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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-12386
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INCOMNET, INC.
(Exact Name of Registrant as Specified in its Charter)
CALIFORNIA 95-2871296
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) No.)
2801 MAIN STREET 92614
IRVINE, CALIFORNIA (Zip Code)
(Address of Principal Executive Offices)
(949) 251-8000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, NO PAR
VALUE
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety (90) days: Yes / / No /X/
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. /X/
The aggregate market value of the voting common stock held by non-affiliates
of the Registrant computed by reference to the average of closing bid and asked
price as reported on the NASDAQ System on April 7, 1999 was approximately $14.64
million.
The number of outstanding shares of Incomnet, Inc.'s common stock as of
April 15, 1999 was 19,933,000 shares, all of one class.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS................................................................................. 1
ITEM 2. PROPERTIES............................................................................... 14
ITEM 3. LEGAL PROCEEDINGS........................................................................ 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................... 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................... 21
ITEM 6. SELECTED FINANCIAL DATA.................................................................. 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.... 24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................... 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................................. 31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..... 32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................................... 33
ITEM 11. EXECUTIVE COMPENSATION................................................................... 36
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................... 48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................... 51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORMS 8-K........................ 55
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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains statements that are based upon
certain estimates, projections and other forward-looking statements within the
meaning of the Securities Litigation Reform Act of 1995 with respect to
Incomnet, Inc. ("Incomnet") and its subsidiary, Incomnet Communications
Corporation ("ICC"). Forward-looking statements give Incomnet's expectations or
forecast of future events. These statements can be identified by the fact that
they do not relate strictly to historical or current facts. They use words such
as "estimate," "expect," "project," "plan," "believe," "anticipate," "intend,"
and other words and terms of similar meanings in connection with disclosures of
future operating or financial performance. In particular, these statements
relate to future actions, prospective performance or results of current and
anticipated products, sales, efforts, expenses, the outcome of contingencies
such as legal proceedings, and financial results.
All of the forward-looking statements contained in the Annual Report on Form
10-K or in other Incomnet publications may turn out to be wrong. They can be
affected by inaccurate assumptions or by known or unknown risks and
uncertainties. Many such factors will be important in determining actual or
future results. Consequently, no forward-looking statement can be guaranteed.
Incomnet's actual results may vary materially and there are no guarantees about
the performance of Incomnet stock.
Incomnet undertakes no obligation to correct or update any forward-looking
statements, whether as a result of new information, future events or otherwise.
Future disclosures on related subjects in Incomnet's reports to the SEC may
update some of Incomnet's disclosures (including Forms 10-Q and 8-K filed in the
future) contained herein.
Some of the facts that could cause uncertainties are:
- New competitors and intensification of price competition from other
long-distance providers;
- New products that make ICC's products and services obsolete;
- Adverse state, federal and local government regulations governing the
telecom industry;
- Inability to obtain additional capital as needed;
- Loss of customers;
- Technical problems with ICC's billing system, products and services;
- Departure of key Representatives and inability to attract new
Representatives;
- Litigation and administrative proceedings;
- Departure or retirement of key executives; and
- Costs and risks of entering and expanding into new markets and new
services.
PART I
ITEM 1. BUSINESS
Incomnet is the parent company of ICC, a company that provides discount long
distance and telecommunication services to residential consumers and businesses
throughout the United States. ICC's telecommunication services are sold by ICC's
network of independent sales representatives ("Representatives"). During 1998,
Incomnet was also the parent company of Auto Dismantler Network ("AutoNetwork")
and GenSource Corporation ("GenSource"). Incomnet also owns an interest in Rapid
Cast, Inc. (now known as Optical Dynamics Corporation) ("RCI").
Incomnet sold the assets of its subsidiary AutoNetwork on March 20, 1998 for
$1.3 million in cash and notes. AutoNetwork is a provider of information
services to licensed automobile dismantlers in the
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western United States. The subscribers to AutoNetwork services receive
up-to-date information about the availability of used automobile parts for
purchase, sale or exchange.
In February 1995, Incomnet acquired a 51% ownership interest in RCI. In
early 1997, Incomnet's percentage interest in RCI was reduced to 33% on a
fully-diluted basis by the sale of additional shares of RCI to new investors.
During the third quarter of 1998, Incomnet sold a portion of its RCI stock and
further reduced its percentage ownership interest in RCI to 17.4%.
On March 9, 1999, Incomnet sold its common stock of GenSource, a company
that develops and markets software for use by companies that self-insure various
types employee and business related claims. Incomnet retained an approximate 15%
interest in GenSource in the form of GenSource Preferred Stock. See Item
1--"Sale of GenSource."
Incomnet has no expectation of continuing involvement with the management of
any of these entities, has assigned a value of $200,000 to its remaining equity
interest in RCI and has assigned no value to its remaining equity interest in
GenSource. These entities, previously accounted for as segments, have been
accounted for as discontinued operations in 1998. Incomnet has also reclassified
prior years to present the operating results of the three businesses as
discontinued operations. See Item 7--"Management's Discussion and Analysis of
Financial Condition and Results of Operations-- Discontinued Operations."
Incomnet was incorporated under the laws of California on January 31, 1974.
SIGNIFICANT BUSINESS AND MANAGEMENT CHANGES IN 1998
Incomnet underwent significant business and management changes during 1998.
Its business was streamlined with the sale of the assets of AutoNetwork in early
1998, the sale of a portion of Incomnet's RCI stock and a discontinuance of
Incomnet's involvement and influence over management of RCI in late 1998 and the
sale of the Common Stock of GenSource in early 1999. As a result of these
divestitures, Incomnet's sole focus is the telecommunications business of ICC.
In early 1998, Incomnet's former management proposed to sell ICC's telecom
business which was rapidly deteriorating due to a number of factors including:
- Sanctions against ICC imposed by the Orange County District Attorney in
late 1997 and in early 1998 and by the California Public Utilities
Commission and related compliance obligations following allegations that
ICC had improperly switched customers' long distance carriers.
- ICC's failed attempt at a public offering of its common stock in September
1997 and ICC management's distraction during that process.
- The departure of certain of ICC's key independent Representatives
resulting in a decline in ICC's customer base and revenues.
- ICC's inability to obtain additional debt or equity financing due to its
declining revenues.
- Incomnet management's inability to control the activities of ICC due to a
management separation agreement that insulated ICC from Incomnet's
management and control. This agreement was terminated in late 1998.
As ICC's revenues declined during the first quarter of 1998 and the
retention and recruitment of new Representatives became more difficult, ICC
incurred significant operating deficits. By February 1998, ICC had borrowed all
available funds under its credit facility with First Bank & Trust of Newport
Beach ("First Bank"). During that time, ICC was engaged in discussions regarding
alternatives for selling all or a portion of ICC's business. As a result of
those efforts, a newly formed entity controlled by John R. Dennis (the "Proposed
Buyer") emerged as a potential purchaser and source of capital or financing for
ICC.
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THE PROPOSED ICC ASSET SALE
On March 31, 1998, Incomnet and the Buyer entered into an asset purchase
agreement to sell substantially all of the assets of ICC (the "ICC Asset Sale
Agreement"). The ICC Asset Sale Agreement was then expected to be completed on
or before June 30, 1998.
Throughout the second quarter of 1998, ICC's operations continued to
deteriorate. In early 1998, a number of key Representatives announced that they
were terminating their relationship with ICC and filed suit against ICC claiming
various disagreements with ICC's management. By February 1998, ICC was in
default under its credit facility with First Bank which was due and payable in
June 1998 and, by July 1998, ICC was in default under its contractual
obligations to its primary service provider, WorldCom Network Services, Inc.
("WorldCom").
In May 1998, shareholder John P. Casey informed Incomnet's Board of his
opposition to the proposed ICC Asset Sale Agreement. By June 15, 1998, Mr. Casey
had acquired 21% of the then outstanding shares of Incomnet Common Stock.
The ICC Asset Sale Agreement was ultimately terminated when the Proposed
Buyer insisted on new terms given the continued deterioration of ICC's business.
These additional terms were not acceptable to the Board of Incomnet. On July 1,
1998, Incomnet announced that the proposed ICC Asset Sale Agreement had been
terminated.
THE SEPTEMBER '98 BOARD CHANGE
Shortly after termination of the ICC Asset Sale Agreement, the Incomnet
Board entered into negotiations with Mr. Casey (who was then a 30% shareholder)
concerning a change in the Board and management of Incomnet and ICC. As these
negotiations were taking place, ICC's business was suffering further losses in
the number of Representatives and customers. Part of the deterioration was due
to the departures of Jerry Ballah (a former ICC executive) and Christopher
Mancuso (a former consultant to ICC) who left ICC to form a competing telecom
company and their efforts to hire away key Representatives and employees and
induce customers to terminate ICC as their long distance carrier.
As of September 1, 1998, ICC remained in default under both its service
agreement with WorldCom and its financial obligations to First Bank. On a number
of occasions commencing in August 1998 WorldCom and First Bank threatened to
foreclose on their collateral consisting of all of ICC's subscriber base and
customer accounts. WorldCom was also demanding a management change. Incomnet's
and ICC's management prepared various financial analyses and the Incomnet
directors concluded that if WorldCom could not be satisfied, new financing could
not be obtained and a management change could not be achieved in the short term,
ICC might be forced to file for protection under the bankruptcy laws.
On September 29, 1998, the Board Change Agreement among Incomnet, Mr. Casey
and the six directors of Incomnet (the "Board Change Agreement") was completed.
Throughout this Form 10-K, the directors (or Board) and officers who currently
hold office are referred to as the "New Board," "New Management," or "New
Directors and Officers," while the directors and officers who held office prior
to September 29, 1998 will be referred to herein as the "Former Board" or
"Former Directors and Officers."
Following the Board Change Agreement, five of the six directors of Incomnet
were replaced and Denis Richard was appointed as the new President and CEO of
Incomnet and ICC. In December 1998, Incomnet appointed Stephen Garcia as its
Controller, and, in January 1999, Incomnet appointed George Blanco as its new
Chief Financial Officer.
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Immediately following the Board Change, New Management was successful in
getting WorldCom and First Bank to continue to forebear from taking any action
against ICC's assets so that the New Management had an opportunity to obtain new
financing. Within the time period required under the forebearance agreement with
WorldCom and First Bank, New Management also successfully negotiated and
completed a bridge financing in November 1998 and a term loan financing in
December 1998. The proceeds from these financings were used to completely pay
off the FirstBank loan obligations and to pay all amounts in default to
WorldCom, thus preventing First Bank and WorldCom from seizing ICC's assets
without filing for protection under the bankruptcy laws.
New Management was also immediately faced with many challenges in various
management and marketing areas, including:
- Restructuring management responsibilities and hiring new managers and
executives.
- Rebuilding the number of active Representatives and invigorating their
sales activities.
- Renegotiating a reduction of the severance packages with former
executives.
- Managing and/or attempting to resolve numerous pending litigation matters.
- Negotiating with the former holders of Preferred Stock who had claimed
that they were entitled to receive in excess of 11 million shares of
Incomnet's Common Stock due to Incomnet's inability to deliver common
stock when they tendered their Preferred Stock for conversion to common in
mid-1998.
- Negotiating a more favorable contract with WorldCom, including a reduction
in the rate schedules and the take-or-pay provisions of the contract.
Since the Board Change on September 29, 1998, the following developments
have occurred:
- On December 15, 1998, Incomnet completed a financing from Ironwood Telecom
LLC. See "Recent Developments--Financings" below.
- In March 1999, preliminary approval of a settlement agreement was entered
by the court presiding over Incomnet's pending class action lawsuit on
more favorable terms than those proposed in December 1997. The settlement
is subject to final court approval.
- In September 1998, the Orange County District Attorney lifted a
restriction imposed on ICC to wait 24 hours before verifying that a new
customer wanted to sign up for ICC's telephone service. This restriction
had been a significant impediment to signing up new customers.
- In December 1998, the California Public Utilities Commission lifted
certain verification requirements for new customers which had been an
additional impediment to signing up new customers.
- In October 1998, ICC renegotiated its contract with WorldCom. The
renegotiation resulted in immediate decreases in ICC's long distance
telephone rates which have been passed on to new customers through the
introduction of new marketing programs. In addition, WorldCom released its
security interest in ICC's customer accounts and subscriber base and
significantly reduced ICC's overall purchase commitment.
- ICC has taken steps to revitalize its network marketing organization and
has expanded to a nationwide focus on recruiting new Representatives.
Since the closing of the Ironwood Facility in mid-December (discussed
below), ICC has added approximately 2,600 new Representatives. While ICC
views its network of Representatives as its primary source for obtaining
new customers, ICC has taken steps to target certain markets and customers
with other channels of marketing such as telemarketing, affinity programs
and direct sales. However, such channels have not yet been developed.
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- John P. Casey and Ironwood purchased Incomnet's outstanding convertible
Preferred Stock and all associated rights under arrangements that require
Mr. Casey and Ironwood to hold the stock for repurchase by Incomnet at a
price representing no actual profit except, in the case of Ironwood, for a
carrying cost factor. The estimated repurchase price is $0.42 per share
(the "Repurchase Price"). Those transactions have the effect of avoiding
dilution to Incomnet's shareholders of more than 10 million shares at an
estimated per share purchase price of $.19 (I.E., the estimated conversion
price the former Preferred Holders paid for their Preferred Stock on an
as-converted-to-Common Stock-basis). If Incomnet is not financially or
legally able to repurchase the Preferred Stock, Ironwood and Mr. Casey are
obligated to make the common stock underlying such Preferred Stock
available for sale to all shareholders at the Repurchase Price plus the
costs of such offering.
- ICC obtained a $12.5 million credit facility with Foothill Capital
Corporation dated as of April 9, 1999. This facility was obtained to
assist in executing Incomnet's strategic plan and fund ICC's operations.
ICC'S BUSINESS
GENERAL.
ICC is a provider of long distance telephone services, prepaid calling
cards, telephone travel cards and inbound 800 services to residential and
business customers. ICC operates as a "switchless reseller" in that billing and
customer services are provided by ICC while actual transmission services or
switching of calls is handled by a major carrier. ICC obtains long distance
telecommunication transmission services from a carrier at high volume wholesale
rates and resells those services at retail rates. These services are sold
through ICC's network of Representatives.
ICC's services are sold to customers nationwide, although approximately 64%
of ICC's customers are located in California. Following is a description of
ICC's key products and services:
ICC's long distance and "Dial 1" telephone services permit customers to make
outbound long distance calls from any local telephone line by simply dialing a
"1," the area code and the seven-digit telephone number. This service may be
used for both domestic and international calling. During calendar years 1998,
1997 and 1996, long distance services represented approximately 92%, 80% and 75%
of Incomnet's total net sales from continuing operations.
ICC sells calling cards that allow the user to place calls from anywhere in
the U.S. or Canada to any location in the world with the charges for such calls
billed with the user's long distance service. ICC also offers prepaid calling
cards that allow customers to purchase and pay in advance for a card that allows
the user a fixed amount of telephone usage. During calendar years 1998, 1997 and
1996, prepaid calling cards represented approximately 5%, 8% and 7% of
Incomnet's total net sales from continuing operations.
ICC also offers pager services and 800 services although these products have
not represented a significant amount of Incomnet's revenues. ICC plans to expand
its line of products, including a branded internet service over the next four
months.
ICC's other source of revenues is the fees ICC charges to Representatives
for marketing materials and services. During calendar years 1998, 1997 and 1996,
these marketing revenues represented approximately 3%, 12% and 18% of Incomnet's
total net sales from continuing operations. The decline in marketing revenues
was primarily due to the decrease in new Representatives.
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MARKETING AND SALES REPRESENTATIVES.
ICC's services are marketed primarily through a network marketing system of
Representatives. ICC authorizes and trains Representatives to resell its
services to residential and small business customers and allows the individual
Representatives to build up their own sales force of other Representatives. The
Representatives are provided incentives to recruit new subscribers and expand
their own Representative sales force. ICC believes that this marketing system
reduces its marketing costs, subscriber attrition rate and subscriber
acquisition costs. As of December 31, 1998, ICC had approximately 14,000
Representatives in its network marketing program that pay fees to maintain
active status but all Representatives are not necessarily actively subscribing
new customers. Since mid-December 1998 when the Ironwood Facility was closed,
approximately 2,600 new Representatives have joined ICC's network of
Representatives.
The sales cycle for long distance service consists of Representatives adding
other Representatives to their sales force who in turn sell to new customers. A
new Representative initially has 30 days to sell new subscribers and add
customers to be eligible for certain bonuses. New customers are added to the
network within seven to ten days and are billed on periodic cycles approximately
30 days after being merged into the system as a new customer.
Once a Representative has signed up a long distance telephone customer with
one or more of ICC's services or products, the customer becomes an ICC customer.
ICC's customers pay for their services through:
- Direct billing from ICC;
- Billing from customers' local exchange carrier ("Local Carrier");
- Direct billing on customers' credit cards; and
- Prepayment on calling card products.
ICC has a number of billing and collection agreements with unaffiliated
companies by which ICC's customers are billed through their Local Carrier. Since
September 1997, ICC has decreased the amount of billing through Local Carriers
due to the increasing lag time for receipt of payment. Virtually all new
customers in 1998 receive direct billing from ICC. Approximately 40% of ICC's
customers currently are billed directly by ICC and ICC expects that percentage
to increase over time assuming that ICC successfully implements its recently
acquired billing software. See Item 7--"Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000 Readiness Disclosure."
ICC pays each Representative a commission based upon the amount of telephone
services used by customers who are originated by that Representative. If the
customers originated by a Representative's use certain targeted amounts of
services, the Representative's commission percentage is increased. ICC also pays
override commissions to Representatives if certain targeted amounts of services
are used by a Representative's own customers as well as those telephone
customers sourced by the Representative's sales force. Representatives are also
eligible for a bonus based upon a percentage of all telephone services billed by
ICC to retail customers if certain minimum quotas are achieved by the
Representative. In addition, ICC pays sales quota bonuses to Representatives for
assisting other Representatives in obtaining certain minimum quotas of new
retail long distance business.
WORKING CAPITAL
Incomnet's short term capital needs primarily relate to:
- Funding continuing operations and implementation of management's strategic
plan.
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- Funding payments to ICC's carrier which generally are due and payable
prior to receipt of payment from ICC's customers.
- Costs associated with upgrading or replacing computer hardware and
software. In February 1999 ICC committed to invest in a new direct billing
system that will permit ICC to deliver bills to customers for multiple
services and to complete its plan to convert most, if not all, customers
to direct billing.
OPERATING SUMMARY
Following is a summary of the Net Sales, Gains/Losses and Total Assets of
Incomnet for the three most recent calendar years. The line items identified as
"Continuing Operations" relate to Incomnet and its subsidiary, ICC. The line
items identified as "Discontinued Operations" relate to Incomnet's former
subsidiaries, RCI, GenSource and AutoNetwork.
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DESCRIPTION 1998 1997 1996
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Net Sales From Continuing Operations.......................................... $ 54,868 $ 121,831 $ 97,870
Loss from Continuing Operations............................................... $ (17,633) $ (14,057) $ (6,607)
Loss from Discontinued Operations............................................. $ (1,475) $ (1,561) $ (30,192)
Net loss...................................................................... $ (19,108) $ (15,618) $ (37,676)
Total Assets.................................................................. $ 24,420 $ 41,340 $ 33,730
Net Assets (Liabilities) of Discontinued Operations........................... $ 531 $ 5,707 $ (335)
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RECENT DEVELOPMENTS
FINANCINGS.
On December 15, 1998, Incomnet completed a $16.8 million financing from
Ironwood Telecom LLC (the "Ironwood Facility"). The Ironwood Facility bears
interest at the rate of 12%, payable quarterly, and the principal and unpaid
interest is due on December 31, 2000. The Ironwood Facility is secured by
substantially all of the assets of Incomnet and ICC and ICC guaranteed payment
of the facility. A majority of the proceeds of this loan were used to pay off in
full amounts owed by ICC to First Bank, to make payments to cure defaults to
WorldCom and for general corporate purposes.
In connection with the Ironwood Facility and the Ironwood Bridge Loan that
preceded the Ironwood Facility, Ironwood received an origination fee of $500,000
and an aggregate of 3.6 million warrants. Of the 3.6 million warrants, 1.0
million warrants have an exercise price of $2.25 per share and 2.6 million
warrants have an exercise price of $1.00 per share. The warrants have 5-year
terms.
In November 1998, Ironwood paid approximately $1.09 million to purchase
approximately 370 shares of Incomnet Preferred Stock from five former holders of
Incomnet Series A and Series B Preferred Stock (the "Ironwood Preferred").
Ironwood is obligated to hold the Ironwood Preferred for redemption by Incomnet
at any time before April 30, 2000 if Incomnet is financially able to do so. If
Incomnet does not repurchase the Ironwood Preferred by that date, the Ironwood
Preferred is convertible into 2,328,000 shares of Incomnet Common Stock and
Ironwood and Incomnet have agreed that such Common Stock will be offered to all
shareholders on a pro rata basis at a price equal to the sum of (i) the price
that Ironwood paid for the Ironwood Preferred; (ii) the expenses incurred by
Ironwood (including legal and accounting expenses); and (iii) a carrying charge
equal to an annual 18% interest rate.
In November 1998, Ironwood also loaned $2.1 million to Mr. Casey (the "Casey
Preferred Loan") to purchase 1,598,211 shares of Incomnet Series A and Series B
Preferred Stock. Incomnet is obligated
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to repurchase Mr. Casey's Preferred Stock by November 5, 1999, if Incomnet is
financially able to do so, at a price representing no actual profit to Mr.
Casey. If Incomnet is unable to repurchase the Casey Preferred, Incomnet is
obligated to offer the 8,454,970 shares of Common Stock into which Mr. Casey's
Preferred Stock is presently convertible to Incomnet's Shareholders at a price
representing no actual profit to Mr. Casey. ICC has guaranteed payment of the
Casey Preferred Loan.
On April 9, 1999, ICC obtained a $12.5 million credit facility from Foothill
Capital Corporation (the "Foothill Facility") which ICC plans to use to execute
its strategic plan and to fund ICC's operations. The loan is secured by all of
ICC's assets and certain assets of Incomnet. In connection with the Foothill
Facility, Ironwood and Foothill entered into an Intercreditor and Subordination
Agreement whereby Ironwood agreed to subordinate its right to receive payment on
its debt from Incomnet and Ironwood's interests in Incomnet's and ICC's assets
to Foothill. In consideration for that subordination, Incomnet agreed to issue
warrants to Ironwood to purchase 1.25 million shares of Common Stock. These
warrants have an exercise price of $1.00 per share and have a five-year term.
REBUILDING THE MARKETING PROGRAM.
ICC's services are primarily sold by its Representatives. In early 1998, a
number of ICC's key Representatives (the "Key Representatives") resigned due to
disagreements with Former Management. By mid-1998, an ICC consultant and a
former ICC executive who oversaw the Representatives, Christopher Mancuso and
Jerry Ballah, left ICC and formed a competing telecom sales organization. ICC's
marketing program was seriously hindered by the efforts of this competing
organization to hire away employees and induce Representatives and customers to
leave ICC.
By late 1998, ICC had reached a working and financial settlement with the
Key Representatives who agreed to continue to sell ICC's products and services
and assist ICC in rebuilding ICC's network marketing organization of
Representatives. ICC's rebuilding efforts were assisted by the decisions of the
California Public Utilities Commission and Orange County District Attorney to
lift certain restrictions and relax some of the verification procedures for
signing up new customers. Under the new procedures, when a customer decides to
switch to using ICC's services, the customer can call an independent
verification service or an independent verification service can call the new
customer to confirm the customer's switch to ICC without any mandatory waiting
period.
Since the Board Change in September 1998, ICC has taken a number of positive
steps in rebuilding its network marketing organization including:
- Temporarily reducing the start-up marketing kit fees for new
Representatives as part of a "pre-launch" sales program.
- Establishing monthly recognition and awards events to reward and provide
incentives to the top performing Representatives.
- Establishing regional promotional events where the Key Representatives
promote joining ICC's network of Representatives.
- Developing incentive programs that make ICC more competitive in attracting
new Representatives.
- Developing new marketing materials that will assist Representatives in
their sales efforts.
WORLDCOM CONTRACT.
Since September 1995, ICC has had a carrier contract with WorldCom. The
contract was renegotiated in October 1998 by ICC's New Management. The new
contract has reduced minimum purchase requirements and reduced wholesale long
distance rates. WorldCom also agreed to release its security interest over ICC's
customer base thereby giving ICC the ability to obtain new secured
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financing. Under the new terms, Incomnet has agreed to purchase $250 million in
long distance service over a three-year period, with the option to extend any
shortfall purchase requirements for an additional two-year period. The contract
provides for periodic rate reviews.
In March 1998, WorldCom extended credit to ICC of up to $3 million at an
interest rate of 18% per annum under terms of the prior carrier contract. On
December 15, 1998, ICC repaid its obligation to WorldCom in full out of proceeds
from the Ironwood Facility.
SECURITIES CLASS ACTION SETTLEMENT.
In 1995, Incomnet was sued in a class action lawsuit claiming various
securities law violations. A tentative settlement had been reached in 1997 but
was never finalized due to Incomnet's deteriorating financial condition. In late
1998, Incomnet entered into a new written settlement with the class plaintiffs.
The settlement calls for a cash payment of $500,000, the payment of up to
$100,000 of costs and the issuance of 1.375 million to 4.125 million shares of
Incomnet common stock, depending upon the share price at the time of issuance.
Preliminary court approval of the settlement was entered on March 22, 1999 and a
hearing to obtain final court approval is scheduled for May 1999.
STRATEGY
Incomnet's objective is to become a leading provider of telecom services in
the United States. Incomnet intends to increase its market share in existing
markets and to expand its network of Representatives and customers into new
markets through strategic acquisitions and internal growth.
The principal elements of Incomnet's business strategy include the
following:
- Expanding ICC's network of Representatives.
ICC's network of Representatives is a continuing differentiated
distribution channel that enables ICC to grow at an accelerated pace and
still be very cost effective. The network of Representatives primarily
sells to a "warm" market (I.E., friends, business associates and family)
and increases their own earnings potential by building their own network of
Representatives to assist in the selling process. Because the
Representatives primarily sell to their own warm market, there is a greater
chance to retain customers without having to compete solely on price.
ICC's strategy is to provide a wide range of opportunities for its
Representatives, whether a Representative works on a part-time basis to
supplement other income or whether a Representative desires a full-time
professional and entrepreneurial opportunity. Expanding the training
support of Representatives currently is a top priority for ICC. In
addition, ICC is developing more extensive marketing support materials for
its Representatives to assist them in successful marketing and sales. ICC
is continually reviewing its compensation plans for representatives and
seeks to design compensation that is fair and competitive with other sales
organizations and innovative in the network marketing environment. ICC also
is continuously evaluating various alternative incentive programs to help
maintain a high level of enthusiasm and improve results by its
Representatives.
- Expanding ICC's channels of marketing.
While ICC views its network of Representatives as its primary source for
new telecom customers, ICC is looking to target particular markets and
customers with other types of marketing. ICC has recently engaged
telemarketing companies to generate sales in certain targeted markets. ICC
is also evaluating direct sales for certain markets and types of customers
as well as affinity marketing programs. ICC believes that strategic
acquisitions of other telecom companies with other channels of marketing
could assist in this diversification effort.
- Expanding the type of customer.
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Historically, ICC has focused on residential customers. ICC has plans to
expand its marketing efforts to small and mid-size businesses. This
includes developing an infrastructure of employees who are sophisticated
about the needs and services required by business customers. ICC also
believes that it can expand its customers through strategic acquisitions
of other telecom companies. Currently, Incomnet customers are concentrated
in California, Hawaii, Texas, Washington, New York, Illinois and Florida.
- Expanding the types of telecom products and services to existing
customers.
ICC is in the process of positioning itself as an internet provider. ICC
believes that by having a branded internet service that is billed with
long distance service, ICC will increase customer loyalty and will reduce
customer turnover. ICC is expanding its calling card services so that they
can be used worldwide and is also expanding its pager services. ICC is
also considering offering expanded features and services that will be
important to small and mid-size businesses.
- While ICC has no current plans to build its own network, it may consider
doing so in the future if its business expands and if building such a
network could achieve economies of scale.
COMPETITION
The telecommunications industry is highly competitive and price competition
for long distance services has been intense and is expected to increase.
ICC's primary competitors are AT&T, Sprint and MCI WorldCom. These
competitors have more prominent name recognition than ICC, have larger numbers
of established customers, and have greater financial, technical, personnel,
marketing and other resources. These large long distance carriers have begun to
offer local services in certain markets and are expected to expand those
activities as opportunities are presented. The trend toward consolidation,
mergers, acquisitions and strategic alliances in the telecom industry has
increased the level of competition faced by ICC and is expected to continue to
do so in the future.
In addition to the main carriers, ICC faces increasing competition from
local exchange carriers, satellite carriers, and may eventually compete with
public utilities and cable companies. ICC also may face competition from
companies offering long distance data and voice services over the internet.
ICC also competes for its Representatives with other telecommunication
companies as well as other network marketing companies that use independent
sales representatives. ICC must continuously evaluate its commission schedules
and incentives to stay competitive with other sales organizations (E.G.,
American Communications Network and Excel).
The telecommunications industry is rapidly changing with new technologies,
introduction of new products and services, new strategic alliances and a
changing regulatory landscape. ICC plans to compete in the rapidly evolving
telecommunications industry by offering quality services at competitive rates
and by offering services primarily though personalized network marketing. ICC
believes that acquiring customers through the personal relationships of its
Representatives will create a more loyal customer base and will reduce the need
for ICC to offer deep discounts although ICC recognizes that its prices must
remain competitive. In addition, ICC believes that bundling a variety of
telecommunication services and presenting customers with a fully integrated
monthly billing statement for all services will allow it to penetrate markets
more rapidly and build customer loyalty. ICC believes that customers prefer one
company to be accountable for all their telecommunication services and that a
face-to-face sales and service strategy is the most effective method of
acquiring and maintaining its customer base.
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REGULATION
HISTORICAL PERSPECTIVE.
The local and long distance telephone market was primarily serviced by AT&T
until January 1, 1984 when AT&T and the Justice Department reached an agreement
which Federal District Court Judge Harold A. Greene ratified in his order
modifying an earlier 1956 Decree ("Order"). Pursuant to the Order, local
telephone service was to be provided by Bell Operating Companies ("BOC") which
were split off and legally separated from AT&T. AT&T would then provide long
distance service as an interexchange carrier.
Under Judge Greene's Order, the BOCs were required to provide access to
their local network to all interexchange providers. In addition, the Order
limited the amount of territory in which the BOCs could provide telephone
services. The Order established new fairly small BOC service areas called Local
Access and Transport Areas ("LATAs"). The BOCs were forbidden from providing
interexchange service between LATAs ("interLATA") as that service was reserved
for AT&T and its competitors.
Similarly, GTE was subject to a Consent Decree which created several GTE
Operating Companies ("GTOC") which provided local telephone service and access
to their local telephone network to all interexchange providers. Additionally,
the GTOCs were also forbidden from providing long distance or interLATA service.
THE TELECOMMUNICATIONS ACT OF 1996.
The Telecommunications Act of 1996 ("Telecommunications Act") lifted the
restrictions contained in the AT&T Decree and the GTE Decree, thereby
eliminating certain restrictions on the BOCs and GTOCs from providing long
distance services and engaging in telecommunications equipment manufacturing.
The new statutory provisions permit the BOCs to enter the long distance market
under certain circumstances. As of the date of enactment of the legislation, a
BOC is no longer restricted from providing interLATA long distance service
outside of those markets in which it provides local exchange service (referred
to as "out-of-region" long distance service). A BOC may provide long distance
service within the regions in which it also provides local exchange service
(referred to as "in-region" service) if it satisfies certain procedural and
substantive requirements and upon obtaining FCC approval on a state-by-state
basis.
The GTOCs are permitted to enter the long distance market as of the date of
enactment without regard to limitations by region, although the necessary state
and/or federal regulatory approval that are otherwise applicable to the
provision of intrastate and/or interstate long distance service will need to be
obtained, and the GTOCs are subject to the provisions of the 1996
Telecommunications Act that impose interconnection and other requirements on
Local Carriers.
Incomnet expects that some or all of the BOCs will seek to provide
out-of-region long distance service. Certain of them have already taken steps to
provide out-of-region service in multiple states. It is not known when, and
under what specific condition, other applications will be granted by the state
regulatory commissions in those states. Several of the BOCs have unsuccessfully
sought authority from the FCC to provide in-region long distance service in
various states. While no application had yet been granted by the FCC, it is
expected that most or all of the BOCs will eventually be granted authority to
provide in-region long distance service in many or all states.
The Telecommunications Act also addresses a wide range of other
telecommunications issues that will potentially affect ICC's operations,
including provisions pertaining to regulatory forbearance by the FCC; the
imposition of additional liability for the unauthorized switching of
subscribers' long distance carriers; the creation of new opportunities for
competitive local service providers; provisions pertaining to interconnection;
provisions pertaining to universal service and access charge reform and
requirements pertaining to the treatment and confidentiality of subscriber
network information. The
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legislation requires the FCC to conduct a large number of proceedings to adopt
rules and regulations to implement the new statutory provisions and
requirements. It is unknown at this time precisely the nature and extent of the
impact that the legislation and regulatory developments will have on ICC.
REGULATORY SCHEME APPLICABLE TO ICC.
ICC's telecommunications services are subject to government regulation.
Federal laws and the Federal Communications Commission's ("FCC") regulations
generally apply to interstate and international telecommunications, while
individual state regulatory authorities such as Public Utilities Service
Commissions ("PUC") generally have jurisdiction over aspects of
telecommunications that originate and terminate within the same state. In
addition, ICC's network marketing program is or may be subject to or affected by
extensive federal and state regulation.
ICC is classified by the FCC as a non-dominant carrier, and therefore is
subject to minimal federal regulation. The FCC requires ICC to file tariffs, but
does not extensively review the rates, terms or conditions, although the FCC has
the statutory authority to do so. Non-dominant carriers are required by statutes
to offer interstate and international services under rates, terms and conditions
that are just, reasonable, and not discriminatory. The FCC imposes only minimal
reporting requirements on non-dominant carriers which includes certain
reporting, accounting, and record keeping obligations.
As part of these reporting requirements, ICC currently has separate tariffs
on file with the FCC covering its domestic interstate and international
services. Although the tariffs of non-dominant carriers and the rates and
charges they specify are subject to FCC review, they are presumed to be lawful
and are seldom contested. ICC, as a telecommunications carrier, also is subject
to a variety of FCC regulations that for instance, govern the method in which a
consumer's long distance carrier can be changed, require pay phone owners to be
compensated for 800/888 calls originating from their pay phones, and require
certain documentation and verification prior to billing consumers for
non-telecommunications products and services.
ICC is subject to varying levels of regulation in the states in which it is
currently authorized to provide intrastate telecommunications services. The vast
majority of the states require ICC to apply for certification to provide
intrastate telecommunications services, or to register or to be found exempt
from regulation, before commencing intrastate service. The vast majority of the
states also require ICC to file and maintain detailed tariffs listing their
rates for intrastate service. Many states also impose various reporting
requirements and/or require prior approval for transfers of control of certified
carriers, and/or for corporate reorganization; acquisitions of
telecommunications operations; assignments of carrier assets, including
subscriber bases; carrier stock offerings; and incurrence by carriers of
significant debt obligations. Certificates of authority can generally be
conditioned, modified, canceled, terminated, or revoked by state regulatory
authorities for failure to comply with state law and/or the rules, regulations,
and policies of the state regulatory authorities. Fines and other penalties,
including the return of all monies received for intrastate traffic from
residents of a state may be imposed for such violations. If state regulatory
agencies conclude that ICC has taken steps without obtaining the required
authority, they may impose one or more of the sanctions listed above.
ICC's network marketing system is or may be subject to or affected by
extensive government regulation, including, without limitation, state regulation
of marketing practices and federal and state regulation of the offer and sale of
business franchises, business opportunities, and securities. In addition, the
Internal Revenue Service and state taxing authorities in any of the states where
ICC has Representatives could classify the Representatives as employees of ICC
(as opposed to independent contractors). ICC believes that it is in compliance
with the requirements of federal and state regulatory authorities in each
jurisdiction. A final determination by any other jurisdiction that the
Representatives are employees could cause ICC to be subject to penalties and
interest on taxes not withheld, require ICC to withhold taxes in the future, and
require ICC to pay unemployment insurance. Additionally, an
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adverse determination by any one could influence the decisions of regulatory
authorities in other jurisdictions. Any or all of such factors could adversely
affect the way ICC does business and could affect ICC's ability to attract
potential Representatives. While the regulations governing network marketing are
complex and vary from state to state, ICC believes that it is in compliance with
and has from time to time modified its network marketing program to comply with
interpretations of various regulatory authorities.
Various governmental agencies monitor direct selling activities, and ICC has
occasionally been requested to supply information regarding its marketing plan
to certain of such agencies. Although ICC believes that its network marketing
system is in substantial compliance with laws and regulations of each state
relating to direct selling activities, there is no assurance that legislation
and regulations adopted in particular jurisdictions in the future will not
adversely affect ICC's operations.
EMPLOYEES
Incomnet has sales offices in Irvine, California and Honolulu, Hawaii. As of
December 31, 1998, ICC employed or contracted with 22 general and administrative
personnel, 12 marketing and sales personnel and 78 programming, operations,
information technology and customer services personnel.
SALE OF GENSOURCE
Prior to March 9, 1999, Incomnet owned 100% of GenSource Corporation, a
computer software developer for insurance-related claims administration
("GenSource"). On March 9, 1999, Incomnet sold all of the Common Stock of
GenSource in exchange for the cancellation of $1,775,000 in debt owed by
Incomnet to the former owners of GenSource. Incomnet retained an approximate 15%
interest in GenSource in shares of GenSource preferred stock. As part of the
sale of GenSource stock, Incomnet settled litigation brought by the former
owners of the debt that was canceled as part of the transaction. See also the
discussion of Discontinued Operations in Item 7 below.
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INVESTMENT IN RAPID CAST
As of December 31, 1998, Incomnet owned approximately 6.2 million shares of
Common Stock of RCI which constitutes an approximately 17.4% interest in RCI.
During 1998, Incomnet sold an aggregate of 4.5 million shares of RCI with total
proceeds of $2,700,000. Incomnet is holding its remaining interest in RCI for
sale in the future as circumstances warrant. Incomnet has not entered into any
agreements regarding the sale of its RCI stock. See also the discussion of
Discontinued Operations in Item 7 below.
ITEM 2. PROPERTIES
Incomnet does not own any real estate. Incomnet and its subsidiary ICC
currently lease approximately 64,000 square feet of office space in Irvine,
California at the rate of approximately $72,000 per month. The lease has a
non-cancelable term of five years ending in April 2002, and provides for seven
extension periods of five years each at lease rates based on increases in the
Consumer Price Index. Incomnet has subleased approximately 18,300 square feet of
its Irvine facility providing a monthly savings of approximately $20,000.
ICC also leases approximately 9,900 square feet of office space in Honolulu,
Hawaii. That lease expires in 2007. The lease provides for a termination option
in the year 2002. The monthly lease payments averaged $38,059 during 1998 and
increase by 6% on a bi-annual basis through the term of the lease. Management is
currently evaluating options to sublease and/or reduce its obligations under
this lease.
Incomnet's former GenSource subsidiary leased approximately 8,000 square
feet of office space for its facilities in Valencia, California. That lease
expires on August 31, 1999. GenSource was obligated to make lease payments at
the rate of $6,208 per month through March 31, 1999. Commencing April 1, 1999 to
the balance of the lease, the rate is adjusted based on increases in the
Consumer Price Index. Incomnet's obligation ceased with regard to this lease
obligation when Incomnet sold its ownership of GenSource common stock in March
1999.
ITEM 3. LEGAL PROCEEDINGS
Following is a description of certain pending and recently completed legal
proceedings in which Incomnet is a party. No assurance can be given that any of
these legal proceedings will not have a material adverse impact on the business,
financial condition or results of operation of Incomnet.
PENDING AND RECENTLY COMPLETED LEGAL PROCEEDINGS
SANDRA GAYLES, ET AL. V. SAM D. SCHWARTZ, ET AL. On October 17, 1995,
Incomnet was served with a complaint in a class action lawsuit entitled SANDRA
GAYLES, ET AL. V. SAM D. SCHWARTZ AND INCOMNET, INC., Case No. CV95-0399 AWT
(BQRx), filed in the United States District Court for the Central District of
California. As amended, the complaint alleges that Incomnet violated Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder because Incomnet failed to disclose and falsely denied
the existence of a non-public investigation of Incomnet by the Securities and
Exchange Commission. The complaint also claims that Incomnet and its President
and former Chairman of the Board of Directors, Sam D. Schwartz, violated
Sections 10(b), 16(a), 20(a) and 23(a) of the Securities Exchange Act of 1934,
and Section 25400 of the California Corporations Code, because they did not
disclose until August 1995 purchases and sales of Incomnet's stock made in the
open market by an affiliate of Mr. Schwartz between September 1994 and August
1995. The amended complaint seeks compensatory damages, interest, attorneys'
fees and costs, and other extraordinary, equitable and injunctive relief as may
be appropriate. On January 11, 1996, the court certified the case as a class
action pursuant to the parties' stipulation.
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On October 7, 1997, Incomnet reached a tentative settlement of the lawsuit.
The proposed 1997 settlement consisted of an agreement by Incomnet to pay
$500,000 in cash plus 1.5 million shares of Common Stock. If the value of such
stock was not worth at least $8.15 million, Incomnet would have been required to
make up the difference between the value of the stock and $8.15 million by
issuing warrants with 5-year terms. Accordingly, the tentative settlement had a
total settlement value of $8.65 million. Because of the decline in the value of
Incomnet's stock beginning in July 1997, this proposed settlement could not
proceed under its terms. In 1998, Incomnet and the class plaintiffs began to
negotiate new settlement terms.
In September 1998, Incomnet entered into a new written settlement agreement
with the class plaintiffs. The settlement agreement is subject to court approval
and satisfaction of certain other conditions. The terms of the settlement
include payment to the plaintiffs of a total of $500,000, reimbursement of
certain expenses up to a maximum of $100,000 and issuance of a certain number of
shares of Incomnet's Common Stock based on a formula. The maximum number of
shares of Incomnet Common Stock that will be issued in accordance with the
formula under the settlement agreement is 4,125,000, assuming a $1 per share
trading price at the time the formula is applied. The minimum number of shares
of Common Stock that will be issued under the settlement agreement is 1,375,000
shares, assuming a $3 per share trading price at the time the formula is
applied. Prior to completion of the settlement agreement and issuance of the
shares in accordance with that agreement, Incomnet's shareholders must approve
an amendment to Incomnet's Articles of Incorporation to increase the authorized
number of shares of Common Stock. It is anticipated that the closing of the
settlement agreement and issuance of shares will occur no earlier than June
1999. The Court has preliminarily approved the settlement. A hearing on final
approval is scheduled for May 20, 1999. There can be no assurance that this new
settlement will be approved and consummated. Should the settlement not be
approved, Incomnet intends to vigorously defend the lawsuit. The case is still
in the discovery phase.
In separate litigation pending in California state court, Mr. Schwartz seeks
indemnification from Incomnet with respect to any judgments, legal fees or other
costs incurred in connection with his defense of this lawsuit. Incomnet intends
to vigorously defend itself against Mr. Schwartz's indemnification claims.
JAMES A. BELTZ, ET AL. V. SAMUEL D. SCHWARTZ, ET AL. On July 22, 1997,
Incomnet was named in a lawsuit, JAMES A. BELTZ, ET. AL. V. SAMUEL D. SCHWARTZ,
RITA SCHWARTZ, STEPHEN A. CASWELL, JOEL W. GREENBERG, INCOMNET, INC., DAVID
BODNER AND MURRAY HUBERFELD, Case No. 97-1678 (MJD/AJB), in the United States
District Court for the District of Minnesota. The lawsuit was filed by
approximately twenty plaintiffs who were allowed to opt out of the GAYLES class
action lawsuit to pursue a lawsuit on their own. The complaint alleges that Mr.
Schwartz and the other defendants created a fraudulent scheme to drive up the
price of Incomnet's stock in violation of Sections 9, 10(b) and 20(a) of the
Securities Exchange Act of 1934, Rule 10b-5 promulgated thereunder, and
Minnesota law. The lawsuit alleges losses by the plaintiffs of approximately
$1.5 million and seeks unspecified damages. The case is in the discovery phase.
On or about March 24, 1998, the plaintiffs in this suit plus several
additional plaintiffs commenced a parallel state court action entitled JAMES A.
BELTZ, ET. AL. V. SAMUEL D. SCHWARTZ AND RITA L. SCHWARTZ, STEPHEN A. CASWELL,
JOEL W. GREENBERG, INCOMNET, INC., DAVID BODNER, AND MURRAY HUBERFELD, Case No.
MC 98-00674, in the State of Minnesota, County of Hennepin. This state lawsuit
brings causes of action for violations of Minnesota statutes covering securities
fraud, consumer fraud, control person liability and conspiracy to defraud based
on the same factual allegations pleaded in the federal suit. Plaintiffs allege
losses of over $1.8 million and the lawsuit seeks unspecified damages. The case
will enter the discovery phase should court-sponsored mediation efforts fail to
resolve the parties' disputes. Incomnet plans to vigorously defend this lawsuit.
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In separate litigation pending in California state court, Mr. Schwartz and
Rita Schwartz seek indemnification from Incomnet with respect to any judgments,
legal fees or other costs incurred in their defense of these two lawsuits.
Incomnet intends to vigorously defend itself against Mr. and Mrs. Schwartz's
indemnification claims.
SILVA RUN WORLDWIDE LIMITED V. INCOMNET, INC., ET AL. Incomnet was a
defendant in a lawsuit entitled SILVA RUN WORLDWIDE LIMITED V. INCOMNET, INC.,
SAM D. SCHWARTZ, KALIBER MANAGEMENT, INC., BEAR STEARNS & CO., INC., LESLIE
SOLMONSON, RONALD F. SEALE, MARINER RESERVE FUND, COMPANIA DI INVESTIMENTO
ANTILLANO, COUTTS & CO. AG, SALVATORE M. FRANZELLA, PETER G. EMBIRICOS, AND JOS
SCHUETZ, originally filed in the United States District Court for the Southern
District of New York. The complaint stated that the plaintiff was a purchaser of
Incomnet's stock in July 1995. The complaint alleged that Incomnet and Mr.
Schwartz, violated Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, and Rule 10b-5 promulgated thereunder, and committed common law fraud, as
a result of false and misleading statements made by the defendants and
undisclosed trading in Incomnet's stock engaged in by Mr. Schwartz and his
affiliate. The complaint also alleged that Mr. Schwartz and his affiliate owed a
fiduciary duty to the plaintiff that was breached by their conduct. The
complaint also alleged other causes of action against other unrelated
defendants. Plaintiff claimed economic losses of approximately $2.7 million.
Incomnet answered the complaint in November 1996 and moved to have it
transferred to California. In March 1997, the claims relating to Incomnet, Sam
Schwartz and Kaliber Management, Inc. were ordered severed and transferred from
the court in New York to the same federal court in California which is hearing
the GAYLES class action lawsuit. In November 1998, this transferee court
dismissed all of the federal claims and all but one of the state law claims on
the ground that plaintiff had not opted out of the GAYLES class action lawsuit.
As a result of this ruling, Silva Run Worldwide Limited moved to extend the time
by which it may opt out of the class. The court granted this motion and allowed
Silva Run Worldwide Limited the opportunity to opt out and continue its action
against Incomnet and Mr. Schwartz based upon alleged violations of both federal
and state law. Incomnet plans to vigorously defend this lawsuit.
In separate litigation pending in California state court, Mr. Schwartz seeks
indemnification from Incomnet with respect to any judgments, legal fees or other
costs incurred in connection with his defense of this lawsuit. Incomnet intends
to vigorously defend itself against Mr. Schwartz's indemnification claims.
INCOMNET, INC. V. SAM D. SCHWARTZ. Incomnet filed a lawsuit against Mr.
Schwartz, on April 25, 1997, alleging fraud, breach of fiduciary duty,
negligence, and breach of contract, and seeking declaratory relief and the
imposition of a constructive trust. The lawsuit, entitled INCOMNET, INC., V. SAM
D. SCHWARTZ, Case No. LC 040 840, was filed in the Superior Court of California,
Los Angeles County. In the lawsuit, Incomnet alleges that Mr. Schwartz failed to
disclose to Incomnet or its Board of Directors that he would obtain a direct
financial benefit in connection with certain transactions considered or entered
into by Incomnet during the period from 1993 to 1995. Incomnet further alleges
that Mr. Schwartz fraudulently induced it to enter into a severance agreement
with him on November 27, 1995, and that he breached his fiduciary duty to
Incomnet by self dealing, acting in bad faith and concealing material facts.
Incomnet seeks payment from Mr. Schwartz of the actual damages incurred by it as
a result of Mr. Schwartz's conduct, as well as interest, punitive damages,
attorney's fees and costs, and reimbursement of all payments previously made to
Mr. Schwartz pursuant to the severance agreement. Furthermore, Incomnet seeks a
declaratory judgment that Mr. Schwartz committed acts or omissions involving
known misconduct, the absence of good faith, an improper personal benefit, a
reckless disregard of his duties to Incomnet and its shareholders, an unexcused
pattern of inattention, and a violation of Sections 310 and 317 of the
California Corporations Code.
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On June 24, 1997, Mr. Schwartz answered Incomnet's lawsuit against him
denying the allegations and counterclaiming for (i) enforcement of any payments
due under his severance agreement with Incomnet, (ii) indemnification against
third party claims, and (iii) payment of the same settlement to him as was paid
to certain prior note holders who purchased convertible notes from Incomnet on
February 8, 1995. Incomnet intends to vigorously prosecute this action and
defend against Mr. Schwartz's counterclaims. The lawsuit is in the discovery
phase. A trial date is set for February 2, 2000.
RITA SCHWARTZ V. INCOMNET, INC. On or about December 2, 1997, Rita
Schwartz, a former member of the Board of Directors of Incomnet and the wife of
Mr. Schwartz, filed the case of RITA SCHWARTZ V. INCOMNET, INC., Case No. BC 182
151, in the Superior Court of California, Los Angeles County. Mrs. Schwartz
seeks reimbursement of the legal expenses which she incurred as a result of an
investigation by the Securities and Exchange Commission of Incomnet and as a
defendant in the BELTZ opt-out cases, which are ongoing. Mrs. Schwartz claims
that because she is a former member of the Board of Directors, she is entitled
to reimbursement for her legal fees based upon the Articles of Incorporation of
Incomnet. The lawsuit is presently in the discovery phase. Incomnet plans to
vigorously defend this lawsuit. A trial date is set for February 2, 2000.
ROBERT AND NANCY ZIVITZ V. JOEL GREENBERG, ET AL. On August 27, 1998, Nancy
Zivitz, a former director of Incomnet, and her husband, filed a lawsuit entitled
ROBERT AND NANCY ZIVITZ V. JOEL GREENBERG, ET AL, Case No. 98C 5350, in the
United States District Court for the Northern District of Illinois, against Mr.
Schwartz, his wife Rita Schwartz, a former director of Incomnet, and Joel
Greenberg, a former director and officer of Incomnet, in the United States
District Court in the Northern District of Illinois. The complaint asserts
claims of common law fraud and civil conspiracy based on allegations that
defendants conspired to drive up the price of Incomnet stock by making false
statements regarding Incomnet and that defendants engaged in insider trading.
While Incomnet has not been named in the lawsuit, Mr. and Mrs. Schwartz have
commenced a third party action against Incomnet seeking indemnification with
respect to costs incurred in defending the lawsuit. Incomnet intends to
vigorously oppose this claim. Mr. Greenberg has made written demands for
indemnification and seeks an advance to cover his legal fees in the case.
JACOBS V. INCOMNET, INC. On December 23, 1998, Edward Jacobs, former
President and Chief Executive Officer of ICC, filed an action against Incomnet
in the Superior Court of the State of California, Los Angeles County, entitled
EDWARD R. JACOBS V. INCOMNET, INC., Case No. BC 202857. Mr. Jacobs claims that
Incomnet has failed to pay amounts allegedly owed to him pursuant to a
settlement agreement with Incomnet, dated November 13, 1996. Mr. Jacobs seeks
compensatory damages of $453,000, unspecified consequential damages, interest
and attorneys' fees and costs. Incomnet has answered the complaint and has
asserted a cross-complaint against Mr. Jacobs. Incomnet intends to vigorously
defend the lawsuit.
LAWSUITS BY TWO FORMER OWNERS OF GENSOURCE CORPORATION. On September 23,
1998, Jerry C. Buckley and Ralph Flygare, two former owners of GenSource
Corporation, filed a lawsuit entitled JERRY BUCKLEY, RALPH FLYGARE ET AL. VS.
INCOMNET, INC., GENSOURCE CORPORATION AND MARK RICHARDSON, Case No. LC 046 449,
in the Superior Court of the State of California, Los Angeles County. In the
lawsuit, the plaintiffs alleged that Incomnet defaulted on payments under
promissory notes between Incomnet and the plaintiffs and sought damages of
approximately $1.2 million. This lawsuit was settled and dismissed as part of
the sale of GenSource in March 1999. The sale of GenSource also resolved
potential lawsuits by two other former shareholders of GenSource.
ICC V. JERRY BALLAH, ET AL. On July 21, 1998, ICC sued Jerry Ballah, a
former officer, director and consultant, and others in an action entitled
NATIONAL TELEPHONE & COMMUNICATIONS, INC. V. JERRY BALLAH, WORLD TECHNOLOGIES
MARKETING, INC., ET AL., Case No. 797154, in the Superior Court of California,
Orange County. ICC asserts claims against Mr. Ballah and other defendants for
breach of contract,
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misappropriation of trade secrets, intentional interference with business
relationships, fraud and related claims in connection with defendants' start-up
of a competing business and solicitation of ICC's employees and independent
sales representatives and diversion of ICC's telephone customers to businesses
owned or controlled by defendants. ICC filed its second amended complaint in
February 1999.
In September 1998, Mr. Ballah answered the original complaint and filed a
cross-complaint against ICC alleging that ICC failed to make payments of
$250,000 under a consulting agreement with him. Mr. Ballah alleges claims for
breach of contract and breach of the implied covenant of good faith and fair
dealing and asserts a claim based on work, labor and services rendered. In the
same cross-complaint, an affiliate of Mr. Ballah, defendant World Technologies,
Inc. ("World Tech"), alleges that ICC breached an agreement under which World
Tech would become the exclusive network marketing company for ICC. World Tech
also alleges claims of fraud, negligent misrepresentation and unjust enrichment,
and seeks an accounting.
On July 21, 1998, the court entered a stipulated restraining order enjoining
the defendants in the lawsuit from, among other things, directly or indirectly
attempting to induce any ICC employee or independent sales representative to
work or perform services for the defendants. ICC's motion for preliminary
injunction is currently scheduled for hearing on April 21, 1999. Incomnet plans
to continue to vigorously prosecute this action.
ACTIONS BY FORMER INDEPENDENT SALES REPRESENTATIVES. On May 22, 1998,
former ICC independent sales representatives Mercedes Chan and Chatri
Jhunjhnuwala filed a lawsuit in the Superior Court of the State of California,
Orange County, against Incomnet, ICC, and others entitled MERCEDES CHAN AND
CHATRI JHUNJHNUWALA VS. INCOMNET, INC., NATIONAL TELEPHONE & COMMUNICATIONS,
INC. ET. AL., Case No. 794636. In the lawsuit, the plaintiffs allege that
defendants induced them to become independent representatives of ICC and to
incur sign-up fees and other costs based on false representations concerning the
business of ICC and the amount of commission and bonus payments that could be
earned as independent representatives of ICC. Plaintiffs assert claims for
fraud, breach of contract, wrongful discharge, negligent misrepresentation and
other causes of action and seek general, compensatory, special and punitive
damages. The case is in the discovery phase. A trial date is set for August 30,
1999. Incomnet intends to vigorously defend this lawsuit.
On October 29, 1998, former ICC independent sales representative Chutapa
Varavarn commenced an action in the Superior Court of the State of California,
Orange County, entitled CHUTAPA VARAVARN V. INCOMNET, INC., ET AL., Case No.
801412. The factual and legal allegations are substantially similar to the
allegations in the CHAN lawsuit and plaintiff seeks damages, including punitive
damages. Incomnet intends to vigorously defend this lawsuit.
On August 20, 1998, former ICC independent sales representative Rick Bergen
commenced an action in the Superior Court of the State of California, Orange
County, entitled RICK BERGEN V. INCOMNET, ET AL., Case No. 798468. Plaintiff
contends that ICC failed to make certain payments and commissions based on his
development of sales territories and wrongfully deprived him of other income.
Plaintiff asserts claims for fraud, unfair business practices, negligence,
wrongful discharge and unpaid wages and seeks compensatory and punitive damages.
The case is in the discovery phase and a trial date is set for October 4, 1999.
Incomnet intends to vigorously defend this lawsuit.
On May 26, 1998, former ICC independent sales representative Chuanxu Zang
and another party commenced an action against ICC in state court in Fairfax
County, Virginia, entitled CHUANXU ZANG, ET AL. V. NATIONAL TELEPHONE &
COMMUNICATIONS, INC., Circuit Court Case No. 171965, involving a dispute
regarding the Plaintiff's purchase of long distance telephone calling cards from
ICC. On March 5, 1999, the Fairfax County Circuit Court stayed the action and
ordered that Plaintiffs submit their dispute to arbitration in Orange County,
California, in accordance with the arbitration provision contained in
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<PAGE>
Mr. Zang's independent representative agreement. Plaintiffs have not yet
commenced an arbitration proceeding. Incomnet intends to continue to vigorously
defend this action.
On February 17, 1999, former ICC independent sales representatives Kevin
Porter, Robin Kasten, and Larry Tate attempted to commence separate arbitration
proceedings against Incomnet and ICC, alleging, INTER ALIA, that Incomnet and
ICC failed to make payments owed to them. The complaints in these arbitration
proceedings purport to assert various causes of action against Incomnet and ICC,
including claims for purported fraud, unfair business practices, breach of
contract, negligence and conversion. The plaintiffs in these separate
arbitration proceedings seek unspecified damages, including punitive damages.
Plaintiffs are required under the terms of their independent representative
agreements with ICC to commence any proceedings against ICC before the American
Arbitration Association, but have not yet done so. Incomnet and ICC have not yet
filed answering statements in these actions, and no trial date has been set.
Incomnet intends to vigorously defend itself in these arbitration proceedings.
JACOBS ARBITRATION. On March 19, 1999, Edward Jacobs, former President and
Chief Executive Officer of ICC, commenced an arbitration action against ICC
before the American Arbitration Association, seeking relief in the amount of
$549,776.92, plus interest and attorneys' fees, based upon an alleged breach of
an employment agreement by ICC. ICC has not yet filed an answering statement,
and a trial date has not yet been set. Incomnet plans to vigorously defend this
arbitration proceeding.
JACOBS V. ICC (LABOR COMMISSION). On August 12, 1998, Edward Jacobs, former
President and Chief Executive Officer of ICC, initiated a proceeding against ICC
before the Labor Commissioner of the California Department of Industrial
Relations, known as EDWARD R. JACOBS V. NATIONAL TELEPHONE & COMMUNICATIONS,
INC., Case No. 18-34441-002-182/031. In this Labor Commission proceeding, Mr.
Jacobs claims that he is owed compensation for earned and unused vacation time
totaling $106,153.86, plus penalties and attorneys' fees. ICC denies that it has
any such obligation to Mr. Jacobs. The hearing on Mr. Jacobs' claims commenced
on March 11, 1999, but was not completed. The hearing is currently set to
continue on June 21, 1999. Incomnet intends to continue to vigorously defend
this proceeding.
LAWSUIT BY COMMUNICATIONS CONSULTING, INC. On June 23, 1998, Communications
Consulting, Inc. ("CCI"), filed a lawsuit against National Telephone &
Communications, Inc. entitled COMMUNICATIONS CONSULTING, INC. V. NATIONAL
TELEPHONE & COMMUNICATIONS, INC., Case No. 795910, in the Superior Court of the
State of California, Orange County. CCI claims that ICC improperly terminated a
consulting agreement between CCI and ICC and owes CCI a sum of $127,037.50,
interest and reasonable costs, fees and expenses associated with its lawsuit.
The case is in the discovery phase and a trial date is set for July 26, 1999.
Incomnet intends to vigorously defend this lawsuit.
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION. In August 1994, Incomnet
was notified by the Pacific Regional Office of the Securities and Exchange
Commission that the Commission had initiated an informal inquiry of Incomnet. In
September 1994, the Commission issued a formal order of private investigation.
The Commission's investigation subsequently focused on press releases issued by
Incomnet on January 17 and 18, 1995, and September 6, 1995, and on a report on
Form 8-K issued by Incomnet on August 28, 1995, which the Commission alleged
contained untrue statements of material fact. On May 14, 1998 Incomnet and two
former directors of Incomnet, Stephen A. Caswell and Joel W. Greenberg, entered
into an Offer of Settlement and Order with the Commission pursuant to which they
agreed, without admitting or denying any wrongdoing, not to violate Section
10(b) and 13(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-2,
13a-11 and 13a-13 promulgated thereunder. No civil penalties or other financial
sanctions were imposed on any of the parties. The final administrative order was
entered by the SEC on July 30, 1998.
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<PAGE>
POTENTIAL LAWSUITS. Approximately 50 members of the class in the GAYLES
class action lawsuit against Incomnet have opted out of the class and may file
separate lawsuits against Incomnet. If such claims are filed as legal
complaints, Incomnet will seek to have them consolidated with other pending
lawsuits, if appropriate, or will defend them separately.
A claim may be asserted against Incomnet by Jerry Ballah with respect to a
settlement agreement Incomnet entered into in November 1996. Mr. Jacobs, who was
a party to the settlement, has already commenced a lawsuit in connection with
the settlement agreement. The amount of the damages that may be asserted by Mr.
Ballah is estimated to be approximately $535,000 plus accrued interest, and
possible consequential damages. Incomnet intends to vigorously defend any claims
made against it or ICC by Mr. Ballah.
John R. Dennis and JRD, Inc. may commence an action against ICC based upon
an alleged breach of a purported agreement by which Mr. Dennis and JRD, Inc.
were to provide consulting services to ICC. Absent the existence of such
agreement, Mr. Dennis and JRD, Inc. seek recovery based on alleged benefits they
claim to have provided to ICC as a result of certain alleged activities.
Incomnet believes this case lacks merit and is preparing to respond to any
litigation that may be brought.
From time to time, Incomnet is also involved in litigation arising from the
ordinary course of business, the ultimate resolution of which may or may not
have a material adverse effect on the financial condition or results of
operations of Incomnet.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
20
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
Incomnet's common stock is quoted on the Nasdaq SmallCap Market under the
symbol "ICNT." The following table sets forth the range of high and low bid
prices and the last bid price for Incomnet's common stock during the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998:
QUARTER HIGH LOW LAST BID
- ------------------------------------------------------ --------- --------- -----------
<S> <C> <C> <C>
4th Quarter........................................... 2 3/4 1 13/32 1 3/4
3rd Quarter........................................... 2 3/8 1/4 2 1/8
2nd Quarter........................................... 3/4 5/32 5/16
1st Quarter........................................... 1 3/4 15/32 3/4
YEAR ENDED DECEMBER 31, 1997:
<CAPTION>
QUARTER HIGH LOW LAST BID
- ------------------------------------------------------ --------- --------- -----------
<S> <C> <C> <C>
4th Quarter........................................... 3 13/16 1 1/16 1 3/16
3rd Quarter........................................... 5 3/16 2 15/16 3 5/8
2nd Quarter........................................... 5 1/2 2 11/16 4 7/8
1st Quarter........................................... 5 1/16 2 13/16 3 1/8
</TABLE>
On April 12, 1999, the last sale price per share of Incomnet's common stock,
as quoted by the Nasdaq SmallCap Stock Market, was $.9688.
On April 12, 1999 Incomnet's 19,933,000 shares of common stock outstanding
were held by approximately 4,200 shareholders, including shareholders of record
and shareholders whose stock is held in street name.
DIVIDENDS
Incomnet has not paid cash dividends on its Common Stock during the past
three years. Payment of dividends is within the discretion of Incomnet's Board
of Directors and will depend, among other factors, on earnings, capital
requirements and operating and financial conditions. At the present time,
Incomnet has neither the plans nor the financial resources to declare or pay any
dividends on its Common Stock.
Incomnet's ability to pay dividends is restricted by the Foothill Facility.
The Foothill Facility provides that as long as (i) no event of default on the
Foothill Facility has occurred and is continuing and (ii) ICC has not less than
$2 million of available funds under the facility after giving effect to any
dividend, ICC may pay dividends to Incomnet to cover general and administrative
expenses as historically conducted and to cover accrued dividends on Incomnet
preferred stock up to a maximum of $20 million of preferred stock.
RECENT SALES OF UNREGISTERED SECURITIES
In November and December 1998, Incomnet issued to Ironwood Telecom LLC
("Ironwood") warrants to purchase an aggregate of 3,600,000 shares of Incomnet
Common Stock (the "Ironwood
21
<PAGE>
Warrants"). The Ironwood Warrants were issued in connection with the Ironwood
Facility. The Ironwood Warrants were issued in three tranches:
- The first tranche was issued on November 4, 1998 and entitle Ironwood to
purchase 500,000 shares of Incomnet's Common Stock at an exercise price of
$1.00 per share. Those warrants are exercisable immediately and for a
five-year period ending November 4, 2003.
- The second tranche of warrants was issued on November 16, 1998 and entitle
Ironwood to purchase 100,000 shares of Incomnet's Common Stock at an
exercise price of $1.00 per share. Those warrants are exercisable
immediately and for a five-year period ending November 16, 2003.
- The third tranche of warrants was issued on December 15, 1998 and entitled
Ironwood to purchase an aggregate of 3,000,000 shares of Incomnet's Common
Stock. Those warrants entitled Ironwood to purchase (i) 2,000,000 shares
of Incomnet's Common Stock at an exercise price of $1.00 per share (the
exercise price and number of shares are subject to adjustment based on
Incomnet's operating results), exercisable during the period commencing on
the date Incomnet's Articles of Incorporation are amended to provide for a
sufficient number of shares of Common Stock to allow for such exercise
(the "Amendment Date") and ending five years from the Amendment Date; and
(ii) 1,000,000 shares of Incomnet Common Stock at an exercise price of
$2.25 per share (the exercise price and number of shares are subject to
adjustment based on Incomnet's operating results), exercisable during the
five-year period commencing December 15, 1999 and ending December 15,
2004.
- As of April 13, 1999, none of the Ironwood Warrants have been exercised.
The securities issued in the foregoing transactions were offered and sold
under the exemption provided by Section 4(2) of the Securities Act of 1933.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to
Incomnet's statements of operations data for each of the years ended December
31, 1998, 1997 and 1996 and with respect to balance sheet data at December 31,
1998 and 1997 are derived from the audited consolidated financial statements
included elsewhere in this Annual Report on Form 10-K and are qualified by
reference to those financial statements. The statement of operations data for
the years ended December 31, 1994 and 1995 and with respect to balance sheet
data at December 31, 1994, 1995 and 1996, are derived from audited consolidated
financial statements not included in this Annual Report on Form 10-K. The
following selected consolidated financial data should be read in conjunction
with the Consolidated Financial Statements for Incomnet and the notes thereto
along with Management's Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1998 1996 1995 1994
--------- --------- --------- ---------
1997(2)
-----------
(RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA (1):
Net sales from continuing operations........................ $ 54,868 $ 121,831 $ 97,870 $ 83,202 $ 45,614
(Loss) income from continuing operations.................... (17,633) (14,057) (6,607) 2,576 3,655
(Loss) gain from discontinued operations.................... (1,475) (1,561) (30,192) (1,210) 416
Cumulative effect of accounting change...................... -- -- (877) -- --
--------- ----------- --------- --------- ---------
Net (loss) income........................................... $ (19,108) $ (15,618) $ (37,676) $ 1,366 $ 4,071
--------- ----------- --------- --------- ---------
--------- ----------- --------- --------- ---------
BASIC AND DILUTED (LOSS) EARNINGS PER COMMON SHARE (1):
From continuing operations.................................. $ (1.03) $ (1.08) $ (0.50) $ 0.20 $ 0.38
From discontinued operations................................ (0.09) (0.11) (2.26) (0.09) 0.04
From cumulative effect of accounting change................. -- -- (0.06) -- --
--------- ----------- --------- --------- ---------
Net (loss) earnings......................................... $ (1.12) $ (1.19) $ (2.82) $ 0.11 $ 0.42
--------- ----------- --------- --------- ---------
--------- ----------- --------- --------- ---------
BALANCE SHEET DATA AT DECEMBER 31 (1):
Total assets................................................ $ 24,420 $ 41,340 $ 33,730 $ 55,938 $ 26,152
Long-term obligations....................................... $ 16,819 $ 2,855 $ 1,003 $ 11 $ 1
Net assets (liabilities) of discontinued operations......... $ 531 $ 5,707 $ (335) $ 27,745 $ 784
</TABLE>
- ------------------------
(1) All years have been adjusted to reflect certain financial statement
reclassifications made related to certain entities disposed of during 1998
and early 1999 that have been reflected as discontinued operations. See Item
7."Management's Discussion and Analysis of Financial Condition and Results
of Operations--Discontinued Operations."
(2) Amounts for 1997 have also been restated to reflect a $7.2 million increase
in stockholders' equity in accordance withe the equity method of accounting
for the Company's RCI investment. Additionally, operating results for RCI
for 1997 have been restated to reflect additional losses of $2.0 million.
See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Discontinued Operations."
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<PAGE>
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Following is management's discussion and analysis of certain significant
factors, which have affected the consolidated results of operations and
financial condition of Incomnet during the period included in the accompanying
consolidated financial statements. This discussion should be read in conjunction
with the consolidated financial statements and associated notes set forth
beginning on page F-1 of this Form 10-K.
The following discussion and analysis of financial condition and results of
operations contains statements that are based upon certain estimates,
projections and other forward-looking statements within the meaning of the
Securities Litigation Reform Act of 1995. See "Special Note Regarding
Forward-Looking Statements" on page 1 of this Form 10-K.
OVERVIEW
Incomnet is the parent company of Incomnet Communications Corporation (ICC),
a company that provides long distance and telecommunication services to
residential customers and businesses throughout the United States. ICC's
telecommunication services are sold by ICC's network of independent sales
representatives.
During 1998, Incomnet was also the parent company of Auto Dismantler Network
(AutoNetwork) and GenSource Corporation (GenSource). Incomnet also owns an
interest in Rapid Cast, Inc. (RCI) (now known as Optical Dynamics Corporation).
Incomnet's business was streamlined with the sale of the assets of AutoNetwork
in early 1998, the sale of a portion of Incomnet's RCI stock and on
discontinuance of Incomnet's involvement and influence over management of RCI in
late 1998 and the sale of GenSource in 1999 (See Discontinued Operations).
RESULTS OF CONTINUING OPERATIONS
The following table sets forth, as a percentage of total net sales, certain
consolidated statements of operations data for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Total net sales.................................................... 100% 100% 100%
Cost of sales...................................................... 63 70 66
--- --- ---
Gross profit..................................................... 37 30 34
Operating expenses:
General and administrative....................................... 48 24 29
Depreciation and amortization.................................... 6 2 2
Bad debt expense................................................. 7 5 6
Impairment of long-lived assets.................................. 3 -- --
Other operating expense.......................................... 3 10 3
Total operating expenses....................................... 67 41 40
--- --- ---
Operating loss..................................................... (30) (11) (6)
Interest expense................................................... 3 -- --
Income tax (benefit) expense....................................... (1) 1 1
--- --- ---
Loss from continuing operations.................................... (32) (12) (7)
Loss from discontinued operations.................................. (3) (1) (31)
--- --- ---
Net loss........................................................... (35)% (13)% (38)%
--- --- ---
--- --- ---
</TABLE>
24
<PAGE>
Incomnet reported a loss from continuing operations of $17.6 million for the
year ended December 31, 1998, compared to a loss from continuing operations of
$14.1 million and $6.6 million for the same periods in 1997 and 1996,
respectively. For the comparative periods presented, Incomnet's results of
continuing operations include Incomnet, Inc. and its subsidiary ICC. The results
from operations for the discontinued business segments is reported separately as
discontinued operations. (See Discontinued Operations below).
NET SALES. Incomnet's revenues primarily consist of revenues from long
distance telephone services and marketing program fees paid by Representatives
for marketing materials, services and pre-paid calling cards. A portion of
marketing program revenues are deemed related to continuing support obligations
and are deferred and recognized over the twelve-month contractual service
periods.
Net sales declined $67 million or 55% from $122 million in 1997 to $55
million in 1998 primarily due to significant business changes discussed in more
detail under "Item 1, Business--Significant Business and Management Changes in
1998" ("Significant Business Changes"). The Significant Business Changes caused
the Company to lose existing Representatives and prevented the Company from
attracting new Representatives at a sufficient rate to maintain the size of the
customer base. The loss of Representatives who generally sold to a "warm" market
(i.e., friends, business associates and family members) resulted in higher than
normal customer attrition and reduced the Company's ability to add customers.
The attrition of customers caused the telephone services revenue to decrease $54
million or 50% from $107 million in 1997 to $53 million in 1998. The inability
to attract new Representatives caused marketing revenues to decrease $13 million
or 88% from $15 million in 1997 to $2 million in 1998.
Total net sales increased $24 million or 24% from $98 million in 1996 to
$122 million in 1997 as a result of the significant expansion of ICC's
telecommunications customer base and Representative growth during the first half
of 1997. Incomnet experienced strong growth momentum through the first part of
1997 and abruptly stalled when the PUC and Orange County District Attorney
imposed certain restrictions. Marketing program sales decreased $2 million or
14% from $17 million in 1996 to $15 million in 1997 due to both a price decrease
to Representatives for materials and services and the restrictions imposed in
the fourth quarter of 1997.
COST OF SALES. Cost of sales includes direct costs for both telephone
services and marketing programs. Cost of sales for telephone services includes
the cost of service provided by WorldCom and commissions paid to
Representatives. Marketing program cost of sales include (i) bonus commissions
for assisting new Representatives obtain certain minimum levels of retail long
distance subscribers and related long distance usage, (ii) compensation and
related costs of ICC's employees providing marketing support, (iii) related
overhead and (iv) the cost of providing business forms, and promotional and
presentation materials.
Cost of sales decreased $51 million or 60% from $86 million in 1997 to $35
million in 1998. This change was principally attributable to decreases in
carrier costs associated with a decline in telephone service sales volumes, an
overall decline in sales commissions, and lower average per unit cost for
telecommunication services in 1998.
Cost of sales increased $22 million or 33% from $64 million in 1996 to $86
million in 1997 and was attributable to the increase in carrier costs associated
with increased telephone service sales by ICC in 1997.
GROSS MARGIN. Telephone services gross margins are principally affected by
changes in product mix, telephone services average per unit cost, and changes in
commissions paid on telephone usage. Marketing program gross margins are
principally affected by the promotional and customer acquisition bonuses paid to
the Representatives.
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<PAGE>
The gross margin percentage for telephone services increased to 39% in 1998
from 32% in 1997. The increase was primarily due to a 1997 promotional
international product that carried a negative margin, and lower per unit
telephone service carrier costs in 1998.
The gross margin percentage for telephone services declined to 32% in 1997
compared to 42% in 1996 due to a negative margin promotional product mentioned
above that ran for six months.
Marketing program sales declined to $1.7 million in 1998 from $15.0 million
in 1997. The decrease in marketing program gross margins in 1998 compared to
1997 was primarily due to the extraordinary decline in sales volume which could
not support the relatively fixed cost structure of the underlying marketing
support functions.
Marketing program sales decreased to $15 million in 1997 from $17 million in
1996. The decrease in marketing program gross margins in 1997 compared to 1996
was primarily due to the reduction in prices for marketing materials and
services without a proportional decrease in promotional and customer acquisition
bonuses.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of
costs to provide billing and collection of telephone services, support services
for subscribers, cost of the information systems, and personnel to support
Incomnet's operations.
Although general and administrative costs for Incomnet decreased to $26.0
million in 1998 from $28.7 million in 1997, they increased as a percentage of
net sales to 48% in 1998 from 24% in 1997. This increase as a percentage of net
sales was attributable to an increase in legal costs associated with the
potential sale of ICC in 1998, the change in control at Incomnet, and the
Significant Business Changes.
Net sales increased $24 million or 24% from $98 million in 1996 to $122 in
1997, but general and administrative costs increased by only 1%. As such,
general and administrative costs as a percentage of net sales decreased to 24%
in 1997 compared to 29% in 1996. Incomnet benefited during 1997 from reduced
legal fees, and reduced fees resulting from an increase in the number of
customers billed directly by Incomnet rather than through the local exchange
carriers.
Total general and administrative costs for 1999 will continue to be high as
a percentage of net sales due to the base costs of needed infrastructure support
including facilities, customer service, and other back office operations.
Although Incomnet is undertaking a prudent reduction plan, significant cost
reductions could negatively impact support services needed to rebuild the
business. As Incomnet rebuilds its revenues and exceeds break-even, substantial
growth should be supported with incrementally small cost increases.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $.6
million or 23% in 1998 to $3.4 million compared to $2.8 million in 1997. This
increase was attributable to increased investment in 1997 in computer hardware
and software, furniture and equipment, and leasehold improvements.
Depreciation and amortization increased $0.9 million or 46% in 1997 to $2.8
million compared to $1.9 million in 1996. This increase was attributable
primarily to leasehold improvements made to Incomnet's Irvine headquarters and
Hawaii sales office and by the continuing investment in computer hardware and
software, furniture and equipment, and leasehold improvements required to
support its sales expansion.
BAD DEBT EXPENSE. Bad debt expense increased in 1998 to 7% of net sales or
$3.9 million compared to 1997 bad debt expense of $5.5 million or 5% of net
sales. Bad debt expense in 1998 increased primarily due to a write-off of $0.6
million associated with a note from a former officer. Bad
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<PAGE>
debt expense associated with Incomnet's telecommunications net sales was
approximately 6% in 1998 compared to 5% in 1997.
The increase in ICC's bad debt expense in 1998 compared to 1997 was due
primarily to a change in the number of telephone customers billed directly by
ICC rather than through their local telephone carrier. ICC also experienced a
higher than expected bad debt rate for direct-billed customers in 1998. As
Incomnet continues to increase its base of direct billed customers, it has taken
steps to improve collections by restructuring and outsourcing key collection
functions to a third party service provider.
Bad debt expense in 1997 decreased to 5% of net sales compared to 6% of net
sales in 1996. This decrease was due primarily to an increase in customers
billed by their local telephone carriers which had been more effective in
collecting delinquent accounts than ICC.
IMPAIRMENT OF LONG-LIVED ASSETS. During 1998, Incomnet completed its
evaluation of the recoverability of certain long-lived assets at ICC. In
connection with this evaluation, Incomnet recorded a $1.6 million non-cash
write-down of the carrying value of certain leasehold improvements to their
estimated fair value.
OTHER EXPENSES. For 1998, other expenses of $1.6 million consisted
primarily of a loss on disposal of equipment of $0.8 million and $0.5 million
associated with the settlement of the Public Utilities Commission's action
against ICC in 1998 and $0.1 million for various legal settlements and related
expenses.
Other expenses of $12.5 million in 1997 were primarily attributable to the
settlement of the class action lawsuit for $8.7 million, which was renegotiated
in 1998 [see "Item 3. Legal Proceedings-- Class Action and Related Lawsuits"],
settlement of the State of California and California Public Utilities Commission
actions against ICC for $1.6 million, and design costs and leasehold
improvements of $0.9 million associated with certain abandoned capital
improvements.
NET OPERATING LOSS CARRYFORWARDS. At December 31, 1998, Incomnet had
available net operating loss carryforwards for federal and state income tax
purposes of approximately $32 million and $9 million, respectively, expiring in
various years between 2000 and 2018. Due to the change in ownership provisions
of the Tax Reform Act of 1986, net operating loss carryforwards for Federal and
state income tax reporting purposes are subject to annual limitations.
DISCONTINUED OPERATIONS
Incomnet sold its interest in three businesses previously reported as
business segments. Accordingly, these segments have been accounted for as
discontinued operations in 1998. Incomnet has also reclassified prior years to
present the operating results of the three businesses as discontinued
operations.
- GenSource--In March 1999, Incomnet sold its interest in the common stock
of the computer software business segment, consisting of GenSource
Corporation (GenSource), a developer and marketer of software programs
used to administer insurance-related claims, such as workers' compensation
and short-term and long-term disability. The sale was made to a group of
private investors in exchange for the release from liability of Incomnet
under promissory notes to the former owners of GenSource of approximately
$1,775,000. In addition, Incomnet paid $10,000 in cash for certain
transaction expenses and received 15,507 shares of convertible preferred
stock in GenSource with a stated value of $32.25 per share. No value was
assigned to the preferred stock which represents an approximately 15%
interest in GenSource on a fully-diluted basis. In connection with the
disposition of GenSource, Incomnet expects to recognize a gain of
approximately $1.4 million. Incomnet has no expectation of continuing
involvement with GenSource.
27
<PAGE>
- AutoNetwork--In March 1998, Incomnet sold the network services business
segment to a group of private investors for $1,300,000. The segment
consisted of Auto Dismantler Network (AutoNetwork), a monthly subscription
service that auto dismantlers use to buy, sell and trade used parts that
have been salvaged from automobiles damaged in traffic collisions. During
the year ended December 31, 1998, Incomnet recognized a gain on the
disposition of AutoNetwork of $535,000.
- Rapid Cast--Incomnet acquired 51% of the common stock of RCI (10.2 million
of the 20 million outstanding shares) in February 1995. Initially, RCI was
accounted for using the equity method of accounting. However, by the
second quarter of 1995, control was determined to be other than temporary
and RCI was consolidated with Incomnet. In January 1997, RCI sold 8
million new shares of its common stock in a private placement and issued
an additional 2.3 million shares in other transactions, reducing
Incomnet's investment in RCI to approximately 33% and requiring the equity
method of accounting for its remaining interest in RCI. In its
consolidated financial statements for the year ended December 31, 1997 as
originally reported, Incomnet gave no recognition to the increase in its
share of RCI's net equity resulting from the sale by RCI of its common
stock because prior management was not satisfied that the sale would
provide sufficient resources to allow RCI to become successful. However,
the accompanying consolidated financial statements have been restated to
reflect a $7.2 million increase in consolidated stockholders' equity in
accordance with the equity method of accounting. Additionally, operating
results for RCI for 1997 and for the first nine months of 1998 have been
restated to reflect additional losses of $2.0 million and $1.3 million,
respectively, to account for Incomnet's share of RCI's net losses under
the equity method of accounting. In the third quarter of 1998, Incomnet
sold a portion of its investment in RCI to outside investors, which
resulted in a net gain on the disposition of $2.6 million. In the fourth
quarter of 1998, Incomnet decided to streamline its operations to focus
solely on its telecommunications business. As part of that effort,
Incomnet has determined to dispose of its investment in RCI and expects
that this will occur in 1999. At December 31, 1998, Incomnet holds a 17.4%
ownership interest in RCI, with a carrying value of $200,000, and warrants
for the purchase of 2.6 million additional RCI shares of common stock at
exercise prices ranging from $0.75 to $2.25 per share. Incomnet has no
expectation of continuing involvement with RCI.
Summarized financial information for the discontinued operations are as
follows (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Current assets............................................................ $ 992 $ 812
Total assets.............................................................. 1,433 6,480
Total liabilities (current)............................................... (902) (773)
Net assets of discontinued operations..................................... 531 5,707
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues......................................................... $ 3,530 $ 3,313 $ 6,093
</TABLE>
The net assets of the discontinued operations as of December 31, 1998
represent the net assets of GenSource of $331,000 and RCI of $200,000, which
have been classified as current assets as of December 31, 1998. The net assets
of discontinued operations at December 31, 1997 are comprised of $3,280,000,
$827,000 and $1,600,000 of GenSource, AutoNetwork and RCI, respectively.
28
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
For the years ended December 31, 1998, 1997 and 1996, Incomnet recognized
net losses from continuing operations of $17.6 million, $14.1 million and $6.6
million, respectively. In addition, Incomnet realized net losses from its
discontinued operations aggregating $1.5 million, $1.6 million and $30.2 million
during the respective annual periods. As a result, at December 31, 1998,
Incomnet has an accumulated deficit and net capital deficiency of $84.7 million
and $15.8 million, respectively, and its current liabilities exceed its current
assets by approximately $13.1 million.
Additionally, beginning in August 1997 and continuing through the year ended
December 31, 1998, Incomnet experienced declining revenues due to decreases in
the number of telephone customers and the number of active Representatives.
These decreases are the result of the Significant Business Changes. Management
believes the improvements that have occurred in the third quarter of 1998 and
since the change in the composition of the Board of Directors on September 30,
1998 in part alleviate these conditions. A more detailed discussion of these
improvements are outlined in "Item 1, Business-- The September '98 Board
Change."
Incomnet is also taking steps to revitalize ICC's network marketing
organization, including developing new telecommunications products that are more
competitive, working closer with its Representatives to help them better
understand the products and services provided by ICC, developing new commission
and bonus programs that will make ICC more competitive in attracting new
Representatives, and expanding its focus on Representative recruiting from
primarily a Southern California focus to a nationwide program. Management
believes its new marketing plans will revitalize ICC's efforts to attract
additional representatives. In addition to revitalizing its network marketing
organization, ICC also is continuing a cost control program that is anticipated
to result in a more efficient operation and a reduced cost structure overall.
Lastly, Incomnet is seeking additional financing that may take the form of
either additional debt or equity.
To meet its need for additional financing and support its operating
requirements, in December 1998, Incomnet obtained $16.6 million from Ironwood
Telecom LLC (Ironwood) under a secured term loan facility. In April 1999,
Incomnet obtained a line-of-credit facility providing for borrowings, based on
eligible accounts receivable, up to a maximum of $12.5 million from Foothill
Capital. In addition, Incomnet has had recent discussions with Ironwood
regarding the possible conversion into equity of some or all of Incomnet's $16.6
million debt obligation under the Ironwood Facility.
Incomnet is also seeking to arrange for additional equity. To assist in its
financing efforts, Incomnet has engaged a financial advisor to help locate
additional sources of equity financing. No assurances can be given that Incomnet
will be successful in raising additional equity financing through this financial
advisor or at all.
Incomnet has also engaged a financial advisor to assist Incomnet in
connection with its equity capital raising efforts. No assurances can be given
that Incomnet will be successful in raising additional equity capital through
this financial advisor or at all.
Management believes Incomnet has sufficient sources of financing to continue
operations throughout 1999 at planned levels of operations. However, there are
no assurances that Incomnet will attain planned levels of operations.
Ultimately, Incomnet's long-term success is dependent upon its ability to
successfully execute its strategic plan, obtain additional long-term financing,
complete its Year 2000 remediation, and ultimately attain sustained profitable
operations. (See Note 1 of the Notes to Consolidated Financial Statements).
CONTINUING OPERATIONS. Cash flows used in operating activities in 1998 was
$7.6 million. This was primarily due to the loss from continuing operations of
$17.6 million offset by non-cash expenses of $7.4 million, a $4.6 million
decline in accounts receivable, $3.6 million used to bring the balance
29
<PAGE>
payable to WorldCom from 60 to 30 days and changes of $1.6 million in other
working capital accounts.
Incomnet used $0.2 million in investing activities primarily consisting of
purchases of computer hardware and software and leasehold improvements.
Incomnet's financing cash flows were primarily from the funding of the Ironwood
Facility (discussed above) and repayment of its previous line of credit with
First Bank.
DISCONTINUED OPERATIONS. Cash provided by (used in) discontinued operations
(see discussion on Discontinued Operations above) was $3.7 million, $1.5 million
and ($2.1) million for the years ended December 31, 1998, 1997 and 1996,
respectively. The cash provided or used by discontinued operations arose from
normal operations and gain or losses on disposition of the segments.
CAPITAL EXPENDITURES. Incomnet acquired approximately $0.4 million of
facilities and equipment in the year ended December 31, 1998. The capital for
these acquisitions was primarily provided through capital leases. To meet its
planned capital requirements over the next 12 months, Incomnet believes that it
will spend approximately $3.9 million. Some of these capital expenditures will
assist Incomnet and ICC to modernize its information systems, broaden its
product offering and realize process efficiencies. Because Incomnet presently
does not have the capital for such anticipated expenditures, it will have to
finance or lease these capital expenditures.
LITIGATION. Incomnet is subject to pending litigation and has taken a
reserve of $8.5 million associated with anticipated legal settlement of the
class action lawsuit. Incomnet is a defendant in other pending litigation that
may have a material adverse effect on Incomnet's financial condition and results
of operation. No reserves have been set up for this litigation [see "Part I.
Item 3. Legal Proceedings and Notes to Consolidated Financial Statements--Note
11--"Litigation"].
YEAR 2000 READINESS DISCLOSURE
Many existing computer systems and applications use only two digits to
identify a year in their respective date fields without considering the impact
of the upcoming change in the century. These systems need to be corrected or
replaced with systems that are Year 2000 ("Y2K") compliant.
Incomnet and ICC have identified the major information technology (e.g.,
computer hardware and software) ("IT") and non-information technology (e.g.,
heating and air-conditioning systems) ("non-IT") systems that must either be
upgraded or replaced to meet the needs of operations and to be Y2K compliant.
These changes will result in a combination of software, hardware and equipment
upgrades or replacements. Some of the key systems identified by ICC were: the
internal financial system; the billing and customer service system; the
independent representative tracking and commission system; the calling card
system; the internal corporate telephone exchange, the security and
communications systems.
Since the Board Change in September 1998, Incomnet has spent or committed to
spend approximately $3 million to upgrade or replace certain of its IT and
non-IT systems for strategic business purposes (the "Strategic Systems
Commitment"). Many of these expenditures are expected to be paid out over a
number of years. As of December 31, 1998, approximately $200,000 of the
Strategic Systems Commitment has been spent on upgrades and replacements and an
estimated $500,000 was spent during the first quarter of 1999. An ancillary
benefit of those expenditures is that the new hardware and software is Y2K
compliant. In addition, ICC has budgeted $200,000 to upgrade or replace existing
IT and non-IT systems (the "Upgrade Commitment") for the specific purpose of
becoming Y2K compliant. Approximately $60,000 of the upgrade commitment was
spent during the first quarter of 1999. Incomnet and ICC currently estimate that
all key upgrades and replacements of IT and non-IT systems will be completed and
tested by October 1999.
30
<PAGE>
Incomnet has dedicated internal resources and personnel to the Y2K problem
and has already acquired most of the IT and non-IT upgrades to existing
equipment.
During the first quarter of 1999, ICC sent out questionnaires to its key
suppliers and vendors, including WorldCom, its underlying carrier, USBI, a local
carrier clearing house, and LITE and SBC Communications with whom ICC has
billing and collection services agreements. To date, none of the responses to
the questionnaires has caused Incomnet or ICC to believe that its key service
providers or vendors are at risk of not being Y2K compliant before December 31,
1999; however, approximately 5 vendors of non-critical systems or products have
not yet returned their questionnaires. Incomnet and ICC currently expect to
receive responses to all questionnaires by June 30, 1999.
One of ICC's most significant Y2K risks is its automated billing system. In
order to permit ICC to perform more direct and integrated billing, ICC invested
in a new billing system in the first quarter of 1999. ICC has received
assurances that the new billing system is Y2K compliant. ICC plans to commence
testing the new system in June and July 1999 and currently expects that it will
be fully operational by October 1999.
While Incomnet and ICC currently believe that all key IT and non-IT systems
will be Y2K compliant by October 1999, there can be no assurance at this time
that ICC will be able to make all necessary changes, that all of Incomnet's and
ICC's systems or applications are or will be Y2K compliant, that such upgrades
will be completed on a timely basis at reasonable costs, or that such upgrades
will be able to anticipate and correct all of the problems triggered by the
actual impact of Y2K. There can be no assurance, even if Incomnet and ICC
achieve Y2K compliance in their own products and services, that systems provided
to Incomnet or ICC by outside suppliers will be Y2K compliant. There also can be
no assurance that such impact will not result in a material disruption or have a
material adverse effect on Incomnet's or ICC's business, results of operation or
financial condition.
The most likely worst-case scenario at ICC which management has identified
to date is that, due to unanticipated implementation problems, ICC's new billing
system may not be fully operational by December 31, 1999. In the event
implementation of the new billing system is delayed, the Company has developed a
contingency plan which contemplates transferring the billing and collection
function to one or more of the local exchange carriers or third party billing
services that the Company currently uses to bill a portion of its customer base.
In the event, the Company is unable to implement its contingency plan, the
Company may be unable to bill and collect some or all of its revenue for an
indeterminable amount of time, which could cause ICC to cease operations.
Incomnet plans to conduct Y2K testing of its new billing system in June and July
1999 to address this worst-case scenario.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incomnet is exposed to changes in interest rate risk to the extent of its
borrowings under its $12.5 million credit facility with Foothill Capital
Corporation entered into in April 1999. Borrowings under that credit facility
bear interest at the prime rate plus one percent (1%). However, at December 31,
1998, that credit facility was not in existence and Incomnet's other existing
debt was at fixed interest rates. Therefore, for the year ended December 31,
1998, Incomnet had no exposure to interest rate movement on its debt. Under its
current policies, Incomnet does not intend to use interest rate derivative
instruments to manage exposure to interest rate changes under its credit
facility with Foothill Capital.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is included as a separate section following Item
14 of this Annual Report on Form 10-K.
31
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 7, 1999, Incomnet appointed the accounting firm of Ernst & Young
LLP ("Ernst & Young") as independent accountants to audit Incomnet's
consolidated financial statements for the fiscal year ended December 31, 1998.
On that date, Incomnet also dismissed Stonefield Josephson, Inc. ("Stonefield"),
the accounting firm that previously audited Incomnet's consolidated financial
statements. The decision to change accountants was approved by Incomnet's Board
of Directors. Incomnet elected to change auditors to facilitate the attraction
of new Board members and key executives and to assist in the evaluation of
complex issues related to the restructuring of Incomnet's debt and plans to grow
ICC's business.
Stonefield's reports on Incomnet's financial statements for the past two
fiscal years ended December 31, 1997 contained no adverse opinion or disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principles, other than on March 12, 1998, Stonefield had previously
reported that Incomnet's losses and liabilities in excess of assets as of
December 31, 1997 gave rise to substantial doubt about Incomnet's ability to
continue as a going concern.
At the time of the change of auditors, there were no disagreements between
Incomnet and Stonefield on any matter of accounting principles or practices,
financial statement disclosure, auditing scope or procedure. Within Incomnet's
two most recent fiscal years and any subsequent interim period preceding its
dismissal, Stonefield did not advise Incomnet that: (i) Incomnet should change
its internal controls; (ii) Stonefield could no longer rely on management's
representations; (iii) Stonefield was unwilling to be associated with the
financial statements prepared by Incomnet's management; (iv) Incomnet needed to
expand the scope of Stonefield's audit; or (v) information had come to
Stonefield's attention that may materially impact fairness or reliability of a
previously issued audit report or underlying financial statements.
Prior to its engagement as Incomnet's independent accountants, Ernst & Young
had audited the financial statements of Rapid Cast, Inc. (now named Optical
Dynamics Corporation), currently a 17.4% owned investee of Incomnet, for each of
the three years in the period ended December 31, 1997, and of ICC, Incomnet's
principal operating subsidiary, for the year ended December 31, 1996.
Stonefield, in connection with its audit of the consolidated financial
statements of Incomnet, also audited the financial statements of ICC for the
year ended December 31, 1996 and Stonefield's report relating to its audit of
Incomnet's consolidated financial statements for such year was included in
Incomnet's Annual Report on Form 10-K for the year ended December 31, 1996,
without reference to, or reliance on, the audit of ICC's financial statements
undertaken by Ernst & Young.
Except for the reports delivered by Ernst & Young in connection with the
audits of the financial statements of Rapid Cast, Inc. and ICC described in the
preceding paragraph, during Incomnet's two most recent fiscal years and any
subsequent interim period prior to engaging Ernst & Young as Incomnet's
independent accountants, no written report was provided by Ernst & Young to
Incomnet; and Incomnet has not consulted with Ernst & Young in any matter that
was considered an important factor to Incomnet in reaching its decision as to
the accounting, auditing or financial reporting issue regarding either (i) the
application of accounting principles to a specified transaction, either
completed or proposed, or (ii) the type of audit opinion that might be rendered
on Incomnet's consolidated financial statements.
32
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
As of April 15, 1999 the following persons serve as directors and executive
officers of Incomnet and ICC. Each officer serves at the pleasure of Incomnet's
Board of Directors. In accordance with the Board Change Agreement and subject to
applicable law, Incomnet agreed to nominate Dr. Silverman as a director at the
next annual meeting.
DIRECTORS
<TABLE>
<S> <C>
JOHN P. CASEY
CHAIRMAN OF THE BOARD
AGE: 50
DIRECTOR SINCE: September 29, 1998
PRINCIPAL OCCUPATION: Vice Chairman of Meridian Investments, Inc., an NASD registered
broker-dealer ("Meridian")
RECENT BUSINESS Since 1981, Mr. Casey has been the Senior Vice President,
EXPERIENCE: Financial Marketing for Meridian and since October 1998, its Vice
Chairman. 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. Since
October 1998, Mr. Casey has also served as a director of ICC,
Incomnet's wholly owned subsidiary.
OTHER DIRECTORSHIPS: Val-u-net; 1-800-Database; Make-a-Wish Foundation
R. SCOTT EISENBERG
AGE: 39
DIRECTOR SINCE: October 2, 1998
PRINCIPAL OCCUPATION: Vice President, Product Management for CyberCash
RECENT BUSINESS Since June 1996, Mr. Eisenberg has been the Director, Product
EXPERIENCE: Management for CyberCash, a leading provider of payment solutions
for internet and real-world storefronts. From March 1993 until he
joined CyberCash in June 1996, Mr. Eisenberg held key management
positions with MCI Telecommunications in its internet services
sector and long distance telephone services sector. From 1989 to
1993, Mr. Eisenberg was a partner in an investment banking firm
where he advised emerging growth companies in connection with
equity and debt financings and mergers and acquisitions.
</TABLE>
33
<PAGE>
<TABLE>
<S> <C>
JOHN P. HILL, JR.
AGE: 38
DIRECTOR SINCE: September 29, 1998
PRINCIPAL OCCUPATION: Administrative Manager, Quince Associates
RECENT BUSINESS Mr. Hill is the Administrative Manager of Quince Associates, a
EXPERIENCE: privately 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. Since October 1, 1998, Mr. Hill has also served as a
director of ICC.
OTHER DIRECTORSHIPS: Covol Technologies, Inc.
DENIS RICHARD
AGE: 38
DIRECTOR SINCE: October 2, 1998
PRINCIPAL OCCUPATION: President and Chief Executive Officer of Incomnet (since September
29, 1998) and Chairman, President and Chief Executive Officer of
ICC (since October 2, 1998)
RECENT BUSINESS From 1995 until he joined Incomnet in October 1998, Mr. Richard
EXPERIENCE: held executive management positions at Teleglobe Inc. and its
affiliates. Teleglobe is one of the world's largest
intercontinental telecommunications companies. In January 1996,
Mr. Richard was appointed Vice President, Law & Corporate Affairs
for Teleglobe International Corp. Prior to this appointment, he
served as Director of Special Projects for Teleglobe Inc. From
1989 until he joined Teleglobe in 1995, Mr. Richard was Senior
Counsel with BCE Inc., where he was involved in many of that
company's telecommunications investment activities, as well as
heading several other divestiture and reorganization projects.
DR. HOWARD P. SILVERMAN
AGE: 58
DIRECTOR SINCE: January 20, 1977
PRINCIPAL OCCUPATION: Independent Consultant, Investment Banking
RECENT BUSINESS From November 1996 to October 1997, Dr. Silverman served as an
EXPERIENCE: investment banking consultant with Andrew, Alexander, Wise & Co.
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 middle market companies. From 1985 to 1991,
he was the founder and Chairman of the Board of Vision Sciences, a
company that developed, manufactured and marketed in-office lens
casting systems.
</TABLE>
34
<PAGE>
<TABLE>
<S> <C>
MICHAEL A. STEIN
AGE: 49
DIRECTOR SINCE: September 29, 1998
PRINCIPAL OCCUPATION: Executive Vice President and Chief Financial Officer of Nordstrom,
Inc.
RECENT BUSINESS In October 1998, Mr. Stein became the Executive Vice President and
EXPERIENCE: Chief Financial Officer of Nordstrom, Inc., a fashion specialty
retailer with 97 stores located in 22 states. At Nordstrom, Mr.
Stein is responsible for all of Nordstrom's financial operations
and strategic planning. From 1993 through September 1998, Mr.
Stein was the Executive Vice President and Chief Financial Officer
of Marriott International, Inc. At Marriott, Mr. Stein was
responsible for Marriott's treasury, corporate and project
finance, investor relations, controllership, tax, risk management
and internal audit functions. 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.
EXECUTIVE OFFICERS (OTHER THAN MR. RICHARD)
GEORGE P. BLANCO
AGE: 42
EXECUTIVE OFFICER SINCE: January 19, 1999
PRINCIPAL OCCUPATION: Executive Vice President, Chief Financial Officer and Secretary of
Incomnet and ICC
RECENT BUSINESS From August 1987 through September 1994 Mr. Blanco was employed by
EXPERIENCE: PriceWaterhouseCoopers LLP in both the Consulting and Financial
Advisory Services practices. He was admitted to the partnership of
PriceWaterhouseCoopers LLP in May 1994. He left that firm in
October of 1994 to co-found Baymark Strategies LLC, a financial
and business consulting advisory company providing turnaround
consulting, capital sourcing, bankruptcy advisory and debt
restructuring services. In January 1998, Mr. Blanco returned to
PriceWaterhouseCoopers LLP as Managing Director of the Financial
Advisory Services Division where he specialized in business
recovery services until he joined Incomnet in January of 1999.
</TABLE>
35
<PAGE>
<TABLE>
<S> <C>
TIMOTHY M. CIACCIO
AGE: 41
EXECUTIVE OFFICER SINCE: January 18, 1999
PRINCIPAL OCCUPATION: Senior Vice President, Operations and Chief Information Officer
for ICC
RECENT BUSINESS Since joining ICC on August 18, 1997, Mr. Ciaccio has been
EXPERIENCE: responsible for all technology related issues and the day-to-day
operations of information technology at ICC which includes
application programming, systems operation, network operations and
technical support functions. During the period May 1996 through
August 1997, Mr. Ciaccio was Vice President and Information
Technology and Chief Information Officer for NextWave Telecom,
Inc. and during the prior year was the Vice President, Chief
Information Officer, for Los Angeles Cellular Telephone Company
where he was responsible for long-range planning, strategic
direction, developing, integrating, acquiring and supporting
business applications. During the period 1991 through 1995, Mr.
Ciaccio was director of information services for Nutrilite
Products, Inc., a manufacturer of vitamins and food supplements,
where he was responsible for the information technology department
and corporate strategic planning.
STEPHEN A. GARCIA
AGE: 40
EXECUTIVE OFFICER SINCE: December 14, 1998
PRINCIPAL OCCUPATION: Controller for Incomnet and ICC
RECENT BUSINESS Mr. Garcia joined ICC in April 1997 as Assistant Controller. In
EXPERIENCE: December of 1998, Mr. Garcia became the Controller for Incomnet
and Corporate Controller for ICC. From March 1993 to March 1997,
Mr. Garcia served as Controller for Melles Girot, Inc., a
wholly-owned subsidiary of J. Bibby and Sons, PLC, based in
England. Melles Girot is a manufacturer and worldwide distributor
of photonic (lasers, optics and optical mechanical) components.
Prior to joining Melles Girot, Mr. Garcia served for one year as
assistant controller for a reference lab and diagnostic kit
manufacturer and, prior to that, he was a senior accountant for
Deloitte & Touche. Mr. Garcia is a certified public accountant.
</TABLE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires Incomnet's directors, executive officers and holders
of more than 10% of Incomnet's Common Stock to file with the Commission initial
reports of ownership and reports of changes in ownership of Common Stock and
other equity securities of Incomnet. Based on a review of the filings submitted
to Incomnet and written representations by Incomnet's directors and officers,
Incomnet believes that during the fiscal year ended December 31, 1998, its
officers, directors and holders of more than 10% of Incomnet's Common Stock
complied with all Section 16(a) filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table discloses compensation received by Incomnet's new and
former Chief Executive Officer and the most highly paid current and former
executive officers of Incomnet and its wholly owned subsidiary, ICC, for fiscal
year ending December 31, 1998 as well as their compensation for each of the
fiscal years ending December 31, 1997 and December 31, 1996.
36
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
(A) (B) (C) (D) (E) (F) (G) (H)
SECURITIES
UNDERLYING
RESTRICTED OPTIONS/ ALL OTHER
NAME AND PRINCIPAL OTHER ANNUAL STOCK AWARD(S) SARS COMPENSATION
POSITION YEAR SALARY($) BONUS($) COMPENSATION ($) (#) ($)
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT NAMED OFFICERS
DENIS RICHARD, 1998 $ 73,750 $353,000 $41,268(1) $2,600,000(2)
CEO and President
of Incomnet and
Chairman, CEO and
President of ICC
DEBRA A.L. CHUCKAS, 1998 $181,973(6) $ 20,000(7)
Director, Customer
Service of ICC
1997 $177,129(6) 100,000(15)
1996 $ 87,023
TIMOTHY M. CIACCIO, 1998 $160,445(8) $ 20,000(7) $ 138(5)
Senior Vice
President,
Operations and
Information
Officer of ICC
1997 $ 55,607(8) 50,000(15)
FORMER NAMED OFFICERS
MELVYN REZNICK, 1998 $278,838 $100,000(9)
Chairman and
President of
Incomnet
1997 $276,116 $175,000
1996 $175,000 175,000(12)
EDWARD JACOBS, 1998 $253,977 $ 13,430
Chairman of ICC
1997 $472,106 $13,334 528,847(13)
1996 $379,502 $15,970
JAMES QUANDT, 1998 $397,708(10) $114,100 $105,538(11)
President and CEO
of ICC
1997 $462,486(10) $122,707 600,000(14)
MICHAEL KEEBAUGH, 1998 $181,618(3) $ 65,000(4) $ 1,297(5)
Executive VP and
Chief Operating
Officer of ICC
1997 $166,158(3) 100,000(15) $ 467(5)
</TABLE>
- ------------------------------
(1) Consists of $29,937 in relocation expenses and $11,331 for temporary
housing.
(2) On September 29, 1998, and in connection with this employment agreement,
Mr. Richard was granted 13 shares of Incomnet Series C Preferred Stock
convertible into 1.3 million shares of Incomnet Common Stock. The $2.6
million value
37
<PAGE>
assigned to the 13 shares of Preferred Stock granted to Mr. Richard
specified in the table was determined in accordance with the rules of the
SEC and is based on the closing sale price of Common Stock as reported on
the Nasdaq SmallCap Market on the date of grant of the Series C Preferred
Stock multiplied by the 1.3 million shares of Common Stock issuable upon
conversion of Mr. Richard's 13 shares of Series C Preferred Stock. As of
December 31, 1998 that value, in accordance with the SEC's rules, would
have been $2,275,000. Those values do not take into account the significant
restrictions applicable to such Preferred Stock, including a right of
repurchase by Incomnet if Mr. Richard desires to sell his stock or Mr.
Richard's employment is terminated without good reason or Mr. Richard's
employment is terminated for "cause" as defined in his employment
agreement. The right of repurchase will be calculated based on an
as-converted-to-common basis reduced by $2.1775 for each as-converted
common share. Accordingly, if the right to repurchase was triggered, Mr.
Richard would be entitled to the difference between the then current market
price and $2.1775 per share. Given (i) Incomnet's financial circumstances
at the time of grant, (ii) no underlying shares of Common Stock were
available to be issued upon conversion of his Preferred Stock, (iii) the
repurchase right of Incomnet that, if exercised, would provide value to Mr.
Richard only if the Common Stock increased in value over $2.1775 per share
and (iv) the other restrictions on the Preferred Stock and Common Stock
issuable upon conversion thereof, the restricted stock award had nominal
value to Mr. Richard when granted.
(3) Includes $1,297 in vested 401(k) matching contributions paid by ICC during
1998 and $156 in vested matching 401(k) contributions during 1997. Mr.
Keebaugh terminated his employment with ICC effective April 2, 1999.
(4) Mr. Keebaugh was paid a retention bonus of $20,000 and a signing bonus of
$45,000.
(5) Represents unvested portion of ICC's 401(k) matching contribution for the
specified year.
(6) Includes $1,765 in vested 401(k) matching contributions paid by ICC during
1998 and $623 in vested 401(k) matching contributions during 1997. Prior to
April 7, 1999, Ms. Chuckas served as Senior Vice President, Marketing
Support. Effective April 7, 1999, Ms. Chuckas' s title was changed to
Director, Customer Service and her compensation was significantly reduced
at that date.
(7) Represents retention in bonus paid in August, 1998. In April 1998, ICC
approved a retention bonus plan for 44 key employees. The plan was put in
place in contemplation of the proposed sale of ICC as described in Item 1
of this Form 10-K.
(8) Includes $139 in matching vested 401(k) contributions paid by ICC during
1998 and $156 in vested matching 401(k) contributions during 1997.
(9) In accordance with Mr. Reznick's severance agreement with Incomnet, Mr.
Reznick was entitled to a lump sum payment of $100,000 in December 1998,
but he elected to defer that payment until January 1999.
(10) Includes $946 in vested 401(k) matching contributions paid by ICC during
1998 and $556 in vested 401(k) matching contributions during 1997.
(11) Represents severance payment pursuant to Mr. Quandt's severance agreement
with ICC dated November 2, 1998.
(12) Represents options to purchase 175,000 shares of Incomnet Common Stock at
$4.37 per share. As described below under the caption
"Employment/Severance Contracts," Mr. Reznick's options were terminated
except for 50,000 options which may be exercised at $4.37 per share
through September 1, 2003.
(13) Represents options to purchase 528,847 shares of ICC Stock. These options
expired and were not exercised.
(14) Represents options to purchase 600,000 shares of ICC Stock. These options
expired and were not exercised.
(15) Represents options to purchase ICC Stock. These options were terminated on
January 18, 1999. On that date, each of Messrs. Keebaugh and Ciaccio and
Ms. Chuckas were granted options to purchase 100,000 shares of Incomnet
Common Stock at $1.78125 per share. These new options vest over a 2-year
period ending December 31, 2000.
SUMMARY OF STOCK OPTION COMPENSATION
Incomnet's 1996 Stock Option Plan allows grants of stock options and other
rights relating to Common Stock. No grant of stock options under the 1996 Stock
Option Plan was made in 1998 and no stock options were exercised during 1998.
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<PAGE>
The Incomnet and ICC stock options granted to Named Executive Officers that
were outstanding as of December 31, 1998 are as follows:
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS
AT 12/31/98 AT 12/31/98
(#) EXCERCISABLE / (#) ($) EXCERCISABLE / ($)
NAME UNEXERCISABLE UNEXERCISABLE
(A) (B) (C)
<S> <C> <C>
NAMED OFFICERS
MICHAEL KEEBAUGH 50,000 / 50,000(1) 0(2)
(ICC Options)
DEBRA A.L. CHUCKAS 50,000 / 50,000(1) 0(2)
(ICC Options)
TIMOTHY M. CIACCIO 0 / 50,000(1) 0(2)
(ICC Options)
MELVYN REZNICK 50,000 / 0 0(3)
(Incomnet Options)
</TABLE>
- ------------------------
(1) These options to purchase ICC stock were terminated on January 18, 1999. On
that date, each of Messrs. Keebaugh and Ciaccio and Ms. Chuckas were granted
an option to purchase 100,000 shares of Incomnet Common Stock at an exercise
price of $1.78125 per share of which 25% vest on June 30 and December 31,
1999 and June 30 and December 31, 2000. These Incomnet options terminate at
the earlier of January 18th, 2002 or 90 days after termination of employment
by Incomnet or ICC. Mr. Keebaugh terminated his employment effective April
2, 1999 and, therefore, his Incomnet options will terminate before they are
vested. Effective April 7, 1999, Ms. Chuckas' Incomnet options were reduced
to 50,000 and her vesting schedule changed so that 33% of these Incomnet
options vest at December 31, 1999, 2000 and 2001.
(2) The exercise price of these options is $3.50 per share. ICC stock is not
publicly traded and there is no market for ICC stock. ICC is Incomnet's only
subsidiary. Incomnet's stock closed at $1.75 on December 31, 1998.
Accordingly, Incomnet has concluded that none of these options were
"in-the-money" as of December 31, 1998.
(3) Mr. Reznick's options have an exercise price of $4.37. On December 31, 1998,
Incomnet's stock closed at $1.75 per share. Mr. Reznick resigned effective
September 29, 1999.
Incomnet has not repurchased any stock options previously granted to
executive officers, directors or key consultants during 1998. Incomnet plans to
discontinue the 1996 Stock Option Plan, provided that shareholders approve a new
Equity Incentive Stock Plan that is expected to be included in the proxy
statement for the 1999 annual meeting of shareholders. Incomnet further plans to
substitute all outstanding employee options under the 1996 Stock Option Plan
with the new options on substantially identical terms under the Equity Incentive
Stock Plan. These Substituted Options will count against the share limit under
the new Equity Incentive Stock Plan.
OTHER INCENTIVE PLANS
Incomnet and ICC currently do not have any long-term incentive plans or
compensation plans for its executive officers and directors. However, in April
1998, ICC announced the adoption of a one-time
39
<PAGE>
retention bonus program in anticipation of the proposed sale of ICC. The
retention bonus plan provided for a bonus to key employees provided that such
employees continued to be employed by ICC on the tenth day following the sale of
ICC or 60 days following termination of a sale of ICC. The proposed sale of ICC
was terminated in mid-1998 and retention bonuses in the aggregate amount of
$253,031 were paid in August 1998 to 44 key employees of ICC. The average
retention bonus paid to an employee was $5,751 and the highest individual
retention bonus paid was $20,000.
COMPENSATION OF DIRECTORS--STANDARD ARRANGEMENTS
COMPENSATION FOR NON-EMPLOYEE DIRECTORS.
During 1998, each of the non-employee New Directors (other than Mr. Casey)
was granted an option to purchase ten shares of Series D Preferred Stock of
Incomnet (the "New Director Options"). Each share of Series D Preferred is
convertible into 10,000 shares of Incomnet Common Stock. The exercise price for
the Series D Preferred Stock was based on the market price for the underlying
Common Stock at the time of grant. The options vest over a two-year period with
four shares vesting immediately and three shares vesting on each of the first
two anniversary dates of the grants. Three of the outside directors have an
exercise price of $21,875 for each share of Series D (or $2.1875 per common
share on an as-converted-to-common basis) and one director has an exercise price
of $22,500 for each share of Series D (or $2.25 per common share on an
as-converted-to-common basis). The New Director Options have a term of ten
years.
These options were granted in consideration of the New Directors' commitment
to join the New Board and, in the case of Dr. Silverman, to continue to serve on
the Board, at a time when Incomnet and ICC were facing financial and operating
difficulties. These difficulties are discussed in more detail in Item 1 of this
Form 10-K.
During 1998, the New Directors received no retainer fees or meeting fees but
were reimbursed for their out-of-pocket expenses relating to Board membership.
Mr. Richard received no additional compensation for his services as a director
other than reimbursement of expenses relating to Board membership.
For fiscal year 1999, the non-employee New Directors (other than Mr. Casey)
will each receive $1,000 for each board meeting held in person plus
reimbursement of out-of-pocket expenses attendant to board membership. The
non-employee New Directors will not be compensated for telephone meetings or
committee meetings unless a committee meeting is in person and on a day that no
in-person board meeting is held. No stock or options will be granted to
non-employee directors during 1999 in recognition of the 1998 option grants in
September 1998.
It is anticipated that each non-employee director elected at the annual
meeting of shareholders to be held in 2000 will be granted an option to purchase
10,000 shares of Incomnet Common Stock at the then market price.
During 1999, Mr. Richard will not be entitled to any additional compensation
for his services as a director other than reimbursement of expenses related to
board membership.
CHAIRMAN COMPENSATION ARRANGEMENTS.
On September 29, 1998, Mr. Casey and Incomnet entered into an agreement (the
"Casey Services Agreement"), under which Mr. Casey agreed to perform certain
duties as Chairman of the Board of the Directors of Incomnet. The Casey Services
Agreement provides that Mr. Casey will be entitled to a quarterly service fee
based on the fair market value of Incomnet's Common Stock at the end of each
fiscal quarter during the term of the Agreement. Under the Casey Services
Agreement, the fair market value of Incomnet's Common Stock is generally equal
to the average closing price of the Common Stock for the last five trading days
during the applicable fiscal quarter. If the fair market value of the
40
<PAGE>
Common Stock is less than $4.00 per share at the end of each fiscal quarter for
the term of the Agreement, Mr. Casey will be entitled to a service fee of $1.00
for that quarter. If the fair market value of the Common Stock is $4.00 or more
at the end of each calendar quarter, Mr. Casey will be entitled to a service fee
equal to the product of (i) $25,000, (ii) the number determined by dividing the
fair market value of the Common Stock by four. Generally, this will result in a
$25,000 quarterly service fee for Mr. Casey if the market price of the Common
Stock is $4.00, and an additional $25,000 for each additional $4.00 increase in
the market price of the Common Stock.
The maximum fee Mr. Casey would be entitled to receive in any fiscal quarter
is $250,000. During 1998 no payments were made to Mr. Casey under the Casey
Services Agreement.
COMPENSATION OF DIRECTORS--OTHER ARRANGEMENTS
During the period January 1, 1998 to September 29, 1998, the Former
Directors, who were not employees of Incomnet, received no compensation for
their services as directors other than reimbursement of their out-of-pocket
expenses related to Board membership.
EMPLOYMENT/SEVERANCE CONTRACTS
RICHARD EMPLOYMENT AGREEMENT.
On September 29, 1998, Incomnet and ICC entered into an employment agreement
with Denis Richard, pursuant to which Mr. Richard agreed to serve as President
and Chief Executive Officer of Incomnet and its subsidiary, ICC. Mr. Richard was
asked to join Incomnet at a particularly difficult time for Incomnet due to the
following factors:
- ICC was in default on its primary credit facility with First Bank.
- ICC had defaulted on obligations to its primary service provider,
WorldCom. WorldCom was threatening to enforce its security interest in
ICC's customer accounts.
- As a condition to their continued forbearance, First Bank and WorldCom
required that new management of ICC be selected.
- ICC and Incomnet were having difficulties obtaining new sources of
financing and the Former Board was evaluating bankruptcy alternatives.
- Many Incomnet and ICC executives had been fired or were voluntarily
terminated.
- The California Public Utilities Commission, California Attorney General
and Orange County District Attorney had imposed operating restrictions on
ICC in connection with settlements following allegations of unauthorized
switching of consumers' long distance service providers to ICC.
- Incomnet and ICC were embroiled in numerous litigation matters, including
a class action litigation against Incomnet and former directors and
officers.
- Competitors were trying to hire away ICC's key independent sales
representatives.
- There was a failed attempt to conduct an initial public offering of ICC
and the proposed sale of ICC was terminated a few months prior to Mr.
Richard joining Incomnet.
All of the above factors and the fact that Mr. Richard was being asked to
leave the stable environment of his former employer, Teleglobe Inc., for a
company in extremely difficult financial position contributed to the Board's
decision to approve an employment package that contained equity incentives for
Mr. Richard that would have value only if Incomnet's and ICC's financial
difficulties could be favorably resolved.
41
<PAGE>
The Richard Employment Agreement commenced on September 29, 1998 and
terminates on December 31, 2001. The Richard Employment Agreement obligates
Incomnet and ICC to nominate Mr. Richard as a director of Incomnet and ICC (and
Chairman of the Board of ICC), if Mr. Richard so requests during the term of his
agreement. Mr. Richard was appointed as a director of ICC (and as its Chairman)
on October 1, 1998 and a director of Incomnet on October 2, 1998.
Mr. Richard's annual base salary during 1998 was $325,000. In addition, Mr.
Richard received a one-time signing bonus of $353,000. If Mr. Richard terminates
his employment voluntarily on or before December 14, 1999 without "good reason,"
as defined in the Richard Employment Agreement, he must return a pro-rated
portion of his signing bonus. He is also eligible to participate in the
Executive Bonus Plan of Incomnet and may receive up to 100% of his then current
base salary as a bonus, as determined by Incomnet's Compensation Committee,
provided, however, that Mr. Richard is entitled to a minimum guaranteed bonus in
fiscal 1999 and 2000 equal to 50% of his then current base salary. Mr. Richard
is also entitled to certain fringe benefits under the Richard Employment
Agreement, including a car allowance, a temporary housing allowance (for six
months), and broker and closing costs on the sale and purchase of his residence
and moving expenses.
Under the Richard Employment Agreement, Incomnet issued to Mr. Richard 13
shares of Incomnet's Series C Preferred Stock. The Series C Preferred Stock will
be convertible into an aggregate of 1.3 million shares of Incomnet's Common
Stock at such time as Incomnet's Articles of Incorporation have been amended to
increase the authorized number of shares of Incomnet's Common Stock to satisfy
the conversion. The 13 shares of Series C Preferred Stock will be entitled to
vote with the holders of Incomnet's Common Stock on all matters submitted to
shareholders on as converted to common basis (I.E., the right to vote as if the
Series C Preferred Stock were converted to 1.3 million shares of Common Stock).
Mr. Richard has certain rights to require Incomnet to register the Common Stock
under the Securities Act of 1933, as amended, following the first anniversary of
the commencement of his employment with Incomnet.
Under the Richard Employment Agreement, the shares of Series C Preferred
Stock and the shares of Incomnet's Common Stock that would be issued upon
conversion of the Series C Preferred Stock are subject to (i) a 30-day right of
first refusal in favor of Incomnet (the "Company Repurchase Right") if Mr.
Richard at any time desires to sell, transfer or assign any such securities; and
(ii) a right in favor of Incomnet to repurchase all, but not less than all, such
securities if Mr. Richard terminates voluntarily without good reason or is
terminated by Incomnet for "cause" (as defined in the Richard Employment
Agreement) prior to the first anniversary of the Employment Agreement (the
"Company Repurchase Option"). The Purchase Price for the securities purchased by
Incomnet under Incomnet Repurchase Right or Incomnet Repurchase Option will be
the then current per share market price of Incomnet's Common Stock reduced by
$2.1775 (calculated on an as-converted common basis, if the securities being
transferred are Series C Preferred Stock). The grant of the Series C Preferred
Stock by Incomnet to Mr. Richard is deemed to be compensation from Incomnet to
Mr. Richard and, due to the various restrictions and Incomnet's rights of
repurchase, the current compensation value to Mr. Richard is minimal. No
consideration will be paid by Mr. Richard either for the issuance of the Series
C Preferred Stock or upon the conversion of the Series C Preferred Stock into
shares of Common Stock.
Under the Richard Employment Agreement, Incomnet is obligated to pay Mr.
Richard severance if Mr. Richard terminates for good reason or is terminated by
Incomnet without cause. His severance arrangement calls for continued payment of
base salary for 18 months or, if longer, until December 31, 2001 and
reimbursement of health insurance premiums for 18 months or, if earlier, until
December 31, 2001.
Incomnet is also obligated to indemnify Mr. Richard against certain
liabilities relating to his service to Incomnet and ICC and provide coverage for
Mr. Richard under commercially reasonable
42
<PAGE>
directors' and officers' liability insurance during the term of his employment
and for three years thereafter.
If Mr. Richard is terminated for cause or voluntarily terminates his
employment without good reason, Mr. Richard is prohibited under the Richard
Employment Agreement from competing (as described in the Agreement) against
Incomnet or ICC and from soliciting employees of Incomnet and ICC, both for a
period of 18 months following employment termination.
BLANCO EMPLOYMENT AGREEMENT.
On January 19, 1999, Incomnet entered into an employment agreement with
George Blanco pursuant to which Mr. Blanco agreed to serve as Executive Vice
President and Chief Financial Officer of Incomnet.
Mr. Blanco's annual base salary is $250,000 and is subject to annual review
and increase as determined by the Board during the term of the employment
agreement which ends on December 31, 2001. In addition, Mr. Blanco received a
one-time signing bonus of $100,000. If Mr. Blanco terminates his employment with
Incomnet during the one year following the payment of his signing bonus without
"good reason" (as defined in his employment agreement), he must return a
pro-rated portion of his signing bonus. He is also eligible to receive a bonus
in each year of his employment agreement with a guaranteed minimum annual bonus
for fiscal year 1999 of at least $75,000. Thereafter, his entire bonus will be
determined at the discretion of the Board. Mr. Blanco is also entitled to
certain fringe benefits under his employment agreement including a car allowance
and certain relocation expenses.
Incomnet granted Mr. Blanco an option to purchase 500,000 shares of Incomnet
Common Stock at an exercise price of $1.71875 which was the market price on
January 19, 1999. The option vests as follows: 125,000 options on June 30, 1999
and 20,834 options each month thereafter until November 30, 2000 with a final
vesting of 20,822 on December 31, 2000. In accordance with this schedule, Mr.
Blanco's stock options will be fully vested on December 31, 2000 and will expire
on December 31, 2008. In the event of a "change of control" of Incomnet (as
defined in Mr. Blanco's agreement), Mr. Blanco's options shall automatically
become vested and exercisable in full. In the event that Mr. Blanco terminates
"with good reason" or Incomnet terminates Mr. Blanco "without cause" (as defined
in his agreement), his stock option will automatically become vested and
exercisable in full.
Under Mr. Blanco's employment agreement, Incomnet is obligated to pay Mr.
Blanco severance if Mr. Blanco terminates his employment for good reason or is
terminated without cause. If Mr. Blanco terminates his employment for good
reason, his severance calls for continued payment for 18 months or until
December 31, 2001. If Mr. Blanco's employment is terminated by Incomnet without
cause, then he is entitled to severance payments of a lump sum of three months
salary and continued payment under his salary until September 30, 2001.
REZNICK SEVERANCE AGREEMENT.
On September 29, 1998, Incomnet reached a severance agreement with Melvyn
Reznick, Incomnet's former President and Chief Executive Officer, to settle the
terms of an employment agreement between Incomnet and Mr. Reznick that would
have required Incomnet to pay an aggregate of $1.1 million over a period of four
years to fulfill the terms of the contract. Under the terms of the Severance
Agreement, Mr. Reznick agreed to voluntarily leave his position at Incomnet in
consideration for severance payments of up to $500,000 over a 2-year period and
retained approximately 337,000 Incomnet stock options. On November 2, 1998,
Incomnet's new management renegotiated the Severance Agreement with Mr. Reznick
under which he agreed to reduce his severance payments to $162,499. In addition,
Mr. Reznick agreed to terminate all of his stock options, except for 50,000
stock options at an exercise price of $4.37 per share.
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<PAGE>
QUANDT SEVERANCE AGREEMENT.
On July 1, 1998, ICC reached a severance agreement with Mr. Quandt, ICC's
former President and Chief Executive Officer, to settle the terms of an
employment agreement that would have required ICC to pay an aggregate of
$960,000 over a period of two years to fulfill the terms of the contract. Under
the terms of the Severance Agreement, Mr. Quandt agreed voluntarily to leave his
position at ICC in consideration for severance payments of up to $240,000 over a
one-year period. On November 2, 1998, Incomnet's new management renegotiated the
Severance Agreement with Mr. Quandt, under which he agreed to reduce the
severance payments to $144,061. ICC also agreed to pay Mr. Quandt a lump sum of
$50,000 on or before July 1, 2000 if: (i) ICC enters into a merger in which ICC
or its shareholders retain less than 50% interest in the new company, (ii) ICC
sells substantially all of its assets, or (iii) there is a public offering of
ICC's Common Stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
There are no "interlocks" as defined by the SEC, with respect to any
director who currently serves as a member of the Compensation Committee. The
following non-employee directors serve on the Compensation Committee: John Hill,
Jr., Howard Silverman and Michael A. Stein. It should be pointed out that while
not required by the SEC's rules to be disclosed in this section as an "Insider
Participation," Mr. Hill has a 1% financial interest in Ironwood Telecom LLC who
provided financing to Incomnet during 1998 as discussed below under
"Transactions with Management."
Prior to September 29,1998, the Former Compensation Committee consisted of
Dr. Howard P. Silverman and Nancy Zivitz. There were no "interlocks" as defined
by the SEC with respect to Former Directors who served on the Former
Compensation Committee during 1998, except that Incomnet had loaned $277,995 to
Former Compensation Committee member, Nancy Zivitz. That loan had an interest
rate of 10% and was repaid in full on July 24, 1998.
REPORT OF THE COMPENSATION COMMITTEE
The New Compensation Committee was appointed during the last quarter of 1998
following the Board Change on September 29, 1998.
During the first half of 1998, Incomnet and its subsidiary, ICC, were
focused on the proposal to sell ICC. When the Former Compensation Committee met
concerning executive compensation, there was a decision to freeze salaries for
executives and institute a retention bonus program to help ensure continued
employment by key employees through the then proposed sale period or through the
termination of the proposed sale of ICC. Retention bonuses were paid to a total
of 44 employees in August 1998 following the termination of the sale of ICC.
While objectives and goals may have been established for individual
employees in early 1998 by individual managers, the members of the New
Compensation Committee did not take part in the formulation of any Company-wide
policies or procedures for setting compensation for 1998 other than considering
year-end bonuses for employees.
The New Compensation Committee met in January 1999 to establish a
compensation philosophy and a set of procedures and objectives on a
going-forward basis. The discussion that follows concerning compensation
philosophy and cash and equity based compensation is the product of the New
Compensation Committee's discussions regarding compensation of executives in
1999.
COMPENSATION PHILOSOPHY.
The current compensation philosophy is based on the premise that the
achievements of Incomnet and ICC result from the coordinated efforts of all
individuals working toward common objectives.
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<PAGE>
Incomnet and ICC strive to achieve those objectives through teamwork that is
focused on meeting the expectations of sales representatives, customers and
shareholders.
The goals of the compensation program are:
- To enable Incomnet and ICC to attract, retain and reward talented,
qualified and experienced management;
- To tie executive compensation to Incomnet's and ICC's short term and long
term performance;
- To link executives' and management's goals with the interests of the
shareholders; and
- To reward individual achievement.
Incomnet and ICC achieve these goals through paying competitively, paying
for sustained performance and striving for fairness in administrating its pay.
CASH-BASED COMPENSATION.
SALARY. Incomnet and ICC establish salary ranges for employees by reviewing
compensation for management positions in telecommunications companies and
publicly-held companies with revenues of $50 million to $200 million per year.
Incomnet and ICC then create a salary range based on the results of the peer
group analysis. The range is designed to place an executive officer above or
below the midpoint in the range, according to that officer's overall individual
performance. Overall individual performance is measured against the following
factors:
- Long-term strategic goals set by supervisors or managers;
- Short-term business goals;
- Profitability;
- The development of employees;
- The ability of Incomnet and ICC to pay;
- The fostering of teamwork; and
- Other Company values.
In both setting goals and measuring an executive officer's performance
against those goals, Incomnet and ICC take into account the performance of their
competitors and general economic and market conditions. None of the factors
included in Incomnet's and ICC's goals is assigned a specific weight. Instead,
Incomnet and ICC recognize that these factors may change in order to adapt to
specific business challenges and to changing economic and marketplace
conditions.
BONUSES. Incentive bonuses are dependent upon individual and Company
performance. Incomnet and ICC will review management compensation near-year-end
1999 to determine if bonuses for management and key employees are appropriate.
However, until Incomnet's and ICC's current financial position becomes cash flow
positive, the Company will look primarily to stock options as a means to provide
incentive compensation. In that regard, Incomnet is proposing for shareholder
approval an equity incentive plan.
EQUITY-BASED COMPENSATION.
STOCK INCENTIVE PROGRAM. Incomnet plans to adopt a stock incentive plan
that will cover employees and Representatives of Incomnet and ICC. The purpose
of this program is to provide long term incentives to employees of Incomnet and
ICC to work to maximize shareholder value. Incomnet and ICC also recognize that
a stock incentive program is a necessary element of a competitive
45
<PAGE>
compensation package for their employees. The proposed program utilizes vesting
periods to encourage employees to continue in the employ of Incomnet or ICC and
thereby acts as a retention device for employees. Incomnet believes that the
program will encourage employees to maintain a long-term perspective. If the
stock incentive plan is approved by shareholders, Incomnet plans to grant stock
options annually to a broad-based group representing a substantial majority of
the total employee population of Incomnet and ICC.
In determining the size of an option award for an executive officer, the
Compensation Committee's primary considerations will be the "grant value" of the
award and the performance of the officer measured against the same performance
criteria described above under "Cash-based Compensation" which is used to
determine salary. To determine the grant value guidelines for option awards,
Incomnet plans to survey the same group of companies it surveys for salary
purposes. In addition to considering the grant value and the officer's
performance, the Compensation Committee also plans to consider the number of
outstanding unvested options that the officer holds and the size of previous
option awards to that officer. The Compensation Committee does not expect to
assign specific weights to these items.
CEO COMPENSATION.
Denis Richard was appointed as the President and Chief Executive Officer
("CEO") of Incomnet on September 29, 1998 and of ICC on October 1, 1998. His
employment agreement was approved by the Board on September 29, 1998. In setting
the compensation for Mr. Richard, the Board sought to:
- Provide compensation competitive with other companies;
- Provide an equity incentive that would encourage Mr. Richard to accept the
CEO position immediately;
- Reimburse Mr. Richard for compensation and benefits that he left behind at
his former employer; and
- Motivate Mr. Richard to vigorously pursue the difficult task of making ICC
profitable.
The Board gave considerable weight to the fact that Mr. Richard was asked to
join Incomnet and ICC at a time when Incomnet and ICC were in a financial crisis
and facing extraordinary operating difficulties including: (i) the default by
ICC on its primary credit facility and ICC's difficulties in obtaining new
sources of financing; (ii) the default by ICC under its contract with its
primary service provider, WorldCom Network Services, Inc., and WorldCom's
threats to terminate service and enforce its rights concerning ICC's customer
accounts; (iii) the hiring away of key independent sales representatives; and
(iv) recent terminations of most of Incomnet's and ICC's senior executives.
In approving Mr. Richard's compensation, the Board considered the advice of
a compensation consultant (the "Consultant") in confirming the reasonableness of
the proposed compensation to Mr. Richard under his employment contract. The
Consultant reviewed Mr. Richard's employment contract and compared it to
compensation for CEO's of companies with revenues between $100 million and $200
million. The Consultant's findings were as follows:
- Mr. Richard's salary of $325,000 per year was competitive with companies
of that size;
- Mr. Richard's benefits and perquisites were appropriate;
- Mr. Richard's hiring bonus of $353,000 and relocation payments were fairly
typical and did not seem excessive;
- The severance and non-competition provisions were customary and
reasonable;
- The change-of-control provisions were within a reasonable range; and
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- The equity grant of 13 shares of restricted Preferred Stock convertible
into 1.3 million shares of Common Stock seemed appropriate under the
circumstances.
After review of the Consultant's report and consideration of all relevant
factors, the Compensation Committee concluded that Mr. Richard's compensation
was fair and reasonable to Incomnet and ICC.
COMPENSATION COMMITTEE
John P. Hill, Jr.
Howard P. Silverman
Michael A. Stein
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PERFORMANCE GRAPH
Incomnet's Common Stock is quoted on the Nasdaq SmallCap Market under the
trading symbol ICNT. The following chart shows a 5-year comparison of cumulative
total returns for Incomnet's Common Stock, the Nasdaq U.S. Stock Index ("Nasdaq
Composite") and Nasdaq Telecommunications Stock Index ("Nasdaq Telecom"). The
table assumes that $100 was invested at the close of trading on the last trading
day in 1993.
NOTE: The stock price performance shown on the graph below is not
necessarily indicative of future price performance.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
INCOMNET, INC. NASDAQ COMPOSITE NASDAQ TELECOM
<S> <C> <C> <C>
1993 $100.00 $100.00 $100.00
1994 231.75 97.76 83.45
1995 73.02 138.46 109.26
1996 47.62 170.01 111.72
1997 18.89 208.30 163.84
1998 27.78 293.52 270.01
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The tables below show how much Incomnet voting stock is owned by:
- Each beneficial owner of 5% or more of Incomnet's voting stock;
- Each director;
- Each of the executive officers named in the Summary Compensation Table
(the "Named Officers") at Item 11 of this Form 10-K; and
- All directors and executive officers as a group.
The number of shares of Incomnet voting stock beneficially owned by each
entity, director and Named Officer is determined under rules of the Commission,
and the information is not necessarily indicative of beneficial ownership for
any other purpose. Under such rules, beneficial ownership includes any shares as
to which the individual has the sole or shared voting power or investment power
and also any shares which the individual or entity has the right to acquire as
of June 15, 1999 through the exercise of any stock option or other right.
Unless otherwise indicated, each individual has sole investment and voting
power (or shares such powers with his or her spouse) with respect to the shares
set forth in the following table.
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SECURITY OWNERSHIP OF BENEFICIAL OWNERS OF 5% OR MORE OF INCOMNET'S VOTING STOCK
AND CURRENT DIRECTORS AND NAMED OFFICERS
<TABLE>
<CAPTION>
PERCENT OF
INCOMNET INCOMNET SERIES C VOTING
NAME COMMON STOCK PREFERRED STOCK STOCK
- ----------------------------------------------------------------- -------------- ------------------- -----------
<S> <C> <C> <C>
5% HOLDERS:
Ironwood Telecom LLC............................................. 3,850,000(1) -- 15.4(2)
DIRECTORS:
John P. Casey.................................................... 6,137,504(3) -- 28.9(4)
Denis Richard.................................................... 1,300,000(5) 13(5) 6.1(5)
R. Scott Eisenberg............................................... 40,000(6) -- (8)
John P. Hill, Jr................................................. 40,000(6) -- (8)
Howard P. Silverman.............................................. 75,000(7) -- (8)
Michael A. Stein................................................. 40,000(6) -- (8)
OFFICERS (OTHER THAN MR. RICHARD):
George P. Blanco................................................. -- -- --
Debra A. L. Chuckas.............................................. 1,000 -- (8)
Timothy M. Ciaccio............................................... 5,000 -- (8)
Stephen A. Garcia................................................ 11,200 -- (8)
SECURITY OWNERSHIP OF FORMER DIRECTORS AND FORMER NAMED OFFICERS
<CAPTION>
PERCENT OF
INCOMNET INCOMNET SERIES C VOTING
NAME COMMON STOCK PREFERRED STOCK STOCK
- ----------------------------------------------------------------- -------------- ------------------- -----------
<S> <C> <C> <C>
Melvyn Reznick................................................... 103,400(9) -- (8)
Edward R. Jacobs................................................. -- -- --
James R. Quandt.................................................. -- -- --
Michael J. Keebaugh(10).......................................... -- -- --
All current and former directors and executive officers as a
group (14 persons)............................................. 11,603,105 13 45.49%(4)
</TABLE>
- ------------------------------
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<PAGE>
(1) Ironwood's address is 555 Zang Street, Suite 300, Lakewood, Colorado 80228.
Ironwood owns warrants to purchase up to 4.85 million shares of Common
Stock (the "Ironwood Warrants") of which 3.85 million have an exercise
price of $1.00 per share and 1.0 million have an exercise price of $2.25
per share. Exercise of the Ironwood Warrants is conditioned upon
shareholder approval of an amendment to Incomnet's Articles of
Incorporation to increase the number of authorized shares of Incomnet's
Common Stock (the "Authorizing Amendment"). One million of the 4.85 million
warrants may not be exercised until December 15, 1999. In addition to the
Ironwood Warrants, Ironwood owns 369.6 shares of non-voting preferred
stock. Ironwood is obligated to hold the preferred stock until April 30,
2000, during which time Incomnet is required to repurchase the preferred
stock if it is financially able to do so. If Incomnet does not repurchase
Ironwood's Preferred Stock, Ironwood and Incomnet are obligated to offer
the Common Stock underlying the Preferred Stock to all Incomnet
shareholders on a pro-rata basis. Mr. John P. Hill, Jr., a director of
Incomnet, individually owns approximately 1% of Ironwood.
(2) Computed on the basis of 21.233 million shares of voting stock outstanding
as of April 15, 1999, plus 3.85 million shares that would be issued upon
exercise of the Warrants by Ironwood following shareholder approval of an
increase in the number of authorized shares of Incomnet Common Stock. The
percentage does not take into account Incomnet stock that could be issued
in the future relating to outstanding options, warrants, restricted stock
awards and shares that may be issued in settlement of litigation.
(3) Includes 102,000 shares held in various trusts and accounts for the benefit
of Mr. Casey's minor children. Does not include non-voting Series A and
Series B Preferred Shares of Incomnet which Mr. Casey is obligated to sell
back to Incomnet prior to November 5, 1999, as described above under Item 1
of this Form 10-K. If Incomnet is unable to redeem such Series A and B
Preferred Stock, Incomnet has agreed to convert such Preferred Stock into
8,459,970 shares of Common Stock and Mr. Casey has agreed to offer such
Common Stock to all shareholders on a pro rata basis at a price
representing actual profit to Mr. Casey. Also does not include shares that
may be issued to Mr. Casey in lieu of cash reimbursement of certain
expenses relating to the Board Change Agreement as described in Item 13 of
this Form 10-K below. Mr. Casey has pledged the proceeds of any sale of his
Common Stock to Trans Pacific Stores Ltd. and has secured a loan from
Ironwood Telecom LLC with his shares of Series A and B Preferred Stock.
(4) Percentage of the 21.233 million currently outstanding shares of Voting
Stock, plus 4,045,000 shares that could be issued in respect of options and
warrants specified in the table for Ironwood Telecom and Messrs. Eisenberg,
Hill Silverman and Stein. The percentage does not take into account
additional shares that could be issued in the future as a result of
outstanding warrants, options, restricted stock awards and shares that may
be issued in settlement of litigation.
(5) Mr. Richard owns 100% of the outstanding Incomnet Series C Preferred Stock.
The 13 shares of Series C Preferred Stock are convertible into 1.3 million
shares of Common Stock. Incomnet currently has no authorized but unissued
Common Stock. If a proposal to increase the number of shares of Common
Stock is approved by shareholders, Mr. Richard would be entitled to convert
his 13 shares of Series C Preferred Stock into 1.3 million shares of Common
Stock. The Series C Preferred Stock was granted to Mr. Richard in
connection with his employment and is subject to certain restrictions,
including Incomnet's rights to repurchase such stock. The percentage of
Voting Stock reported as owned by Mr. Richard, assumes 19.933 million
shares of Incomnet Common Stock currently outstanding and 1.3 million
additional shares that would be issued to Mr. Richard upon conversion of
his Preferred Stock, assuming the shareholders approve the proposal to
increase the authorized number of shares of Common Stock and Mr. Richard
elects to convert his Preferred Stock into Common Stock. Mr. Richard is
entitled to vote his Preferred Stock on an as-converted-to-Common
Stock-basis in all matters presented for a vote of holders of Common Stock.
The percentage does not take into account additional shares of Incomnet
Common Stock that could be issued in the future relating to outstanding
options, warrants, restricted stock awards and shares that may be issued in
settlement of litigation.
(6) Represents an option to purchase 4 shares of Series D Preferred at $21,875
per share in the case of Messrs. Hill and Stein and $22,500 per share in
the case of Mr. Eisenberg. Each share of Series D Preferred Stock is
convertible into 10,000 shares of Common Stock. Exercise is subject to
Incomnet increasing its authorized Common Stock. Does not include options
granted to each of Messrs. Hill, Stein and Eisenberg to purchase an
additional 6 shares of Series D Preferred at $21,875 per share in the case
of Messrs. Hill and Stein and $22,500 per share in the case of Mr.
Eisenberg that have not yet vested.
(7) Includes an option to purchase 4 shares of Series D Preferred Stock at
$21,875 per share and an option to purchase 35,000 shares of Common Stock
at $4.25 per share. Each share of Series D Preferred Stock is convertible
into 10,000 shares of Common Stock. Exercise is subject to Incomnet
increasing its authorized Common Stock. Does not include options granted to
purchase an additional 6 shares of Series D Preferred Stock at $21,875 per
share that have not yet vested.
(8) Less than 1%.
(9) Includes an option to purchase 50,000 shares of Common Stock at $4.32 per
share. This option expires September 1, 2003.
(10) Mr. Keebaugh terminated his employment with ICC effective April 2, 1999
and is currently a consultant to ICC.
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<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As described below, Incomnet has entered into or was a party to a number of
transactions with its directors, officers and holders of 5% of Incomnet's voting
stock.
THE BOARD CHANGE AGREEMENT.
On September 29, 1998, Incomnet consummated the Board Change Agreement among
the Former Directors, John P. Casey and Incomnet.
As a result of the Board Change Agreement, five new directors were
appointed. In addition to the change in the composition of the Board of
Directors, the Board Change Agreement obligates Incomnet, subject to applicable
law, to nominate Dr. Silverman for re-election to the Board at the next annual
meeting of Incomnet's shareholders. Further, the Board Change Agreement
obligates Incomnet to form and appoint members to an Audit Committee,
Compensation Committee and a Disinterested Director Committee and to offer Dr.
Silverman the opportunity to be a member on each of those committees.
Under the Board Change Agreement, Mr. Casey was obligated to exercise his
option to acquire 1,598.211 shares of Series A and Series B Preferred Stock (the
"Casey Preferred"). Incomnet has the right to repurchase the Casey Preferred at
a repurchase price equal to Mr. Casey's purchase price plus his carrying costs.
That price is estimated to be $.42 per share (the "Repurchase Price") on an
as-converted-to Common Stock-basis. Mr. Casey is obligated under the Board
Change Agreement to hold the Preferred Stock until November 5, 1999. If Incomnet
is not financially able to repurchase the Casey Preferred Stock before November
5, 1999, Mr. Casey is obligated to tender the Casey Preferred to Incomnet for
conversion on November 5, 1999 and the Company is then obligated to offer the
stock to all shareholders at the Repurchase Price plus the cost of the offering.
Incomnet is obligated under the Board Change Agreement to reimburse Mr.
Casey for certain costs and expenses associated with the events surrounding the
Board Change.
LOAN TO FORMER DIRECTOR.
In November 1996, Incomnet extended a loan to Former Director, Nancy Zivitz,
and her spouse. In early 1997 the loan was extended. The principal amount of the
loan was $277,955 with an annual interest rate of 10%. On July 24, 1998, Ms.
Zivitz repaid the loan in full.
SEVERANCE AGREEMENTS WITH FORMER MANAGEMENT.
In September 1998, Incomnet and its former President and Chairman, Melvyn H.
Reznick entered into a severance agreement that was subsequently amended in
November, 1998 as described in Item 11 of this Form 10-K.
On July 1, 1998, Incomnet's subsidiary, ICC, reached a severance agreement
with James Quandt, ICC's former President and Chief Executive Officer, that was
subsequently amended in November, 1998 as described in Item 11 of this Form
10-K.
On July 1, 1998, ICC entered into a severance agreement with Victor
Streufert, ICC's former Senior Vice President and Chief Financial Officer,
pursuant to which ICC was to pay Mr. Streufert up to $480,000 over a 2-year
period. On November 2, 1998, Incomnet entered into an amended arrangement under
which the severance payments were reduced to $75,185. Mr. Streufert will be
entitled to an additional $37,500 if, on or before July 1, 2000, (i) ICC enters
into a merger in which ICC or its shareholders retain less than a 50% interest
in the new company, (ii) ICC sells substantially all of its assets, or (iii)
there is a public offering of ICC's stock.
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Incomnet had entered into an employment agreement with Stephen Caswell, a
former officer employee of Incomnet under which Mr. Caswell was entitled to
severance in the amount of $260,000. In October, 1998 Incomnet and Mr. Caswell
agreed to amend his employment arrangement under which Mr. Caswell will continue
to be employed through April 30, 1999, after which his employment may be
extended at Incomnet's option for an additional six months or Mr. Caswell will
receive a severance payment of $30,000. Mr. Caswell also agreed to terminate all
of his outstanding Incomnet stock options. Mr. Caswell's employment was
terminated in March 1999.
AGREEMENTS WITH MR. CASEY.
On September 29, 1998, Mr. Casey entered into a services agreement with
Incomnet as described in Item 11 of this Form 10-K. No amounts were paid to Mr.
Casey under his Service Agreement in 1998.
In accordance with the Board Change Agreement completed on September 28,
1998, the New Board agreed to reimburse Mr. Casey for certain of his
out-of-pocket costs and expenses relating to his efforts to replace the board
and key management of Incomnet. In light of Incomnet's current financial
position, Mr. Casey has agreed to accept payment for his out-of-pocket costs in
shares of Incomnet Common Stock. The New Board agreed to the reimbursement in
stock of Mr. Casey's expenses, provided that shareholders also approve the
reimbursement. The categories of Mr. Casey's proposed reimbursements are his
out-of-pocket expenses relating to: (i) filings made with the Securities and
Exchange Commission and other regulatory agencies in connection with the Board
Change Agreement; (ii) the negotiations with WorldCom, First Bank, institutional
investors and potential providers of debt and equity to Incomnet; (iii)
settlement of the class action; (iv) obtaining directors' and officers'
insurance coverage; (v) negotiations and documentation of the Board Change
Agreement and related documents and preparation of the Information Statement to
shareholders concerning the Board Change; (vi) due diligence prior to entering
into the Board Change Agreement; and (vii) negotiating and documenting the
transactions, whereby Mr. Casey acquired 1598.211 shares of Series A and Series
B Preferred Stock that Mr. Casey agreed to sell back to Incomnet prior to
November 5, 1999 at a price representing no actual profit to Mr. Casey. Incomnet
has reimbursed a total of $228,310 to Mr. Casey and Mr. Casey is owed an
additional $910,192.
Mr. Casey borrowed $2,124,790 to purchase the Casey Preferred under a loan
from Ironwood. Mr. Casey is obligated to pay that loan on the earlier of the
repurchase of the Casey Preferred Stock by Incomnet or any rights offering of
the common stock underlying the Casey Preferred Stock. ICC has guaranteed Mr.
Casey's obligations to repay the loan to Ironwood used to purchase the Casey
Preferred Stock.
In January 1999, Mr. Casey agreed to guarantee Incomnet's obligation to
issue up to 900,000 shares pursuant to options granted to five officers of
Incomnet and ICC. Incomnet currently has insufficient authorized common stock to
issue any shares of Common Stock if such officers should elect to exercise their
options. Incomnet plans to request shareholder approval of a proposal to
increase the authorized number of shares of Common Stock. If any such officer
who was granted options elects to exercise his or her options prior to Incomnet
obtaining an increase in the authorized number of common stock, Mr. Casey has
agreed to transfer some his shares to Incomnet to permit Incomnet to complete
such exercise. In such event, Incomnet will reimburse Mr. Casey in an equal
number of shares of Common Stock. Once Incomnet has sufficient authorized common
stock, the guarantee by Mr. Casey will terminate.
IRONWOOD FINANCINGS.
On December 15, 1998, Incomnet completed a secured credit financing with
Ironwood Telecom LLC. Ironwood provided a total of $16.6 million under this
facility and an additional $1.09 million in
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<PAGE>
connection with the purchase of outstanding Incomnet Preferred Stock which it is
obligated to hold for repurchase by Incomnet or a rights offering to
shareholders. John Hill, Jr., a director of Incomnet and ICC, indirectly owns
approximately 1% of Ironwood. The amount borrowed from Ironwood by Incomnet
bears interest at the rate of 12% per year, payable quarterly, with principal
and accrued interest due on December 31, 2000. In connection with the credit
facility, Incomnet issued warrants to purchase 2 million shares of Common Stock
at an exercise price of $1.00 per share, and 1 million shares of Common Stock at
an exercise price of $2.25 per share, subject to adjustment based on Incomnet's
operating results. The Ironwood credit facility was secured by all of the assets
of Incomnet and ICC and was guaranteed by ICC. However, effective April 9, 1999,
Ironwood agreed to subordinate its priority interest in ICC's assets in exchange
for 1.25 million warrants to purchase Incomnet Common Stock with an exercise
price of $1.00 per share. These warrants have a term of five years. Prior to
December 15, 1998 Ironwood provided $6 million (i) in bridge financing; and (ii)
on behalf of Incomnet in connection with the exercise by Mr. Casey of an option
to purchase outstanding Incomnet Preferred Stock. Ironwood received 600,000
warrants with an exercise price of $1.00 in connection with the bridge
financing. The principal amount under the bridge facility was refinanced under
the Ironwood secured credit facility described above.
DISGORGEMENT OF SHORT SWING PROFITS TO THE COMPANY BY A FORMER DIRECTOR.
On January 8, 1998, David Wilstein, a director of Incomnet, disclosed in a
Form 4 that he had purchased 65,000 shares of Incomnet's Common Stock on January
5, 6, and 7, 1998 and sold 65,000 shares of Incomnet's Common Stock on December
1, 1997 at a higher price. On January 12, 1998, Incomnet informed Mr. Wilstein
that he had generated a short swing profit pursuant to Section 16(b) of the
Securities Exchange Act of 1934. On January 26, 1998, Mr. Wilstein paid to
Incomnet short swing profits plus interest of $95,456.
ICC LOAN TO FORMER OFFICER.
On March 31, 1997, ICC made a loan to Jerry Ballah in the original principal
amount of $550,219. The loan accrued interest at the annual rate of 5.83%. The
entire principal amount and accrued interest under the loan were due on March
31, 1999. Mr. Ballah failed to make payments of principal and interest on the
loan when due. ICC has demanded that Mr. Ballah pay $614,375 constituting the
principal amount and all accrued interest owing to ICC. Mr. Ballah has not
complied with ICC's demand for repayment of this loan.
CONVERTIBLE DEBT UNITS.
In April 1997, ICC entered into certain arrangements with Jerry Ballah and
Edward R. Jacobs which would permit those persons to acquire common stock of ICC
through the issuance of ICC's convertible debt units. Under the arrangements
with Mr. Ballah, ICC issued Mr. Ballah 1,257,116 convertible debt units in the
aggregate principal amount of $3,771,348 (or $3 per debt unit). Interest at the
annual rate of 6.49% on the $3,771,348 principal amount is payable by ICC to Mr.
Ballah annually on April 11 of each year in which the debt units are
outstanding. The principal amount owing by ICC to Mr. Ballah under the debt
units is due on April 11, 2002.
The purchase price for each debt unit issued to Mr. Ballah was $3 per unit
or $3,771,348 in the aggregate. Mr. Ballah paid the purchase price to acquire
the debt units by delivery of a promissory note payable by him in the principal
amount of $3,771,348. This promissory note accrues interest at the annual rate
of 6.74% payable annually on April 11 of each year in which the note is
outstanding. The principal amount owing by Mr. Ballah to ICC under his
promissory note is due on April 11, 2002.
The terms of Mr. Ballah's promissory note described above mirror the
requirements of ICC under the convertible debt units with the exception that Mr.
Ballah owes interest to ICC annually under his
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<PAGE>
promissory note at an annual rate of 0.25% greater than the interest rate owing
by ICC to Mr. Ballah under the convertible debt units. This difference in
interest rates requires Mr. Ballah to make an annual payment to ICC on April 11,
1998, 1999, 2000, 2001 and 2002 of $9,428.37 in each such year. Given that the
principal and interest amount owing by ICC under the convertible debt units is
completely offset by the principal amount and interest owing by Mr. Ballah to
ICC under his promissory note, during the period in which ICC's convertible debt
units are outstanding, ICC will not be obligated to pay Mr. Ballah any amount
under the convertible debt units.
ICC's debt units are convertible into common stock of ICC at the conversion
ratio of $3 per outstanding principal amount of the debt unit. Thus, the
outstanding aggregate principal amount of the debt units issued to Mr. Ballah of
$3,771,348 is convertible into 1,257,116 shares of ICC's common stock
($3,771,348 aggregate principal amount divided by $3 conversion ratio per share
of ICC common stock equals 1,257,116 shares of ICC common stock). In addition,
in order to convert the debt units into ICC's common stock, Mr. Ballah must pay
a conversion price of $0.01 per share or $12,571 in the aggregate (1,257,116
shares multiplied by $.01 conversion price per share equals $12,571 aggregate
conversion price).
Mr. Ballah has not made the required payment under his promissory note of
$9,428.37 to ICC on April 11, 1998 and 1999. Thus, he is in default under his
promissory note obligations owing to ICC. His promissory note is secured by the
convertible debt units issued by ICC.
Mr. Jacobs has been issued convertible debt units to ICC in exchange for the
delivery of Mr. Jacobs' promissory note in the principal amount of $4,221,345 on
substantially the same terms as described above for Mr. Ballah. Mr. Jacobs has
made the required payments of interest under his promissory note of $10,553 in
each of April 1998 and 1999.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORMS 8-K
(A) (1) FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
<S> <C>
Reports of Independent Auditors
Consolidated Balance Sheet at December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 1998, 1997 and
1996
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULE. The following Financial Statement Schedule is submitted herewith:
Schedule II--Valuation and Qualifying Accounts at December 31, 1998, 1997 and 1996
</TABLE>
All other schedules are omitted as the required information is not present
or is not present in amounts sufficient to require submission of the schedule,
or because the information required is included in the consolidated financial
statements or notes thereto.
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(3) LIST OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
2.1 Asset Purchase Agreement between NTC Acquisition, Inc. and National Telephone & Communications, Inc.,
dated March 31, 1998. Incorporated by reference from Exhibit 99.1 attached to Incomnet's Form 8-K,
filed with the Securities and Exchange Commission on April 8, 1998.
2.2 Agreement to Purchase AutoNetwork Assets between Incomnet, Inc. and AutoSkill, Inc., dated March 20,
1998. Incorporated by reference from Exhibit 10.24 attached to Incomnet's Annual Report on Form
10-K, for the fiscal year ending December 31, 1997, filed with the Securities and Exchange
Commission on April 15, 1998.
3.1 Articles or Incorporation and amendments thereto.
3.2 Certificate of Determination for Series A 2% Convertible Preferred Stock. Incorporated by reference
from Exhibit 3.3 attached to Incomnet's Pre-effective Amendment No. 1 to the Form S-3 filed with
the Securities and Exchange Commission on October 21, 1996.
3.3 Certificate of Determination for Series B 6% Convertible Preferred Stock. Incorporated by reference
from Exhibit 3.7 attached to Incomnet's Registration Statement on Form S-3 filed with the
Securities and Exchange Commission on November 22, 1997.
3.4 Certificate of Determination for Series C.
3.5 Certificate of Determination for Series D.
3.6 Revised Bylaws of Incomnet, Inc., dated January 18, 1999.
10.1 Form of Warrant to Purchase 510,000 Shares of RCI Common Stock dated February 7, 1995. Incorporated
by reference from Exhibit 4.5 attached to Incomnet's Registration Statement on Form S-3 filed with
the Securities and Exchange Commission on May 13, 1996.
10.2 Form of Warrant to Purchase RCI Common Stock, dated April 1996 in connection with bridge loans made
to RCI from April 1996 through January 1997. Incorporated by reference from Exhibit 4.6 attached to
Incomnet's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on
May 13, 1996.
10.3 Form of Warrant to Purchase Shares of Incomnet, Inc., in connection with a December 1996 settlement
with Robert Cohen, Jeff Rubin, and related parties, expiring December 9, 1999. Incorporated by
reference from Exhibit 4.7 attached to Incomnet's Pre-Effective Amendment No. 1 to Form S-3, filed
with the Securities and Exchange Commission on March 24, 1997.
10.4 Form of Warrant to Purchase Shares of Incomnet, Inc., in connection with the settlement of STEVENS V.
SCHWARTZ AND INCOMNET, INC., expiring December 17, 2001. Incorporated by reference from Exhibit 4.8
attached to Incomnet's Pre-Effective Amendment No. 1 to Form S-3 Registration Statement filed with
the Securities and Exchange Commission on March 24, 1997.
10.5 Employment Agreement between NTC and James R. Quandt, dated January 6, 1997. Incorporated by
reference from Exhibit 10.32 attached to Incomnet's Pre-Effective Amendment No. 1 to Form S-3,
filed with the Securities and Exchange Commission on March 24, 1997.
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.6 Letter of Acknowledgment for Amended and Restated Management Incentive Agreement Between NTC and
Incomnet, Inc., dated January 28, 1997. Incorporated by reference from Exhibit 10.31 attached to
Incomnet's Pre-Effective Amendment No. 1 to Form S-3, filed with the Securities and Exchange
Commission on March 24, 1997.
10.7 Settlement Agreements entered into on February 14, 1996, between Incomnet and various note holders,
including Arthur Caplan, Jules Nordlicht, Rita Folger, Richard S. Jaffe, Kenneth Lebow, Lenore
Katz, and Moshe Miller. Incorporated by reference from Exhibit 10.20 attached to Incomnet's
Registration Statement on Form S-3 filed with the Securities and Exchange Commission on May 13,
1996.
10.8 Carrier Switched Services Agreement with Wiltel, Inc., dated September 15, 1995. Incorporated by
reference from Exhibit 10.14 attached to Incomnet's Registration Statement on Form S-3 filed with
the Securities and Exchange Commission on May 13, 1996 and declared effective on October 31, 1996.
(Portions of this Agreement have been redacted. Incomnet has requested that the Securities and
Exchange Commission grant confidential treatment to the redacted portions of the Agreement.)
10.9 Settlement Agreement Between Joel W. Greenberg and Incomnet, Inc. dated May 9, 1996. Incorporated by
reference from Exhibit 99.A attached to Incomnet's Report on Form 8-K, dated June 18, 1996,
relating to the settlement agreement with Joel W. Greenberg and his resignation as a director of
Incomnet.
10.10 Form of Registration Rights Agreement Between Incomnet, Inc. and Purchasers of Series A Convertible
Preferred Stock dated September 27, 1996. Incorporated by reference from Incomnet's Pre-effective
Amendment No. 1 to Form S-3, filed with the Securities and Exchange Commission on October 21, 1996.
10.11 Management Incentive Agreement with ICC (formerly NTC), dated October 14, 1996. Incorporated by
reference from Exhibit 10.27 attached to Incomnet's Registration Statement on Form S-3 filed with
the Securities and Exchange Commission on November 22, 1996.
10.12 Settlement Agreements by and among Incomnet, Inc., Edward Jacobs and Jerry Ballah dated November 13,
1996. Incorporated by reference from Exhibit 10.28 attached to Incomnet's Registration Statement on
Form S-3 filed with the Securities and Exchange Commission on November 22, 1996.
10.13 Rapid Cast, Inc. Shareholder's Agreement, dated January 15, 1997. Incorporated by reference from
Exhibit 10.29 attached to Incomnet's Pre-Effective Amendment No. 1 to Form S-3, filed with the
Securities and Exchange Commission on March 24, 1997.
10.14 Registration Rights Agreement for Rapid Cast, Inc., dated January 15, 1997. Incorporated by reference
from Exhibit 10.20 to Incomnet's Pre-Effective Amendment No. 1 to Form S-3, filed with the
Securities and Exchange Commission on March 24, 1997.
10.15 Settlement and Mutual Release Agreement between Incomnet, Inc. and various parties including Robert
Cohen, Alan Cohen, Jeff Rubin, Jeff Cohen, Broadway Partners, Lenore Katz, and Allyson Cohen, dated
December 9, 1996. Incorporated by reference from Exhibit 10.33 attached to Incomnet's Pre-Effective
Amendment No. 1 to Form S-3, filed with the Securities and Exchange Commission on March 24, 1997.
10.16 Revised Standard Lease by ICC (formerly NTC) for space in Honolulu, Hawaii dated November 20, 1996.
Incorporated by reference from Exhibit 10.15 attached to Incomnet's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 filed with the Securities and Exchange Commission on April
15, 1997.
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.17 Promissory Note and Business Loan Agreement dated March 27, 1997 between National Telephone and
Communications, Inc. and First Bank and Trust, Irvine Regional Office. Incorporated by reference
from Exhibit 10.16 attached to Incomnet's Annual Report on Form 10-K for the fiscal year ending
December 31, 1996, filed with the Securities and Exchange Commission on April 15, 1997.
10.18 Amended and Restated Management Incentive Agreement Between ICC (formerly NTC) and Incomnet, Inc.,
dated January 28, 1997. Incorporated by reference from Incomnet's Pre-effective Amendment to Form
S-3, filed with the Securities and Exchange Commission on March 24, 1997.
10.19 Amendment to Employment Agreement between Incomnet, Inc. and Melvyn H. Reznick, dated June 5, 1997.
Incorporated by reference from Exhibit 10.36 attached to Incomnet's Pre-effective Amendment No. 2
to Form S-3, filed with the Securities and Exchange Commission on July 9, 1997.
10.20 Employment Agreement between Incomnet, Inc. and Stephen A. Caswell, dated June 5, 1997. Incorporated
by reference from Exhibit 10.37 attached to Incomnet's Pre-effective Amendment No. 2 to Form S-3,
filed with the Securities and Exchange Commission on July 9, 1997.
10.21 Employment Agreement between National Telephone & Communications, Inc. and Edward R. Jacobs, dated
July 25, 1997. Incorporated by reference from Exhibit 10.3 attached to Incomnet's Quarterly Report
on Form 10-Q, for the quarterly period ending September 30, 1997, filed with the Securities and
Exchange Commission on November 13, 1997.
10.22 Office Lease between ICC (formerly NTC) and The Carter Family Investment Partnership, LP, commencing
April 18, 1997. Incorporated by reference from Incomnet's report on Form 10-Q filed with the
Securities and Exchange Commission on May 15, 1997.
10.23 Commitment Letter provided by Ironwood Telecom LLC to Incomnet, Inc. to provide Incomnet with a
secured credit facility, dated October 30, 1998. Incorporated by reference from Exhibit 10.1
attached to Incomnet's Report on Form 10-Q for the quarterly period ending September 30, 1998 filed
with the Securities and Exchange Commission on November 17, 1998.
10.24 Bridge Loan and Security Agreement between Incomnet, Inc. and Ironwood Telecom LLC, dated November 4,
1998. Incorporated by reference from the Exhibit 10.2 attached to Company's Report on Form 10-Q for
the quarterly period ending September 30, 1998 filed with the Securities and Exchange Commission on
November 16, 1998.
10.25 Bridge Loan Note executed by Incomnet, Inc. in favor of Ironwood Telecom LLC, dated November 4, 1998.
Incorporated by reference from Exhibit 10.3 attached to Incomnet's Report on Form 10-Q for the
quarterly period ending September 30, 1998 filed with the Securities and Exchange Commission on
November 16, 1998.
10.26 Guaranty executed by National Telephone & Communications, Inc. in favor of Ironwood Telecom LLC,
dated November 4, 1998, relating to Incomnet Inc.'s Bridge Loan Note. Incorporated by reference
from Exhibit 10.5 attached to Incomnet's Report on Form 10-Q for the quarterly period ending
September 30, 1998 filed with the Securities and Exchange Commission on November 16, 1998.
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.27 Guaranty executed by National Telephone & Communications, Inc. in favor of Ironwood Telecom LLC,
dated November 4, 1998, relating to Mr. Casey's Secured Promissory Note. Incorporated by reference
from Exhibit 10.7 attached to Incomnet's Report on Form 10-Q for the quarterly period ending
September 30, 1998 filed with the Securities and Exchange Commission on November 16, 1998.
10.28 Severance Agreement between Incomnet, Inc. and Melvyn Reznick, dated September 29, 1998, and
amendment thereto dated November 1, 1998. Incorporated by reference from Exhibit 10.7 attached to
Incomnet's Report on Form 10-Q for the quarterly period ending September 30, 1998 filed with the
Securities and Exchange Commission on November 16, 1998.
10.29 Separation Agreement between Incomnet, Inc. and James R. Quandt, dated July 1, 1998, and amendment
thereto dated October 30, 1998. Incorporated by reference from Exhibit 10.8 attached to Incomnet's
Report on Form 10-Q for the quarterly period ending September 30, 1998 filed with the Securities
and Exchange Commission on November 16, 1998.
10.30 Separation Agreement between Incomnet, Inc. and Victor C. Streufert, dated July 1, 1998, and
amendment thereto dated October 30, 1998. Incorporated by reference from Exhibit 10.9 attached to
Incomnet's Report on Form 10-Q for the quarterly period ending September 30, 1998 filed with the
Securities and Exchange Commission on November 16, 1998.
10.31 Amendment to Employment Agreement between Incomnet, Inc. and Stephen A. Caswell, dated October 29,
1998. Incorporated by reference from Exhibit 10.10 attached to Incomnet's Report on Form 10-Q for
the quarterly period ending September 30, 1998 filed with the Securities and Exchange Commission on
November 16, 1998.
10.32 Settlement and Release Agreement between Incomnet, Inc. and the Cohen Parties, including Dr. Robert
Cohen, Stefanie Rubin, Allyson Cohen, Jeffrey Cohen, Jeffrey Rubin, Dr. Alan Cohen, Lenore Katz,
Broadway Partners and Meryl Cohen, custodian for Gabrielle Cohen, Erica Cohen, Jaclyn Cohen and
Nicole Cohen, dated November 5, 1998. Incorporated by reference from Exhibit 10.11 attached to
Incomnet's Report on Form 10-Q for the quarterly period ending September 30, 1998 filed with the
Securities and Exchange Commission on November 16, 1998.
10.33 Settlement and Release Agreement Among Incomnet, Inc., Ironwood Telecom LLC, Ellen Cohen and Martin
Fabrikant, dated November 5, 1998. Incorporated by reference from Exhibit 10.12 attached to
Incomnet's Report on Form 10-Q for the quarterly period ending September 30, 1998 filed with the
Securities and Exchange Commission on November 16, 1998.
10.34 Stock Purchase and Release Agreement Among Gary Kaplowitz, Alan Rothstein, S&R Holdings, Ironwood
Telecom LLC, Incomnet, Inc. and John P. Casey, dated November 4, 1998. Incorporated by reference
from Exhibit 10.13 attached to Incomnet's Report on Form 10-Q for the quarterly period ending
September 30, 1998 filed with the Securities and Exchange Commission on November 16, 1998.
10.35 Employment Agreement by and among Incomnet, Inc., National Telephone & Communications, Inc., and
Denis Richard, dated September 29, 1998. Incorporated by reference from Exhibit 10.2 attached to
Incomnet's Report on Form 8-K, as filed with the Securities and Exchange Commission on October 14,
1998.
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.36 Acknowledgment Letter of Services Agreement Between Incomnet, Inc. and John P. Casey, dated September
29, 1998. Incorporated by reference from Exhibit 10.2 attached to Incomnet's Report on Form 8-K,
filed with the Securities and Exchange Commission on October 14, 1998.
10.37 Board Change Agreement among Incomnet, Inc., the Current Directors of Incomnet, Inc. and John P.
Casey, dated 28, 1998. Incorporated by reference from Exhibit 10.1 attached to Incomnet's Report on
Form 8-K, filed with the Securities and Exchange Commission on August 31, 1998.
10.38 Standard Sublease Between National Telephone & Communications, Inc., and Vision Capital Services
Corporation and Performance Capital Management, Inc., dated July 28, 1998. Incorporated by
reference from Exhibit 10.17 attached to Incomnet's Report on Form 10-Q for the quarterly period
ending September 30, 1998 filed with the Securities and Exchange Commission on November 16, 1998.
10.39 Warrant Agreement dated as of November 4, 1998 between Incomnet, Inc., and Ironwood Telecom LLC
relating to the issuance of 500,000 Incomnet, Inc. Warrants. Incorporated by reference from Exhibit
10.4 attached to Incomnet's report on Form 10-Q for the quarterly period ending September 30, 1998
filed with the Securities & Exchange Commission on November 16, 1998.
10.40 Warrant Agreement dated as of November 16, 1998 between Incomnet, Inc., and Ironwood Telecom LLC
relating to the issuance of 100,000 Incomnet, Inc. Warrants.
10.41 Registration Rights Agreement dated as of November 4, 1998 between Incomnet, Inc. and Ironwood
Telecom LLC.
10.42 Loan and Security Agreement dated as of December 15, 1998 among Incomnet, Inc., Incomnet
Communications Corporation and Ironwood Telecom LLC.
10.43 Term Note dated December 15, 1998 issued by Incomnet, Inc. in the original principal amount of
$8,374,610.64 payable to Ironwood Telecom LLC.
10.44 WorldCom Promissory Note dated December 15, 1998, issued by Incomnet, Inc. in the original principal
amount of $3,456,151.56 payable to Ironwood Telecom LLC.
10.45 Amended and Restated First Bank Promissory Note dated December 15, 1998 issued by Incomnet, Inc. in
the original principal amount of $4,954,707.80 payable to Ironwood Telecom LLC.
10.46 Guaranty dated as of December 15, 1998, by Incomnet Communications Corporation in favor of Ironwood
Telecom LLC.
10.47 Warrant to Purchase 2,000,000 Shares of Common Stock of Incomnet, Inc. dated December 15, 1998 issued
by Incomnet, Inc. to Ironwood Telecom LLC.
10.48 Warrant to Purchase 1,000,000 Shares of Common Stock of Incomnet, Inc. dated December 15, 1998 issued
by Incomnet, Inc. to Ironwood Telecom LLC.
10.49 Employment Agreement between Incomnet, Inc. and George P. Blanco dated January 19, 1999.
10.50 Incomnet, Inc. Equity Incentive Stock Plan, approved by the Board of Directors of Incomnet, Inc. on
January 18, 1999.
10.51 Incomnet, Inc. Employee Stock Purchase Plan, approved by the Board of Directors of Incomnet, Inc. on
January 18, 1999.
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.52 Settlement Agreement and Mutual General Release among Incomnet, Inc., GenSource Corporation, Jerry C.
Buckley, Ralph M. Flygare, Robert Reisbaum and E.V. Schmidt dated as of March 9, 1999.
10.53 Telecommunications Services Agreement and Rate Schedule between WorldCom Network Services, Inc. and
Incomnet Communications Corporation dated as of November 1, 1998. (Portions of this Agreement have
been redacted. Incomnet has requested that the Securities and Exchange Commission grant
confidential treatment to the redacted portions of the Agreement.)
10.54 Program Enrollment Terms Agreement between WorldCom Network Services, Inc. and Incomnet
Communications Corporation dated as of November 1, 1999. (Portions of this Agreement have been
redacted. Incomnet has requested that the Securities and Exchange Commission grant confidential
treatment to the redacted portions of the Agreement.)
10.55 Service Schedule Agreement between WorldCom Network Services, Inc. and Incomnet Communications
Corporation dated as of November 1, 1998. (Portions of this Agreement have been redacted. Incomnet
has requested that the Securities and Exchange Commission grant confidential treatment to the
redacted portions of the Agreement.)
10.56 Amendment No. 1 to Telecommunications Services Agreement and Program Enrollment Terms between ICC and
WorldCom effective March 12, 1999. (Portions of this Agreement have been redacted. Incomnet has
requested that the Securities and Exchange Commission grant confidential treatment to the redacted
portions of the Agreement.)
10.57 Loan and Security Agreement between ICC and Foothill Capital Corporation dated as of April 9, 1999.
10.58 Intellectual Property Security Agreement between ICC and Foothill Capital Corporation dated as of
April 9, 1999.
10.59 Security Agreement between Incomnet, Inc. and Foothill Capital Corporation dated as of April 9, 1999.
10.60 Intercreditor and Subordination Agreement between Foothill Capital Corporation and Ironwood Telecom
LLC dated as of April 9, 1999.
10.61 Warrant issued to Ironwood Telecom LLC to purchase 1,250,000 shares of Incomnet Common Stock dated
April 9, 1999.
10.62 Key Independent Representative Stock Option Plan for ICC adopted as of February 28, 1997.
Incorporated by reference from Exhibit 10.34 to Incomnet's Amendment No. 2 to Form S-3 filed with
the Securities and Exchange Commission July 9, 1997.
10.63 1996 Senior Executive and Consultant Convertible Debt Plan for ICC adopted as of February 28, 1997.
Incorporated by reference from Exhibit 10.34 to Incomnet's Amendment No. 2 to Form S-3, filed with
the Securities and Exchange Commission July 9, 1997.
10.64 ICC Directors Stock Option Plan adopted as of February 28, 1997. Incorporated by reference from
Exhibit 10.34 to Incomnet's Amendment No. 2 to Form S-3 filed with the Securities and Exchange
Commission on July 9, 1997.
10.65 ICC 1996 Stock Option Plan adopted February 28, 1997. Incorporated by reference from Exhibit 10.34 to
Incomnet's Amendment No. 2 to Form S-3 filed with the Securities and Exchange Commission on July 9,
1997.
10.66 Promissory Note executed by Jerry Ballah in favor of ICC dated as of April 11, 1997 in the amount of
$3,771,348.
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.67 Convertible Debt Unit dated as of April 11, 1997 issued to Jerry Ballah.
10.68 Convertible Debt Plan Grant Agreement dated as of April 11, 1997 between ICC and Jerry Ballah dated
April 11, 1997.
10.69 Convertible Debt Unit Pledge Agreement between Jerry Ballah and ICC dated as of April 11, 1997.
10.70 Promissory Note executed by Edward R. Jacobs in favor of ICC dated as of April 11, 1997 in the amount
of $3,021,345.
10.71 Convertible Debt Unit dated as of April 11, 1997 issued to Edward R. Jacobs.
10.72 Convertible Debt Plan Grant Agreement between ICC and Edward R. Jacobs dated April 11, 1997.
10.73 Convertible Debt Unit dated as of April 11, 1997 issued to Edward R. Jacobs.
10.74 Promissory Note executed by Edward R. Jacobs in favor of ICC dated as of April 11, 1997 in the amount
of $1,200,000.
10.75 Convertible Debt Plan Grant Agreement between ICC and Edward R. Jacobs dated April 11, 1997.
10.76 Convertible Debt Unit Pledge Agreement between Edward R. Jacobs and ICC dated as of April 11, 1997.
10.77 Promissory Note in the amount of $550,219.77 executed by Jerry Ballah in favor of ICC dated March 31,
1997.
10.78 Amendment to Registration Rights Agreement between Ironwood and Incomnet dated as of April 9, 1999.
10.79 Consent and Amendment No. 1 to Loan and Security Agreement between Ironwood and Incomnet dated as of
April 9, 1999.
21 Subsidiaries of the Registrant.
27 Financial data schedule (Article 5 of Regulation S-X).
</TABLE>
(B) RECENTLY FILED REPORTS ON FORM 8-K
The following report on Form 8-K was filed by Incomnet during the fiscal
year ended December 31, 1998:
Report on Form 8-K--Changes in Control of Registrant, dated September 29,
1998 and filed with the Securities and Exchange Commission on October 14,
1998.
62
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
INCOMNET, INC.
Report of Ernst & Young LLP, Independent Auditors.......................................................... F-2
Report of Stonefield, Josephson, Inc., Independent Auditors................................................ F-3
Consolidated Balance Sheets at December 31, 1998 and 1997.................................................. F-4
Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996................. F-5
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 1998, 1997 and
1996..................................................................................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996................. F-7
Notes to Consolidated Financial Statements................................................................. F-9
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Incomnet, Inc.
We have audited the accompanying consolidated balance sheet of Incomnet,
Inc. as of December 31, 1998 and the related consolidated statements of
operations, shareholders' equity (deficit), and cash flows for the year then
ended. Our audit also included the financial statement schedule listed in the
Index at Item 14(a) with respect to the year ended December 31, 1998. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Incomnet, Inc. at December 31, 1998 and the consolidated results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule with respect to information for the year ended
December 31, 1998, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
/S/ ERNST & YOUNG LLP
April 9, 1999
Orange County, California
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Incomnet, Inc.
We have audited the consolidated balance sheet of Incomnet, Inc. and
subsidiaries as of December 31, 1997 and the related consolidated statements of
operations, shareholders' equity and cash flows for the two years in the period
ended December 31, 1997, and the schedule listed in Item 14 for the two years
ended December 31, 1997. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As set forth in Note 1 to the consolidated financial statements, in
connection with adopting the equity method of accounting for Rapid Cast, Inc.
("RCI"), the Company adjusted the carrying amount of its investment to equal its
equity interest in the net assets of RCI. Accordingly, the 1997 financial
statements reflect an increase in shareholders' equity of $7.2 million and
equity in loss of $2.0 million (included in discontinued operations) over
amounts previously reported, for which the Company reported a gain on
disposition of $2.6 million in 1998.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Incomnet, Inc. at December 31, 1997 and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Stonefield Josephson, Inc.
Santa Monica, California
March 12, 1998,
except for Note 1, as to which the date is
April 14, 1999
F-3
<PAGE>
INCOMNET, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1998 1997
--------- ---------
(RESTATED)
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash........................................................................... $ 3,772 $ 754
Accounts receivable, less allowance for doubtful accounts of $3,298 and $2,698
at December 31, 1998 and 1997, respectively.................................. 5,579 13,402
Notes receivable from employees and shareholders, net of allowance of $925 and
$209 at December 31, 1998 and 1997, respectively............................. -- 840
Net assets of discontinued operations.......................................... 531 5,707
Prepaid expenses and other current assets...................................... 424 1,086
--------- ---------
Total current assets............................................................. 10,306 21,789
Facilities and equipment, net.................................................... 9,287 14,445
Goodwill, net of accumulated amortization of $1,830 and $1,534 at
December 31, 1998 and 1997, respectively....................................... 3,950 4,246
Deposits and other assets........................................................ 877 860
--------- ---------
Total assets..................................................................... $ 24,420 $ 41,340
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................................... $ 3,002 $ 9,605
Accrued expenses............................................................... 2,188 3,820
Accrued litigation settlement.................................................. 8,500 8,650
Accrued excise taxes........................................................... 3,009 1,869
Current portion of long-term debt.............................................. 2,307 9,383
Deferred revenue............................................................... 1,007 1,633
Other current liabilities...................................................... 3,386 946
--------- ---------
Total current liabilities........................................................ 23,399 35,906
Long-term debt, excluding current portion........................................ 16,819 2,855
Commitments and contingencies (NOTES 2, 10 AND 11)
Shareholders' equity (deficit):
Preferred stock, no par value:
Authorized shares--100,000
Issued and outstanding shares--2,056 and 4,029 at December 31, 1998 and 1997,
respectively (Aggregate liquidation preference of $2,204 at December 31,
1998)...................................................................... 1,802 3,758
Common stock, no par value:
Authorized shares--20,000,000
Issued and outstanding shares--19,933,000 and 12,740,721 at December 31, 1998
and 1997, respectively..................................................... 67,114 64,386
Accumulated deficit............................................................ (84,714) (65,565)
--------- ---------
Total shareholders' equity (deficit)............................................. (15,798) 2,579
--------- ---------
Total liabilities and shareholders' equity (deficit)............................. $ 24,420 $ 41,340
--------- ---------
--------- ---------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
INCOMNET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
(RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Net sales:
Telephone services.................................................. $ 53,131 $ 106,878 $ 80,474
Marketing program................................................... 1,737 14,953 17,396
--------- --------- ---------
Total net sales....................................................... 54,868 121,831 97,870
Cost of sales:
Telephone services.................................................. 32,673 73,022 46,317
Marketing program................................................... 1,974 12,826 18,153
--------- --------- ---------
Total cost of sales................................................... 34,647 85,848 64,470
--------- --------- ---------
Gross profit.......................................................... 20,221 35,983 33,400
Operating expenses:
General and administrative.......................................... 25,953 28,722 28,442
Depreciation and amortization....................................... 3,448 2,812 1,926
Bad debt expense.................................................... 3,852 5,495 5,945
Impairment of long-lived assets..................................... 1,633 -- --
Other operating expense............................................. 1,577 12,527 2,968
--------- --------- ---------
Total operating expenses.............................................. 36,463 49,556 39,281
--------- --------- ---------
Operating loss........................................................ (16,242) (13,573) (5,881)
Interest expense, net of interest income of $218, $91 and $178 for
1998, 1997 and 1996, respectively................................... (1,844) (283) (89)
--------- --------- ---------
Loss from continuing operations before income tax (benefit) expense
and cumulative effect of accounting change.......................... (18,086) (13,856) (5,970)
Income tax (benefit) expense.......................................... (453) 201 637
--------- --------- ---------
Loss from continuing operations....................................... (17,633) (14,057) (6,607)
--------- --------- ---------
Discontinued operations:
Loss from operations of discontinued optical systems, network
services and computer software businesses less applicable income
tax benefit of $8,449 in 1996..................................... (4,610) (1,561) (30,192)
Gain on disposal of optical systems, network services and computer
software businesses............................................... 3,135 -- --
--------- --------- ---------
Loss from discontinued operations................................... (1,475) (1,561) (30,192)
Cumulative effect of accounting change, net of tax of $10............. -- -- (877)
--------- --------- ---------
Net loss.............................................................. $ (19,108) $ (15,618) $ (37,676)
--------- --------- ---------
--------- --------- ---------
Basic and diluted loss per common share:
From continuing operations.......................................... $ (1.03) $ (1.08) $ (0.50)
From discontinued operations........................................ (0.09) (0.11) (2.26)
From cumulative effect of accounting change......................... -- -- (0.06)
--------- --------- ---------
--------- --------- ---------
Net loss per share.................................................. $ (1.12) $ (1.19) $ (2.82)
--------- --------- ---------
--------- --------- ---------
Weighted average number of common shares.............................. 17,255 13,578 13,370
--------- --------- ---------
--------- --------- ---------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
INCOMNET, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
-------------------- ------------------------ ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
--------- --------- ------------- --------- ------------ ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995...................... -- $ -- 13,262,648 $ 55,392 $ (12,844) $ 42,548
Common stock issued in litigation settlement.... -- -- 107,033 436 -- 436
Issuance of preferred stock, net................ 2,440 2,355 -- -- -- 2,355
Cumulative effect of accounting change.......... -- -- -- -- 877 877
Other, net...................................... -- -- -- -- 86 86
Net loss........................................ -- -- -- -- (37,676) (37,676)
--------- --------- ------------- --------- ------------ ----------
Balance at December 31, 1996...................... 2,440 2,355 13,369,681 55,828 (49,557) 8,626
Equity method adjustments related to Rapid
Cast.......................................... -- -- -- 7,217 -- 7,217
Preferred stock converted to common stock....... (845) (845) 386,006 845 -- --
Retirement of common stock in connection with
16(b) settlement -- -- (1,047,966) -- -- --
Issuance of preferred stock, net................ 2,434 2,248 -- -- -- 2,248
Common stock issued in litigation settlement.... -- -- 33,000 100 -- 100
Issuance of warrants............................ -- -- -- 36 -- 36
Dividend with respect to beneficial conversion
feature ($426 per share) -- -- -- 360 (360) --
Other, net...................................... -- -- -- -- (30) (30)
Net loss (restated)............................. -- -- -- -- (15,618) (15,618)
--------- --------- ------------- --------- ------------ ----------
Balance at December 31, 1997 (restated)........... 4,029 3,758 12,740,721 64,386 (65,565) 2,579
Preferred stock converted to common stock....... (1,986) (1,986) 6,666,458 1,986 -- --
Common stock issued for dividends in arrears
($21 per share) on preferred stock
conversions................................... -- -- 101,035 41 (41) --
Preferred stock issued for services rendered.... 13 25 -- -- -- 25
Common stock issued for cash.................... -- -- 283,000 200 -- 200
Common stock issued for services rendered....... -- -- 26,786 81 -- 81
Common stock issued in litigation settlement.... -- -- 115,000 86 -- 86
Stock options issued for services rendered...... -- 5 -- 6 -- 11
Warrants issued in litigation settlement........ -- -- -- 49 -- 49
Warrants issued related to long-term debt....... -- -- -- 279 -- 279
Net loss........................................ -- -- -- -- (19,108) (19,108)
--------- --------- ------------- --------- ------------ ----------
Balance at December 31, 1998...................... 2,056 $ 1,802 19,933,000 $ 67,114 $ (84,714) $ (15,798)
--------- --------- ------------- --------- ------------ ----------
--------- --------- ------------- --------- ------------ ----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
INCOMNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
(RESTATED)
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss:...................................................... $ (19,108) $ (15,618) $ (37,676)
Less loss from discontinued operations....................... 1,475 1,561 30,192
Less cumulative effect of accounting change.................. -- -- 877
--------- --------- ---------
Loss from continuing operations.............................. (17,633) (14,057) (6,607)
Adjustments to reconcile loss from continuing operations to net
cash provided by (used in) operating activities:
Depreciation and amortization................................ 3,448 2,812 1,926
Provision for uncollectible accounts receivable.............. 3,244 5,319 5,682
Provision for uncollectible notes receivable................. 608 176 263
Impairment of long-lived assets.............................. 1,633 -- --
Loss on disposal of equipment................................ 815 -- --
Amortization of original issue discount...................... 191 -- --
Other, net................................................... 252 136 436
Changes in operating assets and liabilities:
Accounts receivable........................................ 4,579 (6,732) (6,563)
Other current assets....................................... 645 (361) (232)
Accounts payable........................................... (6,603) (2,485) 3,982
Accrued expenses........................................... (1,632) (1,869) 3,891
Accrued litigation settlement.............................. (150) 8,650 --
Accrued excise taxes....................................... 1,140 211 (119)
Deferred revenue........................................... (626) (2,408) 2,851
Other current liabilities.................................. 2,440 946 --
--------- --------- ---------
Net cash (used in) provided by operating activities............ (7,649) (9,662) 5,510
INVESTING ACTIVITIES
Additions to facilities and equipment, net..................... (428) (3,515) (4,639)
(Increase) decrease in notes receivable........................ 232 (255) (58)
Increase in other assets....................................... -- -- 553
--------- --------- ---------
Net cash used in investing activities.......................... (196) (3,770) (4,144)
FINANCING ACTIVITIES
Proceeds from (repayments of) line of credit, net.............. $ (8,440) $ 8,440 $ --
Proceeds from issuance of long-term debt, net.................. 18,930 176 --
Repayment of long-term debt.................................... (3,528) (433) (999)
Proceeds from issuance of preferred stock, net................. -- 2,248 2,355
Proceeds from issuance of common stock, net.................... 200 -- --
Other, net..................................................... -- (30) --
--------- --------- ---------
Net cash provided by financing activities...................... 7,162 10,401 1,356
--------- --------- ---------
Net cash provided by (used in) continuing operations........... (683) (3,031) 2,722
Net cash provided by (used in) discontinued operations......... 3,701 1,524 (2,112)
--------- --------- ---------
</TABLE>
F-7
<PAGE>
INCOMNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
(RESTATED)
(IN THOUSANDS)
<S> <C> <C> <C>
Net increase (decrease) in cash................................ 3,018 (1,507) 610
Cash at beginning of year...................................... 754 2,261 1,651
--------- --------- ---------
Cash at end of year............................................ $ 3,772 $ 754 $ 2,261
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Non cash investing and financing transactions:
CONTINUING OPERATIONS
Assets acquired under capital leases......................... $ 14 $ 855 $ 1,772
DISCONTINUED OPERATIONS
-- 7,217 --
Interest in additional equity of Rapid Cast, Inc.............
Assumption of liabilities in connection with purchase of
GenSource.................................................. -- 1,910 --
Write-off of patents for Rapid Cast.......................... -- -- (39,146)
</TABLE>
SEE ACCOMPANYING NOTES.
F-8
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Incomnet, Inc. (the Company or Incomnet), through its wholly owned
subsidiary, Incomnet Communications Corporation, Inc. (ICC) (formerly known as
National Telephone & Communications, Inc.) is an inter-exchange carrier and
reseller of discount long distance telephone services to residential and small
business customers nationwide, although approximately 64% of the Company's
customers are located in California. Other products include 800-number services
and calling card products. Service is provided by procuring long distance
telecommunications transmission services from a long distance communication
carrier at wholesale rates for high volume usage and reselling those services at
discount retail rates. ICC uses a network of independent representatives to sell
its telecommunications related services to retail customers. ICC is responsible
for the servicing and billing of the customers as well as the collection of
monies owed by the customers for their use of ICC's telephone services and
products.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation.
DISCONTINUED OPERATIONS
The Company sold most of its interest in three businesses previously
reported as business segments. Accordingly, these segments have been accounted
for as discontinued operations in 1998. The Company has also reclassified prior
years to present the operating results of the three businesses as discontinued
operations.
- GenSource--In March 1999, the Company sold its interest in the common
stock of the computer software business segment, consisting of GenSource
Corporation (GenSource), a developer and marketer of software programs
used to administer insurance-related claims, such as workers' compensation
and short-term and long-term disability. The sale was made to a group of
private investors in exchange for the release from liability of the
Company under promissory notes to the former owners of GenSource of
approximately $1,775,000. In addition, the Company paid $10,000 in cash
for certain transaction expenses and received 15,507 shares of convertible
preferred stock in GenSource with a stated value of $32.25 per share. No
value was assigned to the preferred stock, which represents an
approximately 15% interest in GenSource on a fully-diluted basis. In
connection with the disposition of GenSource, the Company expects to
recognize a gain of approximately $1,394,000. The Company has no
expectation of continuing involvement with GenSource.
- AutoNetwork--In March 1998, the Company sold the network services business
segment to a group of private investors for $1,254,000 in cash and notes.
The segment consisted of Auto Dismantler Network (AutoNetwork), a monthly
subscription service that auto dismantlers use to buy, sell and trade used
parts that have been salvaged from automobiles. During the year ended
December 31, 1998, the Company recognized a gain on the disposition of
AutoNetwork of $535,000.
F-9
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- Rapid Cast--The Company acquired 51% of the common stock of Rapid Cast,
Inc. (RCI) (10.2 million of the then 20 million outstanding shares) in
February 1995. Initially, RCI was accounted for using the equity method.
However, by the second quarter of 1995, control was determined to be other
than temporary and RCI was consolidated with the Company. In January 1997,
RCI sold 8 million new shares of its common stock in a private placement
and issued an additional 2,344,000 shares in other transactions, reducing
the Company's investment in RCI to approximately 33% and requiring the
equity method of accounting for its remaining interest in RCI. In its
consolidated financial statements for the year ended December 31, 1997 as
originally reported, the Company gave no recognition to the increase in
its share of RCI's net equity resulting from the sale by RCI of its common
stock because prior management was not satisfied that the sale would
provide sufficient resources to allow RCI to become successful. However,
the accompanying consolidated financial statements have been restated to
reflect a $7.2 million increase in consolidated stockholders' equity in
accordance with the equity method of accounting. Additionally, operating
results for RCI for 1997 and for the first nine months of 1998 have been
restated to reflect additional losses of $2.0 million and $1.3 million,
respectively, to account for the Company's share of RCI's net losses under
the equity method of accounting. In the third quarter of 1998, the Company
sold a portion of its investment in RCI to outside investors, which
resulted in a net gain on the disposition of $2.6 million. In the fourth
quarter of 1998, the Company decided to streamline its operations to focus
solely on its telecommunications business. As part of that effort, the
Company has determined to dispose of its investment in RCI and expects
that this will occur in 1999. At December 31, 1998, the Company holds a
17.4% ownership interest in RCI, with a carrying value of $200,000, and
warrants for the purchase of 2.6 million additional RCI shares of common
stock at exercise prices ranging from $0.75 to $2.25 per share. The
Company has no expectation of continuing involvement with Rapid Cast.
Summarized financial information for the discontinued operations are as
follows (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1998 1997
--------- -----------
(RESTATED)
<S> <C> <C>
Current assets........................................................... $ 992 $ 812
Total assets............................................................. 1,433 6,480
Total liabilities (current).............................................. (902) (773)
Net assets of discontinued operations.................................... 531 5,707
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues......................................................... $ 3,530 $ 3,313 $ 6,093
</TABLE>
The net assets of the discontinued operations as of December 31, 1998
represent the net assets of GenSource of $331,000 and RCI of $200,000, which
have been classified as current assets as of December 31, 1998. The net assets
of discontinued operations at December 31, 1997 are comprised of $3.280,000,
$827,000 and $1,600,000 of GenSource, AutoNetwork and RCI, respectively.
F-10
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Significant estimates made in preparing the consolidated
financial statements include the allowance for doubtful accounts, income tax
valuation allowance, litigation settlement costs, certain accrued liabilities
and future undiscounted cash flows used in the analysis of the impairment of
long-lived assets. Actual results could differ from those estimates.
REVENUE AND RELATED COST RECOGNITION
The Company recognizes revenue and cost of sales as follows:
TELEPHONE SERVICES
Long distance telecommunications service revenues are generated when
customers make long distance telephone calls from their business or residential
telephones or by using any of the Company's telephone calling cards. Proceeds
from prepaid telephone calling cards are recorded as deferred revenue when the
cash is received, and recognized as revenue as the telephone service is
provided.
Telephone services cost of sales include the cost of long distance service
provided by the Company's long distance carrier, WorldCom Network Services, Inc.
(WorldCom), and commissions paid to independent representatives.
MARKETING PROGRAM
ICC markets its products through a multi-level, network marketing program of
independent sales representatives (ISRs). ICC authorizes and trains the ISRs to
sell its services to residential and small business customers, and allows the
ISRs to develop their own organizational group of other ISRs or "downline" sales
force.
Marketing program revenues are derived from the sale of marketing supplies,
training and continuing support services to ISRs. Payment for all such materials
and services is generally required at the point-of-purchase or the inception of
the ISR agreements. A portion of such revenue is deemed related to training and
continuing support obligations and is deferred and recognized after the training
is provided and, over the twelve-month contractual service period for continuing
support, respectively. Commencing in 1998, the Company deferred an amount equal
to the amounts that the Company charges when these elements are sold separately.
Marketing program cost of sales includes: bonus commissions paid to ISRs for
assisting new ISRs to obtain certain minimum levels of new retail long distance
subscribers; compensation and related costs of the Company's employees providing
marketing support; related overhead; and the cost of providing training,
business forms, and promotional and presentation materials. All bonuses are
expensed by the Company when earned by the ISRs.
F-11
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MARKETING COMMISSIONS AND BONUSES
The Company maintains a separate bank account for the payment of marketing
commissions. Funding of this account is adjusted regularly to provide for
management's estimates of required reserve balances. ICC pays three types of
commissions. First, ICC pays commissions on long distance usage for customers
directly signed up by each ISR. These commissions are owed when customers use
ICC's long distance telephone service. ICC also pays override commissions on
long distance usage for customers who are in an ISRs "downline". These
commissions are owed when customers are billed for long distance usage if
certain minimum levels of retail telephone business are achieved by the ISR and
his or her "downline." Lastly, ICC pays bonus commissions to the sponsors of the
ISRs when new ISRs sign up a specified number of customers within a minimum time
period. These bonus commissions are owed after the new customers are activated
on ICC's telephone service.
ADVERTISING
The cost of advertising is expensed as incurred. The Company incurred
$93,000, $486,000 and $456,000 in advertising costs during 1998, 1997 and 1996,
respectively.
CONCENTRATION OF CREDIT AND BUSINESS RISK
The Company sells its telephone and related services to individuals and
small businesses nationwide, although approximately 64% of the Company's
customers are located in California. The Company's customers pay for their long
distance calling usage either through direct billing by the Company, through
billing from the customer's local exchange carrier ("LEC"), through direct
billing of the customer's major credit card, or by prepaying for long distance
time in the case of certain calling card products. In certain states, the
Company has an agency agreement with an unaffiliated company which bills
customers' local intrastate calls through the local telephone company. The
Company believes that it does not have any significant concentrations of credit
risks with its end-user customers or ISRs. Accounts receivables due from LECs at
December 31, 1998 and 1997 aggregated $3,703,000 and $9,784,000, respectively.
The Company performs periodic credit evaluations of its customers' financial
position and generally does not require collateral. Credit losses have been
within management's expectations and amounts provided for uncollectible
accounts.
The Company's financial position and results of operations may be
significantly and adversely impacted in the event that the purchases of long
distance telephone services by the Company do not meet the minimum purchase
requirements under the amended long distance service purchase commitment
agreement with WorldCom discussed in Note 10.
F-12
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FACILITIES AND EQUIPMENT
Facilities and equipment are stated at cost. The Company capitalizes the
costs associated with purchasing, developing and enhancing its computer
software. Depreciation and amortization are provided using the straight-line
method over estimated useful lives of the respective assets as follows:
<TABLE>
<S> <C>
Computer hardware and software 3 to 5 years
Furniture and office equipment 5 to 10 years
Leasehold improvements 10 years
</TABLE>
The ten year useful life assigned to the leasehold improvements of the
Company's primary facility in Irvine has been estimated based upon the five-year
non-cancelable lease term plus the assumed exercise of the first five-year
option provided for in the April 1997 lease agreement described in NOTE 10.
GOODWILL
Goodwill, representing the excess of purchase price over the fair value of
the net assets of ICC, is amortized on a straight-line basis over its estimated
useful life of 20 years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Unless otherwise indicated, the fair value of the Company's financial
instruments approximate their carrying values.
LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles held and used by the
Company are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
recoverability test is performed at the individual entity level based on
undiscounted net cash flows. Based upon its analysis, the Company believes that
no impairment of the carrying value of its long-lived assets, inclusive of
goodwill, existed at December 31, 1998. The Company's analysis was based on an
estimate of future undiscounted cash flows using forecasts contained in the
Company's strategic plan. It is at least reasonably possible that the Company's
estimate of future undiscounted cash flows may change during 1999. If the
Company's estimate of future undiscounted cash flow should change or if the
strategic plan is not achieved, future analyses may indicate insufficient future
undiscounted cash flows to recover the carrying value of the Company's
long-lived assets, in which case such assets would be written down to estimated
fair value.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES (APB 25), and related interpretations, in
accounting for its employee stock options because the alternative fair value
accounting provided for under Statement of Financial Standards No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION(SFAS 123), requires the use of option
valuation models that were not developed for use in valuing employee stock
options as discussed in NOTE 8. Under APB 25, because the exercise prices of the
Company's employee stock options generally equal the market price
F-13
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of the underlying stock on the date of grant, no compensation expense is
recognized. Options granted to consultants, independent representatives and
other nonemployees are accounted for using the fair value method as prescribed
by SFAS 123.
INCOME TAXES
Deferred income tax assets and liabilities are computed for differences
between the financial statement and tax basis of assets and liabilities based on
enacted tax laws and rates applicable to the period in which differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to amounts which are more likely than
not to be realized.
NET LOSS PER SHARE
Basic and diluted loss per share is computed based on the weighted average
number of common shares outstanding during each period since common stock
equivalents are antidilutive. Because the impact of options, warrants, and other
convertible instruments (21,437,000, 9,322,000 and 4,004,000 in 1998, 1997 and
1996, respectively) are antidilutive, there is no difference between the loss
per share amounts computed for basic and diluted purposes. Loss per share from
continuing operations has been increased as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
Loss from continuing operations.......................... $ (17,633) $ (14,057) $ (6,607)
Beneficial conversion feature of preferred stock
(NOTE 8)............................................... -- (360) --
Preferred stock dividends................................ (41) (88) --
Preferred stock dividends in arrears..................... (91) (105) (12)
----------- ----------- ---------
Loss from continuing operations applicable to common
shareholders........................................... $ (17,765) $ (14,610) $ (6,619)
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME (SFAS 130), which
establishes standards for reporting and displaying comprehensive income and its
components in the financial statements. For the years ended December 31, 1998,
1997 and 1996, the Company did not have any material components of other
comprehensive income as defined in SFAS 130.
SEGMENT REPORTING
The Company operates in one industry segment, marketing and reselling of
long distance telephone services to residential and small business customers
nationwide, although approximately 64% of the Company's customers are located in
California. No single customer accounted for as much as 10% of net sales in
1998, 1997 or 1996.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION (SFAS 131). This standard
F-14
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. Operating segments are
components of an enterprise about which separate financial information is
available that is regularly evaluated by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. SFAS 131 also
requires that all public business enterprises report information about the
revenues derived from the enterprise's products or services (or groups of
similar products or services), the countries in which the enterprise earns
revenues and hold assets and major customers regardless of whether that
information is used in making operating decisions. However, SFAS 131 does not
require an enterprise to report information that is not prepared for internal
use if reporting it would be impractical. SFAS 131 is effective for financial
statements for periods beginning after December 15, 1997. The Company adopted
SFAS 131 in 1998. The adoption of SFAS 131 did not have any impact on the
Company's financial position or results of operations.
RECLASSIFICATIONS
Certain amounts reported in prior years have been reclassified to conform
with the current year presentation.
2. OPERATIONS AND FINANCING
For the years ended December 31, 1998, 1997 and 1996, the Company recognized
net losses from continuing operations of $17,633,000, $14,057,000 and
$6,607,000, respectively. In addition, the Company realized net losses from its
discontinued operations aggregating $1,475,000, $1,561,000 and $30,192,000
during the respective annual periods. As a result, at December 31, 1998, the
Company has an accumulated deficit and net capital deficiency of $84,714,000 and
$15,798,000, respectively, and its current liabilities exceed its current assets
by approximately $13,093,000.
To meet its need for additional financing to meet its operating
requirements, in December 1998, the Company obtained $16.6 million from Ironwood
Telecom LLC (Ironwood) under a secured term loan facility, and in April 1999,
the Company obtained a line-of-credit facility providing for borrowings, based
on eligible accounts receivable, up to a maximum of $12.5 million. Accordingly,
management believes the Company has sufficient sources of financing to continue
operations throughout 1999 at planned levels of operations. The Company is
seeking to arrange additional financing that may take the form of either
additional debt or equity, but there is currently no committed source of such
additional financing.
Additionally, beginning in August 1997 and continuing through the year ended
December 31, 1998, the Company experienced declining revenues due to decreases
in the number of telephone customers and the number of active ISRs. These
decreases are the result of a number of factors including the following:
- Sanctions imposed by the California Public Utilities Commission in the
first quarter of 1998 and related compliance obligations imposed under a
stipulation among ICC, the California Attorney General and the Orange
County District Attorney. The sanctions and compliance obligations
followed findings that ICC had engaged in unauthorized switching of
customers' interexchange
F-15
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. OPERATIONS AND FINANCING (CONTINUED)
carriers during 1997. The order also required that several former senior
executives and directors leave the Company.
- ICC's failed attempt at a public offering of its common stock in September
1997.
- The termination of the proposed sale of all or substantially all of ICC's
assets to a third party in July 1998.
- The operational distraction caused by the Company's focus on the
regulatory actions against the Company, the aborted IPO and the potential
sale of ICC.
- The departure of several key ISRs to form a competitive telecommunications
marketing company and their efforts to hire Company employees and to
induce ISRs and telephone customers to leave ICC and join them in their
new operations.
Management believes the following improvements that have occurred in the
third quarter of 1998 and since the change in the composition of the Board of
Directors on September 29, 1998 in part alleviate these conditions.
- In April 1999, the Company obtained a line-of-credit facility providing
for borrowings, based on eligible accounts receivable, up to a maximum of
$12.5 million. Borrowings under this facility are secured by an interest
in substantially all the assets of the Company. The Company plans to use
the proceeds of the line-of-credit financing to execute its strategic plan
and fund operating requirements.
- In December 1998, the Company received $16.6 million from Ironwood Telecom
LLC (Ironwood) under a secured term loan facility to meet the Company's
short-term financing needs. The proceeds from this financing principally
were used to satisfy the Company's obligations to its long distance
carrier, WorldCom, its former lender, First Bank, and to pay certain
accrued liabilities. In April 1999, in connection with obtaining the
line-of-credit facility, Ironwood subordinated its interest in the assets
of the Company and adopted the financial covenants set forth in the
line-of-credit facility.
- In March 1999, the Company sold its interest in the common stock of
GenSource to the former owners of GenSource for forgiveness of notes
payable to the former owners aggregating $1,775,000. In connection with
the sale, the Company also received preferred stock of GenSource,
representing a 15% equity interest on a fully diluted basis, and the legal
dispute with the former owners of GenSource was settled.
- In October 1998, ICC renegotiated its contract with WorldCom resulting in
a decrease of the "take or pay" provisions of the contract from $1.1
billion to $250 million over a three year period, with the ability to
extend the contract for two additional years if necessary. The new
contract also resulted in an immediate decrease in the Company's telephone
rates, which allowed the Company to develop and market its new long
distance telephone service programs that management believes are among the
most competitive in the industry.
- In September 1998, the Company entered into a revised settlement agreement
for its pending class action lawsuit on terms more favorable than those
outlined in the proposed settlement in December 1997. The September 1998
proposed settlement is subject to final court approval.
F-16
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. OPERATIONS AND FINANCING (CONTINUED)
- In September 1998, the District Attorney of Orange County lifted a
restriction that required ICC to wait 24 hours before verifying that a new
customer wanted to sign up for ICC's telephone service. This restriction
had been a significant impediment to signing up new customers. The
verification procedures for signing up new customers were also reduced.
- In the third quarter of 1998, the Company sold 4.5 million shares of its
holdings of 10.7 million shares of Rapid Cast, raising cash of $2.7
million. The Company also anticipates selling its remaining ownership of
6.2 million shares of Rapid Cast, when appropriate, although it presently
has no specific arrangements to sell such shares.
- In July 1998, ICC settled a lawsuit with one of its leading former ISRs,
who has rejoined the Company's marketing network and is playing an
important role in the effort to revitalize ICC's network marketing
operations.
- In November 1998, John P. Casey, Chairman of the Board of Directors, and
Ironwood purchased substantially all of the then outstanding convertible
preferred stock and associated rights from certain former preferred
shareholders under arrangements that require Mr. Casey and Ironwood to
hold the stock for approximately one year. This provides an opportunity
for the Company to redeem such stock for a price representing no actual
profit except, in the case of Ironwood, for a carrying cost factor. The
Company hopes to redeem the preferred stock, if financially able, prior to
expiration of the redemption period. The redemption price is currently
estimated at $3.5 million, exclusive of costs and interest (the "Preferred
Price"). These arrangements provide a means of potentially avoiding a
dilution to the Company's shareholders of more than 10 million shares.
However, there is no assurance that the Company will have sufficient funds
to redeem the preferred stock. If the Company is not financially able to
redeem the preferred stock, Mr. Casey and Ironwood are obligated to offer,
on a pro-rata basis, the common stock issuable upon the conversion of the
preferred stock to the Company's common stockholders at the Preferred
Price plus certain costs adjusted for carrying costs and other expenses.
- Management is currently implementing the remediation phase of its project
to make its information systems year 2000 compliant. Remediation and
testing are expected to be complete at various dates through October 1999
including replacement of its mission critical billing and accounts
receivable system. In the event implementation of the new billing system
is delayed, the Company has developed a contingency plan which
contemplates transferring the billing and collection function to one or
more of the local exchange carriers or third party billing services that
the Company currently uses to bill a portion of its customer base.
ICC is also taking steps to revitalize its network marketing organization,
including developing new telecommunications products that are more competitive,
working closer with its ISRs to help them better understand the products and
services provided by ICC, developing new commission and bonus programs that will
make ICC more competitive in attracting new ISRs, and expanding its focus on ISR
recruiting from primarily a Southern California program to a nationwide program.
Management believes its new marketing plans will revitalize the Company's
efforts to recruit additional representatives. In addition to revitalizing its
network marketing organization, ICC also is undertaking a cost reduction program
that is anticipated to result in a more efficient operation and a reduced cost
structure. Lastly, the Company is seeking additional financing that may take the
form of either additional debt or equity.
F-17
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. OPERATIONS AND FINANCING (CONTINUED)
Management believes the Company has sufficient sources of financing to
continue operations throughout 1999 at planned levels of operations. However,
due to uncertainties inherent in the achievement of management's strategic plan,
there is no assurance that the Company will attain planned levels of operations.
Ultimately, the Company's long-term success is dependent upon its ability to
successfully execute its strategic plan, obtain additional long-term financing,
complete its year 2000 remediation, and ultimately attain sustained profitable
operations.
3. RELATED PARTY TRANSACTIONS
On March 31, 1997, the Company extended a loan to a former ISR in the amount
of $583,000. The note and accrued interest was due on March 31, 1999. At
December 31, 1998, the loan is fully reserved.
On November 5, 1996, the Company extended to a director of the Company a
loan of $278,000 at an interest rate of 10% per annum. The loan was repaid in
full, including interest, in July 1998, and the pledged stock was returned to
the director.
In 1995, the Company extended a loan to a former officer of the Company in
the amount of $342,000 used, in part, to purchase shares of the Company's common
stock. The loan is secured by 20,000 shares of common stock and, at December 31,
1998, is fully reserved.
See other related party disclosures in Note 2, "Operations and Financing"
and Note 3, "Shareholders' Equity."
4. FACILITIES AND EQUIPMENT
Facilities and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Leasehold improvements..................................... $ 7,230 $ 9,643
Computer hardware and software............................. 6,420 6,605
Furniture and equipment.................................... 3,164 3,290
--------- ---------
16,814 19,538
Less accumulated depreciation and amortization............. (7,527) (5,093)
--------- ---------
$ 9,287 $ 14,445
--------- ---------
--------- ---------
</TABLE>
Assets under capital leases at December 31, 1998, are $2,248,000, net of
accumulated amortization of $878,000. Amortization of equipment leased under
capital leases is included in depreciation and amortization expense in the
consolidated statement of operations.
5. IMPAIRMENT OF LONG-LIVED ASSETS
During 1998, the Company completed its evaluation of the recoverability of
certain long-lived assets at ICC. In connection with this evaluation, the
Company recorded a $1,633,000 non-cash write-down of the carrying value of
certain leasehold improvements to their estimated fair value.
F-18
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Ironwood term loan, net of original issue discount of $543.............. $ 16,057 $ --
Notes payable to former owners of GenSource............................. 1,775 1,910
Capital lease obligations............................................... 1,294 1,888
Revolving line-of-credit................................................ -- 8,440
--------- ---------
19,126 12,238
Less current portion of long-term debt.................................. 2,307 9,383
--------- ---------
$ 16,819 $ 2,855
--------- ---------
--------- ---------
</TABLE>
IRONWOOD TERM LOAN
The Ironwood term loan bears interest at 12%, payable quarterly, is due
December 31, 2000 and is secured by substantially all of the assets of the
Company.
For arranging the term loan, Ironwood received an origination fee of
$400,000 and warrants in two tranches. The first tranche of warrants entitles
Ironwood to purchase two million shares of the Company's common stock at an
exercise price of $1.00 per share. These warrants are exercisable until 2004.
The second tranche of warrants entitles Ironwood to purchase one million shares
of the Company's common stock at an exercise price of $2.25 per share. These
warrants are exercisable on December 15, 1999 and for a period of five years
thereafter. The exercise price will be reduced and the number of warrants will
be increased in both tranches if the Company does not meet certain performance
targets in the fourth quarter of 1999 and the year 2000. The first and second
tranche of warrants were assigned values of approximately $124,000 and $40,000,
respectively, determined by independent appraisal. The value assigned to the
warrants and the origination fee (together, the original issue discount)
associated with the issuance of the term financing aggregated $564,000, and is
being recognized as additional interest expense over the term of the loan. The
remaining original issue discount is $543,000 at December 31, 1998. In April
1999, in connection with obtaining the line-of-credit facility, Ironwood agreed
to subordinate its right to receive payment on its debt from the Company and its
interest in the assets of the Company and adopted the financial covenants set
forth in the line-of-credit facility. In consideration for that subordination,
Incomnet agreed to issue warrants to Ironwood to purchase 1.25 million shares of
common stock. These warrants have an exercise price of $1.00 per share and a
five-year term.
CAPITAL LEASE OBLIGATIONS
The capital lease obligations are payable in variable monthly installments
through February 2003, bear interest at effective rates ranging from 5.65% to
11.06% and are secured by property and equipment with a net book value of
approximately $1,370,000 at December 31, 1998.
F-19
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
6. LONG-TERM DEBT (CONTINUED)
NOTES TO FORMER OWNERS OF GENSOURCE
In May 1997, the Company issued promissory notes payable to the former
owners of GenSource in connection with the acquisition of GenSource. The notes
obligated the Company to pay the former owners an aggregate of $1,927,000 over a
period of five years, plus interest of 8%, with payments commencing in May 1998.
In June 1998, the Company defaulted on payments under notes with two of the
former owners which total approximately $1,239,000. In March 1999, the Company
sold its interest in the common stock of Gensource in exchange for release from
liability of the Company under the promissory notes to the former owners of
GenSource. (SEE ALSO NOTE 1--"DISCONTINUED OPERATIONS" AND "NOTE
11--LITIGATION")
LINE OF CREDIT
On April 9, 1999, the Company entered into a loan and security agreement
(the Line of Credit) with a financial institution. Under the Line of Credit, the
financial institution agreed to make advances to the Company, based on eligible
receivables, of up to $12.5 million. Borrowings under the Line of Credit will
bear interest at the lender's reference rate plus 1%, but in no event less than
7%. The reference rate at the date of the agreement was 7.75%. The Line of
Credit expires in April 2002, is secured by substantially all the assets of the
Company, restricts expenditures for dividend distributions and certain capital
expenditures, and requires the Company to maintain minimum levels of tangible
net worth over the term of the agreement.
MINIMUM PAYMENTS
Principal payments on long-term debt are $2,307,000 in 1999, $16,939,000 in
2000, $236,000 in 2001 and $187,000 in 2002.
7. INCOME TAXES
Significant components of the provision for (benefit from) income taxes are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Continuing operations--current:
Federal............................................ $ (100) $ -- $ 263
State.............................................. (353) 201 374
--------- --------- ---------
Total continuing operations.......................... (453) 201 637
--------- --------- ---------
Discontinued operations--deferred:
Federal.............................................. -- -- (7,182)
State................................................ -- -- (1,267)
--------- --------- ---------
Total discontinued operations........................ -- -- (8,449)
--------- --------- ---------
$ (453) $ 201 $ (7,812)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-20
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
7. INCOME TAXES (CONTINUED)
The following is a reconciliation from the statutory federal income tax rate
to the Company's effective tax rate for income taxes provided on continuing
operations:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Federal statutory tax rate................... (34.0%) (34.0%) (34.0%)
Losses producing no current tax benefit...... 31.9 33.9 28.8
Goodwill amortization........................ 0.6 0.1 5.2
State taxes.................................. (2.0) 1.5 6.2
Non-deductible expenses...................... 1.0 -- 4.5
----- ----- -----
Effective tax rate........................... (2.5%) 1.5% 10.7%
----- ----- -----
----- ----- -----
</TABLE>
The components of the Company's deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................... $ 11,569 $ 8,799
Allowance for doubtful accounts....................... 3,022 2,505
Accruals not currently deductible..................... 1,666 4,084
Other................................................. 546 126
--------- ---------
Total deferred tax assets............................... 16,803 15,514
Deferred tax liabilities--
Property and equipment, principally due to differences
in depreciation..................................... 87 2,345
--------- ---------
Total deferred taxes.................................... 16,716 13,169
Less valuation allowance................................ (16,716) (13,169)
--------- ---------
Net deferred taxes...................................... $ -- $ --
--------- ---------
--------- ---------
</TABLE>
At December 31, 1998, the Company had available net operating loss
carryforwards for federal and state income tax purposes of approximately $32
million and $9 million, respectively, expiring in various years between 2000 and
2018. Due to the change in ownership provisions of the Tax Reform Act of 1986,
net operating loss carryforwards for Federal and state income tax reporting
purposes are subject to annual limitations. Should a change in ownership occur,
net operating loss carryforwards may be limited as to use in future years.
F-21
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
8. SHAREHOLDERS' EQUITY
PREFERRED STOCK
The Company is authorized to issue up to 100,000 shares of preferred stock,
no par value. At December 31, preferred stock authorized, issued and outstanding
was as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN THOUSANDS,
EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C>
Redeemable convertible nonvoting preferred stock, Series A, stated value
$1,000 per share:
Authorized--4,000
Issued and outstanding--801 and 1,595 shares in 1998 and 1997, liquidation
preference of $837 at December 31, 1998................................. $ 716 $ 1,510
Redeemable convertible nonvoting preferred stock, Series B, stated value
$1,000 per share:
Authorized--2,900 shares
Issued and outstanding--1,242 and 2,434 shares in 1998 and 1997,
liquidation preference of $1,354 at December 31, 1998................... 1,056 2,248
Convertible preferred stock, Series C, stated value $1,000 per share:
Authorized--25 shares
Issued and outstanding--13, liquidation preference of $13 at December 31,
1998.................................................................... 25 --
Convertible preferred stock, Series D, stated value $100 per share:
Authorized--50 shares
Issued and outstanding--none.............................................. 5 --
--------- ---------
Total preferred stock....................................................... $ 1,802 $ 3,758
--------- ---------
--------- ---------
</TABLE>
REDEEMABLE CONVERTIBLE SERIES A PREFERRED STOCK (Series A Preferred)--The
Series A Preferred has a cumulative noncompounded annual dividend of 2% payable
in cash or stock at the Company's option upon conversion of the preferred stock
into common stock, and prior to the payment of any dividends on the common
stock. The Series A Preferred has a liquidation preference of stated value per
share plus all cumulative unpaid dividends, whether or not declared by the
Company's Board of Directors. Upon any liquidation or change of control of the
Company (i.e. transfer of more than 50% of its voting stock), the Series A
Preferred shareholders are entitled to the first priority in payment from the
Company's assets, before any payments are made on the Company's common stock or
other series of preferred stock, until the liquidation preference is paid in
full. The Series A Preferred shareholders may convert each share of Series A
Preferred into the number of shares of the Company's common stock calculated as
stipulated in the Company's Articles of Incorporation. If for any reason a
registration statement covering the shares of common stock issuable upon the
conversion of the Series A Preferred is not in effect with the Securities and
Exchange Commission at the time of a valid conversion by a Series A Preferred
shareholder, then the Conversion Price is reduced by 3% per month for each of
the first three months that the effectiveness of the registration is late. The
Company has the right to cause a conversion of the Series A Preferred Stock into
common stock on the same terms at any time after one year after the Series A
Preferred Stock is issued. The Company has the right to redeem the Series A
Preferred for its issuance price plus cumulative unpaid dividends if the
Company's
F-22
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
8. SHAREHOLDERS' EQUITY (CONTINUED)
stock trades at a price which averages $2.00 per share or less for any period of
five consecutive trading days after the Series A Preferred is issued. The
conversion price is subject to adjustment under certain conditions.
REDEEMABLE CONVERTIBLE SERIES B PREFERRED STOCK (Series B Preferred)--The
Series B Preferred has a cumulative noncompounded annual dividend of 6% payable
in cash or stock at the Company's option at conversion and prior to the payment
of any dividends on the Company's common stock. No dividends may be declared or
paid on the Series B Preferred until all cumulative unpaid dividends have been
declared and paid on the outstanding Series A Preferred. The Series B Preferred
has a liquidation preference of stated value per share plus all cumulative
unpaid dividends, whether or not declared by the Company. No liquidation
preference may be paid to the holders of Series B Preferred until the full
liquidation preference has been paid to the holders of the outstanding Series A
Preferred. The Series B Preferred shareholders may convert each share of Series
B Preferred into the number of shares of the Company's common stock calculated
as stipulated in the Company's Articles of Incorporation. If for any reason a
registration statement covering the shares of common stock issuable upon the
conversion of the Series B Preferred is not in effect with the Securities and
Exchange Commission at the time of a valid conversion by a Series B Preferred
shareholder, then the Conversion Price is reduced by 3% per month for each of
the first three months that the effectiveness of the registration is late. The
Company has the right to cause a conversion of the Series B Preferred Stock into
common stock on the same terms at any time after one year after the Series B
Preferred Stock is issued. The Company has the right to redeem the Series B
Preferred for its issuance price plus cumulative unpaid dividends if the
Company's stock trades at a price which averages $2.00 per share or less for any
period of five consecutive trading days after the Series B Preferred is issued.
The conversion price is subject to adjustment under certain conditions.
In connection with the sale of the Series B Preferred in 1997, a portion of
the proceeds has been allocated to a beneficial conversion feature, which is the
right of the preferred shareholder to convert the securities into common stock
after the earlier of 120 days after the date of the issuance or the date the
securities are registered. Accordingly, the difference between the conversion
price and fair value of stock into which it is convertible, equal to $360,000
for the Series B Preferred, has been allocated to common stock. This amount has
been recognized as a dividend to the preferred shareholders over the minimum
period in which the shareholders could have realized that return, and net loss
applicable to common stock has been increased in calculating loss per share. Net
loss applicable to common stock has also been increased in calculating loss per
share for the dividends in arrears on both series of preferred stock.
CONVERTIBLE SERIES C PREFERRED STOCK (Series C Preferred)--Each share of
Series C Preferred can converted into shares of common stock, at the conversion
ratio stipulated in the Articles of Incorporation, at the option of the holder
in whole or in part at any time; provided that the number of shares of common
stock authorized are sufficient to issue shares of common stock upon conversion.
Series C Preferred shareholders are entitled to a number of votes equal to the
number of shares of common stock into which the preferred shares could have been
converted immediately prior to the record date for such vote. Series C Preferred
holders have the right to receive any dividend or distribution declared on the
common stock of the Company on an as-converted-to common stock basis. The Series
C Preferred has a liquidation preference of stated value per share plus all
cumulative
F-23
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
8. SHAREHOLDERS' EQUITY (CONTINUED)
unpaid dividends. Such payment will be subject to prior payment in full or
liquidation preferences with respect to Series A and Series B Preferred Stock.
Payments to Series C Preferred on liquidation will be made pari passu with the
Series D Preferred Stock discussed below but prior and in preference to the
Company's common shareholders.
CONVERTIBLE SERIES D PREFERRED STOCK (Series D Preferred)--Each share of
Series D Preferred will be converted into shares of common stock, at the
conversion ratio stipulated in the Articles of Incorporation, at the option of
the holder in whole or in part at any time; provided that the number of shares
of common stock authorized are sufficient to issue shares of common stock upon
conversion. Series D Preferred holders are entitled to a number of votes equal
to the number of shares of common stock into which the preferred shares could
have been converted immediately prior to the record date for such vote. Series D
Preferred holders have the right to any dividend or distribution declared on the
common stock of the Company. Series D Preferred has a liquidation preference of
stated value per share, plus all cumulative unpaid dividends. Such payment will
be subject to prior payment in full of liquidation preferences with respect to
Series A and Series B Preferred stock. Payments to Series D Preferred on
liquidation will be made pari passu with Series C Preferred but prior and in
preference to the Company's common shareholders.
COMMON STOCK ISSUABLE
At December 31, 1998, a total of 21,437,000 shares of common stock are
potentially issuable for conversion of convertible preferred stock, exercise of
options and exercise of warrants, as well as for settlement of pending
litigation as described in the table below. The conversion or exercise of such
claims on the common stock of the Company are subject to the approval by the
Company's shareholders of an increase in the number of authorized shares of
common stock (Stock Approval) which is expected to occur June 15, 1999.
<TABLE>
<CAPTION>
COMMON SHARES
ISSUABLE ON
CONVERSION, EXERCISE
OR SETTLEMENT
---------------------
(IN THOUSANDS)
<S> <C>
Convertible preferred stock............................................ 12,112
Warrants............................................................... 4,490
Litigation settlement (maximum per tentative settlement)............... 4,125
Common stock options................................................... 410
Preferred stock options................................................ 300
------
21,437
------
------
</TABLE>
F-24
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
8. SHAREHOLDERS' EQUITY (CONTINUED)
ACQUISITION OF PREFERRED SHARES BY THE CHAIRMAN OF THE BOARD
In connection with the exercise of an option to acquire shares of Series A
and Series B Preferred pursuant to a previous agreement reached between the
Company's Chairman and certain preferred stock owners on November 5, 1998,
Ironwood loaned the Chairman approximately $2.1 million, the proceeds of which
were used to exercise the option. The Chairman is obligated to allow the Company
to repurchase the preferred stock at his acquisition cost (approximately $2.4
million in the aggregate or $0.29 per share of common stock after conversion)
plus expenses, including the interest charged under the loan to the Chairman
from Ironwood. If the Company is not able to repurchase the preferred stock by
November 5, 1999, these shares will be converted into common stock and offered
for sale in a rights offering to the Company's common shareholders at a purchase
price equal to the Chairman's acquisition cost plus expenses. The preferred
stock is convertible into approximately 8.5 million shares of the Company's
common stock.
TRANSACTIONS WITH OTHER PREFERRED HOLDERS
On November 4, 1998, Ironwood entered into transactions similar to the
Chairman's option exercise transaction with five holders of preferred stock (the
Other Preferred Holders). Under these transactions, Ironwood agreed to purchase
shares of Series A and Series B Preferred convertible into an aggregate of
approximately 2.3 million shares of the Company's common stock (the Other
Preferred Stock). Ironwood paid an aggregate amount of approximately $1.1
million to these five holders. Under the agreements between the Company and
Ironwood, Ironwood is obligated to allow the Company to redeem the Other
Preferred Stock at its acquisition cost (approximately $1.1 million in the
aggregate or $0.48 per share of common stock after conversion) plus expenses,
including a carrying charge of 18% per annum on the purchase price paid by
Ironwood. If the Company is not able to repurchase the Other Preferred Stock by
April 30, 2000, under these agreements, the Other Preferred Stock will be
converted into common stock and offered for sale in a rights offering to the
Company's common shareholders at a purchase price equal to Ironwood's
acquisition cost plus interest and expenses.
For arranging certain interim financing, the loan to the Chairman, and
payments to the Other Preferred Shareholders, Ironwood received an origination
fee of $100,000 and warrants to purchase 600,000 shares of the Company's common
stock at an exercise price of $1.00. All of the warrants issued in connection
with the interim financing have a five year term exercisable until 2003. The
value assigned to these warrants of $116,000, based on independent appraisal,
and the origination fee have been reflected as additional interest expense in
the accompanying statement of operations for the year ended December 31, 1998.
In consideration for the settlement of certain claims against the Company,
the Company issued warrants to purchase 244,870 shares of common stock to two
holders of Other Preferred Stock, exercisable at $1.00 per share. The two
holders also obtained registration rights which will require the Company to
register the common stock underlying these warrants under certain circumstances.
The Company also issued warrants to purchase 18,000 shares of common stock to
three holders of Other Preferred Stock, exercisable at $1.09 per share. These
warrants were valued at approximately $47,000 and $1,000, respectively, and have
been reflected as a litigation settlement cost in the accompanying statement of
operations for the year ended December 31, 1998. On September 29, 1998, the
Company granted 13 shares of the Series C Preferred to the Company's Chief
Executive Officer. These preferred
F-25
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
8. SHAREHOLDERS' EQUITY (CONTINUED)
shares are convertible into 1.3 million shares of the Company's common stock.
The estimated fair value of these Series C Preferred shares, determined by
independent appraisal, approximated $25,000 and was charged to compensation
expense in the accompanying statement of operations.
DIVIDENDS
Dividends on the Series A and B Preferred are due only upon conversion of
the preferred to common stock. Cumulative dividends in arrears at December 31,
1998 aggregate $36,000 or $45 per share on the Series A Preferred and $112,000
or $90 per share on the Series B preferred. During 1998, 1,986 shares of Series
A and Series B Preferred were converted to 6,666,458 shares of common stock.
Dividends of $41,000 were recorded in connection with this conversion. During
1997, 845 shares of Series A and Series B Preferred were converted to 386,006
shares of common stock.
STOCK OPTIONS
Effective February 5, 1996, the Company adopted a qualified stock option
plan that replaced a previous plan adopted in 1994. This plan is for directors,
employees and key consultants of the Company and allows for the issuance of up
to 1.5 million shares of common stock at an exercise price equal to the fair
market value of the Company's common stock on the date of grant.
CONSULTANT OPTION
On September 29, 1998, the Company granted an option to purchase 75,000
shares of the Company's common stock at $2.00 per share (i.e., the closing
market price on September 29, 1998) to a consultant to the Company (the
"Consultant Option"). The shares of common stock issuable under the Consultant
Option are subject to Stock Approval. The Consultant Option may be exercised at
any time during the 10-year period following date of issuance. This option was
valued at $6,000 and has been reflected in general and administrative expense in
the accompanying statement of operations for the year ended December 31, 1998.
DIRECTOR STOCK OPTION GRANTS
On September 29 and October 2, 1998, the board approved the grant of an
option to purchase 10 shares of a Series D Preferred to each of the Company's
three new outside directors (the "Director Options"). The Director Options have
a term of ten years and vest over a two-year period. Each share of preferred
stock will be convertible into 10,000 shares of the Company's common stock or a
total of 300,000 common shares. The exercise price for the Director Options was
based on the closing price for the Company's common stock at the time of the
grants of $2.19 per share.
A fourth director was granted an option to purchase 100,000 shares of the
Company's common stock at the exercise price of $2.25. The option has a term of
ten years, vests over a two-year period, and expires on October 2, 2008.
The Consultant Option and Director Options were granted pursuant to an
exemption from registration under section 4(2) of the Securities Act of 1933 on
the basis that each of the recipients had the appropriate investment intent and
the offering was targeted to a select group of officers, directors and one
consultant.
F-26
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
8. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTION ACTIVITY
A summary of the Company's stock option activity, and related information
for the years ended December 31 follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of the year............ 945 $ 4.60 780 $ 4.68 300 $ 4.87
Granted......................................... 175 2.14 165 4.25 505 4.56
Forfeited/expired............................... 710 $ 4.64 -- -- 25 $ 4.56
----- ----- -----------
Outstanding at end of the year.................. 410 $ 3.49 945 $ 4.60 780 $ 4.68
----- ----- -----------
----- ----- -----------
Exercisable at end of the year.................. 360 $ 3.34 645 $ 4.53 390 $ 4.64
----- ----- -----------
----- ----- -----------
Weighted-average fair value of options granted
during the year............................... $ 205 $ 1.17 $ 482 $ 2.92 $ 1,823 $ 3.61
----- ----- -----------
----- ----- -----------
</TABLE>
Options outstanding under the 1996 plan are exercisable for a period of five
years after vesting through termination of the plan in February 2006. The number
of options available for grant under the 1996 plan was 1,090,000 at December 31,
1998.
Pro forma information regarding net loss and loss per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value of each option grant was estimated on the date of the grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for 1998, 1997 and 1996, respectively: dividend yield of 0.0% for
all three years; volatility factors of the expected market price of the
Company's common stock of 121%, 66% and 71%; risk-free interest rates of 5.25%,
6.25% and 5.25%; and a weighted-average expected life of five years for the
options for all three years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-27
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
8. SHAREHOLDERS' EQUITY (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands, except for loss per share
information):
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Pro forma net loss from continuing
operations................................ $ (17,766) $ (14,138) $ (7,133)
Pro forma net loss.......................... $ (19,241) $ (15,699) $ (38,202)
Pro forma net loss per common share--from
continuing operations-- basic and
diluted................................... $ (1.04) $ (1.08) $ (0.53)
Pro forma net loss per common share--basic
and diluted............................... $ (1.12) $ (1.20) $ (2.86)
</TABLE>
ICC MANAGEMENT INCENTIVE PLANS
A Management Incentive Agreement dated January 28, 1997 provides for the
establishment of three stock option plans and one convertible debt plan for the
purchase of securities of the Company's subsidiary, ICC. The exercise price of
all stock options issued under the option plans will not be less than the fair
market value of ICC's common stock on the date of grant. In addition, the
conversion price of the convertible debt issued under the convertible debt plan
will not be less than the fair market value of ICC's common stock on the date of
the issuance of the convertible debentures.
The ICC incentive plans were put in place in conjunction with the proposed
IPO of ICC in 1997. That IPO was terminated in the third quarter of 1997. As a
result, management has decided to no longer grant or issue additional options
under these plans.
KEY INDEPENDENT SALES REPRESENTATIVES STOCK OPTION PLAN. A total of
2,884,615 shares of ICC common stock are reserved for issuance under this plan.
Options to purchase 892,171 shares of ICC's common stock were granted to key
independent sales representatives who were corporate team members on February
28, 1997. The stock option plan provides for 50% of the awards issued to vest on
June 30, 1998 and the remaining 50% will vest on June 30, 1999. At December 31,
1998, this plan had 594,921 options outstanding.
EXECUTIVES, EMPLOYEES AND KEY CONSULTANTS STOCK OPTION PLAN. A total of
3,705,001 shares of common stock are reserved for issuance under this plan.
Options representing 1,446,026 of these reserved shares are subject to a
time-in-service only vesting requirement. Options representing 1,682,051 of the
reserved shares will vest in four equal annual installments on the anniversary
of the grant date, subject to the acceleration. No more than 480,770 shares
issuable pursuant to options reserved under the above provisions may be issued
to persons eligible to receive convertible debt units under the Senior Executive
and Consultant Convertible Debt Plan.
Additional options representing 576,924 shares will be reserved under this
plan for issuance to persons eligible to receive convertible debt units under
the Senior Executive and Consultant Convertible Debt Plan. These options were
granted upon the creation of the plan but do not vest until
F-28
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
8. SHAREHOLDERS' EQUITY (CONTINUED)
January 31, 2002. The vesting of these options will accelerate if the Company
achieves revenues for any calendar quarter ending prior to January 1, 2000, as
follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
QUARTERLY REVENUES VESTING
- ------------------ -----------------------
<S> <C>
1$00 million...... 192,308
1$25 million...... 192,308
1$80 million...... 192,308
</TABLE>
Options to purchase 3,127,544 shares of ICC's common stock were granted
under this plan in the first half of 1997. At December 31, 1998, 463,450 options
are outstanding under this plan.
BOARD OF DIRECTORS PLAN. A total of 300,000 shares are reserved for issuance
under this plan. Each director of ICC will be eligible to receive an option to
purchase up to 25,000 shares of ICC common stock. Such options vest in four
equal annual installments on each anniversary date of the option grant date.
There are no options outstanding under this plan at December 31, 1998.
SENIOR EXECUTIVE AND CONSULTANT CONVERTIBLE DEBT PLAN. A total of 2,664,231
shares are reserved for issuance under this plan. On April 11, 1997, ICC issued
2,664,231 convertible debt units in the aggregate principal amount of $7,993,000
(or $3.00 per debt unit) to the former senior executives of the Company. The
convertible debt units are due on April 11, 2002, bear interest at 6.49% and are
convertible at $3.01 per unit into 2,664,231 shares of common stock of ICC.
The purchase price for each debt unit issued was $3.00 per unit or
$7,993,000 in the aggregate. The former executives paid the purchase price to
acquire the debt units by delivery of promissory notes payable to ICC for the
entire purchase price. The promissory notes are also due on April 11, 2002 and
bear interest at 6.74%. The convertible debt units and the related promissory
notes have been offset in the accompanying consolidated financial statements.
The Company has considered these transactions as equivalents to stock option
issuances since no cash has traded hands and the primary value, if any, from
this transaction would be the convertibility of the convertible debt units into
shares of ICC's Common Stock as indicated above. The Company is in dispute with
the holders of these instruments related to other matters (Note
11--"Litigation").
F-29
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
8. SHAREHOLDERS' EQUITY (CONTINUED)
A summary of the ICC stock option activity, including the convertible debt
units treated as stock option equivalents, and related information for the years
ended December 31 follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997
------------------------------ ----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
Outstanding at the beginning of the
year................................ 6,061 $ 3.30 -- $ --
Granted............................. -- -- 6,784 3.33
Exercised........................... -- -- -- --
Forfeited........................... 2,338 3.50 723 3.55
----- ----- ----------- -----
----- ----- ----------- -----
Outstanding at the end of the year.... 3,723 $ 3.15 6,061 $ 3.30
----- ----- ----------- -----
----- ----- ----------- -----
Exercisable at the end of the year.... 3,174 $ 3.15 2,689 $ 3.30
----- ----- ----------- -----
----- ----- ----------- -----
Weighted-average fair value of options
granted during the year............. -- -- $ 22,591 $ 3.33
----- -----------
----- -----------
</TABLE>
WARRANTS
The Company has issued warrants to purchase the Company's common stock to
certain individuals or organizations as follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
NUMBER OF OUTSTANDING EXERCISE PRICE PER
DATE ISSUED AT 12/31/98 SHARE EXPIRATION
- --------------------------- ----------------------- ------------------- -----------
<S> <C> <C> <C>
5/9/96................... 100 6.00 5/9/01
5/9/96................... 50 7.00 5/9/01
12/9/96................... 360 3.75 12/9/99
12/17/96................... 12 2.94 12/17/01
7/29/97................... 50 3.50(2) 7/29/99
11/3/97................... 55 2.00(2) 11/3/99
1/21/98................... 18 1.09 1/21/01
11/4/98................... 500 1.00(1) 11/04/03
11/5/98................... 245 1.00 11/5/01
11/16/98................... 100 1.00(1) 11/16/03
12/15/98................... 1,000 2.25(1) 5/20/04
12/15/98................... 2,000 1.00(1) 12/15/04
-----
4,490
-----
-----
</TABLE>
- ------------------------
(1) These warrants were issued pursuant to the Ironwood Bridge Loan and Term
Loan financing. The exercise price and the number of shares issuable are
subject to adjustment. The holder has been granted registration rights with
respect to the common stock underlying these warrants. (See Note 7)
F-30
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
8. SHAREHOLDERS' EQUITY (CONTINUED)
(2) These warrants were issued as part of two Series B Convertible Preferred
Stock offerings by the Company on July 29, 1997 and November 3, 1997,
respectively.
SHORT SWING PROFITS
In January 1996, the Company was served with a derivative shareholders
lawsuit entitled RICHARD MORALES VS. INCOMNET, INC. AND SAM D. SCHWARTZ, 96
Civil 0225 in the United States District Court for the Southern District of New
York, alleging violations of Section 16(b) of the Securities Exchange Act of
1934, as amended, and demanding that the Company assert claims against Mr.
Schwartz for the payment of short-swing profits plus interest. Mr. Schwartz has
retained separate counsel for this action. In early July 1996, Mr. Schwartz
deposited 800,000 shares of his Incomnet, Inc. common stock into a
court-approved escrow account with the Company's New York counsel as security
for his obligation to pay short swing profits. On February 21, 1997, the
plaintiffs and Sam Schwartz entered into a stipulated settlement pursuant to
which Mr. Schwartz agreed to pay $4,250,000 to the Company as full payment of
his short swing profit obligation to the Company. On July 10, 1997, the United
States District Court for the Southern District of New York gave final approval
to the settlement of the lawsuit. In the final settlement, Mr. Schwartz
delivered to the Company 1,047,966 shares of the Company's common stock and
$600,000 in cash for attorney's fees and expenses directly to the shareholder's
counsel.
F-31
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
9. OTHER OPERATING EXPENSE
The major components of Other Operating Expense are as follows for the years
ended December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Loss on disposal of equipment...................... $ 815 $ -- $ --
Settlement of Public Utilities Commission action
against ICC and related fines.................... 462 1,652 --
Settlement of actions with officers/shareholders... 99 -- 2,750
Legal expenses related to aborted ICC spin-off..... 19 478 --
Settlement of class action......................... -- 8,687 --
Related liquidated damages......................... -- 621 --
Abandonment of asset after PUC action.............. -- 900 --
Other, net......................................... 182 189 218
--------- --------- ---------
$ 1,577 $ 12,527 $ 2,968
--------- --------- ---------
--------- --------- ---------
</TABLE>
10. COMMITMENTS
LEASES
The Company leases its office and operating facilities and certain equipment
under noncancelable leases. In April 1997, the Company entered into a new lease
agreement on its primary facility in Irvine. The lease provides for an original
non-cancelable term of five years ending in April 2002 and seven five-year
extension periods at lease rates based on the consumer price index. The Company
subleases a portion of this space under a noncancelable four year agreement with
monthly income of approximately $20,000. The sublease is dated September 1998
and expires in April 2002. The aggregate future minimum rentals to be received
under this sublease is $806,000 at December 31, 1998.
Future minimum annual rentals under operating lease arrangements at December
31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING
LEASES
-----------
<S> <C>
1999............................................................................... $ 2,011
2000............................................................................... 1,610
2001............................................................................... 1,330
2002............................................................................... 646
2003............................................................................... 371
Thereafter......................................................................... 1,189
-----------
Total minimum lease payments....................................................... $ 7,157
-----------
-----------
</TABLE>
Although the Company is not obligated to exercise any of the extension
period renewals for the Irvine facility, management expects to exercise the
first five-year renewal.
Rent expense for the years ended December 31, 1998, 1997 and 1996 was
$2,565,000, $2,068,000, and $800,000, respectively. Sublease income was $81,000
in 1998.
F-32
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
10. COMMITMENTS (CONTINUED)
WORLDCOM CONTRACT
Since September 1995, the Company has had a carrier contract with WorldCom.
Pursuant to the contract, renegotiated in October 1998, the Company has agreed
to purchase $250 million in telephone service over a three-year period, with the
ability to extend any shortfall purchase requirements for an additional two
years. In addition, WorldCom released its security interest in ICC's customer
accounts and subscriber base.
Minimum purchase requirements under the WorldCom contract are as follows (in
millions):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, COMMITMENT
- -------------------------------------------------------------------------------- -------------
<S> <C>
1999............................................................................ $ 24.5
2000............................................................................ 50.5
2001............................................................................ 52.5
------
$ 127.5
------
------
</TABLE>
During the years ended December 31, 1998, 1997, and 1996, the Company
purchased $28.6 million, $59.4 million and $44.4 million, respectively, of
telephone services from WorldCom under its purchase commitment. In March 1998,
WorldCom extended credit to ICC of up to $3 million at an interest rate of 18%
per annum under terms of the prior carrier contract. On December 15, 1998, ICC
repaid its obligation to WorldCom out of proceeds from the Ironwood term loan.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with the Company's
Chief Executive Officer, Chief Financial Officer and a services agreement with
the Chairman. These agreements provide for aggregate annual salary and fees of
up to approximately $1.2 million. The agreements are three years in duration and
expire through December 2001.
OTHER COMMITMENTS
The Company has also guaranteed the obligations of the Chairman to Ironwood
in the amount of $2.1 million in connection with the Chairman's purchase of
preferred stock (Note 8). In addition, the Company has also agreed to pay
certain of the Chairman's legal expenses of approximately $312,000 incurred in
connection with the preferred stock transaction.
In April 1998, the Company settled litigation with an affiliate. As a part
of that settlement, the Company is obligated to pay the affiliate $50,000 per
month for sixteen months for services to be rendered by the affiliate under the
settlement agreement. In addition, the Company committed to pay rent expense on
behalf of the affiliate in the amount of $22,000 per month for six months.
F-33
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
11. LITIGATION
The following is a description of certain pending legal proceedings in which
Incomnet is a party. No assurance is given that any of these legal proceedings
will not have a material adverse impact on the business, financial condition or
results of operation of Incomnet.
SANDRA GAYLES, ET AL. V. SAM D. SCHWARTZ, ET AL. On October 17, 1995,
Incomnet was served with a complaint in a class action lawsuit entitled SANDRA
GAYLES, ET AL. V. SAM D. SCHWARTZ AND INCOMNET, INC., Case No. CV95-0399 AWT
(BQRx), filed in the United States District Court for the Central District of
California. As amended, the complaint alleges that Incomnet violated Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder because Incomnet failed to disclose and falsely denied
the existence of a non-public investigation of Incomnet by the Securities and
Exchange Commission. The complaint also claims that Incomnet and its President
and former Chairman of the Board of Directors, Sam D. Schwartz, violated
Sections 10(b), 16(a), 20(a) and 23(a) of the Securities Exchange Act of 1934,
and Section 25400 of the California Corporations Code, because they did not
disclose until August 1995 purchases and sales of Incomnet's stock made in the
open market by an affiliate of Mr. Schwartz between September 1994 and August
1995. The amended complaint seeks compensatory damages, interest, attorneys'
fees and costs, and other extraordinary, equitable and injunctive relief as may
be appropriate. On January 11, 1996, the court certified the case as a class
action pursuant to the parties' stipulation.
On October 7, 1997, Incomnet reached a tentative settlement of the lawsuit.
The proposed 1997 settlement consisted of an agreement by Incomnet to pay
$500,000 in cash plus securities with a value of $8.15 million for a total
settlement value of $8.65 million. Because of a decline in the value of
Incomnet's stock beginning in July 1997, this proposed settlement could not
proceed under its terms. In 1998, Incomnet and the class plaintiffs began to
negotiate new settlement terms.
In September 1998, Incomnet entered into a new written settlement agreement
with the class plaintiffs. The settlement agreement is subject to court approval
and satisfaction of certain other conditions. The terms of the settlement
include payment to the plaintiffs of a total of $500,000, reimbursement of
certain expenses up to a maximum of $100,000 and issuance of a certain number of
shares of Incomnet's common stock based on a formula. The maximum number of
shares of Incomnet common stock that are to be issued in accordance with the
formula under the settlement agreement is 4,125,000, assuming a $1 per share
trading price at the time the formula is applied. The minimum number of shares
of common stock that are to be issued under the settlement agreement is
1,375,000 shares, assuming a $3 per share trading price at the time the formula
is applied. Prior to completion of the settlement agreement and issuance of the
shares in accordance with that agreement, Incomnet's shareholders must approve
an amendment to Incomnet's Articles of Incorporation to increase the authorized
number of shares of common stock. It is anticipated that the closing of the
settlement agreement and issuance of shares will occur no earlier than June
1999. The Court has preliminarily approved the settlement. A hearing on final
approval is scheduled for May 20, 1999. There is no assurance that this new
settlement will be approved and consummated. Should the settlement not be
approved, Incomnet intends to vigorously defend the lawsuit. The case is still
in the discovery phase. The Company accrued the orginal settlement amount of
$8.65 million in the accompanying balance sheet and statement of operations for
the year ended December 31, 1997. The Company does not intend to adjust the
accrued litigation settlement in the consolidated financial statements until
closing and final approval of the settlement agreement, approval of the related
amendments to the articles of
F-34
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
11. LITIGATION (CONTINUED)
incorporation to increase the authorized number of shares of common stock of the
Company and elimination of any other uncertainties related to the settlement.
In separate litigation pending in California state court, Mr. Schwartz seeks
indemnification from Incomnet with respect to any judgments, legal fees or other
costs incurred in connection with his defense of this lawsuit. Incomnet intends
to vigorously defend against Mr. Schwartz's indemnification claims.
The following lawsuits are in varying stages of the legal process and, as a
result, the Company is unable to estimate the probability of the outcome or a
range of potential loss, if any.
JAMES A. BELTZ, ET AL. V. SAMUEL D. SCHWARTZ, ET AL. On July 22, 1997,
Incomnet was named in a lawsuit, JAMES A. BELTZ, ET. AL. V. SAMUEL D. SCHWARTZ,
RITA SCHWARTZ, STEPHEN A. CASWELL, JOEL W. GREENBERG, INCOMNET, INC., DAVID
BODNER AND MURRAY HUBERFELD, Case No. 97-1678 (MJD/AJB), in the United States
District Court for the District of Minnesota. The lawsuit was filed by
approximately twenty plaintiffs who were allowed to opt out of the GAYLES class
action lawsuit to pursue a lawsuit on their own. The complaint alleges that Mr.
Schwartz and the other defendants created a fraudulent scheme to drive up the
price of Incomnet's stock in violation of Sections 9, 10(b) and 20(a) of the
Securities Exchange Act of 1934, Rule 10b-5 promulgated thereunder, and
Minnesota law. The lawsuit alleges losses by the plaintiffs of approximately
$1.5 million and seeks unspecified damages. The case is in the discovery phase.
On or about March 24, 1998, the plaintiffs in this suit plus several additional
plaintiffs commenced a parallel state court action entitled JAMES A. BELTZ, ET.
AL. V. SAMUEL D. SCHWARTZ AND RITA L. SCHWARTZ, STEPHEN A. CASWELL, JOEL W.
GREENBERG, INCOMNET, INC., DAVID BODNER, AND MURRAY HUBERFELD, Case No. MC
98-00674, in the State of Minnesota, County of Hennepin. This state lawsuit
brings causes of action for violations of Minnesota statutes covering securities
fraud, consumer fraud, control person liability and conspiracy to defraud based
on the same factual allegations pleaded in the federal suit. Plaintiffs allege
losses of over $1.8 million and the lawsuit seeks unspecified damages. The case
will enter the discovery phase should court-sponsored mediation efforts fail to
resolve the parties' disputes. Incomnet plans to vigorously defend this lawsuit.
In separate litigation pending in California state court, Mr. Schwartz and
Rita Schwartz seek indemnification from Incomnet with respect to any judgments,
legal fees or other costs incurred in their defense of these two lawsuits.
Incomnet intends to vigorously defend against the Schwartzs' indemnification
claims.
SILVA RUN WORLDWIDE LIMITED V. INCOMNET, INC., ET AL. Incomnet was a
defendant in a lawsuit entitled SILVA RUN WORLDWIDE LIMITED V. INCOMNET, INC.,
SAM D. SCHWARTZ, KALIBER MANAGEMENT, INC., BEAR STEARNS & CO., INC., LESLIE
SOLMONSON, RONALD F. SEALE, MARINER RESERVE FUND, COMPANIA DI INVESTIMENTO
ANTILLANO, COUTTS & CO. AG, SALVATORE M. FRANZELLA, PETER G. EMBIRICOS, AND JOS
SCHUETZ, originally filed in the United States District Court for the Southern
District of New York. The complaint stated that the plaintiff was a purchaser of
Incomnet's stock in July 1995. The complaint alleged that Incomnet and Mr.
Schwartz, violated Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, and Rule 10b-5 promulgated thereunder, and committed common law fraud, as
a result of false and misleading statements made by the defendants and
undisclosed trading in Incomnet's stock engaged in by Mr. Schwartz and his
affiliate. The complaint also alleged that Mr. Schwartz and his affiliate owed a
fiduciary duty to the plaintiff that was breached by their conduct. The
complaint also alleged other
F-35
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
11. LITIGATION (CONTINUED)
causes of action against other unrelated defendants. Plaintiff claimed economic
losses of approximately $2.7 million.
Incomnet answered the complaint in November 1996 and moved to have it
transferred to California. In March 1997, the claims relating to Incomnet, Sam
Schwartz and Kaliber Management, Inc. were ordered severed and transferred from
the court in New York to the same federal court in California which is hearing
the GAYLES class action lawsuit. In November 1998, this transferee court
dismissed all of the federal claims and all but one of the state law claims on
the ground that plaintiff had not opted out of the GAYLES class action lawsuit.
As a result of this ruling, Silva Run Worldwide Limited moved to extend the time
by which it may opt out of the class. The court granted this motion and allowed
Silva Run Worldwide Limited the opportunity to opt out and continue its action
against Incomnet and Mr. Schwartz based upon alleged violations of both federal
and state law. Incomnet plans to vigorously defend this lawsuit.
In separate litigation pending in California state court, Mr. Schwartz seeks
indemnification from Incomnet with respect to any judgments, legal fees or other
costs incurred in connection with his defense of this lawsuit. Incomnet intends
to vigorously defend against Mr. Schwartz's indemnification claims.
INCOMNET, INC. V. SAM D. SCHWARTZ. Incomnet filed a lawsuit against Mr.
Schwartz, on April 25, 1997, alleging fraud, breach of fiduciary duty,
negligence, and breach of contract, and seeking declaratory relief and the
imposition of a constructive trust. The lawsuit, entitled INCOMNET, INC., V. SAM
D. SCHWARTZ, Case No. LC 040 840, was filed in the Superior Court of California,
Los Angeles County. In the lawsuit, Incomnet alleges that Mr. Schwartz failed to
disclose to Incomnet or its Board of Directors that he would obtain a direct
financial benefit in connection with certain transactions considered or entered
into by Incomnet during the period from 1993 to 1995. Incomnet further alleges
that Mr. Schwartz fraudulently induced it to enter into a severance agreement
with him on November 27, 1995, and that he breached his fiduciary duty to
Incomnet by self dealing, acting in bad faith and concealing material facts.
Incomnet seeks payment from Mr. Schwartz of the actual damages incurred by it as
a result of Mr. Schwartz's conduct, as well as interest, punitive damages,
attorney's fees and costs, and reimbursement of all payments previously made to
Mr. Schwartz pursuant to the severance agreement. Furthermore, Incomnet seeks a
declaratory judgment that Mr. Schwartz committed acts or omissions involving
known misconduct, the absence of good faith, an improper personal benefit, a
reckless disregard of his duties to Incomnet and its shareholders, an unexcused
pattern of inattention, and a violation of Sections 310 and 317 of the
California Corporations Code.
On June 24, 1997, Mr. Schwartz answered Incomnet's lawsuit against him
denying the allegations and counterclaiming for (i) enforcement of any payments
due under his severance agreement with Incomnet, (ii) indemnification against
third party claims, and payment of the same settlement to him as was paid to
certain prior noteholders who purchased convertible notes from Incomnet on
February 8, 1995. Incomnet intends to vigorously prosecute this action and
defend against Mr. Schwartz's counterclaims. The lawsuit is in the discovery
phase. A trial date is set for February 2, 2000.
RITA SCHWARTZ V. INCOMNET, INC. On or about December 2, 1997, Rita
Schwartz, a former member of the Board of Directors of Incomnet and the wife of
Mr. Schwartz, filed the case of RITA SCHWARTZ V. INCOMNET, INC.,Case No. BC 182
151, in the Superior Court of California, Los Angeles County.
F-36
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
11. LITIGATION (CONTINUED)
Mrs. Schwartz seeks reimbursement of the legal expenses which she incurred as a
result of an investigation by the Securities and Exchange Commission of Incomnet
and as a defendant in the BELTZ opt-out cases, which are ongoing. Mrs. Schwartz
claims that because she is a former member of the Board of Directors, she is
entitled to reimbursement for her legal fees based upon the Articles of
Incorporation of Incomnet. The lawsuit is presently in the discovery phase.
Incomnet plans to vigorously defend this lawsuit. A trial date is set for
February 2, 2000.
ROBERT AND NANCY ZIVITZ V. JOEL GREENBERG, ET AL. On August 27, 1998, Nancy
Zivitz, a former director of Incomnet, and her husband, filed a lawsuit entitled
ROBERT AND NANCY ZIVITZ V. JOEL GREENBERG, ET AL, Case No. 98C 5350, in the
United States District Court for the Northern District of Illinois, against Mr.
Schwartz, his wife Rita Schwartz, a former director of Incomnet, and Joel
Greenberg, a former director and officer of Incomnet, in the United States
District Court in the Northern District of Illinois. The complaint asserts
claims of common law fraud and civil conspiracy based on allegations that
defendants conspired to drive up the price of Incomnet stock by making false
statements regarding Incomnet and that defendants engaged in insider trading.
While Incomnet has not been named in the lawsuit, Mr. and Mrs. Schwartz have
commenced a third party action against Incomnet seeking indemnification with
respect to costs incurred in defending the lawsuit. Incomnet intends to
vigorously oppose this claim. Mr. Greenberg has made written demands for
indemnification and seeks an advance to cover his legal fees in the case. In
April 1999, the United States District Court granted Incomnet's motion to
dismiss this case.
JACOBS V. INCOMNET, INC. On December 23, 1998, Edward Jacobs, former
President and Chief Executive Officer of ICC, filed an action against Incomnet
in the Superior Court of the State of California, Los Angeles County, entitled
EDWARD R. JACOBS V. INCOMNET, INC., Case No. BC 202857. Mr. Jacobs claims that
Incomnet has failed to pay amounts allegedly owed to him pursuant to a
settlement agreement with Incomnet, dated November 13, 1996. Mr. Jacobs seeks
compensatory damages of $453,000, unspecified consequential damages, interest
and attorneys' fees and costs. Incomnet has answered the complaint and has
asserted a cross-complaint against Mr. Jacobs. Incomnet intends to vigorously
defend the lawsuit.
LAWSUITS BY TWO FORMER OWNERS OF GENSOURCE CORPORATION. On September 23,
1998, Jerry C. Buckley and Ralph Flygare, two former owners of GenSource
Corporation, filed a lawsuit entitled JERRY BUCKLEY, RALPH FLYGARE ET AL. VS.
INCOMNET, INC., GENSOURCE CORPORATION AND MARK RICHARDSON, Case No. LC 046 449,
in the Superior Court of the State of California, Los Angeles County. In the
lawsuit, the plaintiffs alleged that Incomnet defaulted on payments under
promissory notes between Incomnet and the plaintiffs and sought damages of
approximately $1.2 million. This lawsuit was settled and dismissed as part of
the sale of GenSource back to the former owners in March 1999. The sale of
GenSource also resolved potential lawsuits by two other former shareholders of
GenSource.
F-37
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
11. LITIGATION (CONTINUED)
ICC V. JERRY BALLAH, ET AL. On July 21, 1998, ICC sued Jerry Ballah, a
former officer, director and consultant, and others in an action entitled
NATIONAL TELEPHONE & COMMUNICATIONS, INC. V. JERRY BALLAH, WORLD TECHNOLOGIES
MARKETING, INC., ET AL., Case No. 797154, in the Superior Court of California,
Orange County. ICC asserts claims against Mr. Ballah and other defendants for
breach of contract, misappropriation of trade secrets, intentional interference
with business relationships, fraud and related claims in connection with
defendants' start-up of a competing business and solicitation of ICC's employees
and independent sales representatives and diversion of ICC's telephone customers
to businesses owned or controlled by defendants. ICC filed its second amended
complaint in February 1999.
In September 1998, Mr. Ballah answered the original complaint and filed a
cross-complaint against ICC alleging that ICC failed to make payments of
$250,000 under a consulting agreement with him. Mr. Ballah alleges claims for
breach of contract and breach of the implied covenant of good faith and fair
dealing and asserts a claim based on work, labor and services rendered. In the
same cross-complaint, an affiliate of Mr. Ballah, defendant World Technologies,
Inc. ("World Tech"), alleges that ICC breached an agreement under which World
Tech would become the exclusive network marketing company for ICC. World Tech
also alleges claims of fraud, negligent misrepresentation and unjust enrichment,
and seeks an accounting.
On July 21, 1998, the court entered a stipulated restraining order enjoining
the defendants in the lawsuit from, among other things, directly or indirectly
attempting to induce any ICC employee or independent sales representative to
work or perform services for the defendants. ICC's motion for preliminary
injunction is currently scheduled for hearing on April 21, 1999. Incomnet plans
to continue to vigorously prosecute this action.
ACTIONS BY FORMER INDEPENDENT SALES REPRESENTATIVES. On May 22, 1998,
former ICC independent sales representatives Mercedes Chan and Chatri
Jhunjhnuwala filed a lawsuit in the Superior Court of the State of California,
Orange County, against Incomnet, ICC, and others entitled MERCEDES CHAN AND
CHATRI JHUNJHNUWALA VS. INCOMNET, INC., NATIONAL TELEPHONE & COMMUNICATIONS,
INC. ET. AL., Case No. 794636. In the lawsuit, the plaintiffs allege that
defendants induced them to become independent representatives of ICC and to
incur sign-up fees and other costs based on false representations concerning the
business of ICC and the amount of commission and bonus payments that could be
earned as independent representatives of ICC. Plaintiffs assert claims for
fraud, breach of contract, wrongful discharge, negligent misrepresentation and
other causes of action and seek general, compensatory, special and punitive
damages. The case is in the discovery phase. A trial date is set for August 30,
1999. Incomnet intends to vigorously defend this lawsuit.
On October 29, 1998, former ICC independent sales representative Chutapa
Varavarn commenced an action in the Superior Court of the State of California,
Orange County, entitled CHUTAPA VARAVARN V. INCOMNET, INC., ET AL.,Case No.
801412. The factual and legal allegations are substantially similar to the
allegations in the CHAN lawsuit and plaintiff seeks damages, including punitive
damages. Incomnet intends to vigorously defend this lawsuit.
On August 20, 1998, former ICC independent sales representative Rick Bergen
commenced an action in the Superior Court of the State of California, Orange
County, entitled RICK BERGEN V. INCOMNET, ET AL., Case No. 798468. Plaintiff
contends that ICC failed to make certain payments and
F-38
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
11. LITIGATION (CONTINUED)
commissions based on his development of sales territories and wrongfully
deprived him of other income. Plaintiff asserts claims for fraud, unfair
business practices, negligence, wrongful discharge and unpaid wages and seeks
compensatory and punitive damages. The case is in the discovery phase and a
trial date is set for October 4, 1999. Incomnet intends to vigorously defend
this lawsuit.
On May 26, 1998, former ICC independent sales representative Chuanxu Zang
and another party commenced an action against ICC in state court in Fairfax
County, Virginia, entitled CHUANXU ZANG, ET AL. V. NATIONAL TELEPHONE &
COMMUNICATIONS, INC., Circuit Court Case No. 171965, involving a dispute
regarding the Plaintiff's purchase of long distance telephone calling cards from
ICC. On March 5, 1999, the Fairfax County Circuit Court stayed the action and
ordered that Plaintiffs submit their dispute to arbitration in Orange County,
California, in accordance with the arbitration provision contained in Mr. Zang's
independent representative agreement. Plaintiffs have not yet commenced an
arbitration proceeding. Incomnet intends to continue to vigorously defend this
action.
On February 17, 1999, former ICC independent sales representatives Kevin
Porter, Robin Kasten, and Larry Tate attempted to commence separate arbitration
proceedings against Incomnet and ICC, alleging, INTER ALIA, that Incomnet and
ICC failed to make payments owed to them. The complaints in these arbitration
proceedings purport to assert various causes of action against Incomnet and ICC,
including claims for purported fraud, unfair business practices, breach of
contract, negligence and conversion. The plaintiffs in these separate
arbitration proceedings seek unspecified damages, including punitive damages.
Plaintiffs are required under the terms of their independent representative
agreements with ICC to commence any proceedings against ICC before the American
Arbitration Association, but have not yet done so. Incomnet and ICC have not yet
filed answering statements in these actions, and no trial date has been set.
Incomnet intends to vigorously defend these arbitration proceedings.
JACOBS ARBITRATION. On March 19, 1999, Edward Jacobs, former President and
Chief Executive Officer of ICC, commenced an arbitration action against ICC
before the American Arbitration Association, seeking relief in the amount of
$549,777, plus interest and attorneys' fees, based upon an alleged breach of an
employment agreement by ICC. ICC has not yet filed an answering statement, and a
trial date has not yet been set. Incomnet plans to vigorously defend this
arbitration proceeding.
JACOBS V. ICC (LABOR COMMISSION). On August 12, 1998, Edward Jacobs, former
President and Chief Executive Officer of ICC, initiated a proceeding against ICC
before the Labor Commissioner of the California Department of Industrial
Relations, known as EDWARD R. JACOBS V. NATIONAL TELEPHONE & COMMUNICATIONS,
INC., Case No. 18-34441-002-182/031. In this Labor Commission proceeding, Mr.
Jacobs claims that he is owed compensation for earned and unused vacation time
totaling $106,154, plus penalties and attorneys' fees. ICC denies that it has
any such obligation to Mr. Jacobs. The hearing on Mr. Jacobs' claims commenced
on March 11, 1999, but was not completed. The hearing is currently set to
continue on June 21, 1999. Incomnet intends to continue to vigorously defend
this proceeding.
LAWSUIT BY COMMUNICATIONS CONSULTING, INC. On June 23, 1998, Communications
Consulting, Inc. ("CCI"), filed a lawsuit against National Telephone &
Communications, Inc. entitled COMMUNICATIONS CONSULTING, INC. V. NATIONAL
TELEPHONE & COMMUNICATIONS, INC.,Case No. 795910, in the Superior Court of the
State of California, Orange County. CCI claims that ICC improperly terminated a
consulting
F-39
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
11. LITIGATION (CONTINUED)
agreement between CCI and ICC and owes CCI a sum of $127,038, interest and
reasonable costs, fees and expenses associated with its lawsuit. The case is in
the discovery phase and a trial date is set for July 26, 1999. Incomnet intends
to vigorously defend this lawsuit.
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION. In August 1994, Incomnet
was notified by the Pacific Regional Office of the Securities and Exchange
Commission that the Commission had initiated an informal inquiry of Incomnet. In
September 1994, the Commission issued a formal order of private investigation.
The Commission's investigation subsequently focused on press releases issued by
Incomnet on January 17 and 18, 1995, and September 6, 1995, and on a report on
Form 8-K issued by Incomnet on August 28, 1995, which the Commission alleged
contained untrue statements of material fact. On May 14, 1998, Incomnet and two
former directors of Incomnet, Stephen A. Caswell and Joel W. Greenberg, entered
into an Offer of Settlement and Order with the Commission pursuant to which they
agreed, without admitting or denying any wrongdoing, not to violate Section
10(b) and 13(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-2,
13a-11 and 13a-13 promulgated thereunder. No civil penalties or other financial
sanctions were imposed on any of the parties. The final administrative order was
entered by the SEC on July 30, 1998.
POTENTIAL LAWSUITS. Approximately 50 members of the class in the GAYLES
class action lawsuit against Incomnet have opted out of the class and may file
separate lawsuits against Incomnet. If such claims are filed as legal
complaints, Incomnet will seek to have them consolidated with other pending
lawsuits, if appropriate, or will defend them separately.
A claim may be asserted against Incomnet by Jerry Ballah with respect to a
settlement agreement Incomnet entered into in November 1996. Mr. Jacobs, who was
a party to the settlement, has already commenced a lawsuit in connection with
the settlement agreement. The amount of the damages that may be asserted by Mr.
Ballah is estimated to be approximately $535,000 plus accrued interest, and
possible consequential damages. Incomnet intends to vigorously defend any claims
made against it or ICC by Mr. Ballah.
John R. Dennis and JRD, Inc. may commence an action against ICC based upon
an alleged breach of a purported agreement by which Mr. Dennis and JRD, Inc.
were to provide consulting services to ICC. Absent the existence of such
agreement, Mr. Dennis and JRD, Inc. seek recovery based on alleged benefits they
claim to have provided to ICC as a result of certain alleged activities.
Incomnet believes this case lacks merit and is preparing to respond to any
litigation that may be brought.
From time to time, Incomnet is also involved in litigation arising from the
ordinary course of business, the ultimate resolution of which is not expected to
have a material adverse effect on the financial condition, results of operations
or cash flows of Incomnet.
12. PROFIT SHARING PLAN
The Company sponsors a 401(k) savings plan implemented during 1997 for
employees who are 21 years of age or older and have been employed by the Company
for at least six months. Plan participants are allowed to contribute up to 15%
of their base annual compensation. The plan also provides for the Company to
make a discretionary matching contribution. The profit sharing
F-40
<PAGE>
INCOMNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
12. PROFIT SHARING PLAN (CONTINUED)
contribution and related expense for the years ended December 31, 1998 and 1997
was $57,000 and $47,000.
13. FOURTH QUARTER ADJUSTMENTS
During the fourth quarter 1998, the Company changed its method of estimating
deferred marketing revenue. The impact of adopting this change in estimation
methodology resulted in the restatement of previously filed interim reports on
Form 10-Q for the quarterly periods ended March 31, June 30, and September 30,
1998 to increase/(reduce) marketing revenues recognized by $(435,000), $242,000
and $75,000, respectively. The impact of adopting this change on the Company's
consolidated financial statements for the year ended December 31, 1998, was to
reduce marketing program revenue recognized by $144,000.
F-41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: April 15, 1999
<TABLE>
<S> <C> <C>
INCOMNET, INC.
(Registrant)
By: /s/ DENIS RICHARD
-----------------------------------------
Denis Richard
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
President and Chief
/s/ DENIS RICHARD Executive Officer and
- ------------------------------ Director (Principal April 15, 1999
Denis Richard Executive Officer)
Executive Vice President,
/s/ GEORGE P. BLANCO Chief Financial Officer
- ------------------------------ and Secretary (Principal April 15, 1999
George P. Blanco Financial Officer)
/s/ STEPHEN A. GARCIA
- ------------------------------ Controller April 15, 1999
Stephen A. Garcia
/s/ JOHN P. CASEY
- ------------------------------ Chairman of the Board April 15, 1999
John P. Casey
/s/ SCOTT EISENBERG
- ------------------------------ Director April 15, 1999
Scott Eisenberg
/s/ JOHN HILL, JR.
- ------------------------------ Director April 15, 1999
John Hill, Jr.
</TABLE>
S-1
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ DR. HOWARD SILVERMAN
- ------------------------------ Director April 15, 1999
Dr. Howard Silverman
/s/ MICHAEL A. STEIN
- ------------------------------ Director April 15, 1999
Michael A. Stein
</TABLE>
S-2
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
INCOMNET, INC.
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING AMOUNTS CHARGED
OF TO COSTS AND BALANCE AT END
PERIOD EXPENSES DEDUCTIONS(1) OF PERIOD
----------- ----------------- ------------- ---------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Deducted from asset accounts:
Accounts receivable allowance for doubtful
accounts....................................... $ 2,698 $ 3,244 $ (2,644) $ 3,298
Notes receivable allowance for doubtful
accounts....................................... 209 608 108 925
----------- ------ ------------- ------
Total.............................................. $ 2,907 $ 3,852 $ (2,536) $ 4,223
----------- ------ ------------- ------
----------- ------ ------------- ------
Year ended December 31, 1997(2):
Deducted from asset accounts:
Accounts receivable allowance for doubtful
accounts....................................... $ 4,142 $ 5,319 $ (6,763) $ 2,698
Notes receivable allowance for doubtful
accounts....................................... 209 176 (176) 209
----------- ------ ------------- ------
Total.............................................. $ 4,351 $ 5,495 $ (6,939) $ 2,907
----------- ------ ------------- ------
----------- ------ ------------- ------
Year ended December 31, 1996(2):
Deducted from asset accounts:
Accounts receivable allowance for doubtful
accounts....................................... $ 1,988 $ 5,682 $ (3,528) $ 4,142
Notes receivable allowance for doubtful
accounts....................................... 209 263 (263) 209
----------- ------ ------------- ------
Total.............................................. $ 2,197 $ 5,945 $ (3,791) $ 4,351
----------- ------ ------------- ------
----------- ------ ------------- ------
</TABLE>
- ------------------------------
(1) Uncollectible amounts written off, net of recoveries.
(2) Amounts for 1997 and 1996 have been adjusted to reflect reclassifications
made related to discontinued operations. See Note 1--Discontinued Operations
in the Notes to Consolidated Financial Statements elsewhere herein for
further information.
S-3
<PAGE>
LIST OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
2.1 Asset Purchase Agreement between NTC Acquisition, Inc. and National Telephone & Communications, Inc.,
dated March 31, 1998. Incorporated by reference from Exhibit 99.1 attached to Incomnet's Form 8-K,
filed with the Securities and Exchange Commission on April 8, 1998.
2.2 Agreement to Purchase AutoNetwork Assets between Incomnet, Inc. and AutoSkill, Inc., dated March 20,
1998. Incorporated by reference from Exhibit 10.24 attached to Incomnet's Annual Report on Form
10-K, for the fiscal year ending December 31, 1997, filed with the Securities and Exchange
Commission on April 15, 1998.
3.1 Articles or Incorporation and amendments thereto.
3.2 Certificate of Determination for Series A 2% Convertible Preferred Stock. Incorporated by reference
from Exhibit 3.3 attached to Incomnet's Pre-effective Amendment No. 1 to the Form S-3 filed with
the Securities and Exchange Commission on October 21, 1996.
3.3 Certificate of Determination for Series B 6% Convertible Preferred Stock. Incorporated by reference
from Exhibit 3.7 attached to Incomnet's Registration Statement on Form S-3 filed with the
Securities and Exchange Commission on November 22, 1997.
3.4 Certificate of Determination for Series C.
3.5 Certificate of Determination for Series D.
3.6 Revised Bylaws of Incomnet, Inc., dated January 18, 1999.
10.1 Form of Warrant to Purchase 510,000 Shares of RCI Common Stock dated February 7, 1995. Incorporated
by reference from Exhibit 4.5 attached to Incomnet's Registration Statement on Form S-3 filed with
the Securities and Exchange Commission on May 13, 1996.
10.2 Form of Warrant to Purchase RCI Common Stock, dated April 1996 in connection with bridge loans made
to RCI from April 1996 through January 1997. Incorporated by reference from Exhibit 4.6 attached to
Incomnet's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on
May 13, 1996.
10.3 Form of Warrant to Purchase Shares of Incomnet, Inc., in connection with a December 1996 settlement
with Robert Cohen, Jeff Rubin, and related parties, expiring December 9, 1999. Incorporated by
reference from Exhibit 4.7 attached to Incomnet's Pre-Effective Amendment No. 1 to Form S-3, filed
with the Securities and Exchange Commission on March 24, 1997.
10.4 Form of Warrant to Purchase Shares of Incomnet, Inc., in connection with the settlement of STEVENS V.
SCHWARTZ AND INCOMNET, INC., expiring December 17, 2001. Incorporated by reference from Exhibit 4.8
attached to Incomnet's Pre-Effective Amendment No. 1 to Form S-3 Registration Statement filed with
the Securities and Exchange Commission on March 24, 1997.
10.5 Employment Agreement between NTC and James R. Quandt, dated January 6, 1997. Incorporated by
reference from Exhibit 10.32 attached to Incomnet's Pre-Effective Amendment No. 1 to Form S-3,
filed with the Securities and Exchange Commission on March 24, 1997.
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.6 Letter of Acknowledgment for Amended and Restated Management Incentive Agreement Between NTC and
Incomnet, Inc., dated January 28, 1997. Incorporated by reference from Exhibit 10.31 attached to
Incomnet's Pre-Effective Amendment No. 1 to Form S-3, filed with the Securities and Exchange
Commission on March 24, 1997.
10.7 Settlement Agreements entered into on February 14, 1996, between Incomnet and various note holders,
including Arthur Caplan, Jules Nordlicht, Rita Folger, Richard S. Jaffe, Kenneth Lebow, Lenore
Katz, and Moshe Miller. Incorporated by reference from Exhibit 10.20 attached to Incomnet's
Registration Statement on Form S-3 filed with the Securities and Exchange Commission on May 13,
1996.
10.8 Carrier Switched Services Agreement with Wiltel, Inc., dated September 15, 1995. Incorporated by
reference from Exhibit 10.14 attached to Incomnet's Registration Statement on Form S-3 filed with
the Securities and Exchange Commission on May 13, 1996 and declared effective on October 31, 1996.
(Portions of this Agreement have been redacted. Incomnet has requested that the Securities and
Exchange Commission grant confidential treatment to the redacted portions of the Agreement.)
10.9 Settlement Agreement Between Joel W. Greenberg and Incomnet, Inc. dated May 9, 1996. Incorporated by
reference from Exhibit 99.A attached to Incomnet's Report on Form 8-K, dated June 18, 1996,
relating to the settlement agreement with Joel W. Greenberg and his resignation as a director of
Incomnet.
10.10 Form of Registration Rights Agreement Between Incomnet, Inc. and Purchasers of Series A Convertible
Preferred Stock dated September 27, 1996. Incorporated by reference from Incomnet's Pre-effective
Amendment No. 1 to Form S-3, filed with the Securities and Exchange Commission on October 21, 1996.
10.11 Management Incentive Agreement with ICC (formerly NTC), dated October 14, 1996. Incorporated by
reference from Exhibit 10.27 attached to Incomnet's Registration Statement on Form S-3 filed with
the Securities and Exchange Commission on November 22, 1996.
10.12 Settlement Agreements by and among Incomnet, Inc., Edward Jacobs and Jerry Ballah dated November 13,
1996. Incorporated by reference from Exhibit 10.28 attached to Incomnet's Registration Statement on
Form S-3 filed with the Securities and Exchange Commission on November 22, 1996.
10.13 Rapid Cast, Inc. Shareholder's Agreement, dated January 15, 1997. Incorporated by reference from
Exhibit 10.29 attached to Incomnet's Pre-Effective Amendment No. 1 to Form S-3, filed with the
Securities and Exchange Commission on March 24, 1997.
10.14 Registration Rights Agreement for Rapid Cast, Inc., dated January 15, 1997. Incorporated by reference
from Exhibit 10.20 to Incomnet's Pre-Effective Amendment No. 1 to Form S-3, filed with the
Securities and Exchange Commission on March 24, 1997.
10.15 Settlement and Mutual Release Agreement between Incomnet, Inc. and various parties including Robert
Cohen, Alan Cohen, Jeff Rubin, Jeff Cohen, Broadway Partners, Lenore Katz, and Allyson Cohen, dated
December 9, 1996. Incorporated by reference from Exhibit 10.33 attached to Incomnet's Pre-Effective
Amendment No. 1 to Form S-3, filed with the Securities and Exchange Commission on March 24, 1997.
10.16 Revised Standard Lease by ICC (formerly NTC) for space in Honolulu, Hawaii dated November 20, 1996.
Incorporated by reference from Exhibit 10.15 attached to Incomnet's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 filed with the Securities and Exchange Commission on April
15, 1997.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.17 Promissory Note and Business Loan Agreement dated March 27, 1997 between National Telephone and
Communications, Inc. and First Bank and Trust, Irvine Regional Office. Incorporated by reference
from Exhibit 10.16 attached to Incomnet's Annual Report on Form 10-K for the fiscal year ending
December 31, 1996, filed with the Securities and Exchange Commission on April 15, 1997.
10.18 Amended and Restated Management Incentive Agreement Between ICC (formerly NTC) and Incomnet, Inc.,
dated January 28, 1997. Incorporated by reference from Incomnet's Pre-effective Amendment to Form
S-3, filed with the Securities and Exchange Commission on March 24, 1997.
10.19 Amendment to Employment Agreement between Incomnet, Inc. and Melvyn H. Reznick, dated June 5, 1997.
Incorporated by reference from Exhibit 10.36 attached to Incomnet's Pre-effective Amendment No. 2
to Form S-3, filed with the Securities and Exchange Commission on July 9, 1997.
10.20 Employment Agreement between Incomnet, Inc. and Stephen A. Caswell, dated June 5, 1997. Incorporated
by reference from Exhibit 10.37 attached to Incomnet's Pre-effective Amendment No. 2 to Form S-3,
filed with the Securities and Exchange Commission on July 9, 1997.
10.21 Employment Agreement between National Telephone & Communications, Inc. and Edward R. Jacobs, dated
July 25, 1997. Incorporated by reference from Exhibit 10.3 attached to Incomnet's Quarterly Report
on Form 10-Q, for the quarterly period ending September 30, 1997, filed with the Securities and
Exchange Commission on November 13, 1997.
10.22 Office Lease between ICC (formerly NTC) and The Carter Family Investment Partnership, LP, commencing
April 18, 1997. Incorporated by reference from Incomnet's report on Form 10-Q filed with the
Securities and Exchange Commission on May 15, 1997.
10.23 Commitment Letter provided by Ironwood Telecom LLC to Incomnet, Inc. to provide Incomnet with a
secured credit facility, dated October 30, 1998. Incorporated by reference from Exhibit 10.1
attached to Incomnet's Report on Form 10-Q for the quarterly period ending September 30, 1998 filed
with the Securities and Exchange Commission on November 17, 1998.
10.24 Bridge Loan and Security Agreement between Incomnet, Inc. and Ironwood Telecom LLC, dated November 4,
1998. Incorporated by reference from the Exhibit 10.2 attached to Company's Report on Form 10-Q for
the quarterly period ending September 30, 1998 filed with the Securities and Exchange Commission on
November 16, 1998.
10.25 Bridge Loan Note executed by Incomnet, Inc. in favor of Ironwood Telecom LLC, dated November 4, 1998.
Incorporated by reference from Exhibit 10.3 attached to Incomnet's Report on Form 10-Q for the
quarterly period ending September 30, 1998 filed with the Securities and Exchange Commission on
November 16, 1998.
10.26 Guaranty executed by National Telephone & Communications, Inc. in favor of Ironwood Telecom LLC,
dated November 4, 1998, relating to Incomnet Inc.'s Bridge Loan Note. Incorporated by reference
from Exhibit 10.5 attached to Incomnet's Report on Form 10-Q for the quarterly period ending
September 30, 1998 filed with the Securities and Exchange Commission on November 16, 1998.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.27 Guaranty executed by National Telephone & Communications, Inc. in favor of Ironwood Telecom LLC,
dated November 4, 1998, relating to Mr. Casey's Secured Promissory Note. Incorporated by reference
from Exhibit 10.7 attached to Incomnet's Report on Form 10-Q for the quarterly period ending
September 30, 1998 filed with the Securities and Exchange Commission on November 16, 1998.
10.28 Severance Agreement between Incomnet, Inc. and Melvyn Reznick, dated September 29, 1998, and
amendment thereto dated November 1, 1998. Incorporated by reference from Exhibit 10.7 attached to
Incomnet's Report on Form 10-Q for the quarterly period ending September 30, 1998 filed with the
Securities and Exchange Commission on November 16, 1998.
10.29 Separation Agreement between Incomnet, Inc. and James R. Quandt, dated July 1, 1998, and amendment
thereto dated October 30, 1998. Incorporated by reference from Exhibit 10.8 attached to Incomnet's
Report on Form 10-Q for the quarterly period ending September 30, 1998 filed with the Securities
and Exchange Commission on November 16, 1998.
10.30 Separation Agreement between Incomnet, Inc. and Victor C. Streufert, dated July 1, 1998, and
amendment thereto dated October 30, 1998. Incorporated by reference from Exhibit 10.9 attached to
Incomnet's Report on Form 10-Q for the quarterly period ending September 30, 1998 filed with the
Securities and Exchange Commission on November 16, 1998.
10.31 Amendment to Employment Agreement between Incomnet, Inc. and Stephen A. Caswell, dated October 29,
1998. Incorporated by reference from Exhibit 10.10 attached to Incomnet's Report on Form 10-Q for
the quarterly period ending September 30, 1998 filed with the Securities and Exchange Commission on
November 16, 1998.
10.32 Settlement and Release Agreement between Incomnet, Inc. and the Cohen Parties, including Dr. Robert
Cohen, Stefanie Rubin, Allyson Cohen, Jeffrey Cohen, Jeffrey Rubin, Dr. Alan Cohen, Lenore Katz,
Broadway Partners and Meryl Cohen, custodian for Gabrielle Cohen, Erica Cohen, Jaclyn Cohen and
Nicole Cohen, dated November 5, 1998. Incorporated by reference from Exhibit 10.11 attached to
Incomnet's Report on Form 10-Q for the quarterly period ending September 30, 1998 filed with the
Securities and Exchange Commission on November 16, 1998.
10.33 Settlement and Release Agreement Among Incomnet, Inc., Ironwood Telecom LLC, Ellen Cohen and Martin
Fabrikant, dated November 5, 1998. Incorporated by reference from Exhibit 10.12 attached to
Incomnet's Report on Form 10-Q for the quarterly period ending September 30, 1998 filed with the
Securities and Exchange Commission on November 16, 1998.
10.34 Stock Purchase and Release Agreement Among Gary Kaplowitz, Alan Rothstein, S&R Holdings, Ironwood
Telecom LLC, Incomnet, Inc. and John P. Casey, dated November 4, 1998. Incorporated by reference
from Exhibit 10.13 attached to Incomnet's Report on Form 10-Q for the quarterly period ending
September 30, 1998 filed with the Securities and Exchange Commission on November 16, 1998.
10.35 Employment Agreement by and among Incomnet, Inc., National Telephone & Communications, Inc., and
Denis Richard, dated September 29, 1998. Incorporated by reference from Exhibit 10.2 attached to
Incomnet's Report on Form 8-K, as filed with the Securities and Exchange Commission on October 14,
1998.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.36 Acknowledgment Letter of Services Agreement Between Incomnet, Inc. and John P. Casey, dated September
29, 1998. Incorporated by reference from Exhibit 10.2 attached to Incomnet's Report on Form 8-K,
filed with the Securities and Exchange Commission on October 14, 1998.
10.37 Board Change Agreement among Incomnet, Inc., the Current Directors of Incomnet, Inc. and John P.
Casey, dated 28, 1998. Incorporated by reference from Exhibit 10.1 attached to Incomnet's Report on
Form 8-K, filed with the Securities and Exchange Commission on August 31, 1998.
10.38 Standard Sublease Between National Telephone & Communications, Inc., and Vision Capital Services
Corporation and Performance Capital Management, Inc., dated July 28, 1998. Incorporated by
reference from Exhibit 10.17 attached to Incomnet's Report on Form 10-Q for the quarterly period
ending September 30, 1998 filed with the Securities and Exchange Commission on November 16, 1998.
10.39 Warrant Agreement dated as of November 4, 1998 between Incomnet, Inc., and Ironwood Telecom LLC
relating to the issuance of 500,000 Incomnet, Inc. Warrants. Incorporated by reference from Exhibit
10.4 attached to Incomnet's report on Form 10-Q for the quarterly period ending September 30, 1998
filed with the Securities & Exchange Commission on November 16, 1998.
10.40 Warrant Agreement dated as of November 16, 1998 between Incomnet, Inc., and Ironwood Telecom LLC
relating to the issuance of 100,000 Incomnet, Inc. Warrants.
10.41 Registration Rights Agreement dated as of November 4, 1998 between Incomnet, Inc. and Ironwood
Telecom LLC.
10.42 Loan and Security Agreement dated as of December 15, 1998 among Incomnet, Inc., Incomnet
Communications Corporation and Ironwood Telecom LLC.
10.43 Term Note dated December 15, 1998 issued by Incomnet, Inc. in the original principal amount of
$8,374,610.64 payable to Ironwood Telecom LLC.
10.44 WorldCom Promissory Note dated December 15, 1998, issued by Incomnet, Inc. in the original principal
amount of $3,456,151.56 payable to Ironwood Telecom LLC.
10.45 Amended and Restated First Bank Promissory Note dated December 15, 1998 issued by Incomnet, Inc. in
the original principal amount of $4,954,707.80 payable to Ironwood Telecom LLC.
10.46 Guaranty dated as of December 15, 1998, by Incomnet Communications Corporation in favor of Ironwood
Telecom LLC.
10.47 Warrant to Purchase 2,000,000 Shares of Common Stock of Incomnet, Inc. dated December 15, 1998 issued
by Incomnet, Inc. to Ironwood Telecom LLC.
10.48 Warrant to Purchase 1,000,000 Shares of Common Stock of Incomnet, Inc. dated December 15, 1998 issued
by Incomnet, Inc. to Ironwood Telecom LLC.
10.49 Employment Agreement between Incomnet, Inc. and George P. Blanco dated January 19, 1999.
10.50 Incomnet, Inc. Equity Incentive Stock Plan, approved by the Board of Directors of Incomnet, Inc. on
January 18, 1999.
10.51 Incomnet, Inc. Employee Stock Purchase Plan, approved by the Board of Directors of Incomnet, Inc. on
January 18, 1999.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.52 Settlement Agreement and Mutual General Release among Incomnet, Inc., GenSource Corporation, Jerry C.
Buckley, Ralph M. Flygare, Robert Reisbaum and E.V. Schmidt dated as of March 9, 1999.
10.53 Telecommunications Services Agreement and Rate Schedule between WorldCom Network Services, Inc. and
Incomnet Communications Corporation dated as of November 1, 1998. (Portions of this Agreement have
been redacted. Incomnet has requested that the Securities and Exchange Commission grant
confidential treatment to the redacted portions of the Agreement.)
10.54 Program Enrollment Terms Agreement between WorldCom Network Services, Inc. and Incomnet
Communications Corporation dated as of November 1, 1999. (Portions of this Agreement have been
redacted. Incomnet has requested that the Securities and Exchange Commission grant confidential
treatment to the redacted portions of the Agreement.)
10.55 Service Schedule Agreement between WorldCom Network Services, Inc. and Incomnet Communications
Corporation dated as of November 1, 1998. (Portions of this Agreement have been redacted. Incomnet
has requested that the Securities and Exchange Commission grant confidential treatment to the
redacted portions of the Agreement.)
10.56 Amendment No. 1 to Telecommunications Services Agreement and Program Enrollment Terms between ICC and
WorldCom effective March 12, 1999. (Portions of this Agreement have been redacted. Incomnet has
requested that the Securities and Exchange Commission grant confidential treatment to the redacted
portions of the Agreement.)
10.57 Loan and Security Agreement between ICC and Foothill Capital Corporation dated as of April 9, 1999.
10.58 Intellectual Property Security Agreement between ICC and Foothill Capital Corporation dated as of
April 9, 1999.
10.59 Security Agreement between Incomnet, Inc. and Foothill Capital Corporation dated as of April 9, 1999.
10.60 Intercreditor and Subordination Agreement between Foothill Capital Corporation and Ironwood Telecom
LLC dated as of April 9, 1999.
10.61 Warrant issued to Ironwood Telecom LLC to purchase 1,250,000 shares of Incomnet Common Stock dated
April 9, 1999.
10.62 Key Independent Representative Stock Option Plan for ICC adopted as of February 28, 1997.
Incorporated by reference from Exhibit 10.34 to Incomnet's Amendment No. 2 to Form S-3 filed with
the Securities and Exchange Commission July 9, 1997.
10.63 1996 Senior Executive and Consultant Convertible Debt Plan for ICC adopted as of February 28, 1997.
Incorporated by reference from Exhibit 10.34 to Incomnet's Amendment No. 2 to Form S-3, filed with
the Securities and Exchange Commission July 9, 1997.
10.64 ICC Directors Stock Option Plan adopted as of February 28, 1997. Incorporated by reference from
Exhibit 10.34 to Incomnet's Amendment No. 2 to Form S-3 filed with the Securities and Exchange
Commission on July 9, 1997.
10.65 ICC 1996 Stock Option Plan adopted February 28, 1997. Incorporated by reference from Exhibit 10.34 to
Incomnet's Amendment No. 2 to Form S-3 filed with the Securities and Exchange Commission on July 9,
1997.
10.66 Promissory Note executed by Jerry Ballah in favor of ICC dated as of April 11, 1997 in the amount of
$3,771,348.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.67 Convertible Debt Unit dated as of April 11, 1997 issued to Jerry Ballah.
10.68 Convertible Debt Plan Grant Agreement dated as of April 11, 1997 between ICC and Jerry Ballah dated
April 11, 1997.
10.69 Convertible Debt Unit Pledge Agreement between Jerry Ballah and ICC dated as of April 11, 1997.
10.70 Promissory Note executed by Edward R. Jacobs in favor of ICC dated as of April 11, 1997 in the amount
of $3,021,345.
10.71 Convertible Debt Unit dated as of April 11, 1997 issued to Edward R. Jacobs.
10.72 Convertible Debt Plan Grant Agreement between ICC and Edward R. Jacobs dated April 11, 1997.
10.73 Convertible Debt Unit dated as of April 11, 1997 issued to Edward R. Jacobs.
10.74 Promissory Note executed by Edward R. Jacobs in favor of ICC dated as of April 11, 1997 in the amount
of $1,200,000.
10.75 Convertible Debt Plan Grant Agreement between ICC and Edward R. Jacobs dated April 11, 1997.
10.76 Convertible Debt Unit Pledge Agreement between Edward R. Jacobs and ICC dated as of April 11, 1997.
10.77 Promissory Note in the amount of $550,219.77 executed by Jerry Ballah in favor of ICC dated March 31,
1997.
10.78 Amendment to Registration Rights Agreement between Ironwood and Incomnet dated as of April 9, 1999.
10.79 Consent and Amendment No. 1 to Loan and Security Agreement between Ironwood and Incomnet dated as of
April 9, 1999.
21 Subsidiaries of the Registrant.
27 Financial data schedule (Article 5 of Regulation S-X).
</TABLE>
7
<PAGE>
ARTICLES OF INCORPORATION
OF
CKB, SYSTEMS, INC.
FIRST: The name of the corporation is CKB, SYSTEMS, INC.
SECOND: The purposes of the corporation are:
(a) Primarily to engage in the specific business of the design of computer
systems.
(b) Generally to engage in the business of the design of computer base
systems, manufacture, construct, fabricate, buy, sell, import, export, and
otherwise deal in and with computers, computer components, computer systems and
related products; and to develop patent, copyright, or otherwise protect and
exploit new inventions, designs and systems in computer sciences.
(c) To engage in any business or transaction which the Board of Directors
of the corporation may from time to time authorize or approve, whether related
or unrelated to the business described in Paragraphs (a) and (b) above, or to
any other business then or theretofore transacted by the corporation.
(d) To act as principal, agent, joint venturer, partner, or in any other
capacity which may be authorized or approved by the Board of Directors of the
corporation.
(e) To transact business anywhere in the world.
(f) To have and exercise all rights and powers now or hereafter granted to
a corporation by law.
The foregoing statement of purposes shall be construed as a statement of
both purposes and powers, and the purposes and powers in each paragraph shall,
except where otherwise expressed, not be limited or restricted by reference to
or inference from the terms or provisions of any other paragraph, but shall be
regarded as independent purposes and powers.
THIRD: The principal office of the corporation for the transaction of
business is in Los Angeles County, California.
FOURTH: (a) The number of directors of the corporation is three
(3).
(b) The names and addresses of the persons appointed to act as
the first directors are:
<PAGE>
LAWRENCE C. CALLAWAY
20525 Leadwell Street
Canoga Park, California
GLEN E. KELLY
2290 Farnworth Street
Camarillo, California
RENEE M. BETTENBURG
38850 Farwell Drive, #10-D
Fremont, California
FIFTH: The corporation is authorized to issue only one class of shares
having a total number of 75,000 shares. The par value of each share is $1.00 and
the aggregate par value of all shares is $75,000.
SIXTH: No distinction shall exist between the shares of the
corporation or the holders thereof.
IN WITNESS WHEREOF, the undersigned, who are the incorporators and the
above named first directors of this corporation, have executed these Articles of
Incorporation on January 18, 1974.
/s/ Lawrence C. Callaway
-------------------------------------
LAWRENCE C. CALLAWAY - Incorporator
/s/ Glen E. Kelly
-------------------------------------
GLEN E. KELLY - Incorporator
/s/ Renee M. Bettenburg
-------------------------------------
RENEE M. BETTENBURG - Incorporator
[Filed with the California Secretary of State on January 31, 1974.]
2
<PAGE>
STATE OF CALIFORNIA )
)
COUNTY OF LOS ANGELES )
On January 18, 1974, before me, FREEDA HENSON, a Notary Public in and for
said State, personally appeared LAWRENCE C. CALLAWAY, GLEN E. KELLY, and RENEE
M. BETTENBURG, known to me to be the persons whose names are subscribed to the
foregoing Articles of Incorporation, and acknowledged to me that they executed
the same.
WITNESS my hand and official seal.
/s/ Freeda Henson
-------------------------------------
FREEDA HENSON, Notary Public for the
State of California
My Commission Expires: June 27, 1976.
[SEAL]
3
<PAGE>
CERTIFICATE OF AMENDMENT OF
ARTICLES OF INCORPORATION OF
CKB, SYSTEMS, INC.
a California corporation
The undersigned, LAWRENCE C. CALLAWAY and F. WARDE BRAND, JR., do
hereby certify:
1. That they are, respectively, the duly elected and acting President and
Secretary of CKB, SYSTEMS, INC., a California corporation, and constitute at
least two-thirds of the authorized number of directors of said corporation.
2. At a meeting of the Board of Directors of said corporation duly held at
100 Wilshire Boulevard, Santa Monica, California, on the 8th day of March, 1977,
the following resolution was duly adopted and approved by at least two-thirds of
the authorized number of directors of the corporation:
RESOLVED: that Article First of the Articles of Incorporation of
this corporation is hereby amended to read in full as follows:
"FIRST: The name of this corporation is COMPUDYNE, INC."
3. That all of the shareholders adopted and approved said amendment by
written consent of March 8, 1977. The wording of the amended article as set
forth in the shareholder's written consent is the same as that set forth in the
directors' resolution in Paragraph 2, of this Certificate.
4. The total number of shares of said corporation entitled to consent to
the adoption of such amendment is 300. The number of shares represented by said
written consent to said amendment is 300.
/s/ Lawrence C. Callaway
--------------------------------
LAWRENCE C. CALLAWAY
/s/ F. Warde Brand, Jr.
--------------------------------
F. WARDE BRAND, JR.
[Filed with the California Secretary of State on July 18, 1977.]
<PAGE>
Each of the undersigned, declare, under penalty of perjury, that the
matters set forth in the foregoing Certificate are true of their own knowledge.
Executed at Santa Monica, California on July 6, 1977.
/s/ Lawrence C. Callaway
--------------------------------
LAWRENCE C. CALLAWAY
/s/ F. Warde Brand, Jr.
--------------------------------
F. WARDE BRAND, JR.
2
<PAGE>
CERTIFICATE OF OWNERSHIP
Lawrence C. Callaway and Charanjit S. Lohara certify that:
1. They are the President and Treasurer, respectively, of Compudyne, Inc.,
a California corporation.
2. This corporation owns all of the outstanding shares of Statewide
Communications Systems Incorporated, a California corporation.
3. The Board of Directors of this corporation duly adopted the following
resolution:
"RESOLVED, that this corporation merge Statewide Communications
Systems Incorporated, its wholly-owned subsidiary corporation, into itself
and assume all of its obligations pursuant to Section 1110 of the
California Corporations Code."
/s/ Lawrence C. Callaway
--------------------------------
Lawrence C. Callaway
/s/ Charanjit S. Lohara
--------------------------------
Charanjit S. Lohara
[Filed with the California Secretary of State on May 22, 1981.]
The undersigned declare under penalty of perjury that the matters set
forth in the foregoing Certificate are true of their own knowledge. Executed
at Woodland Hills, California on May 19, 1981.
/s/ Lawrence C. Callaway
--------------------------------
Lawrence C. Callaway
/s/ Charanjit S. Lohara
--------------------------------
Charanjit S. Lohara
<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
Charan S. Lohara and Lawrence C. Callaway certify that:
1) They are the Chairman of the Board and Secretary, respectively, of
Compudyne, Inc., a California corporation.
2) Article FIRST of the Articles of Incorporation of this corporation is
amended to read as follows:
"The name of this corporation is Intelligent Communications
Networks, Inc."
3) Article SECOND of the Articles of Incorporation of this corporation is
amended to read as follows:
"The purpose of the corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General
Corporation Law of California other than the banking business, the trust
company business or the practice of a profession permitted to be
incorporated by the California Corporations Code."
4) Article FIFTH of the Articles of Incorporation of this corporation is
amended to read as follows:
"This corporation is authorized to issue only one class of shares
having a total number of ten million (10,000,000) shares. Upon the
amendment of this Article, each outstanding share is split into 83.854
shares.
This corporation elects to be governed by all of the provisions of
the General Corporation Law effective January 1, 1988 not otherwise
applicable to it under Chapter 23 thereof."
5) The foregoing amendments of Articles of Incorporation has been duly
approved by the Board of Directors.
6) The foregoing amendments of Articles of Incorporation has been duly
approved by the required vote of shareholders in accordance with Section 902 of
the Corporations Code. The total number of outstanding shares of the corporation
is 12,205.
<PAGE>
The number of shares voting in favor of the amendment equalled or exceeded the
vote required. The percentage vote required was more than 50%.
/s/ Charan S. Lohara
--------------------------------
Charan S. Lohara
Chairman of the Board
/s/ Lawrence C. Callaway
--------------------------------
Lawrence C. Callaway
Secretary
[Filed with the California Secretary of State on May 27, 1981.]
The undersigned declare under penalty of perjury that the matters set
forth in the foregoing certificate are true of their own knowledge.
Executed at Woodland Hills, California on May 22, 1981.
/s/ Charan S. Lohara
--------------------------------
Charan S. Lohara
/s/ Lawrence C. Callaway
--------------------------------
Lawrence C. Callaway
2
<PAGE>
CERTIFICATION OF AMENDMENT
OF
ARTICLES OF INCORPORATION
Charan S. Lohara and Lawrence C. Callaway certify that:
1. They are the President and the Secretary, respectively, of INTELLIGENT
COMMUNICATIONS NETWORKS, INC., a California corporation.
2. Article FIFTH of the Articles of Incorporation is amended to read as
follows:
"FIFTH: (a) This corporation is authorized to issue two classes of
shares: Common and Preferred. The number of Common shares which the
corporation is authorized to issue is twenty million (20,000,000)
and the number of Preferred shares which the corporation is
authorized to issue is one hundred thousand (100,000). Upon the
amendment of this article to read as herein set forth, each
outstanding share is converted into or reconstituted as one Common
share.
(b) The Preferred shares may be issued in any number of
series, as determined by the board of directors. The board may by
resolution fix the designation and number of shares of any such
series, and may determine, alter or revoke the rights, preferences
and privileges, and restrictions pertaining to any wholly unissued
series. The board may thereafter in the same manner increase or
decrease the number of shares of any such series (but not below the
number of shares of that series then outstanding)."
3. The foregoing amendment of Articles of Incorporation has been duly
approved by the Board of Directors.
4. The foregoing amendment of Articles of Incorporation has been duly
approved by the required vote of shareholders in accordance with Section
902 of the Corporations Code. The total number of outstanding shares of
the corporation is 7,081,774 shares of common stock. The percentage vote
required in favor of the amendment was more than 50%.
<PAGE>
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Dated: January 29, 1986
/s/ Charan S. Lohara
--------------------------------
Charan S. Lohara, President
/s/ Lawrence C. Callaway
--------------------------------
Lawrence C. Callaway, Secretary
[Filed with the California Secretary of State on February 3, 1986.]
2
<PAGE>
CERTIFICATION OF AMENDMENT
OF
INCOMNET, INC.
a California Corporation
Sam D. Schwartz and Stephen A. Caswell certify that:
1. They are duly elected and acting President and Assistant Secretary,
respectively, of said corporation.
2. The Articles of Incorporation of said corporation shall be amended as
follows:
Article FIFTH: (a) is revised and amended to read in its entirety as
follows:
"FIFTH: (a) The corporation is authorized to issue two classes of
shares: Common and Preferred. The number of Common shares which the
corporation is authorized to issue is 20,000,000 and the number of
Preferred shares which the corporation is authorized to issue is
100,000. Upon amendment of this Article FIFTH: (a), each two (2)
outstanding shares of Common is reverse split and converted into one
(1) share of Common. No fractional shares of Common will be issued
to shareholders in connection with such reverse split, but in lieu
thereof, the number of shares to be converted will be rounded up or
down to the nearest whole number, respectively. Further, upon
amendment of this Article FIFTH: (a) there shall be no effect upon
Preferred shares as there are none outstanding.
Article SEVENTH shall be added and shall read in its entirety as follows:
"SEVENTH": The liability of the directors of the Corporation for
monetary damages shall be eliminated to the fullest extent permissible under
California law."
Article EIGHTH shall be added and shall read in its entirety as follows:
"EIGHTH": The Corporation is authorized to provide indemnification of
agents (as defined in Section 317 of the Corporations Code) for breach of duty
to the Corporation and its shareholders through bylaw provisions, through
agreements with the agents, or both, or otherwise, in excess of the
indemnification otherwise permitted by Section 317 of the Corporations Code,
subject to the limits of such excess indemnification set forth in Section 204 of
the Corporations Code."
3. The Foregoing amendments of the Articles of Incorporation have been
duly approved by the Board of Directors.
<PAGE>
4. The foregoing amendments were approved by the required vote of
shareholders in accordance with Section 902 of the California Corporations code.
The total number of outstanding shares entitled to vote with respect to the
amendments were 10,837,144. The favorable vote of a majority of such shares is
required to approve the amendments and the number of such shares voting in favor
of the amendments exceeded the required vote, and there are no preferred shares
outstanding.
We declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Dated: May 24, 1989
/s/ Sam D. Schwartz
---------------------------------
Sam D. Schwartz, President
/s/ Stephen A. Caswell
---------------------------------
Stephen A. Caswell, Asst. Secy.
[Filed with the California Secretary of State on June 1, 1989.]
2
<PAGE>
CERTIFICATE OF AMENDMENT
OF ARTICLE OF INCORPORATION OF
INTELLIGENT COMMUNICATIONS NETWORKS, INC.
CHARAN S. LOHARA and LAWRENCE C. CALLAWAY certify that:
1. They are the President and the Secretary of Intelligent
Communications Networks, Inc. a California corporation.
2. Article First of the Articles of Incorporation is amended to
read: "The name of this corporation is INCOMNET, Inc."
3. The amendment herein set forth has been duly approved by the
Board of Directors.
4. The amendment herein set forth has been duly approved by the
required vote of the shareholders in accordance with Section 902 of the
Corporations Code. The corporation has only one class of shares and the number
of outstanding shares is 7,703,519. The number of shares voting in favor of the
amendment equaled or exceeded the vote required. The percentage vote required
for the approval of the amendment herein set forth was more than 50%.
/s/ Charan S. Lohara
--------------------------------
Charan S. Lohara, President
/s/ Lawrence C. Callaway
--------------------------------
Lawrence C. Callaway, Secretary
[Filed with the California Secretary of State on July 30, 1996.]
3
<PAGE>
CHARAN S. LOHARA and LAWRENCE C. CALLAWAY declare under penalty of
perjury under the laws of the State of California that they have read the
foregoing certificate and know the contents thereof and that the same is true
of their own knowledge.
/s/ Charan S. Lohara
--------------------------------
Charan S. Lohara, President
/s/ Lawrence C. Callaway
--------------------------------
Lawrence C. Callaway, Secretary
<PAGE>
CERTIFICATE OF DETERMINATION OF
CONVERTIBLE SERIES C PREFERRED STOCK OF
INCOMNET, INC.
The undersigned, President and Assistant Secretary, hereby certify that:
1. They are the duly elected and acting President and Assistant Secretary,
respectively, of Incomnet, Inc., a California corporation (the "Company").
2. The Articles of Incorporation of the Company authorize 100,000 shares
of preferred stock, no par value per share. The number of shares of Convertible
Series A Preferred Stock authorized is 4,000, of which 803 are issued and
outstanding. The number of shares of Convertible Series B Preferred Stock
authorized is 2,900, of which 1,243 are issued and outstanding. The number of
shares of Convertible Series C Preferred Stock authorized herein is 25, none of
which have been issued. Upon filing of the Certificate of Determination of
Convertible Series D Preferred Stock concurrently with this Certificate of
Determination of Convertible Series C Preferred Stock, the number of shares of
Convertible Series D Preferred Stock authorized herein is 50, none of which have
been issued.
3. The following is a true and correct copy of resolutions duly adopted by
the Board of Directors at a meeting duly held on January 18, 1999, which
constituted all requisite action on the part of the Company for adoption of such
resolutions.
RESOLUTIONS
WHEREAS, the Board of Directors of the Company (the "Board of Directors")
is authorized to provide for the issuance of the shares of preferred stock in
series, and by filing a certificate pursuant to the applicable law of the State
of California, to establish from time to time the number of shares to be
included in each such series, and to fix the designations, powers, preferences
and rights of the shares of each such series and the qualifications, limitations
or restrictions thereof.
WHEREAS, the Board of Directors desires, pursuant to its authority
described in the immediately preceding recital, to designate a new series of
preferred stock, set the number of shares constituting such series, and fix the
rights, preferences, privileges and restrictions of such series.
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby
designates a new series of preferred stock and the number of shares constituting
such series, and fixes the rights, preferences, privileges and restrictions
relating to such series as follows:
<PAGE>
Section 1. Designation, Amount and Par Value.
A series of preferred stock shall be designated as the Convertible Series
C Preferred Stock (the "Series C Preferred Stock"), and the number of shares so
designated shall be 25. The par value of each share of Series C Preferred Stock
shall be no par value. Each share of Series C Preferred Stock shall have a
stated value of $1,000.00 per share (the "Stated Value").
Section 2. Dividends and Distributions.
The holders of Series C Preferred Stock shall have the rights to receive
dividends set forth in this Section 2. The holders of Series C Preferred Stock
shall be entitled to receive any dividend or distribution declared on the Common
Stock of the Company. Upon declaration of such a dividend or distribution on the
Common Stock of the Company, the holders of Series C Preferred Stock shall be
entitled to such dividend or distribution that the holders of Series C Preferred
Stock would have been entitled to had such holders converted their shares of
Series C Preferred Stock into shares of Common Stock pursuant to Section 5
immediately prior to the record date of such dividend or distribution on the
Common Stock. Except as stated in the preceding sentence, the holders of Series
C Preferred Stock shall not be entitled to receive dividends.
Section 3. Voting Rights.
The holders of the Series C Preferred Stock shall have the voting rights
set forth in this Section 3.
(a) Each share of the Series C Preferred Stock shall entitle the holder
thereof to a number of votes equal to the number of shares of Common Stock such
holder of Series C Preferred Stock could have been converted into immediately
prior to the record date for such vote on all matters submitted to a vote of the
Company's stockholders.
(b) Except as otherwise provided by law, the holders of Series C Preferred
Stock, the holders of Convertible Series D Preferred Stock and the holders of
Common Stock shall vote together as one class on all matters submitted to a vote
of the Company's stockholders.
Section 4. Liquidation.
Upon any liquidation, dissolution, or winding-up of the Company, whether
involuntary or voluntary (a "Liquidation"), holders of shares of Series C
Preferred Stock shall be entitled to receive, out of the assets of the Company,
whether such assets are capital or surplus, for each share of Series C Preferred
Stock an amount equal to the Stated Value, plus an amount equal to accrued but
unpaid dividends payable to such
-2-
<PAGE>
holder of Series C Preferred Stock pursuant to Section 2 above. Such payment
shall be subject to the prior payment in full of the liquidation preferences
with respect to the Convertible Series A Preferred Stock and the Convertible
Series B Preferred Stock and shall be made pari passu with the Convertible
Series D Preferred Stock but prior and in preference to the holders of Junior
Securities (defined below). If the assets of the Company shall be insufficient
to pay in full the amounts payable to the holders of the Series C Preferred
Stock and the holders of the Convertible Series D Preferred Stock, then the
entire assets to be distributed shall be distributed among the holders of the
Series C Preferred Stock and the Convertible Series D Preferred Stock ratably in
accordance with the respective amounts that would be payable on such shares if
all amounts payable thereon were paid in full. A sale, conveyance or disposition
of all or substantially all of the assets of the Company or the effectuation by
the Company of a transaction or series of related transactions in which more
than 75% of the voting power of the Company is disposed of shall be deemed a
Liquidation; provided that, a consolidation or merger of the Company with or
into any other company or companies shall not be treated as a Liquidation, but
instead shall be subject to the provisions of Section 5. The Company shall mail
written notice of any such Liquidation, not less than 60 days prior to the
payment date stated therein, to each record holder of Series C Preferred Stock.
Section 5. Conversion.
(a) Each share of Series C Preferred Stock shall be converted into shares
of Common Stock, at the Conversion Ratio, at the option of the holder in whole
or in part at any time; provided that the number of shares of Common Stock
authorized shall be sufficient to issue shares of Common Stock upon conversion
of the Series C Preferred Stock. The holder shall effect conversions by
surrendering the certificate or certificates representing the shares of Series C
Preferred Stock to be converted to the Company, together with a conversion
notice (the "Holder Conversion Notice") in the manner set forth in Section 5(f)
hereof. Each Holder Conversion Notice shall specify the number of shares of
Series C Preferred Stock to be converted and the date on which such conversion
is to be effected, which date may not be prior to the date the Holder delivers
such Notice by facsimile (the "Holder Conversion Date"). Each Holder Conversion
Notice, once given, shall be irrevocable. If the holder is converting less than
all shares of Series C Preferred Stock represented by the certificate or
certificates tendered by the holder with the Holder Conversion Notice, the
Company shall promptly deliver to the holder a certificate for such number of
shares as have not been converted.
-3-
<PAGE>
(b)
(i) The initial Conversion Price shall be $1.00 per share.
(ii) If the Company, at any time while any shares of Series C
Preferred Stock are outstanding, (a) shall pay a stock dividend or otherwise
make a distribution or distributions on shares of Common Stock payable in shares
of its capital stock (whether payable in shares of Common Stock or of capital
stock of any class), (b) subdivide outstanding shares of Common Stock into a
larger number of shares, (c) combine outstanding shares of Common Stock into a
smaller number of shares, or (d) issue by reclassification of shares of Common
Stock any shares of capital stock of the Company, the Conversion Price shall be
multiplied by a fraction of which the numerator shall be the number of shares of
Common Stock outstanding before such event and of which the numerator shall be
the number of shares of Common Stock outstanding after such event. Any
adjustment made pursuant to this Section 5(b)(ii) shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination or
reclassification.
(iii) All calculations under this Section 5 shall be made to
the nearest cent or the nearest 1/100th of a share, as the case may be.
(iv) Whenever the Conversion Price is adjusted pursuant to
Section 5(d)(ii), the Company shall promptly mail to each holder of Series C
Preferred Stock, a notice setting forth the Conversion Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment.
(v) In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another person, the sale or
transfer of all or substantially all of the assets of the Company or any
compulsory share exchange pursuant to which the Common Stock is converted into
other securities, cash or property, the holders of the Series C Preferred Stock
then outstanding shall have the right thereafter to convert such shares only
into the shares of stock and other securities and property receivable upon or
deemed to be held by holders of Common Stock following such reclassification,
consolidation, merger, sale, transfer or share exchange, and the holders of the
Series C Preferred Stock shall be entitled upon such event to receive such
amount of securities or property as the shares of Common Stock of the Company
into which such shares of Series C Preferred Stock could have been converted
immediately prior to such reclassification, consolidation, merger, sale,
transfer or share exchange would have been entitled. The terms of any such
consolidation, merger, sale, transfer or share exchange shall include such terms
so as to continue to give to the holder of Series C Preferred Stock the right to
receive the securities or property set forth in this Section 5(b)(v) upon any
conversion following such consolidation, merger, sale, transfer or share
exchange.
-4-
<PAGE>
This provision shall similarly apply to successive reclassifications,
consolidations, mergers, sales, transfers or share exchanges.
(c) Upon a conversion hereunder the Company shall not be required to issue
stock certificates representing fractions of shares of Common Stock, but may if
otherwise permitted, make a cash payment in respect of any final fraction of a
share based on the Per Share Market Value at such time. If the Company elects
not, or is unable, to make such a cash payment, the holder of a share of Series
C Preferred Stock shall be entitled to receive, in lieu of the final fraction of
a share, one whole share of Common Stock.
(d) The issuance of certificates for shares of Common Stock on conversion
of Series C Preferred Stock shall be made without charge to the holders thereof
for any documentary stamp or similar taxes that may be payable in respect of the
issue or delivery of such certificate, provided that the Company shall not be
required to pay any tax that may be payable in respect of any transfer involved
in the issuance and delivery of any such certificate upon conversion in a name
other than that of the holder of such shares of Series C Preferred Stock so
converted and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
(e) Shares of Series C Preferred Stock converted into Common Stock shall
be canceled and shall have the status of authorized but unissued shares of
preferred stock.
(f) Each Holder Conversion Notice shall be given by facsimile and by mail,
postage prepaid, addressed to the attention of the Secretary of the Company at
the facsimile telephone number and address of the principal place of business of
the Company. Any such notice shall be deemed given and effective upon (i) the
earliest to occur of (a) if such notice is delivered via facsimile prior to 4:30
p.m. (Eastern Standard Time) on any date, such date, (b) if such Conversion
Notice is delivered via facsimile after 4:30 p.m. on any date, the next date,
(c) five days after deposit in the United States mails, or (d) upon actual
receipt by the Company, or (ii) such later date as is specified in such notice.
Section 6. Definitions.
"Common Stock" means shares now or hereafter authorized of the class of
Common Stock, no par value, of the Company and stock of any other class into
which such shares may hereafter have been reclassified or changed.
"Conversion Ratio" means, at any time, a fraction, of which the numerator
is 100,000, and of which the denominator is the Conversion Price at such time.
-5-
<PAGE>
"Junior Securities" means the Common Stock and all other equity securities
of the Company, except the Company's Convertible Series A Preferred Stock,
Convertible Series B Preferred Stock, Convertible Series C Preferred Stock and
Convertible Series D Preferred Stock.
"Per Share Market Value" means on any particular date (a) the closing sale
price per share of the Common Stock of such date on The Nasdaq Stock Market or
other stock exchange on which the Common Stock has been listed or if there is no
such price on such date, then the closing bid price on such exchange on the date
nearest preceding such date, or (b) if the Common Stock is not listed on The
Nasdaq Stock Market or any stock exchange, the closing bid for a share of Common
Stock in the over-the-counter market, as reported by the NASD at the close of
business of such date, or (c) the closing bid price for a share of Common Stock
in the over-the-counter market as reported by the National Quotation Bureau
Incorporated (or similar organization or agency succeeding to its functions of
reporting prices), or (d) if the Common Stock is no longer publicly traded the
fair market value of a share of Common Stock as determined in good faith by the
Board of Directors.
Section 7. Notices.
Any notice required by the provisions hereof to be given to the holders of
shares of Series C Preferred Stock shall be deemed given when personally
delivered to such holder or five business days after the same has been deposited
in the United States mail, certified or registered mail, return receipt
requested, postage prepaid, and addressed to each holder of record at his
address appearing on the books of the Company.
-6-
<PAGE>
Dated: /s/ Denis Richard
------------- ------------------------------
Denis Richard, President
/s/ Michael Keebaugh
------------------------------
Michael Keebaugh, Assistant Secretary
Denis Richard, as President of Incomnet, Inc., and Michael Keebaugh, as
Assistant Secretary of Incomnet, Inc. hereby declare under penalty of perjury
under the laws of the State of California that they have read the foregoing
certificate and know the contents thereof and that the same is true of their own
knowledge.
Dated: /s/ Denis Richard
------------- ------------------------------
Denis Richard, President
/s/ Michael Keebaugh
------------------------------
Michael Keebaugh, Assistant Secretary
-7-
<PAGE>
CERTIFICATE OF DETERMINATION OF
CONVERTIBLE SERIES D PREFERRED STOCK OF
INCOMNET, INC.
The undersigned, President and Assistant Secretary, hereby certify that:
1. They are the duly elected and acting President and Assistant Secretary,
respectively, of Incomnet, Inc., a California corporation (the "Company").
2. The Articles of Incorporation of the Company authorize 100,000 shares
of preferred stock, no par value per share. The number of shares of Convertible
Series A Preferred Stock authorized is 4,000, of which 803 are issued and
outstanding. The number of shares of Convertible Series B Preferred Stock
authorized is 2,900, of which 1,243 are issued and outstanding. The number of
shares of Convertible Series D Preferred Stock authorized is 50, none of which
have been issued. The number of shares of Convertible Series D Preferred Stock
authorized herein is 50 none of which have been issued. Upon filing of the
Certificate of Determination of Convertible Series C Preferred Stock
concurrently with this Certificate of Determination of Convertible Series D
Preferred Stock, the number of shares of Convertible Series C Preferred Stock
authorized herein in 25, none of which have been issued.
3. The following is a true and correct copy of resolutions duly adopted by
the Board of Directors at a meeting duly held on January 18, 1999, which
constituted all requisite action on the part of the Company for adoption of such
resolutions.
RESOLUTIONS
WHEREAS, the Board of Directors of the Company (the "Board of Directors")
is authorized to provide for the issuance of the shares of preferred stock in
series, and by filing a certificate pursuant to the applicable law of the State
of California, to establish from time to time the number of shares to be
included in each such series, and to fix the designations, powers, preferences
and rights of the shares of each such series and the qualifications, limitations
or restrictions thereof.
WHEREAS, the Board of Directors desires, pursuant to its authority
described in the immediately preceding recital, to designate a new series of
preferred stock, set the number of shares constituting such series, and fix the
rights, preferences, privileges and restrictions of such series.
<PAGE>
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby
designates a new series of preferred stock and the number of shares constituting
such series, and fixes the rights, preferences, privileges and restrictions
relating to such series as follows:
Section 1. Designation, Amount and Par Value.
A series of preferred stock shall be designated as the Convertible Series
D Preferred Stock (the "Series D Preferred Stock"), and the number of shares so
designated shall be 50. The par value of each share of Series D Preferred Stock
shall be no par value. Each share of Series D Preferred Stock shall have a
stated value of $100.00 per share (the "Stated Value").
Section 2. Dividends and Distributions. The holders of Series D Preferred
Stock shall have the rights to receive dividends set forth in this Section 2.
(a) The holders of Series D Preferred Stock shall not be entitled to
receive dividends.
(b) Notwithstanding Section 2(a) above, the holders of Preferred Stock
shall be entitled to receive any dividend or distribution declared on the Common
Stock of the Company. Upon declaration of such a dividend or distribution on the
Common Stock of the Company, the holders of Series D Preferred Stock shall be
entitled to such dividend or distribution that the holders of Series D Preferred
Stock would have been entitled to had such holders converted their shares of
Preferred Stock into shares of Common Stock pursuant to Section 5 immediately
prior to the record date of such dividend or distribution on the Common Stock.
Except as stated in the preceding sentence, the holders of Series D Preferred
Stock shall not be entitled to receive dividends.
Section 3. Voting Rights.
The holders of the Series D Preferred Stock shall have the voting rights
set forth in this Section 3.
(a) Each share of the Series D Preferred Stock shall entitle the holder
thereof to a number of votes equal to the number of shares of Common Stock such
holder of Series D Preferred Stock could have been converted into immediately
prior to the record date for such vote on all matters submitted to a vote of the
Company's stockholders.
(b) Except as otherwise provided by law, the holders of Series D Preferred
Stock, the holders of Convertible Series C Preferred Stock and the holders of
-2-
<PAGE>
Common Stock shall vote together as one class on all matters submitted to a vote
of the Company's stockholders.
Section 4. Liquidation.
Upon any liquidation, dissolution, or winding-up of the Company, whether
involuntary or voluntary (a "Liquidation"), holders of shares of Series D
Preferred Stock shall be entitled to receive, out of the assets of the Company,
whether such assets are capital or surplus, for each share of Series D Preferred
Stock an amount equal to the Stated Value, plus an amount equal to accrued but
unpaid dividends payable to such holder of Series D Preferred Stock pursuant to
Section 2(b) above. Such payment shall be subject to the prior payment in full
of the liquidation preferences with respect to the Convertible Series A
Preferred Stock and the Convertible Series B Preferred Stock and shall be made
pari passu with the Convertible Series C Preferred Stock but prior and in
preference to the holders of Junior Securities (defined below). If the assets of
the Company shall be insufficient to pay in full the amounts payable to the
holders of the Series D Preferred Stock and the holders of the Convertible
Series C Preferred Stock, then the entire assets to be distributed shall be
distributed among the holders of the Series D Preferred Stock and the
Convertible Series C Preferred Stock ratably in accordance with the respective
amounts that would be payable on such shares if all amounts payable thereon were
paid in full. A sale, conveyance or disposition of all or substantially all of
the assets of the Company or the effectuation by the Company of a transaction or
series of related transactions in which more than 75% of the voting power of the
Company is disposed of shall be deemed a Liquidation; provided that, a
consolidation or merger of the Company with or into any other company or
companies shall not be treated as a Liquidation, but instead shall be subject to
the provisions of Section 5. The Company shall mail written notice of any such
Liquidation, not less than 60 days prior to the payment date stated therein, to
each record holder of Series D Preferred Stock.
Section 5. Conversion.
(a) Each share of Series D Preferred Stock shall be converted into shares
of Common Stock, at the Conversion Ratio, at the option of the holder in whole
or in part at any time; provided that the number of shares of Common Stock
authorized shall be sufficient to issue shares of Common Stock upon conversion
of the Series D Preferred Stock. The holder shall effect conversions by
surrendering the certificate or certificates representing the shares of Series D
Preferred Stock to be converted to the Company, together with a conversion
notice (the "Holder Conversion Notice") in the manner set forth in Section 5(f)
hereof. Each Holder Conversion Notice shall specify the number of shares of
Series D Preferred Stock to be converted and the date on which such conversion
is to be effected, which date may not be prior to the date the Holder delivers
such Notice
-3-
<PAGE>
by facsimile (the "Holder Conversion Date"). Each Holder Conversion Notice, once
given, shall be irrevocable. If the holder is converting less than all shares of
Series D Preferred Stock represented by the certificate or certificates tendered
by the holder with the Holder Conversion Notice, the Company shall promptly
deliver to the holder a certificate for such number of shares as have not been
converted.
(b)
(i) The initial Conversion Price shall be $1.00 per share.
(ii) If the Company, at any time while any shares of Series D
Preferred Stock are outstanding, (a) shall pay a stock dividend or otherwise
make a distribution or distributions on shares of Common Stock payable in shares
of its capital stock (whether payable in shares of Common Stock or of capital
stock of any class), (b) subdivide outstanding shares of Common Stock into a
larger number of shares, (c) combine outstanding shares of Common Stock into a
smaller number of shares, or (d) issue by reclassification of shares of Common
Stock any shares of capital stock of the Company, the Conversion Price shall be
multiplied by a fraction of which the numerator shall be the number of shares of
Common Stock outstanding before such event and of which the numerator shall be
the number of shares of Common Stock outstanding after such event. Any
adjustment made pursuant to this Section 5(b)(ii) shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination or
reclassification.
(iii) All calculations under this Section 5 shall be made to
the nearest cent or the nearest 1/100th of a share, as the case may be.
(iv) Whenever the Conversion Price is adjusted pursuant to
Section 5(d)(ii), the Company shall promptly mail to each holder of Series D
Preferred Stock, a notice setting forth the Conversion Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment.
(v) In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another person, the sale or
transfer of all or substantially all of the assets of the Company or any
compulsory share exchange pursuant to which the Common Stock is converted into
other securities, cash or property, the holders of the Series D Preferred Stock
then outstanding shall have the right thereafter to convert such shares only
into the shares of stock and other securities and property receivable upon or
deemed to be held by holders of Common Stock following such reclassification,
consolidation, merger, sale, transfer or share exchange, and the holders of the
Series D Preferred Stock shall be entitled upon such event to receive such
amount of securities or property as the shares of Common Stock of the Company
into which such
-4-
<PAGE>
shares of Series D Preferred Stock could have been converted immediately prior
to such reclassification, consolidation, merger, sale, transfer or share
exchange would have been entitled. The terms of any such consolidation, merger,
sale, transfer or share exchange shall include such terms so as to continue to
give to the holder of Series D Preferred Stock the right to receive the
securities or property set forth in this Section 5(b)(v) upon any conversion
following such consolidation, merger, sale, transfer or share exchange. This
provision shall similarly apply to successive reclassifications, consolidations,
mergers, sales, transfers or share exchanges.
(c) Upon a conversion hereunder the Company shall not be required to issue
stock certificates representing fractions of shares of Common Stock, but may if
otherwise permitted, make a cash payment in respect of any final fraction of a
share based on the Per Share Market Value at such time. If the Company elects
not, or is unable, to make such a cash payment, the holder of a share of Series
D Preferred Stock shall be entitled to receive, in lieu of the final fraction of
a share, one whole share of Common Stock.
(d) The issuance of certificates for shares of Common Stock on conversion
of Series D Preferred Stock shall be made without charge to the holders thereof
for any documentary stamp or similar taxes that may be payable in respect of the
issue or delivery of such certificate, provided that the Company shall not be
required to pay any tax that may be payable in respect of any transfer involved
in the issuance and delivery of any such certificate upon conversion in a name
other than that of the holder of such shares of Series D Preferred Stock so
converted and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
(e) Shares of Series D Preferred Stock converted into Common Stock shall
be canceled and shall have the status of authorized but unissued shares of
preferred stock.
(f) Each Holder Conversion Notice shall be given by facsimile and by mail,
postage prepaid, addressed to the attention of the Secretary of the Company at
the facsimile telephone number and address of the principal place of business of
the Company. Any such notice shall be deemed given and effective upon (i) the
earliest to occur of (a) if such notice is delivered via facsimile prior to 4:30
p.m. (Eastern Standard Time) on any date, such date, (b) if such Conversion
Notice is delivered via facsimile after 4:30 p.m. on any date, the next date,
(c) five days after deposit in the United States mails, or (d) upon actual
receipt by the Company, or (ii) such later date as is specified in such notice.
-5-
<PAGE>
Section 6. Definitions.
"Common Stock" means shares now or hereafter authorized of the class of
Common Stock, no par value, of the Company and stock of any other class into
which such shares may hereafter have been reclassified or changed.
"Conversion Ratio" means, at any time, a fraction, of which the numerator
is 10,000, and of which the denominator is the Conversion Price at such time.
"Junior Securities" means the Common Stock and all other equity securities
of the Company, except the Company's Convertible Series A Preferred Stock,
Convertible Series B Preferred Stock, Convertible Series D Preferred Stock and
Convertible Series C Preferred Stock.
"Per Share Market Value" means on any particular date (a) the closing bid
price per share of the Common Stock of such date on The Nasdaq Stock Market or
other stock exchange on which the Common Stock has been listed or if there is no
such price on such date, then the closing bid price on such exchange on the date
nearest preceding such date, or (b) if the Common Stock is not listed on The
Nasdaq Stock Market or any stock exchange, the closing bid for a share of Common
Stock in the over-the-counter market, as reported by the NASD at the close of
business of such date, or (c) the closing bid price for a share of Common Stock
in the over-the-counter market as reported by the National Quotation Bureau
Incorporated (or similar organization or agency succeeding to its functions of
reporting prices), or (d) if the Common Stock is no longer publicly traded the
fair market value of a share of Common Stock as determined in good faith by the
Board of Directors.
Section 7. Notices.
Any notice required by the provisions hereof to be given to the holders of
shares of Series D Preferred Stock shall be deemed given when personally
delivered to such holder or five business days after the same has been deposited
in the United States mail, certified or registered mail, return receipt
requested, postage prepaid, and addressed to each holder of record at his
address appearing on the books of the Company.
-6-
<PAGE>
Dated: /s/ Denis Richard
------------- ------------------------------
Denis Richard, President
/s/ Michael Keebaugh
------------------------------
Michael Keebaugh, Assistant Secretary
Denis Richard, as President of Incomnet, Inc., and Michael Keebaugh, as
Assistant Secretary of Incomnet, Inc. hereby declare under penalty of perjury
under the laws of the State of California that they have read the foregoing
certificate and know the contents thereof and that the same is true of their own
knowledge.
Dated: /s/ Denis Richard
------------- ------------------------------
Denis Richard, President
/s/ Michael Keebaugh
------------------------------
Michael Keebaugh, Assistant Secretary
-7-
<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
INCOMNET, INC.
(As of January 18, 1999)
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I OFFICES...........................................................1
Section 1. PRINCIPAL OFFICES............................................1
Section 2. OTHER OFFICES................................................1
ARTICLE II MEETINGS OF SHAREHOLDERS.........................................1
Section 1. PLACE OF MEETINGS............................................1
Section 2. ANNUAL MEETINGS OF SHAREHOLDERS..............................1
Section 3. SPECIAL MEETINGS.............................................1
Section 4. NOTICE OF SHAREHOLDERS' MEETINGS.............................2
Section 5. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.................2
Section 6. QUORUM.......................................................3
Section 7. ADJOURNED MEETING AND NOTICE THEREOF.........................3
Section 8. VOTING.......................................................3
Section 9. WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDERS...........4
Section 10. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.....5
Section 11. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING, AND GIVING
CONSENTS......................................................5
Section 12. PROXIES.....................................................6
Section 13. INSPECTORS OF ELECTION......................................6
ARTICLE III DIRECTORS.......................................................7
Section 1. POWERS.......................................................7
Section 2. NUMBER OF DIRECTORS..........................................8
Section 3. ELECTION AND TERM OF OFFICE OF DIRECTORS.....................8
Section 3A NOMINATION OF DIRECTORS......................................9
Section 4. VACANCIES...................................................10
Section 5. PLACE OF MEETINGS AND TELEPHONIC MEETINGS...................10
Section 6. ANNUAL MEETINGS.............................................11
Section 7. OTHER REGULAR MEETINGS......................................11
Section 8. SPECIAL MEETINGS............................................11
Section 9. DISPENSING WITH NOTICE......................................11
Section 10. QUORUM.....................................................11
Section 11. ADJOURNMENT................................................12
Section 12. NOTICE OF ADJOURNMENT......................................12
Section 13. ACTION WITHOUT MEETING.....................................12
Section 14. FEES AND COMPENSATION OF DIRECTORS.........................12
<PAGE>
ARTICLE IV COMMITTEES......................................................12
Section 1. COMMITTEES OF DIRECTORS.....................................12
Section 2. MEETINGS AND ACTION OF COMMITTEES...........................13
ARTICLE V OFFICERS.........................................................13
Section 1. OFFICERS....................................................13
Section 2. ELECTION OF OFFICERS........................................14
Section 3. SUBORDINATE OFFICERS, ETC...................................14
Section 4. REMOVAL AND RESIGNATION OF OFFICERS.........................14
Section 5. VACANCIES IN OFFICES........................................14
Section 6. CHAIRMAN OF THE BOARD.......................................14
Section 7. PRESIDENT...................................................14
Section 8. VICE PRESIDENTS.............................................15
Section 9. SECRETARY...................................................15
Section 10. CHIEF FINANCIAL OFFICER....................................15
ARTICLE VI INDEMNIFICATION AND INSURANCE...................................16
ARTICLE VII RECORDS AND REPORTS............................................18
Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER................18
Section 2. MAINTENANCE AND INSPECTION OF BYLAWS........................19
Section 3. MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS.......19
Section 4. INSPECTION BY DIRECTORS.....................................19
Section 5. ANNUAL REPORT TO SHAREHOLDERS...............................19
Section 6. FINANCIAL STATEMENTS........................................19
Section 7. ANNUAL STATEMENT OF GENERAL INFORMATION.....................20
ARTICLE VIII GENERAL CORPORATE MATTERS.....................................21
Section 1. RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING.......21
Section 2. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS...................21
Section 3. CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED...........21
Section 4. CERTIFICATES FOR SHARES.....................................21
Section 5. LOST CERTIFICATES...........................................22
Section 6. REPRESENTATION OF SHARES OF OTHER CORPORATIONS..............22
ARTICLE IX AMENDMENTS......................................................22
Section 1. AMENDMENT BY SHAREHOLDERS...................................22
Section 2. AMENDMENT BY DIRECTORS......................................22
ARTICLE X GENERAL..........................................................23
Section 1. GOVERNING LAW...............................................23
ii
<PAGE>
Section 2. CONSTRUCTION AND DEFINITIONS................................23
iii
<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
INCOMNET, INC.
(As of January 18,1999)
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICES. The Board of Directors shall fix the
location of the principal executive office of the corporation at any place
within or outside the State of California. If the principal executive office is
located outside this state, and the corporation has one or more business offices
in this state, the Board of Directors shall likewise fix and designate a
principal business office in the State of California.
Section 2. OTHER OFFICES. The Board of Directors may at any time establish
branch or subordinate offices at any place or places where the corporation is
qualified to do business
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. PLACE OF MEETINGS. Meetings of shareholders shall be held at
any place within or outside the State of California designated by the Board of
Directors. In the absence of any such designation, shareholders' meetings shall
be held at the principal executive office of the corporation.
Section 2. ANNUAL MEETINGS OF SHAREHOLDERS. The annual meeting of
shareholders shall be held each year on a date and at a time designated by the
Board of Directors. At each annual meeting directors shall be elected and any
other proper business may be transacted.
Section 3. SPECIAL MEETINGS. A special meeting of the shareholders may be
called at any time by the Board of Directors, or by the Chairman of the Board,
or by the President, or by one or more shareholders holding shares in the
aggregate entitled to cast not less than 10% of the votes at any such meeting.
<PAGE>
If a special meeting is called by any person or persons other than the
Board of Directors, the request shall be in writing, specifying the time of such
meeting and the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the Chairman of the Board, the President, any
Vice President or the Secretary of the corporation. The officer receiving such
request forthwith shall cause notice to be given to the shareholders entitled to
vote, in accordance with the provisions of Sections 4 and 5 of this Article II,
that a meeting will be held at the time requested by the person or persons
calling the meeting, not less than thirty-five (35) nor more than sixty (60)
days after the receipt of the request. If the notice is not given within twenty
(20) days after receipt of the request, the person or persons requesting the
meeting may give the notice. Nothing contained in this paragraph of this Section
3 shall be construed as limiting, fixing or affecting the time when a meeting of
shareholders called by action of the Board of Directors may be held.
Section 4. NOTICE OF SHAREHOLDERS' MEETINGS. All notices of meetings of
shareholders shall be sent or otherwise given in accordance with Section 5 of
this Article II not less than ten (10) nor more than sixty (60) days before the
date of the meeting being noticed. The notice shall specify the place, date and
hour of the meeting and (i) in the case of a special meeting, the general nature
of the business to be transacted, or (ii) in the case of the annual meeting
those matters which the Board of Directors, at the time of giving the notice,
intends to present for action by the shareholders. The notice of any meeting at
which directors are to be elected shall include the name of any nominee or
nominees which, at the time of the notice, management intends to present for
election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect financial
interest, pursuant to Section 310 of the Corporations Code of California, (ii)
an amendment of the Articles of Incorporation, pursuant to Section 902 of such
Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of
such Code, (iv) a voluntary dissolution of the corporation, pursuant to Section
1900 of such Code, or (v) a distribution in dissolution other than in accordance
with the rights of outstanding preferred shares pursuant to Section 2007 of such
Code, the notice shall also state the general nature of such proposal.
Section 5. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any
meeting of shareholders shall be given either personally or by first-class mail
or telegraphic or other written communication, charges prepaid, addressed to the
shareholder at the address of such shareholder appearing on the books of the
corporation or given by the shareholder to the corporation for the purpose of
notice. If no such address appears on the corporation's books or has been so
given, notice shall be deemed to have been given if sent by first-class mail or
telegraphic or other written communication to the corporation's principal
executive office, or if published at least once in a newspaper of general
circulation in the county where such office is located.
2
<PAGE>
Notice shall be deemed to have been given at the time when delivered personally
or deposited in the mail or sent by telegram or other means of written
communication.
If any notice addressed to a shareholder at the address of such
shareholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the shareholder
at such address, all future notices or reports shall be deemed to have been duly
given without further mailing if the same shall be available to the shareholder
upon written demand of the shareholder at the principal executive office of the
corporation for a period of one year from the date of the giving of such notice.
An affidavit of the mailing or other means of giving any notice of any
shareholders' meeting shall be executed by the Secretary, Assistant Secretary or
any transfer agent of the corporation giving such notice, and shall be filed and
maintained in the minute book of the corporation.
Section 6. QUORUM. The presence in person or by proxy of the holders of a
majority of the shares entitled to vote at any meeting of shareholders shall
constitute a quorum for the transaction of business. The shareholders present at
a duly called or held meeting at which a quorum is present may continue to do
Business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
Section 7. ADJOURNED MEETING AND NOTICE THEREOF. Any shareholders'
meeting, annual or special, whether or not a quorum is present, may be adjourned
from time to time by the vote of the majority of the shares represented at such
meeting, either in person or by proxy, but in the absence of a quorum, no other
business may be transacted at such meeting, except as provided in Section 6 of
this Article II.
When any meeting of shareholders, either annual or special, is adjourned
to another time or place, notice need not be given of the adjourned meeting if
the time and place thereof are announced at a meeting at which the adjournment
is taken, unless a new record date for the adjourned meeting is fixed, or unless
the adjournment is for more than forty-five (45) days from the date set for the
original meeting, in which case the Board of Directors shall set a new record
date. Notice of any such adjourned meeting, if required, shall be given to each
shareholder of record entitled to vote at the adjourned meeting in accordance
with the provisions of Sections 4 and 5 of this Article 11. At any adjourned
meeting the corporation may transact any business which might have been
transacted at the original meeting.
Section 8. VOTING. The shareholders entitled to vote at any meeting of
shareholders shall be determined in accordance with the provisions of Section 11
of this Article II, subject to the provisions of Sections 702 to 704, inclusive,
of the Corporations
3
<PAGE>
Code of California (relating to voting shares held by a fiduciary, in the name
of a corporation or in joint ownership). Such vote may be by voice vote or by
ballot; provided, however, that all elections for directors must be by ballot
upon demand by a shareholder at any election and before the voting begins. Any
shareholder entitled to vote on any matter (other than the election of
directors) may vote part of the shares in favor of the proposal and refrain from
voting the remaining shares or vote them against the proposal, but, if the
shareholder fails to specify the number of shares such shareholder is voting
affirmatively, it will be conclusively presumed that the shareholder's approving
vote is with respect to all shares such shareholder is entitled to vote. If a
quorum is present, the affirmative vote of the majority of the shares
represented at the meeting and voting on any matter (other than the election of
directors), provided that the shares voting affirmatively must also constitute
at least a majority of the required quorum, shall be the act of the
shareholders, unless the vote of a greater number or voting by classes is
required by the California General Corporation Law or the Articles of
Incorporation.
At a shareholders' meeting involving the election of directors, no
shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a
number of votes greater than the number of the shareholder's shares) unless such
candidate or candidates' names have been placed in nomination prior to
commencement of the voting and a shareholder has given notice prior to
commencement of the voting of the shareholder's intention to cumulate votes. If
any shareholder has given such notice, then every shareholder entitled to vote
may cumulate such shareholder's votes for candidates in nomination and give one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which such shareholder's shares are
entitled, or distribute the shareholder's votes on the same principle among any
or all of the candidates, as the shareholder thinks fit. The candidates
receiving the highest number of votes, up to the number of directors to be
elected, shall be elected.
Section 9. WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDERS. The
transactions of any meeting of shareholders, either annual or special, however
called and noticed, and wherever held, shall be as valid as though had at a
meeting duly held after regular call and notice, if a quorum be present either
in person or by proxy, and if, either before or after the meeting, each person
entitled to vote, not present in person or by proxy, signs a written waiver of
notice or a consent to a holding of the meeting, or an approval of the minutes
thereof. The waiver of notice or consent need not specify either the business to
be transacted or the purpose of any annual or special meeting of shareholders,
except that if action is taken or proposed to be taken for approval of any of
those matters specified in the second paragraph of Section 4 of this Article II,
the waiver of notice or consent shall state the general nature of such proposal.
All such waivers, consents or approvals shall be filed with the corporate
records or made a part of the minutes of the meeting.
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Attendance of a person at a meeting shall also constitute a waiver of
notice of such meeting, except when the person objects, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened, and except that attendance at a meeting is not a waiver of
any right to object to the consideration of matters not included in the notice
of the meeting if such objection is expressly made at the meeting.
Section 10. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any
action which may be taken at any annual or special meeting of shareholders may
be taken without a meeting and without prior notice, if a consent in writing,
setting forth the action so taken, is signed by the holders of outstanding
shares having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted. In the case of election of directors, such
consent shall be effective only if signed by the holders of all outstanding
shares entitled to vote for the election of directors; provided, however, that a
director may be elected at any time to fill a vacancy not filled by the
directors by the written consent of the holders of a majority of the outstanding
shares entitled to vote for the election of directors. All such consents shall
be filed with the Secretary of the corporation and shall be maintained in the
corporate records. Any shareholder giving a written consent, or the
shareholder's proxy holders, or a transferee of the shares or a personal
representative of the shareholder or their respective proxy holder, may revoke
the consent by a writing received by the Secretary of the corporation prior to
the time that written consents of the number of shares required to authorize the
proposed action have been filed with the Secretary.
If the consents of all shareholders entitled to vote have not been
solicited in writing, and if the unanimous written consent of all such
shareholders shall not have been received, the Secretary shall give prompt
notice of the corporate action approved by the shareholders without a meeting.
Such notice shall be given in the manner specified in Section 5 of this Article
II. In the case of approval of (i) contracts or transactions in which a director
has a direct or indirect financial interest, pursuant to Section 310 of the
Corporations Code of California, (ii) indemnification of agents of the
corporation, pursuant to Section 317 of such Code, (iii) a reorganization of the
corporation, pursuant to Section 1201 of such Code, or (iv) a distribution in
dissolution other than in accordance with the rights of outstanding preferred
shares pursuant to Section 2007 of such Code, such notice shall be given at
least ten (10) days before the consummation of any such action authorized by any
such approval.
Section 11. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING, AND GIVING
CONSENTS. For purposes of determining the shareholders entitled to notice of any
meeting or to vote or entitled to give consent to corporate action without a
meeting, the Board of Directors may fix, in advance, a record date, which shall
not be more than sixty (60) days nor less than ten (10) days prior to the date
of any such meeting
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nor more than sixty (60) days prior to such action without a meeting, and in
such case only shareholders of record at the close of business on the date so
fixed are entitled to notice and to vote or to give consents, as the case may
be, notwithstanding any transfer of any shares on the books of the corporation
after the record date fixed as aforesaid, except as otherwise provided in the
California General Corporation Law.
If the Board of Directors does not so fix a record date:
(a) The record date for determining shareholders entitled to
notice of or to vote at a meeting of shareholders shall be at the close of
business on the business day next preceding the day on which notice is
given or, if notice is waived, at the close of business on the business
day next preceding the day on which the meeting is held.
(b) The record date for determining shareholders entitled to
give consent to corporate action in writing without a meeting, (i) when no
prior action by the Board has been taken, shall be the day on which the
first written consent is given, or (ii) when prior action of the Board has
been taken, shall be at the close of business on the day on which the
Board adopts the resolution relating thereto, or the sixtieth (60th) day
prior to the date of such other action, whichever is later.
Section 12. PROXIES. Every person entitled to vote for directors or on any
other matter shall have the right to do so either in person or by one or more
agents authorized by a written proxy signed by the person and filed with the
Secretary of the corporation. A proxy shall be deemed signed if the
shareholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the shareholder or the
shareholder's attorney in fact. A validly executed proxy which does not state
that it is irrevocable shall continue in full force and effect unless (i)
revoked by the person executing it, prior to the vote pursuant thereto, by a
writing delivered to the corporation stating that the proxy is revoked or by a
subsequent proxy presented to the meeting and executed by, or attendance at the
meeting and voting in person by, the person executing the proxy; or (ii) written
notice of the death or incapacity of the maker of such proxy is received by the
corporation before the vote pursuant thereto is counted; provided, however, that
no such proxy shall be valid after the expiration of eleven (11) months from the
date of such proxy, unless otherwise provided in the proxy. The revocability of
a proxy that states on its face that it is irrevocable shall be governed by the
provisions of Section 705(e) and (f) of the Corporations Code of California.
Section 13. INSPECTORS OF ELECTION. Before any meeting of shareholders,
the Board of Directors may appoint any persons other than nominees for office to
act as inspectors of election at the meeting or its adjournment. If no
inspectors of election are so appointed, the chairman of the meeting may, and on
the request of any shareholder or a shareholder's proxy shall, appoint
inspectors of election at the meeting.
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The number of inspectors shall be either one (1) or three (3). If inspectors are
appointed at a meeting on the request of one or more shareholders or proxies,
the holders of a majority of shares or their proxies present at the meeting
shall determine whether one (1) or three (3) inspectors are to be appointed. If
any person appointed as inspector fails to appear or fails or refuses to act,
the chairman of the meeting may, and upon the request of any shareholder or a
shareholder's proxy shall, appoint a person to fill such vacancy.
The duties of these inspectors shall be as follows:
(a) Determine the number of shares outstanding and the voting power
of each, the shares represented at the meeting, the existence of a quorum,
and the authenticity, validity and effect of proxies;
(b) Receive votes, ballots or consents;
(c) Hear and determine all challenges and questions in any way
arising in connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the election or
vote with fairness to all shareholders.
ARTICLE III
DIRECTORS
Section 1. POWERS. Subject to the provisions of the California General
Corporation Law and any limitations in the Articles of Incorporation and these
Bylaws relating to action required to be approved by the shareholders or by the
outstanding shares, the business and affairs of the corporation shall be managed
and all corporate powers shall be exercised by or under the direction of the
Board of Directors.
Without prejudice to such general powers, but subject to the same
limitations, it is hereby expressly declared that the directors shall have the
power and authority to:
(a) Select and remove all officers, agents, and employees of the
corporation, prescribe such powers and duties for them as may not be
inconsistent
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with law, the Articles of Incorporation or these Bylaws, fix their
compensation, and require from them security for faithful service.
(b) Change the principal executive office or the principal business
office in the State of California from one location to another; cause the
corporation to be qualified to do business in any other state, territory,
dependency, or foreign country and conduct business within or outside the
State of California; designate any place within or without the State for
the holding of any shareholders' meeting or meetings, including annual
meetings; adopt, make and use a corporate seal, and prescribe the forms of
certificates of stock, and alter the form of such seal and of such
certificates from time to time as in their judgment they may deem best,
provided that such forms shall at all times comply with the provisions of
law.
(c) Authorize the issuance of shares of stock of the corporation
from time to time, upon such terms as may be lawful, in consideration of
money paid, labor done or services actually rendered, debts or securities
cancelled or tangible or intangible property actually received.
(d) Borrow money and incur indebtedness for the purposes of the
corporation, and cause to be executed and delivered therefor, in the
corporate name, promissory notes, bonds, debentures, deeds of trust,
mortgages, pledges, hypothecations, or other evidences of debt and
securities therefor.
Section 2. NUMBER OF DIRECTORS. The number of directors of the corporation
shall be not less than five (5) nor more than nine (9). The exact number of
directors shall be six (6) until changed, within the limits specified above, by
a Bylaw amending this Section 2, duly adopted by the Board of Directors or by
the shareholders. Such indefinite number of directors may be changed, or a
definite number fixed without provision for an indefinite number, by a duly
adopted amendment to the Articles of Incorporation or by an amendment to this
Bylaw duly adopted by the vote or written consent of holders of a majority of
the outstanding shares entitled to vote; provided, however that an amendment
reducing the number or the minimum number of directors to a number less than
five cannot be adopted if the votes cast against its adoption at a meeting of
the shareholders, or the shares not consenting in the case of action by written
consent, are equal to more than 16-2/3% of the outstanding shares entitled to
vote. No amendment may change the states maximum number of authorized directors
to a number greater than two times the stated minimum number of directors minus
one.
Section 3. ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors shall be
elected at each annual meeting of the shareholders to hold office until the next
annual meeting. Each director, including a director elected to fill a vacancy,
shall hold office until the expiration of the term for which elected and until a
successor has been elected and qualified.
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Section 3A. NOMINATION OF DIRECTORS. Only persons who are nominated in
accordance with the procedures set forth in this Section 3A shall be eligible
for election as, and to serve as, directors. Nominations of persons for election
to the Board of Directors may be made at a meeting of the stockholders at which
directors are to be elected (i) by or at the direction of the Board of Directors
or (ii) by any stockholder of the Corporation who is a stockholder of record at
the time of the giving of such stockholder's notice provided for in this Section
3A, who shall be entitled to vote at such meeting in the election of directors
and who complies with the requirements of this Section 3A. Such nominations,
other than those made by or at the direction of the Board of Directors. shall be
preceded by timely advance notice in writing to the Secretary of the
Corporation. To be timely, a stockholders' notice shall be delivered to, or
mailed and received at, the principal executive offices of the Corporation (i)
with respect to an election to be held at the annual meeting of the stockholders
of the Corporation, not later than the close of business on the 90th day prior
to the first anniversary of the preceding year's annual meeting; provided,
however, that with respect to the annual meeting of stockholders to be held in
1997 or in the event that the date of the annual meeting is more than 30 days
before or more than 60 days after such anniversary date, notice by the
stockholder to be timely must be so delivered not later than the close of
business on the later of the 90th day prior to such annual meeting or the 10th
day following the day on which public announcement of the date of such meeting
is first made by the Corporation. and (ii) with respect to an election to be
held at a special meeting of stockholders of the Corporation for the election of
directors, not later than the close of business on the tenth day following the
day on which notice of the date of the special meeting was mailed to
stockholders of the Corporation or public disclosure of the date of the special
meeting was made, whichever first occurs.
Any such stockholder's notice to the Secretary of the Corporation shall
set forth (x) as to each person whom the stockholder proposes to nominate for
election or re-election as a director: (i) the name, age, business address and
residence address of such person, (ii) the principal occupation or employment of
such person, (iii) the number of shares of each class of capital stock of the
Corporation beneficially owned by such person, (iv) the written consent of such
person to having such person's name placed in nomination at the meeting and to
serve as a director if elected and (v) any other information relating to such
person that is required to be disclosed in solicitations of proxies for election
of directors, or is otherwise required, pursuant to Regulation 14A under the
Securities Exchange Act, and (y) as to the stockholder giving the notice, (i)
the name and address, as they appear on the Corporation's books, of such
stockholder and (ii) the number of shares of each class of voting stock of the
Corporation which are then beneficially owned by such stockholder. The presiding
officer of the meeting of stockholders shall determine whether the requirements
of this Section 3A have been met with respect to any nomination or intended
nomination. If the presiding officer determines that any nomination was not made
in accordance with the requirements of this Section 3A, he shall so declare at
the meeting and the defective nomination shall be disregarded. Notwithstanding
the
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foregoing provisions of this Section 3A, a stockholder shall also comply with
all applicable requirements of the Exchange Act and the rules and regulations
thereunder with respect to the matters set forth in this Section 3A.
Section 4. VACANCIES. Vacancies in the Board of Directors may be filled by
a majority of the remaining directors, though less than a quorum, or by a sole
remaining director, except that a vacancy created by the removal of a director
by the vote or written consent of the shareholders or by court order may be
filled only by the vote of a majority of the shares represented and voting at a
duly held meeting at which a quorum is present, or by the written consent of
holders of all outstanding shares entitled to vote. Each director so elected
shall hold office until the next annual meeting of the shareholders and until a
successor has been elected and qualified.
A vacancy or vacancies in the Board of Directors shall be deemed to exist
in the case of the death, resignation or removal of any director, or if the
Board of Directors by resolution declares vacant the office of a director who
has been declared of unsound mind by an order of court or convicted of a felony,
or if the authorized number of directors be increased, or if the shareholders
fail, at any meeting of shareholders at which any director or directors are
elected, to elect the full authorized number of directors to be voted for at
that meeting.
The shareholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors but any such election by
written consent shall require the consent of a majority of the outstanding
shares entitled to vote.
Any director may resign upon giving written notice to the Chairman of the
Board, the President, the Secretary or the Board of Directors. A resignation
shall be effective upon the giving of the notice, unless the notice specifies a
later time for its effectiveness. If the resignation of a director is effective
at a future time, the Board of Directors may elect a successor to take office
when the resignation becomes effective.
No reduction of the authorized number of directors shall have the effect
of removing any director prior to the expiration of his term of office.
Section 5. PLACE OF MEETINGS AND TELEPHONIC MEETINGS. Regular meetings of
the Board of Directors may be held at any place within or without the State that
has been designated from time to time by resolution of the Board. In the absence
of such designation, regular meetings shall be held at the principal executive
office of the corporation. Special meetings of the Board shall be held at any
place within or without the State that has been designated in the notice of the
meeting or, if not stated in the notice or there is no notice, at the principal
executive office of the corporation. Any meeting, regular or special, may be
held by conference telephone or similar communication equipment, so long as all
directors participating in such meeting can hear
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one another, and all such directors shall be deemed to be present in person at
such meeting.
Section 6. ANNUAL MEETINGS. Immediately following each annual meeting of
shareholders, the Board of Directors shall hold a regular meeting for the
purpose of organization, any desired election of officers and the transaction of
other business. Notice of this meeting shall not be required.
Section 7. OTHER REGULAR MEETINGS. Other regular meetings of the Board of
Directors shall be held without call at such time as shall from time to time be
fixed by the Board of Directors. Such regular meetings may be held without
notice.
Section 8. SPECIAL MEETINGS. Special meetings of the Board of Directors
for any purpose or purposes may be called at any time by the Chairman of the
Board or the President or any Vice President or the Secretary or any two
directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at his or her address as
it is shown upon the records of the corporation. In case such notice is mailed,
it shall be deposited in the United States mail at least four (4) days prior to
the time of the holding of the meeting. In case such notice is delivered
personally, or by telephone or telegram, it shall be delivered personally or by
telephone or to the telegraph company at least forty-eight (48) hours prior to
the time of the holding of the meeting. Any oral notice given personally or by
telephone may be communicated to either the director or to a person at the
office of the director who the person giving the notice has reason to believe
will promptly communicate it to the director. The notice need not specify the
purpose of the meeting nor the place if the meeting is to be held at the
principal executive office of the corporation.
Section 9. DISPENSING WITH NOTICE. The transactions of any meeting of the
Board of Directors, however called and noticed or wherever held, shall be as
valid as though had at a meeting duly held after regular call and notice if a
quorum be present and if, either before or after the meeting, each of the
directors not present signs a written waiver of notice, a consent to holding the
meeting or an approval of the minutes thereof. The waiver of notice or consent
need not specify the purpose of the meeting. All such waivers, consents and
approvals shall be filed with the corporate records or made a part of the
minutes of the meeting. Notice of a meeting need not be given to any director
who attends the meeting without protesting, prior thereto or at its
commencement, the lack of notice to such director.
Section 10. QUORUM. A majority of the authorized number of directors shall
constitute a quorum for the transaction of business, except to adjourn as
hereinafter provided. Every act or decision done or made by a majority of the
directors present at a meeting duly held at which a quorum is present shall be
regarded as the act of the Board
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of Directors, subject to the provisions of Section 310 of the Corporations Code
of California (approval of contracts or transactions in which a director has a
direct or indirect material financial interest), Section 311 (appointment of
committees), and Section 317(e) (indemnification of directors). A meeting at
which a quorum is initially present may continue to transact business
notwithstanding the withdrawal of directors, if any action taken is approved by
at least a majority of the required quorum for such meeting.
Section 11. ADJOURNMENT. A majority of the directors present, whether or
not constituting a quorum, may adjourn any meeting to another time and place.
Section 12. NOTICE OF ADJOURNMENT. Notice of the time and place of holding
an adjourned meeting need not be given, unless the meeting is adjourned for more
than twenty-four (24) hours, in which case notice of such time and place shall
be given prior to the time of the adjourned meeting, in the manner specified in
Section 8 of this Article III, to the directors who were not present at the time
of the adjournment.
Section 13. ACTION WITHOUT MEETING. Any action required or permitted to be
taken by the Board of Directors may be taken without a meeting, if all members
of the Board shall individually or collectively consent in writing to such
action. Such action by written consent shall have the same force and effect as a
unanimous vote of the Board of Directors. Such written consent or consents shall
be filed with the minutes of the proceedings of the Board.
Section 14. FEES AND COMPENSATION OF DIRECTORS. Directors and members of
committees may receive such compensation, if any, for their services, and such
reimbursement of expenses, as may be fixed or determined by resolution of the
Board of Directors. Nothing herein contained shall be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise, and receiving compensation for such services.
ARTICLE IV
COMMITTEES
Section 1. COMMITTEES OF DIRECTORS. The Board of Directors may, by
resolution adopted by a majority of the authorized number of directors,
designate one or more committees, each consisting of two or more directors, to
serve at the pleasure of the Board. The Board may designate one or more
directors as alternate members of any committee, who may replace any absent
member at any meeting of the committee. Any such committee, to the extent
provided in the resolution of the Board, shall have all the authority of the
Board, except with respect to:
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(a) the approval of any action which, under the General Corporation
Law of California, also requires shareholders' approval or approval of the
outstanding shares;
(b) the filling of vacancies on the Board of Directors or in any
committee;
(c) the fixing of compensation of the directors for serving on the
Board or on any committee;
(d) the amendment or repeal of Bylaws or the adoption of new Bylaws;
(e) the amendment or repeal of any resolution of the Board of
Directors which by its express terms is not so amendable or repealable;
(f) a distribution to the shareholders of the corporation, except at
a rate or in a periodic amount or within a price range determined by the
Board of Directors; or
(g) the appointment of any other committees of the Board of
Directors or the members thereof.
Section 2. MEETINGS AND ACTION OF COMMITTEES. Meetings and action of
committees shall be governed by, and held and taken in accordance with, the
provisions of Article III of these Bylaws, Sections 5 (place of meetings), 7
(regular meetings), 8 (special meetings and notice), 9 (dispensing with notice),
10 (quorum), 11 (adjournment), 12 (notice of adjournment) and 13 (action without
meeting), with such changes in the context of those Bylaws as are necessary to
substitute the committee and its members for the Board of Directors and its
members, except that the time of regular meetings of committees may be
determined by resolution of the Board of Directors as well as the committee,
special meetings of committees may also be called by resolution of the Board of
Directors and notice of special meetings of committees shall also be given to
all alternate members, who shall have the right to attend all meetings of the
committee. The Board of Directors may adopt rules for the government of any
committee not inconsistent with the provisions of these Bylaws.
ARTICLE V
OFFICERS
Section 1. OFFICERS. The officers of the corporation shall be a President,
a Secretary and a Chief Financial Officer. The corporation may also have, at the
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discretion of the Board of Directors, a Chairman of the Board, one or more Vice
Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers,
and such other officers as may be appointed in accordance with the provisions of
Section 3 of this Article V. Any number of offices may be held by the same
person.
Section 2. ELECTION OF OFFICERS. The officers of the corporation, except
such officers as may be appointed in accordance with the provisions of Section 3
of this Article V, shall be chosen by the Board of Directors, and each shall
serve at the pleasure of the Board, subject to the rights, if any, of an officer
under any contract of employment.
Section 3. SUBORDINATE OFFICERS, ETC. The Board of Directors may appoint,
and may empower the President to appoint, such other officers as the business of
the corporation may require, each of whom shall hold office for such period,
have such authority and perform such duties as are provided in the Bylaws or as
the Board of Directors may from time to time determine.
Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if
any, of an officer under any contract of employment, any officer may be removed,
either with or without cause, by the Board of Directors, at any regular or
special meeting thereof, or, except in case of an officer chosen by the Board of
Directors, by any officer upon whom such power of removal may be conferred by
the Board of Directors.
Any officer may resign at any time by giving written notice to the
corporation. Any such resignation shall take effect at the date of the receipt
of such notice or at any later time specified therein; and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective. Any such resignation is without prejudice to the rights, if
any, of the corporation under any contract to which the officer is a party.
Section 5. VACANCIES IN OFFICES. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed in these Bylaws for regular appointments to such office.
Section 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if such an
officer be elected, shall, if present, preside at all meetings of the Board of
Directors and exercise and perform such other powers and duties as may be from
time to time assigned to him by the Board of Directors or prescribed by the
Bylaws. If there is no President, the Chairman of the Board shall in addition be
the Chief Executive Officer of the corporation and shall have the powers and
duties prescribed in Section 7 of this Article V.
Section 7. PRESIDENT. Subject to such supervisory powers, if any, as may
be given by the Board of Directors to the Chairman of the Board, if there be
such an
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officer, the President shall be the Chief Executive Officer of the corporation
and shall, subject to the control of the Board of Directors, have general
supervision, direction and control of the business and the officers of the
corporation. He shall preside at all meetings of the shareholders and, in the
absence of the Chairman of the Board, or if there be none, at all meetings of
the Board of Directors. He shall have the general powers and duties of
management usually vested in the office of President of a corporation, and shall
have such other powers and duties as may be prescribed by the Board of Directors
or the Bylaws.
Section 8. VICE PRESIDENTS. In the absence or disability of the President,
the Vice Presidents, if any, in order of their rank as fixed by the Board of
Directors or, if not ranked, a Vice President designated by the Board of
Directors, shall perform all the duties of the President, and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
President. The Vice Presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board of Directors or the Bylaws, the President or the Chairman of the Board if
there is no President.
Section 9. SECRETARY. The Secretary shall keep or cause to be kept, at the
principal executive office or such other place as the Board of Directors may
order, a book of minutes of all meetings and actions of directors, committees of
directors and shareholders, with the time and place of holding, whether regular
or special, and, if special, how authorized, the notice thereof given, the names
of those present at directors' and committee meetings, the number of shares
present or represented at shareholders' meetings, and the proceedings thereof.
The Secretary shall keep, or cause to be kept, at the principal executive
office or at the office of the corporation's transfer agent or registrar, as
determined by resolution of the Board of Directors, a share register, or a
duplicate share register, showing the names of all shareholders and their
addresses, the number and classes of shares held by each, the number and date of
certificates issued for the same, and the number and date of cancellation of
every certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all meetings of
the shareholders and of the Board of Directors required by the Bylaws or by law
to be given, and he shall keep the seal of the corporation, if one be adopted,
in safe custody, and shall have such other powers and perform such other duties
as may be prescribed by the Board of Directors or by the Bylaws.
Section 10. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall
keep and maintain, or cause to be kept and maintained, adequate and correct
books and records of accounts of the properties and business transactions of the
corporation, including accounts of its assets, liabilities, receipts,
disbursements, gains, losses, capital,
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retained earnings and shares. The books of account shall be open at all
reasonable times to inspection by any director.
The Chief Financial Officer shall deposit all moneys and other valuables
in the name and to the credit of the corporation with such depositories as may
be designated by the Board of Directors. He shall disburse the funds of the
corporation as may be ordered by the Board of Directors, shall render to the
President and directors, whenever they request it, an account of all of his
transactions as Chief Financial Officer and of the financial condition of the
corporation, and shall have other powers and perform such other duties as may be
prescribed by the Board of Directors or the Bylaws.
ARTICLE VI
INDEMNIFICATION AND INSURANCE
(a) Right to Indemnification. Each person who was or is made a party to or
is threatened to be made a party to or is involuntarily involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "Proceeding"), by reason of the fact that he or she, or a person
of whom he or she is the legal representative, is or was a director or officer
of the corporation or is or was serving (during such person's tenure as director
or officer) at the request of the corporation, any other corporation,
partnership, joint venture, trust or other enterprise in any capacity, whether
the basis of a Proceeding is an alleged action in an official capacity as a
director or officer or in any other capacity while serving as a director or
officer, shall be indemnified and held harmless by the corporation to the
fullest extent authorized by California General Corporation Law, as the same
exists or may hereafter be amended (but, in the case of any such amendment, only
to the extent that such amendment permits the corporation to provide broader
indemnification rights than said law permitted the corporation to provide prior
to such amendment), against all expenses, liability and loss (including
attorneys' fees, judgments, fines, or penalties and amounts to be paid in
settlement) reasonably incurred or suffered by such person in connection
therewith. The right to indemnification conferred in this Section shall be a
contract right and shall include the right to be paid by the corporation the
expenses incurred in defending a Proceeding in advance of its final disposition;
provided, however, that, if California General Corporation Law requires, the
payment of such expenses in advance of the final disposition of a Proceeding
shall be made only upon receipt by the corporation of an undertaking by or on
behalf of such director or officer to repay all amounts so advanced if it shall
ultimately be determined that such director or officer is not entitled to be
indemnified under this Section or otherwise. No amendment to or repeal of this
Article VI shall apply to or have any effect on any right to indemnification
provided hereunder with respect to any acts or omissions occurring prior to such
amendment or repeal.
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(b) Right of Claimant to Bring Suit. If a claim for indemnity under
paragraph (a) of this Section is not paid in full by the corporation within
ninety days after a written claim has been received by the corporation, the
claimant may at any time thereafter bring suit against the corporation to
recover the unpaid amount of the claim and, if successful in whole or in part,
the claimant shall also be entitled to be paid the expense of prosecuting such
claim including reasonable attorneys' fees incurred in connection therewith. It
shall be a defense to any such action (other than an action brought to enforce a
claim for expenses incurred in defending a Proceeding in advance of its final
disposition where the required undertaking, if any is required, has been
tendered to the corporation) that the claimant has not met the standards of
conduct which make it permissible under California General Corporation Law for
the corporation to indemnify the claimant for the amount claimed, but the burden
of proving such defense shall be on the corporation. Neither the failure of the
corporation (including its Board of Directors, independent legal counsel, or its
shareholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in
California General Corporation Law, nor an actual determination by the
corporation (including its Board of Directors, independent legal counsel, or its
shareholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard of conduct.
(c) Non-Exclusivity of Rights. The rights conferred in this Section shall
not be exclusive of any other rights which any director, officer, employee or
agent may have or hereafter acquire under any statute, provision of the Articles
of Incorporation, bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, to the extent the additional rights to indemnification
are authorized in the Articles of Incorporation of the corporation.
(d) Insurance. In furtherance and not in limitation of the powers
conferred by statute:
(i) the corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the
corporation, or is serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any expense, liability or
loss, whether or not the corporation would have the power to indemnify the
person against that expense, liability or loss under the California
General Corporation Law.
(ii) the corporation may create a trust fund, grant a security
interest and/or use other means (including, without limitation, letters of
credit, surety bonds and/or other similar arrangements), as well as enter
into
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contracts providing indemnification to the full extent authorized or
permitted by law and including as part thereof provisions with respect to
any or all of the foregoing to ensure the payment of such amounts as may
become necessary to effect indemnification as provided therein, or
elsewhere.
(e) Indemnification of Employees and Agents of the Corporation. The
corporation may, to the extent authorized from time to time by the Board of
Directors, grant rights to indemnification, including the right to be paid by
the corporation the expenses incurred in defending a Proceeding in advance of
its final disposition, to any employee or agent of the corporation to the
fullest extent of the provisions of this Section or otherwise with respect to
the indemnification and advancement of expenses of directors and officers of the
corporation.
ARTICLE VII
RECORDS AND REPORTS
Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. The corporation
shall keep at its principal executive office, or at the office of its transfer
agent or registrar, if either be appointed and as determined by resolution of
the Board of Directors, a record of its shareholders, giving the names and
addresses of all shareholders and the number and class of shares held by each
shareholder.
A shareholder or shareholders of the corporation holding at least five
percent (5%) in the aggregate of the outstanding voting shares of the
corporation may (i) inspect and copy the records of shareholders' names and
addresses and shareholdings during usual business hours upon five days' prior
written demand upon the corporation, and/or (ii) obtain from the transfer agent
of the corporation, upon written demand and upon the tender of such transfer
agent's usual charges for such list, a list of the shareholders' names and
addresses, who are entitled to vote for the election of directors, and their
shareholdings, as of the most recent record date for which such list has been
compiled or as of a date specified by the shareholder subsequent to the date of
demand. Such list shall be made available to such shareholder or shareholders by
the transfer agent on or before the later of five (5) days after the demand is
received or the date specified therein as the date as of which the list is to be
compiled. The record of shareholders shall also be open to inspection upon the
written demand of any shareholder or holder of a voting trust certificate, at
any time during usual business hours, for a purpose reasonably related to such
holder's interests as a shareholder or as the holder of a voting trust
certificate. Any inspection and copying under this Section 1 may be made in
person or by
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an agent or attorney of the shareholder or holder of a voting trust certificate
making such demand.
Section 2. MAINTENANCE AND INSPECTION OF BYLAWS. The corporation shall
keep at its principal executive office, or if its principal executive office is
not in the State of California at its principal business office in this state,
the original or a copy of the Bylaws as amended to date, which shall be open to
inspection by the shareholders at all reasonable times during office hours. If
the principal executive office of the corporation is outside this state and the
corporation has no principal business office in this state, the Secretary shall,
upon the written request of any shareholder, furnish to such shareholder a copy
of the Bylaws as amended to date.
Section 3. MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. The
accounting books and records and minutes of proceedings of the shareholders and
the Board of Directors and any committee or committees of the Board of Directors
shall be kept at such place or places designated by the Board of Directors, or,
in the absence of such designation, at the principal executive office of the
corporation. The minutes shall be kept in written form and the accounting books
and records shall be kept either in written form or in any other form capable of
being converted into written form. Such minutes and accounting books and records
shall be open to inspection upon the written demand of any shareholder or holder
of a voting trust certificate, at any reasonable time during usual business
hours, for a purpose reasonably related to such holder's interests as a
shareholder or as the holder of a voting trust certificate. Such inspection may
be made in person or by an agent or attorney, and shall include the right to
copy and make extracts. The foregoing rights of inspection shall extend to the
records of each subsidiary corporation of the corporation.
Section 4. INSPECTION BY DIRECTORS. Every director shall have the absolute
right at any reasonable time to inspect all books, records and documents of
every kind and the physical properties of the corporation and each of its
subsidiary corporations. Such inspection by a director may be made in person or
by agent or attorney and the right of inspection includes the right to copy and
make extracts.
Section 5. ANNUAL REPORT TO SHAREHOLDERS. The annual report to
shareholders referred to in Section 1501 of the General Corporation Law is
expressly dispensed with, but nothing herein shall be interpreted as prohibiting
the Board of Directors from issuing annual or other periodic reports to the
shareholders of the corporations as they deem appropriate.
Section 6. FINANCIAL STATEMENTS. A copy of any annual financial statement
and any income statement of the corporation for each quarterly period of each
fiscal year, and any accompanying balance sheet of the corporation as of the end
of each such period, that has been prepared by the corporation shall be kept on
file in the
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principal executive office of the corporation for twelve (12) months and each
such statement shall be exhibited at all reasonable times to any shareholder
demanding an examination of any such statement or a copy shall be mailed to any
such shareholder.
If a shareholder or shareholders holding at least five percent (5%) of the
outstanding shares of any class of stock of the corporation make a written
request to the corporation for an income statement of the corporation for the
three-month, six-month or nine-month period of the current fiscal year ended
more than thirty (30) days prior to the date of the request, and a balance sheet
of the corporation as of the end of such period, the Chief Financial Officer
shall cause such statement to be prepared, if not already prepared, and shall
deliver personally or mail such statement or statements to the person making the
request within thirty (30) days after the receipt of such request. If the
corporation has not sent to the shareholders its annual report for the last
fiscal year, this report shall likewise be delivered or mailed to such
shareholder or shareholders within thirty (30) days after such request.
The corporation also shall, upon the written request of any shareholder,
mail to the shareholder a copy of the last annual, semi-annual or quarterly
income statement which it has prepared and a balance sheet as of the end of such
period.
The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report thereon, if any, of the independent
accountants engaged by the corporation or the certificate of an authorized
officer of the corporation that such financial statements were prepared without
audit from the books and records of the corporation.
Section 7. ANNUAL STATEMENT OF GENERAL INFORMATION. The corporation shall
each year during the calendar month in which its Articles of Incorporation were
originally filed with the California Secretary of State, or at any time during
the immediately preceding five (5) calendar months, file with the Secretary of
State of the State of California, on the prescribed form, a statement setting
forth the authorized number of directors, the names and complete business or
residence addresses of all incumbent directors, the names and complete business
or residence addresses of the Chief Executive Officer, Secretary and Chief
Financial Officer, the street address of its principal executive office or
principal business office in this state and the general type of business
constituting the principal business activity of the corporation, together with a
designation of the agent of the corporation for the purpose of service of
process, all in compliance with Section 1502 of the Corporations Code of
California.
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ARTICLE VIII
GENERAL CORPORATE MATTERS
Section 1. RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. For
purposes of determining the shareholders entitled to receive payment of any
dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any other lawful action, (other than action by
shareholders by written consent without a meeting) the Board of Directors may
fix, in advance, a record date, which shall not be more than sixty (60) days
prior to any such action, and in such case only shareholders of record on the
date so fixed are entitled to receive the dividend, distribution or allotment of
rights or to exercise the rights, as the case may be, notwithstanding any
transfer of any shares on the books of the corporation after the record date
fixed as aforesaid, except as otherwise provided in the California General
Corporation Law.
If the Board of Directors does not so fix a record date, the record date
for determining shareholders for any such purpose shall be at the close of
business on the day on which the Board adopts the resolution relating thereto,
or the sixtieth (60th) day prior to the date of such action, whichever is later.
Section 2. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks, drafts
or other orders for payment of money, notes or other evidences of indebtedness,
issued in the name of or payable to the corporation, shall be signed or endorsed
by such person or persons and in such manner as, from time to time, shall be
determined by resolution of the Board of Directors.
Section 3. CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The Board of
Directors, except as otherwise provided in these Bylaws, may authorize any
officer or officers, agent or agents, to enter into any contract or execute any
instrument in the name of and on behalf of the corporation, and such authority
may be general or confined to specific instances; and, unless so authorized or
ratified by the Board of Directors or within the agency power of an officer, no
' officer, agent or employee shall have any power or authority to bind the
corporation by any contract or engagement or to pledge its credit or to render
it liable for any purpose or to any amount.
Section 4. CERTIFICATES FOR SHARES. A certificate or certificates for
shares of the capital stock of the corporation shall be issued to each
shareholder when any such shares are fully paid, and the Board of Directors may
authorize the issuance of certificates or shares as partly paid provided that
such certificates shall state the amount of the consideration to be paid
therefor and the amount paid thereon. All certificates shall be signed in the
name of the corporation by the Chairman of the Board or the President or
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Vice President and by the Chief Financial Officer or an Assistant Treasurer or
the Secretary or any Assistant Secretary, certifying the number of shares and
the class or series of shares owned by the shareholder. Any or all of the
signatures on the certificate may be facsimile. In case any officer, transfer
agent or registrar who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the corporation
with the same effect as if such person were an officer, transfer agent or
registrar at the date of issue.
Section 5. LOST CERTIFICATES. Except as hereinafter in this Section 5
provided, no new certificates for shares shall be issued in lieu of an old
certificate unless the latter is surrendered to the corporation and canceled at
the same time. The Board of Directors may in case any share certificate or
certificate for any other security is lost, stolen or destroyed, authorize the
issuance of a new certificate in lieu thereof, upon such terms and conditions as
the Board may require, including provision for indemnification of the
corporation secured by a bond or other adequate security sufficient to protect
the corporation against any claim that may be made against it, including any
expense or liability, on account of the alleged loss, theft or destruction of
such certificate or the issuance of such new certificate.
Section 6. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The Chairman of
the Board, the President, or any Vice President, or any other person authorized
by resolution of the Board of Directors or by any of the foregoing designated
officers, is authorized to vote on behalf of the corporation any and all shares
of any other corporation or corporations, foreign or domestic, standing in the
name of the corporation. The authority herein granted to said officers to vote
or represent on behalf of the corporation any and all shares held by the
corporation in any other corporation or corporations may be exercised by any
such officer in person or by any person authorized to do so by proxy duly
executed by said officer.
ARTICLE IX
AMENDMENTS
Section 1. AMENDMENT BY SHAREHOLDERS. New Bylaws may be adopted or these
Bylaws may be amended or repealed by the vote or written consent of holders of a
majority of the outstanding shares entitled to vote; provided, however, that if
the Articles of Incorporation of the corporation set forth the number of
authorized directors of the corporation, the authorized number of directors may
be changed only by an amendment of the Articles of Incorporation.
Section 2. AMENDMENT BY DIRECTORS. Subject to the rights of the
shareholders as provided in Section I of this Article IX, Bylaws, other than a
Bylaw or an
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amendment thereof changing the authorized number of directors, may be adopted,
amended or repealed by the Board of Directors.
ARTICLE X
GENERAL
Section 1. GOVERNING LAW. This corporation is organized under the
provisions of the California General Corporation Law (Corporations Code Sections
100-2319) as in effect on the date of filing of its original Articles of
Incorporation, namely January 31, 1974. Upon such filing the California
Secretary of State assigned the following corporation number to this
corporation: 0697800. The corporate affairs of this corporation shall be
governed by and conducted in accordance with the provisions of the California
General Corporation Law, as the same presently exist and are from time to time
hereafter amended or superseded, except in those instances where the Articles of
Incorporation or Bylaws of this corporation, now or through amendment hereafter,
may adopt alternative rules which are permissible under the California General
Corporation Law. Any provision (or portion thereof) in these Bylaws which is not
permissible under the California General Corporation Law or is inconsistent with
the Articles of Incorporation of this corporation (as they may from time to time
be amended and supplemented) is void, but the balance of these Bylaws shall
nevertheless be valid and effective.
Section 2. CONSTRUCTION AND DEFINITIONS. Unless the context requires
otherwise, the general provisions, rules of construction, and definitions in the
California General Corporation Law shall govern the construction of these
Bylaws. Without limiting the generality of the foregoing, the singular number
includes the plural, the plural number includes the singular, and the term
"person" includes both a corporation and a natural person.
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WARRANT AGREEMENT
This WARRANT AGREEMENT (this "Agreement") is made and entered into as of
November 16, 1998, by and between Incomnet, Inc., a California corporation (the
"Company"), and Ironwood Telecom LLC, a Colorado limited liability company (the
"Investor").
BACKGROUND
The Company is authorized to issue one class of Common Stock and three
classes of Preferred Stock. Pursuant to this Agreement, the Company shall issue
100,000 warrants to the Investor entitling the Investor to purchase an aggregate
of 100,000 shares of Common Stock of the Company representing not less than 0.5%
of the outstanding shares of Common Stock of the Company.
The Company and the Investor previously entered into a Bridge Loan and
Security Agreement dated November 4, 1998 (the "Bridge Loan and Security
Agreement"), pursuant to which the Investor has agreed to make a secured term
loan to the Company in the original principal amount of $1,785,470. In addition,
the Company issued to the Investor an additional Secured Promissory Note dated
November 16, 1998 (the "$1M Note"), in the original principal amount of
$1,000,000, in connection with an additional loan of $1,000.000 made by the
Investor to the Company. The obligations under the $1M Note are secured by the
collateral described in, and pursuant to, the Bridge Loan and Security Agreement
Issuance of the warrants described herein is in partial consideration for the
loan evidenced by the $1M Note.
AGREEMENT
NOW, THEREFORE, the Company and the Investor agree as follows:
1.
DEFINITIONS
1.1. Certain Defined Terms.
The following terms used in this Agreement have the following meanings:
"$1M Note" means the Secured Promissory Note dated November 16, 1998, in
the original principal amount of $1 million, issued by the Company in favor of
the Investor.
"Accredited Investor" has the meaning given to that term in Section 501(a)
of Regulation D promulgated under the Act.
<PAGE>
"Act" means the Securities Act of 1933, as amended from time to time, or
any successor statute.
"Bridge Loan" has the meaning given to that term in the Bridge Loan and
Security Agreement.
"Bridge Loan and Security Agreement" means the Bridge Loan and Security
Agreement, dated the date hereof, between the Company and the Investor.
"Bridge Loan Note" has the meaning given to that term in the Bridge Loan
and Security Agreement.
"Charter Documents" of a Person means the articles or certificate of
incorporation, the by-laws and any other charter documents of such Person,
including without limitation any certificate of designation, as amended or
restated and as in effect as of the Closing Date.
"Common Stock" means the Company's Common Stock, no par value.
"Closing Date" means the date on which the proceeds of the $1M are
disbursed in accordance with the Bridge Loan Agreement.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, or any successor statute.
"Commission" means the Securities and Exchange Commission or any other
federal agency at the time administering the Act.
"Current Exercise Price" means the Exercise Price immediately before the
occurrence of any event which, pursuant to Article 4, causes an adjustment to
the Exercise Price.
"Distribution" means any transfer of cash or property by a Person to the
Investor without consideration, whether by way of dividend or otherwise, or the
purchase or redemption by such Person of its shares for cash or other property.
"Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time, or any successor statute.
"Exercise Price" means the price of $1.00 per share, adjusted from time to
time as provided in Article 4.
"Expiration Date" means 5:00 p.m., Los Angeles time, on November 16, 2003,
subject to extensions pursuant to Section 2.1.
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"Person" means and includes natural persons, corporations, limited
partnerships, general partnerships, joint stock companies, joint ventures,
associations, companies, trusts, banks, trust companies, land trusts, business
trusts and other organizations, whether or not legal entities, and governments
and agencies and political subdivisions thereof.
"Subsidiary" of any Person means a corporation of which more than fifty
percent (50%) of the outstanding shares of capital stock of each class having
ordinary voting power is owned by such Person, by one or more Subsidiaries of
such Person, or by such Person and one or more of its Subsidiaries.
"Transfer" means the sale, pledge, assignment or other transfer of the
Warrants or the Warrant Shares, in whole or in part, and of the rights of the
Investors under this Agreement.
"Warrant Certificate" means the certificate representing the Warrants,
registered in the name of the Investor, substantially in the form of Exhibit A.
"Warrants" means the warrants issued pursuant to this Agreement, which,
when exercised, give the Investor the right to obtain one share of Common Stock
per warrant, subject to adjustment as provided herein.
"Warrant Shares" means the shares of Common Stock acquired or
acquirable upon exercise of the Warrants, any shares of Common Stock issued
as (or issuable upon the conversion or exercise of any warrant, right or
other security which is issued as) a dividend or other distribution with
respect to, or in exchange for or in replacement of, such shares of Common
Stock and any other interest in the Company that has been or may be acquired
upon exercise of the Warrants; provided, however, that a Warrant Share will
no longer be a Warrant Share when such share is sold to a Person acquiring
such share from a selling Investor in a sale by such Investor pursuant to a
registered public offering or an offering made to the public that is exempted
from registration by rule or regulation of the Commission, including Rules
144 and 144A under the Act or any successor rule or regulation.
1.2. Interpretation
Unless the context of this Agreement clearly requires otherwise,
references to the plural include the singular, to the singular include the
plural, and to the part include the whole. The term "including" is not limiting
and the term "or" has the inclusive meaning represented by the term "and/or."
The words "hereof," "herein," "hereunder," and similar terms in this Agreement
refer to this Agreement as a whole and not to any particular provision of this
Agreement. References to "Articles," "Sections," "Subsections," "Exhibits," and
"Schedules" are to Articles, Sections, Subsections, Exhibits and Schedules,
respectively, of this Agreement, unless otherwise specifically provided. Terms
defined herein may be used in the singular or the plural. Any
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capitalized terms used herein which are not specifically defined herein have the
meaning given to them in the Loan Agreement.
2.
THE WARRANTS
2.1. Issuance of Warrants
On the Closing Date, in consideration of the purchase by the
Investor of the Bridge Loan Note, the Company shall issue to the Investor One
Hundred Thousand (100,000) Warrants and shall deliver to the Investor a
Warrant Certificate representing such Warrants.
2.2. Execution of Warrant Certificates
Warrant Certificates may be signed on behalf of the Company by
any person authorized by the Company to do so. Any person who, on the actual
date of the execution of a Warrant Certificate, is authorized by the Company
to sign the Warrant Certificate, may sign on the Company's behalf even if
such person was not authorized to do so on the Closing Date.
2.3. Registration
The Company may deem and treat the registered Investor of a
Warrant Certificate as the absolute owner for all purposes, notwithstanding
any notation of ownership or other writing thereon made by anyone.
2.4. Transfers
The Warrants may not be Transferred without the prior written
consent of the Company.
2.5. Exchanges
At the option of the Investor, any Warrant Certificate may be
exchanged when surrendered at the principal office of the Company for one or
more Warrant Certificates representing in the aggregate a Warrant or Warrants
to acquire a like number and kind of shares of Common Stock in the Company by
the Investor. Warrant Certificates surrendered for exchange shall be
canceled by the Company.
2.6. Mutilated or Missing Warrant Certificates
If any of the Warrant Certificates shall be mutilated, lost,
stolen or destroyed, the Company shall issue, in exchange and substitution
for and upon
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cancellation of such Warrant Certificate, a new Warrant Certificate representing
an equivalent number of Warrants, but only upon receipt of evidence of such
loss, theft or destruction reasonably satisfactory to the Company or, if
requested by the Company, upon receipt of a duly executed indemnification
agreement reasonably satisfactory to the Company; provided, however, that the
Investor shall not be required to deliver an indemnity bond.
2.7. Term and Exercisability of Warrants
The Warrants shall be exercisable, in whole or in part, at any
time and from time to time in number described in Section 2.1 and in the
manner provided in Section 2.8; provided, however, that at the Expiration
Date (as reset from time to time pursuant to Section 2.1) any unexercised
Warrants shall become void and all rights of the Investor as a Investor of
the Warrants shall cease.
2.8. Manner of Exercise of Warrants
Subject to the provisions of this Agreement, the Investor shall
have the right to purchase from the Company, and the Company shall issue and
sell to such Investor, one share of Common Stock for each Warrant exercised,
upon surrender to the Company at its principal office of the Warrant
Certificate representing such Warrant, together with a Form of Warrant
Subscription in substantially the form of Exhibit C completed and signed, and
upon payment to the Company of the Exercise Price in lawful money of the
United States of America.
2.9. Issuance of Shares Upon Exercise
Upon exercise of a Warrant, the Company shall issue and cause to be
delivered to the Investor, registered in such name or names as the Investor may
designate, a certificate representing the share or shares of Common Stock
issuable upon the exercise of such Warrant. The Warrants shall be exercisable,
at the election of the Investor thereof, either as an entirety or for part only
of the number of Warrants specified in the Warrant Certificate representing such
Warrants. If less than all of the Warrants evidenced by a Warrant Certificate
are exercised at any time prior to the Expiration Date, a new Warrant
Certificate or Certificates shall be issued by the Company, to the Investor
representing the remaining unexercised number of Warrants evidenced by the
Warrant Certificate so surrendered. All Warrant Certificates surrendered upon
exercise of Warrants shall be canceled by the Company.
2.10. Payment of Fees, Expenses and Taxes
The Investor shall pay all expenses and taxes imposed by law or any
governmental agency, including any documentary stamp taxes, attributable to the
issuance of Warrant Shares upon the exercise of Warrant.
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The Borrower shall pay to the Lender on demand all costs and
expenses that the Lender pays or incurs in connection with the negotiation,
preparation, consummation, administration, enforcement, and termination of
this Warrant Agreement, including, without limitation reasonable attorneys'
and paralegals' fees and disbursements of counsel to the Lender.
2.11. Reservation of Shares
The Company covenants and agrees that, so long as any Warrants remain
outstanding, the Company shall at all times have authorized and reserved a
number of shares of Common Stock sufficient to provide for the exercise of
the Warrants.
2.12. Fractional Shares
The Company need not issue fractional shares upon the exercise of Warrants
but in lieu thereof may pay to the Investor the Fair Value of such fractional
shares; provided, however, that in the event that the Company undertakes a
reduction in the number of shares of Common Stock outstanding, it shall be
required to issue fractional shares to the Investor which exercises all or any
part of its Warrants.
3.
REPRESENTATIONS AND WARRANTIES
3.1. By the Company
The Company represents and warrants to the Investor as follows:
3.1.1. Legal Status
The Company and its Subsidiaries are corporations duly formed and
existing under the laws of the state where organized.
3.1.2. Valid Issue.
All shares of Common Stock, which may be issued upon exercise of the
Warrants are duly authorized and, upon issuance in accordance with the
provisions of this Agreement, shall be validly issued, fully paid and
nonassessable and free from all taxes, liens, charges and security interests.
3.1.3. Authority; No Conflicts.
This Agreement, and any instrument or agreement required
hereunder, are within the Company's powers, have been duly authorized, and do
not conflict with any of its Charter Documents.
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3.1.4. Binding and Enforceable.
This Agreement is a legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, subject,
as to enforcement, (i) to bankruptcy, insolvency, reorganization, arrangement,
moratorium and other laws of general applicability relating to or affecting
creditors' rights and (ii) to general principles of equity, whether such
enforcement is considered in a proceeding at law or in equity.
3.1.5. Conflict.
This Agreement does not conflict with any law, agreement, or
obligation by which the Company or any of its Subsidiaries is bound.
3.2. Securities Law Representations of the Investor
The Investor represents, warrants and acknowledges to the Company as
follows:
3.2.1. Investment.
The Warrants issued to the Investor, and the Warrant Shares to be
issued to the Investor upon exercise of the Warrants, are being acquired for
investment for the Investor's own account, not as a nominee or agent, and not
with a view to or for sale in connection with the distribution thereof. The
Investor has not been contacted concerning the acquisition of the Warrants or
Warrant Shares by means of any advertisement.
3.2.2. Sophistication.
The Investor has such knowledge and experience in financial and
business matters as to be capable of evaluating the merits and risks of the
Investor's investment in the Warrants and the Warrant Shares; the Investor has
the ability to bear the economic risks of such investment; the Investor has the
capacity to protect its own interests in connection with the transactions
contemplated by this Agreement; and the Investor has had an opportunity to ask
questions of management of the Company and to obtain such financial and other
information from the Company as the Investor deems necessary or appropriate in
connection with evaluating the merits of the investment in the Warrants and the
Warrant Shares. The Investor acknowledges that the Warrants have not been and
will not be registered under the Act and may not be transferred except in
compliance with the Act and with the prior consent of the Company.
3.2.3. Transfer Restrictions.
There are no more than 10 members of the Investor and the Investor
will cause each of its members to agree to appropriate restrictions on
transferability of their member interests in the Investor in order to prevent a
possible public distribution of the Warrant Shares under federal and applicable
state securities laws.
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<PAGE>
4.
ANTI-DILUTION PROTECTION
4.1. Stock Splits, Consolidations, Dividends and Distributions
If the outstanding shares of Common Stock are subdivided into a greater
number of shares of Common Stock or if the Company makes a dividend in the form
of stock or other Distribution of its stock to stock Investors, the Current
Exercise Price shall, simultaneously with the effectiveness of such subdivision,
dividend or Distribution, be proportionately reduced, and conversely, if the
outstanding shares of Common Stock shall be combined into a smaller number of
shares of Common Stock, the Current Exercise Price shall, simultaneously with
the effectiveness of such combination, be proportionately increased.
4.2. Successive Changes
The provisions of this Article shall apply to successive dividends or
other Distributions, subdivisions and combinations on or of shares of Common
Stock after the date of this Agreement.
4.3. Adjustment of Shares Issuable Upon Exercise of Warrants
Upon each adjustment of the Exercise Price as a result of the
calculations made pursuant to this Article 4, each Warrant outstanding prior
to the making of the adjustment in the Exercise Price shall thereafter be
treated as that number of Warrants, and shall evidence the right to purchase,
at the adjusted Exercise Price, that number of shares of Common Stock
(calculated to the nearest hundredths), obtained by (i) multiplying the
number of shares of Common Stock purchasable upon exercise of a Warrant prior
to adjustment by the Exercise Price in effect prior to adjustment, and
(ii) dividing the product so obtained by the Exercise Price in effect after
such adjustment of the Exercise Price.
4.4. Notice of Adjustment to Investors
Upon the occurrence of each adjustment or readjustment of the Exercise
Price, the Company shall compute such adjustment or readjustment in accordance
with the terms hereof. The Company shall furnish the Investor with a certificate
signed by the Company's chief financial officer setting forth in reasonable
detail (i) the Exercise Price after such adjustment or readjustment, (ii) the
method of calculation and the facts upon which such calculation is based and
(iii) the number of shares of Common Stock purchasable upon exercise of a
Warrant after such adjustment or readjustment.
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5.
MISCELLANEOUS
5.1. Notices
In order to be effective, any notice or other communication required or
permitted hereunder shall be in the form, and transmitted in the manner,
required under the Secured Promissory Note.
5.2. Successors and Assigns
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns, except that the
Investor may not Transfer any of the Warrants without the prior written
consent of the Company.
5.3. Governing Law
This Agreement shall be governed by and construed in accordance with
the laws of the State of Colorado applicable to contracts entered into and to
be performed wholly within Colorado by Colorado residents.
5.4. Consent to Jurisdiction
The Company hereby consents to the non-exclusive jurisdiction, venue
and forum of any state or federal court in Colorado with respect to any
action, whether commenced by the Investor or any other Person, which, in
whole or in part, in any way arises under or relates to this Agreement.
5.5. Execution in Counterparts
This Agreement may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which, when so
executed, shall be deemed to be an original and all of which, when taken
together, shall constitute but one and the same agreement.
5.6. Remedies
In the event of a breach by the Company of this Agreement, any Investor
injured by such breach, in addition to being entitled to exercise all rights
granted by law, including recovery of damages, shall be entitled to specific
performance of its rights under this Agreement. The Company agrees that monetary
damages would not be adequate compensation for any loss incurred by reason of a
breach of this Agreement by the Company and hereby waives the defense in any
action for specific performance that a remedy at law would be adequate.
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<PAGE>
5.7. Incorporation of Exhibits and Schedules by Reference
All Exhibits and Schedules to this Agreement are incorporated herein by
this reference.
5.8. Entire Agreement; Amendment
This Agreement (including the Exhibits, Schedules and the parts of
the Bridge Loan and Security Agreement incorporated by reference herein) is
issued pursuant to the letter agreement, dated October 30, 1998, between the
Company and the Investor and constitutes the entire agreement between the
Company and the Investor with respect to the subject matter hereof, superseding
all prior or contemporaneous negotiations, communications, discussions and
correspondence concerning the subject matter hereof. This Agreement may be
modified or amended or any provision hereof may be waived only with the written
consent of the Company and the Investor.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, this Agreement
to become effective as of the date first above written.
INCOMNET, INC.,
a California corporation
By: /s/ Denis Richard
--------------------------------------
Denis Richard
President and Chief Executive Officer
IRONWOOD TELECOM LLC,
a Colorado limited liability company
By: /s/ Donald V. Berlanti
--------------------------------------
Donald V. Berlanti
Member
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<PAGE>
EXHIBITS
Exhibit A: Form of Warrant Certificate
Exhibit B: Form of Assignment
Exhibit C: Form of Warrant Subscription
12
<PAGE>
EXHIBIT A
THE WARRANTS REPRESENTED BY THIS WARRANT CERTIFICATE AND THE SHARES PURCHASABLE
UPON EXERCISE OF THE WARRANTS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT") AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT IN
COMPLIANCE WITH THE ACT, THE RULES AND REGULATIONS PROMULGATED THEREUNDER AND
ANY APPLICABLE STATE SECURITIES LAWS.
THE WARRANTS REPRESENTED BY THIS CERTIFICATE ARE ISSUED PURSUANT TO AND ARE
SUBJECT TO A WARRANT AGREEMENT WHICH FIXES THE RIGHTS AND OBLIGATIONS OF THE
COMPANY AND THE INVESTOR OF THESE WARRANTS. A COPY OF THE WARRANT AGREEMENT IS
ON FILE AT THE COMPANY'S PRINCIPAL OFFICE.
COMMON STOCK WARRANT CERTIFICATE
For the Purchase of 100,000
shares of Common Stock
Incomnet, Inc., a California corporation (the "Company"), hereby certifies
that, for value received, Ironwood Telecom LLC or any registered assigns, is the
registered investor (the "Investor") of One Hundred Thousand (100,000) Warrants
(the "Warrants") to purchase One Hundred Thousand (100,000) shares (the
"Shares") of Common Stock of the Company ("Common Stock"); provided, however,
the number of Warrants represented by this Common Stock Warrant Certificate and
the number of shares of the Company's common stock issuable upon exchange of the
Warrants shall be increased in accordance with Article 4 of the Warrant
Agreement. Each Warrant entitles the Investor to purchase from the Company one
fully paid and nonassessable share of Common Stock at an initial exercise price
(the "Exercise Price") of $1.00 per share.
The Investor's right to purchase Shares hereunder shall be exercised by
surrender to the Company of this Warrant Certificate, together with an executed
Form of Warrant Subscription (attached hereto) and payment of the aggregate
Exercise Price of the Warrants exercised, at the principal executive office of
the Company, upon the terms and subject to the conditions set forth in this
Warrant Certificate and in the Warrant Agreement referred to herein.
The Warrants represented by this Warrant Certificate have been issued
pursuant to a Warrant Agreement dated as of November 16, 1998 (the "Warrant
Agreement")
Exh. A-1
<PAGE>
between the Company and Ironwood Telecom LLC. The Warrant Agreement is
incorporated in this Warrant Certificate by this reference and must be referred
to for a description of the rights, obligations and duties of the Company and
the Investors of the Warrants issued pursuant to the Warrant Agreement.
If, upon any exercise of Warrants represented by this Warrant Certificate,
the number of Warrants exercised is less than the total number of Warrants
represented by this Warrant Certificate, there shall be issued to the Investor
or the Investor's assignee a new Warrant Certificate representing the number of
Warrants not exercised.
This Warrant Certificate, when surrendered to the Company in accordance
with the terms of the Warrant Agreement, may be exchanged without payment of any
service charge for another Warrant Certificate or Warrant Certificates
representing in the aggregate a like number of Warrants.
Subject to and in accordance with the terms of the Warrant Agreement, any
or all of the Warrants represented by this Warrant Certificate may be
transferred by presentation to the Company accompanied by an executed Form of
Assignment (attached hereto). A new Warrant Certificate representing the number
of Warrants so transferred shall be issued to the transferee, subject to any
limitations provided in the Warrant Agreement, without charge. If the number of
Warrants so transferred is less than the total number of Warrants represented by
this Warrant Certificate, there shall be issued to the transferor a new Warrant
Certificate representing the number of Warrants not transferred.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
signed by the person named below thereunto duly authorized.
DATED: November 16, 1998 INCOMNET, INC.,
a California corporation
By:
-----------------------------------
Its:
-----------------------------------
Exh. A-2
<PAGE>
EXHIBIT B
FORM OF ASSIGNMENT
(To be executed by the registered Investor if such Investor
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED, __________ hereby sells, assigns and
transfers unto __________, the Warrants represented by the attached Warrant
Certificate, together with all right, title and interest therein, and does
hereby irrevocably constitute and appoint ____________ to transfer such Warrants
on the books of the within-named Corporation with full power of substitution.
DATED: , 19
------------------
Signature
---------------------------
Exh. B-1
<PAGE>
EXHIBIT C
FORM OF WARRANT SUBSCRIPTION
(To be signed only upon exercise of Warrant.)
TO____________________:
The undersigned, the Investor of the Warrants represented by the attached
Warrant Certificate (the "Investor"), hereby irrevocably elects to exercise the
purchase right represented by such Warrants for, and to purchase thereunder,
__________* Shares of Common Stock (the "Shares") of Incomnet, Inc. (the
"Company") and herewith makes payment, as provided in the Warrant Agreement, of
US $_____________ therefor. The Investor hereby requests that the Company issue
______ shares of Common Stock and requests that the certificate(s) for such
Shares be issued in the name of, and delivered to:
_________________________ (Signature must conform in all
_________________________ respects to name of Investor as
(Address) specified on the face of the
Warrant Certificate)
Dated:______________19__.
*Insert here the number of Shares called for on the face of the Warrant
Certificate (or, in the case of a partial exercise, the portion thereof as to
which the Warrants are being exercised), in either case without making any
adjustment for additional Shares or any other securities or property or cash
which, pursuant to the adjustment provisions of the Warrant Agreement, may be
deliverable upon exercise.
Exh. C-1
<PAGE>
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement ("Agreement") is made and entered into
as of November 4, 1998, between Ironwood Telecom LLC, a Colorado limited
liability company ("Lender"), and Incomnet, Inc., a California corporation (the
"Company").
R E C I T A L S
A. Lender is providing a bridge loan with proceeds of up to $3 million to
the Company (the "Bridge Loan") and committing to fund a term loan with proceeds
of up to $20 million (the "Term Loan").
B. Pursuant to the Bridge Loan, the Company has agreed to issue to Lender
warrants to purchase 500,000 shares of the Company's common stock ("Common
Stock").
C. Pursuant to the Term Loan, the Company plans to issue to Lender
additional warrants to purchase 3,000,000 shares of the Company's Common Stock,
subject to adjustment.
D. Lender is requiring and the Company is willing to grant Lender
registration rights with respect to the Company's common stock ("Common Stock")
underlying the warrants issued under the Bridge Loan and Term Loan ("Warrants").
NOW, THEREFORE, in consideration of the foregoing and intending to be
legally bound, the parties agree as follows:
1. Registration Rights.
Lender shall have the registration rights set forth below in respect of
the shares of Common Stock underlying the Warrants issued to Lender under the
Bridge Loan and Term Loan (the "Registrable Securities"). These registration
rights are granted to Lender and may not be transferred to any other person
without the prior written consent of the Company.
1.1 Shelf Registration.
Upon the written request of Lender at any time and provided that the
Company is eligible to use Form S-3 (or a comparable form permitting substantial
incorporation by reference), the Company shall file a "shelf" registration
statement on any appropriate form pursuant to Rule 415 (or similar rule that may
be adopted by the SEC) under the Securities Act (a "Shelf Registration") for all
of the then Registrable Securities.
<PAGE>
The Company hereby agrees to file such Shelf Registration as
promptly as practicable following the request therefor and thereafter to use its
best efforts to cause such Shelf Registration to become effective and thereafter
to keep it continuously effective for three years from the effective date of
such Shelf Registration Statement, or such shorter period as shall terminate on
the date on which all the Registrable Securities covered by the Shelf
Registration have been sold pursuant to such Shelf Registration or otherwise.
The Company shall only be obligated to file one Shelf Registration. The Company
shall have no further obligation to register such Registrable Securities once
the Company has registered the Registrable Securities on a Shelf Registration.
The Company further agrees to supplement or make amendments to the
Shelf Registration, if required by the rules, regulations or instructions
applicable to the registration form utilized by the Company or by the Securities
Act or rules and regulations thereunder for shelf registration or any
underwriter of the Registrable Securities.
If the Company determines in its good faith judgment that the filing
of a Shelf Registration under this Section 1.1 hereof or the use of any related
prospectus would require the disclosure of material information that the Company
has a bona fide business purpose for preserving as confidential or the
disclosure of which would impede the Company's ability to consummate a
significant transaction, and that the Company is not otherwise required by
applicable securities laws or regulations to disclose, upon written notice of
such determination by the Company, the rights of Lender to offer, sell or
distribute any Registrable Securities pursuant to a Shelf Registration or to
require the Company to take action with respect to the registration or sale of
any Registrable Securities pursuant to a Shelf Registration shall be suspended
until the date upon which the Company notifies Lender in writing that suspension
of such rights for the grounds set forth in this Section 1.1 is no longer
necessary, and the Company agrees to give such notice as promptly as practicable
following the date that such suspension of rights is no longer necessary;
provided, however, that the Company shall not be permitted to suspend a Shelf
Registration under this Section 1.1 for more than 90 days in any calendar year
in which the Shelf Registration is effective.
If Lender so elects, the offering of Registrable Securities pursuant
to a Shelf Registration shall be in the form of an registration in which the
Registrable Securities are sold to an underwriter (an "Underwritten Offering").
If the managing underwriter or underwriters of such offering advise the Company
and Lender in writing that in their opinion the number of shares of Registrable
Securities requested to be included in such offering is too large and would
adversely affect the success of such offering, the Company will include in such
offering the aggregate number of Registrable Securities which in the opinion of
such managing underwriter or underwriters can be sold without any such material
adverse effect and the amount to be offered shall be reduced to the amount
recommended by such managing underwriter or underwriters. Unless Lender
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<PAGE>
consents in writing, no other party, including the Company, shall be permitted
to offer securities in any such offering.
1.2 Incidental Registration.
If at any time prior to the expiration of the term of the Warrants,
the Company proposes to file a registration statement under the Securities Act
(other than in connection with the Shelf Registration, or a Registration
Statement on Form S-4 or S-8, or any form substituting therefor) with respect to
an offering of any class of security by the Company for its own account or for
the account of any of its security holders, then the Company shall give written
notice of such proposed filing to Lender as soon as practicable (but in no event
less than thirty days before the anticipated filing date), and such notice shall
offer to Lender the opportunity to register such number of Registrable
Securities as Lender may request. Lender shall so advise the Company in writing
within 20 days after the date of receipt of such notice from the Company (which
request shall set forth the number of Registrable Securities for which
registration is requested). The Company shall include in such Registration
Statement all such Registrable Securities so requested to be included therein,
and, if such registration is an Underwritten Registration, the Company shall use
its best efforts to cause the managing underwriter or underwriters to permit the
Registrable Securities requested to be included in the Registration Statement
for such offering to be included (on the same terms and conditions as similar
securities of the Company included therein to the extent appropriate); provided,
however, that if the managing underwriter or underwriters of such offering
deliver a written opinion to the Lender that the total number of securities that
are proposed to be included in such offering is such that the success of the
offering would be materially and adversely affected by inclusion of the
securities requested to be included, then the amount of securities to be offered
for the accounts of the Company, the Lender and other holders registering
securities pursuant to registration rights shall be allocated as follows:
(i) if such registration has been initiated by the Company as a
primary offering, first to the securities sought to be included by the Company,
second to the Registrable Securities sought to be included by Lender and third
to the securities sought to be included by other holders of registration rights;
and
(ii) if such registration has been initiated by a holder of
registration rights (other than Lender), first to the securities sought to be
included by such holder, second to the securities sought to be included by the
Company, and third to the Registrable Securities sought to be included by Lender
and to all other securities sought to be included by other holders of
registration rights, pro rata, on the basis of the number of securities owned by
each such holder.
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<PAGE>
2. Hold-Back Agreements.
2.1 Restrictions on Public Sale by Holder of Registrable Securities.
Lender agrees, if requested by the managing underwriters in an
Underwritten Offering, not to effect any public sale or distribution of
securities of the Company of the same class as the securities included in such
Registration Statement, including a sale pursuant to Rule 144 under the
Securities Act (except as part of such Underwritten Registration), during the
10-day period prior to the filing of a Registration Statement with respect to
such Underwritten Offering, and during the 90-day period beginning on the
closing date of each Underwritten Offering made pursuant to such Registration
Statement, to the extent timely notified in writing by the Company or the
managing underwriters.
2.2 Restrictions on Sale of Securities by the Company.
The Company agrees not to effect any public sale or distribution of
any securities similar to those being registered, or any securities convertible
into or exchangeable or exercisable for such securities (except pursuant to a
registration statement on Form S-4 or S-8, or any substitute form that may be
adopted by the SEC) during the ten days prior to the filing of a registration
statement with respect to such Underwritten Offering, and during the 90-day
period beginning on the effective date of any Registration Statement (except as
part of such registration statement (x) where Lender consents or (y) where
Lender is participating in such registration statement pursuant to Section 1.2
hereof and such registration statement was filed by the Company).
3. Registration Procedures.
In connection with the Company's registration obligations pursuant to
Section 1 hereof, the Company will use its best efforts to effect such
registration to permit the sale of such Registrable Securities in accordance
with the intended method or methods of distribution thereof, and pursuant
thereto the Company will as expeditiously as possible take the actions described
below.
3.1 Preparation of Registration Statement.
The Company shall prepare and file with the SEC, as soon as
practicable, a Registration Statement relating to the applicable registration on
any appropriate form under the Securities Act, which forms shall be available
for the sale of the Registrable Securities in accordance with the intended
method or methods of distribution thereof and shall include all financial
statements of the Company, and use its best efforts to cause such Registration
Statement to become effective; provided that before filing a Registration
Statement or Prospectus or any amendments or supplements thereto, including
documents incorporated by reference after the initial filing of the Registration
4
<PAGE>
Statement, the Company will furnish one counsel selected by Lender, and the
underwriters, if any, copies of all such documents proposed to be filed, which
documents will be subject to the review of such counsel and underwriters, and
the Company will not file any Registration Statement or amendment thereto or any
prospectus or any supplement thereto (including such documents incorporated by
reference) to which such counsel or the underwriters, if any, shall reasonably
object.
3.2 Preparation of Amendments.
The Company shall prepare and file with the SEC such amendments and
post-effective amendments to the Registration Statement as may be necessary to
keep the Registration Statement effective for the applicable period, or such
shorter period which will terminate when all Registrable Securities covered by
such Registration Statement have been sold. The Company shall cause the
prospectus to be supplemented by any required prospectus supplement, and as so
supplemented to be filed pursuant to Rule 424 under the Securities Act and
comply with the provisions of all securities covered by such Registration
Statement during the applicable period in accordance with the intended method or
methods of distribution by Lender set forth in such Registration Statement or
supplement to the prospectus the Company shall not be deemed to have used its
best efforts to keep a Registration Statement effective during the applicable
period if it voluntarily takes any action that would result in Lender not being
able to sell such Registrable Securities during that period unless such action
is required under applicable law; provided that the foregoing shall not apply to
actions taken by the Company in good faith and for valid business reasons,
including, without limitation, a merger or the acquisition or sale of assets, so
long as the Company promptly thereafter complies with the requirements of
Section 3 hereof, if applicable.
3.3 Notification of Filings.
The Company shall notify the Lender and the managing underwriters,
if any, promptly, and confirm such advice in writing, (1) when the prospectus or
any prospectus supplement or post-effective amendment has been filed, and, with
respect to the Registration Statement or any post-effective amendment, when the
same has become effective, (2) of any request by the SEC for amendments or
supplements to the registration statement or the prospectus or for additional
information, (3) of the issuance by the SEC of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any proceedings
for that purpose, (4) if at any time the representations and warranties of the
Company contemplated by Section 3.14 below cease to be true and correct, (5) of
the receipt by the Company of any notification with respect to the suspension of
the qualification of the Registrable Securities for sale in any jurisdiction or
the initiation or threatening of any proceeding for such purpose and (6) of the
happening of any event which makes any statement made in the Registration
Statement, the prospectus or any document incorporated therein by reference
untrue or which requires
5
<PAGE>
the making of any changes in the Registration Statement, the prospectus or any
document incorporated therein by reference in order to make the statements
therein not misleading.
3.4 Prevent Suspension.
The Company shall make every reasonable effort to obtain the
withdrawal of any order suspending the effectiveness of the Registration
Statement at the earliest possible moment.
3.5 Underwriters' Request.
If reasonably requested by the managing underwriter or underwriters
or a Lender, the Company shall promptly incorporate in a prospectus supplement
or post-effective amendment such information as the managing underwriters and
the Lender agree should be included therein relating to the sale of the
Registrable Securities, including, without limitation, information with respect
to the number of Registrable Securities being sold to such underwriters, the
purchase price being paid therefor by such underwriters and with respect to any
other terms of the Underwritten (or best efforts underwritten) Offering of the
Registrable Securities to be sold in such offering; and make all required
filings of such prospectus supplement or post-effective amendment as soon as
notified of the matters to be incorporated in such prospectus supplement or
post-effective amendment.
3.6 Provide Documents.
The Company shall promptly prior to the filing of any document which
is to be incorporated by reference into the Registration Statement or the
prospectus (after initial filing of the Registration Statement), make available
representatives of the Company for discussion of such document and make such
changes in such document prior to the filing thereof as counsel for such selling
holders or underwriters may reasonably request.
3.7 Copies of Registration Statement.
The Company shall furnish to Lender and each managing underwriter,
without charge, at least one signed copy of the Registration Statement and any
post-effective amendment thereto, including financial statements and schedules,
all documents incorporated therein by reference and all exhibits (including
those incorporated by reference).
3.8 Prospectus Copies.
The Company shall deliver to Lender and the underwriters, if any,
without charge, as many copies of the prospectus (including each preliminary
prospectus) and any
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<PAGE>
amendment or supplement thereto as such persons may reasonably request. The
Company consents to the use of the prospectus or any amendment or supplement
thereto by Lender and the underwriters, if any, in connection with the offering
and sale of the Registrable Securities covered by the prospectus or any
amendment or supplement thereto.
3.9 Blue Sky Compliance.
Prior to any public offering of Registrable Securities, the Company
shall register or qualify or cooperate with the selling holders of Registrable
Securities, the underwriters, if any, and their respective counsel in connection
with the registration or qualification of such Registrable Securities for offer
and sale under the securities or blue sky laws of such jurisdictions as any
seller or underwriter reasonably requests in writing and do any and all other
acts or things necessary or advisable to enable the disposition in such
jurisdictions of the Registrable Securities covered by the Registration
Statement.
3.10 Certificates.
The Company shall cooperate with Lender and the managing
underwriters, if any, to facilitate the timely preparation and delivery of
certificates representing Registrable Securities to be sold and not bearing any
restrictive legends and enable such Registrable Securities to be in such
denominations and registered in such names as the managing underwriters may
request at least two business days prior to any sale of Registrable Securities
to the underwriters.
3.11 Other Approvals.
The Company shall cause the Registrable Securities covered by the
applicable Registration Statement to be registered with or approved by such
other governmental agencies or authorities as may be necessary to enable the
seller or sellers thereof or the underwriters, if any, to consummate the
disposition of such Registrable Securities.
3.12 Supplement.
Upon the occurrence of any event contemplated by Section 3.3(6)
above, subject to Section 1.1, the Company prepare a supplement or
post-effective amendment to the Registration Statement or the related prospectus
or any document incorporated therein by reference or file any other required
document so that, as thereafter delivered to the purchasers of the Registrable
Securities, the prospectus will not contain an untrue statement of a material
fact or omit to state any material fact necessary to make the statements therein
not misleading.
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3.13 Listing.
The Company shall cause all Registrable Securities covered by the
Registration Statement to be listed on each securities exchange on which similar
securities issued by the Company are then listed.
3.14 Sales Facilitation.
The Company shall enter into such agreements (including an
underwriting agreement) and take all such other actions in connection therewith
in order to expedite or facilitate the disposition of such Registrable
Securities and in connection therewith, whether or not an underwriting agreement
is entered into and whether or not the registration is an Underwritten
Registration, (1) make such representations and warranties to the holders of
such Registrable Securities and the underwriters, if any, in form, substance and
scope as are customarily made by issuers to underwriters in primary underwritten
offerings; (2) obtain opinions of counsel to the Company and updates thereof
(which counsel and opinions (in form, scope and substance) shall be reasonably
satisfactory to the managing underwriters, if any, and Lender, covering the
matters customarily covered in opinions requested in Underwritten Offerings and
such other matters as may be reasonably requested by such holders and
underwriters); (3) obtain "cold comfort" letters and updates thereof from the
Company's independent certified public accountants addressed to Lender and the
underwriters, if any, such letters to be in customary form and covering matters
of the type customarily covered in "cold comfort" letters by underwriters in
connection with primary Underwritten Offerings; (4) if an underwriting agreement
is entered into, the same shall set forth in full the indemnification provisions
and procedures of Section 5 hereof with respect to all parties to be indemnified
pursuant to said Section; and (5) the Company shall deliver such documents and
certificates as may be requested by Lender and the managing underwriters, if
any, to evidence compliance with clause (1) above and with any customary
conditions contained in the underwriting agreement or other agreement entered
into by the Company. The above shall be done at each closing under such
underwriting or similar agreement or as and to the extent required thereunder.
3.15 Financial Records.
The Company shall make available for inspection by Lender, any
underwriter participating in any disposition pursuant to such registration, and
any attorney or accountant retained by Lender or underwriter, all financial and
other records, pertinent corporate documents and properties of the Company and
cause the Company's officers, directors and employees to supply all information
reasonably requested by any such representative, underwriter, attorney or
accountant in connection with such registration; provided that any records,
information or documents that are designated by the Company
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in writing as confidential shall be kept confidential by such Persons unless
disclosure of such records, information or documents is required by court or
administrative order.
3.16 Compliance with Rules.
The Company shall otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC, and make available to its security
holders, as soon as reasonably practicable, an earnings statement covering a
period of 12 months, beginning within three months after the effective date of
the registration statement, which earnings statement shall satisfy the
provisions of section 11(a) of the Securities Act.
3.17 NASD Filings.
The Company shall cooperate with Lender and each underwriter
participating in the disposition of such Registrable Securities and their
respective counsel in connection with any filings required to be made with the
National Association of Securities Dealers, Inc. (the "NASD").
The Company may require Lender to furnish to the Company such
information regarding the distribution of such securities as the Company may
from time to time reasonably request in writing.
Lender agrees by acquisition of such Registrable Securities that,
upon receipt of any notice from the Company of the happening of any event of the
kind described in Section 3.12 hereof, Lender will forthwith discontinue
disposition of Registrable Securities until Lender's receipt of the copies of
the supplemented or amended prospectus contemplated by Section 3.12 hereof, or
until it is advised in writing (the "Advice") by the Company that the use of the
prospectus may be resumed, and has received copies of any additional or
supplemental filings which are incorporated by reference in the prospectus, and,
if so directed by the Company such holder will deliver to the Company, (at the
Company's expense), all copies, other than permanent file copies then in such
holder's possession, of the prospectus covering such Registrable Securities
current at the time of receipt of such notice.
4. Registration Expenses.
All expenses incident to the Company's performance of or compliance
with this Agreement, including without limitation: all registration and filing
fees; fees with respect to filings required to be made with the NASD; fees and
expenses of compliance with securities or blue sky laws (including fees and
disbursements of counsel for the underwriters of Registrable Securities in
connection with blue sky qualifications of the Registrable Securities and
determination of their eligibility for investment under the laws of such
jurisdictions as the managing underwriters or Lender may designate); printing
expenses, messenger, telephone and delivery expenses; fees and disbursements of
counsel
9
<PAGE>
for the Company and customary fees and expenses for independent certified public
accountants retained by the Company (including the expenses of any comfort
letters or costs associated with the delivery by independent certified public
accountants of a comfort letter or comfort letters requested pursuant to Section
3.14 hereof); fees and disbursements of one counsel for the Lender and all other
holders of registration rights; all internal expenses of the Company (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties); the expense of any annual audit; the
fees and expenses incurred in connection with the listing of the securities to
be registered on each securities exchange on which similar securities issued by
the Company are then listed; and the fees and expenses of any person, including
special experts, retained by the Company (all such expenses being herein called
"Registration Expenses") will be borne by the Company regardless of whether the
Registration Statement becomes effective. The Company shall not have any
obligation to pay any underwriting discounts, commissions or similar fees
attributable to the sale of Registrable Securities.
5. Indemnification: Contribution.
5.1 Indemnification by the Company.
The Company agrees to indemnify and hold harmless Lender and its
members, managers, and their respective partners, officers, directors, employees
and agents, and each person who controls such person (within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act) against all
losses, claims, damages, liabilities and expenses arising out of or based upon
any untrue or alleged untrue statement of a material fact contained in any
Registration Statement, prospectus or preliminary prospectus or any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
the same are caused by or contained in any information furnished in writing to
the Company by Lender expressly for use therein. The Company will also indemnify
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in the distribution, their officers and directors
and each person who controls such persons (within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act) to the same extent as
provided above with respect to the indemnification of Lender, if requested.
5.2 Indemnification by Lender.
Lender agrees to indemnify and hold harmless the Company and its
directors, officers, employees and agents, and each person who controls the
Company (within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act) against any losses, claims, damages, liabilities and expenses
resulting from any untrue statement of a material fact or any omission of a
material fact required to be stated
10
<PAGE>
in the Registration Statement or prospectus or preliminary prospectus or
necessary to make the statements therein not misleading, to the extent, but only
to the extent, that such untrue statement or omission is contained in any
information or affidavit so furnished in writing by Lender to the Company
specifically for inclusion in such Registration Statement or prospectus. In no
event shall the liability of Lender hereunder be greater in amount than the
dollar amount of the proceeds received by Lender upon the sale of the
Registrable Securities giving rise to such indemnification obligation. The
Company shall be entitled to receive indemnities from underwriters, selling
brokers, dealer managers and similar securities industry professionals
participating in the distribution, to the same extent as provided above with
respect to information so furnished in writing by such persons specifically for
inclusion in any prospectus or Registration Statement.
5.3 Conduct of Indemnification Proceedings.
Any Person entitled to indemnification hereunder will (i) give
prompt notice to the indemnifying party of any claim with respect to which it
seeks indemnification and (ii) permit such indemnifying party to assume the
defense of such claim with counsel reasonably satisfactory to the indemnified
party; provided, however , that any person entitled to indemnification hereunder
shall have the right to employ separate counsel and to participate in the
defense of such claim, but the fees and expenses of such counsel shall be at the
expense of such person unless (a) the indemnifying party has agreed to pay such
fees or expenses, (b) the indemnifying party shall have failed to assume the
defense of such claim and employ counsel reasonably satisfactory to such person
or (c) based upon written advice of counsel to such person, there shall be one
or more defenses available to such person that are not available to the
indemnifying party or there shall exist conflicts of interest pursuant to
applicable rules of professional conduct between such person and the
indemnifying party (in which case, if the person notifies the indemnifying party
in writing that such person elects to employ separate counsel at the expense of
the indemnifying party, the indemnifying party shall not have the right to
assume the defense of such claim on behalf of such person), in each of which
events the fees and expenses of such counsel shall be at the expense of the
indemnifying party. The indemnifying party will not be subject to any liability
for any settlement made without its consent (but such consent will not be
unreasonably withheld), but if settled with its written consent, or if there be
a final judgment for the plaintiff in any such action or proceeding, the
indemnifying party shall indemnify and hold harmless the indemnified parties
from and against any loss or liability (to the extent stated above) by reason of
such settlement or judgment. No indemnified party will be required to consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to such claim or
litigation.
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<PAGE>
5.4 Contribution.
If for any reason the indemnification provided for in the preceding
Sections 5.1 and 5.2 is unavailable to an indemnified party or insufficient to
hold it harmless as contemplated by the preceding Sections 5.1 and 5.2, then the
indemnifying party shall contribute to the amount paid or payable by the
indemnified party as a result of such loss, claim, damage or liability in such
proportion as is appropriate to reflect not only the relative benefits received
by the indemnified party and the indemnifying party, but also the relative fault
of the indemnified party and the indemnifying party, as well as any other
relevant equitable considerations, provided, that Lender shall not be required
to contribute an amount greater than the dollar amount of the proceeds received
by Lender with respect to the sale of the Registrable Securities giving rise to
such indemnification obligation. The relative fault of the Company on the one
hand and of Lender on the other shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by such party, and the parties' relative intent, knowledge, access to
information, and opportunity to correct or prevent such statement or omission.
No person guilty of fraudulent misrepresentation (within the meaning of Section
10(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentations.
6. Participation in Underwritten Registrations
6.1 Selection of Underwriter.
If any of the Registrable Securities covered by the Shelf
Registration are to be sold in an Underwritten Offering, the investment banker
or investment bankers and manager or managers that will administer the offering
will be selected by Lender; provided that such investment bankers and managers
must be reasonably satisfactory to the Company.
6.2 Commitment to Sell; Cooperation.
Lender shall not participate in any underwritten registration
hereunder pursuant to Section 1.2 unless Lender (i) agrees to sell on the basis
provided in any underwriting arrangements and (ii) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents required under the terms of such underwriting arrangements.
Nothing in this Section 6 shall be construed to create any additional rights
regarding the registration of Registrable Securities.
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<PAGE>
7. Successors and Assigns.
Each covenant and representation of this Agreement shall inure to the
benefit and be binding upon each of the parties, their personal representatives,
assigns and other successors in interest.
8. Entire Agreement.
This Agreement constitutes the entire agreement between the parties and
supersedes all other agreements, representations, warranties, statements,
promises and undertakings whether oral or written with respect to the subject
matter of this Agreement. This Agreement may be modified only by written
agreement signed by all parties.
9. Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the State of Colorado, except that no doctrine of choice of law shall be
used to apply the laws of any other state or jurisdiction.
10. Counterparts.
This Agreement may be executed simultaneously in any number of
counterparts, each of which counterpart shall be deemed to be an original and
such counterpart shall constitute one and the same instrument.
11. Further Acts of the Parties.
The parties to this Agreement hereby agree to execute any other documents,
to take further actions which are reasonably necessary and appropriate in order
to implement the transactions contemplated by this Agreement.
12. Authorized Signatures.
Each of the parties to this Agreement hereby represents that the person
signing below are authorized to execute this Agreement on behalf of their
respective party.
13. Fees and Costs.
The Borrower shall pay to the Lender on demand all costs and
expenses that the Lender pays or incurs in connection with the negotiation,
preparation, consummation, administration, enforcement, and termination of this
Agreement, including, without limitation reasonable attorneys' and paralegals'
fees and disbursements of counsel to the Lender.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been entered into as of the date
first written above.
"COMPANY"
INCOMNET, INC.
By: /s/ Denis Richard
---------------------------------------
Denis Richard
President and Chief Executive Officer
"LENDER"
IRONWOOD TELECOM LLC
By: /s/ Donald V. Berlanti
---------------------------------------
Donald V. Berlanti
Member
14
<PAGE>
LOAN AND SECURITY AGREEMENT
DATED AS OF DECEMBER 15, 1998
AMONG
INCOMNET, INC.,
INCOMNET COMMUNICATIONS CORPORATION
AND
IRONWOOD TELECOM LLC
<PAGE>
TABLE OF CONTENTS
Page
----
1. DEFINITIONS AND TERMS..................................................1
1.1. Definitions...................................................1
1.2. Rules of Construction.........................................8
2. LOANS..................................................................9
2.1. Term Loan.....................................................9
3. INTEREST AND OTHER CHARGES.............................................9
3.1. Interest......................................................9
3.2. Maximum Interest Rate........................................10
3.3. Origination Fee..............................................10
4. PAYMENTS AND PREPAYMENTS..............................................10
4.1. Repayment of Loan............................................10
4.2. Voluntary Prepayments of Loan................................10
4.3. Place and Form of Payments; Extension of Time................11
4.4. Application and Reversal of Payments.........................11
4.5. Indemnity for Returned Payments..............................11
5. LENDER'S BOOKS AND RECORDS; QUARTERLY STATEMENTS......................11
6. COLLATERAL............................................................12
6.1. Grant of Security Interest...................................12
6.2. Perfection and Protection of Security Interest...............12
6.3. Location of Collateral.......................................13
6.4. Title to, Liens on, and Sale and Use of, Collateral..........14
6.5. Access and Examination.......................................14
6.6. Insurance....................................................14
6.7. Collection of Accounts; Payments.............................15
6.8. Equipment....................................................16
6.9. Documents, Instruments, and Chattel Paper....................16
6.10. Right to Cure................................................17
6.11. Lender's Rights, Duties and Liabilities......................17
7. BOOKS AND RECORDS; FINANCIAL INFORMATION; NOTICES.....................17
7.1. Books and Records............................................17
7.2. Financial Information........................................18
7.3. Notices to Lender............................................18
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8. GENERAL WARRANTIES AND REPRESENTATIONS................................19
8.1. Authorization, Validity, and Enforceability of this
Agreement and the Loan Documents.............................19
8.2. Validity and Priority of Security Interest...................20
8.3. Organization and Qualification...............................20
8.4. Corporate Name; Prior Transactions...........................20
8.5. Subsidiaries and Affiliates..................................20
8.6. Use of Proceeds..............................................21
8.7. Public Disclosure............................................21
8.8. Intangible Property..........................................21
8.9. Capital......................................................21
8.10. Material Litigation..........................................22
8.11. Title, Security Interests of Lender..........................22
8.12. Restrictive Agreements, Labor Contracts......................22
8.13. Laws.........................................................22
8.14. Consents.....................................................22
8.15. Defaults.....................................................22
8.16. Financial Condition..........................................23
8.17. ERISA........................................................23
8.18. Taxes........................................................23
8.19. Business Relationships.......................................23
8.20. ICC Ownership................................................23
9. AFFIRMATIVE AND NEGATIVE COVENANTS....................................24
9.1. Taxes and Other Obligations..................................24
9.2. Corporate Existence and Good Standing........................24
9.3. Maintenance of Property and Insurance........................24
9.4. Mergers, Consolidations, Acquisitions or Sales...............24
9.5. Transactions Affecting Collateral or Obligations.............25
9.6. Guaranties...................................................25
9.7. Debt.........................................................25
9.8. Prepayment...................................................25
9.9. Transactions with Affiliates.................................25
9.10. Liens........................................................26
9.11. Restricted Investments.......................................26
9.12. Equity Sales.................................................26
9.13. EBITDA and Other Financial Covenants.........................26
9.14. Intentionally Deleted........................................26
9.15. Further Assurances...........................................26
9.16. Expenses.....................................................26
9.17. Notice of Litigation.........................................27
9.18. ERISA........................................................27
9.19. Labor Disputes...............................................27
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<PAGE>
9.20. Capital Expenditures.........................................27
9.21. Name.........................................................27
10. CLOSING; CONDITIONS TO CLOSING........................................27
10.1. Representations and Warranties; Covenants; Events............28
10.2. Delivery of Documents........................................28
11. DEFAULT; REMEDIES.....................................................29
11.1. Events of Default............................................29
11.2. Remedies.....................................................31
12. MISCELLANEOUS.........................................................32
12.1. Cumulative Remedies; No Prior Recourse to Collateral.........32
12.2. No Implied Waivers...........................................33
12.3. Severability.................................................33
12.4. Governing Law................................................33
12.5. Consent to Jurisdiction and Venue; Service of Process........33
12.6. Waivers......................................................34
12.7. Survival of Representations and Warranties...................34
12.8. Indemnification..............................................34
12.9. Other Security and Guaranties................................35
12.10. Notices......................................................35
12.11. Waiver of Notices............................................36
12.12. Binding Effect; Assignment; Disclosure.......................36
12.13. Modification.................................................36
12.14. Counterparts.................................................36
12.15. Captions.....................................................36
12.16. Right of SetOff..............................................37
12.17. Fees and Expenses............................................37
12.18. Prior Agreements.............................................37
12.19. Additional Post-Closing Covenants............................38
iii
<PAGE>
LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT (the "Agreement") is made and entered
into as of December 15, 1998, by and among Incomnet, Inc., a California
corporation ("Borrower"), Incomnet Communications Corporation, Inc., a Delaware
corporation formerly known as National Telecommunications & Communications, Inc.
("ICC"), and Ironwood Telecom LLC, a Colorado limited
liability company ("Lender").
BACKGROUND
Lender has agreed to make financing available to or for the benefit of
Borrower in the total amount of $16,785,470.00 on the terms and conditions set
forth below. ICC currently has outstanding debt with (i) Worldcom Network
Services, Inc. ("Worldcom") with the outstanding amount of $3,456,151.56 as of
December 15, 1998 ("Worldcom Debt") secured by a security agreement dated June
1, 1996 between ICC and Worldcom ("Worldcom Security Agreement") and (ii) First
Bank & Trust ("First Bank") with the outstanding amount of $4,954,707.80 as of
December 15, 1998 ("First Bank Debt") secured by a promissory note dated March
27, 1997 as modifed from time to time between ICC and First Bank ("First Bank
Note"). Lender, ICC and Borrower have agreed that Lender will (i) purchase or
obtain by assignment the Worldcom Debt and the First Bank Debt and (ii) advance
funds or provide financing to Borrower at Closing with the total Principal
Amount of all such transactions equal to $16,785,470.00. On the terms and
conditions described below, Borrower and ICC are granting to Lender a security
interest in certain of their property.
AGREEMENT
In consideration of the mutual conditions and agreements set forth in this
Agreement, and for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Borrower and Lender hereby agree as follows:
1. DEFINITIONS AND TERMS.
1.1. Definitions.
The capitalized terms used in this Agreement and the Exhibits and
the Schedules attached hereto shall have the meanings set forth below or
elsewhere as indicated in this Agreement:
"Account" means Borrower's or ICC's, as the case may be, right to
payment arising out of a sale or lease and delivery of goods or rendition of
services in the ordinary course of Borrower's or ICC's business.
"Account Debtor" means each Person obligated in any way on or in
connection with an Account.
"Adjusted Tangible Net Worth" means, at any date: (a) the book value
(after deducting related depreciation, obsolescence, amortization, valuation and
other proper reserves
<PAGE>
as determined in accordance with GAAP) at which the assets of Borrower would be
shown on its balance sheet at such date prepared in accordance with GAAP less
(b) the amount at which Borrower's liabilities would be shown on such balance
sheet, including as liabilities all reserves for contingencies and other
potential liabilities which would be shown on such balance sheet.
"Affiliate" means a Person, other than Lender (a) which, directly or
indirectly, controls, is controlled by or is under common control with,
Borrower; (b) which beneficially owns or holds, directly or indirectly, five
percent or more of any class of voting stock of Borrower; or (c) five percent or
more of any class of the voting stock (or if such Person is not a corporation,
five percent or more of the equity interest) of which is beneficially owned or
held, directly or indirectly, by Borrower. The term control (including the terms
"controlled by" and "under common control with") means the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of the Person in question.
"Agreement" means this Loan and Security Agreement dated as of
December 15, 1998, among Borrower, ICC and Lender.
"Amended and Restated Note(s)" means individually and collectively
the Amended and Restated First Bank Note and the Worldcom Promissory Note in the
forms attached hereto as Exhibit A.
"Borrower" means Incomnet, Inc., a California corporation.
"Business Day" means any day that is not a Saturday, Sunday, or a
day on which banks in Los Angeles, California or Denver, Colorado, are required
or permitted to close.
"Casey" means John P. Casey, an individual.
"Closing Date" means December 15, 1998.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time.
"Collateral" has the meaning given to such term in Section 6.1.1.
"Contract Rights" means, collectively, all of Borrower's or ICC's,
as the case may be, rights and remedies under, and all moneys and claims for
money due or to become due to Borrower under all material contracts and
agreements to which Borrower is a party and any and all amendments, supplements,
extensions, and renewals thereof, including but not limited to the LEC contracts
set forth on Schedule 1.1.
"Debt" means all liabilities, obligations and indebtedness of
Borrower to any Person, of any kind or nature, now or hereafter owing, arising,
due or payable, howsoever evidenced, created, incurred, acquired or owing,
whether primary, secondary, direct, contingent, fixed or otherwise. Without in
any way limiting the generality of the foregoing, Debt shall specifically
include the following: (i) Borrower's liabilities and obligations to trade
creditors; (ii) all Obligations; (iii) all obligations and liabilities of any
Person secured by any Lien on Borrower's Property, even though Borrower shall
not have assumed or become liable for the
2
<PAGE>
payment thereof; provided, however, that all such obligations and liabilities
which are limited in recourse to such Property shall be included in Debt only to
the extent of the book value of such Property as would be shown on a balance
sheet of Borrower prepared in accordance with GAAP; (iv) all obligations and
liabilities created or arising under any capital lease or conditional sale or
other title retention agreement with respect to Property used or acquired by
Borrower, even if the rights and remedies of the lessor, seller or lender
thereunder are limited to repossession of such Property; provided, however, that
all such obligations and liabilities which are limited in recourse to such
Property shall be included in Debt only to the extent of the book value of such
Property as would be shown on a balance sheet of Borrower prepared in accordance
with GAAP; (v) all accrued pension fund and other employee benefit plan
obligations and liabilities; (vi) all obligations and liabilities under
Guaranties; and (vii) deferred taxes.
"EBITDA" means in any fiscal period, Borrower's consolidated net
income (other than extraordinary or non-recurring items of Borrower for such
period), plus (i) the amount of all interest expense, income tax expense,
depreciation expense, and amortization expense of Borrower for such period, on a
consolidated basis, and plus or minus (as the case may be) (ii) any other
non-cash charges which have been added or subtracted, as the case may be, in
calculating Borrower's consolidated net income for such period.
"Equipment" means all of Borrower's or ICC's, as the case may be,
now owned and hereafter acquired machinery, equipment, furniture, furnishings,
fixtures, and other tangible personal property (except Inventory), including
data processing hardware and software, motor vehicles and office equipment, as
well as all of such types of property leased by Borrower or ICC and all of
Borrower's or ICC's rights and interests with respect thereto under such leases
(including options to purchase); together with all present and future additions
and accessions thereto, replacements therefor, component and auxiliary parts and
supplies used or to be used in connection therewith, and all substitutes for any
of the foregoing, and all manuals, drawings, instructions, warranties and rights
with respect thereto wherever any of the foregoing is located.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended from time to time.
"Event" means any event or condition which, with notice, the passage
of time, the happening of any other condition or event, or any combination
thereof, would constitute an Event of Default.
"Event of Default" has the meaning given to such term in Section
11.1.
"Fiscal Year" means Borrower's fiscal year for financial accounting
purposes. The current Fiscal Year of Borrower will end on December 31, 1998.
"GAAP" means at any particular time generally accepted accounting
principles as in effect at such time.
"General Intangibles" means all general intangibles of Borrower or
ICC's, as the case may be, whether now owned or hereafter created or acquired by
Borrower or ICC, including all choses in action, causes of action, corporate or
other business records, deposit accounts,
3
<PAGE>
investment property, inventions, designs, drawings, blueprints, patents, patent
applications, trademarks and the goodwill of the business symbolized thereby,
names, trade names, trade secrets, goodwill, copyrights, registrations,
licenses, franchises, customer lists, security and other deposits, rights in all
litigation presently or hereafter pending for any cause or claim (whether in
contract, tort or otherwise), and all judgments now or hereafter arising
therefrom, all claims of Borrower against Lender, rights to purchase or sell
real or personal property, rights as a licensor or licensee of any kind,
royalties, telephone numbers, proprietary information, purchase orders, and all
insurance policies and claims (including without limitation life insurance, key
man insurance, credit insurance, liability insurance, property insurance and
other insurance), tax refunds and claims, computer programs, discs, tapes and
tape files, claims under guaranties, security interests or other security held
by or granted to Borrower or ICC, all rights to indemnification and all other
intangible property of every kind and nature (other than Receivables).
"Guaranty" by any Person means all obligations of such Person which
in any manner directly or indirectly guarantee the payment or performance of any
indebtedness or other obligation of any other Person (the "guaranteed
obligations"), or assure or in effect assure the holder of the guaranteed
obligations against loss in respect thereof, including any such obligations
incurred through an agreement, (a) to purchase the guaranteed obligations or any
Property constituting security therefor or (b) to advance or supply funds for
the purchase or payment of the guaranteed obligations or to maintain a working
capital or other balance sheet condition.
"Intercompany Accounts" means all assets and liabilities, however
arising, which are due to Borrower from any Affiliate other than Lender, Casey
or Richard, or due from Borrower to any Affiliate other than Lender, Casey or
Richard, or which otherwise arise from any transaction by Borrower with any
Affiliate other than Lender, Casey or Richard.
"Inventory" means all of Borrower's or ICC's, as the case may be,
now owned and hereafter acquired inventory, goods, merchandise, and other
personal property, wherever located, to be furnished under any contract of
service or held for sale or lease, all raw materials, workinprocess, finished
goods, returned and repossessed goods, and materials and supplies of any kind,
nature or description which are or might be used or consumed in Borrower's or
ICC's business or used in connection with the manufacture, packing, shipping,
advertising, selling or finishing of such inventory, goods, merchandise and
other personal property, and all documents of title or other documents
representing them.
"IRS" means the Internal Revenue Service or any successor agency.
"Lawsuit" has the meaning given to such term in Section 10.4.
"Lender" means Ironwood Telecom LLC, a Colorado limited liability
company.
"Lien" means: any interest in property securing an obligation owed
to, or a claim by, a Person other than the owner of the Property, whether such
interest is based on the common law, statute, or contract, and includes a
security interest, charge, claim, or lien arising from a mortgage, deed of
trust, encumbrance, pledge, hypothecation, assignment, deposit arrangement,
4
<PAGE>
agreement, or conditional sale, or a lease, consignment or bailment for security
purposes, or any reservation, exception, encroachment, easement, rightofway,
condition, restrictment, lease or other title exception or encumbrance affecting
Property.
"Loan" has the meaning given to such term in Section 2.1.
"Loan Documents" means this Agreement, the Notes, the Warrants, the
Registration Rights Agreement, and all other agreements, instruments, and
documents heretofore, now or hereafter evidencing, securing, guaranteeing or
otherwise relating to the Obligations, the Collateral, the Security Interest or
any other aspect of the transactions contemplated by this Agreement.
"Material Adverse Change" means a material and adverse change in the
Property, business, operations or condition (financial or otherwise) of Borrower
and its Subsidiaries taken as a whole.
"Note(s)" has the meaning given to such term in Section 2.1.
"ICC" means National Telephone & Communications, Inc., a Delaware
corporation.
"Obligations" means all obligations relating to the Worldcom Debt
and the First Bank Debt, all present and future loans, advances, liabilities,
obligations, covenants, duties, and Debts owing by Borrower or ICC to Lender,
whether or not arising under this Agreement, whether or not evidenced by any
note or other instrument or document, whether arising from an extension of
credit, opening of a letter of credit, acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including those
acquired by assignment from others, and any participation by Lender in
Borrower's or ICC's debts owing to others), absolute or contingent, due or to
become due, primary or secondary, as principal or guarantor, and including all
interest, charges, expenses, fees, attorneys' fees, filing fees and any other
sums chargeable to Borrower or ICC hereunder, under another Loan Document, or
under any other agreement or instrument with Lender.
"Payment Account" means each blocked bank account or bank account
associated with a lock box, established pursuant to Section 6.7, to which the
funds of Borrower (including Proceeds of Accounts and other Collateral) are
deposited or credited, and which is maintained in the name of Lender or
Borrower, as Lender may determine, on terms acceptable to Lender.
"PBGC" means the Pension Benefit Guaranty Corporation or any Person
succeeding to the functions thereof.
"Permitted Liens" means: (a) Liens for taxes not yet payable or
Liens for taxes being contested in good faith and by proper proceedings
diligently pursued, provided that a reserve or other appropriate provision, if
any, as shall be required by GAAP shall have been made therefor and that a stay
of enforcement of any such Lien is in effect; (b) Liens in favor of Lender; (c)
Liens upon Equipment granted in connection with the acquisition of such
Equipment by Borrower or ICC after the date hereof to the extent specifically
permitted by this Agreement;
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(d) reservations, exceptions, encroachments, easements, rights of way,
covenants, conditions, restrictions, leases and other similar title exceptions
or encumbrances affecting the Real Property, provided that they do not in the
aggregate materially detract from the value of such Real Property or materially
interfere with their use in the ordinary conduct of Borrower's or ICC's
business; (e) deposits under workmen's compensation, unemployment insurance,
social security and other similar laws; (f) liens relating to statutory
obligations with respect to surety and appeal bonds, performance bonds and other
obligations of a like nature incurred in the ordinary course of business,
provided such are not either individually or in the aggregate in a material
amount; and (g) Liens described on Schedule 6.4.
"Person" means any individual, sole proprietorship, partnership,
joint venture, trust, unincorporated organization, association, corporation,
Public Authority, or any other entity.
"Plan" means any pension or other employee benefit plan which is
subject to Title IV of ERISA, and which is: (a) a plan maintained by Borrower or
any Related Company; (b) a plan to which Borrower or any Related Company
contributes or is required to contribute; (c) a plan to which Borrower or any
Related Company was required to make contributions at any time during the five
(5) calendar years preceding the date of this Agreement; or (d) any other plan
with respect to which Borrower or any Related Company has incurred or may incur
liability, including contingent liability, under Title IV of ERISA, either to
such plan or to the PBGC.
"Premises" means all of Borrower's or ICC's rights, title, and
interest in the real property now owned or leased or hereafter acquired,
including all rights and easements in connection therewith and all buildings and
improvements now or hereafter constructed thereon.
"Principal Amount" means the aggregate amount of the principal
amounts under the Notes as the same may be (i) reduced from time to time by
payments of principal in accordance with the terms of this Agreement and the
Notes or (ii) increased under the terms of this Agreement or the Notes.
"Proceeds" means all products and proceeds, including rentals, of
any Collateral, and all proceeds of such proceeds and products, including all
cash and credit balances, all payments under any indemnity, warranty, or
guaranty payable with respect to any Collateral, all awards for taking by
eminent domain, all proceeds of fire or other insurance, and all money and other
Property obtained as a result of any claims against third parties or any legal
action or proceeding with respect to Collateral.
"Property" means any interest in any kind of property or asset,
whether real, personal or mixed, or tangible or intangible.
"Public Authority" means the government of any country or sovereign
state, or of any state, province, municipality, or other political subdivision
thereof, or any department, agency, public corporation or other instrumentality
of any of the foregoing.
"Real Property" means all of Borrower's or ICC's rights, title, and
interest, other than leasehold interests, in real property now owned or
hereafter acquired by Borrower, including
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all rights and easements in connection therewith and all buildings and
improvements now or hereafter constructed thereon.
"Receivables" means all of Borrower's or ICC's, as the case may be,
now owned and hereafter arising or acquired: (a) accounts (whether or not earned
by performance), including accounts owed to Borrower or ICC by any of its
Subsidiaries or Affiliates, together with all interest, late charges, penalties,
collection fees, and other sums which shall be due and payable in connection
with any account; (b) proceeds of any letters of credit naming Borrower or ICC
as beneficiary; (c) contract rights, chattel instruments, documents, general
intangibles (including choses in action, causes of action, tax refunds, tax
refund claims, Reversions and other amounts payable to Borrower or ICC from
pension and employee benefit plans, rights and claims against shippers and
carriers, rights to indemnification and business interruption insurance) and all
forms of obligations owing to Borrower or ICC (including obligations owing to
Borrower or ICC by Subsidiaries and Affiliates); (d) guarantees and other
security for any of the foregoing; (e) rights of stoppage in transit, replevin,
and reclamation; and (f) other rights or remedies of an unpaid vendor, lienor or
secured party.
"Related Company" means any member of any controlled group of
corporations (as defined in Section 414 of the Code) of which Borrower is a
part, or any trade or business (whether or not incorporated) which together with
Borrower would be treated as a single employer under Section 4001 of ERISA.
"Reportable Event" shall have the meaning assigned to that term in
Title IV of ERISA, including a reportable event described in Section 4043 of
ERISA or the regulations thereunder, a withdrawal from a Plan described in
Section 4063 of ERISA, or a cessation of operations described in Section 4062(e)
of ERISA.
"Restricted Investment" means any acquisition of Property by
Borrower or any of its Subsidiaries in exchange for cash or other Property,
whether in the form of an acquisition of stock, indebtedness or other
obligation, or by loan, advance, capital contribution or otherwise, except the
following: (a) Property to be used in the business of Borrower; (b) current
assets arising from the sale or lease of goods or rendition of services in the
ordinary course of business of Borrower; (c) direct obligations of the United
States of America, or any agency thereof, or obligations guaranteed by the
United States of America, provided that such obligations mature within one (1)
year from the date of acquisition thereof; (d) certificates of deposit maturing
within one (1) year from the date of acquisition, bankers' acceptances,
Eurodollar bank deposits, or overnight bank deposits, in each case issued by,
created by, or with a bank or trust company organized under the laws of the
United States or any state thereof having capital and surplus aggregating at
least $100,000,000; (e) commercial paper given the highest rating by a national
credit rating agency and maturing not more than two hundred seventy (270) days
from the date of creation thereof; and (f) investments in any of Borrower's
Subsidiaries (by capital contribution or otherwise) or purchase or repurchase of
any stock or indebtedness, or any Property, of any of Borrower's Subsidiaries,
other than as contemplated under this Agreement.
"Reversions" means any funds which may become due to Borrower or ICC
in connection with the termination of any Plan or other employee benefit plan.
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"Richard" means Denis Richard, an individual.
"Security Interest" means, collectively, the Liens granted to Lender
in the Collateral pursuant to this Agreement, the other Loan Documents or any
other agreement.
"Subscriber Data" means, wherever located, and whether now owned or
hereafter acquired or created: (a) all customer lists, all documents containing
the names, addresses, telephone numbers or other information regarding
Borrower's or ICC's customers, and tapes, programs, printouts, disks, and other
material or documents relation to the recording, billing or analyzing of any of
the forgoing; (b) customer accounts and contracts for the furnishing by Borrower
or ICC of telecommunications services, and billing and collection contracts,
whether evidenced by a document or otherwise; and (c) all records and documents
relating to any and all of the foregoing items in (a) and (b) whether in the
form of writing, microfilm, microfiche, tape, or electronic media.
"Subsidiary" means any present or future corporation of which
Borrower owns, directly or indirectly, more than 50% of the voting stock.
"Term Note" means the promissory note in the amount of $8,374,610.64
as more fully described in Section 2.1 and in the form attached hereto as
Exhibit A.
"Termination Event" means: (a) a Reportable Event with respect to a
Plan described in Section 4043 of ERISA and the regulations issued thereunder
(other than a Reportable Event not subject to the provision for thirty (30)
days' notice to the PBGC under such regulations); (b) the withdrawal of Borrower
or any Related Company from a Plan during a plan year in which it was a
"substantial employer" as defined in Section 4001(a) (2) of ERISA; (c) the
filing of a notice of intent to terminate a Plan or the treatment of a Plan
amendment as a termination under Section 4041 of ERISA; (d) the institution of
proceedings by the PBGC to terminate or have a trustee appointed to administer a
Plan; (e) any other event or condition which might constitute grounds under
Section 4042 of ERISA for the termination of, or the appointment of a trustee to
administer, any Plan; or (f) the partial or complete withdrawal of Borrower or
any Related Company from a Multiemployer Plan (as defined under ERISA).
"UCC" means the Uniform Commercial Code (or any successor statute)
of the State of Colorado, California or of any other state the laws of which are
required by thereof to be applied in connection with the issue of perfection of
security interests, as such statutes are in effect during the term hereof.
1.2. Rules of Construction.
This Agreement shall be construed in accordance with the following
rules of construction:
(i) any accounting term used in this Agreement shall have, unless
otherwise specifically provided herein, the meaning customarily given in
accordance with GAAP, and all financial computations hereunder shall be
computed, unless otherwise specifically provided herein, in accordance with GAAP
as consistently applied;
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(ii) other than accounting terms, all undefined terms contained in
this Agreement shall, unless the context indicates otherwise, have the meanings
provided for by the UCC to the extent the same are used or defined therein;
(iii) the terms defined in this Agreement include the plural as well
as the singular;
(iv) all references in this Agreement to designated "Sections" and
other subdivisions are to the designated Sections and other subdivisions of the
body of this Agreement;
(v) pronouns of either gender or neuter shall include, as
appropriate, the other pronoun forms;
(vi) 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
(vii) the words "includes" and "including" are not limiting.
2. LOANS.
2.1. Term Loan.
Lender shall make a term loan (the "Loan") to Borrower and Borrower
agrees to receive the Loan in an amount equal to the Principal Amount and
pursuant to the terms and provisions of this Agreement. The term "Loan" shall
incorporate all debt evidenced by the Amended and Restated Notes and the Term
Note. The proceeds of the Loan shall be disbursed on the Closing Date in
accordance with Schedule 2. The Loan shall be repayable in accordance with the
terms of the Term Note and the Amended and Restated Notes (the Term Note and the
Amended and Restated Notes shall be individually and/or collectively referred to
and defined herein as the "Note(s)") and the Notes shall be authorized, issued
and delivered by Borrower and ICC as the case may be to Lender, in the forms
attached as Exhibit A. On the Closing Date, Borrower shall issue to Lender the
Warrants substantially in the form of Exhibit B.
3. INTEREST AND OTHER CHARGES.
3.1. Interest.
3.1.1. Interest Formula.
Borrower shall pay to Lender interest on the unpaid principal
balance of the Loan at a per annum rate equal to twelve percent (12%). Interest
charges shall be computed on the basis of a year of 360 days and actual days
elapsed and shall be payable to Lender quarterly in arrears on the last Business
Day of each Fiscal Quarter, with the first such payment of interest (which shall
include interest in arrears from December 15, 1998 through December 31, 1998)
becoming due and payable on March 31, 1999.
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3.1.2. Default Interest Rates.
If any Event of Default occurs, then, from the date such Event of
Default occurs and until it is cured, or until all Obligations are paid and
performed in full, whichever first occurs, Borrower shall pay interest on the
unpaid principal balance of the Loan at a per annum rate equal to three percent
(3%) plus the rate of interest otherwise specified herein as applicable to the
Loan (the "Default Rate").
3.2. Maximum Interest Rate.
In no event shall the interest rate and other charges hereunder
exceed the highest rate permissible under any law which a court of competent
jurisdiction shall, in a final determination, deem applicable hereto. If a court
determines that Lender has received interest and other charges hereunder in
excess of the highest rate applicable hereto, such excess shall be deemed to
have been received on account of, and shall automatically be applied to reduce,
the Obligations, other than interest, in the inverse order of maturity, and the
provisions hereof shall be deemed amended to provide for the highest permissible
rate. If there are no Obligations outstanding, Lender shall refund to Borrower
such excess.
3.3. Origination Fee.
On the Closing Date, Borrower shall pay to Lender an origination fee
in the amount of $400,000 plus attorneys' fees and related expenses in
connection with the negotiation, preparation, or consumation of this Agreement
and the transactions contemplated hereby.
4. PAYMENTS AND PREPAYMENTS.
4.1. Repayment of Loan.
Borrower shall repay this portion of the Principal Amount that is
then outstanding, plus all accrued and unpaid interest thereon, on December 31,
2000.
4.2. Voluntary Prepayments of Loan.
4.2.1. Borrower may prepay the Principal Amount in whole or in part
at any time and from time to time, upon at least two (2) Business Days' prior
written notice to Lender. All prepayments of the principal of the Principal
Amount shall be accompanied by the payment of all accrued but unpaid interest on
the prepaid Principal Amount to the date of prepayment.
4.2.2. Any prepayment under this Section 4.2 of less than all of the
outstanding Principal Amount shall be applied, first, to accrued but unpaid
interest on the Loan and, second, to the Principal Amount to be prepaid.
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4.3. Place and Form of Payments; Extension of Time.
All payments of principal, interest and other sums due to Lender
shall be made at Lender's address set forth in the Note held by Lender or at
such other address as shall be designated by Lender. Except for Proceeds
received directly by Lender, all such payment shall be made in immediately
available funds. If any payment of the Principal Amount, interest thereon or
other sum to be made hereunder becomes due and payable on a day other than a
Business Day, the due date of such payment shall be extended to the next
succeeding Business Day and interest thereon shall be payable at the applicable
interest rate during such extension.
4.4. Application and Reversal of Payments.
Lender shall have the continuing and exclusive right to apply and
reverse and reapply any and all Proceeds of Collateral and payments that Lender
receives to any portion of the Obligations.
4.5. Indemnity for Returned Payments.
If after receipt of any payment of, or Proceeds applied to the
payment of, all or any part of the Obligations, Lender is for any reason
required to surrender such payment or Proceeds to any Person, because such
payment or Proceeds is invalidated, declared fraudulent, set aside, determined
to be void or voidable as a preference, or a diversion of trust funds, or for
any other reason, then the Obligations or part thereof intended to be satisfied
shall be revived and continue and this Agreement shall continue in full force as
if such payment or Proceeds had not been received by Lender, and Borrower shall
be liable to pay to Lender and hereby does indemnify Lender and holds Lender
harmless for the amount of such payment or Proceeds surrendered. The provisions
of this Section 4.5 shall be effective notwithstanding any contrary action which
may have been taken by Lender in reliance upon such payment or Proceeds, and any
such contrary action so taken shall be without prejudice to Lender's rights
under this Agreement and shall be deemed to have been conditioned upon such
payment or Proceeds having become final and irrevocable. The provisions of this
Section 4.5 shall survive the termination of this Agreement.
5. LENDER'S BOOKS AND RECORDS; QUARTERLY STATEMENTS.
Borrower and ICC agree that the books and records of Lender showing
the Obligations and the transactions pursuant to this Agreement and the other
Loan Documents shall be admissible in any action or proceeding arising
therefrom, and shall constitute prima facie proof thereof, irrespective of
whether any Obligation is also evidenced by a promissory note or other
instrument. Lender will provide to Borrower a quarterly statement of Loans,
payments, and other transactions pursuant to this Agreement. Such statement
shall be deemed correct, accurate, and binding on Borrower and as an account
stated (except for reversals and reapplications of payments made as provided in
Section 4.5 and corrections of errors discovered by Lender), unless Borrower
notifies Lender in writing to the contrary within thirty (30) days after such
statement is rendered. In the event a timely written notice of objections is
given by Borrower, only the items to which exception is expressly made will be
considered to be disputed by Borrower.
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6. COLLATERAL.
6.1. Grant of Security Interest.
6.1.1. As security for the Obligations, each of Borrower and ICC
hereby grants to Lender a continuing security interest in, lien on, and
assignment of all of their respective Property including the following: (i) all
Contract Rights, Equipment, General Intangibles, Inventory, Receivables,
Subscriber Data (excluding Subscriber Data for the residents of the State of New
York until any necessary approvals are received) and Proceeds, wherever located
and whether now existing or hereafter arising or acquired; (ii) all proceeds of
the sale of any equity securities of Rapid Cast, Inc. of which Borrower is the
owner (beneficial or otherwise), and all equity securities of ICC owned by
Borrower, (iii) all moneys, securities and other property and the Proceeds
thereof, now or hereafter held or received by, or in transit to, Lender from or
for Borrower or ICC, whether for safekeeping, pledge, custody, transmission,
collection or otherwise, including all of Borrower's and ICC's deposit accounts,
credits, and balances with any financial institution or local exchange carrier,
and all claims of Borrower or ICC against any financial institution or local
exchange carrier at any time existing relating to Borrower's and ICC's deposit
accounts with any financial institution with which Borrower or ICC maintains
deposits or Borrower's or ICC's accounts with any local exchange carrier with
which Borrower or ICC has a contractual relationship or otherwise does business;
(iv) all of Borrower's and ICC's deposit accounts with any financial
institutions with which Borrower or ICC maintains deposits; and (v) all books,
records and other Property relating to or referring to any of the foregoing,
including all books, records, ledger cards, data processing records, computer
software and other Property and general intangibles at any time evidencing or
relating to the Equipment, General Tangibles, Proceeds, and other property
referred to above (all of the foregoing, together with the Premises and all
other Property in which Lender may at any time be granted a Lien, being herein
collectively referred to as the "Collateral"). Lender shall have all of the
rights of a secured party with respect to the Collateral under the UCC and other
applicable laws.
6.1.2. All Obligations shall constitute a single loan secured by the
Collateral. Lender may, except as otherwise provided in the Loan Documents, in
its sole discretion, (i) exchange, waive, or release any of the Collateral, (ii)
apply Collateral and direct the order or manner of sale thereof as Lender may
determine and (iii) settle, compromise, collect, or otherwise liquidate any
Collateral in any manner, all without affecting the Obligations or Lender's
right to take any other action with respect to any other Collateral.
6.2. Perfection and Protection of Security Interest.
6.2.1. Borrower and ICC shall each, at their expense, perform all
steps requested by Lender at any time to perfect, maintain, protect and enforce
the Security Interest, including: (i) executing and filing financing or
continuation statements, and
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amendments thereof, in form and substance satisfactory to Lender; (ii)
delivering to Lender the originals of all instruments, documents, and chattel
paper, and all other Collateral of which Lender determines it should have
physical possession in order to perfect and protect the Security Interest
therein, duly endorsed or assigned to Lender without restriction; (iii) placing
notations on Borrower's or ICC's books of account, as the case may be, to
disclose the Security Interest; (iv) delivering to Lender all letters of credit
on which Borrower or ICC is named beneficiary; and (v) taking such other steps
as are deemed necessary by Lender to maintain the Security Interest.
6.2.2. Lender may file, without Borrower's or ICC's signature, one
or more financing statements disclosing the Security Interest. Each of Borrower
and ICC agree that a photocopy or other reproduction of this Agreement or of a
financing statement is sufficient as a financing statement. If any Collateral is
at any time in the possession or control of any warehouseman, bailee or any of
Borrower's or ICC's agents or processors, then Borrower or ICC shall notify
Lender thereof and shall notify such Person of the Security Interest in such
Collateral and, upon Lender's request, instruct such Person to hold all such
Collateral for Lender's account subject to Lender's instructions. If at any time
any Collateral is located on any Premises that are not owned by Borrower or ICC,
then Borrower or ICC shall obtain written waivers, in form and substance
satisfactory to Lender, of all present and future Liens to which the owner or
lessor or any mortgagee of such Premises may be entitled to assert against the
Collateral. From time to time, Borrower or ICC shall, upon Lender's request,
execute and deliver confirmatory written instruments pledging the Collateral to
Lender but Borrower's failure to do so shall not affect or limit the Security
Interest. So long as this Agreement is in effect, and until all Obligations have
been fully satisfied, the Security Interest shall continue in full force and
effect in all Collateral. Prior hereto or concurrently herewith Borrower shall
deliver to Lender (i) certificates representing the Rapid Cast, Inc. equity
securities, the sales proceeds of which are pledged as security for the
Obligations pursuant to Section 6.1 and (ii) certificates representing the ICC
equity securities endorsed in blank and pledged hereunder as security of the
Obligations pursuant to Section 6.1. Lender shall hold the certificates
representing the Rapid Cast, Inc. equity securities as security for Borrower's
covenant not to sell the securities represented by such certificates without the
prior consent of Lender.
6.3. Location of Collateral.
Borrower represents and warrants to Lender that: (a) a correct and
complete list of Borrower's chief executive office, the location of its books
and records, the locations of the Collateral and the locations of all of its
other places of business is set forth in Schedule 6.3; and (b) Schedule 6.3
correctly identifies any of such facilities and locations that are not owned by
Borrower and sets forth the names of the owners and lessors of, and, to the best
of Borrower's knowledge, the holders of any mortgages on such facilities and
locations. Borrower agrees that it will not maintain any Collateral at any
location other than those listed on Schedule 6.3, and that it will not otherwise
change or add to any of such locations, unless it gives Lender at least thirty
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(30) days' prior written notice and executes such financing statements and other
documents that Lender requests in connection therewith.
6.4. Title to, Liens on, and Sale and Use of, Collateral.
Borrower represents, warrants and covenants to Lender that: (i) all
Collateral is and will continue to be owned by Borrower or ICC free and clear of
all Liens whatsoever, except for the Security Interest and other Permitted
Liens; (ii) the Security Interest will not be subject to any prior Lien except
Permitted Liens, if any; (iii) Borrower or ICC will use, store and maintain the
Collateral with all reasonable care and will use the Collateral for lawful
purposes only; (iv) Borrower and ICC will not, without Lender's prior written
approval, sell, or dispose of, or permit the sale or disposition of any
Collateral except in the ordinary course of business; and (v) Borrower will not,
without Lender's prior written approval, sell, dispose of, transfer or assign
any equity securities of Rapid Cast, Inc., now or hereafter owned by Borrower
(beneficially or otherwise). The inclusion of Proceeds in the Collateral shall
not be deemed Lender's consent to any sale or other disposition of the
Collateral except as expressly permitted herein.
6.5. Access and Examination.
Lender shall at all reasonable times have access to, examine, audit,
make extracts from and inspect Borrower's and ICC's records, files and books of
account and the Collateral and may discuss Borrower's and ICC's affairs with
Borrower's and ICC's officers and management. Borrower and ICC shall deliver to
Lender any instrument necessary for Lender to obtain records from any service
bureau maintaining records for Borrower. Lender may, at any time, and at
Borrower's expense, make copies of all of Borrower's and ICC's books and
records, or require Borrower or ICC to deliver such copies to Lender. Lender
may, without expense to Lender, use such of Borrower's and ICC's personnel,
supplies and premises as may be reasonably necessary for maintaining or
enforcing the Security Interest.
6.6. Insurance.
6.6.1. Borrower or ICC shall insure the Collateral against loss or
damage by fire with extended coverage, theft, burglary, pilferage, loss in
transit and such other hazards as Lender shall specify, in amounts, under
policies and by insurers acceptable to Lender. Borrower or ICC or shall also
maintain flood insurance, in the event of a designation of the area in which any
Real Property is located as "flood prone" or a "flood risk area," as defined by
the Flood Disaster Protection Act of 1973, in an amount to be reasonably
determined by Lender, and shall comply with the additional requirements of the
National Flood Insurance Program as set forth therein. Borrower or ICC shall
cause Lender to be named in each such policy as secured party or mortgagee and
loss payee or additional insured, in a manner acceptable to Lender. Each policy
of insurance shall contain a clause or endorsement requiring the insurer to give
not less than thirty (30) days' prior written notice to Lender in the event of
cancellation of the policy for any reason whatsoever and a clause or endorsement
stating that the interest of Lender shall not be impaired or invalidated by any
act or neglect of Borrower or ICC or the owner of any Premises where Collateral
is located nor by the use of such Premises for purposes
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more hazardous than are permitted by such policy. All premiums for such
insurance shall be paid by Borrower or ICC when due, and certificates of
insurance and, if requested, photocopies of the policies shall be delivered to
Lender. If Borrower or ICC fails to procure such insurance or to pay the
premiums therefor when due, Lender may (but shall not be required to) do so and
charge the costs thereof to Borrower's loan account. Borrower or ICC shall
promptly notify Lender of any loss, damage, or destruction to the Collateral or
arising from its use, whether or not covered by insurance.
6.6.2. Lender is hereby authorized to collect all insurance proceeds
directly. After deducting from such proceeds the expenses, if any, incurred by
Lender in the collection or handling thereof, Lender may apply such proceeds to
the reduction of the Obligations, in such order as Lender determines, or, at
Lender's option, may permit or require Borrower to use such money, or any part
thereof, to replace, repair, restore or rebuild the Collateral in a diligent and
expeditious manner with materials and workmanship of substantially the same
quality as existed before the loss, damage or destruction.
6.7. Collection of Accounts; Payments.
6.7.1. Prior to Closing, Borrower and ICC shall establish a lockbox
service for collections of Accounts at a bank determined by Lender and pursuant
to documentation satisfactory to Lender. Borrower and ICC shall instruct all
Account Debtors to make all payments directly to the address established for
such service. If, notwithstanding such instructions, Borrower or ICC receives
any Proceeds of Accounts, it shall receive such payments as Lender's trustee and
shall immediately deliver such payments to Lender in their original form duly
endorsed in blank or deposit them into a Payment Account, as Lender may direct.
All collections received in any such lockbox or Payment Account or directly by
Borrower, ICC or Lender, and all funds in any Payment Account or other account
to which such collections are deposited, shall be the sole property of Lender
and shall be subject to Lender' s sole control. Until Borrower or ICC defaults
under this Agreement or until Lender reasonably believes a Borrower or ICC
default is imminent hereunder, Lender will disburse such funds in the lock box
account to Borrower to be used by Borrower in the ordinary course of business
subject to the terms of this Agreement. Lender may, at any time, notify obligors
that the Accounts have been assigned to Lender and of the Security Interest
therein, and may collect them directly and charge the collection costs and
expenses to Borrower's loan account. Borrower and ICC, at Lender's request,
shall execute and deliver to Lender such documents as Lender shall require to
grant Lender access to any post office box in which collections of Accounts are
received.
6.7.2. If sales of Inventory are made for cash or cash equivalents,
Borrower and ICC shall immediately deliver to Lender the identical checks, cash
or other forms of payment which Borrower or ICC receives.
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6.7.3. All payments received by Lender on account of Accounts or as
Proceeds of other Collateral will be Lender's sole property and will be credited
to Borrower's loan account (conditional upon final collection) upon the date of
Lender's receipt thereof.
6.7.4. In the event Borrower repays all of the Obligations upon the
termination of this Agreement, other than through Lender's receipt of payments
on account of Accounts or Proceeds of other Collateral, such payment will be
credited (conditional upon final collection) upon the date of Lender's receipt
thereof.
6.8. Equipment.
Borrower and ICC represent and warrant to Lender that all of the
Equipment is and will be used or held for use in Borrower's or ICC's business.
Borrower or ICC shall keep and maintain the Equipment in good operating
condition and repair (ordinary wear and tear excepted) and shall make all
necessary replacements thereof. Borrower or ICC shall promptly inform Lender of
any material additions to or deletions from the Equipment. Borrower and ICC
shall not permit any Equipment to become a fixture to real property or an
accession to other personal property, unless Lender has a valid, perfected, and
first priority Security Interest in such real or personal property. Borrower and
ICC shall not, without Lender's prior written consent, sell, lease as a lessor,
or otherwise dispose of any of the Equipment; provided, however, that Borrower
and ICC may dispose of obsolete or unusable Equipment having an orderly
liquidation value no greater than $5,000 individually, and $50,000 in the
aggregate in any Fiscal Year, without Lender's consent, subject to the
conditions set forth below. In the event any of the Equipment is sold,
transferred or otherwise disposed of with Lender's prior written consent or as
otherwise permitted hereby and: (i) such sale, transfer or disposition is
effected without replacement of such Equipment, or such Equipment is replaced by
Equipment leased by Borrower or ICC, or by Equipment purchased by Borrower or
ICC subject to a lien or other right constituting a Permitted Lien, then
Borrower or ICC shall deliver all of the cash proceeds of any such sale,
transfer or disposition to Lender, which proceeds shall be applied to the
repayment of the Obligations; or (ii) such sale, transfer or disposition is made
in connection with the purchase by Borrower or ICC of replacement Equipment
(other than subject to a Permitted Lien), then Borrower or ICC shall use the
proceeds of such sale, transfer or disposition to finance the purchase by
Borrower or ICC of replacement Equipment and shall deliver to Lender written
evidence of the use of the proceeds for such purchase. All replacement Equipment
purchased by Borrower or ICC shall be free and clear of all liens, claims and
encumbrances, except for the Security Interest and other Permitted Liens.
6.9. Documents, Instruments, and Chattel Paper.
Borrower represents and warrants to Lender that: (a) all documents,
instruments and chattel paper describing, evidencing, or constituting
Collateral, and all signatures and endorsements thereon, are and will be
complete, valid and genuine, and (b) all are and will be owned by Borrower or
ICC free and clear of all Liens other than Permitted Liens.
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6.10. Right to Cure.
Lender may, in its sole discretion, pay any amount or do any act
required of Borrower hereunder in order to preserve, protect, maintain or
enforce the Obligations, the Collateral or the Security Interest, and which
Borrower or ICC fails to pay or do, including payment of any judgment against
Borrower, any insurance premium, any warehouse charge, processing charge, any
landlord's claim and any other Lien upon the Collateral. All payments that
Lender makes under this Section 6.10 and all outofpocket costs and expenses that
Lender pays or incurs in connection with any action taken by it hereunder shall
be charged to Borrower's loan account. Any payment made or other action taken by
Lender under this Section 6.10 shall be without prejudice to any right to assert
an Event of Default hereunder and to proceed accordingly. Borrower and ICC
hereby appoint Lender and Lender's designees as Borrower's attorney and as such,
shall have the power: (a) to endorse Borrower's or ICC's name on any checks,
notes, acceptances, money orders, or other forms of payment or security that
come into Lender's possession; (b) to sign Borrower's or ICC's name on any
document of title relating to any Collateral; (c) to notify the post office
authorities to change the address for delivery of Borrower's or ICC's mail to an
address designated by Lender and to open and dispose of all mail to Borrower or
ICC and (d) to do all things necessary to carry out this Agreement. Borrower and
ICC ratify and approve all acts of Lender and Lender's designees as Borrower's
attorney-in-fact. Neither Lender nor Lender's designee shall be liable for any
acts or omissions or for any error of judgment or mistake of fact or law. This
power, being coupled with an interest, is irrevocable until this Agreement has
been terminated and the Obligations have been fully satisfied.
6.11. Lender's Rights, Duties and Liabilities.
Borrower and ICC assume all responsibility and liability arising
from or relating to the use, sale or other disposition of the Collateral.
Neither Lender nor any of its officers, directors, employees, or agents shall be
liable or responsible in any way for the safekeeping of any of the Collateral,
or for any act or failure to act with respect to the Collateral, or for any
diminution in the value thereof, all of which shall be at Borrower's and ICC's
sole risk. The Obligations shall not be affected by any failure to Lender to
take any steps to perfect the Security Interest or to collect or realize upon
the Collateral, nor shall loss of or damage to the Collateral.
7. BOOKS AND RECORDS; FINANCIAL INFORMATION; NOTICES.
7.1. Books and Records.
Borrower and ICC shall maintain, at all times, correct and complete
books, records and accounts in which complete, correct and timely entries are
made of its transactions in accordance with GAAP. Borrower and ICC shall, by
means of appropriate entries, reflect in such accounts and in all financial
statements proper liabilities and reserves for all taxes and proper provision
for depreciation and amortization of Property and bad debts, all in accordance
with GAAP. Borrower and ICC shall maintain at all times books and records
pertaining to the Collateral in such detail, form, and scope as Lender shall
reasonably require.
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7.2. Financial Information.
Borrower and ICC shall promptly furnish to Lender all such financial
information as Lender shall reasonably request, and notify its auditors and
accountants that Lender is authorized to obtain such information directly from
them. Without limiting the foregoing, Borrower and its Subsidiaries will furnish
to Lender:
7.2.1. Promptly upon their becoming available, copies of each proxy
statement, financial statement and report which Borrower sends to its
shareholders;
7.2.2. Promptly after filing with the PBGC and the IRS a copy of
each annual report or other filing filed with respect to each Plan of Borrower
or any Related Company; and
7.2.3. Such additional information as Lender may from time to time
reasonably request regarding the financial and business affairs of Borrower or
any Subsidiary.
7.3. Notices to Lender.
In addition to other notices required under this Agreement, Borrower
and ICC shall notify Lender in writing of the following matters at the following
times:
7.3.1. Immediately after becoming aware of the existence of any
Event of Default;
7.3.2. Within two (2) days after becoming aware that the holder of
any capital stock of Borrower or ICC or of any Debt of Borrower or of ICC has
given notice or taken any action with respect to a claimed default;
7.3.3. Within two (2) days after becoming aware of any Material
Adverse Change in Borrower's or ICC's Property, business, operations or
condition (financial or otherwise) or of any event or circumstance could
reasonably be expected to result in a Material Adverse Change;
7.3.4. Within two (2) days after becoming aware of any pending or
threatened action, proceeding or counterclaim by any Person, or any pending or
threatened investigation by a Public Authority, which may materially and
adversely affect the Collateral, the repayment of the Obligations, Lender's
rights under the Loan Documents or Borrower's or ICC's Property, business,
operations or condition (financial or otherwise);
7.3.5. Within two (2) days after becoming aware of any pending or
threatened strike, work stoppage, material unfair labor practice claim or other
material labor dispute affecting Borrower, ICC or any of their Subsidiaries;
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7.3.6. Within two (2) days after becoming aware of any violation of
any law, statute, regulation or ordinance of a Public Authority applicable to
Borrower or ICC, which may materially and adversely affect the Collateral, the
repayment of the Obligations, Lender's rights under the Loan Documents, or
Borrower's or ICC's Property, business, operations or condition (financial or
otherwise);
7.3.7. (a) Immediately after becoming aware of any Termination Event
with respect to a Plan, or any other Reportable Event with respect to a Plan,
accompanied by any materials required to be filed with the PBGC with respect
thereto; (b) immediately after Borrower's or ICC's receipt of any notice
concerning the imposition of any withdrawal liability under Section 4042 of
ERISA with respect to a Plan; (c) immediately upon the establishment of any Plan
not existing at the Closing Date or the commencement of contributions by
Borrower or ICC to any Plan to which Borrower or ICC was not contributing at the
Closing Date; and (d) immediately upon becoming aware of any other event or
condition regarding a Plan or Borrower's or ICC's or a Related Company's
compliance with ERISA which may materially and adversely affect Borrower's or
ICC's Property, business, operation or condition (financial or otherwise); and
7.3.8. Thirty (30) days prior to Borrower or ICC changing its name.
Each notice given under this Section 7.3 shall describe the subject matter
thereof in reasonable detail and shall set forth the action that Borrower or ICC
has taken or proposes to take with respect thereto.
8. GENERAL WARRANTIES AND REPRESENTATIONS.
Borrower and ICC jointly and severally continuously warrant and
represent to Lender, at all times during the term of this Agreement and until
all Obligations have been satisfied, that, in addition to other representations
and warranties set forth in this agreement and except as hereafter disclosed to
and accepted by Lender in writing:
8.1. Authorization, Validity, and Enforceability of this Agreement and
the Loan Documents.
Borrower has the corporate power and authority to execute, deliver
and perform this Agreement and the other Loan Documents, to incur the
Obligations and to grant the Security Interest. ICC has the corporate power and
authority to grant the Security Interest and to perform all of their obligations
contemplated by this Agreement. Borrower and ICC have taken all necessary
corporate action to authorize its execution, delivery and performance of this
Agreement and the other Loan Documents. No consent, approval or authorization
of, or filing with, any Public Authority, and no consent of any other Person, is
required in connection with Borrower's or ICC's execution, delivery and
performance of this Agreement and the other Loan Documents, except for those
already duly obtained. This Agreement and the other Loan Documents have been
duly executed and delivered by Borrower or ICC, as the case may be, and
constitute legal, valid and binding obligations of Borrower and ICC, as the case
may be, enforceable against them in accordance with their respective terms,
without defense, set-off, or
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counterclaim. Borrower's and ICC's, as the case may be, execution, delivery and
performance of this Agreement and the other Loan Documents do not and will not
conflict with, or constitute a violation or breach of, or constitute a default
under, or result in the creation or imposition of any Lien upon the Property of
Borrower or ICC or any of their Subsidiaries (except as contemplated by this
Agreement and the other Loan Documents) by reason of the terms of (a) any
mortgage, lease, agreement, or instrument to which Borrower, ICC or any of their
Subsidiaries is a party or which is binding upon Borrower, ICC or any of their
Subsidiaries, (b) any judgment, law, statute, rule or governmental regulation
applicable to Borrower, ICC or any of their Subsidiaries or (c) the Certificate
or Articles of Incorporation or ByLaws of Borrower, ICC or any of their
Subsidiaries.
8.2. Validity and Priority of Security Interest.
The provisions of this Agreement and the other Loan Documents create
legal and valid Liens on all the Collateral in Lender's favor, and when all
proper filings, recordings, and other actions necessary to perfect such Liens
have been made or taken, such Liens will constitute perfected and continuing
Liens on all the Collateral except for Permitted Liens securing all the
Obligations, and will be enforceable against Borrower or ICC and all third
parties.
8.3. Organization and Qualification.
Borrower: (a) is duly incorporated and organized and validly
existing in good standing under the laws of the State of California; and is
qualified to do business in states, if any, in which qualification is necessary
in order for it to own or lease its Property and conduct its business; and (b)
has all requisite power and authority to conduct its business and to own its
Property, including all governmental permits, licenses and authorizations needed
to conduct its business.
ICC: (a) is duly incorporated and organized and validly existing in
good standing under the laws of the State of Delaware; (b) is qualified to do
business as a foreign corporation and is in good standing in the States of
Arizona, California, Hawaii, Nevada, Oregon and Washington which are the only
states in which qualification is necessary in order for it to own or lease its
Property or conduct its business; and (c) has all requisite power and authority
to conduct its business and to own its Property, including all governmental
permits, licenses and authorizations needed to conduct its business.
8.4. Corporate Name; Prior Transactions.
Neither Borrower nor ICC has, during the past five (5) years, been
known by or used any other corporate or fictitious name, or been a party to any
merger or consolidation, or acquired all or substantially all of the assets of
any Person, or acquired any of its Property out of the ordinary course of
business, except as set forth on Schedule 8.4.
8.5. Subsidiaries and Affiliates.
A correct and complete list of the name and relationship to Borrower
of each and all of Borrower's Subsidiaries and other Affiliates (other than
Lender, Casey or Richard) is set
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forth in Schedule 8.5. Each Subsidiary and Affiliate is (a) duly incorporated
and organized and validly existing in good standing under the laws of its state
of incorporation set forth on Schedule 8.5 and (b) qualified to do business as a
foreign corporation and in good standing in the states set forth opposite its
name on Schedule 8.5, which are the only states in which such qualification is
necessary in order for it to own or lease its Property and conduct its business.
8.6. Use of Proceeds.
8.6.1. None of the transactions contemplated in this Agreement
(including the use of certain proceeds from such Loans) will violate or result
in the violation of Section 7 of the Securities Exchange Act of 1934, as
amended, or any regulations issued pursuant thereto, including Regulations G, T,
U and X of the Board of Governors of the Federal Reserve System ("Federal
Reserve Board"), 12 C.F.R., Chapter II. Borrower does not own or intend to carry
or purchase any "margin stock" within the meaning of said Regulation G. None of
the proceeds of the Loans will be used, directly or indirectly, to purchase or
carry (or refinance any borrowing, the proceeds of which were used to purchase
or carry) any "margin stock" within the meaning of the Securities Exchange Act
of 1934, as amended.
8.6.2. Borrower will use the proceeds of the Loan for no purposes
other than (i) to repay certain obligations of Borrower to Lender; (ii) to make
capital contributions to ICC; and (iii) for Borrower's general corporate
purposes.
8.7. Public Disclosure.
At the time of filing or submission, no document filed by Borrower
with the Securities and Exchange Commission pursuant to the Securities Exchange
Act of 1934, as amended, contains any untrue statement of a material fact or
omits to state any material fact necessary in order to make the statements
contained herein or therein not misleading.
8.8. Intangible Property.
Borrower and ICC possess adequate assets, licenses, patents, patent
applications, copyrights, trademarks, trademark applications and trade names for
the present and planned future conduct of its business without any known
conflict with the rights of others, and each is valid and has been duly
registered or filed with the appropriate governmental authorities.
8.9. Capital.
Upon Closing, Borrower and ICC shall have capital sufficient to
conduct their business, will be able to pay their debts as they mature and own
property having a fair salable or realizable value greater than the amount
required to pay all of its debts (including contingent debts). Lender
acknowledges that, subject to the terms of this Agreement, Borrower may obtain
commercially reasonable lines of credit in the ordinary course of business.
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8.10. Material Litigation.
Except for the items set forth and described on Schedule 8.10,
neither Borrower nor ICC has any pending or knowledge of any threatened
litigation, actions or proceedings which would, if adversely determined,
materially and adversely affect its business, assets, operations, prospects or
condition, financial or otherwise, or the Collateral or any of Lender's
interests therein.
8.11. Title, Security Interests of Lender.
Borrower or ICC has good, indefeasible and merchantable title to the
Collateral and, upon the filing of UCC-1 Financing Statements in the appropriate
offices, this Agreement and such documents shall create valid and perfected
first priority liens in the Collateral (other than (a) Collateral consisting of
Receivables which the account debtor is the United States or any agency thereof
and (b) Collateral to which a perfected lien may be obtained only by possession
of such Collateral), subject only to Permitted Liens.
8.12. Restrictive Agreements, Labor Contracts.
Neither Borrower nor ICC is a party or subject to any contract or
subject to any charge, corporate restriction, judgment, decree or order
materially and adversely affecting its business, assets, operations, prospects
or condition, financial or otherwise, or which restricts its right or ability to
incur Indebtedness, and are not party to any labor dispute. In addition, no
labor contract of either Borrower or ICC is scheduled to expire during the
Initial Term of this Agreement, except as disclosed on Schedule 8.12 hereto.
8.13. Laws.
Neither Borrower nor ICC is in violation of any applicable statute,
regulation, ordinance or any order of any court, tribunal or governmental
agency, in any respect materially and adversely affecting the Collateral or
their business, assets, operations, prospects or condition, financial or
otherwise.
8.14. Consents.
Borrower and ICC have obtained or caused to be obtained or issued
any required consent of a governmental agency or other Person in connection with
the financing contemplated hereby.
8.15. Defaults.
Except as disclosed on Schedule 8.15 hereto, neither Borrower nor
ICC is in default with respect to any note, indenture, loan agreement, mortgage,
lease, deed or other agreement to which it is a party or by which it or its
assets are bound, nor has any event occurred which, with the giving of notice or
the lapse of time, or both, would cause such a default.
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8.16. Financial Condition.
The financial information provided to Lender, specifically including
the third quarter, 1998 financial statements of Borrower and ICC (the "Current
Financial Statements") fairly represents Borrower's and ICC's financial
condition and results of operations and those of such other Persons described
therein as of the date thereof; there are no material omissions from the
financial information or other facts or circumstances not reflected in the
financial information; and there has been no material and adverse change in such
financial condition or operations since the date of the Current Financial
Statements delivered to Lender hereunder.
8.17. ERISA.
None of Borrower, ICC, any ERISA Affiliate, or any Plan is or has
been in violation of any of the provisions of ERISA, any of the qualification
requirements of IRC Section 401(a) or any of the published interpretations
thereunder, nor has Borrower or any ERISA Affiliate received any notice to such
effect. No notice of intent to terminate a Plan has been filed under Section
4041 of ERISA, nor has any Plan been terminated under ERISA. No lien upon the
assets of Borrower or ICC has arisen with respect to a Plan. No prohibited
transaction or reportable event has occurred with respect to a Plan. Neither
Borrower, ICC nor any ERISA Affiliate has incurred any withdrawal liability with
respect to any multiemployer Plan. Borrower, ICC and each ERISA Affiliate have
made all contributions required to be made by them to any Plan or Multiemployer
Plan when due. There is no accumulated funding deficiency in any Plan, whether
or not waived;
8.18. Taxes.
Borrower and ICC have filed all tax returns and such other reports
as they are required by law to file and have paid or made adequate provision for
the payment on or prior to the date when due of all taxes, assessments and
similar charges that are due and payable;
8.19. Business Relationships.
Except as set forth in Schedule 8.19 hereto, there exists no actual
or threatened termination, cancellation or limitation of, or any modification or
change in, the business relationship between Borrower or ICC and any customer or
any group of customers whose purchases individually or in the aggregate are
material to the business of Borrower or ICC, or with any material supplier, and
there exists no present condition or state of facts or circumstances which would
materially and adversely affect Borrower or ICC or prevent Borrower or ICC from
conducting such business after the consummation of the transactions contemplated
by this Agreement in substantially the same manner in which it has heretofore
been conducted; and
8.20. ICC Ownership.
As of the date hereof, Borrower owns one hundred percent (100%) of
all the outstanding stock in ICC. After the transactions contemplated herein are
consumated, Borrower shall not own less than 93% of the outstanding stock of ICC
(excluding stock subject to
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employee or consultant stock options which do not exceed 8.55% of the
outstanding stock of ICC) and there are no valid outstanding rights of any third
party to acquire any stock in ICC.
9. AFFIRMATIVE AND NEGATIVE COVENANTS.
In addition to other covenants contained in this Agreement, Borrower
and ICC covenant that, so long as any of the Obligations remains outstanding:
9.1. Taxes and Other Obligations.
Borrower and ICC shall each: (a) file when due all tax returns and
other reports which it is required to file, pay when due all taxes, fees,
assessments and other governmental charges against it or upon its Property,
income, and franchises, make all required withholding and other tax deposits,
and establish adequate reserves for the payment of all such items, and shall
provide to Lender, upon request, satisfactory evidence of its timely compliance
with the foregoing; and (b) pay when due all Debt owed by it and perform and
discharge in a timely manner all other obligations undertaken by it; provided,
however, that Borrower and ICC need not pay any tax, fee, assessment,
governmental charge or Debt, or perform or discharge any other obligation, that
it is contesting in good faith by appropriate proceedings diligently pursued and
with respect to which prior notice has been given to Lender and reserves
satisfactory to Lender have been provided or a bond satisfactory to Lender has
been posted.
9.2. Corporate Existence and Good Standing.
Borrower, ICC and each of their Subsidiaries shall maintain its
corporate existence and its qualification and good standing in all states
necessary to conduct its business and own its Property, and shall obtain and
maintain all licenses, permits, franchises and governmental authorizations
necessary to conduct its business and own its Property.
9.3. Maintenance of Property and Insurance.
Borrower, ICC and each of their Subsidiaries shall: (a) maintain all
of its Property necessary and useful in its business in good operating condition
and repair, ordinary wear and tear excepted; and (b) maintain with financially
sound and reputable insurers such other insurance with respect to its Property
and business against casualties and contingencies of such types (including
business interruption, environmental liability, public liability, product
liability, and larceny, embezzlement or other criminal misappropriation) and in
such amounts as is customary for Persons of established reputation engaged in
the same or a similar business and similarly situated, naming Lenderas
additional insured under each such policy.
9.4. Mergers, Consolidations, Acquisitions or Sales.
Except with the prior written consent of Lender or in connection
with the reincorporation of Borrower in the State of Delaware (provided such
reincorporation does not alter the ownership of Borrower) neither Borrower nor
ICC shall enter into any transaction of merger, reorganization or consolidation,
or transfer, sell, assign, lease or otherwise dispose of all
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or any material part of its Property other than in the ordinary course of
business, or windup, liquidate or dissolve, or agree to do any of the foregoing.
9.5. Transactions Affecting Collateral or Obligations.
Neither Borrower, ICC nor any of their Subsidiaries shall enter into
any transaction which materially and adversely affects the Collateral or
Borrower's ability to repay the Obligations.
9.6. Guaranties.
Neither Borrower, ICC nor any of their Subsidiaries shall make,
issue, or become liable on any Guaranty, except Guaranties in favor of Lender.
9.7. Debt.
Neither Borrower, ICC nor any of their Subsidiaries shall incur or
maintain any Debt, other than: (a) the Obligations; (b) trade payables and other
contractual obligations to suppliers and customers incurred in the ordinary
course of business; (c) Debt incurred to finance the purchase of Equipment in
the ordinary course of business; (d) other Debt set forth on Schedule 9.7; and
(e) intercompany accounts.
9.8. Prepayment.
Neither Borrower, ICC nor any of their Subsidiaries shall
voluntarily prepay any Debt, except the Obligations in accordance with their
terms.
9.9. Transactions with Affiliates.
Except as set forth below, or, as otherwise allowed under the Loan
Documents, neither Borrower, ICC nor any of their Subsidiaries shall: sell,
transfer, distribute or pay any money or Property to any Affiliate, or lend or
advance money or Property to any Affiliate, or invest in (by capital
contribution or otherwise) or purchase or repurchase any stock or indebtedness,
or any Property, of any Affiliate, pay any dividends, or become liable on any
Guaranty of the indebtedness, dividends, or other obligations of any Affiliate.
Notwithstanding the foregoing: Borrower and ICC may (i) pay commercially
reasonable compensation to employees, (ii) invest in any of its Subsidiaries (by
capital contribution or otherwise), (iii) provide the Guaranty by ICC of the
obligations of Casey under the Secured Promissory Note issued by Casey to Lender
on November 4, 1998 or any other obligations of Casey owing to Lender, (iv)
redeem Borrower's stock owned by Casey and Lender and (v) if no Event of Default
has occurred and is continuing, Borrower and ICC may engage in transactions with
Affiliates in the normal course of business, in amounts and upon terms fully
disclosed to Lender, provided that such terms are no less favorable to Borrower
or the Subsidiary, as the case may be, than those which would be obtainable in a
comparable arm's length transaction with a third party who is not an Affiliate.
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9.10. Liens.
Neither Borrower, ICC nor any of their Subsidiaries shall create,
incur, assume, or permit to exist any Lien on any Property now owned or
hereafter acquired by any of them, except Permitted Liens.
9.11. Restricted Investments.
Neither Borrower, ICC nor any of their Subsidiaries shall make any
Restricted Investment.
9.12. Equity Sales.
Without the prior consent of Lender, neither Borrower, ICC nor any
of their Subsidiaries shall sell any equity securities or grant any option or
other rights to purchase or acquire any equity securities.
9.13. EBITDA and Other Financial Covenants.
Borrower and ICC shall comply with the financial covenants set forth
on Schedule 9.13.
9.14. Intentionally Deleted.
Intentionally deleted.
9.15. Further Assurances.
Borrower and ICC shall execute and deliver, or cause to be executed
and delivered, to Lender such documents and agreements, and shall take or cause
to be taken such actions, as Lender may, from time to time, request, to carry
out the terms and conditions of this Agreement and the other Loan Documents.
9.16. Expenses.
Borrower or ICC shall Promptly reimburse Lender for all costs, fees
and expenses incurred by Lender in connection with the negotiation, preparation,
execution, delivery, administration and enforcement of each of the Loan
Documents, including, but not limited to, the attorneys' and paralegals' fees of
in-house and outside counsel, expert witness fees, lien, title search and
insurance fees, appraisal fees, all charges and expenses incurred in connection
with any and all environmental reports and environmental remediation activities,
and all other costs, expenses, taxes and filing or recording fees payable in
connection with the transactions contemplated by this Agreement, including
without limitation all such costs, fees and expenses as Lender shall incur or
for which Lender shall become obligated in connection with (i) any inspection or
verification of the Collateral, (ii) any proceeding relating to the Loan
Documents or the Collateral, (iii) actions taken with respect to the Collateral
and Lender's security interest therein, including, without limitation, the
defense or prosecution of any action involving Lender and Borrower or any third
party, (iv) enforcement of any of Lender's rights and remedies with
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respect to the Obligations or Collateral, and (v) consultation with Lender's
attorneys and participation in any workout, bankruptcy or other insolvency or
other proceeding involving Borrower, ICC or any Affiliate, whether or not suit
is filed. Borrower shall also pay all Lender charges in connection with bank
wire transfers, forwarding of loan proceeds, deposits of checks and other items
of payment, returned checks, establishment and maintenance of lockboxes and
other blocked accounts, and all other bank and administrative matters, in
accordance with Lender's schedule of bank and administrative fees and charges in
effect from time to time;
9.17. Notice of Litigation.
Borrower or ICC shall promptly notify Lender in writing of any
litigation, suit or administrative proceeding which could reasonably be expected
to lead to a Material Adverse Change in the Collateral or Borrower's or ICC's
business, assets, operations, prospects or condition, financial or otherwise,
whether or not the claim is covered by insurance;
9.18. ERISA.
Borrower or ICC shall notify Lender in writing (i) promptly upon the
occurrence of any event described in Paragraph 4043 of ERISA, other than a
termination, partial termination or merger of a Plan or a transfer of a Plan's
assets and (ii) prior to any termination, partial termination or merger of a
Plan or a transfer of a Plan's assets;
9.19. Labor Disputes.
Borrower or ICC, as the case may be, shall promptly notify Lender in
writing of any labor dispute (excluding isolated or individual actions which
either individually or in the aggregate could reasonably be expected to lead to
a Material Adverse Change) to which Borrower is or may become subject and the
expiration of any labor contract to which Borrower is a party or bound.
9.20. Capital Expenditures.
Borrower or ICC, as the case may be, shall promptly notify Lender in
writing of the making of any capital Expenditure materially affecting Borrower's
or ICC's business, assets, prospects, operations or condition, financial or
otherwise.
9.21. Name.
Neither Borrower nor ICC shall use any corporate or fictitious name
other than its corporate name as set forth in its Articles or Certificate of
Incorporation on the date hereof.
10. CLOSING; CONDITIONS TO CLOSING.
Lender will not be obligated to make the Loan, unless the following
conditions precedent have been satisfied as determined by Lender:
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10.1. Representations and Warranties; Covenants; Events.
Borrower's and ICC's representations and warranties contained in
this Agreement and the other Loan Documents shall be correct and complete as of
the Closing Date; Borrower and ICC shall have performed and complied with all
covenants, agreements, and conditions contained herein and in the other Loan
Documents which are required to have been performed or complied with on or
before the Closing Date; and there shall exist no Event or Event of Default on
the Closing Date.
10.2. Delivery of Documents.
Borrower shall have delivered, or cause to be delivered, to Lender
the following documents fully executed by Borrower and any party thereto other
than Lender:
10.2.1. The Notes in the form of Exhibit A;
10.2.2. Warrants to purchase two million shares of Borrower's Common
Stock at an exercise price of $1.00 per share and Warrants to purchase one
million shares of Borrower's Common Stock at an exercise price of $2.25 per
share, substantially in the form of Exhibit B;
10.2.3. A UCC-1 financing statement substantially in the form of
Exhibit C;
10.2.4. The Registration Rights Agreement substantially in the form
of Exhibit D;
10.2.5. The Guaranty in the form of Exhibit E;
10.2.6. Assignments of rights under contracts with any local
exchange carrier with which Borrower or ICC is doing business;
10.2.7. Certificates of good standing for Borrower and ICC from the
secretary of state of their states of incorporation and certificates of
qualification to do business from states where Borrower or ICC are conducting
business;
10.2.8. Board resolutions and incumbency certificates from Borrower
and ICC authorizing the transactions contemplated by this Agreement;
10.2.9. Fully executed UCC-3 financing statements or similar UCC
statements evidencing assignment of the debt from Worldcom and First Bank;
10.2.10. Opinion of counsel to Borrower and ICC for the benefit of
Lender in form and substance acceptable to Lender;
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10.2.11. An environmental certificate from Borrower and ICC, in form
and substance acceptable to lender, with respect to the offices set forth on
Exhibit F;
10.2.12. Intentionally deleted;
10.2.13. Evidence assuring Lender that there is no breach by the
plaintiffs in the Class Action Lawsuit under the settlement agreement that
would, in Lender's judgment, cause such settlement agreement not to close as
contemplated;
10.2.14. All documents which Borrower was obligated to deliver to
Lender as a condition of the Bridge Loan specified in the October 30, 1998
Commitment to Fund letter between Lender and Borrower; and
10.2.15. All other documents, certificates, or materials requested
by Lender to evidence compliance with the terms and conditions of this
Agreement.
11. DEFAULT; REMEDIES.
11.1. Events of Default.
It shall constitute an event of default ("Event of Default") if any
one or more of the following shall occur for any reason:
11.1.1. any failure to make payment of principal, interest or fees
on any of the Obligations when due;
11.1.2. any representation or warranty made by Borrower or ICC in
this Agreement, any of the other Loan Documents, or any certificate furnished by
Borrower, ICC or any of their Subsidiaries at any time to Lender shall prove to
be untrue in any material respect as of the date when made or furnished;
11.1.3. default shall occur in the observance or performance of any
of the covenants and agreements contained in this Agreement, the Notes, any
other Loan Document, or any other agreement entered into at any time to which
Borrower, ICC or any of their Subsidiaries and Lender are party, or if any such
agreement or document shall terminate (other than in accordance with its terms
or the terms hereof or with the written consent of Lender) or become void or
unenforceable without the written consent of Lender;
11.1.4. any default by Borrower or ICC under any agreement or
instrument which could reasonably be expected to lead to a Material Adverse
Change;
11.1.5. except as set forth on Schedule 11.1.5, any default by
Borrower or ICC in any payment of an amount greater than $25,000 per individual
occurrence or $250,000 in the aggregate of all such defaults or alleged defaults
relating to (i) principal
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or interest on any indebtedness (other than the Obligations) for borrowed money
beyond any period of grace provided with respect thereto or (ii) the performance
of any other agreement, term or condition contained in any agreement under which
any such obligation is contained therin; provided, however, that there shall be
no threshold allowance for any default under any local exchange carrier contract
where there is no grace period or for any obligation of Borrower or ICC to
Worldcom
11.1.6. Borrower or ICC shall make a general assignment for benefit
of creditors; or any proceeding shall be instituted by Borrower seeking to
adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up,
reorganization, arrangement, adjustment, protection relief, or composition of it
or its debts under law relating to bankruptcy, insolvency or reorganization or
relief of debtors, or seeking entry of an order for relief or the appointment of
a receiver, trustee, or other similar official for it or for any substantial
part of its property or Borrower or ICC, as the case may be, shall take any
corporate action to authorize any of the actions set forth above in this Section
11.1.6;
11.1.7. an involuntary petition shall be filed or an action or
proceeding otherwise commenced against Borrower or ICC seeking reorganization,
arrangement or readjustment of Borrower's or ICC's debts or for any other relief
under the Federal Bankruptcy Code, as amended, or under any other bankruptcy or
insolvency act or law, state or federal, now or hereafter existing and remain
undismissed or unvacated for a period of forty-five (45) days;
11.1.8. a receiver, assignee, liquidator, trustee or similar officer
for Borrower or ICC or for all or any part of their Property shall be appointed
involuntarily;
11.1.9. Borrower or ICC shall file a certificate of dissolution
under applicable state law or shall be liquidated, dissolved or woundup or shall
commence or have commenced against it any action or proceeding for dissolution,
windingup or liquidation, or shall take any corporate action in furtherance
thereof; Borrower or ICC shall be nationalized, expropriated or condemned,
seized or otherwise appropriated, or custody or control of such Property or of
Borrower or ICC shall be assumed by any Public Authority or any court of
competent jurisdiction at the instance of any Public Authority, except where
contested in good faith by proper proceedings diligently pursued where a stay of
enforcement is in effect;
11.1.10. any guaranty of the Obligations shall be terminated,
revoked or declared void or invalid;
11.1.11. one or more final judgments for the payment of money, which
could reasonably be expected to lead to a Material Adverse Change, shall be
rendered against Borrower or ICC and Borrower or ICC shall fail to discharge the
same within forty-five (45) days from the date of notice of entry thereof or to
appeal therefrom;
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11.1.12. any loss, theft, damage or destruction of any item or items
of Collateral occurs which: (i) materially and adversely affects the operation
of Borrower's or ICC's business; or (ii) is material in amount and is not
adequately covered by insurance;
11.1.13. Borrower ceases to own 93% of the outstanding stock of ICC
(excluding stock subject to employee or consultant stock options which do not
exceed 8.55% of the outstanding stock of ICC);
11.1.14. any event or condition shall occur or exist with respect to
a Plan that could, in Lender's reasonable judgment, subject Borrower, ICC or any
of their Subsidiaries to any tax, penalty or other liabilities under ERISA or
the Code in the aggregate material in relation to the business, operations,
Property or financial or other condition of Borrower, ICC and their
Subsidiaries, taken as a whole;
11.1.15. Borrower or ICC shall generally not pay its debts as debts
become due or shall admit its inability to pay its debts generally;
11.1.16. a Material Adverse Change shall occur; or
11.1.17. Lender determines in its sole judgment that the balance of
collectable Receivables drops or has dropped below the amounts set forth in
Schedule 9.13 or any of the financial targets set forth on Schedule 9.13 are not
met.
11.2. Remedies.
11.2.1. If an Event of Default exists, Lender may, without notice to
or demand on Borrower, do one or more of the following at any time or times and
in any order: (i) terminate this Agreement; (ii) declare any or all Obligations
to be immediately due and payable (provided, however, that upon the occurrence
of any Event of Default described in Section , Section , Section or Section ,
all Obligations shall automatically become immediately due and payable without
any action by Lender); and (iii) pursue its other rights and remedies under the
Loan Documents and applicable law.
11.2.2. If an Event of Default exists: (i) Lender shall have, in
addition to all other rights, the rights and remedies of a secured party under
the UCC; (ii) Lender may, at any time, take possession of the Collateral and
make it available to Lender at a place or places reasonably convenient to
Lender; (iii) Lender may use any and all of the Collateral including the General
Intangibles to continue the business of Borrower or ICC and (iv) Lender may sell
and deliver any Collateral at public or private sales, for cash, upon credit or
otherwise, at such prices and upon such terms as Lender deems advisable, in its
sole discretion, and may, if Lender deems it reasonable, postpone or adjourn any
sale of the Collateral by an announcement at the time and place of sale or such
postponed or adjourned sale without giving a new notice of sale. Without in any
way requiring
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notice to be given in the following manner, Borrower and ICC agree that any
notice by Lender of sale, disposition or other intended action hereunder or in
connection herewith, whether required by the UCC or otherwise, shall constitute
reasonable notice to Borrower and ICC if such notice is mailed by registered or
certified mail, return receipt requested, postage prepaid, or is delivered
personally against receipt, at least five (5) days prior to such action to
Borrower's address specified in or pursuant to Section . If any Collateral is
sold on terms other than payment in full at the time of sale, no credit shall be
given against the Obligations until Lender receives payment, and if the buyer
defaults in payment, Lender may resell the Collateral without further notice to
Borrower or ICC. In the event Lender seeks to take possession of all or any
portion of the Collateral by judicial process, Borrower and ICC irrevocably
waives: (a) the posting of any bond, surety or security with respect thereto
which might otherwise be required; (b) any demand for possession prior to the
commencement of any suit or action to recover the Collateral; and (c) any
requirement that Lender retain possession and not dispose of any Collateral
until after trial or final judgment. Borrower and ICC each agree that Lender has
no obligation to preserve rights to the Collateral or marshal any Collateral for
the benefit of any Person. Lender is hereby granted a license or other right to
use, without charge, Borrower's and ICC's labels, patents, copyrights, name,
trade secrets, trade names, trademarks, and advertising matter, or any similar
property, in completing production of, advertising or selling any Collateral,
and Borrower's and ICC's rights under all licenses and all franchise agreements
shall inure to Lender's benefit. The proceeds of sale shall be applied first to
all expenses of sale, including attorneys' fees, and second, in whatever order
Lender elects, to all Obligations. Lender shall return any excess to Borrower
and Borrower and ICC shall remain liable for any deficiency.
11.2.3. If an Event of Default occurs, Borrower and ICC each hereby
waives all rights to notice and hearing prior to the exercise by Lender of
Lender's rights to repossess the Collateral without judicial process or to
replevy, attach or levy upon the Collateral without notice or hearing.
12. MISCELLANEOUS.
12.1. Cumulative Remedies; No Prior Recourse to Collateral.
The enumeration herein of Lender's rights and remedies is not
intended to be exclusive, and such rights and remedies are in addition to and
not by way of limitation of any other rights or remedies that Lender may have
under the UCC or other applicable law. Lender shall have the right, in its sole
discretion, to determine which rights and remedies are to be exercised and in
which order. The exercise of one right or remedy shall not preclude the exercise
of any others, all of which shall be cumulative. To the extent permitted by law,
Lender may, without limitation, proceed directly against Borrower or ICC to
collect the Obligations without any prior recourse to the Collateral.
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12.2. No Implied Waivers.
No act, failure or delay by Lender shall constitute a waiver of any
of its rights and remedies. No single or partial waiver by Lender of any
provision of this Agreement, or any other Loan Document, or of breach or default
hereunder or thereunder, or of any right or remedy which Lender may have, shall
operate as a waiver of any other provision, breach, default, right or remedy or
of the same provision, breach, default, right or remedy on a future occasion. No
waiver by Lender shall affect its right to require strict performance of this
Agreement except as to the matter waived.
12.3. Severability.
Any provision of this Agreement which is prohibited or invalid under
applicable law of any jurisdiction (including without limitation federal or
state regulatory authorities) shall be ineffective to the extent of such
prohibition or unenforceability, without invalidating the remainder of this
Agreement, and any such prohibition or unenforceability in any jurisdiction
shall not invalidate or render unenforceable such provision in any other
jurisdiction.
12.4. Governing Law.
This Agreement shall be deemed to have been made in the State of
Colorado and shall be governed by and interpreted in accordance with the laws of
such state, except that no doctrine of choice of law shall be used to apply the
laws of any other state or jurisdiction and except to the extent that the law of
the location of the Collateral would govern, and in that case that law shall
govern with respect to issues concerning perfection and remedies available with
respect to the Collateral located there only.
12.5. Consent to Jurisdiction and Venue; Service of Process.
Borrower and ICC agree that, in addition to any other courts that
may have jurisdiction under applicable laws, any action or proceeding to enforce
or arising out of this Agreement or any of the other Loan Documents may be
commenced in the state court of original jurisdiction of the State of Colorado
for Jefferson County, or in the United States District Court for Colorado, and
Borrower and ICC consent and submit in advance to such jurisdiction, agrees that
venue will be proper in such courts on any such matter and irrevocably waive,
and agree not to plead or claim, any objection that either may ever have to the
venue of any such action or proceeding in any such court or that such action or
proceeding was brought in an inconvenient court. Borrower and ICC hereby waive
personal service of process and agrees that a summons and complaint commencing
an action or proceeding in any such court shall be properly served and shall
confer personal jurisdiction if served by registered or certified mail to
Borrower or ICC. Should Borrower or ICC fail to appear or answer any summons,
complaint, process or papers so served within thirty (30) days after the mailing
or other service thereof, it shall be deemed in default and an order or judgment
may be entered against it as demanded or prayed for in such summons, complaint,
process or papers. The choice of forum set forth in this Section 12.5 shall not
be deemed to preclude the enforcement of any judgment obtained in such forum, or
the taking of any action under this Agreement to enforce the same, in any
appropriate jurisdiction.
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12.6. Waivers.
BORROWER AND ICC HEREBY WAIVE TRIAL BY JURY, RIGHTS OF SETOFF, AND
THE RIGHT TO INTERPOSE COUNTERCLAIMS IN ANY LITIGATION IN ANY COURT WITH RESPECT
TO, IN CONNECTION WITH, OR ARISING OUT OF THIS AGREEMENT, THE OTHER LOAN
DOCUMENTS, THE OBLIGATIONS OR THE COLLATERAL, OR ANY INSTRUMENT OR DOCUMENT
DELIVERED PURSUANT HERETO OR THERETO, OR ANY OTHER CLAIM OR DISPUTE HOWSOEVER
ARISING, BETWEEN BORROWER OR ICC AND LENDER. BORROWER AND ICC CONFIRM THAT THE
FOREGOING WAIVERS ARE INFORMED AND FREELY MADE.
12.7. Survival of Representations and Warranties.
All of Borrower's and ICC's representations and warranties contained
in this Agreement shall survive the execution, delivery, and acceptance thereof
by the parties, notwithstanding any investigation by Lender or its agents.
12.8. Indemnification.
Borrower and ICC hereby jointly and severally indemnify, defend and
hold Lender, and its directors, officers, agents, employees and counsel,
harmless from and against any and all losses, claims, damages, liabilities,
expenses, deficiencies, judgments or penalties imposed on, incurred by or
asserted against any of them, whether direct, indirect or consequential, arising
out of or by reason of any litigation, investigations, claims, or proceedings
(whether based on any federal, state or local laws or other statutes or
regulations, including securities, environmental, or commercial laws and
regulations, under common law or at equitable cause, or on contract or
otherwise) commenced or threatened, which arise out of or in any way based upon
the negotiation, preparation, execution, delivery, enforcement, performance or
administration of this Agreement, any other Loan Document, or any undertaking or
proceeding related to any of the transactions contemplated hereby or any act,
omission to act, event or transaction related or attendant thereto, including
amounts paid in settlement, court costs, and the fees and expenses of counsel
reasonably incurred in connection with any such litigation, investigation, claim
or proceeding. Without limiting the foregoing, if, by reason of any suit or
proceeding of any kind, nature, or description against Borrower or ICC, or by
Borrower or ICC or any other party against Lender, which in Lender's sole
discretion makes it advisable for Lender to seek counsel for protection and
preservation of its liens and security assets, or to defend its own interest,
such expenses and counsel fees shall be allowed to Lender. To the extent that
the undertaking to indemnify, pay and hold harmless set forth in this Section
12.8 may be unenforceable because it is violative of any law or public policy,
Borrower and ICC shall contribute the maximum portion which it is permitted to
pay and satisfy under applicable law, to the payment and satisfaction of all
indemnified matters incurred by Lender. The foregoing indemnity shall survive
the payment of the Obligations and the termination of this Agreement. All of the
foregoing costs and expenses shall be part of the Obligations and secured by the
Collateral.
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12.9. Other Security and Guaranties.
Lender may, without notice or demand and without affecting
Borrower's or ICC's obligations hereunder, from time to time: (a) take from any
Person and hold collateral (other than the Collateral) for the payment of all or
any part of the Obligations and exchange, enforce or release such collateral or
any part thereof; and (b) accept and hold any endorsement or guaranty of payment
of all or any part of the Obligations and release any such endorser or
guarantor, or any Person who has given any Lien in any other collateral as
security for the payment of all or any part of the Obligations, or any other
Person in any way obligated to pay all or any part of the Obligations.
12.10. Notices.
All notices, demands and requests that either party is required or
elects to give to the other shall be in writing, shall be delivered personally
against receipt, or sent by recognized overnight courier service, or mailed by
registered or certified mail, return receipt requested, postage prepaid, or sent
by telex or telecopy, and shall be addressed to the party to be notified as
follows:
If to the
Lender: Ironwood Telecom LLC
555 Zang Street, Suite 300
Lakewood, Colorado 80228
Attention: Mr. John P. Hill
Telecopier: (303) 985-5875
with a copy to: Howrey & Simon
1299 Pennsylvania Ave., N.W.
Washington, D.C. 20004-2402
Attention: Roger A. Klein, Esquire
Telecopier: (202) 383-6610
If to the
Borrower: Incomnet, Inc.
2801 Main Street
Irvine, California 92614
Attention: Mr. Denis Richard
Telecopier: (949) 224-7474
with a copy to: Heller Ehrman White & McAuliffe
601 South Figueroa Street, 40th Floor
Los Angeles, California 90017
Attention: Paul H. Greiner, Esquire
Telecopier: (213) 614-1868
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If to ICC: Incomnet Communications Corporation
2801 Main Street
Irvine, California 92614
Attention: Mr. Denis Richard
Telecopier: (949) 224-7474
or to such other address as each party may designate for itself by like notice.
Any such notice, demand, or request shall be deemed given when received if
personally delivered or sent by overnight courier, or when deposited in the
United States mails, postage paid, if sent by registered or certified mail, or
when answerback received, if sent by telex or telecopier.
12.11. Waiver of Notices.
Unless otherwise expressly provided herein, Borrower and ICC waive
presentment, protest and notice of demand or dishonor and protest as to any
instrument, as well as any and all other notices to which it might otherwise be
entitled. No notice to or demand on Borrower which Lender may elect to give
shall entitle Borrower or ICC to any further notice or demand in the same,
similar or other circumstances.
12.12. Binding Effect; Assignment; Disclosure.
The provisions of this Agreement shall be binding upon and inure to
the benefit of the respective representatives, successors and assigns of the
parties hereto; provided, however, that no interest herein may be assigned by
Borrower or ICC without the prior written consent of Lender. The rights and
benefits of Lender hereunder shall, if Lender so agrees, inure to any party
acquiring any interest in the Obligations or any part thereof. Borrower and ICC
agree that Lender may use Borrower's or ICC's name in advertising and
promotional materials and in conjunction therewith disclose the general terms of
this Agreement.
12.13. Modification.
This Agreement is intended by Borrower, ICC and Lender to be the
final, complete, and exclusive expression of the agreement between them. This
Agreement supersedes any and all prior and contemporaneous oral or written
agreements relating to the subject matter hereof. No modification, rescission,
waiver, release, or amendment of any provision of this Agreement shall be made,
except by a written agreement signed by Borrower and ICC and a duly authorized
officer of Lender.
12.14. Counterparts.
This Agreement may be executed in any number of counterparts, and by
Lender, Borrower and ICC in separate counterparts, each of which shall be an
original, but all of which shall together constitute one and the same agreement.
12.15. Captions.
The captions contained in this Agreement are for convenience only,
are without substantive meaning and should not be construed to modify, enlarge,
or restrict any provision.
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12.16. Right of SetOff.
Whenever an Event of Default exists, Lender is hereby authorized at
any time, and from time to time, to set off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held and
other indebtedness at any time owing by Lender or any affiliate of Lender to or
for the credit or the account of Borrower or ICC against any and all of the
Obligations, whether or not then due and payable. Lender agrees promptly to
notify Borrower or ICC after any such setoff and application made by Lender,
provided that the failure to give such notice shall not affect the validity of
such setoff and application.
12.17. Fees and Expenses.
Borrower or ICC shall pay to Lender on demand, all costs and
expenses that Lender pays or incurs in connection with the negotiation,
preparation, consummation, administration, enforcement, and termination of this
Agreement, including, without limitation reasonable attorneys' fees and
disbursements of counsel to Lender.
12.18. Prior Agreements.
Borrower and ICC hereby acknowledge that the warrant agreements, the
Registration Rights Agreement, the side agreements dated November 4 and November
6, 1998 and collateral pledges associated with the Bridge Loan are still in full
force and effect.
[Section 12.19 and signature page to follow.]
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12.19. Additional Post-Closing Covenants.
Within thirty (30) days after Closing, Borrower shall provide or
cause to be delivered to Lender: (a) key man insurance issued by an insurance
company reasonably acceptable to Lender in the amount of three million dollars
($3,000,000) insuring the life of Denis Richard with Lender being listed as
primary beneficiary and evidence of one year of paid premiums and (b) waivers of
landlords' liens on the Collateral from Borrower and ICC landlords in a form
reasonably acceptable to Lender.
IN WITNESS WHEREOF, the parties have entered into this Agreement on
the date first above written.
INCOMNET, INC.
By: /s/ Denis Richard
---------------------------------
Denis Richard
President and Chief Executive
Officer
INCOMNET COMMUNICATIONS CORPORATION,
formerly known as NATIONAL TELEPHONE &
COMMUNICATIONS, INC.
By: /s/ Denis Richard
---------------------------------
Denis Richard
President and Chief Executive
Officer
IRONWOOD TELECOM LLC
By: /s/ Donald V. Berlanti
---------------------------------
Donald V. Berlanti
Member
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SCHEDULES
Schedule 1.1 LEC Contracts
Schedule 6.3 - Location of Collateral
Schedule 6.4 - Permitted Liens
Schedule 8.4 - Fictitious Names; Names of Acquired Persons
Schedule 8.5 - Subsidiaries
Schedule 8.10 Litigation
Schedule 9.7 - Permitted Debt
Schedule 9.13 Additional Financial Covenants
Schedule 11.1.5 Defaults
EXHIBITS
Exhibit A - Notes (Section 10.2.1)
Exhibit B - Form of Warrant (Section 10.2.2)
Exhibit C - Form of UCC-1 (Section 10.2.3)
Exhibit D - Form of Registration Rights Agreement (Section 10.2.4)
Exhibit E - Form of Guaranty (Section 10.2.5)
Exhibit F Environmental Certificate (Section 10.2.11)
iv
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TERM NOTE
$8,374,610.64 December 15, 1998
FOR VALUE RECEIVED, the undersigned, Incomnet, Inc., a California
corporation whose principal offices are located at 2801 Main Street, Irvine,
California, 92614 (the "Borrower"), HEREBY UNCONDITIONALLY PROMISES TO PAY to
the order of Ironwood Telecom, LLC, a Colorado limited liability company (the
"Lender"), the principal sum of EIGHT MILLION THREE HUNDRED SEVENTY FOUR
THOUSAND SIX HUNDRED TEN AND 64/100 DOLLARS ($8,374,610.64) (the "Term Note
Principal Amount") plus all accrued and unpaid interest and fees thereon on the
Maturity Date (defined below).
All capitalized terms not otherwise defined herein shall have the meaning
given such term in the Loan and Security Agreement, dated the date hereof, among
the Borrower, the Lender and Incomnet Communications Corporation (the "Loan
Agreement").
1. PAYMENTS
(a) As set forth above, the Term Note Principal Amount and all accrued and
unpaid interest and fees thereon shall be due and payable on the Maturity Date.
As used herein, "Maturity Date" means December 31, 2000.
(b) The Borrower shall pay to the Lender interest on the unpaid Term Note
Principal Amount at a per annum rate equal to twelve percent (12%). Interest
charges shall be computed on the basis of a year of 360 days and actual days
elapsed and shall be payable to the Lender quarterly in arrears on the first
Business Day of each Fiscal Quarter, with the first such payment of interest
becoming due and payable on January 1, 1999 ("First Payment"). Accrued interest
for the period from December 15, 1998 through December 31, 1998 shall be paid in
arrears along with the First Payment.
(c) If any Event of Default occurs, then, from the date such Event of
Default occurs and until it is cured, or until all Obligations are paid and
performed in full, whichever first occurs, the Borrower shall pay interest on
the unpaid Term Note Principal Amount at a per annum rate equal to three percent
(3%) plus the rate of interest otherwise specified herein as applicable to such
loan.
(d) In no event shall the interest rate and other charges hereunder exceed
the highest rate permissible under any law which a court of competent
jurisdiction shall, in a final determination, deem applicable hereto. If a court
determines that the Lender has received interest and other charges hereunder in
excess of the highest rate applicable hereto, such excess shall be deemed to
have been received on account of, and shall automatically be applied to reduce,
the Term Note Principal Amount in the inverse order of maturity, and the
provisions hereof shall be deemed amended to provide for the highest permissible
rate. If there is no Term Note Principal Amount outstanding, the Lender shall
refund to the Borrower such excess.
(e) The Borrower may prepay the Term Note Principal Amount in whole or in
part at any time and from time to time, upon at least two (2) Business Days'
prior written notice to the
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Lender. All prepayments of the principal of the Term Note Principal Amount shall
be accompanied by the payment of all accrued but unpaid interest on the prepaid
principal amount of the Term Note Principal Amount to the date of prepayment.
Any prepayment under this section of less than all of the outstanding Term Note
Principal Amount shall be applied, first, to accrued but unpaid interest on the
Term Note Principal Amount and, second, to the Term Note Principal Amount to be
prepaid.
(f) All payments of principal, interest, and other sums due to the Lender
shall be made at the following address:
Ironwood Telecom LLC
555 Zang Street, Suite 300
Lakewood, Colorado 80228
Attention: John P. Hill
or such other address or bank account as may be designated by the Lender in
writing from time to time. All such payments shall be made in immediately
available funds. If any payment of the Term Note Principal Amount, interest
thereon or other sum to be made hereunder becomes due and payable on a day other
than a Business Day, the due date of such payment shall be extended to the next
succeeding Business Day and interest thereon shall be payable at the applicable
interest rate during such extension.
(g) This Term Note is the Term Note referred to in the Loan Agreement. All
terms and conditions set forth in the Loan Agreement are incorporated herein and
made a part hereof. The Loan Agreement is secured by certain collateral more
specifically described in the Loan Agreement.
2. EVENTS OF DEFAULT
Upon and after the occurrence of an Event of Default under the Notes or as
described in the Loan Agreement, the Lender shall have all of the rights and
remedies set forth in Section 11.2 of the Loan Agreement.
3. FEES AND COSTS
The Borrower shall pay to the Lender on demand all costs and expenses that
the Lender pays or incurs in connection with the negotiation, preparation,
consummation, administration, enforcement, and termination of this Agreement,
including, without limitation reasonable attorneys' and paralegals' fees and
disbursements of counsel to the Lender.
4. GOVERNING LAW
THIS PROMISSORY NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAW OF THE STATE OF COLORADO, EXCEPT THAT NO DOCTRINE OF CHOICE OF LAW
SHALL BE USED TO APPLY THE LAWS OF ANY OTHER STATE OR JURISDICTION.
2
<PAGE>
5. NO RIGHT OF SET-OFF
No set-off, counterclaim, reduction or diminution of any obligation, or
any defense of any kind or nature (other than performance by the undersigned of
its obligations hereunder) which the Borrower has or may have against Lender or
any affiliate or assignee thereof shall be available hereunder to the Borrower.
6. WAIVER OF PRESENTMENT; CUMULATION OF REMEDIES
All parties to this Term Note, including the Borrower and any sureties,
endorsers or guarantors, hereby waive presentment for payment, demand, protest,
notice of dishonor, notice of acceleration of maturity, and all defenses on the
ground of extension of time for payment hereof, and agree to continue and remain
bound for the payment of principal, interest and all other sums payable
hereunder, notwithstanding any change or changes by way of release, surrender,
exchange or substitution of any security for this Term Note or by way of any
extension or extensions of time for payment of principal or interest; and all
such parties waive all and every kind of notice of such change or changes and
agree that the same may be made without notice to or consent of any of them. The
rights and remedies of the holder as provided herein shall be cumulative and
concurrent and may be pursued singularly, successively or together at the sole
discretion of the holder, and may be exercised as often as occasion therefor
shall occur, and the failure to exercise any such right or remedy shall in no
event be construed as a waiver or release of the same.
INCOMNET, INC.
By: /s/ Denis Richard
-------------------------------------------
Denis Richard
Its: President and Chief Executive Officer
3
<PAGE>
WORLDCOM PROMISSORY NOTE
$3,456,151.56 December 15, 1998
FOR VALUE RECEIVED, the undersigned, Incomnet, Inc., a California
corporation whose principal offices are located at 2801 Main Street, Irvine,
California 92614, and Incomnet Communications Corporation, a Delaware
corporation whose principal offices are located at 2801 Main Street, Irvine,
California 92614 (Incomnet, Inc. and Incomnet Communications Corporation shall
jointly and severally for purposes of this Worldcom Promissory Note be referred
to as the "Borrower"), HEREBY UNCONDITIONALLY PROMISES TO PAY to the order of
Ironwood Telecom, LLC, a Colorado limited liability company (the "Lender"), the
principal sum of THREE MILLION FOUR HUNDRED FIFTY-SIX THOUSAND ONE HUNDRED
FIFTY-ONE AND 56/100 DOLLARS ($3,456,151.56) (the "Worldcom Principal Amount")
plus all accrued and unpaid interest and fees thereon on the Maturity Date
(defined below).
All capitalized terms not otherwise defined herein shall have the meaning
given such term in the Loan and Security Agreement, dated the date hereof, among
the Borrower, the Lender and Incomnet Communications Corporation (the "Loan
Agreement").
1. PAYMENTS
(a) As set forth above, the Principal Amount and all accrued and unpaid
interest and fees thereon shall be due and payable on the Maturity Date. As used
herein, "Maturity Date" means December 31, 2000.
(b) The Borrower shall pay to the Lender interest on the unpaid Worldcom
Principal Amount at a per annum rate equal to twelve percent (12%). Interest
charges shall be computed on the basis of a year of 360 days and actual days
elapsed and shall be payable to the Lender quarterly in arrears on the last
Business Day of each Fiscal Quarter, with the first such payment of interest
becoming due and payable on March 31, 1999 ("First Payment"). Accrued interest
for the period from December 15, 1998 through December 31, 1998 shall be paid in
arrears along with the First Payment.
(c) If any Event of Default occurs, then, from the date such Event of
Default occurs and until it is cured, or until all Obligations are paid and
performed in full, whichever first occurs, the Borrower shall pay interest on
the unpaid Worldcom Principal Amount at a per annum rate equal to three percent
(3%) plus the rate of interest otherwise specified herein as applicable to such
loan.
(d) In no event shall the interest rate and other charges hereunder exceed
the highest rate permissible under any law which a court of competent
jurisdiction shall, in a final determination, deem applicable hereto. If a court
determines that the Lender has received interest and other charges hereunder in
excess of the highest rate applicable hereto, such excess shall be deemed to
have been received on account of, and shall automatically be applied to reduce,
the Worldcom Principal Amount in the inverse order of maturity, and the
provisions
<PAGE>
hereof shall be deemed amended to provide for the highest permissible rate. If
there is no Worldcom Principal Amount outstanding, the Lender shall refund to
the Borrower such excess.
(e) The Borrower may prepay the Worldcom Principal Amount in whole or in
part at any time and from time to time, upon at least two (2) Business Days'
prior written notice to the Lender. All prepayments of principal shall be
accompanied by the payment of all accrued but unpaid interest on the prepaid
Worldcom Principal Amount to the date of prepayment. Any prepayment under this
section of less than all of the outstanding Worldcom Principal Amount shall be
applied, first, to accrued but unpaid interest on the Worldcom Principal Amount
and, second, to the Worldcom Principal Amount to be prepaid.
(f) All payments of principal, interest, and other sums due to the Lender
shall be made at the following address:
Ironwood Telecom LLC
555 Zang Street, Suite 300
Lakewood, Colorado 80228
Attention: John P. Hill
or such other address or bank account as may be designated by the Lender in
writing from time to time. All such payments shall be made in immediately
available funds. If any payment of the Worldcom Principal Amount, interest
thereon or other sum to be made hereunder becomes due and payable on a day other
than a Business Day, the due date of such payment shall be extended to the next
succeeding Business Day and interest thereon shall be payable at the applicable
interest rate during such extension.
(g) This Worldcom Promissory Note is the Worldcom Promissory Note referred
to in the Loan Agreement. The Lender is entitled to the benefits and security
provided thereby or referred to therein, as well as all security relating to the
Security Agreement between Incomnet Communications Corporation (formerly known
as National Telephone & Communications, Inc.) and Worldcom Network Services,
Inc. dated June 1, 1996. All terms and conditions set forth in the Loan
Agreement with respect to the Amended and Restated Notes are incorporated herein
and made a part hereof. The Loan Agreement and this Worldcom Promissory Note are
secured by certain collateral more specifically described in the Loan Agreement.
2. EVENTS OF DEFAULT
Upon and after the occurrence of an Event of Default under the Notes or as
described in the Loan Agreement, the Lender shall have all of the rights and
remedies set forth in Section 11.2 of the Loan Agreement.
3. FEES AND COSTS
The Borrower shall pay to the Lender on demand all costs and expenses that
the Lender pays or incurs in connection with the negotiation, preparation,
consummation, administration, enforcement, and termination of this Agreement,
including, without limitation reasonable attorneys' and paralegals' fees and
disbursements of counsel to the Lender.
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<PAGE>
4. GOVERNING LAW
THIS PROMISSORY NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAW OF THE STATE OF COLORADO, EXCEPT THAT NO DOCTRINE OF CHOICE OF LAW
SHALL BE USED TO APPLY THE LAWS OF ANY OTHER STATE OR JURISDICTION.
5. NO RIGHT OF SET-OFF
No set-off, counterclaim, reduction or diminution of any obligation, or
any defense of any kind or nature (other than performance by the undersigned of
its obligations hereunder) which the Borrower has or may have against Lender or
any affiliate or assignee thereof shall be available hereunder to the Borrower.
6. WAIVER OF PRESENTMENT; CUMULATION OF REMEDIES
All parties to this Worldcom Promissory Note, including the Borrower and
any sureties, endorsers or guarantors, hereby waive presentment for payment,
demand, protest, notice of dishonor, notice of acceleration of maturity, and all
defenses on the ground of extension of time for payment hereof, and agree to
continue and remain bound for the payment of principal, interest and all other
sums payable hereunder, notwithstanding any change or changes by way of release,
surrender, exchange or substitution of any security for this Worldcom Promissory
Note or by way of any extension or extensions of time for payment of principal
or interest; and all such parties waive all and every kind of notice of such
change or changes and agree that the same may be made without notice to or
consent of any of them. The rights and remedies of the holder as provided herein
shall be cumulative and concurrent and may be pursued singularly, successively
or together at the sole discretion of the holder, and may be exercised as often
as occasion therefor shall occur, and the failure to exercise any such right or
remedy shall in no event be construed as a waiver or release of the same.
INCOMNET, INC.
By: /s/ Denis Richard
-------------------------------------------
Denis Richard
Its: President and Chief Executive Officer
3
<PAGE>
AMENDED AND RESTATED FIRST BANK PROMISSORY NOTE
$4,954,707.80 December 15, 1998
FOR VALUE RECEIVED, the undersigned, Incomnet, Inc., a California
corporation whose principal offices are located at 2801 Main Street, Irvine,
California, 92614 and Incomnet Communications Corporation, a Delaware
corporation whose principal offices are located at 2801 Main Street, Irvine,
California, 92614 (Incomnet, Inc. and Incomnet Communications Corporation shall
jointly and severally for purposes of this Amended and Restated First Bank
Promissory Note be referred to as the "Borrower"), HEREBY UNCONDITIONALLY
PROMISES TO PAY to the order of Ironwood Telecom, LLC, a Colorado limited
liability company (the "Lender"), the principal sum of FOUR MILLION NINE HUNDRED
FIFTY FOUR THOUSAND SEVEN HUNDRED SEVEN AND 80/100 DOLLARS ($4,954,707.80) (the
"First Bank Principal Amount") plus all accrued and unpaid interest and fees
thereon on the Maturity Date (defined below).
All capitalized terms not otherwise defined herein shall have the meaning
given such term in the Loan and Security Agreement, dated the date hereof, among
the Borrower, the Lender and Incomnet Communications Corporation (the "Loan
Agreement").
1. PAYMENTS
(a) As set forth above, the First Bank Principal Amount and all accrued
and unpaid interest and fees thereon shall be due and payable on the Maturity
Date. As used herein, "Maturity Date" means December 31, 2000.
(b) The Borrower shall pay to the Lender interest on the unpaid First Bank
Principal Amount at a per annum rate equal to twelve percent (12%). Interest
charges shall be computed on the basis of a year of 360 days and actual days
elapsed and shall be payable to the Lender quarterly in arrears on the last
Business Day of each Fiscal Quarter, with the first such payment of interest
becoming due and payable on March 31, 1999 ("First Payment"). Accrued interest
for the period from December 15, 1998 through December 31, 1998 shall be paid in
arrears along with the First Payment.
(c) If any Event of Default occurs, then, from the date such Event of
Default occurs and until it is cured, or until all Obligations are paid and
performed in full, whichever first occurs, the Borrower shall pay interest on
the unpaid First Bank Principal Amount at a per annum rate equal to three
percent (3%) plus the rate of interest otherwise specified herein as applicable
to such loan.
(d) In no event shall the interest rate and other charges hereunder exceed
the highest rate permissible under any law which a court of competent
jurisdiction shall, in a final determination, deem applicable hereto. If a court
determines that the Lender has received interest and other charges hereunder in
excess of the highest rate applicable hereto, such excess shall be deemed to
have been received on account of, and shall automatically be applied to reduce,
the First Bank Principal Amount in the inverse order of maturity, and the
provisions
<PAGE>
hereof shall be deemed amended to provide for the highest permissible rate. If
there is no First Bank Principal Amount outstanding, the Lender shall refund to
the Borrower such excess.
(e) The Borrower may prepay the First Bank Principal Amount in whole or in
part at any time and from time to time, upon at least two (2) Business Days'
prior written notice to the Lender. All prepayments of principal shall be
accompanied by the payment of all accrued but unpaid interest on the prepaid
First Bank Principal Amount to the date of prepayment. Any prepayment under this
section of less than all of the outstanding First Bank Principal Amount shall be
applied, first, to accrued but unpaid interest on the First Bank Principal
Amount and, second, to the First Bank Principal Amount to be prepaid.
(f) All payments of principal, interest, and other sums due to the Lender
shall be made at the following address:
Ironwood Telecom LLC
555 Zang Street, Suite 300
Lakewood, Colorado 80228
Attention: John P. Hill
or such other address or bank account as may be designated by the Lender in
writing from time to time. All such payments shall be made in immediately
available funds. If any payment of the First Bank Principal Amount, interest
thereon or other sum to be made hereunder becomes due and payable on a day other
than a Business Day, the due date of such payment shall be extended to the next
succeeding Business Day and interest thereon shall be payable at the applicable
interest rate during such extension.
(g) Notwithstanding any provision in any loan agreement between First Bank
and Borrower to the contrary, the payments under this Amended and Restated First
Bank Promissory Note shall be made in accordance with the terms of the Loan
Agreement.
(h) This Amended and Restated First Bank Promissory Note is the Amended
and Restated First Bank Note referred to in the Loan Agreement. The Lender is
entitled to the benefits and security provided thereby or referred to therein,
as well as all security relating to the Original Note referenced below. All
terms and conditions set forth in the Loan Agreement with respect to the Amended
and Restated Notes are incorporated herein and made a part hereof. The Loan
Agreement and this Amended and Restated First Bank Promissory Note are secured
by certain collateral more specifically described in the Loan Agreement.
(i) This Amended and Restated First Bank Promissory Note amends and
restates that certain promissory note made by Incomnet Communications
Corporation formerly know as National Telephone & Communications Inc. (the
"Original Note") payable to the order of First Bank & Trust on March 27, 1997
and as more fully described in the Loan Agreement. As of the date hereof, the
outstanding principal balance of and all accrued and unpaid interest owing on
said Original Note shall, without any action on the part of any party, be deemed
to be outstanding under this Amended and Restated First Bank Promissory Note.
Acceptance by the Lender of this Amended and Restated First Bank Promissory Note
shall not be deemed or construed as payment or satisfaction of all or any
portion of the indebtedness evidenced by the Original Note amended
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<PAGE>
and restated hereby, all of which continues to remain outstanding although the
indebtedness represented thereby is now represented hereby. In addition, by
executing this Amended and Restated First Bank Promissory Note, Borrower
acknowledges that there are no defenses, offsets, lender defaults, or any other
matters giving rise or cause to Borrower not being obligated to make payments
under the Original Note or to Lender under this Amended and Restated First Bank
Promissory Note.
2. EVENTS OF DEFAULT
Upon and after the occurrence of an Event of Default under the Notes or as
described in the Loan Agreement, the Lender shall have all of the rights and
remedies set forth in Section 11.2 of the Loan Agreement.
3. FEES AND COSTS
The Borrower shall pay to the Lender on demand all costs and expenses that
the Lender pays or incurs in connection with the negotiation, preparation,
consummation, administration, enforcement, and termination of this
Agreement, including, without limitation reasonable attorneys' and
paralegals' fees and disbursements of counsel to the Lender.
4. GOVERNING LAW
THIS PROMISSORY NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAW OF THE STATE OF COLORADO, EXCEPT THAT NO DOCTRINE OF CHOICE OF LAW
SHALL BE USED TO APPLY THE LAWS OF ANY OTHER STATE OR JURISDICTION.
5. NO RIGHT OF SET-OFF
No set-off, counterclaim, reduction or diminution of any obligation, or
any defense of any kind or nature (other than performance by the undersigned of
its obligations hereunder) which the Borrower has or may have against Lender or
any affiliate or assignee thereof shall be available hereunder to the Borrower.
6. WAIVER OF PRESENTMENT; CUMULATION OF REMEDIES
All parties to this Amended and Restated First Bank Promissory Note,
including the Borrower and any sureties, endorsers or guarantors, hereby waive
presentment for payment, demand, protest, notice of dishonor, notice of
acceleration of maturity, and all defenses on the ground of extension of time
for payment hereof, and agree to continue and remain bound for the payment of
principal, interest and all other sums payable hereunder, notwithstanding any
change or changes by way of release, surrender, exchange or substitution of any
security for this Amended and Restated First Bank Promissory Note or by way of
any extension or extensions of time for payment of principal or interest; and
all such parties waive all and every kind of notice of such change or changes
and agree that the same may be made without notice to or consent of any of them.
The rights and remedies of the holder as provided herein shall be cumulative and
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<PAGE>
concurrent and may be pursued singularly, successively or together at the sole
discretion of the holder, and may be exercised as often as occasion therefor
shall occur, and the failure to exercise any such right or remedy shall in no
event be construed as a waiver or release of the same.
INCOMNET, INC.
By: /s/ Denis Richard
-------------------------------------------
Denis Richard
Its: President and Chief Executive Officer
4
<PAGE>
GUARANTY
This Guaranty (the "Guaranty") is made and entered into as of December 15,
1998, (the "Effective Date"), by Incomnet Communications Corporation (formerly
known as National Telephone & Communications, Inc.), a Delaware corporation
("Guarantor"), in favor of Ironwood Telecom LLC, a Colorado limited liability
company ("Lender"). This Guaranty is executed and delivered in connection with a
(i) Term Note in the original principal amount of $8,374,610.64 dated as of the
Effective Date (the "Term Note") (ii) a Worldcom Promissory Note in the original
principal amount of $3,456,151.56 dated as of the Effective Date, evidencing the
assignment of Guarantor's Worldcom Debt to Lender (the "Worldcom Note") and
(iii) an Amended and Restated First Bank Promissory Note in the original
principal amount of $4,954,707.80 dated as of the Effective Date evidencing the
assignment of Guarantor's First Bank Debt to Lender (the "First Bank Note").
Each of the Term Note, the Worldcom Note and the First Bank Note are secured by
the Loan and Security Agreement dated as of the Effective Date (the "Loan
Agreement") among Lender, Borrower, Guarantor and all three promissory notes
shall be referred to herein collectively as the "Notes".
Guarantor, for the benefit of Lender, agrees as set forth below.
1. Definitions.
Any capitalized term not otherwise defined in this Guaranty shall have the
meaning given to the term in the Loan Agreement.
2. Guaranty.
Guarantor unconditionally guaranties to Lender the timely (whether as
scheduled or upon acceleration) payment and performance by Borrower of the
following (the "Guarantied Obligations"):
2.1. The principal, interest and other charges or amounts due under the
Notes and the other Loan Documents (whether by acceleration or otherwise) and
all renewals, extensions, modifications and rearrangements of any of the Loan
Documents;
2.2. The other obligations set forth in or arising out of the Notes and
the other Loan Documents;
2.3. Any of the forgoing arising out of or in connection with any renewal,
extension or other modification of the Notes or any of the other Loan Documents;
2.4. Any of the foregoing arising after Borrower has commenced or become
subject to any proceeding under the Bankruptcy Code, including any advances made
to Borrower, any interest that accrues after the filing of the bankruptcy
petition (even if the interest cannot be collected in the proceeding under the
Bankruptcy Code), and attorneys fees.
<PAGE>
If Borrower fails to pay or perform any of the Guarantied Obligations, Guarantor
will immediately pay or perform the obligation upon the written request of the
Lender.
3. Lender's Direct Rights.
3.1. This is a guaranty of payment and performance and is not a guaranty
of collection.
3.2. In the event that Borrower fails timely to pay or perform under any
of the Notes or any of the other Guarantied Obligations, Lender may enforce its
rights under this Guaranty without first seeking to obtain payment or
performance from:
3.2.1. Borrower;
3.2.2. Any other guarantor;
3.2.3. Any collateral Lender may hold for any of the Notes or any of
the other Loan Documents or any guaranty of any of the Notes or any of the other
Loan Documents, including this one; or
3.2.4. Exercise of any other remedy or right that Lender may have.
3.3. In the event Borrower becomes subject to a voluntary or involuntary
proceeding under the Bankruptcy Code, Lender may immediately pursue its rights
under this Guaranty, even though Lender may be stayed from accelerating or
collecting the Guarantied Obligations as against Borrower.
4. Continuing Guaranty.
This is a continuing guaranty of the Guarantied Obligations and may not be
terminated.
5. No Notice Required.
Lender does not have to notify Guarantor of any of the following events
and Guarantor will not be released or exonerated from its obligations under this
Guaranty if it is not notified of these events:
5.1. Borrower's failure to pay timely any amount owed under any of the
Notes or any of the other Loan Documents or to pay or perform any of the other
Guarantied Obligations;
5.2. Borrower's failure to perform any other obligation under any of the
Notes, the Loan Agreement, or any other Loan Document;
5.3. Any sale or other disposition of any collateral for any of the Notes,
for the other Guarantied Obligations, or for any guaranty of any of the Notes or
any of the Guarantied Obligations;
5.4. Lender's acceptance of this Guaranty;
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<PAGE>
5.5. Any renewal, extension or other modification of any of the Notes, any
other Loan Document, or any of the other Guarantied Obligations; or
5.6. All other notices to which it might be entitled.
6. Guarantor's Additional Waivers.
Guarantor waives any right it may have to any of the following acts:
6.1. Demand;
6.2. Presentment;
6.3. Diligence;
6.4. Protest;
6.5. Notice of dishonor; and
6.6. Any other notice to which it may be entitled.
7. No Release of Guarantor.
Lender may do any of the following, by action or inaction, without
releasing or exonerating Guarantor from any of its obligations under this
Guaranty:
7.1. Renew, extend or otherwise modify or alter any of the Notes, the Loan
Agreement, any other Loan Document or any of the other Guarantied Obligations;
7.2. Release Borrower from any of the Guarantied Obligations;
7.3. Sell, release, subordinate, impair, waive or otherwise fail to obtain
or perfect a security interest in, or realize upon, any collateral for any of
the Notes, any of the other Guarantied Obligations, or any other guaranty of any
of the Notes;
7.4. Advance additional funds in its discretion for purposes related to
the purposes set forth in the Loan Agreement;
7.5. From time to time and without first requiring performance on the part
of Borrower and without being required to exhaust any or all security held by
Lender, to look to and require performance by Guarantor of any obligation on the
part of Guarantor to be performed pursuant to the terms hereof, by action at law
or in equity or both, and further to collect in any such action its costs and
expenses, including reasonable attorneys' fees incurred in enforcing its rights
hereunder;
7.6. Foreclose on any collateral for any of the Notes or a guaranty of any
of the Notes in a manner that diminishes, impairs or precludes the right of
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<PAGE>
Guarantor to enjoy any rights of subrogation against Borrower or any other
guarantor, or to obtain reimbursement, performance, or indemnification for
payment or performance under this Guaranty;
7.7. Make an election under Bankruptcy Code ss. 1111(b)(2);
7.8. Permit or suffer the creation of secured or unsecured credit or debt
under Bankruptcy Code ss. 364;
7.9. Permit or suffer the disallowance, avoidance or subordination of any
of the Guarantied Obligations or collateral for any of the Guarantied
Obligations;
7.10. Fail to exercise any right or remedy it may have with respect to the
payment or performance of any of the Notes, any of the other Loan Documents or
any of the other Guarantied Obligations; or
7.11. Fail to obtain a guaranty, other assurance of payment, or credit
enhancement from any other person.
8. No Subrogation, etc.
Guarantor waives and shall not seek to exercise any of the following
rights that it may have against Borrower, any other guarantor, or any collateral
provided by Borrower or any other guarantor, for any amounts paid by it, or acts
performed by it, under this Guaranty:
8.1. Subrogation;
8.2. Reimbursement;
8.3. Performance;
8.4. Indemnification (including any rights to indemnification set forth in
this Guaranty).
9. Subordination of Guarantor.
9.1. Subordination of Claims.
All principal and interest on all existing and future indebtedness,
liabilities, and obligations of Borrower to Guarantor, whether fixed or
contingent, matured or unmatured, and liquidated or unliquidated (the
"Subordinated Debt") shall at all times be subordinated in right of payment to
the payment and performance of the Notes, the other Loan Documents and the other
Guarantied Obligations.
9.2. Payments.
Upon the occurrence of any default, event of default or Event of Default
under any of the Loan Documents, Guarantor will not accept any payments on any
of the Subordinated Debt. If no default, event of default or Event of Default
has occurred under any of the Loan Documents
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<PAGE>
and Guarantor receives any payment on the Subordinated Debt, it will hold such
payment in trust for the benefit of Lender; if any default, event of default or
Event of Default has occurred under any of the Loan Documents and Guarantor
receives any payment on the Subordinated Debt, it shall immediately deliver such
payment to Lender, but, in either event, without otherwise reducing or affecting
in any manner the liability of Guarantor under the other provisions of this
Guaranty.
9.3. Attorney-in-Fact.
Guarantor appoints Lender Guarantor's attorneyinfact to file claims, and
receive payments, on behalf of Guarantor with respect to any of the Subordinated
Debt in any proceeding by or against Borrower under the Bankruptcy Code
(including Chapters 7 or 11), any assignment for the benefit of Lenders made by
Borrower, or in any other reorganization or insolvency proceeding.
10. Miscellaneous.
10.1. Revival of Debt.
Guarantor's obligations under this Guaranty shall again include amount
returned by Lender in the event that Lender must return any amount paid by
Borrower or any other guarantor of the Notes or of any of the other Guarantied
Obligations because of the application of:
10.1.1. the Bankruptcy Code;
10.1.2. any fraudulent transfer law; or
10.1.3. any law respecting preferences.
10.2. No Marshalling.
Lender has no obligation to marshall any assets in favor of Guarantor, or
against or in payment of:
10.2.1. the Notes,
10.2.2. any of the other Guarantied Obligations, or
10.2.3. any other obligation owed to Lender by Guarantor, Borrower,
or any other person.
10.3. Fees and Costs.
Guarantor will pay all of Lender's fees and costs incurred in enforcing
this Guaranty, including Lender's reasonable attorneys' fees.
10.4. Assignment.
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<PAGE>
Guarantor may not assign his obligations or liabilities under this
Guaranty. Subject to the preceding sentence, this Guaranty shall be binding upon
the parties hereto and their respective heirs, executors, successors,
representatives and assigns and shall inure to the benefit of the parties hereto
and their respective successors and assigns. Lender may assign its rights under
this Guaranty.
10.5. Applicable Law.
The law of the state of Colorado will apply to the interpretation and
enforcement of this Guaranty except that no doctrine of choice of law shall be
and to apply the laws of any other state or jurisdiction.
10.6. Indemnification by Borrower.
Borrower will indemnify Guarantor against, and hold it harmless from, all
payments which Guarantor may at any time be required to make to Lender under
this Guaranty.
10.7. Integration.
This Guaranty is the entire agreement of Borrower and Guarantor with
respect to the subject matter of this Guaranty.
10.8. Rights Cumulative.
All of Lender's rights under this Guaranty are cumulative. The exercise of
any one right does not exclude the exercise of any other right given in this
Guaranty or any other right of Lender not set forth in this Guaranty.
10.9. Rules of Construction.
The following rules shall apply in interpreting the meaning of this
Guaranty:
10.9.1. "Includes" and "including" are not limiting;
10.9.2. "Or" is not exclusive; and
10.9.3. "All" includes "any" and "any" includes "all."
10.10. Severability.
If any provision of this Guaranty is unenforceable, or otherwise invalid,
the remaining provisions of this Guaranty shall be enforced to the fullest
possible extent.
10.11. Notices.
Lender may give any notice to Guarantor at the following address, until
changed in writing by notice given by Borrower:
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<PAGE>
Incomnet Communications Corporation
2801 Main Street
Irvine, California 92614
Telecopy: (949) 251-8085
Attention: Mr. Denis Richard
10.12. Joint and Several Liability.
The obligations hereunder of the persons and/or entities constituting
Guarantor under this Guaranty are joint and several.
10.13. Headings; Number; Gender.
Section headings used in this Guaranty are for convenience only. They are
not a part of this Guaranty and shall not be used in construing it. Wherever
appropriate in this Guaranty, the singular shall be deemed to also refer to the
plural, and the plural to the singular, and pronouns of certain genders shall be
deemed to include either or both of the other genders.
10.14. Review of Documents.
Guarantor acknowledges that he has copies of and is fully familiar with
each and every Loan Document.
10.15. Counterparts.
This Guaranty may be executed in counterparts, each of which shall be
deemed an original, but all of which, when taken together, shall be deemed one
and the same agreement.
10.16. Acknowledgment of Waivers.
Guarantor acknowledges that certain provisions of this Guaranty operate as
waivers of rights that Guarantor would otherwise have under applicable law.
IN WITNESS WHEREOF, the undersigned have executed this Guaranty as of the
date first above written.
"Guarantor"
INCOMNET COMMUNICATIONS CORPORATION, formerly known as
NATIONAL TELEPHONE & COMMUNICATIONS, INC.
By: /s/ Denis Richard
--------------------------------
Denis Richard
President and Chief Executive Officer
7
<PAGE>
AGREEMENT OF BORROWER
Incomnet, Inc., a California corporation, hereby agrees to indemnify
Incomnet Communications Corporation. as set forth in Section 10.6 to the
foregoing Guaranty.
INCOMNET, INC.,
a California corporation
By: /s/ Denis Richard
-------------------------------------
Denis Richard
President and Chief Executive Officer
8
<PAGE>
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY
NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A
REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT
OR AN EXEMPTION FROM SUCH REGISTRATION.
No. WA___1 Warrant to Purchase 2,000,000 Shares of
Common Stock (subject to adjustment)
WARRANT TO PURCHASE COMMON STOCK
of
INCOMNET, INC.
This certifies that, for value received, IRONWOOD TELECOM LLC and its
registered assigns ("Holder") is entitled, subject to the terms set forth below,
to purchase from INCOMNET, INC., a California corporation (the "Company"),
2,000,000 shares of the Common Stock of the Company, on the date the Company's
Articles of Incorporation are amended to provide for a sufficient number of
authorized shares of Common Stock to allow for the issuance of the number of
shares of Common Stock underlying this Warrant (the date of such amendment, the
"Initial Exercise Date"), upon surrender hereof, at the principal office of the
Company referred to below, with the Notice of Exercise form attached hereto (the
"Notice of Exercise") duly executed, and simultaneous payment therefor in lawful
money of the United States as hereinafter provided, at the Exercise Price as set
forth in Section 2 below. The number, character and Exercise Price of such
shares of Common Stock are subject to adjustment as provided below. The term
"Warrant" as used herein shall include this Warrant and any warrants delivered
in substitution or exchange therefor as provided herein.
This Warrant is issued in connection with the transactions described the
Loan and Security Agreement dated as of December 15, 1998 (the "Loan
Agreement"), between the Company, the Holder and the other party identified
therein.
1. Term of Warrant. Subject to the terms and conditions set forth herein,
this Warrant shall be exercisable, in whole or in part, during the term
commencing on the Initial Exercise Date and ending at 5:00 p.m., Pacific
Standard Time, on the five-year anniversary of the Initial Exercise Date, and
shall be void thereafter.
2. Exercise Price. The Exercise Price at which this Warrant may be
exercised shall be $1.00 per share of Common Stock, as adjusted from time to
time pursuant to Section 11 hereof.
3. Exercise of Warrant.
3.1. Notice of Exercise. The purchase rights represented by this
Warrant are exercisable by the holder in whole or in part, but not for less than
10,000 shares at a time (or such lesser number of shares which may then
constitute the maximum number purchasable; such number being subject to
adjustment as provided in Section 11 below), at any time, or from time to time,
during the term hereof as described in Section 1 above, by the surrender of this
Warrant
<PAGE>
and the Notice of Exercise duly completed and executed on behalf of the Holder,
at the office of the Company (or such other office or agency of the Company as
it may designate by notice in writing to the Holder at the address of the Holder
appearing on the books of the Company), upon payment in cash or by check
acceptable to the Company of the purchase price of the shares to be purchased.
3.2. Issuance of Stock. This Warrant shall be deemed to have been
exercised immediately prior to the close of business on the date of its
surrender for exercise as provided above, and the person entitled to receive the
shares of Common Stock issuable upon such exercise shall be treated for all
purposes as the holder of record of such shares as of the close of business on
such date. As promptly as practicable on or after such date and in any event
within ten (10) days thereafter, the Company at its expense shall issue and
deliver to the person or persons entitled to receive the same a certificate or
certificates for the number of shares issuable upon such exercise. In the event
that this Warrant is exercised in part, the Company at its expense will execute
and deliver a new Warrant of like tenor exercisable for the number of shares for
which this Warrant may then be exercised.
4. No Fractional Shares or Scrip. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant. In lieu of any fractional share to which the Holder would otherwise be
entitled, the Company shall make a cash payment equal to the Exercise Price
multiplied by such fraction.
5. Replacement of Warrant. On receipt of evidence reasonably satisfactory
to the Company of the loss, theft, destruction or mutilation of this Warrant
and, in the case of loss, theft or destruction, on delivery of an indemnity
agreement reasonably satisfactory in form and substance to the Company or, in
the case of mutilation, on surrender and cancellation of this Warrant, the
Company at its expense shall execute and deliver, in lieu of this Warrant, a new
warrant of like tenor and amount.
6. Rights of Shareholders. Subject to Sections 9 and 11 of this Warrant,
the Holder shall not be entitled to vote or receive dividends or be deemed the
holder of Common Stock or any other securities of the Company that may at any
time be issuable on the exercise hereof for any purpose, nor shall anything
contained herein be construed to confer upon the Holder, as such, any of the
rights of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to shareholders at any meeting thereof,
or to give or withhold consent to any corporate action or to receive notice of
meetings, or to receive dividends or subscription rights or otherwise until the
Warrant shall have been exercised as provided herein.
7. Transfer of Warrant.
7.1. Warrant Register. The Company will maintain a register (the
"Warrant Register") containing the names and addresses of the Holder or Holders.
Any Holder of this Warrant or any portion thereof may change its address as
shown on the Warrant Register by written notice to the Company requesting such
change and the Company shall immediately make the appropriate changes to the
Warrant Register. Any notice or written communication required or permitted to
be given to the Holder may be delivered or given by mail to such Holder as shown
on the Warrant Register and at the address shown on the Warrant Register. Until
this
2
<PAGE>
Warrant is transferred on the Warrant Register of the Company, the Company may
treat the Holder as shown on the Warrant Register as the absolute owner of this
Warrant for all purposes, notwithstanding any notice to the contrary.
7.2. Warrant Agent. The Company may, by written notice to the
Holder, appoint an agent for the purpose of maintaining the Warrant Register
referred to in Section 7(a) above, issuing the Common Stock or other securities
then issuable upon the exercise of this Warrant, exchanging this Warrant,
replacing this Warrant, or any or all of the foregoing. Thereafter, any such
registration, issuance, exchange, or replacement, as the case may be, shall be
made at the office of such agent.
7.3. Transferability and NonNegotiability of Warrant. This Warrant
may not be transferred or assigned in whole or in part without compliance with
all applicable federal and state securities laws by the transferor and the
transferee (including the delivery of investment representation letters and
legal opinions reasonably satisfactory to the Company, if such are requested by
the Company), provided, however, that this Warrant may not be transferred in
part unless such transfer is to a transferee who pursuant to such transfer
receives the right to purchase at least 10,000 shares hereunder. Subject to the
provisions of this Warrant with respect to compliance with the Securities Act of
1933, as amended (the "Act"), title to this Warrant may be transferred by
endorsement (by the Holder executing the Assignment Form attached hereto (the
"Assignment Form") and delivery in the same manner as a negotiable instrument
transferable by endorsement and delivery.
7.4. Exchange of Warrant Upon a Transfer. On surrender of this
Warrant for exchange, properly endorsed on the Assignment Form and subject to
the provisions of this Warrant with respect to compliance with the Act and with
the limitations on assignments and transfers and contained in this Section 7,
the Company at its expense shall issue to or on the order of the Holder a new
warrant or warrants of like tenor, in the name of the Holder or as the Holder
(on payment by the Holder of any applicable transfer taxes) may direct, for the
number of shares issuable upon exercise hereof.
7.5. Compliance with Securities Laws.
(i) The Holder of this Warrant, by acceptance hereof,
acknowledges that this Warrant and the shares of Common Stock or Common
Stock to be issued upon exercise hereof are being acquired solely for the
Holder's own account and not as a nominee for any other party, and for
investment, and that the Holder will not offer, sell or otherwise dispose
of this Warrant or any shares of Common Stock to be issued upon exercise
hereof except under circumstances that will not result in a violation of
the Act or any state securities laws. Upon exercise of this Warrant, the
Holder shall, if requested by the Company, confirm in writing, in a form
satisfactory to the Company, that the shares of Common Stock so purchased
are being acquired solely for the Holder's own account and not as a
nominee for any other party, for investment, and not with a view toward
distribution or resale.
3
<PAGE>
(ii) This Warrant and all shares of Common Stock issued upon
exercise hereof shall be stamped or imprinted with a legend in
substantially the following form (in addition to any legend required by
state securities laws):
THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SECURITIES
AND ANY SECURITIES OR SHARES ISSUED HEREUNDER OR THEREUNDER MAY NOT BE
SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM UNDER SAID ACT. COPIES OF THE AGREEMENT COVERING THE PURCHASE OF
THESE SECURITIES AND RESTRICTING THEIR TRANSFER OR SALE MAY BE OBTAINED AT
NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OR RECORD HEREOF TO THE
SECRETARY OF THE COMPANY AT THE PRINCIPAL EXECUTIVE OFFICES OF THE
COMPANY.
8. Reservation of Stock. The Company covenants that during the term this
Warrant is exercisable, the Company will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of Common Stock upon the exercise of this Warrant and, from time to time, will
take all steps necessary to amend its Articles of Incorporation (the "Articles")
to provide sufficient reserves of shares of Common Stock issuable upon exercise
of this Warrant; provided, however, that as of December 15, 1998 the Company
does not have any shares of Common Stock available for issuance upon the
exercise of this Warrant, and the Holder hereby acknowledges that she
understands that shares of Common Stock are so unavailable; provided, further,
that the Company hereby covenants and agrees to request that its shareholders
approve of a proposal at the next annual meeting of shareholders to amend the
Articles to increase the Company's authorized Common Stock in sufficient number
to provide for the issuance of all securities of the Company outstanding as of
the Initial Exercise Date exercisable or convertible into Common Stock. The
Company further covenants that all shares that may be issued upon the exercise
of rights represented by this Warrant, upon exercise of the rights represented
by this Warrant and payment of the Exercise Price, all as set forth herein, will
be free from all taxes, liens and charges in respect of the issue thereof (other
than taxes in respect of any transfer occurring contemporaneously or otherwise
specified herein). The Company agrees that its issuance of this Warrant shall
constitute full authority to its officers who are charged with the duty of
executing stock certificates to execute and issue the necessary certificates for
shares of Common Stock upon the exercise of this Warrant.
9. Notices. Upon the written request of the Holder, whenever the Exercise
Price or number of shares purchasable hereunder shall be adjusted pursuant to
Section 11 hereof, the Company shall issue a certificate signed by its Chief
Financial Officer setting forth, in reasonable detail, the event requiring the
adjustment, the amount of the adjustment, the method by which such adjustment
was calculated, and the Exercise Price and number of shares purchasable
hereunder after giving effect to such adjustment, and shall cause a copy of such
certificate to be mailed (by first-class mail, postage prepaid) to the Holder of
this Warrant. All notices and requests required under this Warrant shall be in
writing and shall be deemed to have been given for all purposes (a) upon
personal delivery, (b) one day after being sent, when sent by professional
overnight courier service from and to locations within the continental United
States, (c) five days after posting when sent by registered or certified mail,
or (d) on the date of transmission (if transmitted during normal business hours
otherwise on the next succeeding business day) when sent by telegram, telegraph,
telex or telecopier, addressed to the Holder at its addresses set forth on the
Warrant Register, and addressed to the Company at 2801 Main Street, Irvine,
California 92614, Telecopier No. (949) 2247474. The Holder or the Company may
from time to time by notice in writing delivered as provided herein, designate a
different mailing address to which such notices or requests shall thereafter be
delivered.
4
<PAGE>
10. Amendments.
10.1. Amendment. Any term of this Warrant may be amended with the
written consent of the Company and the Holder. Any amendment effected in
accordance with this Section 10 shall be binding upon the Company and each
future holder of this Warrant.
10.2. Waiver. No waivers of, or exceptions to, any term, condition
or provision of this Warrant, in any one or more instances, shall be deemed to
be, or construed as, a further or continuing waiver of any such term, condition
or provision.
11. Adjustments. The Exercise Price and the number of shares purchasable
hereunder are subject to adjustment from time to time as follows:
11.1. Gross Revenue Target. If the gross revenue of the Company
during the fourth quarter of 1999, on an annualized basis, is less than $98
million, the Exercise Price shall be reduced, and the number of shares of Common
Stock issuable upon the exercise of this Warrant shall be increased, in the same
proportion as the difference between the Company's actual revenues during the
fourth quarter of 1999, on an annualized basis, and $98 million. Gross revenue
shall be determined in accordance with generally accepted accounting principles;
provided, however, that for purposes of determining the Company's actual gross
revenue during the fourth quarter of 1999 in order to make an adjustment in the
Exercise Price or number of shares of Common Stock issuable upon exercise of
this Warrant, the gross revenue of any corporation, partnership, limited
liability company or other entity acquired or merged with or into the Company
during or before the fourth quarter of 1999 shall be included in the calculation
of the Company's revenue as if the acquired company's gross revenues were part
of the Company's gross revenues for the entire fourth quarter of 1999, whether
or not such inclusion of revenues is consistent with generally accepted
accounting principles.
11.2. Merger, Sale of Assets, etc. If at any time while this
Warrant, or any portion thereof, is outstanding and unexpired there shall be (i)
a reorganization (other than a combination, reclassification, exchange or
subdivision of shares otherwise provided for herein), (ii) a merger or
consolidation of the Company with or into another corporation in which the
Company is not the surviving entity, or a reverse triangular merger in which the
Company is the surviving entity but the shares of the Company's capital stock
outstanding immediately prior to the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash, or
otherwise, or (iii) a sale or transfer of the Company's properties and assets
as, or substantially as, an entirety to any other person, then, as a part of
such reorganization, merger, consolidation, sale or transfer, lawful provision
shall be made so that the holder of this Warrant shall thereafter be entitled to
receive upon exercise of this Warrant, during the period specified herein and
upon payment of the Exercise Price then in effect, the number of shares of stock
or other securities or property of the successor corporation resulting from such
reorganization, merger, consolidation, sale or transfer that a holder of the
shares deliverable upon exercise of this Warrant would have been entitled to
receive in such reorganization, consolidation, merger, sale or transfer if this
Warrant had been exercised immediately before such reorganization, merger,
consolidation, sale or transfer, all subject to further adjustment as provided
in this Section 11. The foregoing provisions of this Section 11.2 shall
similarly apply to successive reorganizations, consolidations, mergers, sales
and transfers and to the stock or securities of any other corporation that are
at the time receivable upon the exercise of this Warrant. If the per-share
consideration payable to the holder hereof for shares in connection with any
such transaction is in a form other than cash or marketable securities, then the
value of such consideration shall be determined in good faith by the Company's
Board of Directors. In all events, appropriate adjustment (as determined in good
faith by the Company's Board of Directors) shall be made in the application of
the provisions of this Warrant with respect to the rights and interests of the
Holder after the transaction, to the end that the provisions of this Warrant
shall be applicable after that event, as near as reasonably may be, in relation
to any shares or other property deliverable after that event upon exercise of
this Warrant.
5
<PAGE>
11.3. Reclassification, etc. If the Company, at any time while this
Warrant, or any portion thereof, remains outstanding and unexpired by
reclassification of securities or otherwise, shall change any of the securities
as to which purchase rights under this Warrant exist into the same or a
different number of securities of any other class or classes, this Warrant shall
thereafter represent the right to acquire such number and kind of securities as
would have been issuable as the result of such change with respect to the
securities that were subject to the purchase rights under this Warrant
immediately prior to such reclassification or other change and the Exercise
Price therefor shall be appropriately adjusted, all subject to further
adjustment as provided in this Section 11.
11.4. Split, Subdivision or Combination of Shares. If the Company at
any time while this Warrant, or any portion thereof, remains outstanding and
unexpired shall split, subdivide or combine the securities as to which purchase
rights under this Warrant exist, into a different number of securities of the
same class, the Exercise Price for such securities shall be proportionately
decreased in the case of a split or subdivision or proportionately increased in
the case of a combination.
11.5. Adjustments for Dividends in Stock or Other Securities or
Property. If while this Warrant, or any portion hereof, remains outstanding and
unexpired the holders of the securities as to which purchase rights under this
Warrant exist at the time shall have received, or, on or after the record date
fixed for the determination of eligible shareholders, shall have become entitled
to receive, without payment therefor, other or additional stock or other
securities or property (other than cash) of the Company by way of dividend, then
and in each case, this Warrant shall represent the right to acquire, in addition
to the number of shares of the security receivable upon exercise of this
Warrant, and without payment of any additional consideration therefor, the
amount of such other or additional stock or other securities or property (other
than cash) of the Company that such holder would hold on the date of such
exercise had it been the holder of record of the security receivable upon
exercise of this Warrant on the date hereof and had thereafter, during the
period from the date hereof to and including the date of such exercise, retained
such shares and/or all other additional stock available by it as aforesaid
during such
6
<PAGE>
period, giving effect to all adjustments called for during such period by the
provisions of this Section 11.
11.6. Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment pursuant to this Section 11, the Company shall, upon
the written request, at any time, of any Holder of this Warrant, furnish or
cause to be furnished to such Holder a like certificate setting forth: (i)
adjustments and readjustments in accordance with the terms hereof; (ii) the
Exercise Price at the time in effect; and (iii) the number of shares and the
amount, if any, of other property that at the time would be received upon the
exercise of the Warrant.
12. Registration Rights. Upon exercise of this Warrant, the Holder shall
have and be entitled to exercise, together with all other holders of Registrable
Securities possessing registration rights under that certain Registration Rights
Agreement, dated November 5, 1998, between the Company, the Holder and the other
parties identified therein or are otherwise bound thereby (the "Registration
Rights Agreement"), the rights of registration granted under the Registration
Rights Agreement to Registrable Securities (with respect to the shares issued on
exercise of this Warrant). By its receipt of this Warrant, Holder agrees to be
bound by the Registration Rights Agreement upon exercise of this Warrant as a
party thereto.
13. Miscellaneous.
(a) Attorneys' Fees. In any action at law or in equity to enforce
any of the provisions or rights under this Warrant, the unsuccessful party to
such litigation, as determined by the court in a final judgment or decree, shall
pay the successful party all costs, expenses and reasonable attorneys' fees
incurred by the successful party (including, without limitation, costs, expenses
and fees on any appeal).
(b) Governing Law; Venue. This Warrant and the legal relations
between the Holder and the Company shall be governed by and construed in
accordance with the laws of the State of Colorado applicable to contracts made
and performed in such State and without regard to conflicts of law doctrines of
any other State or country. In the event of any action at law or equity to
enforce any of the provisions or rights under this Agreement, the parties agree
that the proper venue for such action is Denver, Colorado and that the parties
may bring such an action to enforce their respective rights under this Agreement
only in a court located within Douglas or Jefferson County, State of Colorado.
The parties further agree that such court shall have personal jurisdiction over
each of the parties to this Agreement.
7
<PAGE>
IN WITNESS WHEREOF, INCOMNET, INC. has caused this Warrant to be
executed by its officers thereunto duly authorized.
Dated: December 15, 1998 INCOMNET, INC.
By: /s/ Denis Richard
-------------------------------
Denis Richard
President and Chief Executive
Officer
ATTEST:
By: /s/ Michael Keebaugh
---------------------------
Michael Keebaugh
Assistant Secretary
8
<PAGE>
NOTICE OF EXERCISE
To: INCOMNET, INC.
(1) The undersigned hereby elects to purchase ______ shares of Common
Stock of INCOMNET, INC., pursuant to the terms of the attached Warrant, and
tenders herewith payment of the purchase price for such shares in full.
(2) In exercising this Warrant, the undersigned hereby confirms and
acknowledges that the shares of Common Stock or the Common Stock are being
acquired solely for the account of the undersigned and not as a nominee for any
other party, and for investment, and that the undersigned will not offer, sell
or otherwise dispose of any such shares of Common Stock or Common Stock except
under circumstances that will not result in a violation of the Securities Act of
1933, as amended, or any state securities laws.
(3) Please issue a certificate or certificates representing those shares
of Common Stock in the name of the undersigned or in such other name as is
specified below:
--------------------------------------
(Name)
--------------------------------------
(Name)
(4) Please issue a new Warrant for the unexercised portion of the attached
Warrant in the name of the undersigned or in such other name as is specified
below:
--------------------------------------
(Name)
- ------------------------ --------------------------------------
(Date) (Signature)
<PAGE>
ASSIGNMENT FORM
FOR VALUE RECEIVED, the undersigned registered owner of this Warrant
hereby sells, assigns and transfers unto the Assignee named below all of the
rights of the undersigned under the within Warrant, with respect to the number
of shares of Common Stock (or Common Stock) set forth below:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
and does hereby irrevocably constitute and appoint ________________________ as
Attorney-in-Fact to make such transfer on the books of INCOMNET, INC.,
maintained for the purpose, with full power of substitution in the premises.
The undersigned also represents that, by assignment hereof, the Assignee
acknowledges that this Warrant and the shares of stock to be issued upon
exercise hereof or conversion thereof are being acquired for investment and that
the Assignee will not offer, sell or otherwise dispose of this Warrant or any
shares of stock to be issued upon exercise hereof or conversion thereof except
under circumstances which will not result in a violation of the Securities Act
of 1933, as amended, or any state securities laws. Further, the Assignee has
acknowledged that upon exercise of this Warrant, the Assignee shall, if
requested by the Company, confirm in writing, in a form satisfactory to the
Company, that the shares of stock so purchased are being acquired for investment
and not with a view toward distribution or resale.
Dated:
-----------------------
--------------------------------------
Signature of Holder
ATTEST:
- -----------------------------
Signature of Assignee
<PAGE>
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY
NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A
REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT
OR AN EXEMPTION FROM SUCH REGISTRATION.
No. WA___2 Warrant to Purchase 1,000,000
Shares of Common Stock (subject
to adjustment)
WARRANT TO PURCHASE COMMON STOCK
of
INCOMNET, INC.
This certifies that, for value received, IRONWOOD TELECOM LLC and its
registered assigns ("Holder") is entitled, subject to the terms set forth below,
to purchase from INCOMNET, INC., a California corporation (the "Company"),
1,000,000 shares of the Common Stock of the Company, on December 15, 1999 (the
"Initial Exercise Date"), upon surrender hereof, at the principal office of the
Company referred to below, with the Notice of Exercise form attached hereto (the
"Notice of Exercise") duly executed, and simultaneous payment therefor in lawful
money of the United States as hereinafter provided, at the Exercise Price as set
forth in Section 2 below. The number, character and Exercise Price of such
shares of Common Stock are subject to adjustment as provided below. The term
"Warrant" as used herein shall include this Warrant and any warrants delivered
in substitution or exchange therefor as provided herein.
This Warrant is issued in connection with the transactions described the
Loan and Security Agreement dated as of December 15, 1998 (the "Loan
Agreement"), between the Company, the Holder and the other party identified
therein.
1. Term of Warrant. Subject to the terms and conditions set forth herein,
this Warrant shall be exercisable, in whole or in part, during the term
commencing on the Initial Exercise Date and ending at 5:00 p.m., Pacific
Standard Time, on the five-year anniversary of the Initial Exercise Date, and
shall be void thereafter.
2. Exercise Price. The Exercise Price at which this Warrant may be
exercised shall be $2.25 per share of Common Stock, as adjusted from time to
time pursuant to Section 11 hereof.
3. Exercise of Warrant.
3.1. Notice of Exercise. The purchase rights represented by this
Warrant are exercisable by the holder in whole or in part, but not for less than
10,000 shares at a time (or such lesser number of shares which may then
constitute the maximum number purchasable; such number being subject to
adjustment as provided in Section 11 below), at any time, or from time to time,
during the term hereof as described in Section 1 above, by the surrender of this
Warrant and the Notice of Exercise duly completed and executed on behalf of the
Holder, at the office of the Company (or such other office or agency of the
Company as it may designate by notice in
<PAGE>
writing to the Holder at the address of the Holder appearing on the books of the
Company), upon payment in cash or by check acceptable to the Company of the
purchase price of the shares to be purchased.
3.2. Issuance of Stock. This Warrant shall be deemed to have been
exercised immediately prior to the close of business on the date of its
surrender for exercise as provided above, and the person entitled to receive the
shares of Common Stock issuable upon such exercise shall be treated for all
purposes as the holder of record of such shares as of the close of business on
such date. As promptly as practicable on or after such date and in any event
within ten (10) days thereafter, the Company at its expense shall issue and
deliver to the person or persons entitled to receive the same a certificate or
certificates for the number of shares issuable upon such exercise. In the event
that this Warrant is exercised in part, the Company at its expense will execute
and deliver a new Warrant of like tenor exercisable for the number of shares for
which this Warrant may then be exercised.
4. No Fractional Shares or Scrip. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant. In lieu of any fractional share to which the Holder would otherwise be
entitled, the Company shall make a cash payment equal to the Exercise Price
multiplied by such fraction.
5. Replacement of Warrant. On receipt of evidence reasonably satisfactory
to the Company of the loss, theft, destruction or mutilation of this Warrant
and, in the case of loss, theft or destruction, on delivery of an indemnity
agreement reasonably satisfactory in form and substance to the Company or, in
the case of mutilation, on surrender and cancellation of this Warrant, the
Company at its expense shall execute and deliver, in lieu of this Warrant, a new
warrant of like tenor and amount.
6. Rights of Shareholders. Subject to Sections 9 and 11 of this Warrant,
the Holder shall not be entitled to vote or receive dividends or be deemed the
holder of Common Stock or any other securities of the Company that may at any
time be issuable on the exercise hereof for any purpose, nor shall anything
contained herein be construed to confer upon the Holder, as such, any of the
rights of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to shareholders at any meeting thereof,
or to give or withhold consent to any corporate action or to receive notice of
meetings, or to receive dividends or subscription rights or otherwise until the
Warrant shall have been exercised as provided herein.
7. Transfer of Warrant.
7.1. Warrant Register. The Company will maintain a register (the
"Warrant Register") containing the names and addresses of the Holder or Holders.
Any Holder of this Warrant or any portion thereof may change its address as
shown on the Warrant Register by written notice to the Company requesting such
change and the Company shall immediately make the appropriate changes to the
Warrant Register. Any notice or written communication required or permitted to
be given to the Holder may be delivered or given by mail to such Holder as shown
on the Warrant Register and at the address shown on the Warrant Register. Until
this Warrant is transferred on the Warrant Register of the Company, the Company
may treat the
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<PAGE>
Holder as shown on the Warrant Register as the absolute owner of this Warrant
for all purposes, notwithstanding any notice to the contrary.
7.2. Warrant Agent. The Company may, by written notice to the
Holder, appoint an agent for the purpose of maintaining the Warrant Register
referred to in Section 7(a) above, issuing the Common Stock or other securities
then issuable upon the exercise of this Warrant, exchanging this Warrant,
replacing this Warrant, or any or all of the foregoing. Thereafter, any such
registration, issuance, exchange, or replacement, as the case may be, shall be
made at the office of such agent.
7.3. Transferability and NonNegotiability of Warrant. This Warrant
may not be transferred or assigned in whole or in part without compliance with
all applicable federal and state securities laws by the transferor and the
transferee (including the delivery of investment representation letters and
legal opinions reasonably satisfactory to the Company, if such are requested by
the Company), provided, however, that this Warrant may not be transferred in
part unless such transfer is to a transferee who pursuant to such transfer
receives the right to purchase at least 10,000 shares hereunder. Subject to the
provisions of this Warrant with respect to compliance with the Securities Act of
1933, as amended (the "Act"), title to this Warrant may be transferred by
endorsement (by the Holder executing the Assignment Form attached hereto (the
"Assignment Form") and delivery in the same manner as a negotiable instrument
transferable by endorsement and delivery.
7.4. Exchange of Warrant Upon a Transfer. On surrender of this
Warrant for exchange, properly endorsed on the Assignment Form and subject to
the provisions of this Warrant with respect to compliance with the Act and with
the limitations on assignments and transfers and contained in this Section 7,
the Company at its expense shall issue to or on the order of the Holder a new
warrant or warrants of like tenor, in the name of the Holder or as the Holder
(on payment by the Holder of any applicable transfer taxes) may direct, for the
number of shares issuable upon exercise hereof.
7.5. Compliance with Securities Laws.
(i) The Holder of this Warrant, by acceptance hereof,
acknowledges that this Warrant and the shares of Common Stock or Common
Stock to be issued upon exercise hereof are being acquired solely for the
Holder's own account and not as a nominee for any other party, and for
investment, and that the Holder will not offer, sell or otherwise dispose
of this Warrant or any shares of Common Stock to be issued upon exercise
hereof except under circumstances that will not result in a violation of
the Act or any state securities laws. Upon exercise of this Warrant, the
Holder shall, if requested by the Company, confirm in writing, in a form
satisfactory to the Company, that the shares of Common Stock so purchased
are being acquired solely for the Holder's own account and not as a
nominee for any other party, for investment, and not with a view toward
distribution or resale.
(ii) This Warrant and all shares of Common Stock issued upon
exercise hereof shall be stamped or imprinted with a legend in
substantially the following form (in addition to any legend required by
state securities laws):
3
<PAGE>
THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SECURITIES
AND ANY SECURITIES OR SHARES ISSUED HEREUNDER OR THEREUNDER MAY NOT BE
SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM UNDER SAID ACT. COPIES OF THE AGREEMENT COVERING THE PURCHASE OF
THESE SECURITIES AND RESTRICTING THEIR TRANSFER OR SALE MAY BE OBTAINED AT
NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OR RECORD HEREOF TO THE
SECRETARY OF THE COMPANY AT THE PRINCIPAL EXECUTIVE OFFICES OF THE
COMPANY.
8. Reservation of Stock. The Company covenants that during the term this
Warrant is exercisable, the Company will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of Common Stock upon the exercise of this Warrant and, from time to time, will
take all steps necessary to amend its Articles of Incorporation (the "Articles")
to provide sufficient reserves of shares of Common Stock issuable upon exercise
of this Warrant; provided, however, that as of December 15, 1998 the Company
does not have any shares of Common Stock available for issuance upon the
exercise of this Warrant, and the Holder hereby acknowledges that she
understands that shares of Common Stock are so unavailable; provided, further,
that the Company hereby covenants and agrees to request that its shareholders
approve of a proposal at the next annual meeting of shareholders to amend the
Articles to increase the Company's authorized Common Stock in sufficient number
to provide for the issuance of all securities of the Company outstanding as of
the Initial Exercise Date exercisable or convertible into Common Stock. The
Company further covenants that all shares that may be issued upon the exercise
of rights represented by this Warrant, upon exercise of the rights represented
by this Warrant and payment of the Exercise Price, all as set forth herein, will
be free from all taxes, liens and charges in respect of the issue thereof (other
than taxes in respect of any transfer occurring contemporaneously or otherwise
specified herein). The Company agrees that its issuance of this Warrant shall
constitute full authority to its officers who are charged with the duty of
executing stock certificates to execute and issue the necessary certificates for
shares of Common Stock upon the exercise of this Warrant.
9. Notices. Upon the written request of the Holder, whenever the Exercise
Price or number of shares purchasable hereunder shall be adjusted pursuant to
Section 11 hereof, the Company shall issue a certificate signed by its Chief
Financial Officer setting forth, in reasonable detail, the event requiring the
adjustment, the amount of the adjustment, the method by which such adjustment
was calculated, and the Exercise Price and number of shares purchasable
hereunder after giving effect to such adjustment, and shall cause a copy of such
certificate to be mailed (by first-class mail, postage prepaid) to the Holder of
this Warrant. All notices and requests required under this Warrant shall be in
writing and shall be deemed to have been given for all purposes (a) upon
personal delivery, (b) one day after being sent, when sent by professional
overnight courier service from and to locations within the continental United
States, (c) five days after posting when sent by registered or certified mail,
or (d) on the date of transmission (if transmitted during normal business hours
otherwise on the next succeeding business day) when sent by telegram, telegraph,
telex or telecopier, addressed to the Holder at its
4
<PAGE>
addresses set forth on the Warrant Register, and addressed to the Company at
2801 Main Street, Irvine, California 92614, Telecopier No. (949) 2247474. The
Holder or the Company may from time to time by notice in writing delivered as
provided herein, designate a different mailing address to which such notices or
requests shall thereafter be delivered.
10. Amendments.
10.1. Amendment. Any term of this Warrant may be amended with the
written consent of the Company and the Holder. Any amendment effected in
accordance with this Section 10 shall be binding upon the Company and each
future holder of this Warrant.
10.2. Waiver. No waivers of, or exceptions to, any term, condition
or provision of this Warrant, in any one or more instances, shall be deemed to
be, or construed as, a further or continuing waiver of any such term, condition
or provision.
11. Adjustments. The Exercise Price and the number of shares purchasable
hereunder are subject to adjustment from time to time as follows:
11.1. Gross Revenue Target. If the gross revenue of the Company
during the fourth quarter of 2000, on an annualized basis, is less than $222.9
million, the Exercise Price shall be reduced, and the number of shares of Common
Stock issuable upon the exercise of this Warrant shall be increased, in the same
proportion as the difference between the Company's actual revenues during the
fourth quarter of 2000, on an annualized basis, and $222.9 million. Gross
revenue shall be determined in accordance with generally accepted accounting
principles; provided, however, that for purposes of determining the Company's
actual gross revenue during the fourth quarter of 2000 in order to make an
adjustment in the Exercise Price or number of shares of Common Stock issuable
upon exercise of this Warrant, the gross revenue of any corporation,
partnership, limited liability company or other entity acquired or merged with
or into the Company during or before the fourth quarter of 2000 shall be
included in the calculation of the Company's revenue as if the acquired
company's gross revenues were part of the Company's gross revenues for the
entire fourth quarter of 2000, whether or not such inclusion of revenues is
consistent with generally accepted accounting principles.
11.2. Merger, Sale of Assets, etc. If at any time while this
Warrant, or any portion thereof, is outstanding and unexpired there shall be (i)
a reorganization (other than a combination, reclassification, exchange or
subdivision of shares otherwise provided for herein), (ii) a merger or
consolidation of the Company with or into another corporation in which the
Company is not the surviving entity, or a reverse triangular merger in which the
Company is the surviving entity but the shares of the Company's capital stock
outstanding immediately prior to the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash, or
otherwise, or (iii) a sale or transfer of the Company's properties and assets
as, or substantially as, an entirety to any other person, then, as a part of
such reorganization, merger, consolidation, sale or transfer, lawful provision
shall be made so that the holder of this Warrant shall thereafter be entitled to
receive upon exercise of this Warrant, during the period specified herein and
upon payment of the Exercise Price then in effect, the number of shares of stock
or other securities or property of the successor corporation resulting from such
reorganization, merger, consolidation, sale or transfer that a holder of the
shares deliverable upon exercise of this
5
<PAGE>
Warrant would have been entitled to receive in such reorganization,
consolidation, merger, sale or transfer if this Warrant had been exercised
immediately before such reorganization, merger, consolidation, sale or transfer,
all subject to further adjustment as provided in this Section 11. The foregoing
provisions of this Section 11.2 shall similarly apply to successive
reorganizations, consolidations, mergers, sales and transfers and to the stock
or securities of any other corporation that are at the time receivable upon the
exercise of this Warrant. If the per-share consideration payable to the holder
hereof for shares in connection with any such transaction is in a form other
than cash or marketable securities, then the value of such consideration shall
be determined in good faith by the Company's Board of Directors. In all events,
appropriate adjustment (as determined in good faith by the Company's Board of
Directors) shall be made in the application of the provisions of this Warrant
with respect to the rights and interests of the Holder after the transaction, to
the end that the provisions of this Warrant shall be applicable after that
event, as near as reasonably may be, in relation to any shares or other property
deliverable after that event upon exercise of this Warrant.
11.3. Reclassification, etc. If the Company, at any time while this
Warrant, or any portion thereof, remains outstanding and unexpired by
reclassification of securities or otherwise, shall change any of the securities
as to which purchase rights under this Warrant exist into the same or a
different number of securities of any other class or classes, this Warrant shall
thereafter represent the right to acquire such number and kind of securities as
would have been issuable as the result of such change with respect to the
securities that were subject to the purchase rights under this Warrant
immediately prior to such reclassification or other change and the Exercise
Price therefor shall be appropriately adjusted, all subject to further
adjustment as provided in this Section 11.
11.4. Split, Subdivision or Combination of Shares. If the Company at
any time while this Warrant, or any portion thereof, remains outstanding and
unexpired shall split, subdivide or combine the securities as to which purchase
rights under this Warrant exist, into a different number of securities of the
same class, the Exercise Price for such securities shall be proportionately
decreased in the case of a split or subdivision or proportionately increased in
the case of a combination.
11.5. Adjustments for Dividends in Stock or Other Securities or
Property. If while this Warrant, or any portion hereof, remains outstanding and
unexpired the holders of the securities as to which purchase rights under this
Warrant exist at the time shall have received, or, on or after the record date
fixed for the determination of eligible shareholders, shall have become entitled
to receive, without payment therefor, other or additional stock or other
securities or property (other than cash) of the Company by way of dividend, then
and in each case, this Warrant shall represent the right to acquire, in addition
to the number of shares of the security receivable upon exercise of this
Warrant, and without payment of any additional consideration therefor, the
amount of such other or additional stock or other securities or property (other
than cash) of the Company that such holder would hold on the date of such
exercise had it been the holder of record of the security receivable upon
exercise of this Warrant on the date hereof and had thereafter, during the
period from the date hereof to and including the date of such exercise, retained
such shares and/or all other additional stock available by it as aforesaid
during such period, giving effect to all adjustments called for during such
period by the provisions of this Section 11.
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<PAGE>
11.6. Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment pursuant to this Section 11, the Company shall, upon
the written request, at any time, of any Holder of this Warrant, furnish or
cause to be furnished to such Holder a like certificate setting forth: (i)
adjustments and readjustments in accordance with the terms hereof; (ii) the
Exercise Price at the time in effect; and (iii) the number of shares and the
amount, if any, of other property that at the time would be received upon the
exercise of the Warrant.
12. Registration Rights. Upon exercise of this Warrant, the Holder shall
have and be entitled to exercise, together with all other holders of Registrable
Securities possessing registration rights under that certain Registration Rights
Agreement, dated November 5, 1998, between the Company, the Holder and the other
parties identified therein or are otherwise bound thereby (the "Registration
Rights Agreement"), the rights of registration granted under the Registration
Rights Agreement to Registrable Securities (with respect to the shares issued on
exercise of this Warrant). By its receipt of this Warrant, Holder agrees to be
bound by the Registration Rights Agreement upon exercise of this Warrant as a
party thereto.
13. Miscellaneous.
(a) Attorneys' Fees. In any action at law or in equity to enforce
any of the provisions or rights under this Warrant, the unsuccessful party to
such litigation, as determined by the court in a final judgment or decree, shall
pay the successful party all costs, expenses and reasonable attorneys' fees
incurred by the successful party (including, without limitation, costs, expenses
and fees on any appeal).
(b) Governing Law; Venue. This Warrant and the legal relations
between the Holder and the Company shall be governed by and construed in
accordance with the laws of the State of Colorado applicable to contracts made
and performed in such State and without regard to conflicts of law doctrines of
any other State or country. In the event of any action at law or equity to
enforce any of the provisions or rights under this Agreement, the parties agree
that the proper venue for such action is Denver, Colorado and that the parties
may bring such an action to enforce their respective rights under this Agreement
only in a court located within Jefferson or Douglas County, State of Colorado.
The parties further agree that such court shall have personal jurisdiction over
each of the parties to this Agreement.
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<PAGE>
IN WITNESS WHEREOF, INCOMNET, INC. has caused this Warrant to be
executed by its officers thereunto duly authorized.
Dated: December 15, 1998 INCOMNET, INC.
By: /s/ Denis Richard
-------------------------------------
Denis Richard
President and Chief Executive Officer
ATTEST:
By: /s/ Michael Keebaugh
---------------------------
Michael Keebaugh
Assistant Secretary
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<PAGE>
NOTICE OF EXERCISE
To: INCOMNET, INC.
(1) The undersigned hereby elects to purchase ______ shares of Common
Stock of INCOMNET, INC., pursuant to the terms of the attached Warrant, and
tenders herewith payment of the purchase price for such shares in full.
(2) In exercising this Warrant, the undersigned hereby confirms and
acknowledges that the shares of Common Stock or the Common Stock are being
acquired solely for the account of the undersigned and not as a nominee for any
other party, and for investment, and that the undersigned will not offer, sell
or otherwise dispose of any such shares of Common Stock or Common Stock except
under circumstances that will not result in a violation of the Securities Act of
1933, as amended, or any state securities laws.
(3) Please issue a certificate or certificates representing those shares
of Common Stock in the name of the undersigned or in such other name as is
specified below:
------------------------------------
(Name)
------------------------------------
(Name)
(4) Please issue a new Warrant for the unexercised portion of the attached
Warrant in the name of the undersigned or in such other name as is specified
below:
------------------------------------
(Name)
- --------------------------- ------------------------------------
(Date) (Signature)
<PAGE>
ASSIGNMENT FORM
FOR VALUE RECEIVED, the undersigned registered owner of this Warrant
hereby sells, assigns and transfers unto the Assignee named below all of the
rights of the undersigned under the within Warrant, with respect to the number
of shares of Common Stock (or Common Stock) set forth below:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
and does hereby irrevocably constitute and appoint ___________________________
as Attorney-in-Fact to make such transfer on the books of INCOMNET, INC.,
maintained for the purpose, with full power of substitution in the premises.
The undersigned also represents that, by assignment hereof, the Assignee
acknowledges that this Warrant and the shares of stock to be issued upon
exercise hereof or conversion thereof are being acquired for investment and that
the Assignee will not offer, sell or otherwise dispose of this Warrant or any
shares of stock to be issued upon exercise hereof or conversion thereof except
under circumstances which will not result in a violation of the Securities Act
of 1933, as amended, or any state securities laws. Further, the Assignee has
acknowledged that upon exercise of this Warrant, the Assignee shall, if
requested by the Company, confirm in writing, in a form satisfactory to the
Company, that the shares of stock so purchased are being acquired for investment
and not with a view toward distribution or resale.
Dated:
-------------------
------------------------------------
Signature of Holder
ATTEST:
- -------------------------------
Signature of Assignee
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into as of
January 19, 1999, by and between INCOMNET, INC., a California corporation (the
"Company"), and GEORGE BLANCO, an individual (the "Executive").
WHEREAS, the Company desires to employ the Executive as its Executive
Vice- President and Chief Financial Officer and the Executive is willing to
serve in each capacity; and
WHEREAS, the Company and the Executive wish to set forth the terms and
conditions of such employment.
NOW, THEREFORE, in consideration of the promises and mutual covenants
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. Definitions. Words or phrases which are initially capitalized or are
within quotation marks shall have the meanings provided in this Section 1 and as
provided elsewhere herein. For the purposes of this Agreement, the following
definitions apply:
"Beneficially Owns" or "Beneficial Ownership" has the meaning specified
under Rule 13d-3 promulgated under the Exchange Act.
"Change in Control" means (a) a sale of all or substantially all the
assets of the Company; (b) any merger or consolidation of the Company pursuant
to which the holders of all of the shares of the Company's outstanding capital
stock immediately prior to such transaction beneficially own, as a group, less
than sixty-six and two-thirds percent (66 2/3%) of the outstanding shares of
capital stock of the surviving entity immediately following such transaction;
(c) the issuance of securities by the Company for cash, securities or other
property in a transaction immediately after which the party or parties acquiring
such securities beneficially own fifty percent (50%) or more of the outstanding
shares of capital stock of the Company; (d) the acquisition by an individual,
entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act (collectively, a "Person") of beneficial ownership of
any capital stock of the Company if, after such acquisition, such Person
beneficially owns fifty percent (50%) or more of either (i) the then outstanding
shares of Common Stock (the "Outstanding Company Common Stock"), or (ii) the
combined voting power of the then-outstanding securities of the Company entitled
to vote generally in the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that for purposes of this subsection (d) only,
any acquisition of Outstanding Company Voting Securities by John P. Casey, who
is a current shareholder of the Company, or his spouse or issue or trusts for
the benefit of John P. Casey or his spouse or issue or other entities formed
primarily for the benefit of
<PAGE>
John P. Casey or his spouse or issue or such trusts shall not constitute a
change in control; or (e) a change in the members of the Company's Board of
Directors such that the Continuing Directors do not constitute a majority of the
Company's Board of Directors (or, if applicable, the Board of Directors of a
successor corporation to the Company).
"Competition" means: (a) participating, directly or indirectly, as an
individual proprietor, partner, stockholder, officer, employee, director, joint
venturer, investor, lender, consultant or in any capacity whatsoever within the
United States of America, in a business in competition with any business
conducted by the Company or its affiliates, provided, however, that such
participation shall not include (i) ownership of mutual fund shares or the mere
ownership of not more than four percent (4%) of the total outstanding stock of a
publicly held company; (ii) the performance of services for any enterprise to
the extent no portion of such services are performed, directly or indirectly,
for the portion of the enterprise in the aforesaid competition; or (iii) any
activity engaged in with the prior written approval of the Company's Board.
"Confidential Information" means any and all information of the Company
and its affiliates that is not generally known by others with whom it competes
or does business, or with whom it plans to compete or do business. Confidential
Information includes without limitation such information relating to: (i) the
development, financial, manufacturing, marketing, research, and testing
activities of the Company and its affiliates, (ii) the products and services of
the Company and its affiliates, (iii) the costs, financial performance,
revenues, sources of supply and strategic plans of the Company and its
affiliates, (iv) the identity and special needs of clients and customers of the
Company and its affiliates, (v) the individuals and organizations with whom the
Company and its affiliates have business relationships and the nature of such
relationships. Confidential Information also includes and all information that
the Company and its affiliates have received from customers or others with any
agreement or understanding, express or implied, that it would not be disclosed.
Notwithstanding the foregoing, the term "Confidential Information" shall not for
the purposes of this Agreement include information that at the time of
disclosure is generally available to and known by the public.
"Continuing Director" means at any date a member of the Company's Board of
Directors (i) who was a member of the Board on the date of this Agreement, or
(ii) who was nominated or elected subsequent to such date by at least a majority
of the directors who were Continuing Directors at the time of such nomination or
election or whose election to the Board was recommended or endorsed by at least
a majority of the directors who were Continuing Directors at the time of such
nomination or election; provided, however, that there shall be excluded from
clause (ii) above any individual whose initial assumption of office occurred as
a result of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened solicitation or
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<PAGE>
proxies or consents, by or on behalf of a person other than the then current
members of the Company's Board of Directors.
"Disabled" or "Disability" means unable because of a physical or mental
impairment(s) (as defined in 29 C.F.R. ss. 1630.2(h)) to perform the essential
functions of the job with or without reasonable accommodation.
"Employment Term" means the period commencing on January 19, 1999 (the
"Commencement Date") and terminating on December 31, 2001.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Securities Act" means the Securities Act of 1933, as amended.
"Solicitation" means recruiting, soliciting or inducing, of any
non-clerical employee or employees of the Company or its subsidiaries to
terminate their employment with, or otherwise cease their relationship with, the
Company or its subsidiaries who within six (6) months before had been a
non-clerical employee of the Company or its subsidiaries, provided, however,
that solicitation shall not include any of the foregoing activities engaged in
with the prior written approval of the Company's Board.
"Subsidiary" means any corporation, general partnership, limited
partnership, limited liability company, trust or other entity in which the
Company beneficially owns fifty percent (50%) or more of the outstanding
securities, economic interests or combined voting power in the election of
directors, general partners, trustees or members of the governing body of such
entity, as applicable.
"Termination for Cause" means the termination of the Executive's
employment by reason of (i) willful misconduct by Executive with regard to the
Company, its affiliates, their businesses or employees, provided that the
Company gives written notice to Executive at least thirty (30) days prior to
such termination with reasonable details of the facts and circumstances claimed
as the basis of termination; (ii) the knowing refusal of Executive to follow the
lawful direction of the Chief Executive Officer of the Company, provided that
the foregoing refusal shall not be "Cause" if Executive in good faith believes
that such direction is illegal, unethical or immoral and promptly so notifies
the Chief Executive Officer or Chairman of the Board, (iii) continuing willful
refusal by Executive to perform the duties required of him hereunder (other than
any such failure resulting from Disability) after a written demand for
performance is delivered to Executive by the Chief Executive Officer of the
Company which specifically identifies the manner in which it is believed that
Executive has continually refused to attempt to perform his duties hereunder;
(iv) Executive being convicted of a felony (other than a felony involving a
traffic violation); (v) the breach by Executive of any fiduciary duty owed by
Executive to the Company or its affiliates; or (vi) Executive's act of
embezzlement, defalcation or fraud with regard the Company or its affiliates
(other than
3
<PAGE>
good faith expense account disputes); or (vii) the Executive's failure to
perform his lawful material duties as required by this Agreement; provided,
however, that as to subclause (vii) above, the Company shall have given
Executive written notice of such failure to perform, with reasonable detail of
the facts and circumstances claimed as a basis of termination (referred to
herein as a "material breach"), and Executive shall have failed to (a) correct
such material breach within thirty (30) days after receipt of the notice
(excluding any period Executive is on vacation) and (b) Executive shall have
diligently performed his lawful material duties thereafter.
"Termination for Good Reason" means a termination by the Executive by
written notice given within ninety (90) days after the occurrence of the Good
Reason event. For purposes of this Agreement, "Good Reason" shall mean the
occurrence or failure to cause the occurrence, as the case may be, without
Executive's express written consent, of any of the following circumstances,
unless such circumstances are fully corrected prior to the date of termination
specified in the Notice of Termination for Good Reason: (i) any material
diminution of Executive's responsibilities hereunder as Executive Vice-President
and Chief Financial Officer of the Company (except in each case in connection
with the termination of Executive's employment for Cause or Disability or as a
result of Executive's death; (ii) the assignment to Executive of duties
inconsistent with duties of a chief financial officer of comparable companies;
or (iii) at the election of Executive, upon a "Change in Control" of Company
provided that notice of such termination is given after such Change in Control;
provided, however, that if Denis Richard shall be the President and Chief
Executive Officer of the Company upon the occurrence of such Change in Control,
then Executive may elect to terminate his employment because of such Change in
Control only if the employment of Denis Richard with the Company shall be
terminated after such Change in Control, it being understood that even if Mr.
Richard shall be employed by the Company nothing herein shall prevent Executive
from electing to terminate his employment for Good Reason due to any reason
other than a Change in Control.
2. Employment. Subject to the terms and conditions set forth in this
Agreement, the Company hereby offers to employ the Executive for the Employment
Term and the Executive hereby accepts such employment.
2.1. Position. During the Employment Term, the Executive shall serve
as Executive Vice-President and Chief Financial Officer of the Company.
2.2. Duties. The Executive shall report directly to the President
and Chief Executive Officer of the Company and shall perform such duties as are
intrinsic to his position and such other duties and responsibilities on behalf
of the Company as may reasonably be assigned to him from time to time.
4
<PAGE>
2.3. Full Time Employment. During the Employment Term, Executive
shall devote substantially all of his business time and efforts to the
performance of his duties hereunder and use his best efforts in such endeavors;
provided, however that Executive shall be allowed, to the extent that such
activities do not materially interfere with the performance of his duties and
responsibilities hereunder, to manage his passive personal investments and to
serve on corporate, civic, or charitable boards or committees. Notwithstanding
the foregoing, Executive shall not serve on any corporate board of directors if
such service would be inconsistent with his fiduciary responsibilities to the
Company and in no event shall Executive serve on any such board unless
previously approved by the Chief Executive Officer of the Company.
2.4. Affiliates. Upon request of the Company's Board, the Executive
shall also serve as an officer of affiliates of the Company with no additional
compensation. Any compensation paid to Executive by any such affiliate shall
reduce the Company's compensation obligations hereunder.
3. Compensation and other Benefits. As compensation for all services
performed by the Executive under and during the Employment Term and subject to
performance of the Executive's duties and obligations to the Company, the
following remuneration shall be provided to the Executive by the Company.
3.1. Signing Bonus. The Company shall pay the Executive a signing
bonus equal to one hundred thousand dollars ($100,000) (the "Signing Bonus")
within thirty (30) days after the Commencement Date. Notwithstanding anything
else herein, if Executive voluntarily terminates his employment with the Company
without Good Reason within one (1) year following the date of payment of the
Signing Bonus, the Executive shall repay to the Company a percentage of the
Signing Bonus equal to the percentage of the year remaining after the date of
termination, calculated on the basis of actual days. The repayment shall occur
within sixty (60) days of the date of such termination.
3.2. Base Salary. During the Employment Term, Executive shall be
paid a base salary at the annual rate of not less than two hundred and fifty
thousand dollars ($250,000). Base salary shall be payable by the Company in
accordance with its usual payroll practices but not less frequently than once
every two weeks. The Executive's Base Salary shall be subject to annual review
by the Company's Board, and may be increased, but not decreased, from time to
time. The base salary as determined as aforesaid from time to time shall
constitute "Base Salary" for purposes of this Agreement.
3.3. Annual Bonus. For each fiscal year or portion thereof during
the Employment Term, the Executive shall be eligible to participate in an annual
bonus plan of the Company in accordance with, and subject to the terms of, such
plan as determined by the Company's Board and the President and Chief Executive
Officer; provided,
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however, that Executive shall be entitled to minimum annual bonus for fiscal
year 1999 of at least thirty percent (30%) of Base Salary (the "Guaranteed
Bonus") and thereafter Executive's bonus will be determined at the discretion of
the Board and the President and Chief Executive Officer of the Company and in
accordance with the annual bonus plan available to senior executives of the
Company.
3.4. Long Term Incentive Plan. For each fiscal year or portion
thereof during the Employment Term, the Executive shall be eligible to
participate in any stock option plan made available to executives of the Company
in accordance with, and subject to the terms of, such plan. The Company hereby
acknowledges that it intends to adopt a stock option plan for use in connection
with the recruitment of other senior executives.
3.5. Other Compensation. The Company may, upon recommendation of the
Compensation Committee of the Company's Board, award to the Executive such other
bonuses and compensation as, in its absolute discretion, it deems appropriate
and reasonable.
3.6. Employee Benefit Plans. During the Employment Term, the
Executive shall be entitled to participate in all pension, retirement, savings,
and welfare benefit plans and arrangements and shall be eligible to receive all
fringe benefits and perquisites generally maintained or provided by the Company
from time to time for the benefit of senior executives of the Company, in
accordance with their respective terms as in effect from time to time (other
than any special arrangement entered into by contract with another executive).
3.7. Automobile. During the Employment Term, the Company will
provide a car allowance of one thousand two hundred dollars ($1,200) per month.
The Company shall in addition pay for the cost of insurance and fuel for such
automobile. The Executive shall be responsible for any income tax consequences
arising from the use of the automobile under this arrangement.
3.8. Vacation and Sick Leave. During the Employment Term, except as
otherwise provided in this Agreement, the Executive shall be entitled to paid
vacation each year in accordance with the Company's policies in effect from time
to time, and will accrue paid vacation time at the rate four weeks per calendar
year, up to a maximum of five weeks. Paid vacation time will continue to accrue
until the amount accrued reaches the five-week maximum. When Executive has
reached the five-week accrual cap, no additional vacation will be accrued until
Executive has taken vacation time to reduce the accrued vacation below the cap.
After he has taken vacation, Executive will resume accruing vacation until he
once again reaches the five-week accrual cap. No retroactive accruals will be
made for the period in which vacation accrual stopped. Executive shall also be
entitled to such periods of sick leave as is customarily provided by the Company
for its senior executive officers.
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3.9. Business Expenses. Upon submission of appropriate
documentation, the Executive shall be reimbursed for the travel, entertainment
and other business expenses incurred by Executive in the performance of his
duties hereunder, in accordance with the applicable policies as in effect from
time to time.
3.10. Liability Insurance. Both during his employment hereunder, and
for a three year period commencing after the Executive ceases to be an employee
of the Company, the Company shall maintain commercially reasonable directors'
and officers' liability insurance policies covering the Executive with respect
to his service as an officer and/or director of the Company or any of its
affiliates and to the maximum extent permitted by law and the applicable
Articles of Incorporation and By-laws, shall indemnify the Executive from
liability, loss or expense (including reasonable attorney's fees) arising out of
such service.
3.11. Relocation. The Company agrees to reimburse Executive up to
seventy-five thousand dollars ($75,000) for all reasonable expenses (including
broker's fees, closing costs, all transaction costs and physical relocation
costs incurred by Executive in moving from Los Angeles to Orange County,
California). Executive shall be responsible for any income tax consequences
arising from the payments made under this Section 5(c).
3.12. Withholding Taxes. The Company may withhold from any and all
amounts payable under this Agreement such federal, state and local taxes as may
be required to be withheld pursuant to any applicable law or regulation.
3.13. Legal Fees. The Company will reimburse the Executive for
reasonable legal fees incurred in negotiating this Agreement, up to a maximum of
$2,500.00.
4. Stock Options. The Company hereby grants Executive an option (the
"Option") to purchase Five Hundred Thousand (500,000) shares of Company Common
Stock (voting) (the "Shares"), with an Option price ("Option Price") equal to
the fair market value of the Shares as of the first day of the Employment Term,
in accordance with the terms and conditions of the Company's 1996 Stock Option
Plan or any successor plan and upon the following terms and conditions:
4.1. Vesting. The Shares issued pursuant to the Option shall vest as
follows: 125,000 Shares on June 30, 1999, and 20,834 at the end of each month
thereafter until November 30, 2000, with a final vesting of 20,822 on December
31, 2000. In accordance with this vesting schedule, the Option shall be fully
vested at December 31, 2000.
4.2. Expiration. The Option shall expire on December 31, 2008.
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4.3. Exercise. The Option shall be exercised in accordance with the
terms of the Company's existing stock option plan.
4.4. Effect on Option.
(a) Upon the occurrence of a Change in Control, the entire Option
shall automatically become vested in full and immediately exercisable in full.
(b) Without limiting the foregoing, in the event of a Termination
for Good Reason or Termination Without Cause, the entire Option shall
automatically become vested in full and immediately exercisable in full.
(c) In the event of termination of employment for any reason other
than death, Executive shall have ninety (90) days from the date of termination
to exercise his Option to the extent the Option was exercisable by him at the
date of such termination.
(d) In the event of the Executive's death, Executive's estate shall
have one hundred eighty (180) days from the date of death to exercise
Executive's Option to the extent the Option was exercisable by him on the date
of his death.
5. Termination of Employment. The employment of Executive under this
Agreement shall terminate prior to the expiration of the Employment Term upon
the occurrence of any of the following events:
5.1. Death. In the event of the Executive's death during the
Employment Term, the Executive's employment shall immediately and automatically
terminate without further obligations to Executive's legal representatives under
this Agreement (except for its obligations to recognize his rights under Section
4.4(c) of this Agreement) or otherwise except for: (i) any compensation earned
but not yet paid, including without limitation, any declared but unpaid bonus
for the prior fiscal year, any unpaid Signing Bonus, any amount of Base Salary
or deferred compensation, if any, accrued or earned but unpaid, any accrued
vacation pay payable pursuant to the Company's policies, any unreimbursed
business expenses, which amounts shall be promptly paid in a lump sum to
Executive's estate; and (ii) any other amounts or benefits owing to Executive or
his designated beneficiaries under the then-applicable employee benefit or
equity plans of the Company or its affiliates, which shall be paid in accordance
with such plans.
5.2. Disability. If Executive becomes Disabled for six (6) or more
consecutive months, the Company may terminate the Executive's employment for
Disability upon thirty (30) days prior written notice. Such termination shall
not be effective if Executive ceases to be Disabled and returns to the full-time
performance of his material duties within such 30-day notice period. If the
Executive is eligible for disability payments prior to said termination under
any disability plan sponsored by the
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Company, his Base Salary shall be reduced by the amount of such disability
payments. If his employment is terminated by reason of Disability, Executive
shall be entitled to receive: (i) any compensation earned but not yet paid,
including without limitation, any declared but unpaid bonus for the prior fiscal
year, any unpaid Signing Bonus, any amount of Base Salary or deferred
compensation, if any, accrued or earned but unpaid, any accrued vacation pay
payable pursuant to the Company's policies, any unreimbursed business expenses,
which amounts shall be promptly paid to Executive in a lump sum; and (ii) any
other amounts or benefits owing to Executive under the then-applicable employee
benefit or equity plans of the Company or its affiliates, which shall be paid in
accordance with such plans. Notwithstanding anything to the contrary, Company
shall pay Executive, an amount, paid monthly, equal to the monthly cost incurred
by Executive for continuing group medical and/or dental coverage, if any, under
COBRA until the first anniversary of the date of termination for Disability. If
at the time of termination for Disability, the Company is providing life
insurance coverage for Executive under its group life policy, the Company shall,
to the extent permissible, continue to cover Executive under its group life
policy at a cost not to exceed the monthly premium cost being paid by Company
for Executive's life insurance coverage immediately prior to the time of
termination for Disability ("Monthly Life Insurance Premium") until the first
anniversary of the date of Executive's employment was terminated, or if
Executive shall not be eligible for continued coverage under the Company's group
life policy, pay to Executive, on a monthly basis, an amount equal to the
Monthly Life Insurance Premium until the first anniversary of the date
Executive's employment was terminated.
5.3. Termination for Cause. The Executive's employment hereunder may
be terminated at any time by the Company for Cause (subject to applicable notice
and cure periods) by providing the Executive with a written Notice of
Termination for Cause, which shall set forth in reasonable detail the facts and
circumstances which provide the basis for Termination for Cause and the
effective date of such action. The Company's failure to set forth in the Notice
of Termination for Cause any facts or circumstances which contribute to the
showing of Cause shall not waive any right of the Company hereunder or preclude
the Company from asserting such fact or circumstance in enforcing its rights
hereunder. Any purported Termination for Cause which is held by a court not to
have been based on the grounds set forth in this Agreement or not to have
followed the procedures set forth in this Agreement shall be deemed a
Termination Without Cause.
5.4. Termination Without Cause. The Executives' employment hereunder
may be terminated by the Company at any time after June 30, 2000 for any or no
reason and without advance notice.
5.5. Termination for Good Reason. The Executive's employment
hereunder may be terminated at any time by the Executive for Good Reason
(subject to applicable notice and cure periods) by providing the Company with a
written Notice of
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Termination for Good Reason, which shall set forth in reasonable detail the
facts and circumstances that provide a basis for his Termination for Good Reason
and the effective date of such action. The failure by Executive to set forth in
the Notice of Termination for Good Reason any facts or circumstances which
contribute to the showing of Good Reason shall not waive any right of Executive
hereunder or preclude Executive from asserting such fact or circumstance in
enforcing his rights hereunder. The Notice of Termination for Good Reason shall
provide for a date of termination not less than thirty (30) nor more than sixty
(60) days after the date such Notice of Termination for Good Reason is given.
5.6. Payments Due. If the Executive's employment hereunder is
terminated by the Company for Cause, by the Executive without Good Reason, or
due to the completion of the Employment Term, the Executive shall be entitled to
receive only his Base Salary through the effective date of termination, any
unreimbursed business expenses, and any accrued vacation pay payable pursuant to
applicable policies of the Company. The Executive's rights under any benefit
plan or any equity plan following such termination of employment shall be
determined in accordance with the provisions of the applicable benefit or equity
plan.
5.7. Termination for Good Reason Severance Compensation. If the
Executive terminates his employment hereunder for Good Reason during the
Employment Term, the Company shall have no further obligations to Executive
under this Agreement (except for its obligations to recognize his rights under
Section 4.4(b) and (c) of this Agreement) or otherwise, except that the
Executive shall receive: (i) any compensation earned but not yet paid, including
without limitation, any declared but unpaid bonus for the prior fiscal year, any
unpaid Signing Bonus, any amount of Base Salary or deferred compensation, if
any, accrued or earned but unpaid, any accrued vacation pay payable pursuant to
the Company's policies, any unreimbursed business expenses, which amounts shall
be promptly paid to Executive in a lump sum; (ii) equal monthly payments, in
accordance with the Company's normal payroll practices, of an amount equal to
the monthly payments of Executive's then Base Salary for a period of eighteen
(18) months following the date of his termination or until December 31, 2001,
whichever is earlier; (iii) reimbursement for the cost of Executive's continued
participation in the Company's health insurance plan until the expiration of the
maximum period permitted by COBRA or until December 31, 2001, whichever shall
occur first; and (iv) any other amounts or benefits owing to Executive under the
then-applicable employee benefit or equity plans of the Company or its
affiliates, which shall be paid in accordance with such plans.
5.8. Termination Without Cause Severance Compensation. If the
Executive's employment is terminated by the Company Without Cause during the
Employment Term in accordance with Section 5.4, the Company shall have no
further obligations to Executive under this Agreement (except for its
obligations to recognize his
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rights under Section 4.4(b) and (c) of this Agreement) or otherwise, except that
the Executive shall receive: (i) any compensation earned but not yet paid,
including without limitation, any declared but unpaid bonus for the prior fiscal
year, any unpaid Signing Bonus, any amount of Base Salary or deferred
compensation, if any, accrued or earned but unpaid, any accrued vacation pay
payable pursuant to the Company's policies, any unreimbursed business expenses,
which amounts shall be promptly paid to Executive in a lump sum; (ii) an amount
equal to three monthly payments of Executive's then Base Salary paid in a lump
sum not later than 30 days from the date of employment termination; (iii) equal
monthly payments, in accordance with the Company's normal payroll practices, of
an amount equal to the monthly payments of Executive's then Base Salary for a
period from the date of employment termination through September 30, 2001; (iv)
reimbursement for the cost of Executive's continued participation in the
Company's health insurance plan until the expiration of the maximum period
permitted by COBRA or until December 31, 2001, whichever shall occur first; and
(v) any other amounts or benefits owing to Executive under the then-applicable
employee benefit or equity plans of the Company or its affiliates, which shall
be paid in accordance with such plans.
5.9. No Mitigation: Set-Off. In the event of any termination of
employment, the Executive shall be under no obligation to seek other employment
and, subject to Section 5 below, there shall be no offset against any amounts
due Executive under this Agreement on account of any remuneration attributable
to any subsequent employment that Executive may obtain. Any amounts due under
Section 5.7 are in the nature of severance payments, or liquidated damages, or
both, and are not in the nature of a penalty. Such amounts are inclusive, and in
lieu of any amounts payable under any other salary continuation or cash
severance arrangement of the Company and to the extent paid or provided under
any other such arrangement shall be offset from the amount due hereunder. The
Company shall have no obligations to Executive upon a termination of employment
except as specified in this Agreement. If Executive dies while receiving
payments under Section 5.7, any remaining payments shall be paid to Executive's
estate.
6. Confidentiality, Non-Competition, and No Solicitation. As a condition
of his employment or continued employment by the Company, Executive will sign
the Company's standard form Confidentiality Agreement.
7. Executive's Representations. The Executive represents and warrants to
the Company that, as of the date hereof, there is no legal impediment to his
performing his obligations under this Agreement and neither entering into this
Agreement nor performing his contemplated service hereunder will violate any
agreement to which he is a party on the date hereof any other legal restriction.
8. Company's Representations. The Company represents and warrants to the
Executive that, as of the date hereof, there are no legal impediments on its
performance of
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its obligations under the Agreement and that neither the entering into of this
Agreement nor the performing of its obligations hereunder will violate any
agreement in which it is a party as the date hereof or any other legal
restriction.
9. Entire Agreement/Amendments. This Agreement and the instruments
contemplated herein, contain the entire understanding of the parties with
respect to the employment of Executive by the Company and supersede any policy
of the Company with regard to severance payments and any prior agreements
between the Company and the Executive with regard to employment or severance.
There are no restrictions, agreements, promises, warranties, covenants,
representations or undertakings between the parties with respect to the subject
matter herein other than those expressly set forth herein and therein. This
Agreement may not be altered, modified, or amended except by written instrument
signed by the parties hereto.
10. Non-Waiver. The failure of a party to insist upon strict adherence to
any term of this Agreement on any occasion shall not be considered a waver of
such party's rights or deprive such party of the right thereafter to insist upon
strict adherence to that term or any other term of this Agreement. Any such
waiver must be in writing and signed by Executive or an authorized officer of
the Company.
11. Interpretation and Binding Effect. This Agreement shall inure to the
benefit of and be binding upon the personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees legatees and permitted
assignees of the parties hereto.
11.1. Non-Assignment. This Agreement shall not be assignable by any
of the parties hereto except by operation of law.
11.2. Survivorship. The respective rights and obligations of the
parties hereunder shall survive any termination of Executive's employment to the
extent necessary to the agreed preservation of such rights and obligations.
11.3. Communications. For the purpose of this Agreement, notices and
all other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given (i) when faxed or delivered, or (ii)
five (5) business days after being mailed by United States registered or
certified mail, return receipt requested, postage prepaid, addressed to the
appropriate address set forth on Schedule A to this Agreement, provided that all
notices to the Company shall be directed to the attention of the Secretary of
the Company, or to such other address as any party may have furnished to the
other in writing in accordance herewith. Notice of change of address shall be
effective only upon receipt.
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11.4. Counterparts. This Agreement may be signed in counterparts,
each of which shall be an original, with the same effect as if the signatures
thereto and hereto were upon the same instrument.
11.5. Headings. The headings of the sections contained in this
Agreement are for convenience only and shall not be deemed to control or affect
the meaning or construction of any provision of this Agreement.
11.6. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California without
reference to principles of conflict of laws.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the day and year first above written.
INCOMNET, INC.
By: /s/ Denis Richard
--------------------------------
Denis Richard
President and Chief Executive Officer
/s/ George Blanco
--------------------------------
George Blanco
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INCOMNET, INC.
EQUITY INCENTIVE STOCK PLAN
SECTION 1
PURPOSE; DEFINITIONS
(a) Purpose. The purpose of the Plan is to provide selected eligible
employees of, independent sales representatives of, and consultants to,
Incomnet, Inc., a California corporation, its subsidiaries and affiliates an
opportunity to participate in the Company's future by offering them an
opportunity to acquire stock in the Company so as to retain, attract and
motivate them.
(b) Definitions. For purposes of the Plan, the following terms have the
following meanings:
(i) "Award" means any award under the Plan, including any Option,
Restricted Stock, Stock Purchase Right or Performance Share Award.
(ii) "Award Agreement" means, with respect to each Award, the signed
written agreement between the Company and the Plan participant setting forth the
terms and conditions of the Award.
(iii) "Board" means the Board of Directors of the Company.
(iv) "Change in Control" has the meaning set forth in Section 9(a).
(v) "Change in Control Price" has the meaning set forth in
Section 9(c).
(vi) "Code" means the Internal Revenue Code of 1986, as amended
from time to time, and any successor statute.
(vii) "Commission" means the Securities and Exchange Commission and
any successor agency.
(viii) "Committee" means the Committee referred to in Section 2, or
the Board in its capacity as administrator of the Plan in accordance with
Section 2.
(ix) "Company" means Incomnet, Inc., a California corporation.
(x) "Continuing Director" means at any date a member of the
Company's Board of Directors (i) who was a member of the Board on the date of
this Plan, or (ii) who was nominated or elected subsequent to such date by at
least a majority of the directors who were Continuing Directors at the time of
such nomination or election or whose election to the Board was recommended or
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endorsed by at least a majority of the directors who were Continuing Directors
at the time of such nomination or election; provided, however, that there shall
be excluded from clause (ii) above any individual whose initial assumption of
office occurred as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation or proxies or consents, by or on behalf of a person other than the
then current members of the Company's Board of Directors.
(xi) "Disability" means permanent and total disability as determined
by the Committee for purposes of the Plan.
(xii) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, and any successor statute.
(xiii) "Executive Officer" means any officer whose compensation is
required to be described under Item 402 of Regulation S-K.
(xiv) "Fair Market Value" means as of any given date (a) if the
Stock is listed on any established stock exchange, the Nasdaq National Market
System or the Nasdaq SmallCap Market System, the closing sales price for the
Stock or the average of the bid and asked prices if no sales were reported, as
quoted on such system or exchange, as reported in the Wall Street Journal or
similar publication; or (b) in the absence of an established market for the
Stock, the fair market value of the Stock as determined by the Committee in good
faith.
(xv) "Incentive Stock Option" means any Option intended to be and
designated as an "incentive stock option" within the meaning of Section 422 of
the Code.
(xvi) "Nonqualified Stock Option" means any Option that is not an
Incentive Stock Option.
(xvii) "Option" means an option granted under Section 5.
(xviii) "Performance Period" means the period determined by the
Committee under Section 8(a) .
(xvix) "Performance Share" means the equivalent, as of any time such
assessment is made, of the Fair Market Value of one share of Stock.
(xx) "Performance Share Award" means an Award under Section 8.
(xxi) "Plan" means this Incomnet, Inc. Equity Incentive Plan, as
amended from time to time.
(xxii) "Restricted Stock" means an Award of Stock subject to
restrictions, as more fully described in Section 6.
(xxiii) "Restriction Period" means the period determined by the
Committee under Section 6(b).
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(xxiv) "Rule 16b-3" means Rule 16b-3 under Section 16(b) of the
Exchange Act, as amended from time to time, and any successor rule.
(xxv) "Stock" means the no par value Common Stock of the Company,
and any successor security.
(xxvi) "Stock Purchase Right" means an Award granted under Section
7.
(xxvii) "Subsidiary" has the meaning set forth in Section 424 of the
Code.
(xxviii) "Tax Date" means the date defined in Section 10(f).
(xxvix) "Termination" means, for purposes of the Plan, with respect
to a participant, that the participant has ceased to be, for any reason,
employed by, consulting to, or a sales representative of the Company, a
subsidiary or an affiliate; provided, that for purposes of this definition, if
so determined by the President of the Company, in his sole discretion,
Termination shall not include a change in status from an employee of, to a
consultant to, the Company or any subsidiary or affiliate, or vice versa.
SECTION 2
ADMINISTRATION
(a) Committee. The Plan shall be administered by the Board or, upon
delegation by the Board, by a committee of the Board appointed by the Board that
will satisfy Rule 16b-3 and Section 162(m) of the Code, as in effect with
respect to the Company from time to time. In connection with the administration
of the Plan, the Committee shall have the powers possessed by the Board. The
Committee may act only by a majority of its members, except that the Committee
may from time to time select another committee or one or more other persons to
be responsible so long as such selection comports with the requirements of
Section 162(m) of the Code and Rule 16b-3. The Board at any time may abolish the
Committee and revest in the Board the administration of the Plan.
(b) Authority. The Committee shall grant Awards to eligible employees and
consultants. In particular and without limitation, the Committee, subject to the
terms of the Plan, shall:
(i) select the officers, other key employees, sales representatives
and consultants to whom Awards may be granted;
(ii) determine whether and to what extent Awards are to be granted
under the Plan;
(iii) determine the number of shares to be covered by each Award
granted under the Plan;
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(iv) determine the terms and conditions of any Award granted under
the Plan and any related loans to be made by the Company, based upon factors
determined by the Committee; and
(v) determine to what extent and under what circumstances any Award
payments may be deferred by a participant.
(c) Committee Determinations Binding. The Committee may adopt, alter and
repeal administrative rules, guidelines and practices governing the Plan as it
from time to time shall deem advisable, may interpret the terms and provisions
of the Plan, any Award and any Award Agreement and may otherwise supervise the
administration of the Plan. Any determination made by the Committee pursuant to
the provisions of the Plan with respect to any Award shall be made in its sole
discretion at the time of the grant of the Award or, unless in contravention of
any express term of the Plan or Award, at any later time. All decisions made by
the Committee under the Plan shall be binding on all persons, including the
Company and Plan participants.
SECTION 3
STOCK SUBJECT TO PLAN
(a) Number of Shares. The total number of shares of Stock reserved and
available for issuance pursuant to Awards under this Plan shall be 5 million
shares. Such shares may consist, in whole or in part, of authorized and unissued
shares or treasury shares or shares reacquired in private transactions or open
market purchases, but all shares issued under the Plan, regardless of source
shall be counted against the 5 million-share limitation. If any Option
terminates or expires without being exercised in full or if any shares of Stock
subject to an Award are forfeited, or if an Award otherwise terminates without a
payment being made to the participant in the form of Stock, the shares issuable
under such Option or Award shall again be available for issuance in connection
with Awards. To the extent an Award is paid in cash, the number of shares of
Stock representing, at Fair Market Value on the date of the payment, the value
of the cash payment shall not be available for later grant under the Plan. Any
Award under this Plan shall be governed by the terms of the Plan and any
applicable Award Agreement.
(b) Adjustments. In the event of any merger, reorganization,
consolidation, recapitalization, stock dividend, stock split or other change in
corporate structure affecting the Stock, such substitution or adjustments shall
be made in the aggregate number of shares of Stock reserved for issuance under
the Plan, in the number and exercise price of shares subject to outstanding
Options, and in the number of shares subject to other outstanding Awards, as may
be determined to be appropriate by the Committee, in its sole discretion;
provided,
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however, that the number of shares subject to any Award shall always be a whole
number.
SECTION 4
ELIGIBILITY
Awards may be granted to officers and other employees of, independent
sales representatives of, and consultants to, the Company, its subsidiaries and
affiliates (excluding members of the Committee and any person who serves only as
a director).
SECTION 5
STOCK OPTIONS
(a) Types. Any Option granted under the Plan shall be in such form as the
Committee may from time to time approve. The Committee shall have the authority
to grant to any participant Incentive Stock Options, Nonqualified Stock Options
or both types of Options. Incentive Stock Options may be granted only to
employees of the Company, its parent (within the meaning of Section 424(e) of
the Code) or Subsidiaries. Any portion of an Option that is not designated as,
or does not qualify as, an Incentive Stock Option shall constitute a
Nonqualified Stock Option.
(b) Terms and Conditions. Options granted under the Plan shall be subject
to the following terms and conditions:
(i) Option Term. The term of each Option shall be fixed by the
Committee, but no Incentive Stock Option shall be exercisable more than ten (10)
years after the date the Option is granted, and no Nonqualified Stock Option
shall be exercisable more than fifteen (15) years after the date the Option is
granted. If, at the time the Company grants an Incentive Stock Option, the
optionee owns directly or by attribution stock possessing more than 10% of the
total combined voting power of all classes of stock of the Company, or any
parent or Subsidiary of the Company, the Incentive Stock Option shall not be
exercisable more than five (5) years after the date of grant.
(ii) Grant Date. The Company may grant Options under the Plan at any
time and from time to time before the Plan terminates. The Committee shall
specify the date of grant or, if it fails to, the date of grant shall be the
date of action taken by the Committee to grant the Option. However, if an Option
is approved in anticipation of employment, the date of grant shall be the date
the intended optionee is first treated as an employee for payroll purposes.
(iii) Exercise Price. The exercise price per share of Stock
purchasable under an Option shall be equal to at least 85% of the Fair Market
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Value on the date of grant, and in the case of Incentive Stock Options shall be
equal to at least the Fair Market Value on the date of grant; provided, however,
that if, at the time the Company grants an Incentive Stock Option, the optionee
owns directly or by attribution stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company, or any parent or
Subsidiary of the Company, then the exercise price shall be not less than 110%
of the Fair Market Value on the date the Incentive Stock Option is granted.
(iv) Exercisability. Subject to the other provisions of the Plan, an
Option shall be exercisable in its entirety at grant or at such times and in
such amounts as are specified in the Award Agreement evidencing the Option. The
Committee, in its absolute discretion, at any time may waive any limitations
respecting the time at which an Option first becomes exercisable in whole or in
part.
(v) Method of Exercise; Payment. To the extent the right to purchase
shares has accrued, Options may be exercised, in whole or in part, from time to
time, by written notice from the optionee to the Company stating the number of
shares being purchased, accompanied by payment of the exercise price for the
shares.
(vi) No Disqualification. Notwithstanding any other provision in the
Plan, no term of the Plan relating to Incentive Stock Options shall be
interpreted, amended or altered nor shall any discretion or authority granted
under the Plan be exercised so as to disqualify the Plan under Section 422 of
the Code or, without the consent of the optionee affected, to disqualify any
Incentive Stock Option under such Section 422.
SECTION 6
RESTRICTED STOCK
(a) Price. The Committee may grant to a participant Restricted Stock in
consideration of past services for which such participant has not otherwise been
fully compensated or for such other consideration, if any, as determined by the
Committee as permitted by law.
(b) Restrictions. Subject to the provisions of the Plan and the Award
Agreement, during the Restriction Period set by the Committee, commencing with,
and not exceeding ten (10) years from, the date of such Award, the participant
shall not be permitted to sell, assign, transfer, pledge or otherwise encumber
shares of Restricted Stock. Within these limits, the Committee may provide for
the lapse of such restrictions in installments and may accelerate or waive such
restrictions, in whole or in part, based on service, performance or such other
factors or criteria as the Committee may determine.
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(c) Dividends. Unless otherwise determined by the Committee, with respect
to dividends on shares of Restricted Stock, dividends payable in cash shall be
automatically reinvested in additional Restricted Stock, and dividends payable
in Stock shall be paid in the form of Restricted Stock.
(d) Termination. Except to the extent otherwise provided in the Award
Agreement and pursuant to Section 6(b), in the event of a Termination during the
Restriction Period, all shares still subject to restriction shall be forfeited
by the participant.
SECTION 7
STOCK PURCHASE RIGHTS
(a) Price. The Committee may grant Stock Purchase Rights which shall
enable the recipients to purchase Stock at a price equal to not less than 85% of
its Fair Market Value on the date of grant.
(b) Exercisability. Stock Purchase Rights shall be exercisable for a
period determined by the Committee not exceeding 30 days from the date of the
grant.
SECTION 8.
PERFORMANCE SHARES
(a) Awards. The Committee shall determine the nature, length and starting
date of the Performance Period for each Performance Share Award, which period
shall be at least one (1) year (subject to Section 9) and not more than six (6)
years. The consideration payable by a participant with respect to a Performance
Share Award shall be an amount determined by the Committee in the exercise of
the Committee's discretion at the time of the Award; provided, that the amount
of consideration may be zero and may in no event exceed 50% of the Fair Market
Value at the time of grant. The Committee shall determine the performance
objectives to be used in awarding Performance Shares and the extent to which
such Performance Shares have been earned. Performance Periods may overlap and
participants may participate simultaneously with respect to Performance Share
Awards that are subject to different Performance Periods and different
performance factors and criteria. At the beginning of each Performance Period,
the Committee shall determine for each Performance Share Award subject to such
Performance Period the number of shares of Stock (which may consist of
Restricted Stock) to be awarded to the participant at the end of the Performance
Period if and to the extent that the relevant measures of performance for such
Performance Share Award are met. Such number of shares of Stock may be fixed or
may vary in accordance with such performance or other criteria as may be
determined by the Committee. The Committee may provide that (i) amounts
equivalent to interest at such rates as the Committee may determine, or (ii)
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amounts equivalent to dividends paid by the Company upon outstanding Stock shall
be payable with respect to Performance Share Awards.
(b) Termination. Except as otherwise provided in the Award Agreement or
determined by the Committee, in the event of a Termination during a Performance
Period, the participant shall not be entitled to any payment with respect to the
Performance Shares subject to the Performance Period.
(c) Form of Payment. Payment shall be made in the form of cash or whole
shares of Stock, as the Committee, in its discretion, shall determine.
SECTION 9
CHANGE IN CONTROL
(a) Definition of "Change in Control". For purposes of Section 9(b), a
"Change in Control" means the occurrence of any one of the following:
(i) Any "person", as such term is used in Sections 13(d) and 14(d)
of the Exchange Act (other than the Company, a subsidiary, an affiliate, a
Company employee benefit plan, John P. Casey or any of Mr. Casey's affiliates or
Ironwood Telecom LLC, a Colorado Limited liability company, or any of Ironwood's
affiliates, including any trustee of such plan acting as trustee) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing 50% or more of
the combined voting power of the Company's then outstanding securities;
(ii) A change in the members of the Company's Board of Directors
such that the Continuing Directors do not constitute a majority of the Company's
Board of Directors; or
(iii) the dissolution or liquidation (partial or total) of the
Company or a sale of assets involving 50% or more of the total assets of the
Company as reported on the most recent financial statement of the Company filed
with the Securities and Exchange Commission, any merger or reorganization of the
Company whether or not another entity is the survivor, a transaction pursuant to
which the holders, as a group, of all of the shares of the Company outstanding
prior to the transaction hold, as a group, less than 66-2/3% of the shares of
the Company outstanding after the transaction, or any other event which the
Board determines, in its discretion, would materially alter the structure of the
Company or its ownership.
(b) Impact of Event. In the event of a "Change in Control" as defined in
Section 9(a), but only if and to the extent so specifically determined by the
Board in its discretion, which determination may be amended or reversed only by
the affirmative vote of a majority of the persons who were directors at the time
such determination was made, acceleration and valuation provisions no more
favorable to participants than the following may apply:
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(i) Subject to Section 5(b)(vi), any Options outstanding as of the
date such Change in Control is determined to have occurred and not then
exercisable and vested shall become fully exercisable and vested.
(ii) The restrictions and limitations applicable to any Restricted
Stock and Stock Purchase Rights shall lapse, and such Restricted Stock shall
become fully vested.
(iii) The value (net of any exercise price) of all outstanding
Options, Restricted Stock and Stock Purchase Rights, unless otherwise determined
by the Committee at or after grant and subject to Rule 16(b)3, shall be cashed
out on the basis of the "Change in Control Price", as defined in Section 9(c),
as of the date such Change in Control is determined to have occurred or such
other date as the Board may determine prior to the Change in Control.
(iv) Any outstanding Performance Share Awards shall be vested and
paid in full as if all performance criteria had been met.
(c) Change in Control Price. For purposes of this Section 9, "Change in
Control Price" means the highest price per share paid in any transaction quoted
on the Nasdaq SmallCap Market or other exchange system in which the Company's
stock is traded or quoted or paid or offered in any bona fide transaction
related to a potential or actual Change in Control of the Company at any time
during the preceding 60 day period as determined by the Board, except that, in
the case of Incentive Stock Options, such price shall be based only on
transactions reported for the date on which the Board decides to cash out such
Options.
SECTION 10
GENERAL PROVISIONS
(a) Award Grants. Any Award may be granted either alone or in addition to
other Awards granted under the Plan. Subject to the terms and restrictions set
forth elsewhere in the Plan, the Committee shall determine the consideration, if
any, payable by the participant for any Award and, in addition to those set
forth in the Plan, any other terms and conditions of the Awards. The Committee
may condition the grant or payment of any Award upon the attainment of specified
performance goals or such other factors or criteria, including vesting based on
continued employment or consulting, as the Committee shall determine.
Performance objectives may vary from participant to participant and among groups
of participants and shall be based upon such Company, subsidiary, group or
division factors or criteria as the Committee may deem appropriate, including,
but not limited to, earnings per share or return on equity. The other provisions
of Awards also need not be the same with respect to each recipient. Unless
specified otherwise in the Plan or by the Committee, the date of grant of an
Award shall be the date of action by the Committee to grant the Award. The
Committee may also
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substitute new Options for previously granted Options, including previously
granted Options having higher exercise prices.
(b) Award Agreement. As soon as practicable after the date of an Award
grant, the Company and the participant shall enter into a written Award
Agreement identifying the date of grant, and specifying the terms and conditions
of the Award. Options are not exercisable until after execution of the Award
agreement by the Company and the Plan participant, but a delay in execution of
the agreement shall not affect the validity of the Option grant.
(c) Certificates. All certificates for shares of Stock or other securities
delivered under the Plan shall be subject to such stock transfer orders, legends
and other restrictions as the Committee may deem advisable under the rules,
regulations and other requirements of the Commission, any market in which the
Stock is then traded and any applicable federal, state or foreign securities
law.
(d) Termination. Unless otherwise provided in the applicable Award
Agreement or by the Committee, in the event of retirement or Termination for any
reason other than death or Disability, Awards held at the date of Termination
(and only to the extent then exercisable or payable, as the case may be) may be
exercised in whole or in part at any time within three (3) months after the date
of Termination, or such lesser period specified in the Award Agreement (but in
no event after the expiration date of the Award), but not thereafter. If
Termination is due to retirement or to death or Disability, Awards held at the
date of Termination (and only to the extent then exercisable or payable, as the
case may be) may be exercised in whole or in part by the participant in the case
of retirement or Disability, by the participant's guardian or legal
representative or by the person to whom the Award is transferred by will or the
laws of descent and distribution, at any time within one (1) year from the date
of Termination or any lesser period specified in the Award Agreement (but in no
event after the expiration of the Award).
(e) Delivery of Purchase Price. If and only to the extent authorized by
the Committee, participants may make all or any portion of any payment due to
the Company
(i) with respect to the consideration payable for an Award,
(ii) upon exercise of an Award, or
(iii) with respect to federal, state, local or foreign tax payable
in connection with an Award, by delivery of (x) cash, (y) check, or (z) any
property other than cash (including a promissory note of the participant or
shares of Stock or securities) so long as, if applicable, such property
constitutes valid consideration for the Stock under, and otherwise complies
with, applicable law. No promissory note under the Plan shall have a term
(including extensions) of
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more than five years or shall be of a principal amount exceeding 90% of the
purchase price paid by the borrower.
(f) Tax Withholding. Any shares or other securities so withheld or
tendered will be valued by the Committee as of the date they are withheld or
tendered; provided, however, that Stock shall be valued at Fair Market Value on
such date. The value of the shares withheld or tendered may not exceed the
required federal, state, local and foreign withholding tax obligations as
computed by the Company. Unless the Committee permits otherwise, the participant
shall pay to the Company in cash, promptly when the amount of such obligations
becomes determinable (the "Tax Date"), all applicable federal, state, local and
foreign withholding taxes that the Committee in its discretion determines to
result, (i) from the lapse of restrictions imposed upon an Award, (ii) upon
exercise of an Award, or (iii) from a transfer or other disposition of shares
acquired upon exercise or payment of an Award, or otherwise related to the Award
or the shares acquired in connection with an Award.
A participant who has received an Award or payment under an Award may, to
the extent, if any, authorized by the Committee in its discretion, make an
election to (x) deliver to the Company a promissory note of the participant on
the terms set forth in Section 10(e), or (y) tender any such securities to the
Company to pay the amount of tax that the Committee in its discretion determines
to be required to be withheld by the Company subject to the following
limitations:
(i) such election shall be irrevocable;
(ii) such election shall be subject to the disapproval of the
Committee;
(iii) in the case of participants subject to Section 16(b) of the
Exchange Act, such tender may not be made within six (6) months of the
acquisition of the securities to be tendered to satisfy the tax withholding
obligation (except that this limitation shall not apply in the event of death or
Disability of such person before the six month period expires); and
(iv) in the case of participants subject to Section 16(b) of the
Exchange Act, such election must be made in any ten day period beginning on the
third business day following the date of release for publication of quarterly or
annual summary statements of sales and earnings.
(g) No Transferability. No Award shall be assignable or otherwise
transferable by the participant other than by will or by the laws of descent and
distribution. During the life of a participant, an Award shall be exercisable,
and any elections with respect to an Award may be made, only by the participant
or participant's guardian or legal representative.
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(h) Adjustment of Awards; Waivers. Subject to Section 5(b)(vi), the
Committee may adjust the performance goals and measurements applicable to Awards
(i) to take into account changes in law and accounting and tax rules, (ii) to
make such adjustments as the Committee deems necessary or appropriate to reflect
the inclusion or exclusion of the impact of extraordinary or unusual items,
events or circumstances in order to avoid windfalls or hardships, and (iii) to
make such adjustments as the Committee deems necessary or appropriate to reflect
any material changes in business conditions. In the event of hardship or other
special circumstances of a participant and otherwise in its discretion, the
Committee may waive in whole or in part any or all restrictions, conditions,
vesting, or forfeiture with respect to any Award granted to such participant.
(i) Non-Competition. The Committee may condition its discretionary waiver
of a forfeiture, the acceleration of vesting at the time of Termination of a
participant holding any unexercised or unearned Award, the waiver of
restrictions on any Award, or the extension of the expiration period to a period
not longer than that provided by the Plan upon such participant's agreement (and
compliance with such agreement) to (i) not engage in any business or activity
competitive with any business or activity conducted by the Company and (ii) be
available for consultations at the request of the Company's management, all on
such terms and conditions (including conditions in addition to (i) and (ii)) as
the Committee may determine.
(j) Dividends. The reinvestment of dividends in additional Stock or
Restricted Stock at the time of any dividend payment pursuant to Section 6(c)
shall only be permissible if sufficient shares of Stock are available under
Section 3 for such reinvestment (taking into account then outstanding Awards).
(k) Regulatory Compliance. Each Award under the Plan shall be subject to
the condition that, if at any time the Committee shall determine that (i) the
listing, registration or qualification of the shares of Stock upon any
securities exchange or for trading in any securities market or under any state
or federal law, (ii) the consent or approval of any government or regulatory
body or (iii) an agreement by the participant with respect thereto, is necessary
or desirable, then such Award shall not be consummated in whole or in part
unless such listing, registration, qualification, consent, approval or agreement
shall have been effected or obtained free of any conditions not acceptable to
the Committee.
(l) Rights as Shareholder. Unless the Plan or the Committee expressly
specifies otherwise, an optionee shall have no rights as a shareholder with
respect to any shares covered by an Award until the stock certificates
representing the shares are actually delivered to the optionee. Subject to
Sections 3(b) and 6(c), no adjustment shall be made for dividends or other
rights for which the record date is prior to the date the certificates are
delivered.
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(m) Beneficiary Designation. The Committee, in its discretion, may
establish procedures for a participant to designate a beneficiary to whom any
amounts payable in the event of the participant's death are to be paid.
(n) Additional Plans. Nothing contained in the Plan shall prevent the
Company, a subsidiary or an affiliate from adopting other or additional
compensation arrangements for its employees and consultants.
(o) No Employment Rights. The adoption of the Plan shall not confer upon
any employee any right to continued employment nor shall it interfere in any way
with the right of the Company, a subsidiary or an affiliate to terminate the
employment of any employee at any time.
(p) Rule 16(b)3. Notwithstanding any provision of the Plan, the Plan shall
always be administered, and Awards shall always be granted and exercised, in
such a manner as to conform to the provisions of Rule 16(b)3.
(q) Governing Law. The Plan and all Awards shall be governed by and
construed in accordance with the laws of the State of California.
(r) Use of Proceeds. All cash proceeds to the Company under the Plan shall
constitute general funds of the Company.
(s) Unfunded Status of Plan. The Plan shall constitute an "unfunded" plan
for incentive and deferred compensation. The Committee may authorize the
creation of trusts or arrangements to meet the obligations created under the
Plan to deliver Stock or make payments; provided, however, that unless the
Committee otherwise determines, the existence of such trusts or other
arrangements shall be consistent with the "unfunded" status of the Plan.
(t) Assumption by Successor. The obligations of the Company under the Plan
and under any outstanding Award may be assumed by any successor corporation,
which for purposes of the Plan shall be included within the meaning of
"Company".
(u) Limitation on Award Grants to Executive Officers. The Company may not
in any one fiscal year grant Awards under the Plan for more than 750,000 shares
to any Executive Officer.
SECTION 11.
AMENDMENTS AND TERMINATION
The Board may amend, alter or discontinue the Plan or any Award, but no
amendment, alteration or discontinuance shall be made which would impair the
rights of a participant under an outstanding Award without the participant's
consent. In addition, to the extent required for the Plan (i) to comply with
Rule 16b-3, (ii) with respect to grants to Executive Officers to the extent
required to qualify Awards as "qualified performance-based compensation" under
Section
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162(m) of the Code, or, (iii) with respect to provisions solely as they relate
to Incentive Stock Options, to the extent required for the Plan to comply with
Section 422 of the Code, the Board may not amend or alter the Plan without the
approval of a majority of the voting power of the shares of the Company entitled
to vote at a duly held shareholders' meeting or by an action by written consent
and, if at a meeting, a quorum of the voting power of the Company is represented
in person or by proxy, where such amendment or alteration would:
(a) except as expressly provided in the Plan, increase the total number of
shares reserved for issuance pursuant to Awards under the Plan;
(b) except as expressly provided in the Plan, change the minimum price
terms of Section 5(b)(iii);
(c) change the class of employees and consultants eligible to participate
in the Plan;
(d) increase the number of Awards to any Executive Officer;
(e) extend the maximum Option period under Section 5(b)(i); or
(f) materially increase the benefits accruing to participants under the
Plan.
SECTION 12.
EFFECTIVE DATE OF PLAN
The Plan shall be effective on the date it is adopted by the Board but all
Awards shall be conditioned upon approval of the Plan (a) at a duly held
shareholders' meeting by the affirmative vote of the holders of a majority of
the voting power of the shares of the Company entitled to vote and represented
in person or by proxy at the meeting, or (b) by an action by written consent of
the holders of a majority of the voting power of the shares of the Company
entitled to vote.
SECTION 13
TERM OF PLAN
No Award shall be granted on or after December 31, 2008, but Awards
granted prior to December 31, 2008 may extend beyond that date.
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INCOMNET, INC.
EMPLOYEE STOCK PURCHASE PLAN
SECTION 1
PURPOSE
This Incomnet, Inc. Employee Stock Purchase Plan (the "Plan") is designed
to encourage and assist employees of Incomnet, Inc. (the "Company") and any
Participating Subsidiary, as defined in Section 4, to acquire an equity interest
in the Company through the purchase of shares of Company common stock (the
"Common Stock").
SECTION 2
ADMINISTRATION
The Plan shall be administered by the Board of Directors of the Company
(or a committee thereof designated by the Board of Directors, which in either
case is referred to as the "Board"). The Board may from time to time select a
committee or persons (the "Administrator") to be responsible for any matters in
implementing the Plan. If no such committee or persons are selected, the Board
shall be the Administrator. Subject to the express provisions of the Plan, to
the overall supervision of the Board, and to the limitations of Section 423 of
the Internal Revenue Code of 1986, as amended (the "Code"), the Administrator
may administer and interpret the Plan in any manner it believes to be desirable,
and any such interpretation shall be conclusive and binding on the Company and
all persons.
SECTION 3
NUMBER OF SHARES
(a) The total number of shares of Common Stock reserved and available for
issuance pursuant to this Plan shall be 1,000,000. Such shares may consist, in
whole or in part, of authorized and unissued shares or treasury shares
reacquired in private transactions or open market purchases, but all shares
issued under this Plan and the Foreign Plan shall be counted against the
1,000,000 share limitation.
(b) In the event of any reorganization, recapitalization, stock split,
reverse stock split, stock dividend, combination of shares, offering of rights,
or other similar change in the capital structure of the Company, the Board may
make such adjustment, if any, as it deems appropriate in the number, kind, and
purchase price of the shares available for purchase under the Plan and in the
maximum number of shares subject to any option under the Plan.
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SECTION 4
ELIGIBILITY REQUIREMENTS
(a) Each employee of the Company and each Participating Subsidiary, except
those described in the next paragraph, shall become eligible to participate in
the Plan in accordance with Section 5 on the first Enrollment Date on or
following commencement of his or her employment by the Company or the
Participating Subsidiary or following such period of employment as is designated
by the Board from time to time. Participation in the Plan is entirely voluntary.
(b) The following employees are not eligible to participate in the Plan:
(i) employees who would, immediately upon enrollment in the Plan,
own directly or indirectly (including options or rights to acquire stock
possessing) five percent or more of the total combined voting power or value of
all classes of stock of the Company or any subsidiary of the Company; and
(ii) employees who are customarily employed by the Company less than
20 hours per week or less than five months in any calendar year.
(c) "Employee" shall mean any individual who is an employee of the Company
or a Participating Subsidiary. Whether an individual qualifies as an Employee
shall be determined by the Administrator, in its sole discretion. The
Administrator shall be guided by the provisions of Treasury Regulation Section
1.421-7 and Section 3401(c) of the Code and the Treasury Regulations thereunder,
with the intent that the Plan cover all "employees" within the meaning of those
provisions other than those who are not eligible to participate in the Plan.
Unless the Administrator makes a contrary determination, the Employees of the
Company shall, for all purposes of this Plan, be those individuals who are
carried as employees of the Company or a Participating Subsidiary for regular
payroll purposes. Any inquiries regarding eligibility to participate in the Plan
shall be directed to the Administrator, whose decision will be final.
(d) "Subsidiary" shall mean any corporation described in Section 424(e) or
(f) of the Code. "Participating Subsidiary" shall mean a subsidiary which has
been designated by the Administrator as covered by the Plan.
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SECTION 5
ENROLLMENT
Any eligible employee may enroll or re-enroll in the Plan each year as of
the first trading day of (i) July 1999, (ii) the third month following such
month, and (iii) each yearly anniversary of such months (e.g. any January,
April, July and October), or such other days as may be established by the Board
from time to time (the "Enrollment Dates"). In order to enroll, an eligible
employee must complete, sign, and submit to the Company an enrollment form. Any
enrollment form received by the designee of the Administrator by the 15th day of
the month preceding an Enrollment Date (or by the day preceding the Enrollment
Date in the case of employees hired after such 15th day), or such other date
established by the Administrator from time to time, will be effective on that
Enrollment Date. For purposes of the Plan, a "trading day" is any day on which
regular trading occurs on any established stock exchange or market system on
which the Common Stock is traded.
SECTION 6
GRANT OF OPTION ON ENROLLMENT
(a) Enrollment or re-enrollment by a participant in the Plan on an
Enrollment Date will constitute the grant by the Company to the participant of
an option to purchase shares of Common Stock from the Company under the Plan.
Any participant whose option expires and who has not withdrawn from the Plan
will automatically be re-enrolled in the Plan and granted a new option on the
Enrollment Date immediately following the date on which the option expires.
Furthermore, except as may otherwise be determined by the Administrator, each
Participant who has not withdrawn from the Plan will automatically be
re-enrolled in the Plan and granted a new option on any Enrollment Date on which
the fair market value per share of the Company's Common Stock is lower than the
fair market value per share on the Enrollment Date for such Participant's
existing option.
(b) Except as provided in Section 9, each option granted under the Plan
shall have the following terms:
(i) each option granted under the Plan will have a term of not more
than 24 months or such shorter option period as may be established by the Board
from time to time; notwithstanding the foregoing, however, (x) whether or not
all shares have been purchased thereunder, the option will expire on the earlier
to occur of (A) the completion of the purchase of shares on the last Purchase
Date occurring within 24 months after the Enrollment Date for such option, or
such shorter option period as may be established by the Board before an
Enrollment Date for all options to be granted on such date, or (B) the date on
which the
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employee's participation in the Plan terminates for any reason and (y) options
granted under the Plan shall have a term of three months unless extended by the
Board, effective on the Enrollment Date following such extension;
(ii) payment for shares purchased under the option will be made only
through payroll withholding in accordance with Section 7;
(iii) purchase of shares upon exercise of the option will be
effected only on the Purchase Dates established in accordance with Section 8;
(iv) the price per share under the option will be determined as
provided in Section 8;
(v) the number of shares available for purchase under an option
will, unless otherwise established by the Board before an Enrollment Date for
all options to be granted on such date, be determined by dividing $25,000 by the
fair market value of a share of Common Stock on the Enrollment Date and by
multiplying the result by the number of calendar years included in whole or in
part in the period from grant to expiration of the option;
(vi) the option (taken together with all other options then
outstanding under this and all other similar stock purchase plans of the Company
and any subsidiary of the Company, collectively "Options") will in no event give
the participant the right to purchase shares at a rate per calendar year which
accrues in excess of $25,000 of fair market value of such shares, determined at
the applicable Enrollment Date; and
(vii) the option will in all respects be subject to the terms and
conditions of the Plan, as interpreted by the Administrator from time to time.
SECTION 7
PAYROLL AND TAX WITHHOLDING; USE BY COMPANY
(a) Each participant shall elect to have amounts withheld from his or her
compensation paid by the Company during the option period, at a rate equal to
any whole percentage up to 15 percent, or such other maximum percentage as the
Board may establish from time to time before an Enrollment Date. Compensation
includes regular salary payments, commissions, overtime pay and any other
compensation as may be determined from time to time by the Board of Directors,
but excludes all other payments including, without limitation, long-term
disability or workers compensation payments, car allowances, employee referral
bonuses, relocation payments, expense reimbursements (including but not limited
to travel, entertainment, and moving expenses), salary gross-up payments, and
non-cash recognition awards. The participant shall designate a rate of
withholding in his or her enrollment form and may elect to increase or decrease
the rate of contribution effective as of any Enrollment Date, by delivery to the
Company, not later than the
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15th day of the month preceding such Enrollment Date, of a written notice
indicating the revised withholding rate.
(b) Payroll withholdings shall be credited to an account maintained for
purposes of the Plan on behalf of each participant, as soon as administratively
feasible after the withholding occurs. The Company shall be entitled to use the
withholdings for any corporate purpose, shall have no obligation to pay interest
on withholdings to any participant, and shall not be obligated to segregate
withholdings.
(c) Upon disposition of shares acquired by exercise of an option, the
participant shall pay, or make provision adequate to the Company for payment of,
all federal, state, and other tax (and similar) withholdings that the Company
determines, in its discretion, are required due to the disposition, including
any such withholding that the Company determines in its discretion is necessary
to allow the Company to claim tax deductions or other benefits in connection
with the disposition. A participant shall make such similar provisions for
payment that the Company determines, in its discretion, are required due to the
exercise of an option, including such provisions as are necessary to allow the
Company to claim tax deductions or other benefits in connection with the
exercise of the option.
SECTION 8
PURCHASE OF SHARES
(a) On the last trading day of each month immediately preceding a month
containing an Enrollment Date, or on such other days as may be established by
the Board from time to time, prior to an Enrollment Date for all options to be
granted on an Enrollment Date (each a "Purchase Date"), the Company shall apply
the funds then credited to each participant's payroll withholdings account to
the purchase of whole shares of Common Stock. The cost to the participant for
the shares purchased under any option shall be not less than 85 percent of the
lower of:
(i) the fair market value of the Common Stock on the Enrollment
Date for such option; or
(ii) the fair market value of the Common Stock on that Purchase
Date. The "fair market value" of the Common Stock on a date shall be (a) if the
Common Stock is listed on any established stock exchange, the Nasdaq National
Market System or the Nasdaq SmallCap Market System, the closing sales price for
the Stock or the average of the bid and asked prices if no sales were reported,
as quoted on such system or exchange, as reported in the Wall Street Journal or
similar publication; or (b) in the absence of an established market for the
Common Stock, the fair market value of the Common Stock as determined by the
Board in
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good faith, or the fair market value on such date as determined by the
Administrator if shares of Common Stock are not so traded, quoted or reported.
(b) Any funds in an amount less than the cost of one share of Common Stock
left in a participant's payroll withholdings account on a Purchase Date shall be
carried forward in such account for application on the next Purchase Date, and
any additional amount shall be distributed to the participant.
(c) If at any Purchase Date, the shares available under the Plan are less
than the number all participants would otherwise be entitled to purchase on such
date, purchases shall be reduced proportionately to eliminate the deficit. Any
funds that cannot be applied to the purchase of shares due to such a reduction
shall be refunded to participants as soon as administratively feasible.
SECTION 9
WITHDRAWAL FROM THE PLAN
A participant may withdraw from the Plan in full (but not in part) at any
time, effective after written notice thereof is received by the Company. All
funds credited to a participant's payroll withholdings account shall be
distributed to him or her without interest within 60 days after notice of
withdrawal is received by the Company. Any eligible employee who has withdrawn
from the Plan may enroll in the Plan again on any subsequent Enrollment Date in
accordance with the provisions of Section 5.
SECTION 10
TERMINATION OF EMPLOYMENT
Participation in the Plan terminates immediately when a participant ceases
to be employed by the Company for any reason whatsoever (including death or
disability) or otherwise becomes ineligible to participate in the Plan. As soon
as administratively feasible after termination, the Company shall pay to the
participant or his or her beneficiary or legal representative, all amounts
credited to the participant's payroll withholdings account; provided, however,
that if a participant ceases to be employed by the Company because of the
commencement of employment with a Subsidiary of the Company that is not a
Participating Subsidiary, funds then credited to such participant's payroll
withholdings account shall be applied to the purchase of whole shares of Common
Stock at the next Purchase Date, and any funds remaining after such purchase
shall be paid to the participant.
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SECTION 11
DESIGNATION OF BENEFICIARY
(a) Each participant may designate one or more beneficiaries in the event
of death and may, in his or her sole discretion, change such designation at any
time. Any such designation shall be effective upon receipt in written form by
the Company and shall control over any disposition by will or otherwise.
(b) As soon as administratively feasible after the death of a participant,
amounts credited to his or her account shall be paid in cash to the designated
beneficiaries or, in the absence of a designation, to the executor,
administrator, or other legal representative of the participant's estate. Such
payment shall relieve the Company of further liability with respect to the Plan
on account of the deceased participant. If more than one beneficiary is
designated, each beneficiary shall receive an equal portion of the account
unless the participant has given express contrary written instructions.
SECTION 12
ASSIGNMENT
(a) The rights of a participant under the Plan shall not be assignable by
such participant, by operation of law or otherwise. No participant may create a
lien on any funds, securities, rights, or other property held by the Company for
the account of the participant under the Plan, except to the extent that there
has been a designation of beneficiaries in accordance with the Plan, and except
to the extent permitted by the laws of descent and distribution if beneficiaries
have not been designated.
(b) A participant's right to purchase shares under the Plan shall be
exercisable only during the participant's lifetime and only by him or her,
except that a participant may direct the Company in the enrollment form to issue
share certificates to the participant and his or her spouse in community
property, to the participant jointly with one or more other persons with right
of survivorship, or to certain forms of trusts approved by the Administrator.
SECTION 13
ADMINISTRATIVE ASSISTANCE
If the Administrator in its discretion so elects, it may retain a
brokerage firm, bank, or other financial institution to assist in the purchase
of shares, delivery of reports, or other administrative aspects of the Plan. If
the Administrator so elects, each participant shall be deemed upon enrollment in
the Plan to have authorized the establishment of an account on his or her behalf
at such institution. Shares purchased by a participant under the Plan shall be
held in the account in the
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name in which the share certificate would otherwise be issued pursuant to
Section 12(b).
SECTION 14
COSTS
All costs and expenses incurred in administering the Plan shall be paid by
the Company, except that any stamp duties or transfer taxes applicable to
participation in the Plan may be charged to the account of such participant by
the Company. Any brokerage fees for the purchase of shares by a participant
shall be paid by the Company, but brokerage fees for the resale of shares by a
participant shall be borne by the participant.
SECTION 15
EQUAL RIGHTS AND PRIVILEGES
All eligible employees shall have equal rights and privileges with respect
to the Plan so that the Plan qualifies as an "employee stock purchase plan"
within the meaning of Section 423 of the Code and the related Treasury
Regulations. Any provision of the Plan which is inconsistent with Section 423 of
the Code shall without further act or amendment by the Company or the Board be
reformed to comply with the requirements of Section 423. This Section 15 shall
take precedence over all other provisions of the Plan.
SECTION 16
APPLICABLE LAW
The Plan shall be governed by the substantive laws (excluding the conflict
of laws rules) of the State of California.
SECTION 17
MODIFICATION AND TERMINATION
(a) The Board may amend, alter, or terminate the Plan at any time,
including amendments to outstanding options. No amendment shall be effective
unless within 12 months after it is adopted by the Board, it is approved by the
holders of a majority of the votes cast at a duly held shareholders' meeting at
which a quorum of the voting power of the Company is represented in person or by
proxy, if such amendment would:
(i) increase the number of shares reserved for purchase under the
Plan; or
(ii) require shareholder approval in order to comply with Rule 16b-3
under the Securities Exchange Act of 1934, as amended.
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(b) In the event the Plan is terminated, the Board may elect to terminate
all outstanding options either immediately or upon completion of the purchase of
shares on the next Purchase Date, or may elect to permit options to expire in
accordance with their terms (and participation to continue through such
expiration dates). If the options are terminated prior to expiration, all funds
contributed to the Plan that have not been used to purchase shares shall be
returned to the participants as soon as administratively feasible.
(c) In the event of the sale of all or substantially all of the assets of
the Company, or the merger or consolidation of the Company with or into another
corporation, or the dissolution or liquidation of the Company, the Board shall
provide for the assumption or substitution of each option under the Plan by the
successor or surviving corporation, or a parent or subsidiary thereof, unless
the Board decides to take such other action as it deems appropriate, including,
without limitation, providing for the termination of the Plan and providing for
a Purchase Date to occur on the trading day immediately preceding the date of
such termination.
SECTION 18
RIGHTS AS AN EMPLOYEE
Nothing in the Plan shall be construed to give any person the right to
remain in the employ of the Company or to affect the Company's right to
terminate the employment of any person at any time with or without cause.
SECTION 19
RIGHTS AS A SHAREHOLDER; DELIVERY OF CERTIFICATES
Unless otherwise determined by the Board, certificates evidencing shares
purchased on any Purchase Date shall be delivered to participants as soon as
administratively feasible. Participants shall be treated as the owners of their
shares effective as of the Purchase Date. If approved by the Administrator in
its discretion, the Company instead of delivery of share certificates (i)
deliver a certificate (or equivalent) to a broker for crediting to the
Participant's account, or (ii) make a notation in the Participant's favor of
non-certificated shares on the Company's stock records.
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SECTION 20
SIX-MONTH NONTRANSFERABILITY OF SHARES
Unless otherwise determined by the Board, shares purchased under the Plan
shall be nontransferable except by operation of law or bequest for a period of
six months from the date of issue. Any certificate delivered to a Participant
shall be so legended. Such legended certificate may be exchanged for an
unlegended certificate after the expiration of such six-month period.
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SETTLEMENT AGREEMENT AND MUTUAL GENERAL RELEASE
This Settlement Agreement and Mutual General Release (this "Agreement") is
made and entered into as of March 9, 1999, by and among Incomnet, Inc., a
California corporation ("Incomnet"), GenSource Corporation, a California
corporation (formerly known as California Interactive Computing, Inc., the
"Company"), Jerry C. Buckley, an individual ("Buckley"), Ralph M. Flygare, an
individual ("Flygare"), Robert Reisbaum, an individual ("Reisbaum") and E. V.
Schmidt, an individual ("Schmidt").
RECITALS
A. Pursuant to a Stock Purchase Agreement dated April 25, 1997, among
Incomnet, the Company and Buckley, Incomnet purchased 25,129.5 shares of capital
stock, par value $0.10 per share (the "Company Stock"), of the Company (the
"Buckley Shares"). In consideration for such shares, Incomnet issued a
promissory note to Buckley in the principal amount of $500,000 (the "Buckley
Purchase Note"). Also, Incomnet assumed the Company's obligation to Buckley in
the outstanding amount of $286,011.89, $90,000 of which was paid in cash by
Incomnet and the remaining balance of $196,011.89 is the subject of a promissory
note (the "Buckley Assumption Note").
B. Pursuant to a Stock Purchase Agreement dated April 25, 1997, among
Incomnet, the Company and Flygare, Incomnet purchased 25,129.5 shares of Company
Stock (the "Flygare Shares"). In consideration for such shares, Incomnet issued
a promissory note to Flygare in the principal amount of $500,000 (the "Flygare
Purchase Note"). Also, Incomnet assumed the Company's obligation to Flygare in
the outstanding amount of $132,516.02, $75,000 of which was paid in cash by
Incomnet and the remaining balance of $57,516.02 is the subject of a promissory
note (the "Flygare Assumption Note").
C. Pursuant to a Stock Purchase Agreement dated April 25, 1997, between
Incomnet and Reisbaum, Incomnet purchased 24,629.5 shares of Company Stock (the
"Reisbaum Shares"). In consideration for such shares, Incomnet made a cash down
payment of $27,860 and issued a promissory note to Reisbaum in the principal
amounts of $27,859 and $434,333 (such debt to be hereinafter referred to as the
"Reisbaum Purchase Note").
D. Pursuant to a Stock Purchase Agreement dated April 25, 1997, between
Incomnet and Schmidt, Incomnet purchased 11,982 shares of Company Stock (the
"Schmidt Shares"). In consideration for such shares, Incomnet made a cash down
payment of $27,108 and issued a promissory note to Schmidt in the principal
amount of $211,297 (the "Schmidt Purchase Note").
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E. Pursuant to a Stock Purchase Agreement dated April 25, 1997, between
Incomnet and Dianne Orendorff, Incomnet purchased 1,000 shares of Company Stock.
In consideration for such shares, Incomnet paid $19,900 in cash to Ms.
Orendorff.
F. Pursuant to a Stock Purchase Agreement dated April 25, 1997, between
Incomnet and Nora Kenner Hoffberg, Incomnet purchased 500 shares of Company
Stock. In consideration for such shares, Incomnet paid $9,950 in cash to Ms.
Hoffberg.
G. For purposes of this Agreement, the Buckley Assumption Note and the
Flygare Assumption Note shall be hereinafter referred to collectively as the
"Assumption Notes." For purposes of this Agreement, the Buckley Purchase Note,
the Flygare Purchase Note, the Assumption Notes, the Reisbaum Purchase Note and
the Schmidt Purchase Note shall be hereinafter referred to collectively as the
"Notes."
H. Also, in connection with these purchases of Company Stock, Incomnet
entered into escrow agreements (the "Escrow Agreements") with each of Buckley,
Flygare, Reisbaum and Schmidt (collectively, the "Noteholders") and the escrow
agent thereunder.
I. Since the date of these Purchase Agreements, Incomnet has made capital
contributions to the Company of approximately $1,500,000 (the "Capital
Infusions").
J. A dispute has arisen among Incomnet and the Noteholders as to
Incomnet's obligations under the Notes and claims that Incomnet has against the
Noteholders in connection with the sales of shares of Company Stock to Incomnet
and Incomnet's Capital Infusions to the Company.
K. As a result, Buckley and Flygare, as plaintiffs, and Incomnet, as
defendant, are parties to a certain lawsuit, Buckley et al. v. Incomnet, Case
No. LC046449 (the "Action"), filed in the Superior Court for the County of Los
Angeles of the State of California (the "Court").
L. Buckley, Flygare and Incomnet have agreed to settle the Action, and the
Noteholders, the Company and Incomnet have agreed to resolve their disputes as
set forth in this Agreement:
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. Return of Shares; Issuance of Securities; and Settlement.
1.1. Return of Shares. At the Closing, Incomnet shall transfer (i)
25,129.50 shares of Company Stock (the "Buckley Return Shares") to Buckley, (ii)
24,627 shares of Company Stock (the "Flygare Return Shares") to Flygare and
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(iii) 12,221.5 shares of Company Stock (the "Schmidt Return Shares") to Schmidt,
in the manner directed by each of Buckley, Flygare and Schmidt (collectively,
the "Returning Shareholders"). In consideration therefor, at the Closing, the
Returning Shareholders shall cancel their respective Notes, which Notes shall
become null and void and be without further effect.
1.2. Issuance of Replacement Notes by the Company. At the Closing,
the Company shall issue replacement promissory notes (the "Replacement Notes")
to Buckley and Flygare in the principal amounts of $196,011.89 and $52,512.79,
respectively, copies of which have been provided to Incomnet.
1.3. Issuance of Company Stock to Buckley and Flygare. At the
Closing, the Company shall issue 1,930 and 1,394 shares of Company Stock to
Buckley and Flygare, respectively, in partial consideration of the Capital
Infusions made by Incomnet to the Company and cancellation of shares of Company
Stock currently owed by Incomnet. These shares are being directed by Incomnet to
Buckley and Flygare in consideration for amounts of unpaid interest currently
owed to such Noteholders under their respective Notes.
1.4. Exchange of Reisbaum Purchase Note. At the Closing, the Company
shall issue a replacement promissory note to Reisbaum in form and substance as
attached hereto as Exhibit A (the "Reisbaum Replacement Note") in the principal
amount of $336,255.67. At the Closing, a guaranty of the Reisbaum Replacement
Note shall be executed and delivered by each of Eric Hoffberg and Nora Kenner
Hoffberg and Mr. and Mrs. Jerry C. Buckley, which signatures shall be
authenticated by a notary public (such guaranty to be hereinafter referred to as
the "Guaranty"). The Guaranty shall be in form and substance as attached hereto
as Exhibit B. In addition, at the Closing, the Company shall pay to Reisbaum
$31,810.02 by certified or cashier's check. In exchange therefore, Reisbaum
shall cancel the Reisbaum Purchase Note, and such note shall become null and
void and be of no further effect.
1.5. Issuance of Preferred Stock to Incomnet. At the Closing, in
partial consideration for the Capital Infusions and the cancellation of certain
shares of Company Stock pursuant to Section 1.7 hereof, the Company shall issue
to Incomnet 15,507 shares of the Company's Series A Preferred Stock (the
"Preferred Stock"), such Preferred Stock to have the rights, privileges,
preferences and designations as set forth in the Amended and Restated Articles
of Incorporation (the "Restated Articles") attached hereto as Exhibit C.
1.6. Cancellation of Incomnet Shares. At the Closing, Incomnet shall
transfer 26,392.5 shares of Company Stock to the Company representing the
remainder of shares of Company Stock owned by Incomnet after the transfers
described in Section 1.1. Upon receipt thereof, such shares shall be canceled
and retired by the Company.
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1.7. Termination of Escrow Agreements. At the Closing, the Escrow
Agreements shall be terminated and all right, title and interest in the shares
of Common Stock held thereunder shall vest in Incomnet; provided, however, that
the Incomnet shall continue to be obligated to transfer such shares in
accordance with the provisions of this Agreement.
1.8. Settlement. At the Closing, Buckley and Flygare shall cause the
Action to be dismissed with prejudice as to all parties thereto and Incomnet
shall pay a settlement fee of a total of $10,000 to Buckley and Flygare in the
manner so designated by them.
2. Closing.
2.1. Time and Place. The closing of the transactions contemplated by
this Agreement (the "Closing") will take place at the offices of Heller Ehrman
White & McAuliffe, 601 South Figueroa Street, California 90017, at 2:15 p.m. on
March 9, 1999, or such other date and time as agreed upon unless this Agreement
shall have terminated pursuant to Section 8.1 hereof.
2.2. Deliveries. At the Closing:
(a) Incomnet will deliver to Buckley, Flygare, Reisbaum and
Schmidt, as applicable:
i. Stock certificate(s) evidencing the Buckley Return
Shares, duly endorsed (or accompanied by a duly executed stock power) for
transfer to Buckley;
ii. Stock certificate(s) evidencing the Flygare Return
Shares, duly endorsed (or accompanied by a duly executed stock power) for
transfer to Flygare;
iii. Stock certificate(s) evidencing the Schmidt Return
Shares, duly endorsed (or accompanied by a duly executed stock power) for
transfer to Schmidt;
iv. Payment of $5,000 by certified or cashier's check to
Buckley;
v. Payment of $5,000 by certified or cashier's check to
Flygare; and
vi. A certificate executed by Incomnet confirming (A)
the accuracy of the representations and warranties of Incomnet and (B) the
performance of the covenants of Incomnet and the Company, as provided in Section
6 of this Agreement.
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(b) The Company will deliver to Buckley, Flygare and Reisbaum,
as applicable:
i. A Replacement Note issued to Buckley in accordance
with Section 1.2 of this Agreement;
ii. A Replacement Note issued to Flygare in accordance
with Section 1.2 of this Agreement;
iii. The Reisbaum Replacement Note issued to Reisbaum in
accordance with Section 1.4 of this Agreement;
iv. Payment of $31,810.02 by certified or cashier's
check to Reisbaum; and
v. Stock certificates evidencing the shares of Common
Stock to be issued to Buckley and Flygare pursuant to Section 1.3 of this
Agreement.
(c) The Noteholders will deliver to Incomnet:
i. The Notes, accompanied by a notification that such
Notes, and the indebtedness represented thereby, may be canceled and will have
no further force and effect upon the consummation of the transactions
contemplated by this Agreement; and
ii. A certificate executed by each Noteholder confirming
(A) the accuracy of the representations and warranties of such Noteholder and
(B) the performance of the covenants of such Noteholder, as provided in Section
5.2 of this Agreement.
(d) The Company will deliver to Incomnet a stock certificate
evidencing Incomnet's ownership of the shares of Preferred Stock as set forth in
Section 1.5 of the Agreement.
(e) Incomnet shall deliver to the Company a stock
certificate(s) evidencing all shares of Company Stock owned by it other than the
Buckley Return Shares, the Flygare Return Shares and the Schmidt Return Shares,
duly endorsed (or accompanied by a duly executed stock power) for transfer to
the Company.
(f) Buckley and Eric Hoffberg shall deliver to Reisbaum:
i. The Guaranty executed by the parties in accordance
with Section 1.4.
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ii. The Net Worth Certification in form and substance as
attached hereto as Exhibit D executed by Jerry Buckley and Ruth Buckley.
iii. The Net Worth Certification in form and substance
as attached hereto as Exhibit E executed by Eric Hoffberg and Nora Kenner
Hoffberg.
(g) Buckley and Flygare shall deliver to Incomnet a duly
executed copy of a dismissal with prejudice of the Action in the form attached
hereto as Exhibit F.
(h) Incomnet shall assign to the Company all of Incomnet's
right, title and interest to trademarks and trade names to the name "GenSource"
and any derivation thereof and to any other product of the Company.
3. Representations and Warranties.
3.1. Representations and Warranties of Incomnet. Incomnet represents
and warrants to the Noteholders as follows:
(a) Incomnet is a corporation duly organized, validly existing
and in good standing under the laws of the State of California.
(b) This Agreement constitutes the legal, valid, and binding
obligation of Incomnet, enforceable against Incomnet in accordance with its
terms. Incomnet has the corporate power, authority and capacity to execute and
deliver this Agreement and to perform its obligations under this Agreement.
(c) Neither the execution and delivery of this Agreement by
Incomnet nor the consummation or performance of any of the transactions
contemplated by this Agreement by Incomnet will give any corporation,
partnership, other entity or individual (each a "Person") the right to prevent,
delay or otherwise interfere with any of the transactions contemplated by this
Agreement pursuant to (i) any provision of Incomnet's Articles of Incorporation
or Bylaws; (ii) any resolution adopted by the Board of Directors or the
shareholders of Incomnet; (iii) any legal requirement or court order to which
Incomnet may be subject; or (iv) any contract to which Incomnet is a party.
(d) Incomnet is not and will not be required to obtain any
approval or consent which it has not already obtained from any Person in
connection with the execution and delivery of this Agreement or the consummation
or performance of the transactions contemplated by this Agreement.
(e) Incomnet owns the Buckley Return Shares, Flygare Return
Shares and Schmidt Return Shares free and clear of all encumbrances other than
those restrictions set forth in the Escrow Agreements, and upon the transfer and
delivery of such shares to the Returning Shareholders, respectively, such
Returning Shareholders
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shall receive good and marketable title to such shares, except for restrictions
on transferability generally imposed on securities under federal and state
securities laws.
3.2. Representations and Warranties of the Noteholders. Each
Noteholder, severally and not jointly, represents and warrants to Incomnet as
follows:
(a) This Agreement constitutes the legal, valid and binding
obligation of such Noteholder, enforceable against such Noteholder in accordance
with its terms. Such Noteholder has the power and authority to execute and
deliver this Agreement and to perform his obligations under this Agreement.
(b) Neither the execution and delivery of this Agreement by
such Noteholder nor the consummation or performance of any of the transactions
contemplated by this Agreement by such Noteholder will give any Person the right
to prevent, delay or otherwise interfere with any of the transactions
contemplated by this Agreement pursuant to (i) any legal requirement or court
order to which he may be subject; or (ii) any contract to which he is a party or
by which he may be bound.
(c) Such Noteholder is not, nor will be, required to obtain
any approval or consent which he has not already obtained from any Person in
connection with the execution and delivery of this Agreement or the consummation
or performance of any of the transactions contemplated by this Agreement.
(d) Such Noteholder owns his Note(s) free and clear of all
encumbrances, and upon the transfer and delivery of his Note(s) to Incomnet, and
the cancellation thereof, such Note(s) shall be null and void and be of no
further effect.
(e) Such Noteholder is fully familiar with the condition of
the business and finances of the Company and is not relying upon Incomnet for
any information or assurances with respect to the Company.
4. Covenants.
4.1. Covenants Prior to the Closing.
(a) Incomnet shall give prompt notice to each Noteholder, and
each Noteholder shall give prompt notice to Incomnet, of (i) the occurrence, or
failure to occur, of any event that causes any representation or warranty
contained in this Agreement to be untrue or inaccurate at any time from the date
of this Agreement to the Closing Date and (ii) any failure of Incomnet or such
Noteholder, as the case may be, to comply with or satisfy, in any material
respect, any covenant, condition or agreement to be complied with or satisfied
by it or him under this Agreement.
(b) Incomnet and each Noteholder agree to cooperate and use
their best efforts to obtain (and will immediately prepare all registrations,
filings and
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applications, requests and notices preliminary to) any and all approvals and
permits that may be necessary or which may be reasonably requested by Incomnet
or such Noteholders to consummate the transactions contemplated by this
Agreement.
4.2. Covenants Continuing After the Closing.
(a) If at any time Buckley, Flygare or Schmidt wishes to sell,
or otherwise dispose of, any shares of Company Stock owned by him to any person
(the "Purchaser"), Incomnet, or any subsequent holders of Preferred Stock (each
a "Holder"), shall have the right to participate pro rata in such transaction,
and accordingly shall have the right to require, as a condition to such sale or
disposition, that the Purchaser purchase from such Holder(s), at the same price
per share and on the same terms and conditions as involved in such sale or
disposition by such Noteholder, a portion of the shares of Preferred Stock held
by such Holder(s) which such Purchaser would otherwise purchase from such
Noteholder, equal to the total number of shares purchased by such Purchaser
multiplied by the quotient of (x) the number of shares of Preferred Stock owned
by such Holder(s) by (y) the number of shares of Company Stock owned by such
Noteholder plus the number of shares of Preferred Stock owned by such Holder(s).
The Holder(s) wishing so to participate in any such sale or disposition shall
notify such Noteholder within 30 days after the receipt of notice of such
proposed sale or disposition from such Noteholder.
(b) The Company may issue stock options to purchase up to an
aggregate of 4,300 shares of Company Stock, with an exercise price of $9.90 per
share and vesting over a three-year period, to Eric Hoffberg, Nora Kenner
Hoffberg and other key employees of the Company; provided, however, that the
Company shall not grant options to purchase Company Stock (or any security
directly or indirectly convertible into Company Stock) to any Noteholder.
(c) For so long as Incomnet owns any Preferred Stock of the
Company, the Company shall not, without the prior written consent of Incomnet,
(i) pay any dividends; (ii) increase compensation, if any, currently payable to
Buckley, Flygare, Eric Hoffberg or Nora Kenner Hoffberg, other than as provided
in employment or consulting agreements currently in existence; or (iii) enter
into any transaction or agreement, including employment and consulting
agreements other than those currently in existence, with any person or entity
that is, or, immediately prior to entering into such a transaction or agreement,
is controlled by, (A) an existing officer of the Company, (B) an existing
director of the Company, (C) a Noteholder, (D) an owner of more than 5% of the
equity securities of the Company, or (E) a family member of any of the
aforementioned.
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5. Conditions Precedent to Incomnet's Obligation to Close. The following
conditions shall be fulfilled as a condition precedent to the obligations of
Incomnet to consummate the transactions contemplated by this Agreement.
5.1. Deliveries. All deliveries shall have been made pursuant to
Sections 2.2(c), 2.2(d) and 2.2(g) of this Agreement.
5.2. Accuracy of Representations and Warranties and Performance of
Covenants. All of the representations and warranties of the Noteholders 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 Closing
Date as if made on the Closing Date. The Noteholders shall have in all material
respects performed, satisfied and complied with all covenants, agreements and
conditions required by the Agreement to be performed, satisfied or complied with
by them on or before the date of this Agreement.
6. Conditions Precedent to Noteholders' Obligations to Close. As a
condition precedent to the obligation of each Noteholder to consummate the
transactions contemplated by this Agreement, all of the representations and
warranties of Incomnet 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 Closing Date as if made on the Closing Date.
Incomnet shall have in all material respects performed, satisfied and complied
with all covenants, agreements and conditions required by the Agreement to be
performed, satisfied or complied with by it on or before the date of this
Agreement.
6.1. Additional Conditions Precedent to Buckley's Obligations to
Close. The following conditions shall be fulfilled as additional conditions
precedent to the obligations of Buckley to consummate the transactions
contemplated by this Agreement.
(a) Deliveries. All deliveries shall have been made pursuant
to Sections 2.2(a)(i), 2.2(a)(iv), 2.2(b)(i), 2.2(b)(v) and 2.2(e) of this
Agreement.
(b) Issuance of Company Stock to Guarantors. The Company shall
have issued 4,300 shares of Company Stock to each of (i) Jerry Buckley and Ruth
Buckley, and (ii) Eric Hoffberg and Nora Kenner Hoffberg, in consideration for
the Guaranty.
6.2. Additional Condition Precedent to Flygare's Obligations to
Close. As an additional condition precedent to the obligations of Flygare to
consummate the transactions contemplated by this Agreement, all deliveries shall
have been made pursuant to Sections 2.2(a)(ii), 2.2(a)(v), 2.2(b)(ii), 2.2(b)(v)
and 2.2(e) of this Agreement.
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6.3. Additional Conditions Precedent to Reisbaum's Obligations to
Close. As an additional condition precedent to the obligations of Reisbaum to
consummate the transactions contemplated by this Agreement, all deliveries shall
have been made pursuant to Sections 2.2(b)(iii), 2.2(b)(iv) and 2.2(f) of this
Agreement.
6.4. Additional Condition Precedent to Schmidt's Obligations to
Close. As an additional condition precedent to the obligations of Schmidt to
consummate the transactions contemplated by this Agreement, all deliveries shall
have been made pursuant to Sections 2.2(a)(iii) and 2.2(e) of this Agreement.
7. Releases; Covenant Not to Sue; Related Matters.
7.1. General Releases. At the Closing, for good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
each party hereto, on behalf of himself or itself and, to the fullest extent
permitted by law, each of his or its 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, 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).
7.2. Covenant not to Sue. At the Closing, 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.
7.3. 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 7.1. 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.
7.4. Indemnity. At the Closing, 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
10
<PAGE>
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 7.1 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 7.1.
7.5. 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
7.5(b).
(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,
11
<PAGE>
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, including,
without limitation, any claims arising out of, relating to or connected in any
way with the Stock Purchase Agreements, the Notes or the Escrow Agreements
described in the recitals to this Agreement.
7.6. Limitations. Notwithstanding the foregoing, the releases and
indemnity in this Section 7 shall not extend to any claims arising out of or
relating to the failure of any party to perform his, her or its obligations
under this Agreement or the Replacement Notes, the Reisbaum Replacement Note,
the Guaranty or the Restated Articles, or arising from any of the Net Worth
Certificates (collectively, the "Other Agreements").
8. TERMINATION
8.1. Termination Events. This Agreement may, by notice given prior
to or at the Closing, be terminated:
(a) by any party, 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 Buckley, Flygare, Reisbaum or Schmidt if any of the
conditions precedent to such person's obligations to close in Section 6 is, or
becomes, impossible to satisfy or fails to be satisfied (other than through the
failure of any of the Noteholders to comply with his obligations under this
Agreement) and such party seeking termination has not waived or does not waive
such condition in writing; or (ii) by Incomnet, if any of the conditions
precedent in Section 5 is, or becomes, impossible to satisfy or fails to be
satisfied (other than through the failure of Incomnet to comply with its
obligations under this Agreement) and Incomnet has not waived or does not waive
such condition in writing; or
(c) by mutual consent of each Noteholder and Incomnet; or
8.2. Actions Upon Termination. Upon termination of this Agreement
pursuant Section 8.1, each party shall immediately return all monies,
instruments, certificates or other thing tendered to such party in anticipation
of the closing of the transactions contemplated by this Agreement.
8.3. Effect of Termination. Each party's right of termination under
Section 8.1 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 8.1,
all further obligations of the parties under this Agreement shall terminate;
provided, however, that if this Agreement is
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<PAGE>
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.
9. MISCELLANEOUS
9.1. 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.
9.2. Expenses. Subject to Sections 7.4 and Section 9.10, each party
shall bear his or its own expenses, including attorneys' fees, incurred by him
or it in connection with the negotiation, execution, delivery and performance of
this Agreement.
9.3. 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.
9.4. 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
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<PAGE>
nationally recognized overnight delivery service, in each case to the
appropriate addresses and telecopier numbers set forth in Exhibit G (or to such
other addresses and telecopier numbers as a party may designate by notice to the
other parties).
9.5. 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.
9.6. Entire Agreement; Amendment. This Agreement and the Other
Agreements supersede all prior and contemporaneous written and oral agreements
and understandings between the parties with respect to their respective subject
matters and each constitutes a complete and exclusive statement of the terms of
the agreement between the parties thereto 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.
9.7. 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.
9.8. 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.
9.9. 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.
9.10. 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.
9.11. 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
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<PAGE>
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.
9.12. Waiver. The rights and remedies of the parties to this
Agreement are cumulative and not alternative. Except as provided in Section 9.3,
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.
9.13. 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.
15
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above.
INCOMNET, INC.
By: /s/ Denis Richard
-------------------------------------
Denis Richard
President and Chief Executive Officer
GENSOURCE CORPORATION
By: /s/ Eric Hoffberg
-------------------------------------
Eric Hoffberg
President
NOTEHOLDERS:
/s/ Jerry C. Buckley
-------------------------------------
Jerry C. Buckley
/s/ Ralph M. Flygare
-------------------------------------
Ralph M. Flygare
/s/ Robert Reisbaum
-------------------------------------
Robert Reisbaum
/s/ E. V. Schmidt
-------------------------------------
E. V. Schmidt
16
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EXHIBIT C
FORM OF
AMENDED AND RESTATED ARTICLES OF INCORPORATION
See attached.
17
<PAGE>
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF GENSOURCE CORPORATION
Eric Hoffberg and Jerry Buckley certify that:
1. They are the President and Secretary, respectively, of GenSource
Corporation, a California corporation (the "Corporation" or the "Company").
2. The Articles of Incorporation of the Corporation are amended and
restated to read in full as set forth on Exhibit A hereto:
3. The foregoing amendment and restatement was approved by the Board of
Directors of the Corporation.
4. The foregoing amendment and restatement was approved by the required
vote of the shareholders of the Corporation entitled to vote, in accordance with
Section 902 of the General Corporation Law of California. The total number of
outstanding shares entitled to vote with respect to the foregoing amendment and
restatement was eighty-eight thousand three hundred seventy and one-half
(88,370.5) shares of capital stock. The number of shares voting in favor of the
foregoing amendment and restatement equaled or exceeded the vote required. The
required vote was a majority of the outstanding shares of capital stock.
We further declare under penalty of perjury under the law of the State
of California that the matters set forth in this Certificate are true and
correct of our own knowledge.
Date: February __, 1999
-------------------------------
Eric Hoffberg, President
-------------------------------
Jerry Buckley, Secretary
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EXHIBIT A
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
GENSOURCE CORPORATION
10.
The name of this corporation is GenSource Corporation.
11.
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
12.
This corporation is authorized to issue only two (2) classes of shares of
stock to be designated respectively "Preferred Stock" and "Common Stock". The
total number of such shares which this corporation is authorized to issue is
two-hundred fifteen thousand five-hundred seven (215,507); the number of
Preferred Shares shall be fifteen-thousand five-hundred seven (15,507) of the
par value of $0.001 each, and the number of Common Shares shall be two-hundred
thousand (200,000) of the par value of $0.001 each.
The following provisions shall constitute the rights, preferences,
privileges and restrictions granted to or imposed upon the Preferred Stock:
(a) Designation, Amount and Par Value.
A series of Preferred Stock shall be designated as the Non-Voting
Convertible Series A Preferred Stock (the "Series A Preferred Stock"), and the
number of shares so designated shall be 15,507. The par value of each share of
Series A Preferred Stock shall be $0.001 par value. Each share of Series A
Preferred Stock shall have a stated value of $32.25 per share (the "Stated
Value").
(b) Dividends and Distributions.
The holders of Series A Preferred Stock (the "Holders") shall have the
rights to receive dividends set forth in this Section 2. The Holders shall be
entitled to receive any dividend or distribution declared on the Common Stock of
the Company. Upon declaration of such a dividend or distribution on the Common
Stock of the Company,
<PAGE>
each Holder shall be entitled to such dividend or distribution that such Holder
would have been entitled to had such Holder's shares of Series A Preferred Stock
been converted into shares of Common Stock pursuant to Section 5 below
immediately prior to the record date of such dividend or distribution on the
Common Stock. Except as stated in this Section 2, the Holders shall not be
entitled to receive dividends.
(c) Voting Rights; Access Rights.
i. Except as otherwise required by law or hereunder, as to any
matters submitted to a vote of the shareholders (including but not limited to
the election of directors), the holder of each share of Common Stock issued and
outstanding shall have one vote and the Holders shall not be entitled to vote on
any matter; provided, however, that the Company shall not take any of the
following actions without the consent of the holders of a majority of the then
issued and outstanding shares of Series A Preferred Stock (the "Majority
Holders"):
(i) Issue any securities (other than an aggregate of 4,300 shares of
Common Stock upon exercise of employee stock options) at a purchase price below
$19.00 per share (exclusive of any underwriting discounts and commissions in a
public offering); or
(ii) Merge or consolidate with any other corporation, partnership or
other entity or transfer or sell all or substantially all of the assets of the
Company to any other corporation, partnership or other entity; provided,
however, the Company may proceed with such a transaction without the consent of
the Majority Holders if the Company can cause a fairness opinion to be delivered
to the Holders from a mutually agreed upon valuation firm that the transaction
is fair to the Holders from a financial point of view. If the Company and the
Holders are unable to mutually agree upon a valuation firm to render such
opinion, then each of the Company and the Holders shall select a valuation firm
of their own choosing and such firms shall together choose a third valuation
firm. The opinion of a majority of the selected valuation firms will determine
whether the transaction is fair to the Holders from a financial point of view.
ii. The Holders shall be entitled to information and access
rights, including, but not limited to, (i) the right to receive monthly
unaudited financial reports and annual financial statements (such financial
statements shall be audited beginning with the statement for the year ended
December 31, 1999), (ii) access to attend meetings of the Company's Board of
Directors, and special committees thereof, and (iii) opportunities to meet and
discuss matters with management of the Company.
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<PAGE>
(d) Liquidation.
Upon any liquidation, dissolution, or winding-up of the Company, whether
involuntary or voluntary (a "Liquidation"), the Holders shall be entitled to
receive, out of the assets of the Company, whether such assets are capital or
surplus, for each share of Series A Preferred Stock an amount equal to the
Stated Value, plus an amount equal to accrued but unpaid dividends payable to
such Holders pursuant to Section 2 above. Such payment shall be in preference to
the holders of Junior Securities (defined below). If the assets of the Company
shall be insufficient to pay in full the amounts payable to the Holders, then
the entire assets to be distributed shall be distributed among the Holders
ratably in accordance with the respective amounts that would be payable on such
shares if all amounts payable thereon were paid in full. The Company shall mail
written notice of any such Liquidation, not less than 60 days prior to the
payment date stated therein, to each record holder of Series A Preferred Stock.
(e) Conversion.
i. Each share of Series A Preferred Stock shall be
automatically converted into shares of Common Stock, at the Conversion Ratio, at
the closing of the following events:
(i) a public offering of Common Stock in which the aggregate proceeds
received by the Company exceeds $1,000,000, net of underwriting discounts and
commissions;
(ii) a merger, consolidation, recapitalization or reorganization of the
Company (other than such a transaction conducted solely for the purpose of
changing the Company's state of incorporation);
(iii) a transfer or sale of all or substantially all of the assets of the
Company; or
(iv) a transfer, sale or the issuance of 50% or more of the then issued
and outstanding Common Stock.
ii.
(i) The initial Conversion Price shall be $1.00 per share.
(ii) If the Company, at any time while any shares of Series A Preferred
Stock are outstanding, (a) shall pay a stock dividend or otherwise make a
distribution or distributions on shares of Common Stock payable in shares of its
capital stock (whether payable in shares of Common Stock or of capital stock of
any class), (b) subdivide outstanding shares of Common Stock into a larger
number of shares, (c)
21
<PAGE>
combine outstanding shares of Common Stock into a smaller number of shares, or
(d) issue by reclassification of shares of Common Stock any shares of capital
stock of the Company, the Conversion Price shall be multiplied by a fraction of
which the numerator shall be the number of shares of Common Stock outstanding
before such event and of which the denominator shall be the number of shares of
Common Stock outstanding after such event. Any adjustment made pursuant to this
Section 5(b)(ii) shall become effective immediately after the record date for
the determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision, combination or reclassification.
(iii) All calculations under this Section 5 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be.
(iv) Whenever the Conversion Price is adjusted pursuant to Section
5(b)(ii), the Company shall promptly mail to each Holder, a notice setting forth
the Conversion Price after such adjustment and setting forth a brief statement
of the facts requiring such adjustment.
iii. Upon a conversion hereunder the Company shall not be
required to issue stock certificates representing fractions of shares of Common
Stock, but may if otherwise permitted, make a cash payment in respect of any
final fraction of a share based on the Per Share Market Value at such time. If
the Company elects not, or is unable, to make such a cash payment, the Holder
shall be entitled to receive, in lieu of the final fraction of a share, one
whole share of Common Stock.
iv. The issuance of certificates for shares of Common Stock on
conversion of Series A Preferred Stock shall be made without charge to the
holders thereof for any documentary stamp or similar taxes that may be payable
in respect of the issue or delivery of such certificate, provided that the
Company shall not be required to pay any tax that may be payable in respect of
any transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the Holder of such shares of Series A
Preferred Stock so converted and the Company shall not be required to issue or
deliver such certificates unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
v. Shares of Series A Preferred Stock converted into Common
Stock shall be canceled and shall have the status of authorized but unissued
shares of Preferred Stock.
22
<PAGE>
(f) Definitions.
"Conversion Ratio" means, at any time, a fraction, of which the numerator
is 1, and of which the denominator is the Conversion Price at such time.
"Junior Securities" means the Common Stock and all other equity securities
of the Company, except for the Series A Preferred Stock.
"Per Share Market Value" means on any particular date (a) the closing sale
price per share of the Common Stock of such date on The Nasdaq Stock Market or
other stock exchange on which the Common Stock has been listed or if there is no
such price on such date, then the closing bid price on such exchange on the date
nearest preceding such date, or (b) if the Common Stock is not listed on The
Nasdaq Stock Market or any stock exchange, the closing bid for a share of Common
Stock in the over-the-counter market, as reported by the NASD at the close of
business of such date, or (c) the closing bid price for a share of Common Stock
in the over-the-counter market as reported by the National Quotation Bureau
Incorporated (or similar organization or agency succeeding to its functions of
reporting prices), or (d) if the Common Stock is not publicly traded the fair
market value of a share of Common Stock as determined in good faith by the Board
of Directors.
(g) Notices.
Any notice required by the provisions hereof to be given to the Holders shall be
deemed given when personally delivered to such Holder or five business days
after the same has been deposited in the United States mail, certified or
registered mail, return receipt requested, postage prepaid, and addressed to
each Holder of record at his address appearing on the books of the Company.
23
<PAGE>
[Portions of this Telecommunications Services Agreement and Rate Schedule
have been redacted.
The redacted portions are marked with an asterisk. The Company
has applied to the Securities and Exchange Commission for
confidential treatment of the redacted portions.]
WORLDCOM NETWORK SERVICES, INC.
CLASSIC/TRANSCEND(TM) SWITCHED SERVICES
TELECOMMUNICATIONS SERVICES AGREEMENT
This Telecommunications Services Agreement (the "TSA") is entered into as
of the 1st day of November, 1998, by and between WORLDCOM NETWORK SERVICES,
INC., a Delaware corporation, with its principal office at 6929 North Lakewood
Avenue, Tulsa, Oklahoma 74117 ("WorldCom") and, INCOMNET COMMUNICATIONS
CORPORATION (successor-in-interest to National Telephone & Communications, Inc.)
a Delaware corporation, with its principal office at 2801 North Main Street,
Irvine, CA 92614 ("Customer").
In consideration of good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Switched Services; Other Documents; Start of Service.
(A) Services WorldCom agrees to provide and Customer agrees to accept and
pay for switched telecommunications services and other associated services
(collectively the "Switched Services") as further described in the
"Service Schedule" attached hereto and incorporated herein by reference,
which describes the particular services, specific terms and other
information necessary or appropriate for WorldCom to provide the Service
to Customer. The Switched Services provided by WorldCom are subject to (i)
the terms and conditions contained in this TSA and the Program Enrollment
Terms (the "PET") which are attached hereto and incorporated herein by
reference, (ii) the rates and discounts set forth in the applicable Rate
and Discount Schedule (the "Rate Schedule") attached hereto and
incorporated herein by reference, and (iii) each Service Request
(described below) which is accepted hereunder. The PET, as subscribed to
by the parties, shall set forth the Effective Date, the Service Term,
Customer's minimum monthly commitment, if any, and other information
necessary to provide the Switched Services under this TSA. In the event of
a conflict between the terms of this TSA, the PET, the Service Schedule,
the Rate Schedule and the Service Request(s), the following order of
precedence will prevail: (1) the PET, (2) the Rate Schedule, (3) the
Service Schedule, (4) this TSA, and (5) Service Request(s). This TSA, the
PET, the Service Schedule and the applicable Rate and Discount Schedule
are sometimes collectively referred to as the "Agreement".
(B) Service Requests Customer's requests to initiate or cancel Switched
Services shall be described in an appropriate WorldCom Service Request
("Service Request"). A Service
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Request may consist of machine readable tapes, facsimiles or other means
approved by WorldCom. Further, Service Requests shall specify all
reasonable information, as determined by WorldCom, necessary or
appropriate for WorldCom to provide the Switched Service(s) in question,
which shall include without limitation, the type, quantity and end
point(s) (when necessary) of circuits comprising a Service Interconnection
as described in the applicable Service Schedules, or automatic number
identification ("ANI") information relevant to the Switched Service(s),
the Requested Service Date, and charges, if any, relevant to the Switched
Services described in the Service Request. After WorldCom's receipt and
verification of a valid Service Request for SWITCHED ACCESS Service (as
defined in the Service Schedule) requiring a change in the primary
interexchange carrier ("PIC"), WorldCom agrees to (i) submit the ANI(s)
relevant to such Service Requests to the following local exchange carriers
("LECs") (with which WorldCom currently has electronic interface
capabilities) within ten (10) days: Ameritech, Bell Atlantic, BellSouth,
Nynex, Pacific Bell, Southwestern Bell, US West, GTE and United, and (ii)
submit the ANI(s) relevant to such Service Requests to those LECs with
which WorldCom does not have electronic interface capabilities within a
reasonable time.
(C) Start of Service WorldCom's obligation to provide and Customer's
obligation to accept and pay for non-usage sensitive charges for Switched
Services shall be binding to the extent provided for in this Agreement
upon the submission of an acceptable Service Request to WorldCom by
Customer. Customer's obligation to pay for usage sensitive charges for
Switched Services shall commence with respect to any Switched Service as
of the date the Switched Service in question is made available to and used
by Customer ("Start of Service"), but in no event later than the
"Requested Service Date" if such Switched Service is available for
Customer's use as of such Requested Service Date. Start of Service for
particular Services shall be further described in the Service Schedule
relevant to the Switched Services in question.
2. Cancellation.
(A) Cancellation Charge At any time after the Effective Date, Customer may
cancel this Agreement if Customer provides written notification thereof to
WorldCom not less than thirty (30) days prior to the effective date of
cancellation. In such case (or in the event WorldCom terminates this
Agreement as provided in Section 7), Customer shall pay to WorldCom all
charges for Services provided through the effective date of such
cancellation plus a cancellation charge (the "Cancellation Charge") equal
to one hundred percent (100%) of Customer's commitment(s), if any, (as
described in the PET) that would have become due for the unexpired portion
of the Service Term.
(B) Liquidated Damages It is agreed that WorldCom's damages in the event
Customer cancels this Agreement shall be difficult or impossible to
ascertain. The provision for a cancellation charge in Subsection 2(A)
above is intended, therefore, to establish liquidated damages in the event
of a cancellation and is not intended as a penalty.
(C) Cancellation Without Charge Notwithstanding anything to the contrary
contained in Subsection 2(.A) above, Customer may cancel this Agreement
without incurring any cancellation charge if (i) WorldCom fails to provide
a network as warranted in Section 8 below; (ii) WorldCom fails to deliver
call detail records promptly based on the frequency selected by Customer
(i.e., monthly. weekly or daily); or (iii) WorldCom fails to submit ANI(s)
relevant to such Service Requests to the LECs within the time period
described in Subsection 1(B) above. Provided, e.g., Customer must give
WorldCom written notice of any such default and an
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opportunity to such default within five (5) days of the notice. In the
event WorldCom fails to cure any such default within the five-day period
on more than three (3) occasions within any six (6) month period, Customer
may cancel this Agreement without incurring any cancellation charge.
3. Customer's End Users.
(A) End Users Customer will obtain and upon WorldCom's request provide
WorldCom (within two (2) business days of the date of the request) a
written Letter of Agency ("LOA") acceptable to WorldCom [or with any other
means approved by the Federal Communications Commission ("FCC") or any
applicable public utility commission ("PUC")], for each ANI indicating the
consent of such end user of Customer ("End User") to be served by Customer
and transferred (by way of change of such End User's designated PIC) to
the WorldCom network prior to order processing. Each LOA will provide,
among other things, that the End User has consented to the transfer being
performed by Customer or Customer's designee. When applicable, Customer
will be responsible for notifying its End Users, in writing (or by any
other means approved by the FCC) that (i) a transfer charge will be
reflected on their LEC bill for effecting a change in their PIC, (ii) the
entity name under which their interstate, intrastate and/or operator
services will be billed (if different from Customer), and (iii) the
"primary" telephone number(s) to be used for maintenance and questions
concerning their long distance service and/or billing. Customer agrees to
send WorldCom a copy of the documentation Customer uses to satisfy the
above requirements promptly upon request of WorldCom. WorldCom may change
the foregoing requirements for Customer's confirming orders and/or for
notifying End Users regarding the transfer charge at any time in order to
conform with applicable FCC and state regulations. Provided, however,
Customer will be solely responsible for ensuring that the transfer of End
Users to the WorldCom network conforms with applicable FCC and state
regulations, including without limitation, the regulations established by
the FCC with respect to verification of orders for long distance service
generated by telemarketing as promulgated in 47 C.F.R., Part 64, Subpart
K,ss.64.1100 or any successor regulation(s).
(B) Transfer Charges/Disputed Transfers Customer agrees that it is
responsible for (i) all charges incurred by WorldCom to change the PIC of
End Users to the WorldCom network, (ii) all charges incurred by WorldCom
to change End Users back to their previous PIC arising from disputed
transfers to the WorldCom network plus, at WorldCom's option, an
administrative charge equal to twenty percent (20%) of such charges, and
(iii) any other damages suffered by or awards against WorldCom resulting
from disputed transfers.
(C) Excluded ANIs WorldCom has the right to reject any ANI supplied by
Customer for any of the following reasons: (i) WorldCom is not authorized
to provide or does not provide long distance services in the particular
jurisdiction in which the ANI is located, (ii) a particular ANI submitted
by Customer is not in proper form, (iii) Customer is not certified to
provide long distance services in the jurisdiction in which the ANI is
located, (iv) Customer is in material default of this Agreement, (v)
Customer fails to cooperate with WorldCom in implementing reasonable
verification processes determined by WorldCom to be necessary or
appropriate in the conduct of business, or (vi) any other circumstance
reasonably determined by WorldCom which could adversely affect WorldCom's
performance under this Agreement or WorldCom's general ability to transfer
its other customers or other end users to the WorldCom network, including
without limitation, WorldCom's ability to electronically effect PIC
changes with the LECs. In the event WorldCom rejects an ANI, WorldCom will
notify Customer of its decision specifically
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describing the rejected ANI and the reason(s) for rejecting that ANI, and
will not incur any further liability under this Agreement with regard to
that ANI. Further, any ANI requested by Customer for Switched Services may
be deactivated by WorldCom if no Switched Services billings relevant
thereto are generated in any three (3) consecutive calendar month/billing
periods. WorldCom will be under no obligation to accept ANIs within the
last full calendar month period preceding the scheduled expiration of the
Service Term.
(D) Records Customer will maintain documents and records ("Records")
supporting Customer's re-sale of Switched Services, including, but not
limited to, appropriate and valid LOAs from End Users for a period of not
less than (twelve) 12 months or such longer period as may be required by
applicable law, rule or regulation. Customer shall indemnify WorldCom for
any costs, charges or expenses incurred by WorldCom arising from disputed
PIC selections involving Switched Services to be provided to Customer for
which Customer cannot produce an appropriate LOA relevant to the ANI and
PIC charge in question, or when WorldCom is not reasonably satisfied that
the validity of a disputed LOA has been resolved.
(E) Customer Service Customer will be solely responsible for billing its
End Users and providing such End Users with customer service. Customer
agrees to notify WorldCom as soon as reasonably possible in the event an
End User notifies Customer of problems associated with the Switched
Services, including without limitation, excess noise, echo, or loss of
service.
4. Customer's Responsibilities.
(A) Expedite Charges In the event Customer requests expedited services
and/or changes to Service Requests and WorldCom agrees to such request,
WorldCom will pass through the charges assessed by any supplying parties
(e.g., local access providers) for such expedited charges and/or changes
to Service Requests involved at the same rate to Customer. WorldCom may
further condition its performance of such request upon Customer's payment
of such additional charges to WorldCom.
(B) Fraudulent Calls Customer shall indemnify and hold WorldCom harmless
from all costs, expenses, claims or actions arising from fraudulent calls
of any nature which may comprise a portion of the Switched Services to the
extent that the party claiming the call(s) in question to be fraudulent is
(or had been at the time of the call) an End User of such Switched
Services through Customer or an end user of the Switched Services through
Customer's distribution channels. Customer shall not be excused from
paying WorldCom for Switched Services provided to Customer or any portion
thereof on the basis that fraudulent calls comprised a corresponding
portion of the Switched Services. In the event WorldCom discovers
fraudulent calls being made (or reasonably believes fraudulent calls are
being made), nothing contained herein shall prohibit WorldCom from taking
immediate action (without notice to Customer) that is reasonably necessary
to prevent such fraudulent calls from taking place, including without
limitation, denying Switched Services to particular ANIs or terminating
Switched Services to or from specific locations.
5. Charges and Payment Terms.
(A) Payment WorldCom billings for Switched Services hereunder are made on
a monthly basis (or such other basis as may be mutually agreed to by the
parties) following Start of Service. Subject to Subsection 5(C) below,
Switched Services shall be billed at the rates set forth in the
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applicable Rate and Discount Schedule attached hereto. Customer will be
notified of WorldCom's time of day rate periods (including WorldCom
Recognized National Holidays). Discounts, if any, applicable to the rates
for certain Services are set forth in the Rate and Discount Schedule.
Customer will pay all undisputed charges relative to each WorldCom invoice
for Switched Services within thirty (30) days of the invoice date set
forth on each WorldCom invoice to Customer ("Due Date"). If payment is not
received by WorldCom on or before the Due Date, Customer shall also pay a
late fee in the amount of the lesser of one and one-half percent (1 1/2%)
of the unpaid balance of the charges for Switched Services rendered per
month or the maximum lawful rate under applicable state law.
(B) Taxes Customer acknowledges and understands that WorldCom computes all
charges herein exclusive of any applicable federal, state or local use,
excise, gross receipts, sales and privilege taxes, duties, fees or similar
liabilities (other than general income or property taxes), whether charged
to or against WorldCom or Customer because of the Switched Services
furnished to Customer ("Additional Charges"). Customer shall pay such
Additional Charges in addition to all other charges provided for herein.
Customer will not be liable for certain Additional Charges if Customer
provides WorldCom with an appropriate exemption certificate.
(C) Modification of Charges WorldCom reserves the right to eliminate
particular Switched Services and/or modify charges for particular Switched
Services (which charge modifications shall not exceed then-current
generally available WorldCom charges for comparable services), upon not
less than sixty (60) days prior notice to Customer, which notice will
state the effective date for the charge modification. In the event
WorldCom notifies Customer of the elimination of a particular Switched
Service and/or an increase in the charges, Customer may terminate this
Agreement without incurring a cancellation charge only with respect to the
Switched Service(s) affected by the increase in charges. In order to
cancel such Switched Service(s), Customer must notify WorldCom, in
writing, at least thirty (30) days prior to the effective date of the
increase in charges. In the event Customer cancels its subscription to a
particular Switched Service as described in this Subsection 5(C), WorldCom
and Customer agree to negotiate in good faith concerning Customer's
minimum monthly commitment, if any, described in the PET.
(D) Billing Disputes Notwithstanding the foregoing, amounts reasonably
disputed by Customer (along with late fees attributable to such amounts)
shall apply but shall not be due and payable for a period of sixty (60)
days following the Due Date therefor, provided Customer: (i) pays all
undisputed charges on or before the Due Date, (ii) presents a written
statement of any billing discrepancies to WorldCom in reasonable detail on
or before the Due Date of the invoice in question, and (iii) negotiates in
good faith with WorldCom for the purpose of resolving such dispute within
said sixty (60) day period. In the event such dispute is mutually agreed
upon and resolved in favor of WorldCom, Customer agrees to pay WorldCom
the disputed amounts together with any applicable late fees within ten
(10) days of the resolution (the "Alternate Due Date"). In the event such
dispute is mutually agreed upon and resolved in favor of Customer,
Customer will receive a credit for the disputed charges in question and
the applicable late fees. In the event WorldCom has responded to
Customer's dispute in writing and the parties fail to mutually resolve or
settle the dispute within such sixty (60) day period (unless WorldCom has
agreed in writing to extend such period) all disputed amounts together
with late fees shall become due and payable, and this provision shall not
be construed to prevent Customer from pursuing any available legal
remedies. WorldCom shall not be obligated to consider any Customer notice
of billing discrepancies which are received by WorldCom more than sixty
(60) days following the Due Date of the invoice in question.
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6. Credit, Creditworthiness:
(A) Credit Customer's execution of this Agreement signifies Customer's
acceptance of WorldCom's initial and continuing credit approval procedures
and policies. WorldCom reserves the right to withhold initiation or full
implementation of any or all Switched Services under this Agreement
pending WorldCom's initial satisfactory credit review and approval thereof
which may be conditioned upon terms specified by WorldCom, including, but
not limited to, security for payments due hereunder in the form of a cash
deposit or other means. WorldCom reserves the right to modify its
requirements, if any, with respect to any security or other assurance
provided by Customer for payments due hereunder in light of Customer's
actual usage when compared to projected usage levels upon which any
security or assurance requirement was based.
(B) Creditworthiness If at any time there is a material adverse change in
Customer's creditworthiness, then in addition to any other remedies
available to WorldCom, WorldCom may elect, in its sole discretion, to
exercise one or more of the following remedies: (i) cause Start of Service
for Switched Services described in a previously executed Service Request
to be withheld; (ii) cease providing Switched Services pursuant to a
Suspension Notice in accordance with Section 7(A); (iii) decline to accept
a Service Request or other requests from Customer to provide Switched
Services which WorldCom may otherwise be obligated to accept and/or (iv)
condition its provision of Switched Services or acceptance of a Service
Request on Customer's assurance of payment which shall be a deposit or
such other means to establish reasonable assurance of payment. An adverse
material change in Customer's creditworthiness shall include, but not be
limited to: (i) Customer's material default of its obligations to WorldCom
under this or any other agreement with WorldCom; (ii) failure of Customer
to make full payment of all undisputed charges due hereunder on or before
the Due Date (or disputed charges on or before the Alternate Due Date) on
three (3) or more occasions during any period of twelve (12) or fewer
months or Customer's failure to make such payment on or before the Due
Date (or the Alternate Due Date, if applicable) in any two (2) consecutive
months; (iii) acquisition of Customer (whether in whole or by majority or
controlling interest) by an entity which is insolvent, which is subject to
bankruptcy or insolvency proceedings, which owes past due amounts to
WorldCom or any entity affiliated with WorldCom or which is a materially
greater credit risk than Customer; or, (iv) Customer's being subject to or
having filed for bankruptcy or insolvency proceedings or the legal
insolvency of Customer.
7. Remedies for Breach.
(A) Suspension of Service In the event all undisputed charges due pursuant
to WorldCom's invoice are not paid in full by the Due Date or disputed
charges owed by Customer, if any, are not paid in full by the Alternate
Due Date, WorldCom shall have the right, after giving Customer at least
ten (10) days prior notice and opportunity to pay such charges within such
10-day period, to suspend all or any portion of the Switched Services to
Customer ("Suspension Notice") until such time (designated by WorldCom in
its Suspension Notice) as Customer has paid in full all undisputed charges
then due to WorldCom, --- including any late fees. Following such payment,
WorldCom shall reinstitute Switched Services to Customer only when
Customer provides ---- WorldCom with satisfactory assurance of Customer's
ability to pay for such Switched Services (i.e., a deposit, letter of
credit or other means acceptable to WorldCom) and Customer's advance
payment of the cost of reinstituting such Switched Services. If Customer
fails to make the required payment by the date set forth in the Suspension
Notice, Customer will be deemed to have canceled the Services suspended
effective as of the date of suspension which cancellation
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shall not relieve Customer for payment of applicable cancellation charges
as described in Section 2.
(B) Disconnection of Service In the event Customer is in material breach
of this Agreement, including without limitation, failure to pay all
undisputed charges due hereunder by the date stated in the Suspension
Notice described in Subsection 7(A) above, WorldCom shall have the right,
after giving Customer at least five (5) days prior written notice and
opportunity to cure (which notice may be given instead of or in
conjunction with the Suspension Notice described in Subsection 7(A)
above), and in addition to foreclosing any security interest WorldCom may
have, to (i) disconnect all or any portion the Switched Services being
provided hereunder and/or terminate this Agreement; (ii) withhold billing
information from Customer; and/or (iii) contact the End Users (for whom
calls are originated and terminated solely over facilities comprising the
WorldCom network) directly and bill such End Users directly until such
time as WorldCom has been paid in full for the amount owed by Customer. If
Customer fails to make payment by the date stated in the Suspension Notice
and WorldCom, after giving Customer five (5) days prior written notice,
terminates this Agreement as provided in this Section 7, such termination
shall not relieve Customer for payment of applicable cancellation charges
as described in Section 2 above.
8. Warranty. WorldCom will use reasonable efforts under the circumstances to
maintain its overall network quality. The quality of Switched Services provided
hereunder shall be consistent with telecommunications common carrier industry
standards, government regulations and sound business practices. WORLDCOM MAKES
NO OTHER WARRANTIES ABOUT THE SWITCHED SERVICES PROVIDED HEREUNDER, EXPRESS OR
IMPLIED, INCLUDING BUT NOT LIMITED TO, ANY WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE OR USE.
9. Liability; General Indemnity; Reimbursement.
(A) Limited Liability IN NO EVENT WILL EITHER PARTY HERETO BE LIABLE TO
THE OTHER PARTY FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL
LOSSES OR DAMAGES, INCLUDING WITHOUT LIMITATION, LOSS OF REVENUE, LOSS OF
CUSTOMERS OR CLIENTS, LOSS OF GOODWILL OR LOSS OF PROFITS ARISING IN ANY
MANNER FROM THIS AGREEMENT AND THE PERFORMANCE OR NONPERFORMANCE OF
OBLIGATIONS HEREUNDER.
(B) General Indemnity In the event parties other than Customer (e.g.,
Customer's End Users) shall have use of the Switched Services through
Customer, then Customer agrees to forever indemnify and hold WorldCom, its
affiliated companies and any third-party provider or operator of
facilities employed in provision of the Switched Services harmless from
and against any and all claims, demands, suits, actions, losses, damages,
assessments or payments which those parties may assert arising out of or
relating to any defect in the Switched Services.
(C) Reimbursement Customer agrees to reimburse WorldCom for all reasonable
costs and expenses incurred by WorldCom due to WorldCom's direct
participation (either as a party or witness) in any administrative,
regulatory or criminal proceeding concerning Customer if WorldCom's
involvement in said proceeding is based solely on WorldCom's provision of
Switched Services to Customer.
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10. Force Majeure. If WorldCom's performance of this Agreement or any obligation
hereunder is prevented, restricted or interfered with by causes beyond its
reasonable control including, but not limited to, acts of God, fire, explosion,
vandalism, cable cut, storm or other similar occurrence, any law, order,
regulation, direction, action or request of the United States government, or
state or local governments, or of any department, agency, commission, court,
bureau, corporation or other instrumentality of any one or more such
governments, or of any civil or military authority, or by national emergency,
insurrection, riot, war, strike, lockout or work stoppage or other labor
difficulties, or supplier failure, shortage, breach or delay, then WorldCom
shall be excused from such performance on a day-to-day basis to the extent of
such restriction or interference. WorldCom shall use reasonable efforts under
the circumstances to avoid or remove such causes or nonperformance and shall
proceed to perform with reasonable dispatch whenever such causes are removed or
cease.
11. State Certification. Customer warrants that in all jurisdictions in which it
provides long distance services that require certification, it has obtained the
necessary certification from the appropriate governmental authority and, if
required by WorldCom, agrees to provide proof of such certification acceptable
to WorldCom. In the event Customer is prohibited, either on a temporary or
permanent basis, from continuing to conduct its telecommunications operations in
a given state, Customer shall (i) immediately notify WorldCom by facsimile, and
(ii) send written notice to WorldCom within twenty-four (24) hours of such
prohibition.
12. Interstate/Intrastate Service. Except with respect to Services specifically
designated as intrastate Services or international Services, the rates provided
to Customer in the Service Schedule are applicable only to switched Services if
such Switched Services are used for carrying interstate telecommunications
(i.e., Switched Services subject to FCC jurisdiction). WorldCom shall not be
obligated to provide Switched Services with end points within a single state or
Switched Services which originate/terminate at points both of which are situated
within a single state. In those states where WorldCom is authorized to provide
intrastate service (i.e., telecommunications transmission services subject to
the jurisdiction of state regulatory authorities), WorldCom will, at its option,
provide intrastate Switched Services pursuant to applicable state laws,
regulations and applicable tariff, if any, filed by WorldCom with state
regulatory authorities as required by applicable law.
13. Authorized Use of WorldCom Name; Press Releases. Without WorldCom's prior
written consent, Customer shall not (i) refer to itself as an authorized
representative of WorldCom whenever it refers to the Switched Services in
promotional, advertising or other materials, or (ii) use WorldCom's logos, trade
marks, service marks, or any variations thereof in any of its promotional,
advertising or other materials. Additionally, Customer shall provide to WorldCom
for its prior review and written approval, all promotions, advertising or other
materials or activity using or displaying WorldCom's name or the Services to be
provided by WorldCom. Customer agrees to change or correct, at Customer's
expense, any such material or activity which WorldCom, in its sole judgment,
determines to be inaccurate, misleading or otherwise objectionable. Customer is
explicitly authorized to only use the following statements in its sales
literature or if in response to an inquiry by Customer's end user: (i) "Customer
utilizes the WorldCom network", (ii) "Customer utilizes WorldCom's facilities",
(iii) "WorldCom provides only the network facilities", and (iv) "WorldCom is our
network services provider". Except as specifically provided in this Section 13,
the parties further agree that any press release, advertisement or publication
generated by a party regarding this Agreement, the Services provided hereunder
or in which a party desires to mention the name of the other party or the other
party's parent or affiliated company(ies), will be submitted to the
nonpublishing party for its written approval prior to publication.
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14. Notices. Notices under this Agreement shall be in writing and delivered to
the person identified below at the offices of the parties as they appear below
or as otherwise provided for by proper notice hereunder. Customer shall notify
WorldCom in writing if Customer's billing address is different than the address
shown below. The effective date for any notice under this Agreement shall be the
date of actual receipt of such notice by the appropriate party, notwithstanding
the date of mailing or transmittal via hand delivery, or facsimile.
If to WorldCom: WorldCom Network Services, Inc.
6929 North Lakewood Avenue
Tulsa, Oklahoma 74117
Attn: Carrier Sales Dept.
If to Customer: Incomnet Communications Corporation
2801 Main St.
Irvine, CA 92614
Attn: Dale DeForge/Legal Dept
Telephone No.: 949-224-7750
Fax No.: 949-224-7474
15. No-Waiver. No term or provision of this Agreement shall be deemed waived and
no breach or default shall be deemed excused unless such waiver or consent shall
be in writing and signed by the party claimed to have waived or consented. A
consent to waiver of or excuse for a breach or default by either party, whether
express or implied, shall not constitute a consent to, waiver of, or excuse for
any different or subsequent breach or default.
16. Partial Invalidity; Government Action.
(A) Partial Invalidity If any part of any provision of this Agreement or
any other agreement, document or writing given pursuant to or in
connection with this Agreement shall be invalid or unenforceable under
applicable law, rule or regulation, that part shall be ineffective to the
extent of such invalidity only, without in any way affecting the remaining
parts of that provision or the remaining provisions of this Agreement. In
such event, Customer and WorldCom will negotiate in good faith with
respect to any such invalid or unenforceable part to the extent necessary
to render such part valid and enforceable.
(B) Government Action Upon thirty (30) days prior notice, either party
shall have the right, without liability to the other, to cancel an
affected portion of the Switched Service if any material rate or term
contained herein and relevant to the affected Switched Service is
substantially changed (to the detriment of the terminating party) or found
to be unlawful or the relationship between the parties hereunder is found
to be unlawful by order of the highest court of competent jurisdiction to
which the matter is appealed, the FCC, or other local, state or federal
government authority of competent jurisdiction.
17. Exclusive Remedies. Except as otherwise specifically provided for herein,
the remedies set forth in this Agreement comprise the exclusive remedies
available to either party at law or in equity.
18. Use of Service. Upon WorldCom's acceptance of a Service Request hereunder,
WorldCom will provide the Switched Services specified therein to Customer upon
condition that such Switched Services shall not be used for any unlawful
purpose. The provision of Switched Services will not create a
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partnership or joint venture between the parties or result in a joint
communications service offering to any third parties, and WorldCom and Customer
agree that this Agreement, to the extent it is subject to FCC regulation, is an
inter-carrier agreement which is not subject to the filing requirements of
Section 211 (a) of the Communications Act of 1934 (47 U.S.C. ss. 211 (a)) as
implemented in 47 C.F.R. ss. 43.51.
19. Choice of Law; Forum.
(A) Law This Agreement shall be construed under the laws of the State of
Oklahoma without regard to choice of law principles.
(B) Forum Any legal action or proceeding with respect to this Agreement
may be brought in the Courts of the State of Oklahoma in and for the
County of Tulsa or the United States of America for the Northern District
of Oklahoma. By execution of this Agreement, both Customer and WorldCom
hereby submit to such jurisdiction, hereby expressly waiving whatever
rights may correspond to either of them by reason of their present or
future domicile. In furtherance of the foregoing, Customer and WorldCom
hereby agree to service by U.S. Mail at the notice addresses referenced in
Section 14. Such service shall be deemed effective upon the earlier of
actual receipt or seven (7) days following the date of posting.
20. Proprietary Information.
(A) Confidential Information The parties understand and agree that the
terms and conditions of this Agreement (but not the existence thereof),
all documents referenced herein (including invoices to Customer for
Switched Services provided hereunder), communications between the parties
regarding this Agreement or the Switched Services to be provided hereunder
(including price quotes to Customer for any services proposed to be
provided or actually provided hereunder), as well as such information
relevant to any other agreement between the parties (collectively
"Confidential Information"), are confidential as between Customer and
WorldCom.
(B) Limited Disclosure A party shall not disclose Confidential Information
(unless subject to discovery or disclosure pursuant to legal process), to
any other party other than the directors, officers, and employees of a
party or a party's agents including their respective attorneys,
consultants, brokers, lenders, insurance carriers or bona fide prospective
purchasers who have specifically agreed in writing to nondisclosure of the
terms and conditions hereof. Any disclosure hereof required by legal
process shall only be made after providing the non-disclosing party with
notice thereof in order to permit the non-disclosing party to seek an
appropriate protective order or exemption. Violation by a party or its
agents of the foregoing provisions shall entitle the nondisclosing party,
at its option, to obtain injunctive relief without a showing of
irreparable harm or injury and without bond.
(C) Survival of Confidentiality The provisions of this Section 20 will be
effective as of the date of this Agreement and remain in full force and
effect for a period which will be the longer of (i) one (1) year following
the date of this Agreement, or (ii) one (1) year from the termination of
all Services hereunder.
21. Successors and Assignment. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors or assigns,
provided, however, that Customer shall not
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assign or transfer its rights or obligations under this Agreement without the
prior written consent of WorldCom, which consent shall not be unreasonably
withheld or delayed, and further provided that any assignment or transfer
without such consent shall be void.
22. General.
(A) Survival of Terms The terms and provisions contained in this Agreement
that by their sense and context are intended to survive the performance
thereof by the parties hereto shall so survive the completion of
performance and termination of this Agreement, including, without
limitation, provisions for indemnification and the making of any and all
payments due hereunder.
(B) Headings Descriptive headings in this Agreement are for convenience
only and shall not affect the construction of this Agreement.
(C) Industry Terms Words having well-known technical or trade meanings
shall be so construed, and all listings of items shall not be taken to be
exclusive, but shall include other items, whether similar or dissimilar to
those listed, as the context reasonably requires.
(D) Rule of Construction No rule of construction requiring interpretation
against the drafting party hereof shall apply in the interpretation of
this Agreement.
23. Entire Agreement. This Agreement consists of (i) all the terms and
conditions contained herein, and (ii) all documents incorporated herein
specifically by reference. This Agreement constitutes the complete and exclusive
statement of the understandings between the parties and supersedes all proposals
and prior agreements (oral or written) between the parties relating to the
Switched Services provided hereunder. No subsequent agreement between the
parties concerning the Switched Services shall be effective or binding unless it
is made in writing and subscribed to by Customer and WorldCom.
Page 11 of 12
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Telecommunications
Services Agreement as of the dates set forth below which Agreement will be
effective as described in the PET attached hereto.
WORLDCOM NETWORK SERVICES, INC. INCOMNET COMMUNICATIONS CORPORATION
By /s/ John H. Krummel By /s/ Michael J. Keebaugh
----------------------------- -----------------------------
(Signature) (Signature)
John H. Krummel Michael J. Keebaugh
----------------------------- -----------------------------
(Print Name) (Print Name)
Senior Vice President Sr. VP Operations
----------------------------- -----------------------------
(Title) (Title)
November 1, 1998 November 1, 1998
----------------------------- -----------------------------
(Date) (Date)
Page 12 of 12
<PAGE>
WORLDCOM NETWORK SERVICES, INC.
CLASSIC SWITCHED SERVICES
RATE SCHEDULE
This Rate and Discount Schedule is made this 1st day of November, 1998, by
and between WorldCom Network Services, Inc. ("WorldCom") and Incomnet
Communications Corporation (successor-in-interest to National Telephone &
Communications, Inc.) ("Customer") and is a part of their Telecommunications
Services Agreement for Switched Services. Capitalized terms not defined herein
shall have the meaning ascribed to them in the TSA, the PET or the Service
Schedule. NOTE: ANY MODIFICATIONS, ADDITIONS OR DELETIONS FROM THIS RATE AND
DISCOUNT SCHEDULE WILL NOT BE EFFECTIVE UNLESS SPECIFICALLY SET FORTH IN THE
PET.
I. RATES
[*]
Page 13 of 12
<PAGE>
[Portions of this Program Enrollment Terms have been redacted. The redacted
portions are marked with an asterisk. The Company has applied to the
Securities and Exchange Commission for
confidential treatment of the redacted portions.]
EFFECTIVE DATE:____________
WORLDCOM NETWORK SERVICES, INC.
CLASSIC/TRANSCEND(TM) SWITCHED SERVICES
PROGRAM ENROLLMENT TERMS
These Program Enrollment Terms (the "PET") are made this 1st day of
November, 1998, by and between WorldCom Network Services, Inc. ("WorldCom") and
Incomnet Communications Corporation (successor-in-interest to National Telephone
& Communications, Inc.) ("Customer") and are a part of their Telecommunications
Services Agreement for Switched Services. Capitalized terms not defined herein
shall have the meaning ascribed to them in the TSA, the Service Schedule or the
applicable Rate and Discount Schedule.
1. PRIOR AGREEMENT: Notwithstanding anything to the contrary contained in
Section 24 of the Telecommunications Services Agreement (the "TSA"), the
parties acknowledge that they previously executed that certain
Telecommunications Services Agreement dated November 15, 1994, and more
particularly described as TSA#NTC-941101 (the "Prior Agreement"). The
parties agree that as of the Effective Date described in Section 2 below,
(i) the Prior Agreement will be canceled in its entirety and of no further
force or effect with the exception of certain accrued obligations arising
under the Prior Agreement such as the payment of money or the application
of credits arising prior to the Effective Date, and provisions intended to
survive termination, such as limitation of liability, indemnification and
confidentiality, and (ii) all Services currently being provided under the
Prior Agreement will be provisioned and maintained by WorldCom taking
into account the terms and conditions of this Agreement (including the
rates set forth in the Rate Schedule attached herewith).
2. SERVICE TERM: The Service Term shall commence as of November 1, 1998 (the
"Effective Date") and shall continue through and include October 31, 2001
(the "Service Term"), subject to extension as provided in Subsection 3(B)
below; provided, however, in no event will this Agreement be extended past
October 31, 2003. Upon expiration of the Service Term, the Switched
Services in question will continue to be provided pursuant to the same
terms and conditions as are then in effect (including, without limitation,
the applicable rates, discounts and commitments, if any), subject to
termination by either party upon ninety (90) days prior written notice to
the other party.
Page 1 of 5
<PAGE>
3. CUSTOMER'S MINIMUM MONTHLY REVENUE COMMITMENT/DEFICIENCY CHARGE:
(A) Commencing with the November, 1998, billing period (i.e., December,
1998 invoice) and continuing through the end of the Service Term, Customer
agrees to maintain, on a take-or-pay basis, Monthly Revenue (as defined in
the applicable Rate Schedule) of at least the amounts shown below
(collectively, "Customer's Minimum Revenue Commitment") in the respective
periods shown (collectively, the "Commitment Period"), subject to
modification as described in Section 4 below.
Minimum Monthly
Period Revenue Commitment
------ ------------------
11/1/98 (12/1/98 invoice) through 4/30/99 [*]
5/1/99 (6/1/99 invoice) through 10/31/99 [*]
11/1/99 (12/1/99 invoice) through 10/31/00 [*]
11/1/00 (12/1/00 invoice) through 10/31/01 [*]
(B) In the event the Service Term is extended as described in Subsection
4(C) below, Customer's Minimum Revenue Commitment during the extension
period(s) will be as follows for the periods indicated.
Minimum Monthly
Period Revenue Commitment
------ ------------------
11/1/99 (12/1/01 invoice) through 10/31/02 [*]
11/1/00 (12/1/02 invoice) through 10/31/03 [*]
(C) In the event Customer does not maintain Customer's applicable Minimum
Revenue Commitment in any month shown above, then for those month(s) only,
Customer will pay WorldCom the difference between Customers applicable
Minimum Revenue Commitment and Customer's actual Monthly Revenue (as
described in the applicable Rate Schedule) for such month (collectively,
the "Deficiency Charge"). The Deficiency Charge will be due at the same
time payment is due for Service provided to Customer, or immediately in an
amount equal to Customer's applicable Minimum Revenue Commitment(s) for
the unexpired portion of the Service Term, if WorldCom terminates this
Agreement based on Customer's default.
4. CUSTOMER'S AGGREGATE MINIMUM REVENUE COMMITMENT:
(A) In addition to Customer's Minimum Monthly Revenue Commitments
described in Section 3 above, commencing with the Effective Date and
continuing through the end of the Service Term (subject to extension as
provided herein) Customer agrees to maintain Monthly Revenue which totals
in the aggregate of at least $250,000,000 (which amount may be increased
as described in Subsection (B) below) ("Customer's Aggregate Commitment").
In order to achieve Customer's Aggregate Commitment, Customer agrees to
maintain cumulative Monthly Revenue of at least the amounts shown below
(collectively, the "Target Amount") in the respective yearly periods
indicated (the "Target Period"):
Page 2 of 5
<PAGE>
Period Target Amount
------ -------------
November, 1998 - October, 1999 (Year 1) [*]
November, 1999 - October, 2000 (Year 2) [*]
November, 2000 - October, 2001 (Year 3) [*]
IF APPLICABLE AS DETERMINED UNDER SUBSECTION (C) BELOW:
November, 2001 - October, 2002 (Year 4) To be Determined
November, 2002 - October, 2003 (Year 5) To be Determined
(B) In the event Customer's actual cumulative Monthly Revenue in any
Target Period (including any Deficiency Charges described in Subsection
3(C) above actually paid by Customer during such Target Period) is greater
than the applicable Target Amount for such Target Period, any excess
amount will be deducted from the Target Amount for such the immediately
following Target Period.
(C) In the event Customer's actual cumulative Monthly Revenue in any
Target Period (including any Deficiency Charges described in Subsection
3(C) above actually paid by Customer during such Target Period) is less
than the applicable Target Amount for such Target Period (hereinafter
referred to as a "Shortfall Amount"), the Shortfall Amount will first be
increased by the applicable percentage shown below and then added to the
Target Amount for the immediately following Target Period. Further,
Customer's Aggregate Commitment will be increased by an amount equal to
the Shortfall Amount times the percentage shown ("Customer's Modified
Aggregate Commitment"). If necessary, the Service Term will be extended
beyond Year 3 but in no event will the extension period go beyond October
31, 2003.
Year Percent
---- -------
1 [*]
2 [*]
3 [*]
4 [*]
Example: Assume Customer's actual Monthly Revenue in Year 1 is [*].
The Target Amount for Year 2 will be [*][[*]+([*]x[*])] and
Customer's Aggregate Commitment will be [*]([*]+[*]x[*]).
(D) As soon as Customer's aggregate Monthly Revenue since November 1,
1998, equals at least Customer's Aggregate Commitment (or Customer's
Modified Aggregate Commitment, if applicable), either Customer or WorldCom
may terminate this Agreement upon at least ninety (90) days' prior written
notice.
5. REQUIREMENTS AGREEMENT: In consideration of the rates set forth in the
Rate Schedule, a reduction in Customer's commitments under the Prior
Agreement, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, during the Service Term
Customer agrees to purchase one hundred percent (100%) of its
telecommunications services requirements from SWITCHED
Page 3 of 5
<PAGE>
ACCESS Service (1+ and Toll Free) (which services are described in this
Agreement) from WorldCom under the terms and conditions set forth in this
Agreement ("Customer's Requirements Obligation"). Upon request from
WorldCom, Customer agrees to provide WorldCom reasonable documentation
evidencing Customer's compliance with this Section 5 and if requested by
WorldCom, agrees to allow WorldCom or its representatives to audit
Customer's books and records as may be necessary solely to ensure
Customer's compliance with Customer's Requirements Obligation. In the
event Customer is in breach of this Agreement, in addition to WorldCom's
other rights and remedies described in this Agreement, notwithstanding
anything to the contrary contained in the Agreement, WorldCom shall have
the right to immediately increase Customer's SWITCHED ACCESS Service rates
set forth in the Rate Schedule to [*]. Any increase as described herein
will not affect Customer's Commitments set forth in Sections 3 and 4
above.
6. WAIVER OF DEFICIENCY CHARGES: Upon execution of this Agreement, in
consideration of Customer's Requirements Obligation and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, WorldCom agrees to waive all deficiency charges which have
been assessed Customer under the terms of the Prior Agreement up through
and including October 31, 1998.
7. QUARTERLY REVIEW OF RATES: Provided Customer is in substantial compliance
with the terms of this Agreement, commencing February 1, 1999, and
continuing on the first day of every fourth (4th) month thereafter (i.e.,
June 1, October 1, February 1, etc.), WorldCom and Customer agree to
review the rates hereunder and negotiate in good faith as to whether
modifications are necessary in order to maintain reasonable parity between
such rates and rates then made generally available by WorldCom to its
other carrier customers for the same Services taking into account all of
the terms associated with such rates. In connection with such review, the
parties agree to review the relative state of parity between the
then-current rates offered to Customer under the terms of this Agreement
and the rates generally available in the wholesale marketplace for similar
services and commitments. Provided, however, nothing contained in this
Section 7 will obligate WorldCom to reduce Customer's rates under this
Agreement or obligate or require WorldCom to adopt the same or similar
rates or offer the same or similar products of third parties.
8. CONDITIONAL OBLIGATIONS: The parties specifically acknowledge that the
terms and conditions offered hereunder are contingent upon (i) Customer's
compliance with the requirements set forth in that certain Forbearance
Letter dated October 30, 1998 from Denis Richard, Customer's President and
Chief Executive Officer Robert S. Vetera, Director of Credit for WorldCom,
and (ii) WorldCom and Customer's reconciliation of all of Customer's
accounts on or before March 15, 1999, which reconciliation must be
satisfactory to WorldCom.
9. PROMOTIONAL CREDIT: In consideration of Customer's Minimum Revenue
Commitment (as described in Section 3 above) and other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, WorldCom agrees to provide Customer a nine-month promotional
pricing allowance (as
Page 4 of 5
<PAGE>
described herein) based on the incremental growth of charges for
Customer's Interstate SWITCHED ACCESS Service (1+ and Toll Free) within
the 48 contiguous United States ("Promotional Traffic"). For purposes of
this Section 9, the parties agree that the base amount (the "Base Amount")
of charges for such Promotional Traffic will be determined by multiplying
(x) Customer's minutes of Promotional Traffic shown on Customer's November
1, 1998 invoice (i.e., Customer's October, 1998 Promotional Traffic) times
(y)[*](hereinafter referred to as the "Base Amount"). WorldCom will then
apply a discount (the "Promotional Credit") equal to [*] for every dollar
charged Customer over the Base Amount for the Promotional Traffic, if any,
for the nine (9) months commencing with Customer's December 1, 1998
invoice (i.e., Customer's November, 1998 Promotional Traffic) and
continuing through Customer's August 1, 1999 invoice (i.e., Customer's
July, 1999 Promotional Traffic). Promotional Credits, if any, will be
applied by WorldCom one month in arrears. For example, the first
Promotional Credit, if any, based on Customer's December 1, 1998 invoice
will be applied to Customer's January 1, 1998 invoice, and the Promotional
Credit, if any, based on Customer's August 1, 1999 invoice will be applied
to Customer's September 1, 1999 invoice.
IN WITNESS WHEREOF, the parties have executed these Classic/TRANSCEND(TM)
Switched Services Program Enrollment Terms.
WORLDCOM NETWORK SERVICES, INC. INCOMNET COMMUNICATIONS CORPORATION
By By /s/ Michael J. Keebaugh
----------------------------- -----------------------------
(Signature) (Signature)
Michael J. Keebaugh
----------------------------- -----------------------------
(Print Name) (Print Name)
Sr. VP Operations
----------------------------- -----------------------------
(Title) (Title)
Page 5 of 5
<PAGE>
[Portions of this Service Schedule have been redacted. The redacted
portions are marked with an asterisk. The Company has applied to the
Securities and Exchange Commission for
confidential treatment of the redacted portions.]
WORLDCOM NETWORK SERVICES, INC.
CLASSIC/TRANSCEND(TM) SWITCHED SERVICES
SERVICE SCHEDULE
This Service Schedule is made this 1st day of November, 1998, by and
between WorldCom Network Services, Inc. ("WorldCom") and Incomnet Communications
Corporation (successor-in-interest to National Telephone & Communications, Inc.)
("Customer") and is a part of their Telecommunication Services Agreement for
Switched Services. Neither Customer nor WorldCom shall be obligated with respect
to the Switched Services described below, nor any other condition of such
Switched Services until Customer has submitted and WorldCom has accepted a
Service Request with respect to the particular Switched Service. Capitalized
terms not defined herein shall have the meaning ascribed to them in the TSA, the
PET or the applicable Rate and Discount Schedule.
1. SWITCHED SERVICES: During the Service Term of the Agreement, WorldCom will
provide the following Switched Services (all as more particularly described
herein), (i) to and from the locations below, and (ii) for the charges and
applicable discounts set forth in the applicable Rate and Discount Schedule
attached herewith:
(a) "TERMINATION Service" which is WorldCom's termination of calls received
from Customer's Service Interconnection(s).
(b) "TOLL FREE ORIGINATION Service" which is the origination of Toll Free
calls by WorldCom and the termination of such calls to Customer's Service
Interconnection(s).
(c) "SWITCHED ACCESS Service" which is the origination (via individual
telephone access lines) and termination of calls solely over facilities
comprising the WorldCom network.
(d) "DEDICATED ACCESS Service" which is the origination and termination of
calls solely over facilities comprising the WorldCom network which
origination or termination is via dedicated access lines.
(e) "TRAVEL CARD Service" which is the origination (via Travel Card Toll Free
number access) and termination of calls solely over facilities comprising
the WorldCom network.
2. SERVICE INTERCONNECTIONS:
(a) In order to utilize (i) TERMINATION Service and TOLL FREE ORIGINATION
Service, one or more full time dedicated connections between Customer's
network and the WorldCom network at one or more WorldCom designated
locations ("WorldCom POP") must
Page 1 of 8
<PAGE>
be established ("Carrier Service Interconnections"), and (ii) DEDICATED
ACCESS Service, one or more full time dedicated connections between an End
User's private branch exchange ("PBX") or other customer premise equipment
and the WorldCom network at one or more WorldCom POP(s) must be
established ("Dedicated Service Interconnections"). Each Carrier Service
Interconnection and Dedicated Service Interconnection shall be comprised
of one or more dedicated access circuits, as the case may be. Carrier
Service Interconnections and Dedicated Service Interconnections are
collectively referred to as "Service Interconnections".
(b) The circuit(s) comprising each Service Interconnection to a WorldCom
POP shall be requested by Customer on the appropriate WorldCom Service
Request. Each Service Request will describe (among other things) the
WorldCom POP to which a Service Interconnection is to be established, the
Requested Service Date therefor, the type and quantity of circuits
comprising the Service Interconnection and any charges and other
information relevant thereto, such as, Customer's terminating or
originating switch location, as the case may be. Such additional
information may be obtained from Customer or gathered by WorldCom and
recorded in Technical Information Sheets provided by WorldCom.
(c) Once ordered, and unless otherwise provided for in this TSA, Service
Interconnections or the circuits comprising each Service Interconnection
may only be canceled by Customer upon not less than thirty (30) days prior
written notice to WorldCom.
(d) With respect to a Carrier Service Interconnection, absent the
automatic number identification ("ANI") of the calling party, Customer
shall provide WorldCom with a written certification (the "Certification")
of the percentage of interstate (including international) and intrastate
minutes of use relevant to the minutes of traffic to be terminated in the
same state in which the WorldCom POP is located to which the Carrier
Service Interconnection is made. This Certification shall be provided by
Customer prior to Start of Service for any Carrier Service Interconnection
and may be modified from time to time by Customer and subject to
recertification upon the request of WorldCom which requests shall not be
made unilaterally by WorldCom more than once each calendar quarter. Any
such modification(s) or Certification (s) shall be effective as of the
first day of any calendar month and following at least forty-five (45)
days notice from Customer. In the event Customer fails to make such
Certification, the relevant minutes of use will be deemed to be subject to
the Intrastate Rates described in the applicable Rate and Discount
Schedule. In the event WorldCom or any other third party requires an audit
of WorldCom's interstate/intrastate minutes of traffic, Customer agrees to
cooperate in such audit at its expense and make its call detail records,
billing systems and other necessary information reasonably available to
WorldCom or any third party solely for the purpose of verifying Customer's
interstate/intrastate minutes of traffic. Customer agrees to indemnify
WorldCom for any liability WorldCom incurs in the event Customer's
Certification is different than that determined by the audit.
(e) With respect to Carrier Service Interconnections, Customer shall be
solely responsible for establishing and maintaining each Carrier Service
Interconnection over facilities subject to WorldCom's approval. With
respect to Dedicated Service Interconnections, WorldCom will provision and
maintain local access facilities between the End User location (i.e., PBX)
and the WorldCom POP, subject to any LEC charges plus other applicable
terms and charges set forth in WorldCom's F.C.C. Tariff No. 5, however,
Customer may elect to be responsible for establishing each Dedicated
Service Interconnection over facilities subject to WorldCom's approval.
Service Interconnections shall only be comprised of DS-1 facilities unless
otherwise provided for in the Service Request and agreed to in writing by
WorldCom. If a Service Interconnection is proposed to be made via a local
exchange carrier, WorldCom will have the authority to direct
Page 2 of 8
<PAGE>
Customer to utilize WorldCom's entrance facilities or local serving
arrangement ("LSA") with the relevant local telephone operating company,
and Customer will be subject to a non-discriminatory charge therefor from
WorldCom. The monthly recurring charge relevant to Customer's use of LSA
capacity shall be subject to upward adjustment by WorldCom from time to
time which adjustment, if any, shall not exceed the rate that otherwise
would be charged for the equivalent switched access capacity between the
same points by the relevant local telephone operating company pursuant to
its published charges for the type of service in question.
(f) If other private line interexchange facilities are necessary to
establish a Service Interconnection, and such facilities are requested
from WorldCom, such facilities will be provided on an individual case
basis.
(g) Commencing with the second full calendar month folbwing Start of
Service for each circuit comprising a Service Interconnection (i.e., both
Carrier Service Interconnections and Dedicated Service Interconnections)
and thereafter, Customer will maintain Switched Services measured usage
charges per DS-1 (or DS-1 equivalent circuit) of not less than an average
of [*] per calendar month/billing period ("Minimum Monthly Usage"). In the
event Customer fails to obtain the required Minimum Monthly Usage for the
circuits comprising each Service Interconnection, WorldCom will charge and
Customer will pay the difference between the number of DS-1s times the
Minimum Monthly Usage (i.e., [*]) and Customer's total Switched Services
measured usage charges for the circuit(s) comprising the Service
Interconnection in question ("Minimum Usage Charge"). WorldCom TERMINATION
Service and TOLL FREE ORIGINATION Service minutes carried over the same
Service Interconnection, if any, shall be included in determining if
Customer has met the Minimum Monthly Usage requirement.
Example: Assume Customer's actual Switched Services measured usage
charges for 2 DS-1s comprising a Carrier Service Interconnection at
WorldCom POP A is [*], Customer's actual Switched Services measured
usage charges for 2 DS-1s comprising a Carrier Service
Interconnection at WorldCom POP B is [*], and Customer's End User's
actual Switched Services measured usage charges for 1 DS-1
comprising a Dedicated Service Interconnection at WorldCom POP C is
[*]. Customer would not be subject to a Minimum Usage Charge since
Customer's actual Minimum Monthly Usage is [*] which exceeds
Customer's Minimum Monthly Usage of [*] [5 x [*]].
(h) DS-1 circuits comprising all Service Interconnections will be subject
to a nonrecurring [*] per DS-1 switch port installation charge, and DS-3
circuits comprising all Service Interconnections will be subject to a
nonrecurring per DS-3 switch port installation charge as determined on an
individual case basis.
3. FORECASTS: Before Customer's initial order for Switched Services, Customer
shall provide WorldCom with a forecast regarding the number of minutes expected
to be terminated or originated in various LATAs and/or Tandems, so as to enable
WorldCom to configure optimum network arrangements. In the event Customer's
Switched Service traffic volumes result in a lower than industry standard
completion rate or otherwise adversely affect the WorldCom Network, WorldCom
reserves the right to block the source of such adverse traffic at any time.
Customer will provide WorldCom with additional forecasts from time to time upon
WorldCom's request which shall not be more frequent than once every three (3)
months.
4. START OF SERVICE: Start of Service for the various Switched Services will
occur as described below:
Page 3 of 8
<PAGE>
SERVICE START OF SERVICE
- --------------------------------------------------------------------------------
Concurrently with the activation of each circuit
comprising Carrier Service Interconnections
TERMINATION Service relevant to TERMINATION Service
- --------------------------------------------------------------------------------
Concurrently with the activation of each circuit
TOLL FREE ORIGINATION comprising Carrier Service Interconnections
Service relevant to TOLL FREE ORIGINATION Service
- --------------------------------------------------------------------------------
ANI by ANI basis concurrently with the activation of
each ANI to be served, and a TOLL FREE Number by
TOLL FREE Number basis concurrently with
SWITCHED ACCESS Service activation of each TOLL FREE Number
- --------------------------------------------------------------------------------
Concurrently with the activation of each circuit
DEDICATED ACCESS Service comprising Dedicated Service Interconnections
- --------------------------------------------------------------------------------
Code by Code basis concurrently with the
TRAVEL CARD Service activation of each Code
- --------------------------------------------------------------------------------
5. LIMITATION OF ORIGINATION OR TERMINATION LOCATIONS
- --------------------------------------------------------------------------------
SWITCHED SERVICE ORIGINATION FROM TERMINATION TO
- --------------------------------------------------------------------------------
Any direct dialable
TERMINATION Service Any WorldCom POP location worldwide
- --------------------------------------------------------------------------------
Locations in the 48
contiguous United States,
Hawaii, Alaska, the US Any Customer designated
TOLL FREE ORIGINATION Virgin Islands, Puerto Carrier Service
Service Rico and Canada Interconnection
- --------------------------------------------------------------------------------
All equal access
exchanges in the 48
contiguous United States
(except in LATA
SWITCHED ACCESS (1+) 921-Fishers Island, New Any direct dialable
Service York) and Hawaii location worldwide
- --------------------------------------------------------------------------------
Locations in the 48
contiguous United States,
Hawaii, Alaska, the US Locations in the 48
SWITCHED ACCESS (Toll Virgin Islands, Puerto contiguous United States
Free) Service Rico and Hawaii
- --------------------------------------------------------------------------------
DEDICATED ACCESS (1+) Locations in the 48 Any direct dialable
Service contiguous United States location worldwide
- --------------------------------------------------------------------------------
Locations in the 48
contiguous United States,
Hawaii, Alaska, the US Any Customer designated
DEDICATED ACCESS (Toll Virgin Islands, Puerto Dedicated Service
Free) Service Rico Interconnection
- --------------------------------------------------------------------------------
Locations in the 48
contiguous United
States, Hawaii, Alaska,
Locations in the 48 the US Virgin Islands,
BASIC TRAVEL CARD Service contiguous United States Puerto Rico and Canada
- --------------------------------------------------------------------------------
Locations in Hawaii,
Alaska, the US Virgin
Islands, Puerto Rico and Locations in the 48
BASIC TRAVEL CARD Services Canada contiguous United States
- --------------------------------------------------------------------------------
Select International Locations in the 48
BASIC TRAVEL CARD Service locations. contiguous United States
- --------------------------------------------------------------------------------
SEE Schedule 6 to the SEE Schedule 6 to the
TRAVEL CARD Service - applicable Rate and applicable Rate and
Enhanced Features Discount Schedule. Discount Schedule.
- --------------------------------------------------------------------------------
Page 4 of 8
<PAGE>
6. BILLING INCREMENTS:
(A) Classic Service - (i) all calls (excluding California IntraLATA
and California intrastate calls and calls to International
Locations, Canada and Mexico) will be billed in six (6) second
increments and subject to a six (6) second minimum charge, (ii)
California IntraLATA and California intrastate calls will be
billed in six (6) second increments and subject to an eighteen
(18) second minimum, and (ii) calls to International Locations,
Canada and Mexico will be billed in six (6) second increments and
subject to a thirty (30) second minimum charge.
(B) All calls will be billed (i) utilizing Hardware Answer
Supervision where available, and with respect to TOLL FREE
Services, commencing with Customer's switch wink or answer back.
If Customer is found to be non-compliant in passing back
appropriate answer supervision, i.e., answer back, WorldCom
reserves the right to suspend TOLL FREE Service or deny requests
by Customer for additional Service until appropriate compliance
is established.
7. CDR MEDIA: WorldCom will provide Call Detail Records (CDRs) for WorldCom's
Switched Services in machine readable form in one of several magnetic tape
formats (selected by Customer on Customer's Service Request) ("CDR Media"). CDR
Media provided under this Section (i) monthly is provided at no charge, (ii)
weekly is subject to a recurring monthly charge of [*], and (iii) daily is
subject to the applicable non-recurring Installation Charge as described below
(plus all leased-line and equipment costs necessary to implement Daily CDR Media
which will be determined on an individual case basis depending on Customer's
specific configuration).
- --------------------------------------------------------------------------------
Total Contract Non-Recurring
TYPE Value Installation Charge
- --------------------------------------------------------------------------------
Daily CDR Media-Customer
provided hardware and software [*] [*]
- --------------------------------------------------------------------------------
Daily CDR Media-PC Solution [*] [*]
- --------------------------------------------------------------------------------
Sub-Daily CDR Media-Customer
provided hardware and software [*] [*]
- --------------------------------------------------------------------------------
Sub-Daily CDR Media-PC Solution [*] [*]
- --------------------------------------------------------------------------------
8. TOLL FREE NUMBERS:
(a) TOLL FREE numbers will be issued to Customer (i.e., issuance equates
to activation or reservation, whichever occurs first) on a random basis.
Customer requests for specific numbers will be considered by WorldCom, and
if provided, will be subject to additional charges as set forth below and
WorldCom's then current reservation policy which shall also apply to any
randomly selected and reserved TOLL FREE number. At any time preceding
three (3) months from the scheduled expiration of the Service Term,
Customer may only reserve TOLL FREE numbers in an amount equal to the
greater of (i) 50, or (ii) fifteen percent (15%) of the total number of
TOLL FREE numbers activated by WorldCom for Customer. Customer requests
for TOLL FREE numbers inconsistent with the above stated conditions may be
considered by WorldCom on an individual case basis. TOLL FREE numbers
reserved for Customer will be activated upon Customer's request, however,
with respect to TRANSCEND(TM)Service, WorldCom may charge Customer an SMS
Storage fee for each TOLL FREE number.
(b) Customer Request for Specific Numbers - [*] per individual TOLL FREE
number.
Page 5 of 8
<PAGE>
(c) Customer specifically agrees that regardless of the method in which a
TOLL FREE number is reserved for or otherwise assigned to Customer, that
Customer will not seek any remedy from WorldCom under a theory of
detrimental reliance or otherwise that such TOLL FREE number(s) are found
not to be available for Customer's use until such TOLL FREE number is put
in service for the benefit of Customer, and that such TOLL FREE number(s)
shall not be sold, bartered, brokered or otherwise released by Customer
for a fee ("TOLL FREE Number Trafficking"). Any attempt by Customer to
engage in TOLL FREE Number Trafficking shall be grounds for reclamation by
WorldCom for reassignment of the TOLL FREE number(s) reserved for or
assigned to Customer.
9. ENHANCED TOLL FREE SERVICES: The following TOLL FREE identification services
and routing options (collectively, "Enhanced TOLL FREE Services") are available
from WorldCom:
IDENTIFICATION SERVICES:
i. Dialed Number Identification Service - identification of specific
TOLL FREE number dialed.
ii. Real-Time ANI - receipt of telephone number of calling party.
TOLL FREE ROUTING OPTIONS:
i. Message Referral - recording (up to six (6) months) that informs
callers that the TOLL FREE number has been disconnected or refers
callers to new number.
ii. Call Area Selection - selection or blockage of locations from which
TOLL FREE numbers can be received (i.e., State, NPA, LATA or NXX
level).
iii. Call Distributor Routing - distribution of TOLL FREE traffic evenly
over dedicated access lines in a trunk group (e.g., ascending,
descending, most idle, least idle).
iv. Route Completion (Overflow) - overflow of TOLL FREE dedicated access
traffic only to up to five (5) pre-defined alternate routing groups
(e.g., dedicated access, WATs access lines or switched access
lines).
v. Geographic Routing - termination of calls to a single TOLL FREE
number from two or more originating routing groups to different
locations.
vi. Time-of-Day Routing - routing of calls to single TOLL FREE number
based on time of day (up to forty-eight (48) time slots of 15-minute
increments in a 24-hour period).
vii. Day-of-Week Routing - routing of calls to single TOLL FREE number
based on each day of the week.
viii. Day-of-Year Routing - routing of calls to single TOLL FREE number
based on up to fifteen (15) customer-specified holidays.
ix. Percent Allocation Routing - routing of calls for each originating
routing group to two (2) or more terminating locations based on
customer-specified percentage.
Page 6 of 8
<PAGE>
Customer will receive the Identification Services described above at no
charge. The minutes of use rates for TOLL FREE Routing Options described
above (in addition to the TOLL FREE Routing Option Feature Charges
described below) will be the same rates for SWITCHED ACCESS Service (TOLL
FREE) and DEDICATED ACCESS Service (TOLL FREE), whichever is applicable,
as described in the applicable Rate and Discount Schedule excluding Route
Completion (Overflow). If Customer selects Route Completion (Overflow) and
Customers traffic overflows from DEDICATED ACCESS Service (TOLL FREE) to
SWITCHED ACCESS Service (TOLL FREE), Customer's minute of use rate will be
the rate associated with SWITCHED ACCESS Service (TOLL FREE). The TOLL
FREE Routing Option Feature Charges are as follows:
Installation Charge: [*] per feature; maximum of [*] per TOLL FREE
number.
Change Order Charge: [*] per feature; maximum of [*] per TOLL FREE
number.
Monthly Recurring Charge: [*] per feature; maximum of [*] per TOLL FREE
number.
Expedite Charge: [*] (i.e., outside normal interval time of four (4)
business days).
Note: More than ten (10) points of termination for a single feature will
be treated as two (2) features. Further, every additional ten (10) points
of termination will be treated as a separate feature.
10. RESPORG SERVICES: Responsible Organization Services (relevant to TOLL
FREE Numbers) if provided by WorldCom will be provided by WorldCom pursuant
to WorldCom's F.C.C. Tariff No. 5.
11. AUTHORIZATION CODES FOR TRAVEL CARD SERVICE: WorldCom will supply Customer
with authorization codes ("Codes") containing nine (9) or fourteen (14) digits
for use with a corresponding TOLL FREE Service number for origination and
termination of TRAVEL CARD Service calls. The Codes may be obtained by Customer
in blocks of ten (10) not to exceed a total of 1000 Codes at any one time.
WorldCom reserves the right to deny access to any Code at any time.
12. INBOUND PORTION OF TRAVEL CARD SERVICE CALL: The inbound service portion of
a TRAVEL CARD Service call (i.e., the TOLL FREE Service) must be provided by
WorldCom.
13. ACCOUNTING CODES: For every billed telephone number (BTN) requested by
Customer, whether verified or non-verified, Customer shall pay a monthly
recurring charge of [*].
14. PAY PHONE SURCHARGE: In the event WorldCom is required to compensate
payphone service providers (PSPs) for toll-free or access code calls which
originate from payphones (including without limitation, any Order adopted by the
FCC) ("Payphone Surcharge"), WorldCom will charge and Customer agrees to pay
WorldCom the amount of the Payphone Surcharge which is required to be paid by
WorldCom.
15. RBOC TERMINATION/ORIGINATION: With respect to Classic Switched Services,
following Start of Service for TERMINATION SERVICE, TOLL FREE ORIGINATION
Service and/or DEDICATED ACCESS Service, Customer will maintain at least 80% of
the minutes of traffic (during any calendar month or pro rata portion thereof)
with respect to each of the above-mentioned Services for termination or
origination in a Tandem owned and operated by a Regional Bell Operating Company
("RBOC Terminations/Originations") and subject to such RBOC's tariffed access
charges. WorldCom
Page 7 of 8
<PAGE>
shall have the right to apply a [*] per minute surcharge to the number of
minutes by which Non-RBOC Terminations/Originations exceed 20% of total monthly
minutes for each of the following Services: TERMINATION Service, TOLL FREE
ORIGINATION Service and DEDICATED ACCESS Service.
16. PRESUBSCRIBED INTEREXCHANGE CARRIER CHARGE (PICC): With respect to Classic
Switched Services, WorldCom will charge Customer for any LEC-assessed
presubscribed interexchange carrier charge ("PICC Charge") which PICC Charge
will be reasonably determined by WorldCom as of a date certain each month (the
"PICC Charge Determination Date") but only if WorldCom is directly billed by the
LEC for such PICC Charge. Customer's PICC Charge will be determined as of the
PICC Charge Determination Date and will be based on the same criteria for which
WorldCom is assessed such charge by the LEC (e.g., number and type of Customer's
End Users (i.e., residential or business) as well as the type of line associated
with each such End User (i.e., single line, secondary line or multi-line). This
Section 16 will be deemed to include any other similar additional charges
assessed by a LEC after the date of this Agreement, (i.e., charges for which
WorldCom is not currently being assessed).
IN WITNESS WHEREOF, Customer has initialed this CLASSIC/TRANSCEND(TM)
SWITCHED SERVICES Service Schedule on the date first written above.
INCOMNET COMMUNICATIONS CORPORATION
Customer's Initials /s/ MJK
----------------
Page 8 of 8
<PAGE>
AMENDMENT NO. 1
(RATE MODIFICATION AMENDMENT)
THIS AMENDMENT NO. 1 (Rate Modification Amendment) is made this 8th day of
March, 1999, by and between Incomnet Communications Corporation ("Customer") and
WorldCom Network Services, Inc. ("Worldcom"), to those certain Program
Enrollment Terms to that certain Telecommunications Services Agreement TSA#
ICC-981101 made by and between Customer and WorldCom dated November 1, 1998 (the
"TSA"). In the event of any conflict between the terms of the TSA, and the
terms of this Amendment No. 1, the terms of this Amendment No. 1 shall control.
The TSA, and this Amendment No. 1 shall collectively be referred to as the
"Agreement". The effective date of this Rate Modification Amendment shall be
March 12, 1999 ("Effective Date").
1. SPECIAL SWITCHED ACCESS INTERSTATE RATES
Notwithstanding anything to the contrary contained in Subsection IC of the Rate
and Discount Schedule regarding SWITCHED ACCESS Services, Customer will receive
the following rates with respect to the SWITCHED ACCESS Services described
below, provided, however, Customer shall be responsible for submitting NPA/NXX
numbers within the state of California to a WorldCom specified "California 1+
Rate Plan" subaccount for rating in accordance with (ii) below and failure of
the Customer to effect the submission of such California NPA/NXX numbers to the
California 1+ Rate Plan sub-account will result in rating in accordance with
Subpart (i) below:
(i) 1+ Interstate calls originating from an NPA/NXX outside the state
of California and terminating within the remaining 48 contiguous
United States: $[*] per minute (not subject to further discount)
(ii) 1+ Interstate calls originating from an NPA/NXX within the state
of California and terminating within the remaining 48 contiguous
United States: $[*] per minute (not subject to further discount)
(iii) Toll Free Interstate calls originating and terminating within the
48 contiguous United States: $[*] per minute
2. SPECIAL INTRASTATE RATES
Commencing as of the Effective Date and continuing throughout the Service Term
and any extensions thereto, Customer will receive the Special Intrastate Rates
for SWITCHED ACCESS 1+ Service and SWITCHED ACCESS TOLL FREE Service described
below.
<PAGE>
<TABLE>
<CAPTION>
STATE SPECIAL INTRASTATE RATE
----- -----------------------
<S> <C>
Alabama [*]
Arkansas
Connecticut
Florida
Georgia
Indiana
Kansas
Kentucky
Maine
Maryland
Michigan
New Jersey
New York
Ohio
Oregon
Rhode Island
Tennessee
Utah
Virginia
Wisconsin
</TABLE>
3. SPECIAL INTERNATIONAL RATES
Commencing as of the Effective Date and continuing throughout the Service Term
and any extensions thereto, Customer will receive the Special International
Rates for DEDICATED ACCESS 1+ Service, SWITCHED ACCESS 1+ Service and SWITCHED
ACCESS 1+ Service from Hawaii ("HI") described below.
<TABLE>
<CAPTION>
COUNTRY DEDICATED RATE SWITCHED RATE SWITCHED RATE FROM HI
- ------- -------------- ------------- ---------------------
<S> <C> <C> <C>
Australia $[*] $[*] $[*]
Argentina
Brazil
Cambodia
Chile
China
El Salvador
France
Germany
<CAPTION>
COUNTRY DEDICATED RATE SWITCHED RATE SWITCHED RATE FROM HI
- ------- -------------- ------------- ---------------------
<S> <C> <C> <C>
Guatemala $[*] $[*] $[*]
Hong Kong
India
Page 2 of 3
<PAGE>
Japan
Nicaragua
Nigeria
Russia
South Korea
Taiwan
Thailand
Vietnam
</TABLE>
Except as amended herein, the terms and conditions of the Agreement will remain
in full force and effect throughout the Service Term and any extension thereof.
IN WITNESS WHEREOF the parties have entered into this Amendment No. 1 on the
date first written above.
WORLDCOM NETWORK SERVICES, INCOMNET COMMUNICATIONS
INC. CORPORATION
By /s/ Robert Brejcha By /s/ Michael J. Keebaugh
---------------------------- -----------------------------------
(Signature) (Signature)
Robert Brejcha Michael J. Keebaugh
- ------------------------------- -------------------------------------
(Print Name) (Print Name)
Vice President Sr. VP Operations
- ------------------------------- -------------------------------------
(Title) (Title)
Page 3 of 3
<PAGE>
================================================================================
LOAN AND SECURITY AGREEMENT
by and between
INCOMNET COMMUNICATIONS CORPORATION
and
FOOTHILL CAPITAL CORPORATION
Dated as of April 9, 1999
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE(S)
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<S> <C>
2. DEFINITIONS AND CONSTRUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 ACCOUNTING TERMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
1.3 CODE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
1.4 CONSTRUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
1.5 SCHEDULES AND EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2. LOAN AND TERMS OF PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.1 REVOLVING ADVANCES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.2 INTENTIONALLY OMITTED.. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.3 INTENTIONALLY OMITTED.. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.4 INTENTIONALLY OMITTED.. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.5 OVERADVANCES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.6 INTEREST RATES, PAYMENTS, AND CALCULATIONS. . . . . . . . . . . . . . . . . 16
2.7 COLLECTION OF ACCOUNTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.8 CREDITING PAYMENTS; APPLICATION OF COLLECTIONS. . . . . . . . . . . . . . . 17
2.9 DESIGNATED ACCOUNT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.10 MAINTENANCE OF LOAN ACCOUNT; STATEMENTS OF OBLIGATIONS.. . . . . . . . . . 18
2.11 FEES.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3. CONDITIONS; TERM OF AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.1 CONDITIONS PRECEDENT TO THE INITIAL ADVANCE.. . . . . . . . . . . . . . . . 19
3.2 CONDITIONS PRECEDENT TO ALL ADVANCES. . . . . . . . . . . . . . . . . . . . 20
3.3 CONDITION SUBSEQUENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.4 TERM; AUTOMATIC RENEWAL.. . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.5 EFFECT OF TERMINATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.6 EARLY TERMINATION BY BORROWER.. . . . . . . . . . . . . . . . . . . . . . . 21
3.7 TERMINATION UPON EVENT OF DEFAULT.. . . . . . . . . . . . . . . . . . . . . 21
4. CREATION OF SECURITY INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.1 GRANT OF SECURITY INTEREST. . . . . . . . . . . . . . . . . . . . . . . . . 22
4.2 NEGOTIABLE COLLATERAL.. . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.3 COLLECTION OF ACCOUNTS, GENERAL INTANGIBLES, AND NEGOTIABLE COLLATERAL. . . 22
4.4 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED.. . . . . . . . . . . . . . . 22
4.5 POWER OF ATTORNEY.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.6 RIGHT TO INSPECT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . . . . . . . 23
5.1 NO ENCUMBRANCES.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5.2 ELIGIBLE ACCOUNTS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5.3 INTENTIONALLY OMITTED.. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5.4 EQUIPMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5.5 LOCATION OF INVENTORY AND EQUIPMENT.. . . . . . . . . . . . . . . . . . . . 24
5.6 INVENTORY RECORDS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
5.7 LOCATION OF CHIEF EXECUTIVE OFFICE; FEIN. . . . . . . . . . . . . . . . . . 24
5.8 DUE ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. . . . . . . . . . . . . . 24
5.9 DUE AUTHORIZATION; NO CONFLICT. . . . . . . . . . . . . . . . . . . . . . . 24
5.10 LITIGATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.11 NO MATERIAL ADVERSE CHANGE.. . . . . . . . . . . . . . . . . . . . . . . . 25
5.12 SOLVENCY.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.13 EMPLOYEE BENEFITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.14 ENVIRONMENTAL CONDITION. . . . . . . . . . . . . . . . . . . . . . . . . . 25
6. AFFIRMATIVE COVENANTS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
i
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6.1 ACCOUNTING SYSTEM.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
6.2 COLLATERAL REPORTING. . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES.. . . . . . . . . . . . . . . . 26
6.4 TAX RETURNS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.5 CARRIER AND LEC PAYABLES. . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.6 INTENTIONALLY OMITTED.. . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.7 INTENTIONALLY OMITTED.. . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.8 MAINTENANCE OF EQUIPMENT. . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.9 TAXES.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.10 INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.11 NO SETOFFS OR COUNTERCLAIMS. . . . . . . . . . . . . . . . . . . . . . . . 29
6.12 LOCATION OF EQUIPMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . 29
6.13 COMPLIANCE WITH LAWS.. . . . . . . . . . . . . . . . . . . . . . . . . . . 29
6.14 EMPLOYEE BENEFITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
6.15 LEASES.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
6.16 YEAR 2000 COMPLIANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7. NEGATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.1 INDEBTEDNESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.2 LIENS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.3 RESTRICTIONS ON FUNDAMENTAL CHANGES.. . . . . . . . . . . . . . . . . . . . 31
7.4 DISPOSAL OF ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.5 CHANGE NAME.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.6 GUARANTEE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
7.7 NATURE OF BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
7.8 PREPAYMENTS AND AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . 32
7.9 CHANGE OF CONTROL.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
7.10 INTENTIONALLY OMITTED. . . . . . . . . . . . . . . . . . . . . . . . . . . 32
7.11 DISTRIBUTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
7.12 ACCOUNTING METHODS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
7.13 INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
7.14 TRANSACTIONS WITH AFFILIATES.. . . . . . . . . . . . . . . . . . . . . . . 33
7.15 SUSPENSION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
7.16 COMPENSATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
7.17 USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
7.18 CHANGE IN LOCATION OF CHIEF EXECUTIVE OFFICE; INVENTORY AND
EQUIPMENT WITH BAILEES.. . . . . . . . . . . . . . . . . . . . . . . . . . 33
7.19 NO PROHIBITED TRANSACTIONS UNDER ERISA . . . . . . . . . . . . . . . . . . 33
7.20 FINANCIAL COVENANT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
7.21 CONTRACTS WITH LOCAL EXCHANGE CARRIERS.. . . . . . . . . . . . . . . . . . 34
8. EVENTS OF DEFAULT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
9. FOOTHILL'S RIGHTS AND REMEDIES. . . . . . . . . . . . . . . . . . . . . . . . . 36
9.1 RIGHTS AND REMEDIES.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
9.2 REMEDIES CUMULATIVE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
10. TAXES AND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
11. WAIVERS; INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
11.1 DEMAND; PROTEST; ETC.. . . . . . . . . . . . . . . . . . . . . . . . . . . 38
11.2 FOOTHILL'S LIABILITY FOR COLLATERAL. . . . . . . . . . . . . . . . . . . . 39
11.3 INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
12. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.. . . . . . . . . . . . . . . . . . 40
14. DESTRUCTION OF BORROWER'S DOCUMENTS. . . . . . . . . . . . . . . . . . . . . . 41
15. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
15.1 EFFECTIVENESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
ii
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<S> <C>
15.2 SUCCESSORS AND ASSIGNS.. . . . . . . . . . . . . . . . . . . . . . . . . . 41
15.3 SECTION HEADINGS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
15.4 INTERPRETATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
15.5 SEVERABILITY OF PROVISIONS.. . . . . . . . . . . . . . . . . . . . . . . . 42
15.6 AMENDMENTS IN WRITING. . . . . . . . . . . . . . . . . . . . . . . . . . . 42
15.7 COUNTERPARTS; TELEFACSIMILE EXECUTION. . . . . . . . . . . . . . . . . . . 42
15.8 REVIVAL AND REINSTATEMENT OF OBLIGATIONS.. . . . . . . . . . . . . . . . . 42
15.9 INTEGRATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
</TABLE>
SCHEDULES AND EXHIBITS
Schedule P-1 Permitted Liens
Schedule 5.10 Litigation
Schedule 5.13 ERISA Benefit Plans
Schedule 6.9 Taxes
Schedule 6.12 Location of Equipment
Schedule 7.1 Indebtedness
Schedule 7.20 Tangible Net Worth Covenant
Exhibit C-1 Form of Compliance Certificate
iii
<PAGE>
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (THIS "AGREEMENT"), is entered into as of
April 9, 1999, between FOOTHILL CAPITAL CORPORATION, a California corporation
("Foothill"), with a place of business located at 11111 Santa Monica Boulevard,
Suite 1500, Los Angeles, California 90025-3333 and INCOMNET COMMUNICATIONS
CORPORATION, a Delaware corporation ("Borrower"), with its chief executive
office located at 2801 Main Street, Irvine, California.
The parties agree as follows:
2. DEFINITIONS AND CONSTRUCTION.
2.1 DEFINITIONS. As used in this Agreement, the following terms
shall have the following definitions:
"ACCOUNT DEBTOR" means any Person who is or who may become
obligated under, with respect to, or on account of, an Account.
"ACCOUNTS" means all currently existing and hereafter arising
accounts (both billed and unbilled), contract rights, and all other forms of
obligations owing to Borrower arising out of the sale or lease of goods, the
sale or lease of General Intangibles relating to the provision of
telecommunication services or the rendition of services by Borrower,
irrespective of whether earned by performance, and any and all credit insurance,
guaranties, or security therefor.
"ADVANCES" has the meaning set forth in SECTION 2.1(a).
"AFFILIATE" means, as applied to any Person, any other Person
who directly or indirectly controls, is controlled by, is under common control
with or is a director or officer of such Person. For purposes of this
definition, "control" means the possession, directly or indirectly, of the power
to vote 5% or more of the securities having ordinary voting power for the
election of directors or the direct or indirect power to direct the management
and policies of a Person.
"AGREEMENT" has the meaning set forth in the preamble hereto.
"AUTHORIZED PERSON" means any officer or other employee of
Borrower.
"AVAILABILITY" means, as the date of determination, Borrower's
cash and cash equivalents, PLUS unused borrowing availability pursuant to
SECTION 2.1, LESS accounts payable that are past due beyond Borrower's
historical business practices.
1
<PAGE>
"AVERAGE UNUSED PORTION OF MAXIMUM AMOUNT" means, as of any
date of determination, the Maximum Amount, LESS the average Daily Balance of
Advances that were outstanding during the immediately preceding month. The
average Daily Balances of Advances shall be calculated by adding together all of
the Daily Balances for each day of the month and dividing that number by the
number of days in that month.
"BANKRUPTCY CODE" means the United States Bankruptcy Code (11
U.S.C. Section 101 ET SEQ.), as amended, and any successor statute.
"BENEFIT PLAN" means a "defined benefit plan" (as defined in
Section 3(35) of ERISA) for which Borrower, any Subsidiary of Borrower, or any
ERISA Affiliate has been an "employer" (as defined in Section 3(5) of ERISA)
within the past six years.
"BORROWER" has the meaning set forth in the preamble to this
Agreement.
"BORROWER'S BOOKS" means all of Borrower's books and records
including: ledgers; records indicating, summarizing, or evidencing Borrower's
properties or assets (including the Collateral) or liabilities; all information
relating to Borrower's business operations or financial condition; and all
computer programs, disk or tape files, printouts, runs, or other computer
prepared information.
"BORROWING BASE" has the meaning set forth in SECTION 2.1(a).
"BUSINESS DAY" means any day that is not a Saturday, Sunday,
or other day on which national banks are authorized or required to close.
"CARRIER" means MCI/Worldcom or any other provider of long
distance telephone service with whom Borrower does business from time to time.
"CARRIER AGREEMENT" means each contract or agreement in effect
between Borrower and a Carrier.
"CARRIER CONSENT AGREEMENT" means an agreement by a Carrier in
favor of Borrower, that is in form and substance satisfactory to Foothill, or
that may be assigned to Foothill and is in fact so assigned, and that is in full
force and effect, whereby the Carrier consents to the grant of a security
interest in favor of Foothill in the Carrier Agreement then in effect between
Borrower and the applicable Carrier.
"CARRIER RESERVE" means a reserve in an amount equal to one
week of accrued accounts payable to Carriers.
"CHANGE OF CONTROL" shall be deemed to have occurred at such
time as: (a) Parent ceases to own at least 100% of Borrower's outstanding
capital stock, or (b) a "person" or "group" (within the meaning of Sections
13(d) and 14(d)(2) of the Securities
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Exchange Act of 1934), other than John P. Casey or Ironwood or their Affiliates,
becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934), directly or indirectly, of more than 40% of the total
voting power of all classes of stock then outstanding of Parent entitled to vote
in the election of directors.
"CLOSING DATE" means the date of the making of the initial
Advance.
"CODE" means the California Uniform Commercial Code.
"COLLATERAL" means each of the following:
(a) the Accounts,
(b) Borrower's Books,
(c) the Equipment,
(d) the General Intangibles,
(e) the Inventory,
(f) the Investment Property,
(g) the Negotiable Collateral,
(h) any money, or other assets of Borrower that now or
hereafter come into the possession, custody, or control of Foothill, excluding
any proceeds of the sale of the stock of Rapid Cast, Inc. which is owned by
Borrower, and
(i) the proceeds and products, whether tangible or
intangible, of any of the foregoing, including proceeds of insurance covering
any or all of the Collateral, and any and all Accounts, Borrower's Books,
Equipment, General Intangibles, Inventory, Investment Property, Negotiable
Collateral, Real Property, money, deposit accounts, or other tangible or
intangible property resulting from the sale, exchange, collection, or other
disposition of any of the foregoing, or any portion thereof or interest therein,
and the proceeds thereof.
"COLLATERAL ACCESS AGREEMENT" means a landlord waiver,
mortgagee waiver, bailee letter, or acknowledgement agreement of any
warehouseman, processor, lessor, consignee, or other Person in possession of,
having a Lien upon, or having rights or interests in the Equipment or Inventory,
in each case, in form and substance satisfactory to Foothill.
"COLLECTIONS" means all cash, checks, notes, instruments, and
other items of payment (including, insurance proceeds, proceeds of cash sales,
rental proceeds, and tax refunds), but excluding all amounts received by
Borrower from the sale of shares of
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Borrower's capital stock or proceeds of subordinated Indebtedness that replaces
Indebtedness payable to Ironwood.
"COMMUNICATION ACT" means the Communications Act of 1934, as
amended, 49 U.S.C. Sec. 151 et seq.
"COMPLIANCE CERTIFICATE" means a certificate substantially in
the form of EXHIBIT C-1 and delivered by the chief accounting officer of
Borrower to Foothill.
"DAILY BALANCE" means, with respect to each day during the
term of this Agreement, the amount of an Obligation owed at the end of such day.
"DEEMS ITSELF INSECURE" means that the Person deems itself
insecure in accordance with the provisions of Section 1208 of the Code.
"DEFAULT" means an event, condition, or default that, with the
giving of notice, the passage of time, or both, would be an Event of Default.
"DESIGNATED ACCOUNT" means account number 4159354943 of
Borrower maintained with Borrower's Designated Account Bank, or such other
deposit account of Borrower (located within the United States) which has been
designated, in writing and from time to time, by Borrower to Foothill.
"DESIGNATED ACCOUNT BANK" means Wells Fargo Bank, National
Association, whose office is located at 2030 Main Street, Suite 900, Irvine,
California 92614, and whose ABA number is 12100248.
"DILUTION" means, in each case based upon the experience of
the immediately prior three months, the result of dividing the Dollar amount of
(a) bad debt write-downs, discounts, advertising, returns, promotions, credits,
or other dilutive items with respect to the Accounts, by (b) Borrower's
Collections (excluding extraordinary items) plus the Dollar amount of clause
(a).
"DILUTION RESERVE" means, as of any date of determination, an
amount sufficient to reduce Foothill's advance rate against Eligible Accounts by
one percentage point for each percentage point by which Dilution is in excess of
10%.
"DISBURSEMENT LETTER" means an instructional letter executed
and delivered by Borrower to Foothill regarding the extensions of credit to be
made on the Closing Date, the form and substance of which shall be satisfactory
to Foothill.
"DOLLARS OR $" means United States dollars.
"EARLY TERMINATION PREMIUM" has the meaning set forth in
SECTION 3.6.
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"ELIGIBLE ACCOUNTS" means those Accounts arising out of the
provision of telecommunication services performed or accepted, consumed or
utilized by an Account Debtor in the ordinary course of Borrower's business,
that strictly comply with each and all of the representations and warranties
respecting Eligible Accounts made by Borrower to Foothill in the Loan Documents,
and that are and at all times continue to be acceptable to Foothill in all
respects; PROVIDED, HOWEVER, that standards of eligibility may be fixed and
revised from time to time by Foothill in Foothill's reasonable credit judgment.
Eligible Accounts shall not include the following:
(b) Accounts that the Account Debtor has failed to pay
within 90 days of original invoice date or 60 days from due date.
(c) Accounts owed by an Account Debtor or its Affiliates
where 50% or more of all Accounts owed by that Account Debtor (or its
Affiliates) are deemed ineligible under clause (a) above;
(d) Accounts with respect to which the Account Debtor is an
employee, Affiliate, or agent of Borrower;
(e) Accounts with respect to which goods are placed on
consignment, guaranteed sale, sale or return, sale on approval, bill and hold,
or other terms by reason of which the payment by the Account Debtor may be
conditional;
(f) Accounts that are not payable in Dollars or with respect
to which the Account Debtor: (i) does not maintain its chief executive office in
the United States, or (ii) is not organized under the laws of the United States
or any State thereof, or (iii) is the government of any foreign country or
sovereign state, or of any state, province, municipality, or other political
subdivision thereof, or of any department, agency, public corporation, or other
instrumentality thereof, unless (y) the Account is supported by an irrevocable
letter of credit satisfactory to Foothill (as to form, substance, and issuer or
domestic confirming bank) that has been delivered to Foothill and is directly
drawable by Foothill, or (z) the Account is covered by credit insurance in form
and amount, and by an insurer, satisfactory to Foothill;
(g) Accounts with respect to which the Account Debtor is
either (i) the United States or any department, agency, or instrumentality of
the United States (exclusive, however, of Accounts with respect to which
Borrower has complied, to the satisfaction of Foothill, with the Assignment of
Claims Act, 31 U.S.C. Section 3727), or (ii) any State of the United States
(exclusive, however, of Accounts owed by any State that does not have a
statutory counterpart to the Assignment of Claims Act);
(h) Accounts with respect to which the Account Debtor is a
creditor of Borrower, has or has asserted a right of setoff, has disputed its
liability, or has made any claim with respect to the Account;
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(i) Accounts with respect to an Account Debtor whose total
obligations owing to Borrower exceed 10% of all Eligible Accounts (or in the
case of each of Pacific Bell Telephone or USBI 40% of Eligible Accounts, subject
to continued monitoring of the creditworthiness of such Account Debtors), to the
extent of the obligations owing by such Account Debtor in excess of such
percentage;
(j) Accounts with respect to which the Account Debtor is
subject to any Insolvency Proceeding, or becomes insolvent, or goes out of
business;
(k) Accounts the collection of which Foothill, in its
reasonable credit judgment, believes to be doubtful by reason of the Account
Debtor's financial condition;
(l) Accounts with respect to which the goods giving rise to
such Account have not been shipped and billed to the Account Debtor, the
services giving rise to such Account have not been performed and accepted by the
Account Debtor, or the Account otherwise does not represent a final sale;
(m) Accounts with respect to which the Account Debtor is
located in the states of New Jersey, Minnesota, or West Virginia (or any other
state that requires a creditor to file a Business Activity Report or similar
document in order to bring suit or otherwise enforce its remedies against such
Account Debtor in the courts or through any judicial process of such state),
unless Borrower has qualified to do business in New Jersey, Minnesota, West
Virginia, or such other states, or has filed a Notice of Business Activities
Report with the applicable division of taxation, the department of revenue, or
with such other state offices, as appropriate, for the then-current year, or is
exempt from such filing requirement; and
(n) Accounts that represent progress payments or other
advance billings that are due prior to the completion of performance by Borrower
of the subject contract for goods or services.
"ELIGIBLE UNBILLED ACCOUNTS" means Accounts meeting the
criteria of Eligible Accounts except that such Accounts have not been billed by
Borrower or transmitted by Borrower to the third party biller, and such accounts
are (a) not more than 45 days of the date of their accrual or (b) Accounts
arising from Borrower's Suresaver Product.
"EQUIPMENT" means all of Borrower's present and hereafter
acquired machinery, machine tools, motors, equipment, furniture, furnishings,
fixtures, vehicles (including motor vehicles and trailers), tools, parts, goods
(other than consumer goods, farm products, or Inventory), wherever located,
including, (a) any interest of Borrower in any of the foregoing, and (b) all
attachments, accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing.
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"ERISA" means the Employee Retirement Income Security Act of
1974, 29 U.S.C. Sections 1000 et seq., amendments thereto, successor statutes,
and regulations or guidance promulgated thereunder.
"ERISA AFFILIATE" means (a) any corporation subject to ERISA
whose employees are treated as employed by the same employer as the employees of
Borrower under IRC Section 414(b), (b) any trade or business subject to ERISA
whose employees are treated as employed by the same employer as the employees of
Borrower under IRC Section 414(c), (c) solely for purposes of Section 302 of
ERISA and Section 412 of the IRC, any organization subject to ERISA that is a
member of an affiliated service group of which Borrower is a member under IRC
Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section
412 of the IRC, any party subject to ERISA that is a party to an arrangement
with Borrower and whose employees are aggregated with the employees of Borrower
under IRC Section 414(o).
"ERISA EVENT" means (a) a Reportable Event with respect to any
Benefit Plan or Multiemployer Plan, (b) the withdrawal of Borrower, any of its
Subsidiaries or ERISA Affiliates from a Benefit Plan during a plan year in which
it was a "substantial employer" (as defined in Section 4001(a)(2) of ERISA),
(c) the providing of notice of intent to terminate a Benefit Plan in a distress
termination (as described in Section 4041(c) of ERISA), (d) the institution by
the PBGC of proceedings to terminate a Benefit Plan or Multiemployer Plan,
(e) any event or condition (i) that provides a basis under Section 4042(a)(1),
(2), or (3) of ERISA for the termination of, or the appointment of a trustee to
administer, any Benefit Plan or Multiemployer Plan, or (ii) that may result in
termination of a Multiemployer Plan pursuant to Section 4041A of ERISA, (f) the
partial or complete withdrawal within the meaning of Sections 4203 and 4205 of
ERISA, of Borrower, any of its Subsidiaries or ERISA Affiliates from a
Multiemployer Plan, or (g) providing any security to any Plan under Section
401(a)(29) of the IRC by Borrower or its Subsidiaries or any of their ERISA
Affiliates.
"EVENT OF DEFAULT" has the meaning set forth in SECTION 8.
"FCC" means the Federal Communications Commission or any
governmental body or agency succeeding to the functions thereof.
"FCC RULES" means Title 47 of the Code of Federal Regulations,
as amended, and FCC decisions issued pursuant to the adoption of such
regulations.
"FEIN" means Federal Employer Identification Number.
"FOOTHILL" has the meaning set forth in the preamble to this
Agreement.
"FOOTHILL ACCOUNT" has the meaning set forth in SECTION 2.7.
"FOOTHILL EXPENSES" means all: costs or expenses (including
taxes, and insurance premiums) required to be paid by Borrower under any of the
Loan Documents that
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are paid or incurred by Foothill; fees or charges paid or incurred by Foothill
in connection with Foothill's transactions with Borrower, including, fees or
charges for photocopying, notarization, couriers and messengers,
telecommunication, public record searches (including tax lien, litigation, and
UCC searches and including searches with the patent and trademark office, the
copyright office, or the department of motor vehicles), filing, recording,
publication, appraisal (including periodic Collateral or appraisals), costs and
expenses incurred by Foothill in the disbursement of funds to Borrower (by wire
transfer or otherwise); charges paid or incurred by Foothill resulting from the
dishonor of checks; costs and expenses paid or incurred by Foothill to correct
any default or enforce any provision of the Loan Documents, or in gaining
possession of, maintaining, handling, preserving, storing, shipping, selling,
preparing for sale, or advertising to sell the Collateral or any portion
thereof, irrespective of whether a sale is consummated; costs and expenses paid
or incurred by Foothill in examining Borrower's Books; costs and expenses of
third party claims or any other suit paid or incurred by Foothill in enforcing
or defending the Loan Documents or in connection with the transactions
contemplated by the Loan Documents or Foothill's relationship with Borrower or
any guarantor; and Foothill's reasonable attorneys fees and expenses incurred
in advising, structuring, drafting, reviewing, administering, amending,
terminating, enforcing, defending, or concerning the Loan Documents (including
attorneys fees and expenses incurred in connection with a "workout," a
"restructuring," or an Insolvency Proceeding concerning Borrower or any
guarantor of the Obligations), irrespective of whether suit is brought.
"GAAP" means generally accepted accounting principles as in
effect from time to time in the United States, consistently applied.
"GENERAL INTANGIBLES" means all of Borrower's present and
future general intangibles and other personal property (including contract
rights, rights arising under common law, statutes, or regulations, choses or
things in action, goodwill, patents, trade names, trademarks, servicemarks,
copyrights, blueprints, drawings, purchase orders, customer lists, monies due or
recoverable from pension funds, route lists, rights to payment and other rights
under any royalty or licensing agreements, infringement claims, computer
programs, information contained on computer disks or tapes, literature, reports,
catalogs, deposit accounts, insurance premium rebates, tax refunds, and tax
refund claims), other than goods, Accounts, and Negotiable Collateral.
"GOVERNING DOCUMENTS" means the certificate or articles of
incorporation, by-laws, or other organizational or governing documents of any
Person.
"GOVERNMENTAL AUTHORITY" means any nation or government, any
state or other political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government.
"HAZARDOUS MATERIALS" means (a) substances that are defined or
listed in, or otherwise classified pursuant to, any applicable laws or
regulations as "hazardous substances," "hazardous materials," "hazardous
wastes," "toxic substances," or any other formulation intended to define, list,
or classify substances by reason of deleterious properties
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such as ignitability, corrosivity, reactivity, carcinogenicity, reproductive
toxicity, or "EP toxicity", (b) oil, petroleum, or petroleum derived
substances, natural gas, natural gas liquids, synthetic gas, drilling fluids,
produced waters, and other wastes associated with the exploration, development,
or production of crude oil, natural gas, or geothermal resources, (c) any
flammable substances or explosives or any radioactive materials, and (d)
asbestos in any form or electrical equipment that contains any oil or
dielectric fluid containing levels of polychlorinated biphenyls in excess of 50
parts per million.
"INDEBTEDNESS" means: (a) all obligations of Borrower for
borrowed money, (b) all obligations of Borrower evidenced by bonds, debentures,
notes, or other similar instruments and all reimbursement or other obligations
of Borrower in respect of letters of credit, bankers acceptances, interest rate
swaps, or other financial products, (c) all obligations of Borrower under
capital leases, (d) all obligations or liabilities of others secured by a Lien
on any property or asset of Borrower, irrespective of whether such obligation or
liability is assumed, and (e) any obligation of Borrower guaranteeing or
intended to guarantee (whether guaranteed, endorsed, co-made, discounted, or
sold with recourse to Borrower) any indebtedness, lease, dividend, letter of
credit, or other obligation of any other Person.
"INSOLVENCY PROCEEDING" means any proceeding commenced by or
against any Person under any provision of the Bankruptcy Code or under any other
bankruptcy or insolvency law, assignments for the benefit of creditors, formal
or informal moratoria, compositions, extensions generally with creditors, or
proceedings seeking reorganization, arrangement, or other similar relief.
"INTANGIBLE ASSETS" means, with respect to any Person, that
portion of the book value of all of such Person's assets that would be treated
as intangibles under GAAP.
"INTELLECTUAL PROPERTY SECURITY AGREEMENT" means that certain
Intellectual Property Security Agreement, of even date herewith, between
Borrower and Foothill.
"INTERCREDITOR AGREEMENT" means that certain Intercreditor and
Subordination Agreement, of even date herewith, between Foothill and Ironwood,
and acknowledged by Borrower.
"INVENTORY" means all present and future inventory in which
Borrower has any interest, including goods held for sale or lease or to be
furnished under a contract of service and all of Borrower's present and future
raw materials, work in process, finished goods, and packing and shipping
materials, wherever located.
"INVESTMENT PROPERTY" means all of Borrower's presently
existing and hereafter acquired or arising investment property (as that term is
defined in Section 9115 of the Code).
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"IRONWOOD" means Ironwood Telecom LLC, a Colorado limited
liability company.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"LEC RESERVE" means a reserve for fees payable to local
exchange carriers and USBI equal to one month's fees, based upon a trailing
three month average.
"LIEN" means any interest in property securing an obligation
owed to, or a claim by, any Person other than the owner of the property, whether
such interest shall be based on the common law, statute, or contract, whether
such interest shall be recorded or perfected, and whether such interest shall be
contingent upon the occurrence of some future event or events or the existence
of some future circumstance or circumstances, including the lien or security
interest arising from a mortgage, deed of trust, encumbrance, pledge,
hypothecation, assignment, deposit arrangement, security agreement, adverse
claim or charge, conditional sale or trust receipt, or from a lease,
consignment, or bailment for security purposes and also including reservations,
exceptions, encroachments, easements, rights-of-way, covenants, conditions,
restrictions, leases, and other title exceptions and encumbrances affecting Real
Property.
"LOAN ACCOUNT" has the meaning set forth in SECTION 2.10.
"LOAN DOCUMENTS" means this Agreement, the Disbursement
Letter, the Lockbox Agreements, the Intellectual Property Security Agreement,
the Intercreditor Agreement, any note or notes executed by Borrower and payable
to Foothill, and any other agreement entered into, now or in the future, in
connection with this Agreement.
"LOCKBOX ACCOUNT" shall mean a depositary account established
pursuant to one of the Lockbox Agreements.
"LOCKBOX AGREEMENTS" means those certain Lockbox Operating
Procedural Agreements and those certain Depository Account Agreements, in form
and substance satisfactory to Foothill, each of which is among Borrower,
Foothill, and one of the Lockbox Banks.
"LOCKBOX BANKS" means Wells Fargo Bank, National Association,
or such other banks as may be agreed to by Foothill and Borrower from time to
time.
"LOCKBOXES" has the meaning set forth in SECTION 2.7.
"MATERIAL ADVERSE CHANGE" means (a) a material adverse change
in the business, prospects, operations, results of operations, assets,
liabilities or condition (financial or otherwise) of Borrower or Parent, (b) the
material impairment of Borrower's ability to perform its obligations under the
Loan Documents to which it is a party or of Foothill to
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<PAGE>
enforce the Obligations or realize upon the Collateral, (c) a material
adverse effect on the value of the Collateral or the amount that Foothill
would be likely to receive (after giving consideration to delays in payment
and costs of enforcement) in the liquidation of such Collateral, or (d) a
material impairment of the priority of Foothill's Liens with respect to the
Collateral.
"MAXIMUM AMOUNT" means $12,500,000.
"MULTIEMPLOYER PLAN" means a "multiemployer plan" (as defined
in Section 4001(a)(3) of ERISA) to which Borrower, any of its Subsidiaries, or
any ERISA Affiliate has contributed, or was obligated to contribute, within the
past six years.
"NEGOTIABLE COLLATERAL" means all of Borrower's present and
future letters of credit, notes, drafts, instruments, Investment Property,
securities (including the shares of stock of Subsidiaries of Borrower),
documents, personal property leases (wherein Borrower is the lessor), and
chattel paper.
"OBLIGATIONS" means all loans, Advances, debts, principal,
interest (including any interest that, but for the provisions of the Bankruptcy
Code, would have accrued), contingent reimbursement obligations under any
outstanding Letters of Credit, premiums (including Early Termination Premiums),
liabilities (including all amounts charged to Borrower's Loan Account pursuant
hereto), obligations, fees, charges, costs, or Foothill Expenses (including any
fees or expenses that, but for the provisions of the Bankruptcy Code, would have
accrued), lease payments, guaranties, covenants, and duties owing by Borrower to
Foothill of any kind and description (whether pursuant to or evidenced by the
Loan Documents or pursuant to any other agreement between Foothill and Borrower,
and irrespective of whether for the payment of money), whether direct or
indirect, absolute or contingent, due or to become due, now existing or
hereafter arising, and including any debt, liability, or obligation owing from
Borrower to others that Foothill may have obtained by assignment or otherwise,
and further including all interest not paid when due and all Foothill Expenses
that Borrower is required to pay or reimburse by the Loan Documents, by law, or
otherwise.
"OVERADVANCE" has the meaning set forth in SECTION 2.5.
"PARENT" means Incomnet, Inc., a California corporation.
"PBGC" means the Pension Benefit Guaranty Corporation as
defined in Title IV of ERISA, or any successor thereto.
"PERMITTED LIENS" means (a) Liens held by Foothill, (b) Liens
for unpaid taxes that either (i) are not yet due and payable or (ii) are the
subject of Permitted Protests, (c) Liens set forth on SCHEDULE P-1, (d) the
interests of lessors under operating leases and purchase money security
interests and Liens of lessors under capital leases to the extent that the
acquisition or lease of the underlying asset is permitted under SECTION 7.21 and
so long as the Lien only attaches to the asset purchased or acquired and only
secures the purchase price of the
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asset, (e) Liens arising by operation of law in favor of warehousemen,
landlords, carriers, mechanics, materialmen, laborers, or suppliers, incurred
in the ordinary course of business of Borrower and not in connection with the
borrowing of money, and which Liens either (i) are for sums not yet due and
payable, or (ii) are the subject of Permitted Protests, (f) Liens arising
from deposits made in connection with obtaining worker's compensation or
other unemployment insurance, (g) Liens or deposits to secure performance of
bids, tenders, or leases (to the extent permitted under this Agreement),
incurred in the ordinary course of business of Borrower and not in connection
with the borrowing of money, (h) Liens arising by reason of security for
surety or appeal bonds in the ordinary course of business of Borrower, (i)
Liens of or resulting from any judgment or award that would not cause a
Material Adverse Change and as to which the time for the appeal or petition
for rehearing of which has not yet expired, or in respect of which Borrower
is in good faith prosecuting an appeal or proceeding for a review, and in
respect of which a stay of execution pending such appeal or proceeding for
review has been secured, (j) Liens in favor of Ironwood that are subordinated
pursuant to the Intercreditor Agreement, (k) Liens in favor of a subordinated
lender or investor whose Indebtedness replaces all or a portion of the
Ironwood Indebtedness, provided that such subordinated lender or investor has
executed a subordination or intercreditor agreement which provides Foothill
with no fewer rights than as set forth in the Intercreditor Agreement, and
(l) with respect to any Real Property, easements, rights of way, zoning and
similar covenants and restrictions, and similar encumbrances that customarily
exist on properties of Persons engaged in similar activities and similarly
situated and that in any event do not materially interfere with the ordinary
conduct of the business of Borrower.
"PERMITTED PROTEST" means the right of Borrower to protest
any Lien (other than any such Lien that secures the Obligations), tax (other
than payroll taxes or taxes that are the subject of a United States federal
tax lien), or rental payment, provided that (a) a reserve with respect to
such obligation is established on the books of Borrower in an amount that is
reasonably satisfactory to Foothill, (b) any such protest is instituted and
diligently prosecuted by Borrower in good faith, and (c) Foothill is
satisfied that, while any such protest is pending, there will be no
impairment of the enforceability, validity, or priority of any of the Liens
of Foothill in and to the Collateral.
"PERSON" means and includes natural persons, corporations,
limited liability companies, limited partnerships, general partnerships,
limited liability partnerships, joint ventures, trusts, land trusts, business
trusts, or other organizations, irrespective of whether they are legal
entities, and governments and agencies and political subdivisions thereof.
"PLAN" means any employee benefit plan, program, or
arrangement maintained or contributed to by Borrower or with respect to which
it may incur liability.
"REAL PROPERTY" means any estates or interests in real
property now owned or hereafter acquired by Borrower, but excluding the
leasehold interest on the parking lot next door to the Borrower's office at
2801 Main Street, Irvine, California.
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"REFERENCE RATE" means the variable rate of interest, per
annum, most recently announced by Wells Fargo Bank, National Association, or
any successor thereto, as its "base rate," irrespective of whether such
announced rate is the best rate available from such financial institution.
"RENEWAL DATE" has the meaning set forth in SECTION 3.4.
"REPORTABLE EVENT" means any of the events described in
Section 4043(c) of ERISA or the regulations thereunder other than a Reportable
Event as to which the provision of 30 days notice to the PBGC is waived under
applicable regulations.
"RETIREE HEALTH PLAN" means an "employee welfare benefit plan"
within the meaning of Section 3(1) of ERISA that provides benefits to
individuals after termination of their employment, other than as required by
Section 601 of ERISA.
"SECURITY AGREEMENT" means that certain Security Agreement, of
even date herewith, between Foothill and Parent, pursuant to which Parent has
pledged the outstanding capital stock of Borrower and granted certain other
security interests to Foothill.
"SOLVENT" means, with respect to any Person on a particular
date, that on such date (a) at fair valuations, all of the properties and assets
of such Person are greater than the sum of the debts, including contingent
liabilities, of such Person, (b) the present fair salable value of the
properties and assets of such Person is not less than the amount that will be
required to pay the probable liability of such Person on its debts as they
become absolute and matured, (c) such Person is able to realize upon its
properties and assets and pay its debts and other liabilities, contingent
obligations and other commitments as they mature in the normal course of
business, (d) such Person does not intend to, and does not believe that it will,
incur debts beyond such Person's ability to pay as such debts mature, and
(e) such Person is not engaged in business or a transaction, and is not about to
engage in business or a transaction, for which such Person's properties and
assets would constitute unreasonably small capital after giving due
consideration to the prevailing practices in the industry in which such Person
is engaged. In computing the amount of contingent liabilities at any time, it
is intended that such liabilities will be computed at the amount that, in light
of all the facts and circumstances existing at such time, represents the amount
that reasonably can be expected to become an actual or matured liability.
"SUBSIDIARY" of a Person means a corporation, partnership,
limited liability company, or other entity in which that Person directly or
indirectly owns or controls the shares of stock or other ownership interests
having ordinary voting power to elect a majority of the board of directors (or
appoint other comparable managers) of such corporation, partnership, limited
liability company, or other entity.
"TANGIBLE NET WORTH" means, as of any date of determination,
the difference of (a) Parent's total stockholder's equity, PLUS $8,150,000
representing settlements payable until such amount is converted into equity,
PLUS the outstanding principal balance of
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the Ironwood Indebtedness and any Indebtedness that replaces or refinances
the Ironwood Indebtedness, MINUS (b) the sum of: (i) all Intangible Assets
of Parent, (ii) all of Parent's prepaid expenses, and (iii) all amounts due
to Parent from Affiliates.
"USBI" means Billing Concepts, Inc., a Delaware corporation.
"VOIDABLE TRANSFER" has the meaning set forth in SECTION 15.8.
"YEAR 2000 COMPLIANT" means, with regard to any Person,
that all software in goods produced or sold by, or utilized by and material
to the business operations or financial condition of, such entity are able to
interpret and manipulate data on and involving all calendar dates correctly
and without causing any abnormal ending scenario, including in relation to
dates in and after the year 2000.
1.2 ACCOUNTING TERMS. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP. When used herein,
the term "financial statements" shall include the notes and schedules thereto.
Whenever the term "Borrower" is used in respect of a financial covenant or a
related definition, it shall be understood to mean Borrower on a consolidated
basis unless the context clearly requires otherwise.
1.3 CODE. Any terms used in this Agreement that are defined in
the Code shall be construed and defined as set forth in the Code unless
otherwise defined herein.
1.4 CONSTRUCTION. Unless the context of this Agreement clearly
requires otherwise, references to the plural include the singular, references to
the singular include the plural, the term "including" is not limiting, and the
term "or" has, except where otherwise indicated, the inclusive meaning
represented by the phrase "and/or." The words "hereof," "herein," "hereby,"
"hereunder," and similar terms in this Agreement refer to this Agreement as a
whole and not to any particular provision of this Agreement. An Event of
Default shall "continue" or be "continuing" until such Event of Default has been
waived in writing by Foothill. Section, subsection, clause, schedule, and
exhibit references are to this Agreement unless otherwise specified. Any
reference in this Agreement or in the Loan Documents to this Agreement or any of
the Loan Documents shall include all alterations, amendments, changes,
extensions, modifications, renewals, replacements, substitutions, and
supplements, thereto and thereof, as applicable.
1.5 SCHEDULES AND EXHIBITS. All of the schedules and exhibits
attached to this Agreement shall be deemed incorporated herein by reference.
2. LOAN AND TERMS OF PAYMENT.
2.1 REVOLVING ADVANCES.
(a) Subject to the terms and conditions of this Agreement,
Foothill agrees to make advances ("Advances") to Borrower in an amount
outstanding not to exceed at
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any one time the lesser of (i) the Maximum Amount, or (ii) the Borrowing
Base. For purposes of this Agreement, "Borrowing Base", as of any date of
determination, shall mean the result of:
(x) 80% of the value of Eligible Accounts, LESS the
amount, if any, of the Dilution Reserve, the Carrier Reserve and the
LEC Reserve; PLUS
(y) the lesser of (i) 50% of the value of Eligible
Unbilled Accounts, less customary reserves, if any, and (ii) 35% of
the amount of credit availability created by Eligible Accounts and
Eligible Unbilled Accounts combined, MINUS
(z) the aggregate amount of reserves, if any,
established by Foothill under SECTIONS 2.1(b), 6.15, AND 10.
Notwithstanding anything to the contrary herein,
outstanding Advances pursuant to this SECTION 2.1 shall be limited
to the lower of: (i) 75% of Borrower's trailing three months
Collections and (ii) 75% of Borrower's trailing three months net
revenues, all of which shall be satisfactory to Foothill in all
respects.
(b) Anything to the contrary in SECTION 2.1(a) above
notwithstanding, Foothill may create reserves against or reduce its advance
rates based upon Eligible Accounts if it determines that (i) that has occurred a
Material Adverse Change or (ii) there exist any excise tax obligations that are
past due and unpaid by Borrower.
(c) Amounts borrowed pursuant to this SECTION 2.1 may be
repaid and, subject to the terms and conditions of this Agreement, reborrowed at
any time during the term of this Agreement.
2.2 INTENTIONALLY OMITTED.
2.3 INTENTIONALLY OMITTED.
2.4 INTENTIONALLY OMITTED.
2.5 OVERADVANCES. If, at any time or for any reason, the amount
of Obligations owed by Borrower to Foothill pursuant to SECTION 2.1 is greater
than either the Dollar or percentage limitations set forth in SECTION 2.1 (an
"Overadvance"), Borrower immediately shall pay to Foothill, in cash, the amount
of such excess to be used by Foothill to repay Advances outstanding under
SECTION 2.1.
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2.6 INTEREST RATES, PAYMENTS, AND CALCULATIONS.
(a) Interest Rate. Except as provided in clause (c) below,
(i) all Obligations shall bear interest on the Daily Balance at a per annum rate
of one percentage point above the Reference Rate.
(b) Intentionally Omitted.
(c) Default Rate. Commencing on the fifth day after
Foothill notifies Borrower that: (i) an Event of Default has occurred and
(ii) Foothill intends to impose a default rate of interest, all Obligations
shall bear interest on the Daily Balance at a per annum rate equal to four
percentage points above the Reference Rate unless the facts or circumstances
giving rise to the Event of Default no longer exist as of the last day of such
notice period. The provisions of this SECTION 2.6(c) are not intended to affect
any of Foothill's other rights and remedies under this Agreement.
(d) Minimum Interest. In no event shall the rate of
interest chargeable hereunder for any day be less than 7.00% per annum. To the
extent that interest accrued hereunder at the rate set forth herein would be
less than the foregoing minimum daily rate, the interest rate chargeable
hereunder for such day automatically shall be deemed increased to the minimum
rate.
(e) Payments. Interest payable hereunder shall be due and
payable, in arrears, on the first day of each month during the term hereof.
Borrower hereby authorizes Foothill, at its option, without prior notice to
Borrower, to charge such interest, all Foothill Expenses (as and when incurred),
the fees and charges provided for in SECTION 2.11 (as and when accrued or
incurred), and other payments due under any Loan Document to Borrower's Loan
Account, which amounts thereafter shall accrue interest at the rate then
applicable to Advances hereunder. Any interest not paid when due shall be
compounded and shall thereafter accrue interest at the rate then applicable to
Advances hereunder.
(f) Computation. The Reference Rate as of the date of this
Agreement is 7.75% per annum. In the event the Reference Rate is changed from
time to time hereafter, the applicable rate of interest hereunder automatically
and immediately shall be increased or decreased by an amount equal to such
change in the Reference Rate. All interest and fees chargeable under the Loan
Documents shall be computed on the basis of a 360 day year for the actual number
of days elapsed.
(g) Intent to Limit Charges to Maximum Lawful Rate. In no
event shall the interest rate or rates payable under this Agreement, plus any
other amounts paid in connection herewith, exceed the highest rate permissible
under any law that a court of competent jurisdiction shall, in a final
determination, deem applicable. Borrower and Foothill, in executing and
delivering this Agreement, intend legally to agree upon the rate or rates of
interest and manner of payment stated within it; PROVIDED, HOWEVER, that,
anything contained herein to the contrary notwithstanding, if said rate or rates
of interest or manner of payment exceeds the maximum allowable under applicable
law, then, IPSO FACTO as of the date of this
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Agreement, Borrower is and shall be liable only for the payment of such
maximum as allowed by law, and payment received from Borrower in excess of
such legal maximum, whenever received, shall be applied to reduce the
principal balance of the Obligations to the extent of such excess.
2.7 COLLECTION OF ACCOUNTS. Borrower shall at all times
maintain lockboxes (the "Lockboxes") and, immediately after the Closing Date,
shall instruct all Account Debtors with respect to the Accounts, General
Intangibles, and Negotiable Collateral of Borrower to remit ALL Collections
in respect thereof to such Lockboxes. Borrower, Foothill, and the Lockbox
Banks shall enter into the Lockbox Agreements, which among other things shall
provide for the opening of a Lockbox Account for the deposit of Collections
at a Lockbox Bank. Borrower agrees that all Collections and other amounts
received by Borrower from any Account Debtor or any other source immediately
upon receipt shall be deposited into a Lockbox Account. No Lockbox Agreement
or arrangement contemplated thereby shall be modified by Borrower without the
prior written consent of Foothill. Upon the terms and subject to the
conditions set forth in the Lockbox Agreements, all amounts received in each
Lockbox Account shall be wired each Business Day into an account (the
"Foothill Account") maintained by Foothill at a depositary selected by
Foothill. If on any Business Day Foothill has received an amount from the
Lockbox Account into the Foothill Account that exceeds the amount of the
outstanding Obligations, then Foothill shall wire such excess to the
Designated Account on the next Business Day.
2.8 CREDITING PAYMENTS; APPLICATION OF COLLECTIONS. The
receipt of any Collections by Foothill (whether from transfers to Foothill by
the Lockbox Banks pursuant to the Lockbox Agreements or otherwise)
immediately shall be applied provisionally to reduce the Obligations
outstanding under SECTION 2.1, but shall not be considered a payment on
account unless such Collection item is a wire transfer of immediately
available federal funds and is made to the Foothill Account or unless and
until such Collection item is honored when presented for payment. From and
after the Closing Date, Foothill shall be entitled to charge Borrower for two
Business Days of `clearance' or `float' at the rate set forth in SECTION
2.6(a)(i) or SECTION 2.6(c)(i), as applicable, on all Collections that are
received by Foothill (regardless of whether forwarded by the Lockbox Banks to
Foothill, whether provisionally applied to reduce the Obligations under
SECTION 2.1, or otherwise). This across-the-board two Business Day clearance
or float charge on all Collections is acknowledged by the parties to
constitute an integral aspect of the pricing of Foothill's financing of
Borrower, and shall apply irrespective of the characterization of whether
receipts are owned by Borrower or Foothill, and whether or not there are any
outstanding Advances, the effect of such clearance or float charge being the
equivalent of charging two Business Days of interest on such Collections.
Should any Collection item not be honored when presented for payment, then
Borrower shall be deemed not to have made such payment, and interest shall be
recalculated accordingly. Anything to the contrary contained herein
notwithstanding, any Collection item shall be deemed received by Foothill
only if it is received into the Foothill Account on a Business Day on or
before 11:00 a.m. California time. If any Collection item is received into
the Foothill Account on a non-Business Day or after 11:00 a.m. California
time on a Business Day, it shall be deemed to have been received by Foothill
as of the opening of business on the immediately following Business Day.
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2.9 DESIGNATED ACCOUNT. Foothill is authorized to make the
Advances under this Agreement based upon telephonic or other instructions
received from anyone purporting to be an Authorized Person, or without
instructions if pursuant to SECTION 2.6(e). Borrower agrees to establish and
maintain the Designated Account with the Designated Account Bank for the
purpose of receiving the proceeds of the Advances requested by Borrower and
made by Foothill hereunder. Unless otherwise agreed by Foothill and
Borrower, any Advance requested by Borrower and made by Foothill hereunder
shall be made to the Designated Account.
2.10 MAINTENANCE OF LOAN ACCOUNT; STATEMENTS OF OBLIGATIONS.
Foothill shall maintain an account on its books in the name of Borrower (the
"Loan Account") on which Borrower will be charged with all Advances made by
Foothill to Borrower or for Borrower's account, including, accrued interest,
Foothill Expenses, and any other payment Obligations of Borrower. In
accordance with SECTION 2.8, the Loan Account will be credited with all
payments received by Foothill from Borrower or for Borrower's account,
including all amounts received in the Foothill Account from any Lockbox Bank.
Foothill shall render statements regarding the Loan Account to Borrower,
including principal, interest, fees, and including an itemization of all
charges and expenses constituting Foothill Expenses owing, and such
statements shall be conclusively presumed to be correct and accurate and
constitute an account stated between Borrower and Foothill unless, within 60
days after receipt thereof by Borrower, Borrower shall deliver to Foothill
written objection thereto describing the error or errors contained in any
such statements.
2.11 FEES. Borrower shall pay to Foothill the following fees:
(a) Closing Fee. On the Closing Date, a closing fee of
$62,500;
(b) Unused Line Fee. On the first day of each month
during the term of this Agreement, an unused line fee in an amount equal to
0.25% per annum times the Average Unused Portion of the Maximum Amount,
payable in arrears.
(c) Intentionally Omitted;
(d) Financial Examination, Documentation, and Appraisal
Fees. Foothill's customary fee of $750 per day per examiner, plus out-of-pocket
expenses for each financial analysis and examination (i.e., audits) of Borrower
performed by personnel employed by Foothill; and, the actual charges paid or
incurred by Foothill if it elects to employ the services of one or more third
Persons to perform such financial analyses and examinations (i.e., audits) of
Borrower or to appraise the Collateral; PROVIDED, HOWEVER, prior to the
occurrence of an Event of Default Foothill shall not require more than four
audits during any twelve month period; and
(e) Servicing Fee. On the first day of each month during
the term of this Agreement, and thereafter so long as any Obligations are
outstanding, a servicing fee in an amount equal to $2,500, payable in arrears.
3. CONDITIONS; TERM OF AGREEMENT.
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3.1 CONDITIONS PRECEDENT TO THE INITIAL ADVANCE. The
obligation of Foothill to make the initial Advance is subject to the
fulfillment, to the satisfaction of Foothill and its counsel, of each of the
following conditions on or before the Closing Date:
(a) the Closing Date shall occur on or before April 14,
1999;
(b) Foothill shall have received searches reflecting the
filing of its financing statements;
(c) Foothill shall have received each of the following
documents, duly executed, and each such document shall be in full force and
effect:
i. the Lockbox Agreements;
ii. the Disbursement Letter;
iii. the Intercreditor Agreement;
iv. the Intellectual Property Security Agreement; and
v. the Security Agreement.
(d) Foothill shall have received a certificate from the
Secretary of Borrower attesting to the resolutions of Borrower's Board of
Directors authorizing its execution, delivery, and performance of this
Agreement and the other Loan Documents to which Borrower is a party and
authorizing specific officers of Borrower to execute the same;
(e) Foothill shall have received copies of Borrower's
Governing Documents, as amended, modified, or supplemented to the Closing
Date, certified by the Secretary of Borrower;
(f) Foothill shall have received a certificate of status
with respect to Borrower, dated within 10 days of the Closing Date, such
certificate to be issued by the appropriate officer of the jurisdiction of
organization of Borrower, which certificate shall indicate that Borrower is in
good standing in such jurisdiction;
(g) Foothill shall have received certificates of status with
respect to Borrower, each dated within 15 days of the Closing Date, such
certificates to be issued by the appropriate officer of the jurisdictions in
which its failure to be duly qualified or licensed would constitute a Material
Adverse Change, which certificates shall indicate that Borrower is in good
standing in such jurisdictions;
(h) Foothill shall have received a certificate of insurance,
together with the endorsements thereto, as are required by SECTION 6.10, the
form and substance of which shall be satisfactory to Foothill and its counsel;
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(i) Borrower shall not have less than $3,000,000 of
Availability after giving effect to the Advances and fees made on the Closing
Date, and Borrower's accounts payable must be current;
(j) Foothill shall have received such Collateral Access
Agreements from lessors, warehousemen, bailees, and other third persons as
Foothill may require;
(k) Foothill shall have received an opinion of Borrower's
counsel in form and substance satisfactory to Foothill in its sole discretion;
(l) Foothill shall have received consents to assignment of
monies payable to Borrower by GTE Telephone Operating Companies, Pacific Bell
Telephone and USBI, the form and substance of which shall be satisfactory to
Foothill and its counsel;
(m) Foothill shall have received satisfactory evidence that
all tax returns required to be filed by Borrower have been timely filed and all
taxes upon Borrower or its properties, assets, income, and franchises (including
real property taxes and payroll taxes) have been paid prior to delinquency,
except such taxes that (i) are the subject of a Permitted Protest or (ii) have
been disclosed in SCHEDULE 6.9; and
(n) all other documents and legal matters in connection with
the transactions contemplated by this Agreement shall have been delivered,
executed, or recorded and shall be in form and substance satisfactory to
Foothill and its counsel.
3.2 CONDITIONS PRECEDENT TO ALL ADVANCES. The following shall be
conditions precedent to all Advances hereunder:
(a) the representations and warranties contained in this
Agreement and the other Loan Documents shall be true and correct in all material
respects on and as of the date of such extension of credit, as though made on
and as of such date (except to the extent that such representations and
warranties relate solely to an earlier date);
(b) no Default or Event of Default shall have occurred and
be continuing on the date of such extension of credit, nor shall either result
from the making thereof; and
(c) no injunction, writ, restraining order, or other order
of any nature prohibiting, directly or indirectly, the extending of such credit
shall have been issued and remain in force by any governmental authority against
Borrower, Foothill, or any of their Affiliates.
3.3 CONDITION SUBSEQUENT. As a condition subsequent to initial
closing hereunder, Borrower shall perform or cause to be performed the following
(the failure by Borrower to so perform or cause to be performed constituting an
Event of Default):
(a) within 30 days of the Closing Date, deliver to Foothill
the certified copies of the policies of insurance, together with the
endorsements thereto, as are
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required by SECTION 6.10, the form and substance of which shall be
satisfactory to Foothill and its counsel.
3.4 TERM; AUTOMATIC RENEWAL. This Agreement shall become
effective upon the execution and delivery hereof by Borrower and Foothill and
shall continue in full force and effect for a term ending on the date (the
"Renewal Date") that is three years from the Closing Date and automatically
shall be renewed for successive one year periods thereafter, unless sooner
terminated pursuant to the terms hereof. Either party may terminate this
Agreement effective on the Renewal Date or on any anniversary of the Renewal
Date by giving the other party at least 90 days prior written notice. The
foregoing notwithstanding, Foothill shall have the right to terminate its
obligations under this Agreement immediately and without notice upon the
occurrence and during the continuation of an Event of Default.
3.5 EFFECT OF TERMINATION. On the date of termination of this
Agreement, all Obligations (including contingent reimbursement obligations of
Borrower with respect to any outstanding Letters of Credit) immediately shall
become due and payable without notice or demand. No termination of this
Agreement, however, shall relieve or discharge Borrower of Borrower's duties,
Obligations, or covenants hereunder, and Foothill's continuing security
interests in the Collateral shall remain in effect until all Obligations have
been fully and finally discharged and Foothill's obligation to provide
additional credit hereunder is terminated. If Borrower has sent a notice of
termination pursuant to the provisions of SECTION 3.4, but fails to pay the
Obligations in full on the date set forth in said notice, then Foothill may, but
shall not be required to, renew this Agreement for an additional term of one
year.
3.6 EARLY TERMINATION BY BORROWER. The provisions of SECTION 3.4
that allow termination of this Agreement by Borrower only on the Renewal Date
and certain anniversaries thereof notwithstanding, Borrower has the option, at
any time upon 90 days prior written notice to Foothill, to terminate this
Agreement by paying to Foothill, in cash, the Obligations, in full, together
with a premium (the "Early Termination Premium") in an amount equal to (a) 3.00%
of the Maximum Amount if such termination occurs within one year of the Closing
Date, (b) 2.00% of the Maximum Amount if such termination occurs during the
second year after the Closing Date and (c) 1.00% of the Maximum Amount if such
termination occurs at any time after two years from the Closing Date, including
any renewal period.
3.7 TERMINATION UPON EVENT OF DEFAULT. If Foothill terminates
this Agreement upon the occurrence of an Event of Default, in view of the
impracticability and extreme difficulty of ascertaining actual damages and by
mutual agreement of the parties as to a reasonable calculation of Foothill's
lost profits as a result thereof, Borrower shall pay to Foothill upon the
effective date of such termination, a premium in an amount equal to the Early
Termination Premium. The Early Termination Premium shall be presumed to be the
amount of damages sustained by Foothill as the result of the early termination
and Borrower agrees that it is reasonable under the circumstances currently
existing. The Early Termination Premium provided for in this SECTION 3.7 shall
be deemed included in the Obligations.
4. CREATION OF SECURITY INTEREST.
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4.1 GRANT OF SECURITY INTEREST. Borrower hereby grants to
Foothill a continuing security interest in all currently existing and hereafter
acquired or arising Collateral in order to secure prompt repayment of any and
all Obligations and in order to secure prompt performance by Borrower of each of
its covenants and duties under the Loan Documents. Foothill's security
interests in the Collateral shall attach to all Collateral without further act
on the part of Foothill or Borrower. Anything contained in this Agreement or
any other Loan Document to the contrary notwithstanding, except for the sale of
Inventory to buyers in the ordinary course of business, Borrower has no
authority, express or implied, to dispose of any item or portion of the
Collateral.
4.2 NEGOTIABLE COLLATERAL. In the event that any Collateral,
including proceeds, is evidenced by or consists of Negotiable Collateral,
Borrower, immediately upon the request of Foothill, shall endorse and deliver
physical possession of such Negotiable Collateral to Foothill.
4.3 COLLECTION OF ACCOUNTS, GENERAL INTANGIBLES, AND NEGOTIABLE
COLLATERAL. At any time that an Event of Default has occurred and is
continuing, Foothill or Foothill's designee may (a) notify customers or Account
Debtors of Borrower that the Accounts, General Intangibles, or Negotiable
Collateral have been assigned to Foothill or that Foothill has a security
interest therein, and (b) collect the Accounts, General Intangibles, and
Negotiable Collateral directly and charge the collection costs and expenses to
the Loan Account. Borrower agrees that it will hold in trust for Foothill, as
Foothill's trustee, any Collections that it receives and immediately will
deliver said Collections to the Foothill Account in their original form as
received by Borrower.
4.4 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. At any time
upon the request of Foothill, Borrower shall execute and deliver to Foothill all
financing statements, continuation financing statements, fixture filings,
security agreements, pledges, assignments, control agreements, endorsements of
certificates of title, applications for title, affidavits, reports, notices,
schedules of accounts, letters of authority, and all other documents that
Foothill reasonably may request, in form satisfactory to Foothill, to perfect
and continue perfected Foothill's security interests in the Collateral, and in
order to fully consummate all of the transactions contemplated hereby and under
the other the Loan Documents.
4.5 POWER OF ATTORNEY. Borrower hereby irrevocably makes,
constitutes, and appoints Foothill (and any of Foothill's officers, employees,
or agents designated by Foothill) as Borrower's true and lawful attorney, with
power to (a) if Borrower refuses to, or fails timely to execute and deliver any
of the documents described in SECTION 4.4, sign the name of Borrower on any of
the documents described in SECTION 4.4, (b) at any time that an Event of
Default has occurred and is continuing or Foothill deems itself insecure, sign
Borrower's name on any invoice or bill of lading relating to any Account,
drafts against Account Debtors, schedules and assignments of Accounts,
verifications of Accounts, and notices to Account Debtors, (c) send requests
for verification of Accounts, (d) endorse Borrower's name on any Collection
item that may come into Foothill's possession, (e) at any time that an Event of
Default has occurred and is continuing or Foothill deems itself insecure,
notify the post office authorities to change the address for delivery of
Borrower's mail to an address designated by Foothill, to receive and open all
mail addressed to Borrower, and to
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retain all mail relating to the Collateral and forward all other mail to
Borrower, (f) at any time that an Event of Default has occurred and is
continuing or Foothill deems itself insecure, make, settle, and adjust all
claims under Borrower's policies of insurance and make all determinations and
decisions with respect to such policies of insurance, and (g) at any time that
an Event of Default has occurred and is continuing or Foothill deems itself
insecure, settle and adjust disputes and claims respecting the Accounts
directly with Account Debtors, for amounts and upon terms that Foothill
determines to be reasonable, and Foothill may cause to be executed and
delivered any documents and releases that Foothill determines to be necessary.
The appointment of Foothill as Borrower's attorney, and each and every one of
Foothill's rights and powers, being coupled with an interest, is irrevocable
until all of the Obligations have been fully and finally repaid and performed
and Foothill's obligation to extend credit hereunder is terminated.
4.6 RIGHT TO INSPECT. Foothill (through any of its officers,
employees, or agents) shall have the right, from time to time hereafter to
inspect Borrower's Books and to check, test, and appraise the Collateral in
order to verify Borrower's financial condition or the amount, quality, value,
condition of, or any other matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES.
In order to induce Foothill to enter into this Agreement, Borrower
makes the following representations and warranties which shall be true, correct,
and complete in all material respects as of the date hereof, and shall be true,
correct, and complete in all respects as of the Closing Date, and at and as of
the date of the making of each Advance thereafter, as though made on and as of
the date of such Advance (except to the extent that such representations and
warranties relate solely to an earlier date) and such representations and
warranties shall survive the execution and delivery of this Agreement:
5.1 NO ENCUMBRANCES. Borrower has good and indefeasible title to
the Collateral, free and clear of Liens except for Permitted Liens.
5.2 ELIGIBLE ACCOUNTS. The Eligible Accounts and Eligible
Unbilled Accounts are bona fide existing obligations created by the sale and
delivery of Inventory or the rendition of services to Account Debtors in the
ordinary course of Borrower's business, unconditionally owed to Borrower without
defenses, disputes, offsets, counterclaims, or rights of return or cancellation.
The services giving rise to such Eligible Accounts and Eligible Unbilled
Accounts have been completed for the Account Debtor, or to the Account Debtor's
agent. Borrower has not received notice of actual or imminent bankruptcy,
insolvency, or material impairment of the financial condition of any Account
Debtor regarding any Eligible Account.
5.3 INTENTIONALLY OMITTED.
5.4 EQUIPMENT. All of the Equipment is used or held for use in
Borrower's business and is fit for such purposes.
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5.5 LOCATION OF INVENTORY AND EQUIPMENT. The Inventory and
Equipment are not stored with a bailee, warehouseman, or similar party (without
Foothill's prior written consent) and are located only at the locations
identified on SCHEDULE 6.12 or otherwise permitted by SECTION 6.12.
5.6 INVENTORY RECORDS. Borrower keeps correct and accurate
records itemizing and describing the kind, type, quality, and quantity of the
Inventory, and Borrower's cost therefor.
5.7 LOCATION OF CHIEF EXECUTIVE OFFICE; FEIN. The chief executive
office of Borrower is located at the address indicated in the preamble to this
Agreement and Borrower's FEIN is 88-0241740.
5.8 DUE ORGANIZATION AND QUALIFICATION; SUBSIDIARIES.
(a) Borrower is duly organized and existing and in good
standing under the laws of the jurisdiction of its incorporation and qualified
and licensed to do business in, and in good standing in, any state where the
failure to be so licensed or qualified reasonably could be expected to cause a
Material Adverse Change.
(b) Borrower does not have any direct or indirect
Subsidiaries.
5.9 DUE AUTHORIZATION; NO CONFLICT.
(a) The execution, delivery, and performance by Borrower of
this Agreement and the Loan Documents to which it is a party have been duly
authorized by all necessary corporate action.
(b) The execution, delivery, and performance by Borrower of
this Agreement and the Loan Documents to which it is a party do not and will not
(i) violate any provision of federal, state, or local law or regulation
(including Regulations T, U, and X of the Federal Reserve Board) applicable to
Borrower, the Governing Documents of Borrower, or any order, judgment, or decree
of any court or other Governmental Authority binding on Borrower, (ii) conflict
with, result in a breach of, or constitute (with due notice or lapse of time or
both) a default under any material contractual obligation or material lease of
Borrower, (iii) result in or require the creation or imposition of any Lien of
any nature whatsoever upon any properties or assets of Borrower, other than
Permitted Liens, or (iv) require any approval of stockholders or any approval or
consent of any Person under any material contractual obligation of Borrower.
(c) Other than the filing of appropriate financing
statements, fixture filings, and mortgages, the execution, delivery, and
performance by Borrower of this Agreement and the Loan Documents to which
Borrower is a party do not and will not require any registration with, consent,
or approval of, or notice to, or other action with or by, any federal, state,
foreign, or other Governmental Authority or other Person.
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(d) This Agreement and the Loan Documents to which Borrower
is a party, and all other documents contemplated hereby and thereby, when
executed and delivered by Borrower will be the legally valid and binding
obligations of Borrower, enforceable against Borrower in accordance with their
respective terms, except as enforcement may be limited by equitable principles
or by bankruptcy, insolvency, reorganization, moratorium, or similar laws
relating to or limiting creditors' rights generally.
(e) The Liens granted by Borrower to Foothill in and to its
properties and assets pursuant to this Agreement and the other Loan Documents
are validly created, perfected, and first priority Liens, subject only to
Permitted Liens.
5.10 LITIGATION. There are no actions or proceedings pending by or
against Borrower before any court or administrative agency and Borrower does not
have knowledge or belief of any pending, threatened, or imminent litigation,
governmental investigations, or claims, complaints, actions, or prosecutions
involving Borrower or any guarantor of the Obligations, except for: (a) ongoing
collection matters in which Borrower is the plaintiff; (b) matters disclosed on
SCHEDULE 5.10; and (c) matters arising after the date hereof that, if decided
adversely to Borrower, would not cause a Material Adverse Change.
5.11 NO MATERIAL ADVERSE CHANGE. All financial statements relating
to Borrower that have been delivered by Borrower to Foothill have been prepared
in accordance with GAAP (except, in the case of unaudited financial statements,
for the lack of footnotes and being subject to year-end audit adjustments) and
fairly present Borrower's financial condition as of the date thereof and
Borrower's results of operations for the period then ended. There has not been
a Material Adverse Change with respect to Borrower since the date of the latest
financial statements submitted to Foothill on or before the Closing Date.
5.12 SOLVENCY. Borrower is Solvent. No transfer of property is
being made by Borrower and no obligation is being incurred by Borrower in
connection with the transactions contemplated by this Agreement or the other
Loan Documents with the intent to hinder, delay, or defraud either present or
future creditors of Borrower.
5.13 EMPLOYEE BENEFITS. None of Borrower, any of its Subsidiaries,
or any of their ERISA Affiliates maintains or contributes to any Benefit Plan,
other than those listed on SCHEDULE 5.13. Borrower, each of its Subsidiaries
and each ERISA Affiliate have satisfied the minimum funding standards of ERISA
and the IRC with respect to each Benefit Plan to which it is obligated to
contribute. No ERISA Event has occurred nor has any other event occurred that
may result in an ERISA Event that reasonably could be expected to result in a
Material Adverse Change. None of Borrower or its Subsidiaries, any ERISA
Affiliate, or any fiduciary of any Plan is subject to any direct or indirect
liability with respect to any Plan under any applicable law, treaty, rule,
regulation, or agreement. None of Borrower or its Subsidiaries or any ERISA
Affiliate is required to provide security to any Plan under Section 401(a)(29)
of the IRC.
5.14 ENVIRONMENTAL CONDITION. None of Borrower's properties or
assets has ever been used by Borrower or, to the best of Borrower's knowledge,
by previous owners or operators in the disposal of, or to produce, store,
handle, treat, release, or transport, any
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Hazardous Materials. None of Borrower's properties or assets has ever been
designated or identified in any manner pursuant to any environmental protection
statute as a Hazardous Materials disposal site, or a candidate for closure
pursuant to any environmental protection statute. No Lien arising under any
environmental protection statute has attached to any revenues or to any real or
personal property owned or operated by Borrower. Borrower has not received a
summons, citation, notice, or directive from the Environmental Protection
Agency or any other federal or state governmental agency concerning any action
or omission by Borrower resulting in the releasing or disposing of Hazardous
Materials into the environment.
6. AFFIRMATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until full and final payment of the Obligations, Borrower
shall do all of the following:
6.1 ACCOUNTING SYSTEM. Maintain a standard and modern system of
accounting that enables Borrower to produce financial statements in accordance
with GAAP, and maintain records pertaining to the Collateral in the form
available on the Closing Date and such records as from time to time may be
reasonably requested by Foothill within 30 days of such request.
6.2 COLLATERAL REPORTING. Provide Foothill with the following
documents at the following times in form satisfactory to Foothill: (a) promptly
after each business cycle, but not less than five times per month, a sales
journal, collection journal, and credit register since the last such schedule
and a calculation of the Borrowing Base as of such date, (b) on a monthly basis
and, in any event, by no later than the 20th day of each month during the term
of this Agreement, (1) a detailed calculation of the Borrowing Base, (2) a
detailed aging, by total, of the Accounts, together with a reconciliation to the
detailed calculation of the Borrowing Base previously provided to Foothill, and
(2) the status of accrued excise taxes, (c) on a monthly basis and, in any
event, by no later than the 20th day of each month during the term of this
Agreement, a summary aging, by vendor, of Borrower's accounts payable and any
book overdraft and unpaid taxes, (d) promptly after each business cycle, but not
less than five times each month, notice of all disputes or claims, (e) upon
request, copies of invoices in connection with the Accounts, customer
statements, credit memos, remittance advices and reports, deposit slips, in
connection with the Accounts and for Inventory and Equipment acquired by
Borrower, purchase orders and invoices, (f) upon request from Foothill, a
detailed list of Borrower's customers, (g) on a monthly basis, a calculation of
the Dilution for the prior month; (h) upon request, Borrower's electronic data
and (i) at any time that an Event of Default has occurred and is continuing,
such other reports as to the Collateral or the financial condition of Borrower
as Foothill may request from time to time. Monthly statements evidencing
telephonic services shall be mailed by Borrower to each Account Debtor and, at
Foothill's direction, the statements shall indicate on their face that the
Account has been assigned to Foothill and that all payments are to be made
directly to Foothill.
6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Deliver to
Foothill: (a) as soon as available, but in any event within 30 days after the
end of each month during each
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of Borrower's fiscal years (or 45 days after the end of each of Borrower's
fiscal quarters), a company prepared balance sheet, income statement, and
statement of cash flow covering Borrower's operations during such period; and
(b) as soon as available, but in any event within 90 days after the end of each
of Borrower's fiscal years, financial statements of Borrower for each such
fiscal year, audited by independent certified public accountants reasonably
acceptable to Foothill and certified, without any qualifications, by such
accountants to have been prepared in accordance with GAAP, together with a
certificate of such accountants addressed to Foothill stating that such
accountants do not have knowledge of the existence of any Default or Event of
Default. Such audited financial statements shall include a balance sheet,
profit and loss statement, and statement of cash flow and, if prepared, such
accountants' letter to management. If Borrower is a parent company of one or
more Subsidiaries or Affiliates, or is a Subsidiary or Affiliate of another
company, then, in addition to the financial statements referred to above,
Borrower agrees to deliver financial statements prepared on a consolidating
basis so as to present Borrower and each such related entity separately, and on
a consolidated basis.
Together with the above, Borrower also shall deliver to
Foothill Parent's Form 10-Q Quarterly Reports, Form 10-K Annual Reports, and
Form 8-K Current Reports, and any other filings made by Parent with the
Securities and Exchange Commission, if any, as soon as the same are filed, or
any other information that is provided by Parent to its public shareholders, and
any other report reasonably requested by Foothill relating to the financial
condition of Parent.
Each month, together with the financial statements provided
pursuant to SECTION 6.3(a), Borrower shall deliver to Foothill a Compliance
Certificate signed by its chief financial officer (as an officer of Borrower and
not in his or her individual capacity) to the effect that: (i) all financial
statements delivered or caused to be delivered to Foothill hereunder have been
prepared in accordance with GAAP (except, in the case of unaudited financial
statements, for the lack of footnotes and being subject to year-end audit
adjustments) and fairly present the financial condition of Borrower, (ii) the
representations and warranties of Borrower contained in this Agreement and the
other Loan Documents are true and correct in all material respects on and as of
the date of such certificate, as though made on and as of such date (except to
the extent that such representations and warranties relate solely to an earlier
date), (iii) for each month that also is the date on which a financial covenant
in SECTION 7.20 is to be tested, Borrower is in compliance at the end of such
period with the applicable financial covenants contained in SECTION 7.20 (and
demonstrating such compliance in reasonable detail), and (iv) on the date of
delivery of such certificate to Foothill there does not exist any condition or
event that constitutes a Default or Event of Default (or, in the case of clauses
(i), (ii), or (iii), to the extent of any non-compliance, describing such
non-compliance as to which he or she may have knowledge and what action Borrower
has taken, is taking, or proposes to take with respect thereto).
After an Event of Default has occurred and is continuing,
Borrower shall issue written instructions to its independent certified public
accountants authorizing them to communicate with Foothill and to release to
Foothill whatever financial information concerning Borrower that Foothill may
request.
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6.4 TAX RETURNS. Deliver to Foothill copies of Parent's future
federal income tax returns, and any amendments thereto, within 30 days of the
filing thereof with the Internal Revenue Service.
6.5 CARRIER AND LEC PAYABLES. At all times, keep its accounts
payable to Carriers, local exchange carriers and USBI current, in accordance
with their respective terms.
6.6 INTENTIONALLY OMITTED.
6.7 INTENTIONALLY OMITTED.
6.8 MAINTENANCE OF EQUIPMENT. Maintain the Equipment in good
operating condition and repair (ordinary wear and tear excepted), and make all
necessary replacements thereto so that the value and operating efficiency
thereof shall at all times be maintained and preserved. Other than those items
of Equipment that constitute fixtures on the Closing Date, Borrower shall not
permit any item of Equipment to become a fixture to real estate or an accession
to other property, and such Equipment shall at all times remain personal
property.
6.9 TAXES. Except for assessments and taxes set forth in
SCHEDULE 6.9, cause all assessments and taxes, whether real, personal, or
otherwise, due or payable by, or imposed, levied, or assessed against Borrower
or any of its property to be paid in full, before delinquency or before the
expiration of any extension period, except to the extent that the validity of
such assessment or tax shall be the subject of a Permitted Protest. Except for
assessments and taxes set forth in SCHEDULE 6.9, Borrower shall make due and
timely payment or deposit of all such federal, state, and local taxes,
assessments, or contributions required of it by law, and will execute and
deliver to Foothill, on demand, appropriate certificates attesting to the
payment thereof or deposit with respect thereto, except to the extent that the
validity of such assessment or tax shall be the subject of a Permitted Protest.
Except for assessments and taxes set forth in SCHEDULE 6.9, Borrower will make
timely payment or deposit of all tax payments and withholding taxes required of
it by applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state
disability, and local, state, and federal income taxes, and will, upon request,
furnish Foothill with proof satisfactory to Foothill indicating that Borrower
has made such payments or deposits.
6.10 INSURANCE.
(a) At its expense, keep the Collateral insured against loss
or damage by fire, theft, explosion, sprinklers, and all other hazards and
risks, and in such amounts, as are ordinarily insured against by other owners in
similar businesses. Borrower also shall maintain business interruption, public
liability, product liability, and property damage insurance relating to
Borrower's ownership and use of the Collateral, as well as insurance against
larceny, embezzlement, and criminal misappropriation. Nothing herein shall
require the Borrower to maintain earthquake insurance.
(b) All such policies of insurance shall be in such form,
with such companies, and in such amounts as may be reasonably satisfactory to
Foothill. All insurance
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required herein shall be written by companies which are authorized to do
insurance business in the State of California. All hazard insurance and such
other insurance as Foothill shall specify, shall contain a California Form
438BFU (NS) mortgagee endorsement, or an equivalent endorsement satisfactory to
Foothill, showing Foothill as first loss payee thereof, and shall contain a
waiver of warranties. Every policy of insurance referred to in this SECTION
6.10 shall contain an agreement by the insurer that it will not cancel such
policy except after 30 days prior written notice to Foothill and that any loss
payable thereunder shall be payable notwithstanding any act or negligence of
Borrower or Foothill which might, absent such agreement, result in a forfeiture
of all or a part of such insurance payment. Borrower shall deliver to Foothill
certified copies of such policies of insurance and evidence of the payment of
all premiums therefor.
(c) Original policies or certificates thereof satisfactory
to Foothill evidencing such insurance shall be delivered to Foothill at least
30 days prior to the expiration of the existing or preceding policies. Borrower
shall give Foothill prompt notice of any loss covered by such insurance, and
Foothill shall have the right to adjust any loss payable under any such
insurance policies without any liability to Borrower whatsoever in respect of
such adjustments. Any monies received as payment for any loss under any
insurance policy including the insurance policies mentioned above, shall be paid
over to Foothill to be applied at the option of Foothill either to the
prepayment of the Obligations without premium, in such order or manner as
Foothill may elect, or shall be disbursed to Borrower. Upon the occurrence of
an Event of Default, Foothill shall have the right to apply all prepaid premiums
to the payment of the Obligations in such order or form as Foothill shall
determine.
6.11 NO SETOFFS OR COUNTERCLAIMS. Make payments hereunder and
under the other Loan Documents by or on behalf of Borrower without setoff or
counterclaim and free and clear of, and without deduction or withholding for or
on account of, any federal, state, or local taxes.
6.12 LOCATION OF EQUIPMENT. Keep the Equipment only at the
locations identified on SCHEDULE 6.12; PROVIDED, HOWEVER, that Borrower may
amend SCHEDULE 6.12 so long as such amendment occurs by written notice to
Foothill not less than 30 days prior to the date on which the Equipment is moved
to such new location, so long as such new location is within the continental
United States, and so long as, at the time of such written notification,
Borrower provides any financing statements necessary to perfect and continue
perfected Foothill's security interests in such assets and also provides to
Foothill a Collateral Access Agreement.
6.13 COMPLIANCE WITH LAWS. Comply with the requirements of all
applicable laws, rules, regulations, and orders of any governmental authority,
including the Communications Act, FCC rules and those relating to
telecommunications, the Fair Labor Standards Act and the Americans With
Disabilities Act, other than laws, rules, regulations, and orders the
non-compliance with which, individually or in the aggregate, would not have
and could not reasonably be expected to cause a Material Adverse Change.
6.14 EMPLOYEE BENEFITS.
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(a) Deliver to Foothill: (i) promptly, and in any event
within 10 Business Days after Borrower or any of its Subsidiaries knows or has
reason to know that an ERISA Event has occurred that reasonably could be
expected to result in a Material Adverse Change, a written statement of the
chief financial officer of Borrower describing such ERISA Event and any action
that is being taking with respect thereto by Borrower, any such Subsidiary or
ERISA Affiliate, and any action taken or threatened by the IRS, Department of
Labor, or PBGC. Borrower or such Subsidiary, as applicable, shall be deemed to
know all facts known by the administrator of any Benefit Plan of which it is the
plan sponsor, (ii) promptly, and in any event within three Business Days after
the filing thereof with the IRS, a copy of each funding waiver request filed
with respect to any Benefit Plan and all communications received by Borrower,
any of its Subsidiaries or, to the knowledge of Borrower, any ERISA Affiliate
with respect to such request, and (iii) promptly, and in any event within three
Business Days after receipt by Borrower, any of its Subsidiaries or, to the
knowledge of Borrower, any ERISA Affiliate, of the PBGC's intention to terminate
a Benefit Plan or to have a trustee appointed to administer a Benefit Plan,
copies of each such notice.
(b) Cause to be delivered to Foothill, upon Foothill's
request, each of the following: (i) a copy of each Plan (or, where any such
plan is not in writing, complete description thereof) (and if applicable,
related trust agreements or other funding instruments) and all amendments
thereto, all written interpretations thereof and written descriptions thereof
that have been distributed to employees or former employees of Borrower or its
Subsidiaries; (ii) the most recent determination letter issued by the IRS with
respect to each Benefit Plan; (iii) for the three most recent plan years, annual
reports on Form 5500 Series required to be filed with any governmental agency
for each Benefit Plan; (iv) all actuarial reports prepared for the last three
plan years for each Benefit Plan; (v) a listing of all Multiemployer Plans, with
the aggregate amount of the most recent annual contributions required to be made
by Borrower or any ERISA Affiliate to each such plan and copies of the
collective bargaining agreements requiring such contributions; (vi) any
information that has been provided to Borrower or any ERISA Affiliate regarding
withdrawal liability under any Multiemployer Plan; and (vii) the aggregate
amount of the most recent annual payments made to former employees of Borrower
or its Subsidiaries under any Retiree Health Plan.
6.15 LEASES. Pay when due all rents and other amounts payable
under any leases to which Borrower is a party or by which Borrower's properties
and assets are bound, unless such payments are the subject of a Permitted
Protest. To the extent that Borrower fails timely to make payment of such rents
and other amounts payable when due under its leases, Foothill shall be entitled,
in its discretion, to reserve an amount equal to such unpaid amounts against the
Borrowing Base.
6.16 YEAR 2000 COMPLIANCE. Except for Borrower's billing system,
which shall be year 2000 Compliant prior to October 1, 1999, Borrower shall be
year 2000 Compliant prior to July 31, 1999. In addition, prior to July 31,
1999, Borrower shall have received reasonable assurances from USBI and the local
exchange carriers that they shall be year 2000 Compliant not later than
September 30, 1999.
7. NEGATIVE COVENANTS.
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Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until full and final payment of the Obligations, Borrower
will not do any of the following:
7.1 INDEBTEDNESS. Create, incur, assume, permit, guarantee, or
otherwise become or remain, directly or indirectly, liable with respect to any
Indebtedness, except:
(a) Indebtedness evidenced by this Agreement;
(b) Indebtedness set forth in SCHEDULE 7.1, including
Indebtedness to Ironwood;
(c) Indebtedness secured by Permitted Liens; and
(d) refinancings, renewals, or extensions of Indebtedness
permitted under clauses (b) and (c) of this SECTION 7.1 (and continuance or
renewal of any Permitted Liens associated therewith) so long as: (i) the net
cash proceeds of such refinancings, renewals, or extensions do not result in
an increase in the aggregate principal amount of the Indebtedness so
refinanced, renewed, or extended, (ii) such refinancings, renewals,
refundings, or extensions do not result in a shortening of the average
weighted maturity of the Indebtedness so refinanced, renewed, or extended,
and (iii) to the extent that Indebtedness that is refinanced was subordinated
in right of payment to the Obligations, then the subordination terms and
conditions of the refinancing Indebtedness must be at least as favorable to
Foothill as those applicable to the refinanced Indebtedness.
7.2 LIENS. Create, incur, assume, or permit to exist, directly or
indirectly, any Lien on or with respect to any of its property or assets, of any
kind, whether now owned or hereafter acquired, or any income or profits
therefrom, except for Permitted Liens (including Liens that are replacements of
Permitted Liens to the extent that the original Indebtedness is refinanced under
SECTION 7.1(d) and so long as the replacement Liens only encumber those assets
or property that secured the original Indebtedness).
7.3 RESTRICTIONS ON FUNDAMENTAL CHANGES. Enter into any
merger, consolidation, reorganization, or recapitalization, or reclassify its
capital stock, or liquidate, wind up, or dissolve itself (or suffer any
liquidation or dissolution), or convey, sell, assign, lease, transfer, or
otherwise dispose of, in one transaction or a series of transactions, all or
any substantial part of its property or assets.
7.4 DISPOSAL OF ASSETS. Sell, lease, assign, transfer, or
otherwise dispose of any of Borrower's properties or assets other than sales
of Inventory to buyers in the ordinary course of Borrower's business as
currently conducted.
7.5 CHANGE NAME. Change Borrower's name, FEIN, corporate
structure (within the meaning of Section 9402(7) of the Code), or identity, or
add any new fictitious name.
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7.6 GUARANTEE. Guarantee or otherwise become in any way liable
with respect to the obligations of any third Person except by endorsement of
instruments or items of payment for deposit to the account of Borrower or
which are transmitted or turned over to Foothill.
7.7 NATURE OF BUSINESS. Make any change in the principal nature
of Borrower's business.
7.8 PREPAYMENTS AND AMENDMENTS.
(a) Except in connection with a refinancing permitted by
SECTION 7.1(d) or as provided in SECTION 7.8(c), prepay, redeem, retire,
defease, purchase, or otherwise acquire any Indebtedness owing to any third
Person, other than the Obligations in accordance with this Agreement,
(b) Directly or indirectly, amend, modify, alter, increase,
or change any of the terms or conditions of any agreement, instrument, document,
indenture, or other writing evidencing or concerning Indebtedness permitted
under SECTIONS 7.1(b), (c), OR (d), and
(c) Notwithstanding anything to the contrary contained
herein, Borrower may, on or after December 31, 2000, make the scheduled payment
of principal on its Indebtedness to Ironwood, in whole or in part, so long as:
(i) no Event of Default has occurred and is continuing and (ii) Borrower has not
less than $2,000,000 of Availability after giving effect to such payment.
7.9 CHANGE OF CONTROL. Cause, permit, or suffer, directly or
indirectly, any Change of Control.
7.10 INTENTIONALLY OMITTED.
7.11 DISTRIBUTIONS. Make any distribution or declare or pay any
dividends (in cash or other property, other than capital stock) on, or purchase,
acquire, redeem, or retire any of Borrower's capital stock, of any class,
whether now or hereafter outstanding, PROVIDED, HOWEVER, (a) that so long as no
Event of Default has occurred and is continuing, Borrower may pay dividends to
Parent to pay its general and administrative expenses in the ordinary course of
business as historically conducted, and (b) that so long as: (i) no Event of
Default has occurred and is continuing and (ii) Borrower has not less than
$2,000,000 of Availability after giving effect to the dividend, Borrower may pay
dividends to Parent to allow it to (a) pay accrued dividends or their
functional equivalent on up to $20,000,000 of Parent's outstanding Preferred
Stock and (b) redeem up to $3,865,000 of its outstanding Preferred Stock.
7.12 ACCOUNTING METHODS. Modify or change its method of accounting
or enter into, modify, or terminate any agreement currently existing, or at any
time hereafter entered into with any third party accounting firm or service
bureau for the preparation or storage of Borrower's accounting records without
said accounting firm or service bureau
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agreeing to provide Foothill information regarding the Collateral or
Borrower's financial condition.
7.13 INVESTMENTS. Directly or indirectly make, acquire, or
incur any liabilities (including contingent obligations) for or in connection
with (a) the acquisition of the securities (whether debt or equity) of, or
other interests in, a Person, (b) loans, advances, capital contributions, or
transfers of property to a Person, or (c) the acquisition of all or
substantially all of the properties or assets of a Person.
7.14 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter
into or permit to exist any material transaction with any Affiliate of
Borrower except for transactions that are in the ordinary course of
Borrower's business, upon fair and reasonable terms, that are fully disclosed
to Foothill, and that are no less favorable to Borrower than would be
obtained in an arm's length transaction with a non-Affiliate.
7.15 SUSPENSION. Suspend or go out of a substantial portion of its
business.
7.16 COMPENSATION. Increase the annual fee or per-meeting fees
paid to directors during any year by more than 15% over the prior year.
7.17 USE OF PROCEEDS. Use (a) the proceeds of the Advances made
hereunder for any purpose other than (i) on the Closing Date to pay
transactional costs and expenses incurred in connection with this Agreement, and
(ii) thereafter, consistent with the terms and conditions hereof, for its lawful
and permitted corporate purposes.
7.18 CHANGE IN LOCATION OF CHIEF EXECUTIVE OFFICE; INVENTORY AND
EQUIPMENT WITH BAILEES. Relocate its chief executive office to a new location
without providing 30 days prior written notification thereof to Foothill and so
long as, at the time of such written notification, Borrower provides any
financing statements or fixture filings necessary to perfect and continue
perfected Foothill's security interests and also provides to Foothill a
Collateral Access Agreement with respect to such new location. The Inventory
and Equipment shall not at any time now or hereafter be stored with a bailee,
warehouseman, or similar party without Foothill's prior written consent.
7.19 NO PROHIBITED TRANSACTIONS UNDER ERISA. Directly or
indirectly:
(a) engage, or permit any Subsidiary of Borrower to engage,
in any prohibited transaction which is reasonably likely to result in a civil
penalty or excise tax described in Sections 406 of ERISA or 4975 of the IRC for
which a statutory or class exemption is not available or a private exemption has
not been previously obtained from the Department of Labor;
(b) permit to exist with respect to any Benefit Plan any
accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of
the IRC), whether or not waived;
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(c) fail, or permit any Subsidiary of Borrower to fail, to
pay timely required contributions or annual installments due with respect to any
waived funding deficiency to any Benefit Plan;
(d) terminate, or permit any Subsidiary of Borrower to
terminate, any Benefit Plan where such event would result in any liability of
Borrower, any of its Subsidiaries or any ERISA Affiliate under Title IV of
ERISA;
(e) fail, or permit any Subsidiary of Borrower to fail, to
make any required contribution or payment to any Multiemployer Plan;
(f) fail, or permit any Subsidiary of Borrower to fail, to
pay any required installment or any other payment required under Section 412 of
the IRC on or before the due date for such installment or other payment;
(g) amend, or permit any Subsidiary of Borrower to amend, a
Plan resulting in an increase in current liability for the plan year such that
either of Borrower, any Subsidiary of Borrower or any ERISA Affiliate is
required to provide security to such Plan under Section 401(a)(29) of the IRC;
or
(h) withdraw, or permit any Subsidiary of Borrower to
withdraw, from any Multiemployer Plan where such withdrawal is reasonably likely
to result in any liability of any such entity under Title IV of ERISA;
which, individually or in the aggregate, results in or reasonably would be
expected to result in a claim against or liability of Borrower, any of its
Subsidiaries or any ERISA Affiliate in excess of $10,000.
7.20 FINANCIAL COVENANT. See SCHEDULE 7.20 for Tangible Net Worth
covenant.
7.21 CONTRACTS WITH LOCAL EXCHANGE CARRIERS. Enter into any new
contractual arrangements with local exchange carriers ("LECs") or other Persons,
or materially amend, modify, or extend existing contractual arrangements with
the LECs or USBI or other Persons, if the effect would be to: (a) prohibit
Foothill from having a Lien on the rights of Borrower thereunder, (b) prohibit
disclosure of the terms thereof to Foothill, or (c) grant a Lien to the LEC or
such other Person in the Collateral.
8. EVENTS OF DEFAULT.
Any one or more of the following events shall constitute an event of
default (each, an "Event of Default") under this Agreement:
8.1 If Borrower fails to pay when due and payable or when declared
due and payable, any portion of the Obligations (whether of principal, interest
(including any interest which, but for the provisions of the Bankruptcy Code,
would have accrued on such amounts),
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fees and charges due Foothill, reimbursement of Foothill Expenses, or other
amounts constituting Obligations);
8.2 If Borrower fails to perform, keep, or observe: (a) any
term, provision, condition, covenant, or agreement contained in SECTION 6.2,
SECTION 6.3 or SECTION 6.9 and such failure continues for a period of five
days after such failure, (b) any term, provision, condition, covenant, or
agreement contained in SECTION 6.4, SECTION 6.12 or SECTION 6.15 and such
failure continues for a period of 10 days after such failure, or (c) any
other term, provision, covenant, or agreement contained in this Agreement, in
any of the Loan Documents, or in any other present or future agreement
between Borrower and Foothill;
8.3 If there is a Material Adverse Change;
8.4 If any material portion of Borrower's properties or assets
is attached, seized, subjected to a writ or distress warrant, or is levied
upon, or comes into the possession of any third Person;
8.5 If an Insolvency Proceeding is commenced by Borrower;
8.6 If an Insolvency Proceeding is commenced against Borrower and
any of the following events occur: (a) Borrower consents to the institution of
the Insolvency Proceeding against it; (b) the petition commencing the Insolvency
Proceeding is not timely controverted; (c) the petition commencing the
Insolvency Proceeding is not dismissed within 90 calendar days of the date of
the filing thereof; PROVIDED, HOWEVER, that, during the pendency of such period,
Foothill shall be relieved of its obligation to extend credit hereunder; (d) an
interim trustee is appointed to take possession of all or a substantial portion
of the properties or assets of, or to operate all or any substantial portion of
the business of, Borrower; or (e) an order for relief shall have been issued or
entered therein;
8.7 If Borrower is enjoined, restrained, or in any way prevented
by court order from continuing to conduct all or any material part of its
business affairs;
8.8 If a notice of Lien, levy, or assessment in excess of $100,000
is filed of record with respect to any of Borrower's properties or assets by the
United States Government, or any department, agency, or instrumentality thereof,
or by any state, county, municipal, or governmental agency, or if any taxes or
debts, in excess of $100,000 in the aggregate, owing at any time hereafter to
any one or more of such entities becomes a Lien, whether choate or otherwise,
upon any of Borrower's properties or assets and the same is not paid on the
payment date thereof; PROVIDED, HOWEVER, that Foothill may reserve the amount of
such Lien;
8.9 If a judgment or other claim becomes a Lien or encumbrance
upon any material portion of Borrower's properties or assets;
8.10 If there is a default in any material agreement to which
Borrower is a party with one or more third Persons and such default (a) occurs
at the final maturity of the obligations thereunder, or (b) after all applicable
notifications have been made and all
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applicable grace periods have run, results in a right by such third
Person(s), irrespective of whether exercised, to accelerate the maturity of
Borrower's obligations thereunder;
8.11 If Borrower makes any payment on account of Indebtedness that
has been contractually subordinated in right of payment to the payment of the
Obligations, except to the extent such payment is permitted by the terms of the
subordination provisions applicable to such Indebtedness;
8.12 If any material misstatement or misrepresentation exists now
or hereafter in any warranty, representation, statement, or report made to
Foothill by Borrower or any officer, employee, agent, or director of Borrower,
or if any such material warranty or representation is withdrawn.
9. FOOTHILL'S RIGHTS AND REMEDIES.
9.1 RIGHTS AND REMEDIES. Upon the occurrence, and during the
continuation, of an Event of Default Foothill may, at its election, without
notice of its election and without demand, do any one or more of the following,
all of which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due and
payable;
(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement, under any of the Loan Documents, or
under any other agreement between Borrower and Foothill;
(c) Terminate this Agreement and any of the other Loan
Documents as to any future liability or obligation of Foothill, but without
affecting Foothill's rights and security interests in the Collateral and without
affecting the Obligations;
(d) Settle or adjust disputes and claims directly with
Account Debtors for amounts and upon terms which Foothill considers advisable,
and in such cases, Foothill will credit Borrower's Loan Account with only the
net amounts received by Foothill in payment of such disputed Accounts after
deducting all Foothill Expenses incurred or expended in connection therewith;
(e) Cause Borrower to hold all returned Inventory in trust
for Foothill, segregate all returned Inventory from all other property of
Borrower or in Borrower's possession and conspicuously label said returned
Inventory as the property of Foothill;
(f) Without notice to or demand upon Borrower or any
guarantor, make such payments and do such acts as Foothill considers necessary
or reasonable to protect its security interests in the Collateral. Borrower
agrees to assemble the Collateral if Foothill so requires, and to make the
Collateral available to Foothill as Foothill may designate. Borrower authorizes
Foothill to enter the premises where the Collateral is located, to take and
maintain possession of the Collateral, or any part of it, and to pay, purchase,
contest, or
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compromise any encumbrance, charge, or Lien that in Foothill's determination
appears to conflict with its security interests and to pay all expenses
incurred in connection therewith. With respect to any of Borrower's owned or
leased premises, Borrower hereby grants Foothill a license to enter into
possession of such premises and to occupy the same, without charge, for up to
120 days in order to exercise any of Foothill's rights or remedies provided
herein, at law, in equity, or otherwise;
(g) Without notice to Borrower (such notice being expressly
waived), and without constituting a retention of any collateral in satisfaction
of an obligation (within the meaning of Section 9505 of the Code), set off and
apply to the Obligations any and all (i) balances and deposits of Borrower held
by Foothill (including any amounts received in the Lockbox Accounts), or (ii)
indebtedness at any time owing to or for the credit or the account of Borrower
held by Foothill;
(h) Hold, as cash collateral, any and all balances and
deposits of Borrower held by Foothill, and any amounts received in the Lockbox
Accounts, to secure the full and final repayment of all of the Obligations;
(i) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Foothill is hereby granted a license or other right to
use, without charge, Borrower's labels, patents, copyrights, rights of use of
any name, trade secrets, trade names, trademarks, service marks, and advertising
matter, or any property of a similar nature, as it pertains to the Collateral,
in completing production of, advertising for sale, and selling any Collateral
and Borrower's rights under all licenses and all franchise agreements shall
inure to Foothill's benefit;
(j) Sell the Collateral at either a public or private sale,
or both, by way of one or more contracts or transactions, for cash or on terms,
in such manner and at such places (including Borrower's premises) as Foothill
determines is commercially reasonable. It is not necessary that the Collateral
be present at any such sale;
(k) Foothill shall give notice of the disposition of the
Collateral as follows:
(1) Foothill shall give Borrower and each holder of a
security interest in the Collateral who has filed with Foothill a written
request for notice, a notice in writing of the time and place of public sale,
or, if the sale is a private sale or some other disposition other than a public
sale is to be made of the Collateral, then the time on or after which the
private sale or other disposition is to be made;
(2) The notice shall be personally delivered or
mailed, postage prepaid, to Borrower as provided in SECTION 12, at least five
days before the date fixed for the sale, or at least five days before the date
on or after which the private sale or other disposition is to be made; no notice
needs to be given prior to the disposition of any portion of the Collateral that
is perishable or threatens to decline speedily in value or that is of a type
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customarily sold on a recognized market. Notice to Persons other than Borrower
claiming an interest in the Collateral shall be sent to such addresses as they
have furnished to Foothill;
(3) If the sale is to be a public sale, Foothill also
shall give notice of the time and place by publishing a notice one time at least
five days before the date of the sale in a newspaper of general circulation in
the county in which the sale is to be held;
(l) Foothill may credit bid and purchase at any public sale;
and
(m) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower. Any excess
will be returned, without interest and subject to the rights of third Persons,
by Foothill to Borrower.
9.2 REMEDIES CUMULATIVE. Foothill's rights and remedies under
this Agreement, the Loan Documents, and all other agreements shall be
cumulative. Foothill shall have all other rights and remedies not inconsistent
herewith as provided under the Code, by law, or in equity. No exercise by
Foothill of one right or remedy shall be deemed an election, and no waiver by
Foothill of any Event of Default shall be deemed a continuing waiver. No delay
by Foothill shall constitute a waiver, election, or acquiescence by it.
10. TAXES AND EXPENSES.
If Borrower fails to pay any monies (whether taxes, assessments,
insurance premiums, or, in the case of leased properties or assets, rents or
other amounts payable under such leases) due to third Persons, or fails to make
any deposits or furnish any required proof of payment or deposit, all as
required under the terms of this Agreement, then, to the extent that Foothill
determines that such failure by Borrower could result in a Material Adverse
Change, in its discretion and without prior notice to Borrower, Foothill may do
any or all of the following: (a) make payment of the same or any part thereof;
(b) set up such reserves in Borrower's Loan Account as Foothill deems necessary
to protect Foothill from the exposure created by such failure; or (c) obtain and
maintain insurance policies of the type described in SECTION 6.10, and take any
action with respect to such policies as Foothill deems prudent. Any such
amounts paid by Foothill shall constitute Foothill Expenses. Any such payments
made by Foothill shall not constitute an agreement by Foothill to make similar
payments in the future or a waiver by Foothill of any Event of Default under
this Agreement. Foothill need not inquire as to, or contest the validity of,
any such expense, tax, or Lien unless it is the subject of a Permitted Protest,
and the receipt of the usual official notice for the payment thereof shall be
presumptive evidence that the same was validly due and owing.
11. WAIVERS; INDEMNIFICATION.
11.1 DEMAND; PROTEST; ETC. Borrower waives demand, protest, notice
of protest, notice of default or dishonor, notice of payment and nonpayment,
nonpayment at maturity, release, compromise, settlement, extension, or renewal
of accounts, documents, instruments, chattel paper, and guarantees at any time
held by Foothill on which Borrower may in any way be liable.
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11.2 FOOTHILL'S LIABILITY FOR COLLATERAL. So long as Foothill
complies with its obligations, if any, under Section 9207 of the Code, Foothill
shall not in any way or manner be liable or responsible for: (a) the
safekeeping of the Collateral; (b) any loss or damage thereto occurring or
arising in any manner or fashion from any cause; (c) any diminution in the value
thereof; or (d) any act or default of any carrier, warehouseman, bailee,
forwarding agency, or other Person. All risk of loss, damage, or destruction of
the Collateral shall be borne by Borrower.
11.3 INDEMNIFICATION. Borrower shall pay, indemnify, defend,
and hold Foothill, each Participant, and each of their respective officers,
directors, employees, counsel, agents, and attorneys-in-fact (each, an
"Indemnified Person") harmless (to the fullest extent permitted by law) from
and against any and all claims, demands, suits, actions, investigations,
proceedings, and damages, and all reasonable attorneys fees and disbursements
and other costs and expenses actually incurred in connection therewith (as
and when they are incurred and irrespective of whether suit is brought), at
any time asserted against, imposed upon, or incurred by any of them in
connection with or as a result of or related to the execution, delivery,
enforcement, performance, and administration of this Agreement and any other
Loan Documents or the transactions contemplated herein, and with respect to
any investigation, litigation, or proceeding related to this Agreement, any
other Loan Document, or the use of the proceeds of the credit provided
hereunder (irrespective of whether any Indemnified Person is a party
thereto), or any act, omission, event or circumstance in any manner related
thereto (all the foregoing, collectively, the "Indemnified Liabilities").
Borrower shall have no obligation to any Indemnified Person under this
SECTION 11.3 with respect to any Indemnified Liability that a court of
competent jurisdiction finally determines to have resulted from the gross
negligence or willful misconduct of such Indemnified Person. This provision
shall survive the termination of this Agreement and the repayment of the
Obligations.
12. NOTICES.
Unless otherwise provided in this Agreement, all notices or demands
by any party relating to this Agreement or any other Loan Document shall be in
writing and (except for financial statements and other informational documents
which may be sent by first-class mail, postage prepaid) shall be personally
delivered or sent by registered or certified mail (postage prepaid, return
receipt requested), overnight courier, or telefacsimile to Borrower or to
Foothill, as the case may be, at its address set forth below:
<TABLE>
<S> <C>
IF TO BORROWER: INCOMNET COMMUNICATIONS CORPORATION
2801 Main Street
Irvine, California 92614
Attn: George Blanco
Fax No. 949.244.7474
WITH COPIES TO: HELLER, EHRMAN, WHITE & MCAULIFFE
601 South Figueroa Street, 40th Floor
Los Angeles, California 90017
Attn: G. Thomas Stromberg, Esq.
Fax No. 213.614.1868
</TABLE>
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<TABLE>
<S> <C>
IF TO FOOTHILL: FOOTHILL CAPITAL CORPORATION
11111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025-3333
Attn: Business Finance Division Manager
Fax No. 310.478.9788
WITH COPIES TO: BUCHALTER, NEMER, FIELDS & YOUNGER
601 South Figueroa Street, Suite 2400
Los Angeles, California 90017
Attn: Robert C. Colton, Esq.
Fax No. 213.896.0400
</TABLE>
The parties hereto may change the address at which they are to
receive notices hereunder, by notice in writing in the foregoing manner given to
the other. All notices or demands sent in accordance with this SECTION 12,
other than notices by Foothill in connection with Sections 9504 or 9505 of the
Code, shall be deemed received on the earlier of the date of actual receipt or
three days after the deposit thereof in the mail. Borrower acknowledges and
agrees that notices sent by Foothill in connection with Sections 9504 or 9505 of
the Code shall be deemed sent when deposited in the mail or personally
delivered, or, where permitted by law, transmitted by telefacsimile or other
similar method set forth above.
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS
EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT), THE CONSTRUCTION,
INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE
PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR
THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. THE
PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE
STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF
CALIFORNIA OR, AT THE SOLE OPTION OF FOOTHILL, IN ANY OTHER COURT IN WHICH
FOOTHILL SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT
MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. EACH OF BORROWER AND
FOOTHILL WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH
MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO
THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 13.
BORROWER AND FOOTHILL HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF
ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN
DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT
CLAIMS,
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TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY
CLAIMS. EACH OF BORROWER AND FOOTHILL REPRESENTS THAT IT HAS REVIEWED THIS
WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A
COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE
COURT.
14. DESTRUCTION OF BORROWER'S DOCUMENTS.
All documents, schedules, invoices, agings, or other papers
delivered to Foothill may be destroyed or otherwise disposed of by Foothill
four months after they are delivered to or received by Foothill, unless
Borrower requests, in writing, the return of said documents, schedules, or
other papers and makes arrangements, at Borrower's expense, for their return.
15. GENERAL PROVISIONS.
15.1 EFFECTIVENESS. This Agreement shall be binding and deemed
effective when executed by Borrower and Foothill.
15.2 SUCCESSORS AND ASSIGNS. This Agreement shall bind and
inure to the benefit of the respective successors and assigns of each of the
parties; PROVIDED, HOWEVER, that Borrower may not assign this Agreement or
any rights or duties hereunder without Foothill's prior written consent and
any prohibited assignment shall be absolutely void. No consent to an
assignment by Foothill shall release Borrower from its Obligations. Foothill
may assign this Agreement and its rights and duties hereunder and no consent
or approval by Borrower is required in connection with any such assignment.
Foothill reserves the right to sell, assign, transfer, negotiate, or grant
participations in all or any part of, or any interest in Foothill's rights
and benefits hereunder. In connection with any such assignment or
participation, Foothill may disclose all documents and information which
Foothill now or hereafter may have relating to Borrower or Borrower's
business. To the extent that Foothill assigns its rights and obligations
hereunder to a third Person, Foothill thereafter shall be released from such
assigned obligations to Borrower and such assignment shall effect a novation
between Borrower and such third Person.
15.3 SECTION HEADINGS. Headings and numbers have been set forth
herein for convenience only. Unless the contrary is compelled by the
context, everything contained in each section applies equally to this entire
Agreement.
15.4 INTERPRETATION. Neither this Agreement nor any uncertainty
or ambiguity herein shall be construed or resolved against Foothill or
Borrower, whether under any rule of construction or otherwise. On the
contrary, this Agreement has been reviewed by all parties and shall be
construed and interpreted according to the ordinary meaning of the words used
so as to fairly accomplish the purposes and intentions of all parties hereto.
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15.5 SEVERABILITY OF PROVISIONS. Each provision of this
Agreement shall be severable from every other provision of this Agreement for
the purpose of determining the legal enforceability of any specific provision.
15.6 AMENDMENTS IN WRITING. This Agreement can only be amended
by a writing signed by both Foothill and Borrower.
15.7 COUNTERPARTS; TELEFACSIMILE EXECUTION. This Agreement may
be executed in any number of counterparts and by different parties on
separate counterparts, each of which, when executed and delivered, shall be
deemed to be an original, and all of which, when taken together, shall
constitute but one and the same Agreement. Delivery of an executed
counterpart of this Agreement by telefacsimile shall be equally as effective
as delivery of an original executed counterpart of this Agreement. Any party
delivering an executed counterpart of this Agreement by telefacsimile also
shall deliver an original executed counterpart of this Agreement but the
failure to deliver an original executed counterpart shall not affect the
validity, enforceability, and binding effect of this Agreement.
15.8 REVIVAL AND REINSTATEMENT OF OBLIGATIONS. If the
incurrence or payment of the Obligations by Borrower or any guarantor of the
Obligations or the transfer by either or both of such parties to Foothill of
any property of either or both of such parties should for any reason
subsequently be declared to be void or voidable under any state or federal
law relating to creditors' rights, including provisions of the Bankruptcy
Code relating to fraudulent conveyances, preferences, and other voidable or
recoverable payments of money or transfers of property (collectively, a
"Voidable Transfer"), and if Foothill is required to repay or restore, in
whole or in part, any such Voidable Transfer, or elects to do so upon the
reasonable advice of its counsel, then, as to any such Voidable Transfer, or
the amount thereof that Foothill is required or elects to repay or restore,
and as to all reasonable costs, expenses, and attorneys fees of Foothill
related thereto, the liability of Borrower or such guarantor automatically
shall be revived, reinstated, and restored and shall exist as though such
Voidable Transfer had never been made.
[Remainder of this page intentionally left blank]
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15.9 INTEGRATION. This Agreement, together with the other Loan
Documents, reflects the entire understanding of the parties with respect to
the transactions contemplated hereby and shall not be contradicted or
qualified by any other agreement, oral or written, before the date hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed in Los Angeles, California.
INCOMNET COMMUNICATIONS CORPORATION,
a Delaware corporation
By /s/ Denis Richard
--------------------------------------
Name: Denis Richard
Title: President
FOOTHILL CAPITAL CORPORATION,
a California corporation
By /s/ Rhonda Foreman
--------------------------------------
Name: Rhonda Foreman
----------------------------------
Title: Vice President
----------------------------------
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EXHIBIT 10.58
INTELLECTUAL PROPERTY SECURITY AGREEMENT
This INTELLECTUAL PROPERTY SECURITY AGREEMENT ("Agreement"), dated as of
April 9, 1999, is entered into between INCOMNET COMMUNICATIONS CORPORATION, a
Delaware corporation ("Debtor") and FOOTHILL CAPITAL CORPORATION, a California
corporation ("Foothill"), in light of the following:
A. Debtor and Foothill are, contemporaneously herewith, entering into
that certain Loan and Security Agreement ("Loan Agreement") and other
instruments, documents and agreements contemplated thereby or related thereto
(collectively, together with the Loan Agreement, the "Loan Documents"); and
B. Debtor is the owner of certain intellectual property, identified
below, in which Debtor is granting a security interest to Foothill.
NOW THEREFORE, in consideration of the mutual promises, covenants,
conditions, representations, and warranties hereinafter set forth and for other
good and valuable consideration, the parties hereto mutually agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 DEFINITIONS. The following terms, as used in this
Agreement, have the following meanings:
"CODE" means the California Uniform Commercial Code, as
amended and supplemented from time to time, and any successor statute.
"COLLATERAL" means:
(i) Each of the trademarks and rights and interest which
are capable of being protected as trademarks (including trademarks,
service marks, designs, logos, indicia, tradenames, corporate names,
company names, business names, fictitious business names, trade styles,
and other source or business identifiers, and applications pertaining
thereto), which are presently, or in the future may be, owned, created,
acquired, or used (whether pursuant to a license or otherwise) by Debtor,
in whole or in part, and all trademark rights with respect thereto
throughout the world, including all proceeds thereof (including license
royalties and proceeds of infringement suits), and rights to renew and
extend such trademarks and trademark rights;
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(ii) All of Debtor's right, title, and interest in and to
the trademarks and trademark registrations listed on SCHEDULE A, attached
hereto, as the same may be updated hereafter from time to time;
(iii) All of Debtor's rights to register trademark claims
under any state or federal trademark law or regulation of any foreign
country and to apply for, renew, and extend the trademark registrations
and trademark rights, the right (without obligation) to sue or bring
opposition or cancellation proceedings in the name of Debtor or in the
name of Foothill for past, present, and future infringements of the
trademarks, registrations, or trademark rights and all rights (but not
obligations) corresponding thereto in the United States and any foreign
country, and the associated goodwill;
(iv) All general intangibles relating to the foregoing;
and
(v) All proceeds of any and all of the foregoing
(including, without limitation, license royalties and proceeds of
infringement suits) and, to the extent not otherwise included, all
payments under insurance, or any indemnity, warranty, or guaranty payable
by reason of loss or damage to or otherwise with respect to the
Collateral.
"OBLIGATIONS" means all obligations, liabilities, and
indebtedness of Debtor to Foothill, whether direct, indirect, liquidated, or
contingent, and whether arising under this Agreement, the Loan Agreement, any
other of the Loan Documents, or otherwise, including all costs and expenses
described in SECTION 10.8 hereof.
1.2 CONSTRUCTION. Unless the context of this Agreement clearly
requires otherwise, references to the plural include the singular, references to
the singular include the plural, and the term "including" is not limiting. The
words "hereof," "herein," "hereby," "hereunder," and other similar terms refer
to this Agreement as a whole and not to any particular provision of this
Agreement. Any initially capitalized terms used but not defined herein shall
have the meaning set forth in the Loan Agreement. Any reference herein to any
of the Loan Documents includes any and all alterations, amendments, extensions,
modifications, renewals, or supplements thereto or thereof, as applicable.
Neither this Agreement nor any uncertainty or ambiguity herein shall be
construed or resolved against Foothill or Debtor, whether under any rule of
construction or otherwise. On the contrary, this Agreement has been reviewed by
Debtor, Foothill, and their respective counsel, and shall be construed and
interpreted according to the ordinary meaning of the words used so as to fairly
accomplish the purposes and intentions of Foothill and Debtor.
2. GRANT OF SECURITY INTEREST.
Debtor hereby grants to Foothill a first-priority security
interest in all of Debtor's right, title, and interest in and to the Collateral
to secure the Obligations.
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3. REPRESENTATIONS, WARRANTIES AND COVENANTS.
Debtor hereby represents, warrants, and covenants that:
3.1 TRADEMARKS; SERVICE MARKS.
(i) A true and complete schedule setting forth all
federal and state trademark and service mark registrations owned or
controlled by Debtor or licensed to Debtor, together with a summary
description and full information in respect of the filing or issuance
thereof and expiration dates is set forth on SCHEDULE A.
3.2 VALIDITY; ENFORCEABILITY. To the knowledge of Debtor, each
of Debtor's service marks and trademarks is valid and enforceable, and Debtor is
not presently aware of any past, present, or prospective claim by any third
party that any of its service marks, or trademarks are invalid or unenforceable,
or that its use of any service marks, or trademarks violates the rights of any
third person, or of any basis for any such claims;
3.3 TITLE. To the knowledge of Debtor, Debtor is the sole and
exclusive owner of the entire and unencumbered right, title, and interest in and
to each of the service marks, service mark registrations, trademarks, and
trademark registrations set forth on SCHEDULES A and B, free and clear of any
liens, charges, and encumbrances, including pledges, assignments, licenses, shop
rights, and covenants by Debtor not to sue third persons;
3.4 NOTICE. Debtor has used and will continue to use proper
statutory notice in connection with its use of each of its service marks, and
trademarks;
3.5 QUALITY. Debtor has used and will continue to use
consistent standards of reasonable high quality (which may be consistent with
Debtor's past practices) in the sale, and delivery of services sold or delivered
under or in connection with its service marks and trademarks, including, to the
extent applicable, in the operation and maintenance of its merchandising
operations, and will not do anything to impair the validity of its service marks
and trademarks;
3.6 PERFECTION OF SECURITY INTEREST. Except for the filing of
a financing statement with the Secretary of State of California and filings with
the United States Patent and Trademark Office necessary to perfect the security
interests created hereunder, no authorization, approval, or other action by, and
no notice to or filing with, any governmental authority or regulatory body is
required either for the grant by Debtor of the security interest hereunder or
for the execution, delivery, or performance of this Agreement by Debtor or for
the perfection of or the exercise by Foothill of its rights hereunder to the
Collateral in the United States.
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4. AFTER-ACQUIRED SERVICE MARK, OR TRADEMARK RIGHTS.
If Debtor shall obtain rights to any new service marks or
trademarks, the provisions of this Agreement shall automatically apply thereto.
Debtor shall give prompt notice in writing to Foothill with respect to any such
new service marks or trademarks, or renewal or extension of any service mark or
trademark registration. Debtor shall bear any expenses incurred in connection
with future service mark or trademark registrations, if any.
5. LITIGATION AND PROCEEDINGS.
Debtor shall commence and diligently prosecute in its own name, as
the real party in interest, for its own benefit, and its own expense, such
suits, administrative proceedings, or other action for infringement or other
damages as are in its reasonable business judgment necessary to protect the
Collateral. Debtor shall provide to Foothill any information with respect
thereto reasonably requested by Foothill. Foothill shall provide at Debtor's
expense all necessary cooperation in connection with any such suits,
proceedings, or action, including, without limitation, joining as a necessary
party. Following Debtor's becoming aware thereof, Debtor shall notify Foothill
of the institution of, or any adverse determination in, any proceeding in the
United States Patent and Trademark Office, or any United States, state, or
foreign court regarding Debtor's claim of ownership in any of the service marks
or trademarks, its right to apply for the same, or its right to keep and
maintain such service mark or trademark rights.
6. POWER OF ATTORNEY.
Debtor grants Foothill power of attorney, having the full
authority, and in the place of Debtor and in the name of Debtor, from time to
time following an Event of Default in Foothill's discretion, to take any action
and to execute any instrument which Foothill may reasonably deem necessary or
advisable to accomplish the purposes of this Agreement, including, without
limitation, as may be subject to the provisions of this Agreement: to endorse
Debtor's name on all applications, documents, papers, and instruments necessary
for Foothill to use or maintain the Collateral; to ask, demand, collect, sue
for, recover, impound, receive, and give acquittance and receipts for money due
or to become due under or in respect of any of the Collateral; to file any
claims or take any action or institute any proceedings that Foothill may deem
necessary or desirable for the collection of any of the Collateral or otherwise
to enforce Foothill's rights with respect to any of the Collateral and to
assign, pledge, convey, or otherwise transfer title in or dispose of the
Collateral to any person.
7. EVENTS OF DEFAULT.
Any of the following events shall be an Event of Default:
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7.1 LOAN AGREEMENT. An Event of Default shall occur. "Event
of Default" shall have the same meaning as such term is given in the Loan
Agreement;
7.2 MISREPRESENTATION. Any representation or warranty made
herein by Debtor or in any document furnished to Foothill by Debtor under this
Agreement is incorrect in any material respect when made or when reaffirmed; and
7.3 BREACH. Debtor fails to observe or perform any covenant,
condition, or agreement to be observed or performed pursuant to the terms hereof
which materially and adversely affects Foothill.
8. SPECIFIC REMEDIES.
Upon the occurrence of any Event of Default, Foothill shall have,
in addition to, other rights given by law or in this Agreement, the Loan
Agreement, or in any other Loan Document, all of the rights and remedies with
respect to the Collateral of a secured party under the Code, including the
following:
8.1 NOTIFICATION. Foothill may notify licensees to make
royalty payments on license agreements directly to Foothill;
8.2 SALE. Foothill may sell or assign the Collateral and
associated goodwill at public or private sale for such amounts, and at such time
or times as Foothill reasonably deems advisable. Any requirement of reasonable
notice of any disposition of the Collateral shall be satisfied if such notice is
sent to Debtor five days prior to such disposition. Debtor shall be credited
with the net proceeds of such sale only when they are actually received by
Foothill, and Debtor shall continue to be liable for any deficiency remaining
after the Collateral is sold or collected. If the sale is to be a public sale,
Foothill shall also give notice of the time and place by publishing a notice one
time at least five days before the date of the sale in a newspaper of general
circulation in the county in which the sale is to be held. To the maximum
extent permitted by applicable law, Foothill may be the purchaser of any or all
of the Collateral and associated goodwill at any public sale and shall be
entitled, for the purpose of bidding and making settlement or payment of the
purchase price for all or any portion of the Collateral sold at any public sale,
to use and apply all or any part of the Obligations as a credit on account of
the purchase price of any collateral payable by Foothill at such sale.
9. FOOTHILL'S DUTIES.
Foothill shall not have any duties with respect to the Collateral
other than the duty to use reasonable care if the Collateral is in its
possession. In accordance with Section 9207 of the Code, Foothill shall be
deemed to have used reasonable care if it observes substantially the same
standard of care with respect to the custody or preservation of the Collateral
as it observes with respect to similar assets owned by Foothill. Without
limiting the generality of the foregoing, Foothill shall not be under any
obligation to take
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any steps to preserve rights in the Collateral against any other parties, to
sell the same if it threatens to decline in value, or to exercise any rights
represented thereby (including rights with respect to calls, conversions,
exchanges, maturities, or tenders); PROVIDED, HOWEVER, that Foothill may, at
its option, do so, and any and all expenses incurred in connection therewith
shall be for the account of Debtor.
10. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION, INTERPRETATION,
AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES HERETO WITH RESPECT TO ALL
MATTERS ARISING HEREUNDER OR RELATED HERETO SHALL BE DETERMINED UNDER, GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA,
WITHOUT GIVING EFFECT TO ITS CONFLICT OF LAWS PRINCIPLES. THE PARTIES AGREE
THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT SHALL
BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE
COUNTY OF LOS ANGELES, STATE OF CALIFORNIA OR, AT THE SOLE OPTION OF FOOTHILL,
IN ANY OTHER COURT IN WHICH FOOTHILL SHALL INITIATE LEGAL OR EQUITABLE
PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN
CONTROVERSY. EACH OF DEBTOR AND FOOTHILL WAIVES, TO THE EXTENT PERMITTED UNDER
APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON
CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN
ACCORDANCE WITH THIS SECTION 10. DEBTOR AND FOOTHILL HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED
THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL
OTHER COMMON LAW OR STATUTORY CLAIMS. DEBTOR AND FOOTHILL REPRESENT THAT EACH
HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF
LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A
TRIAL BY THE COURT.
11. GENERAL PROVISIONS.
11.1 EFFECTIVENESS. This Agreement shall be binding and deemed
effective when executed by Debtor and Foothill.
11.2 SUCCESSORS AND ASSIGNS. This Agreement shall bind and
inure to the benefit of the respective successors and assigns of each of the
parties; PROVIDED,
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HOWEVER, that Debtor may not assign this Agreement or any rights or duties
hereunder without Foothill's prior written consent and any prohibited
assignment shall be absolutely void. Foothill may assign this Agreement and
its rights and duties hereunder and no consent or approval by Debtor is
required in connection with any such assignment.
11.3 SECTION HEADINGS. Headings and numbers have been set forth
herein for convenience only. Unless the contrary is compelled by the context,
everything contained in each section applies equally to this entire Agreement.
11.4 INTERPRETATION. Neither this Agreement nor any uncertainty
or ambiguity herein shall be construed or resolved against Foothill or Debtor,
whether under any rule of construction or otherwise. On the contrary, this
Agreement has been reviewed by all parties and shall be construed and
interpreted according to the ordinary meaning of the words used so as to fairly
accomplish the purposes and intentions of all parties hereto.
11.5 SEVERABILITY OF PROVISIONS. Each provision of this
Agreement shall be severable from every other provision of this Agreement for
the purpose of determining the legal enforceability of any specific provision.
11.6 AMENDMENTS IN WRITING. This Agreement can only be amended
by a writing signed by both Foothill and Debtor.
11.7 COUNTERPARTS; TELEFACSIMILE EXECUTION. This Agreement may
be executed in any number of counterparts and by different parties on separate
counterparts, each of which, when executed and delivered, shall be deemed to be
an original, and all of which, when taken together, shall constitute but one and
the same Agreement. Delivery of an executed counterpart of this Agreement by
telefacsimile shall be equally as effective as delivery of a manually executed
counterpart of this Agreement. Any party delivering an executed counterpart of
this Agreement by telefacsimile also shall deliver a manually executed
counterpart of this Agreement but the failure to deliver a manually executed
counterpart shall not affect the validity, enforceability, and binding effect of
this Agreement.
11.8 FEES AND EXPENSES. Debtor shall pay to Foothill on demand
all reasonable costs and reasonable expenses that Foothill pays or incurs in
connection with the negotiation, preparation, consummation, administration,
enforcement, and termination of this Agreement, including: (a) reasonable
attorneys' and paralegals' fees and disbursements of counsel to Foothill;
(b) costs and expenses (including reasonable attorneys' and paralegals' fees and
disbursements) for any amendment, supplement, waiver, consent, or subsequent
closing in connection with this Agreement and the transactions contemplated
hereby; (c) costs and expenses of lien and title searches; (d) taxes, fees, and
other charges for filing this Agreement at the United States Patent and
Trademark Office, or for filing financing statements, and continuations, and
other actions to perfect, protect, and continue the security interest created
hereunder; (e) sums paid or incurred to pay any amount or take any action
required of Debtor under this Agreement that Debtor fails to pay or take;
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(f) costs and expenses of preserving and protecting the Collateral; and
(g) costs and expenses (including reasonable attorneys' and paralegals' fees and
disbursements) paid or incurred to enforce the security interest created
hereunder, sell or otherwise realize upon the Collateral, and otherwise enforce
the provisions of this Agreement, or to defend any claims made or threatened
against Foothill arising out of the transactions contemplated hereby (including
preparations for the consultations concerning any such matters). The foregoing
shall not be construed to limit any other provisions of this Agreement or the
Loan Documents regarding costs and expenses to be paid by Debtor. The parties
agree that reasonable attorneys' and paralegals' fees and costs incurred in
enforcing any judgment are recoverable as a separate item in addition to fees
and costs incurred in obtaining the judgment and that the recovery of such
attorneys' and paralegals' fees and costs is intended to survive any judgment,
and is not to be deemed merged into any judgment.
11.9 NOTICES. Except as otherwise provided herein, all notices,
demands, and requests that either party is required or elects to give to the
other shall be in writing and shall be governed by the provisions of Section 12
of the Loan Agreement.
11.10 TERMINATION BY FOOTHILL. After termination of the Loan
Agreement and when Foothill has received payment and performance, in full, of
all Obligations, Foothill shall execute and deliver to Debtor a termination of
all of the security interests granted by Debtor hereunder.
11.11 INTEGRATION. This Agreement, together with the other Loan
Documents, reflect the entire understanding of the parties with respect to the
transactions contemplated hereby and shall not be contradicted or qualified by
any other agreement, oral or written, before the date hereof.
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IN WITNESS WHEREOF, the parties have executed this Agreement on
the date first written above.
FOOTHILL CAPITAL CORPORATION,
a California corporation
By: /s/ Rhonda Foreman
------------------------------------
Name: Rhonda Foreman
-----------------------------------
Title: Vice President
----------------------------------
INCOMNET COMMUNICATIONS CORPORATION, a
Delaware corporation
By: /s/ Denis Richard
------------------------------------
Denis Richard
President
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EXHIBIT 10.59
SECURITY AGREEMENT
This SECURITY AGREEMENT (as may hereafter be amended, supplemented
or restated from time-to-time in accordance with the terms hereof, this
"Agreement"), dated as of April 9, 1999 is entered into by and between INCOMNET,
INC., a California corporation ("Pledgor"), and FOOTHILL CAPITAL CORPORATION, a
California corporation ("Foothill"), in light of the following facts:
R E C I T A L S
A. Incomnet Communications Corporation, a Delaware corporation
("Borrower") and Foothill are contemporaneously herewith entering into that
certain Loan and Security Agreement, dated as of even date (as may hereafter be
amended, supplemented or restated from time-to-time in accordance with the terms
thereof, the "Loan Agreement");
B. Pledgor is the record owner of 42,290,940 shares of the
Common Stock of Borrower and owns certain deposit accounts; and
C. Pursuant to the terms of the Loan Agreement, Pledgor and
Foothill are entering into this Agreement as additional security for the
Obligations (as defined in the Loan Agreement).
A G R E E M E N T
NOW THEREFORE, in consideration of the mutual promises, covenants,
conditions, representations, and warranties hereinafter set forth and for other
good and valuable consideration, the parties hereto mutually agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 DEFINITIONS. All initially capitalized terms used
but not defined in this Agreement shall have the meanings assigned to such terms
in the Loan Agreement. In addition, the following terms, as used in this
Agreement, have the following meanings:
"BANKRUPTCY CODE" means Bankruptcy Reform Act of
1978 (11 U.S.C. Sections 101-1330), as amended or supplemented from time to
time, and any successor statute, and any and all rules issued or promulgated in
connection therewith.
"CODE" means the California Uniform Commercial Code,
as amended and supplemented from time to time, and any successor statute.
"COLLATERAL" means all of the following:
(i) 42,290,940 shares of the outstanding Common
Stock of Borrower which shares constitutes one hundred percent (100%) of the
capital stock of Borrower
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and all of the hereafter-acquired shares of Common Stock of Borrower in which
Pledgor has an interest at any time while this Agreement is in effect (the
"Shares");
(ii) All of Pledgor's presently existing and
hereafter arising stock subscription warrants, stock options, or other rights to
Borrower's capital stock and all rights represented thereby (the "Options");
(iii) The proceeds of each of the foregoing,
including any and all dividends, cash, stock, instruments, and other property
from time to time received, receivable, or otherwise distributed in respect of
or in exchange for the Shares or Options (the "Proceeds"); and
(iv) Pledgor's Deposit Accounts.
"DEPOSIT ACCOUNT(S)" shall have the meaning given to
such term in the Code.
"EVENT OF DEFAULT" has the meaning given to such
term in SECTION 10.
"PLEDGOR'S DEPOSIT ACCOUNT(S)" means all Deposit
Accounts now-owned or hereafter-acquired by Pledgor, including but not limited
to, those Deposit Accounts more specifically described on EXHIBIT A hereto.
"SECURED OBLIGATIONS" means the Obligations (as
defined in the Loan Agreement) and the obligations of Pledgor hereunder.
"'33 ACT" means the Securities Act of 1933, as
amended and supplemented from time to time, and any successor statute, and any
and all rules promulgated in connection therewith.
1.2 CONSTRUCTION. Unless the context of this Agreement
clearly requires otherwise, references to the plural include the singular,
references to the singular include the plural, and the term "including" is not
limiting. The words "hereof," "herein," "hereby," "hereunder," and other
similar terms refer to this Agreement as a whole and not to any particular
provision of this Agreement. Any reference herein to any document includes any
and all alterations, amendments, extensions, modifications, renewals, or
supplements thereto or thereof, as applicable. Neither this Agreement nor any
uncertainty or ambiguity herein shall be construed or resolved against Foothill
or Pledgor, whether under any rule of construction or otherwise. On the
contrary, this Agreement has been reviewed by Pledgor, Foothill, and their
respective counsel, and shall be construed and interpreted according to the
ordinary meaning of the words used so as to fairly accomplish the purposes and
intentions of Foothill and Pledgor.
2. PLEDGE. As security for the prompt and complete payment
and performance of the Secured Obligations, Pledgor hereby delivers, pledges,
and grants to Foothill a continuing security interest in all of Pledgor's
now-owned or hereafter-acquired right, title, and interest in and to the
Collateral, including but not limited to, the right to receive all proceeds
and
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payments of principal and interest, in the Deposit Accounts. All
certificates or instruments representing or evidencing the Collateral shall
be delivered promptly to and held by Foothill pursuant hereto and shall be in
suitable form for transfer or assignment in blank, all in form and substance
satisfactory to Foothill. Pledgor hereby agrees, immediately upon the
execution and delivery of this Agreement, that Foothill may take any and all
actions necessary to register and perfect its lien upon the Collateral.
3. FURTHER ASSURANCES. Pledgor agrees that it shall
cooperate with Foothill and shall execute and deliver, or cause to be
executed and delivered, to Foothill all security agreements, stock powers,
proxies, assignments, financing statements, instruments, notices (including
notices, in form and substance of EXHIBIT B hereto, directed to the
organization with whom any Deposit Account is maintained, regarding
Foothill's security interest hereunder), and other documents, and shall take
all further action, at the expense of Pledgor, from time to time reasonably
requested by Foothill, in order to maintain a continuing, first-priority,
perfected security interest in the Collateral in favor of Foothill, and to
enable Foothill to exercise and enforce its rights and remedies hereunder
with respect to the Collateral, and Pledgor agrees that it shall execute and
deliver to Foothill at Foothill's request any further applications,
agreements, documents and instruments, and shall perform any and all acts
deemed necessary by Foothill to carry into effect the terms, conditions, and
provisions of this Agreement and the transactions connected herewith. Should
Pledgor fail to execute or deliver any such applications, agreements,
documents, financing statements and instruments, or to perform any such acts,
Pledgor acknowledges that Foothill may execute and deliver the same and
perform such acts in the name of Pledgor and on its behalf as its
attorney-in-fact in accordance with SECTION 13.
4. FOOTHILL'S DUTIES. Foothill shall not have any duties with
respect to the Collateral other than the duty to use reasonable care if the
Collateral is in its possession. In accordance with Section 9207 of the Code,
Foothill shall be deemed to have used reasonable care if it observes
substantially the same standard of care with respect to the custody or
preservation of the Collateral as it observes with respect to similar assets
owned by Foothill. Without limiting the generality of the foregoing, Foothill
shall not be under any obligation to take any steps to preserve rights in the
Collateral against any other parties, to sell the same if it threatens to
decline in value, or to exercise any rights represented thereby (including
rights with respect to calls, conversions, exchanges, maturities, or tenders);
PROVIDED, HOWEVER, that Foothill may, at its option, do so, and any and all
expenses incurred in connection therewith shall be for the account of Pledgor.
5. VOTING RIGHTS; DIVIDENDS; ETC. During the term of this
Agreement, and as long as no Event of Default has occurred and is continuing:
5.1 Pledgor shall be entitled to exercise any and all
voting and other consensual rights pertaining to the Shares or any part
thereof; PROVIDED, HOWEVER, no vote shall be cast or any consent, waiver or
ratification given or any action taken which would violate or be inconsistent
with the terms of this Agreement, the Loan Agreement or any other instrument
or agreement referred to therein or herein, or which could have the effect of
impairing the value of the Collateral or any part thereof or the position or
interest of Foothill therein.
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5.2 Pledgor shall be entitled to receive and retain any
and all dividends and distributions paid in respect of the Shares; PROVIDED,
HOWEVER, that any and all:
(a) dividends and distributions paid or payable
other than in cash in respect of, and any and all additional shares or
instruments or other property received, receivable, or otherwise distributed in
respect of, or in exchange for the Shares;
(b) dividends and distributions paid or payable
in cash in respect of any Shares in connection with a partial or total
liquidation or dissolution, merger, consolidation of Borrower, or any exchange
of stock, conveyance of assets, or similar corporate reorganization; and
(c) cash paid with respect to, payable, or
otherwise distributed on redemption of, or in exchange for, any Shares,
shall be forthwith delivered to Foothill to hold as Collateral and shall, if
received by Pledgor, be received in trust for the benefit of Foothill, be
segregated from the other property or funds of Pledgor, and be forthwith
delivered to Foothill as Collateral in the same form as so received (with any
necessary endorsement), and, if deemed appropriate by Foothill, Pledgor shall
take such actions, including the actions described in SECTION 2, as Foothill may
require.
6. REPRESENTATIONS, WARRANTIES, AND COVENANTS. Pledgor
warrants, represents, and covenants that:
6.1 Pledgor is a corporation duly organized, validly
existing and in good standing under the laws of California.
6.2 The execution, delivery and performance of this
Agreement are within Pledgor's powers, are not in conflict with the terms of the
Articles of Incorporation or By-Laws or other organizational agreement or
instrument of Pledgor, and will not result in a breach of or constitute a
default under any material contract, obligation, indenture or other instrument
to which Pledgor is a party or by which Pledgor is bound; and there is no
material law, rule or regulation, nor is there any judgment, decree or order of
any court or governmental authority binding on Pledgor which would be
contravened by the execution, delivery, performance or enforcement of this
Agreement.
6.3 Pledgor has taken all corporate action necessary to
authorize the execution and delivery of this Agreement, and the consummation of
the transactions contemplated hereby and thereby. Upon its execution and
delivery in accordance with the terms hereof, this Agreement will constitute
legal, valid and binding agreements and obligations of Pledgor, enforceable
against Pledgor in accordance with its terms, except as enforceability may be
limited by bankruptcy, insolvency, and similar laws and equitable principles
affecting the enforcement of creditors' rights generally.
6.4 Other than United States federal laws and state and
securities laws and rules and the transfer restrictions contained in the Loan
and Security Agreement, dated as of
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December 15, 1998 among Pledgor, Incomnet Communications Corporation and
Ironwood Telecom LLC (the Ironwood LSA"), which Ironwood LSA was amended by
the parties to allow, among other things, the grant of a security interest
under this Agreement, there are no restrictions upon the transfer of any of
the Collateral to or by Foothill; Pledgor is the sole beneficial owner of the
Collateral, and Pledgor has the right to pledge and grant a security interest
in or otherwise transfer such Collateral free of any encumbrances or rights
of third parties, except for the junior security interest held by Ironwood
Telecom LLC.
6.5 All of the Collateral shall remain free from all
liens, claims, encumbrances, and purchase-money or other security interests
except as created hereby and except for the junior security interest held by
Ironwood Telecom LLC. Pledgor shall not, without Foothill's prior written
consent, sell or otherwise dispose of any of the Collateral.
6.6 The execution and delivery of this Agreement, and
the delivery to Foothill of the certificate evidencing the Shares creates a
valid, perfected, and first-priority security interest in the Collateral in
favor of Foothill, and all actions necessary or desirable to such perfection
have been duly taken.
6.7 No authorization or other action by, and no notice
to or filing with, any governmental authority or regulatory body is required:
(a) for the grant by Pledgor of the security interest granted hereby or for the
execution, delivery, or performance of this Agreement by Pledgor; (b) for the
perfection of or exercise by Foothill of its rights and remedies hereunder
(except as may have been taken by or at the direction of Pledgor or as may be
required in connection with a disposition of the Collateral by laws affecting
the offering and sale of securities generally); or (c) for the exercise by
Foothill of the voting or other rights provided for in this Agreement or the
remedies in respect of the Collateral pursuant to this Agreement (except as may
be required in connection with a disposition of the Collateral by laws affecting
the offering and sale of securities generally).
6.8 Borrower presently has issued and outstanding
42,290,940 shares of Common Stock, which shares are owned by Pledgor.
6.9 There are no presently existing Options.
6.10 The Shares have been duly and validly issued by
Borrower, and are fully paid and nonassessable.
6.11 Pledgor has made its own arrangements for keeping
informed of changes or potential changes affecting the Collateral (including,
but not limited to, rights to convert, rights to subscribe, payment of
dividends, reorganization or other exchanges, tender offers, and voting rights),
and Pledgor agrees that Foothill shall not have any responsibility or liability
for informing Pledgor of any such changes or potential changes or for taking any
action or omitting to take any action with respect thereto.
7. SHARE ADJUSTMENTS. In the event that during the term of
this Agreement, any reclassification, readjustment, or other change is declared
or made in the capital structure of
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Borrower, or any Option is exercised, all new substituted and additional
shares, options, or other securities, issued or issuable to Pledgor by reason
of any such change or exercise shall be delivered to and held by Foothill
under the terms of this Agreement in the same manner as the Collateral
originally pledged hereunder.
8. OPTIONS. In the event that during the term of this
Agreement Options shall be issued or exercised in connection with the
Collateral, such Options acquired by Pledgor shall be immediately assigned by
Pledgor to Foothill and all new shares or other securities so acquired by
Pledgor shall also be immediately assigned to Foothill to be held under the
terms of this Agreement in the same manner as the Collateral originally pledged
hereunder.
9. CONSENT. Pledgor hereby consents that, from time to time,
before or after the occurrence or existence of any Event of Default, with or
without notice to or assent from Pledgor, any other security at any time held by
or available to Foothill for any of the Secured Obligations or any other
security at any time held by or available to Foothill of any other person, firm,
or corporation secondarily or otherwise liable for any of the Secured
Obligations, may be exchanged, surrendered, or released and any of the Secured
Obligations may be changed, altered, renewed, extended, continued, surrendered,
compromised, waived, or released, in whole or in part, as may be mutually agreed
by Foothill and Borrower. Pledgor shall remain bound under this Agreement
notwithstanding any such exchange, surrender, release, alteration, renewal,
extension, continuance, compromise, waiver, or inaction, or extension of further
credit.
10. EVENT OF DEFAULT. The occurrence of an Event of Default
under, and as defined in, the Loan Agreement shall constitute an event of
default ("Event of Default") under this Agreement.
11. REMEDIES UPON DEFAULT. Upon the occurrence and continuance
of an Event of Default, Foothill shall have, in addition to any other rights
given by law or in this Agreement, in the Loan Agreement, or in any other
agreement between Foothill and Pledgor, all of the rights and remedies with
respect to the Collateral of a secured party under the Code, and also shall
have, without limitation, the following rights, which Pledgor hereby agrees to
be commercially reasonable:
11.1 to transfer all or any part of the Collateral into
the Foothill's name or the name of its nominee or nominees;
11.2 all rights of Pledgor to exercise the voting and
other consensual rights that it would otherwise be entitled to exercise pursuant
to SECTION 5.1 and to receive the dividends and distributions that it would
otherwise be authorized to receive and retain pursuant to SECTION 5.2 shall, at
Foothill's option, cease, and all such rights shall, at Foothill's option,
thereupon become vested in Foothill, and Foothill shall, at its option,
thereupon have the sole right to exercise such voting and other consensual
rights and to receive and hold as Collateral such dividends and interest
payments. Any payments received by Pledgor contrary to the provisions of this
Section shall be held in trust by Pledgor for the benefit of Foothill, shall be
segregated from other funds of Pledgor, and shall be promptly paid over to
Foothill, with any necessary endorsement;
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11.3 to vote the Shares (whether or not transferred into
the name of the Foothill), and give all consents, waivers and ratifications in
respect of the Collateral and otherwise act with respect thereto as though it
were the outright owner thereof; PLEDGOR HEREBY IRREVOCABLY CONSTITUTES AND
APPOINTS FOOTHILL THE PROXY AND ATTORNEY-IN-FACT OF PLEDGOR, COUPLED WITH AN
INTEREST, WITH FULL POWER OF SUBSTITUTION TO DO SO; SUCH PROXY SHALL CONTINUE IN
FULL FORCE AND EFFECT AND TERMINATE UPON THE SOONER TO OCCUR OF: (a) THE
INDEFEASIBLE PAYMENT IN FULL OF THE SECURED OBLIGATIONS; AND (b) APRIL 9, 2009;
11.4 at any time or from time to time, to sell, assign
and deliver, or grant options to purchase, all or any part of the Collateral, or
any interest therein, at any public or private sale, without demand of
performance, advertisement or notice of intention to sell or of the time or
place of sale or adjournment thereof or to redeem or otherwise (all of which are
hereby waived by Pledgor), for cash, on credit or for other property, for
immediate or future delivery without any assumption of credit risk, and for such
price or prices and on such terms as the Foothill in its absolute discretion may
determine; PROVIDED, that at least five days notice of the time and place of any
such sale shall be given to Pledgor. Foothill shall not be obligated to make
any such sale of Collateral regardless of whether any such notice of sale has
therefore been given. Pledgor hereby waives any other requirement of notice,
demand, or advertisement for sale, to the extent permitted by law. Pledgor
hereby waives and releases to the fullest extent permitted by law any right or
equity of redemption with respect to the Collateral, whether before or after
sale hereunder, and all rights, if any, of marshalling the Collateral and any
other security for the Secured Obligations or otherwise. At any such sale,
unless prohibited by applicable law, Foothill may bid for and purchase all or
any part of the Collateral so sold free from any such right or equity of
redemption. Foothill shall not be liable for failure to collect or realize upon
any or all of the Collateral or for any delay in so doing nor shall Foothill be
under any obligation to take any action whatsoever with regard thereto;
11.5 to buy the Collateral, in its own name, or in the
name of a designee or nominee. Foothill shall have the right to execute any
document or form, in its name or in the name of the Pledgor, that may be
necessary or desirable in connection with such sale of the Collateral;
11.6 to sell the Collateral by a private placement,
restricting bidders and prospective purchasers to those who will represent and
agree that they are purchasing for investment only and not for distribution. In
so doing, Foothill may solicit offers to buy the Collateral, or any part of it
for cash, from a limited number of investors deemed by Foothill, in its
reasonable credit judgment, to be responsible parties unrelated to Foothill and
each other, who might be interested in purchasing the Collateral. If Foothill
shall solicit such offers from not less than four (4) such investors, then the
acceptance by Foothill of the highest offer obtained therefor shall be deemed to
be a commercial reasonable method of disposition of such Collateral, even though
the sales price established and/or obtained may be substantially less than the
price that would be obtained pursuant to a public offering. Notwithstanding the
foregoing, should Foothill determine that, prior to any public offering of any
securities contained in the Collateral, such
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securities should be registered under the '33 Act and/or registered or
qualified under any other United States federal or state law, and that such
registration and/or qualification is not practical, Pledgor agrees that it
will be commercially reasonable if a private sale is arranged so as to avoid
a public offering even if offers are solicited from fewer than four
investors, and even though the sale price established and/or obtained may be
substantially less than the price that would be obtained pursuant to a public
offering.
12. INDEFEASIBLE PAYMENT. The Secured Obligations shall not be
considered indefeasibly paid for purposes of this Agreement unless and until all
payments to Foothill are no longer subject to any right on the part of any
Person, including Borrower, Borrower as a debtor in possession, or any trustee
(whether appointed under the Bankruptcy Code or otherwise) of Borrower or any of
Borrower's Assets, to invalidate or set aside such payments or to seek to recoup
the amount of such payments or any portion thereof, or to declare same to be
fraudulent or preferential. In the event that, for any reason, any portion of
such payments to Foothill is set aside or restored, whether voluntarily or
involuntarily, after the making thereof, then the obligation intended to be
satisfied thereby shall be revived and continued in full force and effect as if
said payment or payments had not been made.
13. FOOTHILL AS PLEDGOR'S ATTORNEY-IN-FACT. Pledgor hereby
irrevocably appoints Foothill as its attorney-in-fact to arrange for the
transfer, at any time after the occurrence and during the continuance of an
Event of Default, of the Collateral on the books of Borrower to the name of
Foothill or to the name of Foothill's nominee. Pledgor further authorizes
Foothill to perform any and all reasonable acts which Foothill deems reasonably
necessary for the protection and preservation of the Collateral or of the value
of Foothill's security interest therein, including but not limited to receiving
income thereon as additional security hereunder, all at Pledgor's expense, and
Pledgor agrees to repay Foothill promptly upon demand any amounts expended
hereunder by Foothill, together with interest thereon. Pledgor further grants
to Foothill a power of attorney coupled with an interest to execute all
agreements, financing statements, continuation financing statements, forms,
applications, documents and instruments and to take all reasonable actions and
do all things as could be executed, taken, or done by Pledgor in connection with
the protection and preservation of the Collateral or this Agreement if Pledgor
does not timely do so upon notice to Pledgor. This power of attorney is
irrevocable and coupled with an interest, and authorizes Foothill to act for
Pledgor in connection with the matters described herein without notice to or
demand upon Pledgor.
14. WAIVERS.
14.1 Pledgor absolutely, unconditionally, knowingly, and
expressly waives:
(a) (1) notice of acceptance hereof; (2) notice
of any loans or other financial accommodations made or extended under the Loan
Documents or the creation or existence of any Secured Obligations; (3) notice of
the amount of the Secured Obligations, subject, however, to Pledgor's right to
make inquiry of Foothill to ascertain the amount of the Secured Obligations at
any reasonable time; (4) notice of any adverse change in the financial condition
of Borrower or of any other fact that might increase Pledgor's risk hereunder;
(5) notice
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of presentment for payment, demand, protest, and notice thereof as to any
instruments among the Loan Documents; (6) notice of any Default or Event of
Default under the Loan Documents; and (7) all other notices (except if such
notice is specifically required to be given to Pledgor hereunder or under the
Loan Documents) and demands to which Pledgor might otherwise be entitled.
(b) its right, under Sections 2845 or 2850 of the
California Civil Code, or otherwise, to require Foothill to institute suit
against, or to exhaust any rights and remedies which Foothill has or may have
against, Borrower or any third Person, or against any collateral for the Secured
Obligations provided by Borrower or any third Person. Pledgor further waives
any defense arising by reason of any disability or other defense (other than the
defense that the Secured Obligations shall have been fully and finally performed
and indefeasibly paid) of Borrower or by reason of the cessation from any cause
whatsoever of the liability of Borrower in respect thereof.
(c) (1) any rights to assert against Foothill any
defense (legal or equitable), set-off, counterclaim, or claim which Pledgor may
now or at any time hereafter have against Borrower or any other Person liable to
Foothill; (2) any defense, set-off, counterclaim, or claim, of any kind or
nature, arising directly or indirectly from the present or future lack of
perfection, sufficiency, validity, or enforceability of the Secured Obligations
or any security therefor; (3) any defense Pledgor has to performance hereunder,
and any right Pledgor has to be exonerated, provided by Sections 2819, 2822, or
2825 of the California Civil Code, or otherwise, arising by reason of: the
impairment or suspension of Foothill's rights or remedies against Borrower; the
alteration by Foothill of the Secured Obligations; any discharge of Borrower's
obligations to Foothill by operation of law as a result of Foothill's
intervention or omission; or the acceptance by Foothill of anything in partial
satisfaction of the Secured Obligations; (4) the benefit of any statute of
limitations affecting Pledgor's liability hereunder or the enforcement thereof,
and any act which shall defer or delay the operation of any statute of
limitations applicable to the Secured Obligations shall similarly operate to
defer or delay the operation of such statute of limitations applicable to
Pledgor's liability hereunder.
14.2 Pledgor absolutely, unconditionally, knowingly, and
expressly waives any defense arising by reason of or deriving from (i) any claim
or defense based upon an election of remedies by Foothill including any defense
based upon an election of remedies by Foothill under the provisions of
Sections 580a, 580b, 580d, and 726 of the California Code of Civil Procedure or
any similar law of California or any other jurisdiction; or (ii) any election by
Foothill under Bankruptcy Code Section 1111(b) to limit the amount of, or any
collateral securing, its claim against Borrower. Pursuant to Section 2856 of
the California Civil Code:
"Pledgor waives all rights and defenses arising out of an election
of remedies by the creditor, even though that election of remedies, such
as a nonjudicial foreclosure with respect to security for a guaranteed
obligation, has destroyed Pledgor's rights of subrogation and
reimbursement against Borrower by the operation of Section 580(d) of the
California Code of Civil Procedure or otherwise."
"Pledgor waives all rights and defenses that Pledgor may
have because Borrower's Obligations are secured by real property.
This means, among other things:
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"(1) Foothill may collect from Pledgor without
first foreclosing on any real or personal property collateral
pledged by Borrower.
"(2) If Foothill forecloses on any real property
collateral pledged by Borrower:
(A) The amount of the Secured Obligations
may be reduced only by the price for which that collateral is sold
at the foreclosure sale, even if the collateral is worth more than
the sale price.
(B) Foothill may collect from Pledgor even
if the Foothill, by foreclosing on the real property collateral,
have destroyed any right Pledgor may have to collect from
Borrower.
"This is an unconditional and irrevocable waiver of any
rights and defenses Pledgor may have because Borrower's Obligations are
secured by real property. These rights and defenses include, but are not
limited to, any rights or defenses based upon Section 580a, 580b, 580d,
or 726 of the California Code of Civil Procedure."
If any of the Secured Obligations at any time are secured by a mortgage or deed
of trust upon real property, Foothill may elect, in its sole discretion, upon a
default with respect to the Secured Obligations, to foreclose such mortgage or
deed of trust judicially or nonjudicially in any manner permitted by law, before
or after enforcing the Loan Documents, without diminishing or affecting the
liability of Pledgor hereunder except to the extent the Secured Obligations are
repaid with the proceeds of such foreclosure. Pledgor understands that (a) by
virtue of the operation of California's antideficiency law applicable to
nonjudicial foreclosures, an election by Foothill nonjudicially to foreclose
such a mortgage or deed of trust probably would have the effect of impairing or
destroying rights of subrogation, reimbursement, contribution, or indemnity of
Pledgor against Borrower or other guarantors or sureties, and (b) absent the
waiver given by Pledgor, such an election would prevent Foothill from enforcing
the Loan Documents against Pledgor. Understanding the foregoing, and
understanding that Pledgor is hereby relinquishing a defense to the
enforceability of the Loan Documents, Pledgor hereby waives any right to assert
against Foothill any defense to the enforcement of the Loan Documents, whether
denominated "estoppel" or otherwise, based on or arising from an election by
Foothill nonjudicially to foreclose any such mortgage or deed of trust. Pledgor
understands that the effect of the foregoing waiver may be that Pledgor may have
liability hereunder for amounts with respect to which Pledgor may be left
without rights of subrogation, reimbursement, contribution, or indemnity against
Borrower or other guarantors or sureties. Pledgor also agrees that the "fair
market value" provisions of Section 580a of the California Code of Civil
Procedure shall have no applicability with respect to the determination of
Pledgor's liability under the Loan Documents.
14.3 Pledgor hereby absolutely, unconditionally,
knowingly, and expressly waives: (i) any right of subrogation Pledgor has or
may have as against Borrower with respect to the Secured Obligations; (ii) any
right to proceed against Borrower or any other person or entity, now or
hereafter, for contribution, indemnity, reimbursement, or any other suretyship
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rights and claims, whether direct or indirect, liquidated or contingent, whether
arising under express or implied contract or by operation of law, which Pledgor
may now have or hereafter have as against Borrower with respect to the Secured
Obligations; and (iii) any right to proceed or seek recourse against or with
respect to any property or asset of Borrower.
14.4 WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER
OR OTHER PROVISION SET FORTH IN THIS AGREEMENT, TO THE MAXIMUM EXTENT PERMITTED
BY LAW, PLEDGOR HEREBY ABSOLUTELY, KNOWINGLY, UNCONDITIONALLY, AND EXPRESSLY
WAIVES AND AGREES NOT TO ASSERT ANY AND ALL BENEFITS OR DEFENSES ARISING
DIRECTLY OR INDIRECTLY UNDER ANY ONE OR MORE OF CALIFORNIA CIVIL CODE
SECTIONS 2799, 2808, 2809, 2810, 2815, 2819, 2820, 2821, 2822, 2825, 2839, 2845,
2848, 2849, AND 2850, CALIFORNIA CODE OF CIVIL PROCEDURE SECTIONS 580a, 580b,
580c, 580d, AND 726, CALIFORNIA UNIFORM COMMERCIAL CODE SECTIONS 3116, 3118,
3119, 3419, 3605, 9504, AND 9507, AND CHAPTER 2 OF TITLE 14 OF PART 4 OF
DIVISION 3 OF THE CALIFORNIA CIVIL CODE.
15. GENERAL PROVISIONS.
15.1 CUMULATIVE REMEDIES; NO PRIOR RECOURSE TO
COLLATERAL. The enumeration herein of Foothill's rights and remedies is not
intended to be exclusive, and such rights and remedies are in addition to and
not by way of limitation of any other rights or remedies that the Foothill may
have under the Loan Agreement, the Loan Documents, the Code, or other applicable
law. Foothill shall have the right, in its sole discretion, to determine which
rights and remedies are to be exercised and in which order. The exercise of one
right or remedy shall not preclude the exercise of any others, all of which
shall be cumulative.
15.2 NO IMPLIED WAIVERS. No act, failure, or delay by
Foothill shall constitute a waiver of any of its rights and remedies. No single
or partial waiver by Foothill of any provision of this Agreement or any other
Loan Document, or of a breach or default hereunder or thereunder, or of any
right or remedy which Foothill may have, shall operate as a waiver of any other
provision, breach, default, right, or remedy or of the same provision, breach,
default, right, or remedy on a future occasion. No waiver by Foothill shall
affect its rights to require strict performance of this Agreement.
15.3 NOTICES. All notices or demands by any party hereto
to the other party and relating to this Agreement shall be sent in accordance
with the terms of SECTION 12 of the Loan Agreement.
15.4 SUCCESSORS AND ASSIGNS. This Agreement shall bind
the successors and assigns of Pledgor, and shall inure to the benefit of the
successors and assigns of Foothill; PROVIDED, HOWEVER, that Pledgor may not
assign this Agreement nor delegate any of its duties hereunder without
Foothill's prior written consent and any prohibited assignment shall be
absolutely void. Foothill may assign this Agreement and its rights and duties
hereunder and no consent or approval by Pledgor is required in connection with
any such assignment. Foothill
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reserves the right to sell, assign, transfer, negotiate, or grant
participations in all or any part of, or any interest in Foothill's rights
and benefits hereunder.
15.5 SECTION HEADINGS. Headings and numbers have been
set forth herein for convenience only. Unless the contrary is compelled by the
context, everything contained in each section applies equally to this entire
Agreement.
15.6 AMENDMENTS IN WRITING. This Agreement cannot be
changed or terminated orally, but only by a writing signed by each party hereto.
All prior agreements, understandings, representations, warranties, and
negotiations, if any, are merged into this Agreement.
15.7 COUNTERPARTS; TELEFACSIMILE EXECUTION. This
Agreement may be executed in any number of counterparts and by different parties
on separate counterparts, each of which, when executed and delivered, shall be
deemed to be an original, and all of which, when taken together, shall
constitute but one and the same Agreement. Delivery of an executed counterpart
of this Agreement by telefacsimile shall be equally as effective as delivery of
a manually executed counterpart of this Agreement. Any party delivering an
executed counterpart of this Agreement by telefacsimile also shall deliver a
manually executed counterpart of this Agreement but the failure to deliver a
manually executed counterpart shall not affect the validity, enforceability, and
binding effect of this Agreement.
15.8 TERMINATION BY FOOTHILL. After termination of the
Loan Agreement and when Foothill has received payment and performance, in full,
of the Secured Obligations, Foothill shall execute and deliver to Pledgor a
termination of all of the security interests granted by Pledgor hereunder and,
to the extent they have been delivered to Foothill and not disposed of in
accordance with this Agreement, certificates evidencing the Shares.
15.9 GOVERNING LAW; SEVERABILITY OF PROVISIONS. This
Agreement shall be deemed to have been made in the State of California and the
validity, enforceability, construction, interpretation and enforcement of this
Agreement and the rights of the parties hereto shall be determined under,
governed by and construed in accordance with the laws of the State of California
without regard to the principles of conflicts of law; PROVIDED, HOWEVER, the
respective rights of the parties hereto in the Collateral, including voting the
Shares, transfer of the Shares and proxy rights, shall be governed by the
corporate laws of the State of California to the extent such law is applicable
to such rights. If any provision of this Agreement or its exhibits shall be
determined to be invalid, void or illegal, such provision shall be construed and
amended in a manner which would permit its enforcement, but in no event shall
such provision affect, impair or invalidate any other provision hereof.
15.10 JURISDICTION AND VENUE; WAIVER OF JURY TRIAL. THE
PARTIES HERETO AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH
THIS AGREEMENT SHALL BE TRIED AND LITIGATED ONLY IN THE STATE OR FEDERAL COURT
LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA. THE PARTIES HERETO
HEREBY EXPRESSLY WAIVE ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND,
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ACTION, CAUSE OF ACTION OR PROCEEDING ARISING UNDER OR WITH RESPECT TO OR IN
ANY WAY RELATED TO THIS AGREEMENT. THE PARTIES HERETO MAY FILE AN ORIGINAL
COUNTERPART OR A COPY OF THIS SECTION OF THE AGREEMENT WITH ANY COURT AS
WRITTEN EVIDENCE OF THE CONSENT OF THE OTHER PARTY HERETO TO THE WAIVER OF
ITS RIGHT TO TRIAL BY JURY.
IN WITNESS WHEREOF, the parties have executed this Agreement on
the date first written above.
INCOMNET, INC.,
a California corporation
By: /s/ Denis Richard
-----------------------------
Name: Denis Richard
----------------------------
Title: President
---------------------------
FOOTHILL CAPITAL CORPORATION,
a California corporation
By: /s/ Rhonda Foreman
-----------------------------
Name: Rhonda Foreman
----------------------------
Title: Vice President
----------------------------
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EXHIBIT 10.60
INTERCREDITOR AND SUBORDINATION AGREEMENT
This INTERCREDITOR AND SUBORDINATION AGREEMENT is entered into as of
April 9, 1999, between FOOTHILL CAPITAL CORPORATION, a California corporation
("Senior Creditor") and IRONWOOD TELECOM LLC, a Colorado limited liability
company ("Subordinated Creditor") in light of the following:
R E C I T A L S
A. Senior Creditor and INCOMNET COMMUNICATIONS CORPORATION, a
Delaware corporation ("Debtor") have entered into that certain Loan and Security
Agreement, dated as of April 9, 1999 (the "Senior Creditor Loan Agreement"),
pursuant to which Senior Creditor has agreed to extend certain financial
accommodations to Debtor.
B. As security for the prompt payment and performance of the Senior
Creditor Indebtedness (as hereinafter defined), Debtor and Parent have granted
Senior Creditor a security interest in all of the Collateral (as hereinafter
defined).
C. Subordinated Creditor, Incomnet, Inc., a California corporation
("Parent") and Debtor have entered into that certain Loan and Security
Agreement, dated as of December 15, 1998 (the "Subordinated Creditor Loan
Agreement") pursuant to which Subordinated Creditor presently holds the Notes,
as such term is defined in the Subordinated Creditor Loan Agreement.
D. As security for the prompt payment and performance of the
Subordinated Creditor Indebtedness (as hereinafter defined) Debtor and Parent
have granted Subordinated Creditor a security interest in the Collateral.
E. Senior Creditor and Subordinated Creditor wish to agree as to
their respective liens upon and security interests in the assets of Debtor, and
as to certain other rights, priorities, and interests as between Senior Creditor
and Subordinated Creditor.
A G R E E M E N T
In consideration of the foregoing, the mutual covenants contained
herein, and for other good and valuable consideration, the receipt of which
Senior Creditor and Subordinated Creditor hereby acknowledge, Senior Creditor
and Subordinated Creditor hereby agree as follows:
1. DEFINITIONS. The following terms, as used in this Agreement,
shall have the following meanings:
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"ACCOUNTS", "CHATTEL PAPER", "DOCUMENTS", "EQUIPMENT",
"FIXTURES", "GENERAL INTANGIBLES", "INSTRUMENTS", "INVENTORY", and "INVESTMENT
PROPERTY" shall have the meanings assigned to them under the UCC.
"AGREEMENT" means this Intercreditor and Subordination Agreement
together with any and all amendments, extensions, modifications, riders,
addenda, exhibits, and schedules hereto.
"BANKRUPTCY CASE" means any proceeding commenced by or against
Debtor, under any provision of the Bankruptcy Code or under any other federal or
state bankruptcy or insolvency law, including assignments for the benefit of
creditors, formal or informal moratoria, compositions, extensions generally with
its creditors, or proceedings seeking reorganization, arrangement, or other
similar relief, and all converted or succeeding cases in respect thereof.
"BANKRUPTCY CODE" means the United States Bankruptcy Code (11
U.S.C. Section 101, ET SEQ.), as amended, and any successor statute.
"COLLATERAL" means all of Debtor's presently existing and
hereafter acquired personal property, including, without limitation, Accounts,
Chattel Paper, deposit accounts, Documents, Equipment, Fixtures, General
Intangibles, Instruments, Inventory, and Investment Property; all of Debtor's
and all proceeds and insurance proceeds of the foregoing, all of Debtor's books
and records relating thereto and all of the outstanding shares of Debtor's
capital stock, excluding, however, any or all stock or other ownership interest
held by Debtor or Parent in Rapid Cast, Inc.
"SECURED CREDITOR REMEDIES" means any action by a Secured
Creditor in furtherance of the sale, foreclosure, realization upon, or the
repossession or liquidation of any of the Collateral, including without
limitation, (i) the exercise of any remedies or rights of a "Secured Creditor"
under Division 9 of the UCC, such as, without limitation, the notification of
account debtors; (ii) the exercise of any remedies available to a judgment
creditor; or (iii) any other remedy available in respect of the Collateral
available to such Secured Creditor under any Secured Creditors' Agreement to
which it is a party.
"SECURED CREDITOR" means any of Senior Creditor or Subordinated
Creditor, or any successor or assignee of any of them, in its capacity as a
secured creditor under the Senior Creditor Agreements or the Subordinated
Creditor Agreements, respectively.
"SECURED CREDITORS' AGREEMENTS" means, collectively, the Senior
Creditor Agreements and the Subordinated Creditor Agreements.
"SECURED CREDITORS' INDEBTEDNESS" means, collectively, the Senior
Creditor Indebtedness and the Subordinated Creditor Indebtedness.
"SENIOR CREDITOR AGREEMENTS" means, collectively, the Senior
Creditor Loan Agreement, any Loan Documents referred to therein, and any other
document,
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instrument, or agreement entered into by or in favor of Senior Creditor and
Debtor in connection with the Senior Creditor Indebtedness and the
Collateral, together with any amendments, replacements, substitutions, or
restatements thereof.
"SENIOR CREDITOR INDEBTEDNESS" means any and all presently
existing or hereafter arising indebtedness, claims, debts, liabilities, and
obligations of Debtor owing to Senior Creditor, whether direct or indirect,
contingent or of any other nature, character, or description (including all
interest accruing after commencement of any case, proceeding, or other action
relating to the bankruptcy, insolvency, or reorganization of Debtor and all
amounts and interest that, but for the provisions of the Bankruptcy Code, would
have accrued and become due).
"SENIOR CREDITOR PRIORITY AMOUNT" means $15,000,000 plus
(i) accrued and unpaid interest on the Senior Creditor Indebtedness, (ii) fees
payable to Senior Creditor pursuant to SECTION 2.11 of the Senior Creditor Loan
Agreement and (iii) Foothill Expenses as defined in the Senior Creditor Loan
Agreement.
"SUBORDINATED CREDITOR AGREEMENTS" means, collectively, the
Subordinated Creditor Loan Agreement, and any other document, instrument, or
agreement now existing or in the future entered into by or in favor of
Subordinated Creditor and Debtor in connection with the Subordinated Creditor
Indebtedness or the Collateral, together with any amendments, replacements,
substitutions, or restatements thereof.
"SUBORDINATED CREDITOR INDEBTEDNESS" means any and all presently
existing or hereafter arising indebtedness (including the indebtedness evidenced
by the Amended and Restated Notes and the Term Note, as such terms are defined
in the Subordinated Creditor Loan Agreement), claims, debts, liabilities, and
obligations of Debtor owing to Subordinated Creditor, whether direct or
indirect, whether contingent or of any other nature, character, or description
(including all interest accruing after commencement of any case, proceeding, or
other action relating to the bankruptcy, insolvency, or reorganization of Debtor
to the extent such interest is an allowable claim in any such proceeding).
"UCC" means the Uniform Commercial Code as adopted in the State
of California, or in such other jurisdiction as governs the perfection of the
liens and security interests in the Collateral for the purposes of the
provisions hereof relating to such perfection or effect of perfection.
2. SUBORDINATION OF SUBORDINATED CREDITOR INDEBTEDNESS.
(a) Except as otherwise provided in this Agreement, only
regularly scheduled payments of interest and the payment of principal at
maturity shall be made with respect to the Subordinated Creditor Indebtedness
while the Senior Creditor Indebtedness remains outstanding. No payment on
account of the Subordinated Creditor Indebtedness shall be made by or on behalf
of Debtor with respect to regularly scheduled payments of interest or the
payment of principal on Subordinated Creditor Indebtedness, if at the time of
such payment or immediately after giving effect thereto there shall have
occurred and be continuing an Event
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of Default (as described in the Senior Creditor Loan Agreement) unless such
Event of Default is due to a default under the Subordinated Creditor
Agreements and the Subordinated Creditor has agreed to waive or forbear from
acting on such default. Except as set forth in SECTION 2(b), so long as
Subordinated Creditor is prohibited from receiving payments of principal
under this SECTION 2(a), Subordinated Creditor, or any party on behalf of
Subordinated Creditor, may not do any of the following: (i) accelerate any
part of the Subordinated Creditor Indebtedness; (ii) commence, prosecute, or
participate in any administrative, legal, or equitable action to enforce its
Subordinated Creditor Indebtedness; or (iii) join in any Bankruptcy Case
against Debtor by filing of an involuntary petition; PROVIDED, HOWEVER, that
Subordinated Creditor may take such actions if there is an uncured monetary
default of the Subordinated Creditor Indebtedness: (A) at any time 30 days
after it has delivered to Senior Creditor a Subordinated Debt Default Notice
(as defined below), if and only if, Senior Creditor has not delivered a
Blockage Notice (as defined below) or (B) at any time after the expiration of
any Blockage Period (as defined below) or at any time prior to the expiration
of any Blockage Period, subject to the limitations of SECTIONS 2(b) or 9
hereof, if any Bankruptcy Case is commenced against the Debtor or its assets
(except by Subordinated Creditor) so long as such proceeding is not dismissed
or settled. Notwithstanding anything to the contrary contained in this
Agreement, Subordinated Creditor shall not take any action with respect to
the Collateral upon expiration of any Blockage Period so long as Senior
Creditor has commenced action to collect or enforce the Collateral and is
continuing such action in a diligent manner.
(b) (i) Subordinated Creditor hereby agrees to provide to
Senior Creditor written notice (a "Subordinated Debt Default Notice"), with a
copy to Debtor, of any event of default of Debtor under the Subordinated
Creditor Indebtedness pursuant to which Subordinated Creditor desires to
institute either legal proceedings against Debtor to collect the Subordinated
Creditor Indebtedness or to foreclose on any assets of the Debtor securing such
Subordinated Creditor Indebtedness. Such notice shall set forth a description
of the default and the Subordinated Creditor's desired actions.
(ii) At any time during the continuation of any default
under the Subordinated Creditor Agreements or at any time within 30 days after
receipt of a Subordinated Debt Default Notice, Senior Creditor may deliver
written notice thereof to Subordinated Creditor in the manner set forth herein
(each a "Blockage Notice"), specifying the default or defaults upon which such
Blockage Notice is based including Senior Creditor's receipt of a Subordinated
Debt Default Notice. A Blockage Period (a "Blockage Period") shall be in effect
for the purposes of this Agreement from the date of delivery or deemed delivery
of any Blockage Notice to the earlier of (i) 180 days after a Blockage Notice
shall have been given to the Subordinated Creditor or (ii) through the date on
which all defaults are cured or waived in writing or the benefits of such
Blockage Period are waived in writing by Senior Creditor.
(iii) During any Blockage Period or such shorter period if
all of the Senior Creditor Indebtedness shall have been paid in full, in cash,
Debtor shall not make, and Subordinated Creditor shall not receive, accept, or
retain, and agrees not to take, sue for, or demand from Debtor payment of all or
any of the Subordinated Creditor
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Indebtedness or otherwise accelerate the principal amount due and payable
thereunder or commence, or join with any creditor other than the Senior
Creditor Lender, in commencing, an involuntary Bankruptcy Case.
Notwithstanding the foregoing, (i) not more than one Blockage Notice shall be
given with respect to the Senior Creditor Indebtedness within a period of 360
consecutive days, and (ii) no default which existed or was continuing on the
date of any Blockage Notice shall be made the basis for the giving of a
subsequent Blockage Notice.
(c) Senior Creditor shall have the right to provide Subordinated
Creditor with a written notice (a "Senior Debt Default Notice") of any event of
default of Debtor under the Senior Creditor Indebtedness which notice shall
serve as a Blockage Notice. Such notice shall specify the default or defaults
upon which the Blockage Notice is based. Upon Subordinated Creditor's receipt
of the Blockage Notice, a Blockage Period shall be in effect as described in
SECTION 2(b).
(d) Upon (i) any maturity (whether by acceleration or otherwise)
of the principal amount due on the Subordinated Creditor Indebtedness, or
(ii) any payment or distribution of assets of Debtor, of any kind or character,
whether in cash, property, or securities, following commencement of a Bankruptcy
Case, then all amounts due or to become due upon all Senior Creditor
Indebtedness shall first be paid in full in cash, before any payment is made by
Debtor on account of the Subordinated Creditor Indebtedness; and following
commencement of a Bankruptcy Case, any payment or distribution of assets of
Debtor of any kind or character, whether in cash, property or securities, to
which the Subordinated Creditor would be entitled, except for the provisions
hereof, shall be paid by Debtor or any other person making such payment or
distribution, or by the Subordinated Creditor if received by it, directly to the
Senior Creditor to the extent necessary to pay all Senior Creditor Indebtedness
in full, in cash, before any payment or distribution is made to the Subordinated
Creditor. In any Bankruptcy Case, Subordinated Creditor may file proof of claim
which indicates Subordinated Creditor's interest in Debtor's assets.
(e) In the event that, notwithstanding the foregoing, any
payment or distribution of assets of a Debtor, whether in cash, property or
securities, prohibited by the foregoing, shall be received by Subordinated
Creditor in respect of Subordinated Creditor Indebtedness before all Senior
Creditor Indebtedness is paid in full in cash, such payment or distribution
shall be held in trust for the benefit of the Senior Creditor and shall be paid
over to or delivered to the Senior Creditor until all such Senior Creditor
Indebtedness shall have been paid in full, in cash.
3. PERMITTED LIENS AND RELATIVE PRIORITIES. As between the Secured
Creditors, notwithstanding: (a) the terms (including the description of
collateral), dating, execution, or delivery of any document, instrument, or
agreement; the time, order, occurrence, method, or manner of granting, or
perfection of any security interest or lien; the time of filing or recording of
any financing statements, assignments, deeds of trust, mortgages, or any other
documents, instruments, or agreements under the UCC or any other applicable law;
(b) the existence of (or the order in which any Secured Creditor becomes a party
to or a beneficiary of) any collateral agency arrangement with any party other
than a Secured
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Creditor, or the appointment of such other party as a collateral
agent to perfect the Secured Creditors' liens and security interests, in all or
in any part of the Collateral; (c) the existence of any control agreement in
favor of any Secured Creditor; or (d) any provision of the UCC or any other
applicable law to the contrary, the Secured Creditors agree that, as to the
Collateral of Debtor:
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(i) Senior Creditor shall have a first priority security
interest in and lien thereon to secure the Senior Creditor Indebtedness up to
the Senior Priority Amount; and
(ii) Subordinated Creditor shall have a junior and subordinate
security interest in and lien thereon to secure the Subordinated Creditor
Indebtedness.
For purposes of the foregoing allocation of priorities, any claim
or a right to a set-off shall be treated in all respects as a security interest
and no claimed right of set-off shall be asserted to defeat or diminish the
rights or priorities provided for herein.
4. NO ALTERATION OF PRIORITY AND PERFECTION. The lien and security
interest priorities provided in SECTION 3 shall not be altered or otherwise
affected by any amendment, modification, supplement, extension, renewal,
restatement, or refinancing of any of the Secured Creditor Indebtedness, nor by
any action or inaction which either Secured Creditor may take or fail to take in
respect of the Collateral, or otherwise. Each Secured Creditor consents to
Debtor's granting to each other Secured Creditor the liens and security
interests reflected in SECTION 3. Subordinated Creditor shall be solely
responsible for perfecting and maintaining the perfection of its lien or
security interest in any of the Collateral. Subordinated Creditor agrees that it
will not directly or indirectly take any action to contest or challenge the
validity, legality, perfection, priority (up to the Senior Priority Amount),
avoidability, or enforceability of the liens or security interests of Senior
Creditor upon the Collateral or seek to have the same avoided, disallowed, set
aside, or otherwise invalidated in any judicial proceeding or otherwise. In the
event that Subordinated Creditor (either individually or together with others)
breaches or causes to be breached the terms of the preceding sentence, resulting
(directly or indirectly) in the avoidance or imperfection of Senior Creditor's
lien or security interest in some or all of the Collateral, then the priority of
the lien or security interest of Subordinated Creditor in any such affected
Collateral shall continue to be governed by the terms of SECTION 3 irrespective
of the avoidance or imperfection of Senior Creditor's lien or security interest.
Notwithstanding anything to the contrary contained in this Agreement, Senior
Creditor hereby consents to the conversion, in whole or in part, of Subordinated
Creditor Indebtedness into shares of Parent's preferred stock.
5. MANAGEMENT OF COLLATERAL. Notwithstanding anything to the
contrary contained in any of the Senior Creditor Agreements or the Subordinated
Creditor Agreements:
(a) Until the Senior Creditor Indebtedness (up to the Senior
Priority Amount) has been fully paid in cash, and all obligations of Senior
Creditor to extend credit under the Senior Creditor Agreements have been
terminated: (i) Senior Creditor shall have the exclusive right to manage the
Collateral, including the exclusive right to perform and enforce the terms of
the Senior Creditor Agreements with respect to the Collateral and to exercise
and enforce all privileges and rights thereunder according to Senior Creditor's
discretion, but in a commercially reasonable manner in compliance with the UCC,
including, without limitation, the exclusive right to enforce or settle
insurance claims with respect to the Collateral, take or retake control or
possession of the Collateral and to hold, prepare for sale, sell, lease, or
liquidate the Collateral; (ii) neither Subordinated Creditor nor any party
acting on their behalf, shall exercise any Secured Party Remedies with respect
to the Collateral; and (iii) any and all proceeds of the Collateral (other than
regularly scheduled payments made on the Subordinated
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Creditor Indebtedness) which shall come into the possession, control, or
custody of Subordinated Creditor will be deemed to have been received for the
account of Senior Creditor and shall be immediately paid over to Senior
Creditor. In connection with the provisions of CLAUSE 5(a)(i) ABOVE,
Subordinated Creditor waives any and all rights to affect the method or
challenge the appropriateness of any action by Senior Creditor with respect
to the Collateral, and waives any claims or defenses it may have against
Senior Creditor, including any such claims or defenses based on any actions
or omissions of any such person, in connection with the perfection,
maintenance, enforcement, foreclosure, sale, liquidation, or release of any
lien or security interest therein by Senior Creditor, or any modification or
waiver of any Senior Creditor Agreements, except as provided or limited under
this Agreement.
(b) The rights and priorities set forth in this Agreement shall
remain binding irrespective of the terms of any plan of reorganization in a
Bankruptcy Case or other provisions of the Bankruptcy Code or any similar
federal or state statute.
6. SALE OF COLLATERAL. Until the Senior Creditor Indebtedness (up
to the Senior Priority Amount and in accordance with SECTION 2(b)) has been
fully paid in cash and all obligations of Senior Creditor to extend credit under
the Senior Creditor Agreements have been terminated: (i) only Senior Creditor
shall have the right to restrict or permit, or approve or disapprove, the sale
of the Collateral; and (ii) Subordinated Creditor will, immediately upon the
request of Senior Creditor, release or otherwise terminate its liens and
security interests upon the Collateral, to the extent such Collateral is sold by
Debtor with the consent of Senior Creditor in accordance with the Senior
Creditor Agreements, and Subordinated Creditor will promptly deliver (at
Debtor's expense) such release documents as Senior Creditor or Debtor may
reasonably require in connection therewith.
7. SECTION 9504 NOTICE AND WAIVER OF MARSHALING. Each Secured
Creditor hereby acknowledges that this Agreement shall constitute notice of the
other Secured Creditor's respective interests in the Collateral as provided by
Section 9504 of the UCC and each of the Secured Creditors waives any right to
compel the other Secured Creditor to marshal any of the Collateral or to seek
payment from any particular assets of Debtor or from any third party.
8. INSURANCE. In the event of the occurrence of a fire or other
casualty resulting in damage to all or any portion of any Collateral
(collectively, a "Casualty"):
(a) Subordinated Creditor hereby waives any right to participate
or join in any adjustment, compromise, or settlement of any claims resulting
from a Casualty with respect to any Collateral;
(b) all proceeds received or to be received on account of a
Casualty shall be applied in the manner or manners provided for in the Senior
Creditor Agreements; and
(c) Subordinated Creditor agrees to execute and deliver any
documents, instruments, agreements or further assurances reasonably required to
effectuate any of the foregoing.
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9. BANKRUPTCY ISSUES.
(a) Except as provided in this SECTION 9, this Agreement
shall continue in full force and effect after the commencement of a
Bankruptcy Case (all references herein to Debtor being deemed to apply to
Debtor as debtor-in-possession and to a trustee for Debtor's estate in a
Bankruptcy Case), and shall apply with full force and effect with respect to
all Collateral acquired by Debtor, and to all Secured Creditors' Indebtedness
incurred by Debtor, subsequent to such commencement.
(b) If Debtor shall become subject to a Bankruptcy Case, and
if Senior Creditor shall desire to permit the use of cash collateral or to
provide post-petition financing to Debtor, Subordinated Creditor agrees as
follows: (i) adequate notice to Subordinated Creditor shall be deemed to have
been provided for such use of cash collateral or post-petition financing if
the such parties receive notice thereof at least three business days prior to
the earlier of (y) any hearing on a request to approve such use of cash
collateral or post-petition financing or (z) the date of entry of an order
approving the same; and (ii) no objection will be raised by Subordinated
Creditor to any such use of cash collateral or such post-petition financing
by Senior Creditor on the grounds of a failure to provide adequate protection
for the Subordinated Creditor's junior liens and security interests in the
Collateral, provided that the Subordinated Creditor is granted the same
rights, benefits, and protections as Senior Creditor, including the same
liens and security interests on the post-petition Collateral, that may be
granted to or for the benefit of Senior Creditor, junior only to the liens or
security interests of Senior Creditor therein. No objection will be raised
by Subordinated Creditor to Senior Creditor's motion for relief from the
automatic stay in any proceeding under the Bankruptcy Code to foreclosure on
and sell the Collateral.
10. NOTICE OF DEFAULT AND CERTAIN EVENTS. Subordinated Creditor
shall promptly notify Senior Creditor in writing of the occurrence of any of the
following as applicable:
(a) any default or event of default under the Subordinated
Creditor Agreements; or
(b) the demand for payment of, acceleration of or termination of
any of the Subordinated Creditor Indebtedness.
11. ADDITIONAL DOCUMENTS. The Secured Creditors agree to execute and
deliver, upon the request of any other Secured Party, such documents and
instruments (appropriate for filing, if requested) as may be necessary or
appropriate to fully implement or to fully evidence the understandings and
agreements contained in this Agreement. Without limiting the foregoing, in the
event that all or part of any of the Senior Creditor Indebtedness is hereafter
refinanced, Subordinated Creditor agrees to enter into one or more new
agreements with the refinancing lender or lenders on terms identical to those of
this Agreement.
12. REPRESENTATIONS AND WARRANTIES. Subordinated Creditor represents
and warrants to Senior Creditor that Subordinated Creditor is the holder of the
liens and security
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interests which secure or will secure the Subordinated Creditor Indebtedness.
Subordinated Creditor agrees that it shall not assign or transfer any of
such liens and security interests without (i) prior notice being given to
Senior Creditor and (ii) such assignment or transfer being made expressly
subject to the terms of this Agreement. Subordinated Creditor further
warrants to Senior Creditor that it has full right, power, and authority to
enter into this Agreement and, to the extent Subordinated Creditor is an
agent or trustee for other parties, that this Agreement shall fully bind all
such other parties.
13. MODIFICATION OF SENIOR CREDITOR INDEBTEDNESS. Subordinated
Creditor agrees that Senior Creditor shall have absolute power and discretion,
without notice to Subordinated Creditor, to deal in any manner with the Senior
Creditor Indebtedness, including, but not by way of limitation, the power and
discretion to do any of the following: (a) any demand for payment of any Senior
Creditor Indebtedness may be rescinded in whole or in part, and any Senior
Creditor Indebtedness may be continued, and the Senior Creditor Indebtedness or
the liability of the Debtor upon or for any part thereof, or any Collateral or
guaranty therefor, or right of offset with respect thereto, may, from time to
time, in whole or in part, be modified, accelerated, compromised, waived,
surrendered, or released; and (b) the Senior Creditor Agreements may be amended,
modified, supplemented, or terminated, in whole or in part, as Senior Creditor
may deem advisable from time to time, and, in compliance with the UCC, any
Collateral may be sold, and any Collateral may be exchanged, waived,
surrendered, or released. Subordinated Creditor will remain bound under this
Agreement, and the subordination provided for herein shall not be impaired,
abridged, released, or otherwise affected notwithstanding any such modification,
acceleration, compromise, amendment, supplement, termination, sale, exchange,
waiver, surrender, or release. The Senior Creditor Indebtedness shall
conclusively be deemed to have been created, contracted, or incurred in reliance
upon this Agreement, and all dealings between Senior Creditor and Debtor shall
be deemed to have been consummated in reliance upon this Agreement.
14. SUBORDINATED CREDITOR'S WAIVERS. Subordinated Creditor:
(a) waives any and all notice of or proof of reliance by Senior Creditor upon
this Agreement; and (b) agrees not to assert against Senior Creditor, any rights
as a guarantor or surety, and nothing in this Agreement shall constitute
Subordinated Creditor a guarantor or surety.
15. BINDING EFFECT; OTHER. This Agreement shall be a continuing
agreement, shall be binding upon and shall inure to the benefit of the parties
hereto from time to time and their respective successors and assigns, shall be
irrevocable, and shall remain in full force and effect until the Senior Creditor
Indebtedness shall have been paid in full in cash, and the obligation of Senior
Creditor to extend credit under the Senior Creditor Agreements shall have been
irrevocably terminated, but shall continue to be effective, or be reinstated, as
the case may be, if any payment, or any part thereof, of any amount paid by or
on behalf of Debtor with regard to any Senior Creditor Indebtedness is rescinded
or must otherwise be restored or returned as a result of a Bankruptcy Case, or
otherwise, all as though such payments had not been made. Any waiver or
amendment hereunder must be evidenced by a signed writing of a party to be bound
thereby, and shall only be effective in the specific instance. This Agreement
shall be governed by and construed in accordance with the laws of the State of
California. The
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parties agree that actions may be tried and litigated in the state and
federal courts located in the County of Los Angeles, in the State of
California. The headings in this Agreement are for convenience of reference
only, and shall not alter or otherwise affect the meaning hereof.
16. PARTIES INTENDED TO BE BENEFITTED. All of the understandings,
covenants, and agreements contained herein are solely for the benefit of Senior
Creditor and Subordinated Creditor, and there are no other parties, including
Debtor or any of the creditors, successors, or assigns of Debtor, which are
intended to be benefitted, in any way, by this Agreement.
17. NO LIMITATION INTENDED. Nothing contained in this Agreement is
intended to or shall affect or limit, in any way, the rights that the Secured
Creditors have with respect to any third parties. The Secured Creditors hereby
specifically reserve all of their respective rights against Debtor and all other
third parties.
18. NOTICE. Whenever it is provided herein that any notice, demand,
request, consent, approval, declaration, or other communication shall or may be
given to or served upon any of the parties hereto, or whenever any of the
parties desires to give or serve upon the other communication with respect to
this Agreement, each such notice, demand, request, consent, approval,
declaration, or other communication shall be in writing and shall be delivered
either in person, with receipt acknowledged, or by regular, registered, or
certified United States mail, postage prepaid, or by telefacsimile, addressed as
follows:
(a) If to Senior Creditor, at:
Foothill Capital Corporation
11111 Santa Monica Blvd., Suite 1500
Los Angeles, CA 90025-3333
Attn: Business Finance Division Manager
Fax: (310) 478-9788
with a copy to:
Buchalter, Nemer, Fields & Younger
601 S. Figueroa Street, Suite 2400
Los Angeles, CA 90017-5704
Attn: Robert C. Colton, Esq.
Fax: (213) 896-0400
(b) If to Subordinated Creditor, at:
Ironwood Telecom LLC
555 Zang Street, Suite 300
Lakewood, Colorado 80228
Attn: Robert A. Klein, Esq.
Fax: (303) 985-5875
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with a copy to:
Howrey & Simon
1299 Pennsylvania Avenue N.W.
Washington, D.C. 20004-2402
Attn: Rod Nydam, Esq.
Fax: (202) 383-6610
or at such other address as may be substituted by notice given as herein
provided. Giving of any notice required hereunder may be waived in writing by
the party entitled to receive such notice. Every notice, demand, request,
consent, approval, declaration or other communication hereunder shall be deemed
to have been duly given or served on the date on which personally delivered,
with receipt acknowledged, or actually received via telefacsimile transmission,
or three days after the same shall have been deposited in the United States
mail.
19. SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
20. COMPLETE AGREEMENT. This Agreement constitutes the complete
agreement and understanding of each of the Secured Creditors and supersedes all
prior or contemporaneous oral and written negotiations, agreements and
understandings, express or implied, with respect to the subject matter hereof.
21. SUCCESSORS AND ASSIGNS. Subordinated Creditor agrees to enter
into an agreement substantially in the form of this Agreement, with any senior,
secured lender that refinances or replaces the Senior Creditor Indebtedness.
This Agreement shall be binding upon, and inure to the benefit of, the
successors and assigns of Senior Creditor and Subordinated Creditor.
22. CONSTRUCTION. Unless the context of this Agreement clearly
requires otherwise, references to the plural include the singular, the singular
includes the plural, the part includes the whole, "including" is not limiting,
and "or" has the inclusive meaning represented by the phrase "and/or." The
words "hereof," "herein," "hereby," "hereunder," and similar terms in this
Agreement refer to this Agreement as a whole and not to any particular provision
of this Agreement. Article, section, subsection, exhibit, and schedule
references are to this Agreement unless otherwise specified.
23. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, and by Senior Creditor and Subordinated Creditor in separate
counterparts, each of which shall be an original, but all of which shall
together constitute one and the same Agreement.
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24. WAIVER OF JURY TRIAL. SENIOR CREDITOR AND SUBORDINATED CREDITOR
HEREBY EXPRESSLY WAIVE ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION
OR CAUSE OF ACTION (A) ARISING UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT,
DOCUMENT, OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR (B) IN
ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF SENIOR
CREDITOR AND SUBORDINATED CREDITOR WITH RESPECT TO THIS AGREEMENT OR ANY OTHER
INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED BY THEM IN CONNECTION
HEREWITH, OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER
NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR
OTHERWISE. SENIOR CREDITOR AND SUBORDINATED CREDITOR HEREBY AGREE AND CONSENT
THAT ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT
TRIAL WITHOUT JURY, AND THAT EITHER OF THEM MAY FILE AN ORIGINAL COUNTERPART OR
A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT TO THE
WAIVER OF RIGHT TO TRIAL BY JURY.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first herein above set forth.
FOOTHILL CAPITAL CORPORATION,
a California corporation
By /s/ Rhonda Foreman
----------------------------------
Title: Vice President
------------------------------
IRONWOOD TELECOM LLC,
a Colorado limited liability company
By /s/ Donald V. Berlanti
----------------------------------
Title: Member
-------------------------------
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ACKNOWLEDGMENT
The undersigned, INCOMNET COMMUNICATIONS CORPORATION and INCOMNET,
INC., a California corporation, hereby acknowledge receipt of a copy of the
foregoing Intercreditor and Subordination Agreement and consent thereto, and
agree to recognize all rights granted thereby to the parties thereto, and will
not do any act or perform any obligation which is not in accordance with the
agreements set forth in such Intercreditor and Subordination Agreement. The
undersigned further acknowledge that they are not intended beneficiaries under
the Intercreditor and Subordination Agreement.
Dated as of April 9, 1999.
INCOMNET COMMUNICATIONS CORPORATION, a
Delaware corporation
By /s/ Denis Richard
----------------------------------
Name: Denis Richard
Title: President
INCOMNET, INC.,
a California corporation
By /s/ Denis Richard
----------------------------------
Name: Denis Richard
Title: President
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EXHIBIT 10.61
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY
NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A
REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT
OR AN EXEMPTION FROM SUCH REGISTRATION.
No. WA-C-1 Warrant to Purchase 1,250,000 Shares of
Common Stock (subject to adjustment)
WARRANT TO PURCHASE COMMON STOCK
OF
INCOMNET, INC.
This certifies that, for value received, IRONWOOD TELECOM LLC and its
registered assigns ("Holder") is entitled, subject to the terms set forth
below, to purchase from INCOMNET, INC., a California corporation (the
"Company"), 1,250,000 shares of the Common Stock of the Company, on the date
the Company's Articles of Incorporation are amended to provide for a
sufficient number of authorized shares of Common Stock to allow for the
issuance of the number of shares of Common Stock underlying this Warrant (the
date of such amendment, the "Initial Exercise Date"), upon surrender hereof,
at the principal office of the Company referred to below, with the Notice of
Exercise form attached hereto (the "Notice of Exercise") duly executed, and
simultaneous payment therefor in lawful money of the United States as
hereinafter provided, at the Exercise Price as set forth in Section 2 below.
The number, character and Exercise Price of such shares of Common Stock are
subject to adjustment as provided below. The term "Warrant" as used herein
shall include this Warrant and any warrants delivered in substitution or
exchange therefor as provided herein.
This Warrant is issued in connection with the transactions described
in the Intercreditor and Subordination Agreement, dated as of April 9, 1999,
between Foothill Capital Corporation and the Holder.
1. TERM OF WARRANT. Subject to the terms and conditions set forth
herein, this Warrant shall be exercisable, in whole or in part, during the
term commencing on the Initial Exercise Date and ending at 5:00 p.m., Pacific
Standard Time, on the five-year anniversary of the Initial Exercise Date, and
shall be void thereafter.
<PAGE>
2. EXERCISE PRICE. The Exercise Price at which this Warrant may
be exercised shall be $1.00 per share of Common Stock, as adjusted from time
to time pursuant to Section 11 hereof.
3. EXERCISE OF WARRANT.
3.1. NOTICE OF EXERCISE. The purchase rights represented by
this Warrant are exercisable by the holder in whole or in part, but not for
less than 10,000 shares at a time (or such lesser number of shares which may
then constitute the maximum number purchasable; such number being subject to
adjustment as provided in Section 11 below), at any time, or from time to
time, during the term hereof as described in Section 1 above, by the
surrender of this Warrant and the Notice of Exercise duly completed and
executed on behalf of the Holder, at the office of the Company (or such other
office or agency of the Company as it may designate by notice in writing to
the Holder at the address of the Holder appearing on the books of the
Company), upon payment in cash or by check acceptable to the Company of the
purchase price of the shares to be purchased.
3.2. ISSUANCE OF STOCK. This Warrant shall be deemed to have
been exercised immediately prior to the close of business on the date of its
surrender for exercise as provided above, and the person entitled to receive
the shares of Common Stock issuable upon such exercise shall be treated for
all purposes as the holder of record of such shares as of the close of
business on such date. As promptly as practicable on or after such date and
in any event within ten (10) days thereafter, the Company at its expense
shall issue and deliver to the person or persons entitled to receive the same
a certificate or certificates for the number of shares issuable upon such
exercise. In the event that this Warrant is exercised in part, the Company
at its expense will execute and deliver a new Warrant of like tenor
exercisable for the number of shares for which this Warrant may then be
exercised.
4. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant. In lieu of any fractional share to which the Holder would otherwise
be entitled, the Company shall make a cash payment equal to the Exercise
Price multiplied by such fraction.
5. REPLACEMENT OF WARRANT. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of
an indemnity agreement reasonably satisfactory in form and substance to the
Company or, in the case of mutilation, on surrender and cancellation of this
Warrant, the Company at its expense shall execute and deliver, in lieu of
this Warrant, a new warrant of like tenor and amount.
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6. RIGHTS OF SHAREHOLDERS. Subject to Sections 9 and 11 of this
Warrant, the Holder shall not be entitled to vote or receive dividends or be
deemed the holder of Common Stock or any other securities of the Company that
may at any time be issuable on the exercise hereof for any purpose, nor shall
anything contained herein be construed to confer upon the Holder, as such,
any of the rights of a stockholder of the Company or any right to vote for
the election of directors or upon any matter submitted to shareholders at any
meeting thereof, or to give or withhold consent to any corporate action or to
receive notice of meetings, or to receive dividends or subscription rights or
otherwise until the Warrant shall have been exercised as provided herein.
7. TRANSFER OF WARRANT.
7.1. WARRANT REGISTER. The Company will maintain a register
(the "Warrant Register") containing the names and addresses of the Holder or
Holders. Any Holder of this Warrant or any portion thereof may change its
address as shown on the Warrant Register by written notice to the Company
requesting such change and the Company shall immediately make the appropriate
changes on the Warrant Register. Any notice or written communication
required or permitted to be given to the Holder may be delivered or given by
mail to such Holder as shown on the Warrant Register and at the address shown
on the Warrant Register. Until this Warrant is transferred on the Warrant
Register of the Company, the Company may treat the Holder as shown on the
Warrant Register as the absolute owner of this Warrant for all purposes,
notwithstanding any notice to the contrary.
7.2. WARRANT AGENT. The Company may, by written notice to
the Holder, appoint an agent for the purpose of maintaining the Warrant
Register referred to in Section 7(a) above, issuing the Common Stock or other
securities then issuable upon the exercise of this Warrant, exchanging this
Warrant, replacing this Warrant, or any or all of the foregoing. Thereafter,
any such registration, issuance, exchange, or replacement, as the case may
be, shall be made at the office of such agent.
7.3. TRANSFERABILITY AND NON-NEGOTIABILITY OF WARRANT. This
Warrant may not be transferred or assigned in whole or in part without
compliance with all applicable federal and state securities laws by the
transferor and the transferee (including the delivery of investment
representation letters and legal opinions reasonably satisfactory to the
Company, if such are requested by the Company), provided, however, that this
Warrant may not be transferred in part unless such transfer is to a
transferee who pursuant to such transfer receives the right to purchase at
least 10,000 shares hereunder. Subject to the provisions of this Warrant
with respect to compliance with the Securities Act of 1933, as amended (the
"Act"), title to this Warrant may be transferred by endorsement (by the
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<PAGE>
Holder executing the Assignment Form attached hereto (the "Assignment Form")
and delivery in the same manner as a negotiable instrument transferable by
endorsement and delivery.
7.4. EXCHANGE OF WARRANT UPON A TRANSFER. On surrender of
this Warrant for exchange, properly endorsed on the Assignment Form and
subject to the provisions of this Warrant with respect to compliance with the
Act and with the limitations on assignments and transfers and contained in
this Section 7, the Company at its expense shall issue to or on the order of
the Holder a new warrant or warrants of like tenor, in the name of the Holder
or as the Holder (on payment by the Holder of any applicable transfer taxes)
may direct, for the number of shares issuable upon exercise hereof.
7.5. COMPLIANCE WITH SECURITIES LAWS.
(i) The Holder of this Warrant, by acceptance hereof,
acknowledges that this Warrant and the shares of Common Stock or Common
Stock to be issued upon exercise hereof are being acquired solely for the
Holder's own account and not as a nominee for any other party, and for
investment, and that the Holder will not offer, sell or otherwise dispose
of this Warrant or any shares of Common Stock to be issued upon exercise
hereof except under circumstances that will not result in a violation of
the Act or any state securities laws. Upon exercise of this Warrant, the
Holder shall, if requested by the Company, confirm in writing, in a form
satisfactory to the Company, that the shares of Common Stock so purchased
are being acquired solely for the Holder's own account and not as a
nominee for any other party, for investment, and not with a view toward
distribution or resale.
(ii) This Warrant and all shares of Common Stock issued
upon exercise hereof shall be stamped or imprinted with a legend in
substantially the following form (in addition to any legend required by
state securities laws):
THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933. SUCH SECURITIES AND ANY SECURITIES OR SHARES ISSUED
HEREUNDER OR THEREUNDER MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID
ACT. COPIES OF THE AGREEMENT COVERING THE PURCHASE OF THESE
SECURITIES AND RESTRICTING THEIR TRANSFER OR SALE MAY BE OBTAINED
AT NO COST BY WRITTEN REQUEST
4
<PAGE>
MADE BY THE HOLDER OR RECORD HEREOF TO THE SECRETARY OF THE COMPANY AT
THE PRINCIPAL EXECUTIVE OFFICES OF THE COMPANY.
8. RESERVATION OF STOCK. The Company covenants that during the
term this Warrant is exercisable, the Company will reserve from its
authorized and unissued Common Stock a sufficient number of shares to provide
for the issuance of Common Stock upon the exercise of this Warrant and, from
time to time, will take all steps necessary to amend its Articles of
Incorporation (the "Articles") to provide sufficient reserves of shares of
Common Stock issuable upon exercise of this Warrant; provided, however, that
as of April 9, 1999 the Company does not have any shares of Common Stock
available for issuance upon the exercise of this Warrant, and the Holder
hereby acknowledges that she understands that shares of Common Stock are so
unavailable; provided, further, that the Company hereby covenants and agrees
to request that its shareholders approve of a proposal at the next annual
meeting of shareholders to amend the Articles to increase the Company's
authorized Common Stock in sufficient number to provide for the issuance of
all securities of the Company outstanding as of the Initial Exercise Date
exercisable or convertible into Common Stock. The Company further covenants
that all shares that may be issued upon the exercise of rights represented by
this Warrant, upon exercise of the rights represented by this Warrant and
payment of the Exercise Price, all as set forth herein, will be free from all
taxes, liens and charges in respect of the issue thereof (other than taxes in
respect of any transfer occurring contemporaneously or otherwise specified
herein). The Company agrees that its issuance of this Warrant shall
constitute full authority to its officers who are charged with the duty of
executing stock certificates to execute and issue the necessary certificates
for shares of Common Stock upon the exercise of this Warrant.
9. NOTICES. Upon the written request of the Holder, whenever the
Exercise Price or number of shares purchasable hereunder shall be adjusted
pursuant to Section 11 hereof, the Company shall issue a certificate signed
by its Chief Financial Officer setting forth, in reasonable detail, the event
requiring the adjustment, the amount of the adjustment, the method by which
such adjustment was calculated, and the Exercise Price and number of shares
purchasable hereunder after giving effect to such adjustment, and shall cause
a copy of such certificate to be mailed (by first-class mail, postage
prepaid) to the Holder of this Warrant. All notices and requests required
under this Warrant shall be in writing and shall be deemed to have been given
for all purposes (a) upon personal delivery, (b) one day after being sent,
when sent by professional overnight courier service from and to locations
within the continental United States, (c) five days after posting when sent
by registered or certified mail, or (d) on the date of transmission (if
transmitted during normal business hours otherwise on the next succeeding
business day) when sent by telegram, telegraph, telex or telecopier,
addressed to the Holder at its addresses set
5
<PAGE>
forth on the Warrant Register, and addressed to the Company at 2801 Main
Street, Irvine, California 92614, Telecopier No. (949) 224-7474. The Holder
or the Company may from time to time by notice in writing delivered as
provided herein, designate a different mailing address to which such notices
or requests shall thereafter be delivered.
10. AMENDMENTS.
10.1. AMENDMENT. Any term of this Warrant may be amended with
the written consent of the Company and the Holder. Any amendment effected in
accordance with this Section 10 shall be binding upon the Company and each
future holder of this Warrant.
10.2. WAIVER. No waivers of, or exceptions to, any term,
condition or provision of this Warrant, in any one or more instances, shall
be deemed to be, or construed as, a further or continuing waiver of any such
term, condition or provision.
11. ADJUSTMENTS. The Exercise Price and the number of shares
purchasable hereunder are subject to adjustment from time to time as follows:
11.1. MERGER, SALE OF ASSETS, ETC. If at any time while this
Warrant, or any portion thereof, is outstanding and unexpired there shall be
(i) a reorganization (other than a combination, reclassification, exchange or
subdivision of shares otherwise provided for herein), (ii) a merger or
consolidation of the Company with or into another corporation in which the
Company is not the surviving entity, or a reverse triangular merger in which
the Company is the surviving entity but the shares of the Company's capital
stock outstanding immediately prior to the merger are converted by virtue of
the merger into other property, whether in the form of securities, cash, or
otherwise, or (iii) a sale or transfer of the Company's properties and assets
as, or substantially as, an entirety to any other person, then, as a part of
such reorganization, merger, consolidation, sale or transfer, lawful
provision shall be made so that the holder of this Warrant shall thereafter
be entitled to receive upon exercise of this Warrant, during the period
specified herein and upon payment of the Exercise Price then in effect, the
number of shares of stock or other securities or property of the successor
corporation resulting from such reorganization, merger, consolidation, sale
or transfer that a holder of the shares deliverable upon exercise of this
Warrant would have been entitled to receive in such reorganization,
consolidation, merger, sale or transfer if this Warrant had been exercised
immediately before such reorganization, merger, consolidation, sale or
transfer, all subject to further adjustment as provided in this Section 11.
The foregoing provisions of this Section 11.1 shall similarly apply to
successive reorganizations, consolidations, mergers, sales and transfers and
to the stock or securities of any other corporation that are at the time
receivable upon the exercise of this Warrant. If the per-share consideration
payable to the
6
<PAGE>
holder hereof for shares in connection with any such transaction is in a form
other than cash or marketable securities, then the value of such
consideration shall be determined in good faith by the Company's Board of
Directors. In all events, appropriate adjustment (as determined in good
faith by the Company's Board of Directors) shall be made in the application
of the provisions of this Warrant with respect to the rights and interests of
the Holder after the transaction, to the end that the provisions of this
Warrant shall be applicable after that event, as near as reasonably may be,
in relation to any shares or other property deliverable after that event upon
exercise of this Warrant.
11.2. RECLASSIFICATION, ETC. If the Company, at any time
while this Warrant, or any portion thereof, remains outstanding and unexpired
by reclassification of securities or otherwise, shall change any of the
securities as to which purchase rights under this Warrant exist into the same
or a different number of securities of any other class or classes, this
Warrant shall thereafter represent the right to acquire such number and kind
of securities as would have been issuable as the result of such change with
respect to the securities that were subject to the purchase rights under this
Warrant immediately prior to such reclassification or other change and the
Exercise Price therefor shall be appropriately adjusted, all subject to
further adjustment as provided in this Section 11.
11.3. SPLIT, SUBDIVISION OR COMBINATION OF SHARES. If the
Company at any time while this Warrant, or any portion thereof, remains
outstanding and unexpired shall split, subdivide or combine the securities as
to which purchase rights under this Warrant exist, into a different number of
securities of the same class, the Exercise Price for such securities shall be
proportionately decreased in the case of a split or subdivision or
proportionately increased in the case of a combination.
11.4. ADJUSTMENTS FOR DIVIDENDS IN STOCK OR OTHER SECURITIES
OR PROPERTY. If while this Warrant, or any portion hereof, remains
outstanding and unexpired the holders of the securities as to which purchase
rights under this Warrant exist at the time shall have received, or, on or
after the record date fixed for the determination of eligible shareholders,
shall have become entitled to receive, without payment therefor, other or
additional stock or other securities or property (other than cash) of the
Company by way of dividend, then and in each case, this Warrant shall
represent the right to acquire, in addition to the number of shares of the
security receivable upon exercise of this Warrant, and without payment of any
additional consideration therefor, the amount of such other or additional
stock or other securities or property (other than cash) of the Company that
such holder would hold on the date of such exercise had it been the holder of
record of the security receivable upon exercise of this Warrant on the date
hereof and had thereafter, during the period from the date hereof to and
including the date of such exercise, retained such shares and/or all other
additional stock available by it as aforesaid during such
7
<PAGE>
period, giving effect to all adjustments called for during such period by the
provisions of this Section 11.
11.5. CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of
each adjustment or readjustment pursuant to this Section 11, the Company
shall, upon the written request, at any time, of any Holder of this Warrant,
furnish or cause to be furnished to such Holder a like certificate setting
forth: (i) adjustments and readjustments in accordance with the terms hereof;
(ii) the Exercise Price at the time in effect; and (iii) the number of shares
and the amount, if any, of other property that at the time would be received
upon the exercise of the Warrant.
12. REGISTRATION RIGHTS. Upon exercise of this Warrant, the Holder
shall have and be entitled to exercise, together with all other holders of
Registrable Securities possessing registration rights under that certain
Registration Rights Agreement, dated November 4, 1998, herewith, between the
Company, the Holder and the other parties identified therein or are otherwise
bound thereby (the "Registration Rights Agreement"), the rights of
registration granted under the Registration Rights Agreement to Registrable
Securities (with respect to the shares issued on exercise of this Warrant).
By its receipt of this Warrant, Holder agrees to be bound by the Registration
Rights Agreement upon exercise of this Warrant as a party thereto.
13. MISCELLANEOUS.
(A) ATTORNEYS' FEES. In any action at law or in equity to
enforce any of the provisions or rights under this Warrant, the unsuccessful
party to such litigation, as determined by the court in a final judgment or
decree, shall pay the successful party all costs, expenses and reasonable
attorneys' fees incurred by the successful party (including, without
limitation, costs, expenses and fees on any appeal).
(B) GOVERNING LAW; VENUE. This Warrant and the legal
relations between the Holder and the Company shall be governed by and
construed in accordance with the laws of the State of Colorado applicable to
contracts made and performed in such State and without regard to conflicts of
law doctrines of any other State or country. In the event of any action at
law or equity to enforce any of the provisions or rights under this
Agreement, the parties agree that the proper venue for such action is Denver,
Colorado and that the parties may bring such an action to enforce their
respective rights under this Agreement only in a court located within Douglas
or Jefferson County, State of Colorado. The parties further agree that such
court shall have personal jurisdiction over each of the parties to this
Agreement.
8
<PAGE>
IN WITNESS WHEREOF, INCOMNET, INC. has caused this Warrant to be
executed by its officers thereunto duly authorized.
Dated: April 9, 1999 INCOMNET, INC.
By: /s/ Denis Richard
------------------------------
Denis Richard
President and Chief Executive Officer
ATTEST:
By: /s/ George Blanco
------------------------------
George Blanco
Secretary
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<PAGE>
NOTICE OF EXERCISE
TO: INCOMNET, INC.
(1) The undersigned hereby elects to purchase ______ shares of
Common Stock of INCOMNET, INC., pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price for such shares
in full.
(2) In exercising this Warrant, the undersigned hereby confirms and
acknowledges that the shares of Common Stock or the Common Stock are being
acquired solely for the account of the undersigned and not as a nominee for
any other party, and for investment, and that the undersigned will not offer,
sell or otherwise dispose of any such shares of Common Stock or Common Stock
except under circumstances that will not result in a violation of the
Securities Act of 1933, as amended, or any state securities laws.
(3) Please issue a certificate or certificates representing those
shares of Common Stock in the name of the undersigned or in such other name
as is specified below:
--------------------------------------
(Name)
--------------------------------------
(Name)
(4) Please issue a new Warrant for the unexercised portion of the
attached Warrant in the name of the undersigned or in such other name as is
specified below:
--------------------------------------
(Name)
- ------------------------------- --------------------------------------
(Date) (Signature)
<PAGE>
ASSIGNMENT FORM
FOR VALUE RECEIVED, the undersigned registered owner of this Warrant
hereby sells, assigns and transfers unto the Assignee named below all of the
rights of the undersigned under the within Warrant, with respect to the
number of shares of Common Stock (or Common Stock) set forth below:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
and does hereby irrevocably constitute and appoint ________________________
as Attorney-in-Fact to make such transfer on the books of INCOMNET, INC.,
maintained for the purpose, with full power of substitution in the premises.
The undersigned also represents that, by assignment hereof, the
Assignee acknowledges that this Warrant and the shares of stock to be issued
upon exercise hereof or conversion thereof are being acquired for investment
and that the Assignee will not offer, sell or otherwise dispose of this
Warrant or any shares of stock to be issued upon exercise hereof or
conversion thereof except under circumstances which will not result in a
violation of the Securities Act of 1933, as amended, or any state securities
laws. Further, the Assignee has acknowledged that upon exercise of this
Warrant, the Assignee shall, if requested by the Company, confirm in writing,
in a form satisfactory to the Company, that the shares of stock so purchased
are being acquired for investment and not with a view toward distribution or
resale.
Dated:
---------------------
-------------------------------------
Signature of Holder
ATTEST:
- --------------------------------------
Signature of Assignee
<PAGE>
PROMISSORY NOTE
$3,771,348 Dated as of April 11, 1997
FOR VALUE RECEIVED, on or before five years from the date hereof, the
undersigned, Jerry Ballah (the "Maker"), promises to pay to the order of
National Telephone & Communications, Inc., a Delaware corporation (the
"Corporation") at 2801 Main Street, Irvine, California 92614, or at such other
place as the holder hereof may from time to time designate in writing, the
principal sum of Three Million Seven Hundred Seventy-One Thousand Three Hundred
Forty-Eight Dollars ($3,771,348), or so much thereof as shall be advanced or
readvanced and from time to time remain unpaid, plus interest on the principal
balance thereof at a rate of six and seventy-four hundredths percentum (6.74%)
per annum annually.
This Note shall be payable in successive annual installments of accrued
interest only, followed by one final installment at maturity in the amount of
the then outstanding principal balance of this Note and all accrued and unpaid
interest thereon. Such consecutive annual installments shall be due on each
anniversary of the date hereof until the fifth anniversary of the date hereof,
the maturity date of this Note, when the entire principal balance of this Note
and all accrued and unpaid interest thereon, as well as all other costs, fees or
charges payable hereunder, if any, shall be due and payable in full. Interest
on this Note shall be calculated on a 360 day year, per diem basis. All
payments hereunder shall be made in lawful currency of the United States and in
immediately available funds.
This Note is secured by a certain Convertible Debt Unit Pledge Agreement
(the "Pledge Agreement") dated of even date herewith between the Maker and the
Corporation. This Note Agreement and the Pledge Agreement, together with all
extensions, renewals and modifications thereof and substitutions therefor are
collectively referred to as the "security documents."
If (i) default be made in the payment of interest due on any anniversary of
the date hereof or principal due on the maturity date of this Note, (ii) the
Maker files a voluntary petition under the federal Bankruptcy Code or (iii) an
involuntary petition under the federal Bankruptcy Code is filed against the
Maker and such involuntary petition is not dismissed within ninety (90) days of
the date that such petition was filed, then in any of such events, the entire
principal balance hereof and all accrued and unpaid interest hereon shall at
once become due and payable at the option of the holder. The failure of the
holder to exercise this option shall not constitute a waiver of the right to
exercise the same on any future date.
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<PAGE>
This Note may be prepaid, in whole or in part, at any time without penalty
and shall be prepaid in full at such times and in such amounts as provided in
the Pledge Agreement. Any partial prepayments shall not, however, relieve the
Maker of the obligation to pay principal hereunder as and when the same would
otherwise fall due.
The Maker (i) waives presentment, demand, protest and notice of
presentment, notice of protest and notice of dishonor of this debt and each and
every other notice of any kind with respect to this Note, and (ii) agrees that
the holder of this Note, at any time or times, without notice to him or his
consent, may grant extensions of time, without limit as to the number or the
aggregate period of such extensions, for the payment of any sums due hereunder.
The Maker promises to pay all costs of collection, including reasonable
attorneys' fees, upon default in the payment of the principal of this Note or
interest hereon when due, whether suit be brought or not.
In the event any one or more of the provisions contained in this Note or
any of the other security documents shall for any reason be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Note or any of the
other security documents, but this Note and the other security documents shall
be construed as if such invalid, illegal or unenforceable provision had never
been contained herein.
This Note may not be changed orally, but only by an agreement in writing
signed by the parties against whom enforcement of any waiver, change,
modification or discharge is sought.
The Maker warrants and represents that the loan evidenced hereby is being
made for business or investment purposes.
This Note shall be governed in all respects by the laws of California and
shall be binding upon and inure to the benefit of the parties hereto and their
respective heirs, executors, administrators, personal representatives,
successors and assigns.
WITNESS:
/s/ Karen Letterman /s/ Jerry Ballah (SEAL)
- ------------------------------- -------------------------------
Jerry Ballah
Maker
2
<PAGE>
UNIT NUMBER: 3
- --------------------------------------------------------------------------------
CONVERTIBLE DEBT UNIT
DATED AS OF APRIL 11, 1997
ISSUED BY
NATIONAL TELEPHONE & COMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
THIS CONVERTIBLE DEBT UNIT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED OR ANY APPLICABLE, STATE SECURITIES LAW, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT AND STATE SECURITIES LAW COVERING SUCH CONVERTIBLE DEBT
UNIT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THIS
CONVERTIBLE DEBT UNIT REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH
SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT OR APPLICABLE SECURITIES LAW.
<PAGE>
NATIONAL TELEPHONE & COMMUNICATIONS, INC.
CONVERTIBLE DEBT UNIT
Number of Convertible Debt Units: 1,257,116 Irvine, California
Principal Amount of Convertible Debt: $3,771,348 Dated as of April 11, 1997
NATIONAL TELEPHONE & COMMUNICATIONS, INC., a Delaware corporation
(hereinafter the "Company"), for value received, hereby promises to pay to the
registered holder hereof, on the date which is five years from the date hereof
(the "Maturity Date") the sum of Three Million Seven Hundred Seventy-One
Thousand Three Hundred Forty-Eight Dollars ($3,771,348), and to pay interest
thereon to the registered holder hereof, on each anniversary hereof at the rate
of 6.49 percent per annum until the principal hereof is paid in full. In the
event that any anniversary hereof is not a Business Day, as hereinafter defined,
the Company shall pay interest on the first following day that is a Business
Day. The principal of and interest on the Convertible Debt evidenced by this
Convertible Debt Unit shall be payable at the office of the Company at 2801 Main
Street, Irvine, California 92614 in such coin or currency of the United States
as of the time of payment is legal tender for payment of public and private
debts. The term Business Day means a day on which commercial banks settle
payments in Los Angeles, California.
1. SENIOR EXECUTIVE AND CONSULTANT CONVERTIBLE DEBT PLAN; GRANT
AGREEMENT. This Convertible Debt Unit has been issued under the terms of (a)
the Company's 1996 Senior Executive and Consultant Convertible Debt Plan (the
"Plan") and (b) the Grant Agreement (the "Grant Agreement") dated as of April
11, 1997 between the Company and Jerry Ballah. The registered holder hereof is
entitled to the benefits of, and subject to the restrictions contained in, the
Plan and the Grant Agreement, and reference is made thereto for a description of
all rights, remedies and restrictions thereunder. Neither reference to the Plan
or to the Grant Agreement, nor any provision thereof, shall affect or impair the
absolute and unconditional obligation of the Company to pay, when due, the
principal amount hereof, together with all accrued interest thereon.
2. MATURITY. The principal amount of the Convertible Debt evidenced by
this Convertible Debt Unit shall become due and payable on the Maturity Date, if
not previously converted pursuant to Section 3 hereof. In the event that the
Maturity Date is not a Business Day, the Convertible Debt evidenced by this
Convertible Debt Unit shall be due and payable on the first following day that
is a Business Day.
3. CONVERSION RIGHT. Subject to the provisions of Section 10(b) of the
Plan, the registered holder may, at any time prior to the Maturity Date, convert
this Convertible Debt Unit into shares of the Company's common stock, par value
$.01 per share (the
<PAGE>
"Common Stock") at the rate (the "Conversion Rate") of one Convertible Debt
Unit for one share of the Common Stock at the conversion price of one cent
per share of Common Stock. The Conversion Rate shall be adjusted as
described in Section 10(a) of the Plan within twenty (20) days following the
consummation of any of the transactions described in Section 10(a) of the
Plan.
4. MECHANICS OF CONVERSION. Before the registered holder of this
Convertible Debt Unit will be entitled to convert the same into shares of the
Common Stock, such holder will surrender this Convertible Debt Unit at the
principal office of the Company, and he will give written notice to the Company
in the form of Exhibit A to the Grant Agreement (the "Conversion Notice")
stating (i) the number of the Convertible Debt Units he wishes to convert into
shares of the Common Stock and (ii) the total conversion price for such number
of shares of the Common Stock. The registered holder of this Convertible Debt
Unit shall include with such Conversion Notice payment of the total conversion
price. The Company, as soon as reasonably practicable after its receipt of the
Conversion Notice and payment of the total conversion price, will issue and
deliver at such office to such holder, a certificate for the number of shares of
the Common Stock to which such holder will be entitled as aforesaid and if such
holder has elected to convert less than all of his Convertible Debt Units into
shares of the Common Stock, the Company shall deliver to such holder a new
Convertible Debt Unit in the number of the Convertible Debt Units that he did
not elect to convert. Such conversion will be deemed to have been made
immediately prior to the close of business on the date that the Company receives
the Conversion Notice and payment of the total conversion price from the
registered holder of this Convertible Debt Unit holder, and such registered
holder will be treated for all purposes as the record holder of such shares of
the Common Stock on such date. If the conversion is in connection with the
initial public offering of shares of the Common Stock, the conversion will be
conditioned upon the closing with the underwriter or underwriters of the sale of
securities pursuant to such offering, in which event the registered holder of
this Convertible Debt Unit shall not be deemed to have converted his Convertible
Debt Unit until immediately prior to the closing of such sale of securities.
5. REDEMPTION. This Convertible Debt Unit is not subject to redemption
or prepayment by the Company in whole or in part, except as otherwise provided
in Section 3 hereof.
6. EVENTS OF DEFAULT. Each of the following events shall be an Event of
Default hereunder:
a. The Company shall fail to pay (i) any interest payment hereon
when due or (ii) the principal hereof on the Maturity Date;
2
<PAGE>
b. The Company files a voluntary petition under the federal
Bankruptcy Code; or
c. An involuntary petition under the federal Bankruptcy Code is
filed against the Company and such involuntary petition is not dismissed within
thirty (30) days of the date that such petition was filed.
7. RIGHTS OF THE HOLDER FOLLOWING AN EVENT OF DEFAULT. Upon the
occurrence of any Event of Default, the registered holder of this Convertible
Debt Unit, in his sole discretion, may do either or both of the following: (i)
declare all principal and interest due on the Convertible Debt evidenced by this
Convertible Debt Unit immediately due and payable without demand, protest,
notice of protest, notice of default, presentment for payment or further notice
of any kind; and (ii) proceed to enforce such other and additional rights and
remedies as the registered holder may have under other agreements with the
Company or applicable law. The failure of the registered holder to exercise any
of the rights and remedies set forth in the preceding sentence shall not
constitute a waiver of the right to exercise the same on any future date.
8. REGISTRATION; TRANSFERABILITY; LOCK-UP AGREEMENT. This Convertible
Debt Unit shall be registered in a Convertible Debt Unit Register maintained by
the Company. This Convertible Debt Unit is subject to the restrictions on the
transfer set forth in the Grant Agreement. This Convertible Debt Unit and
shares of the Common Stock issued upon the conversion thereof are subject to
provisions regarding a lock-up agreement set forth in the Grant Agreement and to
the Pledge Agreement of even date herewith between the Company and Jerry Ballah.
9. RESERVATION OF COMMON STOCK ISSUABLE UPON CONVERSION. The Company at
all times will reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of
this Convertible Debt Unit such number of shares of Common Stock as from time to
time shall be sufficient to effect the conversion of all of the Convertible Debt
Units evidenced by this Convertible Debt Unit; and if at any time the number of
authorized but unissued shares of Common Stock is not sufficient to effect the
conversion of all of the Convertible Debt Units evidenced by this Convertible
Debt Unit, in addition to such other remedies as may be available to the
registered holder of this Convertible Debt Unit for such failure, the Company
will take such corporate action as, in the opinion of its counsel, may be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as will be sufficient for such purpose.
10. NOTICE. Any notice or other communication in connection with this
Convertible Debt Unit shall be in writing and delivered by hand or by certified
or registered mail, return receipt requested. All such notices and
communications shall be effective (i) if given by mail, when deposited in the
mail, and (ii) if delivered by hand, on
3
<PAGE>
the date delivered. Any such notice or communication shall be addressed as
provided below (or at such other address as such person shall specify in writing
to the other parties hereto in accordance with the provisions hereof):
a. if to the Company,
National Telephone & Communications, Inc.
2801 Main Street
Irvine, California 92614
Attention: President
b. if the to Registered Holder,
to his address as set forth in the Convertible Debt Unit
Register.
11. COSTS OF COLLECTION. The Company shall pay all costs of collection,
including reasonable attorneys' fees, upon the occurrence of an Event of
Default, whether suit be brought or not.
12. MODIFICATION. This Convertible Debt Unit may not be modified,
amended, discharged or waived orally, but only by a written instrument executed
by the Company.
13. INVALIDITY. In the event any one or more of the provisions contained
in this Convertible Debt Unit shall for any reason be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceabilty shall not affect any other provision of this Convertible Debt
Unit, but this Convertible Debt Unit shall be construed as if such invalid,
illegal or unenforceable provision had never been contained herein.
14. GOVERNING LAW. This Convertible Debt Unit is governed by the laws of
the State of Delaware, without giving effect to principles of conflict of laws.
15. CAPTIONS. The captions and headings set forth in this Convertible
Debt Unit are for convenience purposes only and shall not limit, define or
otherwise have any effect on the interpretation of the agreements and
understandings set forth herein.
16. OWNERSHIP OF THIS CONVERTIBLE DEBT UNIT. The Company and any agent of
the Company may treat the registered holder of this Convertible Debt Unit as the
owner hereof for the purpose of receiving payment as herein provided and for all
other purposes, and neither the Company nor any such agent shall be affected by
any notice to the contrary.
4
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Convertible Debt Unit to be
executed by its duly authorized officer.
NATIONAL TELEPHONE &
COMMUNICATIONS, INC.
By: /s/ James R. Quandt
--------------------------------
Name: James R. Quandt
Title: President
5
<PAGE>
NATIONAL TELEPHONE & COMMUNICATIONS, INC.
1996 SENIOR EXECUTIVE AND CONSULTANT
CONVERTIBLE DEBT PLAN (THE "PLAN")
GRANT AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Grant Agreement ("Grant Agreement").
I. NOTICE OF CONVERTIBLE DEBT UNIT GRANT
Grantee's Name and Address Jerry Ballah
32 Canyon Fairway
Newport Beach, California 92660
You have been granted Convertible Debt Units of the Company (the
"Convertible Debt Units") in the form of Schedule I hereto, which may be
converted to shares of the Common Stock of the Company (the "Shares"), subject
to the terms and conditions of the Plan and this Grant Agreement, as follows:
<TABLE>
<S> <C>
Date of Grant April 11, 1997
Number of Convertible Debt Units 1,257,116
Purchase Price per Convertible Debt Unit $3.00
Interest Rate 6.49% per annum,
payable annually
Total Number of Shares into which the 1,257,116
Convertible Debt Units may be converted
Conversion Price per Share $.01
Expiration Date April 11, 2002
(No more than 5 years from date of grant)
</TABLE>
II. AGREEMENT
1. GRANT OF CONVERTIBLE DEBT UNITS. The Committee hereby grants to the
Grantee named in Section I of this Grant Agreement (the "Grantee"), the right to
purchase the number of Convertible Debt Units set forth in Section I, at the
purchase price per Convertible Debt Unit set forth in Section I (the "Purchase
Price"), subject to the terms and conditions of the Plan, which is incorporated
herein by reference. In the event of a conflict between the terms and
conditions of the Plan and the terms and conditions of this
<PAGE>
Grant Agreement, the terms and conditions of the Plan shall prevail. The
Grantee may review a copy of the Plan at the office of the Secretary of the
Company at 2801 Main Street, Irvine, California 92614.
2. METHOD OF PAYMENT. The purchase price of Convertible Debt Units shall
be paid as set forth in the Plan. The price of Shares issued upon conversion of
Convertible Debt Units shall be paid as set forth in the Plan.
3. TRANSFERABILITY OF CONVERTIBLE DEBT UNITS. Convertible Debt Units may
not be transferred in any manner otherwise than by will or by the laws of
descent or distribution and may be exercised during the lifetime of the Grantee
only by the Grantee. The terms of the Plan and this Grant Agreement shall be
binding upon the executors, administrators, heirs, successors and assigns of the
Grantee.
4. LOCK-UP AGREEMENT. No less than thirty (30) days prior to the
commencement of any offering of Shares in a bona fide underwriting pursuant to a
registration statement under the Securities Act, the Grantee shall execute and
deliver a written agreement (the "Lock-Up Agreement") between the Company, the
underwriter or underwriters of the Shares and the Grantee pursuant to which the
Grantee agrees that he will not offer, sell, contract to sell or otherwise
dispose of up to one hundred percent (100%) of the Convertible Debt Units or
Shares issued upon the conversion thereof for a period not to exceed 180 days
after the commencement by such underwriter or underwriters of such offering in a
form negotiated by the Committee (which form of Lock-Up Agreement shall be
conclusive and not subject to negotiation by the Grantee). A condition
precedent to any transfer of the Convertible Debt Units or any Shares issued
upon the conversion thereof is that the transferee agree in writing to be bound
by the obligation described in the preceding sentence to execute and deliver a
Lock-Up Agreement.
5. TERM OF CONVERTIBLE DEBT UNITS. Convertible Debt Units may be
converted only on or before the expiration date set forth in Section I and may
be converted only in accordance with the Plan and the terms of this Grant
Agreement.
6. TAX CONSEQUENCES. The conversion of Convertible Debt Units will have
federal and state income tax consequences. THE GRANTEE SHOULD CONSULT A TAX
ADVISER UPON THE GRANT OF CONVERTIBLE DEBT UNITS AND BEFORE CONVERTING
CONVERTIBLE DEBT UNITS OR DISPOSING OF THE SHARES OF COMMON STOCK ACQUIRED UPON
CONVERSION, PARTICULARLY WITH RESPECT TO HIS STATE'S TAX LAWS.
7. ENTIRE AGREEMENT; GOVERNING LAW. The Plan is incorporated herein by
reference. The Plan, the Convertible Debt Unit and this Grant Agreement
constitute the entire agreement of the parties with respect to the subject
matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and the Grantee with
2
<PAGE>
respect to the subject matter hereof. This Grant Agreement is governed by the
laws of the State of Delaware, without giving effect to principles of conflict
of laws.
8. WARRANTIES, REPRESENTATIONS AND COVENANTS. The undersigned Grantee
warrants and represents that he has reviewed the Plan and this Grant Agreement
in its entirety, has had an opportunity to obtain the advice of counsel prior to
executing this Grant Agreement and fully understands all provisions of the Plan
and this Grant Agreement. The Grantee hereby agrees to accept as binding,
conclusive and final all decisions or interpretations of the Committee upon any
questions relating to the Plan and Grant Agreement. The Grantee further agrees
to notify the Company promptly upon any change in the residence address
indicated below.
GRANTEE: NATIONAL TELEPHONE & COMMUNICATIONS, INC.
a Delaware corporation
/s/ Jerry Ballah By: /s/ James R. Quandt
- ------------------------------- -----------------------------------
Signature Title: President
Jerry Ballah
- -------------------------------
Print Name
Residence Address:
32 Canyon Fairway
- -------------------------------
Newport Beach, CA 92660
- -------------------------------
3
<PAGE>
EXHIBIT A
NATIONAL TELEPHONE & COMMUNICATIONS, INC.
1996 SENIOR EXECUTIVE AND CONSULTANT
CONVERTIBLE DEBT PLAN
CONVERSION NOTICE
National Telephone & Communications, Inc.
2801 Main Street
Irvine, California 92614
Attention: Secretary
1. CONVERSION OF CONVERTIBLE DEBT UNITS. Effective as of today, _____
199_, the undersigned ("Purchaser") hereby elects to convert _____ Convertible
Debt Units into _______ shares (the "Shares") of the Common Stock of National
Telephone & Communications, Inc. (the "Company") under and pursuant to the 1996
Senior Executive and Consultant Convertible Debt Plan (the "Plan") and the Grant
Agreement dated ____________________, 199_ (the "Grant Agreement"). The
purchase price for the Shares shall be $_______________, as specified in the
Grant Agreement.
2. DELIVERY OF PAYMENT. Purchaser herewith delivers to the Company the
full purchase price for the Shares.
3. REPRESENTATION OF PURCHASER. Purchaser acknowledges that Purchaser
has received, read and understood the Plan and this Grant Agreement and agrees
to abide by and be bound by their terms and conditions.
4. RIGHTS OF STOCKHOLDER. Purchaser shall not be deemed to be the holder
of, or to have any of the rights of a holder with respect to, any Shares for
which such Convertible Debt Units are converted including, but not limited to,
rights to vote or to receive dividends unless and until Purchaser has satisfied
all requirements for conversion of the Convertible Debt Units pursuant to their
terms, the certificates evidencing such Shares have been issued and Purchaser
has become a record holder of such Shares. A share certificate for the number
of Shares so acquired shall be issued to Purchaser as soon as practicable after
conversion of the Convertible Debt Units. No adjustment will be made for a
dividend or other right for which the record date is prior to the date all the
conditions set forth above are satisfied, except as provided in Section 10 of
the Plan.
5. LOCK-UP AGREEMENT. No less than thirty (30) days prior to the
commencement of any offering of Shares in a bona fide underwriting pursuant to a
registration statement under the Securities Act, Purchaser shall execute and
deliver a
<PAGE>
written agreement (the "Lock-Up Agreement") between the Company, the underwriter
or underwriters of the Shares and Purchaser pursuant to which Purchaser agrees
that he will not offer, sell, contract to sell or otherwise dispose of up to one
hundred percent (100%) of the Convertible Debt Units or Shares issued upon the
conversion thereof for a period not to exceed 180 days after the commencement by
such underwriter or underwriters of such offering in a form negotiated by the
Committee (which form of Lock-Up Agreement shall be conclusive and not subject
to negotiation by Purchaser). A condition precedent to any transfer of the
Convertible Debt Units or any Shares issued upon the conversion thereof is that
the transferee agree in writing to be bound by the obligation described in the
preceding sentence to execute and deliver a Lock-Up Agreement.
6. TAX CONSULTANT. Purchaser understands that Purchaser may suffer
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
7. ENTIRE AGREEMENT; GOVERNING LAW. The Plan, the Convertible Debt Unit
and Grant Agreement arc incorporated herein by reference. This Agreement, the
Plan, the Convertible Debt Unit and the Grant Agreement constitute the entire
agreement of the parties with respect to the subject matter hereof and supersede
in their entirety all prior undertakings and agreements of the Company and
Purchaser with respect to the subject matter hereof. This agreement is governed
by the laws of the State of Delaware without giving effect to principles of
conflict of laws.
Submitted by: Accepted by:
PURCHASER: NATIONAL TELEPHONE &
COMMUNICATIONS, INC.
By:
- ------------------------------ -----------------------------------
Signature Its:
- ------------------------------
Print Name
Address: Address:
- ------------------------------ -----------------------------------
- ------------------------------ -----------------------------------
2
<PAGE>
CONVERTIBLE DEBT UNIT PLEDGE AGREEMENT
CONVERTIBLE DEBT UNIT PLEDGE AGREEMENT, dated as of April 11, 1997, between
Jerry Ballah (the "Pledgor") and National Telephone & Communications, Inc., a
Delaware corporation (the "Pledgee").
WHEREAS, the Pledgee has made a loan to the Pledgor in order to permit the
Pledgor to acquire certain convertible debt units of the Pledgor described in
Schedule 1 hereto which are convertible into certain shares of common stock of
the Pledgee (the "Common Stock"), which loan is evidenced by a Promissory Note
of the Pledgor of even date herewith (the "Promissory Note");
WHEREAS, the Pledgee requires the Pledgor, as a condition to making the
aforementioned loan, to enter into this Agreement.
NOW, THEREFORE, in consideration of the making of such loan, the Pledgor
hereby agrees with the Pledgee as follows:
SECTION 1. PLEDGE. To secure the due and punctual payment by the Pledgor
of the Liabilities (as hereinafter defined), the Pledgor hereby pledges,
hypothecates, assigns, transfers, sets over and delivers unto the Pledgee and
hereby grants to the Pledgee a security interest in the following:
(i) the convertible debt unit specified in Schedule 1 hereto (the
"Pledged Units") and the instrument representing the Pledged Units,
and all cash, securities, interest, rights and other property at
any time and from time to time received, receivable or otherwise
distributed in respect of, or in exchange for, any or all of the
Pledged Units;
(ii) all shares of the Common Stock into which the Pledged Units may
hereafter be converted (the "Pledged Shares") and all cash,
securities, interest, dividends, options, rights and other property
at any time and from time to time received, receivable or otherwise
distributed in respect of, or in exchange for, any or all of the
Pledged Shares;
(iii) all other property hereafter delivered to the Pledgee in
substitution for or in addition to any of the foregoing, all
certificates and instruments representing or evidencing such
property and all cash, securities, interest, dividends, options,
rights and other property at any time and from time to time
received, receivable or otherwise distributed in respect of, or in
exchange for, any or all thereof; and
<PAGE>
(iv) all proceeds of any of the foregoing (the Pledged Units, the
Pledged Shares and all such additional shares, certificates,
instruments, cash, securities, interest, dividends, options, rights
and other property being herein collectively called the
"Collateral").
The term "Liabilities," as used herein shall mean all obligations and
liabilities of the Pledgor to the Pledgee under the Promissory Note.
SECTION 2. CERTAIN RIGHTS REGARDING COLLATERAL AND LIABILITIES.
(a) The Pledgee shall not be liable for its failure to collect or
realize upon the Liabilities or any collateral, security or guaranty therefor,
or any part thereof, or for any delay in so doing, nor shall the Pledgee be
under any obligation to take any action whatsoever with respect thereto.
(b) The Pledgee may from time to time, after any portion of the
Liabilities shall become due and payable, without notice to the Pledgor, (i)
transfer all or any part of the Collateral into the name of the Pledgee or its
nominee, with or without disclosing that such Collateral is subject to the lien
and security interest granted hereby, (ii) enforce collection of any of the
Collateral, and surrender, release or exchange all or any part thereof, or
compromise or extend or renew for any period (whether or not longer than the
original period) any obligations of any nature of any party with respect
thereto, (iii) resort to the Collateral for payment of any portion of the
Liabilities whether or not it shall have resorted to any other property securing
payment of any portion of the Liabilities or shall have proceeded against any
party primarily or secondarily liable on any portion of the Liabilities and (iv)
take control of any proceeds of the Collateral.
SECTION 3. INTEREST, DIVIDENDS AND OTHER RIGHTS.
(a) So long as no portion of the Liabilities shall be due and payable,
the Pledgor shall be entitled to receive and retain interest paid on the Pledged
Units, to vote the Pledged Shares, to give consents, waivers and ratifications
in respect of the Pledged Shares and to receive and retain cash dividends made
on or in respect of the Pledged Shares; PROVIDED, HOWEVER, that any and all
cash, stock and/or liquidating dividends, distributions in property, returns of
capital or other distributions made on or in respect of the Pledged Units and/or
Pledged Shares resulting from a subdivision, combination or reclassification of
the outstanding capital stock of the issuer thereof or received in exchange for
the Pledged Units and/or Pledged Shares or any part thereof or as a result of
any merger, consolidation, acquisition or other exchange of assets to which the
issuer thereof may be a party or otherwise, and any and all cash and other
property received in exchange for any Collateral shall be and become part of the
Collateral pledged hereunder and, if received by the Pledgor, shall be held by
the Pledgor in trust on behalf of and for the benefit of the Pledgee and shall
forthwith be delivered to the Pledgee or its designated nominee (accompanied, if
appropriate, by proper instruments of assignment and/or stock
2
<PAGE>
powers executed by the Pledgor in accordance with the Pledgee's instructions) to
be held subject to the terms of this Agreement; and PROVIDED FURTHER that no
vote shall be cast or consent, waiver or ratification given or action taken
which would impair the Collateral or the security interests granted hereby.
(b) Upon the nonpayment, when due, of any portion of the Liabilities,
all rights of the Pledgor pursuant to Section 3(a) hereof shall, at the election
of the Pledgee, cease, and the Pledgee shall have the sole and exclusive right
and authority to vote, to give consents, waivers and ratifications, and receive
all interest, dividends and distributions pursuant to Section 3(a) hereof.
SECTION 4. REMEDIES. In the event that any portion of the Liabilities is
not paid when due for any reason other than the failure of the Pledgee to pay
interest to the Pledgor on the Pledged Units as and when due, the Pledgee,
without demand of performance or other demand, advertisement or notice of any
kind (except the notice specified below of time and place of public or private
sale) to or upon the Pledgor or any other person (all and each of which demands,
advertisements, and/or notices being hereby expressly waived by the Pledgor),
may forthwith collect, receive, appropriate and realize upon the Collateral, or
any part thereof, and/or may forthwith sell, assign, give options to purchase,
contract to sell or otherwise dispose of and deliver the Collateral, or any part
thereof, in one or more parcels at public or private sales, at any exchange or
broker's board or at any of the Pledgee's offices or elsewhere, upon such terms
and conditions as it may deem advisable and at such prices as it may deem best,
for cash or on credit or for future delivery, without assumption of any credit
risk, with the right upon any such sale, public or private, to purchase the
whole or any part of the Collateral so sold, free of any right or equity of
redemption in the Pledgor, which right or equity is hereby expressly waived and
released by the Pledgor. The Pledgee shall apply the net proceeds of any such
collection, recovery, receipt, appropriation, realization or sale, after
deducting all reasonable costs and expenses of every kind incurred therein or
incidental to the care, safekeeping or otherwise of any and all of the
Collateral or in any way relating to the rights of the Pledgee hereunder
(including reasonable attorney's fees and legal expenses), to the payment in
whole or in part of the Liabilities in such order as it may elect, and only
after such application of such net proceeds and after the payment in full of the
Liabilities by the Pledgee and any other amount required by any provision of
law, including, without limitation, Section 9-504(l)(c) of the Uniform
Commercial Code, need the Pledgee account for the surplus, if any, to the
Pledgor. The Pledgor agrees that the Pledgee need not give more than twenty
(20) days' notice of the time and place of any public sale or of the time after
which a private sale or other intended disposition is to take place and that
such notice is reasonable notification of such matters. No notification need be
given the Pledgor if, after any portion of the Liabilities is not paid when due
for any reason other than the failure of the Pledgee to pay interest to the
Pledgor on the Pledged Units as and when due, it shall have signed a statement
renouncing or modifying any right to notification of any sale or other intended
disposition. The Pledgee shall not be obligated
3
<PAGE>
to make any sale pursuant to any such notice. The Pledgee may, without notice
or publication, adjourn any public or private sale or cause the same to be
adjourned from time to time by announcement at the time and place fixed for the
sale, and such sale may be made at any time or place to which the same may be so
adjourned. In case of any sale of all or any part of the Collateral on credit
or for future delivery, the Collateral so sold may be retained by the Pledgee
until the selling price is paid by the purchaser thereof, but the Pledgee shall
incur no liability in the case of the failure of such purchaser to take up and
pay for the Collateral so sold and in case of any such failure such Collateral
may again be sold on like notice. The Pledgee, however, instead of exercising
the power of sale herein conferred upon it, may proceed by a suit at law or in
equity to foreclose the pledge and security interest under this Agreement and
sell the Collateral, or any part thereof, under a judgment or decree of a court
of competent jurisdiction. In addition to the rights and remedies granted to it
in this Agreement and in any other instrument or agreement securing, evidencing
or relating to any portion of the Liabilities, the Pledgee shall have all the
rights and remedies of a secured party under the Uniform Commercial Code. The
Pledgor further agrees to waive and agrees not to assert any rights or
privileges which it may acquire under Secion 9-112 of the Uniform Commercial
Code.
SECTION 5. REPRESENTATIONS. WARRANTIES AND COVENANTS. The Pledgor
represents and warrants that (a) the Pledgor is the legal record and beneficial
owner of, and has good and marketable title to, the Pledged Units, subject to no
perfected lien whatsoever except the lien created by this Agreement; (b) no
consent of any other person (including, without limitation, his creditors) and
no consent, license, permit, approval or authorization of, exemption by, notice
or report to, or registration, filing or declaration with, any governmental
authority, domestic or foreign, is required to be obtained by him in connection
with the execution, delivery or performance of this Agreement; (c) the
execution, delivery and performance of this Agreement will not violate any
provision of any applicable law or regulation, or of any order, judgment, writ,
award or decree of any court, arbitrator or governmental authority, domestic or
foreign, or of any mortgage, indenture, lease, contract or other agreement,
instrument or undertaking to which the Pledgor is a party or which purports to
be binding upon the Pledgor or upon any of the Pledgor's assets, and will not
result in the creation or imposition of any lien on any of the Pledgor's assets
except as contemplated by this Agreement; and (d) the Pledgor has delivered to
the Pledgee the Pledged Units with the understanding that the Pledgee will
reflect this transfer in the Convertible Debt Unit Transfer Ledger (the
"Ledger") maintained by it, and the pledge and delivery of the Pledged Units
pursuant to this Agreement creates a valid lien on and a perfected security
interest in the Pledged Units, and the proceeds thereof, subject to no prior
lien, or to any agreement purporting to grant to any third party a security
interest in the Pledgor's property or assets which would include the Pledged
Units. The Pledgor covenants and agrees that, except as otherwise provided in
Section 6, the Pledgor will not sell, assign, transfer, exchange or otherwise
dispose of, or grant any option with respect to, the Collateral, nor will the
Pledgor create, incur or permit to exist any perfected lien with respect to any
part of the Collateral, or any
4
<PAGE>
interest therein, or any proceeds thereof, except for the lien created by this
Agreement, without the prior written consent of the Pledgee; and the Pledgor
further covenants and agrees that the Pledgor will defend the Pledgee's right,
title and security interest in and to the Collateral and the proceeds thereof
against the claims and demands of all persons; and the Pledgor further covenants
and agrees to deliver to the Pledgee from time to time on request such
assignments, stock powers and similar documents, satisfactory in form and
substance to the Pledgee, with respect to the Collateral as the Pledgee may
request.
SECTION 6. CONVERSION OF THE PLEDGED UNITS; RELEASE OF THE PLEDGED SHARES.
The Pledgee recognizes that the Pledgor may from time to time convert the
Pledged Units into shares of the Common Stock which are Pledged Shares. The
Pledgee agrees that as long as the fair market value of the Collateral (the
"Collateral Requirement") exceeds one hundred and twenty percent (120%) of the
then outstanding amount of Liabilities (whether such Liabilities have been
prepaid by the Pledgor in increments of $10,000 or not), the Pledgor shall be
entitled to obtain a release of such number of the Pledged Shares in excess of
the Collateral Requirement from the Pledgee within ten (10) days of the
Pledgor's written request therefor. For purposes of determining the fair market
value of the Collateral, (i) the Pledged Units shall have a fair market value of
the principal amount thereof and (ii) the Pledged Shares shall have a fair
market value determined as follows:
(a) If the Common Stock is listed on any established stock exchange or
a national market system, including without limitation the National Market
System of the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") System, the fair market value of a share of Common Stock
shall be the closing sales price for such stock on the date of determination
(or, if no such price is reported on such date, such price as reported on the
nearest preceding day) as quoted on such system or exchange (or the exchange
with the greatest volume of trading in the Common Stock), as reported in THE
WALL STREET JOURNAL or such other source as the Board of Directors of the
Pledgee deems reliable;
(b) If the Common Stock is quoted on the NASDAQ System (but not on the
National Market System thereof) or is regularly quoted by a recognized
securities dealer but selling prices are not reported, the fair market value of
a share of Common Stock shall be the mean of the closing bid and asked prices
for the Common Stock on the date of determination (or, if such prices are not
reported on such date, such prices as reported on the interest preceding date),
as reported in THE WALL STREET JOURNAL or such other source as the Board of
Directors of the Pledgee deems reliable; or
(c) If the fair market value is not determined pursuant to (a) or (b)
above, then the fair market value shall be determined in good faith by the Board
of Directors of the Pledgee.
5
<PAGE>
The Pledgee agrees that following any release by the Pledgee to the Pledgor of
the Pledged Shares, in the event that the fair market value of the Collateral
falls below the Collateral Requirement and remains below the Collateral
Requirement for fifteen (15) consecutive days, the Pledgee shall within ten (10)
days thereafter either (x) deliver to the Pledgee such number of shares of the
Common Stock (together with stock powers with respect to such shares of the
Common Stock) or (y) prepay the Liabilities as described in this Section 6 in
such amounts so that the Collateral Requirement is met.
SECTION 7. SALE OF THE PLEDGED UNITS OR THE PLEDGED SHARES.
(a) The Pledgor recognizes that the Pledgee may be unable to effect a
public sale of any or all of the Pledged Units and/or the Pledged Shares by
reason of certain prohibitions contained in the Securities Act of 1933, as
amended (the "Securities Act"), and applicable state securities laws, but may be
compelled to resort to one or more private sales thereof to a restricted group
of purchasers who will be obliged to agree, among other things, to acquire such
securities for their own account for investment and not with a view to the
distribution or resale thereof. The Pledgor acknowledges and agrees that any
such private sale may result in prices and other terms less favorable to the
seller than if such sale were a public sale and, notwithstanding such
circumstances, agrees that any such private sale shall not be deemed to have
been made in commercially unreasonable manner by virtue of its private nature.
The Pledgee shall be under no obligation to delay a sale of any of the Pledged
Units and/or the Pledged Shares for the period of time necessary to permit the
issuer thereof to register such securities for public sale under the Securities
Act or under applicable state securities laws even if the issuer would agree to
do so.
(b) The Pledgor further agrees to do or cause to be done all such other
acts and things as may be necessary to make such sale or sales of any portion or
all of the Pledged Units and/or the Pledged Shares valid and binding and in
compliance with any and all applicable laws, regulations, orders, writs,
injunctions, decrees or awards of any and all courts, arbitrators or
governmental instrumentalities, domestic or foreign, having jurisdiction over
any such sale or sales, all at the Pledgor's expense.
SECTION 8. FURTHER ASSURANCE. The Pledgor agrees that, at any time and
from time to time upon the written request of the Pledgee, it will execute and
deliver such further documents and do such further acts and things as the
Pledgee may reasonably request in order to effect the purposes of the Agreement.
SECTION 9. AUTHORITY OF PLEDGEE.
(a) The Pledgee is hereby appointed the attorney-in-fact of the Pledgor
for the purpose of carrying out the provisions of this Agreement and taking any
action and executing any instruments which the Pledgee may deem necessary or
advisable to accomplish the purposes hereof, which appointment as
attorney-in-fact is irrevocable and coupled with an interest, provided that no
action may be taken by the Pledgee pursuant to
6
<PAGE>
such appointment so long as the Liabilities are not yet due and payable.
Without limiting the generality of the foregoing, the Pledgee shall have the
right and power to receive, endorse and collect all checks made payable to the
order of the Pledgor representing any dividend or other distribution in respect
of the Collateral or any part thereof and to give full discharge for the same.
(b) The Pledgee shall have and be entitled to exercise all such powers
hereunder as are specifically delegated to the Pledgee by the terms hereof,
together with such powers as are incidental thereto. The Pledgee may execute
any of its duties hereunder by or through agents or employees and shall be
entitled to retain counsel and to act in reliance upon the advice of such
counsel concerning all matters pertaining to its duties hereunder. Neither the
Pledgee, nor any director, officer or employee of the Pledgee, shall be liable
for any action taken or omitted to be taken by it or them hereunder or in
connection herewith, except for its or their own gross negligence or willful
misconduct. The Pledgor hereby agrees to reimburse the Pledgee, on demand, for
all reasonable expenses incurred by the Pledgee in connection with the
enforcement of this Agreement (including expenses incurred by any agent employed
by the Pledgee) and agrees to indemnify and hold harmless the Pledgee and/or any
such agent from and against any and all liability incurred by the Pledgee or
such agent hereunder or in connection herewith, unless such liability shall be
due to willful misconduct or negligence on the part of the Pledgee or such
agent.
SECTION 10. SEVERABILITY. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
SECTION 11. NO WAIVER; CUMULATIVE REMEDIES. The Pledgee shall not by any
act, delay, omission or otherwise be deemed to have waived any of its rights,
powers or remedies hereunder and no waiver shall be valid unless in writing,
signed by the Pledgee, and then only to the extent therein set forth. A waiver
by the Pledgee of any right, power or remedy hereunder on any one occasion shall
not be construed as a bar to the exercise of any right, power or remedy which
the Pledgee would otherwise have on any future occasion. No failure to
exercise, nor any delay in exercising, on the part of the Pledgee any right,
power or remedy hereunder shall operate as a waiver thereof; nor shall any
single or partial exercise of any right, power or remedy hereunder preclude any
other or further exercise thereof or the exercise of any other right, power or
remedy. The rights, powers and remedies herein provided are cumulative and may
be exercised singly or concurrently, and are not exclusive of any rights, powers
or remedies provided by law.
SECTION 12. NOTICES. All notices, demands, requests and other
communications provided for or permitted under this Agreement shall be in
writing,
7
<PAGE>
either delivered in hand or sent by registered first class mail, postage
prepaid, or by facsimile with answer-back, addressed, if to the Pledgor, to
Jerry Ballah at his address as reflected in the Ledger and, if to the Pledgee,
to President, National Telephone & Communications, Inc., 2801 Main Street,
Irvine, California 92614 or to such other address as the party to receive any
such notice, demand, request or communication may have designated by written
notice to the other party, which notice complies as to delivery with the terms
of this Section 12.
SECTION 13. TERMINATION. Upon payment in full of the Liabilities in
accordance with their terms and the performance by the Pledgor of all of the
Pledgor's obligations under this Agreement, this Agreement shall terminate and
the Pledgor shall be entitled to the return, at the Pledgor's expense, of such
of the Collateral in the possession or control of the Pledgee as may have been
pledged by the Pledgor under this Agreement and which has not theretofore been
disposed of pursuant to the provisions hereof.
SECTION 14. MISCELLANEOUS. This Agreement and all obligations of the
Pledgor hereunder shall be binding upon his successors and assigns, and shall,
together with the rights, powers and remedies of the Pledgee hereunder, inure to
the benefit of the Pledgee and its successors and assigns.
SECTION 15. AMENDMENTS; APPLICABLE LAW. None of the terms or provisions
of this Agreement may be amended except by an instrument in writing, duly
executed by the Pledgee. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
8
<PAGE>
IN WITNESS WHEREOF, the Pledgor and the Pledgee have duly executed and
delivered this Agreement as of the day and year first above written.
PLEDGOR
/s/ Jerry Ballah
---------------------------------
Jerry Ballah
PLEDGEE
NATIONAL TELEPHONE &
COMMUNICATIONS, INC.
By: James R. Quandt
------------------------------
James R. Quandt
President
9
<PAGE>
SCHEDULE 1
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT NUMBER OF SHARES
ISSUER OF CONVERTIBLE DEBIT OF INTO
CONVERTIBLE DEBT UNIT UNIT NUMBER CONVERTIBLE DEBT WHICH CONVERTIBLE
--------------------- ----------- ---------------- -----------------
<S> <C> <C> <C>
National Telephone & 3 $3,771,348 1,257,116
Communications, Inc.
</TABLE>
10
<PAGE>
PROMISSORY NOTE
$3,021,345 Dated as of April 11, 1997
FOR VALUE RECEIVED, on or before five years from the date hereof, the
undersigned, Edward R. Jacobs (the "Maker"), promises to pay to the order of
National Telephone & Communications, Inc., a Delaware corporation (the
"Corporation") at 2801 Main Street, Irvine, California 92614, or at such other
place as the holder hereof may from time to time designate in writing, the
principal sum of Three million Twenty-One Thousand Three Hundred Forty-Five
Dollars ($3,021,345), or so much thereof as shall be advanced or readvanced and
from time to time remain unpaid, plus interest on the principal balance thereof
at a rate of six and seventy-four hundredths percentum (6.74%) per annum
annually.
This Note shall be payable in successive annual installments of accrued
interest only, followed by one final installment at maturity in the amount of
the then outstanding principal balance of this Note and all accrued and unpaid
interest thereon. Such consecutive annual installments shall be due on each
anniversary of the date hereof until the fifth anniversary of the date hereof,
the maturity date of this Note, when the entire principal balance of this Note
and all accrued and unpaid interest thereon, as well as all other costs, fees or
charges payable hereunder, if any, shall be due and payable in full. Interest
on this Note shall be calculated on a 360 day year, per diem basis. All
payments hereunder shall be made in lawful currency of the United States and in
immediately available funds.
This Note is secured by a certain Convertible Debt Unit Pledge Agreement
(the "Pledge Agreement") dated of even date herewith between the Maker and the
Corporation. This Note Agreement and the Pledge Agreement, together with all
extensions, renewals and modifications thereof and substitutions therefor are
collectively referred to as the "security documents."
If (i) default be made in the payment of interest due on any anniversary of
the date hereof or principal due on the maturity date of this Note, (ii) the
Maker files a voluntary petition under the federal Bankruptcy Code or (iii) an
involuntary petition under the federal Bankruptcy Code is filed against the
Maker and such involuntary petition is not dismissed within ninety (90) days of
the date that such petition was filed, then in any of such events, the entire
principal balance hereof and all accrued and unpaid interest hereon shall at
once become due and payable at the option of the holder. The failure of the
holder to exercise this option shall not constitute a waiver of the right to
exercise the same on any future date.
This Note may be prepaid, in whole or in part, at any time without penalty
and shall be prepaid in full at such times and in such amounts as provided in
the Pledge
<PAGE>
Agreement. Any partial prepayments shall not, however, relieve the Maker of the
obligation to pay principal hereunder as and when the same would otherwise fall
due.
The Maker (i) waives presentment, demand, protest and notice of
presentment, notice of protest and notice of dishonor of this debt and each and
every other notice of any kind with respect to this Note, and (ii) agrees that
the holder of this Note, at any time or times, without notice to him or his
consent, may grant extensions of time, without limit as to the number or the
aggregate period of such extensions, for the payment of any sums due hereunder.
The Maker promises to pay all costs of collection, including reasonable
attorneys' fees, upon default in the payment of the principal of this Note or
interest hereon when due, whether suit is brought or not.
In the event any one or more of the provisions contained in this Note or
any of the other security documents shall for any reason be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Note or any of the
other security documents, but this Note and the other security documents shall
be construed as if such invalid, illegal or unenforceable provision had never
been contained herein.
This Note may not be changed orally but only by an agreement in writing
signed by the parties against whom enforcement of any waiver, change,
modification or discharge is sought.
The Maker warrants and represents that the loan evidenced hereby is being
made for business or investment purposes.
This Note shall be governed in all respects by the laws of California and
shall be binding upon and inure to the benefit of the parties hereto and their
respective heirs, executors, administrators, personal representatives,
successors and assigns.
WITNESS:
/s/ Karen Letterman /s/ E. R. Jacobs (SEAL)
- ----------------------------------- --------------------------
Edward R. Jacobs
Maker
2
<PAGE>
UNIT NUMBER: 1
- --------------------------------------------------------------------------------
CONVERTIBLE DEBT UNIT
DATED AS OF APRIL 11, 1997
ISSUED BY
NATIONAL TELEPHONE & COMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
THIS CONVERTIBLE DEBT UNIT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED OR ANY APPLICABLE, STATE SECURITIES, LAW, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT AND STATE SECURITIES LAW COVERING SUCH CONVERTIBLE DEBT
UNIT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THIS
CONVERTIBLE DEBT UNIT REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH
SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT OR APPLICABLE SECURITIES LAW.
<PAGE>
NATIONAL TELEPHONE & COMMUNICATIONS, INC.
CONVERTIBLE DEBT UNIT
Number of Convertible Debt Units: 1,007,115 Irvine, California
Principal Amount of Convertible Debt: $3,021,345 Dated as of April 11, 1997
NATIONAL TELEPHONE & COMMUNICATIONS, INC., a Delaware corporation
(hereinafter the "Company"), for value received, hereby promises to pay to the
registered holder hereof, on the date which is five years from the date hereof
(the "Maturity Date") the sum of Three Million Twenty-One Thousand Three Hundred
and Forty-Five Dollars ($3,021,345), and to pay interest thereon to the
registered holder hereof, on each anniversary hereof at the rate of 6.49 percent
per annum until the principal hereof is paid in full. In the event that any
anniversary hereof is not a Business Day, as hereinafter defined, the Company
shall pay interest on the first following day that is a Business Day. The
principal of and interest on the Convertible Debt evidenced by this Convertible
Debt Unit shall be payable at the office of the Company at 2801 Main Street,
Irvine, California 92614 in such coin or currency of the United States as of the
time of payment is legal tender for payment of public and private debts. The
term Business Day means a day on which commercial banks settle payments in Los
Angeles, California.
1. SENIOR EXECUTIVE AND CONSULTANT CONVERTIBLE DEBT PLAN; GRANT
AGREEMENT. This Convertible Debt Unit has been issued under the terms of (a) the
Company's 1996 Senior Executive and Consultant Convertible Debt Plan (the
"Plan") and (b) the Grant Agreement (the "Grant Agreement") dated as of April
11, 1997 between the Company and Edward R. Jacobs. The registered holder hereof
is entitled to the benefits of, and subject to the restrictions contained in,
the Plan and the Grant Agreement, and reference is made thereto for a
description of all rights, remedies and restrictions thereunder. Neither
reference to the Plan or to the Grant Agreement, nor any provision thereof,
shall affect or impair the absolute and unconditional obligation of the Company
to pay, when due, the principal amount hereof, together with all accrued
interest thereon.
2. MATURITY. The principal amount of the Convertible Debt evidenced by
this Convertible Debt Unit shall become due and payable on the Maturity Date, if
not previously converted pursuant to Section 3 hereof. In the event that the
Maturity Date is not a Business Day, the Convertible Debt evidenced by this
Convertible Debt Unit shall be due and payable on the first following day that
is a Business Day.
3. CONVERSION RIGHT. Subject to the provisions of Section 10(b) of the
Plan, the registered holder may, at any time prior to the Maturity Date, convert
this Convertible
<PAGE>
Debt Unit into shares of the Company's common stock, par value S.01 per share
(the "Common Stock") at the rate (the "Conversion Rate") of one Convertible Debt
Unit for one share of the Common Stock at the conversion price of one cent per
share of Common Stock. The Conversion Rate shall be adjusted as described in
Section 10(a) of the Plan within twenty (20) days following the consummation of
any of the transactions described in Section 10(a) of the Plan.
4. MECHANICS OF CONVERSION. Before the registered holder of this
Convertible Debt Unit will be entitled to convert the same into shares of the
Common Stock, such holder will surrender this Convertible Debt Unit at the
principal office of the Company, and he will give written notice to the Company
in the form of Exhibit A to the Grant Agreement (the "Conversion Notice")
stating (i) the number of the Convertible Debt Units he wishes to convert into
shares of the Common Stock and (ii) the total conversion price for such number
of shares of the Common Stock. The registered holder of this Convertible Debt
Unit shall include with such Conversion Notice payment of the total conversion
price. The Company, as soon as reasonably practicable after its receipt of the
Conversion Notice and payment of the total conversion price, will issue and
deliver at such office to such holder, a certificate for the number of shares of
the Common Stock to which such holder will be entitled as aforesaid and if such
holder has elected to convert less than all of his Convertible Debt Units into
shares of the Common Stock, the Company shall deliver to such holder a new
Convertible Debt Unit in the number of the Convertible Debt Units that he did
not elect to convert. Such conversion will be deemed to have been made
immediately prior to the close of business on the date that the Company receives
the Conversion Notice and payment of the total conversion price from the
registered holder of this Convertible Debt Unit holder, and such registered
holder will be treated for all purposes as the record holder of such shares of
the Common Stock on such date. If the conversion is in connection with the
initial public offering of shares of the Common Stock, the conversion will be
conditioned upon the closing with the underwriter or underwriters of the sale of
securities pursuant to such offering, in which event the registered holder of
this Convertible Debt Unit shall not be deemed to have converted his Convertible
Debt Unit until immediately prior to the closing of such sale of securities.
5. REDEMPTION. This Convertible Debt Unit is not subject to redemption or
prepayment by the Company in whole or in part, except as otherwise provided in
Section 3 hereof.
6. EVENTS OF DEFAULT . Each of the following events shall be an Event of
Default hereunder:
a. The Company shall fail to pay (i) any interest payment hereon
when due or (ii) the principal hereof on the Maturity Date;
2
<PAGE>
b. The Company files a voluntary petition under the federal
Bankruptcy Code; or
c. An involuntary petition under the federal Bankruptcy Code is
filed against the Company and such involuntary petition is not dismissed within
thirty (30) days of the date that such petition was filed.
7. RIGHTS OF THE HOLDER FOLLOWING AN EVENT OF DEFAULT. Upon the
occurrence of any Event of Default, the registered holder of this Convertible
Debt Unit, in his sole discretion, may do either or both of the following: (i)
declare all principal and interest due on the Convertible Debt evidenced by this
Convertible Debt Unit immediately due and payable without demand, protest,
notice of protest, notice of default, presentment for payment or further notice
of any kind; and (ii) proceed to enforce such other and additional rights and
remedies as the registered holder may have under other agreements with the
Company or applicable law. The failure of the registered holder to exercise any
of the rights and remedies set forth in the preceding sentence shall not
constitute a waiver of the right to exercise the same on any future date.
8. REGISTRATION; TRANSFERABILITY; LOCK-UP AGREEMENT. This Convertible
Debt Unit shall be registered in a Convertible Debt Unit Register maintained by
the Company. This Convertible Debt Unit is subject to the restrictions on the
transfer set forth in the Grant Agreement. This Convertible Debt Unit and shares
of the Common Stock issued upon the conversion thereof arc subject to provisions
regarding a lock-up agreement set forth in the Grant Agreement and to the Pledge
Agreement of even date herewith between the Company and Edward R. Jacobs.
9. RESERVATION OF COMMON STOCK ISSUABLE UPON CONVERSION. The Company at
all times will reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of
this Convertible Debt Unit such number of shares of Common Stock as from time to
time shall be sufficient to effect the conversion of all of the Convertible Debt
Units evidenced by this Convertible Debt Unit; and if at any time the number of
authorized but unissued shares of Common Stock is not sufficient to effect the
conversion of all of the Convertible Debt Units evidenced by this Convertible
Debt Unit, in addition to such other remedies as may be available to the
registered holder of this Convertible Debt Unit for such failure, the Company
will take such corporate action as, in the opinion of its counsel, may be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as will be sufficient for such purpose.
10. NOTICE. Any notice or other communication in connection with this
Convertible Debt Unit shall be in writing and delivered by hand or by certified
or registered mail, return receipt requested. All such notices and
communications shall be effective (i) if given by mail, when deposited in the
mail, and (ii) if delivered by hand, on
3
<PAGE>
the date delivered. Any such notice or communication shall be addressed as
provided below (or at such other address as such person shall specify in writing
to the other parties hereto in accordance with the provisions hereof):
a. if to the Company,
National Telephone & Communications, Inc.
2801 Main Street
Irvine, California 92614
Attention: President
b. if the to Registered Holder,
to his address as set forth in the Convertible Debt Unit
Register.
11. COSTS OF COLLECTION. The Company shall pay all costs of collection,
including reasonable attorneys' fees, upon the occurrence of an Event of
Default, whether suit be brought or not.
12. MODIFICATION. This Convertible Debt Unit may not be modified, amended,
discharged or waived orally, but only by a written instrument executed by the
Company.
13. INVALIDITY. In the event any one or more of the provisions contained
in this Convertible Debt Unit shall for any reason be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Convertible Debt
Unit, but this Convertible Debt Unit shall be construed as if such invalid,
illegal or unenforceable provision had never been contained herein.
14. GOVERNING . This Convertible Debt Unit is governed by the laws of the
State of Delaware, without giving effect to principles of conflict of laws.
15. CAPTIONS. The captions and headings set forth in this Convertible Debt
Unit arc for convenience purposes only and shall not limit, define or otherwise
have any effect on the interpretation of the agreements and understandings set
forth herein.
16. OWNERSHIP OF THIS CONVERTIBLE DEBT UNIT. The Company and any agent of
the Company may treat the registered holder of this Convertible Debt Unit as the
owner hereof for the purpose of receiving payment as herein provided and for all
other purposes, and neither the Company nor any such agent shall be affected by
any notice to the contrary.
4
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Convertible Debt Unit to be
executed by its duly authorized officer.
NATIONAL TELEPHONE &
COMMUNICATIONS, INC.
By: /s/ James R. Quandt
--------------------------------
Name: James R. Quandt
Title: President
5
<PAGE>
NATIONAL TELEPHONE & COMMUNICATIONS, INC.
1996 SENIOR EXECUTIVE AND CONSULTANT
CONVERTIBLE DEBT PLAN (THE "PLAN")
GRANT AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Grant Agreement ("Grant Agreement").
I. NOTICE OF CONVERTIBLE DEBTUNIT GRANT
Grantee's Name and Address Edward R. Jacobs
2801 Main Street
Irvine, California 92614
You have been granted Convertible Debt Units of the Company (the
"Convertible Debt Units") in the form of Schedule I hereto, which may be
converted to shares of the Common Stock of the Company (the "Shares"), subject
to the terms and conditions of the Plan and this Grant Agreement, as follows:
<TABLE>
<S> <C>
Date of Grant April 11, 1997
Number of Convertible Debt Units 1,007,115
Purchase Price per Convertible Debt Unit $3.00
Interest Rate 6.49% per annum,
payable annually
Total Number of Shares into which the
Convertible Debt Units may be converted 1,007,115
Conversion Price per Share $.01
Expiration Date April 11, 2002
(No more than 5 years from date of grant)
</TABLE>
II. AGREEMENT
1. GRANT OF CONVERTIBLE DEBT UNIT . The Committee hereby grants to the
Grantee named in Section I of this Grant Agreement (the "Grantee"), the right to
purchase the number of Convertible Debt Units set forth in Section I, at the
purchase price per
<PAGE>
Convertible Debt Unit set forth in Section I (the "Purchase Price"), subject to
the terms and conditions of the Plan, which is incorporated herein by reference.
In the event of a conflict between the terms and conditions of the Plan and the
terms and conditions of this Grant Agreement, the terms and conditions of the
Plan shall prevail. The Grantee may review a copy of the Plan at the office of
the Secretary of the Company at 2801 Main Street, Irvine, California 92614.
2. METHOD OF PAYMENT. The purchase price of Convertible Debt Units shall
be paid as set forth in the Plan. The price of Shares issued upon conversion of
Convertible Debt Units shall be paid as set forth in the Plan.
3. TRANSFERABILITY OF CONVERTIBLE DEBT UNITS. Convertible Debt Units may
not be transferred in any manner otherwise than by will or by the laws of
descent or distribution and may be exercised during the lifetime of the Grantee
only by the Grantee. The terms of the Plan and this Grant Agreement shall be
binding upon the executors, administrators, heirs, successors and assigns of the
Grantee.
4. LOCK-UP AGREEMENT. No less than thirty (30) days prior to the
commencement of any offering of Shares in a bona fide underwriting pursuant to a
registration statement under the Securities Act, the Grantee shall execute and
deliver a written agreement (the "Lock-Up Agreement") between the Company, the
underwriter or underwriters of the Shares and the Grantee pursuant to which the
Grantee agrees that he will not offer, sell, contract to sell or otherwise
dispose of up to one hundred percent (100%) of the Convertible Debt Units or
Shares issued upon the conversion thereof for a period not to exceed 180 days
after the commencement by such underwriter or underwriters of such offering in a
form negotiated by the Committee (which form of Lock-Up Agreement shall be
conclusive and not subject to negotiation by the Grantee). A condition precedent
to any transfer of the Convertible Debt Units or any Shares issued upon the
conversion thereof is that the transferee agree in writing to be bound by the
obligation described in the preceding sentence to execute and deliver a Lock-Up
Agreement.
5. TERM OF CONVERTIBLE DEBT UNITS. Convertible Debt Units may be
converted only on or before the expiration date set forth in Section I and may
be converted only in accordance with the Plan and the terms of this Grant
Agreement.
6. TAX CONSEQUENCES. The conversion of Convertible Debt Units will have
federal and state income tax consequences. THE GRANTEE SHOULD CONSULT A TAX
ADVISER UPON THE GRANT OF CONVERTIBLE DEBT UNITS AND BEFORE CONVERTING
CONVERTIBLE DEBT UNITS OR DISPOSING OF THE SHARES OF COMMON STOCK ACQUIRED UPON
CONVERSION, PARTICULARLY WITH RESPECT TO HIS STATE'S TAX LAWS.
2
<PAGE>
7. ENTIRE AGREEMENT; GOVERNING LAW. The Plan is incorporated herein by
reference. The Plan, the Convertible Debt Unit and this Grant Agreement
constitute the entire agreement of the parties with respect to the subject
matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and the Grantee with respect to the subject matter
hereof. This Grant Agreement is governed by the laws of the State of Delaware,
without giving effect to principles of conflict of laws.
8. WARRANTIES. REPRESENTATIONS AND COVENANTS. The undersigned Grantee
warrants and represents that he has reviewed the Plan and this Grant Agreement
in its entirety, has had an opportunity to obtain the advice of counsel prior to
executing this Grant Agreement and fully understands all provisions of the Plan
and this Grant Agreement. The Grantee hereby agrees to accept as binding,
conclusive and final all decisions or interpretations of the Committee upon any
questions relating to the Plan and Grant Agreement. The Grantee further agrees
to notify the Company promptly upon any change in the residence address
indicated below.
GRANTEE: NATIONAL TELEPHONE & COMMUNICATIONS, INC.
a Delaware corporation
/s/ E. R. Jacobs By: /s/ James R. Quandt
- -------------------------- ----------------------------------------
Signature Title: President
E. R. JACOBS
- --------------------------
Print Name
Residence Address:
27101 Puerta Del Oro
- --------------------------
Mission Viejo, CA 92691
- --------------------------
<PAGE>
EXHIBIT A
NATIONAL TELEPHONE & COMMUNICATIONS, INC.
1996 SENIOR EXECUTIVE AND CONSULTANT
CONVERTIBLE DEBT PLAN
CONVERSION NOTICE
National Telephone & Communications, Inc.
2801 Main Street
Irvine, California 92614
Attention: Secretary
1. CONVERSION OF CONVERTIBLE DEBT UNITS. Effective as of today,
_____________, 199_, the undersigned ("Purchaser") hereby elects to convert
_______ Convertible Debt Units into __________ shares (the "Shares") of the
Common Stock of National Telephone & Communications, Inc. (the "Company") under
and pursuant to the 1996 Senior Executive and Consultant Convertible Debt Plan
(the "Plan") and the Grant Agreement dated ______________, 199__ (the "Grant
Agreement"). The purchase price for the Shares shall be $_________________, as
specified in the Grant Agreement.
2. DELIVERY OF PAYMENT . Purchaser herewith delivers to the Company the
full purchase price for the Shares.
3. REPRESENTATION OF PURCHASER. Purchaser acknowledges that Purchaser has
received, read and understood the Plan and this Grant Agreement and agrees to
abide by and be bound by their terms and conditions.
4. RIGHTS OF STOCKHOLDER. Purchaser shall not be deemed to be the holder
of, or to have any of the rights of a holder with respect to, any Shares for
which such Convertible Debt Units are converted including, but not limited to,
rights to vote or to receive dividends unless and until Purchaser has satisfied
all requirements for conversion of the Convertible Debt Units pursuant to their
terms, the certificates evidencing such Shares have been issued and Purchaser
has become a record holder of such Shares. A share certificate for the number of
Shares so acquired shall be issued to Purchaser as soon as practicable after
conversion of the Convertible Debt Units. No adjustment will be made for a
dividend or other right for which the record date is prior to the date all the
conditions set forth above are satisfied, except as provided in Section 10 of
the Plan.
5. LOCK-UP AGREEMENT. No less than thirty (30) days prior to the
commencement of any offering of Shares in a bona fide underwriting pursuant to a
<PAGE>
registration statement under the Securities Act, Purchaser shall execute and
deliver a written agreement (the "Lock-Up Agreement") between the Company, the
underwriter or underwriters of the Shares and Purchaser pursuant to which
Purchaser agrees that he will not offer, sell, contract to sell or otherwise
dispose of up to one hundred percent (100%) of the Convertible Debt Units or
Shares issued upon the conversion thereof for a period not to exceed 180 days
after the commencement by such underwriter or underwriters of such offering in a
form negotiated by the Committee (which form of Lock-Up Agreement shall be
conclusive and not subject to negotiation by Purchaser). A condition precedent
to any transfer of the Convertible Debt Units or any Shares issued upon the
conversion thereof is that the transferee agree in writing to be bound by the
obligation described in the preceding sentence to execute and deliver a Lock-Up
Agreement.
6. TAX CONSULTATION. Purchaser understands that Purchaser may suffer
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
7. ENTIRE AGREEMENT; GOVERNING LAW. The Plan, the Convertible Debt Unit
and Grant Agreement are incorporated herein by reference. This Agreement, the
Plan, the Convertible Debt Unit and the Grant Agreement constitute the entire
agreement of the parties with respect to the subject matter hereof and supersede
in their entirety all prior undertakings and agreements of the Company and
Purchaser with respect to the subject matter hereof. This agreement is governed
by the laws of the State of Delaware without giving effect to principles of
conflict of laws.
Submitted by: Accepted by:
PURCHASER. NATIONAL TELEPHONE &
COMMUNICATIONS, INC.
By:
- ------------------------------ ---------------------------------
Signature Its:
--------------------------------
- ------------------------------
Print Name
Address: Address:
- ------------------------------ ---------------------------------
- ------------------------------ ---------------------------------
2
<PAGE>
UNIT NUMBER: 2
- --------------------------------------------------------------------------------
CONVERTIBLE DEBT UNIT
DATED AS OF APRIL 11, 1997
ISSUED BY
NATIONAL TELEPHONE & COMMUNICATIONS, INC.
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THIS CONVERTIBLE DEBT UNIT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED OR ANY APPLICABLE STATE SECURITIES LAW, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT AND STATE SECURITIES LAW COVERING SUCH CONVERTIBLE DEBT
UNIT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THIS
CONVERTIBLE DEBT UNIT REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH
SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT OR APPLICABLE SECURITIES LAW.
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NATIONAL TELEPHONE & COMMUNICATIONS, INC.
CONVERTIBLE DEBT UNIT
Number of Convertible Debt Units: 400,000 Irvine, California
Principal Amount of Convertible Debt: $1,200,000 Dated as of April 11, 1997
NATIONAL TELEPHONE & COMMUNICATIONS, INC., a Delaware corporation
(hereinafter the "Company"), for value received, hereby promises to pay to the
registered holder hereof, on the date which is five years from the date hereof
(the "Maturity Date") the sum of One Million Two Hundred Thousand Dollars
(S1,200,000), and to pay interest thereon to the registered holder hereof, on
each anniversary hereof at the rate of 6.49 percent per annum until the
principal hereof is paid in full. In the event that any anniversary hereof is
not a Business Day, as hereinafter defined, the Company shall pay interest on
the first following day that is a Business Day. The principal of and interest on
the Convertible Debt evidenced by this Convertible Debt Unit shall be payable at
the office of the Company at 2801 Main Street, Irvine, California 92614 in such
coin or currency of the United States as of the time of payment is legal tender
for payment of public and private debts. The term Business Day means a day on
which commercial banks settle payments in Los Angeles, California.
1. SENIOR EXECUTIVE AND CONSULTANT CONVERTIBLE DEBT PLAN; GRANT
AGREEMENT. This Convertible Debt Unit has been issued under the terms of (a) the
Company's 1996 Senior Executive and Consultant Convertible Debt Plan (the
"Plan") and (b) the Grant Agreement (the "Grant Agreement") dated as of April
11, 1997 between the Company and Edward R. Jacobs. The registered holder hereof
is entitled to the benefits of, and subject to the restrictions contained in,
the Plan and the Grant Agreement, and reference is made thereto for a
description of all rights, remedies and restrictions thereunder. Neither
reference to the Plan or to the Grant Agreement, nor any provision thereof,
shall affect or impair the absolute and unconditional obligation of the Company
to pay, when due, the principal amount hereof, together with all accrued
interest thereon.
2. MATURITY. The principal amount of the Convertible Debt evidenced by
this Convertible Debt Unit shall become due and payable on the Maturity Date, if
not previously converted pursuant to Section 3 hereof. In the event that the
Maturity Date is not a Business Day, the Convertible Debt evidenced by this
Convertible Debt Unit shall be due and payable on the first following day that
is a Business Day.
3. CONVERSION RIGHT. Subject to the provisions of Section 10(b) of the
Plan, the registered holder may, at any time prior to the Maturity Date, convert
this Convertible Debt Unit into shares of the Company's common stock, par value
$.01 per share (the "Common Stock") at the rate (the "Conversion Rate") of one
Convertible Debt Unit for
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one share of the Common Stock at the conversion price of one cent per share of
Common Stock. The Conversion Rate shall be adjusted as described in Section
10(a) of the Plan within twenty (20) days following the consummation of any of
the transactions described in Section 10(a) of the Plan.
4. MECHANICS OF CONVERSION. Before the registered holder of this
Convertible Debt Unit will be entitled to convert the same into shares of the
Common Stock, such holder will surrender this Convertible Debt Unit at the
principal office of the Company, and he will give written notice to the Company
in the form of Exhibit A to the Grant Agreement (the "Conversion Notice")
stating (i) the number of the Convertible Debt Units he wishes to convert into
shares of the Common Stock and (ii) the total conversion price for such number
of shares of the Common Stock. The registered holder of this Convertible Debt
Unit shall include with such Conversion Notice payment of the total conversion
price. The Company, as soon as reasonably practicable after its receipt of the
Conversion Notice and payment of the total conversion price, will issue and
deliver at such office to such holder, a certificate for the number of shares of
the Common Stock to which such holder will be entitled as aforesaid and if such
holder has elected to convert less than all of his Convertible Debt Units into
shares of the Common Stock, the Company shall deliver to such holder a new
Convertible Debt Unit in the number of the Convertible Debt Units that he did
not elect to convert. Such conversion will be deemed to have been made
immediately prior to the close of business on the date that the Company receives
the Conversion Notice and payment of the total conversion price from the
registered holder of this Convertible Debt Unit holder, and such registered
holder will be treated for all purposes as the record holder of such shares of
the Common Stock on such date. If the conversion is in connection with the
initial public offering of shares of the Common Stock, the conversion will be
conditioned upon the closing with the underwriter or underwriters of the sale of
securities pursuant to such offering, in which event the registered holder of
this Convertible Debt Unit shall not be deemed to have converted his Convertible
Debt Unit until immediately prior to the closing of such sale of securities.
5. REDEMPTION. This Convertible Debt Unit is not subject to redemption or
prepayment by the Company in whole or in part, except as otherwise provided in
Section 3 hereof
6. EVENTS OF DEFAULT . Each of the following events shall be an Event of
Default hereunder:
a. The Company shall fail to pay (i) any interest payment hereon
when due or (ii) the principal hereof on the Maturity Date;
b. The Company files a voluntary petition under the federal
Bankruptcy Code; or
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c. An involuntary petition under the federal Bankruptcy Code is
filed against the Company and such involuntary petition is not dismissed within
thirty (30) days of the date that such petition was filed.
7. RIGHTS OF THE HOLDER FOLLOWING AN EVENT OF DEFAULT. Upon the
occurrence of any Event of Default, the registered holder of this Convertible
Debt Unit, in his sole discretion, may do either or both of the following: (i)
declare all principal and interest due on the Convertible Debt evidenced by this
Convertible Debt Unit immediately due and payable without demand, protest,
notice of protest, notice of default, presentment for payment or further notice
of any kind; and (ii) proceed to enforce such other and additional rights and
remedies as the registered holder may have under other agreements with the
Company or applicable law. The failure of the registered holder to exercise any
of the rights and remedies set forth in the preceding sentence shall not
constitute a waiver of the right to exercise the same on any future date.
8. REGISTRATION; LOCK-UP AGREEMENT. This Convertible Debt Unit shall be
registered in a Convertible Debt Unit Register maintained by the Company. This
Convertible Debt Unit and shares of the Common Stock issued upon the conversion
thereof are subject to provisions regarding a lock-up agreement set forth in the
Grant Agreement.
9. RESERVATION OF COMMON STOCK ISSUABLE UPON CONVERSION. The Company at
all times will reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of
this Convertible Debt Unit such number of shares of Common Stock as from time to
time shall be sufficient to effect the conversion of all of the Convertible Debt
Units evidenced by this Convertible Debt Unit; and if at any time the number of
authorized but unissued shares of Common Stock is not sufficient to effect the
conversion of all of the Convertible Debt Units evidenced by this Convertible
Debt Unit, in addition to such other remedies as may be available to the
registered holder of this Convertible Debt Unit for such failure, the Company
will take such corporate action as, in the opinion of its counsel, may be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as will be sufficient for such purpose.
10. NOTICE. Any notice or other communication in connection with this
Convertible Debt Unit shall be in writing and delivered by hand or by certified
or registered mail, return receipt requested. All such notices and
communications shall be effective (i) if given by mail, when deposited in the
mail, and (ii) if delivered by hand, on the date delivered. Any such notice or
communication shall be addressed as provided below (or at such other address as
such person shall specify in writing to the other parties hereto in accordance
with the provisions hereof):
a. if to the Company,
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National Telephone & Communications, Inc.
2801 Main Street
Irvine, California 92614
Attention: President
b. if the to Registered Holder,
to his address as set forth in the Convertible Debt Unit
Register.
11. COSTS OF COLLECTION. The Company shall pay all costs of collection,
including reasonable attorneys' fees, upon the occurrence of an Event of
Default, whether suit be brought or not.
12. MODIFICATION. This Convertible Debt Unit may not be modified, amended,
discharged or waived orally, but only by a written instrument executed by the
Company.
13. INVALIDITY. In the event any one or more of the provisions contained
in this Convertible Debt Unit shall for any reason be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Convertible Debt
Unit, but this Convertible Debt Unit shall be construed as if such invalid,
illegal or unenforceable provision had never been contained herein.
14. GOVERNING LAW . This Convertible Debt Unit is governed by the laws of
the State of Delaware, without giving effect to principles of conflict of laws.
15. CAPTIONS . The captions and headings set forth in this Convertible
Debt Unit are for convenience purposes only and shall not limit, define or
otherwise have any effect on the interpretation of the agreements and
understandings set forth herein.
16. OWNERSHIP OF THIS CONVERTIBLE DEBT UNIT. The Company and any agent of
the Company may treat the registered holder of this Convertible Debt Unit as the
owner hereof for the purpose of receiving payment as herein provided and for all
other purposes, and neither the Company nor any such agent shall be affected by
any notice to the contrary.
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IN WITNESS WHEREOF, the Company has caused this Convertible Debt Unit to be
executed by its duly authorized officer.
NATIONAL TELEPHONE &
COMMUNICATIONS, INC.
By: /s/ James R. Quandt
---------------------------------
Name: James R. Quandt
Title: President
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PROMISSORY NOTE
$1,200,000 Dated as of April 11, 1997
FOR VALUE RECEIVED, on or before five years from the date hereof, the
undersigned, Edward R. Jacobs (the "Maker"), promises to pay to the order of
National Telephone & Communications, Inc., a Delaware corporation (the
"Corporation") at 2801 Main Street, Irvine, California 92614, or at such other
place as the holder hereof may from time to time designate in writing, the
principal sum of One Million Two Hundred Thousand Dollars ($1,200,000), or so
much thereof as shall be advanced or readvanced and from time to time remain
unpaid, plus interest on the principal balance thereof at a rate of six and
seventy-four hundredths per annum (6.74%) per annum annually.
This Note shall be payable in successive annual installments of accrued
interest only, followed by one final installment at maturity in the amount of
the then outstanding principal balance of this Note and all accrued and unpaid
interest thereon. Such consecutive annual installments shall be due on each
anniversary of the date hereof until the fifth anniversary of the date hereof,
the maturity date of this Note, when the entire principal balance of this Note
and all accrued and unpaid interest thereon, as well as all other costs, fees or
charges payable hereunder, if any, shall be due and payable in full. Interest on
this Note shall be calculated on a 360 day year, per diem basis. All payments
hereunder shall be made in lawful currency of the United States and in
immediately available funds.
If (i) default be made in the payment of interest due on any anniversary of
the date hereof or principal due on the maturity date of this Note, (ii) the
Maker files a voluntary petition under the federal Bankruptcy Code or (iii) an
involuntary petition under the federal Bankruptcy Code is filed against the
Maker and such involuntary petition is not dismissed within ninety (90) days of
the date that such petition was filed, then in any of such events, the entire
principal balance hereof and all accrued and unpaid interest hereon shall at
once become due and payable at the option of the holder. The failure of the
holder to exercise this option shall not constitute a waiver of the right to
exercise the same on any future date.
This Note may be prepaid, in whole or in part, at any time without penalty.
Any partial prepayments shall not, however, relieve the Maker of the obligation
to pay principal hereunder as and when the same would otherwise fall due.
The Maker (i) waives presentment, demand, protest and notice of
presentment, notice of protest and notice of dishonor of this debt and each and
every other notice of
<PAGE>
any kind with respect to this Note, and (ii) agrees that the holder of this
Note, at any time or times, without notice to him or his consent, may grant
extensions of time, without limit as to the number or the aggregate period of
such extensions, for the payment of any sums due hereunder.
The Maker promises to pay all costs of collection, including reasonable
attorneys' fees, upon default in the payment of the principal of this Note or
interest hereon when due, whether suit be brought or not.
In the event any one or more of the provisions contained in this Note shall
for any reason be held to be invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect any other
provision of this Note, but this Note shall be construed as if such invalid,
illegal or unenforceable provision had never been contained herein.
This Note may not be changed orally, but only by an agreement in writing
signed by the parties against whom enforcement of any waiver, change,
modification or discharge is sought.
The Maker warrants and represents that the loan evidenced hereby is being
made for business or investment purposes.
This Note shall be governed in all respects by the laws of California and
shall be binding upon and inure to the benefit of the parties hereto and their
respective heirs, executors, administrators, personal representatives,
successors and assigns.
WITNESS:
/s/ Karen Letterman /s/ E. R. Jacobs (SEAL)
- ------------------------------ -------------------------------
Edward R. Jacobs
Maker:
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NATIONAL TELEPHONE & COMMUNICATIONS, INC.
1996 SENIOR EXECUTIVE AND CONSULTANT
CONVERTIBLE DEBT PLAN (THE "PLAN")
GRANT AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Grant Agreement ("Grant Agreement").
I. NOTICE OF CONVERTIBLE DEBT UNIT GRANT
Grantee's Name and Address Edward R. Jacobs
2801 Main Street
Irvine, California 92614
You have been granted Convertible Debt Units of the Company (the
"Convertible Debt Units") in the form of Schedule I hereto, which may be
converted to shares of the Common Stock of the Company (the "Shares"), subject
to the terms and conditions of the Plan and this Grant Agreement, as follows:
<TABLE>
<S> <C>
Date of Grant April 11, 1997
Number of Convertible Debt Units 400,000
Purchase Price per Convertible Debt Unit $3.00
Interest Rate 6.49% per annum,
payable annually
Total Number of Shares into which the
Convertible Debt Units may be converted 400,000
Conversion Price per Share $.01
Expiration Date April 11, 2002
(No more than 5 years from date of
grant)
</TABLE>
II. AGREEMENT
1. GRANT OF CONVERTIBLE DEBT UNITS. The Committee hereby grants to the
Grantee named in Section I of this Grant Agreement (the "Grantee"), the right to
purchase
<PAGE>
the number of Convertible Debt Units set forth in Section 1, at the purchase
price per Convertible Debt Unit set forth in Section I (the "Purchase Price"),
subject to the terms and conditions of the Plan, which is incorporated herein by
reference. In the event of a conflict between the terms and conditions of the
Plan and the terms and conditions of this Grant Agreement, the terms and
conditions of the Plan shall prevail. The Grantee may review a copy of the Plan
at the office of the Secretary of the Company at 2801 Main Street, Irvine,
California 92614.
2. METHOD OF PAYMENT. The purchase price of Convertible Debt Units shall
be paid as set forth in the Plan. The price of Shares issued upon conversion of
Convertible Debt Units shall be paid as set forth in the Plan.
3. Transferability of Convertible Debt Unit . Convertible Debt Units may
be transferred in by the Grantee but only on the condition that the transferee
(the "Transferee") agrees in writing to be bound by all of the terms of the Plan
and this Grant Agreement. Convertible Debt Units may be exercised during the
lifetime of the Grantee only by the Grantee, or in the event of a transfer of
such Convertible Debt Units by the Grantee, only by the Transferee. The terms
of the Plan and this Grant Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Grantee.
4. LOCK-UP AGREEMENT . No less than thirty (30) days prior to the
commencement of any offering of Shares in a bona fide underwriting pursuant to a
registration statement under the Securities Act, the Grantee shall execute and
deliver a written agreement (the "Lock-Up Agreement") between the Company, the
underwriter or underwriters of the Shares and the Grantee pursuant to which the
Grantee agrees that he will not offer, sell, contract to sell or otherwise
dispose of up to one hundred percent (100%) of the Convertible Debt Units or
Shares issued upon the conversion thereof for a period not to exceed 180 days
after the commencement by such underwriter or underwriters of such offering in a
form negotiated by the Committee (which form of Lock-Up Agreement shall be
conclusive and not subject to negotiation by the Grantee). A condition precedent
to any transfer of the Convertible Debt Units or any Shares issued upon the
conversion thereof is that the transferee agree in writing to be bound by the
obligation described in the preceding sentence to execute and deliver a Lock-Up
Agreement.
5. TERM OF CONVERTIBLE DEBT UNITS. Convertible Debt Units may be
converted only on or before the expiration date set forth in Section I and may
be converted only in accordance with the Plan and the terms of this Grant
Agreement.
6. TAX CONSEQUENCES. The conversion of Convertible Debt Units will have
federal and state income tax consequences. THE GRANTEE SHOULD CONSULT A TAX
ADVISER UPON THE GRANT OF CONVERTIBLE DEBT UNITS AND
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<PAGE>
BEFORE CONVERTING CONVERTIBLE DEBT UNITS OR DISPOSING OF THE SHARES OF COMMON
STOCK ACQUIRED UPON CONVERSION, PARTICULARLY WITH RESPECT TO HIS STATE'S TAX
LAWS.
7. ENTIRE AGREEMENT; GOVERNING LAW. The Plan is incorporated herein by
reference. The Plan, the Convertible Debt Unit and this Grant Agreement
constitute the entire agreement of the parties with respect to the subject
matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and the Grantee with respect to the subject matter
hereof. This Grant Agreement is governed by the laws of the State of Delaware,
without giving effect to principles of conflict of laws.
8. WARRANTIES, REPRESENTATIONS AND COVENANTS. The undersigned Grantee
warrants and represents that he has reviewed the Plan and this Grant Agreement
in its entirety, has had an opportunity to obtain the advice of counsel prior to
executing this Grant Agreement and fully understands all provisions of the Plan
and this Grant Agreement. The Grantee hereby agrees to accept as binding,
conclusive and final all decisions or interpretations of the Committee upon any
questions relating to the Plan and Grant Agreement. The Grantee further agrees
to notify the Company promptly upon any change in the residence address
indicated below.
GRANTEE: NATIONAL TELEPHONE &
COMMUNICATIONS, INC.
a Delaware corporation
/s/ E. R. Jacobs By: /s/ James R. Quandt
- -------------------------------- -----------------------------------
Signature Title: President
E. R. Jacobs
- --------------------------------
Print Name
Residence Address:
27101 Puerta Del Oro
- --------------------------------
Mission Viejo, CA d 92691
- --------------------------------
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<PAGE>
EXHIBIT A
NATIONAL TELEPHONE & COMMUNICATIONS, INC.
1996 SENIOR EXECUTIVE AND CONSULTANT
CONVERTIBLE DEBT PLAN
CONVERSION NOTICE
National Telephone & Communications, Inc.
2801 Main Street
Irvine, California 92614
Attention: Secretary
1. CONVERSION OF CONVERTIBLE DEBT UNITS. Effective as of today,
__________, 199_, the undersigned ("Purchaser") hereby elects to convert _____
Convertible Debt Units into __________ shares (the "Shares") of the Common Stock
of National Telephone & Communications, Inc. (the "Company") under and pursuant
to the 1996 Senior Executive and Consultant Convertible Debt Plan (the "Plan")
and the Grant Agreement dated __________, 199__ (the "Grant Agreement"). The
purchase price for the Shares shall be $__________, as specified in the Grant
Agreement.
2. DELIVERY OF PAYMENT. Purchaser herewith delivers to the Company the
full purchase price for the Shares.
3. REPRESENTATION OF PURCHASER. Purchaser acknowledges that Purchaser has
received, read and understood the Plan and this Grant Agreement and agrees to
abide by and be bound by their terms and conditions.
4. RIGHTS OF STOCKHOLDER. Purchaser shall not be deemed to be the holder
of, or to have any of the rights of a holder with respect to, any Shares for
which such Convertible Debt Units arc converted including, but not limited to,
rights to vote or to receive dividends unless and until Purchaser has satisfied
all requirements for conversion of the Convertible Debt Units pursuant to their
terms, the certificates evidencing such Shares have been issued and Purchaser
has become a record holder of such Shares. A share certificate for the number of
Shares so acquired shall be issued to Purchaser as soon as practicable after
conversion of the Convertible Debt Units. No adjustment will be made for a
dividend or other right for which the record date is prior to the date all the
conditions set forth above arc satisfied, except as provided in Section 10 of
the Plan.
5. LOCK-UP AGREEMENT. No less than thirty (30) days prior to the
commencement of any offering of Shares in a bona fide underwriting pursuant to a
<PAGE>
registration statement under the Securities Act, Purchaser shall execute and
deliver a written agreement (the "Lock-Up Agreement") between the Company, the
underwriter or underwriters of the Shares and Purchaser pursuant to which
Purchaser agrees that he will not offer, sell, contract to sell or otherwise
dispose of up to one hundred percent (100%) of the Convertible Debt Units or
Shares issued upon the conversion thereof for a period not to exceed 180 days
after the commencement by such underwriter or underwriters of such offering in a
form negotiated by the Committee (which form of Lock-Up Agreement shall be
conclusive and not subject to negotiation by Purchaser). A condition precedent
to any transfer of the Convertible Debt Units or any Shares issued upon the
conversion thereof is that the transferee agree in writing to be bound by the
obligation described in the preceding sentence to execute and deliver a Lock-Up
Agreement.
6. TAX CONSULTATION. Purchaser understands that Purchaser may suffer
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
7. ENTIRE AGREEMENT; GOVERNING LAW . The Plan, the Convertible Debt Unit
and Grant Agreement are incorporated herein by reference. This Agreement, the
Plan, the Convertible Debt Unit and the Grant Agreement constitute the entire
agreement of the parties with respect to the subject matter hereof and supersede
in their entirety all prior undertakings and agreements of the Company and
Purchaser with respect to the subject matter hereof This agreement is governed
by the laws of the State of Delaware without giving effect to principles of
conflict Of laws.
Submitted by: Accepted by:
PURCHASER: NATIONAL TELEPHONE &
COMMUNICATIONS, INC.
By:
- ------------------------------ ---------------------------------
Signature Its:
--------------------------------
- ------------------------------
Print Name
Address: Address:
- ------------------------------ ------------------------------------
- ------------------------------ ------------------------------------
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CONVERTIBLE DEBT UNIT PLEDGE AGREEMENT
CONVERTIBLE DEBT UNIT PLEDGE AGREEMENT, dated as of April 11, 1997, between
Edward R. Jacobs (the "Pledgor") and National Telephone & Communications, Inc.,
a Delaware corporation (the "Pledgee").
WHEREAS, the Pledgee has made a loan to the Pledgor in order to permit the
Pledgor to acquire certain convertible debt units of the Pledgor described in
Schedule 1 hereto which are convertible into certain shares of common stock of
the Pledgee (the "Common Stock"), which loan is evidenced by a Promissory Note
of the Pledgor of even date herewith (the "Promissory Note");
WHEREAS, the Pledgee requires the Pledgor, as a condition to making the
aforementioned loan, to enter into this Agreement.
NOW, THEREFORE, in consideration of the making of such loan, the Pledgor
hereby agrees with the Pledgee as follows:
SECTION 1. PLEDGE. To secure the due and punctual payment by the Pledgor
of the Liabilities (as hereinafter defined), the Pledgor hereby pledges,
hypothecates, assigns, transfers, sets over and delivers unto the Pledgee and
hereby grants to the Pledgee a security interest in the following:
(i) the convertible debt unit specified in Schedule 1 hereto (the
"Pledged Units") and the instrument representing the Pledged Units,
and all cash, securities, interest, rights and other property at
any time and from time to time received, receivable or otherwise
distributed in respect of, or in exchange for, any or all of the
Pledged Units;
(ii) all shares of the Common Stock into which the Pledged Units may
hereafter be converted (the "Pledged Shares") and all cash,
securities, interest, dividends, options, rights and other property
at any time and from time to time received, receivable or otherwise
distributed in respect of, or in exchange for, any or all of the
Pledged Shares;
(iii) all other property hereafter delivered to the Pledgee in
substitution for or in addition to any of the foregoing, all
certificates and instruments representing or evidencing such
property and all cash, securities, interest, dividends, options,
rights and other property at any time and from time to time
received, receivable or otherwise distributed in respect of, or in
exchange for, any or all thereof, and
<PAGE>
(iv) all proceeds of any of the foregoing (the Pledged Units, the
Pledged Shares and all such additional shares, certificates,
instruments, cash, securities, interest, dividends, options, rights
and other property being herein collectively called the
"Collateral").
The term "Liabilities," as used herein shall mean all obligations and
liabilities of the Pledgor to the Pledgee under the Promissory Note.
SECTION 2. CERTAIN RIGHTS REGARDING COLLATERAL AND LIABILITIES.
(a) The Pledgee shall not be liable for its failure to collect or
realize upon the Liabilities or any collateral, security or guaranty therefor,
or any part thereof, or for any delay in so doing, nor shall the Pledgee be
under any obligation to take any action whatsoever with respect thereto.
(b) The Pledgee may from time to time, after any portion of the
Liabilities shall become due and payable, without notice to the Pledgor, (i)
transfer all or any part of the Collateral into the name of the Pledgee or its
nominee, with or without disclosing that such Collateral is subject to the lien
and security interest granted hereby, (ii) enforce collection of any of the
Collateral, and surrender, release or exchange all or any part thereof, or
compromise or extend or renew for any period (whether or not longer than the
original period) any obligations of any nature of any party with respect
thereto, (iii) resort to the Collateral for payment of any portion of the
Liabilities whether or not it shall have resorted to any other property securing
payment of any portion of the Liabilities or shall have proceeded against any
party primarily or secondarily liable on any portion of the Liabilities and (iv)
take control of any proceeds of the Collateral.
SECTION 3. INTEREST, DIVIDENDS AND OTHER RIGHTS.
(a) So long as no portion of the Liabilities shall be due and payable,
the Pledgor shall be entitled to receive and retain interest paid on the Pledged
Units, to vote the Pledged Shares, to give consents, waivers and ratifications
in respect of the Pledged Shares and to receive and retain cash dividends made
on or in respect of the Pledged Shares; PROVIDED, HOWEVER, that any and all
cash, stock and/or liquidating dividends, distributions in property, returns of
capital or other distributions made on or in respect of the Pledged Units and/or
Pledged Shares resulting from a subdivision, combination or reclassification of
the outstanding capital stock of the issuer thereof or received in exchange for
the Pledged Units and/or Pledged Shares or any part thereof or as a result of
any merger, consolidation, acquisition or other exchange of assets to which the
issuer thereof may be a party or otherwise, and any and all cash and other
property received in exchange for any Collateral shall be and become part of the
Collateral pledged hereunder and, if received by the Pledgor, shall be held by
the Pledgor in trust on behalf of and for the benefit of the Pledgee and shall
forthwith be delivered to the Pledgee or its designated nominee (accompanied, if
appropriate, by proper instruments of assignment and/or stock
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<PAGE>
powers executed by the Pledgor in accordance with the Pledgee's instructions) to
be held subject to the terms of this Agreement; and PROVIDED FURTHER hat no vote
shall be cast or consent, waiver or ratification given or action taken which
would impair the Collateral or the security interests granted hereby.
(b) Upon the nonpayment, when due, of any portion of the Liabilities,
all rights of the Pledgor pursuant to Section 3(a) hereof shall, at the election
of the Pledgee, cease, and the Pledgee shall have the sole and exclusive right
and authority to vote, to give consents, waivers and ratifications, and receive
all interest, dividends and distributions pursuant to Section 3(a) hereof.
SECTION 4. REMEDIES. In the event that any portion of the Liabilities is
not paid when due for any reason other than the failure of the Pledgee to pay
interest to the Pledgor on the Pledged Units as and when due, the Pledgee,
without demand of performance or other demand, advertisement or notice of any
kind (except the notice specified below of time and place of public or private
sale) to or upon the Pledgor or any other person (all and each of which demands,
advertisements, and/or notices being hereby expressly waived by the Pledgor),
may forthwith collect, receive, appropriate and realize upon the Collateral, or
any part thereof, and/or may forthwith sell, assign, give options to purchase,
contract to sell or otherwise dispose of and deliver the Collateral, or any part
thereof, in one or more parcels at public or private sales, at any exchange or
broker's board or at any of the Pledgee's offices or elsewhere, upon such terms
and conditions as it may deem advisable and at such prices as it may deem best,
for cash or on credit or for future delivery, without assumption of any credit
risk, with the right upon any such sale, public or private, to purchase the
whole or any part of the Collateral so sold, free of any right or equity of
redemption in the Pledgor, which right or equity is hereby expressly waived and
released by the Pledgor. The Pledgee shall apply the net proceeds of any such
collection, recovery, receipt, appropriation, realization or sale, after
deducting all reasonable costs and expenses of every kind incurred therein or
incidental to the care, safekeeping or otherwise of any and all of the
Collateral or in any way relating to the rights of the Pledgee hereunder
(including reasonable attorney's fees and legal expenses), to the payment in
whole or in part of the Liabilities in such order as it may elect, and only
after such application of such net proceeds and after the payment in full of the
Liabilities by the Pledgee and any other amount required by any provision of
law, including, without limitation, Section 9-504(l)(c) of the Uniform
Commercial Code, need the Pledgee account for the surplus, if any, to the
Pledgor. The Pledgor agrees that the Pledgee need not give more than twenty
(20) days' notice of the time and place of any public sale or of the time after
which a private sale or other intended disposition is to take place and that
such notice is reasonable notification of such matters. No notification need be
given the Pledgor if, after any portion of the Liabilities is not paid when due
for any reason other than the failure of the Pledgee to pay interest to the
Pledgor on the Pledged Units as and when due, it shall have signed a statement
renouncing or modifying any right to notification of any sale or other intended
disposition. The Pledgee shall not be obligated to make any sale pursuant to any
such notice. The Pledgee may, without notice or
3
<PAGE>
publication, adjourn any public or private sale or cause the same to be
adjourned from time to time by announcement at the time and place fixed for the
sale, and such sale may be made at any time or place to which the same may be so
adjourned. In case of any sale of all or any part of the Collateral on credit or
for future delivery, the Collateral so sold may be retained by the Pledgee until
the selling price is paid by the purchaser thereof, but the Pledgee shall incur
no liability in the case of the failure of such purchaser to take up and pay for
the Collateral so sold and in case of any such failure such Collateral may again
be sold on like notice. The Pledgee, however, instead of exercising the power of
sale herein conferred upon it, may proceed by a suit at law or in equity to
foreclose the pledge and security interest under this Agreement and sell the
Collateral, or any part thereof, under a judgment or decree of a court of
competent jurisdiction. In addition to the rights and remedies granted to it in
this Agreement and in any other instrument or agreement securing, evidencing or
relating to any portion of the Liabilities, the Pledgee shall have all the
rights and remedies of a secured party under the Uniform Commercial Code. The
Pledgor further agrees to waive and agrees not to assert any rights or
privileges which it may acquire under Section 9-12 of the Uniform Commercial
Code.
SECTION 5. REPRESENTATIONS. WARRANTIES AND COVENANTS. The Pledgor
represents and warrants that (a) the Pledgor is the legal record and beneficial
owner of, and has good and marketable title to, the Pledged Units, subject to no
perfected lien whatsoever except the lien created by this Agreement; (b) no
consent of any other person (including, without limitation, his creditors) and
no consent, license, permit, approval or authorization of, exemption by, notice
or report to, or registration, filing or declaration with, any governmental
authority, domestic or foreign, is required to be obtained by him in connection
with the execution, delivery or performance of this Agreement; (c) the
execution, delivery and performance of this Agreement will not violate any
provision of any applicable law or regulation, or of any order, judgment, writ,
award or decree of any court, arbitrator or governmental authority, domestic or
foreign, or of any mortgage, indenture, lease, contract or other agreement,
instrument or undertaking to which the Pledgor is a party or which purports to
be binding upon the Pledgor or upon any of the Pledgor's assets, and will not
result in the creation or imposition of any lien on any of the Pledgor's assets
except as contemplated by this Agreement; and (d) the Pledgor has delivered to
the Pledgee the Pledged Units with the understanding that the Pledgee will
reflect this transfer in the Convertible Debt Unit Transfer Ledger (the
"Ledger") maintained by it, and the pledge and delivery of the Pledged Units
pursuant to this Agreement creates a valid lien on and a perfected security
interest in the Pledged Units, and the proceeds thereof, subject to no prior
lien, or to any agreement purporting to grant to any third party a security
interest in the Pledgor's property or assets which would include the Pledged
Units. The Pledgor covenants and agrees that, except as otherwise provided in
Section 6, the Pledgor will not sell, assign, transfer, exchange or otherwise
dispose of, or grant any option with respect to, the Collateral, nor will the
Pledgor create, incur or permit to exist any perfected lien with respect to any
part of the Collateral, or any interest therein, or any proceeds thereof, except
for the lien created by this
4
<PAGE>
Agreement, without the prior written consent of the Pledgee; and the Pledgor
further covenants and agrees that the Pledgor will defend the Pledgee's right,
title and security interest in and to the Collateral and the proceeds thereof
against the claims and demands of all persons; and the Pledgor further covenants
and agrees to deliver to the Pledgee from time to time on request such
assignments, stock powers and similar documents, satisfactory in form and
substance to the Pledgee, with respect to the Collateral as the Pledgee may
request.
SECTION 6. CONVERSION OF THE PLEDGED UNITS; RELEASE OF THE PLEDGED SHARES.
The Pledgee recognizes that the Pledgor may from time to time convert the
Pledged Units into shares of the Common Stock which are Pledged Shares. The
Pledgee agrees that as long as the fair market value of the Collateral (the
"Collateral Requirement") exceeds one hundred and twenty percent (120%) of the
then outstanding amount of Liabilities (whether such Liabilities have been
prepaid by the Pledgor in increments of $10,000 or not), the Pledgor shall be
entitled to obtain a release of such number of the Pledged Shares in excess of
the Collateral Requirement from the Pledgee within ten (10) days of the
Pledgor's written request therefor. For purposes of determining the fair market
value of the Collateral, (i) the Pledged Units shall have a fair market value of
the principal amount thereof and (ii) the Pledged Shares shall have a fair
market value determined as follows:
(a) If the Common Stock is listed on any established stock exchange or
a national market system, including without limitation the National Market
System of the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") System, the fair market value of a share of Common Stock
shall be the closing sales price for such stock on the date of determination
(or, if no such price is reported on such date, such price as reported on the
nearest preceding day) as quoted on such system or exchange (or the exchange
with the greatest volume of trading in the Common Stock), as reported in THE
WALL STREET JOURNAL, or such other source as the Board of Directors of the
Pledgee deems reliable;
(b) If the Common Stock is quoted on the NASDAQ System (but not on the
National Market System thereof) or is regularly quoted by a recognized
securities dealer but selling prices are not reported, the fair market value of
a share of Common Stock shall be the mean of the closing bid and asked prices
for the Common Stock on the date of determination (or, if such prices are not
reported on such date, such prices as reported on the nearest preceding date),
as reported in THE WALL STREET JOURNAL or such other source as the Board of
Directors of the Pledgee deems reliable; or
(c) If the fair market value is not determined pursuant to (a) or (b)
above, then the fair market value shall be determined in good faith by the Board
of Directors of the Pledgee.
5
<PAGE>
The Pledgee agrees that following any release by the Pledgee to the Pledgor
of the Pledged Shares, in the event that the fair market value of the Collateral
falls below the Collateral Requirement and remains below the Collateral
Requirement for fifteen (15) consecutive days, the Pledgee shall within ten (10)
days thereafter either (x) deliver to the Pledgee such number of shares of the
Common Stock (together with stock powers with respect to such shares of the
Common Stock) or (y) prepay the Liabilities as described in this Section 6 in
such amounts so that the Collateral Requirement is met.
SECTION 7. SALE OF THE PLEDGED UNITS OR THE PLEDGED SHARES.
(a) The Pledgor recognizes that the Pledgee may be unable to effect a
public sale of any or all of the Pledged Units and/or the Pledged Shares by
reason of certain prohibitions contained in the Securities Act of 1933, as
amended (the "Securities Act"), and applicable state securities laws, but may be
compelled to resort to one or more private sales thereof to a restricted group
of purchasers who will be obliged to agree, among other things, to acquire such
securities for their own account for investment and not with a view to the
distribution or resale thereof. The Pledgor acknowledges and agrees that any
such private sale may result in prices and other terms less favorable to the
seller than if such sale were a public sale and, notwithstanding such
circumstances, agrees that any such private sale shall not be deemed to have
been made in commercially unreasonable manner by virtue of its private nature.
The Pledgee shall be under no obligation to delay a sale of any of the Pledged
Units and/or the Pledged Shares for the period of time necessary to permit the
issuer thereof to register such securities for public sale under the Securities
Act or under applicable state securities laws even if the issuer would agree to
do so.
(b) The Pledgor further agrees to do or cause to be done all such other
acts and things as may be necessary to make such sale or sales of any portion or
all of the Pledged Units and/or the Pledged Shares valid and binding and in
compliance with any and all applicable laws, regulations, orders, writs,
injunctions, decrees or awards of any and all courts, arbitrators or
governmental instrumentalities, domestic or foreign, having jurisdiction over
any such sale or sales, all at the Pledgor's expense.
SECTION 8. FURTHER ASSURANCE. The Pledgor agrees that, at any time and
from time to time upon the written request of the Pledgee, it will execute and
deliver such further documents and do such further acts and things as the
Pledgee may reasonably request in order to effect the purposes of the Agreement.
SECTION 9. AUTHORITY OF PLEDGEE.
(a) The Pledgee is hereby appointed the attorney-in-fact of the Pledgor
for the purpose of carrying out the provisions of this Agreement and taking any
action and executing any instruments which the Pledgee may deem necessary or
advisable to accomplish the purposes hereof, which appointment as
attorney-in-fact is irrevocable and
6
<PAGE>
coupled with an interest, provided that no action may be taken by the Pledgee
pursuant to such appointment so long as the Liabilities are not yet due and
payable. Without limiting the generality of the foregoing, the Pledgee shall
have the right and ower to receive, endorse and collect all checks made payable
to the order of the Pledgor representing any dividend or other distribution in
respect of the Collateral or any part thereof and to give full discharge for the
same.
The Pledgee shall have and be entitled to exercise all such powers
hereunder as are specifically delegated to the Pledgee by the terms hereof,
together with such powers as are incidental thereto. The Pledgee may execute any
of its duties hereunder by or through agents or employees and shall be entitled
to retain counsel and to act in reliance upon the advice of such counsel
concerning all matters pertaining to its duties hereunder. Neither the Pledgee,
nor any director, officer or employee of the Pledgee, shall be liable for any
action taken or omitted to be taken by it or them hereunder or in connection
herewith, except for its or their own gross negligence or willful misconduct.
The Pledgor hereby agrees to reimburse the Pledgee, on demand, for all
reasonable expenses incurred by the Pledgee in connection with the enforcement
of this Agreement (including expenses incurred by any agent employed by the
Pledgee) and agrees to indemnify and hold harmless the Pledgee and/or any such
agent from and against any and all liability incurred by the Pledgee or such
agent hereunder or in connection herewith, unless such liability shall be due to
willful misconduct or negligence on the part of the Pledgee or such agent.
SECTION 10. SEVERABILITY. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
SECTION 11. NO WAIVER; CUMULATIVE REMEDIES. The Pledgee shall not by any
act, delay, omission or otherwise be deemed to have waived any of its rights,
powers or remedies hereunder and no waiver shall be valid unless in writing,
signed by the Pledgee, and then only to the extent therein set forth. A waiver
by the Pledgee of any right, power or remedy hereunder on any one occasion shall
not be construed as a bar to the exercise of any right, power or remedy which
the Pledgee would otherwise have on any future occasion. No failure to exercise,
nor any delay in exercising, on the part of the Pledgee any right, power or
remedy hereunder shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, power or remedy hereunder preclude any other or
further exercise thereof or the exercise of any other right, power or remedy.
The rights, powers and remedies herein provided are cumulative and may be
exercised singly or concurrently, and are not exclusive of any rights, powers or
remedies provided by law.
SECTION 12. NOTICES. All notices, demands, requests and other
communications provided for or permitted under this Agreement shall be in
writing, either delivered in
7
<PAGE>
hand or sent by registered first class mail, postage prepaid, or by facsimile
with answer-back, addressed, if to the Pledgor, to Edward R. Jacobs at his
address as reflected in the Ledger and, if to the Pledgee, to President,
National Telephone & Communications, Inc., 2801 Main Street, Irvine, California
92614 or to such other address as the party to receive any such notice, demand,
request or communication may have designated by written notice to the other
party, which notice complies as to delivery with the terms of this Section 12.
SECTION 13. TERMINATION. Upon payment in full of the Liabilities in
accordance with their terms and the performance by the Pledgor of all of the
Pledgor's obligations under this Agreement, this Agreement shall terminate and
the Pledgor shall be entitled to the return, at the Pledgor's expense, of such
of the Collateral in the possession or control of the Pledgee as may have been
pledged by the Pledgor under this Agreement and which has not theretofore been
disposed of pursuant to the provisions hereof.
SECTION 14. MISCELLANEOUS. This Agreement and all obligations of the
Pledgor hereunder shall be binding upon his successors and assigns, and shall,
together with the rights, powers and remedies of the Pledgee hereunder, inure to
the benefit of the Pledgee and its successors and assigns.
SECTION 15. AMENDMENTS; APPLICABLE LAW. None of the terms or provisions of
this Agreement may be amended except by an instrument in writing, duly executed
by the Pledgee. This Agreement shall be governed by and construed in accordance
with the laws of the State of California.
IN WITNESS WHEREOF, the Pledgor and the Pledgee have duly executed and
delivered this Agreement as of the day and year first above written.
PLEDGOR
/s/ E. R. Jacobs
-------------------------------------
Edward R. Jacobs
PLEDGEE
NATIONAL TELEPHONE &
COMMUNICATIONS, INC.
By: /s/ James R. Quandt
-------------------------------------
James R. Quandt
President
8
<PAGE>
SCHEDULE 1
<TABLE>
<CAPTION>
Principal Amount Number of Shares
Issuer of Convertible Debit of into
Convertible Debt Unit Unit Number Convertible Debt which Convertible
--------------------- ----------- ---------------- ------------------
<S> <C> <C> <C>
National 1 $3,021,345 1,007,115
Telephone &
Communications, Inc.
</TABLE>
<PAGE>
EXHIBIT 10.77
PROMISSORY NOTE
$550,219.77 March 31, 1997
FOR VALUE RECEIVED, on or before one (1) year from the date hereof ( the
"Maturity Date"), the undersigned, Jerry W. Ballah (the "Maker"), promises to
pay to the order of National Telephone & Communications, Inc., a Delaware
corporation (the "Corporation") at 280 Main Street, Irvine, California 92614,
or at such other place as the holder hereof may from time to time designate
in writing, the principal, sum of five hundred fifty thousand two hundred
nineteen dollars and seventy-seven cents ($550,219.77), or so much thereof as
shall be advanced or readvanced and from time to time remain unpaid, plus
interest on the principal balance thereof at a rate of five and eighty-three
hundredths percentum (5.83%) per annum annually, which is the applicable
federal rate for short-term debt instruments, as determined by the Internal
Revenue Service in accordance with Section 1274(d) of the Internal Revenue
code of 1986, as amended and in effect on the date hereof.
The entire principal balance of this Note and all accrued and unpaid
interest thereon, as well as all other costs, fees and charges payable
hereunder, if any, shall be due and payable in full on the Maturity Date.
Interest on this Note shall be calculated on a 360 day year, per diem basis.
All payments hereunder shall be made in lawful currency of the United States
and in immediately available funds.
The term of this Note may be extended beyond the Maturity Date for one
(1) extension period of one (1) year (provided that if the initial public
offering of the shares of the common stock of the Corporation has not been
consummated prior to March 31, 1998, the extension period shall end on the
first to occur of (i) March 31, 1999 or (ii) the date which is six (6) months
after the closing of such initial public offering), provided that prior to
obtaining such extension the Maker provides the holder of this Note with
written notice of its election to extend at least twenty (20) days prior to
the Maturity Date. In the event of the extension of the term of this Note in
accordance with this paragraph, the entire principal balance of this Note and
all accrued and unpaid interest thereon, and all other sums due hereunder,
shall be due and payable in full on the last day of the extension period.
Except as otherwise provided in the preceding paragraph, in the event
that any payment of principal and/or interest is not actually received by the
holder of this Note within ten (10) days of the date such payment is due, the
Maker agrees to pay a late charge equal to five percent (5%) of the total
amount of the delinquent payment. All payments received on this Note shall
be applied first to late charges, if any, then to interest and then to
principal.
<PAGE>
This Note may be prepaid, in whole or in part, at any time without
penalty. Any partial prepayments hall not, however, relieve the Maker of the
obligation to pay principal hereunder as and when the same would otherwise
fall due.
The Maker (i) waives presentment, demand, protest and notice of
presentment, notice of protest and notice of dishonor of this debt and each
and every other notice of any kind with respect to this Note, (ii) agrees
that the holder of this Note, at any time or times, without notice to it or
its consent, may grant extensions of time, without limit as to the number of
the aggregate period of such extensions, for the payment of any sums due
hereunder, and (iii) to the extent not prohibited by law, waive the benefit
of any law or rule of law intended for its advantage or protection as an
obligor hereunder or providing for its release or discharge from liability
under this Note, in whole or in part, on account of any facts or
circumstances other than full and complete payment of all amounts due
hereunder.
The Maker promises to pay all costs of collection, including reasonable
attorneys' fees, upon default in the payment of the of the principal of this
Note or interest or other sums hereon when due, whether suit be brought or
not.
In the event any one or more of the provisions contained in this Note
shall for any reason be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provisions of this Note, but this Note shall be construed as if such
invalid, illegal or unenforceable provision had never been contained herein.
This Note may not be changed orally, but only by an agreement in writing
signed by the parties against whom enforcement of any waiver, change,
modification or discharge is sought.
The Maker warrants and represents that the loan evidenced hereby is
being made for business or investment purposes.
This Note shall be governed in all respects by the laws of California
and shall be binding upon and inure to the benefit of the parties hereto and
their respective heirs, executors, administrators, personal representatives,
successors and assigns.
WITNESS:
/s/ Victor Streufert /s/ Jerry W. Ballah
- ------------------------------- ---------------------------------------
Jerry W. Ballah
Maker
2
<PAGE>
EXHIBIT 10.78
AMENDMENT NO. 1 TO
REGISTRATION RIGHTS AGREEMENT
This Amendment No. 1 to Registration Rights Agreement (this "Amendment") is
made and entered into as of April 9, 1999 between Ironwood Telecom LLC, a
Colorado limited liability company ("Ironwood"), and Incomnet, Inc., a
California corporation (the "Company").
R E C I T A L S
A. Foothill Financial Corporation ("Foothill") is providing additional
financing to the Company ("Foothill Financing").
B. Pursuant to the Foothill Financing, Foothill is requiring Ironwood to
subordinate the liens and security interests (the "Subordination") Ironwood
maintains over certain assets of Incomnet Communications Corporation, a Delaware
company and subsidiary of the Company.
C. Ironwood is requiring additional warrants for the purchase of the
Company's Common Stock as consideration for the Subordination (the "Warrants").
D. Ironwood is requiring and the Company is willing to grant Ironwood
registration rights with respect to the Company's common stock underlying the
Warrants.
NOW, THEREFORE, in consideration of the foregoing and intending to be
legally bound, the parties agree as follows:
The Registration Rights Agreement, dated November 4, 1998, by and between
Ironwood and the Company, shall be amended as follows:
1. Recitals B, C and D shall be renumbered Recitals C, D and F, respectively,
and new Recitals B and E shall be inserted, and shall read in their entirety as
follows:
"B. Lender is agreeing to subordinate certain liens and security
interests, created in favor of Lender pursuant to the Bridge Loan and
Term Loan with respect to certain assets of Incomnet Communications
Corporation, a Delaware corporation and subsidiary of the Company (the
"Subordination"), so that the Company may obtain additional financing
under a loan and security agreement with Foothill Financial
Corporation."
<PAGE>
"E. Pursuant to the Subordination, the Company plans to issue to
Lender additional warrants to purchase 1,250,000 shares of the
Company's Common Stock."
2. Recital F shall be amended in its entirety to read as follows:
"F. Lender is requiring and the Company is willing to grant
Lender registration rights with respect to the Company's common stock
("Common Stock") underlying the warrants issued under the Bridge Loan,
Term Loan and Subordination ("Warrants")."
3. Section 1 shall be amended in its entirety to read as follows:
"1. REGISTRATION RIGHTS.
Lender shall have the registration rights set forth below in
respect of the shares of Common Stock underlying the Warrants issued
to Lender under the Bridge Loan, Term Loan and Subordination (the
"REGISTRABLE SECURITIES"). These registration rights are granted to
Lender and may not be transferred to any other person without the
prior written consent of the Company."
IN WITNESS WHEREOF, this Amendment has been entered into as of the date
first written above.
"COMPANY" "LENDER"
INCOMNET, INC. IRONWOOD TELECOM LLC
By: /s/ Denis Richard By: /s/ Donald V. Berlanti
------------------------------------ -----------------------------
Denis Richard Donald V. Berlanti
President and Chief Executive Officer Member
<PAGE>
CONSENT AND AMENDMENT NO. 1
TO LOAN AND SECURITY AGREEMENT
This Consent and Amendment No. 1 to Loan and Security Agreement, dated
April 9, 1999 (this "Agreement"), is among INCOMNET, INC., a California
corporation ("Borrower"), INCOMNET COMMUNICATIONS CORPORATION, a Delaware
corporation ("ICC") and IRONWOOD TELECOM LLC, a Colorado limited liability
company ("Ironwood").
BACKGROUND
On December 15, 1998, Borrower, ICC and Ironwood entered into a Loan and
Security Agreement, and certain related documents (collectively, the "Ironwood
Documents") pursuant to which Ironwood made financing available to or for the
benefit of Borrower in the total amount of $16,785,470.00 on the terms and
conditions set forth in the Loan Documents. Such terms and conditions included,
without limitation, certain covenants and grants of a security interest in
certain of Borrower's and ICC's personal property.
Borrower and ICC each now desires that ICC obtain on the date hereof
financing arrangements from Foothill Capital Corporation ("Foothill") on the
terms and conditions set forth in the Loan and Security Agreement, the Security
Agreement and the Intellectual Property Security Agreement, each dated April 9,
1999 and between Foothill and ICC and certain other related documents between
Foothill and either Borrower or ICC, or both of them, and only those which are
executed concurrently herewith (collectively, the "Foothill Documents").
Foothill desires to provide such financing arrangements on the terms and
conditions set forth in the Foothill Documents.
Borrower, ICC and Ironwood are entering into this Agreement for the
purposes of (i) consenting to the financing arrangements set forth in the
Foothill Documents and the terms and conditions thereof and (ii) amending the
financial covenants set forth in the Ironwood Documents.
AGREEMENT
1. CONSENT TO THE FOOTHILL FINANCING.
Ironwood hereby consents to the financing arrangement, the making of loans,
the granting of security interests and each other term and condition set forth
in the Foothill Documents. Neither entering into the Foothill Documents nor
performing the obligations of Borrower or ICC thereunder shall be a breach,
default or Event of Default under the Ironwood Documents.
<PAGE>
2. AMENDMENT OF THE LOAN DOCUMENTS.
a. The following definition shall be added to Section 1.1 of the
Loan and Security Agreement, dated December 15, 1999, among Borrower, ICC and
Ironwood (the "Ironwood Loan Agreement"):
"TANGIBLE NET WORTH" shall have the meaning given such term in the
Loan and Security Agreement, dated April 9, 1999, among Borrower, ICC and
Foothill Capital Corporation."
b. Section 9.13 of the Loan and Security Agreement, dated December
15, 1999, among Borrower, ICC and Ironwood shall be deleted in its entirety and
the following shall be included therefor:
"9.13 FINANCIAL COVENANTS .
Borrower and ICC shall comply with the following financial covenants:
9.13.1. Tangible Net Worth. Borrower, on a consolidated
basis, shall not fail to maintain Tangible Net Worth of at least the following
amounts as of the date of each of Borrower's fiscal quarters set forth below:
<TABLE>
<CAPTION>
Quarter Ending Minimum Tangible Net Worth
-------------- --------------------------
<S> <C>
June 30, 1999 ($3,200,000)
September 30, 1999 ($5,300,000)
December 31, 1999 ($6,200,000)
Thereafter As determined by ICC and Foothill
Capital Corporation ("Foothill")
pursuant to Section 7.20 of the Loan
and Security Agreement, dated April 9,
1999, among borrower, ICC and
Foothill."
</TABLE>
c. Schedule 9.13 shall be deleted in its entirety.
3. AMENDMENT OF IRONWOOD DOCUMENTS.
Each of the Company and ICC hereby agree that it will not amend,
modify or change Sections 7.1, 7.2, 7.8, 7.11 of the Loan and Security
Agreement, dated April 9, 1999, among Borrower, ICC and Foothill Capital
Corporation (the Foothill Loan Agreement") or the definition of "Permitted
Liens" in the Foothill Loan Agreement without the prior written consent of
Ironwood.
2
<PAGE>
4. MISCELLANEOUS.
a. Governing Law. This Agreement shall be deemed to have been made
in the Sate of Colorado and shall be governed by and interpreted in accordance
with the laws of such state, except that no doctrine of choice of law shall be
used to apply the laws of any other state or jurisdiction.
b. Modification. This Agreement and the Ironwood Documents,
collectively, are intended by borrower, ICC and Ironwood to be the final,
complete, and exclusive expression of the agreement between them. This
Agreement supersedes any and all prior and contemporaneous oral or written
agreements relating to the subject matter hereof. No modification, rescission,
waiver, release, or amendment of any provision of this Agreement shall be made,
except by a written agreement signed by Borrower and ICC and a duly authorized
officer of Ironwood.
c. Counterparts. This agreement may be executed in any number of
counterparts, and by Ironwood, Borrower and ICC in separate counterparts, each
of which shall be an original, but all of which shall together constitute one
and the same agreement.
d. Captions. The captions contained in this Agreement are for
convenience only, are without substantive meaning and should be construed to
modify, enlarge, or restrict any provision.
3
<PAGE>
IN WITNESS WHEREOF, the parties have entered into this Agreement on the
date first above written.
INCOMNET, INC.
By: /s/ Denis Richard
----------------------------------------
Denis Richard
President
INCOMNET COMMUNICATIONS
CORPORATION
By: /s/ Denis Richard
----------------------------------------
Denis Richard
President
IRONWOOD TELECOM LLC
By: /s/ Donald V. Berlanti
----------------------------------------
Donald V. Berlanti
Member
4
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
As of December 31, 1998, the subsidiaries of Incomnet, Inc. were:
1. Incomnet Communications Corporation, a Delaware corporation
(formerly known as National Telephone & Communications, Inc. or
NTC).
2. GenSource Corporation, a California corporation. The Company
sold the common stock of GenSource in March, 1999 and currently
holds only a preferred stock interest in GenSource.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL INFORMATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1998 JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<CASH> 3,772 754 0
<SECURITIES> 0 0 0
<RECEIVABLES> 10,333 17,149 0
<ALLOWANCES> 10,333 2,907 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 10,306 21,789 0
<PP&E> 16,814 19,538 0
<DEPRECIATION> 7,527 5,093 0
<TOTAL-ASSETS> 24,420 41,340 0
<CURRENT-LIABILITIES> 23,399 35,906 0
<BONDS> 0 0 0
0 0 0
1,802 3,758 0
<COMMON> 67,114 64,386 0
<OTHER-SE> 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> 24,420 41,340 0
<SALES> 54,868 121,831 97,870
<TOTAL-REVENUES> 54,868 121,831 97,870
<CGS> 34,647 85,848 64,470
<TOTAL-COSTS> 34,647 85,848 64,470
<OTHER-EXPENSES> 32,611 44,061 33,336
<LOSS-PROVISION> 3,852 5,495 5,945
<INTEREST-EXPENSE> 2,062 374 267
<INCOME-PRETAX> (18,086) (13,856) (5,970)
<INCOME-TAX> (453) 201 637
<INCOME-CONTINUING> (17,633) (14,057) (6,607)
<DISCONTINUED> (1,475) (1,561) (30,192)
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 (877)
<NET-INCOME> (19,108) (15,618) (37,676)
<EPS-PRIMARY> (1.12) (1.19) (2.82)
<EPS-DILUTED> (1.12) (1.19) (2.82)
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