,000 to Stephen A. Caswell on
a non-recourse basis. The loan was increased to $340,000 plus interest, during
1996. Mr. Caswell was an officer of the Company at the time of the
transactions and is currently an employee of GenSource. The note receivable was
in connection with the exercise of Mr. Caswell's options to purchase the
Company's Common Stock at the request of the Company's former President. The
Company has agreed to look only to the shares of the Company held by Mr. Caswell
(currently 20,000 shares) as a source of loan repayment. Accordingly, a reserve
of $208,800 was provided in the fourth quarter of 1995, representing the
difference between the then-market value of the shares held by Mr. Caswell and
the then-amount of the loan. In January 1997, Mr. Caswell agreed to add to the
collateral against the outstanding loan by pledging newly-granted stock options
that were issued to him to acquire 40,000 shares of stock at $4.25 per share.
The Company also agreed that it would pay all tax-related
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<PAGE>
expenses that Mr. Caswell might incur if the loan is not repaid in full. As
of September 11, 1998, Mr. Caswell has made no principal or interest payments
on the note receivable.
LOAN BY THE COMPANY TO A DIRECTOR
On November 5, 1996, the Company extended to Nancy Zivitz, a member of the
Board, and her husband, Clarence Robert Zivitz, a loan of $265,000 at an
interest rate of 10% per annum. The loan was secured by 201,800 shares of the
Company's Common Stock which was delivered to the Company by Mr. and Mrs.
Zivitz. On January 15, 1997, the note was extended until May 1, 1997. A new
note was signed on May 1, 1997 for $277,955 bearing interest at a rate of 10%
per annum, due and payable in full on January 15, 1998. On July 24, 1998, Mrs.
Zivitz repaid the note in full in cash.
SETTLEMENT AGREEMENT WITH MELVYN H. REZNICK
The Company and Melvyn H. Reznick, the President and Chairman of the Board
of Directors of the Company, have entered into a settlement agreement (the
"Settlement Agreement") pursuant to which Mr. Reznick will resign his positions
as President and Chairman of the Board of Directors of the Company, and Chief
Executive Officer and Chairman of the Board of Directors of GenSource. Under
the Settlement Agreement, Mr. Reznick's employment and his position as a
director and officer of the Company and as an officer and director of GenSource
will terminate on the earlier of (i) September 30, 1998, or (ii) the Board
Change. For the period from October 1, 1998 to September 30, 1999, Mr. Reznick
will be paid his annual salary of $250,000 and his automobile allowance of $650
per month regardless of his other income during that period, if any, except
that he will not receive the automobile allowance if he is receiving one from
another source during that period. For the period from October 1, 1999 to
September 30, 2000, Mr. Reznick will be paid his annual salary of $250,000 and
his monthly automobile allowance of $650 per month, less any earnings or
automobile allowances he is paid during that period from other sources. Mr.
Reznick is not required to mitigate severance payments during the first 12
months after the termination of his employment, but is required to utilize his
best efforts to mitigate severance compensation during the second 12 months
after the termination.
The Settlement Agreement provides for the maintenance of health insurance
coverage for Mr. Reznick for two years after the termination, subject to
mitigation. Mr. Reznick is also entitled to retain his 300,000 vested stock
options for the entire period during which they are exercisable had he remained
employed by the Company. Mr. Reznick is obligated to provide up to 40 hours per
month of consulting services for the Company, NTC and GenSource during the first
12 months after the termination, and up to 10 hours per month during the second
12 months after the termination. Consulting hours in excess of 40 hours and 10
hours, respectively, will be compensated at the rate of $150 per hour.
Pursuant to the Settlement Agreement, each of the Company, NTC and
GenSource will indemnify Mr. Reznick to the extent permitted under California
law. The Settlement Agreement also includes general releases by each of the
Company, NTC and GenSource of Mr. Reznick, and by Mr. Reznick of each of the
Company, NTC and GenSource.
SEPARATION AGREEMENTS WITH NTC OFFICERS
In July 1998, NTC entered into severance agreements with James R. Quandt
pursuant to which his employment agreement with NTC was terminated effective
August 31, 1998, and with Victor Struefert pursuant to which his employment
agreement with NTC was terminated effective
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<PAGE>
July 31, 1998. See footnotes (1) and (4) under "DIRECTORS AND EXECUTIVE
OFFICERS OF THE COMPANY - Executive Compensation - Total Cash Compensation."
EXHIBITS
A copy of the Board Change Agreement is included as Exhibit A to this
Information Statement.
By Order of the Board of Directors
/s/ MARK J. RICHARDSON
-------------------------
Mark J. Richardson, Esq.
Corporate Secretary
September 11, 1998
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<PAGE>
EXHIBIT A
BOARD CHANGE AGREEMENT
AMONG
INCOMNET, INC.,
THE CURRENT DIRECTORS OF INCOMNET, INC.
AND
JOHN P. CASEY
August 28, 1998
<PAGE>
TABLE OF CONTENTS
PAGE
1. RESIGNATION AND APPOINTMENT OF DIRECTORS; BOARD MATTERS. . . . . . . . . 3
1.1. Resignation of Directors. . . . . . . . . . . . . . . . . . . . . 3
1.2. Appointment of Directors. . . . . . . . . . . . . . . . . . . . . 3
1.3. Committees of New Board.. . . . . . . . . . . . . . . . . . . . . 3
1.4. Reelection of Silverman.. . . . . . . . . . . . . . . . . . . . . 3
1.5. Number of Directors . . . . . . . . . . . . . . . . . . . . . . . 3
2. CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . 4
3.1. Representations of Individuals. . . . . . . . . . . . . . . . . . 4
3.2. Company Representations to Individuals. . . . . . . . . . . . . . 4
3.3. Additional Company Representations to Casey.. . . . . . . . . . . 5
3.4. Additional Casey Representations to Company.. . . . . . . . . . . 6
4. COVENANTS OF COMPANY AND CURRENT BOARD PRIOR TO CLOSING. . . . . . . . . 6
4.1. Access; Shareholders' List. . . . . . . . . . . . . . . . . . . . 6
4.2. Required Approvals; Conditions. . . . . . . . . . . . . . . . . . 6
4.3. Notification. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.4. Stand Still.. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5. COVENANTS OF CASEY PRIOR TO CLOSING. . . . . . . . . . . . . . . . . . . 8
5.1. Required Approvals; Conditions. . . . . . . . . . . . . . . . . . 8
5.2. Notification. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6. ADDITIONAL AND CONTINUING COVENANTS. . . . . . . . . . . . . . . . . . . 8
6.1. Additional Financing. . . . . . . . . . . . . . . . . . . . . . . 8
6.2. Assignment of Cohen Option. . . . . . . . . . . . . . . . . . . . 8
(i)
<PAGE>
6.3. Increase in Number of Authorized Shares.. . . . . . . . . . . . . 9
6.4. Exercise of Cohen Option by Casey; Redemption of Cohen
Preferred Stock.. . . . . . . . . . . . . . . . . . . . . . . . . 9
6.5. Inability to Redeem Cohen Option or Cohen Preferred Stock;
Conversion of Cohen Preferred Stock into Common Stock;
Agreement to Conduct Offering of Common Stock.. . . . . . . . . . 9
6.6. Confidentiality.. . . . . . . . . . . . . . . . . . . . . . . . . 10
7. CONDITIONS PRECEDENT TO CASEY'S OBLIGATION TO CLOSE. . . . . . . . . . . 10
7.1. Approval and Conditional Appointment of Casey
Board Designee .. . . . . . . . . . . . . . . . . . . . . . . . . 10
7.2. Class Action Lawsuit Settlement.. . . . . . . . . . . . . . . . . 11
7.3. Directors' and Officers' Insurance Coverage.. . . . . . . . . . . 11
7.4. Rescission of Autonomy Agreement. . . . . . . . . . . . . . . . . 11
7.5. Rescission of Supermajority Bylaw Provision.. . . . . . . . . . . 11
7.6. Cohen Group Approval. . . . . . . . . . . . . . . . . . . . . . . 11
7.7. NTC Secured Creditor Matters; No Liquidation Proceedings. . . . . 11
7.8. Information Statement.. . . . . . . . . . . . . . . . . . . . . . 11
7.9. Accuracy of Representations.. . . . . . . . . . . . . . . . . . . 12
7.10. Performance of Covenants.. . . . . . . . . . . . . . . . . . . . . 12
7.11. Additional Documents.. . . . . . . . . . . . . . . . . . . . . . . 12
7.12. No Legal Proceedings.. . . . . . . . . . . . . . . . . . . . . . . 12
8. CONDITIONS PRECEDENT TO COMPANY'S AND CURRENT
BOARD'S OBLIGATION TO CLOSE . . . . . . . . . . . . . . . . . . . . . . 12
8.1. Approval and Conditional Appointment of Casey Board Designee. . . 12
8.2. Cohen Group Approval. . . . . . . . . . . . . . . . . . . . . . . 13
8.3. Information Statement.. . . . . . . . . . . . . . . . . . . . . . 13
8.4. Accuracy of Representations.. . . . . . . . . . . . . . . . . . . 13
8.5. Performance of Covenants. . . . . . . . . . . . . . . . . . . . . 13
8.6. Additional Documents. . . . . . . . . . . . . . . . . . . . . . . 13
8.7. No Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 13
(ii)
<PAGE>
9. SPECIFIC RELEASES; COVENANT NOT TO SUE AND RELATED MATTERS . . . . . . . 13
9.1. Specific Releases.. . . . . . . . . . . . . . . . . . . . . . . . 13
9.2. Covenant not to Sue.. . . . . . . . . . . . . . . . . . . . . . . 14
9.3. Waiver of Statutory Provision.. . . . . . . . . . . . . . . . . . 14
9.4. Indemnity.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
9.5. Certain Definitions.. . . . . . . . . . . . . . . . . . . . . . . 15
9.6. Maintenance of D&O Insurance. . . . . . . . . . . . . . . . . . . 16
9.7. Enforcement.. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
10. TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
10.1. Termination Events. . . . . . . . . . . . . . . . . . . . . . . . 16
10.2. Effect of Termination.. . . . . . . . . . . . . . . . . . . . . . 17
11. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
11.1. Rules of Construction.. . . . . . . . . . . . . . . . . . . . . . 17
11.2. Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
11.3. Survival of Representations and Covenants.. . . . . . . . . . . . 18
11.4. Notices.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
11.5. Equitable Remedies. . . . . . . . . . . . . . . . . . . . . . . . 18
11.6. Entire Agreement; Amendment.. . . . . . . . . . . . . . . . . . . 19
11.7. Successors; Assignment. . . . . . . . . . . . . . . . . . . . . . 19
11.8. Governing Law.. . . . . . . . . . . . . . . . . . . . . . . . . . 19
11.9. Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . 19
11.10. Attorneys' Fees.. . . . . . . . . . . . . . . . . . . . . . . . . 19
11.11. Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . 19
11.12. Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
11.13. Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
(iii)
<PAGE>
BOARD CHANGE AGREEMENT
This Board Change Agreement (this "Agreement") is made and entered
into as of August 28, 1998, by and among Incomnet, Inc., a California
corporation (the "Company"), Richard Horowitz, an individual ("Horowitz"),
Rolf Lesem, an individual ("Lesem"), Melvyn Reznick, an individual
("Reznick"), Howard Silverman, an individual ("Silverman"), David Wilstein,
an individual ("Wilstein"), Nancy Zivitz, an individual ("Zivitz"), and John
P. Casey, an individual ("Casey").
R E C I T A L S
A. The current members of the Board of Directors of the Company are
Horowitz, Lesem, Reznick, Silverman, Wilstein and Zivitz (collectively, the
"Current Board").
B. Casey beneficially owns 6,137,504 shares of the Common Stock
("Common Stock") representing approximately 31% of the Company's outstanding
Common Stock as more fully described in the Schedule 13D filed by Casey
(listing the Company as the issuer) with the Securities and Exchange
Commission (the "SEC") on April 7, 1998 and as subsequently amended (as
amended, the "Casey Schedule 13D").
C. As more fully described in the Casey Schedule 13D, Casey has an
option (the "Cohen Option") to purchase shares of the Company's Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock
(collectively, the "Preferred Stock"), pursuant to the Option Agreement dated
as of July 15, 1998 (the "Option Agreement"), among Casey, Robert Cohen,
Stefanie Rubin, Allyson Cohen, Jeffrey Cohen, Alan Cohen, Lenore Katz,
Broadway Partners, Meryl Cohen, Gabrielle Cohen, Jaclyn Cohen, Erica Cohen
and Nicole Cohen (collectively, the "Cohen Group"). Under the Option
Agreement, Casey has the right to purchase 1,598.211 shares of Preferred
Stock (the "Cohen Preferred Stock") for $2.3 million plus certain accrued
dividends and penalties as provided in the Option Agreement (the "Cohen
Exercise Price"). The Preferred Stock is convertible into shares of the
Common Stock. As disclosed in the Casey Schedule 13D, Casey believes that,
if he exercised the Cohen Option to acquire the Cohen Preferred Stock and
elected to convert the Cohen Preferred Stock into shares of the Common Stock,
these shares, upon issuance, would represent approximately 27% of the
post-conversion outstanding Common Stock. All of the Company's authorized
Common Stock is currently issued and outstanding and, accordingly, the
Company currently does not have shares of its Common Stock available for
issuance in order to meet its obligations to issue Common Stock upon
conversion of the outstanding shares of Preferred Stock and certain other
outstanding options and warrants to purchase Common Stock.
D. The Cohen Group previously attempted to convert the Cohen Preferred
Stock on June 10 and 11, 1998. Since the Company did not have any authorized
shares of Common Stock available for issuance at that time, it was unable to
issue those shares of Common Stock to the Cohen Group. Under the Option
Agreement, Casey acquired all rights and claims of the Cohen Group relating to
the Cohen Preferred Stock.
E. With approximately 31% of the outstanding shares of the Common Stock
that Casey already beneficially owns, after giving effect to the conversion of
the Cohen Preferred Stock and issuance of the underlying Common Stock at the
conversion price for the Cohen Preferred Stock on June 10 and 11, 1998, Casey
would own approximately 47% of the Common Stock that would be outstanding
immediately following the exercise of the Cohen Option and conversion of the
Cohen Preferred Stock into shares of the Common Stock.
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F. The Company's wholly owned subsidiary, National Telephone &
Communications, Inc. ("NTC"), is in default under a secured credit facility (the
"First Bank Credit Facility") provided by First Bank & Trust Company of Newport
Beach ("First Bank"), under which NTC's obligations are secured by, among other
things, NTC's accounts receivable. First Bank has agreed to forbear any rights
it has against NTC under this facility until August 28, 1998.
G. NTC is in default on its obligations to make certain payments to
WorldCom Network Services, Inc. ("WorldCom") under the Amended Carrier
Switched Services Agreement dated May 12, 1997 (the "WorldCom Agreement"),
between NTC and WorldCom. The payments owed to WorldCom by NTC under the
WorldCom Agreement are secured by, among other things, NTC's customer
accounts. WorldCom has agreed to forbear any rights it has against NTC under
the WorldCom Agreement until August 28, 1998.
H. A class action lawsuit is pending against the Company in the
United States District Court for the Central District of California entitled
SANDRA GAYLES ET. AL V. SAM D. SCHWARTZ AND INCOMNET, INC. (CASE NO.
CV95-0399 AWT (BQRX) (the "Class Action Lawsuit").
I. It is the intent of the parties that all members of the Current
Board except for Silverman resign and that Casey, John Hill, Jr. ("Hill") and
one person to be designated by Casey (the "Casey Board Designee") be
appointed to the Company's Board of Directors, on the terms and subject to
the conditions set forth herein (such change in Board composition is referred
to herein as the "Board Change"). Thus, upon satisfaction of these
conditions and the completion of the matters set forth in this Agreement, the
members of the Company's Board of Directors will be Silverman, Casey, Hill
and the Casey Board Designee (collectively, the "New Board").
J. WorldCom and First Bank have conditioned additional forbearance with
respect to the defaults by NTC under the WorldCom Agreement and the First Bank
Credit Facility, respectively, on the execution of this Agreement providing for
the Board Change. The Current Board and/or representatives of the Company have
met with Casey on various occasions to discuss his plans and current intentions
with respect to the recapitalization and revitalization of the Company and NTC.
The Current Board has determined that the Board Change is in the best interests
of the Company and its shareholders.
A G R E E M E N T
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth in this Agreement, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties agree as follows:
1. RESIGNATION AND APPOINTMENT OF DIRECTORS; BOARD MATTERS
1.1. RESIGNATION OF DIRECTORS.
Subject to the terms and conditions of this Agreement, at the Effective
Time (as defined in SECTION 2), the resignations of Horowitz, Lesem, Reznick,
Wilstein and Zivitz from the Company's Board of Directors (the "Board") shall be
effective.
1.2. APPOINTMENT OF DIRECTORS.
Subject to the terms and conditions of this Agreement, immediately
following the Effective Time, the appointment to the Board of Casey, Hill and,
if designated by Casey and approved by the Current
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Board as provided herein, the Casey Board Designee shall be effective.
Silverman shall remain as a member of the Board following the Effective Time.
1.3. COMMITTEES OF NEW BOARD.
The New Board shall form and appoint Board members to an audit committee
(the "Audit Committee"), compensation committee (the "Compensation Committee")
and a committee to resolve any issues relating to transactions involving Casey
in his individual capacity (the "Disinterested Director Committee"). The
Company shall, and Casey shall use commercially reasonable efforts to cause the
New Board to, offer Silverman the opportunity to be a member of the Audit
Committee, Compensation Committee and Disinterested Director Committee and, if
the Company forms such a committee, the Executive Committee.
1.4. REELECTION OF SILVERMAN.
Subject to applicable law, following the Effective Time, the Company shall,
and Casey shall use commercially reasonable efforts to cause the Company to,
nominate Silverman for reelection to the Board at the next annual meeting of
shareholders of the Company, provided that he has not resigned from the Board
prior to the mailing to the Company's shareholders of the proxy statement for
such meeting. If Silverman should cease to be a director of the Company for any
reason (whether through voluntary resignation, removal for cause, death,
disability or any other reason), no party, other than the then current members
of the Board in accordance with the Company's Articles of Incorporation, as
amended (the "Articles"), and Bylaws, as amended (the "Bylaws" and together with
the Articles, the "Organizational Documents"), shall have the right to designate
or appoint a successor to Silverman on the Board.
1.5. NUMBER OF DIRECTORS.
Following the Closing, the New Board may, but shall be under no obligation
to, appoint additional members of the Board who may be identified from time to
time, all in accordance with the Organizational Documents.
2. CLOSING
At 10:00 a.m. on the first business day after the satisfaction or waiver of
the conditions in SECTION 7 and SECTION 8 or at such later time and date as
Casey and the Current Board may agree (the "Effective Time"), the conditional
resignations of Horowitz, Lesem, Reznick, Wilstein and Zivitz from the Board
shall be in effect and no longer subject to any condition and, immediately
thereafter the appointment of Casey, Hill and the Casey Designee to the Board
shall be in effect and no longer subject to any condition (such resignation and
appointment, the "Closing"). At 10:00 a.m. (Los Angeles time) on the date of
the Closing (the "Closing Date"), the Current Board shall cause to be delivered
to Casey at the offices of Heller Ehrman White & McAuliffe, counsel to Casey,
such documents as may be reasonably requested by Casey, including documents
evidencing satisfaction of the conditions set forth in this Agreement that are
within the possession or control of the Company or the Current Board. At 10:00
a.m. (Los Angeles time) on the Closing Date, Casey shall cause to be delivered
to the Current Board at the offices of Heller Ehrman White & McAuliffe, counsel
to Casey, such documents as may be reasonably requested by the Company and the
Current Board, including documents evidencing satisfaction of the conditions set
forth in this Agreement that are within the possession or control of Casey.
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<PAGE>
3. REPRESENTATIONS AND WARRANTIES
3.1. REPRESENTATIONS OF INDIVIDUALS.
Each individual who is a party to this Agreement represents and warrants
to all other parties to this Agreement as follows:
(a) this Agreement constitutes the legal, valid and binding
obligation of such person, enforceable against such person in accordance with
its terms, subject to general principles of equity and laws relating to the
enforcement of creditors' rights generally;
(b) to such individual's knowledge, except for the Contracts (defined
below) identified in SCHEDULE 3.1, neither the execution and delivery of this
Agreement nor the consummation or performance of any of the Board Change will,
directly or indirectly (with or without notice or lapse of time) contravene,
conflict with, or result in a violation or breach of any provision of, or give
any Person (defined below) to declare a default or exercise any remedy under, or
to accelerate the maturity or performance of, or to cancel, terminate, or
modify, any material Contract to which such individual is a party; and
(c) the description of such individual and any other matters between
such individual and the Company to be contained in the Information Statement (as
defined in SECTION 7.8) and any other information supplied in writing by such
individual to the Company for inclusion in the Information Statement will be
complete and accurate in all material respects when made and at the Closing and
will not contain any untrue statement of material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
For purposes of this Agreement, (i) the term "Person" means any individual,
corporation (including any non-profit corporation), general or limited
partnership, limited liability company, joint venture, estate, trust,
association, organization, labor union or other similar entity and (ii) the term
"Contract" means any express agreement, contract, obligation, promise,
understanding or undertaking (whether written or oral) that is legally binding.
3.2. COMPANY REPRESENTATIONS TO INDIVIDUALS.
The Company represents and warrants to all other parties to this Agreement
as follows:
(a) it is a corporation duly organized, validly existing and in good
standing under the laws of the State of California, having all corporate powers
to execute, deliver and perform its obligations under this Agreement;
(b) the execution, delivery and performance by the Company of this
Agreement and the consummation of the transactions contemplated hereby are
within the Company's corporate powers and has been duly authorized by all
necessary corporate action;
(c) this Agreement has been duly executed and delivered by the
Company and constitutes a legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, subject to general
principles of equity and laws relating to the enforcement of creditors' rights
generally; and
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<PAGE>
(d) neither the execution and delivery of this Agreement nor the
consummation or performance of any of the Board Change will, directly or
indirectly (with or without notice or lapse of time) (i) contravene, conflict
with, or result in a violation of (A) any provision of the Organizational
Documents of the Company or any of its subsidiaries , or (B) any resolution
adopted by the board of directors or the shareholders of the Company or any of
its subsidiaries or (ii) except for the Contracts identified in SCHEDULE 3.2,
contravene, conflict with, or result in a violation or breach of any provision
of, or give any Person the right to declare a default or exercise any remedy
under, or to accelerate the maturity or performance of, or to cancel, terminate,
or modify, any Contract to which the Company or its subsidiaries is a party or
by which the Company or any of its subsidiaries is bound.
3.3. ADDITIONAL COMPANY REPRESENTATIONS TO CASEY.
The Company represents and warrants to Casey as follows:
(a) at a meeting of the Current Board that was noticed and called in
accordance with the Organizational Documents, resolutions of the Board were duly
adopted approving (i) the acceptance of the resignations of Horowitz, Lesem,
Reznick, Wilstein and Zivitz from the Board and any office of the Company, such
resignations effective on the Effective Time and (ii) the appointment of Casey
and Hill as directors of the Company, such appointments effective immediately
following the Effective Time; and
(b) the Company and all of its subsidiaries have complied (and until
the Effective Time will comply) in all material respects with the provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), relating to the
payment and withholding of Taxes (defined below), including the withholding and
reporting requirements under Code Sections 1441 through 1464, 3401 through 3406,
and 6041 through 6049, as well as similar provisions under any other federal,
state, county or local laws, and have, within the time and in the manner
prescribed by law, withheld from employee wages and paid over to the proper
governmental authorities all material amounts required by applicable law. For
purposes of this Agreement, the term "Taxes" means any federal, state, county,
local or foreign taxes, charges, fees, levies, or other assessments, including
all net income, gross income, sales and use, ad valorem, transfer, gains,
profits, excise, franchise, real and personal property, gross receipt, capital
stock, business and occupation, disability, employment, payroll, license,
estimated, or withholding taxes or charges imposed by any governmental entity,
and includes any interest and penalties (civil or criminal) on or additions to
any such Taxes; and
(c) other than the written information supplied by individuals to the
Company for inclusion in the Information Statement, the Information Statement
will be complete and accurate in all material respects when filed with the SEC
and at the Closing Date and will not contain any untrue statement of material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
3.4. ADDITIONAL CASEY REPRESENTATIONS TO COMPANY.
Casey represents and warrants to the Company that he has no current
reason to believe that he would not have the financial resources necessary to
exercise the Cohen Option in accordance with the terms and conditions set
forth in this Agreement and the Cohen Option.
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<PAGE>
4. COVENANTS OF COMPANY AND CURRENT BOARD PRIOR TO CLOSING
4.1. ACCESS; SHAREHOLDERS' LIST.
From the date of this Agreement until the Effective Time, the Company will,
and will cause each of its subsidiaries and its Representatives (defined below)
to, (a) afford Casey and his Representatives reasonable access to the books and
records, contracts and other documents and data and personnel and
Representatives of the Company and its subsidiaries, (b) furnish Casey and his
Representatives with copies of all such books and records, and contracts and
other existing documents and data as Casey or his Representatives may reasonably
request, and (c) furnish Casey and his Representatives with such additional
financial, operating, and other data and information concerning the Company and
its subsidiaries as Casey and his Representatives may reasonably request. In
addition, the Company shall cause to be delivered to Casey within three business
days after execution of this Agreement a list of all shareholders of record as
of the date of the Agreement. Notwithstanding anything else to the contrary in
this SECTION 4.1, the Company and its subsidiaries shall not be required to
disclose documents, the disclosure of which to Casey, based on advice of legal
counsel, will likely invalidate a claim of attorney-client privilege or attorney
work product privilege relating to such documents provided that the Company or
its subsidiaries has a good faith claim of such privilege. For purposes of this
Agreement, the term "Representatives" means any director, officer, employee,
agent, consultant, advisor, or other representative of such Person, including
legal counsel, accountants, insurance brokers and carriers and financial and
other advisors.
4.2. REQUIRED APPROVALS; CONDITIONS.
From the date of this Agreement until the Effective Time, the Company and
the Current Board shall, and shall cause each of the Company's subsidiaries to
cooperate with Casey with respect to all filings that Casey elects to make or is
required by law to make in connection with the Board Change or any other matter
contemplated under this Agreement. From the date of this Agreement until the
Effective Time, the Company and the Current Board shall use commercially
reasonable efforts to cause the conditions set forth in SECTION 7 and SECTION 8
to be satisfied, including filing with the SEC and mailing to the Company's
shareholders of the Information Statement referenced in SECTION 7.8 and SECTION
8.2; provided, however, that the Company and the Current Board shall not file or
mail the Information Statement without the prior written consent of Casey, such
consent not to be unreasonably withheld.
4.3. NOTIFICATION.
From the date of this Agreement until the Effective Time, the Company and
the Current Board will promptly notify Casey in writing if the Company or the
Current Board becomes aware of any fact or condition that causes or constitutes
a breach of any of the representations and warranties of the Company or the
Current Board as of the date of this Agreement, or if the Company or the Current
Board becomes aware of the occurrence after the date of this Agreement of any
fact or condition that would (except as expressly contemplated by this
Agreement) cause or constitute a breach of any such representation or warranty
had such representation or warranty been made as of the time of occurrence or
discovery of such fact or condition. From the date of this Agreement until the
Effective Time, the Company and the Current Board will promptly notify Casey of
the occurrence of any breach of any covenant of the Company and the Current
Board in this SECTION 4 or of the occurrence of any event that may make the
satisfaction of the conditions set forth in SECTION 7 and SECTION 8 impossible
or unlikely. From the date of this Agreement until the Effective Time, the
Company shall promptly notify Casey of any development or matter that will
likely have a material effect on the business, financial condition or results of
operation of the Company or any of its subsidiaries.
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<PAGE>
4.4. STAND STILL.
From the date of the Agreement until the Effective Time (the "Stand Still
Period"), unless Casey otherwise consents in writing, the Company shall not, and
shall cause all of its subsidiaries not to, directly or indirectly, initiate on
its own or solicit or encourage any inquiries or proposals from, discuss or
negotiate with, provide non-public information to, or consider any unsolicited
inquiries from any third party, in connection with any of the following:
(a) any amendment of the organizational documents of the Company
or any of its subsidiaries;
(b) any extraordinary corporate transaction (merger, sale of
assets, sale of securities or other similar transaction, declaration of dividend
or adoption of shareholder rights plan) or any agreement to incur any material
liability (loans for borrowed money or settlement of litigation, including the
Class Action Lawsuit); or
(c) any increase or agreement to increase compensation payable
to directors, employees or consultants or enter into severance or termination
arrangements affecting directors, consultants or employees or any amendment to
any employee plans or any grant of any options, warrants or rights to purchase
securities of the Company or any of its subsidiaries.
Notwithstanding the foregoing, the Company may (i) enter into the
sublease at 2811 East Main under the terms set forth in the term sheet dated
July 17, 1998 and (ii) obtain debt financing on terms substantially similar
to those previously proposed by a financial institution in July 1998. In
addition, if the Company or any subsidiary proposes to enter into short-term
financing arrangements while the provisions in this SECTION 4.4 are in
effect, Casey's consent permitting the Company to do so shall not be
unreasonably withheld.
5. COVENANTS OF CASEY PRIOR TO CLOSING
5.1. REQUIRED APPROVALS; CONDITIONS.
From the date of this Agreement until the Effective Time, Casey shall
cooperate with the Company and its subsidiaries with respect to all filings
that each of them elects to make or is required by law to make in connection
with the Board Change or any other matter contemplated under this Agreement.
From the date of this Agreement until the Effective Time, Casey shall use
commercially reasonable efforts to cause the conditions set forth in SECTION
7 and SECTION 8 to be satisfied.
5.2. NOTIFICATION.
From the date of this Agreement until the Effective Time, Casey shall
promptly notify the Company in writing if Casey becomes aware of any fact or
condition that causes or constitutes a breach of any of the representations
and warranties of Casey as of the date of this Agreement, or Casey becomes
aware of the occurrence after the date of this Agreement of any fact or
condition that would (except as expressly contemplated by this Agreement)
cause or constitute a breach of any such representation or warranty had such
representation or warranty been made as of the time of occurrence or
discovery of such fact or condition. From the date of this Agreement until
the Effective Time, Casey shall promptly notify the Company in writing of the
occurrence of any breach of any covenant of Casey in this SECTION 5 or of
the occurrence of any event that may make the satisfaction of the conditions
in SECTION 7 or SECTION 8 impossible or unlikely.
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6. ADDITIONAL AND CONTINUING COVENANTS
6.1. ADDITIONAL FINANCING.
Following the Closing, Casey shall use commercially reasonable efforts
to secure additional equity or debt financing for the Company and its
subsidiaries and cause the New Board to consider all options available to the
Company and its subsidiaries to improve their liquidity consistent with their
needs; provided, however, that under no circumstance shall Casey be required
under this Agreement to personally guarantee the obligations of the Company
or any of its subsidiaries or make a loan to, or an equity investment in, the
Company or any of its subsidiaries.
6.2. ASSIGNMENT OF COHEN OPTION.
Following the Closing, Casey shall assign the Cohen Option to the
Company on condition that (a) the Company is financially able to purchase or
redeem the Cohen Preferred Stock at the Cohen Exercise Price prior to the
termination of the Cohen Option, (b) the Cohen Group consents to such
assignment, (c) the Company agrees to exercise the Cohen Option and redeem
the Cohen Preferred Stock at the Cohen Exercise Price prior to the
termination of the Cohen Option and (d) the Company agrees to reimburse Casey
for all costs and expenses incurred by Casey in connection with acquiring and
assigning the Cohen Option (including the amount paid by Casey to secure the
Cohen Option, reasonable attorneys' fees and carrying costs relating
thereto), such amount to be approved by Casey and the Company at the time of
such assignment. The term "Cohen Exercise Price" means $2.3 million plus
certain accrued dividends and penalties as provided in the Option Agreement.
For purposes of determining whether the Company is financially able to redeem
the Cohen Preferred Stock, 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 Section 500 ET SEQ. of the California General
Corporation Law and any applicable contractual restrictions.
6.3. INCREASE IN NUMBER OF AUTHORIZED SHARES.
Following the Closing, subject to applicable law, at the next
shareholders' meeting called for any purpose, the Company shall cause, and
Casey shall use commercially reasonable efforts to cause, a proxy statement
to be prepared and mailed to the Company's shareholders soliciting their
approval to amend the Articles to increase the number of authorized shares of
Common Stock to 50 million shares (the "Amendment to Articles"). Following
the Closing, Casey hereby agrees to vote in favor of the Amendment to
Articles at any shareholders' meeting duly called for that purpose all shares
of Common Stock beneficially owned by him that he is entitled to vote at such
meeting.
6.4. EXERCISE OF COHEN OPTION BY CASEY; REDEMPTION OF COHEN PREFERRED
STOCK.
Following the Closing, if the Company is not financially able to redeem
the Cohen Preferred Stock prior to the termination of the Cohen Option (or
the Cohen Group does not consent to such assignment), Casey shall exercise
the Cohen Option prior to its termination. Following the Closing, for a
maximum of the one-year period beginning on the date the Cohen Option is
exercised by Casey and ending on the one-year anniversary of that exercise
date (the "Redemption Period"), Casey shall hold the Cohen Preferred Stock.
If the Company is financially able to redeem the Cohen Preferred Stock during
the Redemption Period, following the Closing, (i) the Company shall give
written notice to Casey of its financial ability to redeem the Cohen
Preferred Stock, (ii) Casey shall promptly assign and transfer the Cohen
Preferred Stock to the Company and (iii) on such date of transfer, the
Company shall reimburse Casey for all costs and expenses incurred by Casey in
connection with acquiring, exercising and assigning the Cohen Option
(including the amount paid by Casey to secure the Cohen Option, the Cohen
Exercise
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Price, reasonable attorneys' fees and carrying costs relating thereto), such
amount to be approved by Casey and the Company at the time of such assignment.
6.5. INABILITY TO REDEEM COHEN OPTION OR COHEN PREFERRED STOCK;
CONVERSION OF COHEN PREFERRED STOCK INTO COMMON STOCK;
AGREEMENT TO CONDUCT OFFERING OF COMMON STOCK.
(a) If, following the Closing, the Company is not financially
able to redeem the Cohen Preferred Stock before expiration of the Redemption
Period, then as soon as practicable after the later of the expiration of the
Redemption Period and the approval by shareholders of the Amendment to
Articles, Casey shall tender the Cohen Preferred Stock for conversion and the
Company shall convert the Cohen Preferred Stock into that number of shares of
Common Stock that the holders of Cohen Preferred Stock would have been
entitled to receive had the Company been able to convert the Cohen Preferred
Stock when tendered for conversion on June 10 and 11, 1998 (the "Cohen
Common").
(b) If the Cohen Preferred Stock is not redeemed by the
Company before expiration of the Redemption Period and the Cohen Preferred
Stock is converted into shares of Common Stock pursuant to SECTION 6.5(A),
then as soon as is reasonably practicable, Casey shall commence an offering
of the Cohen Common on a pro rata basis to the Company's shareholders
(including Casey) as of a certain record date to be announced by the Company
("Record Holders"). The purchase price for the Cohen Common in such offering
shall be the sum of (i) all costs and expenses incurred by Casey in
connection with acquiring and exercising the Cohen Option (including the
amount paid by Casey to secure the Cohen Option, the Cohen Exercise Price,
reasonable attorneys' fees and carrying costs relating thereto) and (ii) all
costs and expenses attributable to the offering of the Cohen Common
(including any SEC registration fee, state securities law fees, reasonable
attorneys' fees, reasonable accounting fees, all such amounts to be approved
by Casey and the Company at the time of such offering). To the extent that
the Cohen Common is undersubscribed for during the initial round of the
offering, Casey 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, Casey shall be entitled to
offer the balance of the Cohen Common to the parties designated by him
(including Casey) in his sole discretion.
6.6. CONFIDENTIALITY.
From the date of this Agreement and continuing after the Closing, Casey
shall keep confidential from, and shall not disclose to, third parties other
than the Company all documents and other information concerning the Company
and its subsidiaries, and their officers and directors, provided to him or
produced on his behalf by his Representatives prior to the Closing Date that
are covered by the attorney-client privilege or attorney work product
doctrine (the "Privileged Documents"), except with the prior written consent
of Silverman. All of the foregoing obligations and restrictions do not apply
to that part of the Privileged Documents that Casey demonstrates was or
becomes generally available to the public other than as a result of a
disclosure by Casey or Casey's Representatives. If Casey or any of Casey's
Representatives are requested or become legally compelled (by oral questions,
interrogatories, requests for information or documents, subpoena, civil or
criminal investigative demand, or similar process) or are required by a
regulatory body to make any disclosure that is prohibited by this Agreement,
Casey or such Representative, as the case may be, shall provide at least two
members of the Current Board with prompt notice of such request so that the
Current Board may seek an appropriate protective order or other appropriate
remedy. Subject to the foregoing, Casey or such Representative may furnish
that portion (and only that portion) of the Privileged Documents that, upon
the written advice of legal counsel, is legally compelled or is otherwise
required to disclose or else stand liable for contempt or suffer other
material penalty.
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7. CONDITIONS PRECEDENT TO CASEY'S OBLIGATION TO CLOSE
Casey's obligation to effect the Board Change and take such other actions
required to be taken by Casey at the Closing is subject to the satisfaction, at
or prior to the Closing, of each of the following conditions (any of which may
be waived by Casey, in whole or in part):
7.1. APPROVAL AND CONDITIONAL APPOINTMENT OF CASEY BOARD DESIGNEE.
The Casey Board Designee and any executive officer proposed by the New
Board to have positions with the Company or NTC at or immediately following
the Effective Time and who must be identified in the Information Statement
referred to in SECTION 7.8 must have been disclosed to, and approved by, the
Current Board, such approval not to be unreasonably withheld. The Current
Board shall have approved resolutions at a meeting of the Current Board duly
held in accordance with the Bylaws which provide for the appointment of the
Casey Board Designee as a director of the Board, such appointment to be
effective at the Effective Time.
7.2. CLASS ACTION LAWSUIT SETTLEMENT.
A settlement agreement shall have been entered into among the named
parties to the Class Action Lawsuit pending against the Company on terms
reasonably acceptable to Casey.
7.3. DIRECTORS' AND OFFICERS' INSURANCE COVERAGE.
The Company shall have in effect directors' and officers'
insurance coverage with such policy amounts and on such terms as are
acceptable to Casey.
7.4. RESCISSION OF AUTONOMY AGREEMENT.
The Company and NTC shall have caused the agreement dated January 28,
1997 (the "Autonomy Agreement"), between the Company and NTC to be terminated
promptly and no later than three business days following the date of this
Agreement.
7.5. RESCISSION OF SUPERMAJORITY BYLAW PROVISION.
On November 5, 1997, the Board adopted an amendment to the Bylaws (the
"Supermajority Bylaw Provision") requiring that all formal resolutions, acts
and decisions of the Board must be approved by a majority vote plus one
director. The Company shall have rescinded the Supermajority Bylaw Provision
by adopting an amendment to the Bylaws to eliminate the Supermajority Bylaw
Provision, such rescission to be effective on or prior to the Effective Time.
7.6. COHEN GROUP APPROVAL.
The consent or agreement of the Cohen Group approving of (and
authorizing Casey to vote in favor of) the Amendment to Articles at the next
meeting of the Company's shareholders shall have been obtained.
7.7. NTC SECURED CREDITOR MATTERS; NO LIQUIDATION PROCEEDINGS.
WorldCom shall have withdrawn its letter advising NTC of WorldCom's
intention to terminate services under the WorldCom Agreement. First Bank and
WorldCom shall have agreed to forbear their rights to foreclose on the
collateral given to them, and otherwise enforce their rights upon default
under,
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the First Bank Credit Facility and the WorldCom Agreement, respectively, on
terms acceptable to Casey. Neither the Company nor any of its subsidiaries
shall have commenced any liquidation proceedings, filed a voluntary or
involuntary petition under the federal bankruptcy laws or approved an
assignment for the benefit of creditors.
7.8. INFORMATION STATEMENT.
The Company shall have filed and mailed an information statement (the
"Information Statement") in accordance with Rule 14f-1 under the Exchange
Act. The ten-day waiting period required under Rule 14f-1 under the Exchange
Act following mailing of the Information Statement shall have lapsed.
7.9. ACCURACY OF REPRESENTATIONS.
All of the representations and warranties of the Company and
the Current Board set forth in this Agreement shall have been accurate in all
material respects as of the date of this Agreement and shall be accurate in
all material respects as of the Effective Time as if made on the Effective
Time.
7.10. PERFORMANCE OF COVENANTS.
Each of the covenants and obligations that the Company and the
Current Board are required to perform or to comply with pursuant to this
Agreement at or prior to Closing shall have been duly performed and complied
with in all material respects.
7.11. ADDITIONAL DOCUMENTS.
Casey shall have received all documents reasonably requested
by Casey for the purpose of (a) evidencing the accuracy of any of the
representations and warranties of the Company and the Current Board, (b)
evidencing the performance by the Company and the Current Board of any
covenant or obligation required to be performed or complied with by the
Company or the Current Board, (c) evidencing the satisfaction of any
condition referred to in this SECTION 7 and (d) otherwise facilitating the
completion of the Board Change.
7.12. NO LEGAL PROCEEDINGS.
No decree, injunction, judgment, order, ruling, assessment or
writ (collectively, "Order") shall have been declared, entered, issued, or
enforced by any governmental entity which prohibits or restricts (or if
successful, would prohibit or restrict) the Board Change or other
transactions contemplated in this Agreement.
8. CONDITIONS PRECEDENT TO COMPANY'S AND CURRENT BOARD'S OBLIGATION TO CLOSE
The obligations of the Company and the Current Board to effect the Board
Change and take such other actions required to be taken by the Company and
the Current Board at the Closing is subject to the satisfaction, at or prior
to the Closing, of each of the following conditions (any of which may be
waived by the Company and the Current Board, in whole or in part):
8.1. APPROVAL AND CONDITIONAL APPOINTMENT OF CASEY BOARD DESIGNEE.
The Casey Board Designee and any executive officer proposed by the New
Board to have positions with the Company or NTC at or immediately following
the Effective Time and who must be
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identified in the Information Statement must have been disclosed to, and
approved by, the Current Board, such approval not to be unreasonably withheld.
8.2. COHEN GROUP APPROVAL.
The consent or agreement of the Cohen Group approving of an increase in
the authorized number of shares of the Common Stock at the next meeting of
the Company's shareholders shall have been obtained.
8.3. INFORMATION STATEMENT.
The Company shall have filed and mailed the Information Statement in
accordance with Rule 14f-1 under the Exchange Act. The ten-day waiting
period required under Rule 14f-1 under the Exchange Act following mailing of
the Information Statement shall have lapsed.
8.4. ACCURACY OF REPRESENTATIONS.
All of the representations and warranties of Casey set forth in this
Agreement shall have been accurate in all material respects as of the date of
this Agreement and shall be accurate in all material respects as of the
Effective Time as if made on the Effective Time.
8.5. PERFORMANCE OF COVENANTS.
Each of the covenants and obligations that Casey is required to perform
or to comply with pursuant to this Agreement at or prior to Closing shall
have been duly performed and complied with in all material respects.
8.6. ADDITIONAL DOCUMENTS.
The Company and the Current Board shall have received all documents
reasonably requested by them for the purpose of (a) evidencing the accuracy
of any of the representations and warranties of Casey, (b) evidencing the
performance by Casey of any covenant or obligation required to be performed
or complied with by Casey, (c) evidencing the satisfaction of any condition
referred to in this SECTION 8 and (d) otherwise facilitating the completion
of the Board Change.
8.7. NO LEGAL PROCEEDINGS.
No Order shall have been declared, entered, issued, or enforced by any
governmental entity which prohibits or restricts (or if successful, would
prohibit or restrict) the Board Change or other transactions contemplated in
this Agreement.
9. SPECIFIC RELEASES; COVENANT NOT TO SUE AND RELATED MATTERS
9.1. SPECIFIC RELEASES.
At the Effective Time, for good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, each party hereto, on
behalf of himself and, to the fullest extent permitted by law, each of his
Related Persons (as defined below) (each, a "Releasor"), hereby fully
releases and forever discharges each of the other parties hereto (each, a
"Releasee") and each of their past, present and future officers, directors,
stockholders, agents, attorneys, accountants, financial advisors,
representatives,
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employees, executors, administrators, heirs, spouses, successors and assigns
(each, a "Releasee Affiliate") from any and all liability, obligation and
responsibility for any and all Claims (as defined below).
9.2. COVENANT NOT TO SUE.
At the Effective Time, each Releasor covenants and agrees not to
participate in, commence or to permit (to the extent within their control)
the assertion or commencement of any demand, allegation, litigation or
similar proceeding or action relating to any Claim, including, without
limitation, by or through the Company, and not to encourage, assist or
cooperate with any person pursuing or asserting any Claim, against any
Releasee or any Releasee Affiliate.
9.3. WAIVER OF STATUTORY PROVISION.
Each Releasor hereby waives the provisions of Section 1542 of the
California Civil Code only to the extent it applies to the releases given by
such Releasor in SECTION 9.1. Section 1542 of the California Civil Code
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.
9.4. INDEMNITY.
(a) At the Effective Time, without in any way limiting any of
the rights and remedies otherwise available to any Releasee, each party
hereto (each, an "Indemnitor"), severally and not jointly, shall indemnify
and hold harmless each Releasee from and against all loss, liability, claim,
damage (including incidental and consequential damages) or expense (including
costs of investigation and defense and reasonable attorneys' fees) whether or
not involving third party claims, arising directly or indirectly from or in
connection with (i) the assertion by or on behalf of such Indemnitor or any
of his Related Persons of any claim or other matter purported to be released
pursuant to the release set forth in SECTION 9.1 and (ii) the assertion by
any third party of any claim or demand against any Releasee which claim or
demand arises directly or indirectly from, or in connection with, any
assertion by or on behalf of such Indemnitor or any of his Related Persons
against such third party of any claims or other matters purported to be
released pursuant to the release set forth in SECTION 9.1.
(b) For the period of any applicable statute of limitations,
the Company shall, and no party hereto shall take any action to impair the
ability or power of the Company to, indemnify and hold harmless each person
who is or who has been a director or officer of the Company in respect of
acts and omissions occurring through the date on which such person shall have
ceased to be a director and officer of the Company, as the case may be, to
the full extent permitted by applicable law. All parties agree that all
rights of indemnification or limitations on liability now existing in favor
of any such person entitled to indemnification or any other party hereto as
provided (i) in the Organizational Documents, (ii) in any indemnification
agreement between the Company and any such person or (iii) pursuant to
applicable law, shall survive and continue in full force and effect until
expiration of any applicable statute of limitations period, provided that all
rights to indemnification in respect to any claim or claims asserted or made
within such period shall continue until the final disposition of all such
claims.
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9.5. CERTAIN DEFINITIONS.
(a) As used in this Agreement, with respect to a specified
Releasor or Indemnitor who is an individual, the term "Related Person" means
(i) each other member of such individual's Family; (ii) any Person that is
directly or indirectly controlled by such individual or one or more members
of such individual's Family; (iii) any Person in which such individual or
members of such individual's Family hold (individually or in the aggregate) a
Material Interest; and (iv) any Person with respect to which such individual
or one or more members of such individual's Family serves as a director,
officer, partner, executor, or trustee (or in a similar capacity). For
purposes of this Agreement, the term "Family" means (i) the individual, (ii)
the individual's spouse, (iii) any other natural person who is related to the
individual or the individual's spouse within the second degree, and (iv) any
other natural person who resides with such individual. Further, for purposes
of this Agreement, the term "Material Interest" means direct or indirect
beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) of
voting securities or other voting interests representing at least 10% of the
outstanding voting power of any Person or equity securities or other equity
interests representing at least 10% of the outstanding equity securities or
equity interests in any Person.
(b) As used in this Agreement, with respect to a specified
Releasor or Indemnitor which is not an individual, the term "Related Person"
means (i) any Person that directly or indirectly controls, is directly or
indirectly controlled by, or is directly or indirectly under common control
with such specified Releasor or Indemnitor, (ii) any individual or Person
that holds a Material Interest in such specified Releasor or Indemnitor,
(iii) each individual that serves as a director, officer, partner, executor,
or trustee of such specified Releasor or Indemnitor (or in a similar
capacity), (iv) any Person in which such specified Releasor or Indemnitor
holds a Material Interest, (v) any Person with respect to which such
specified Indemnitor serves as a general partner or a trustee (or in a
similar capacity) and (vi) any Related Person of any individual described in
clause (ii) or (iii) of this SECTION 9.5.
(c) As used in this Agreement, the term "Claim" means any actual
or alleged liability, claim, action, suit, cause of action, obligation, debt,
controversy, dispute, promise, contract, lien, judgment, account,
representation, covenant, agreement, demand of any kind or nature, whether
known or unknown, foreseen or unforeseen, both at law and in equity, that any
Releasor may or could have had or now or hereafter may have against the
respective Releasees arising out of, relating to or connected in any way with
(i) the Board Change of Control, (ii) the proposed sale or recapitalization
of NTC originally contemplated in or about December 1997, including pursuant
to the Asset Purchase Agreement dated as of March 31, 1998, between NTC
Acquisition, Inc. and NTC, (iii) the proposed NTC debt financing with a
financial institution in July 1998, (iv) the sale of up to 2.5 million shares
of Rapid Cast at $0.60 per share, (v) upon the redemption of the Cohen
Preferred Stock or the approval by the Company's shareholders of the
Amendment to Articles and subsequent conversion of the Cohen Preferred Stock
into shares of Common Stock based on the conversion price when tendered for
conversion on June 10 and 11, 1998, all as provided in this Agreement, the
failure to have shares of Common Stock available for issuance to the holders
of the Cohen Preferred Stock upon their attempted conversion of such stock
into shares of Common Stock on June 10 and 11, 1998 or (vi) any action,
failure to act, representation, event, transaction, occurrence or other
subject matter resulting from, arising out of, relating to, connected in any
way with, or alleged, suggested or mentioned in connection with the matters
described in clauses (i) through (v) of this SECTION 9.5(C).
9.6. MAINTENANCE OF D&O INSURANCE.
The Company shall (and no party hereto shall take any action to impair
the ability or power of the Company) provide officers' and directors'
liability insurance ("D&O Insurance") covering each person who is or who has
been a director or officer of the Company in respect of acts and omissions
occurring
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through the date on which such person shall have ceased to be a director and
officer of the Company until the third anniversary of the date of this
Agreement, in respect of acts or omissions occurring through the Closing
Date, on terms with respect to coverage and amount no less favorable than
those of such policies in effect on the date of this Agreement; provided,
that the Company shall not be required to pay combined annual premiums for
the D&O Insurance in excess of 125% of the premium paid for the existing D&O
Insurance by the Company for the current policy period (the "Maximum
Premium"); provided further that in the event the payment of the Maximum
Premium for any year is insufficient to maintain such insurance, the Company
shall purchase as much D&O Insurance coverage as may be purchased for the
Maximum Premium; provided, further, that the Company shall not be liable for
breach of its obligations to provide D&O Insurance if such insurance cannot
be obtained at any price for any annual period in which insurance is so
unavailable.
9.7. ENFORCEMENT.
The provisions of SECTION 9.4(B) and SECTION 9.6 hereof shall inure to
the benefit of each Indemnitee and the other parties hereto who are
indemnified herein or who have rights of indemnification or limitations on
liability as described in the second sentence of Section 9.5(b). The Company
shall pay all legal fees and expenses incurred by or on behalf of any such
person in enforcing his rights under SECTION 9.5(B) and SECTION 9.6 and shall
advance to any such person funds to cover such fees and expenses upon receipt
of an undertaking from such person to return any portions of such funds that
are not used for such fees and expenses or to which he was otherwise not
entitled to receive under applicable law.
10. TERMINATION
10.1. TERMINATION EVENTS.
This Agreement may, by notice given prior to or at the Closing, be
terminated:
(a) by either Casey or the Company if a material breach of any
provision of this Agreement has been committed by another party and such
breach has not been waived;
(b) (i) by Casey if any of the conditions in SECTION 7 is or
becomes impossible to satisfy (other than through the failure of Casey to
comply with his obligations under this Agreement) and Casey has not waived or
does not waive such condition; or (ii) by the Company, if any of the
conditions in SECTION 8 is or becomes impossible to satisfy (other than
through the failure of the Company or members of the Current Board to comply
with their obligations under this Agreement) and the Company or the Current
Board have not waived or do not waive such condition;
(c) by mutual consent of Casey and the Company; or
(d) by either Casey or the Company if the Closing has not occurred
(other than through the failure of any party seeking to terminate this
Agreement to comply fully with its obligations under this Agreement) on or
before September 30, 1998, or such later date upon which the parties may
agree.
10.2. EFFECT OF TERMINATION.
Each party's right of termination under SECTION 10.1 is in
addition to any other rights it may have under this Agreement or otherwise,
and the exercise of a right of termination shall not be an election of
remedies. If this Agreement is terminated pursuant to SECTION 10.1, all
further obligations of the parties
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under this Agreement shall terminate, except that the obligations to reimburse
Casey for costs and expenses described in clauses (a) through (g) of the first
sentence of SECTION 11.2 shall survive such termination; provided, however,
that if this Agreement is terminated by a party because of the breach of the
Agreement by another party or because one or more of the conditions to the
terminating party's obligations under this Agreement is not satisfied as a
result of the other party's failure to comply with its obligations under this
Agreement, the terminating party's right to pursue all legal remedies shall
survive such termination unimpaired.
11. MISCELLANEOUS
11.1. RULES OF CONSTRUCTION.
This Agreement shall be construed in accordance with the following rules of
construction:
(a) the terms defined in this Agreement include the plural as well as
the singular;
(b) all references in the Agreement to designated "Sections" and
other subdivisions are to the designated Sections and other subdivisions of the
body of this Agreement, and all such references are for convenience of reference
only, and shall be ignored in the construction and interpretation of this
Agreement;
(c) pronouns of either gender or neuter shall include, as
appropriate, the other pronoun forms;
(d) the words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
Section or other subdivision; and
(e) the words "includes" and "including" are not limiting.
11.2. EXPENSES.
In addition to the costs and expenses otherwise expressly required to be
paid in accordance with SECTION 6.2, SECTION 6.4 and SECTION 6.5(B) relating
to the Cohen Option and the Cohen Preferred Stock, the Company shall
reimburse Casey for any reasonable costs and expenses (including reasonable
attorneys' fees) incurred by him in connection with (a) the settlement of the
Class Action Lawsuit, (b) any filings made by the Company or Casey with the
SEC or any other regulatory agency in connection with the Board Change, (c)
the preparation of the Information Statement, (d) obtaining directors' and
officers' insurance coverage, (e) negotiating and preparing the non-binding
term sheet dated August 21, 1998 (and all prior iterations thereof) relating
to the proposed Board Change and this Agreement, (f) any negotiations with
WorldCom or First Bank with respect to NTC and (g) any negotiations with
institutional investors relating to additional equity or debt financing for
the Company or NTC. Other than the costs and expenses relating to the Cohen
Preferred Stock and those matters described in clauses (a) through (g) above,
(i) upon the approval of a majority of the Disinterested Director Committee
(and without requiring approval of the Company's shareholders), the Company
shall reimburse Casey up to $100,000 of costs and expenses incurred by him on
or after April 1, 1998 in connection with due diligence concerning the
Company and its proposal to sell NTC, the attempt to prevent such sale and
any related documentation and his evaluation of his rights and alternatives
as a significant shareholder of the Company (collectively, the "Due Diligence
and Other Costs") and (ii) upon the approval of the majority of the
disinterested members of the New Board and the Company's disinterested
shareholders, the Company shall reimburse Casey for Due Diligence and Other
Costs in excess of $100,000.
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11.3. SURVIVAL OF REPRESENTATIONS AND COVENANTS.
All representations, warranties, covenants, and obligations in this
Agreement and any other certificate or document delivered pursuant to this
Agreement will survive the Closing. The waiver of any condition based on the
accuracy of any representation or warranty, or on the performance of or
compliance with any covenant or obligation, shall constitute a waiver of the
right to indemnification, payment of damages, or other remedy based on such
representations, warranties, covenants and obligations.
11.4. NOTICES.
All notices, consents, waivers, and other communications under this
Agreement must be in writing and will be deemed to have been duly given when
(a) delivered by hand (with written confirmation of receipt), (b) sent by
telecopier (when an appropriate answer back is received from the recipient's
telecopier), provided that a copy is mailed by U.S. mail, or (c) when
received by the addressee, if sent by a nationally recognized overnight
delivery service, in each case to the appropriate addresses and telecopier
numbers set forth in EXHIBIT A (or to such other addresses and telecopier
numbers as a party may designate by notice to the other parties).
11.5. EQUITABLE REMEDIES.
Each party hereto acknowledges that any other party hereto to whom or
which it owes any obligation hereunder would not have an adequate remedy at
law for money damages, and that irreparable harm would occur, in the event
that any or all of such obligations were not honored strictly in accordance
with their terms, and therefore agrees that such other party or parties shall
be entitled to an injunction (or other appropriate equitable remedy) to
prevent any such breach of those obligations and to obtain specific
enforcement of such obligations in addition to any other remedy to which it
may be entitled at law or in equity.
11.6. ENTIRE AGREEMENT; AMENDMENT.
This Agreement supersedes all prior and contemporaneous written and oral
agreements and understandings between the parties with respect to its subject
matter (including the term sheet dated August 21, 1998 delivered by Casey and
approved by the Company) and constitutes (along with the documents referred
to in this Agreement) a complete and exclusive statement of the terms of the
agreement between the parties with respect to its subject matter. This
Agreement may not be amended except by a written agreement executed by the
party to be charged with the amendment.
11.7. SUCCESSORS; ASSIGNMENT.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors, heirs, representatives and
permitted assigns, but no party may assign, delegate or otherwise transfer
any of its rights or obligations under this Agreement without the consent of
the other parties hereto.
11.8. GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with the
internal laws of the State of California, without regard to the principles of
conflicts of laws.
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11.9. COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each of
which will be deemed to be an original copy of this Agreement and all of
which, when taken together, will be deemed to constitute one and the same
agreement.
11.10. ATTORNEYS' FEES.
If any legal proceeding should be instituted to enforce any term hereof
by any party, the prevailing party or parties in such litigation shall be
entitled to recover all of their costs and expenses, including reasonable
attorneys' fees and related costs and expenses.
11.11. FURTHER ASSURANCES.
The parties agree (a) to furnish upon request to each other such further
information, (b) to execute and deliver to each other such other documents,
and (c) to do such other acts and things, all as the other party may
reasonably request for the purpose of carrying out the intent of this
Agreement.
11.12. WAIVER.
The rights and remedies of the parties to this Agreement are cumulative
and not alternative. Neither the failure nor any delay by any party in
exercising any right, power, or privilege under this Agreement or the
documents referred to in this Agreement will operate as a waiver of such
right, power, or privilege, and no single or partial exercise of any such
right, power, or privilege will preclude any other or further exercise of
such right, power, or privilege or the exercise of any other right, power, or
privilege. No provision of this Agreement may be waived except in a writing
signed by the party to be charged with the waiver. To the maximum extent
permitted by applicable law, (a) no waiver that may be given by a party will
be applicable except in the specific instance for which it is given and (b)
no notice to or demand on one party will be deemed to be a waiver of any
obligation of such party or of the right of the party giving such notice or
demand to take further action without notice or demand as provided in this
Agreement.
11.13. SEVERABILITY.
If any provision of this Agreement is held invalid or
unenforceable by any court of competent jurisdiction, the other provisions of
this Agreement shall remain in full force and effect provided that the
essential terms and conditions of this Agreement for all parties remain
valid, binding and enforceable. Any provision of this Agreement held invalid
or unenforceable only in part or degree shall remain in full force and effect
to the extent not held invalid or unenforceable.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or
caused this Agreement to be executed by their duly authorized officers, as of
the date first above written.
INCOMNET, INC.
By /s/ Melvyn Reznick
------------------------------------
Melvyn Reznick
Chairman and Chief Executive Officer
/s/ Richard Horowitz /s/ Howard Silverman
--------------------- --------------------
RICHARD HOROWITZ HOWARD SILVERMAN
/s/ Rolf Lesem /s/ David Wilstein
--------------------- --------------------
ROLF LESEM DAVID WILSTEIN
/s/ Melvyn Reznick /s/ Nancy Zivitz
--------------------- --------------------
MELVYN REZNICK NANCY ZIVITZ
/s/ John P. Casey
---------------------
JOHN P. CASEY
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