-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JmGMB7jgDLp2B7lt7uhOb0y6VxttoOzsFng3rx87zhuSM0HLvfA8mARNJfEWMTQE Tc+rll6ekd/8K53ooweK7g== 0000912057-96-009302.txt : 19960514 0000912057-96-009302.hdr.sgml : 19960514 ACCESSION NUMBER: 0000912057-96-009302 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 19960513 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INCOMNET INC CENTRAL INDEX KEY: 0000353356 STANDARD INDUSTRIAL CLASSIFICATION: TELEGRAPH & OTHER MESSAGE COMMUNICATIONS [4822] IRS NUMBER: 952871296 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-03635 FILM NUMBER: 96562091 BUSINESS ADDRESS: STREET 1: 21031 VENTURA BLVD STREET 2: STE 1100 CITY: WOODLAND HILLS STATE: CA ZIP: 91364 BUSINESS PHONE: 8188873400 MAIL ADDRESS: STREET 1: 2801 NORTH MAIN ST CITY: IRVINE STATE: CA ZIP: 92714-5901 FORMER COMPANY: FORMER CONFORMED NAME: INTELLIGENT COMMUNICATIONS NETWORKS INC DATE OF NAME CHANGE: 19860805 S-3 1 S-3 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 9, 1996 REGISTRATION NO. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- INCOMNET, INC. --------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) CALIFORNIA 7375 95-2871296 ----------------- ----------------- -------------- (State or Other (Primary Standard (IRS Employer Jurisdiction Industrial Identification of Incorporation Classification Number) or Organization) Code Number) 21031 VENTURA BOULEVARD, SUITE 1100 WOODLAND HILLS, CALIFORNIA 91364 (818) 887-3400 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) -------------- MELVYN REZNICK, PRESIDENT INCOMNET, INC. 21031 VENTURA BOULEVARD, SUITE 1100 WOODLAND HILLS, CALIFORNIA 91364 (818) 887-3400 (NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: MARK J. RICHARDSON, ESQ. 1299 OCEAN AVENUE, SUITE 900 SANTA MONICA, CALIFORNIA 90401 (310) 393-9992 -------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT IS DECLARED EFFECTIVE. IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE BEING OFFERED ON A DELAYED OR CONTINUOUS BASIS PURSUANT RULE 415 UNDER THE SECURITIES ACT OF 1933, CHECK THE FOLLOWING BOX /X/ -------------- CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS PROPOSED PROPOSED MAXIMUM OF SECURITIES AMOUNT TO BE MAXIMUM OFFERING AGGREGATE AMOUNT OF TO BE REGISTERED REGISTERED(1) PRICE PER SHARE OFFERING PRICE REGISTRATION FEE Common Stock.................... 214,000 $5.75 $1,230,500 $ 424.31 157,500 12.00 1,890,000 $ 651.72 32,500 12.00 390,000 $ 134.48 31,000 5.00 155,000 $ 53.45 190,000 10.00 1,900,000 $ 655.16 Common Stock Underlying Warrants to Purchase Common Stock(1)....................... 75,000 11.25 843,750 290.95 Total........................ 700,000 -- $6,409,250 $ 2,210.07
- ------------ (1) Pursuant to Rule 416, there are also being registered such additional shares of Common Stock as may become issuable pursuant to the anti-dilution provisions of the Warrants. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. PROSPECTUS SUBJECT TO COMPLETION, DATED MAY 9, 1996 INCOMNET, INC. 700,000 SHARES OF COMMON STOCK The shares covered by this Prospectus are comprised of (i) 75,000 shares of the Common Stock of Incomnet, Inc., a California corporation (the "Company") which may be purchased upon the exercise of 75,000 warrants (the "Warrants") held by a consultant to the Company (the "Warrantholder"), (ii) 411,000 shares of the Common Stock of the Company (the "Outstanding Shares") which were issued to several investors in prior private placements or conversions of privately placed convertible promissory notes, and (iii) 214,000 shares of the Company's Common Stock (the "Shares"), some or all of which may be issued in connection with settlement agreements with existing shareholders and, to the extent shares remain after paying settlement amounts, will be offered and sold from time to time at the prevailing market price through a registered member of the National Association of Securities Dealers, Inc. (the "Underwriter"). The Underwriter for the offer and sale of the Shares is J. Alexander Securities, Inc. The shares of Common Stock issuable upon the exercise of the Warrants are referred to herein as the "Underlying Shares." The Outstanding and Underlying Shares are being offered for resale by the Warrantholder and the Shareholders and not pursuant to an initial issuance of stock by the Company. The Warrants have not been separately registered and are not offered by this Prospectus. The Warrants and Outstanding Shares were issued in private placements pursuant to Section 4(2) of the Securities Act of 1933, as amended. See "DESCRIPTION OF CAPITAL STOCK" and "SELLING SECURITY HOLDERS." The Company's Common Stock is traded on the NASDAQ Small Capital Market ("NASDAQ/Small Cap") under the symbol "ICNT." The last reported sale price of the Common Stock on the NASDAQ/Small Cap on May 6, 1996 was $5.75 per share. See "PRICE RANGE OF COMMON STOCK AND DIVIDENDS." See "RISK FACTORS" for certain factors that should be considered by prospective investors. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Price Underwriting Proceeds to Discounts and to Public Commissions(1) Company PER UNDERLYING SHARE (2). . . . . . . . $11.25 $0 $843,750 PER SHARE (3) . . . . . . . . . . . . . $ --- $ --- $ --- TOTAL (4) . . . . . . . . . . . . . . . $ --- $ --- $ --- - --------------------------------------- (1) No underwriters will be involved in the exercise of Warrants nor were any underwriters involved in the issuance of the Warrants or the Outstanding Shares. The Warrantholder and Shareholders do not have any specific plan of distribution with respect to the Outstanding Shares or Underlying Shares. The sale of the Outstanding Shares and Underlying Shares may be made in the open market through broker-dealers or in individual negotiated transactions. (2) The price per share for the Underlying Shares reflects the exercise price of the Warrants held by the Warrantholder. (3) Those Shares which are not issued as part of existing settlement agreements may be issued from time to time at the prevailing market price through the Underwriter. The price per Share and underwriting commission are therefore undetermined at this time. (4) The total proceeds to the Company will equal the aggregate exercise price of 75,000 Warrants and the original issuance price of the Shares. The proceeds from the sale of the Shares is not known at this time since the number of Shares remaining after the finalization of the settlement agreements will not be known until five business days after the effective date of the registration statement encompassing this Prospectus. Furthermore, the remaining Shares, if any, will be issued from time to time at the prevailing market price through the Underwriter. The amount of underwriting discounts and commissions on the sale of the Shares is also not known at this time. See "THE COMPANY - Settlement Agreements with Prior Noteholders." The Warrantholder and Outstanding Shareholders will receive all net proceeds from the sale of their respective Outstanding Shares and Underlying Shares. AVAILABLE INFORMATION Incomnet, Inc. is subject to the information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith file reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). Copies of such reports, proxy statements and other information can be obtained, upon payment of prescribed fees, from the SEC at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. In addition, such reports, proxy statements and other information can be inspected at the SEC's facilities referred to above and at the SEC's Regional Office at 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036-3648. The Company's Common Stock is reported on the National Association of Securities Dealers Automated Quotation Small Capital System and such reports, proxy statements and other information regarding Incomnet are available for inspection and copying at 33 Whitehall, New York, New York 10004. The Company has filed with the SEC a Registration Statement on Form S-3 (together with any amendments thereto, the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Underlying Shares. This Prospectus does not contain all the information set forth in the Registration Statement. Such additional information may be obtained from the SEC's principal office in Washington, D.C. Statements contained in this Prospectus or in any document incorporated by reference in this Prospectus as to the contents of any contract or other document referred to herein or therein are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement or such other document, each such statement being qualified in all respects by such reference. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed with the SEC are incorporated in this Prospectus by reference: (a) The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 filed on April 8, 1996 (provided that the information referred to in Item 402(a)(8) of Regulation S-K shall not be deemed to be specifically incorporated herein). (b) The Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1995 filed on May 12, 1995, as amended by the Company's Form 8 for the fiscal quarter ended March 31, 1995, filed on July 27, 1995. (c) The Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1995 filed on August 2, 1995. -2- (d) The Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1995, filed on November 14, 1995. (e) The Company's Current Report on Form 8-K filed on July 25, 1995, its Current Report on Form 8-K filed on August 18, 1995, its Current Report on Form 8-K filed on November 15, 1995, its Current Report on Form 8-K filed on November 30, 1995, its Current Report on Form 8-K filed on February 9, 1996, its Current Report on Form 8-K filed on April 29, 1996, its Current Report on Form 8-K filed on February 8, 1995, its Current Report on Form 8-K filed on May 13, 1992 and amended on October 9, 1992, and its Current Report on Form 8-K filed on January 12, 1994 and amended on February 14, 1994, July 22, 1994 and September 20, 1994 regarding the change of the Company's Certifying Accountant. (f) The Company's Proxy Statement on Schedule 14A, dated June 14, 1996 and filed with the Securities and Exchange Commission on May 2, 1996. (g) All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus. Any statement contained in a document incorporated herein by reference will be deemed to be modified or superseded for the purpose of this Prospectus to the extent that a statement contained herein or in a subsequently filed document modifies or supersedes such statement. Any such statement so modified or superseded will not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. This Prospectus incorporates documents by reference which are not presented herein or delivered with this Prospectus. Such documents relating to the Company are available without charge upon request made to Incomnet, Inc., 21031 Ventura Boulevard, Suite 1100, Woodland Hills, California 91364 (telephone (818) 887- 3400), attention: Melvyn Reznick, President. No person is authorized to give any information or to make any representations other than as contained herein and, if given or made, such information or representations must not be relied upon as having been authorized. This Prospectus does not constitute an offer or solicitation by anyone in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such an offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any distribution of securities made hereunder shall under any circumstances create an implication that there has been no change in the affairs of the Company since the date hereof or that the information herein is correct as of any time subsequent to the date of this Prospectus. PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. THE COMPANY Incomnet, Inc. (the "Company" or "Incomnet") and its two subsidiaries, National Telephone Communications, Inc. ("NTC") and Rapid Cast, Inc. ("RCI"), are engaged in three types of businesses: (i) interactive computer networking products and services, (ii) discount long distance telephone communications services to residential and commercial customers in the United States, and (iii) manufacture and marketing of the Fast Cast-TRADEMARK- LenSystem that allows retail -3- optical stores and wholesale optical lens manufacturing laboratories to produce single vision, flat-top bifocal and progressive multifocal lenses rapidly on demand. NTC is a wholly-owned subsidiary of the Company and RCI is 51% owned by the Company. Incomnet, Inc. was incorporated under the laws of the State of California on January 31, 1974. The Company acquires and develops computer hardware and software for interactive communications networks. It currently operates a communications network under the tradename "AutoNETWORK" for several hundred automobile dismantling companies in California, Colorado, Nevada, Arizona, Oregon and Washington. The network permits the subscribers to share information simultaneously and to communicate electronically on a real-time basis through individual computer workstations linked by the Company's proprietary software, central message switching computer and front-end network processor. The Company is evaluating other business applications for its communications technology in order to establish more subscriber-based communications networks. The Company's principal executive office is located at 21031 Ventura Boulevard, Suite 1100, Woodland Hills, California, 91364. Its telephone number is (818) 887-3400. National Telephone Communications, Inc. was incorporated under the laws of the State of Nevada on September 6, 1984. Since July 1989 NTC has operated as an inter-exchange carrier and reseller of long distance telephone service, providing nationwide long distance telephone access to its residential and commercial customers. NTC purchases large blocks of time from long distance national and regional telecommunications carriers at rates based upon high volume usage. NTC resells the time to its customers at discounted telecommunications retail rates. In general, NTC provides its customers with rates that are 5% to 50% below the published retail rates of major national carriers like AT&T and MCI with complete domestic and international coverage. NTC's products include (i) fixed rate per minute services called Call$aver, (ii) a prepaid calling card product, Sure$aver, which eliminates calling card surcharges such as those imposed by AT&T, MCI and Sprint, and (iii) a measured rate Dial-1 service that is interconnected to local telephone companies throughout the United States. NTC is licensed to provide telecommunication services by the Public Utilities Commissions of numerous states. NTC markets its services through referral marketing agents and affinity groups on a nationwide basis. NTC's offices are located at 2801 North Main Street, Irvine, California, 92714. Its telephone number is (714) 251-8000. Rapid Cast, Inc. was incorporated under the laws of the State of Delaware February 12, 1994. RCI owns 100% of the issued and outstanding stock of Q2100, Inc. ("Q2100"), which it acquired from Pearle, Inc. on February 8, 1995. The Company acquired 51% of the issued and outstanding stock of RCI on February 8, 1995, as well. Q2100 owns certain domestic and foreign patents and patent applications relating to a new technology, commonly known as Thick Film Radiation Cured Polymer Technology (the "Technology"), which enables retail optical stores, small to mid-sized wholesale optical lens manufacturing laboratories and other dispensers of prescription ophthalmic lenses to produce lenses on site rapidly and at a cost generally lower than if they were purchased from third party manufacturers and distributors. RCI is currently manufacturing and marketing this technology through the sale of casting machines and liquid monomer under the name Rapid Cast or the Fast Cast Lensystem. RCI's principal executive office is located at 1500 Hempstead Turnpike, East Meadow, New York 11554 and its telephone number is (516) 465-7312. RCI also has executive offices located at 4415 Poplar Level Road, Louisville, Kentucky 40233, where its telephone number is (502) 459-6722. * * * -4- THE OFFERING Type of Security Registered . . . . . . . . . . . Common Stock, no par value. Number of Outstanding Shares. . . . . . . . . . . 411,000 Number of Underlying Shares . . . . . . . . . . . . . . . . 75,000 Number of Shares. . . . . . . . . . . . . . . . . 214,000 Selling Security Holders . . . . . . . . . . . . The Outstanding Shares are held primarily by affiliates of the Company or RCI who purchased them in a private placement made on June 30, 1995, or who converted 8% convertible promissory notes (issued in February 1995 to finance the acquisition of a controlling interest in RCI) into shares in July 1995. The holders of the Outstanding Shares also include other investors in the 8% convertible promissory notes who converted their notes into shares or who were issued shares pursuant to settlement agreements. The Underlying Shares are issuable upon the exercise of 75,000 Warrants held by Price International, Inc. See "SELLING SECURITY HOLDERS." Terms of the Warrants. . . . . . . . . . . . . . The 75,000 Warrants entitle Price International, Inc. to purchase 75,000 shares of the Company's Common Stock at an exercise price of $11.25 per share, exercisable until November 15, 1997. See "SELLING SECURITY HOLDERS." Issuance of Shares . . . . . . . . . . . . . . . The unissued Shares are reserved for issuance pursuant to settlement agreements entered into with certain existing shareholders, depending on the average public market price of the Company's Common Stock during the five trading days immediately preceding or following the effective date of this Prospectus. To the extent that Shares remain unissued after the satisfaction of the settlement agreements, the Company may issue them from time to time through the Underwriter in open market transactions in accordance with Rule 415. The amount of net proceeds to be received by the Company from the sale of the Shares, if any, is not known at this time because it depends on the number of unissued Shares remaining after the settlement with certain existing shareholders, -5- and the prevailing market price of the Company's Common Stock on the dates that it elects to sell the Shares, if any. See "THE COMPANY-Settlement With Prior Noteholders." Assuming an average market price of $5.00 per share for the purpose of calculating the settlement amounts, an additional 45,500 Shares would be required to be issued pursuant to the settlement agreements. Assuming a net sale price of $5.00 per Share for all remaining Shares sold by the Company through the Underwriter, the Company would receive net proceeds of $842,500 from the sale of 168,500 Shares. See "SELLING SECURITY HOLDERS." Shares to be Outstanding After Issuance of Shares and Exercise of Warrants. . . . . . . . . . . . . . . . . . . 13,513,024 Voting Rights. . . . . . . . . . . . . . . . . . Each Share and Underlying Share of Common Stock will have one vote per share, if and when issued, and each Outstanding Share has one vote. The Warrants do not have any voting rights associated with them. Use of Proceeds. . . . . . . . . . . . . . . . . The Company would receive net proceeds of $843,750 from the exercise of all 75,000 Warrants. The amount of net proceeds to be received by the Company from the sale of the Shares, if any, is not known at this time. The Company will not receive any proceeds from the sale of the Outstanding Shares or the Underlying Shares. The Company expects to use the net proceeds from the exercise of the Warrants and sale of Shares, if any, for general working capital purposes. There is no assurance that the Warrants will be exercised or that any Shares will be sold by the Company through the Underwriter. See "USE OF PROCEEDS." NASDAQ Symbol. . . . . . . . . . . . . . . . . . ICNT
-6- SUMMARY CONSOLIDATED FINANCIAL DATA INCOMNET, INC., NATIONAL TELEPHONE COMMUNICATIONS, INC. AND RAPID CAST, INC.
YEAR ENDED DECEMBER 31 ------------------------------------------------------------------- 1995 1994 1993 1992(2) 1991(1) ---- ---- ---- ----- ----- STATEMENT OF REVENUES Revenues $86,564,917 $46,815,057 $11,298,972 $5,534,874 $1,898,071 Income (Loss) before income taxes and extraordinary items and minority interest 856,543 4,000,242 (1,606,844) (2,264,597) 13,257 Income (Loss) before extraordinary items 1,366,025 3,999,187 (1,606,844) (2,461,697) 1,322 Net Income (Loss)(3) 1,366,025 4,071,194 (948,769) (2,021,333) 1,322 PER COMMON SHARE DATA Net Income (Loss) .11 .42 (.12) (.28) 0 Cash Dividends 0 0 0 0 0 Book Value 3.21 1.58 .48 .13 .20 Number of Shares 13,262,648 10,482,854 8,183,877 7,189,671 6,936,311 BALANCE SHEET DATA Total Assets 74,105,629 26,158,346 8,665,839 6,744,994 2,174,428 Long-Term Debt 8,459,772(1) 900 20,000 176,000 83,334 Shareholders' Equity 42,548,056 16,535,153 3,929,148 1,047,125 1,396,000
- ----------------------------------------------------------------- (1) Long term liabilities include $8,449,050 of deferred tax liability arising from the nondeductibility of the RCI patent rights, which will be eliminated in accordance with Statement of Financial Accounting Standards No. 109 as the underlying patent rights are amortized to expense. -7- FINANCIAL RATIOS AND OTHER DATA:
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31,1995 DECEMBER 31,1994 DECEMBER 31,1993 Operating Cash Flow $1,378,839 $3,083,887 ($1,237,225) Capital Expenditures 28,824,127 2,100,464 (1,991,998) Operating cash flow less capital expenditures (27,445,288) 983,423 (482,452) Capital expenditures as percentage of operating cash flow 2,090% 68.1% (5) Operating cash flow to interest expense, net of interest income 896.3% (4) (5) Operating cash flow less capital expenditures to interest expense, net of interest income (6) (4) (5)
- ----------------------------- 1. In 1991 the Company wrote-off its entire investment in Incomnet India Limited. See footnote 12 to the Notes to Consolidated Financial Statements of Incomnet in its 1994 Form 10-K for an explanation of the investment and the write-off of the investment in Incomnet India Limited. See also "Item 14. Financial Statements" in the Company's 1994 Form 10-K. 2. The historical financial information of the Company is consolidated with the financial information of NTC commencing in 1992 to reflect the acquisition by the Company of a majority of the outstanding shares of NTC in February 1992. See "Item 14. Financial Statements" in the Company's 1994 Form 10-K. No provision for minority interest is made in the consolidated financial statements because NTC has a negative shareholders' equity. 3. After provision for income taxes. 4. The Company had no net interest expense during the year ended December 31, 1994. 5. During the twelve month period ended December 31, 1993, the Company had a negative operating cash flow. Interest expense was $51,455 for the year ended December 31, 1993. 6. During the twelve month period ended December 31, 1995, the Company had capital expenditures substantially in excess of operating cash flow, as indicated in the table. -8- RISK FACTORS Prospective investors should consider carefully, in addition to the other information contained in this Prospectus, the following factors before purchasing the Underlying Shares. RISKS RELATING TO INCOMNET, INC. AND NTC POSSIBLE DEFICIENCIES IN CARRIER SERVICE. The telecommunications business is extremely competitive and its success depends upon several factors, including high quality technology, effective marketing, accurate billing and responsive customer service. As a "switchless" reseller of long distance telephone service registered with the Federal Communications Commission and state public utility commissions, the Company provides billing and customer service directly. The Company is, however, dependent upon services provided to it and its customers by telecommunications carriers. The Company has the right to provide long distance telephone service to its customers through any telecommunications carriers that it chooses. At present, the Company has contracts with several carriers. The two main carriers which provide service to the Company are Wiltel, which handles most calls in the mainland United States, and U.S. Sprint, which handles calls from Hawaii to the United States. The Company is subject to the risk that its carriers may not provide high quality telephone service to the Company's customers, along with accurate, timely billing records of that service to the Company. RISK OF TERMINATION OF CARRIER SERVICE. The Company's newest contract with Wiltel commenced on September 15, 1995 as an amendment to the contract entered into on November 15, 1994 (service had been provided under a prior arrangement since July 1992). The Wiltel Carrier Switched Services Agreement expires by its terms on November 15, 1999. Wiltel may terminate its carrier agreement with the Company or modify the charges upon 60 days prior written notice to the Company. The Company may not terminate the new Wiltel contract without a cancellation charge (the cancellation charge would be 100% of the minimum purchase requirement for the remaining term of the agreement) unless Wiltel increases its rates under the agreement by an amount the effect of which would be to cause total charges for the three months immediately preceding the rate increase to be 5% greater than they were with the original discounts. The Sprint contract commenced on April 7, 1993 and is terminable by either party upon 30 days prior notice. The termination of the contracts with either of these carriers or an increase in rates would have an adverse impact on the Company's financial condition and operating results if the Company could not replace either carrier with similar service at an equivalent price. The Company could lose its carrier contracts for reasons beyond its control. While the Company has the right to switch its customers to other carriers in its discretion, there is no assurance that the Company could replace its carrier contracts on substantially similar terms if its current contracts were terminated or were not renewed upon their expiration. Should the Company lose its contracts and not be able to replace them, it would have a significant adverse impact on both the Company's telephone and marketing related revenues because the Company would not be able to sign on new customers. There is also no assurance that the Company will continue to have the capital available and retain the qualified personnel that are required to maintain a satisfactory level of services to its customers. See "Item 1. Business" in the Company's 1995 Form 10-K. MINIMUM PURCHASE REQUIREMENT. Pursuant to its new Carrier Service Agreement with Wiltel, the Company is obligated to purchase a minimum amount of telephone time on a "take-or-pay" basis. If the Company is not able to use the minimum amount of telephone time under the new agreement, then it must pay to Wiltel the difference between the actual usage and the minimum usage requirement in cash. The Company could experience operating losses as the result of the minimum purchase requirement in the new carrier contract. The Company -9- currently relies on purchases by an unaffiliated party under the Wiltel agreement (at no profit to the Company) in order to meet the minimum purchase requirement. If the unaffiliated co-purchaser ceases to purchase telephone time under the agreement, the Company could experience significant operating losses. See "Item 1. Business - Contract with Wiltel" in the Company's 1995 Form 10-K." SEC INVESTIGATION AND RELATED LAWSUITS. In August 1994, the Company was notified by the Pacific regional office of the Securities and Exchange Commission that the Commission had initiated a confidential investigation of the Company. In September 1994 the Commission issued a formal order of private investigation. The Commission stated in its correspondence to the Company that the investigation "should not be construed as an adverse reflection on any person, entity or security, or as an indication by the Commission or its staff that any violation of law has occurred." In August and September 1994, the Company supplied copies of its books and records to the Commission, and the Company's present and prior independent certified public accounting firms submitted their working papers pursuant to the Commission's subpoena. In February 1995, the Company provided to the Commission pursuant to its subpoena additional documents associated with NTC's regulatory authorizations and with the Company's recent acquisition of a controlling interest in RCI. The Company continues to fully cooperate with the Commission. While the Company believes that the outcome of the fact finding investigation will not have a material adverse effect on the financial condition or operating results of the Company, no assurance can be given on this matter until the investigation is concluded. See "Item 3. Legal Proceedings - Securities and Exchange Commission Investigation" in the Company's 1995 Form 10-K. On January 20, 1995, a class action lawsuit was filed in the United States District Court of the Central District of California against Incomnet, Inc. and Sam D. Schwartz, known as Isabel M. Sperber vs. Incomnet, Inc and Sam D. Schwartz, alleging violations of federal securities laws. In particular, the suit alleges that the defendants violated Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, as amended, by not disclosing in August 1994 that the Securities and Exchange Commission had initiated a confidential investigation of the Company. The suit also alleges that the Company issued false and misleading press releases on January 17, 1995 and January 18, 1995. On October 17, 1995, the complaint was amended to add claims that the Company and its former Chairman, Sam D. Schwartz, violated federal and state securities laws because Mr. Schwartz did not disclose until August 1995 purchases and sales of the Company's stock made in the open market by an affiliate of Mr. Schwartz between September 1994 and August 1995. Two additional civil lawsuits were filed in federal district court in Georgia making similar claims and allegations, one of which has been transferred to the same California court as the Sperber case. Litigation has been threatened by other potential claimants. The suit seeks recision and damages on behalf of the plaintiffs. There is no assurance that these pending and threatened lawsuits will not have a material adverse effect on the Company and its financial and operating results. See "Item 3. Legal Proceedings" in the Company's 1995 Form 10-K and "RISK FACTORS - Risks Relating to Incomnet and NTC - Status of Settlement Agreements." RISKS INHERENT IN NETWORK MARKETING PROGRAMS. The Company sells its telephone service through a network marketing program in which independent sales representatives sign up both new independent sales representatives and telecommunications customers. The independent sales representatives are independent contractors, not employees of the Company, and pay all their own expenses. New independent representatives purchase sales materials, training and limited product inventories from the Company. As the representatives sign up new representatives, who themselves also sign up new representatives, the initial representative builds a "downline" of representatives that can reach through multiple levels. The Company's marketing plan allows a representative to build a network down to seven levels. Representatives do not receive -10- commissions for bringing in new representatives. Representatives only receive commissions, overrides and bonuses based on bringing telephone customers and revenues to the Company. While the development of a strong network marketing program can result in a stable base of independent sales representatives who generate revenues from signing up both new customers and new representatives, there are risks inherent in network marketing. Because the representatives are structured in downlines, there is a much higher risk associated with competitive programs designed to attract the Company's existing base of representatives. If representatives decide to leave the Company's program for a competitive program, there is a strong incentive for those representatives to bring other representatives in their downlines to the new program, all of whom will also try to move their telephone customers to the new program. As the momentum of representatives switching to new programs builds, the Company would experience a substantial loss of both representatives and customers. As a result, a sales force based upon network marketing has the inherent risk of eroding more rapidly than would otherwise occur if the Company operated through a base of representatives who worked directly for the Company. There are no assurances that the Company can keep its marketing plan competitive against competitive plans. Consequently, there is a risk that the Company's base of representatives and customers could decline in a manner that would have a serious impact on the Company's revenues and earnings. RECENT LOSS OF INDEPENDENT SALES REPRESENTATIVES. In February 1994, a group of approximately ten independent sales representatives in Northern California left the Company to market a competitive telephone service using a multi-level marketing approach. These representatives attempted to recruit other representatives and telephone customers away from the Company to their competitive program. The Company believes that these representatives took proprietary lists of the Company's representatives and customers with the intention of soliciting them to join their program, which was in direct violation of contracts that these representatives signed when they joined the Company's marketing program. As a result, the Company has filed suit against the representatives for damages of $500,000 for the loss of customers who were obtained through the taking of proprietary lists from the Company. The Company also sought and received a temporary restraining order against the representatives from continuing to use the Company's proprietary materials to solicit customers from the Company. The Company estimates that it has lost under 100 representatives and under 1,000 customers as a result of actions by the former marketing representatives. The Company's request for a permanent injunction was denied by the court on the grounds that the Company had not sustained enough continuing damages to warrant a permanent injunction. There are no assurances that the losses will remain at the current level. The defendants have filed a cross-complaint against NTC and the Company claiming that NTC failed to meet its contractual obligations to the defendants, and that the actions taken by the defendants were legal. The cross-complaint seeks compensatory and special damages, along with general and punitive damages. There is no assurance that the Company will prevail in its lawsuit to recover damages or that it may not lose more representatives and customers in the future, or that the defendants will not be successful with their cross- complaint. See "Item 3. Legal Proceedings - Legal Action Against Prior Representatives" in the Company's 1995 Form 10-K. QUALIFICATION OF PRIOR AUDIT REPORTS. The reports of the independent certified public accountants with respect to the Company's financial statements for the fiscal year ending December 31, 1995 include an explanatory paragraph with respect to uncertainties related to the pending shareholders' class action matter. The reports of the independent certified public accountants with respect to the Company's financial statements for the fiscal years ending December 31, 1992 and 1993 raised substantial doubts regarding the Company's ability to continue as going concerns because the current liabilities of the Company exceeded current assets by a significant margin. In addition, the scope of Grant Thornton's audit report with respect to Incomnet for the fiscal year ending December 31, 1990 was limited to the extent that it was not -11- able to verify certain amounts with respect to Incomnet's investment in Incomnet, India, Ltd. In 1991 Incomnet wrote-off its entire investment in Incomnet India, Ltd. POSSIBLE NEED FOR ADDITIONAL FINANCING - DILUTION OF OWNERSHIP IN RCI. The Company may need additional capital in order to finance its anticipated growth, especially the growth of its subsidiaries, NTC and RCI. NTC must purchase and install more computer hardware and software to add capacity. Unforeseen events such as the unexpected loss of customers or expenditures which were not budgeted could also require the Company to seek additional capital. In January and early February 1995, the Company utilized $5,000,000 of its own cash to acquire 51% of RCI and approximately $4,776,638 of its own cash to repurchase its shares in the open market, leaving it with cash working capital of only approximately $1,644,968 as of December 31, 1995. Furthermore, the Company's ownership of RCI would be diluted below 51% if RCI sells additional equity to raise capital and the Company does not participate in such investment. On January 1996 the Company contributed an additional $326,400 in capital to RCI in order to maintain its relative percentage interest in that subsidiary. On April 19, 1996, the Company loaned an additional $510,000 to RCI as its pro rata share of advances made by RCI's shareholders to finance its operations. There is no assurance that the Company or its subsidiaries could obtain additional capital or financing, if necessary, or obtain it on acceptable terms. NO ASSURANCE OF PROFITABILITY - RECENT LOSSES. In the past the Company and its wholly owned subsidiary, NTC, have incurred substantial operating losses and have only recently achieved profitability. RCI and its wholly owned subsidiary, Q2100, have only recently emerged from the development stage and have incurred substantial operating losses since their inception. See "RISK FACTORS - Risks Relating to RCI - Recent Emergence From Development Stage." There is no assurance that the Company's consolidated revenues will continue to grow or be earned at current levels, or that the Company will continue to be profitable. For the fiscal year ending December 31, 1993 the Company had a net loss of $948,769 on a consolidated basis and NTC had a net loss of $1,033,232, although the Company had net income on a consolidated basis of $4,071,194 for the year ended December 31, 1994. For the fiscal year ending December 31, 1995, the Company had a net income on a consolidated basis of $1,366,025. As of December 31, 1995, NTC had an accumulated shareholders' deficit of approximately $2,602,340 and RCI had an accumulated shareholders' deficit of approximately $1,450,085. There is no assurance that the Company will not incur operating deficits in the future. See "SELECTED CONSOLIDATED FINANCIAL INFORMATION", "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS", and "Item 14. Financial Statements" in the Company's 1995 Form 10-K. COMPETITION. The telephone and telecommunications industries are extremely competitive, especially the provision of long distance telephone services. In its long distance telephone business, the Company competes with several long distance carriers such as AT&T, MCI, Sprint and others, which have substantially greater financial, marketing and other resources than the Company. The Company depends on independent marketing representatives in order to obtain customers for its long distance telephone services. Several other network marketing firms also utilize independent marketing representatives to sell long distance telephone services, and may compete with the Company for marketing representatives. Independent marketing representatives may leave the Company to work for competitors from time to time, adversely affecting the Company's business. The Company's network telecommunications business is also subject to competition, and both business segments may experience competition from new competitors in the future. Many of the Company's competitors have higher national, regional and local recognition than the Company. There is no assurance that the Company will be able to continue to successfully compete in the long distance telephone or network telecommunications businesses. See "THE COMPANY" and "Item 1. Business - Operations" in the Company's 1995 Form 10-K. -12- ADVERSE IMPACT OF GOVERNMENT REGULATION. The Company's businesses are subject to government regulation in several respects which could cause additional operating costs and which must be monitored for compliance. The Company must comply with advertising and disclosure rules relating to its sale of long distance telephone services to the public. Its retail marketing program utilizing independent representatives to recruit retail customers and additional representatives is subject to state laws regulating public network marketing programs. The Company's telephone subsidiary, NTC, must be registered with the public utility commissions of most states in order to provide telephone service in those states. While NTC's registrations are effective in most of those states, it continues to operate through agency contracts in certain states where its registrations are pending. NTC anticipates that the balance of its pending registrations will be approved. NO DIVIDENDS ON COMMON STOCK. The Company has not paid dividends on its Common Stock in the past and does not anticipate the payment of any cash dividends in the near future. See "PRICE RANGE OF COMMON STOCK AND DIVIDENDS." STATUS OF SETTLEMENT AGREEMENTS. The Company entered into or has offered a series of settlement agreements with former holders of the 8% convertible promissory notes issued by the Company on February 8, 1995 to finance the acquisition of 51% of RCI. The settlements provide for the issuance of additional shares of the Company's Common Stock depending on the prevailing average market price of the Company's Common Stock on the NASDAQ on the five trading days immediately preceding or following the effective date of this Prospectus. There is no assurance regarding the number of additional shares which the Company may have to issue under those settlement agreements. Furthermore, one of the settlement agreements covering 10,000 shares (i.e., $100,000 of investment) has not yet been executed by a prior noteholder and there is no assurance that he will enter into the proposed settlement. The unsigned prior noteholder may elect instead to file a lawsuit against the Company for his claims. See "THE COMPANY - Settlement With Prior Noteholders" and "Item 3. Legal Proceedings - Claims By Prior Noteholders" in the Company's 1995 Form 10-K. CONTROL BY THE PRINCIPAL STOCKHOLDERS. The principal stockholders own in the aggregate approximately 10.2% of the combined voting power of the Company's Common Stock, not including those shares owned by its prior Chairman and President, Sam D. Schwartz (who owns approximately 15% of the outstanding shares). Accordingly, the principal stockholders are able to exercise significant control of the vote on matters submitted to a vote of the Company's stockholders. Such control by the principal stockholders may have the effect of discouraging certain types of transactions involving an actual or potential change of control of the Company, including transactions in which the holders of Common Stock might otherwise receive a premium for their shares over then current market prices. See "PRINCIPAL STOCKHOLDERS." BUSINESS DEPENDENT ON KEY PERSONNEL. The Company's business is partially dependent upon the performance of certain key individuals, including its President and Chief Executive Officer, certain executives of its wholly- owned subsidiary, NTC, and certain executives of its 51% owned subsidiary, RCI. The Company has entered into a two year employment agreement with Melvyn Reznick, its President and Chief Executive Officer, a three year employment agreement with Edward R. Jacobs, the President of NTC, and employment agreements with Larry Joel and Jeff Rubin, executive officers of RCI, but has not entered into long term employment agreements with any other individuals, although it may do so in the future. The Company does not anticipate a termination of its employment relationships with any of its key executives. The loss of one or more key executives of the Company, NTC or RCI could have an adverse impact on the Company's business. See "Item 1. Business - Employees" in the Company's 1995 Form 10-K. -13- SHORT-SWING PROFITS PAYABLE TO THE COMPANY. Based on the Company's calculations and those by plaintiff's counsel in the pending lawsuit filed against the Company and Sam D. Schwartz, the Company's prior President, entitled RICHARD MORALES VS. INCOMNET, INC. AND SAM D. SCHWARTZ, 96 Civil 0225, filed in January 1996 in the United States District Court in the Southern District of New York, the Company is owed $2,128,000 in short-swing profits pursuant to Section 16(b) of the Securities and Exchange Act of 1934, as amended, by Mr. Schwartz. The Company and Mr. Schwartz are currently in settlement discussions regarding a payment schedule for the short-swing profits, which may be made by the redemption of a sufficient number of shares of the Company's Common Stock owned by Mr. Schwartz to equal the amount of the short-swing profits plus interest owed to the Company. See "Item 3. Legal Proceedings - Section 16(b) Lawsuit" in the Company's 1995 Form 10-K. Furthermore, on February 29, 1996, the Company made a written demand to Joel W. Greenberg, the Chairman of the Board of Directors, for the payment of $46,500 in short-swing profits to the Company pursuant to Section 16(b) of the Exchange Act. Those short-swing profits have not yet been paid to the Company. There is no assurance regarding if or when the short-swing profits owed to the Company will be paid. RISKS RELATING TO RCI RECENT EMERGENCE FROM DEVELOPMENT STAGE. RCI recently emerged from its development stage. RCI was incorporated in February 1994 and did not commence marketing its products until after a controlling interest in it was acquired by the Company on February 8, 1995. RCI has a limited operating history and only began shipping its products in April 1995. RCI and Q2100 have incurred substantial operating losses since their inception. As of December 31, 1995, they had a consolidated shareholders' deficiency accumulated during their development stage of $1,450,085. The likelihood of RCI's success must be considered in light of the foregoing facts, together with the expenses, difficulties, uncertainties and delays frequently encountered in connection with the early phases of a new business. Unanticipated difficulties relating to marketing, manufacturing or competition, for instance, could materially adversely affect RCI's ability to achieve its business objectives. See "Item 1. Business - Rapid Cast, Inc." RISK OF UNCERTAIN MARKET ACCEPTANCE; COST OF LENSYSTEM. RCI's success depends substantially upon the acceptance of the LenSystem as an alternative to traditional methods of purchasing and fabricating eyeglass lenses. Factors that may adversely affect market acceptance include potential customers' unfamiliarity with the Company's relatively new technology, lens making processes, products, lens designs and materials, their reluctance to change current methods of purchasing and fabricating lenses, and the initial capital investment in purchasing the LenSystem. Furthermore, potential customers may be reluctant to purchase the LenSystem because it cannot currently manufacture all possible prescriptions and lens types. In addition, lens dispensers can obtain single vision lenses (approximately 50% of the lens type dispensed) at prices competitive with or lower than the cost of producing such lenses utilizing the LenSystem. After LenSystems are purchased, there can be no assurance that customers will continue to use their LenSystem to fabricate lenses. Consequently, there can be no assurance that customers will accept RCI's products as an alternative to traditional methods of purchasing and fabricating optical lenses. Moreover, market acceptance of the LenSystem will depend, in large part, upon its pricing (of both the LenSystem and the Rapid Cast Liquid Monomer) and RCI's ability to demonstrate the advantages of the LenSystem over competing products, technologies, and current distribution channels. See "Item 1. Business - Rapid Cast, Inc." in the Company's 1995 Form 10-K. -14- POSSIBLE LOSSES; POSSIBLE NEED FOR ADDITIONAL FINANCING; UNCERTAINTY OF ADDITIONAL FINANCING. RCI's operations to date have consumed substantial amounts of capital, and RCI expects its capital and operating expenditures to increase in the next few years. Such operating expenses may exceed RCI's revenues. RCI believes that its existing capital resources and anticipated cash flow from planned operations together with the net proceeds of future placements of securities should be adequate to satisfy its capital requirements in the foreseeable future. There is no assurance, however, that RCI will be able to obtain additional financing or capital from any source. RCI's need for additional financing will depend upon numerous factors, including, but not limited to, the extent that and duration of RCI's future operating losses, the level and timing of future revenues and expenditures, market acceptance of new products, the results of ongoing research and development projects, competing technologies, market developments, and the ability of RCI to maintain and develop additional collaborative arrangements and international distribution agreements. Except for a credit line of up to $500,000 with Bank Leumi Trust, which is fully drawn as of December 31, 1995, the Company currently has no committed external source of funds. To the extent that existing resources are insufficient to fund RCI's activities, RCI may seek to raise additional funds through public or private financings. There can be no assurances that additional financing will be available or, if available, that it will be available on acceptable terms. If additional funds are raised by issuing equity securities, further dilution to then existing stockholders may result. If adequate funds are not available, RCI's results of operation may be adversely affected. See "Item 1. Business - Rapid Cast, Inc." in the Company's 1995 Form 10-K. LOANS FROM RCI FOUNDERS. As of April 30, 1996, RCI owed approximately $1,463,334 to the founding stockholders of RCI, which does not include an additional $1,648,000 loaned or to be loaned to RCI in January, April and May 1996 by its existing shareholders and executives, including the Company, which loaned its pro rata share of $836,400. See "THE COMPANY - Loans to Rapid Cast, Inc." The indebtedness to the RCI founders and any additional amounts loaned by them to RCI accrues interest at the rate of 7% per annum. The indebtedness is due July 31, 1996 subject to certain conditions. No funds are presently available to repay the indebtedness. See "Item 1. Business - Acquisition of Rapid Cast, Inc." in the Company's 1995 Form 10-K. COMPETITION. The vision care industry is subject to intense competition from a variety of sources. RCI competes with conventional channels of distribution, including lens manufacturers and wholesale lens laboratories and, to a lesser extent, with manufacturers of point of sale lens fabrication systems, manufacturers of contact lenses and providers of equipment related to medical treatments to correct refractive disorders. Many of RCI's competitors have significantly greater financial, technological, marketing and other resources than RCI, which could enable such competitors to develop new processes or products that could render RCI's products obsolete or less competitive. In addition, many of RCI's competitors have significantly greater experience than RCI in developing new lenses, lens materials and fabrication technologies, and there can be no assurance that RCI will be able to compete effectively with such competitors. The effects of such competition could have a material adverse effect on RCI's financial condition and results of operations. RAPID TECHNOLOGICAL CHANGE. The potential market for the LenSystem is one characterized by rapidly changing technology, and many of RCI's competitors have substantially greater resources for the research and development of new technologies than RCI will have for such purposes. There can be no assurance that technologies or medical advances, including, without limitation, laser vision correction, Radial Keratotomy (RK) and new ophthalmic drugs which could obviate the need for prescription lenses, will not render the LenSystem uncompetitive or obsolete. RCI's ability to anticipate changes in technology, and then to -15- improve the Technology or development or acquire new technologies in response to such changes, will therefore be a critical factor affecting RCI's ability to grow and become profitable. There accordingly can be no assurance that the Technology will not be subject to the development or widespread acceptance of any new processes or products that cause the Technology to become noncompetitive, incompatible, or result in early product obsolescence, or that RCI's business will not be materially adversely affected as a result. Substantial research and development is being conducted by competitors and others with respect to lens fabrication systems that could enable eyewear dispensers to fabricate plastic eyeglass lenses at the point of sale. RCI believes that this research and development will continue and may intensify and accelerate. The development or widespread acceptance of any new process or products, including new lens shapes, sizes, coatings and materials that cause RCI's products to become obsolete, noncompetitive or incompatible, would have a material adverse effect on RCI's financial condition and results of operations. THE OPTICAL MARKETPLACE. RCI's success will depend, in significant part, on its ability to anticipate trends and changes in the optical marketplace and to develop or acquire technology capable of satisfying the demands of the marketplace in connection with such trends and changes. Among the factors RCI must be aware of are fashion, lens material, lens coatings and treatments. Some or all of the changes required to be made in response to these factors may not be adaptable to an onsite lens manufacturing environment and could have a material adverse effect on RCI's financial condition and results of operations. PATENTS AND PROPRIETARY RIGHTS. In February 1995, RCI acquired all of the capital stock of Q2100 and thus all of Q2100's issued patents and patent applications that relate to the Technology. As of the date of this Prospectus, five United States patents have issued, eight United States patent applications are pending, and over 20 foreign applications are pending. RCI's success depends, in significant part, on its ability to obtain patent protection for its products, both in the United States and in other countries, to preserve its intellectual property rights and to operate without infringing on the rights of third parties. There can be no assurances that RCI will be able to protect its intellectual property rights adequately, that competitors will not be able to develop similar technology independently, that the claims allowed on any patents held by RCI will be sufficiently broad to protect RCI's technology or that RCI's patents will provide a significant competitive advantage for its products. Moreover, RCI believes that obtaining foreign patents may be more difficult than obtaining domestic patents because of differences in patent laws. In addition, the protection provided by foreign patents, once they are obtained, may be weaker than the protection provided by United States patents. The failure by RCI to protect adequately its intellectual property rights could have a material adverse effect on RCI's financial condition and results of operations. RCI has been the subject certain legal disputes involving the intellectual property rights of others. See "Item 3. Legal Proceedings - Patent Infringement Lawsuit." Any litigation in the future to enforce patents issued to RCI, to protect trade secrets or know-how possessed by RCI or to defend RCI against claimed infringement of the rights of others would be time-consuming and costly, and could have a material adverse effect on RCI's financial condition and results of operations. Additionally, the manufacture and sale of products that RCI develops or markets may involve the use of processes, products or information, the rights to which may be held by others. There can be no assurance that RCI will be able, for financial reasons or otherwise, to obtain ownership or license rights with regard to the use of such processes, products or information or, if obtained, that the use of such rights will be on terms favorable to RCI. Failure to obtain such rights, if any, could have a material adverse effect upon the financial condition and results of operations of RCI. RCI also relies, and will continue to rely, on trade secrets and proprietary known-how which it seeks to protect, in part, by secrecy agreements with its employees, consultants, licensees, potential strategic partners and others. There can be no assurance that any such -16- agreements will not be breached, that RCI would have adequate remedies for any such breach, or that RCI's trade secrets are not already known to, or will not otherwise become known to, or be independently developed by, RCI's competitors. To the extent that consultants, licensees or other third parties (such as prospective joint venture partners or subcontractors engaged to manufacture the LenSystem) participate in RCI's projects, technological information independently developed by them or by others may be the subject of disputes as to the proprietary rights to such information, which disputes may not be resolved in favor of RCI. The LenSystem uses as its raw material the Rapid Cast Liquid Monomer, which is injected into a lens mold and then cured (i.e., hardened) into a finished lens. The Rapid Cast Liquid Monomer is a proprietary trade secret which is not protected by any issued patents nor the subject of any patent applications. RCI does not currently intend to seek patent protection for the Rapid Cast Liquid Monomer. See "Item 1. Business - Rapid Cast, Inc. - Technical Overview of the Rapid Cast LenSystem" in the Company's 1995 Form 10-K. MANUFACTURING UNCERTAINTIES. RCI currently does not have the facilities to manufacture the LenSystem's equipment components and raw materials (i.e., the Rapid Cast Liquid Monomer) and has no plans to develop its own manufacturing capabilities. RCI engages subcontractors and licensees to produce such components and raw materials. RCI is at present substantially dependent upon four suppliers from which it purchases different components and the Rapid Cast Liquid Monomer. RCI believes that it could take in excess of six months to secure alternatives for its suppliers in the event of the loss of RCI's current suppliers. The glass molds utilized by the LenSystem to produce a specific progressive multifocal design are available from only one supplier. Alternative suppliers for those glass molds or any other component of the LenSystem may not be available. RCI has certain of its components and tooling manufactured abroad and may have additional components provided by foreign suppliers in the future. The loss of a supplier for any material or component used by RCI or the inability of a supplier to fulfill RCI's requirements might cause significant delays in deliveries and the incurrence of additional costs. Such delays or increased costs could have a material adverse effect on RCI's financial condition and results of operations. MARKETING UNCERTAINTIES, DOMESTIC. RCI's marketing efforts in the United States have relied primarily on trade journals, trade shows and conventions to present its products to the marketplace. RCI has not expended significant funds on direct or other marketing campaigns and has a dedicated sales and marketing staff of four persons. There can be no assurance that the implementation of RCI's future marketing plans will be effective or that RCI will not be required to expend more than it currently anticipates in order to market its products. MARKETING UNCERTAINTIES; INTERNATIONAL. RCI generally markets its LenSystem internationally through exclusive local distributors and has entered into several exclusive distribution agreements worldwide. There can be no assurance that the purchase commitments and other obligations contained in these agreements will be honored. Nor can there be any assurance that suitable distributors for other countries to which RCI is not currently distributing will be found. Laws and regulations imposed by foreign countries may also adversely affect the marketing or commercial viability of the LenSystem and the Rapid Cast Liquid Monomer. Additionally, significant fluctuations in the value of the United States dollar could adversely affect future demand for the LenSystem in foreign countries. PRODUCT LIABILITY CLAIMS AND UNINSURED RISKS. The manufacturing, marketing and sale of prescription ophthalmic lenses entail the inherent risk of exposure to product liability claims. These claims might be made by, among others, consumers who purchase lenses manufactured by, or businesses that utilize, the Lensystem. Currently, RCI maintains product liability insurance which provides coverage of $6,000,000 per occurrence and $7,000,000 in the -17- aggregate. There can be no assurance that RCI will be able to maintain such insurance at commercially reasonable rates, if at all, or that the coverage provided thereby is sufficient to fully protect RCI against liability. RCI's inability or failure to protect itself adequately against such liabilities could have a material adverse effect upon its prospects, financial condition and results of operations. EQUIPMENT INSTALLATION AND SERVICE. RCI does not presently have any contracts or arrangements with qualified companies to install and service the LenSystem, currently relying on its staff of installers and technicians. Furthermore, equipment malfunctions may cause RCI to incur unanticipated operating expenses that may not be covered by component manufacturers' warranties. DEPENDENCE UPON KEY PERSONNEL. The success of RCI will be largely dependent upon the continuing services and efforts of certain of its directors and executive officers. The loss of the services of Dr. Larry Joel, Jeffrey Rubin, Dr. Shawn Zimberg or Dr. Omar Buazza could have a material adverse effect upon RCI's ability to achieve its business objectives. RCI has entered into employment agreements with only two of its officers, Dr. Larry Joel, Chairman of the Board and President, and Jeffrey Rubin, Executive Vice President. RCI may enter into employment agreements with some of its other existing officers. RCI expects that its ability to achieve its business objectives will also depend in large part upon its ability to attract and retain highly qualified management personnel in the future, including sales, marketing and scientific staff. There can be no assurance that RCI will be able to attract and retain personnel with the requisite skills and experience necessary to successfully manage RCI's business and operations. REGULATORY CONSIDERATIONS. The lenses produced by the LenSystem are regarded by the United States Food and Drug Administration (the "FDA") as medical "devices" within the meaning of the Federal Food, Drug, and Cosmetic Act (the "Food and Drug Act"), but the lenses may be marketed without pre-market notification, review, approval or clearance by the FDA. Other requirements, principally those concerning impact resistance, current good manufacturing practices, labeling and reporting of certain allegedly device-related adverse effects will apply. RCI believes that the LenSystem, as manufacturing equipment, is itself not a "medical device" under the Food and Drug Act. If the LenSystem is itself a medical device, RCI believes that LenSystem may be marketed without premarket notification, review, approval, or clearance by the FDA, although other requirements, principally those concerning current good manufacturing practices, labeling, and reporting of certain allegedly device- related adverse affects, and of device malfunctions in certain circumstances, would apply. In any event, certain state and local government authorities (such as the State of California) also regulate medical device manufacturers. Depending upon where LenSystem equipment is manufactured, RCI may be subject to such additional state regulations. Although there can be no assurance in this regard, RCI does not anticipate that compliance with such governmental regulation will have an adverse effect upon its business. Failure to comply with FDA, and in some cases, the state requirements, could result in civil sanctions, e.g., product seizure, injunction versus product manufacturing or distribution, or criminal prosecution and conviction. In addition, certain legal impediments and foreign regulatory restrictions may affect the sale and exportation of the LenSystem to countries other than the United States. PAYMENT OF ACQUISITION PRICE OF RCI. The Company issued 600,000 shares of restricted Common Stock to the founding shareholders of RCI to complete the payment of the purchase price of 51% of RCI in lieu of issuing up to 750,000 shares of performance based stock. RCI's financial performance during the twelve month period ending March 31, 1996 indicates that the -18- founding shareholders of RCI would not have been issued any additional shares of the Company's common stock under the original stock purchase agreement. See "Item 1. Business -- Acquisition of Rapid Cast, Inc." in the Company's 1995 Form 10-K. NO ANTICIPATED DIVIDENDS. Since inception, RCI has not declared or paid any cash dividends on its common stock and does not anticipate paying any cash or other dividends on its common stock in the foreseeable future. The declaration and payment of any cash dividends in the future will be determined solely by the Board of Directors of RCI (which will, for the foreseeable future, be elected by RCI's current stockholders, including the Company). AUTHORIZATION OF ADDITIONAL SECURITIES. RCI's Certificate of Incorporation authorizes the issuance of up to 30,000,000 shares of common stock. RCI's Board of Directors has the power to issue any and all of such shares without stockholder approval. RCI may issue a substantial number of additional shares in the future. In this regard, RCI plans to make a private placement of its securities in the near future to raise additional capital which would result in a dilution of the Company's ownership in RCI. To the extent that additional shares of common stock are issued, dilution of the interests of RCI's stockholders will occur. OPTION PLAN. Pursuant to its stock option plan, RCI may grant options to purchase up to 1,500,000 shares of its common stock to directors, officers and employees of, and consultants to, RCI. RCI has issued options to purchase 1,142,000 shares of common stock under the option plan. During the respective exercise periods of the above-mentioned options, the holders thereof are given an opportunity to profit from a rise in the market price of the common stock (if RCI's stock becomes publicly traded), with a resultant dilution of the interests of the then existing stockholders. As a result, the terms upon which RCI may obtain additional equity financing during such periods could be adversely affected. These holders may be expected to exercise their rights to acquire common stock at a time when RCI would, in all likelihood, be able to obtain needed capital through a new offering of securities on terms more favorable than those provided by these options. GENERAL RISKS DILUTION CAUSED BY FUTURE SALES OF SHARES. As of March 31, 1996, the Company has approximately 4,807,200 shares of Common Stock (not including the Shares or Underlying Shares) issued and outstanding which may be deemed "restricted securities" as that term is defined under Rule 144 of the Securities Act of 1933, as amended (the "Securities Act"). The restricted securities may be sold in the future in compliance with Rule 144 or Regulation S of the Securities Act. Ordinarily, under Rule 144 a person who is an affiliate of the Company (as that term is defined in Rule 144) and has beneficially owned restricted securities for a period of two years may, every three months, sell in brokerage transactions an amount that does not exceed the greater of (i) 1% of the outstanding class of such securities or (ii) the average weekly trading volume in such securities on all national exchanges or reported through the automated quotation system of a registered securities association during the four weeks prior to the filing of a notice of sale by a securities holder. A person who is not an affiliate of the Company who beneficially owns restricted securities is also subject to the foregoing volume limitations but may, after the expiration of three years, sell unlimited amounts of such securities under certain circumstances. Pursuant to Regulation S, foreign shareholders may resell their shares without restriction after the expiration of 40 days from the date of the sale of the stock to them. The Company can make no prediction as to the effect, if any, that sales of shares of Common Stock, or the availability of shares for future sale, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock (including the Shares and the Underlying Shares) in the public market, or the perception that such sales could -19- occur, could depress prevailing market prices for the Company's Common Stock. Such sales may also make it more difficult for the Company to sell equity securities or equity-related securities in the future at a time and price which it deems appropriate. DILUTION CAUSED BY FUTURE ISSUANCES OF STOCK BY THE COMPANY. The Company's Certificate of Incorporation, as amended, authorizes the issuance of 20,000,000 shares of Common Stock and 100,000 shares of preferred stock. The Company currently has 13,224,024 shares of Common Stock outstanding and no shares of preferred stock outstanding. Assuming the issuance of all of the Shares and Underlying Shares covered by this Prospectus, the Company would have 13,513,024 shares of its Common Stock outstanding. The remaining shares of Common Stock not issued or reserved for specific purposes may be issued without any action or approval of the Company's stockholders. Although there are no present plans, agreements or undertakings involving the issuance of such shares, except as disclosed in this Prospectus, any such issuance could be used as a method of discouraging, delaying or preventing a change in control of the Company or could dilute the public ownership of the Company. There can be no assurance that the Company will not undertake to issue such shares if it deems it appropriate to do so. See "DESCRIPTION OF CAPITAL STOCK." POSSIBLE ADVERSE EFFECTS OF ISSUANCE OF PREFERRED STOCK. The Company's Certificate of Incorporation, as amended, authorizes the issuance of a maximum of 100,000 shares of Preferred Stock on terms that may be established by the Company's Board of Directors without further stockholder action. The terms of any series of Preferred Stock, which may include priority clams to assets and dividends and special voting rights, could adversely affect the rights of holders of the Common Stock. To date, no Preferred Stock has been issued and the Company has no current plans to issue such Preferred Stock. The issuance of Preferred Stock could make the possible takeover of the Company or the removal of the Company's management more difficult, or otherwise dilute the rights of holders of Common Stock and the market price of the Common Stock. See "DESCRIPTION OF CAPITAL STOCK - Preferred Stock." THE COMPANY GENERAL The Company, its wholly-owned subsidiary, NTC, and its 51% owned subsidiary, RCI, are engaged in three businesses: (i) interactive communications networking services by the Company, (ii) the provision of long distance telephone services by NTC, and (iii) the manufacture and marketing of the Fast Cast--TM-- Lensystem that allows retail optical stores and wholesale optical lens manufacturing laboratories to produce single vision, flat-top bifocal and progressive bifocal and multifocal lenses rapidly on demand. The Company provides interactive communications networking services using its proprietary communications software, a central message switching computer and front-end network processor. All subscribers to Incomnet's communications network can simultaneously access the information on the system, can communicate on the system on a real-time basis and can leave electronic messages. The technology is particularly well suited to networks of buyers and sellers because requests for quotes can be broadcast to all participants simultaneously, while responses and subsequent negotiations associated with the quote can be done privately. The Company's major network is the Auto Dismantler Network, known under the tradename "AutoNETWORK," which currently links several hundred licensed automobile dismantlers in California, Colorado, Nevada, Arizona, Oregon and Washington. AutoNETWORK is a monthly subscription service that automobile dismantlers utilize to buy, -20- sell and trade used parts that have been salvaged from automobiles damaged in traffic collisions. The Company continually evaluates other applications for its telecommunications networking technology, including other industries where electronic broadcast and point-to-point communications would add value to the conduct of their business. See "Item 1. Business - AutoNETWORK" and "Item 1. Business - Network Services" in the Company's 1995 Form 10-K. The Company was incorporated under the laws of the State of California in 1974. Its principal place of business is located at 21031 Ventura Boulevard, Suite 1100, Woodland Hills, California 91364. Its telephone number is (818) 887- 3400. Additional information about the Company is included in documents incorporated by reference in this Prospectus. See "AVAILABLE INFORMATION" and "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE." The Company's wholly owned subsidiary, NTC, is an inter-exchange carrier and reseller of long distance telephone services and provides nationwide long distance telephone access to commercial and residential customers across the United States. Customers of NTC purchase and pay for specific amounts of time either through direct billing from NTC, billing from the customer's local telephone company, or by prepaying for the use of NTC calling cards. NTC's primary products are its Call $aver Calling Card, its Sure $aver Calling Card and its Dial-1 Telephone Service. In order to provide these NTC services, NTC purchases large amounts of long distance time from national and regional carriers at rates based upon high volume usage. NTC then resells this time to customers at discounted retail rates. Its calling cards also eliminate the calling card surcharges generally imposed by AT&T, MCI and Sprint. NTC utilizes a multi-level marketing network of independent sales representatives to market its long distance telephone services to retail customers. NTC was incorporated under the laws of the State of Nevada on September 6, 1984. Its principal offices are located at 2801 North Main Street, Irvine, California 92714 and its telephone number is (714) 251-8000. See "Item 1. Business - Acquisition of National Telephone Communications, Inc. - Operations." See also "AVAILABLE INFORMATION" and "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE." The Company's 51% owned subsidiary, RCI, manufactures and markets the Fast Cast-TM- LenSystem that allows retail optical stores and wholesale optical lens manufacturing laboratories to produce single vision, flat-top bifocal and progressive bifocal lenses on demand, and in minutes. The Fast Cast-TM- LenSystem uses a series of high-accuracy prescription glass molds that are filled with a proprietary liquid monomer (plastic). When exposed to ultraviolet light within the system's curing chamber, the monomer undergoes a chemical reaction that rapidly "cures" or hardens the lens in 15 minutes. RCI commenced assembling and marketing the Rapid Cast equipment, molds and liquid monomer for the Fast Cast-TM-LenSystem in February 1995, when it acquired 100% of the outstanding stock of Q2100, Inc. from Pearle, Inc., and when the Company acquired its controlling interest in RCI. See "Item 1. Business -- Acquisition of Rapid Cast, Inc." and "Item 1. Business -- Rapid Cast, Inc." in the Company's 1995 Form 10-K. SETTLEMENT WITH PRIOR NOTEHOLDERS Commencing in January 1996 the Company entered into a series of settlement agreements with certain prior holders of 8% convertible promissory notes issued by the Company on February 8, 1995 to finance the acquisition of 51% of RCI. See "Item 1. Business - Acquisition of RCI" in the Company's 1995 Form 10-K. Settlement agreements have been executed by six of the prior noteholders who held $725,000 of convertible notes, and a proposed agreement with -21- one other noteholder who held $100,000 of notes is presently pending signature. The settlement agreements and proposed settlement agreement relate to an aggregate of $825,000 of convertible notes. Pursuant to the settlement agreements and proposed settlement agreements, the Company may have to issue additional shares of its Common Stock to these prior noteholders depending on the average quoted price of the Company's stock on the NASDAQ market during the five trading days immediately preceding or following the effective date of this Prospectus. The shares covered by this Prospectus are reserved for possible issuance to the prior noteholders who are parties to signed settlement agreements. See "SELLING SECURITY HOLDERS." If all seven settlement agreements are effective and the average market price of the Company's Common Stock on the NASDAQ market is $5.00 per share during the relevant five day trading periods, the Company would not be obligated to issue any additional shares to Jules Nordlicht, and would be obligated to issue a total of 45,500 shares of its Common Stock to the other six prior noteholders. If the average market price of the Company's Common Stock on the NASDAQ market is $12 or more during the relevant five day trading period, then the Company will not be obligated to issue any additional shares of its Common Stock to any of the prior noteholders. Pursuant to the proposed unsigned settlement agreement with a prior noteholder who invested $100,000 in the convertible notes, if the registration statement covering this Prospectus is not effective by October 31, 1996, then the Company would be obligated to redeem his 10,000 shares of Incomnet Common Stock for $125,000 in cash in lieu of the standard arrangement, no additional shares would be issued, and he would have no shares to be included in this Prospectus. See "SELLING SECURITY HOLDER." See also "Item 3. Legal Proceedings - Claims By Prior Noteholders." LOANS TO RCI In January 1996, most of the shareholders of RCI made their pro rata share of a total loan of $648,000 to RCI to finance its operations. In consideration for their loans, the RCI shareholders who made the advances received convertible notes bearing simple interest at the rate of 8% per annum, payable quarterly, with all principal and accrued but unpaid interest due in full on December 31, 1999. The notes are convertible into shares of RCI common stock at a conversion price of $.80 per share at any time. The Company loaned $326,400 as its pro rata share of the total loan made by the RCI stockholders. In April and May 1996, the existing shareholders and executives of RCI or their affiliates made or agreed to make one year loans aggregating $1,000,000 to RCI to finance its operations. Incomnet, Inc. loaned its pro rata share of the total advance by lending $510,000 to RCI. The loans bear simple interest at the rate of 10% per annum, with interest payable monthly and principal payable in full upon the earlier of (i) one year from the date of the advance, or (ii) upon RCI receiving equity or debt financing from another source totalling $3,000,000 or more. As additional consideration for making the loans, the stockholders of RCI were issued seven year warrants to purchase up to 1,000,000 additional shares of RCI common stock for an exercise price of $2.25 per share. The warrantholders have certain piggyback and demand registration rights with respect to the shares underlying these RCI warrants. The Company made its pro rata share of the loan from the proceeds of an advance made to the Company by its President, Melvyn Reznick, from a line of credit he obtained personally from a bank. See "Certain Relationships and Related Transactions - Loans to the Company by Melvyn Reznick" in the Company's Proxy Statement for the 1996 Annual Meeting of the Shareholders. -22- RECENT DEVELOPMENTS On April 8, 1996, the Company's Board of Directors held a meeting pursuant to which it unanimously declined to renominate Joel W. Greenberg to stand for reelection as a director or to be Chairman of the Company. Mr. Greenberg did not attend the meeting and may contest the Company's slate of Board nominees who are proposed in the Company's Proxy Statement for its 1996 Annual Meeting of the Shareholders. On May 6, 1996, the Company filed a lawsuit against Mr. Greenberg to collect $46,500 of short-swing profits owed by him to the Company pursuant to Section 16(b) of the Securities and Exchange Act of 1934, as amended. The Company had requested payment of the short-swing profits by written letter to Mr. Greenberg on February 29, 1996. See the Company's Proxy Statement for the 1996 Annual Meeting of the Shareholders, filed on May 2, 1996, and the Company's Form 8-K, filed on April 29, 1996, relating to the Company's announcement of its decision not to renominate Mr. Greenberg to its slate of nominated members of the Company's Board of Directors. DIRECTORS AND EXECUTIVE OFFICERS OF RCI THE DIRECTORS AND EXECUTIVE OFFICERS OF RCI. The directors and executive officers have held their positions with RCI since its inception, except for Melvyn Reznick and Joel W. Greenberg, who became directors of RCI in March 1995 and November 1995, respectively, Henry Dachowitz, who became an officer in March 1995, and Steve Luetke, Dr. Omar Buazza and Dr. Shawn Zimberg, who became officers in April 1995. RCI's officers serve at the discretion of its Board of Directors. See "Item 1. Business-Acquisition of Rapid Cast, Inc." in the Company's 1995 Form 10-K, for the rights of the Company to designate directors of RCI, and for the Company's designation of Melvyn Reznick and Joel W. Greenberg as directors of RCI. At the next annual meeting of the RCI shareholders, expected to be held in June 1996, Mr. Greenberg is not expected to be renominated or reelected to the RCI Board of Directors.
NAME AGE POSITION WITH RCI - ---- --- ----------------- Larry Joel, O.D. 49 Chairman of the Board of Directors, Chief Executive Officer and President Robert Cohen, O.D.(1) 52 Director Alan Cohen, O.D. 45 Vice-President, Treasurer and Director Melvyn Reznick(1) 53 Director Joel W. Greenberg 58 Director Jeffrey Rubin 28 Executive Vice President and Secretary Omar Buazza, Ph.D. 44 Vice President of Research and Development Henry Dachowitz 40 Chief Financial Officer and Treasurer Thomas Freedman 43 Chief Operating Officer Shawn Zimberg, M.D. 30 Vice President of Strategic Planning Steve C. Luetke 41 Director of Products Development
- ---------------------- (1) These persons are the administrators of RCI's Amended and Restated Stock Option Plan. -23- Robert Cohen and Alan Cohen are brothers. Jeffrey Rubin is married to Robert Cohen's daughter. There are no other family relationships between any of the directors or executive officers of RCI. RCI has obtained "key person" life insurance in the amount of $1,000,000 on the lives of each of Jeffrey Rubin and Dr. Omar Buazza. LARRY JOEL, O.D. Since 1983, Dr. Joel has been Chairman of the Board of Vision Centers of America, which is engaged in the retail optical business. Dr. Joel was a founder and principal stockholder of ORGIC and has served as its Chairman since 1989. Under his direction, ORGIC developed the Technology which was sold to Q2100 (a subsidiary of Pearle) in 1991. Dr. Joel has also served as President of Q2100 since 1991. In 1969, Dr. Joel received a Bachelor of Science degree and a Doctor of Optometry degree from the Illinois College of Optometry. ROBERT COHEN, O.D. Dr. Cohen has been engaged in the retail and wholesale optical business since 1968. He has been the President, a director and a significant stockholder of Cohen's Fashion Optical since its formation in 1970. Cohen's Fashion Optical, an operator and franchisor of approximately 110 retail optical stores, is one of the nation's top ten retailers of eyewear products, as measured by 1992 sales. Since 1992, Dr. Cohen also has been the Chairman of the Board, Chief Executive Officer and a significant shareholder of Sterling Vision. Sterling Vision is an operator, franchisor and licensor of approximately 235 retail optical stores. Dr. Cohen additionally is a significant stockholder of and a consultant to Neolens, Inc. which manufactures and markets polycarbonate prescription ophthalmic lenses. In 1968, Dr. Cohen received a Bachelor of Science Degree and a Doctor of Optometry degree from the Pennsylvania College of Optometry. ALAN COHEN, O.D. Dr. Cohen has been engaged in the retail and wholesale optical business since 1974. He has been a director, Executive Vice President and significant stockholder of Cohen's Fashion Optical since 1975. Since 1992, Dr. Cohen has also been the Chief Operating Officer, a director and a significant stockholder of Sterling Vision. Dr. Cohen is also a significant stockholder of and a consultant to Neolens, Inc. In 1974, Dr. Cohen received a Bachelor of Science degree and a Doctor of Optometry degree from the Pennsylvania College of Optometry. MELVYN REZNICK. Mr. Reznick was appointed President and Chief Executive Officer of Incomnet, Inc. in November 1995. He has 30 years experience in engineering, manufacturing, management, marketing, real estate and corporate development. From 1977 to November 1995, Mr. Reznick served as President of Property Research and Management Co., a Los Angeles-based company engaged in the business of real estate syndication, development and management. He is a member of the National Association of Corporate Directors (NACD). He received both his Bachelor of Science and Master of Science degrees in Mechanical Engineering Science from the Massachusetts Institute of Technology. JOEL W. GREENBERG. Mr. Greenberg is a commodities trader and an independent investment counselor in Chicago, Illinois. Mr. Greenberg is a member of the Chicago Mercantile Exchange and the International Monetary Market. From 1987 to 1989, Mr. Greenberg was a vice president of Shearson Lehman Hutton in Chicago, Illinois. From 1985 to 1987, Mr. Greenberg was a vice president of Bear Stearns & Co., Inc. in Chicago, Illinois. Mr. Greenberg has been a director of Incomnet, Inc. since April 1988 and its Chairman since November 1995. Mr. Greenberg is a director of Smithfield Foods, Inc., a publicly traded company. Mr. Greenberg was not renominated to run for reelection to the Incomnet, Inc. Board of Directors and may not be reelected to the RCI Board of Directors by its shareholders at their meeting in June 1996. -24- JEFFREY RUBIN. From 1989 to January 1994, Mr. Rubin served as a Vice President of American European, Inc., an international import and export firm. Since 1993, Mr. Rubin has been an Executive Vice-President and significant stockholder of Lensco, a firm that provides consulting services to the optical industry. Mr. Rubin has also been a significant stockholder of and a consultant to Neolens since 1993. See "RISK FACTORS -- Risks Relating to RCI -- Conflicts of Interest." He received a Bachelor of Arts degree in Political Science from the University of Michigan, Ann Arbor, in 1989 and studied at the London School of Economics. OMAR BUAZZA, PH.D. From 1985 until he joined RCI in February 1995, Dr. Buazza worked at the University of Louisville on developing methods for photopolymerizing eyeglass lenses. Prior to joining RCI in February 1995, Dr. Buazza was employed by ORGIC since its inception in 1988. Dr. Buazza received his Ph.D. in Polymer Chemistry from the University of Louisville in 1987 and his Master of Science in Chemistry from the same University in 1978. His undergraduate work was completed at the University of Tripoli where he received a Bachelor of Science degree in Chemistry. HENRY M. DACHOWITZ. From 1992 until joining RCI in February 1995, Mr. Dachowitz was Chief Financial Officer of Pharmos Corporation, a company engaged in the business of developing pharmaceutical products. Prior to assuming his position with Pharmos Corporation in 1992, Mr. Dachowitz was Director of Financial Service Management Consulting for Richard A. Eisner & Company. From 1988 to 1992, Mr. Dachowitz was a Vice President at Bankers Trust. Mr. Dachowitz is a Certified Public Accountant. He received his Bachelor of Science in Accounting from Brooklyn College in 1977 and his Masters in Business Administration from Harvard Business School in 1980. THOMAS FREEDMAN. Prior to joining RCI in March 1996, Mr. Freedman was the Vice-President of Operations at Travel Related Services, Inc., a subsidiary of American Express, in its North Carolina Regional Operations Center from October 1993 until February 1996. Mr. Freedman was the Vice-President of Quality Control and Vice-President of Operations and Engineering for Pearle Vision, Inc., a subsidiary of Grand Metropolitan, PLC, from September 1991 until October 1993. Prior to his position with Pearle Vision, Inc., Mr. Freedman was a Plant Operations Manager, Senior Industrial Engineer and Production Manager with Frito-Lay, Inc., a subsidiary of Pepsico, Inc., from May 1982 until September 1991. Mr. Freedman has a Bachelors of Science in Industrial Engineering and Operations Research which he received from Cornell University, College of Engineering in 1974, and a Masters in Business Administration in Operations Management from the University of Pittsburgh, Graduate School of Business, which he received in 1975. SHAWN ZIMBERG, M.D. Prior to joining RCI on a full time basis in March 1995, Dr. Zimberg had served as a consultant to RCI since its inception from April 1994 to March 5, 1995. Dr. Zimberg also served as a consultant to Integrated Financial Strategies, Inc., a company that invests in the equity securities of small to middle sized capitalization companies in the medical, bio-technology and computer industries. In 1986, he also was founder of DNA Software, Inc., a vertical market software firm. Dr. Zimberg serves as a consultant and Director of MediVisions, Inc., a medical instrument manufacturer. Dr. Zimberg received his Bachelors of Science and M.D. from the University of Michigan in 1991, and completed his specialty training in Radiation Oncology at Memorial Sloan -- Kettering Cancer Center. STEVE C. LUETKE. From 1988 until he joined RCI in February 1995, Mr. Luetke worked at ORGIC on the development of the LenSystem. He is named as an inventor on three patent applications filed by ORGIC related to ultraviolet lens curing technology. Mr. Luetke began his career as a Dispensing Optician and then served as a District Manager for D&K -25- Optical in Minnesota through the early 1980's. He was General Manager of Mobile Eye Care Inc. from 1986 through 1988. Mr. Luetke holds a Bachelor of Science degree in Business Administration from Butler University in Indianapolis. All of RCI's current directors will hold office until the annual meeting of stockholders to be held with respect to RCI's fiscal year ended March 31, 1996 (the "1996 Annual Meeting"), which is expected to be held in June 1996, and until their successors are duly elected and qualified. In May 1996, the Board of Directors plans to propose an Amended and Restated Certificate of Incorporation of RCI. Pursuant to the amendment, the Certificate of Incorporation would provide that commencing after the 1996 Annual Meeting, the terms of office of the directors would be divided into three classes, designated Class I, Class II and Class III. At the 1996 Annual Meeting, Class I directors would be elected for a term expiring at the annual meeting of stockholders to be held in 1997, Class II directors would be elected for a term expiring at the annual meeting of stockholders to be held in 1998, and Class III directors would be elected for a term expiring at the annual meeting of stockholders to be held in 1999. At each annual meeting of stockholders beginning with the 1997 annual meeting, the successors to directors whose terms would then expire would be elected to serve from the time of election and qualification until the third annual meeting following election (and in each case until their successors have been duly elected and qualified). Any additional directorships resulting from an increase in the number of directors would be distributed among the three classes so that, as nearly as possible, each class will consist of an equal number of directors. The RCI directors and stockholders have not yet approved the amendment and there is no assurance that the RCI directors or shareholders will adopt the proposed amendment to RCI's Certificate of Incorporation. RCI DIRECTOR COMPENSATION RCI reimburses its directors for reasonable travel and other expenses incurred in connection with their activities on behalf of RCI, including attendance at Board meetings, but does not pay its directors any fees for Board participation (although it may do so in the future). RCI EXECUTIVE COMPENSATION For the fiscal year ended March 31, 1996, the President and four most highly compensated executive officers of RCI in the aggregate were paid approximately $497,250. The following table sets forth information concerning the cash and other compensation paid by RCI during the fiscal year ended March 31, 1996 to its President and each of its four other most highly compensated executive officers. -26- SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------- NAME AND PRINCIPAL ANNUAL COMPENSATION LONG-TERM ALL OTHER POSITION SALARY ($) BONUS ($) COMPENSATION- COMPENSATION SECURITIES UNDERLYING OPTIONS(1) - ------------------------------------------------------------------------------------------- Larry Joel, Chairman $150,000 $ - 0- - 0 - $ - 0 - and President - ------------------------------------------------------------------------------------------- Thomas Freedman, $5,000 $ - 0 - - 0 - $ - 0 - Chief Operating Officer(2) - ------------------------------------------------------------------------------------------- Jeffrey Rubin, $125,000 $ - 0 - - 0 - $ - 0 - Executive Vice- President & Secretary - ------------------------------------------------------------------------------------------- Henry Dachowitz, Chief $108,750 $10,000 200,000 $ - 0 - Financial Officer & Treasurer - ------------------------------------------------------------------------------------------- Shawn Zimberg, Vice- $90,000 $ - 0 - 200,000 $ 8,500(3) President of Strategic Planning(3) - -------------------------------------------------------------------------------------------
(1) Represents incentive stock options granted pursuant to RCI's 1994 Stock Option Plan. See the table immediately below and "THE COMPANY -- RCI 1994 Stock Option Plan." (2) Mr. Freedman joined RCI in March 1996. (3) The other compensation for Dr. Zimberg reflects automobile and parking allowances. RCI OPTION GRANTS DURING THE FISCAL YEAR ENDED MARCH 31, 1996 The following table sets forth for each of the named executive officers of RCI certain information concerning stock options granted by RCI during the fiscal year ended March 31, 1996. -27-
- ------------------------------------------------------------------------------------------ NAME NUMBER OF PERCENT OF TOTAL EXERCISE PRICE EXPIRATION SECURITIES OPTIONS GRANTED TO PER SHARE(3) DATE(4) UNDERLYING OPTIONS EMPLOYEES IN FISCAL GRANTED(1) YEAR 1996(2) - ------------------------------------------------------------------------------------------ Larry Joel 0 0% 0 -- - ------------------------------------------------------------------------------------------ Thomas Freedman 0 0% 0 -- - ------------------------------------------------------------------------------------------ Jeffrey Rubin 0 0% 0 -- - ------------------------------------------------------------------------------------------ Henry Dachowitz 200,000 17.5% $ 2.00 11/15/2000 - ------------------------------------------------------------------------------------------ Shawn Zimberg 200,000 17.5% $ 2.00 11/15/2000 - ------------------------------------------------------------------------------------------
(1) These options include 50,000 incentive stock options each for Mr. Dachowitz and Dr. Zimberg, and 150,000 nonqualified stock options for each of them granted pursuant to RCI's 1994 Stock Option Plan. See "THE COMPANY -- RCI 1994 Stock Option Plan." (2) During the fiscal year ended March 31, 1996, RCI granted options to purchase an aggregate of 1,142,000 shares of its Common Stock. (3) In determining the fair market value of the RCI common stock, the Board of Directors considered various factors, including RCI's financial condition and results of operations, the book and tangible value of its assets, the absence of a market for its Common Stock and the risks normally associated with high technology companies. Based on these factors, the Board of Directors considered the fair market value of the RCI stock to be $2.00 per share at the time of the grant of the options. (4) Options may terminate before their expiration dates if the optionee's status as an employee is terminated, or within a certain period of time after the optionee's death or disability. RCI COMMON STOCK UNDERLYING UNEXERCISED OPTIONS AS OF FISCAL YEAR ENDED MARCH 31, 1996 The following table sets forth for each of the named officers of RCI the number of shares of RCI common stock subject to both exercisable and unexercisable stock options as of March 31, 1996. All of such options are incentive stock options granted pursuant to RCI's 1994 Stock Option Plan. None of the named officers exercised any options during the fiscal year ended March 31, 1996, and none of the exercisable or unexercisable stock options held by them as of that date represented "in-the-money" options. See "THE COMPANY -- RCI 1994 Stock Option Plan." -28- NUMBER OF SHARES OF COMMON STOCK UNDERLYING UNEXERCISED OPTIONS AT MARCH 31, 1996 Name Exercisable Unexercisable Larry Joel 0 0 Thomas Freedman 0 0 Jeffrey Rubin 0 0 Henry Dachowitz 200,000 0 Shawn Zimberg 200,000 0 RCI EMPLOYMENT AGREEMENTS LARRY JOEL. In February 1995, RCI entered into an employment agreement with Dr. Larry Joel, its Chairman of the Board and President, which expires on December 31, 1999. Under this agreement, Dr. Joel will generally be required to devote his full time to RCI's affairs and is entitled to an annual salary of $150,000. He is also entitled to participate in the option plan referred to below and to receive such insurance, vacation, disability and other benefits as will be made generally available to RCI's executive officers. The agreement requires that all confidential information developed by or made known to Dr. Joel during the course of his employment is to be kept confidential and not disclosed to third parties, except in certain circumstances, and that all inventions conceived by Dr. Joel during his employment relating to RCI's business shall be its exclusive property. The agreement also provides that RCI will be the exclusive owner of all information relating to the RCI Technology or the LenSystem which was developed by or made known to Dr. Joel prior to the term of his employment agreement. Under the agreement, Dr. Joel is also prohibited, subject to certain terms and conditions, from engaging in business activities competitive with RCI's business for a period of three years following the expiration of the agreement. JEFFREY RUBIN. In February 1995, RCI entered into an employment agreement with Jeffrey Rubin, its Executive Vice President and Secretary, which will expire on December 31, 1997. This agreement has terms and conditions substantially identical to those of Dr. Joel's employment agreement, except that Mr. Rubin's annual salary is established at $125,000. RCI COMPENSATION COMMITTEE From the formation of RCI in February 1994 until the election of Sam D. Schwartz and Joel W. Greenberg as directors in February 1995, RCI's Board of Directors did not have a separate Compensation Committee. Accordingly, each of the members of the Board of Directors (then comprised of Dr. Larry Joel, Dr. Robert Cohen, Dr. Alan Cohen and Jeffrey Rubin) participated during that period in deliberations regarding compensation that would be payable including, in the case of Dr. Joel and Mr. Rubin, deliberations regarding their own compensation. In April 1995, the RCI Board established a Compensation Committee consisting solely of nonemployee directors, namely Mr. Schwartz and Robert Cohen. Upon Mr. Schwartz's resignation from the RCI Board of Directors in November 1995 and Melvyn -29- Reznick's appointment as his replacement, Mr. Reznick also replaced Mr. Schwartz on the RCI Compensation Committee. The Compensation Committee makes recommendations concerning salaries, benefits and incentive compensation (including grants under RCI's Stock Option Plan) for directors, officers, employees and consultants of RCI. RCI STOCK OPTION PLAN In February 1994, RCI's Board of Directors and its stockholders adopted RCI's 1994 Stock Option Plan (the "Plan"). The purpose of the Plan is to attract key employees, officers and directors and to encourage their continued employment and their increased stock ownership in RCI. The Board of Directors believes that the granting of stock options under the Plan will promote continuity of management, and will result in increased incentives for those who are or may become responsible for managing RCI. The Plan provides for the grant of options to purchase up to 1,500,000 shares of RCI common stock. If any options expire or terminate without having been exercised in full, the unpurchased shares will again be available for issuance under the Plan. The Plan is administered by a committee of at least two directors (the "Administrators") of RCI who are disinterested with the meaning of Rule 16b-3(c)(2)(i) under the Securities Exchange Act of 1934, as amended. To be disinterested, a director may not have received options under any of RCI's stock option plans, except pursuant to a formula, during the prior one-year period. Currently, Robert Cohen and Melvyn Reznick are the Administrators of the Plan. Options which qualify as Incentive Stock Options ("ISO's") under the Internal Revenue Code of 1986, as amended (the "Code"), and non-qualifying options ("NQSO's") may be issued under the Plan. The Plan provides for a two-prong method for calculating the number of options to be granted based upon a formula and upon the discretion of the Administrators. Formula grants of options to purchase that number of shares of RCI common stock having a fair market value of $25,000 are made to each of the Administrators once each calendar year following RCI's Annual Meeting of Stockholders. The formula provisions of the Plan may be amended not more than once every six months other than to comport with changes in IRS and ERISA rules and regulations. The purchase price of RCI common stock subject to each option issued under the Plan will be determined by the Administrators, but in the case of an ISO (or NQSO issued pursuant to a formula grant under the Plan) may not be less than (i) the fair market value of the RCI common stock subject to the option on the date of grant or (ii) in the case of an option granted to an employee who, at the time the option is granted, owns (within the meaning of the Code) more than 10% of the total combined voting power of all classes of stock of RCI, 110% of the fair market value of the RCI common stock subject to the option on the date of grant. Options under the Plan may be exercised in a manner and at such times fixed by the Board of Directors, but may not be exercised for a term of more than 10 years, or for a term of five years in the case of an employee who, at the time an ISO is granted, owns (within the meaning of the Code) more than 10% of the total combined voting power of all classes of stock of RCI. In no event may ISO's which are exercisable for stock having an aggregate fair market value of more than $100,000 (together with all ISO's granted under any other Plan) be granted which first become exercisable in any one calendar year. Options are not transferable except by will or intestacy on the death of the optionee. In general, options granted under the Plan terminate when an optionee ceases to be employed by RCI or within a specified period after the termination of employment depending upon the reason for such termination. The Plan terminates and no further options can be granted on February 16, 2004. During the fiscal year ended March 31, 1995, no options were granted under the Plan. During the fiscal year ended March 31, 1996, options were granted in respect of an aggregate of 1,142,000 shares of RCI common stock. -30- LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS. As permitted by the Delaware General Corporation Law (the "Delaware Law"), RCI's Certificate of Incorporation includes a provision that eliminates, to the maximum extent permitted by the Delaware Law, any director's personal liability to RCI or its stockholders for monetary damages in respect of any breach by such director of his fiduciary duty. The Delaware Law does not permit a director's personal liability to be eliminated (i) for any breach of a director's duty of loyalty to RCI or its stockholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock repurchases or redemptions, as provided in Section 174 of the Delaware Law, or (iv) for any transaction from which the director derived an improper personal benefit. In addition, as permitted by Section 145 of the Delaware Law, the By-Laws of RCI provide that RCI shall indemnify its directors and executive officers to the fullest extent permitted by the Delaware Law, including those circumstances in which indemnification would otherwise be discretionary, subject to certain exceptions. The By-Laws also provide that RCI will advance expenses to directors and executive officers incurred in connection with an action or proceeding as to which they may be entitled to indemnification, subject to certain exceptions. RCI currently carries director and officer liability insurance. RCI has entered or will enter into indemnity agreements with each of its directors and executive officers that provide the maximum indemnity allowed to directors and executive officers by the Delaware Law and RCI's By-Laws, subject to certain exceptions, as well as certain additional procedural protection. In addition, the indemnity agreements provide generally that RCI will advance expenses incurred by directors and executive officers in any action or proceeding as to which they may be entitled to indemnification, subject to certain exceptions. RCI currently expects to carry director and officer liability insurance in the near future. PRINCIPAL STOCKHOLDERS OF RCI. The table below sets forth, as of March 31, 1996, the number of shares of common stock beneficially owned (which includes the number of warrants to purchase common stock) by (i) each of the RCI directors and executive officers, (ii) each person known by RCI to be the beneficial owner of five percent or more of its outstanding shares of common stock and (iii) all directors and executive officers of RCI as a group. Unless otherwise indicated, RCI believes that the beneficial owner has sole voting power over such shares. -31-
NAME AND ADDRESS OF NUMBER OF SHARES PERCENTAGE OF SHARES BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) OWNED(3) - ------------------ --------------------- -------------------- Larry Joel 3,266,667 16.1% Jeffrey Rubin(4) 1,088,889 5.4% Alan Cohen(5) (6) 1,088,889 5.4% Robert Cohen(6) 1,088,889 5.4% Melvyn Reznick(7) 10,200,000 50.4% Incomnet, Inc.(8) 10,200,000 50.4% Joel W. Greenberg 0 0.0% Steve C. Luetke(9) 0 0.0% Omar Buazza (10) 0 0.0% Henry M. Dachowitz(11) 0 0.0% Shawn H. Zimberg(12) 0 0.0% Laura Huberfeld(13) 1,633,334 8.1% Naomi Bodner(14) 1,633,334 8.1% All directors and executive officers as a group (11 persons) 16,733,332 82.6%
- ---------------------- (1) The address for each named individual or entity is in care of Rapid Cast, Inc., 1500 Hempstead Turnpike, East Meadow, New York 11554, except that (i) Incomnet, Inc. and Melvyn Reznick have an address at Incomnet, Inc., 21031 Ventura Boulevard, Suite 1100, Woodland Hills, California 91364, and (ii) Laura Huberfeld and Naomi Bodner have an address at 152 West 57th Street, New York, New York 10019. (2) Unless otherwise indicated, RCI believes that all persons and entities named in the table have sole voting and investment power with respect to all shares of Common Stock beneficially owned by them, except to the extent authority is shared by spouses under applicable law. A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from the date of this Prospectus upon the exercise of options, warrants or convertible securities. Each beneficial owner's percentage ownership is determined by assuming that options, warrants or convertible securities that are held by such person (but not those held by any other person) and which are exercisable within 60 days of the date of this Prospectus have been exercised and converted. The table does not include any shares issuable (a) upon the exercise of RCI warrants issued on February 8, 1995 in connection with the Company's issuance of 8% convertible notes to finance the acquisition of a controlling interest in RCI, or (b) upon the exercise of options granted under the 1994 RCI Stock Option Plan, or (c) upon the conversion of 8% convertible notes issued by RCI in January 1996 to RCI stockholders who made loans to RCI at that time, or (d) upon the exercise of warrants issued to RCI stockholders who participated in the loan to RCI in April 1996. See "THE COMPANY - Loans to RCI." -31- (3) Assumes a total of 20,250,000 shares outstanding, not including any stock options granted under the RCI 1994 Stock Option Plan, and not including 1,000,000 shares which may be acquired pursuant to the exercise of 1,000,000 outstanding warrants to purchase RCI common stock at a price equal to 50% of the average of the last reported sales price during the first 30 business days after the date RCI's common stock first becomes publicly traded. See "THE COMPANY - RCI Option Grants During the Fiscal Year Ended March 31, 1996" and "Item 1. Business - Acquisition of Rapid Cast, Inc. - Financing" in the Company's 1995 Form 10-K. The total shares outstanding also do not include any shares issuable upon the conversion of 8% convertible notes issued by the Company in January 1996, or upon the exercise of warrants issued by RCI in April 1996 in connection with loans made to RCI by is shareholders at that time. See "THE COMPANY - Loans to RCI." (4) Includes 290,370 shares of RCI common stock beneficially owned by a trust the sole beneficiary of which is Mr. Rubin's wife, Stephanie Cohen Rubin, as to which shares Mr. Cohen disclaims all beneficial interest. (5) Includes 435,555 shares of RCI common stock beneficially owned by each of Alan Cohen's two minor children, Jacqueline Cohen and Gabrielle Cohen, as to which shares Mr. Cohen disclaims all beneficial interest. Does not include 70,000 shares of RCI Common Stock issuable upon the exercise of RCI warrants issued on February 8, 1995. (6) Does not include 60,000 shares owned by Broadway Partners, a partnership comprised of the children of Alan Cohen and Robert Cohen, as to which Robert Cohen disclaims all beneficial interest. Does not include 70,000 shares of RCI Common Stock issuable upon the exercise of RCI warrants issued on February 8, 1995. (7) Consists of shares of RCI common stock beneficially owned by Incomnet by virtue of Mr. Reznick's position as the President and Chief Executive Officer of Incomnet. Does not include shares issuable upon the conversion of 8% promissory notes issued by RCI in January 1996 or warrants to purchase RCI common stock issued by RCI in April 1996. (8) Incomnet acquired 10,200,000 shares of RCI common stock as part of a private placement of securities which was consummated in February 1995. See "Item 1. Business - Acquisition of Rapid Cast, Inc." in the Company's 1995 Form 10-K. Does not include shares issuable upon the conversion of 8% promissory notes issued by RCI in January 1996 or warrants to purchase RCI common stock issued by RCI in April 1996. (9) Does not include 200,000 shares of RCI common stock issuable upon the exercise of stock options granted under the RCI 1994 Stock Option Plan. (10) Does not include 200,000 shares of RCI common stock issuable upon the exercise of stock options granted under the RCI 1994 Stock Option Plan. (11) Does not include 200,000 shares of RCI common stock issuable upon the exercise of stock options granted under the RCI 1994 Stock Option Plan. (12) Does not include 200,000 shares of RCI common stock issuable upon the exercise of stock options granted under the RCI 1994 Stock Option Plan. (13) Includes 544,444 shares of RCI common stock beneficially owned by each of Laura Huberfeld's two minor children, Jessica Huberfeld and Rachel Huberfeld, as to which shares Mrs. Huberfeld disclaims all beneficial interest. Laura Huberfeld is the wife of Murray Huberfeld, a principal of Broad Capital Associates, Inc. (14) Includes 163,333 shares of RCI common stock beneficially owned by each of Naomi Bodner's eight minor children, Moshe Bodner, Aaron Bodner, Elizar Bodner, Tzypporah Bodner, Mordechi Bodner, Yaakov Bodner, Rachel Bodner, and Yissochar Bodner, as to which shares Mrs. Bodner disclaims all beneficial interest. Naomi Bodner is the wife of David Bodner, a principal of Broad Capital Associates, Inc. -32- SECURITIES OF RCI RCI is authorized to issue 30,000,000 shares of common stock, par value $.001 per share. As of April 30, 1996, 20,250,000 shares of RCI common stock are issued and outstanding, warrants to purchase 1,000,000 shares of RCI common stock are issued and outstanding (not including up to an additional 1,000,000 warrants to purchase RCI common stock expected to be issued in May 1996 pursuant to the issuance of short-term notes by RCI in April and May 1996), convertible notes convertible into 679,333 shares of RCI common stock are issued and outstanding (not including an additional 130,667 shares which would be issued upon the conversion of notes not yet funded), and options to purchase 1,142,000 shares of common stock are issued and outstanding. All issued and outstanding shares of common stock are fully paid and nonassessable. Holders of shares of common stock, as such, have no conversion, preemptive or other subscription rights. There are no redemption provisions applicable to the common stock. The holders of common stock are entitled to receive dividends when, as if declared by the Board of Directors out of funds legally available therefor, subject to the prior rights of holders of preferred stock, if any. In the event of liquidation, dissolution or winding up of RCI, the holders of common stock are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision has been made for each class of stock (if any) having preference over the common stock. The holders of common stock are entitled to one vote for each share held of record on all matters to be voted on by the stockholders. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares of common stock voting for the election of directors can elect all of the directors then being elected. RCI has outstanding warrants to purchase 1,000,000 shares of common stock issued on February 8, 1995 (the "RCI Warrants"). The RCI Warrants are exercisable to purchase shares of common stock commencing on the 35th business day after any date before December 31, 1998 (the "Start Date") on which securities of RCI are first traded publicly. The exercise price of the RCI Warrants will be equal to 50% of the average of the last reported sales price on the first 30 business days after the Start Date. The RCI Warrants will expire 180 days after the date, if any, on which they first become exercisable. See "Item 1. Business - Financing of Acquisition of RCI" in the Company's 1995 Form 10-K. RCI has outstanding warrants to purchase an additional 1,000,000 shares of common stock issued on April 30, 1996 ("RCI Additional Warrants"). The RCI Additional Warrants confer on the holders the right to purchase a total of 1,000,000 shares of RCI common stock at any time for a period of seven years at a price of $2.25 per share. See "THE COMPANY - Loans to RCI." CERTAIN RCI TRANSACTIONS RCI leases office space in two locations from companies owned by certain of its stockholders. See "Item 1. Business - Rapid Cast, Inc. - Facilities" in the Company's 1995 Form 10-K. Cohen's Fashion Optical, Sterling Vision and Vision Centers of America are affiliates of certain of RCI's directors and executive officers. See "THE COMPANY - Directors and Executive Officers of RCI." Retail optical stores that are operated by those companies have purchased 33 LenSystems and $1,194,000 of Rapid Cast Liquid Monomer. RCI anticipates that retail optical stores that are operated by or are franchisees of those companies may seek to purchase or lease an undeterminable number of additional LenSystems and Rapid Cast Liquid Monomer from RCI. Except for Vision Centers of America, which has committed to purchase 50 of the LenSystems, which obligation is guaranteed by Dr. Larry Joel, Chairman of the Board and President of RCI, none of such companies or their respective franchisees have made any commitments or executed any contracts to purchase the LenSystem, and there can be no assurance that any additional sales will be agreed upon or consummated. RCI will make the -34- LenSystem available to such users upon terms and conditions comparable to all other purchasers with orders of similar size and nature. The founding stockholders of RCI (not including Incomnet) own 9,800,000 shares of RCI common stock and acquired these shares at a purchase price of approximately $.03 per share. The RCI founding stockholders and their affiliates had, as of March 31, 1996, loaned approximately $1,463,334 to RCI, not including loans made to RCI pursuant to rights offerings in January and April, 1996. See "THE COMPANY - Loans to RCI." The loan, together with any additional loans which are thereafter made by them, are due and payable on July 31, 1996, together with interest at 7% per annum, subject to the following restrictions: until RCI's revenues from continuing operations aggregate at least $1,000,000 in any three consecutive months, RCI may repay these loans only if the lenders furnish or guaranty equivalent lines of credit. In connection with a private placement of RCI units by Incomnet (each unit consisting of one 8% convertible promissory note in the principal amount of $1,000,000 and one RCI Warrant to purchase 100,000 shares of RCI common stock) in February 1995, affiliates of Broad Capital Associates, Inc. purchased 3-1/3 units. In addition, Larry Joel and Robert and Alan Cohen and certain of their affiliates purchased 2-1/2 units. Sam D. Schwartz, the former President and Chairman of the Board of Incomnet, purchased 0.9 units. These purchasers waived interest accrual on the notes included in their units. In connection with this private placement, Incomnet also issued to the RCI founding stockholders 750,000 shares of Incomnet's Common Stock. Incomnet originally agreed to issue to the RCI founding stockholders a maximum of 750,000 additional shares of Incomnet's Common Stock depending on RCI's pre-tax earnings during the first fiscal year after RCI's February 1995 acquisition of Q2100. On June 16, 1995, Incomnet agreed to issue 600,000 additional shares of its Common Stock to the RCI founding stockholders without registration rights in exchange for their relinquishment of their rights to be issued any of the 750,000 shares. See "Item 1. Business - Acquisition of Rapid Cast, Inc. - Certain Transactions" in the Company's 1995 Form 10-K. In January 1996 RCI raised $648,000 in additional capital pursuant to an offering of convertible notes to all of its existing shareholders and executives. Incomnet, Inc. loaned $326,400 to RCI on January 1996 as its pro rata share of the loan pursuant to which the Company has the right to convert the note into 408,000 shares of RCI common stock. In April and May 1996, RCI is in the process of raising $1,000,000 in additional capital pursuant to the issuance of short term notes and seven year warrants. Incomnet, Inc. loaned $510,000 to RCI as its pro rata share of the April loan to RCI. See "THE COMPANY - Directors and Officers of RCI" for information on certain directors and officers of RCI who are also affiliated with potential users of the LenSystem. SEE "Item 1. Business - Rapid Cast, Inc. - Development of Technology" in the Company's 1995 Form 10-K for information on the involvement of Dr. Larry Joel in the development of the Technology and in the sale of the Technology to Pearle. See "THE COMPANY - Directors and Officers of RCI" for information on the current employment of Dr. Joel as President of Q2100. -35- ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW The Company is a Delaware corporation and thus subject to Section 203 of the Delaware General Corporation Law ("Section 203"), which is generally viewed as an anti-takeover statute. In general, Section 203 prohibits a Delaware corporation from engaging in any "business combination" (as defined) with any "interested stockholder" (as defined) for a period of three years following the date that such stockholder became an interested stockholder, unless (i) prior to such date, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; (ii) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (a) by persons who are directors and also officers and (b) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (iii) on or subsequent to such date, the business combination is approved by the board of directors and authorized at an annual or special meeting stockholders, and not by written consent, by the affirmative vote of at least 66-2/3% of the outstanding voting stock which is not owned by the interested stockholder. In general, Section 203 defines a "business combination" to include: (i) any merger or consolidation involving the corporation and the interested stockholder; (ii) any sale, transfer, pledge or other disposition involving the interested stockholder of 10% or more of the assets of the corporation; (iii) (subject to certain exceptions) any transaction which results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; (iv) any transaction involving the corporation which has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or (v) the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an "interested stockholder" as (a) any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation or (b) any entity or person affiliated with or controlling or controlled by such entity or person. The existence of Section 203 would be expected to have the effect of discouraging takeover attempts involving RCI, including attempts that might result in a premium over the market price of RCI's common stock (if it is then publicly traded). USE OF PROCEEDS The Company will not receive any net proceeds from the sale of the Outstanding Shares or the Underlying Shares, if and when issued. The Company would receive $843,750 of net proceeds from the exercise of the Warrants, if and when they are exercised. The amount of net proceeds to be received from the sale of Shares by the Company is uncertain and depends on (i) whether any Shares remain after the issuance of Shares in accordance with the settlement agreements entered into by the Company with certain prior holders of the 8% convertible promissory notes issued by the Company in February 1995, and (ii) the price at which Shares are sold through the Underwriter in the NASDAQ over-the-counter market from time to time. The net proceeds received from the sale of the Shares and the exercise of the Warrants, if any, will be used by the Company for general working capital purposes. See "DESCRIPTION OF CAPITAL STOCK." -36- PRICE RANGE OF COMMON STOCK AND DIVIDENDS The Company's Common Stock is quoted on the NASDAQ Small Capital Market System under the symbol "ICNT." The following table sets forth, for the calendar quarters indicated, the actual high and low sale prices of the Company's Common Stock as reported on the NASDAQ/Small Capital Market commencing for the first quarter of 1994. The approximate number of record holders of Common Stock on May 6, 1996 was 789. HIGH LOW LAST SALE ---- --- --------- 1994 First Quarter 7.25 6.00 6.75 Second Quarter 11.12 6.37 9.75 Third Quarter 12.50 8.00 11.37 Fourth Quarter 14.62 9.94 14.62 1995 First Quarter 14.62 8.25 14.37 Second Quarter 16.37 10.87 15.00 Third Quarter 24.50 9.00 11.00 Fourth Quarter 11.25 2.50 4.56 1996 First Quarter 6.20 4.25 5.12 Second Quarter(a) 5.75 4.50 5.75 - ----------------- (a) Through May 6, 1996. A recent closing sale price for the Common Stock as reported in published financial sources is set forth on the cover page of this Prospectus. There is no public trading market for the Warrants nor is one expected to develop. The Company intends to retain future earnings for use in its business and does not anticipate paying any dividends on shares of its Common Stock in the foreseeable future. -37- CAPITALIZATION The following table sets forth the actual capitalization of the Company at December 31, 1995 and the capitalization of the Company reflecting (i) the issuance of 75,000 Underlying Shares assuming the exercise of all 75,000 Warrants, and (ii) no issuance of Shares.
December 31, 1995 ----------------- Actual As Adjusted ------ ----------- Long-Term Debt:(1) $ 8,459,772 $ 8,459,772 Minority Interest $ 6,905,983 $ 6,905,983 Stockholders' Equity (Deficiency) Preferred Stock, no par value; 100,000 shares authorized, no shares issued and outstanding -- -- Common Stock, no par value; 20,000,000 shares authorized, 13,224,024 shares issued and outstanding (13,299,024 as adjusted)(2) $60,883,892 $61,727,642 Retained earnings (accumulated deficit) (12,843,991) (12,843,991) Treasury Stock (5,491,845) (5,491,845) Total stockholders' equity (deficiency) 42,548,056 43,391,806 ----------- ----------- Total capitalization $57,913,811 $58,757,561 ----------- ----------- ----------- -----------
- --------------------- (1) Excludes current portion of long-term debt. See the Company's Balance Sheet in its Form 10-K for the fiscal year ended December 31, 1995, which is incorporated in this Prospectus by reference. The long term debt includes $8,449,050 of net deferred tax liability arising from the nondeductibility of the RCI patent rights, which will be eliminated in accordance with Statement of Financial Accounting Standards No. 109 as the underlying patent rights are amortized to expense. (2) Assumes a total of 75,000 Underlying Shares of the Company's Common Stock is issued pursuant to the exercise of the Warrants. -38- SELECTED CONSOLIDATED FINANCIAL INFORMATION The selected consolidated financial information for the Company presented under the captions "Statement of Operations Data" and "Balance Sheet Data" for, and as of the end of, each of the years in the five-year period ended December 31, 1995, is derived from the Company's Consolidated Financial Statements. The Company's Consolidated Financial Statements as of December 31, 1993, 1994, and 1995 and for each of the years in the three-year period ended December 31, 1995, and the report thereon, have been incorporated in this Prospectus by reference. This selected consolidated financial information should be read in conjunction with the Company's Consolidated Financial Statements and the related notes thereto included in the Company's 1995 Form 10-K incorporated herein by reference, and with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in this Prospectus. -39- INCOMNET, INC. STATEMENT OF OPERATIONS DATA:
Year Ended December 31 ---------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Revenues $86,564,917 $46,815,057 $11,298,972 $5,534,874 $1,898,071 Income (Loss) before income taxes, extra- ordinary items and minority interest 957,044 4,000,242 (1,606,844) (2,264,597) 13,257 Income (Loss) before extra- ordinary item and minority interest 856,543 3,999,187 (1,606,844) (2,461,697) 1,322 Minority Interest 509,482 -- -- -- -- Net Income (Loss) 1,366,025 4,071,194 (948,769) (2,021,333) 1,322 Net Income (Loss) per share before extraordinary items 0.11 0.42 (0.20) (0.34) 0 Net Income (Loss) per share 0.11 0.42 (0.12) (0.28) 0 Cash dividends per common share 0 0 0 0 0 Weighted average number of shares 12,706,401 9,593,207 8,183,877 7,189,671 6,936,316 BALANCE SHEET DATA: At December 31 ---------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Total assets $74,105,629 $26,158,346 $8,665,839 $6,744,944 $2,174,428 Long-term obligations(1) 8,459,772 900 20,000 176,000 83,334
- --------------- (1) The long term obligations include $8,449,050 of net deferred tax liability arising from the nondeductibility of the RCI patent rights, which will be eliminated in accordance with Statement of Financial Accounting Standards No. 109 as the underlying patent rights are amortized to expense. -40- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONSOLIDATED RESULTS OF OPERATIONS GENERAL Gross revenues from NTC's operations have been increasing steadily since the Company acquired a controlling interest and commenced advancing working capital to NTC in early 1992. Upon acquiring control of NTC, the Company implemented a new marketing plan for NTC pursuant to which compensation payments to the independent marketing representatives were calculated and paid on a more timely basis. NTC uses a network marketing program of independent representatives to sell its telecommunications-related services to retail customers. The growth in NTC's telecommunications-related revenues is directly tied to its network marketing program. NTC's independent representatives typically purchase materials, training and services from NTC to assist them in selling new retail customers and enrolling other representatives in the NTC program. NTC pays the independent representatives a residual monthly commission on the telecommunications revenue. In addition, the network marketing program pays various bonuses and overrides when and if new representatives obtain a minimum number of new telephone customers, typically 10, within a 30 to 60 day period. This program has been designed to bring NTC new retail telephone customers even if little or no growth occurs in the marketing program revenues itself. The new telecommunications revenue generally lags the marketing program revenues by one to six weeks. When the marketing program revenues increase, an increase in NTC's telecommunications-related revenues is expected to follow. Net operating revenues at NTC have also been improving steadily due to (i) increased sales and (ii) increased collection of accounts receivable. As part of its new management program, the billing system was enhanced to allow for multiple billing cycles each month. An arrangement was also made to use local exchange carriers to reduce billing costs, improve collections and terminate telephone service more rapidly when invoices are in arrears. The pre-paid calling card products now offered by NTC also significantly reduce losses due to uncollectible accounts receivable. The Company on a consolidated basis, and the Company's business and NTC's business on a stand-alone basis, are now operating profitably. NTC's long distance telephone services and marketing programs subject the Company to the regulatory control of the Federal Communications Commission and various state regulatory agencies, including but not necessarily limited to state Public Utility Commissions or equivalent, state attorney general offices, and state consumer relations and protection offices. From time-to-time in the normal course of business, NTC receives inquiries, requests and demands from such agencies for information and action. Management does not believe any such inquiries, requests or demands received by the Company to date have had, or are reasonably likely to have in the future, any material impact on NTC's business. The Company's current emphasis with respect to NTC is to continue to ensure that (i) processing capacity is maintained and increased to handle growing sales, (ii) the independent marketing force continues to expand, resulting in a growing base of telephone customers, and (iii) the business is operated efficiently with reliable reporting. While the improved computer processing system is expected to reduce operating expenses as a percentage of gross revenues due in part to increased speed and decreased errors, on-going costs in 1996 for expansion of NTC's infrastructure may result in expenses in 1996 which are comparable, as a percentage of gross revenues, to expenses in 1995 and 1994, depending upon the rate of NTC's growth. -41- In addition to the focus on NTC, the Company anticipates that it will receive more revenues and potential profits in 1996 from its acquisition of Rapid Cast, Inc. on February 8, 1995. See "Item 1. Business - Acquisition of Rapid Cast, Inc." and "Item 1. Business - Rapid Cast, Inc." in the Company's 1995 Form 10-K. The Company continues to seek more business for AutoNETWORK, its interactive computer network and electronic bulletin board system. Although no specific plans have been made, the Company may seek to make an acquisition of a computer network or long distance telephone-related business in the future. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 SALES. Total 1995 sales increased by 85% from $46.8 million in 1994 to $86.6 million in 1995. The majority of this increase was attributable to NTC's sales increase from $45.6 million in 1994 to $83.1 million in 1995. The following table summarizes the Company's year-to-year sales performance by subsidiary and segment:
SUBSIDIARY SEGMENT DOLLARS IN MILLIONS 1995 1994 ---- ---- NTC Telephone (telecommunications services) $70.0 $34.2 NTC Telephone (marketing programs) 13.1 11.4 RCI Optical 2.0 -- AutoNETWORK Network 1.5 1.2 ---- ---- Total Company Sales $86.6 $46.8 ---- ---- ---- ----
NTC's sales increase was driven largely by continued expansion of the customer base for its telecommunications services. As a result of this continuing expansion, NTC's telecommunication service revenues represented 84% of NTC's total 1995 revenues with the remaining 16% generated by sales of NTC's marketing programs. This 1995 revenue mix compares to NTC's 1994 mix of 75% from telecommunication services and 25% from marketing programs. The consolidation of RCI in the third and fourth quarters of 1995 added $2.0 million of optical product sales to the total year results. COST OF SALES. Total Company cost of sales, which tends to vary directly with sales, increased from $31.2 million or 67% of sales in 1994 to $57.9 million or 67% sales in 1995. The following table summarizes the Company's year-to-year changes in two major cost components: DOLLARS IN MILLIONS 1995 1994 ---- ---- Commissions paid to NTC independent sales representatives $ 14.2 $ 7.7 All other costs of sales 43.7 23.5 ------ ----- Total Company Cost of Sales $ 57.9 $31.2 ------ ----- ------ ----- NTC's total commission expense increased from $7.7 million in 1994 to $14.2 million in 1995. The most significant single factor in this year-to-year change was an annual increase of $3.0 million in residual monthly sales commissions paid to independent sales representatives on NTC's expanding telecommunication service revenues. The remainder of the year-to-year change was caused by increases in various bonuses and overrides paid to sales representatives who signed up new telephone service customers for NTC. -42- The second cost component shown in the table above is "all other costs of sales" which represents (1) NTC's long distance carrier costs, (2) NTC's costs of producing sales materials for its independent sales representatives, (3) RCI's costs of producing optical systems and ancillary goods, and (4) AutoNETWORK's costs of providing communications network products and services. GENERAL AND ADMINISTRATIVE. Total general and administrative costs increased from $9.4 million or 20% of sales in 1994 to $19.8 million or 23% of sales in 1995. General and administrative costs generally include the costs of employee salaries, fringe benefits, supplies, and related support costs which are required in order to provide such operating functions as customer service, billing, marketing, product development, information systems, collections of accounts receivable, and accounting. NTC's general and administrative costs increased during 1995 in order to: (1) support its continuing sales growth in 1995 and, (2) build stronger infrastructure to accommodate still greater sales growth and improved cost efficiencies in the future. RCI incurred substantial general and administrative costs in 1995 relating to its startup of operations. DEPRECIATION AND AMORTIZATION. Total Company depreciation and amortization expense increased from $0.4 million in 1994 to $1.0 million in 1995. This increase was caused by greater investment by NTC in computer hardware and software, furniture and equipment, and leasehold improvements required to support its rapid expansion in sales. BAD DEBT EXPENSE. Total Company bad debt expense increased from $1.8 million or 3.8% of sales in 1994 to $4.1 million or 4.8% of sales in 1995. The year-to-year increase in bad debt was caused primarily by increased provisioning of NTC's Dial-1 receivables and secondarily by the Company's establishment of a bad debt reserve for a potentially uncollectible note receivable from a Company shareholder. OTHER INCOME AND EXPENSE. The Company's net income and expense declined from net other income of $0.3 million in 1994 to net other expense of $1.0 million in 1995. This $1.3 million net decline was primarily caused by: (1) a $382,500 settlement with convertible noteholders relating to the acquisition of RCI, (2) a $244,010 settlement with a former Company officer, and (3) a $337,500 write-off of marketable securities by NTC. ACQUISITION COSTS AND EXPENSES. Acquisition costs increased from $0.3 million in 1994 to $1.7 million in 1995. This increase in costs was caused almost entirely by the acquisition of RCI and includes (1) $1,228,206 of amortization expense relating to the acquisition of RCI patent rights, (2) $118,743 of interest expense on notes used to finance the RCI acquisition and related legal costs, and (3) $107,841 of equity in RCI's losses from February 1995 (date of acquisition) through June, 1995 (the period during which the Company's 51% ownership of RCI was recorded under the equity method of accounting). MINORITY INTEREST. Beginning on July 1, 1995, the Company converted from the equity method to the consolidated method of accounting for its 51% ownership in RCI. As a result, 49% of RCI's losses from July 1, 1995 through December 31, 1995 (the "minority interest") were eliminated from the Company's "Consolidated Statements of Operations" for 1995. NET INCOME. Total Company net income declined from $4.1 million or 8.7% of sales in 1994 to $1.4 million or 1.6% of sales in 1995. Although NTC's year-to- year net income increased substantially, those increases were more than offset by losses sustained from the Company's internal operations and from RCI's operations. -43- YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993. In 1994, total revenues were $46,815,057 as compared to $11,298,972 in 1993, an increase of $35,516,085 or 314%. Telecommunications-related revenues (including revenue for the Company's AutoNETWORK business) increased to $35,397,830 in 1994 from $7,022,716 in 1993, an increase of $28,375,114 or 404%, while marketing-related revenues increased to $11,417,227 from $4,260,942 in 1993, an increase of $7,156,285 or 167%. The growth of the Company's telecommunications-related revenues was associated with the increase in the base of marketing representatives, which results in the signing of new telephone customers. The growth of the Company's marketing-related revenues was due to a marketing program involving the sale of marketing programs and materials to independent sales representatives. Operating costs from communication products and services, including commissions to independent sales representatives, increased to $31,148,773 in 1994 from $9,521,803 in 1993, an increase of $21,626,970 or 227%. Expenses associated with commissions, bonuses and overrides paid to NTC's independent representatives for 1994 were $7,658,904 versus $2,339,517 in 1993, an increase of $5,319,389 or 227%. Other increases in expenses were primarily attributable to the increased costs of communication services from NTC's primary carriers and in the increased investment being made in NTC's customer service, marketing support services, billing and other related operations. Selling, general and administrative costs were $9,437,851 in 1994 versus $2,643,583 in 1993, an increase of $6,794,268 or 257%. This increase is attributable to substantial growth in NTC's telecommunications and marketing revenues, which has necessitated substantial increases in the Company's selling, general and administrative operations. The increase in these operations, however, is lower as a percentage increase than the increase in revenues, reflecting an improved economy of scale in the Company's operations. Depreciation and amortization increased to $709,857 in 1994 from $514,598 in 1993, an increase of $195,259 or 38%. This increase is due to the increased investment in capital goods required to conduct and expand operations. Bad debt expense increased to $1,788,772 in 1994 from $174,377 in 1993, an increase of $1,614,395 or 925%. The increase in bad debt was due to the rapid growth in telecommunications revenues in 1994 versus 1993, although the rate of growth of bad debt from 1993 to 1994 reflects an over-reserve for bad debt in 1992 of $1,078,428, which was applied against bad debt in 1993. The actual rate of growth of bad debt in 1994 was commensurate with the rate of growth in telecommunications revenues from 1993 to 1994. Other (income) expense changed from an expense of $51,455 in 1993 to income of $342,445 in 1994, a gain of $393,900, or 765%. The increase is due to the decreased need for the Company to borrow funds in 1994 versus 1993, along with the increase in the Company's cash position, which has resulted in interest gains on funds held in cash accounts. The Company experienced net profit of $4,071,194 in 1994 versus a loss of $948,769 in 1993, an increase of $5,019,963 or 529%. The Company's net profit reflects the improved and profitable operations at NTC in 1994. -44- YEAR ENDED DECEMBER 31, 1993 COMPARED TO YEAR ENDED DECEMBER 31, 1992. Total revenues for 1993 were $11,298,972 as compared to $5,534,874 in 1992, an increase of $5,764,098 or 104%. Communications products and services revenues increased to $7,022,716 from $4,702,521 in 1992, an increase of $2,320,195 or 49%. Marketing services revenues increased to $4,260,942 from $732,372 in 1992, an increase of $3,528,570 or 481%. The increase in communications services revenues reflects the growth in NTC's base of telephone service users, while the increase in marketing services revenues reflects the growing success of NTC in attracting independent representatives to market its products. The Company had an extraordinary gain in 1993 of $658,075, attributable to a settlement with creditors. Communications products and services operating costs increased to $9,521,803 in 1993 from $3,383,694 in 1992, an increase of $6,138,109 or 181%. This increase was primarily attributable to the increased costs of communication services from NTC's primary carriers and in the increased investment being made in NTC's customer service, marketing support services, billing and other related operations. Research and development costs decreased to $69,966 in 1993 from $91,212 in 1992, a decrease of $21,246. This decrease was due to cost controls placed on expenditures and to the Company's focus on improving the operation of existing products. Selling, general and administrative costs were $2,413,237 in 1993 versus $2,671,534 in 1992, a decrease of $258,297 or 10%. This decrease is attributable to improved cost controls in NTC's marketing operations, whose revenues increased from $732,372 to $4,260,942 with no appreciable increase in costs associated with sales. Depreciation and amortization increased to $541,598 in 1993 from $392,230 in 1992, an increase of $122,368 or 31%. This increase is due to the increased investment in capital goods required to conduct and expand operations. Bad debt expense decreased to $174,377 in 1993 from $1,078,428 in 1992, a decrease of $904,051 or 83%. The decrease in bad debt was due to improved customer service and billing operations, particularly the process of submitting call records to Local Exchange Carriers for billing when customers do not pay their telephone bills promptly. Interest expense increased to $211,835 in 1993 from $31,989 in 1992, an increase of $179,846 or 562%. The increase is due to the increased amount of funds loaned to NTC in 1993. The Company experienced a loss of $1,606,844 before extraordinary items in 1993 versus a loss of $2,461,697 before extraordinary items in 1992, a decrease of $854,853 or 34%. While the loss reflects that NTC's operations were not profitable for the 1993 calendar year, the decrease of the loss reflects improvement in NTC's operations. LIQUIDITY AND CAPITAL RESOURCES For the year ended December 31, 1995, the Company had a net profit of $1,366,025 and, at that date, current assets exceeded current liabilities by $1,440,515. Since the Company acquired a controlling interest in NTC in early 1992, the Company's capital needs have primarily been satisfied from outside sources such as the private placement of securities, the exercise of warrants and options, and loans and bank credit lines guaranteed by its principal shareholders. Cash flow from operations did not provide net working capital to the Company during the period from February 1992 to May 1994, but has been positive since that date. -45- The Company had net working capital of $1,440,515 at December 31, 1995, as compared to net working capital of $8,798,793 at December 31, 1994. During 1995, net cash flow from operations was $1,378,839 compared to net cash flow from operations of $3,083,887 in 1994. During 1995, the Company's cash requirements were met through a combination of a cash flow from operations, exercise of warrants to purchase the Company's common stock and private placements of its Common Stock. In 1995, the Company raised $29,058,773 in either private placements or from the exercise of warrants. The Company anticipates that it will continue to attain cash flow sufficient to meet the Company's cash requirements in 1996 through a combination of operations, bank borrowings, private placements of its common stock and the exercise of warrants to purchase the Company's Common Stock. On February 5, 1996, Melvyn Reznick, the President and a director of the Company, personally guaranteed and arranged for a $500,000 bank line of credit for the Company, which may be expanded to a range of $750,000 to $1,000,000 in the near future. As of April 30, 1996, the line had been drawn upon to the extent of $515,000 to fund loans to RCI pursuant to a rights offering made to RCI's stockholders. See "THE COMPANY - Loans to RCI." The Company anticipates that during 1996 it and RCI will need financing in addition to their respective cash flows to fund operations and, in the case of RCI, to finance the growth of its business. The Company had no material commitments for capital expenditures at December 31, 1995, but does expect to continue expanding the NTC headquarters building and purchasing additional equipment commensurate with the requirements of its customer base. During 1995, the Company had capital expenditures of $7,389,419 for plant and equipment. Effective February 12, 1992, the Company entered into a Letter of Agreement (the "Agreement") with NTC to ultimately acquire a controlling interest in NTC. The Company loaned NTC $2,850,000 during 1992, collateralized by substantially all the assets of NTC, from its available working capital resources. In 1993, the Company loaned an additional $1,935,961 to NTC, bringing the total to $4,785,961. In 1994, the Company loaned NTC an additional $308,879, bringing the total to $5,094,810. All loans to NTC were converted into an additional equity investment in NTC at the end of 1994. No further loans were made to NTC during 1995. In May 1992, as settlement with a creditor on a past due accounts payable of approximately $725,000, the Company entered into a non-interest bearing credit facility of approximately $432,000, resulting in a gain of approximately $293,000 ($.04 per common share). The contract was payable in monthly installments of $12,000 for the first twelve months and monthly installments of $16,000 thereafter through November 1994. Maturities of the contract were $84,000 in 1992, $172,000 in 1993 and $176,000 in 1994. This obligation was paid in full in 1994 At December 31, 1995, the Company had net operating loss carryforwards for federal income tax purposes of approximately $16,800,000, which are expected to be available to offset taxable income in future years. The Company and its subsidiaries are engaged in legal proceedings where the ultimate outcome cannot presently be determined. This information is described at "Item 3. Legal Proceedings" in the Company's 1995 Form 10-K. -46- PRINCIPAL STOCKHOLDERS The following table sets forth information concerning the beneficial ownership of the Company's Common Stock as of April 30, 1996. Persons and groups named in the table represent (i) each person known by the Company to own beneficially more than 5% of the Company's Common Stock, (ii) each director of the Company or its NTC subsidiary, (iii) each executive officer of the Company or its NTC subsidiary, and (iv) all directors and executive officers of the Company and its NTC subsidiary as a group.
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENTAGE OF SHARES OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) COMMON STOCK OUTSTANDING(10) - ------------------- ------------------------ ---------------------------- Melvyn Reznick 205,300(2) 1.51% 21031 Ventura Boulevard Suite 1100 Woodland Hills, CA 91364 Sam D. Schwartz 1,998,500(3) 14.74% 21031 Ventura Boulevard Suite 1100 Woodland Hills, CA 91364 Joel W. Greenberg 260,000(4) 1.92% 21031 Ventura Boulevard Suite 1100 Woodland Hills, CA 91364 Nancy Zivitz 669,300(5) 4.94% 7234 Silverbell Drive Sarasota, Florida 34241 Albert Milstein 48,000(6) 0.35% 21031 Ventura Boulevard Suite 1100 Woodland Hills, CA 91364 Edward R. Jacobs 30,000 0.22% 2801 Main Street Irvine, CA 92715 Stephen A. Caswell 20,000(7) 0.15% 21031 Ventura Boulevard Suite 1100 Woodland Hills, CA 91364 Jerry W. Ballah 0 0% 2801 Main Street Irvine, California 92715 William D. Savage 51,000(8) 0.38% 2801 Main Street Irvine, California 92715
-47- Richard A. Marting 55,000(9) 0.41% 2801 Main Street Irvine, California 92715 All directors and officers as a group (seven persons) 1,338,600 9.9%
(1) See the Company's Proxy Statement for the 1996 Annual Meeting of the Shareholders for additional information regarding outstanding stock options and warrants to purchase the Company's Common Stock. (2) Includes stock options to purchase 25,000 shares at an exercise price of $4.87 per share, exercisable at any time until February 28, 2001, stock options to purchase 25,000 shares at an exercise price of $4.87 per share, exercisable at any time until May 31, 2001, and stock options to purchase 100,000 shares at an exercise price of $4.37 per share, exercisable at any time until April 5, 2001. Does not include stock options to purchase 200,000 shares at an exercise price of $4.87 per share, which do not vest until RCI achieves certain financial performance goals, stock options to purchase 50,000 shares at an exercise price of $4.37 per share, which do not vest until RCI becomes a public company, and stock options to purchase an additional 100,000 shares at exercise prices ranging from $4.37 to $4.87 per share, which do not vest until later dates in 1996 and 1997. See "Ratification of 1996 Stock Option Program for Directors, Officers and Key Consultants" in the Company's Proxy Statement for its 1996 Annual Meeting of the Shareholders. (3) Excludes 90,000 shares owned by Rita L. Schwartz, which are her sole and separate property, in which Mr. Schwartz disclaims any beneficial interest. Includes 90,000 shares acquired upon the conversion of 8% convertible promissory notes. (4) Includes warrants to purchase 35,000 shares at an exercise price of $4.87 per share, expiring on August 29, 1997, and stock options to purchase 25,000 shares of the Company's Common Stock at an exercise price of $4.37 per share, expiring on April 5, 2001. (5) Includes 644,300 shares owned by Clarence R. Zivitz, Nancy Zivitz' husband, and stock options to purchase 25,000 shares owned by Nancy Zivitz, a member of the Company's Board of Directors, at an exercise price of $4.37 per share at any time until February 28, 2001. (6) Includes stock options to purchase 25,000 shares at an exercise price of $4.37 per share at any time until April 5, 2001. (7) Does not include stock options to purchase 50,000 shares at an exercise price of $4.37 per share, which do not vest until RCI achieves certain financial performance goals. (8) Includes warrants to purchase 50,000 shares at an exercise price of $8.50 per share, expiring on May 27, 1997. (9) Includes warrants to purchase 50,000 shares at an exercise price of $8.50 per share, expiring on May 27, 1997. (10) Assumes 13,559,024 shares outstanding, including 335,000 shares issuable upon the exercise of stock options and warrants which have vested, but which do not include any Shares or Underlying Shares. -48- Based upon the Company's review of Forms 3, 4 and 5 and any amendments thereto furnished to the Company in compliance with Section 16 of the Securities Exchange Act of 1934, as amended, all of such Forms were filed on a timely basis by such reporting persons. DESCRIPTION OF CAPITAL STOCK The following summaries of certain provisions of the Articles of Incorporation, as amended, and Bylaws of the Company do not purport to be complete and are qualified in their entirety by reference to such instruments, each of which is incorporated by reference as an exhibit to the Registration Statement of which this Prospectus is a part. See "AVAILABLE INFORMATION." GENERAL The Company's authorized capital stock consists of 20,000,000 shares of Common Stock and 100,000 shares of Preferred Stock, without par value. As of April 30, 1996, there were 13,224,024 shares of the Company's Common Stock outstanding, excluding any Shares or Underlying Shares issuable upon the exercise of Warrants. As of April 30, 1996, no shares of the Company's Preferred Stock were issued or outstanding and no Common Stock or Preferred Stock were held as treasury stock. COMMON STOCK DIVIDENDS. Subject to the rights of holders of the Company's Preferred Stock, if any, to receive certain dividends prior to the declaration of dividends on shares of the Company's Common Stock, when and as dividends are declared by the Company's Board of Directors payable in cash, stock or other property, the holders of the Company's Common Stock are entitled to share ratably in such dividends. VOTING RIGHTS. Each holder of the Company's Common Stock has one vote for each share held on matters presented for consideration by the shareholders. PREEMPTIVE RIGHTS. The holders of the Company's Common Stock have no preemptive rights to acquire any additional shares of the Company. ISSUANCE OF STOCK. Under California law the Company's Board of Directors generally may issue authorized shares of the Company's Common Stock or Preferred Stock without shareholder approval. LIQUIDATION RIGHTS. In the event of the liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders of the Company's Common Stock will be entitled to share ratably in any of its assets or funds that are available for distribution to its shareholders after the satisfaction of its liabilities (or after adequate provision is made therefor) and after payment of the liquidation preferences of outstanding Preferred Stock, if any. PREFERRED STOCK The Company's authorized Preferred Stock may be issued from time to time as a class without series, or if so determined by the Board of Directors, in one or more series. The voting rights, dividend rights, conversion rights, redemption rights and liquidation preferences of any Preferred Stock, the number of shares constituting any such series and the terms and conditions -49- of the issue of the Preferred Stock may be fixed by resolution of the Company's Board of Directors. The Company's Preferred Stock, if and when issued, will have a preference over the Company's Common Stock with respect to the payment of dividends and the distribution of assets in the event of the liquidation of the Company, and such other preferences as may be fixed by the Board of Directors. WARRANTS AND OPTIONS In November 1994, the Company approved the Incomnet 1994 Stock Option Plan for the directors, employees and key outside consultants of the Company and its subsidiaries, which provided for the issuance of stock options covering up to 1,500,000 shares of the Company's Common Stock. In November 1994, options to purchase 1,200,000 shares of the Company's Common Stock were granted at an exercise price of $10 per share provided, that the stock options vest and become exercisable only upon NTC earning at least $15 million in pre-tax profits during any continuous four audited quarterly periods until December 31, 1997. See footnote 6, "Shareholders' Equity -- Stock Options" in the Consolidated Financial Statements of the Company included in "Item 8. Financial Statements" in the Company's 1995 Form 10-K. On February 6, 1996, the Company entered into a Management Incentive Agreement pursuant to which Edward R. Jacobs, the grantee of the 1,200,000 stock options issued under the 1994 Stock Option Plan, agreed to cancel all of those options upon adoption of a new stock option plan for NTC, to be effective once NTC becomes a publicly traded company. No additional stock options are intended to be issued under the 1994 Stock Option Plan. On November 30, 1995, the Company issued 300,000 stock options to Melvyn Reznick, the President and Chief Executive Officer of the Company, pursuant to the Employment Agreement entered into by the Company and Mr. Reznick on that date. See "Item 1. Business -- Employees, Officers and Directors -- Officers" in the Company's 1995 Form 10-K. On February 5, 1996, as modified on March 13, 1996 and on April 25, 1996, the Company's Board of Directors adopted the Incomnet 1996 Stock Option Plan for the directors, officers and key outside consultants of the Company pursuant to which an aggregate of 1,300,000 stock options are authorized to be granted, 700,000 of which have been granted (240,000 of which are vested and 460,000 of which are not yet vested), including the 300,000 stock options issued pursuant to Mr. Reznick's Employment Agreement. See "Ratification of 1996 Stock Option Program for Directors, Officers and Key Consultants" in the Company's Proxy Statement for the 1996 Annual Meeting of the Shareholders. In July 1995, ten year stock options held by Sam D. Schwartz (250,000), Rita Schwartz (35,000), Joel Greenberg (35,000) and Stephen A. Caswell (25,000) were converted into three year warrants expiring on August 29, 1997. Mr. Schwartz' 250,000 warrants were cancelled on August 18, 1995 and September 1, 1995 as part of his tender of short-swing profits pursuant to Section 16(b) of the Securities and Exchange Act of 1934, as amended. See "Item 3. Legal Proceedings -- Section 16(b) Lawsuit" in the Company's 1995 Form 10-K. On April 8, 1996, Stephen A. Caswell and the Company agreed to cancel his 25,000 warrants exercisable at $4.87 per share in consideration for the issuance of an additional 20,000 stock option under the Incomnet 1996 Stock Option Plan. Stock options and warrants for the purchase of an additional 107,000 shares of the Company's Common Stock (i.e. 50,000 held by Richard Marting, 50,000 held by William Savage and 7,000 held by four other employees), other than stock options recently granted pursuant to Incomnet's 1996 Stock Option Plan and the performance-based stock options issued under its 1994 Stock Option Plan (which may be cancelled in the future pursuant to the Management Incentive Agreement entered into by the Company with NTC on February 6, 1996), remain outstanding with different exercise prices and expiration dates. See footnote 6, "Shareholders' Equity -- Warrants" to the Company's Consolidated Financial Statements included in "Item 8. Financial Statements" of the Company's 1995 Form 10-K. -50- The holders of warrants and options do not have any voting rights until they exercise the warrants or options and receive voting shares of Common Stock pursuant to such exercise. The number of shares of Common Stock which can be purchased upon the exercise of the warrants and options and the exercise price are subject to adjustment in certain events, such as a stock split, reverse stock split, stock dividend or similar event, in order to prevent dilution to the warrant and option holders under those circumstances. SIZE OF BOARD OF DIRECTORS The Company's Bylaws provide that the Company's Board of Directors will consist of no fewer than four and no more than nine members. The Company's Board of Directors presently has four directors and there are no vacancies. CUMULATIVE VOTING Pursuant to the Company's Bylaws and in accordance with the California Corporations Code, each shareholder is entitled to one vote for each share of the Company's Common Stock held, and such holders may be entitled to cumulative voting rights in the election of directors. Under the California Corporations Code, cumulative voting is not required unless, at the annual meeting and prior to the voting, at least one shareholder gives notice of his intention to cumulate his votes. If one shareholder give notice of an intention to cumulate votes, then all shareholders have cumulative voting rights in the election of directors. If no such notice is given, voting for directors is noncumulative, which means that a simple majority of the shares voting may elect all of the directors. Under cumulative voting, each shareholder entitled to vote has the right to give one candidate a number of votes equal to the number of authorized directors multiplied by the number of votes to which his shares are entitled, or to distribute his votes on the same principle among as many candidates as he desires. As a result, each share of the Company's Common Stock has a number of votes equal to the number of authorized directors. The California cumulative voting law applies only to the election of directors and not to any other matters as to which shareholders may vote. DIRECTOR'S LIABILITY The California Corporations Code and the Company's Bylaws provide that a director of the Company will have no personal liability to the Company or its shareholders for monetary damages for breach of fiduciary duty as a director except (i) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law, (ii) for acts or omissions that a director believes to be contrary to the best interests of the corporation or its shareholders or that involve the absence of good faith on the part of the director, (iii) for any transaction from which a director derived an improper personal benefit, (iv) for acts or omissions that show a reckless disregard for the director's duty to the corporation or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to the corporation or its shareholders, (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the corporation or its shareholders, or (vi) for an unlawful dividend, distribution, stock repurchase or redemption. This provision would generally absolve directors of personal liability for negligence in the performance of duties, including gross negligence. -51- INDEMNIFICATION The Company's Bylaws and Sections 204 and 317 of the California Corporations Code contain comprehensive provisions for indemnification of directors, officers and agents of California corporations against expenses, judgments, fines and settlements in connection with litigation. Under the California Corporations Code, other than an action brought by or in the right of the Company, such indemnification is available if it is determined that the proposed indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, has no reasonable cause to believe his conduct was unlawful. In actions brought by or in the right of the Company, such indemnification is limited to expenses (including attorneys' fees) actually and reasonably incurred if the indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company. No indemnification may be made, however, in respect of any claim, issue or matter as to which such person is adjudged to be liable to the Company unless and only to the extent that the court in which the action was brought determines that in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper. To the extent that the proposed indemnitee has been successful in defense of any action, suit or proceeding, he must be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the action. The Company's Articles of Incorporation, as amended, provide for indemnification of the directors and officers of the Company against liabilities to the maximum extent provided by California law. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is therefore unenforceable. AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS Under the California Corporations Code, a corporation's certificate of incorporation can be amended by the affirmative vote of the holders of a majority of the outstanding shares entitled to vote, and a majority of the outstanding stock of each class entitled to vote as a class, unless the certificate requires the vote of a larger portion of the stock. The Company's Articles of Incorporation, as amended, do not require a larger percentage affirmative vote. As is permitted by the California Corporations Code, the Company's Bylaws give its Board of Directors the power to adopt, amend or repeal the Company's Bylaws. The Company's shareholders entitled to vote have concurrent power to adopt, amend or repeal the Company's Bylaws. DIVIDENDS The California Corporations Code provides that, subject to any restrictions in the corporation's articles of incorporation, dividends may be declared from the corporation's surplus or, if there is no surplus, from its net profits for the fiscal year in which the dividend is declared and the preceding fiscal year. Dividends may not be declared, however, if the corporation's capital has been diminished to an amount less than the aggregate amount of all capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets. -52- TRANSFER AGENT The Transfer Agent and Registrar for the capital stock of the Company is American Stock Transfer Company. SELLING SECURITY HOLDERS THE PRIOR NOTEHOLDERS. The selling security holders include ten persons who previously held an aggregate of $2,225,000 of 8% convertible promissory notes issued by the Company on February 8, 1995 to finance the acquisition of 51% of RCI. All of the prior noteholders except Jules Nordlicht converted their notes into shares of the Company's Common Stock at the rate of one share for every $10 of outstanding original principal amount of notes. The Outstanding Shares relating to the notes and any additional Shares which may be issued pursuant to the settlement agreements entered into with certain prior noteholders are therefore being offered for resale by the prior noteholders and not pursuant to an initial issuance of stock by the Company. The following table lists the selling security holders who are prior noteholders, the original amount of notes purchased by them, and their position with respect to the Company. See "THE COMPANY -- Settlement With Prior Noteholders" and "Item 1. Business -- Acquisition of Rapid Cast, Inc. -- Financing of Acquisition" in the Company's 1995 Form 10-K.
ORIGINAL AMOUNT OF 8% CONVERTIBLE NUMBER OF NAME OF NOTEHOLDER NOTES (1) OUTSTANDING SHARES - ------------------------------------------------------------------------------- Jules Nordlicht 500,000 31,000(3) - ------------------------------------------------------------------------------- Moshe Mueller 25,000 2,500(4) - ------------------------------------------------------------------------------- Alan Cohen (5)** 700,000 50,000(5) - ------------------------------------------------------------------------------- Robert Cohen (5)** 700,000 50,000(5) - ------------------------------------------------------------------------------- Sam D. Schwartz (1)** 900,000 90,000 - ------------------------------------------------------------------------------- Rita Folger 50,000 5,000(4) - ------------------------------------------------------------------------------- Kenneth Lebow 75,000 7,500(4) - ------------------------------------------------------------------------------- Richard C. Jaffe 50,000 5,000(4) - ------------------------------------------------------------------------------- Lenore Katz 25,000 2,500(4) - ------------------------------------------------------------------------------- Arthur Caplan 100,000* 10,000(4) - -------------------------------------------------------------------------------
- ------------------------------ * An executed settlement agreement has not yet been received from this person. ** These persons have not been offered settlement agreements by the Company. They are affiliates of the Company or RCI, one of its subsidiaries. -53- - ------------------------------ (1) Sam D. Schwartz is the prior President and Chairman of the Board of Directors of the Company who resigned on November 30, 1995. (2) All of these notes were converted into shares of the Company's Common Stock in July 1995 at a conversion price of $10 per share, other than Mr. Nordlicht's note which was repaid in full on January 31, 1996. See "Item 3. Legal Proceedings -- Claims By Prior Noteholders" in the Company's 1995 Form 10-K. (3) Pursuant to the settlement agreement with Mr. Nordlicht, the Company is obligated to issue additional Shares to Mr. Nordlicht if the average last sale price on the NASDAQ on the five trading days immediately proceeding the date of this Prospectus is less than $5.00 per share. See "Item 3. Legal Proceedings -- Claims By Prior Noteholders" in the Company's 1995 Form 10-K. (4) Pursuant to the settlement agreements with these prior noteholders, the Company is obligated to issue additional Shares to these persons if the average last sale price on the NASDAQ on the five trading days immediately preceding the date of this Prospectus is less than $12.00 per share. See "Item 3. Legal Proceedings -- Claims By Prior Noteholders" in the Company's 1995 Form 10-K. (5) Alan Cohen and Robert Cohen are brothers and officers, directors and founding shareholders of RCI. They also own optical stores which have placed orders for RCI's LenSystem. In August 1995 they sold a total of 40,000 of the 140,000 shares of the Company's Common Stock which they previously owned upon the conversion of their notes. THE WARRANTHOLDER. The selling security holders include Price International, Inc., the holder of 75,000 Warrants to purchase 75,000 Underlying Shares at an exercise price of $11.25 per share, exercisable at any time until November 15, 1997. These Underlying Shares are therefore being offered for resale by the Warrantholder if and when it exercises its Warrants and not pursuant to an initial issuance of stock by the Company. See "Item 1. Business -- Agreement With Price International, Inc." and Item 3. Legal Proceedings -- Potential Lawsuits" in the Company's 1995 Form 10-K. THE OUTSTANDING SHAREHOLDERS. The selling shareholders include seven investors who purchased units of the Company's securities in a private placement on June 30, 1995 at a price of $12.00 per unit pursuant to Section 4(2) of the Securities Act of 1933, as amended. Each unit consisted of one share of Common Stock and one warrant to purchase one share of Common Stock for a price of $14.00 per share at any time until December 31, 1995. All of the $14 warrants expired unexercised. See footnote 6, "Shareholders' Equity -- Private Placements," to the Consolidated Financial Statements of the Company included in "Item 8. Financial Statements" in the Company's 1995 Form 10-K. The following table lists the selling security holders who are Outstanding Shareholders and the number of Outstanding Shares owned by them. -54-
NAME OF OUTSTANDING SHAREHOLDER NUMBER OF SHARES - ---------------------------------------------------------------------- Lenore Katz(1) 1,750 - ---------------------------------------------------------------------- Broadway Partners(1) 7,000 - ---------------------------------------------------------------------- Dr. Alan Cohen(1) 8,750 - ---------------------------------------------------------------------- Dr. Robert Cohen(1) 8,750 - ---------------------------------------------------------------------- Mueller Trading LP 52,500 - ---------------------------------------------------------------------- Delton Trading SA 52,500 - ---------------------------------------------------------------------- Ace Foundation, Inc. 26,250 - ----------------------------------------------------------------------
(1) Dr. Alan Cohen and Dr. Robert Cohen are officers and directors of RCI. Broadway Partners is a partnership comprised of Alan Cohen's and Robert Cohen's children. SHARES ELIGIBLE FOR FUTURE SALE As of April 30, 1996, the Company has approximately 4,807,200 shares of its Common Stock (not including the Shares or the Underlying Shares issuable upon the exercise of the Warrants covered by this Prospectus, but including all other shares of the Company's Common Stock which can be acquired pursuant to the exercise of other vested outstanding warrants and options) issued and outstanding which may be deemed to be "restricted securities" as that term is defined in Rule 144 of the Securities Act. These restricted securities may be sold in the future in compliance with Rule 144 or Regulation S of the Securities Act. The Company can make no prediction as to the effect, if any, that sales of shares of Common Stock, or the availability of shares for future sale, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock (including shares issued upon the exercise of warrants or options) in the public market, or the perception that such sales could occur, could depress the prevailing market price for the Common Stock. Such sales may also make it more difficult for the Company to sell equity securities or equity-related securities in the future at a time and price which it deems appropriate. See "RISK FACTORS -- General Risks -- Dilution Caused by Future Sales of Shares." LEGAL MATTERS The validity of the issuance of the shares of Common Stock covered by this Prospectus will be passed upon for the Company by Mark J. Richardson, Esq., Counsel to the Company, 1299 Ocean Avenue, Suite 900, Santa Monica, California, 90401. In consideration for certain legal services, the Company has issued to Mr. Richardson options to purchase 50,000 shares of the Company's Common Stock at a purchase price of $4.37 per share, 15,000 of which have vested and are exercisable at any time until April 5, 2001, and 35,000 of which vest on January 1, 1997 and are exercisable at any time until January 1, 2002 EXPERTS The financial statements of the Company, included and incorporated by reference from the Company's Annual Report (Form 10-K) for the years ended December 31, 1995, 1994 and 1993, have been audited by Stonefield Josephson, independent auditors, as set forth in their reports thereon and incorporated herein by reference. Such financial statements are incorporated herein by reference in reliance upon such reports given upon the authority of such firms as experts in accounting and auditing. -55- ===================================== ===================================== NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION 700,000 Shares MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY INCOMNET, INC. UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY Common Stock SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. __________ TABLE OF CONTENTS Available Information 2 Incorporation of Certain Documents by Reference 2 Prospectus Summary 3 Risk Factors 9 The Company 20 __________ Use of Proceeds 36 Price Range of Common Stock PROSPECTUS and Dividends 37 May 9, 1996 Capitalization 38 Selected Consolidated __________ Financial Information 39 Management's Discussion and Analysis of Financial Condition and Results of Operations 41 Principal Stockholders 47 Description of Capital Stock 49 Selling Security Holders 53 Shares Eligible for Future Sale 55 Legal Matters 55 Experts 55 ===================================== ===================================== PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the expenses (other than underwriting discounts and commissions) expected to be incurred in connection with the offering described in this Registration Statement. All amounts are estimated except the registration fees. Registration Fee $ 2,210.07 Printing Costs for Registration Statement, Prospectus and related documents $ 5,000.00 Accounting Fees and Expenses $ 5,000.00 Legal Fees and Expenses $ 30,000.00 Blue Sky Fees and Expenses $ 5,000.00 ----------- Total $ 47,210.67 ----------- -----------
- ----------------- ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. See "DESCRIPTION OF CAPITAL STOCK - Indemnification" in the Prospectus. ITEM 16. EXHIBITS.
Exhibit No. Description ------- ----------- 3.1 The Articles of Incorporation, as amended, of Incomnet, Inc. (A) 3.2 The Bylaws of Incomnet, Inc. (A) 4.1 Warrant to Purchase 500,000 Shares of Incomnet, Inc., dated January 17, 1994. (C) 4.2 Warrant to Purchase 500,000 Shares of Incomnet, Inc., dated May 27, 1994. (D) 4.3 Form of Warrant to Purchase 986,667 Shares of Incomnet, Inc. (E) 4.4 Form of Warrant to Purchase 75,000 Shares of Incomnet, Inc. 4.5 Form of Warrant to Purchase 510,000 Shares of RCI Common Stock with Registration Rights Agreement, dated April 19, 1996. 4.6 Form of Warrant to Purchase RCI Common Stock, dated February 8, 1995. 5.1 Form of Legal Opinion and Consent of Mark J. Richardson, Esq. with respect to securities being registered. 10.1 Agreement by and between Broad Capital Associates, Inc. and Incomnet, Inc., dated February 14, 1994. (C)
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10.2 Agreement by and between Broad Capital Associates, Inc. and Incomnet, Inc., dated May 10, 1994. (C) 10.3 Agreement and Plan of Exchange by and between Incomnet, Inc. and National Telephone Communications, Inc., dated May 12, 1994. (B) 10.4 Consulting Agreement by and between Broad Capital Associates, Inc. and Incomnet, Inc., dated January 17, 1994. (C) 10.5 Agreement by and between Broad Capital Associates, Inc. and Incomnet, Inc., dated August 17, 1994. (C) 10.6 Carrier Switched Services Agreement with Wiltel, Inc., dated September 30, 1993. (B)(1) 10.7 Network Wats Enrollment Form with U.S. Sprint, dated April 7, 1993. (B) 10.8 Carrier Switched Services Agreement with Wiltel, Inc., dated November 15, 1994. (D)(1) 10.9 The Stock Purchase Agreement for the acquisition of RCI, dated January 18, 1995. (F) 10.10 The Stock Purchase Agreement for the acquisition of Q2100, dated October 29, 1994. (F) 10.11 Stock Pledge Agreement, dated February 8, 1995. (F) 10.12 Form of 8% Convertible Secured Promissory Note, dated February 8, 1995. (F) 10.13 Agreement for Promotion of Pagers between NTC and Page Prompt. 10.14 Carrier Switched Services Agreement Wiltel, Inc, dated September 15, 1995.(1) 10.15 Amendment to Stock Purchase Agreement Between Incomnet, Inc. and Rapid Cast, Inc., Dated June 15, 1995. 10.16 Agreement for Promotion of Internet Access Services Between NTC and EarthLink Network. 10.17 Severance Agreement Between Incomnet, Inc. and Sam D. Schwartz, dated November 30, 1995. (G) 10.18 Employment Agreement Between Incomnet, Inc. and Melvyn Reznick, dated November 30, 1995. (G) 10.19 Management Incentive Agreement, dated February 6, 1996, between Incomnet, Inc. and National Telephone Communications, Inc. (H) 10.20 Settlement Agreements and Proposed Settlement Agreements With Prior Noteholders. 10.21 Form of 8% Convertible Note Issued By RCI in January 1996. 10.22 Form of Short-Term 10% Note Issued By RCI in April 1996.
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13.1 The Annual Report on Form 10-K for the fiscal year ending December 31, 1995 for Incomnet, Inc. 13.2 The Proxy Statement for the 1996 Annual Meeting of Incomnet's Shareholders, dated April 26, 1996. 16. Letter re Change in Certifying Accountant. (B) 21. Subsidiaries of the Registrant. (A) 23.1 Consent of Stonefield Josephson, independent Certified Public Accountants, relating to the financial statements. 23.2 Consent of Mark J. Richardson, Esq. is included in his opinion. 24. Power of Attorney is included on the signature page of this Registration Statement.
- ------------ (1) Certain information has been deleted from this agreement pursuant to a request for confidential treatment under Rule 406. (A) Incorporated by reference from Incomnet, Inc.'s Annual Report on Form 10-K for the year ending December 31, 1994. (B) Incorporated by reference from Incomnet Inc.'s Registration Statement on Form S-4 filed with the Securities and Exchange Commission on May 12, 1994, and declared effective on October 27, 1994. (C) Incorporated by reference from the Registration Statement on Form S-3 filed with the Securities and Exchange Commission on June 17, 1994 and declared effective on October 27, 1994. (D) Incorporated by reference from Incomnet's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on December 12, 1994 and declared effective on December 22, 1994. (E) Incorporated by reference from Incomnet's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on January 5, 1995 and declared effective on January 9, 1995. (F) Incorporated by reference from the Company's Report on Form 8-K, dated February 8, 1995, relating to the Company's acquisition of a controlling interest in RCI. (G) Incorporated by reference from the Company's Report on Form 8-K dated November 30, 1995, relating to the resignation of Sam D. Schwartz and employment of Melvyn Reznick. (H) Incorporated by reference from the Company's Report on Form 8-K, dated February 9, 1996, relating to the management incentive agreement between Incomnet and NTC. II-3 ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the provision described in Item 15 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. RULE 430A UNDERTAKINGS. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of Prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act 1933 shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. RULE 415 UNDERTAKINGS. The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (i) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (ii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement; II-4 (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, the President of the Registrant duly thereunto authorized, in the City of Woodland Hills, State of California, on the 8th day of May, 1996. INCOMNET, INC. Registrant By: ----------------------------------- Melvyn Reznick, President and Chief Executive Officer II-5 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Mark J. Richardson his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might do in person, hereby ratifying and confirming all that said attorneys-in- fact and agents of each of them, or their or his substitutes, may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below on the 8th day of May, 1996, by the following persons in the capacities indicated.
Signatures Title ---------- ----- President, Chief Executive - --------------------------------------- Officer and Director Melvyn Reznick (Chief Executive Officer and Principal Financial Officer) Vice President of Information - --------------------------------------- Systems, Secretary (Principal Stephen A. Caswell Accounting Officer) - --------------------------------------- Director Joel W. Greenberg - --------------------------------------- Director Albert Milstein - --------------------------------------- Director Nancy Zivitz
II-6 File No. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549. FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 INCOMNET, INC. EXHIBIT VOLUME TO THE REGISTRATION STATEMENT INDEX TO THE EXHIBIT VOLUME TO REGISTRATION STATEMENT ON FORM S-3 3.1 The Articles of Incorporation, as amended, of Incomnet, Inc. (A) 3.2 The Bylaws of Incomnet, Inc. (A) 4.1 Warrant to Purchase 500,000 Shares of Incomnet, Inc., dated January 17, 1994. (C) 4.2 Warrant to Purchase 500,000 Shares of Incomnet, Inc., dated May 27, 1994. (D) 4.3 Form of Warrant to Purchase 986,667 Shares of Incomnet, Inc. (E) 4.4 Form of Warrant to Purchase 75,000 Shares of Incomnet, Inc. 4.5 Form of Warrant to Purchase 510,000 Shares of RCI Common Stock with Registration Rights Agreement, dated April 19, 1996. 4.6 Form of Warrant to Purchase RCI Common Stock, dated February 8, 1995. 5.1 Form of Legal Opinion and Consent of Mark J. Richardson, Esq. with respect to securities being registered. 10.1 Agreement by and between Broad Capital Associates, Inc. and Incomnet, Inc., dated February 14, 1994. (C) 10.2 Agreement by and between Broad Capital Associates, Inc. and Incomnet, Inc., dated May 10, 1994. (C) 10.3 Agreement and Plan of Exchange by and between Incomnet, Inc. and National Telephone Communications, Inc., dated May 12, 1994. (B) 10.4 Consulting Agreement by and between Broad Capital Associates, Inc. and Incomnet, Inc., dated January 17, 1994. (C) 10.5 Agreement by and between Broad Capital Associates, Inc. and Incomnet, Inc., dated August 17, 1994. (C) 10.6 Carrier Switched Services Agreement with Wiltel, Inc., dated September 30, 1993. (B)(1) 10.7 Network Wats Enrollment Form with U.S. Sprint, dated April 7, 1993. (B) 10.8 Carrier Switched Services Agreement with Wiltel, Inc., dated November 15, 1994. (D)(1) 10.9 The Stock Purchase Agreement for the acquisition of RCI, dated January 18, 1995. (F) 10.10 The Stock Purchase Agreement for the acquisition of Q2100, dated October 28, 1994. (F) 10.11 Stock Pledge Agreement, dated February 8, 1995. (F) 10.12 Form of 8% Convertible Secured Promissory Note, dated February 8, 1995. (F)
10.13 Agreement for Promotion of Pagers between NTC and Page Prompt. 10.14 Carrier Switched Services Agreement with Wiltel, Inc, dated September 15, 1995.(1) 10.15 Amendment to Stock Purchase Agreement Between Incomnet, Inc. and Rapid Cast, Inc., Dated June 15, 1996. 10.16 Agreement for Promotion of Internet Access Services Between NTC and EarthLink Network. 10.17 Severance Agreement Between Incomnet, Inc. and Sam D. Schwartz, dated November 30, 1995. (G) 10.18 Employment Agreement Between Incomnet, Inc. and Melvyn Reznick, dated November 30, 1995. (G) 10.19 Management Incentive Agreement, dated February 6, 1996, between Incomnet, Inc. and National Telephone Communications, Inc. (H) 10.20 Settlement Agreements and Proposed Settlement Agreements With Prior Noteholders. 10.21 Form of 8% Convertible Note Issued By RCI in January 1996. 10.22 Form of Short-Term 10% Note Issued By RCI in April 1996. 13.1 The Annual Report on Form 10-K for the fiscal year ending December 31, 1995 for Incomnet, Inc. 13.2 The Proxy Statement for the 1996 Annual Meeting of Incomnet's Shareholders, dated April 26, 1996. 16. Letter re Change in Certifying Accountant. (B) 21. Subsidiaries of the Registrant. (A) 23.1 Consent of Stonefield Josephson, independent Certified Public Accountants, relating to the financial statements. 23.2 Consent of Mark J. Richardson, Esq. is included in his opinion. 24. Power of Attorney is included on the signature page of this Registration Statement.
- ------------ (1) Certain information has been deleted from this agreement pursuant to a request for confidential treatment pursuant to Rule 406. (A) Incorporated by reference from Incomnet, Inc.'s Annual Report on Form 10-K for the year ending December 31, 1994. (B) Incorporated by reference from Incomnet Inc.'s Registration Statement on Form S-4 filed with the Securities and Exchange Commission on May 12, 1994, and declared effective on October 27, 1994. -9- (C) Incorporated by reference from the Registration Statement on Form S-3 filed with the Securities and Exchange Commission on June 17, 1994 and declared effective on October 27, 1994. (D) Incorporated by reference from Incomnet's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on December 12, 1994 and declared effective on December 22, 1994. (E) Incorporated by reference from Incomnet's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on January 5, 1995 and declared effective on January 9, 1995. (F) Incorporated by reference from the Company's Report on Form 8-K, dated February 8, 1995, relating to the Company's acquisition of a controlling interest in RCI. (G) Incorporated by reference from the Company's Report on Form 8-K, dated November 30, 1995, relating to the resignation of Sam D. Schwartz and employment of Melvyn Reznick. (H) Incorporated by reference from the Company's Report on Form 8-K, dated February 9, 1996, relating to the management incentive agreement between Incomnet and NTC. * * * EX-4.4 2 EXHIBIT 4.4 FORM OF WARRANT EXHIBIT 4.4 FORM OF WARRANT TO PURCHASE 75,000 SHARES OF INCOMNET, INC. EXHIBIT 4.4 WARRANTS FOR PRICE INTERNATIONAL, INC. [ORIGINAL WARRANTS PROVIDED TO PRICE INTERNATIONAL ON OCTOBER 21, 1994] THESE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND HAVE BEEN TAKEN FOR INVESTMENT PURPOSES ONLY AND NOT WITH A VIEW TO THE DISTRIBUTION THEREOF, AND SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT OR REGULATION. TRANSFER OF THIS WARRANT IS RESTRICTED Warrant to Purchase 100,000 Shares WARRANT OF INCOMNET, INC. October 21, 1994 Void After December 31, 1997 This certifies that, for value received Price International, Inc. ("Holder"), or registered assigns, is entitled, subject to the terms set forth below, at any time until December 31, 1997, to purchase from Incomnet, Inc. (the "Company") a California corporation, 100,000 shares of Common Stock of the Company, at a price per share of $11.25 (the "Purchase Price"), subject to adjustment. 1. Exercise (a) The Warrant may be exercised as follows until December 31, 1997 upon surrender to the Company at its principal office, or at such other office or agency as the Company may designate, together with the form of subscription attached hereto, duly executed by the holder and accompanied by payment in cash of check, in lawful money of the United States in an amount equal to the product of the Purchase Price and the number of shares to be acquired on such exercise: (i) 25,000 shares are vested immediately and may be exercised immediately. (ii) 75,000 shares will be vested based upon the performance requirement defined in "Article VI. Stock Warrants." Of the document entitled "Business Agreement Between Incomnet. Inc. and Price International, Inc." dated October 21, 1994. The requirement states that shares will be vested based upon a ratio of one share per $10 in pre-tax earnings generated by the business venture between Price International and Incomnet. (b) Upon any partial exercise, the Company shall promptly issue and deliver to the holder hereof a new Warrant or Warrants of like tenor and dated the date hereof, in the name of the holder and providing for the right to purchase the number of shares with respect to which this Warrants has not been exercised. (c) Upon the exercise of this Warrant, in whole or in part, the holder shall be entitled to receive a certificate or certificates for the number of fully paid and nonassessable shares of the Common Stock of the Company purchasable upon such exercise. If a fraction of a share would be issuable on any exercise of this Warrant, in lieu of the issuance of such fractional share, the Company will pay the cash value of that fractional share, as determined is good faith by its Board of Directors. (d) The Company will at all time reserve and keep available, solely for issuance on exercise of the Warrant, all shares of Common Stock issuable on such exercise. (e) The Company will pay all taxes and other governmental charges that may be imposed in respect of the issue or delivery of shares of Common Stock on exercise of this Warrant. The Company shall not be required, however, to pay any tax or other charge imposed in connection with any transfer involved in the issue of any certificate for shares of Common Stock in any name other than that of the registered holder of the Warrant surrendered in connection with the purchase of such shares, and in such case the Company shall not be required to issue or deliver any stock certificate until such tax or other charge has been paid or it has been established to the Company's satisfaction that no tax or other charge is due. 2. Rights of Holders No holder of the Warrant, by virtue of the ownership of this Warrant, shall be considered a shareholder of the Company for any purpose, nor shall anything in this Warrant be construed to confer on any holder of this Warrant any rights of a shareholder of the Company, including, without limitation, any right to vote, give or withhold consent to any corporation action, receive notice of meetings of shareholders or receive dividends. 3. Adjustments in the Purchase Price and Number of Shares (a) In case the outstanding shares of Common Stock of the Company shall be subdivided into a greater number of share of Common Stock or dividend in stock shall be paid on the Common Stock, the Purchase Price in effect immediately prior to such subdivision or at the record date of such dividend shall, simultaneously with the effectiveness of such subdivision or immediately after the record date of such dividend, be proportionately reduced and, conversely, in case the outstanding shares of Common Stock shall be combined into a small number of shares of Common Stock, the Purchase Price in effect immediately prior to such combination shall, simultaneously with the effectiveness of such combination, be proportionately increased. (b) No adjustment of the Purchase Price shall be made if the amount of such adjustment shall be less than five cents per hare, but in such case any adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment of the Purchase Price which, together with any adjustment so carried forward, shall amount to five cents per share or more. (c) When any adjustment is required to be made in the Purchase Price, the number of shares of Common Stock purchasable upon exercise of the Warrant shall be changed to the number determined by dividing (i) an amount equal to the number of shares issuable pursuant to exercise of the Warrant immediately prior to such adjustment, multiplied by the Purchase Price in effect immediately prior to such adjustment, by (ii) the Purchase Price in effect immediately after such adjustment. (d) In the event of the merger or consolidation of the Company where the Company is not the surviving corporation or becomes a wholly-owned subsidiary, the Company will have the right to call and cancel the Warrant upon 30 days prior written notice to the Holder. The Holder will have the right to exercise the Warrant during such period. In case of any other change in the Common Stock of the Company through merger, consolidation, reclassification, reorganization, recapitalization, or other change in the capital structure of the Company or in the case of a sale of all or substantially all of the property of the Company, appropriate adjustment shall be made so that the holder of the Warrant shall have the right thereafter to receive upon exercise of the Warrant the kind and amount of shares of stock or other securities or property to which he would have been entitled if, immediately prior to such merger, consolidation, reclassification, reorganization, recapitalization, or other change in the capital structure of the Company or in the case of a sale of all or substantially all of the property of the Company, he had held the number of shares of Common Stock which were then purchasable upon the exercise of this Warrant. In any such case, appropriate adjustment shall be made in the application of the provisions set forth herein with respect to the rights and interests thereafter of the holder of this Warrant, to the end that the provisions set forth herein (including provisions with respect to adjustments of the Purchase Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the exercise of this Warrant. (e) When any adjustment is required to be made in the Purchase Price, the Company shall forthwith determine the new Purchase Price and (i) prepare and retain on file a statement describing in reasonable detail the method used in arriving at the new Purchase Price; and (ii) cause a copy of such statement to be mailed to the registered owner or owners of the Warrants, as of the date within ten (10) days after the date when the circumstances giving rise to the adjustment occurred. 4. Transfer and Exchange (a) This Warrant and all rights hereunder may be transferred, subject to compliance with the legend set forth on page one of this Warrant, in whole or in part, by surrender of this Warrant properly endorsed to the Company at its principal office, or at such other office or agency as the Company may designate, and upon payment of any necessary transfer taxes. Upon any partial transfer, the Company will issue and deliver to the holder hereof a new Warrant and Warrants with respect to the shares of Common Stock not so transferred. (b) Until this Warrant is transferred on the books of the Company, the Company may treat the registered holder of this Warrant as the absolute owner for all purposes, notwithstanding any notice to the contrary. (c) This Warrant is exchangeable at such office or agency for Warrants for the same aggregate number of shears of Common Stock, each new Warrant to represent the right to purchase such number of shares as the holder hereof shall designate at the time of such exchange. 5. Notices (a) All notices and other communications from the Company to the holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, to the address furnished to the Company in writing by the last holder of this Warrant who shall have furnished an address to the Company in writing. 6. Headings The headings in this Warrant are for purposes of convenience in reference only, and shall not be deemed to constitute a part hereof. 7. Governing Law This Warrant shall be governed by, and construed and enforced in accordance with, the laws of the State of California applicable to contracts made and to be performed wholly within that state. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its authorized officer as of the date first set forth above. INCOMNET, INC. By: /s/ SAM D. SCHWARTZ By: /s/ STEPHEN A. CASWELL ------------------- ---------------------- Name: Sam D. Schwartz Name: Stephen A. Caswell Title: Chairman Title: Secretary SUBSCRIPTION FORM TO: INCOMNET INC. The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise the purchase rights represented by said Warrant for, and to purchase under said Warrant, ________________ shares of Common Stock of Incomnet, Inc., and herewith make payment therefor, all at the price and on the terms and conditions specified in the within Warrant. DATED: _____________________________ By: _____________________________ [AMENDMENT TO BUSINESS AGREEMENT THAT CHANGES TERMS OF ORIGINAL WARRANTS] INCOMNETFAX May 10, 1995 To: Brian Price Price International 416-630-9234 (fax) CC: Sam Schwartz From: Steve Caswell (818) 587-5697 (fax) (818) 587-5694 (voice) Re: Amendment to Business Agreement Dated October 21, 1994 Between Incomnet and Price International ("Agreement") Here is the offer that we can make to you regarding the vesting of the additional 75,000 warrants subject to a performance requirement as specified in Article VI - Stock Warrants of the Agreement. We will vest the 75,000 warrants at $11.25 that are now subject to specific performance requirements based upon the following terms: 1. You exercise the 25,000 warrants that you now have at $11.25 per share to commence the deal. Because these warrants are registered, you will receive 25,000 shares of free-trading common stock as soon as the stock can be transferred in your name. 2. You agree to exercise at least 25,000 of the additional 75,000 warrants within 30 days of the stock underlying the 75,000 warrants being registered, provided that the bid price for our stock average at least $13.25 per share during the 30 day period from the date of registration. Should you fail to exercise the 25,000 warrants, you would retain vesting on 25,000 of the 75,000 warrants for your initial early exercise, but would lose vesting on the remaining 50,000 warrants, which would become subject to the performance provision in our original deal. 3. You agree to negotiate with the NHLPA so that your license to provide NHLPA telecards is extended for an additional year without any minimum guarantee. 4. Provided that the license with the NHLPA to provide telephone calling cards of NHLPA players is retained, you agree to provide to our business agreement the use of the Parkhurst name on hockey phone cards and related infotainment system products for a five year period, with each year renewable at our option on terms as follows: Year 1 -- No royalty or minimum guarantee. Year 2 -- Five percent royalty on sales, no minimum guarantee. Year 3 -- Five percent royalty on sales, $20,000 minimum guarantee. Year 4 -- Five percent royalty on sales, $35,000 minimum guarantee. Year 4 -- Five percent royalty on sales, $50,000 minimum guarantee. Should the license with the NHLPA not be retained, you have to option to cancel the Parkhurst license when it is due for renewal. 5. Incomnet agrees that an adequate portion of the proceeds of the warrant exercise will be used to properly fund the hockey card business program, including the completion and launch of the Goalie and up-coming fall series and, in particular, the development of an interactive hockey card information system, which will allow hockey news and player reports across multiple leagues, as well as the ability to play hockey trivia interactively and the development and promotion of the Parkhurst North America Hockey Trivia Shootout. Should this be acceptable, we will add this to our business agreement dated October 21, 1994 as an amendment. The Agreement would commence with our receiving from Price International a check for US$281,250 to exercise the 25,000 warrants now vested. Accepted: /s/ Stephan A. Caswell Stephen A. Caswell Incomnet Accepted: /s/ Brian Price Brian Price Price International EX-4.5 3 EXHIBIT 4.5 FORM OF WARRANT EXHIBIT 4.5 FORM OF WARRANT TO PURCHASE 510,000 SHARES OF RCI COMMON STOCK WITH REGISTRATION RIGHTS AGREEMENT RCIW-____________ Warrant to Purchase _________ Shares of Common Stock THESE WARRANTS, AND THE COMMON STOCK ISSUABLE UPON EXERCISE, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED, DISPOSED OF OR OFFERED FOR SALE, IN WHOLE OR IN PART, IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THAT ACT COVERING THESE WARRANTS AND/OR THE COMMON STOCK ISSUABLE UPON EXERCISE THEREOF, OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO RAPID CAST, INC., THAT AN EXEMPTION FROM REGISTRATION IS AVAILABLE. ___________________________________ WARRANTS TO PURCHASE COMMON STOCK OF RAPID CAST, INC. ___________________________________ This is to Certify That, For Value Received, [NAME], or assigns ("Holder"), is entitled to purchase, subject to the provisions of this Agreement, from Rapid Cast, Inc., a Delaware corporation ("RCI"), _____ THOUSAND (______) fully paid, validly issued and nonassessable shares of Common Stock, $.001 par value, of RCI ("Common Stock") at any time or from time to time during the 7-year period (the "Exercise Period") commencing on the date hereof at an initial exercise price equal to $2.25 per share of Common Stock. The number of shares of Common Stock to be received upon the exercise of this Warrant and the price to be paid for each share of Common Stock may be adjusted from time to time as hereinafter set forth. The shares of Common Stock deliverable upon such exercise, and as adjusted from time to time, are hereinafter sometimes referred to as "Warrant Shares" and the exercise price of a share of Common Stock in effect at any time and as adjusted from time to time is hereinafter sometimes referred to as the "Exercise Price." (a) EXERCISE OF WARRANT. This Warrant may be exercised in whole or in part at any time or from time to time during the Exercise Period. (b) RESERVATION OF SHARES. RCI shall at all times reserve for issuance and/or delivery upon exercise of the Warrant such number of shares of the Common Stock as shall be required for issuance and delivery upon exercise of this Warrant. (c) FRACTIONAL SHARES. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. (d) ELIMINATION OF FRACTIONAL SHARES. All fractional shares shall be eliminated by rounding any fraction down to the nearest whole number of shares of Common Stock. (e) RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be entitled to any rights of a stockholder in RCI, either at law or equity, and the rights of the Holder are limited to those expressed herein and are not enforceable against RCI except to the extent set forth herein. (f) ANTI-DILUTION PROVISIONS. The Exercise Price in effect at any time and the number and kind of securities purchasable upon the exercise of the Warrant shall be subject to adjustment from time to time upon the happening of certain events as follows: (1) In case RCI shall (i) declare a dividend or make a distribution on its outstanding shares of Common Stock in shares of Common Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into a greater number of shares, or (iii) combine or reclassify its outstanding shares of Common Stock into a smaller number of shares, the Exercise Price in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, combination or reclassification shall be adjusted so that it shall equal the price determined by multiplying the Exercise Price by a fraction, the denominator of which shall be the number of shares of Common Stock outstanding after giving effect to such action, and the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such action. Such adjustment shall be made successively whenever any event listed above shall occur. (2) In case RCI shall fix a record date for the issuance of rights or warrants (other than employee stock options exercisable at fair market value on the date of grant) to all holders of its Common Stock entitling them to subscribe for or purchase shares of Common Stock (or securities convertible into Common Stock) at a price (the "Subscription Price") (or having a conversion price per share) less than the current market price of the Common Stock (as defined in clause (5) below) on the record date mentioned below, the Exercise Price shall be adjusted so that the same shall equal the price determined by multiplying the Exercise Price in effect immediately prior to the date of issuance by a fraction, the numerator of which shall be the sum of the number of shares of Common Stock outstanding on the record date mentioned below and the number of additional shares of Common Stock which the aggregate offering price of the total number of shares of Common Stock so offered (or the aggregate conversion price of the convertible securities so offered) would purchase at such current market price per share of the Common Stock, and the denominator of which shall be the sum of the number of shares of Common Stock outstanding on such record date and the number of additional shares of Common Stock offered for subscription or purchase (or into which the convertible securities so offered are convertible). Such adjustment shall be made successively whenever such rights or warrants are issued and shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights or warrants; and to the extent that shares of Common Stock are not delivered (or securities convertible into Common Stock are not delivered) after the expiration of such rights or warrants the Exercise Price shall be readjusted to the Exercise Price which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made upon the basis of delivery of only the number of shares of Common Stock (or securities convertible into Common Stock) actually delivered. (3) In case RCI shall hereafter distribute to all holders of its Common Stock evidences of its indebtedness or assets (excluding cash dividends or distributions and dividends or distributions referred to in Subsection (1) above) or subscription rights or warrants (excluding those referred to in Subsection (2) above), then in each such case the Exercise Price in effect thereafter shall be determined by multiplying the Exercise Price in effect immediately prior thereto by a fraction, the numerator of which shall be the total number of shares of Common Stock outstanding multiplied by the current market price per share of Common Stock (as defined below), less the fair market value (as determined by RCI's Board of Directors) of said assets or evidences of indebtedness so distributed or of such rights or warrants, and the denominator of which shall be the total number of shares of Common Stock outstanding multiplied by such current market price per share of Common Stock. Such adjustment shall be made successively whenever such a record date is fixed. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date for the determination of stockholders entitled to receive such distribution. (4) Whenever the Exercise Price payable upon exercise of each Warrant is adjusted pursuant to Subsections (1), (2) and (3) above, the number of Warrant Shares purchasable upon exercise of these Warrant shall simultaneously be adjusted by multiplying the number of Shares initially issuable upon the exercise of these Warrant by the Exercise Price in effect on the date hereof and dividing the product so obtained by the Exercise Price, as adjusted. (5) For the purpose of any computation under Subsections (2) and (3) above, the current market price per share of Common Stock at any date shall be deemed to be the average of the daily closing prices for 30 consecutive business days before such date. The closing price for each day shall be the last sale price or, in case no such reported sale takes place on such day, the average of the last reported bid and asked prices, in either case on the principal national securities exchange on which the Common Stock is admitted to trading or listed, or if not listed or admitted to trading on such exchange, the average of the highest reported bid and lowest reported asked prices as reported by NASDAQ, or other similar organization if NASDAQ is no longer reporting such information, or if not so available, the fair market price as determined in good faith by the Board of Directors. (6) No adjustment in the Exercise Price shall be required unless such adjustment would require an increase or decrease of at least five cents ($.05) in such price; provided, however, that any adjustment which by reason of this Subsection is not required to be made shall be carried forward and taken into account in any subsequent adjustment required to be made hereunder. All calculations under this Section (f) shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. (7) In the event that at any time, as a result of an adjustment made pursuant to Subsection (1) above, the Holder of this Warrant thereafter shall become entitled to receive any shares of RCI, other than Common Stock, thereafter the number of such other shares so receivable upon exercise of this Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in Subsections (1) to (6), inclusive above. (8) Irrespective of any adjustments in the Exercise Price or the number or kind of shares purchasable upon exercise of this Warrant, Warrants theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in the similar Warrant initially issuable pursuant to this Agreement. (g) OFFICER'S CERTIFICATE. Whenever the Exercise Price shall be adjusted as required by the provisions of the foregoing Section, RCI shall forthwith file in the custody of its Secretary or an Assistant Secretary at its principal office and with its stock transfer agent, if any, an officer's certificate showing the adjusted Exercise Price determined as herein provided, setting forth in reasonable detail the facts requiring such adjustment, including a statement of the number of additional shares of Common Stock, if any, and such other facts as shall be necessary to show the reason for and the manner of computing such adjustment. Each such officer's certificate shall be made available at all reasonable times for inspection by the holder or any holder of a Warrant executed and delivered pursuant to Section (a). (h) NOTICES TO WARRANT HOLDERS. So long as this Warrant shall be outstanding, (i) if RCI shall pay any dividend or make any distribution upon the Common Stock, or (ii) if RCI shall offer to the holders of Common Stock for subscription or purchase by them any share of any class or any other rights, or (iii) if any capital reorganization of RCI, reclassification of the capital stock of RCI, consolidation or merger of RCI with or into another corporation, sale, lease or transfer of all or substantially all of the property and assets of RCI to another corporation, or voluntary or involuntary dissolution, liquidation or winding up of RCI shall be effected, then in any such case, RCI shall cause to be mailed by certified mail to the Holder, at least fifteen days prior to the date specified in (x) or (y) below, as the case may be, a notice containing a brief description of the proposed action and stating the date on which (x) a record is to be taken for the purpose of such dividend, distribution or rights, or (y) such reclassification, reorganization, consolidation, merger, conveyance, lease, dissolution, liquidation or winding up is to take place and the date, if any is to be fixed, as of which the holders of Common Stock or other securities shall receive cash or other property deliverable upon such reclassification, reorganization, consolidation, merger, conveyance, dissolution, liquidation or winding up. (i) RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any reclassification, capital reorganization or other change of outstanding shares of Common Stock of RCI, or in case of any consolidation or merger of RCI with or into another corporation (other than a merger with a subsidiary in which merger RCI is the continuing corporation and which does not result in any reclassification, capital reorganization or other change of outstanding shares of Common Stock of the class issuable upon exercise of this Warrant) or in case of any sale, lease or conveyance to another corporation of the property of RCI as an entirety, RCI shall cause effective provisions to be made so that the Holder shall have the right by exercising this Warrant prior to the expiration of the Warrants, to purchase the kind and amount of shares of stock and other securities and property receivable upon such reclassification, capital reorganization and other change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock which might have been purchased upon exercise of this Warrant immediately prior to such reclassification, change, consolidation, merger, sale or conveyance. Any such provision shall include provision for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Warrant. The foregoing provisions of this Section (i) shall similarly apply to successive reclassifications, capital reorganizations and changes of shares of Common Stock and to successive consolidations, mergers, sales or conveyances. In the event that in connection with any such capital reorganization or reclassification, consolidation, merger, sale or conveyance, additional shares of Common Stock shall be issued in exchange, conversion, substitution or payment, in whole or in part, for a security of RCI other than Common Stock, any such issue shall be treated as an issue of Common Stock covered by the provisions of Subsection (1) of Section (f) hereof. (j) REGISTRATION RIGHTS. Holder has been granted certain registration rights as set forth in the Registration Rights Agreement, dated as of the date hereof, by and between RCI and Holder and the holders of certain warrants similar to this Warrant. IN WITNESS WHEREOF, RCI has caused this Warrant to be signed and attested by the Undersigned, being duly authorized, as of the date below. RAPID CAST, INC. By: _________________________________________ Jeff Rubin, Executive Vice President Dated: , 1996 PURCHASE FORM The undersigned hereby irrevocable elects to exercise the within Warrants to the extent of purchasing ___________ shares of Common Stock and hereby makes payment of $_______________ in payment of the actual exercise price thereof. INSTRUCTIONS FOR REGISTRATION OF STOCK Name: _______________________________ Social Security No.: __________ (Print in block letters) Address: __________________________________________________________ __________________________________________________________ Signature: ______________________ Date: _________________________ ASSIGNMENT FORM FOR VALUE RECEIVED, ____________________________________ hereby sells, assigns and transfers unto: Name: _______________________________ Social Security No.: __________ (Print in block letters) Address: __________________________________________________________ __________________________________________________________ the right to purchase Common Stock represented by _________ Warrants to the extent of __________ shares of Common Stock as to which such right is exercisable and does hereby irrevocably constitute and appoint the President of RCI as Attorney, to transfer the same on the books of RCI with full power of substitution in the premises. Date: _________________, 19__ Signature: ____________________________ EX-4.6 4 EXHIBIT 4.6 FORM OF WARRANT EXHIBIT 4.6 FORM OF WARRANT TO PURCHASE RCI COMMON STOCK, DATED FEBRUARY 8, 1995 Warrant to Purchase ________ Shares of Common Stock THESE WARRANTS, AND THE COMMON STOCK ISSUABLE UPON EXERCISE, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED, DISPOSED OF OR OFFERED FOR SALE, IN WHOLE OR IN PART, IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THAT ACT COVERING THESE WARRANTS AND/OR THE COMMON STOCK ISSUABLE UPON EXERCISE THEREOF, OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO RAPID CAST, INC., THAT AN EXEMPTION FROM REGISTRATION IS AVAILABLE. ___________________________________ WARRANTS TO PURCHASE COMMON STOCK OF RAPID CAST, INC. __________________________________ This is to Certify That, For Value Received, _____________, or assigns ("Holder"), is entitled to purchase, subject to the provisions of this Agreement, from Rapid Cast, Inc., a Delaware corporation ("RCI"), _________ THOUSAND (_,000) fully paid, validly issued and nonassessable shares of Common Stock, $.001 par value, of RCI ("Common Stock") at any time or from time to time during the 180-day period (the "Exercise Period") commencing on the 35th business day after the Start Date (as hereinafter defined), if any, at an initial exercise price equal to 50% of the average of the last reported sales price on the first 30 business days after the Start Date. The number of shares of Common Stock to be received upon the exercise of this Warrant and the price to be paid for each share of Common Stock may be adjusted from time to time as hereinafter set forth. The shares of Common Stock deliverable upon such exercise, and as adjusted from time to time, are hereinafter sometimes referred to as "Warrant Shares" and the exercise price of a share of Common Stock in effect at any time and as adjusted from time to time is hereinafter sometimes referred to as the "Exercise Price." The "Start Date" means any date before December 31, 1998 on which securities of RCI are first traded publicly. (a) EXERCISE OF WARRANT. This Warrant may be exercised in whole or in part at any time or from time to time during the Exercise Period. (b) RESERVATION OF SHARES. RCI shall at all times reserve for issuance and/or delivery upon exercise of the Warrant such number of shares of its Common Stock as shall be required for issuance and delivery upon exercise of the Warrant. (c) FRACTIONAL SHARES. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of these Warrant. (d) ELIMINATION OF FRACTIONAL SHARES. All fraction shares shall be eliminated by rounding any fraction down to the nearest whole number of shares of Common Stock. (e) RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be entitled to any rights of a stockholder in RCI, either at law or equity, and the rights of the Holder are limited to those expressed herein and are not enforceable against RCI except to the extent set forth herein. (f) ANTI-DILUTION PROVISIONS. The Exercise Price in effect at any time and the number and kind of securities purchasable upon the exercise of the Warrant shall be subject to adjustment from time to time upon the happening of certain events as follows: (1) In case RCI shall (i) declare a dividend or make a distribution on its outstanding shares of Common Stock in shares of Common Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into a greater number of shares, or (iii) combine or reclassify its outstanding shares of Common Stock into a smaller number of shares, the Exercise Price in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, combination or reclassification shall be adjusted so that it shall equal the price determined by multiplying the Exercise Price by a fraction, the denominator of which shall be the number of shares of Common Stock outstanding after giving effect to such action, and the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such action. Such adjustment shall be made successively whenever any event listed above shall occur. (2) In case RCI shall fix a record date for the issuance of rights or warrants (other than employee stock options exercisable at fair market value on the date of grant) to all holders of its Common Stock entitling them to subscribe for or purchase shares of Common Stock (or securities convertible into Common Stock) at a price (the "Subscription Price") (or having a conversion price per share) less than the current market price of the Common Stock (as defined in clause (5) below) on the record date mentioned below, the Exercise Price shall be adjusted so that the same shall equal the price determined by multiplying the Exercise Price in effect immediately prior to the date of issuance by a fraction, the numerator of which shall be the sum of the number of shares of Common Stock outstanding on the record date mentioned below and the number of additional shares of Common Stock which the aggregate offering price of the total number of shares of Common Stock so offered (or the aggregate conversion price of the convertible securities so offered) would purchase at such current market price per share of the Common Stock, and the denominator of which shall be the sum of the number of shares of Common Stock outstanding on such record date and the number of additional shares of Common Stock offered for subscription or purchase (or into which the convertible securities so offered are convertible). Such adjustment shall be made successively whenever such rights or warrants are issued and shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights or warrants; and to the extent that shares of Common Stock are not delivered (or securities convertible into Common Stock are not delivered) after the expiration of such rights or warrants the Exercise Price shall be readjusted to the Exercise Price which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made upon the basis of delivery of only the number of shares of Common Stock (or securities convertible into Common Stock) actually delivered. (3) In case RCI shall hereafter distribute to all holders of its Common Stock evidences of its indebtedness or assets (excluding cash dividends or distributions and dividends or distributions referred to in Subsection (1) above) or subscription rights or warrants (excluding those referred to in Subsection (2) above), then in each such case the Exercise Price in effect thereafter shall be determined by multiplying the Exercise Price in effect immediately prior thereto by a fraction, the numerator of which shall be the total number of shares of Common Stock outstanding multiplied by the current market price per share of Common Stock (as defined below), less the fair market value (as determined by RCI's Board of Directors) of said assets or evidences of indebtedness so distributed or of such rights or warrants, and the denominator of which shall be the total number of shares of Common Stock outstanding multiplied by such current market price per share of Common Stock. Such adjustment shall be made successively whenever such a record date is fixed. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date for the determination of stockholders entitled to receive such distribution. (4) Whenever the Exercise Price payable upon exercise of each Warrant is adjusted pursuant to Subsections (1), (2) and (3) above, the number of Warrant Shares purchasable upon exercise of these Warrant shall simultaneously be adjusted by multiplying the number of Shares initially issuable upon the exercise of these Warrant by the Exercise Price in effect on the date hereof and dividing the product so obtained by the Exercise Price, as adjusted. (5) For the purpose of any computation under Subsections (2) and (3) above, the current market price per share of Common Stock at any date shall be deemed to be the average of the daily closing prices for 30 consecutive business days before such date. The closing price for each day shall be the last sale price or, in case no such reported sale takes place on such day, the average of the last reported bid and asked prices, in either case on the principal national securities exchange on which the Common Stock is admitted to trading or listed, or if not listed or admitted to trading on such exchange, the average of the highest reported bid and lowest reported asked prices as reported by NASDAQ, or other similar organization if NASDAQ is no longer reporting such information, or it not so available, the fair market price as determined by the Board of Directors. (6) No adjustment in the Exercise Price shall be required unless such adjustment would require an increase or decrease of at least twenty-five cents ($.25) in such price; provided, however, that any adjustment which by reason of this Subsection is not required to be made shall be carried forward and taken into account in any subsequent adjustment required to be made hereunder. All calculations under this Section (f) shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. Anything in this Section (f) to the contrary notwithstanding, RCI shall be entitled, but not required, to make such changes in the Exercise Price, in addition to those required by this Section (f), as it shall determine, in its sole discretion, to be advisable in order that any dividend or distribution in shares of Common Stock, or any subdivision, reclassification or combination of Common Stock, hereafter made by RCI shall not result in any Federal income tax liability to the holders of Common Stock or securities convertible into Common Stock (including Warrants). (7) In the event that at any time, as a result of an adjustment made pursuant to Subsection (1) above, the Holder of this Warrant thereafter shall become entitled to receive any shares of RCI, other than Common Stock, thereafter the number of such other shares so receivable upon exercise of this Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in Subsections (1) to (6), inclusive above. (8) Irrespective of any adjustments in the Exercise Price or the number or kind of shares purchasable upon exercise of this Warrant, Warrants theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in the similar Warrant initially issuable pursuant to this Agreement. (g) OFFICER'S CERTIFICATE. Whenever the Exercise Price shall be adjusted as required by the provisions of the foregoing Section, RCI shall forthwith file in the custody of its Secretary or an Assistant Secretary at its principal office and with its stock transfer agent, if any, an officer's certificate showing the adjusted Exercise Price determined as herein provided, setting forth in reasonable detail the facts requiring such adjustment, including a statement of the number of additional shares of Common Stock, if any, and such other facts as shall be necessary to show the reason for and the manner of computing such adjustment. Each such officer's certificate shall be made available at all reasonable times for inspection by the holder or any holder of a Warrant executed and delivered pursuant to Section (a). (h) NOTICES TO WARRANT HOLDERS. So long as this Warrant shall be outstanding, (i) if RCI shall pay any dividend or make any distribution upon the Common Stock, or (ii) if RCI shall offer to the holders of Common Stock for subscription or purchase by them any share of any class or any other rights, or (iii) if any capital reorganization of RCI, reclassification of the capital stock of RCI, consolidation or merger of RCI with or into another corporation, sale, lease or transfer of all or substantially all of the property and assets of RCI to another corporation, or voluntary or involuntary dissolution, liquidation or winding up of RCI shall be effected, then in any such case, RCI shall cause to be mailed by certified mail to the Holder, at least fifteen days prior to the date specified in (x) or (y) below, as the case may be, a notice containing a brief description of the proposed action and stating the date on which (x) a record is to be taken for the purpose of such dividend, distribution or rights, or (y) such reclassification, reorganization, consolidation, merger, conveyance, lease, dissolution, liquidation or winding up is to take place and the date, if any is to be fixed, as of which the holders of Common Stock or other securities shall receive cash or other property deliverable upon such reclassification, reorganization, consolidation, merger, conveyance, dissolution, liquidation or winding up. (i) RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any reclassification, capital reorganization or other change of outstanding shares of Common Stock of RCI, or in case of any consolidation or merger of RCI with or into another corporation (other than a merger with a subsidiary in which merger RCI is the continuing corporation and which does not result in any reclassification, capital reorganization or other change of outstanding shares of Common Stock of the class issuable upon exercise of this Warrant) or in case of any sale, lease or conveyance to another corporation of the property of RCI as an entirety, RCI shall cause effective provisions to be made so that the Holder shall have the right by exercising this Warrant prior to the expiration of the Warrants, to purchase the kind and amount of shares of stock and other securities and property receivable upon such reclassification, capital reorganization and other change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock which might have been purchased upon exercise of this Warrant immediately prior to such reclassification, change, consolidation, merger, sale or conveyance. Any such provision shall include provision for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Warrant. The foregoing provisions of this Section (i) shall similarly apply to successive reclassifications, capital reorganizations and changes of shares of Common Stock and to successive consolidations, mergers, sales or conveyances. In the event that in connection with any such capital reorganization or reclassification, consolidation, merger, sale or conveyance, additional shares of Common Stock shall be issued in exchange, conversion, substitution or payment, in whole or in part, for a security of RCI other than Common Stock, any such issue shall be treated as an issue of Common Stock covered by the provisions of Subsection (1) of Section (f) hereof. IN WITNESS WHEREOF, RCI has caused this Warrant to be signed and attested by the Undersigned, being duly authorized, as of the date below. RAPID CAST, INC. By: ___________________________________ Larry Joel, President Dated: February 7, 1995 PURCHASE FORM The undersigned hereby irrevocable elects to exercise the within Warrants to the extent of purchasing _____________ shares of Common Stock and hereby makes payment of $_______________ in payment of the actual exercise price thereof. INSTRUCTIONS FOR REGISTRATION OF STOCK Name: _________________________ Social Security No.: ___________ (Print in block letters) Address: __________________________________________________________ __________________________________________________________ Signature: _________________________ Date: _________________________ ASSIGNMENT FORM FOR VALUE RECEIVED, ____________________________________ hereby sells, assigns and transfers unto Name: _________________________ Social Security No.: ___________ (Print in block letters) Address: __________________________________________________________ __________________________________________________________ the right to purchase Common Stock represented by _________ Warrants to the extent of _________ shares of Common Stock as to which such right is exercisable and does hereby irrevocably constitute and appoint the President of RCI as Attorney, to transfer the same on the books of RCI with full power of substitution in the premises. Date: _____________________, 19__ Signature: _________________________ EX-5.1 5 EXHIBIT 5.1 LEGAL OPINION EXHIBIT 5.1 LEGAL OPINION LAW OFFICES OF MARK J. RICHARDSON WILSHIRE PALISADES BUILDING 1299 OCEAN AVENUE SUITE 900 SANTA MONICA, CALIFORNIA 90401 TELEPHONE (310) 393-9992 FACSIMILE (310) 393-2004 May _____, 1996 Incomnet, Inc. 21031 Ventura Boulevard, Suite 1100 Woodland Hills, California 91364 RE: INCOMNET, INC. - VALIDITY OF ISSUANCE OF SHARES Ladies and Gentlemen: We have acted as special counsel to you in connection with the registration on Form S-3 (File No. ____________) under the Securities Act of 1933, as amended ("Registration Statement"), of a total of 700,000 shares of the Common Stock of Incomnet, Inc., no par value, comprised of (i) 75,000 shares (the "Underlying Shares") issuable upon the exercise of 75,000 warrants (the "Warrants") to purchase Common Stock at an exercise price of $11.25 per share at any time until November 15, 1997, (ii) 411,000 outstanding shares (the "Outstanding Shares") issued upon the conversion of 8% convertible promissory notes previously issued by the Company, pursuant to settlement agreements, or in private placements pursuant to Section 4(2) of the Securities Act of 1933, as amended, and (iii) up to 214,000 unissued shares (the "Shares") which may be issued in the future pursuant to settlement agreements or in open market sales under Rule 415 through a registered broker-dealer. You have requested our opinion in connection with the registration of the Shares, the Underlying Shares and the Outstanding Shares covered by the Prospectus, dated April 30, 1996 (the "Prospectus"). In connection with our acting as counsel, we have examined the laws of the State of California together with the form of Warrant attached as Exhibit 4.4 to the Registration Statement, the Prospectus, and certain other documents and instruments prepared on behalf of Incomnet, Inc. as we have deemed necessary and relevant in the preparation of our opinion as hereinafter set forth. In our examination, we have assumed the genuineness of all signatures on original documents and the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified, conformed or photostatic copies of originals, the authenticity of such latter documents, and the proper execution, delivery and filing of the documents referred to in this opinion. Based upon the foregoing, we are of the opinion that the Shares, the Outstanding Shares and the Underlying Shares issued and to be issued by Incomnet, Inc. pursuant to the exercise of the Warrants, the terms of the settlement agreements, and the terms of the Prospectus have been and will be duly created and have been and will be validly issued shares of the Common Stock, no par value, of Incomnet, Inc. Upon payment for the Shares, the Outstanding Shares and the Underlying Shares and full compliance with all of the terms and conditions relating to the issuance of the Shares and the Underlying Shares and the sale of the Outstanding Shares set forth in the Prospectus and in the Warrants, the Shares, the Outstanding Shares and the Underlying Shares will be fully paid and nonassessable. Incomnet, Inc. May ____, 1996 Page 2 For the purposes of this opinion we are assuming the proper execution of all Warrants, settlement agreements, subscription agreements and conversion agreements, and that the appropriate certificates are duly filed and recorded in every jurisdiction in which such filing and recordation is required in accordance with the laws of such jurisdictions. We express no opinion as to the laws of any state or jurisdiction other than California. We consent to the use of this opinion as an exhibit to the Registration Statement, and we further consent to the use of our name in the Registration Statement and the Prospectus which is a part of said Registration Statement. Respectfully submitted, Mark J. Richardson, Esq. EX-10.13 6 EXHIBIT 10.13 AGMT. BETWEEN NTC & PAGE PROMPT EXHIBIT 10.13 AGREEMENT FOR PROMOTION OF PAGERS BETWEEN NTC and PAGE PROMPT AGREEMENT FOR PROMOTION OF PAGERS BETWEEN NTC AND PAGEPROMPT This Agreement For The Promotion Of Pagers ("Agreement") is entered into between National Telephone & Communications, Inc., a Nevada corporation located at 2801 Main Street, Irvine, California 92714 ("NTC") and PagePrompt USA, Inc., a California corporation located at 16810 Valley View, La Mirada, California 90638 ("PGPT") and is entered into by the parties with reference to the following facts. A. In December 1994, NTC entered into an agreement with a pager company other than PGPT ("Other Pager Company") for a joint pager promotion program ("Old Program") similar to the program desired by the parties under this Agreement ("New Program"). B. Because the Other Pager Company was relatively small, NTC was concerned the Other Pager Company would not be able to adequately handle the number of pager customers NTC would produce under the Old Program ("Performance Concerns"). C. NTC believes its Performance Concerns with the Other Pager Company were warranted since the Other Pager Company's performance under the Old Program resulted in hundreds of complaint calls to NTC requiring NTC to take expeditious and costly corrective actions including but not limited to (i) purchasing pagers at its own expense to fulfil the obligations of the Other Pager Company, (ii) delivering the pagers to these NTC customers at NTC's expense, (iii) issuing apologies to the NTC customers, and (iv) securing another pager company to provide paging service to the NTC customers ("Corrective Actions"). D. At the end of May 1995, NTC and PGPT entered into a joint promotional pager program similar to the New Program on a test basis ("Test Program") under an informal agreement ("Hand-Shake Agreement") negotiated between the parties by Christopher Mancuso, a consultant to NTC. E. NTC is satisfied with the performance of PGPT in the Test Program to date, however NTC still has concerns about PGPT's performance abilities, similar to the Performance Concerns, because PGPT is also a relatively small pager company; therefore, NTC is only willing to enter into a formal agreement for the New Program on condition that PGPT provide NTC with certain up-front financial payments based solely on NTC'S performance under the Test Program through June 1995 ("Up-Front Payment"). F. PGPT is satisfied with the performance of NTC in the Test Program and is willing to satisfy NTC's Up-Front Payment condition; however, NTC has advised PGPT that NTC intends to enter into the pager business as a reseller in the future, and PGPT is only willing to provide such Up-Front Payment on condition that NTC warrants to PGPT that NTC will not take any action in the future to recapture the pager customer NTC produces for PGPT under the Test Program and this Agreement. NOW THEREFORE, for fair and reasonable consideration, the parties agree to the following. 1. THE AGREEMENT. NTC agrees to make a good faith effort to produce, but does not guarantee to produce, a minimum of fifty thousand (50,000) orders for pagers from new customers for PGPT ("NTC/PGPT Customers") during the six (6) to twelve (12) month period immediately following the execution of this Agreement, subject to the termination conditions set forth below in Paragraph 8. PGPT agrees to reasonably provide such NTC/PGPT Customers with (i) pagers, in accordance with the program set forth below in Paragraph 3, and (ii) satisfactory pager services such that NTC shall not receive an unreasonable number of complaints about PGPT from the NTC/PGPT Customers and shall not have to take any actions on behalf of the NTC/PGPT Customers similar to the Corrective Actions. 2. NTC'S PROGRAM TO DEVELOP NTC/PGPT CUSTOMERS. Any and all promotional programs used by NTC to produce the NTC/PGPT Customers shall be at NTC's sole discretion and cost, however, the parties agree that said promotional programs must be approved by PGPT. Such NTC programs shall include but shall not necessarily be limited to NTC's gift certificate program used by NTC's Independent Sales Representatives in the Test Program. 3. PGPT'S PROMOTIONAL PAGER PROGRAM FOR THE NTC/PGPT CUSTOMERS. PGPT agrees that the initial promotional program for the NTC/PGPT Customers shall consist of one (1) new numeric pager, of a type acceptable to NTC, to by shipped to each new NTC/PGPT Customer within five (5) business days after such new NTC/PGPT Customer arranges to pay PGPT sixty three dollars and eighty five cents ($63.85) ("Start-Up Fees") through a credit card payment, check payment, cash payment or COD payment ("Pager Payment"). In the event the pager is sent to the NTC/PGPT Customer subject to a COD payment, then an additional five dollar ($5.00) fee shall be added to the Start-Up Fees. The pager itself shall be given to the NTC/PGPT Customer at no charge to either the NTC/PGPT Customer or NTC. However, NTC and PGPT agree the Start-Up Fees shall be charged to the NTC/PGPT Customers to cover the following PGPT costs and charges: -- A fee of thirty nine dollars ($39.00) to cover PGPT's costs of programing and activation of the pager. -- A fee of nineteen dollars and ninety cents ($19.90) to cover two months of PGPT'S charges for pager air time at nine dollars and ninety five cents ($9.95) per month. -- A fee of four dollars and ninety five cents ($4.95) to cover PGPT's shipping and handling costs for the pager. 2 Both parties agree that the above promotional program shall remain in effect for the NTC/PGPT Customers through September 30, 1995, at which time the parties agree to negotiate in good faith to define a new promotional program, if necessary. 4. NTC COMPENSATION. For each new NTC/PGPT Customer over-and-above the first ten thousand (10,000) such new NTC/PGPT Customers ("10,000+ Customers"), PGPT shall pay to NTC the following compensation: -- Twenty five dollars ($25.00) in cash ("Cash Compensation). -- Thirty dollars ($30.00) in PGPT unregistered common stock ("Stock Compensation"). Both parties agree the said first ten thousand (10,000) new NTC/PGPT Customers ("First 10,000 Customers") shall be those first ten thousand (10,000) new NTC/PGPT Customers who received pagers from PGPT and paid PGPT the Pager Payment and shall include new NTC/PGPT Customers produced by the NTC during the Test Program as well as under this Agreement, as may be required to reach ten thousand (10,000). Both parties agree that ten dollars ($10.00) of the Cash Compensation shall be earned by NTC and shall be due to NTC at the time the pager payment is received by PGPT from a 10,000+ customer The Parties agree that the remaining fifteen dollars ($15.00) of the Cash Compensation whall be earned by NTC and shall be due to NTC when and if PGPT receives payment from the a 10,000+ Customer for PGPT'S first air time bill. Both parties agree to negotiate in good faith to determine the reasonable timing for payment of the two (2) Cash Compensation payments to NTC once such payments are earned by NTC. Both parties agree that the Stock Compensation shall be earned by NTC and due to NTC on the last calendar day of each calendar quarter. The parties agree that THE NUMBER OF 10,000+ Customers for which NTC shall be paid the stock compensation shall be the number of "PGPT Paying Customers" who are NTC/PGPT Customers ("NTC/PGPT Paying Customers") at the end of each calendar quarter less the number of NTC/PGPT Paying Customers at the end of the previous calendar quarter ("Stock Compensation Calculation"). The First 10,000 Customers shall not be included in the Stock Compensation Calculation. The parties agree to negotiate in good faith to determine a mutually acceptable definition of "PGPT paying customer". The parties further agree that the Stock Compensation Payment may be paid to NTC, at PGPT'S sole discretion as thirty dollars ($30.00) cash rather than as thirty dollars ($30.00) of PGPT unregistered common stock. The parties also agree: (i) that the price per share of PGPT common stock to be used in determining the number of shares in the thirty dollars ($30.00) of Stock Compensation shall be the average bid price of the stock during the calendar quarter for which the Stock Compensation is earned; (ii) to negotiate in good faith to determine the reasonable timing for payment of any earned stock 3 Compensation to NTC; and (iii) that all PGPT unregistered common stock shares NTC receives as Stock Compensation shall have customary piggyback rights with any future PGPT stock registration. 5. UP-FRONT PAYMENTS TO NTC. PGPT agrees that NTC has earned from PGPT and PGPT shall pay to NTC a cash payment of ($250,000) and a stock payment equal to three hundred thousand dollars ($300,000) of unregistered PGPT common stock ("Already Earned Compensation" for all of NTC's efforts during the test program up to June 30, 1995, and for all NTC/PGPT Customers produced by NTC for PGPT up to June 30, 1995. The parties agree that the value of the unregistered pgpt common stock to be used for determining the number of shares required for the stock payment shall be the average bid price for the PGPT'S common stock during the last 10 (10) business days of June 1995, and that such shares shall have customary piggyback rights with any future PGPT stock registration. Both parties agree to negotiate in good faith to define reasonable timing for PGPT's payment of the Already Earned Compensation to NTC. 6. STOCK OPTION GUARANTEE FOR NTC. At the time of the Hand-Shake Agreement, PGPT agreed to grant NTC and hereby does GRANT NTC AN OPTION TO PURCHASE ONE HUNDRED THOUSAND (100,000) SHARES OF PGPT UNREGISTERED COMMON STOCK AT A PURCHASE PRICE OF TWO DOLLARS AND TWENTY FIVE CENTS ($2.25) PER SHARE ("The Option"). The Option shall become exercisable by NTC at the time either (i) five thousand (5,000) net NTC/PGPT Customers have paid their first pager air time bill and are still using PGPT's service, or (ii) PGPT has delivered pagers to the First 10,000 Customers, whichever first occurs. The Option shall expire on June 30, 1998, and PGPT agrees The Option shares shall have customary piggyback rights with any future PGPT stock registration. 7. NTC WARRANT ON NTC/PGPT CUSTOMERS. NTC warrants to PGPT that NTC will not take any action in the future to recapture NTC/PGPT Customers produced for PGPT by NTC under this agreement and/or under the Test Program for (i) any pager service which NTC may develop for itself or (ii) any other pager company with which NTC may enter into an agreement in the future. 8. TERM OF AGREEMENT. THIS AGREEMENT SHALL AUTOMATICALLY TERMINATE ON JUNE 30, 1996 ("Automatic Termination Date"). The parties agree this Agreement may be terminated by either party prior to the Automatic Termination Date upon delivery of a written termination notice ("Termination Notice") to the other party. In the event one of the parties delivers such Termination Notice to the other party, then this Agreement shall terminate on the thirtieth (30th) calendar day following delivery of such Termination Notice ("Early Termination Date"), unless such Early Termination Date is after June 30, 1996. 4 The parties agree to negotiate in good faith to determine the specific obligations and liabilities of each party following the termination of this Agreement including but not necessarily limited to the liabilities/obligations for NTC/PGPT Customers received by PGPT after termination of this Agreement but resulting from the efforts and promotional programs of NTC prior to the termination. 9. DISPUTES AND VENUE. In the event of any dispute, controversy or claim ("Disputed Matter") between the parties to this Agreement or the breach thereof, the parties agree to submit and are obligated to submit the Disputed Matter to binding arbitration in accordance with the Rules of the American Arbitration Association. The parties further agree that such arbitration shall be held in the County of Orange in the State of California. By execution of this Agreement, the parties irrevocably and unconditionally submit to the jurisdiction of said arbitration in any such Disputed Matter. 10. APPLICABLE LAW. This Agreement shall be construed, governed and enforced in accordance with the laws of the State of California. 11. ATTORNEY FEES. In the event of any Disputed Matter between the parties hereto in connection with this Agreement, the prevailing party shall be entitled to receive from the losing party all of its cost and expenses including but not limited to court costs and reasonable attorney's fees. 12. AMENDMENTS. No amendment, modification, waiver, discharge or change ("Amendment") to this Agreement shall be valid unless such Amendment is in writing and signed by all the parties hereto. 13. ADDITIONAL DOCUMENTS. Each of the parties hereto specifically agrees to execute such other and further instruments and documents as may be reasonably be required to effectuate the terms, conditions and objectives of this Agreement. 14. SEVERABILITY AND COMPLIANCE. If any term, condition or provision of this Agreement is found to be invalid, contrary to law or otherwise unenforceable ("Invalid Provision"), such finding shall in no way affect the validity or enforceability of the terms, conditions and provisions herein. Such other terms, conditions and provisions shall be valid and enforceable as if the Invalid Provision was never a part hereof. Each party hereto shall be excused without further liability from the performance of any duty, obligation or responsibility 5 hereunder to the extent it is prevented from such performance by applicable laws, rules or regulations or by the order or decision of any regulatory authority. 15. WAIVER OF BREACH. The waiver of one party of a breach of any term, condition or provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach of any type whether of similar or dissimilar nature. 16. NOTICES. Any and all notices, demands or other communications ("Notice") given hereunder shall be delivered to the party to whom such Notice is addressed by delivery in person or by delivery through United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to NTC: 2801 Main Street Irvine, California 92714 Attn: President If to PGPT: PagePrompt USA 16810 Valley View La Mirada, California 90638 Attn: Vice President If delivery is by United States mail, notice shall be deemed to have been given three (3) working days after being placed in such mail, as evidenced by a mailing receipt. Either party may change its address for the purpose of this Agreement by giving the other party written notice of its new address. 17. ASSIGNMENTS. This Agreement and the rights and obligations granted or agreed to hereunder may not be assigned by either party by sale of business, operation of law or otherwise without first obtaining the written consent of the other party which both parties agree will not be unreasonably withheld. 18. VALID ENTITY. Each party to this Agreement which is a legal entity such as a partnership, corporation or trust or the like represents that it is a validly formed and existing entity, that it has the authority to enter into this Agreement and that all acts necessary to make this Agreement valid and binding have been done. The person or persons executing this Agreement on behalf of such entity represents that they have the right and authority to do so. 19. CONSTRUCTION. Any rule of law to the contrary notwithstanding, this Agreement shall be construed as if drafted by both parties 6 regardless of which party or which party's legal counsel either actually drafted this Agreement or printed or physically memorialized this Agreement between the parties. 20. COUNTERPARTS. This Agreement may be executed in one or more counterparts, and each such counterpart shall be deemed an original; but all of such counterparts taken together shall constitute one and the same agreement. 21. USE OF PLURAL OR SINGULAR. The use of the singular or plural number in any term, condition or provision of this Agreement shall be deemed to include the other whenever the context so requires. 22. ENTIRE AGREEMENT. This Agreement sets forth and constitutes the entire agreement between the parties with respect to the subject matter herein and supersedes all previous agreements, promises and representations, either oral or in writing, between the parties hereto with respect to the transactions covered hereby, and contains all the covenants and agreements between the parties. Each party to this Agreement acknowledges that no representations, inducements, promises or agreements, orally or otherwise, have been made by any party to this Agreement, or anyone acting on behalf of any party to this Agreement, which are not embroiled herein. 23. BENEFITS. The terms, conditions and provisions of this Agreement shall inure to the benefit of and be binding on the parties hereto and all their respective successors including but not limited to permitted assigns, executors, administrators, heirs and representatives; and no other person or entity shall have any rights whatsoever under this Agreement. Agreed to effective on the 30th day of June, 1995 in the County of Orange, State of California. NTC: PGPT: National Telephone & Page Prompt USA, Inc. Communications, Inc. By: By: /s/ E. R. JACOBS /s/ for -------------------------- -------------------------- E.R. Jacobs Hal Linden President Vice President 7 EX-10.14 7 EXHIBIT 10.14 AGREEMENT WITH WILTEL, INC. EXHIBIT 10.14 CARRIER SWITCHED SERVICES AGREEMENT WITH WILTEL, INC., DATED SEPTEMBER 15, 1995* *Certain information has been deleted from this Agreement pursuant to a request for confidential treatment under Rule 406 of the Securities Act of 1933, as amended. WILMAX INTERIM PROGRAM ENROLLMENT TERMS -------------------------------- [CARRIER] These Interim Program Enrollment Terms (the "INTERIM PET") are made as of the 1st day of September, 1995 (the "EFFECTIVE DATE"), by and between WorldCom Network Services, Inc. d/b/a WilTel (formerly WilTel, Inc.) ("WILTEL") and National Telephone and Communications, Inc. ("CUSTOMER") and are a part of their agreement for switched services, more particularly identified as TSA#NTC-941101 (the "AGREEMENT"). In accordance with the Agreement, charges to Customer for Service obtained thereunder shall be subject to the Discount Schedule set forth below and the Agreement shall also be subject to the terms and conditions set forth herein. The parties acknowledge that they previously executed Program Enrollment Terms dated November 15, 1994 (the "PRIOR PET"). As of the effective date, the Prior PET will be terminated in its entirety subject to reinstatement as provided in Section 2 below. 1. IX TRANSPORT: In connection with Customer's continued substantial growth in Monthly Revenue (as described below) since the execution of the Prior PET, the parties have been in negotiations concerning the increase of Customer's take-or-pay commitments under such Prior PET and the offering by WilTel of additional discounts to Customer. Currently, WilTel has been in the process of developing a new product ("IX TRANSPORT PRODUCT") to be offered to Customer which product the parties believe may adequately and more cost effectively address Customer's telecommunications services requirements. Therefore, the parties have agreed to execute this Interim PET to address Customer's requirements during the Interim Term while the IX Transport Product is tested and implemented by WilTel. 2. SERVICE TERM: The Service Term of this Interim PET will commence as of the Effective Date and continue until the sooner of (i) January 31, 1996, or (ii) the date the IX Transport Product (described in Section 1 above) is offered by WilTel (the "INTERIM TERM"). In the event the parties have failed to execute on or before January 31, 1996 (i) a definitive agreement concerning the terms and conditions relative to the IX Transport Product described in Section 1 above, or (ii) Amended and Restated Program Enrollment Terms whereby Customer agrees to maintain Monthly Revenue of at least $10,000,000 a month for a total of $600,000,000 over not greater than a five (5) year term, the Prior PET will be reinstated as of February 1, 1996 and the terms and conditions contained therein will continue in full force and effect through the end of the Service Term as described in the Prior PET. 05/01/95 Page 1 of 5 CONFIDENTIAL EXECUTION COPY 3. COMMITMENTS/OPTIONS: (A) For purposes of this Agreement, "MONTHLY REVENUE" will include all measured and per call Switched Service charges (i.e., Directory Assistance and both Domestic and International) plus (i) three (3) times Customer's first $300,000 recurring monthly Private Line Interexchange Service charges (i.e., both Domestic and International) from WilTel, (ii) two (2) times Customer's second $300,000 recurring monthly Private Line Interexchange Service charges (i.e., both Domestic and International) from WilTel, and (iii) Customer's recurring monthly Private Line Interexchange Service charges (i.e., both Domestic and International) from WilTel in excess of $600,000. Monthly Revenue shall exclude any pro rata charges, access charges, ancillary or special feature charges, such as, Authorization codes or CDR Tapes, or any other charges other than those identified by the relevant WilTel invoice as Monthly Recurring Interexchange Service charges or Switched Service charges). (B) Commencing with the Effective Date and continuing through and including October 31, 1995 (the "FIRST COMMITMENT PERIOD"), Customer agrees to maintain, on a take-or-pay basis, Monthly Revenue of at least $7,000,000 ("CUSTOMER'S FIRST COMMITMENT"). Further, commencing November 1, 1995, and continuing through end of the Interim Term (the "SECOND COMMITMENT PERIOD"), Customer agrees to maintain, on a take-or-pay basis, Monthly Revenue of at least $7,500,000 ("CUSTOMER'S SECOND COMMITMENT"). 4. DEFICIENCY CHARGE: In the event Customer does not maintain Customer's First Commitment or Customer's Second Commitment, whichever is applicable, in any month in the First Commitment Period or the Second Commitment Period, whichever is applicable, then for those month(s) only, Customer will pay WilTel the difference between Customer's applicable Commitment and Customer's Monthly Revenue as described in Subsection 2(A) above net of any applicable discounts (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 Commitment(s) for the unexpired portion of the Term, if (i) Customer cancels all circuits comprising all Service Interconnections as described in the Service Schedules, or (ii) WilTel terminates the Agreement based on Customer's default. 5. DISCOUNTS/RATES: (A) For the Services listed below, Customer will receive the respective discounts shown (the "DISCOUNTS"): i. SWITCHED ACCESS Service (1+ and 800), Interstate, Day: Twenty-four percent (24%). 05/01/95 Page 2 of 5 CONFIDENTIAL EXECUTION COPY ii. SWITCHED ACCESS Service (1+ and 800), Interstate, Nonday: Eighteen percent (18%). iii. SWITCHED ACCESS Service (1+ and 800), Intrastate, Day/Nonday: Five percent (5%); however, for purposes of this Agreement, as of the Effective Date of this Interim PET, California Intrastate rates shall equal California intraLATA rates as shown on Schedule "1" attached hereto and incorporated herein by reference. iv. DEDICATED ACCESS Service (1+ and 800), Interstate, Day/Nonday: Twenty-four percent (24%). v. DEDICATED ACCESS Service (1+ and 800), Intrastate, Day/Nonday: Five percent (5%). vi. International Service-"Overseas" (i.e., excluding Canada and Mexico): See Schedules "2", "3" and "4" attached hereto and incorporated herein by reference. vii. TRAVEL CARD Service, Basic and Enhanced, Interstate only, Domestic calls only, Day/Nonday: Twenty-four percent (24%). viii. TRAVEL CARD Service, Basic and Enhanced, calls to Extended locations calls only (i.e., Alaska, Hawaii, Puerto Rico and United States Virgin Islands) from the 48 contiguous United States, Day/Nonday: Fifteen percent (15%). Calls from Extended locations will not be subject to any discount. (B) Customer's Discount for (i) TERMINATION Service will be fifteen percent (15%) with respect to interstate measured usage, and the Discount determined under Subsection (A)(v) above with respect to intrastate measured usage, and (ii) 800 ORIGINATION Service will be 17.125% with respect to interstate measured usage, and the Discount determined under Subsection (A)(v) above with respect to intrastate measured usage. (C) For purposes of this Agreement, commencing with the Effective Date and continuing through the end of the Interim Term, the Interstate Supersaver rate per minute for TERMINATION Service as described in Paragraph A of the Pricing Exhibit executed between the parties and dated November 14, 1994 will apply to calls to the ninety (90) LATAs shown on Schedule "5" attached hereto. 05/01/95 Page 3 of 5 CONFIDENTIAL EXECUTION COPY 6. APPLICATION OF DISCOUNTS: (A) During the Interim Term of this Agreement, accumulated credits derived from the applicable Discounts will be applied in arrears commencing with the first day of the month following the Effective Date, that is, the Discount will be applied to Customer's measured usage charges for the preceding month (the "DISCOUNT PERIOD"). The initial Discount Period shall include any partial calendar month following Start of Service, or such other time basis as may be mutually determined by the parties. (B) Each Discount will result in the application of a credit obtained during the Discount Period to the WilTel invoice to Customer relevant to the billed measured Switched Service for the calendar month next following the completion of each Discount Period, PROVIDED Customer has paid undisputed charges (including any late fees, if applicable) for that month and has not otherwise been subject to a Suspension Notice in accordance with the Agreement. Failure of Customer to comply with the foregoing provision shall entitle WilTel to withhold any credit due Customer for the Discount Period in question until such charges (including late fees have been paid in full). 7. CARRIER IDENTIFICATION CODE (CIC) TRANSLATIONS: (A) In the event Customer executes a CIC translation agreement with WilTel (the "CIC AGREEMENT"), WilTel agrees to give Customer a credit (the "CIC CREDIT") in an amount equal to Customer's actual, direct charges from the LECs which are incurred by Customer in connection with the translation process of up to two (2) carrier identification codes simultaneously ("CUSTOMER'S CIC CODES'') and which are reasonably documented in writing to WilTel; provided, however, the CIC Credit will not exceed $500,000.00. Further, the CIC Credit will be applied to Customer's invoices (but not less than zero) commencing with the month following WilTel's receipt of evidence of such charges until such CIC Credit is paid in full. (B) Customer will be solely responsible for submitting and processing access service requests in connection with CIC translations. In order to minimize costs incurred by Customer in converting Customer's End Users to Customer's CIC, WilTel agrees to reasonably cooperate with Customer in effecting such conversion, provided, however, any costs incurred will be borne solely by Customer. Further, Customer will be solely responsible for any disputed transfer charges associated with Customer's CIC Codes. (C) In the event a definitive agreement as described in Section 2 above is not executed on or before January 31, 1996, Customer will be required to repay WilTel the amount of the 05/01/95 Page 4 of 5 CONFIDENTIAL EXECUTION COPY CIC Credit received by Customer under this Section. WilTel shall have the right to set off against any credits which may be due Customer hereunder by the amount of the CIC Credit required to be repaid to WilTel. 7. DIRECTORY ASSISTANCE: Notwithstanding anything to the contrary contained in Paragraph F of the Pricing Exhibit dated November 15, 1994, commencing with the Effective Date and continuing through the end of the Interim Term, Customer's Interstate and Intrastate Rate Per Call will be $0.40. 8. DIALING PLAN: WilTel agrees to continue working with Customer in developing a "10XXX#" dialing plan for use by Customer in offering caller paid services ("CALLER PAID SERVICES") to its end users. The parties acknowledge that Caller Paid Services will be the subject of a separate agreement, and may be subject to technical, regulatory and legal limitations which are not currently known or anticipated by either of the parties. In such case, the parties agree to work together in good faith to resolve such issues to their mutual and reasonable satisfaction. Notwithstanding anything contained herein, WilTel shall be under no greater obligation to Customer with respect to Caller Paid Services which is in any respect greater than any obligation of WilTel hereunder with respect to Service generally. IN WITNESS WHEREOF, THE PARTIES HAVE EXECUTED THESE AMENDED AND RESTATED PROGRAM ENROLLMENT TERMS ON THE DATE FIRST WRITTEN ABOVE. WORLDCOM NETWORK SERVICES, INC. NATIONAL TELEPHONE & D/B/A WILTEL COMMUNICATIONS, INC. By: /s/ Charles Cole By: /s/ C Jacob ---------------------------- ---------------------------- (Signature) (Signature) Charles Cole - -------------------------------- -------------------------------- (Print Name) (Print Name) Vice President Carrier Sales - -------------------------------- -------------------------------- (Title) (Title) 05/01/95 Page 5 of 5 CONFIDENTIAL EXECUTION COPY SCHEDULE 1 WILMAX INTRASTATE PRICE SCHEDULE
SWITCHED ACCESS DEDICATED ACCESS SWITCHED ACCESS DEDICATED ACCESS --------------- ---------------- --------------- ---------------- STATE PEAK OFF PEAK PEAK OFF PEAK STATE PEAK OFF PEAK PEAK OFF PEAK - ------------- ------ -------- ------ -------- ------------- ------ -------- ------ -------- Confidential material deleted pursuant to Rule 406 of the Securities Act of 1933, as amended.
INTERIM DEDICATED INTERNATIONAL PRICING SCHEDULE EFFECTIVE SEPTEMBER 1, 1995 * SERVICE VIA T1 ACCESS FROM THE WILTEL POPS NYCM, CHCG, ATLN, DLLS, AND/OR LSAN * MINIMUM INTERNATIONAL SPENDING LEVEL REQUIRED Confidential material deleted pursuant to Rule 406 of the Securities Act of 1933, as amended.
COUNTRY FLAT RATE COUNTRY CODE (PER MINUTE) - -------------------------- ------------- ------------------ Confidential material deleted pursuant to Rule 406 of the Securities Act of 1933, as amended.
INTERIM SWITCHED INTERNATIONAL PRICING SCHEDULE EFFECTIVE SEPTEMBER 1, 1995 * RATES TO THE FOLLOWING COUNTRIES ARE NOT SUBJECT TO DISCOUNT * MINIMUM INTERNATIONAL SPENDING LEVEL REQUIRED Confidential material deleted pursuant to Rule 406 of the Securities Act of 1933, as amended.
COUNTRY DAY RATE NON-DAY RATE COUNTRY CODE (PER MINUTE) (PER MINUTE) - -------------------------- ------------- ------------------ ------------------ Confidential material deleted pursuant to Rule 406 of the Securities Act of 1933, as amended.
WILMAX INTERNATIONAL
SWITCHED DEDICATED ------------------------------------------ ----------------------------------------- STANDARD DISC/ECON STANDARD DISC/ECON COUNTRY COUNTRY STANDARD RATE DISC/ECON -------- --------- -------- --------- CODE PERIOD RATE PERIOD 1ST 30 SEC ADDTN'L 6 1ST 30 SEC ADDTN'L 6 1ST 30 SEC ADDTN'L 6 1ST 30 SEC ADDTN'L 6 - ------- ------- ------------- ----------- ---------- --------- ---------- --------- ---------- --------- ---------- --------- Confidential material deleted pursuant to Rule 406 of the Securities and Exchange Act of 1933.
SUPERSAVER LATA SCHEDULE
90 LATA PLAN 90 LATA PLAN ------------ ------------ SORTED BY LATA SORTED BY LATA -------------- -------------- CITY LATA CITY LATA ------------- ------ ------------- ------ Confidential material deleted pursuant to Rule 406 of the Securities and Exchange Act of 1933.
Effective September 1, 1995 ADDENDUM This Addendum (the "Addendum") is made as of the 1st day of September, 1995 (the "Effective Date") by and between WORLDCOM NETWORK SERVICES, INC. d/b/a WilTel (formerly WilTel, Inc.) ("WilTel") and NATIONAL TELEPHONE AND COMMUNICATIONS, INC. ("Customer"). This Agreement is in addition to that certain Carrier Digital Service Agreement dated March 14, 1994, and more particularly described as DSA #NTC-940314 between WilTel and Customer (the "DSA"). WilTel and Customer agree to the following terms in addition to those set forth in the DSA. In the event of any conflict between the terms of the DSA and the terms of this Agreement, the terms of this Agreement shall control. Capitalized terms not defined herein shall have the meaning ascribed to them in the DSA. The DSA and this Addendum are collectively referred to as the "Agreement". 1. SERVICE ORDERS FOR PRIVATE LINE SERVICE: WilTel agrees to offer and provide Customer with DS-1 level Interexchange Service (i) that is available and uncommitted (i.e., Service for which WilTel does not have firm orders), (ii) between and among any two (2) cities comprised exclusively of WilTel Cities and WilTel Extended Cities set forth in Exhibit I (or such other cities as may be mutually agreed upon from time to time and documented via a Digital Service Description executed by a duly authorized representative of each party), (iii) at the rates relevant to DS-1 level Interexchange Service as set forth in Section 3 below. Customer acknowledges that WilTel can not make an advance guarantee of the delivery interval for Service originating or terminating in WilTel Extended Cities set forth in Exhibit I. 2. TERM: This Agreement shall commence with the Effective Date and shall continue through the expiration of the Service Term as described in Section 2 of those certain Interim Program Enrollment Terms (the "Interim PET") executed by the parties dated as of September 1, 1995 (the "Term"); provided, however, with respect to any Digital Service Description for which the applicable Minimum Service Commitment Period (as described in Section 4 below) has not been satisfied by the end of the Term, the terms and conditions of this Agreement will remain in full force and effect until such Service Commitment Period has been satisfied. Upon expiration of the Minimum Service Commitment Period for any Service, the Service in question will continue to be provided by WilTel through the end of the Term subject to cancellation by Customer only upon thirty (30) days prior written notice to WilTel. Further, upon the expiration of the Term, all charges relevant to the Service will remain in effect and Service which has met its Minimum Service Commitment Period as described herein will be subject to termination by either party upon not less than thirty (30) days prior written notice to the other party. PRELIMINARY DRAFT Page 1 of 3 CONFIDENTIAL SEPTEMBER 8, 1995 3. RATES: Provided Customer is not in material default of the terms and conditions of this Agreement and the terms and conditions of the Interim PET (including without limitation, Customer's First Commitment and Customer's Second Commitment as described therein), the following provisions will apply to the Service described below for orders submitted by Customer during the Term and subject to a Requested Service Date not later than forty-five (45) days following the expiration of the Term. "Confidential material pursuant to Rule 406 of the Securities Act of 1933, as amended." (B) The Base Rate for Multiple DS-1 level Interexchange Service ("Multiple DS-1 Service") will be the DS-1 level Interexchange Service rates described in Subsection (A) above. Multiple DS-1 Service between and among WilTel On-Net Cities and Extended Cities will be subject to the discounts described below provided all of the following conditions are met: (i) Customer orders at least six (6) DS-1 circuits between or among On-Net Cities or Extended Cities at one time (the "Circuit Package"); (ii) The Requested Service Date(s) relevant to the DS-1s are subject to WilTel's standard intervals and, if more than one date is requested, the dates are within the same thirty (30) period; and (iii) The Service Commitment Period for each of the DS-1s in question is twelve (12) months. In the case of an initial Circuit Package comprised exclusively of existing DS-1s, the Multiple DS-1 Service discount and twelve (12) month Service Commitment Period will commence as of the second monthly billing period following the month in which the Digital Service Description therefor is submitted. If Customer desires to create a larger Circuit Package or create an initial Circuit Package from existing DS-1s and incremental new DS-1s (e.g., take a Circuit Package of 6 to a Circuit Package of 10 DS-1s; or, create an initial Circuit Package of at least 6 DS-1s from an existing 4 DS-1s plus an additional incremental 2 DS-1s), PRELIMINARY DRAFT Page 2 of 3 CONFIDENTIAL SEPTEMBER 8, 1995 Customer will first identify all DS-1s to be in the resulting Circuit Package. All circuits within the resulting Circuit Package will be subject to a twelve (12) month Service Commitment Period commencing as of the date the last circuit comprising the package is installed. If through the creation of a larger Circuit Package existing DS-1s should be subject to a greater level of discount, the applicable discount shall commence for the existing Ds-1s as of the date the last circuit in the larger Circuit Package is installed, and the applicable discount for each new incremental DS-1 relevant to the larger Circuit Package shall commence as of Start of Service for each such incremental DS-1. No. of DS-1s One Common End Two Common Ends ------------ -------------- --------------- 6 -- 12 10% 25% 13 -- 18 15% 30% 19 -- 28 20% 35% 4. MINIMUM SERVICE COMMITMENT PERIOD/MINIMUM SERVICE CHARGE: The Minimum Service Commitment Period for all DS-1 level Interexchange Service ordered by Customer subject to the rates described herein will be twelve (12) months. The minimum monthly recurring Interexchange Service charge for each DS-1 circuit comprising DS-1 level Interexchange Service (including Multiple DS-1 Service) shall be $250. 5. TAKE OR PAY SERVICE COMMITMENT PERIOD LIABILITY: Notwithstanding anything to the contrary contained in Section 11(A) of the DSA, Customer agrees to pay WilTel one hundred percent (100%) (on a take-or-pay basis) of the Interexchange Service charges due for all DS-1 level Interexchange Service (including Multiple DS-1 Service) ordered pursuant to this Agreement for the entire Minimum Service Commitment Period relative to such Service. IN WITNESS WHEREOF, the parties have executed this Addendum as of the date first written above. WORLDCOM NETWORK SERVICES, INC. NATIONAL TELEPHONE AND d/b/a WilTel COMMUNICATIONS, INC. /s/ Charles Cole /s/ P N Jacob - ------------------------------ ------------------------------ (Signature) (Signature) Charles Cole - ------------------------------ ------------------------------ (Print Name) (Print Name) Vice President Carrier Sales - ------------------------------ ------------------------------ (Title) (Title) PRELIMINARY DRAFT Page 3 of 3 CONFIDENTIAL SEPTEMBER 8, 1995 WILMAX PRO AGREEMENT This PRO Agreement (the "PRO Agreement") is made as of the ___ day of September, 1995, by and between WorldCom Network Services, Inc. d/b/a WilTel ("WilTel") and National Telephone and Communications, Inc. ("Customer") and is a part of their agreement for switched services, identified as TSA#NTC-______ (the "Agreement"). RECITALS: A. Customer owns carrier identification code ___ ("Customer's CIC") and in order to effectively manage the processing of primary interexchange carrier ("PIC") designations with respect to Customer's CIC, Customer desires to PIC its end users to Customer's CIC and then have Customer's CIC translated to WilTel's trunk groups (collectively, "WilTel's Trunk Group"). B. WilTel agrees to allow Customer to directly handle PIC order processing for its end users associated with Customer's CIC and agrees to direct the local exchange carriers on a tandem by tandem basis ("LECs") to translate Customer's CIC to WilTel's Trunk Group in accordance with the terms and conditions contained herein. NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, WilTel and Customer agree as follows: 1. PRO PROCEDURES. Prior to implementation of the services provided herein, Customer agrees to meet with designated WilTel representatives to review and acknowledge standard administrative procedures (as contained in Release Date-June, 1994) under this PRO Agreement. 2. CUSTOMER'S OBLIGATIONS. The parties acknowledge that WilTel will handle the direct transmittal of PIC orders to the LECs. However, during the Term of the Agreement, the parties agree that Customer shall be directly responsible for all other PIC order processing associated with Customer's CIC including, but not limited to: a. The provision of necessary personnel and systems, b. The provision to WilTel of information necessary to assist WilTel in determining which ANIs are to be pic'd to which of Customer's CIC Code(s) (which may include WilTel's CIC Code if selected by Customer). c. Dispute resolution of PIC order processing with the LECs attributable to Customer's CIC. d. The provision of prior written notice to WilTel (or transmission of such information electronically to WilTel, as determined by WilTel) of all PIC processing orders for Customer's CIC prior to transmitting such orders to LECs. WilTel has the right 2/1/95 Page 1 of 4 CONFIDENTAL in its sole discretion to reject or delay the transmittal of any order on a tandem by tandem basis. In the event WilTel has not rejected or otherwise requested a delay in the transmittal of all or any portion of such order(s) for reason of network capacity within one (1) business day of receipt of such notice, Customer may proceed to transmit such order(s) to the LECs. 3. WILTEL'S OBLIGATIONS. During the Term of the Agreement, the parties agree that WilTel shall: a. Over a thirty (30) day period following execution of this PRO Agreement, provide Customer with reasonable assistance in the transition to perform its PIC order processing obligations as stated herein. Thereafter WilTel shall have no obligation to (i) perform PIC processing for Customer, or (ii) assist Customer in performing PIC processing. b. Upon Customer's request, and at Customer's sole expense, provide copies of all current and available order documents including, but not limited to, Access Service Requests and Translations Questionnaires which have been submitted to the LECs to provide for or make changes to access services in connection with Customer's CIC. c. Upon Customer's request for translations and identification of the tandems to be translated, as amended for time to time by Customer, WilTel shall use reasonable efforts under the circumstances to ensure that Customer's CIC is promptly translated at LEC tandems (i.e., all subtending equal access end offices), to WilTel's Trunk Groups for Feature Group D access services in accordance with such request. Provided, however, WilTel's obligation is the Subsection c. will not apply if the traffic derived from Customer's CIC is disruptive to or adversely affects the WilTEl Network as determined by WilTel, in its sole discretion, or the procedures set forth in Section 2.d. of this PRO Agreement are not followed by Customer, and, as a result, a network blockage occurs on the WilTel Network from traffic derived from Customer's CIC. Prior to the expiration of the Term of the Agreement, WilTel shall not effect or process translation(s) of Customer's CIC without the prior request or consent of Customer. d. In regard to WilTel's obligation set forth in Subsection c. above, WilTel shall use reasonable efforts under the circumstances to: (i) provide services in performance of its obligations for a charge equal to its costs of providing such services; and/or (ii) obtain the lowest price available from any qualified out-sourcing party or subcontractor to satisfy such translation requests; and in any case use reasonable efforts under the circumstances to obtain the lowest price available from the LECs to satisfy such translation requests. e. The parties agree that the obligation of WilTel to perform under this Section 3 is contingent upon WilTel's obligation to perform under the Agreement. Notwithstanding the other provisions of this PRO Agreement, Customer shall have the right to request the LECs to translate Customer's CIC without involving or utilizing the services of WilTel; provided, however, that during any period in which WilTel is the billed party from the LECs with respect to Customer's CIC, Customer 2/1/95 Page 2 of 4 CONFIDENTAL shall only effect or process translations of Customer's CIC upon prior notice to WilTel and following payment of the LEC charges relevant to such translations pursuant to Section 5 of this PRO Agreement, and in the event Customer breaches the foregoing provision, Customer shall be subject to a claim for actual damages incurred by WilTel as a result thereof. 4. NETWORK PROCESSING. Customer and WilTel shall execute, concurrently with the execution of this PRO Agreement, Letter(s) of Agency for the specific tandems requested, in a form substantially similar to Exhibit "A", attached hereto and made a part hereof, that shall grant WilTel the authority to order changes in and maintenance of access services (i.e., Feature Group D access) which the LECs may provide in connection with Customer's CIC including, without limitation, the irrevocable authority to disconnect or rearrange such access services and/or block or redirect traffic derived from Customer's CIC away from the WilTel Network. The parties, for the purposes of this PRO Agreement, each warrant that they shall not seek to order disconnects or otherwise change access services (except as provided in Section 3.c. above), but Customer shall have authority to otherwise make changes to translations of Customer's CIC. WilTel and Customer agree that such Letter(s) of Agency may require modification in order to accommodate individual LEC requirements. In the event the procedures set forth in Section 2.d. of this Agreement are not followed and, as a result, a network blockage occurs on the WilTel Network from traffic derived from Customer's CIC, then to the extent that WilTel reconfigures its access arrangements to alleviate such blockage and as a result WilTel incurs charges from other carriers for the termination of traffic, which it would not have otherwise incurred, WilTel shall provide prompt written notice to Customer of such charges and proceed under the indemnification provision set forth in Section 7 of this PRO Agreement. 5. PAYMENT. All costs associated with ensuring that Customer's CIC is translated shall be borne by Customer as the party effecting the translation or requesting that WilTel effect such translation(s). Prior to effecting any translations of Customer's CIC by Customer, and, in any event, prior to WilTel's performance of its corresponding obligations under Section 3.c., Customer shall pay $400 per tandem plus all LEC charges associated with effecting and maintaining, if applicable, the services provided herein; provided, however, the LEC charges will not exceed the prevailing charges of such LEC as would otherwise be paid directly by Customer for the relevant service. In the event Customer requests expeditious service hereunder, WilTel may condition such request upon Customer's payment of additional charges to WilTel. 6. 900 SERVICES. Customer shall not translate Customer's CIC for 900 Services without the prior written consent of WilTel. In the event consent is given, to the extent that Customer's CIC is translated for 900 Services, such translations and WilTel-provided 900 service, if any, shall be initiated pursuant to the terms of this PRO Agreement. 7. INDEMNIFICATION. In the event of a network blockage under Section 3.c. above, WilTel shall provide Customer with prompt written notice of any charges WilTel has incurred from other carriers for the termination of traffic which WilTel would not have otherwise incurred. Within ten (10) days of receipt of such notice, Customer shall indemnify WilTel for the full amount of such charges. 8. FURTHER ASSURANCES. Each of the parties hereto agrees to take such further actions and execute, deliver and file such agreements, documents or instruments as the other party to this PRO Agreement may reasonably request or require in order to carry out and effectuate the 2/1/95 Page 3 of 4 CONFIDENTAL transactions contemplated by this PRO Agreement. IN WITNESS WHEREOF, the parties have executed the PRO Agreement on the date first written above. WORLDCOM NETWORK SERVICES, INC NATIONAL TELEPHONE AND COMMUNICATIONS, INC. By: /s/ Charles Cole By: /s/ E.R. Jacobs ------------------------- ------------------------- (Signature) (Signature) Charles Cole - ---------------------------- ---------------------------- (Print Name) (Print Name) Vice President Carrier Sales - ---------------------------- ---------------------------- (Title) (Title) 2/1/95 Page 4 of 4 CONFIDENTAL EXHIBIT "A" ____________, 199_ TO _______________________________________________ [LOCAL EXCHANGE TELEPHONE COMPANY] AND WHOM IT MAY CONCERN: WilTel, Inc. ("WilTel") hereby allows ___________________________________ ("Customer") to initiate orders for telecommunication services relating to translating its Carrier Identification Code _____________ (HEREINAFTER REFERRED TO AS THE "CIC") to WilTel's trunk groups in the specific tandems described on Schedule "I" which is attached hereto and incorporated herein by reference. This includes, without limitation, initial orders, add-on orders, disconnect orders, and any rearrangements thereof, relative to Feature Group D access only. Customer grants WilTel the perpetual and irrevocable authority to disconnect or rearrange such access services and/or block or redirect traffic derived from the CIC away from the WilTel Network. This letter of agency also directs you to remit all bills relating to Bell's access services ordered pursuant to this letter of agency to: WorldCom Network Services, Inc. Line Cost Department, Mail Drop 27-6 P.O. Box 21348 Tulsa, Oklahoma 74121 You may deal directly with Customer on all matters pertaining to said telecommunications services and should follow its instructions with reference thereto. This authorization will remain in effect until you are otherwise notified, by WilTel, in writing. ______________________________________ WORLDCOM NETWORK SERVICES, INC. (CUSTOMER) BY:___________________________________ BY: _____________________________ (Signature) (Signature) ______________________________________ _________________________________ (Print Name) (Print Name) ______________________________________ _________________________________ (Title) (Title) NTC INTERIM PRICING PROPOSAL August 29, 1995 NTC has requested WilTel to propose a $12,000,000/month 3 year commitment revenue plan which would provide for an 18 month ramp at $12,000,000/month pricing prior to the 36 month period during which NTC would maintain the $12,000,000 Monthly Revenue Commitment. WilTel has considered this request and made a preliminary proposal to NTC on August 3, 1995, for purposes of discussion and review by the parties. Upon review of the August 3 Proposal, NTC indicated its concern as to the competitiveness of the rate package contained in the August 3 Proposal principally with respect to the following: International Rates (Dedicated & Switched) Intrastate Rates (Switched) Interstate Rates (Switched) Upon further review of these issues, WilTel firmly believes that the most cost effective program it can offer NTC will be its proprietary IX Transport Product. The IX Transport Product is not currently available; however, as an interim solution is hereby proposed as a firm offer to NTC. 1) NTC will have the option of being one of the initial Beta customers for WilTel's IX Transport Product. In this regard, WilTel represents that testing with NTC could begin in September with full initiation of IX Transport Service by January 1, 1996. 2) As an incentive to NTC for maintaining its outstanding growth with WilTel while final development and implementation of the IX Transport Product is pending, NTC will be provided a pricing package for WilMax Service commensurate with WilTel's current $10,000,000/month program (See Discount Schedule Summary attached) effective September 1, 1995, provided NTC maintains $7,000,000/month in Monthly Revenue from the September 1 through November 1, 1995, usage periods and $7,500,000 in Monthly Revenue from the December 1, 1995 through the February 1, 1996 usage periods. 3) In consideration of NTC's special interests in international service and intrastate California services, the $10,000,000 Interim Program will contain two additional incentives: a) NTC will retain its current Promotional International Pricing for both Switched and Dedicated international traffic through January 31, 1996. b) NTC will obtain 1+ and 800 intrastate California service at the current WilTel IntraLATA prices. NTC - Interim Pricing Proposal August 29, 1995 4) NTC will be provided with assistance and Credit up to $250,000 for LEC charges associated with translating up 3 CICs in the same manner was previously discussed in the August 3 Proposal, and NTC will pay LEC charges in connection with ANIs and PIC disputes associated with its CICs as previously discussed. NTC's only obligation with respect to the CIC translation credit would be to reimburse WilTel for credits received if the parties are unable to finalize a long term relationship for Service under the IXC Transport regime which is comparable to a $10,000,000/month program under a postalized rate regime. 5) If NTC and WilTel are unable to conclude an expanded agreement to their mutual satisfaction by January 31, 1996, NTC's pricing and obligations will revert to the rates, terms and conditions contained in the November 15, 1994 WilMax Agreement effective February 1, 1996, subject to any CIC translation reimbursement obligations of NTC. 6) WilTel will proceed with the "10XXX# Auth Code" Product in accordance with its discussions with Dennis Miga. CONFIDENTIAL NTC INTERIM PRICING PROPOSAL DISCOUNT SCHEDULE SUMMARY
PRODUCTS BASE MONTHLY REVENUE DEVELOPMENT RATES SCHEDULE - ------------------------- ---------------- --------------------------------------------
"Confidential material deleted pursuant to Rule 406 of the Securities Act of 1933, as amended." WILMAX INTERIM PROGRAM ENROLLMENT TERMS [CARRIER] These Interim Program Enrollment Terms (the "Interim PET") are made as of the 1st day of September, 1995 (the "Effective Date"), by and between WorldCom Network Services, Inc. d/b/a WilTel (formerly WilTel, Inc.) ("WILTEL") and National Telephone and Communications, Inc. ("Customer") and are a part of their agreement for switched services, more particularly identified as TSA#NTC-941101 (the "AGREEMENT"). In accordance with the Agreement, charges to Customer for Service obtained thereunder shall be subject to the Discount Schedule set forth below and the Agreement shall also be subject to the terms and conditions set forth herein. The parties acknowledge that they previously executed Program Enrollment Terms dated November 15, 1994 (the "PRIOR PET"). As of the effective date, the Prior PET will be terminated in its entirety subject to reinstatement as provided in Section 2 below. 1. IX TRANSPORT: In connection with Customer's continued substantial growth in Monthly Revenue (as described below) since the execution of the Prior PET, the parties have been in negotiations concerning the increase of Customer's take-or-pay commitments under such Prior PET and the offering by WilTel of additional discounts to Customer. Currently, WilTel has been in the process of developing a new product ("IX TRANSPORT PRODUCT") to be offered to Customer which product the parties believe may adequately and more cost effectively address Customer's telecommunications services requirements. Therefore, the parties have agreed to execute this Interim PET to address Customer's requirements during the Interim Term while the IX Transport Product is tested and implemented by WilTel. 2. SERVICE TERM: The Service Term of this Interim PET will commence as of the Effective Date and continue until the sooner of (i) January 31, 1996, or (ii) the date the IX Transport Product (described in Section 1 above) is offered by WilTel (the "INTERIM TERM"). In the event the parties have failed to execute on or before January 31, 1996 (i) a definitive agreement concerning the terms and conditions relative to the IX Transport Product described in Section 1 above, or (ii) Amended and Restated Program Enrollment Terms whereby Customer agrees to maintain Monthly Revenue of at least $10,000,000 a month for a total of $600,000,000 over not greater than a five (5) year term, the Prior PET will be reinstated as of February 1, 1996 and the terms and conditions contained therein will continue in full force and effect through the end of the Service Team as described in the Prior PET. 05/01/95 Page 1 of 5 CONFIDENTIAL EXECUTION COPY DSA# NTC-940314 WILTEL, INC. CARRIER DIGITAL SERVICE AGREEMENT THIS AGREEMENT is entered into on the 14th day of March, 1994, by and between WILTEL, INC., a Delaware corporation ("WILTEL"), and NATIONAL TELEPHONE & COMMUNICATIONS, a California corporation ("CUSTOMER"), for the provision of the dedicated digital telecommunications interexchange, local access and ancillary services described in Digital Service Descriptions accepted by WilTel under this Agreement, subject to the terms and conditions contained in this Agreement. NOW THEREFORE, the parties agree to the following: 1. INCORPORATION OF DOCUMENTS AND CONTROLLING PROVISIONS: This Agreement consists of all the terms and conditions contained (i) in this Agreement, (ii) in Digital Service Description that conform hereto, and, (iii) in documents incorporated herein specifically by reference. This Agreement constitutes the complete and exclusive statement of the understanding between the parties and supersedes all proposals and prior agreements (oral or written) between the parties relating to Service provided hereunder. In the event any provision of this Agreement conflicts with any statute, rule or order of any governmental unit or regulatory body, or tariff filed by WilTel, then, if required by law, such statute, rule, order or tariff shall control. 2. DIGITAL SERVICE DESCRIPTIONS: Service requested by Customer hereunder shall be requested on WilTel Digital Service Description forms in effect from time to time, or Customer's forms accepted in writing by an Authorized Headquarters Representative of WilTel as hereinafter provided (hereinafter collectively referred to as "Digital Service Descriptions"). Each Digital Service Description shall reference this Agreement by Digital Service Agreement number ("DSA#") and shall become a part of this Agreement only to the extent that it specifies the type of Interexchange Service, quantity of circuits, originating and terminating Page 1 of 12 DSA# NTC-940314 this Agreement. (K) 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. (L) No rule of construction requiring interpretation against the draftsman hereof shall apply in the interpretation of this Agreement. IN WITNESS WHEREOF, the parties have executed this Digital Service Agreement on the date first written above. WILTEL, INC. NATIONAL TELEPHONE & COMMUN. ------------------------------------- (Customer) By: /s/ Mitch L. Lindner By: /s/ Christopher Mancuso ------------------------------- ------------------------------- (Signature) (Signature) Mitch L. Lindner Christopher Mancuso - ----------------------------------- ----------------------------------- (Print Name) (Print Name) Regional Sales Manager Director of NT. Development - ----------------------------------- ----------------------------------- (Title) (Title) Full Business Address: Full Business Address: WilTel, Inc. 2801 N. Main St. Suite 2800, One Williams Center Irvine, CA 92714 Tulsa, Oklahoma 74172 Attn: Contract Administration Attn: Christopher Mancuso (Party to Receive Notices) (Party to Receive Notices) Tel. No. 918-588-3210 Tel. No. 714-251-8000 Page 12 of 12 CUSTOMER AND PRO PROCEDURES I. Contract Administration gives Facilities Cost, Traffic and IS 30 days notice of the CIC translation effective date. A. The customer provides the Salesman with list of tandems where they want to do CIC translations so Facilities cost can estimate the costs of LEC charges discussed later in this document under escrow amounts. The Salesman provides Facilities Cost with this information. B. LECs require 30 days notice from Facilities Cost to coordinate the customer's translated CIC traffic into a WilTel billing cycle. Facilities Cost tells the LEC which LEC BAN the LEC should use for the CIC translated ANIs. The LEC BAN determines in which billing cycle the LEC will bill the ANIs. C. IS needs to know if CABs processing will increase considerably to prepare for increased disk (DASD) requirements. If the customer will have 0+ or 0- traffic, IS needs to handle the customer's 0+ and 0- traffic separately from other Operator Service providers. IS must change the Bill-Pro program to accept the new ACNA. D. Sales gets a list of the customer's current traffic that will be switched to (or is already on) the CIC to be translated. This information can be provided for the number of ANIs listed by tandem or lata. Traffic prefers the traffic information sorted by tandem. Sales provides Traffic with a copy of the traffic estimations 30 days prior to customer requested service date. This assumes the customer's current customer base is large enough it will have an impact on Traffic. Note: if the customer waits until the day they want to submit their ANIs via EDE for large numbers of ANI orders, they run the risk of having the ANIs rejected or put on hold for 30 to 45 days while new capacity is ordered and installed. Page 1 of 5 Release Date: June, 1994 II. The customer requests tandem information for a lata from their CSR. The CSR provides WilTel Provisioning a copy of the request. WilTel Provisioning provides the customer with 2-6 code (the Bell trunk group identifier), ACTL and LEC BAN so the customer can submit their ASR. Attachment B is an example of an ASR. IS provides an automated way for Provisioning to supply the customer with this information. The customer is informed by Provisioning they need to send an ASR to the tandem and to every end office involved. Provisioning informs the customer the DMT field on the ASR should be and "A". More Information is contained on the sample ASR in Attachment B. Provisioning and Line Cost request a monthly report from the customer. A sample report is included in Attachment C. III. The customer submits an ASR requesting the LEC translate the customer's CIC to WilTel's CIC using the 2-6 code, LEC BAN and ACTL provided to them by WilTel Provisioning. The customer should put a project ID on the ASR such as "WilTel redirect" so the LEC can give WilTel Facilities Cost summaries of this project ID. Customer sends a copy of their ASR and FOC to their CSR who sends a copy of the request to Line Cost. IV. Facilities Cost estimates LEC charges to cover the cost of performing functions associated with preparing, transmitting and monitoring translation requests and the access service requests to the LECs, including charges for internal costs and/or out-sourcing costs. Facilities Cost estimates these charges based on the tandems where the customers want to do CIC translations. The customer is required to setup an escrow account WilTel can draw on to cover these costs. Money is wired directly to the bank or to WilTel Treasury for the escrow amount. Each month, Facilities Cost does a true up (or comparison) of actual LEC charges vs. estimated LEC charges. If the customer owes WilTel money, Facilities Cost prepares a charge to the customer and Switched Billing enters that amount into the billing system to appear on the customer's bill. V. The end user (the customer's customer) will receive a bill from the LEC for the end user move charge. It is the customer's responsibility to inform the end user of the end user move charge. Page 2 of 5 Release Date: June, 1994 VI. The customer sends a letter to the LEC saying all PIC dispute charges will be sent to them. The customer sends a copy of this letter to their CSR. This is forwarded to Network Planning. VII. Each customer account on the AS400 will have a CIC. This CIC will be maintainable in Super Maintenance. The CIC will default to 555 unless another CIC is entered. If the customer has 3 CICs they will need at least three customer accounts. If the customer has 2 products (like Origination Only Service and Origination Only Service with Dedicated Access) that require 2 customer accounts and they have 3 CICs they will need 6 (2 times 3) customer accounts. Customer Service? will provide the customer and their salesperson with a table of switched customer account numbers, the CIC and their associated products. VIII. The EDE program distributes the CIC on the customer's account to the ANI records for use by the OPIE and PIC programs. IX. Traffic will setup the CIC in Circuit Inventory option 3.1.9 - CIC file maintenance before the customer submits a request for ANIs via EDE. If this CIC is another carrier's CIC that is translating their CIC to WilTel's, Traffic sets the "PIC" flag to a "N" for no and sets the "Accept LEC responses" flag to "y" to yes. Traffic fills in the ACNA (or responsible billing party) for this CIC. X. CABs (LEC bill reconciliation) will have a lot more LEC bills come in as a result of increased usage. Therefore, each time a customer is setup on a CIC agreement, IS will have to prepare for increased disk utilization. IS must add the ACNA (responsible billing party) to the Bill-pro table in the CABs programs. Provisioning will add the ACNA (or CCNA) to the CCNA Directory (Order Entry option 1.4.2) and set the ACNA indicator equal to "y" for yes, it is an ACNA. Page 3 of 5 Release Date: June, 1994 XI. The customer sends a request for ANIs via EDE (say they submitted the request on a Tuesday). The customer must know which customer number to use for which CIC and which product when placing an order service. Customer Service EDE support informs the customer of the new customer number and when to use it (for ANIs PICed to the customer's CIC). XII. OPIE (network capacity planning software) runs at 7:30 PM the night (Tuesday) the customer sent the ANI request via EDE. OPIE uses PIC requests and ANI requests to determine needed network capacity. OPIE produces a report for non-WilTel customers (as defined by Traffic on CI option 3.1.9) like the 1+ ANI to trunk group report (attachment D) but sorted by customer name and date request submitted. XIII. The next business day (Wednesday), Traffic will receive the new report to analyze whether the ANis can be accepted or rejected. Traffic highlights ANIs that will be rejected and gives the highlighted report to the PIC group. XIV. The PIC group puts a hold status on the PIC processing screen 10.1 for the ANIs highlighted by Traffic. XV. (This step is in question) A new JOB will be added specific to that customer so the PIC agent report can be requested for the customer by the PIC group after the PIC statuses are updated. The information is available to the customer from the Bulletin Board System in their (customer name) PIC.EXE file. The procedure for the customer to pull this information is in their customer handbook. The CIC agreement states WilTel will respond with rejects within 1 business day. If the customer does not get notification of the rejects within 1 day, the customer can assume they can proceed with PICing the ANIs. XVI. PIC processing will only send WilTel owned (as defined in the CIC file-CI option 3.1.9) PIC records to the LECs for PICing to WilTel's CIC. Page 4 of 5 Release Date: June, 1994 XVII. (This step is in question) The customer sends a file of WilTel accepted ANIs to the LEC for PICing to the customer's CIC. The customer gets a file of LEC responses from the LEC in a standard CARE format (attachment E). The customer sends WilTel this file electronically via NDM or T-Tran. NDM and T-Tran takes time to setup for each customer so it is important to have IS and the customer working together as early in the process as possible so dedicated circuits can be set up and NDM tests performed. Not all customers will have the ability to do NDM or T-Tran. In the case NDM or T-Tran is not or will not be setup, the customer will send WilTel a copy of the LEC responses so that the PIC group can manually update the LEC responses for each ANI in PIC Processing 10.1. The updating of the customer's LEC responses in WilTel's PIC files prevents "double counting" projected traffic in OPIE when an ANI is not shown as being PICed when it has and the actual traffic usage is coming in to OPIE via the Traffic system. XVIII. PIC processing will know to accept LEC responses according to the accept LEC responses flag set by Traffic on the CIC file (CI option 3.1.9). XIX. The end user can start using their ANI as soon as the LEC switches them over. XX. End User uses ANIs. OPIE starts using actual usage. 22. If the customer moves any of their traffic to another carrier, they are required to contact WilTel to disconnect service. Page 5 of 5 Release Date: June, 1994 EX-10.15 8 EXHIBIT 10.15 AMENDMENT TO STOCK PURCHASE AGMT. EXHIBIT 10.15 AMENDMENT TO STOCK PURCHASE AGREEMENT BETWEEN INCOMNET, INC. AND RAPID CAST, INC. AMENDMENT AMENDMENT (the "Amendment"), dated as of June 15, 1995, by and among Incomnet, Inc., a California corporation ("Buyer") and the persons listed on Exhibit A hereto (the "Seller Stockholders") who are the founding stockholders of Rapid Cast, Inc., a Delaware corporation ("Seller"). WHEREAS, Seller, Buyer and the Seller Stockholders are parties to a stock purchase agreement, dated as of January 19, 1995 (the "Original Agreement"), pursuant to which, among other things, (a) Buyer acquired from Seller 5,300,000 shares of common stock, par value $.001 per share (the "Common Stock"), of Seller for aggregate consideration of $15,000,000 and (b) Buyer acquired from the Seller Stockholders 4,900,000 shares of the Common Stock for aggregate consideration of (i) 750,000 shares of common stock, no par value, of Buyer (the "Buyer Common Stock") and (ii) contingent rights (the "Rights") to receive such number of additional shares of the Buyer Common Stock as determined in accordance with Section 4.06(b) of the Original Agreement; and WHEREAS, Buyer and the Seller Stockholders desire to amend their agreement, as of the date hereof, to provide for the exchange of the Rights for 600,000 shares of the Buyer Common Stock (the "New Shares"). NOW, THEREFORE, in consideration of the foregoing premises and the respective representations, warranties, covenants 1 and agreements hereinafter set forth, and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE I EXCHANGE Section 1.01 THE EXCHANGE. Effective upon the execution of this Amendment, the Seller Stockholders will, and hereby do, exchange, sell, assign, transfer and deliver to Buyer, and Buyer will, and hereby does, accept and purchase from the Seller Stockholders, the Rights for aggregate consideration of the New Shares. The foregoing transaction is referred to herein as the "Exchange." Section 1.02 TIME AND PLACE OF CLOSING. The closing of the Exchange (the "Closing") shall occur by delivery of all documents and instruments required hereby as mutually agreed upon by the parties concurrently with the execution and delivery of this Amendment. The date on which the Closing occurs is hereinafter referred to as the "Closing Date." Section 1.03 DELIVERIES. At the Closing (a) the Seller Stockholders will deliver to Buyer (i) this Amendment duly executed by each of the Seller Stockholders and (ii) such other documents and certificates as are required to be delivered by the Seller Stockholders pursuant to the terms of this Agreement or reasonably requested by Buyer and (b) Buyer will deliver (i) to each of the Seller Stockholders validly issued certificates representing that number of New Shares as is set forth on Exhibit A hereto and (ii) such other documents and certificates as are required to be 2 delivered by Buyer pursuant to the terms of this Agreement or reasonably requested by the Seller Stockholders. ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE SELLER STOCKHOLDERS Each of the Seller Stockholders represents and warrants to Buyer as follows: Section 2.01 TITLE TO THE RIGHTS. At the Closing, each of the Seller Stockholders will have delivered to Buyer good and valid title to the Rights, free and clear of all pledges, security interests, liens, charges, claims and encumbrances of whatever nature. Section 2.02 AUTHORITY RELATIVE TO THIS AMENDMENT. Each Seller Stockholder has full power and authority to execute and deliver this Amendment and to consummate the transactions contemplated hereby. This Amendment has been duly and validly executed and delivered by each of the Seller Stockholders and constitutes a valid and binding agreement of each such Seller Stockholder, enforceable against each such Seller Stockholder in accordance with its terms. Section 2.03 ACCESS TO INFORMATION. The Seller Stockholders confirm that Buyer has made available to them the opportunity to ask questions of officers and employees of Buyer and to acquire additional information about the business and financial condition of Buyer. Section 2.04 NO IMPLIED REPRESENTATION. It is the explicit intent of each party hereto that each Seller Stockholder 3 is not making any representation or warranty whatsoever, express or implied, except those representations and warranties explicitly set forth in this Agreement. ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to each Seller Stockholder as follows: Section 3.01 NEW SHARES. Upon delivery of the New Shares, Buyer will have delivered to the Seller Stockholders good and valid title to such shares, free and clear of all pledges, security interests, liens, charges, claims and encumbrances of whatever nature. Section 3.02 AUTHORITY RELATIVE TO THIS AGREEMENT. Buyer has full corporate power and authority to execute and deliver this Amendment and to consummate the transactions contemplated hereby. The execution and delivery of this Amendment and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of Buyer and no other corporate proceedings on the part of Buyer are necessary to authorize this Amendment or to consummate the transactions contemplated hereby. This Amendment has been duly and validly executed and delivered by Buyer and constitutes a valid and binding agreement of Buyer, enforceable against Buyer in accordance with its terms. Section 3.03 CONSENTS AND APPROVALS; NO VIOLATIONS. No filing with, and no permit, authorization, consent or approval of, 4 any public body or authority, including courts of competent jurisdiction, domestic or foreign, is necessary for the consummation by Buyer of the transactions contemplated by this Amendment. Neither the execution and delivery of this Amendment by Buyer nor the consummation by Buyer of the transactions contemplated hereby nor compliance by Buyer with any of the provisions hereof will (i) conflict with or result in any breach of any provision of the certificate of incorporation or by-laws of Buyer or any of its subsidiaries, (ii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, agreement or other instrument or obligation to which Buyer or any of its subsidiaries is a party or by which any of them or any of their properties or assets may be bound or (iii) violate any order, writ, injunction, decree, statute, treaty, rule or regulation applicable to Buyer, any of its subsidiaries or any of their properties or assets. ARTICLE IV COVENANTS AND OTHER AGREEMENTS Section 4.01 FURTHER ASSURANCES. The Seller Stockholders and Buyer agree that, from time to time after the Closing, each of them will execute and deliver such further instruments and take such other action as may be necessary to make effective the transactions contemplated hereby. 5 Section 4.02 ORIGINAL AGREEMENT. All agreements, covenants, representations and warranties contained in the Original Agreement which survived the closing of the Original Agreement shall remain in full force and effect; PROVIDED, HOWEVER, each of the Seller Stockholders acknowledges and agrees that upon receipt of the New Shares, all rights (a) to receive any Block B Shares (as defined in the Original Agreement) shall be null and void and Buyer shall have fully satisfied its obligation to deliver Block B Shares and (b) to demand or piggyback registration of the Block B Shares or the New Shares shall be terminated. ARTICLE V AMENDMENT Section 5.01 AMENDMENT. This Amendment may be amended at any time by the parties hereto, but only by an instrument in writing signed on behalf of each of the parties hereto. Section 5.02 FEES AND EXPENSES. Each party shall bear its own fees and expenses incurred in connection with the transactions contemplated hereby. ARTICLE VI SURVIVAL; INDEMNIFICATION Section 6.01 SURVIVAL PERIODS. All representations and warranties of the parties contained in this Amendment shall survive the Closing until the fifteen month anniversary of the Closing, provided that the representation and warranties set forth in Sections 2.01 and 3.01 shall survive without limit. The covenants 6 and agreements of the parties hereto shall survive the Closing without limit. Section 6.02 INDEMNIFICATION. The procedure for indemnification, and obligation to indemnify, as contained in the Original Agreement, shall apply to each of the representations, warranties, covenants and agreements contained in this Amendment. ARTICLE VII MISCELLANEOUS Section 7.01 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed given upon receipt to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Buyer, to Incomnet, Inc. 21031 Ventura Boulevard Woodland Hills, California 91364 Attention: Sam Schwartz with a copy to Mark J. Richardson, Esq. 1299 Ocean Avenue Suite 900 Santa Monica, California 90401 and (b) if to the Seller Stockholders, to The Seller Stockholders c/o Rapid Cast, Inc. 336 Atlantic Avenue East Rockaway, New York 07866 with a copy to Solovay Marshall & Edlin, P.C. 7 845 Third Avenue New York, New York 10022 Attention: Michael B. Solovay, Esq. Section 7.02 DESCRIPTIVE HEADINGS. The descriptive headings herein are inserted for convenience only and are not intended to be part of or to affect the meaning or interpretation of this Amendment. Section 7.03 COUNTERPARTS. This Amendment may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when two or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. Section 7.04 ENTIRE AGREEMENT; ASSIGNMENT. This Amendment (a) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof (other than, except as modified hereby, the Original Agreement) and (b) shall not be assigned by operation of law or otherwise. Section 7.05 GOVERNING LAW. This Amendment shall be governed and construed in accordance with the laws of the State of New York without regard to any applicable principles of conflicts of law. Section 7.06 SPECIFIC PERFORMANCE. The parties hereto agree that if any of the provisions of this Amendment were not performed in accordance with their specific terms or were otherwise breached, irreparable damage would occur, no adequate remedy at law 8 would exist and damages would be difficult to determine, and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or equity. Section 7.07 PUBLICITY. Except as otherwise required by law or the rules of any national securities exchange, for so long as this Amendment is in effect, no party shall issue or cause the publication of any press release or other public announcement with respect to the transactions contemplated by this Amendment without the express prior approval of the other party. Section 7.08 PARTIES IN INTEREST. This Amendment shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Amendment, express or implied, is intended to or shall confer upon any other person or persons any rights, benefits or remedies of any nature whatsoever under or by reason of this Amendment. 9 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be signed by their respective officers thereunto duly authorized as of the date first written above. INCOMNET, INC. By /s/ Sam Schwartz ------------------------------- Name: Title: /s/ Larry Joel /s/ Robert Cohen - ------------------------------------ --------------------------------- LARRY JOEL ROBERT S. COHEN /s/ Jeffrey Rubin /s/ Alan Cohen - ------------------------------------ --------------------------------- JEFFREY RUBIN ALAN COHEN /s/ Meryl Cohen - ------------------------------------ MERYL COHEN as custodian for JACLYN COHEN and GABRIELLE COHEN /s/ Laura Huberfeld under the New York UGMA --------------------------------- LAURA HUBERFELD THE ALLYSON COHEN IRREVOCABLE TRUST By: /s/ Michael Goodman, Trustee /s/ Laura Huberfeld --------------------------------- --------------------------------- LAURA HUBERFELD as custodian for JESSICA HUBERFELD and RACHEL HUBERFELD under THE JEFFREY COHEN the New York UGMA IRREVOCABLE TRUST By: /s/ Michael Goodman, Trustee --------------------------------- THE STEFANIE COHEN RUBIN IRREVOCABLE TRUST By: /s/ Michael Goodman, Trustee --------------------------------- /s/ Naomi Bodner - ------------------------------------ NAOMI BODNER /s/ Naomi Bodner - ------------------------------------ NAIOMI BODNER as custodian for MOSHE BODNER, AARON BODNER, ELIZAR BODNER, TZYPPORAH BODNER, MORDECHI BODNER, YAAKOV BODNER, RACHEL BODNER and YISSOCHAR BODNER under the New York UGMA 10 Exhibit A
NAME OF NUMBER OF SELLER STOCKHOLDER NEW SHARES - ------------------ ---------- - -Larry Joel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .175,000 - -Jeffrey Rubin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,334 - -Meryl Cohen as Custodian for Jaclyn Cohen under the New York UGMA. . . . . . . . . . . . . . . . . . . . . . . . . 23,333 - -Meryl Cohen as Custodian for Gabrielle Cohen under the New York UGMA. . . . . . . . . . . . . . . . . . . . . . . . . 23,333 - -Alan Cohen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,667 - -The Allyson Cohen Irrevocable Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,555 - -The Stefanie Cohen Rubin Irrevocable Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,555 - -The Jeffrey Cohen Irrevocable Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,555 - -Robert Cohen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,668 - -Laura Huberfeld. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,668 - -Laura Huberfeld as Custodian for Jessica Huberfeld under the New York UGMA. . . . . . . . . . . . . . . . . . . . . . . . . 41,666 - -Laura Huberfeld as Custodian for Rachel Huberfeld under the New York UGMA. . . . . . . . . . . . . . . . . . . . . . . . . 41,666 - -Naomi Bodner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000 - -Naomi Bodner as Custodian for Moshe Bodner under the New York UGMA. . . . . . . . . . . . . . . . . . . . . . . . . 12,500 - -Naomi Bodner as Custodian for Aaron Bodner under the New York UGMA. . . . . . . . . . . . . . . . . . . . . . . . . 12,500 - -Naomi Bodner as Custodian for Elizar Bodner under the New York UGMA. . . . . . . . . . . . . . . . . . . . . . . . . 12,500 - -Naomi Bodner as Custodian for Tzypporah Bodner under the New York UGMA. . . . . . . . . . . . . . . . . . . . . . . . . 12,500 - -Naomi Bodner as Custodian for Mordechi Bodner under the New York UGMA. . . . . . . . . . . . . . . . . . . . . . . . . 12,500 - -Naomi Bodner as Custodian for Yaakov Bodner under the New York UGMA. . . . . . . . . . . . . . . . . . . . . . . . . 12,500 - -Naomi Bodner as Custodian for Rachel Bodner under the New York UGMA. . . . . . . . . . . . . . . . . . . . . . . . . 12,500 - -Naomi Bodner as Custodian for Yissochar Bodner under the New York UGMA. . . . . . . . . . . . . . . . . . . . . . . . . 12,500
EX-10.16 9 EXHIBIT 10.16 AGMT. BETWEEN NTC & EARTHLINK EXHIBIT 10.16 AGREEMENT FOR PROMOTION OF INTERNET ACCESS SERVICES BETWEEN NTC AND EARTHLINK NETWORK AGREEMENT FOR PROMOTION OF INTERNET ACCESS SERVICES between NTC AND EARTHLINK NETWORK This Agreement For The Promotion of Internet Access Services ("Agreement") is entered into between National Telephone & Communications, Inc., a Nevada corporation located at 2801 Main Street, Irvine, California 92714 ("NTC") and EarthLink Network, Inc., a California corporation located at 3171 Los Feliz Boulevard, Suite 203, California 90039 ("ELN") and is entered into by the parties with reference to the following facts. A. ELN is a provider of Internet access services ("ELN Internet Access Services") that has developed proprietary Internet access software including Total Access Southern California, Total Access USA 800 and Total Access USA, due for release in August 1995, (collectively, "ELN Internet Access Products"). B. NTC is a reseller of long distance telephone services and products ("Telephone Services") that utilizes a nationwide, multi-level network of independent sales representatives ("NTC IRs") to market its Telephone Services to residential and small business customers ("Retail Customers"). C. NTC has recently developed promotional programs to market telecommunications pagers to the Retail Customers in conjunction with the marketing of NTC's Telephone Services by utilizing NTC IRs. D. ELN desires to engage NTC's services to market the ELN Internet Access Services to Retail Customers through (i) the development by NTC of promotional programs to market the ELN Internet Access Products with the NTC IRs ("NTC Internet Promotion Programs"), and (ii) the implementation by NTC of such NTC Internet Promotion Programs. E. NTC desires to develop and implement the NTC Internet Promotion Programs for ELN on condition that (i) such NTC Internet Promotion Programs can be developed and implemented in such a manner as to also support the NTC IRs' efforts to market NTC's Telephone Services to the Retail Customers, and (ii) NTC can be reasonably compensated for its efforts and expertise in developing the NTC Internet Promotion Programs and reasonably compensated for all Retail Customers added to the ELN Internet Access Service because of the NTC Internet Promotion Programs. NOW THEREFORE, for fair and reasonable consideration, the parties agree to the following. 1. THE AGREEMENT. NTC agrees to immediately begin efforts to develop an initial NTC Internet Promotion Program ("Initial Promotion Program") for the review and approval of ELN ("ELN Approval"), and ELN agrees such ELN Approval shall be expeditiously completed. Following the completion of such Initial Promotion Program and the ELN Approval, NTC agrees to expeditiously initiate a good faith effort to produce a minimum of twenty two thousand (22,000) new customers for the ELN Internet Access Services utilizing an ELN Internet Access Product ("NTC/ELN Customers") during the twelve (12) month period immediately following the execution of this Agreement, although ELN understands NTC cannot guarantee to produce twenty two thousand (22,000) NTC/ELN Customers within such twelve (12) month period. ELN agrees to (i) on a timely basis and at no cost to NTC, provide NTC with such ELN materials and services as are required to reasonably implement the NTC Internet Promotion Programs during the term of this Agreement including but not limited to the software and other materials reasonably necessary for the NTC/ELN Customers to utilize the ELN Internet Access Service through an ELN Internet Access Product ("ELN Internet Materials"), (ii) waive ELN's twenty five dollar ($25.00) setup fee for all NTC/ELN Customers, and (iii) provide satisfactory Internet access services for all NTC/ELN Customers such that NTC shall not receive an unreasonable number of complaints about the ELN Internet Access Service from the NTC/ELN Customers. 2. NTC'S INTERNET PROMOTIONAL PROGRAMS. The parties agree that all NTC Internet Promotion Programs may include but shall not necessarily be limited to (i) an NTC gift certificate program similar to the gift certificate program used by NTC in previous and/or current NTC promotional programs for pagers, and/or (ii) inclusion of the ELN Internet Materials in an NTC package of materials for new NTC IRs. Any and all such NTC Internet Promotion Programs used by NTC to produce the NTC/ELN Customers shall be at NTC's sole discretion, subject to ELN reasonable review and approval before implementation by NTC ("ELN Approval"), and at NTC's sole cost including but not limited to the shipping/handling costs, if any, that NTC may incur in delivering the ELN Internet Materials to a new NTC/ELN Customer, but not including the cost of the ELN Internet Materials which shall be provided to NTC at ELN's sole cost, including ENL's cost of delivery to NTC, as set forth above in Paragraph 1. The parties further agree that said ELN Approval of any NTC Internet Promotion Program shall be at ELN's sole, but reasonable, discretion and NTC agrees such sole ELN discretion shall include but is not limited to (i) determination of the actual amounts of ELN Internet Materials needed to supply NTC's current needs, which ENL agrees to make a good faith effort to deliver to NTC, once ELN Approval is given, and NTC agrees such good faith effort by ELN shall be sufficient to meet the intent of this Agreement, (ii) determination that an NTC Internet Promotion Program may not be cost effective for ELN, (iii) determination as to whether or not the NTC Internet Promotion Program promotes the ELN Internet Access Service in any manner that is misleading or that reflects unfavorably on ELN or that is contrary to applicable laws and regulations, including without limitation those relating to truth in advertising and fair trade practices, and (iv) adherence to copyrights and trademarks of ELN and its licensors. It is understood and agreed that NTC will distribute ELN's Internet materials only within the United States and Canada. 2 NTC warrants and represents to ELN that, without ELN's specific prior written approval, (i) NTC shall not knowingly ship or deliver more than one (1) set of ELN Internet Materials to a single NTC IR, and (ii) NTC shall only ship or deliver ELN Internet Materials to individual NTC IRs who NTC reasonably believes to be end-user customers receiving the ELN Internet Materials either for personal use or for the purpose of demonstrating the ELN Internet Access Service to other potential end-user customers ("End-User Customer") rather than receiving the ELN Internet Materials for the purpose of reselling to other end-user customers. In the event NTC breaches the warranty set forth in this Paragraph, then NTC agrees to be fully bound by the terms, conditions, warranties and representations set forth in Exhibit 1, attached hereto and incorporated herein by reference. ELN understands and acknowledges that NTC IRs, in accordance with each NRC IR's specific agreement with NTC, are not agents or employees of NTC. NTC will ensure that contained in its Internet Promotion Program material going out to NTC IRs will be an NTC memorandum delineating ELN requirements concerning copyrights and trademarks of ELN and its licensors. NTC also agrees that any NTC materials, and/or NTC IR materials provided to NTC for its approval, containing note or mention of ELN and/or its licensors shall be preapproved by ELN before being printed. 3. NTC COMPENSATION FOR DEVELOPING INITIAL PROMOTIONAL PROGRAM. The parties agree that ELN shall pay NTC a fee of one hundred thousand dollars ($100,000.00) specifically and solely for NTC's efforts and expertise in developing the Initial Promotion Program ("Program Development Fee"). The parties agree that a good faith deposit of fifty percent (50%) of such Program Development Fee shall be paid to NTC on execution of this Agreement. The parties further agree that at the time NTC completes the Initial Promotion Program and the ELN Approval is given, the remaining fifty percent (50%) of the program Development Fee shall be due and payable. 4. NTC COMPENSATION FOR EACH NEW NTC/ELN CUSTOMER. ELN agrees to pay NTC twenty dollars ($20.00) for each new NTC/ELN Customer who subscribes to the ELN Internet Access Service during the term of this Agreement ("NTC Commission") if such new NTC/ELN Customer (i) pays ELN for two (2) months usage of such ELN Internet Access Service ("Two Month Period"), and (ii) remains as a subscriber to such ELN Internet Access Service through the end of the Two Month Period. The parties agree that NTC shall earn the NTC Commission at the end of the Two Month Period if the new NTC/ELN Customer is still on said ELN Internet Access Service at the end of the Two Month Period. The parties agree that ELN, by the tenth (10th) calendar day of each month, shall give NTC a reasonable accounting of all NTC Commissions earned by NTC during the proceeding calendar month ("Accrued Commissions"). The parties further agree that ELN shall pay the Accrued Commissions to NTC on a quarterly basis in accordance with a schedule to be determined by good faith negotiations between the parties following the execution of this Agreement. 3 5. SOFTWARE MIX. NTC understands and acknowledges that the mix of software offered by ELN to its potential subscribers has been licensed by ELN through its various licensors. Thus, for reasons which are beyond the control of ELN, the software in the ELN Internet Materials and/or the restrictions on the licensing of such software may change at any time. If reasonably possible to do, ELN agrees to give NTC a minimum of sixty (60) days notice of any change in its software mix and/or licensing restrictions that might affect any or all of NTC's active NTC Internet Promotion Programs. 6. PROPRIETARY RIGHTS. NTC understands and acknowledges that title to and ownership of all copies of software, whether in immediately accessible or encrypted form, contained in the ELN Internet Materials provided to NTC, whether in machine readable or printed form, and all related technical know-how and all rights therein (including without limitation rights in patents, copyrights and trade secrets applicable thereto) are and shall remain the exclusive property of ELN and its licensors. NTC shall not take any action to jepradize, limit or interfer in any manner with ELN's and its licensors' ownership of and rights with respect to the aforesaid software and documentation. NTC shall have only those rights in the software and documentation granted to it pursuant to this Agreement. However, ELN understands and acknowledges that NTC has no control over or liability to ELN for ELN Internet Materials once such materials are shipped or delivered to an End-User Customer in accordance with the provisions set forth in and/or intended by this Agreement. 7. PROPRIETARY NOTICES. NTC, its employees and its agents shall not remove or alter any trademark, trade name, copyright or other proprietary notices, ledgens, symbols or labels appearing on or in copies of ELN Internet Materials and shall use the same notices, ledgens, symbols or labels in or on copies of any of the ELN Internet Materials provided to NTC. 8. EXPORT RESTRICTIONS. NTC agrees that it shall not, directly or indirectly, export or reexport, or knowingly permit the export or reexport of, the ELN software and the documentation or any technical information about the products to any country for which the United States Export Administration Act, any regulation thereunder, or any similar United States law or regulation, requires an export license or other United States governmental approval, unless the appropriate export license or approval has been obtained. However, ELN understands and acknowledges that NTC has no control over or liability to ELN, its licensors or licensees for ELN Internet Materials once such materials are shipped or delivered to an End-User Customer in accordance with the provisions set forth in and/or intended by this Agreement. NTC understands that the ELN Internet Materials will require a special export license to be distributed outside of the United States and Canada. 4 9. RESTRICTED RIGHTS. Use, duplication or disclosure of the of the ELN software by any unit of the U.S. Government is subject to "Restricted Rights" as that term is defined in the relevant Federal Acquisition Regulations and/or the Department of Defense Supplement, as applicable. 10. INDEMNIFICATION. A party to this Agreement ("Indemnifying Party") will indemnify and hold harmless the other party ("Indemnified Party") and/or its respective licensors and licensees against all claims, damages, suits, actions, judgements, losses, costs, reasonable attorney fees and reasonable expenses that the Indemnified Party and its respective customers or its licensees or licensors may sustain or incur by reason of any breach of any Indemnifying Party's warranties or representations contained in this Agreement, provided that each party shall promptly notify the other of any such claim, demand or suit. Promptly after the receipt by the Indemnified Party of notice of any claim asserted by a third party that may give rise to the Indemnifying Party's liability to the Indemnified Party and its respective customers or its licensees or licensors under this Paragraph 10, the Indemnified Party shall give to the Indemnifying Party written notice of such claim and Indemnifying Party shall be entitled to participate, at its own expense, in the defense of any such claim. Indemnified Party shall not pay, acknowledge, compromise or settle any such claim without the written consent of the Indemnifying Party, which consent shall not be unreasonable withheld. The parties agree that the Indemnifying Party's total aggregate liability for all claims set forth in and intended by this Paragraph 10 shall not exceed five hundred thousand dollars ($500,000); and ELN understands and acknowledges that NTC has no control over or liability to ELN, its licensees or licensors for ELN Internet Materials once such materials are shipped or delivered to an End-User Customer in accordance with the provisions set forth in and/or intended by this Agreement. Each party hereto represents to the other party that the singular act of executing this Agreement will not in itself violate any other agreement previously executed by the party including without limitation any agreement with a licensee, licensor or customer, and will not subject either party to any claim set forth in or intended by this Paragraph 10. 11. DISCLAIMER. EACH PARTY DISCLAIMS ALL WARRANTIES EXPRESSED OR IMPLIED CONCERNING THE SUBJECT MATTER OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION ALL WARRANTIES OF MERCHANTABILITY AND FITNESS FOR ANY PARTICULAR PURPOSE. THE EXPRESSED OBLIGATIONS STATED IN THIS AGREEMENT ARE THE ONLY OBLIGATIONS ASSUMED IN RESPECT OF MATTERS DEALT WITH IN THIS AGREEMENT. 12. AGENCY. Neither party shall be deemed to be the employee, agent or partner of the other, and neither shall have the authority to act on behalf of the other in any manner whatsoever. 5 13. TERM OF AGREEMENT. This Agreement shall automatically terminate on June 30, 1996 ("Automatic Termination Date"). The parties agree this Agreement may be terminated by either party prior to the Automatic Termination Date upon delivery of a written termination notice ("Termination Notice") to the other party. In the event one of the parties delivers such Termination Notice to the other party, then this Agreement shall terminate on the thirtieth (30th) calendar day following delivery of such Termination Notice ("Early Termination Date"), unless such Early Termination Date is after June 30, 1996. The parties agree to negotiate in good faith to determine the specific obligations and liabilities of each party following the termination of this Agreement which the parties agree shall include but shall not necessarily be limited to (i) the rights and licenses granted to NTC under this Agreement shall automatically terminate, (ii) any and all rights granted by NTC to the NTC IRs shall automatically terminate, other than the normal-and-usual rights that ELN grants to End-User Customers for such NTC IRs that are End-User Customers, (iii) all copies of ELN Internet Materials delivered or shipped to NTC by ELN which have not already been shipped or delivered by NTC to an End-User Customer shall promptly returned by NTC to ELN, (iv) definition of the actions and adjustments, if any, that may be necessary by the parties if NTC does not produce the number of NTC/ELN Customers contemplated by this Agreement, and (v) definition of the liabilities/obligations of each party for NTC/ELN Customers received by ELN after termination of this Agreement but resulting from the efforts and promotional programs of NTC prior to such termination. The parties further agree that the provisions set forth herein in Paragraphs 6, 7, 10, and 11, and in Exhibit 1, respectively titled "Proprietary Rights", "Proprietary Notices", "Indemnification", "Disclaimer", and "NTC Warranties If Shipments Violate End-User Customer Rules" shall survive expiration or termination of this Agreement. 14. DISPUTES AND VENUE. In the event of any dispute, controversy or claim ("Disputed Matter") between the parties to this Agreement or the breach thereof, the parties agree to submit and are obligated to submit the Disputed Matter to binding arbitration in accordance with the Rules of the American Arbitration Association. The parties further agree that such arbitration shall be held in the County of Orange in the State of California. By execution of this Agreement, the parties irrevocably and unconditionally submit to the jurisdiction of said arbitration in any such Disputed Matter. 15. APPLICABLE LAW. This Agreement shall be construed, governed and enforced in accordance with the laws of the State of California. 6 16. ATTORNEY FEES. In the event of any Disputed Matter between the parties hereto in connection with this Agreement, the prevailing party shall be entitled to receive from the losing party all of its cost and expenses including but not limited to court costs and reasonable attorneys' fees. 17. AMENDMENTS. No amendment, modification, waiver, discharge or change ("Amendment") to this Agreement shall be valid unless such Amendment is in writing and signed by all the parties hereto. 18. ADDITIONAL DOCUMENTS. Each of the parties hereto specifically agrees to execute such other and further instruments and documents as may reasonably be required to effectuate the terms, conditions and objectives of this Agreement. 19. SEVERABILITY AND COMPLIANCE. If any term, condition or provision of this Agreement is found to be invalid, contrary to law or otherwise unenforceable ("Invalid Provision"), such finding shall in no way affect the validity or enforceability of the other terms, conditions and provisions herein. Such other terms, conditions and provisions shall be valid and enforceable as if the Invalid Provision was never a part hereof. Each party hereto shall be excused without further liability from the performance of any duty, obligation or responsibility hereunder to the extent it is prevented form such performance by applicable laws, rules or regulations or by the order or decision of any regulatory authority. 20. WAIVER OF BREACH. The waiver of one party of a breach of any term, condition or provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach of any type whether of similar or dissimilar nature. 21. NOTICES. Any and all notices, demands or other communications ("Notice") given hereunder shall be delivered to the party to whom such Notice is addressed by delivery in person or by delivery through United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to NTC: National Telephone & Communications, Inc. 2801 Main Street Irvine, California 92714 Attn: President 7 If to ELN: EarthLink Network, Inc. 3171 Los Feliz Blvd., Suite 203 Los Angeles, California 90039 Attn: President If delivery is by United States mail, notice shall be deemed to have been given three (3) working days after being placed in such mail, as evidenced by a mailing receipt. Either party may change its address for the purpose of this Agreement by giving the other party written notice of its new address. 22. ASSIGNMENTS. This Agreement and the rights and obligations granted or agreed to hereunder may not be assigned by either party without first obtaining the prior written consent of the other party which both parties agree will not be unreasonably withheld; and any attempt to assign shall be null and void. However, either party shall have the right to assign its rights and obligations set forth in this Agreement to a successor company in the event of sale or merger effecting its operations. 23. VALID ENTITY. Each party to this Agreement which is a legal entity such as a partnership, corporation or trust or the like represents that it is a validly formed and existing entity, that it has the authority to enter into this Agreement and that all acts necessary to make this Agreement valid and binding have been done. The person or persons executing this Agreement on behalf of such entity represents that they have the right and authority to do so. 24. CONSTRUCTION. Any rule of law to the contrary notwithstanding, this Agreement shall be construed as if drafted by both parties regardless of which party or which party's legal counsel either actually drafted this Agreement or printed or physically memorialized this Agreement between the parties. 25. COUNTERPARTS. This Agreement may be executed in one or more counterparts, and each such counterpart shall be deemed an original; but all of such counterparts taken together shall constitute one and the same agreement. 26. USE OF PLURAL OR SINGULAR. The use of the singular or plural number in any term, condition or provision of this Agreement shall be deemed to include the other whenever the context so requires. 27. ENTIRE AGREEMENT. This Agreement sets forth and constitutes the entire agreement between the parties with respect to the subject matter herein and 8 supersedes all previous agreements promises and representations, either oral or in writing, between the parties hereto with respect to the transactions covered hereby, the contains all the covenants and agreements between the parties. Each party to this Agreement acknowledges that no representations, inducements, promises or agreements, orally or otherwise, have been made by any party to this Agreement, or anyone acting on behalf of any party to this Agreement, which are not embroiled herein. 28. BENEFITS. The terms, conditions and provisions of this Agreement shall inure to the benefit of and be binding on the parties hereto and all their respective successors including but not limited to permitted assigns, executors, administrators, heirs and representatives; and no other person or entity shall have any rights whatsoever under this Agreement. Agreed to effective on the 23rd day of June, 1995 in the County of Orange, State of California. NTC: ELN: National Telephone & EarthLink Network, Inc. Communications, Inc. By: By: - --------------------------- --------------------------- E.R. Jacobs Sky Dayton President & CEO President & CEO 9 EXHIBIT I to AGREEMENT FOR PROMOTION OF INTERNET ACCESS SERVICES NTC WARRANTIES IF SHIPMENTS VIOLATE END-USER CUSTOMER RULES In the event NTC breaches its warrantee set forth in Paragraph 3 of the Agreement for Promotion of Internet Access Services by knowingly shipping or delivering multiple sets of ELN Internet Materials to a single NTC IR whose purpose in receiving such materials is for reselling ("Wholesaling IRS") without ELN's specific prior written approval, then NTC agrees to be fully bound by the following terms and conditions. 1. NTC shall be responsible for ensuring that such Wholesaling IRs adhere to and agree to the terms in the sections is this Agreement entitled Proprietary Rights, Proprietary Notices, Export Restrictions, and Restricted Rights ("IR Material Terms"). NTC warrants and represents that it (a) shall ensure that such Wholesaling IRs are informed of and will adhere to the IR Material Terms and (b) will inform ELN immediately of any known breach of such terms. 2. If NTC learns of any breach of an IR Material Term that could damage ELN and/or its third party licensors, NTC shall take prompt, commercially reasonably corrective action at its own expense to remedy the breach and/or obtain all other appropriate relief and shall, in addition, immediately notify ELN in writing of the breach and corrective action taken. The execution of these duties by NTC shall not preclude ELN from also taking corrective action. 3. In addition, if a breach in an IR Material Term occurs that would, in ELN's opinion, result in irreparable harm to ELN and/or its licensors, unless injunctive or other equitable relief is entered into to restrain the violation, NTC shall, as requested by ELN, either (a) use its best efforts to obtain such equitable relief as promptly as reasonably possible, or (b) assign its rights against it to ELN to permit ELN to seek such equitable relief. 4. NTC's obligations as set forth in this Exhibit 1 protect the interest of ELN and its third party licensors shall survive expiration or termination of this agreement. EX-10.20 10 EXHIBIT 10.20 AGMT. WITH PRIOR NOTEHOLDERS EXHIBIT 10.20 SETTLEMENT AGREEMENTS AND PROPOSED SETTLEMENT AGREEMENTS WITH PRIOR NOTEHOLDERS SETTLEMENT AGREEMENT THIS SETTLEMENT AGREEMENT (the "Agreement") is entered into this 14th day of February, 1996 by and between Arthur Caplan, an individual ("AC"), and Incomnet, Inc., a California corporation ("Incomnet") with respect to the following facts. R E C I T A L S A. AC holds 10,000 shares (the "Shares") of the common stock of Incomnet which he received upon the conversion of a $100,000 convertible note (the "Note") issued by Incomnet in February 1995. AC converted the Note and received the Shares in July 1995. B. Pursuant to the terms of the Note, AC had certain registration rights with respect to the Shares. C. Incomnet did not register the Shares in 1995 in accordance with the terms of the Note. NOW THEREFORE, for good and valuable consideration the receipt and sufficiency of which are hereby acknowledged by the parties, the parties hereby agree as follows: 1. CONSIDERATION TO AC In consideration for AC's covenants in Sections 3 and 4 of this Agreement, Incomnet agrees to issue to AC, upon the effective date of the registration statement referred to in Section 2 of this Agreement, a sufficient number of additional registered shares of Incomnet common stock, if required, so that upon said date AC has a total number of registered shares of Incomnet common stock, including the Shares, having an aggregate value of $120,000 based on the average of the last sale price of Incomnet's stock quoted on the NASDAQ during the five trading days immediately preceding the effective date of the registration statement (the "Average Price"); provided, however, that any such adjustment would be subject to appropriate further adjustment in order to take into account any stock splits, stock dividends, spin-offs, reverse stock splits and similar recapitalization or reorganization transactions by Incomnet or its subsidiaries. Accordingly, if the Average Price is less than $12 per share, AC will be issued additional registered shares of Incomnet common stock, based on the above described formula, and if the Average Price is $12 or more, AC will not be issued additional shares. If additional shares are to be issued, Incomnet will deliver irrevocable instructions to its transfer agent for the issuance of the appropriate number of additional shares on the effective date of the registration statement. Notwithstanding anything else herein to the contrary, in the event AC's shares in Incomnet become valueless because Incomnet ceases to conduct business or for other reasons prior to the effective date of the registration statement referred to in Section 2 of this Agreement, then Incomnet will arrange to convey to AC $120,000 worth of the common stock of Rapid Cast, Inc. 2. COVENANTS OF THE COMPANY Incomnet covenants to file a registration statement on Form S-3 with the Securities and Exchange Commission within 90 days after the date this Agreement is executed by both parties hereto covering the Shares, with sufficient additional shares to cover any adjustments referred to in Section 1 of this Agreement, and to use its reasonable efforts to have the registration statement declared effective by the Securities and Exchange Commission as soon as practicable after it is filed. In the event the above referenced registration statement is not declared effective by the Securities and Exchange Commission by October 31, 1996, then Incomnet will pay AC $125,000 in cash and AC will tender his Shares to Incomnet for redemption. 3. COVENANTS OF AC AC agrees to fully cooperate with Incomnet in the preparation of the registration statement referred to in Section 2 of this Agreement. 4. GENERAL RELEASE Effective on the date of the execution of this Agreement by both parties hereto, AC hereby fully and forever releases and discharges Incomnet and any of its past, present and future affiliates, partners, attorneys, accountants, officers, directors, shareholders, employees, successors and predecessors, including but not limited to Sam Schwartz, from any and all claims, demands, obligations, losses, damages, or causes of action of any nature, whether known or unknown, whether based in tort, contract or any other theory of recovery, and whether for compensatory, consequential or punitive damages, that now exist or may hereafter accrue based on actions occurring prior to the effective date of this release, with respect to any claims or causes of action which AC has or may have against Incomnet or Sam Schwartz. The undersigned agree that this release shall not be considered admissions by any party of any liability. The undersigned warrant that no promise or inducement has been offered except as herein set forth. The undersigned are of legal age and legally competent to execute this release and accept full responsibility therefor. The undersigned further agree that all rights under Section 1542 of the Civil Code of California, and any similar law of any state or territory of the United States or other jurisdiction, are hereby expressly waived. Said Section reads as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." The undersigned declare that the terms of this full and final release of all claims have been completely read by the undersigned and are fully understood and voluntarily accepted for the purpose of making a full and final compromise and settlement. AC represents and warrants that it has not assigned any of its above referenced released claims to any third party. -2- 5. INJUNCTIVE RELIEF 5.1 DAMAGES INADEQUATE Each party acknowledges that it would be impossible to measure in money the damages to the other party if there is a failure to comply with any covenants and provisions of this Agreement, and agrees that in the event of any breach of any covenant or provision, the other party to this Agreement will not have an adequate remedy at law. 5.2 INJUNCTIVE RELIEF It is therefore agreed that the other party to this Agreement who is entitled to the benefit of the covenants and provisions of this Agreement which have been breached, in addition to any other rights or remedies which they may have, shall be entitled to immediate injunctive relief to enforce such covenants and provisions, and that in the event that any such action or proceeding is brought in equity to enforce them, the defaulting or breaching party will not urge a defense that there is an adequate remedy at law. 6. WAIVERS If any party shall at any time waive any rights hereunder resulting from any breach by the other party of any of the provisions of this Agreement, such waiver is not to be construed as a continuing waiver of other breaches of the same or other provisions of this Agreement. Resort to any remedies referred to herein shall not be construed as a waiver of any other rights and remedies to which such party is entitled under this Agreement or otherwise. 7. SUCCESSORS AND ASSIGNS Each covenant and representation of this Agreement shall inure to the benefit of and be binding upon each of the parties, their personal representatives, assigns and other successors in interest. 8. ENTIRE AND SOLE 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 a 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 California. -3- 10. COUNTERPARTS This Agreement may be executed simultaneously in any number of counterparts, each of which counterparts shall be deemed to be an original, and such counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, this Agreement has been entered into as of the date first above written. INCOMNET: INCOMNET, INC. By: ___________________________________ Melvyn Reznick, President Date: _________________________________ AC: ___________________________________ Arthur Caplan Date: _________________________________ -4- SETTLEMENT AGREEMENT THIS SETTLEMENT AGREEMENT (the "Agreement") is entered into this 20th day of February, 1996 by and between Rita Folger, an individual ("Shareholder"), and Incomnet, Inc., a California corporation ("Incomnet") with respect to the following facts. R E C I T A L S A. Shareholder holds 5,000 shares (the "Shares") of the common stock of Incomnet which he received upon the conversion of a $50,000 convertible note (the "Note") issued by Incomnet in February 1995. Shareholder converted the Note and received the Shares in July 1995. B. Pursuant to the terms of the Note, Shareholder had certain registration rights with respect to the Shares. C. Incomnet did not register the Shares in 1995 in accordance with the terms of the Note. NOW THEREFORE, for good and valuable consideration the receipt and sufficiency of which are hereby acknowledged by the parties, the parties hereby agree as follows: 1. CONSIDERATION TO SHAREHOLDER In consideration for Shareholder's covenants in Sections 3 and 4 of this Agreement, Incomnet agrees to issue to Shareholder, upon the effective date of the registration statement referred to in Section 2 of this Agreement, a sufficient number of additional registered shares of Incomnet common stock, if required, so that upon said date Shareholder has a total number of registered shares of Incomnet common stock, including the Shares, having an aggregate value of $60,000 based on the average of the last sale price of Incomnet's stock quoted on the NASDAQ during the five trading days immediately preceding the effective date of the registration statement (the "Average Price"); provided, however, that any such adjustment would be subject to appropriate further adjustment in order to take into account any stock splits, stock dividends, spin-offs, reverse stock splits and similar recapitalization or reorganization transactions by Incomnet or its subsidiaries. Accordingly, if the Average Price is less than $12 per share, Shareholder will be issued additional registered shares of Incomnet common stock, based on the above described formula, and if the Average Price is $12 or more, Shareholder will be not be issued additional shares. If additional shares are to be issued, Incomnet will deliver irrevocable instructions to its transfer agent for the issuance of the appropriate number of additional shares on the effective date of the registration statement. 2. COVENANTS OF THE COMPANY Incomnet covenants to file a registration statement on Form S-3 with the Securities and Exchange Commission within 90 days after the date this Agreement is executed by both parties hereto covering the Shares, with sufficient additional shares to cover any adjustments referred to in Section 1 of this Agreement, and to use its reasonable efforts to have the registration statement declared effective by the Securities and Exchange Commission as soon as practicable after it is filed. 3. COVENANTS OF SHAREHOLDER Shareholder agrees to fully cooperate with Incomnet in the preparation of the registration statement referred to in Section 2 of this Agreement. 4. GENERAL RELEASE Effective on the date of the execution of this Agreement by both parties hereto, Shareholder hereby fully and forever releases and discharges Incomnet and any of its past, present and future affiliates, partners, attorneys, accountants, officers, directors, shareholders, employees, successors and predecessors, including but not limited to Sam Schwartz, from any and all claims, demands, obligations, losses, damages, or causes of action of any nature, whether known or unknown, whether based in tort, contract or any other theory of recovery, and whether for compensatory, consequential or punitive damages, that now exist or may hereafter accrue based on actions occurring prior to the effective date of this release, with respect to any claims or causes of action which Shareholder has or may have against Incomnet or Sam Schwartz. The undersigned agree that this release shall not be considered admissions by any party of any liability. The undersigned warrant that no promise or inducement has been offered except as herein set forth. The undersigned are of legal age and legally competent to execute this release and accept full responsibility therefor. The undersigned further agree that all rights under Section 1542 of the Civil Code of California, and any similar law of any state or territory of the United States or other jurisdiction, are hereby expressly waived. Said Section reads as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." The undersigned declare that the terms of this full and final release of all claims have been completely read by the undersigned and are fully understood and voluntarily accepted for the purpose of making a full and final compromise and settlement. Shareholder represents and warrants that it has not assigned any of its above referenced claims to any third party. -2- 5. INJUNCTIVE RELIEF 5.1 DAMAGES INADEQUATE Each party acknowledges that it would be impossible to measure in money the damages to the other party if there is a failure to comply with any covenants and provisions of this Agreement, and agrees that in the event of any breach of any covenant or provision, the other party to this Agreement will not have an adequate remedy at law. 5.2 INJUNCTIVE RELIEF It is therefore agreed that the other party to this Agreement who is entitled to the benefit of the covenants and provisions of this Agreement which have been breached, in addition to any other rights or remedies which they may have, shall be entitled to immediate injunctive relief to enforce such covenants and provisions, and that in the event that any such action or proceeding is brought in equity to enforce them, the defaulting or breaching party will not urge a defense that there is an adequate remedy at law. 6. WAIVERS If any party shall at any time waive any rights hereunder resulting from any breach by the other party of any of the provisions of this Agreement, such waiver is not to be construed as a continuing waiver of other breaches of the same or other provisions of this Agreement. Resort to any remedies referred to herein shall not be construed as a waiver of any other rights and remedies to which such party is entitled under this Agreement or otherwise. 7. SUCCESSORS AND ASSIGNS Each covenant and representation of this Agreement shall inure to the benefit of and be binding upon each of the parties, their personal representatives, assigns and other successors in interest. 8. ENTIRE AND SOLE 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 a 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 California. -3- 10. COUNTERPARTS This Agreement may be executed simultaneously in any number of counterparts, each of which counterparts shall be deemed to be an original, and such counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, this Agreement has been entered into as of the date first above written. INCOMNET: INCOMNET, INC. By: ___________________________________ Melvyn Reznick, President Date: _________________________________ SHAREHOLDER: ___________________________________ Rita Folger Date: _________________________________ -4- SETTLEMENT AGREEMENT THIS SETTLEMENT AGREEMENT (the "Agreement") is entered into this 20th day of February, 1996 by and between Richard C. Jaffe, an individual ("Shareholder"), and Incomnet, Inc., a California corporation ("Incomnet") with respect to the following facts. R E C I T A L S A. Shareholder holds 5,000 shares (the "Shares") of the common stock of Incomnet which he received upon the conversion of a $50,000 convertible note (the "Note") issued by Incomnet in February 1995. Shareholder converted the Note and received the Shares in July 1995. B. Pursuant to the terms of the Note, Shareholder had certain registration rights with respect to the Shares. C. Incomnet did not register the Shares in 1995 in accordance with the terms of the Note. NOW THEREFORE, for good and valuable consideration the receipt and sufficiency of which are hereby acknowledged by the parties, the parties hereby agree as follows: 1. CONSIDERATION TO SHAREHOLDER In consideration for Shareholder's covenants in Sections 3 and 4 of this Agreement, Incomnet agrees to issue to Shareholder, upon the effective date of the registration statement referred to in Section 2 of this Agreement, a sufficient number of additional registered shares of Incomnet common stock, if required, so that upon said date Shareholder has a total number of registered shares of Incomnet common stock, including the Shares, having an aggregate value of $60,000 based on the average of the last sale price of Incomnet's stock quoted on the NASDAQ during the five trading days immediately preceding the effective date of the registration statement (the "Average Price"); provided, however, that any such adjustment would be subject to appropriate further adjustment in order to take into account any stock splits, stock dividends, spin-offs, reverse stock splits and similar recapitalization or reorganization transactions by Incomnet or its subsidiaries. Accordingly, if the Average Price is less than $12 per share, Shareholder will be issued additional registered shares of Incomnet common stock, based on the above described formula, and if the Average Price is $12 or more, Shareholder will be not be issued additional shares. If additional shares are to be issued, Incomnet will deliver irrevocable instructions to its transfer agent for the issuance of the appropriate number of additional shares on the effective date of the registration statement. 2. COVENANTS OF THE COMPANY Incomnet covenants to file a registration statement on Form S-3 with the Securities and Exchange Commission within 90 days after the date this Agreement is executed by both parties hereto covering the Shares, with sufficient additional shares to cover any adjustments referred to in Section 1 of this Agreement, and to use its reasonable efforts to have the registration statement declared effective by the Securities and Exchange Commission as soon as practicable after it is filed. 3. COVENANTS OF SHAREHOLDER Shareholder agrees to fully cooperate with Incomnet in the preparation of the registration statement referred to in Section 2 of this Agreement. 4. GENERAL RELEASE Effective on the date of the execution of this Agreement by both parties hereto, Shareholder hereby fully and forever releases and discharges Incomnet and any of its past, present and future affiliates, partners, attorneys, accountants, officers, directors, shareholders, employees, successors and predecessors, including but not limited to Sam Schwartz, from any and all claims, demands, obligations, losses, damages, or causes of action of any nature, whether known or unknown, whether based in tort, contract or any other theory of recovery, and whether for compensatory, consequential or punitive damages, that now exist or may hereafter accrue based on actions occurring prior to the effective date of this release, with respect to any claims or causes of action which Shareholder has or may have against Incomnet or Sam Schwartz. The undersigned agree that this release shall not be considered admissions by any party of any liability. The undersigned warrant that no promise or inducement has been offered except as herein set forth. The undersigned are of legal age and legally competent to execute this release and accept full responsibility therefor. The undersigned further agree that all rights under Section 1542 of the Civil Code of California, and any similar law of any state or territory of the United States or other jurisdiction, are hereby expressly waived. Said Section reads as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." The undersigned declare that the terms of this full and final release of all claims have been completely read by the undersigned and are fully understood and voluntarily accepted for the purpose of making a full and final compromise and settlement. Shareholder represents and warrants that it has not assigned any of its above referenced released claims to any third party. -2- 5. INJUNCTIVE RELIEF 5.1 DAMAGES INADEQUATE Each party acknowledges that it would be impossible to measure in money the damages to the other party if there is a failure to comply with any covenants and provisions of this Agreement, and agrees that in the event of any breach of any covenant or provision, the other party to this Agreement will not have an adequate remedy at law. 5.2 INJUNCTIVE RELIEF It is therefore agreed that the other party to this Agreement who is entitled to the benefit of the covenants and provisions of this Agreement which have been breached, in addition to any other rights or remedies which they may have, shall be entitled to immediate injunctive relief to enforce such covenants and provisions, and that in the event that any such action or proceeding is brought in equity to enforce them, the defaulting or breaching party will not urge a defense that there is an adequate remedy at law. 6. WAIVERS If any party shall at any time waive any rights hereunder resulting from any breach by the other party of any of the provisions of this Agreement, such waiver is not to be construed as a continuing waiver of other breaches of the same or other provisions of this Agreement. Resort to any remedies referred to herein shall not be construed as a waiver of any other rights and remedies to which such party is entitled under this Agreement or otherwise. 7. SUCCESSORS AND ASSIGNS Each covenant and representation of this Agreement shall inure to the benefit of and be binding upon each of the parties, their personal representatives, assigns and other successors in interest. 8. ENTIRE AND SOLE 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 a 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 California. -3- 10. COUNTERPARTS This Agreement may be executed simultaneously in any number of counterparts, each of which counterparts shall be deemed to be an original, and such counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, this Agreement has been entered into as of the date first above written. INCOMNET: INCOMNET, INC. By: ___________________________________ Melvyn Reznick, President Date: _________________________________ SHAREHOLDER: ___________________________________ Richard C. Jaffe Date: _________________________________ -4- SETTLEMENT AGREEMENT THIS SETTLEMENT AGREEMENT (the "Agreement") is entered into this 20th day of February, 1996 by and between Lenore Katz, an individual ("Shareholder"), and Incomnet, Inc., a California corporation ("Incomnet") with respect to the following facts. R E C I T A L S A. Shareholder holds 2,500 shares (the "Shares") of the common stock of Incomnet which he received upon the conversion of a $25,000 convertible note (the "Note") issued by Incomnet in February 1995. Shareholder converted the Note and received the Shares in July 1995. B. Pursuant to the terms of the Note, Shareholder had certain registration rights with respect to the Shares. C. Incomnet did not register the Shares in 1995 in accordance with the terms of the Note. NOW THEREFORE, for good and valuable consideration the receipt and sufficiency of which are hereby acknowledged by the parties, the parties hereby agree as follows: 1. CONSIDERATION TO SHAREHOLDER In consideration for Shareholder's covenants in Sections 3 and 4 of this Agreement, Incomnet agrees to issue to Shareholder, upon the effective date of the registration statement referred to in Section 2 of this Agreement, a sufficient number of additional registered shares of Incomnet common stock, if required, so that upon said date Shareholder has a total number of registered shares of Incomnet common stock, including the Shares, having an aggregate value of $30,000 based on the average of the last sale price of Incomnet's stock quoted on the NASDAQ during the five trading days immediately preceding the effective date of the registration statement (the "Average Price"); provided, however, that any such adjustment would be subject to appropriate further adjustment in order to take into account any stock splits, stock dividends, spin-offs, reverse stock splits and similar recapitalization or reorganization transactions by Incomnet or its subsidiaries. Accordingly, if the Average Price is less than $12 per share, Shareholder will be issued additional registered shares of Incomnet common stock, based on the above described formula, and if the Average Price is $12 or more, Shareholder will not be issued additional shares. If additional shares are to be issued, Incomnet will deliver irrevocable instructions to its transfer agent for the issuance of the appropriate number of additional shares on the effective date of the registration statement. 2. COVENANTS OF THE COMPANY Incomnet covenants to file a registration statement on Form S-3 with the Securities and Exchange Commission within 90 days after the date this Agreement is executed by both parties hereto covering the Shares, with sufficient additional shares to cover any adjustments referred to in Section 1 of this Agreement, and to use its reasonable efforts to have the registration statement declared effective by the Securities and Exchange Commission as soon as practicable after it is filed. 3. COVENANTS OF SHAREHOLDER Shareholder agrees to fully cooperate with Incomnet in the preparation of the registration statement referred to in Section 2 of this Agreement. 4. GENERAL RELEASE Effective on the date of the execution of this Agreement by both parties hereto, Shareholder hereby fully and forever releases and discharges Incomnet and any of its past, present and future affiliates, partners, attorneys, accountants, officers, directors, shareholders, employees, successors and predecessors, including but not limited to Sam Schwartz, from any and all claims, demands, obligations, losses, damages, or causes of action of any nature, whether known or unknown, whether based in tort, contract or any other theory of recovery, and whether for compensatory, consequential or punitive damages, that now exist or may hereafter accrue based on actions occurring prior to the effective date of this release, with respect to any claims or causes of action which Shareholder has or may have against Incomnet or Sam Schwartz. The undersigned agree that this release shall not be considered admissions by any party of any liability. The undersigned warrant that no promise or inducement has been offered except as herein set forth. The undersigned are of legal age and legally competent to execute this release and accept full responsibility therefor. The undersigned further agree that all rights under Section 1542 of the Civil Code of California, and any similar law of any state or territory of the United States or other jurisdiction, are hereby expressly waived. Said Section reads as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." The undersigned declare that the terms of this full and final release of all claims have been completely read by the undersigned and are fully understood and voluntarily accepted for the purpose of making a full and final compromise and settlement. Shareholder represents and warrants that it has not assigned any of its above referenced released claims to any third party. -2- 5. INJUNCTIVE RELIEF 5.1 DAMAGES INADEQUATE Each party acknowledges that it would be impossible to measure in money the damages to the other party if there is a failure to comply with any covenants and provisions of this Agreement, and agrees that in the event of any breach of any covenant or provision, the other party to this Agreement will not have an adequate remedy at law. 5.2 INJUNCTIVE RELIEF It is therefore agreed that the other party to this Agreement who is entitled to the benefit of the covenants and provisions of this Agreement which have been breached, in addition to any other rights or remedies which they may have, shall be entitled to immediate injunctive relief to enforce such covenants and provisions, and that in the event that any such action or proceeding is brought in equity to enforce them, the defaulting or breaching party will not urge a defense that there is an adequate remedy at law. 6. WAIVERS If any party shall at any time waive any rights hereunder resulting from any breach by the other party of any of the provisions of this Agreement, such waiver is not to be construed as a continuing waiver of other breaches of the same or other provisions of this Agreement. Resort to any remedies referred to herein shall not be construed as a waiver of any other rights and remedies to which such party is entitled under this Agreement or otherwise. 7. SUCCESSORS AND ASSIGNS Each covenant and representation of this Agreement shall inure to the benefit of and be binding upon each of the parties, their personal representatives, assigns and other successors in interest. 8. ENTIRE AND SOLE 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 a 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 California. -3- 10. COUNTERPARTS This Agreement may be executed simultaneously in any number of counterparts, each of which counterparts shall be deemed to be an original, and such counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, this Agreement has been entered into as of the date first above written. INCOMNET: INCOMNET, INC. By: ___________________________________ Melvyn Reznick, President Date: _________________________________ SHAREHOLDER: ___________________________________ Lenore Katz Date: _________________________________ -4- SETTLEMENT AGREEMENT THIS SETTLEMENT AGREEMENT (the "Agreement") is entered into this 20th day of February, 1996 by and between Kenneth Lebow, an individual, as the beneficiary of the Kenneth Lebow IRA R-O ("Shareholder"), and Incomnet, Inc., a California corporation ("Incomnet") with respect to the following facts. R E C I T A L S A. Shareholder holds 7,500 shares (the "Shares") of the common stock of Incomnet which he received upon the conversion of a $75,000 convertible note (the "Note") issued by Incomnet in February 1995. Shareholder converted the Note and received the Shares in July 1995. B. Pursuant to the terms of the Note, Shareholder had certain registration rights with respect to the Shares. C. Incomnet did not register the Shares in 1995 in accordance with the terms of the Note. NOW THEREFORE, for good and valuable consideration the receipt and sufficiency of which are hereby acknowledged by the parties, the parties hereby agree as follows: 1. CONSIDERATION TO SHAREHOLDER In consideration for Shareholder's covenants in Sections 3 and 4 of this Agreement, Incomnet agrees to issue to Shareholder, upon the effective date of the registration statement referred to in Section 2 of this Agreement, a sufficient number of additional registered shares of Incomnet common stock, if required, so that upon said date Shareholder has a total number of registered shares of Incomnet common stock, including the Shares, having an aggregate value of $90,000 based on the average of the last sale price of Incomnet's stock quoted on the NASDAQ during the five trading days immediately preceding the effective date of the registration statement (the "Average Price"); provided, however, that any such adjustment would be subject to appropriate further adjustment in order to take into account any stock splits, stock dividends, spin-offs, reverse stock splits and similar recapitalization or reorganization transactions by Incomnet or its subsidiaries. Accordingly, if the Average Price is less than $12 per share, Shareholder will be issued additional registered shares of Incomnet common stock, based on the above described formula, and if the Average Price is $12 or more, Shareholder will not be issued additional shares. If additional shares are to be issued, Incomnet will deliver irrevocable instructions to its transfer agent for the issuance of the appropriate number of additional shares on the effective date of the registration statement. 2. COVENANTS OF THE COMPANY Incomnet covenants to file a registration statement on Form S-3 with the Securities and Exchange Commission within 90 days after the date this Agreement is executed by both parties hereto covering the Shares, with sufficient additional shares to cover any adjustments referred to in Section 1 of this Agreement, and to use its reasonable efforts to have the registration statement declared effective by the Securities and Exchange Commission as soon as practicable after it is filed. 3. COVENANTS OF SHAREHOLDER Shareholder agrees to fully cooperate with Incomnet in the preparation of the registration statement referred to in Section 2 of this Agreement. 4. GENERAL RELEASE Effective on the date of the execution of this Agreement by both parties hereto, Shareholder hereby fully and forever releases and discharges Incomnet and any of its past, present and future affiliates, partners, attorneys, accountants, officers, directors, shareholders, employees, successors and predecessors, including but not limited to Sam Schwartz, from any and all claims, demands, obligations, losses, damages, or causes of action of any nature, whether known or unknown, whether based in tort, contract or any other theory of recovery, and whether for compensatory, consequential or punitive damages, that now exist or may hereafter accrue based on actions occurring prior to the effective date of this release, with respect to any claims or causes of action which Shareholder has or may have against Incomnet or Sam Schwartz. The undersigned agree that this release shall not be considered admissions by any party of any liability. The undersigned warrant that no promise or inducement has been offered except as herein set forth. The undersigned are of legal age and legally competent to execute this release and accept full responsibility therefor. The undersigned further agree that all rights under Section 1542 of the Civil Code of California, and any similar law of any state or territory of the United States or other jurisdiction, are hereby expressly waived. Said Section reads as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." The undersigned declare that the terms of this full and final release of all claims have been completely read by the undersigned and are fully understood and voluntarily accepted for the purpose of making a full and final compromise and settlement. Shareholder represents and warrants that it has not assigned any of its above referenced released claims to any third party. -2- 5. INJUNCTIVE RELIEF 5.1 DAMAGES INADEQUATE Each party acknowledges that it would be impossible to measure in money the damages to the other party if there is a failure to comply with any covenants and provisions of this Agreement, and agrees that in the event of any breach of any covenant or provision, the other party to this Agreement will not have an adequate remedy at law. 5.2 INJUNCTIVE RELIEF It is therefore agreed that the other party to this Agreement who is entitled to the benefit of the covenants and provisions of this Agreement which have been breached, in addition to any other rights or remedies which they may have, shall be entitled to immediate injunctive relief to enforce such covenants and provisions, and that in the event that any such action or proceeding is brought in equity to enforce them, the defaulting or breaching party will not urge a defense that there is an adequate remedy at law. 6. WAIVERS If any party shall at any time waive any rights hereunder resulting from any breach by the other party of any of the provisions of this Agreement, such waiver is not to be construed as a continuing waiver of other breaches of the same or other provisions of this Agreement. Resort to any remedies referred to herein shall not be construed as a waiver of any other rights and remedies to which such party is entitled under this Agreement or otherwise. 7. SUCCESSORS AND ASSIGNS Each covenant and representation of this Agreement shall inure to the benefit of and be binding upon each of the parties, their personal representatives, assigns and other successors in interest. 8. ENTIRE AND SOLE 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 a 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 California. -3- 10. COUNTERPARTS This Agreement may be executed simultaneously in any number of counterparts, each of which counterparts shall be deemed to be an original, and such counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, this Agreement has been entered into as of the date first above written. INCOMNET: INCOMNET, INC. By: ___________________________________ Melvyn Reznick, President Date: _________________________________ SHAREHOLDER: ___________________________________ Kenneth Lebow, as beneficiary of the Kenneth Lebow IRA R-O Date: _________________________________ -4- SETTLEMENT AGREEMENT THIS SETTLEMENT AGREEMENT (the "Agreement") is entered into this 20th day of February, 1996 by and between Moshe Miller, an individual ("Shareholder"), and Incomnet, Inc., a California corporation ("Incomnet") with respect to the following facts. R E C I T A L S A. Shareholder holds 2,500 shares (the "Shares") of the common stock of Incomnet which he received upon the conversion of a $25,000 convertible note (the "Note") issued by Incomnet in February 1995. Shareholder converted the Note and received the Shares in July 1995. B. Pursuant to the terms of the Note, Shareholder had certain registration rights with respect to the Shares. C. Incomnet did not register the Shares in 1995 in accordance with the terms of the Note. NOW THEREFORE, for good and valuable consideration the receipt and sufficiency of which are hereby acknowledged by the parties, the parties hereby agree as follows: 1. CONSIDERATION TO SHAREHOLDER In consideration for Shareholder's covenants in Sections 3 and 4 of this Agreement, Incomnet agrees to issue to Shareholder, upon the effective date of the registration statement referred to in Section 2 of this Agreement, a sufficient number of additional registered shares of Incomnet common stock, if required, so that upon said date Shareholder has a total number of registered shares of Incomnet common stock, including the Shares, having an aggregate value of $30,000 based on the average of the last sale price of Incomnet's stock quoted on the NASDAQ during the five trading days immediately preceding the effective date of the registration statement (the "Average Price"); provided, however, that any such adjustment would be subject to appropriate further adjustment in order to take into account any stock splits, stock dividends, spin-offs, reverse stock splits and similar recapitalization or reorganization transactions by Incomnet or its subsidiaries. Accordingly, if the Average Price is less than $12 per share, Shareholder will be issued additional registered shares of Incomnet common stock, based on the above described formula, and if the Average Price is $12 or more, Shareholder will not be issued additional shares. If additional shares are to be issued, Incomnet will deliver irrevocable instructions to its transfer agent for the issuance of the appropriate number of additional shares on the effective date of the registration statement. 2. COVENANTS OF THE COMPANY Incomnet covenants to file a registration statement on Form S-3 with the Securities and Exchange Commission within 90 days after the date this Agreement is executed by both parties hereto covering the Shares, with sufficient additional shares to cover any adjustments referred to in Section 1 of this Agreement, and to use its reasonable efforts to have the registration statement declared effective by the Securities and Exchange Commission as soon as practicable after it is filed. 3. COVENANTS OF SHAREHOLDER Shareholder agrees to fully cooperate with Incomnet in the preparation of the registration statement referred to in Section 2 of this Agreement. 4. GENERAL RELEASE Effective on the date of the execution of this Agreement by both parties hereto, Shareholder hereby fully and forever releases and discharges Incomnet and any of its past, present and future affiliates, partners, attorneys, accountants, officers, directors, shareholders, employees, successors and predecessors, including but not limited to Sam Schwartz, from any and all claims, demands, obligations, losses, damages, or causes of action of any nature, whether known or unknown, whether based in tort, contract or any other theory of recovery, and whether for compensatory, consequential or punitive damages, that now exist or may hereafter accrue based on actions occurring prior to the effective date of this release, with respect to any claims or causes of action which Shareholder has or may have against Incomnet or Sam Schwartz. The undersigned agree that this release shall not be considered admissions by any party of any liability. The undersigned warrant that no promise or inducement has been offered except as herein set forth. The undersigned are of legal age and legally competent to execute this release and accept full responsibility therefor. The undersigned further agree that all rights under Section 1542 of the Civil Code of California, and any similar law of any state or territory of the United States or other jurisdiction, are hereby expressly waived. Said Section reads as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." The undersigned declare that the terms of this full and final release of all claims have been completely read by the undersigned and are fully understood and voluntarily accepted for the purpose of making a full and final compromise and settlement. Shareholder represents and warrants that it has not assigned any of its above referenced released claims to any third party. -2- 5. INJUNCTIVE RELIEF 5.1 DAMAGES INADEQUATE Each party acknowledges that it would be impossible to measure in money the damages to the other party if there is a failure to comply with any covenants and provisions of this Agreement, and agrees that in the event of any breach of any covenant or provision, the other party to this Agreement will not have an adequate remedy at law. 5.2 INJUNCTIVE RELIEF It is therefore agreed that the other party to this Agreement who is entitled to the benefit of the covenants and provisions of this Agreement which have been breached, in addition to any other rights or remedies which they may have, shall be entitled to immediate injunctive relief to enforce such covenants and provisions, and that in the event that any such action or proceeding is brought in equity to enforce them, the defaulting or breaching party will not urge a defense that there is an adequate remedy at law. 6. WAIVERS If any party shall at any time waive any rights hereunder resulting from any breach by the other party of any of the provisions of this Agreement, such waiver is not to be construed as a continuing waiver of other breaches of the same or other provisions of this Agreement. Resort to any remedies referred to herein shall not be construed as a waiver of any other rights and remedies to which such party is entitled under this Agreement or otherwise. 7. SUCCESSORS AND ASSIGNS Each covenant and representation of this Agreement shall inure to the benefit of and be binding upon each of the parties, their personal representatives, assigns and other successors in interest. 8. ENTIRE AND SOLE 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 a 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 California. -3- 10. COUNTERPARTS This Agreement may be executed simultaneously in any number of counterparts, each of which counterparts shall be deemed to be an original, and such counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, this Agreement has been entered into as of the date first above written. INCOMNET: INCOMNET, INC. By: ___________________________________ Melvyn Reznick, President Date: _________________________________ SHAREHOLDER: ___________________________________ Moshe Mueller Date: _________________________________ -4- UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK _______________________________________ JULES NORDLICHT, : PLAINTIFF, : : CV 95 5134 -VS- : INCOMNET, INC. AND : STIPULATION OF SETTLEMENT SAM D. SCHWARTZ, : DEFENDANTS. _______________________________________ IT IS HEREBY STIPULATED AND AGREED to by and between the Parties hereto and their respective attorneys, as follows: SETTLEMENT AGREEMENT THIS SETTLEMENT AGREEMENT (the "Agreement") is entered into this ____ day of _________ 1996 by and between Jules Nordlicht, an individual ("JN"), and Incomnet, Inc., a California corporation ("Incomnet") with respect to the following facts. R E C I T A L S A. JN holds a convertible promissory note bearing interest at the rate of 8% per annum (the "Note") payable by Incomnet in full on January 31, 1996. B. Pursuant to the terms of the Note, JN had certain registration rights with respect to the shares underlying the Note. C. Incomnet did not register the shares underlying the Note in 1995 in accordance with the terms of the Note. NOW THEREFORE, for good and valuable consideration the receipt and sufficiency of which are hereby acknowledged by the parties, the parties hereby agree as follows: 1. CONSIDERATION TO JN In consideration for JN's covenants in Sections 3 and 4 of this Agreement, and simultaneously upon the execution of this Agreement by all parties hereto, Incomnet agrees to (i) repay the principal and accrued but unpaid interest on the Note in full, (ii) issue to JN or his designees a minimum of 31,000 shares of the common stock of Incomnet (the "Shares"), subject to adjustment as provided in Section 2 of this Agreement, and deliver irrevocable instructions to the Incomnet transfer agent for the issuance of the Shares, and (iii) transfer to JN upon the execution of this Agreement 5,000 warrants to purchase the common stock of Rapid Cast, Inc. on the same terms and conditions as the warrants which were initially issued to JN with the Note in February 1995, and, if necessary, deliver irrevocable instructions to the appropriate transfer agent for the issuance of the warrants. 2. COVENANTS BY THE COMPANY Incomnet covenants to file a registration statement on Form S-3 with the Securities and Exchange Commission within 90 days after the date this Agreement is executed by both parties hereto covering the Shares, and to use its reasonable efforts to have the registration statement declared effective by the Securities and Exchange Commission as soon as practicable after it is filed. The number of Shares issuable to JN pursuant to this Agreement will be adjusted upward to the extent necessary to result in JN having $155,000 worth of Incomnet Common Stock on the date the registration statement is declared effective by the Securities and Exchange Commission, based on the average of the last sale price of Incomnet's stock quoted on the NASDAQ during the five trading days immediately following the effective date of the registration statement; provided, however, that any such adjustment would be subject to appropriate further adjustment in order to take into account any stock splits, stock dividends, spin-offs, reverse stock splits and similar recapitalization and reorganization transactions by Incomnet or its subsidiaries. Incomnet will be obligated to pay to JN $100,000 in cash as liquidated damages in the event that Incomnet does not file the registration statement within the above referenced 90 day period. In the event Incomnet fails to file the -1- registration statement for the Shares within 90 days after the date of this Agreement, JN is authorized to enter judgment (the "Judgment") against Incomnet in the sum of $100,000. It shall be sufficient for the Clerk of the Court to sign a Judgment to be entered by the Clerk pursuant to this paragraph based solely upon an affidavit of JN, stating that the registration statement was not timely filed and that Incomnet has not paid to JN the sum of $100,000, as provided for in this Agreement. The affidavit and Judgment shall be submitted to the Clerk of the Court after five (5) days' notice to Mark Richardson, counsel for Incomnet. If Incomnet is late with the filing and pays the $100,000 penalty, the Judgment will not be recorded, but Incomnet will still be considered to be in breach of this Agreement until it files said registration statement. If Incomnet is late with the filing and does not pay the $100,000 penalty, then JN may record the Judgment and assert its remedies for Incomnet's breach of this Agreement. If Incomnet files the registration statement within the 90 day time period, then Incomnet will not be obligated to pay any penalty. 3. COVENANTS OF JN Upon execution of this Agreement by Incomnet, JN covenants to prepare and file a Stipulation of Settlement for the current lawsuit pending in the United States District Court for the Eastern District of New York, entitled JULES NORDLICHT VERSUS INCOMNET, INC. AND SAM SCHWARTZ, Case Number 95-CIV5134 (the "Lawsuit"), disclosing this settlement and indicating that the case will be dismissed with prejudice once the terms and conditions of this Settlement Agreement have been fulfilled by Incomnet. JN also agrees to fully cooperate with Incomnet in the preparation of the registration statement referred to in Section 2 of this Agreement. JN agrees not to sell or to give any order to sell (directly or indirectly) the Shares or any other shares of Incomnet, Inc. common stock during the period from and including the effective date of the registration statement until the sixth trading day after the effective date of the registration statement. 4. GENERAL RELEASE Effective on the date of the filing of the registration statement covering the Shares, JN hereby fully and forever releases and discharges Incomnet and any of its past, present and future affiliates, partners, attorneys, accountants, officers, directors, shareholders, employees, successors and predecessors, including but not limited to Sam Schwartz, from any and all claims, demands, obligations, losses, damages, or causes of action of any nature, whether known or unknown, whether based in tort, contract or any other theory of recovery, and whether for compensatory, consequential or punitive damages, that now exist or may hereafter accrue based on actions occurring prior to the effective date of this release, with respect to any claims or causes of action which JN has or may have against Incomnet or Sam Schwartz, including but not limited to those claims made in the Lawsuit. The undersigned agree that this release shall not be considered admissions by any party of any liability. The undersigned warrant that no promise or inducement has been offered except as herein set forth. The undersigned are of legal age and legally competent to execute this release and accept full responsibility therefor. The undersigned further agree that all rights under Section 1542 of the Civil Code of California, and any similar law of any state or territory of the United States or other jurisdiction, are hereby expressly waived. Said Section reads as follows: -2- "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." The undersigned declare that the terms of this full and final release of all claims have been completely read by the undersigned and are fully understood and voluntarily accepted for the purpose of making a full and final compromise and settlement. JN represents and warrants that it has not assigned any of its above referenced released claims to any third party. 5. INJUNCTIVE RELIEF 5.1 DAMAGES INADEQUATE Each party acknowledges that it would be impossible to measure in money the damages to the other party if there is a failure to comply with any covenants and provisions of this Agreement, and agrees that in the event of any breach of any covenant or provision, the other party to this Agreement will not have an adequate remedy at law. 5.2 INJUNCTIVE RELIEF It is therefore agreed that the other party to this Agreement who is entitled to the benefit of the covenants and provisions of this Agreement which have been breached, in addition to any other rights or remedies which they may have, shall be entitled to immediate injunctive relief to enforce such covenants and provisions, and that in the event that any such action or proceeding is brought in equity to enforce them, the defaulting or breaching party will not urge a defense that there is an adequate remedy at law. 6. WAIVERS If any party shall at any time waive any rights hereunder resulting from any breach by the other party of any of the provisions of this Agreement, such waiver is not to be construed as a continuing waiver of other breaches of the same or other provisions of this Agreement. Resort to any remedies referred to herein shall not be construed as a waiver of any other rights and remedies to which such party is entitled under this Agreement or otherwise. 7. SUCCESSORS AND ASSIGNS Each covenant and representation of this Agreement shall inure to the benefit of and be binding upon each of the parties, their personal representatives, assigns and other successors in interest. 8. ENTIRE AND SOLE 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 a written agreement signed by all parties. -3- 9. GOVERNING LAW This Agreement shall be governed by and construed in accordance with the laws of the State of California. 10. COUNTERPARTS This Agreement may be executed simultaneously in any number of counterparts, each of which counterparts shall be deemed to be an original, and such counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, this Agreement has been entered into as of the date first above written. INCOMNET: INCOMNET, INC. By: ___________________________________ Melvyn Reznick, President Date: _________________________________ JN: ___________________________________ Jules Nordlicht Date: _________________________________ SO ORDERED HELLER, HOROWITZ & FEIT, P.C. ATTORNEY FOR PLAINTIFF 292 MADISON AVENUE NEW YORK, NEW YORK 10017 (212) 685-7600 _________________________ BY: _____________________________ U.S. DISTRICT JUDGE ELI FEIT, ESQ. _________________________________ MARK J. RICHARDSON, ESQ. ATTORNEY FOR DEFENDANTS 1299 OCEAN AVENUE, SUITE 900 SANTA MONICA, CALIFORNIA 90401 (310) 393-9992 -4- EX-10.21 11 EXHIBIT 10.21 FORM OF CONVERTIBLE NOTE EXHIBIT 10.21 FORM OF 8% CONVERTIBLE NOTE ISSUED BY RCI IN JANUARY 1996 RCIN-____________ CONVERTIBLE PROMISSORY NOTE $___________ January __, 1996 For value received, the undersigned, RAPID CAST, INC., a Delaware corporation ("Maker"), promises to pay to ____________________ ("Holder") on December 31, 1999, at such place as Holder may designate the principal sum of _________________________ ($______), together with any accrued and unpaid interest thereon. Interest shall accrue beginning as of the date hereof at the rate of eight percent (8%) per annum and shall be payable on each March 31, June 30, September 30 and December 31 on which this Note is outstanding. Interest shall be computed on the basis of a Three Hundred Sixty Five (365) day year. Maker agrees that upon the occurrence of an Event of Default (as defined below) and 15 days (the "Period") following the receipt by Maker of written notice of Holder's determination to accelerate this Note, the entire indebtedness with accrued interest thereon due under this Note shall, at the option of the Holder, become immediately due and payable; provided, however, if Maker has cured the Event of Default during the Period, such Event of Default shall be deemed waived. Failure to exercise such option by Holder shall not, except as expressly set forth in the preceding sentence, constitute a waiver of the right to exercise the same in the event of any subsequent Event of Default. If the entire principal amount outstanding under this Note and all accrued interest are not paid on or before December 31, 1999, all amounts outstanding under this Note shall bear interest at the rate of sixteen percent (16%) per annum computed on the basis of a Three Hundred Sixty Five (365) day year until all such amounts are paid in full. The occurrence at any time of any one or more of the following events shall constitute an Event of Default under this Note: (a) Maker's failure to pay any interest or principal or other amount when due under this Note; (b) the dissolution, liquidation, termination of legal existence, or insolvency of Maker; (c) the appointment of a receiver, trustee or similar judicial officer or agent to take charge of or liquidate any property of assets of Maker, or action by any court to take jurisdiction of all or substantially all of the property or assets of Maker; (d) the sale of all or substantially all of Maker's property or assets; (e) the commencement of any proceeding under any provision of the Bankruptcy Code of the United States, as now in existence or hereafter amended, or of any other proceeding under any federal or state law, now existing or hereafter in effect, relating to bankruptcy, reorganization, insolvency, liquidation or otherwise, for the relief of debtors or readjustment of indebtedness, by or against Maker. Notwithstanding any provisions of this Note, it is the understanding and agreement of the Maker and Holder that the maximum rate of interest to be paid by Maker to Holder shall not exceed the highest or the maximum rate of interest permissible to be charged by a lender such as Holder to a borrower such as Maker under the laws of the State of New York. Any amount paid in excess of such rate shall be considered to have been payments in reduction of principal. Any amount, outstanding under this Note may be prepaid, in whole or in part, by Maker at any time. Prepayment shall be deemed to occur at the time any such prepayment is placed in the mail or delivered to a messenger or overnight carrier for delivery to Holder; provided, however, that in lieu of accepting such prepayment Holder may, withing five days of receipt of any such prepayment amount, elect to convert this Note in the manner set forth ion the next paragraph hereof. Any prepayments shall be applied to reduce the outstanding principal balance of this Note and shall not relieve Maker of its obligations hereunder to (a) make regularly scheduled interest payments and (b) to repay the remaining principal amount when due. If only a portion of the principal is repaid at any time, Holder shall have the obligation to deliver this Note to Maker and Maker shall have the obligation to deliver a substitute note to Holder reflecting the principal amount outstanding upon such repayment. Maker (x) acknowledges that this Note is one of a series of such notes issued on the date hereof and (y) covenants that any prepayment will only be made pro rata among the holders of such series of notes. All, but not less than all, of the principal amount due and owing under this Note may be converted by Holder into such number of shares (the "Conversion Stock") of common stock, par value $.001 per share, of Maker ("Common Stock") as is determined by dividing the principal amount outstanding under this Note by Eighty ($0.80) Cents (the "Conversion Price"), subject to the provisions of the next paragraph hereof. Cash will be paid in lieu of fractional shares of the Conversion Stock. If Holder desires to convert, it shall give written notice thereof (the "Conversion Notice") to Maker and include this Note with the Conversion Notice. Maker shall as promptly as practicable deliver to Holder certificates representing the Conversion Stock and a valid check in the amount of accrued and unpaid interest through the date on which Maker first receives the Conversion Notice. Any such conversion shall not relieve Maker of its obligation to make payments of all interest accrued through the date of conversion. The Conversion Price in effect at any time and the number of shares of Conversion Stock to be received by the Holder upon the conversion of this Note shall be subject to adjustment from time to time upon the happening of certain events as follows: (a) In case Maker shall (i) declare a dividend or make a distribution on its outstanding shares of Common Stock in shares of Common Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into a greater number of shares, or (iii) combine or reclassify its outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, combination or reclassification shall be adjusted so that it shall equal the price determined by multiplying the Conversion Price by a fraction, the denominator of which shall be the number of shares of Common Stock outstanding after giving effect to such action, and the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such action. Such adjustment shall be made successively whenever any event listed above shall occur. (b) Whenever the Conversion Price is adjusted pursuant to subparagraph (a) above, the number of shares of Conversion Stock to be received by the Holder upon the conversion of this Note shall simultaneously be adjusted by multiplying the number of Conversion Shares issuable immediately prior to such event by the Conversion Price in effect immediately prior to such event and dividing the product so obtained by the Conversion Price, as adjusted. Failure by the Holder to insist upon the strict performance by Maker of any terms and provisions herein shall not be deemed to be a waiver of any terms and provisions herein, and the Holder shall retain the right thereafter to insist upon strict performance by the Maker of any and all terms and provisions of this Note or any document securing the repayment of this Note. Maker waives diligence, demand, presentment for payment, notice of nonpayment, protest and notice of protest, and notice of any renewals or extensions of this Note. This Note shall be governed by and construed in accordance with the laws of the State of New York (without regard to principles of conflicts of laws). RAPID CAST, INC. By: ____________________________________ Jeff Rubin, Executive Vice President EX-10.22 12 EXHIBIT 10.22 FORM OF SHORT-TERM NOTE EXHIBIT 10.22 FORM OF SHORT-TERM 10% NOTE ISSUED BY RCI IN APRIL 1996 RCIN-___________ PROMISSORY NOTE $_______________ April __, 1996 FOR VALUE RECEIVED, the undersigned, RAPID CAST, INC., a Delaware corporation ("Maker"), hereby promises to pay to the order of ______________________________ ("Holder"), the principal sum of $_______________, on the earlier of (a) March 31, 1997 or (b) such date as Maker obtains from a third party, in one or more transactions, an aggregate of $3 million or more in equity, debt or other financing. Maker promises to pay interest (computed for the actual number of days elapsed on the basis of a year of 360 days) in respect of the unpaid principal amount hereof from the date hereof until maturity, at the rate of ten percent (10%) per annum. Interest shall be payable on the first day of each month in which this Note is outstanding. Both principal and interest are payable in lawful money of the United States of America at such address as shall be designated by Holder. Maker also promises to pay all costs, expenses and attorneys' and other professional fees incurred in any action to collect this Note or in any litigation or controversy arising from or connected with this Note or any agreement pursuant to which the debt evidenced hereby arises. Maker agrees that upon the occurrence of an Event of Default (as defined below), the entire indebtedness with accrued interest thereon due under this Note shall, at the option of the Holder, be immediately due and payable without notice. Failure to exercise such option shall not constitute a waiver of the right to exercise the same in the event of any subsequent Event of Default. Upon the occurrence of an Event of Default the interest rate on this Note shall automatically increase without notice to fourteen percent (14%) per annum without in any way affecting or limiting Holder's rights upon the occurrence of an Event of Default. The occurrence at any time of any one or more of the following events shall constitute an Event of Default under this Note: (a) Maker's failure to pay the principal amount due hereunder; (b) Maker's failure to pay interest due hereunder, which failure shall continue for five (5) days following written notice from Holder requesting payment; (c) the dissolution, liquidation, termination of legal existence, or insolvency of Maker; (d) the appointment of a receiver, trustee or similar judicial officer or agent to take charge of or liquidate any property of assets of Maker, or action by any court to take jurisdiction of all or substantially all of the property or assets of Maker; (e) the sale of all or substantially all of Maker's property or assets; (f) the commencement of any proceeding under any provision of the Bankruptcy Code of the United States, as now in existence or hereafter amended, or of any other proceeding under any federal or state law, now existing or hereafter in effect, relating to bankruptcy, reorganization, insolvency, liquidation or otherwise, for the relief of debtors or readjustment of indebtedness, by or against Maker. Notwithstanding any provisions of this Note, it is the understanding and agreement of the Maker and Holder that the maximum rate of interest to be paid by Maker to Holder shall not exceed the highest or the maximum rate of interest permissible to be charged by a lender such as Holder to a borrower such as Maker under the laws of the State of New York. Any amount paid in excess of such rate shall be considered to have been payments in reduction of principal. Any amount outstanding under this Note may be prepaid, in whole or in part, by Maker at any time. Any prepayments shall be applied to reduce the outstanding principal balance of this Note and shall not relieve Maker of its obligations to make regularly scheduled interest payments hereunder. Failure by the Holder to insist upon the strict performance by Maker of any terms and provisions herein shall not be deemed to be a waiver of any terms and provisions herein, and the Holder shall retain the right thereafter to insist upon strict performance by the Maker of any and all terms and provisions of this Note. Maker waives diligence, demand, presentment for payment, notice of nonpayment, protest and notice of protest, and notice of any renewals or extensions of this Note. This Note shall be governed by and construed in accordance with the laws of the State of New York (but not its conflicts of law provisions). RAPID CAST, INC. By: _______________________________________ Jeffrey Rubin, Executive Vice President EX-13.1 13 EXHIBIT 13.1 FORM 10-K INCOMNET, INC. 1995 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 COMMISSION FILE NO. 0-12386 INCOMNET, INC. A California IRS Employer No. Corporation 95-2871296 21031 Ventura Blvd., Suite 1100 Woodland Hills, California 91364 Telephone no. (818) 887-3400 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:................None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:..............Common Stock, No Par Value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- 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 to this Form 10-K. [ ] Aggregate market value of voting common stock held by non-affiliates of the registrant (based upon the average of the closing bid and ask prices of $5 3/8 and $5 5/8 respectively, as reported by the NASDAQ System on March 27, 1996) $55,939,956 Number of shares of registrant's common stock outstanding as of March 27, 1996........................................................13,224,024 DOCUMENTS INCORPORATED BY REFERENCE: Portions of registrant's proxy statements relating to registrant's 1996 annual meeting of shareholders have been incorporated by reference into Part III hereof. TABLE OF CONTENTS
PAGE ---- PART I ITEM 1 - BUSINESS General 5 Telephone Services 5 Optical Systems 5 Network Products and Services 5 National Telephone & Communications, Inc. (NTC) 6 Products 6 Network Marketing Program 6 Disclosure of Independent Representative Organizations Related to NTC Executives 7 Pager Agreement 7 Wiltel Contract 8 Management Incentive Agreement 8 Acquisition of Rapid Cast, Inc. (RCI) 9 Acquisition 9 Financing of Acquisition 10 Registration Rights 11 Right to Designate Directors 11 Certain Transactions 11 Agreement with Martin Price 12 Rapid Cast, Inc. (RCI) 12 General 12 The Optical Marketplace 12 The Production and Dispensing of Prescription Eyeglass Lenses 13 The Rapid Cast LenSystem 15 Technical Overview of the Rapid Cast LenSystem 15 Marketing and Pricing Strategy 16 Manufacturing Strategy 17 Research and Development Strategy 17 Maintenance, Warranty and Insurance 17 Competition 17 Patents and Proprietary Rights 18 Governmental Regulation 19 Acquisition of LabTech, Inc. 19 Nonissuer Sales of Stock Pursuant to Regulation S 20 Agreement with Price International, Inc. 20 Network Services 21 Employees, Officers and Directors 21 Employees 21 Officers 22 Reconstitution of Board of Directors 22
2 TABLE OF CONTENTS (CONT'D)
PAGE ---- ITEM 2 - PROPERTIES 23 ITEM 3 - LEGAL PROCEEDINGS 24 Securities & Exchange Commission Investigation 24 Class Action and Related Lawsuits 24 Section 16 (b) Lawsuit 25 Patent Infringement Lawsuit 26 Legal Action Against Prior Representatives 26 Claims by Prior Noteholders 27 Potential Lawsuits 27 ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 28 PART II ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS 29 Market Information 29 Dividends 30 ITEM 6 - SELECTED FINANCIAL DATA 30 Statements of Operations Data 30 Balance Sheet Data 31 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 31 Liquidity and Capital Resources 31 Results of Operations - 1995 Compared to 1994 33 Results of Operations - 1994 Compared to 1993 35 ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 36 PART III ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE REGISTRANT 37 ITEM 11 - EXECUTIVE COMPENSATION 37 ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 37 ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 37 PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 38 Index to Financial Statements 38 Index to Exhibits 39 Report of Independent Auditors 41 Consolidated Balance Sheets 42
3 TABLE OF CONTENTS (CONT'D)
PAGE ---- Consolidated Statements of Operations 44 Consolidated Statements of Shareholders' Equity 45 Consolidated Statements of Cash Flows 46 Notes to Consolidated Financial Statements 48 Note 1 - Summary of Significant Accounting Policies 48 Note 2 - Funding of Marketing Commissions and Deferred Income 49 Note 3 - Related Party Transactions 50 Note 4 - Notes Payable 50 Note 5 - Deferred Tax Liability 51 Note 6 - Shareholders' Equity 52 Note 7 - Commitments and Contingencies 55 Note 8 - Network Marketing Costs 56 Note 9 - Segment Information 57 Note 10 - Gain on Settlement with Creditors 59 Note 11 - Acquisition of Rapid Cast, Inc. 59 Note 12 - Fourth Quarter Adjustments 59 Schedule II - Valuation and Qualifying Accounts 60 Exhibit 3.2 - Amendment to Bylaws Regarding Directors 61 Exhibit 10.2 - Lease Agreement 62 Exhibit 21 - Subsidiaries of the Registrant 69
4 PART I ITEM 1. BUSINESS GENERAL: Incomnet, Inc. (the "Company") was incorporated under the laws of the State of California on January 31, 1974. The Company is engaged in the following businesses: TELEPHONE SERVICES - The Company, through its wholly-owned subsidiary, National Telephone & Communications,-Registered Trademark- Inc. (NTC), markets long distance telecommunications services to commercial and residential customers in the United States. Service is provided by procuring long distance telecommunications transmission services from long distance communication carriers at high volume wholesale rates and reselling those services at retail rates. NTC uses a network marketing program of independent representatives to sell its telecommunications-related services to retail customers. NTC does not sign up telephone customers directly. The growth in NTC's telecommunications-related revenues is directly tied to its network marketing program. NTC's independent representatives typically pay an annual fee in order to purchase materials, training and/or annual services from NTC to assist them in selling new retail customers and enrolling other representatives in the NTC program. NTC pays the independent representatives a residual monthly commission on the telecommunications revenue. In addition, the network marketing program pays various bonuses and overrides when and if representatives obtain a minimum number of new telephone customers within a specific 30 to 60 day period. This program has been designed to bring NTC new retail telephone customers even if little or no growth occurs in the marketing program revenues. The new telecommunications revenues generally lag the new marketing program revenues by one to three months. Sales from this segment accounted for 96% of the Company's total 1995 sales. OPTICAL SYSTEMS - The Company, through its 51%-owned subsidiary Rapid Cast, Inc. (RCI), acquired in February 1995 (see "Acquisition of Rapid Cast,Inc."), manufactures and markets the FastCast-TM- LenSystem that allows retail optical stores and wholesale optical lens manufacturing laboratories to produce single vision, flat-top bifocal and progressive bifocal lenses on demand, in approximately 30 minutes. The FastCast-TM- LenSystem uses a series of high-accuracy prescription glass molds that are filled with a proprietary liquid monomer (plastic). When exposed to ultraviolet light within the system's curing chamber, the monomer undergoes a chemical reaction that rapidly "cures" or hardens the lens. Sales from this segment accounted for 2.3% of the Company's total 1995 sales. Rapid Cast's operating results are included in the accompanying financial statements. NETWORK PRODUCTS AND SERVICES - The Company acquires and/or develops hardware and software, primarily for interactive data communications networks. In this regard, the Company operates a communications network known under the tradename "AutoNETWORK" that services the automotive dismantling industry in California, Nevada, Arizona, Oregon and Washington. Sales from this segment accounted for 1.7% of the Company's total 1995 sales. 5 NATIONAL TELEPHONE & COMMUNICATIONS, INC. (NTC): PRODUCTS - NTC is an inter-exchange carrier and reseller of long distance telephone services to residential and small business customers throughout the United States. NTC's primary product is its Dial-1 Telephone Service. Its other long distance telephone products are 800-Number Services and Calling Card Services, which include the Flag Card, Sure$aver Card, Sure$aver Gold card and Call$aver Card. In order to provide these products, NTC generally contracts to purchase long distance telephone time from national carriers at wholesale rates based upon high volume usage. NTC then resells this time to its customers at its own discounted retail rates which are generally 10% to 60% below AT&T's published, tariffed MTS rates. NTC's Dial-1 Service is transparent to its customers once a customer's long distance service has been converted to NTC. NTC's calling card products operate similarly to the calling card products offered by the major carriers. NTC's customers pay for their long distance calling usage either through direct billing from NTC , through billing from the customer's local exchange carrier ("LEC"), through direct billing by NTC of the customer's major credit card, or by prepaying for long distance time in the case of certain NTC calling card products. In certain states, NTC has an agency agreement with an unaffiliated company which bills customers' local intrastate calls through the local telephone company. Commencing in the second quarter of 1996, NTC intends to increase its use of LECs to bill and collect telephone service accounts receivable. The planned increase in the use of LECs is expected to increase the amount of time that it takes for NTC to receive payment on its accounts receivable. NETWORK MARKETING PROGRAM - NTC markets its products on a nationwide basis through a multi-level, network marketing program of independent sales representatives. NTC authorizes and trains the independent representatives to resell its services to residential and small business customers, and allows the individual representatives to build up their own "downline" sales force of other independent representatives. NTC currently has in excess of 40,000 independent representatives in its network marketing program. Once an independent representative has signed up a long distance telephone customer on one or more of NTC's services/products, the customer becomes an NTC customer. NTC takes over the servicing and billing of the customer as well as the collection of monies owed by the customer for the use of the NTC telephone services/products. NTC pays each independent representative a commission on the telephone usage monies collected from those retail telephone customers who are directly signed up by that representative. NTC also pays override commissions to each independent representative on the monies collected from those telephone customers signed up by the representative's downline as well as a bonus percentage of all telephone monies collected by NTC from the retail telephone customers collectively signed up by all independent representatives, if certain minimums of retail telephone business are personally achieved by the representative. In addition, NTC pays sales bonuses to independent representatives for assisting other representatives to obtain certain minimums of new retail long distance telephone business. NTC does not pay any monies to independent representatives simply for recruiting other representatives into NTC's network marketing program. NTC generally maintains communications with its independent representatives through (1) NTC's proprietary communications systems, (2) NTC's internal 6 personnel dedicated to the support of the independent representatives, (3) various NTC manuals, newsletters and other publications that are periodically and continually sent to the independent representatives, (4) NTC's network of senior independent representatives, and (5) various training programs offered by NTC and its senior independent representatives throughout the United States. NTC believes it is in compliance with all State and Federal regulations governing multi-level marketing companies. However, to ensure the Company has objective and knowledgeable outside legal opinion in this area, NTC has formed a Regulatory Compliance Committee consisting of four former State Attorneys General that periodically reviews NTC's marketing programs for such compliance. DISCLOSURE OF INDEPENDENT REPRESENTATIVE ORGANIZATIONS RELATED TO NTC EXECUTIVES - In order to eliminate potential conflicts of interest, at the end of 1992, NTC implemented its current policy that no senior, decision-making NTC executive or officer may have a downline organization of independent representatives involved with the selling of NTC's long distance telephone services and/or marketing programs ("Executive Downlines"). Violation of this policy subjects such an NTC officer/executive to immediate termination and forfeiture of all past and future commissions from such disallowed Executive Downlines. To the best of the Company's knowledge, none of NTC's senior officers/executives have an Executive Downline, including Ed Jacobs (President and CEO), Jerry Ballah (Executive Vice President), Richard Marting (Vice President of Finance and Administration) and William Savage (Vice President of Operations). In addition, NTC's current policy requires full disclosure by all senior NTC officers/executives of any NTC downline organizations headed by an immediate family member of such senior officer/executive as well as disclosure of the personal involvement of an immediate family member in the sale of NTC's long distance telephone services to retail customers ("Immediate Family Customers/Downlines"). To the best of the Company's knowledge, none of NTC's senior officers/executives have Immediate Family Customers/Downlines with the exception of Jerry Ballah. Mr. Ballah has previously disclosed the existence of Immediate Family Customers/Downlines, at the time each such customer base and/or downline was being initiated by the specific family member, for his mother and his two sons. In addition, although not required by NTC's current policy, Mr. Ballah voluntarily disclosed, at the time each such customer base and/or downline was being initiated, that certain members of the immediate family of Mr. Ballah's fiance have Immediate Family Customers/Downlines. It is also NTC's policy to periodically have the activities and income of such Immediate Family Customers/Downline reviewed by an NTC company committee headed by NTC's President and CEO (and from which the related senior officer/executive is excluded) for the purpose of determining that all of NTC's policies and procedures are being strictly followed. PAGER AGREEMENT - In June 1995, NTC entered into additional promotional agreements with a publicly-traded, personal pager company and a privately-held Internet access service provider. Under the terms of these agreements, (i) NTC will use certain merchandise and services offered by these two companies to enhance NTC's marketing of long distance services, and (ii) NTC will be compensated by the two companies for each subscriber added to their respective services and for the development of certain promotional programs. 7 WILTEL CONTRACT - In September 1995, NTC entered into a new carrier contract with Wiltel, Inc. of Tulsa, Oklahoma, a subsidiary of WorldCom, Inc., covering a potential volume purchase of $600 million of long distance telephone time over a five year period commencing in November 1995. As in the prior carrier contract with Wiltel, Inc., NTC commits to purchase the designated volume of telephone time in accordance with a schedule over the term of the contract. NTC currently relies on the purchases of another unaffiliated long distance telephone service provider to meet its volume purchase requirements under the new contract. MANAGEMENT INCENTIVE AGREEMENT - On February 6, 1996, the Company entered into an agreement with NTC pursuant to which it agreed to permit NTC to do a public underwriting of its (NTC's) common stock in the future. The underwriting would be implemented if NTC receives a firm commitment from a reputable regional or national investment banking firm. The Company also agreed to create three stock option plans for the management, employees and independent sales representatives of NTC. The exercise price of all options issued under such plans will be based on the fair market appraisal value of NTC shares as of the date of the grant of the options. The options will be granted and become exercisable only if NTC becomes a public reporting company and its stock is publicly traded. The options will be granted pursuant to a stock option plan meeting the requirements of Section 16(b)(3) of the Securities Exchange Act of 1934, as amended, and the plans will be registered on Form S-8 under the Securities Act of 1933, as amended. Pursuant to one plan, up to 15% of NTC's outstanding shares, after taking into account the issuance of all shares pursuant to all three plans and the underwriting, will be reserved for issuance pursuant to options granted to current and/or future key independent sales representatives of NTC and will only be vested conditioned upon NTC's achieving certain specific minimum revenue levels prior to January 1, 1999. The NTC Board of Directors will determine the grantees of the stock options under this plan. Pursuant to the second plan, up to 10% of NTC's outstanding shares, after taking into account the issuance of all shares pursuant to all three plans and the underwriting, will be reserved for issuance to two senior executive officers and a key consultant of NTC. The options issued to the two senior executive officers will be fully vested on the date of grant (i.e. the date NTC's stock first becomes publicly traded), while one-third of the options to be granted to the key consultant will vest immediately upon grant, and two-thirds of such options will vest in accordance with a schedule to be determined by NTC's Board of Directors. Pursuant to the third plan, up to 10% of NTC's outstanding shares, taking into account the issuance of all shares pursuant to all three plans, will be reserved for issuance to current and future executive officers, employees and key consultants of NTC. The options, once granted, will vest one-third based on the time of service and two-thirds only if NTC achieves a total of $10 million in pre-tax profits in any four consecutive calendar quarters prior to January 1, 1998. Only 25% of the options eligible for grant under this third plan may be issued to the senior executive officers who are the beneficiaries of the second stock option plan. The Board of Directors of NTC will determine the grantees of the stock options under this plan. 8 Upon the creation of the three plans and issuance of options to Ed Jacobs and Jerry Ballah, Mr. Jacobs will waive his rights to the remaining outstanding warrants and options to purchase the Company's common stock which are provided for in Mr. Jacobs' Employment Agreement. See the Company's Proxy Statement for its 1996 Annual Meeting of Shareholders, filed with the Securities and Exchange Commission on or about April 30, 1996. The agreement with NTC also provides that upon NTC becoming a publicly traded company, it will add four new independent outside directors to the existing Board, which currently consists of three individuals. Initially, the Company will have the right to select two of the new independent directors and NTC will have the right to select the other two. After NTC's initial public offering, the NTC Board of Directors will select future nominees for the NTC Board. The independent directors will constitute the Audit and Compensation Committees of NTC's Board of Directors. Until NTC becomes publicly traded, the NTC Board will remain as currently constituted and certain transactions will require the unanimous consent of the NTC Board members, including the terms of any public offering of NTC's stock. The NTC Board currently consists of Edward Jacobs, Jerry Ballah and Joel W. Greenberg, the Company's designee. The Company has agreed to vote its shareholdings in NTC for the NTC management slate of nominees. The timing and terms of any public offering of NTC's stock is not known at this time, and there is no assurance regarding when or if NTC will do its initial public offering. ACQUISITION OF RAPID CAST, INC. (RCI): ACQUISITION - On February 8, 1995, the Company acquired 10,200,000 shares representing approximately 51% of the outstanding common stock of Rapid Cast, Inc. ("RCI"),a private corporation headquartered in Louisville, Kentucky, for $15,000,000 cash paid to RCI, 750,000 shares of the Company's common stock issued to RCI's current stockholders ("Founding Stockholders"). The purchase agreement also originally provided that an additional 750,000 shares of the Company's common stock that could be earned by RCI's Founding Stockholders based upon the earnings of RCI during its first four full fiscal quarters. On June 30, 1995 the Company's purchase agreement for RCI was amended to provide for the immediate issuance of 600,000 shares of the Company's common stock to the Founding Shareholders in lieu of their right to potentially earn up to 750,000 shares. See "Acquisition of Rapid Cast,Inc.- Certain Transactions." As part of the acquisition, the Company agreed that after the end of the fiscal quarter in which RCI achieves cumulative pre-tax earnings of $1,250,000, provided such earnings are achieved during the first four quarters after the acquisition, it will spin off ("Spin Off") RCI as a public company by registering RCI's shares with the Securities and Exchange Commission and by providing to the Company's shareholders a dividend of a minimum of 25% of the common stock of RCI now owned by the Company. In such event, RCI agreed to take all reasonable steps in order to permit public trading of the Spin Off shares. RCI did not achieve the cumulative pre-tax earnings threshold in its first three fiscal quarters after the acquisition, and the Company is therefore not obligated to implement the Spin-Off. RCI has used about $14,000,000 of the funds it received to acquire all of the outstanding capital stock of Q2100, Inc. ("Q2100"), a company that owns a proprietary technology for manufacturing single focal , bifocal and progressive eyeglass lenses ("LenSystem"), as well as 15 fully assembled and 66 partially assembled production line machines which incorporate this 9 technology and which are suitable for installation in retail optical stores. The system is named the FastCast-TM- LenSystem. Q2100 was previously owned by Pearle, Inc.("Pearle"), which entered into a stock purchase agreement on October 28, 1994 for the sale of 100% of Q2100 to RCI. The purchase price payable by RCI under the stock purchase agreement with Pearle was $15,000,000 in cash (less certain expenses), of which $1,000,000 was paid by RCI on October 28, 1994 as a deposit, and the balance of $14,000,000 was paid on the closing of the acquisition on February 8, 1995 from the proceeds of its stock issuance to the Company. As part of the agreement, Pearle has assumed or discharged all liabilities of Q2100 prior to the acquisition closing. As part of the agreement, RCI has also agreed that after the acquisition it will make the technology available to Pearle and its affiliates on a most favored nation basis. RCI used the remaining $1,000,000 from the issuance of its stock to the Company to fund its operations. FINANCING OF ACQUISITION - In order to pay the purchase price of the stock of RCI, the Company provided $5,000,000 in cash and financed the balance by a private placement of securities consisting of 10 Units. Each Unit consisted of one convertible Note issued by the Company and one Warrant to purchase 100,000 shares of RCI common stock. Each Note was in the principal amount of $1,000,000 or fraction thereof, matured on January 31, 1996, and accrued interest at the rate of 8% per annum. Interest was payable quarterly and at maturity or upon conversion. Purchasers of seven of the Units, who are affiliates of RCI or shareholders of the Company, waived interest accruals on the Notes included in their Units. On June 30, 1995, Units representing $9,350,000 of the Notes were converted at a rate of $10 per share into 935,000 shares of the Company's common stock. An additional $150,000 of the notes were converted at the rate of $10 per share into 15,000 shares of the Company's common stock in July 1995. In January 1995, the remaining Note for $500,000 was repaid in full. The Company is obligated to register the shares of its common stock issued upon the conversion of the Notes which were not otherwise sold in 1995 by those shareholders in transactions under Regulation S. See Item 1-Business, "Rapid Cast, Inc.", "Nonissuer Sales of Stock Pursuant to Regulation S." The Company is in the process of registering under the Securities Act of 1933,as amended, the remaining shares held by the original Noteholders. In addition, in order to settle potential claims by certain of those shareholders and the one Noteholder who did not convert his Note into shares, which could have been asserted because of the Company's failure to register the underlying shares in 1995, the Company agreed to (i) issue and register 31,000 additional shares of common stock and to convey a Warrant to purchase 5,000 shares of RCI common stock to the Noteholder who did not convert his shares, (ii) issue sufficient additional shares to said prior Noteholder, if necessary, to ensure that on the effective date of the registration of these shares, the prior Noteholder has $155,000 worth of the Company's common stock, including the 31,000 shares, based on the average closing market price of the Company's stock on the five trading days immediately following the effective date of the registration statement, and (iii) to issue to the holders of 32,500 shares who did convert their Notes, sufficient additional shares of the Company's common stock, if necessary, to ensure that they have an aggregate of $390,000 worth of the Company's stock on the effective date of the registration statement, based on the average closing market price of the Company's stock on the five trading days immediately preceding the effective date of the registration statement. See "Item 3. Legal Proceedings -Claims By Prior Noteholders." 10 The Warrants to purchase shares of RCI common stock are exercisable commencing with the 35th business day (the "Start Date") on which securities of RCI are first traded publicly, provided that the Start Date must occur on or before December 31, 1998. The exercise price of the Warrants will be equal to 50% of the average of the last reported sales price during the first 30 business days after the Start Date. Securities of RCI will become publicly traded only if RCI is spun off as a public corporation as anticipated under the terms of the acquisition, or if RCI in its discretion determines to consummate a public offering of its securities. The Warrants will expire 180 days after the date, if any, on which they first become exercisable. REGISTRATION RIGHTS - RCI granted to the Company the right to demand registration at RCI's cost of all of the Company's RCI shares. The Company may demand this right only after RCI's securities are publicly traded (whether as a result of the Spin Off or otherwise) and only as to one-third of these shares in each of 1996, 1997 and 1998 on a cumulative basis. RCI has also granted to the Company piggyback registration rights with respect to these shares after RCI's securities are publicly traded. RIGHT TO DESIGNATE DIRECTORS - The Company has the right to elect two of RCI's five directors until the Spin Off, and one of RCI's five directors after the Spin Off. Melvyn Reznick and Joel W. Greenberg are the Company's two designees on the Board of RCI. CERTAIN TRANSACTIONS - The current stockholders of RCI (the "Founding Stockholders") other than the Company consist, among others, of persons related to Broad Capital Associates, Inc. (the "Broad Group") who own 3,266,666 shares of RCI common stock, and Larry Joel, Robert Cohen and persons related to them (the "CRJ Group") who own 6,533,334 of RCI common stock. The Founding Stockholders acquired these shares at a purchase price of approximately $.03 per share. The Founding Stockholders and their affiliates as of December 31, 1995 loaned approximately $1,463,334 to RCI, which amounts, together with any additional loans which are thereafter made by them, will be payable July 31, 1996, together with interest at 7% per annum. RCI may determine to prepay this indebtedness, whether from the proceeds of the placement of the Units or otherwise. As part of the purchase price for the acquisition of 10,200,000 shares of RCI common stock by the Company, the Company issued 750,000 shares of its common stock to the Founding Stockholders on February 8, 1995. The Company also agreed to issue to the Founding Stockholders a maximum of 750,000 additional shares of the Company's common stock depending on RCI's pre-tax earnings during the first four full fiscal quarters after the acquisition closing, which occurred on February 8, 1995. On June 30, 1995, the Company renegotiated the terms of the Agreement and issued to RCI's Founding Stockholders 600,000 unregistered shares of its common stock in lieu of the maximum of 750,000 shares that were to be issued based upon performance factors. The Company made this issuance because, in its opinion, it believed that it was likely that RCI would meet its performance requirements and, hence, attempted to reduce the potential dilution of the Company's stock by 150,000 shares. Based on RCI's actual performance during its first three fiscal quarters, no additional shares would have been issued to the Founding Stockholders. 11 The exact number of additional shares of the Company's common stock which would have been issuable to the Founding Stockholders under the original terms of the acquisition agreement was to be calculated on the last day of each of RCI's first and fourth fiscal quarters following the acquisition closing as follows: (i) for the first quarter, by multiplying $7.5 million by a fraction, the numerator of which was the net pre-tax earnings generated by RCI during such first full fiscal quarter, and the denominator of which is $4.5 million, and (ii) for the first four full fiscal quarters, by multiplying $7.5 million by a fraction, the numerator of which was the aggregate net pre-tax earnings generated by RCI during such four full fiscal quarters less the net pre-tax earnings generated by RCI in the first full quarter, and the denominator of which was $4.5 million. The products determined in (i) and (ii) above were then to be divided by $12.50 per share to determine the number of additional shares issuable to the Founding Stockholders, provided, that if any time during the first four full fiscal quarters after February 8, 1995, RCI earned more than $5.5 million in net pre-tax earnings, the value of each additional share for calculation purposes would have been $10.00 rather than $12.50. AGREEMENT WITH MARTIN PRICE. On August 31, 1995, RCI entered into an agreement with Martin Price pursuant to which it issued 250,000 shares of RCI common stock and paid $150,000 to Mr. Price ($100,000 in cash and $50,000 pursuant to a note) in consideration for the cancellation of a net profit interest in RCI's business which Mr. Price previously owned. Accordingly, RCI currently has 20,250,000 shares of common stock issued and outstanding. RAPID CAST, INC. (RCI): GENERAL. RCI is a Delaware corporation formed in February 1994 which acquired 100% of the outstanding capital stock of Q2100, Inc. ("Q2100") from Pearle, Inc., an unaffiliated subsidiary of Grand Metropolitan, Ltd., a United Kingdom conglomerate. Q2100 owns certain domestic and foreign patents and patent applications relating to a new technology, commonly known as Thick Film Radiation Cured Polymer Technology (the "Technology"), which enables retail optical stores and wholesale optical lens manufacturing laboratories to produce many prescription ophthalmic lenses on site at a cost generally lower than if they were purchased from third party manufacturers or distributors. RCI is marketing the Technology under the name Fast Cast-TM- LenSystem. THE OPTICAL MARKETPLACE. Nearly 60% of the United States population (approximately 151 million people) required some form of vision correction in 1992, according to CENSUS INTERNATIONAL '93: THE OPTICAL INDUSTRY FACT BOOK ("Census93"). It is estimated that, by the year 2000, the United States prescription eyewear population will rise to approximately 164 million people and that, in the following decade, over 180 million people will use prescription eyewear products. Census93 reports that, in the approximately $11.9 billion United States retail optical market in 1992, the average optical retailer's breakdown of dollar revenue by product category was: (a) approximately 47% (or nearly $5.6 billion) from the sale of eyeglass lenses and lens treatments (e.g., the application of scratch-resistant and ultraviolet coatings), (b) approximately 38% from the sale of eyeglass frames and sunglasses, and (c) approximately 15% from the sale of contact lenses. Census93 reports that, out of the approximately 80 million pairs of prescription eyeglass lenses sold in the United States in 1992, an estimated 55% to 60% were single vision lenses, while an estimated 40% to 45% were multifocal lenses (i.e., bifocal, trifocal and cataract lenses). According 12 to Census93, bifocal lenses currently constitute the substantial majority of consumer purchases of multifocal lenses, representing an estimated average of approximately 84% of all multifocal lenses purchased in the years 1987, 1989 and 1991. Multifocal lenses are produced as either "flat-top" or "progressive" lenses. Progressive lenses are distinguished from flat-top lens by the absence of visible horizontal lines separating the different corrective prescription areas. Census93 reports that, by the end of 1992, flat-top bifocal and trifocal lenses held approximately 79% of the multifocal market, while approximately 21% of this market consisted of progressive lenses. The LenSystem is capable of producing single vision, flat-top bifocal and progressive bifocal lenses. Although no assurance can be given in this regard, RCI believes that the market for progressive bifocal lenses offers particularly great opportunities, both because of the potential to convert persons currently wearing flat-top bifocals to the "no-line" option offered by progressive lenses, and because the bulk of the baby boomer generation (ages 30 to 49 in 1994) has not yet reached their early 40s, when people typically first experience the presbyopia that requires correction by bifocals. Single vision and multifocal prescription eyeglass lenses are currently manufactured using one of three basic types of materials. According to Census93, the two conventional materials, glass and hard-resin plastic, accounted respectively for approximately 13% and 64% of 1993 United States prescription lens sales, while the newer premium materials such as polycarbonates, high index plastic and high index glass, accounted for approximately 23% of such sales. Within the categories of single vision and multifocal lenses, there are many types of premium lenses (generally designed to be especially thin, strong, and light) that the LenSystem currently cannot manufacture: (a) high index plastic and high index glass lenses, which generally are very thin, lightweight lenses used to reduce the thickness of very high strength prescription lenses; (b) polycarbonate lenses, which are made from a material with superior impact resistance and are typically used for sports and other eye-safety purposes; and (c) aspheric lenses, which are made to have flatter curves than conventional spherical lenses, thereby improving visual acuity and the appearance of the eyes through the lenses. Census93 estimates that aspheric lenses represented about 1% of 1992 United States sales of prescription lenses. RCI anticipates that sales of high index lenses will continue to grow steadily over the next several years. During the years 1990 through 1992, the United States market of contact lens wearers remained basically flat, according to Census93, at approximately 25 million users. There can be no assurance, however, that technological developments, medical advances, changes in consumer tastes or other factors will not cause the use of contact lenses to grow significantly in the future at the expense of prescription eyeglass lenses. Census93 reports that, despite the recent flat rate of overall contact lens use, a Bausch & Lomb study has found that first-time usage of disposable contact lenses grew at a compounded annual growth rate of 47% from 1989 through 1992. THE PRODUCTION AND DISPENSING OF PRESCRIPTION EYEGLASS LENSES. As previously noted, approximately 77% of all conventional single vision and multifocal prescription eyeglass lenses are currently manufactured from glass or hard-resin plastic. According to Census93, during the years 1991 through 1993 hard-resin plastic was used in the manufacturing of approximately 82% of all prescription lenses made from conventional materials. Although there can be no assurance in this regard, RCI anticipates that the use of glass in manufacturing conventional lenses will decrease 13 over time due to a variety of factors, including its relatively greater weight and inferior impact resistance. After being prescribed for an individual by his or her medical doctor (ophthalmologist) or optometrist, prescription eyeglass lenses reach the consumer through three traditional channels: independent dispensers (consisting of thousands of private sector optometrists, opticians and ophthalmologists), retail optical chain stores (i.e., retailers having at least four stores, including so-called "superoptical" stores or "superstores", mass merchandisers and warehouse membership clubs), and miscellaneous third party and other dispensers. Census93 estimates that independent dispensers accounted for approximately 62% of 1992 United States optical sales, retail optical chain stores accounted for approximately 33% of such sales, and third party and other dispensers accounted for approximately 5% of such sales. The substantial majority of glass and hard-resin plastic prescription lenses purchased in the United States are currently obtained from lens dispensers (such as independent optometrists, opticians, ophthalmologists and retail chain stores) who do not manufacture the lenses on-site. They instead obtain lenses from third party manufacturers and distributors, including hundreds of large factories and large, mid-sized and small wholesale manufacturing laboratories. These manufacturers and distributors have invested in the space and equipment required to grind glass or plastic lenses into a specific prescription and then to finish (i.e., polish) the lenses in order to provide clarity. In the case of plastic lenses, these manufacturers additionally possess the molds and other machinery required in order to form and then "cure" (i.e., harden) such lenses. Conventional curing processes utilize heat-driven reactions to harden the plastic. Heat-curing processes are relatively time-consuming, generally requiring between approximately six and 16 hours, depending upon the specific type of plastic involved. In most cases, a retail lens dispenser who obtains finished lenses from third party manufacturers and distributors cannot offer consumers "same day" service unless that retailer maintains a relatively large, mostly idle and generally expensive inventory of lens blanks. This inventory generally has consisted principally of single vision and flat-top bifocal lenses, due to the historically greater demand for such lenses. Even a retailer who maintains a very extensive inventory of lens blanks typically must place special orders for the majority of lenses required to fill more complex prescriptions and for most premium lenses. Filling any such order generally takes one or more days. Largely as a result of these limitations in the ability of retail lens dispensers to provide consumers with same day service for certain lenses, full service eyeglass lens manufacturing began to move into retail optical outlets in the form of the so-called "superoptical store". Many of these superstores are operated by the large retail optical chain stores, such as LensCrafters, Opti-World, Pearle Express and D&K Optical (of which Dr. Larry Joel, a shareholder, officer and director of RCI, is Chairman of the Board and a significant stockholder). A "superoptical store" is generally understood in the United States optical industry to be a retail store with the on-site equipment necessary to produce the great majority of finished prescription lenses in about one hour. The required equipment generally consists of a surfacing (or grinding) laboratory and a finishing machine. According to Census93, superoptical stores rarely fall below 1,900 square feet in total 14 area. In addition to an investment in equipment and space, a superoptical store typically requires the maintenance of a largely idle inventory of semi-finished lens blanks. THE RAPID CAST LENSYSTEM. The LenSystem incorporates a new technology called Thick Film Radiation Cured Polymer Technology, which uses ultraviolet light instead of heat to initiate the chemical reaction that hardens the Rapid Cast Liquid Monomer into a plastic lens. The Technology resulted from a research program that was initially begun in 1985 by the University of Louisville. In 1988, Dr. Larry Joel and others formed ORGIC, which contracted with the University of Kentucky to sponsor and continue that research program in return for the ownership of all resulting patents and discoveries. By 1990, ORGIC (then majority-owned by Dr. Joel and the predecessor of Q2100) had developed and tested a new liquid monomer, an ultraviolet curing unit and a lens casting machine. ORGIC believed that equipment utilizing the Technology could permit on-site production of prescription eyeglass lenses at a low cost and in a very short amount of time. ORGIC also believed that, in order to commercialize the use of such equipment and effectively bring it to the marketplace, financial and other resources would be required that ORGIC did not possess. In 1991, ORGIC, with the Technology (together with all related issued patents and patent applications), was sold to Pearle and subsequently renamed Q2100, Inc. On February 8, 1995, RCI purchased 100% of Q2100 from Pearle, and the Company purchased 51% of RCI. See "Item 1. Business - - Acquisition of Rapid Cast, Inc." TECHNICAL OVERVIEW OF THE RAPID CAST LENSYSTEM. The Rapid Cast LenSystem consists of three primary components: The Rapid Cast Mold and Gasket Library, the Rapid Cast Liquid Monomer (the "Monomer"), and the Rapid Cast Ultraviolet Curing Unit (the "Curing Unit"). The Rapid Cast Mold and Gasket Library is used to create the actual mold assembly from which a lens will be made. Once the type of lens (i.e., single vision, flat-top bifocal or progressive bifocal) and prescription to be produced are known, a front mold and a back mold are selected from an easy to read wall chart. A gasket is used to hold the front and back molds in place, creating a mold assembly consisting of a hollow cavity. This cavity is then filled with the Rapid Cast Liquid Monomer. The Rapid Cast Liquid Monomer is a proprietary monomer that is injected in liquid form into the mold assembly using a standard squeeze bottle. This Monomer is a "thick film" monomer, meaning that its thickness is best measured in parts of centimeters (as opposed to thin film monomers, which are measured in parts of millimeters). The Rapid Cast Liquid Monomer is chemically inert and, because it is cured by ultraviolet light, does not require the addition of a separate chemical initiator for the hardening process. As a result of its chemical stability, the Rapid Cast Liquid Monomer has a shelf-life of many years and does not require special shipping and storage precautions. These advantages are not generally realized by conventional lens manufacturing processes which use hard-resin monomers to produce plastic lenses. These conventional monomers (such as the CR-39 Monomer, which has long been the substance most commonly used in manufacturing plastic lenses) require the addition of chemical initiators prior to being cured, and those initiators are in some cases flammable or explosive prior to being mixed with the monomer. Temperature-controlled shipping and storage arrangements must accordingly be made, and cold storage facilities must be utilized even after the monomer and initiator are mixed, since the resulting substance hardens and becomes useless when exposed for an extended period to temperatures above approximately 25 degrees fahrenheit. 15 The Curing Unit controls the chemical reaction that occurs when the Rapid Cast Liquid Monomer is exposed to ultraviolet light. It monitors the exact temperature of the lens during this reaction, utilizing multiple cold air jets to control the temperature of each sector of a lens. The Curing Unit also continuously monitors the energy output of the ultraviolet light in order to maintain a constant output, even with fluctuations in electrical current. RCI currently intends to utilize two versions of the Curing Unit, which differ only in the quantity of the lenses that can be produced at one time. The Premier Curing Unit will cure two pairs of lenses within approximately 30 minutes. The smaller Deluxe Curing Unit will cure one pair of lenses in the same amount of time. In addition, the front mold assembly may be coated with a scratch resistant coating and then cured with high intensity UV light onto the mold surface. This coating then adheres to the lens during the curing process. A lens produced by the LenSystem can be subjected to the application of various additional treatments (such as scratch resistant, anti-reflective and ultraviolet coatings) using the same materials and process now employed to apply such coatings to conventional plastic lenses. Scratch resistant and ultraviolet coatings can generally be applied on site in under ten minutes, whereas the application of an anti-reflective coating requires that the lens be sent out to a third party service company. If inadequacies appear in the LenSystem during day to day operation, there is no assurance that any such inadequacies can be corrected at commercially acceptable cost, or at all. MARKETING AND PRICING STRATEGY. RCI expects that initially the bulk of RCI's revenues will be derived from sales of equipment and that as the installed base of equipment stabilizes, an increasing share of revenues will be derived from Monomer sales. RCI is initially seeking to market the LenSystem principally to operators of retail optical stores and small to mid-sized wholesale lens manufacturing laboratories, both inside and outside the United States. Currently the sale price for a single LenSystem with one set of molds is approximately $37,000 for a smaller unit and $43,000 for a larger unit. Operators may be able to lease RCI equipment from third party lessors for approximately $750 to $950 per month at current interest rates over a 60 month period. RCI expects that each purchaser or lessee of a LenSystem will at least initially use RCI's Rapid Cast Liquid Monomer. RCI does not believe that, in the short term, marketing of the LenSystem will require the purchase of significant print, television, radio or other advertising. RCI instead anticipates that the LenSystem will receive a large amount of nonpaid publicity within trade magazines that regularly report on technological changes in the optical industry. RCI may nonetheless utilize limited print advertising in optical industry trade magazines for the purpose of highlighting the LenSystem's perceived advantages. RCI currently intends to focus its marketing resources in the short term on the introduction and demonstration of the LenSystem at one or more optical industry conventions and trade shows. RCI believes that such conventions will provide an attractive forum for exhibiting the LenSystem's limited space requirements, ease of use and high quality output. By the end of the third quarter of 1995, RCI had also hired four employees to market the LenSystem, primarily in the United States. RCI pays these employees salaries and commissions, and reimburses them for expenses in connection with their marketing services. 16 MANUFACTURING STRATEGY. RCI currently does not have the facilities or the experience to manufacture the components of the LenSystem and has no plans to develop its own manufacturing capabilities. RCI currently intends to have such components manufactured through subcontractors. RESEARCH AND DEVELOPMENT STRATEGY. RCI anticipates that, if and to the extent funds become available from future revenues (if any) or other sources, its research and development efforts will emphasize the further development and enhancement of the Technology and the LenSystem, generally in response to potential future changes in technologies, customer preferences and optical industry standards. Should RCI be unable to anticipate these changes (whether because of a lack of adequate research and development funding or otherwise) or fail to improve the LenSystem or develop new technologies in response to these changes, RCI's ability to grow and become profitable could be materially adversely affected. More specifically, RCI believes that, in addition to single vision, flat-top bifocal and progressive bifocal lenses, the Technology could be enhanced to enable it to produce other existing types of prescription lenses as well as new lens designs that may be developed in the future. If and to the extent funds become available, RCI accordingly expects that it might seek to improve the LenSystem so as to broaden the range of low cost, high quality lenses it can produce. There can be no assurance, however, that RCI will in fact ever undertake to develop any such improvements or that any effort to do so would be successful or commercially viable. RCI does not currently anticipate that it will conduct future research and development relating to technologies or products that are not related to the on-site production of prescription eyeglass lenses. There can be no assurance that, if conducted in the future, any of RCI's research and development efforts will be successful, be completed in a timely manner, improve RCI's profitability, or enable it to respond effectively to technological or medical advances or new product developments by competitors. MAINTENANCE, WARRANTY AND INSURANCE. Initial sales of LenSystems are supported by sales and technical representatives who provide installation and training services. RCI provides its customers with a complete operations manual and training videos. RCI currently offers the LenSystem with a one year warranty for parts and labor. RCI currently maintains product liability insurance which provides coverage of $6,000,000 per occurrence and $7,000,000 in the aggregate. There can be no assurance that the coverage provided by those policies is sufficient to protect RCI against liability. RCI's inability or failure to protect itself adequately against such liabilities could have a material adverse effect upon its prospects, financial condition and results of operations. COMPETITION. The prescription ophthalmic lens industry is intensely competitive. Numerous manufacturers and distributors currently supply United States lens dispensers, including such dispensers as retail optical stores and small to mid-sized wholesale optical lens manufacturing laboratories. These are the customers to whom RCI initially intends to market the LenSystem. Many of these manufacturers and distributors are currently capable of supplying lenses to a lens dispenser within 24 hours after receipt of the dispenser's order, and, in many cases they can do so at prices competitive with the cost of producing such lenses utilizing the LenSystem. Innotech Corporation is one competitor of RCI which uses plastic to produce lenses. RCI believes that the LenSystem has superior quality (i.e. better durability) and equivalent pricing to other manufacturers 17 of single vision lenses, and both superior quality and lower pricing with respect to flat-top bifocal and progressive bifocal lenses. If RCI is successful in marketing the LenSystem, it anticipates that other companies or entities will attempt to develop competitive lens casting systems capable of being placed in retail optical store locations. Potential competitors may include companies that own large optical lens manufacturing factories, owners of chains of retail optical stores, large wholesale optical lens manufacturing laboratories, mass merchandisers and warehouse membership clubs that have entered or may enter the retail optical industry, companies in the optical instrument business, companies in the contact lens industry, pharmaceutical and chemical companies that have entered or may enter the retail optical industry or the optical lens manufacturing industry, and universities and public research organizations. Many of these competitors have substantially greater financial, technological, research, product development, manufacturing, sales, marketing and human resources than RCI. There can be no assurance that one or more of these competitors will not develop a system for on-site production of prescription ophthalmic lenses which is competitive with or superior to the LenSystem, or that RCI will have the technological, marketing or financial resources or flexibility to respond to any such development. The development of such a system would, in all likelihood, exert adverse price pressures on the LenSystem and could render it obsolete and unmarketable. PATENTS AND PROPRIETARY RIGHTS. In February 1995 RCI acquired all of the capital stock of Q2100 and thus all of Q2100's issued patents and patent applications that relate to the Technology. RCI is not aware that any party,in the United States or elsewhere, has challenged the validity or enforceability of the issued patents relating to the Technology, other than the patent dispute with Ronald D. Blum O.D. See "Item 3. Legal Proceedings - Patent Infringement Lawsuit." The status of pending patent applications involves complex legal and factual questions, and the scope and breadth of claims to be allowed is uncertain. Accordingly, there can be no assurance that pending patent applications, or patent applications that may be filed by RCI in the future, will result in patents being issued, or that any patents that may be issued in the future will afford protection against competitors with similar technology. Patent applications in the United States are maintained in secrecy until patents are issued and, since publication of discoveries in the scientific or patent literature tends to lag behind actual discoveries by several months or even years, there can be no assurance with respect to pending patent applications that the covered inventions were not first created by other parties, or that such applications were the first to be filed on such inventions. In addition, patents relating to the Technology that have been or may be issued in some foreign countries may not afford the same protection to RCI as is provided under the patent laws of the United States. No assurance can be given that the issued patents relating to the Technology will afford protection against competitors with similar technology, or that any of such patents will not be infringed, designed around by others or invalidated. Applications of the Technology (or future technologies RCI may develop) may infringe patents or proprietary rights of others. If any licenses are found to be required in order for RCI to use the Technology or other processes or products, such licenses may not be available on acceptable terms, if at all. Furthermore, there can be no assurance that challenges will not be instituted against the validity or enforceability of any patent owned by RCI 18 or, if instituted, that such challenges will not be successful. The cost of litigation to uphold the validity and prevent infringement of a patent can be substantial and could have a material adverse effect upon RCI's financial condition and results of operations. In addition to potential patent protection, RCI will rely upon the laws of unfair competition and trade secrets to protect its proprietary rights. RCI currently intends to seek to protect its trade secrets and other proprietary information in part by entering into appropriate confidentiality and nondisclosure agreements with its future employees, consultants, suppliers, joint venturers, subcontractors, licensees, scientific collaborators, sponsored researchers and others. These agreements will generally provide that all confidential information developed by or made known to the other party during the course of the relationship with RCI is to be kept confidential and not disclosed to third parties, except in certain circumstances. In the case of employees, consultants, scientific collaborators and sponsored researchers, the agreements will generally provide that all inventions conceived by them relating to the business of RCI will be the exclusive property of RCI. There can be no assurance, however, that any such agreements will provide meaningful protection for RCI's trade secrets in the event of unauthorized use or disclosure of such information. Although RCI intends to protect its rights vigorously, there can be no assurance that trade secrets will be established or maintained, that secrecy, confidentiality or nondisclosure agreements will be honored, or that others will not independently develop similar or superior technologies. To the extent that employees, consultants or other third parties (such as prospective joint venturers or subcontractors) apply technological information to RCI's projects which has been independently developed by them or others, disputes may arise as to the proprietary rights to such information, which disputes may not be resolved in favor of RCI. RCI was advised by the previous owner of Q2100 that it believes that Q2100 owns the trademark "Fast Cast." RCI may use the Fast Cast mark, "OMB-91," "Rapidcast," or "LenSystem." None of these marks have been federally registered. A prior user of one of these marks could successfully challenge RCI's ownership or use of the mark. GOVERNMENTAL REGULATION. It is the opinion of special counsel to RCI that the lenses produced by the LenSystem are medical "devices" within the meaning of the Federal Food, Drug and Cosmetic Act (the "Food and Drug Act"), but that the lenses may be marketed without pre-market notification, review, approval or clearance by the Federal Food and Drug Administration ("FDA"). Other requirements, principally those concerning impact resistance, good manufacturing practices, labeling and reporting of certain alleged adverse effects will apply. Although the FDA may disagree, such counsel is also of the opinion that the LenSystem is itself not a "medical device" under the Food and Drug Act. However, certain state and local governmental authorities (such as the State of California) also regulate medical device manufacturers. Depending upon where LenSystem equipment is manufactured, RCI may be subject to such additional regulations. Although there can be no assurance in this regard, RCI does not anticipate that compliance with such governmental regulation will have an adverse effect upon its business. ACQUISITION OF LABTECH, INC. - In September 1995, RCI acquired the assets of LabTech, Inc. for $75,000 in cash and a three year interest bearing note for $50,000, and a royalty on future sales using LabTech technology. The $50,000 note was paid in full in December, 1995. The LabTech 19 assets include proprietary technology which accelerates the photochromatic process of tinting lenses in response to changes in light. RCI intends to incorporate this technology into its lens and monomer manufacturing system. NONISSUER SALES OF STOCK PURSUANT TO REGULATION S - Shareholders of the Company who had received shares of the Company's common stock in private placements made in connection with the Company's acquisition and financing of a controlling interest in Rapid Cast, Inc. (i.e. purchasers of convertible notes and the founding shareholders of Rapid Cast, Inc.) sold a substantial portion of such shares in offshore sales pursuant to Rule 904 of Regulation S of the Securities Act of 1933, as amended. The Company estimates that approximately 1,650,000 of such shares were sold pursuant to Rule 904 of Regulations S. The Company's obligation to register those shares with the Securities and Exchange Commission under the terms and conditions of the convertible notes and purchase agreement for the controlling interest in Rapid Cast, Inc. terminated when the shares were sold to the offshore buyers. See Item 1. Business - "Acquisition of Rapid Cast, Inc." The Company did not sell any shares pursuant to Regulation S. AGREEMENT WITH PRICE INTERNATIONAL, INC.: On October 27, 1994, the Company entered into an exclusive agreement with Price International, Inc. ("PRI") of Boca Raton, FL, to provide production, management and marketing services for sports-oriented private label and collectible telephone calling cards. PRI's parent corporation, Price International Ltd. of Toronto, Ontario, Canada has a license with the National Hockey League Players' Association (NHLPA) to provide telephone calling cards of NHLPA players. The Company has already produced and is marketing the first edition of cards under the agreement and is actively working on additional editions. Under the terms of the agreement, PRI has received a warrant that expires on December 31,1997 to purchase 100,000 shares of the Company's common stock at $11.25 per share under the following terms: (i) 25,000 shares were vested on the day the agreement was effective, and (ii) 75,000 shares can be vested based upon a performance requirement in which one share will be vested for every $10 in pre-tax profits earned by the Company from products issued under the agreement during any continuous four audited quarterly periods, up to a maximum of 75,000 shares. In May 1995, PRI and the company entered into another agreement pursuant to which PRI exercised 25,000 warrants at $11.25 per share before their expiration date at the request of the Company and, for the early exercise and other considerations, was vested to exercise the remaining 75,000 warrants at $11.25 per share. The Company agreed to register the 75,000 shares underlying the warrants in a registration statement with the Securities and Exchange Commission that was anticipated to be filed by the Company in 1995. As part of its agreement with the Company, PRI agreed to exercise an additional 25,000 warrants within 30 days of the stock being registered, provided that the price of the stock was at $13 or higher. PRI also agreed to extend the license period with the NHLPA at PRI's expense until the end of June 1996 and also agreed to allow the joint venture to use the trade name Parkhurst in association with the NHLPA phone cards. PRI has the right to use the name Parkhurst, which is a leading manufacturer of trading cards in the hockey market. 20 In December 1995, the Company entered into discussions with PRI to voluntarily terminate the entire agreement due to lower sales than anticipated. The Company does not believe that the agreement with PRI has been profitable. The Company is also in discussions with PRI associated with the remaining 75,000 warrants that were not registered in 1995 as agreed upon by the Company. NETWORK SERVICES: The Company's major network service is the Auto Dismantler Network (known under the tradename "AutoNETWORK") that currently links several hundred licensed automobile dismantlers in California, Nevada, Arizona, Utah, Oregon and Washington. AutoNETWORK is a monthly subscription service that auto dismantlers utilize to buy, sell and trade used parts that have been salvaged from automobiles damaged in traffic collisions. The Company evaluates on a continual basis other applications that could use the Company's broadcast and point-to-point business communications technologies. AutoNETWORK allows automobile dismantlers to buy, sell and trade used automobile parts. By entering a parts request into a personal computer, the request is transmitted to the communications message switching system, which in turn broadcasts the request within seconds to every dismantler on the network or to a selected local or regional subgroup of dismantlers. Those dismantlers who have the requested part in stock and wish to sell it then transmit private messages and enter into private negotiations to sell the part. Generally, a dismantler using AutoNETWORK can locate a part, if available, within minutes of entering his request. The majority of dismantlers on the network generate substantially increased parts sales per month using the network. During September 1989, the Company agreed to a joint venture with Dismantlers Exchange, a privately-owned, Fairfield, California-based operator of voice telephone hotlines used by more than 200 auto dismantlers to locate auto parts throughout Central and Northern California, Oregon and Washington. Under the joint venture agreement, Dismantlers Exchange markets its own version of the Company's computerized parts locator network in its marketing area under the tradename "DX PC Network". Although both companies operate their networks separately, customers of each network are able to receive appropriate parts requests and send private messages to each other. Dismantlers Exchange also operates a central clearinghouse so that customers of either network can search for parts on each network as required. In 1996, the Company intends to invest approximately $30,000 into the AutoNETWORK business to enhance the services provided to the automobile dismantlers in the network. EMPLOYEES, OFFICERS AND DIRECTORS: EMPLOYEES - As of March 22, 1996, the Company, including its subsidiaries, NTC and RCI, employed 267 full-time people, consisting of 32 general and administrative, 48 marketing and sales, and 187 operations and customer service personnel. 21 None of the Company's employees are subject to a collective bargaining agreement, and the Company has not experienced any slow-downs, strikes or work stoppages due to labor difficulties. The Company considers its employee relations to be satisfactory. OFFICERS - The success of the Company is heavily dependent on the Company's President and Chief Executive Officer, Melvyn Reznick, and the President of the Company's NTC subsidiary, Edward R. Jacobs. The Company has a three-year employment contract with Mr. Jacobs that expires on July 25, 1997. Should Mr. Jacobs become unavailable or incapable of performing his duties and functions, the Company could suffer material adverse consequences. There can be no assurance that the Company would be able to attract a competent replacement on a timely basis should the Company find it necessary to replace Mr. Jacobs. On November 30, 1995, the Company entered into a Severance Agreement with Sam D. Schwartz, the prior Chief Executive Officer of the Company, pursuant to which Mr. Schwartz resigned as an officer and director of the Company. Pursuant to the Severance Agreement, the Company agreed to pay Mr. Schwartz severance compensation of $20,000 per month for a twelve month period, and to indemnify him to the extent generally available to officers and directors of companies under California law. Pursuant to the Severance Agreement, the Company currently is reviewing the tender of short-swing profits made by Mr. Schwartz to the Company on August 18, 1995 and September 1, 1995 pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended. The amount of short-swing profits and the value of the stock options tendered by Mr. Schwartz may be recalculated based on the Company's review procedures. See "Item 3. Legal Proceedings -Section 16(b) Lawsuit" and Note 5 - "Short Swing Profits" in the "Notes to Consolidated Financial Statements." On November 30, 1995, the Company entered into a two year Employment Agreement with Melvyn Reznick pursuant to which Mr. Reznick became the President and a director of the Company. Mr. Reznick is also a director of RCI. Pursuant to the Employment Agreement, Mr. Reznick is paid an annual salary of $175,000 and has been granted stock options to purchase 300,000 shares of the Company's common stock at an exercise price of $4.87 per share for a period of five years from the date of vesting. The stock options vest according to the following schedule: 25,000 options on February 28, 1996, 25,000 on May 31, 1996, 25,000 on August 31, 1996, 25,000 on November 30, 1996, 100,000 upon RCI earning cumulative net profits in four or less consecutive fiscal quarters of $1.5 million before taxes and before the Company's acquisition amortization relating to RCI, and 100,000 upon RCI earning cumulative net profits in four or less consecutive fiscal quarters of $2 million before taxes and before the Company's acquisition amortization relating to RCI. The vesting of the 200,000 options which are based on the financial performance of RCI may accelerate upon a sale, spin-off or similar transaction relating to RCI. The Company has agreed to indemnify Mr. Reznick to the extent that indemnification of officers and directors is permitted under California law. RECONSTITUTION OF BOARD OF DIRECTORS - On October 26, 1995, the NASDAQ Listing Qualification Committee determined that it was inadvisable to continue the Company's listing on the Small Capital Market, but also advised that the termination was delayed for a period of 45 days pending 22 a review by the NASDAQ Hearing Review Committee. The Board of Directors of Incomnet requested a reconsideration by the Qualifications Committee of its determination and immediately took action to address the concerns raised by the Qualifications Committee as follows: (a) On November 15, 1995, the Board reconstituted itself with several changes. Rita L. Schwartz and Stephen A. Caswell resigned from the Board and Sam D. Schwartz resigned as Chairman of the Board. Melvyn Reznick, Nancy Zivitz and Albert Milstein were appointed to the Board and Joel W. Greenberg was named Chairman of the Board. (b) On November 15, 1995, the Board of Directors established a policy that all Board members and senior officers must receive permission before purchasing stock in the Company. The Board established a compliance committee to 1) review requests of senior officers to buy stock in the Company, 2) review contracts with outside consultants and 3) set up procedures for communications with the general public. (c) On November 30, 1995, Sam D. Schwartz resigned as President and Chief Executive Officer of Incomnet and Melvyn Reznick was appointed as President and Chief Executive Officer. In December 1995, the Company was notified by the NASDAQ Listing Qualification Committee that after further consideration, the steps taken by the Company were satisfactory and that the Company's stock would remain listed on the NASDAQ Small Capital Market. ITEM 2. PROPERTIES The Company does not own any real estate. The Company leases approximately 6,224 square feet of office facilities at 21031 Ventura Boulevard, Suite 1100, Woodland Hills, California 91364. The Company was obligated to make lease payments at the rate of $8,215 per month through April 1995, and at the rate of $8,713 per month from May 1995 through July 1998. The Company's subsidiary, NTC, currently occupies 70,281 square feet of office space at three sites in Irvine, California which are covered by several lease agreements. Two of these leases are short-term agreements for satellite facilities which will terminate during 1996. NTC is presently nearing completion of negotiations to extend the lease on its headquarters buildings at 2801 Main Street., Irvine, California through June, 2004. Currently, lease payments for the three sites total $59,577 per month. According to the terms of existing leases and the proposed lease extension, NTC would be obligated to pay monthly lease payments averaging $48,912 during 1996, and $49,269 during 1997, with subsequent monthly lease payments increasing by $1,000 to $2,000 each year, reaching average lease payments of $63,957 during 2004. The Company's subsidiary, Rapid Cast, has entered into a lease on approximately 12,250 square feet of office research and development space for its facilities in Louisville, Kentucky, expiring on May 30, 2000. RCI is obligated to make lease payments at the rate of $8,167 per month through December 31, 1997, $8,322 per month in 1998, and $8,433 per month from January 1999 through May 2000. RCI also 23 leases approximately 1,700 square feet of office space in East Rockaway, New York, from an affiliated party on a month-to-month basis for $2,000 per month. ITEM 3. LEGAL PROCEEDINGS SECURITIES AND EXCHANGE COMMISSION INVESTIGATION: On August 9, 1994, the Company was notified by the Pacific Regional Office of the Securities and Exchange Commission that the Commission had initiated an informal investigation of the Company and its subsidiary, NTC. The inquiry is fact-finding in nature. In September 1994, the order was changed to a "formal order of private non-public investigation." The Commission stated in its correspondence to the Company that the investigation "should not be construed as an adverse reflection on any person, entity or security, or as an indication by the Commission or its staff that any violation of law has occurred." The Company believes that the investigation was prompted by erroneous reports in the press in June 1994 that the Company's NTC subsidiary was engaged in unethical business practices associated with its marketing program. In August 1994,the Company voluntarily and promptly supplied copious and substantial copies of its books and records to the Commission, and the Company's present and prior independent certified public accounting firms submitted their working papers. The Commission has taken investigative testimony from several current and former officers and directors of the Company and NTC. The Company has responded promptly to all requests for information from the Commission. The Company believes that it has provided substantial documentation to the Commission that verifies the propriety of its business operations and believes that the ultimate result of the fact-finding investigation will not have a material adverse effect on the Company's financial condition or results of operations. CLASS ACTION AND RELATED LAWSUITS: On October 17, 1995, the Company was served with an amended complaint in the class action lawsuit entitled SANDRA GAYLES; THOMAS COMISKEY, AS TRUSTEE FBO THOMAS COMISKEY, IRA; CHARLES KOWAL; ARTHUR KALTER; MATTHEW G. HYDE; ARTHUR WIRTH; AND ISABEL SPERBER, VS. 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, Western Division, which was originally filed in January 1995. The amended complaint retains the claim alleging that the Company violated Sections (10)b and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated under Section 10(b) of the Exchange Act, because it did not disclose and falsely denied the existence of the non-public investigation of the Company commenced by the Securities and Exchange Commission in August 1994. The complaint adds claims that the Company and its former Chairman, Sam D. Schwartz, violated Sections 10, 16(a), 20(a) and 23(a) of the Exchange Act, and Section 25400 of the California Corporations Code, because they did not disclose until August 1995 purchases and sales of the Company's stock made in the open market by an affiliate of Mr. Schwartz between September 1994 and August 1995. The amended complaint seeks (I) certification of the class, (ii) compensatory damages, (iii) damages pursuant to Section 25500 of the California Corporations Code, (iv) interest and attorneys' fees and costs, and (v) other extraordinary, equitable and injunctive relief as may be appropriate. The Company 24 believes that the prior President's purchases and sales were made in substantial compliance with Rule 10b-18 promulgated under Section 10(b) of the Exchange Act. On January 11, 1996 the case was certified as a class action pursuant to the parties' stipulation. The Company has answered the complaint and the lawsuit is currently in the discovery phase. In October 1995, the Company was served with a civil lawsuit entitled HERBERT M. SCHWARTZ ET AL. V. INCOMNET, INC. SAM D. SCHWARTZ AND KALIBER MANAGEMENT CORPORATION, CV 96-9776 LGB (SHX), now pending in the United States District Court, Central District of California. The case was originally filed in the Northern District of Georgia but the Company successfully moved to transfer it to the Central District of California, the situs of the class action. In February 1996, the Company was served with an additional lawsuit entitled BRENT ABRAHAM, ET AL, V. INCOMNET, INC., SAM D. SCHWARTZ AND KALIBER MANAGEMENT CORPORATION, Civil Action No. 1-96-CV-0051-CC pending in the United States District Court, Northern District of Georgia. These two lawsuits were filed against the Company, its former Chairman and his affiliate by current and prior shareholders of the Company and both allege claims under federal and state law pertaining to misrepresentations, omissions to disclose material facts and undisclosed insider trading which adversely affected the market price for the Company's securities. The complaints allege that the plaintiffs suffered losses in the market value of their stock as a result of the alleged violations. The company's motion to strike two of the plaintiffs claims is pending in the HERBERT SCHWARTZ case. The Company is also seeking to have the ABRAHM case transferred to the same California court and consolidated with the HERBERT SCHWARTZ case which is in the initial stages of discovery. The Company intends to vigorously defend against these lawsuits. SECTION 16(B) LAWSUIT: In January 1996, the Company was served with a derivative shareholders lawsuit entitled RICHARD MORALES VS. INCOMNET, INC. AND SAM D. SCHWARTZ, 96 Civil 0225 in the United States District Court for the Southern District of New York, alleging violations of Section 16(b) of the Securities Exchange Act of 1934, as amended, and demanding that the Company assert claims against Mr. Schwartz for the payment of short-swing profits plus interest. Mr. Schwartz has retained separate counsel for this action. Plaintiff's Fourth Amended Complaints alleges short-swing profits to be approximately $2,128,000. The Company's latest calculations indicate short-swing profits of approximately $2,074,000. The Company is currently reviewing the plaintiff's calculation to determine the reason for the difference, and has forwarded the information to Mr. Schwartz's counsel. The plaintiff also asserts that the 250,000 stock options tendered by Mr. Schwartz on August 20, 1995 and September 1, 1995 as payment of the short-swing profits should be accorded no value because of alleged manipulative and undisclosed trading in the Company's stock by Mr. Schwartz and his affiliate. The parties have not yet agreed on the value of the tendered stock options. The Company's time to respond to the complaint has been extended until early April 1996 while settlement discussions proceed. Mr. Schwartz has not yet answered the complaint. The Company intends to attempt to settle this action and to collect the unpaid amount of the short-swing profits plus interest from Mr. Schwartz. There is no assurance regarding whether a settlement will be reached, whether the short-swing profits plus interest will be collected, the timing of a settlement or collection, or the amount of legal costs which may be incurred in connection with the lawsuit. See "Item 1. Employees - Severance Agreement with Sam D. Schwartz." 25 PATENT INFRINGEMENT LAWSUIT: In July 1995 Rapid Cast, Inc. was served with a lawsuit entitled RONALD D. BLUM, O.D. VS. RAPID CAST, INC., Case No. 95-CV5113, filed in the United States District Court in the Southern District of New York. The complaint alleges that Rapid Cast, Inc. has infringed on the plaintiff's patent for curing plastic lenses by virtue of employing its technology in the FastCast-TM- LenSystem. On July 28, 1995, Rapid Cast, Inc. filed an Answer and Counterclaim for Declaratory Judgment denying the plaintiff's allegations, asserting that the FastCast-TM- LenSystem does not infringe on the plaintiff's patent, alleging that claims in the plaintiff's patent are invalid and unenforceable, and requesting that plaintiff be enjoined from threatening or commencing any litigation against Rapid Cast, Inc. or any of it suppliers, customers or prospective customers. The litigation is presently in the discovery phase. The parties are also actively engaged in settlement discussions. There is no assurance that a final settlement agreement will be made. LEGAL ACTION AGAINST PRIOR REPRESENTATIVES: On July 28, 1994, NTC filed a lawsuit against six prior independent marketing representatives who terminated their relationship with NTC on March 31, 1994. The lawsuit alleges that the defendants breached their agreements with NTC after terminating their representative status by (i) soliciting NTC's customers to leave NTC and sign up with a competitor, (ii) soliciting NTC's other independent marketing representatives to leave NTC and work for a competitor, (iii) misappropriating and failing to return the NTC customer and independent sales representative lists, (iv) disclosing NTC's customers, representatives and other trade secrets to a competitor and (v) willfully and maliciously conspiring to injure NTC's business in order to improve their own business. The causes of action against the defendants are breach of contract, misappropriation of trade secrets and intentional interference with NTC's economic relationships. NTC sought injunctive relief and is seeking monetary damages of at least $500,000, as well as punitive damages in an unspecified amount. On August 31, 1994, the court awarded NTC a temporary injunction against the defendants, enjoining them from disclosing or utilizing any of NTC's trade secrets, including its list of customers and independent sales representatives. A permanent injunction was subsequently denied by the court on the basis that NTC had failed to demonstrate irreparable harm. All of the defendants were located in Northern California. The Company believes that as a result of the defendants' wrongful actions, NTC lost independent marketing representatives in Northern California and retail customers. While these actions slowed the growth rate of NTC's customers and marketing representatives in the Spring of 1994, growth is continuing. The rate at which NTC is signing new representatives, especially from other parts of the United States, is also increasing, which may result in an increased rate of growth in the customer base in the future. On August 30, 1994, the defendants filed a cross-complaint against NTC and the Company, claiming that NTC failed to meet its contractual obligations to the defendants and that actions taken by the defendants as a result were proper and legal. The cross-complaints are seeking compensatory and special damages, along with general and punitive damages. Management cannot predict the ultimate resolution of the lawsuit or its impact on the Company at this time. 26 CLAIMS BY PRIOR NOTEHOLDERS: In January 1996 a civil action was filed against the Company and Sam D. Schwartz in the United States District Court for the Eastern District of New York, entitled JULES NORDLICHT VS. INCOMNET, INC. AND SAM D. SCHWARTZ, Case No. CV 95-5134, alleging breach of contract and material misrepresentations and nondisclosures in connection with the issuance and conversion of promissory notes by the Company in a private placement. The complaint sought damages of $750,000. In early February 1996 the Company entered into a settlement agreement with Mr. Nordlicht pursuant to which the Company agreed to issue to Mr. Nordlicht and register 31,000 shares of the Company's common stock, repay the outstanding balance of his note, and issue him 5,000 additional warrants to purchase shares of Rapid Cast, Inc. (if and when it goes public) which the Company had received pursuant to the redemption of another convertible promissory note previously issued by the Company. Pursuant to the settlement, the Company is obligated to file the registration statement by May 12, 1996 or it is required to pay a $100,000 penalty to Mr. Nordlicht. In addition, the Company may be obligated to issue additional shares to Mr. Nordlicht if, during the five trading days immediately following the effective date of the registration statement, the average last sale price of the Company's common stock on the NASDAQ Small Capital Market is less than $5.00 per share. Accordingly, on the effective date of the registration statement, Mr. Nordlicht is entitled to $155,000 worth of Incomnet, Inc. stock, with a minimum of 31,000 shares which have already been issued to him. The settlement agreement has been filed with the court and the case has been dismissed with prejudice, subject to compliance with the settlement agreement. Claims similar to Mr. Nordlicht's could be asserted against the Company by other holders of shares acquired upon the conversion of privately placed 8% convertible notes which were issued in February 1995 and converted into shares by the holders in July 1995. The Company has had settlement discussions with six such shareholders holding 32,500 shares, and there are additional conversion shares held by prior or current officers or directors of the Company or RCI. Settlement agreements have been sent to all six holders and four covering 20,000 shares have been executed and returned. There is no assurance that the other two settlement agreements will be executed. If the settlement agreements are not signed and a suit is filed, the Company will vigorously defend the action. The settlement agreements call for the Company to register the outstanding shares held by the six holders, and to issue them sufficient additional shares upon the effective date of the registration statement to result in the six holders having free trading shares with a value equal to 120% of the amount of their original investment, based on the average trading price of the Company's common stock for the five trading days immediately preceding the effective date. POTENTIAL LAWSUITS: Price International, Inc. (PRI) may assert a claim for breach of contract and federal securities laws violations in connection with the exercise of 25,000 warrants at $11.25 per share by it allegedly based on statements made to it by the Company (See Agreement with Price International, Inc.). PRI asserted this claim in a letter written to the Company by its counsel in October 1995. The Company has communicated directly with Price International and agreed to register the shares underlying the remaining 75,000 warrants held by Price International. No settlement agreement was, however, entered into and no further threats by Price International have been made. 27 Two clients of a broker-dealer firm have asserted claims against the Company and its prior President alleging misrepresentations in the course of providing information to the shareholders of the Company and alleging omissions to state material facts. These two potential plaintiffs have asserted their claims informally that they purchased the Company's securities through a registered broker-dealer firm in the open market. They claim to have purchased several million dollars worth of the Company's common stock and to have suffered losses because of the acts and/or omissions of the Company and its prior President. If these claims are filed as a legal complaint, the Company will seek to consolidate them with the HERBERT SCHWARTZ and/or the class action lawsuits. From time to time, the Company is involved in litigation arising from the ordinary course of business, the ultimate resolution of which management believes will not have a material adverse effect on the financial condition or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1995. 28 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION: The Company's common stock trades on the Nasdaq Small-Cap Market under the symbol "ICNT". The following table sets forth the range of bid prices for the common stock during the periods indicated. Prices represent the actual high and low sale prices of the Company's stock as provided by Nasdaq real-time pricing information. YEAR ENDED DECEMBER 31, 1995:
Quarter High Low Last Sale ------- ------ ------ --------- 4 11 1/4 2 1/2 4 9/16 3 24 1/2 9 11 2 16 3/8 10 7/8 15 1 14 5/8 8 1/4 14 3/8
YEAR ENDED DECEMBER 31, 1994:
Quarter High Low Last Sale ------- ------ ------ --------- 4 14 5/8 9 15/16 14 5/8 3 12 1/2 8 11 3/8 2 11 1/8 6 3/8 9 3/4 1 7 1/4 6 6 3/4
On March 27, 1996, the last sales price per share of the Company's common stock, as reported by the NASDAQ Stock Market, was $5 1/2. On March 27, 1996, the Company's 13,224,024 shares of common stock outstanding were held by approximately 700 shareholders of record. 29 DIVIDENDS: The Company has not paid cash dividends on its common stock since inception. Payment of dividends is within the discretion of the Company's Board of Directors and will depend, among other factors, on earnings, capital requirements and the operating and financial condition of the Company. At the present time, the Company's anticipated working capital requirements are such that it intends to follow a policy of retaining earnings in order to finance the development of its business. (See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations"). ITEM 6. SELECTED FINANCIAL DATA A summary of selected financial data for the five years ended December 31, 1995, 1994, 1993, 1992 and 1991, is presented below, and should be read in conjunction with the audited consolidated financial statements for the years ended December 31, 1995, 1994 and 1993 at "Item 8. Financial Statements and Supplementary Data." STATEMENTS OF OPERATIONS DATA(1):
Fiscal Years Ended December 31, ---------------------------------------------------------------------- 1995(4) 1994(4) 1993(4) 1992(3,4) 1991(2) ------------ ------------ ------------ ------------ ---------- Sales $86,564,917 $46,815,057 $11,298,972 $ 5,534,874 $1,898,071 Income/(loss) before income taxes, extraordinary items & minority interest 957,044 4,000,242 (1,606,844) (2,264,597) 397,631 Income/(loss) before extraordinary items & minority interest 856,543 3,999,187 (1,606,844) (2,461,697) 1,322 Net income/(loss) 1,366,025 4,071,194 (948,769) (2,021,333) 1,322 Per common share and common share equivalents: Net income/(loss) before extraordinary items 0.11 0.42 (0.20) (0.34) .00 Net income/(loss) 0.11 0.42 (0.12) (0.28) .00
30
BALANCE SHEET DATA:(1) December 31, ------------------------------------------------------------ 1995(4) 1994(4) 1993(4) 1992(3)(4) 1991(2) ----------- ----------- ---------- ---------- ---------- Total assets $74,105,629 $26,158,346 $8,665,839 $6,744,994 $2,174,428 Long-term obligations 8,459,772 900 20,000 176,000 83,334
- -------------- (1) Segment information is presented at "Item 1. Business - Segment Information." (2) In 1991, the Company wrote off its entire investment in Incomnet India Limited. (3) In 1992, the Company acquired a controlling interest in National Telephone & Communications, Inc. This information is described in "Item 1. Business - Acquisition of National Telephone & Communications, Inc. (NTC)." (4) The Company is engaged in legal proceedings where the ultimate outcome cannot presently be determined. This information is described at "Item 3. Legal Proceedings." ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES: For the year ended December 31, 1995, the Company had a net profit of $1,366,025 and, at that date, current assets exceeded current liabilities by $1,440,515. Since the Company acquired a controlling interest in NTC in early 1992, the Company's capital needs have been satisfied from outside sources such as the private placement of securities, the exercise of warrants and options, and loans and bank credit lines guaranteed by its principal shareholders. Cash flow from operations did not provide net working capital to the Company during the period from February 1992 to May 1994, but has been positive since that date. The Company had net working capital of $1,440,515 at December 31, 1995, as compared to net working capital of $8,798,793 at December 31, 1994. During 1995, net cash flow from operations was $1,378,839 compared to net cash flow from operations of $3,083,887 in 1994. During 1995, the Company's cash requirements were met through a combination of cash flow from operations, exercise of warrants to purchase the Company's common stock and private placements of its common stock. In 1995, the Company raised $29,058,773 in either private placements or from the exercise of warrants. The Company anticipates that it will continue to attain cash flow sufficient to meet the Company's cash requirements in 1996 through a combination of operations, bank borrowings, private placements of its common stock and the exercise of warrants to purchase the Company's common stock. On February 5, 1996, Melvyn Reznick, the President and a director of the Company, personally guaranteed and arranged for a $500,000 bank line of credit for the Company, which may be expanded to a range of $750,000 to 31 $1,000,000 in the near future. As of March 22, 1996, the line had not been drawn upon, although the Company expects to draw on it in the future to fund operating expenses at the parent company level, or to fund capital contributions to Rapid Cast, Inc. ("RCI") when the shareholders of RCI are called upon to provide additional funds to RCI for its operations. In this regard, the Company made an additional capital contribution of $324,000 to RCI in January 1996 pursuant to a private rights offering made by RCI. The Company anticipates that during 1996 it and RCI will need financing in addition to their respective cash flows to fund operations and, in the case of RCI, to finance the growth of its business. The Company had no material commitments for capital expenditures at December 31, 1995, but does expect to continue expanding the NTC headquarters building and purchasing additional equipment commensurate with the requirements of its customer base. During 1995, the Company had capital expenditures of $7,389,419 for plant and equipment. Effective February 12, 1992, the Company entered into a Letter of Agreement (the "Agreement") with National Telephone Communications, Inc. ("NTC"), to ultimately acquire a controlling interest in NTC. NTC is a public company that resells long distance telecommunications services. The Company loaned NTC $2,850,000 during 1992, collateralized by substantially all the assets of NTC, from its available working capital resources. In 1993, the Company loaned an additional $1,935,961 to NTC, bringing the total to $4,785,961. In 1994, the Company loaned NTC an additional $308,879, bringing the total to $5,094,810. All loans to NTC were converted into an additional equity investment in NTC at the end of 1994. No further loans were made to NTC during 1995. In May 1992, as settlement with a creditor on a past due accounts payable of approximately $725,000, the Company entered into a non-interest bearing credit facility of approximately $432,000, resulting in a gain of approximately $293,000 ($.04 per common share). The contract was payable in monthly installments of $12,000 for the first twelve months and monthly installments of $16,000 thereafter through November 1994. Maturities of the contract were $84,000 in 1992, $172,000 in 1993 and $176,000 in 1994. This obligation was paid in full in 1994. At December 31, 1995, the Company had net operating loss carryforwards for federal income tax purposes of approximately $16,800,000, which are expected to be available to offset taxable income for the next several years. The Company's subsidiary is engaged in legal proceedings where the ultimate outcome cannot presently be determined. This information is described at "Item 3. Legal Proceedings." 32 RESULTS OF OPERATIONS - 1995 COMPARED TO 1994: SALES - Total 1995 sales increased by 85% from $46.8 million in 1994 to $86.6 million in 1995. The majority of this increase was attributable to NTC's sales increase from $45.6 million in 1994 to $83.1 million in 1995. The following table summarizes the Company's year-to-year sales performance by subsidiary and segment:
$ in millions ------------------- Subsidiary Segment 1995 1994 - ----------- --------------------------------------- ----- ----- NTC Telephone (telecommunications services) $70.0 $34.2 NTC Telephone (marketing programs) 13.1 11.4 RCI Optical 2.0 -- AutoNETWORK Network 1.5 1.2 ----- ----- Total Company Sales $86.6 $46.8 ----- ----- ----- -----
NTC's sales increase was driven largely by continued expansion of the customer base for its telecommunication services. As a result of this continuing expansion, NTC's telecommunication service revenues represented 84% of NTC's total 1995 revenues with the remaining 16% generated by sales of NTC's marketing programs. This 1995 revenue mix compares to NTC's 1994 mix of 75% from telecommunication services and 25% from marketing programs. The consolidation of RCI in the third and fourth quarters of 1995 added $2.0 million of optical product sales to the total year results. COST OF SALES - Total Company cost of sales, which tends to vary directly with sales, increased from $31.2 million or 67% of sales in 1994 to $57.9 million or 67% of sales in 1995. The following table summarizes the Company's year-to-year changes in two major cost components:
$ in millions ------------------ 1995 1994 ------ ------- Commissions paid to NTC independent sales reps $14.2 $ 7.7 All other costs of sales 43.7 23.5 ----- ----- Total Company Cost of Sales $57.9 $31.2 ----- ----- ----- -----
NTC's total commission expense increased from $7.7 million in 1994 to $14.2 million in 1995. The most significant single factor in this year-to-year change was an annual increase of $3.0 million in residual monthly sales commissions paid to independent sales representatives on NTC's expanding telecommunication service revenues. The remainder of the year-to-year change was caused by increases in various bonuses and overrides paid to sales representatives who signed up new telephone service customers for NTC. The second cost component shown in the table above is "all other costs of sales" which represents: (1) NTC's long distance carrier costs, (2) NTC's costs of producing sales materials 33 for its independent sales representatives, (3) RCI's costs of producing optical systems and anscillary goods, and(4) AutoNETWORK costs of providing communications network products and services. GENERAL AND ADMINISTRATIVE - Total G&A costs increased from $9.4 million or 20% of sales in 1994 to $19.8 million or 23% of sales in 1995. G&A costs generally include the costs of employee salaries, fringe benefits, supplies, and related support costs which are required in order to provide such operating functions as customer service, billing, marketing, product development, information systems, collections of accounts receivable, and accounting. NTC's G&A costs increased during 1995 in order to: (1) support its continuing sales growth in 1995 and, (2) build stronger infrastructure to accommodate still greater sales growth and improved cost efficiencies in the future. RCI incurred substantial G&A costs in 1995 relating to its startup of operations. DEPRECIATION AND AMORTIZATION - Total Company depreciation and amortization expense increased from $0.4 million in 1994 to $1.0 million in 1995. This increase was caused by greater investment by NTC in computer hardware and software, furniture and equipment, and leasehold improvements required to support its rapid expansion in sales. BAD DEBT EXPENSE - Total Company bad debt expense increased from $1.8 million or 3.8% of sales in 1994 to $4.1 million or 4.8% of sales in 1995. The year-to-year increase in bad debt was caused primarily by increased provisioning of NTC's Dial-1 receivables and secondarily by the Company's establishment of a bad debt reserve for a potentially uncollectible note receivable from a Company shareholder. OTHER INCOME AND EXPENSE - The Company's net income and expense declined from net other income of $0.3 million in 1994 to net other expense of $1.0 million in 1995. This $1.3 million net decline was primarily caused by: (1) a $382,500 settlement with convertible noteholders relating to the acquisition of RCI, (2) a $244,010 settlement with a former Company officer, and (3) a $337,500 write-off of marketable securities by NTC. ACQUISITION COSTS AND EXPENSES - Acquisition costs increased from $ .3 million in 1994 to $1.7 million in 1995. This increase in costs was caused almost entirely by the acquisition of RCI and includes: (1) $1,228,206 of amortization expense relating to the acquisition of RCI patent rights, (2) $118,743 of interest expense on notes used to finance the RCI acquisition and related legal costs, and (3) $107,841 of equity in RCI's losses from February, 1995 (date of acquisition) through June, 1995 (the period during which the Company's 51% ownership of RCI was recorded under the equity method of accounting). MINORITY INTEREST - Beginning on July 1, 1995, the Company converted from the equity method to the consolidated method of accounting for its 51% ownership in RCI. As a result, 49% of RCI's losses from July 1 through December 31, 1995 (the "minority interest") were eliminated from the Company's "Consolidated Statements of Operations" for 1995. 34 NET INCOME - Total Company net income declined from $4.1 million or 8.7% of sales in 1994 to $1.4 million or 1.6% of sales in 1995. Although NTC's year-to-year net income increased substantially, those increases were more than offset by losses sustained from the Company's internal operations and from RCI's operations. RESULTS OF OPERATIONS - 1994 COMPARED TO 1993: SALES - In 1994, total revenues were $46.8 million as compared to $11.3 million in 1993, an increase of $35.5 million or 314%. Telecommunications-related revenues increased to $35.4 million in 1994 from $7.0 million in 1993, an increase of $28.4 million or 404%, while marketing-related revenues increased to $11.4 million from $4.3 million in 1993, an increase of $7.1 million or 167%. The growth of the Company's telecommunications-related revenues was associated with the increase in the base of marketing representatives, which results in the signing of new telephone customers. The growth of the Company's marketing-related revenues was due to a marketing program involving the sale of marketing programs and materials to independent sales representatives. COST OF SALES - Total Company cost of sales, including commissions to independent sales representatives, increased to $31.2 million in 1994 from $9.5 million in 1993, an increase of $21.7 million or 227%. Expenses associated with commissions, bonuses and overrides paid to NTC's independent representatives for 1994 were $7.7 million versus $2.3 million in 1993, an increase of $5.4 million or 227%. Other increases in expenses were primarily attributable to the increased costs of communication services from NTC's primary carriers. GENERAL AND ADMINISTRATIVE - General and administrative costs were $9.4 million in 1994 versus $2.6 million in 1993, an increase of $6.8 million or 257%. This increase was attributable to substantial growth in NTC's telecommunications and marketing revenues, which necessitated substantial increases in the Company's selling, general and administrative operations. The increase in these operations, however, was lower as a percentage increase than the increase in revenues, reflecting an improved economy of scale in the Company's operations. DEPRECIATION AND AMORTIZATION - Depreciation and amortization increased to $0.7 million in 1994 from $0.5 million in 1993, an increase of $0.2 million or 38%. This increase was due to the increased investment in capital goods required to conduct and expand operations. BAD DEBT EXPENSE - Total Company bad debt expense increase to $1.8 million in 1994 from $0.2 million in 1993, an increase of $1.6 million or 925%. The increase in bad debt was due to the rapid growth in telecommunications revenues in 1994 versus 1993, although the rate of growth of bad debt from 1993 to 1994 reflects an over-reserve for bad debt in 1992 of $1.1 million, which was applied against bad debt in 1993. The actual rate of growth of bad debt in 1994 was commensurate with the rate of growth in telecommunications revenues from 1993 to 1994. OTHER INCOME AND EXPENSE - Total Company other income and expense changed from a net expense of $0.1 million in 1993 to net income of $0.3 million in 1994, a gain of $0.4 million, or 765%. The increase was due to the decreased need for the Company to borrow funds in 1994 35 versus 1993, along with the increase in the Company's cash position, which resulted in interest gains on funds held in cash accounts. NET INCOME - The Company generated net income of $4.1 million in 1994 versus a loss of $0.9 million in 1993, an increase of $5.0 million or 529%. The Company's net income reflects the improved and profitable operations at NTC in 1994. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and supplementary financial information which are required to be filed under this item are presented under "Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K" in this document, and are incorporated herein by reference. 36 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE REGISTRANT The information required under this Item is contained in the definitive Proxy Statement for the Company's 1996 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A by April 30, 1996, and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required under this Item is contained in the definitive Proxy Statement for the Company's 1996 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A by April 30, 1996, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required under this Item is contained in the definitive Proxy Statement for the Company's 1996 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A by April 30, 1996, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required under this Item is contained in the definitive Proxy Statement for the Company's 1996 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A by April 30, 1996, and is incorporated herein by reference. 37 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
INDEX TO FINANCIAL STATEMENTS: Page No. -------- Report of Independent Auditors....................................... 41 Consolidated Balance Sheets - December 31, 1995 and 1994............. 42 Consolidated Statements of Operations - Years Ended December 31, 1995, 1994 and 1993................................................. 44 Consolidated Statements of Shareholders' Equity - Years Ended December 31, 1995, 1994 and 1993.................................... 45 Consolidated Statements of Cash Flows - Years Ended December 31, 1995, 1994 and 1993................................................. 46 Notes to Consolidated Financial Statements........................... 48 Schedule II - Valuation and Qualifying Accounts - December 31, 1995 and 1994....................................................... 60
38 INDEX TO EXHIBITS: Exhibits designated by the symbol * are filed with this Annual Report on Form 10-K. All exhibits not so designated are incorporated by reference to a prior filing as indicated. Exhibits designated by the symbol ** are management contracts or compensatory plans or arrangements that are required to be filed with this report pursuant to this Item 14. The Company undertakes to furnish to any shareholder so requesting a copy of any of the following exhibits upon payment to the Company of the reasonable costs incurred by the Company in furnishing any such exhibit.
EXHIBIT DESCRIPTION NO. 3.2* Proposed Amendment to Bylaws Regarding Directors. 10.1 Contract between Wiltel, Inc. and National Telephone Communications, Inc. dated November 15, 1994, previously filed as an Exhibit to Registration Statement on Form S-3 #33-87302 declared effective on December 22, 1994. 10.2* Standard Office Lease Between William B. Bellis, Sr. And Rapid Cast, Inc. from May 31, 1995 to May 30, 2000 for property on 4510-12 Robards Lane, Louisville, KY. 21* Subsidiaries of the Registrant REPORTS ON FORM 8-K, FILED IN 1995: 20.1 Report on Form 8-K - Acquisition of Rapid Cast, Inc. dated and filed on February 8, 1995. 20.2 Report on Form 8-K - Stock Purchase Agreement for Rapid Cast, Inc., previously filed as Exhibit A dated and filed on February 8, 1995. 20.3 Report on Form 8-K - Stock Purchase Agreement for Q2100, Inc., previously filed as Exhibit B dated and filed on February 8, 1995. 20.4 Report on Form 8-K - Stock Pledge Agreement, previously filed as Exhibit C dated and filed on February 8, 1995. 20.5 Report on Form 8-K - Form of Convertible Note, previously filed as Exhibit D dated and filed on February 8, 1995. 20.6 Report on Form 8-K - Amendment to the Quarterly Report of Form 10-Q for three months ended March 31, 1995, dated July 25, 1995 and filed on July 25, 1995.
39 20.7 Report on Form 8-K - Irrevocable Tender of Payment to Company to Return Short Swing Profits by Sam D. Schwartz dated August 18, 1995 and filed on August 18, 1995. 20.8 Report on Form 8-K - Changes to the Board of Directors of Incomnet dated and filed on November 15, 1995. 20.9 Report on Form 8-K - Change in the President and Chief Executive Officer of Incomnet dated November 30, 1995 and filed on November 15, 1995. 20.10 Report on Form 8-K - Employment Agreement between Incomnet and Melvyn Reznick, President of Incomnet, Inc. dated November 27, 1995 and filed on November 30, 1995. 20.11 Report on Form 8-K - Severance Agreement between Incomnet, Inc. and Sam D. Schwartz, former Chairman and President of Incomnet, Inc. dated November 30, 1995 and filed on November 30, 1995. 20.12 Report on Form 8-K - Agreement with National Telephone & Communications, Inc. (NTC) for incentive stock option program and for a public offering of NTC's stock dated February 6, 1996 and filed on February 9, 1996.
40 Stonefield Josephson [Letterhead] REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders Incomnet, Inc. We have audited the consolidated balance sheets of Incomnet, Inc. and subsidiaries as of December 31, 1995 and 1994 and the related consolidated statements of operations, stockholder's equity and cash flow for each of the three years in the period ended December 31, 1995, and the schedule listed in Item 14. 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 based on our audits. 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 financial statements and schedule are free of material misstatement. An audit included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule. 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. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Incomnet, Inc. at December 31, 1995 and 1994, the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 7 to the financial statements, the Company is a party to a class action matter, claiming losses arising from alleged securities violations based upon the denial and non-disclosure of a pending investigation by the Securities and Exchange Commission and on alleged securities transactions by its former President. Legal counsel to the Company has advised that the ultimate outcome of this matter and a range of potential loss cannot presently be determined. Accordingly, no provision for any liability that may result upon adjudication has been made in accompanying financial statements. /s/ Stonefield Josephson ACCOUNTANCY CORPORATION Santa Monica, California March 8, 1996 41 INCOMNET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1995
1995 1994 -------------- -------------- ASSETS CURRENT ASSETS: Cash & cash equivalents $ 1,644,968 $ 9,694,900 Accounts receivable, less allowance for doubtful accounts of $3,154,241 at December 31, 1995 and $1,530,217 at December 31, 1994 12,177,257 8,603,577 Notes receivable - current portion 102,594 -- Notes receivable from officers & shareholders - net of reserves of $208,800 863,440 -- Inventories 1,646,829 28,362 Prepaid expenses and other 1,197,245 94,247 -------------- -------------- Total current assets 17,632,333 18,421,086 -------------- -------------- PLANT AND EQUIPMENT: Computer hardware & software 5,113,588 3,513,433 Furniture & office equipment 1,878,439 682,650 Leasehold improvements 4,133,885 400,935 -------------- -------------- Total plant & equipment (gross) 11,125,912 4,597,018 Less accumulated depreciation (1,979,858) (1,994,553) -------------- -------------- Total plant & equipment (net) 9,146,054 2,602,465 -------------- -------------- OTHER ASSETS: Excess of purchase price over net assets of NTC, less accumulated amortization of $941,644 at December 31, 1995 and $663,524 at December 31, 1994 4,838,610 4,667,704 Patent rights from the acquisition of RCI less accumulated amortization of $2,019,233 at December 31, 1995 41,688,844 -- Investment in Lab Tech 130,725 -- Investment in marketable securities 190,714 337,500 Notes receivable - long term 155,000 -- Deposits and other 323,349 129,591 -------------- -------------- Total other assets 47,327,242 5,134,795 -------------- -------------- Total assets $ 74,105,629 $ 26,158,346 -------------- -------------- -------------- --------------
See accompanying "Notes to Consolidated Financial Statements." 42 INCOMNET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1995
1995 1994 --------------- --------------- LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 8,783,797 $ 5,813,813 Accrued expenses 3,686,661 1,700,213 Current portion of notes payable 2,530,886 21,494 Deferred income 1,190,474 2,086,773 --------------- --------------- Total current liabilities 16,191,818 9,622,293 --------------- --------------- LONG-TERM LIABILITIES: Notes Payable 9,622 -- Deposits & other 1,100 900 Deferred tax liability (net) 8,449,050 -- --------------- --------------- Total long-term liabilities 8,459,772 900 --------------- --------------- Total liabilities 24,651,590 9,623,193 --------------- --------------- MINORITY INTEREST 6,905,983 -- --------------- --------------- SHAREHOLDERS' EQUITY: Common stock, no par value; 20,000,000 shares authorized; issued and outstanding 13,262,648 shares at December 31, 1995 and 10,482,854 shares at December 31, 1994 60,883,892 31,376,094 Treasury stock (5,491,845) (665,208) Accumulated deficit (12,843,991) (14,175,733) --------------- --------------- Total shareholders' equity 42,548,056 16,535,153 --------------- --------------- Total liabilities, minority interest & shareholders' equity $ 74,105,629 $ 26,158,346 --------------- --------------- --------------- ---------------
See accompanying "Notes to Consolidated Financial Statements." 43 INCOMNET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31,
1995 1994 1993 -------------- -------------- -------------- SALES $ 86,564,917 $ 46,815,057 $ 11,298,972 -------------- -------------- -------------- OPERATING COSTS & EXPENSES: Cost of sales 57,948,207 31,220,780 9,521,803 General & administrative 19,792,906 9,437,851 2,643,583 Depreciation & amortization 1,006,978 444,486 474,022 Bad debt expense 4,124,589 1,788,772 174,377 Other (income)/expense 1,002,283 (342,445) 51,455 -------------- -------------- -------------- Total operating costs and expenses 83,874,963 42,549,444 12,865,240 -------------- -------------- -------------- ACQUISITION COSTS & EXPENSES: NTC Acquisition - goodwill amortization 278,120 265,371 40,576 RCI Acquisition - patent rights amortization 1,228,206 -- -- RCI Acquisition - interest and legal 118,743 -- -- RCI Acquisition - equity in (profit)/loss of unconsolidated subsidiary 107,841 -- -- -------------- -------------- -------------- Total acquisition costs & expenses 1,732,910 265,371 40,576 -------------- -------------- -------------- Income/(loss) before income taxes, extraordinary items & minority interest 957,044 4,000,242 (1,606,844) INCOME TAXES 100,501 1,055 -- -------------- -------------- -------------- Income/(loss) before extraordinary items & minority interest 856,543 3,999,187 (1,606,844) EXTRAORDINARY ITEMS: Gain/(loss) on settlement with creditors -- 72,007 658,075 MINORITY INTEREST 509,482 -- -- -------------- -------------- -------------- Net income/(loss) $ 1,366,025 $ 4,071,194 $ (948,769) -------------- -------------- -------------- -------------- -------------- -------------- INCOME/(LOSS) PER COMMON SHARE AND COMMON SHARE EQUIVALENTS: Income/(loss) before extraordinary items $ 0.11 $ 0.42 $ (0.20) Extraordinary items -- -- 0.08 -------------- -------------- -------------- Net income/(loss) $ 0.11 $ 0.42 $ (0.12) -------------- -------------- -------------- -------------- -------------- -------------- WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND FOR 1995, COMMON SHARE EQUIVALENTS OUTSTANDING 12,706,401 9,593,207 8,183,877 -------------- -------------- -------------- -------------- -------------- --------------
See accompanying "Notes to Consolidated Financial Statements." 44 INCOMNET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY DECEMBER 31, 1995, 1994 AND 1993
COMMON STOCK SHARES AMOUNT GAIN/(DEFICIT) TOTAL -------------- -------------- --------------- -------------- BALANCE AT DECEMBER 31, 1993 9,061,382 $ 22,176,075 $ (18,246,927) $ 3,929,148 Common stock issued upon exercise of warrants 1,308,833 8,544,862 8,544,862 Common stock issued under private placement 100,000 500,000 500,000 Common stock issued in exchange for NTC shares 82,639 155,157 155,157 Repurchase of treasury shares (70,000) (665,208) (665,208) Net income 4,071,194 4,071,194 -------------- -------------- --------------- -------------- BALANCE AT DECEMBER 31, 1994 10,482,854 $ 30,710,886 $ (14,175,733) $ 16,535,153 Common stock issued upon exercise of warrants 489,582 4,343,262 4,343,262 Common stock issued under private placement 157,500 1,890,000 1,890,000 Common stock issued under upon conversion of note 2,300,000 22,664,000 22,664,000 Common stock issued in exchange for NTC shares 253,712 507,424 507,424 Repurchase of treasury shares (451,000) (5,085,025) (5,085,025) Treasury shares sold 30,000 361,500 361,500 Change in valuation of marketable securities (34,283) (34,283) Net income 1,366,025 1,366,025 -------------- -------------- --------------- -------------- BALANCE AT DECEMBER 31, 1995 13,262,648 $ 55,392,047 $ (12,843,991) $ 42,548,056 -------------- -------------- --------------- -------------- -------------- -------------- --------------- --------------
See accompanying "Notes to Consolidated Financial Statements." 45 INCOMNET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31,
1995 1994 1993 ------------- ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: After tax profit/(loss) $ 856,543 $ 4,071,194 $ (948,769) Depreciation & amortization - operations 1,413,447 444,486 474,022 Depreciation & amortization - acquisitions 1,099,859 265,371 40,576 Loss from disposition of furniture & equipment -- -- 5,363 Gain on settlement with creditors -- -- (658,075) ------------- ------------ ------------ Net cash inflow/(outflow) from operating activities 3,369,849 4,781,051 (1,086,883) ------------- ------------ ------------ CASH FLOWS FROM (INCREASE)/DECREASE IN OPERATING ASSETS: Accounts receivable (2,784,363) (6,717,705) (1,024,444) Notes receivable - current portion (102,594) -- -- Notes receivable - due from shareholder (863,440) -- -- Inventories (400,875) 41,615 (62,451) Prepaid expenses & other (999,831) (82,247) (10,136) Notes receivable - long term (155,000) -- -- Deposits & other (193,758) (53,591) 6,354 ------------- ------------ ------------ Net cash inflow/(outflow) from changes in operating assets (5,499,861) (6,811,928) (1,090,677) ------------- ------------ ------------ CASH FLOWS FROM INCREASE/(DECREASE) IN OPERATING LIABILITIES: Accounts payable 2,571,096 3,315,686 1,105,917 Accrued expenses 1,834,054 149,874 165,242 Deferred income (896,299) 1,649,204 (330,824) ------------- ------------ ------------ Net cash inflow/(outflow) from changes in operating liabilities 3,508,851 5,114,764 940,335 ------------- ------------ ------------ Net cash inflow/(outflow) from operations 1,378,839 3,083,887 (1,237,225) ------------- ------------ ------------ CASH FLOWS FROM (INCREASE)/DECREASE IN INVESTING ACTIVITIES: Acquisition of plant & equipment (7,389,419) (1,693,534) (636,266) Patents/intangible assets (663,721) -- -- Investment in Lab Tech (130,725) -- -- Investment in marketable securities 146,786 (262,500) (118,507) Goodwill from acquisition of NTC (449,026) (144,430) -- Patent rights from acquisition of RCI (20,338,022) -- -- ------------- ------------ ------------ Net cash inflow/(outflow) from investing activities (28,824,127) (2,100,464) (754,773) ------------- ------------ ------------
See accompanying "Notes to Consolidated Financial Statements." 46 INCOMNET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, (CONT'D)
1995 1994 1993 ------------- ------------ ------------ CASH FLOWS FROM INCREASE/(DECREASE) IN FINANCING ACTIVITIES: Bank overdraft $ (56,770) $ 56,770 $ (45,005) Minority interest (7,718,137) -- -- Notes payable - current 1,306,198 (264,606) (550,333) Sale of common stock, net 29,507,799 8,069,392 3,267,680 Treasury stock (4,826,638) 465,419 -- Loans from a major shareholder -- (21,125) (600,100) Notes payable - long term 9,822 -- -- Paid in capital 500,000 -- -- Repayment of short-swing profits by a director -- -- 25,726 Prior period adjustment to retainer earnings (1) 698 -- Change in valuation allowance (34,286) -- -- ------------- ----------- ----------- Net cash inflow/(outflow) from financing activities 18,687,987 8,306,548 2,097,968 ------------- ----------- ----------- Net cash inflow/(outflow) from investing & financing (10,136,140) 6,206,084 1,343,195 ------------- ----------- ----------- Net increase/(decrease) in cash & cash equivalents (8,757,301) 9,289,971 105,970 Cash & cash equivalents at beginning of year 10,402,268 404,929 298,959 ------------- ----------- ----------- Cash & cash equivalents at end of year $ 1,644,968 $9,694,900 $ 404,929 ------------- ----------- ----------- ------------- ----------- ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 132,644 $ 1,295 $ 211,835 Income taxes 574,162 1,055 800 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Common stock subscriptions receivable, recorded as addition to common stock -- -- $ 199,998
See accompanying "Notes to Consolidated Financial Statements." 47 INCOMNET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31,1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary National Telephone & Communications-Registered Trademark-, Inc. (NTC), and its 51%-owned subsidiary Rapid Cast, Inc. (RCI). As a company with a controlling interest in RCI, the Company is accounting for RCI using the consolidation method of accounting. The Company shifted from the equity method of accounting for RCI under FASB Statement No. 94 in the first and second quarters of 1995 to the consolidation method because it controls RCI and it is not certain when the Company will cease to hold a controlling interest in RCI by virtue of a spin-off or otherwise. All significant intercompany accounts and transactions have been eliminated in consolidation. REVENUE RECOGNITION - The Company recognizes revenue during the month in which services or products are delivered, as follows: (1) NTC's long distance telecommunications service revenues are generated when customers make long distance telephone calls from their business or residential telephones or by using any of NTC's telephone calling cards. Proceeds from prepaid telephone calling cards are recorded as deferred revenues when the cash is received, and recognized as revenue as the telephone service is utilized. The reserve for deferred revenues is carried on the balance sheet as an accrued liability. Total 1995 long distance telephone service sales totaled $69,994,580. (2) NTC's marketing-related revenues are derived from programs and material sold to the Company's base of independent sales representatives, including forms and supplies, fees for representative and certified trainer renewals, and the Company's Certified Trainer and Customer Representative programs. The Company requires that all such services and materials be paid at the time of purchase. Revenues from marketing-related materials are booked as cash sales when the revenues are received. For the fiscal year ended December 31, 1995, marketing sales totaled $13,132,563. (3) RCI's optical-related revenues are derived from the sale of the Company's optical lens manufacturing system and related supplies. Revenues from optical-related systems and supplies are recognized as sales at the time the products are shipped to the customer. For the six-month period ending December 31, 1995, during which time the Company recorded RCI sales using the consolidation method of accounting, optical product sales totaled $1,992,578. (4) The Company's network service revenues are recognized as sales as the service is delivered. Total 1995 network service sales totaled $1,445,199. CONCENTRATION OF CREDIT RISK - The Company maintains cash balances or invests in U.S. treasury bills at various financial institutions, which are insured up to $100,000 by the Federal Deposit Insurance Corporation. Balances at one of these institutions aggregated approximately $570,910 at December 31, 1995, and $4,087,627 at December 31, 1994. The Company sells its telephone and network services to individuals and small businesses throughout the United States and does not require collateral. It sells its 48 INCOMNET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31,1995 optical products both domestically and internationally. Reserves for uncollectible amounts are provided, which management believes are sufficient. COMPUTER HARDWARE, FURNITURE AND OFFICE EQUIPMENT - Computer hardware, furniture and office equipment are stated at cost. Depreciation is provided by the straight-line method over the assets' estimated useful lives of 5 to 10 years. COMPUTER SOFTWARE - The Company capitalizes the costs associated with purchasing, developing and enhancing its computer software. All software costs are amortized using the straight-line method over the assets' estimated useful lives of 5 to 10 years LEASEHOLD IMPROVEMENTS - All leasehold improvements are stated at cost and are amortized using the straight-line method over the building lease term of 10 years. NET INCOME/(LOSS) PER SHARE - Net income/(loss) per common share is based on the weighted average number of common shares and common share equivalents in 1995. Common share equivalents have been excluded in 1994 and 1993 either because their effect was immaterial (1994) or antidilutive (1993). ACQUISITION AMORTIZATION - The excess of purchase price over net assets of NTC has been recorded as an intangible asset and is being amortized by the straight-line method over twenty years. The excess of purchase price over the value of patent rights acquired with the purchase of the 51% ownership of RCI has been recorded as an intangible asset and is being amortized using the straight-line method over seventeen years. DEFERRED TAX LIABILITY - Deferred income taxes result from temporary differences in the basis of assets and liabilities reported for financial statement and income tax purposes. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. FUNDING OF MARKETING COMMISSIONS AND DEFERRED INCOME: The Company's subsidiary, NTC, maintains separate bank accounts for the deposit of funds related to the reserve of deferred income from the sale of prepaid calling cards and for the payment of marketing commissions. Funding of these accounts is adjusted regularly to provide for management's estimates of required reserve balances. For the marketing commission account, NTC estimates the total commissions owed to active independent representatives ("IR Earned Compensation") each week for all monies collected that week due to the efforts of those active independent representatives. All IR Earned Compensation is then paid to the independent representatives, when due, directly out of the separate marketing bank account. 49 INCOMNET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31,1995 3. RELATED PARTY TRANSACTIONS: Notes receivable from officers and shareholders arise from aggregate loans of $1,072,240 made to three officers in connection with the exercise of their options to purchase the Company's common stock. Two of the notes bear interest at the rate of 5.65% and the third note is non-interest bearing. All three notes are due on demand and are partially secured by the stock acquired upon the exercise of the options. For one of the officer loans, the Company agreed to look only to the shares held by the officer as a source of loan repayment. Accordingly, a reserve of $208,800 was provided in the fourth quarter of 1995, representing the difference between the market value of the shares held by the officer, and the amount of the loan. Included in accounts receivable is approximately $542,000 due from companies controlled by an individual who is an Incomnet shareholder and a founding stockholder of RCI. 4. NOTES PAYABLE: In May 1992, as settlement with a creditor on a past due accounts payable of approximately $725,000, the Company entered into a non-interest bearing credit facility of approximately $432,000 payable to the creditor, resulting in an extraordinary gain of approximately $293,000 ($.04 per common share). The contract was payable in monthly installments of $12,000 for the first twelve months and monthly installments of $16,000 thereafter through December 1994. Maturities of the contract were $124,000 in 1993 and $224,000 in 1994, totaling $348,000. The contract was completed in December 1994. Notes payable consists of the following as of December 31, 1995: Note payable in connection with financing of RCI acquisition, interest at 8%, repaid in January 1996 (see Part I, Item 1, "Acquisition of Rapid Cast, Inc.,-Financing of Acquisition") $ 500,000 Notes payable to founding stockholders of RCI, interest at 7%, due in July 1996 1,517,759 Revolving line of credit of RCI, interest at bank reference rate (approximately 10% at December 31, 1995) 490,000 Other 32,749 ---------- $2,540,508 ---------- ----------
Total 1995 interest expense of $153,840 resulted primarily from interest paid on notes used to acquire RCI and from interest paid by RCI on its bank revolving line of credit 50 INCOMNET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 5. DEFERRED TAX LIABILITY: On February 15, 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes". Effective January 1, 1993, the Company adopted SFAS No, 109, the effect of which was immaterial to the Company's financial statements in 1994 and resulted in a deferred tax liability in 1995. Temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that give rise to significant portions of the deferred income tax assets and liabilities are as follows:
December 31, -------------------------- 1995 1994 ----------- ----------- Deferred tax assets Allowance for doubtful accounts $ 1,360,000 $ 612,000 Financing costs -- 190,000 Non deductible reserves -- 65,000 Net operating loss carryforwards 7,503,000 7,120,000 Other 113,000 -- ----------- ----------- Subtotal 8,976,000 7,987,000 ----------- ----------- Deferred tax liabilities Property and equipment, principally due to differences in depreciation 676,000 267,000 Patent rights 8,449,050 -- ----------- ----------- Subtotal 9,125,050 267,000 ----------- ----------- Total (176,050) 7,720,000 Less valuation allowance (8,273,000) (7,720,000) ----------- ----------- Net deferred tax liability $ 8,449,050 $ - 0 - ----------- ----------- ----------- -----------
The deferred taxes at December 31, 1995 are presented in the accompanying balance sheet as deferred tax assets-current (included in prepaid expenses and other) of $384,000 and deferred tax liability-noncurrent of $8,449,050. 51 INCOMNET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 The following is a reconciliation of the federal statutory tax rate and the effective tax rate:
1995 1994 1993 ---- ---- ----- Federal statutory tax rate 34.0% 34.0% (34.0%) Goodwill 9.9 2.0 9.0 Loss producing no current tax benefit -- -- 25.0 State taxes, net of federal benefits 38.2 -- -- Benefit from net operating loss carryforward (71.5) (36.0) -- Other, net -- -- -- ---- ---- ----- Effective tax rate 10.6% 0% 0% ---- ---- ----- ---- ---- -----
Income tax benefits are recognized only when their realization is assured. Accordingly, potential future income tax benefits resulting from net operating losses incurred to date are not reflected in the consolidated financial statements. At December 31, 1995, Incomnet had available net operating loss carryforwards for federal income tax purposes of approximately $16,800,000, expiring in various years between 2000 and 2008, and Rapid Cast had a carryforward of approximately $1,900,000 expiring through 2012. The company files combined income tax returns for Incomnet and NTC and separate returns for RCI. Accordingly, the federal net operating loss carryforwards of each corporation are available to offset taxable income only of each separate corporation. 6. SHAREHOLDERS' EQUITY: STOCK OPTIONS - The Company has an incentive stock option plan which was adopted in 1994 (the "1994 Plan") for key employees and directors. The plan provides for the issuance of options covering an aggregate of 1,500,000 shares of common stock. In 1996, the Company intends to replace the 1994 stock option plan with a new stock option plan for the executive officers, directors and key consultants of the Company, primarily at the parent company level. The Company's subsidiaries have or are expected to adopt their own separate stock option plans to be implemented when those companies become publicly traded. No additional stock options are expected to be granted under the 1994 stock option plan. In November 1994, the Company approved the 1994 plan for directors, employees, and key outside consultants of the Company that provided for the issuance of up to 1,500,000 shares of common stock. The plan requires that the option price must be at least 100% of the fair market value of the shares on the date the option is granted. In November 1994, options to purchase 1,200,000 shares of the Company's common stock were granted at exercise prices of $10 per share. These options will be vested based upon a performance requirement in which National 52 INCOMNET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 Telephone & Communications, Inc. must earn at least $15 million in pre-tax profits during any continuous four audited quarterly periods until December 31, 1997. WARRANTS - Since 1993, the Company has issued warrants to purchase the Company's common stock to key employees, directors or other individuals or organizations as follows:
Dollar Cancelled or Issued Number Price Exercised Amount Expired Expiration ------ ------ ----- --------- ------ ------- ---------- 9/18/93 375,000 5.00 150,000 $750,000 225,000 9/18/93 15,000 5.00 15,000 9/18/93 5,000 5.00 5,000 25,000 9/18/93 5,000 5.00 5,000 11/18/93 75,000 5.00 75,000 375,000 1-17-94 500,000 7.00 500,000 3,500,000 5/27/94 500,000 10.00 500,000 5,000,000 5/27/94 100,000 8.50 100,000 850,000 5/27/94 100,000 8.50 100,000 850,000 5/27/94 50,000 8.50 5/27/97 5/27/94 50,000 8.50 5/27/97 8/14/94 10,000 8.50 10,000 85,000 11/15/94 100,000 11.25 25,000 281,250 11/15/94 10,000 11.25 10,000 112,500 6/30/95 900,000 14.00 900,000 8/29/95 250,000 11.00 250,000 8/29/95 35,000 4.875 (2) 8/29/97 8/29/95 35,000 4.875 (2) 8/29/97 8/29/95 25,000 4.875 (2) 8/29/97 11/27/95 300,000 4.875 5 years from date of vesting (1) 12/20/95 2,000 5.125 (2) 12/31/96 12/20/95 3,000 5.125 (2) 12/31/96 12/20/95 1,000 5.125 (2) 12/31/96 12/20/95 1,000 5.125 (2) 12/31/96 --------- --------- ----------- --------- 3,447,000 1,475,000 $11,828,750 1,395,000 - --------------------------------------------------------------------------------------
(1) These options vest as follows: 25,000 on February 28, 1996; 25,000 on May 31, 1996; 25,000 on August 31, 1996; and 25,000 on November 30, 1996, with an additional 200,000 upon Rapid Cast, Inc. achieving certain financial goals. (2) The exercise price on these options was adjusted pursuant to a redemption of old stock options and a reissuance of an equivalent number of new stock options with the same expiration date. Since 1993, the Company has issued warrants to purchase a total of 3,447,000 shares of the Company's common stock. At March 22, 1996, warrants to purchase 1,475,000 of those shares 53 INCOMNET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 have been exercised bringing the Company $11,828,750; warrants to purchase 1,395,000 shares have been canceled and warrants remain outstanding to purchase 577,000 shares of the Company's common stock at prices ranging from $4.875 to $11.25 per share. COMMON STOCK - On August 5, 1994, the Company announced that its Board of Directors authorized the repurchase of up to 1,000,000 shares of its common stock from time to time on the open market or in private transactions. The Company's Chief Executive Officer was given the discretion to decide when and if the Company would repurchase shares and to effect such transactions. As of March 27, 1996, the Company has repurchased a net of 486,000 shares of common stock with a value of $5,491,845 under the terms of the repurchase authorization as follows:
Years ended Shares December 31, Repurchased Cost ------------ ----------- ---------- 1994 70,000 $ 665,208 ----------- ---------- 1995 416,000 4,826,637 ----------- ---------- 486,000 $5,491,845 ----------- ---------- ----------- ----------
PRIVATE PLACEMENT - On June 30, 1995, the Company initiated a private placement of 900,000 shares of the Company's restricted common stock at $12 per share and warrants to purchase 900,000 additional shares of the Company's common stock at $14 per share. The warrants were exercisable for a period of six months until December 31, 1995. The aggregate purchase price of the stock and warrants was paid $1,890,000 in cash and subscription notes for a total of $8,910,000 payable upon the registration of the shares and shares underlying the warrants with the Securities and Exchange Commission. As the Company did not register the shares, the Company issued only a total of 157,500 shares in consideration for the contributions of cash made by the investors. The warrants were not exercised and expired on December 31, 1995. The Company's balance sheet reflects the issuance of 157,500 shares of the Company's common stock in exchange for $1,890,000 in capital. The Company is using the proceeds of the private placement to finance the growth requirements of its operating subsidiaries. SHORT SWING PROFITS - On August 18, 1995, the Company filed a Form 8-K disclosing the tender of short swing profits to the Company by its former President and Chief Executive Officer pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended. After adjustments and a preliminary review of all purchases and sales of the Company's common stock through September 1, 1995, the amount of short swing profits was calculated to be $972,870. On August 18, 1995 and, including adjustments, on September 1, 1995, the Company's former President tendered the short swing profits by cancellation of all his options to purchase 250,000 shares of the Company's common stock. Pursuant to the Severance Agreement entered into by the Company with Mr. Schwartz on November 30, 1995, the parties contemplated a review of the short swing profit calculations and an independent appraisal of the stock options tendered by Mr. Schwartz pursuant to Section 16(b) of the Exchange Act. In addition, the Company was served with a derivative shareholder lawsuit asserting claims against Mr. Schwartz for the 54 INCOMNET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 payment of the short swing profits, and seeking an order that the Company collect those profits from Mr. Schwartz. Based on the Company's latest calculations, which include additional transactions disclosed by Mr. Schwartz in filings with the commission in March, 1996, the short swing profits appear to be approximately $2,074,000. The plaintiffs in the shareholder derivative lawsuit calculate short swing profits to be approximately $2,128,000. The value of the tendered stock options has not yet been agreed upon or appraised. There are no assurances, however regarding a final determination of the amount of the short swing profits or the value of the tendered stock options. On February 29, 1996, the Company delivered a demand to Joel Greenberg, the Chairman of the Board of Directors, to pay short swing profits of $46,500 to the Company pursuant to Section 16(b) of the Exchange Act. The Company expects the short swing profits to be paid on or before April 30, 1996. 7. COMMITMENTS AND CONTINGENCIES: LITIGATION - The Company is a defendant in a class action matter alleging securities violation with respect to alleged false denial and non-disclosure of a Securities and Exchange Commission investigation and alleged non-disclosure of purchases and sales of the Company's stock by an affiliate of the former Chairman of the Board. Counsel for the company is unable to estimate the ultimate outcome of this matter and is unable to predict a range of potential loss. Accordingly, no amounts have been provided for the class action lawsuit, in the accompanying financial statements. The Company is under investigation by the Securities and Exchange Commission under a non-public "formal order of private investigation." Management has furnished all information requested by the Commission and does not believe that the matter will have a material adverse impact on its financial position or results of operations. BUILDING LEASES - Rent expense for the years ended December 31, 1995, 1994 and 1993 was $800,694, $277,712 and $204,760, respectively. The Company leases its office and operating facility in Woodland Hills , California under a noncancellable operating lease expiring July 1998. The aggregate future minimum annual rental payments required under the operating lease are as follows:
Years ending December 31, ------------ 1996 $104,556 1997 104,556 1998 60,991 -------- $270,103 -------- --------
55 INCOMNET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 The Company's subsidiary, NTC, leases its office and operating facilities in Irvine, California under several noncancellable operating leases as described in Part I, Item 2, "Properties." The aggregate future minimum annual rental payments required under these operating leases and under the proposed extension are as follows:
Years ending December 31, ------------ 1996 $ 586,943 1997 591,231 1998 603,632 1999 616,406 2000 629,562 2001 643,114 2002 657,072 2003 671,449 2004 383,742 ---------- $5,383,151 ---------- ----------
The Company's 51%-owned subsidiary, RCI, leases its facility in Louisville, Kentucky under a noncancellable operating lease as described in Part I, Item 2, "Properties." The aggregate future minimum annual rental payments required under the operating lease are:
Years ending December 31, ------------ 1996 $ 98,004 1997 98,004 1998 99,864 1999 101,196 2000 42,165 -------- $439,233 -------- --------
8. NETWORK MARKETING COSTS: During 1995, NTC's net cost to operate its network marketing program was $1.9 million as summarized below (in $ millions):
1995 ----- Sales $13.1 Cost of sales 11.2
56 INCOMNET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 Operating expenses for support services 3.8 ----- Total marketing-related costs 15.0 ----- Net marketing cost $ 1.9 ----- ----- % of total NTC (long distance & marketing) sales 2.3%
Marketing sales of $13.1 million were generated by the sale of materials, training and support services to assist NTC independent sales representatives in selling new retail customers and enrolling other representatives in the NTC program. The marketing-related costs include commissions paid to independent sales representatives for acquiring new retail telephone customers, as well as the cost of sales materials, salaries and wages of marketing department personnel, services required to support the independent sales representatives, and other directly identifiable support costs, but do not include residual commissions paid on continuing long distance telephone usage or the typical indirect cost allocations, such as floor-space and supporting departments. When the marketing-related costs of $15.0 million are compared against marketing-related revenues of $13.1 million, the result is a net loss in marketing-related activities of $1.9 million or 2.3% of total NTC sales. 9. SEGMENT INFORMATION: In 1993 and 1994, the Company conducted its business operations in two industry segments, including Network Services and Telephone Services. In 1995, because of the acquisition of RCI, the Company conducted business in three segments, including Network Services, Telephone Services and Optical Systems. No one customer accounted for as much as 10% of the revenues of any segment in 1995, 1994 or 1993. 57 INCOMNET, INC. AND SUBSIDIARIES SEGMENT INFORMATION
Telephone Optical Network General YEAR ENDED DECEMBER 31, 1995 Services Systems Services Corporate Consolidated - ---------------------------- ----------- ----------- ----------- ----------- ------------ Sales $83,127,140 $ 1,992,578 $ 1,445,199 $ -- $86,564,917 ----------- ----------- ----------- ----------- ----------- Income/(loss) before income taxes, extraordinary items & minority interest 5,059,758 (1,039,760) (1,184,327) (1,878,627) 957,044 Income taxes 365,101 -- (102,311) $ (162,289) 100,501 ----------- ----------- ----------- ----------- ----------- Income/(loss) before extraordinary items & minority interest $ 4,694,657 $(1,039,760) $(1,082,016) $(1,716,338) $ 856,543 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Identifiable assets $21,757,624 $25,345,466 $ 1,568,668 $25,433,871 $74,105,629 Depreciation and amortization 704,642 429,719 279,086 $ 1,099,856 2,513,303 Capital expenditures 6,681,148 198,665 509,606 -- 7,389,419
Telephone Optical Network General YEAR ENDED DECEMBER 31, 1995 Services Systems Services Corporate Consolidated - ---------------------------- ----------- ----------- ----------- ----------- ------------ Sales $45,608,753 $ -- $ 1,206,304 $ -- $46,815,057 ----------- ----------- ----------- ----------- ----------- Income/(loss) before income taxes & extraordinary items 3,741,972 -- 154,325 103,945 4,000,242 Income taxes -- -- 1,055 -- 1,055 ----------- ----------- ----------- ----------- ----------- Income/(loss) before extraordinary items $ 3,741,972 $ -- $ 153,270 $ 103,945 $ 3,999,187 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Identifiable assets $12,830,140 $ -- $ 4,271,190 $ 9,057,016 $26,158,346 Depreciation and amortization 220,457 -- 489,400 -- 709,857 Capital expenditures 1,546,708 -- 146,826 -- 1,693,534
Telephone Optical Network General YEAR ENDED DECEMBER 31, 1995 Services Systems Services Corporate Consolidated - ---------------------------- ----------- ----------- ----------- ----------- ------------ Sales $10,031,232 $ -- $ 1,267,740 $ -- $11,298,972 ----------- ----------- ----------- ----------- ----------- Income/(loss) before income taxes & extraordinary items (1,604,794) -- 238,685 (240,735) (1,606,844) Income taxes -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- Income/(loss) before extraordinary items $(1,604,794) $ -- $ 238,685 $ (240,735) $(1,606,844) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Identifiable assets $ 2,431,339 $ -- $ 905,000 $ 5,329,500 $ 8,665,839 Depreciation and amortization 308,776 -- 205,822 -- 514,598 Capital expenditures 461,563 -- 129,330 -- 590,893
58 INCOMNET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 10. GAIN ON SETTLEMENT WITH CREDITORS: During 1993, the Company settled certain past due trade accounts payable of the NTC subsidiary with a face amount of $877,000 in exchange for an agreement to pay $218,925. The transaction resulted in an extraordinary gain on settlement with creditors of $658,075. 11. ACQUISITION OF RAPID CAST, INC.: On February 8, 1995, the Company acquired a 51% ownership in Rapid Cast, Inc. for $28,164,000, in a transaction accounted for using the purchase method of accounting. The acquisition resulted in the recognition of intangible patent assets of $20.3 million, which are being amortized over 17 years. The following summary, prepared on a pro forma basis, combines the consolidated results of operations as if RCI had been acquired as of the beginning of the periods presented, after including the impact of certain adjustments, such as minority interest, equity in loss of unconsolidated subsidiary and patent amortization. (Dollars in thousands, except per share amounts).
1995 1994 ------- ------- Sales $87,860 $46,815 Net income $ 1,080 $ 4,071 Net income per share $ .08 $ 0.42
The pro forma results are not necessarily indicative of what would have occurred if the acquisition had been in effect for the entire periods presented. In addition, they are not intended to be a projection of future results and do not reflect any synergy that might be achieved from combined operations. 12. FOURTH QUARTER ADJUSTMENTS: During the fourth quarter of 1995, the Company recorded adjustments having the effect of reducing net income by approximately $3.1 million or $.24 per share. These adjustments resulted primarily from reserve provisioning related to settlements with shareholders and with the Company's former Chairman, revisions of management's estimates regarding the collectibility of accounts receivable, write-off of marketable securities and inventory, and reserve provisioning for estimated legal fees. 59 SCHEDULE II INCOMNET, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS DECEMBER 31, 1995 AND 1994
Column A Column B Column C Column D Column E - -------- -------- -------- -------- -------- Additions ----------------------------- (2) Balance at Charged to Charged to (1) Balance beginning costs and other accounts Deductions at end Classification of period expenses - describe - describe of period - -------------- ---------- ---------- -------------- ---------- --------- Allowance for doubtful accounts: December 31, 1994 $3,263,659 $4,576,237 -- $4,309,679 $3,530,217 December 31, 1995 $3,530,217 $7,899,168 -- $7,842,435 $3,586,950
(1) Represents write-offs of specific balances determined to be uncollectible. (2) Balance at December 31, 1995 includes $487,678 of other allowances, such as reserves for marketable securities, inventory and notes receivable. 60 EXHIBIT 3.2 INCOMNET, INC. AMENDMENT TO BYLAWS REGARDING DIRECTORS The Board of Directors recommends that the Bylaws of the Corporation be amended in such a way that the Board of Directors consists of not less than four (4) nor more than nine (9) directors, with no fixed number of directors. At present, the Bylaws state that the Board of Directors consists of not less than five (5) nor more than (9) directors, and has been fixed by the Board of Directors at five (5). The proposed Amendment cannot be passed if more than 16.67% of the shareholders vote against the amendment. The Board of Directors proposes that Section 2 of the Bylaws of Incomnet, Inc. be amended to read as follows: Section 2. NUMBER OF DIRECTORS. The number of directors of the Corporation shall not be less than four (4) nor more than nine (9). The exact number of directors shall be unspecified 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 with provision for a specific 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 four cannot be adopted if the voters 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 16.66% of the outstanding shares entitled to vote. No amendment may change the stated maximum number of authorized directors to a number greater than two times the stated number of directors minus one. The present Section 2 of the Bylaws of Incomnet reads as follows: Section 2. NUMBER OF DIRECTORS. The number of directors of the Corporation shall not be less than five (5) nor more than nine (9). The exact number of directors shall be five (5) 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 with provision for a specific 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 four cannot be adopted if the voters 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 16.66% of the outstanding shares entitled to vote. No amendment may change the stated maximum number of authorized directors to a number greater than two times the stated number of directors minus one. 61 EXHIBIT 10.2 LEASE AGREEMENT THIS LEASE AGREEMENT made this day by and between WILLIAM B. BELLIS, SR., whose address is 10691 Brentlinger Lane, Louisville, Kentucky 40291, hereinafter "Lessor"; and RAPID CAST, INC., a Delaware corporation authorized to do business in, and in good standing in the Commonwealth of Kentucky, whose address is: 4510-12 Robards Lane, Louisville, Kentucky 40218, hereinafter "Lessee"; WITNESSETH: That Lessor hereby leases to Lessee, and Lessee hereby rents from Lessor, upon the mutual agreements and covenants and subject to the terms and conditions hereinafter set out, the real estate commonly known as 4610-12 Robards Lane, Louisville, Kentucky 40218, containing approximately 1.3 acres with improvements thereon, and more particularly described in Exhibit A annexed hereto, as part hereof. It is further mutually agreed between the parties as follows: 1. TERM. The term of this lease is a period of five (5) years, commencing May 31st, 1995 and expiring May 30th, 2000. 2. POSSESSION. Possession shall be delivered to Lessee upon execution of this lease by both parties. Provided, however, that Lessor reserves the right of exclusive use of the executive office contained in the leased premises for a period not to exceed 90 days from the date of execution hereof. Lessee shall be entitled to a credit against the rent stipulated herein for the actual number of days during which Lessor occupies the executive office, calculated on the basis of $8.00 per square foot per year plus Lessor's prorate share of its utilities. At time of execution of this lease, Lessee shall pay to Lessor the sum of $8,166.67, being the installment of rent due May 31st, 1995. 3. RENT. Lessee binds itself to pay as fixed rent for the leased premises the sum of $496,400.00, being at the rate of $98,000.00 annually for the first three lease years and at the rate of $101,200.00 annually for the fourth and fifth years, payable in monthly installments on or before the first day of each month during the term hereof, the first 36 monthly installments to be in the amount of $8,166.67 per month and the remaining 24 monthly installments to be in the amount of $8,433.33 per month. All payments of rent shall be made to Lessor at his address stated above, or at such other place as he may direct in writing from time to time. If any installment of rent or other sum due from Lessee is not received by Lessor within five (5) days after such amount is due, Lessee shall pay Lessor a late charge equal to 10% of such overdue amount. The parties agree that such late charge represents a fair and reasonable estimate of the cost Lessor will incur by reason of late payment by Lessee. Lessor's acceptance of such late charge shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, or prevent Lessor from exercising any other right or remedy granted hereunder. 62 4. USE OF PREMISES. The leased premises shall be used for the manufacture and distribution of equipment and machinery for the casting of eyeglass lenses and kindred items, and for training in the use of said equipment and machinery, and not otherwise. So long as Lessee shall pay the rent and perform all of the terms of this lease, Lessee shall peaceably and quietly enjoy the leased premises without any disturbance from Lessor or any person claiming through Lessor. 5. SURRENDER OF PREMISES. Lessee shall deliver and surrender to Lessor, possession of the leased premises upon expiration of this lease or its earlier termination, or at the expiration of any extention or renewal hereof, broom clean and in as good condition and repair as at the commencement of the term, or as may have been put by Lessor or Lessee during the term, ordinary wear and tear and insured damage by fire or the elements beyond Lessee's control excepted. Lessee shall not, at any time, cause, permit or suffer any waste, nor erect or permit to be erected or conducted on the premises any nuisance. 6. DAMAGE OR DESTRUCTION TO PREMISES. In case the premises herein leased or any part thereof shall, during the term of this lease, be destroyed or damaged by fire or other casualty, so that the same shall thereby be rendered unfit for habitation or for the purpose designed, which is to be determined by the Lessor, then and in that event the Lessor may, at any time within five (5) days after the happening of such casualty, by notice in writing to the Lessee or those having estate in the premises, determine (or cancel) this lease, and unless it be so determined, the rent hereinbefore stipulated to be paid or a just and proportional part thereof shall be suspended or abated until the premises shall have been by the Lessor rebuilt or repaired and put in proper condition for use and habitation, and the rent shall thereupon recommence immediately after said rebuilding or repairing shall have been completed, but in any event the rent shall be paid up to the day of said fire or casualty. 7. ASSIGNMENT AND SUBLEASING. The premises shall not be underlet, or the term, in whole or in part, assigned, transferred or set over by the act of the Lessee, by process or operation of law or in any other manner whatsoever, without the prior written consent of the Lessor, which consent shall not be unreasonably withheld, and for a violation of this stipulation, in addition to the forfeiture provided for herein, the rent shall be doubled while the default continues. 8. TAXES AND INSURANCE. Lessor shall pay all real estate taxes on the leased premises. Lessee shall pay all taxes on its contents in the leased premises. Lessor shall pay for all insurance on the improvements. Lessee shall not at any time use the premises, or permit them to be used in such a manner as to increase the rate of insurance thereon. Lessee shall pay, as additional rent, any increase in insurance cost caused by its use of the premises, and any increase in real estate taxes and/or insurance premiums in excess of those paid by Lessor during the first lease year. 9. HOLDING OVER. Should the Lessee continue to occupy the premises after the expiration of said term or any renewal or extension thereof, or after a forfeiture incurred, whether 63 with or against the consent of the Lessor, such tenancy shall be in accordance with the terms of this lease except that Lessee shall be subject to removal at any time. 10. RECOVERY OF PREMISES. Should the Lessor at any time rightfully seek to recover possession of the premises and be obstructed or resisted therein, and any litigation thereon ensue, the Lessee shall pay and discharge all costs and attorney fees and expenses that shall arise from enforcing the covenants of this indenture by Lessor. After service of notice or the commencement of a suit, or after final judgment for possession of said premises, the Lessor may receive and collect any rent due, or that may accrue, and the payment of said rent shall not waive or affect said notice or said suit or said judgment or judgments. 11. ACCESS BY LANDLORD. The Lessor shall have free access to the premises herein leased for the purpose of examining or exhibiting same, or to make any needful repairs or alteration of said premises which said Lessor may deem necessary. 12. SIGNS. No signs shall be installed, written or painted upon the leased premises without the prior written consent of Lessor, and when done by agreement, Lessee shall, if requested by Lessor, remove at Lessee's expense all such signs, writings and paintings at the expiration or termination of the term and repair any damage done by any removal. Lessee may use the existing monument sign, but shall be responsible for its maintenance and repair. All signs erected by Lessee shall be at Lessee's expense and shall comply with any applicable zoning or other regulations. 13. SEVERABILITY. If any one or more of the provisions of this lease are deemed to be unenforceable, the remaining provisions of the lease shall remain in full fore and effect. 14. TIME. Time is of the essence. 15. MAINTENANCE AND REPAIRS. Lessee shall at all times, at Lessee's cost: maintain the leased premises and all public areas adjoining the leased premises, clear of any litter or debris; comply with all laws, ordinances and requirements of all governmental authorities concerning the leased premises and concerning the use and occupancy thereof; install any utility services that Lease may require, and pay for all telephone, gas, electric, water, sewer and other utility charges, trash removal, janitorial services, common area maintenance and lawn and landscape mowing and upkeep; pay for and maintain the leased premises in good condition and in good order and repair at all times; pay for and maintain all mechanical, electrical and other equipment and systems, including the heating and air-conditioning systems, in good operating condition; maintain public liability insurance, protecting both Lessor (who shall be made an additional named insured) and Lessee in the amounts of not less than $1,000,000.00/$1,000,000.00/$1,000,000,000.00; carry fire and casualty insurance on all personal property brought upon the premises by anyone. Lessee shall indemnify and hold harmless Lessor, Manager, and their respective agents and employees, from and against any and all liabilities, damages, claims, demands, costs and expenses of every kind and nature (including reasonable attorneys fees), including those arising from any injury or damage to any person (including death), property or business (a) sustained in or about the Premises, (b) resulting from 64 the negligence or willful act of Lessee, its employees, servants, agents, invitees, licensees or subtenants, or (c) resulting from the failure of Lessee to perform any obligation under this Lease; provided, however, Lessee's obligation under this paragraph shall not apply to injury or damages resulting from the gross negligence or willful act of Lessor, Manager or their respective agents or employees. Lessor shall be responsible for all major repairs, replacement of mechanical systems and building structural components. 16. IMPROVEMENTS AND ALTERATIONS. Lessee shall not make any structural change, modification or alteration nor any decoration, without the prior written consent of Lessor. All fixtures and improvements which may be made or installed by lessee shall become the property of Lessor at the termination of this lease unless Lessor shall request the removal of same, in which event Lessee shall remove same at Lessee's cost, Lessee to repair any damage caused thereby. 17. STORAGE AND USE. Lessee shall not store or use any combustible or explosive materials in the leased buildings which may create an unnecessary hazard or affect the insurance rates on the leased premises. Lessee shall put, keep, and use the leased premises in full compliance with all federal, state and local laws, rules and regulations pertaining to the leased premises, including but not limited to those relating to any hazardous or toxic substance, material or waste which is or becomes regulated by any local authority, the State of Kentucky or the United States Government, or any agency of any of same. Lessee shall indemnify and hold Lessor harmless from any and all claims, judgments, damages, penalties, fines, costs, liabilities and attorney fees incurred in connection with any investigation of site conditions or any clean up, remedial, removal or restoration work required by any federal, state or local governmental agency or authority, and losses (including, without limitation, diminution in value or rental value of the leased premises, sums paid in settlement of claims, attorney fees, consultants' fees and experts' fees) which Lessor shall incur or sustain, during or after the expiration of the lease term and any renewals or extensions thereof, caused by or resulting from any act or omission of Lessee. 18. WAIVER OF DEFAULT. The waiver of any default committed by Lessee shall not constitute or be held to be a waiver of any subsequent or other default. 19. CONDEMNATION. If any part or all of the premises shall be taken (or acquired) for any public of quasi-public use under power of eminent domain or like power, or by private purchase in lieu thereof, this lease shall automatically terminate as to the premises so taken as of the date of possession by the acquiring authority. In the event of a partial taking, and the remainder of the premises shall be suitable for occupancy by Lessee, this lease shall continue as to the remainder and the rent shall be adjusted on a square foot basis; but if the remainder shall not be suitable for such occupancy, then this lease shall terminate in its entirety. All awards of damages for each taking or acquisition shall belong to Lessor, free of any claim of Lessee. 20. SECURITY DEPOSIT. With the execution of this lease, Lessee has deposited with Lessor, the sum of $8,166.67, which sum shall be retained by Lessor as security for the faithful performance of obligations and payment of rents by Lessee, and as security for damage to the 65 property. Lessor may exhaust any and all other remedies against Lessee before resorting to said deposit, but nothing herein contained shall require or be deemed to require Lessor to do so. If the deposit shall not be utilized for any such purposes, then same shall be returned to Lessee within twenty (20) days after the expiration of the term of this lease or any renewal or extension thereof. Lessor shall not be required to pay any interest on said deposit. 21. DEFAULT. If Lessee shall abandon the premises, permit the rent to become in arrears or violate any other obligation herein, Lessor may, at his option, cancel this lease or cancel or modify any portion hereof, or enter the premises as agent of Lessee, by force or otherwise, without being liable in any way therefor, and relet the premises with or without any furniture or equipment that may be therein, as agent of Lessee, at such price and upon such terms, and for such duration of time, as Lessor may determine, and receive the rent therefor, applying same first to the expenses of retaking and reletting (including any court costs, attorneys fees and broker's or realtor's fees) and then to the payment of the rent due hereunder, and if the rental realized by Lessor shall be less than the expenses of retaking and reletting and the rent herein provided, Lessee shall pay any deficiency. If Lessor cancels lease, then Lessee shall be liable for damages for breaching this agreement for the difference between the rental provided for the canceled portion of the term and the amount of rent actually received by Lessor during that period of time, plus all expenses, costs and attorney fees which may be incurred by Lessor. Any default by Lessee shall automatically cancel and extinguish all rights of Lessee under paragraphs 23 and 24 hereof. 22. ENTIRE AGREEMENT. Lessee acknowledges that Lessor has made no representations, agreements, or inducements whatsoever except as may be set forth in this instrument contains the entire agreement between the parties. All prior agreements and understandings are superseded by this instrument. This instrument shall be construed and governed by the laws of the Commonwealth of Kentucky. 23. OPTION TO EXTEND LEASE. Lessee may extend this lease upon the expiration of its initial term, provided that this lease is then in full force and effect and Lessee has at all times fully performed all of its terms and conditions. The extended term shall be for five (5) years, commencing on May 1, 2000, and shall be upon the same terms and conditions as the initial term, except that rent during the extension term, in addition to any increases in taxes and/or insurance, shall be as follows: the rent for the first year of the extension term shall be $101,200.00, and the rent for each year thereafter shall be increased by an amount equal to the increase of each prior year in the Consumer Price Index, United States City Average, All Urban Consumers, of the Bureau of Labor Statistics of the United States Department of Labor. If publication of said index is discontinued, the parties shall substitute the most closely related Index published by any agency of the United States Government. Lessee shall exercise the option for such extended term by delivering written notice thereof to Lessor at least six (6) months or more prior to the expiration of the initial term. 24. PURCHASE OPTION. Lessee shall have the option during the first lease year to purchase the leased premises, provided that the lease is there in full force and effect and that Lessee has at all times fully complied with all terms and conditions herein. The purchase price 66 shall be $950,000.00, payable at the closing in cash or in immediately available funds. Lessor shall convey title by a deed of General Warranty, free and clear of encumbrances but subject to any easements, restrictions and stipulations of record affecting the property, zoning laws and regulations and taxes which may be a lien against the property but which are not due and payable at the time of closing. All taxes for the year of closing shall be prorated between the parties on a calendar year basis. If Lessee elects to exercise such option, it shall deliver written notice thereof to Lessor and the closing shall take place within ninety (90) days thereafter. 25. BROKER'S COMMISSION. Lessor and Lessee agree, represent and acknowledge that Lane Consultants and Harry K. Moore Company are the only brokers with whom they have dealt in connection with the leased premises. Lessor shall be responsible only for the payment of all brokerage commissions in connection with the original term of this lease and in connection with any sale pursuant to paragraph 24 hereof. 26. MISCELLANEOUS 26.1 The captions of this lease are for convenience only, and are not part of the lease, and do not in any way limit or amplify its terms and provisions. 26.2 The provisions of this lease shall be binding on and inure to the benefit of the parties, their legal representatives, successors and permitted assigns. 26.3 This lease may not be changed orally, but only by an agreement in writing and signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. 26.4 If any provision of this lease shall be declared invalid or unenforceable, the remainder of this lease shall continue in full force and effect. 26.5 This lease expresses the mutual intent of the parties, and no presumption or burden of proof shall arise favoring or disfavoring either party by virtue of the authorship of any of the provisions herein. IN TESTIMONY WHEREOF, witness the signatures of the parties hereto, duly authorized thereunto, this 31st day of May, 1995. /s/ WILLIAM B. BELLIS, SR. --------------------------------------- WILLIAM S. BELLIS, SR. -- Lessor RAPID CAST, INC. -- Lessee By /s/ Larry Joel ------------------------------------ Title: President -- Chairman 67 GUARANTY To induce William B. Bellis, Sr., as Lessor, to enter into the foregoing Lease, to which this Guaranty is attached, and in consideration thereof, Larry Joel, O.D. ("Guarantor"), a resident of the State of Kentucky, whose address is 4510 Robards Lane, Louisville, Kentucky, 40218, guarantees the punctual payment and prompt performance of any and all indebtedness and obligations of any kind of Lessee under the foregoing Lease, together with interest thereon and all attorneys fees, costs and expenses of collection or other enforcement of the provisions of this Lease incurred by Lessor. Guarantor hereby expressly waives notice of any default by Lessee under the foregoing Lease. Guarantor shall remain bound under this Guaranty notwithstanding any extension of time of performance to, the granting of any other indulgence to, or any other modification including any increase, of any obligation of Lessee, and the acceptance, alteration or release of any security. This is a continuing, indivisible guarantee by Guarantor of every debt and obligation of Lessee under the foregoing Lease, whenever incurred. This Guaranty shall apply to any renewal or extension of the foregoing Guaranty shall be directly enforceable against Guarantor without resorting to any party otherwise liable and without exhausting any and all remedies against them. Any litigation concerning this Guaranty shall only be brought in the State of Kentucky, and Guarantor hereby appoints the Secretary of State of Kentucky as a process agent regarding any such litigation. Provided, however, that in the event Rapid Cast, Inc. is able to institute a public stock offering that is successful in raising a minimum of $5,000,000, in capital or its retained earnings exceed $5,000,000, then upon the happening of said event, this guaranty shall become void and of no further effect. Rapid Cast, Inc. shall certify to Lessor the occurrence of either of the above and shall provide such documentation as Lessor may require to verify the occurrence. IN TESTIMONY WHEREOF, witness the signature of the Guarantor by its duly authorized representative, this 31st day of May, 1995. /s/ Larry Joel --------------------------------------- Larry Joel, O.D. 68 EXHIBIT 21 INCOMNET, INC. SUBSIDIARIES OF THE REGISTRANT MARCH 27, 1996
State or other jurisdiction of Percentage of incorporation or voting securities Name organization owned - ---- ------------------ ----------------- Incomnet India Limited India 32% Rapid Cast, Inc. New Jersey 51% National Telephone & Communications, Inc. Nevada 100%
69 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 8, 1995 INCOMNET, INC. --------------------------------------- (Registrant) By: /s/ MELVYN REZNICK ------------------------------------ MELVYN REZNICK President and Chief Executive Officer 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:
Signature Capacity Date --------- -------- ---- /s/ MELVYN REZNICK President, Chief Executive April 8, 1996 - -------------------------- Officer, and Director MELVYN REZNICK /s/ JOEL W. GREENBERG Chairman, Board of Directors April 8, 1996 - -------------------------- JOEL W. GREENBERG /s/ RICHARD A. MARTING Vice President of Finance April 8, 1996 - -------------------------- and Administration (NTC) RICHARD A. MARTING /s/ NANCY ZIVITZ Director April 8, 1996 - -------------------------- NANCY ZIVITZ /s/ ALBERT MILSTEIN Director April 8, 1996 - -------------------------- ALBERT MILSTEIN
70 EX-13.2 14 EXHIBIT 13.2 PROXY STATEMENT EXHIBIT 13.2 PROXY STATEMENT, DATED MAY 2, 1996 FOR THE 1996 ANNUAL MEETING OF THE SHAREHOLDERS SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. ) Filed by the Registrant /X/ Filed by a Party other than the Registrant / / Check the appropriate box: / / Preliminary Proxy Statement / / Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) /X/ Definitive Proxy Statement / / Definitive Additional Materials / / Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12 INCOMNET, INC - -------------------------------------------------------------------------------- (Name of Registrant as Specified In Its Charter) - -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): / / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or Item 22(a)(2) of Schedule 14A. / / $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6(i)(3). / / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. 1) Title of each class of securities to which transaction applies: ------------------------------------------------------------------------ 2) Aggregate number of securities to which transaction applies: ------------------------------------------------------------------------ 3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): ------------------------------------------------------------------------ 4) Proposed maximum aggregate value of transaction: ------------------------------------------------------------------------ 5) Total fee paid: ------------------------------------------------------------------------ /X/ Fee paid previously with preliminary materials. / / Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. 1) Amount Previously Paid: ------------------------------------------------------------------------ 2) Form, Schedule or Registration Statement No.: ------------------------------------------------------------------------ 3) Filing Party: ------------------------------------------------------------------------ 4) Date Filed: ------------------------------------------------------------------------ INCOMNET, INC. 21031 Ventura Boulevard, Suite 1100 Woodland Hills, California 91364 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS June 14, 1996 TO OUR SHAREHOLDERS: You are cordially invited to attend the 1996 Annual Meeting of Shareholders of Incomnet, Inc., to be held on Friday, June 14, 1996 at 10:00 A.M., Pacific Time, at the Marriott Hotel, 28159 Oxnard St. Woodland Hills, CA, to consider and act upon the following proposals, as described in the accompanying Proxy Statement: 1. To elect four (4) directors to serve until the next Annual Meeting of Shareholders and thereafter until their successors are elected and qualified. 2. To ratify the Incomnet 1996 Stock Option Plan for the directors, officers, employees and key consultants of Incomnet, Inc. as a replacement for the Incomnet 1994 Stock Option Plan, which will be terminated. 3. To ratify the selection of Stonefield Josephson LLP to serve as the Company's independent auditors for the year ending December 31, 1996. 4. To transact such other business as may properly come before the meeting or any adjournments thereof. The Board of Directors has fixed the close of business on May 10, 1996, as the record date for Shareholders entitled to notice of and to vote at this meeting and any adjournments thereof. By Order of the Board of Directors /s/ Stephen A. Caswell Stephen A. Caswell, Secretary May 2, 1996 Woodland Hills, California ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING IN PERSON. WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, YOU ARE URGED TO COMPLETE, SIGN AND DATE THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. YOUR PROXY WILL NOT BE USED IF YOU ARE PRESENT AT THE ANNUAL MEETING AND DESIRE TO VOTE YOUR SHARES PERSONALLY AT THAT TIME. INCOMNET, INC. 21031 Ventura Boulevard, Suite 1100 Woodland Hills, California 91364 PROXY STATEMENT SOLICITATION, VOTING AND REVOCABILITY OF PROXIES The enclosed proxy is solicited by the Board of Directors of Incomnet, Inc. (the "Company"), 21031 Ventura Boulevard, Suite 1100, Woodland Hills, California 91364, for use at the 1996 Annual Meeting of Shareholders to be held on Friday, June 14, 1996 (the "Annual Meeting"). The Company intends to send this Proxy Statement and the accompanying Notice of Annual Meeting of Shareholders and form of proxy to the holders (the "Shareholders") of its Common Stock, no par value (the "Common Stock"), on or about May 10, 1996. The cost of soliciting proxies will be borne by the Company. It is expected that proxies will be solicited exclusively by mail; however, if it should appear desirable to do so, officers and employees of the Company may communicate with shareholders, banks, brokerage houses, nominees and others by telephone, facsimile, or in person, to request that proxies be furnished. Officers and employees soliciting proxies will not receive any additional compensation for their services. The Company will reimburse brokers and other nominees for their reasonable out-of-pocket expenses incurred in forwarding solicitation material to beneficial owners of shares held of record by such brokers or nominees. The proxy, if returned properly executed and not subsequently revoked, will be voted in accordance with the choices made by the Shareholders with respect to the proposals listed thereon. If no choice is made with respect to the proposals, the proxy will be voted for the election of the Board of Directors' nominees. If any other matters should be presented at the Annual Meeting, the holders of the proxies will vote on such matters in accordance with the views of a majority of the directors. Any Shareholder giving a proxy may revoke it at any time before it is exercised by filing an instrument revoking it or a duly executed proxy bearing a later date with the Secretary of the Company, or by attending the meeting and voting in person. The Company's Annual Report for the year ended December 31, 1995, is being mailed concurrently with this Proxy Statement. Brokerage houses, custodians, nominees, and others may obtain additional copies of the Annual Report or this Proxy Statement by written request to the Company. OUTSTANDING SHARES AND VOTING RIGHTS The only class of the Company's equity securities outstanding is its Common Stock. Shareholders of record at the close of business on May 10, 1996 are entitled to one vote for each share of Common Stock held by them. As of April 26, 1996, there were 13,224,024 shares of common stock outstanding. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The following table sets forth information as of April 26, 1996, with respect to each person who is known by the Company to own beneficially 5% or more of the Company's outstanding Common Stock. Name and Amount and Percent of Address of Nature of Shares of Beneficial Beneficial Common Stock Owner Ownership Outstanding (3) - ---------- ---------- -------------- Sam D. Schwartz 1,998,500(1) 14.74% 333 S. Hope St. - 43rd Floor Los Angeles, CA 90071 Clarence Robert Zivitz 669,300(2) 4.94% 7734 Silver Bell Drive Sarasota, FL 34241 (1) Does not include 35,000 shares owned by Rita L. Schwartz, Mr. Schwartz's wife and warrants to purchase 35,000 shares of the Company's common stock at $4.37 per share. (2) Includes 644,300 shares owned by Mr. Zivitz and warrants to purchase 25,000 shares at an exercise price of $4.37 per share, expiring on February 5, 2001, owned by Mr. Zivitz's wife, Nancy, who is a member of the Company's Board of Directors. These warrants are subject to approval by shareholders [see "Ratification of Stock Option Program for Officers, Directors, Employees and Key Consultants"]. (3) Assumes 13,599,024 shares outstanding, including 335,000 shares issuable upon the exercise of stock options and warrants which have vested. -1- SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth information as of April 26, 1996, with respect to beneficial ownership by each director and officer, and by all directors and officers as a group. All shares shown below are owned by such beneficial owners directly unless otherwise indicated. Amount and Percent of Name of Nature of Shares of Beneficial Beneficial Common Stock Owner Ownership Outstanding (7) - ------------------ ----------- ------------- Nancy Zivitz 669,300(1) 4.94% Joel W. Greenberg 260,000(2) 1.92 Melvyn Reznick 205,300(3) 1.51 Richard A. Marting 55,000(4) 0.41 William D. Savage 51,000(4) 0.38 Albert Milstein 48,000(5) 0.35 Edward R. Jacobs 30,000 0.22 Stephen A. Caswell 20,000(6) 0.15 Jerry Ballah -- -- All directors and officers as a group (9 persons) 1,338,600 9.9% (1) 644,300 shares are owned in the name of Mrs. Zivitz's husband, Clarence Robert Zivitz. Includes warrants to purchase 25,000 shares of the Company's common stock at an exercise price of $4.37 per share, expiring on February 5, 2001. These warrants are subject to approval by shareholders [see "Ratification of Stock Option Program for Officers, Directors, Employees and Key Consultants"]. Does not include 25,000 warrants to purchase shares of the Company's common stock at an exercise price of $4.37 per share that will vest on January 1, 1997 and expire on January 1, 2002. These warrants are subject to approval by shareholders [see "Ratification of Stock Option Program for Officers, Directors, Employees and Key Consultants"]. (2) Includes warrants to purchase 25,000 shares of the Company's common stock at an exercise price of $4.37 per share, expiring on April 5, 2001. These warrants are subject to approval by shareholders [see "Ratification of Stock Option Program for Officers, Directors, Employees and Key Consultants"]. (3) Includes warrants to purchase 150,000 shares of the Company's common stock at a price of $4.875 per share, 25,000 expiring on 2/28/2001 and 25,000 expiring on 5/31/2001 and 100,000 of which are exercisable at a price of $4.37 per share expiring on April 5, 2002. Does not include 350,000 options, 150,000 of which were issued as part of Mr. Reznick's employment contract with Incomnet [see "Employment Contract Between Melvyn Reznick and Incomnet"] and 200,000 of which were issued for services provided to the Company [see "Stock Options & Warrants - Holdings"]. (4) Includes warrants to purchase 50,000 shares at an exercise price of $8.50 per share, expiring on May 27, 1997. (5) Includes warrants to purchase 25,000 shares of the Company's common stock at an exercise price of $4.37 per share, expiring on April 5, 2001. These warrants are subject to approval by shareholders [see "Ratification of Stock Option Program for Officers, Directors, Employees and Key Consultants"]. Does not include 25,000 warrants to purchase shares of the Company's common stock at an exercise price of $4.37 per share that will vest on January 1, 1997 and expire on January 1, 2002. These warrants are subject to approval by shareholders [see "Ratification of Stock Option Program for Officers, Directors, Employees and Key Consultants"]. (6) Does not include warrants to purchase 50,000 shares of the Company's common stock at an exercise price of $4.37 per share. These warrants are subject to performance requirements associated with the Company's 51%-owned subsidiary, Rapid Cast, Inc. and are subject to approval by shareholders [see "Ratification of Stock Option Program for Officers, Directors, Employees and Key Consultants"]. (7) Assumes 13,559,024 shares outstanding, including 335,000 shares issuable upon the exercise of stock options and warrants which have vested. Based upon the Company's review of Forms 3, 4 and 5 and any amendments thereto furnished to the Company in compliance with Section 16 of the Securities Exchange Act of 1934, all of such Forms were filed on a timely basis by such reporting persons. -2- ELECTION OF DIRECTORS Directors are elected by the Shareholders at each annual meeting to hold office until their respective successors are elected and qualified. Pursuant to the Bylaws of the Company, the Board of Directors consists of not less than five (4) nor more than nine (9) directors. Of the current directors listed below, no nominees were elected to the Board of Directors at the 1995 Annual Meeting of Shareholders. In November 1995, Sam D. Schwartz, Stephen A. Caswell and Rita Schwartz, who were elected to the Board of Directors at the 1995 Annual Meeting of Shareholders, resigned from the Board of Directors. In November 1995, Melvyn Reznick, Nancy Zivitz and Albert Milstein were appointed to the Board to replace Mr. Schwartz, Mrs. Schwartz and Mr. Caswell (see "Certain Relations and Related Transactions - Reconstitution of the Board of Directors"). Joel W. Greenberg, who was also elected to serve on the Board of Directors at the 1995 Annual Meeting of Shareholders, has not been nominated by the Board of Directors to stand for reelection (Renomination of Joel W. Greenberg). Mr. Greenberg has notified the Company that he may submit his own proxy statement and nominate his own slate of directors. Voting for the election of directors may be either cumulative or non-cumulative. Under California law, cumulative voting is not permitted unless, at the Annual Meeting and prior to the voting, at least one Shareholder gives notice of his intention to cumulate his votes. If that occurs, then all the Company's Shareholders have cumulative voting rights in the election of directors. If no such notice is given, voting for directors will be non-cumulative, which means that a simple majority of the shares voting may elect all of the directors. Under cumulative voting, each Shareholder entitled to vote has the right to give one candidate a number of votes equal to the number of authorized directors multiplied by the number of votes to which his shares are entitled, or to distribute his votes on the same principle among as many candidates as he desires. Each share of Common Stock, therefore, has a number of votes equal to the number of authorized directors. Proxies may not be voted for more than four (4) directors. Although management of the Company expects that each of the following nominees will be available to serve as a director, in the event that any of them should become unavailable prior to the Annual Meeting, management's proxies will be voted for a nominee or nominees designated by management or will be voted for a lesser number of directors. If there are other nominees, management's proxies will be voted so as to elect the greatest number of the following nominees. Management has no reason to believe that any of its nominees, if elected, will be unavailable to serve. The nominees for election to the Board of Directors as selected by the Board of Directors of the Company are set forth below: Melvyn Reznick Nancy Zivitz Gerald Katell Mark Richardson The biographies of present directors and nominees, including certain additional information, are set forth below. MELVYN REZNICK, 53, has been the President and Chief Executive Officer of Incomnet since November 1995. He has 30 years of experience in engineering, manufacturing, management, marketing, real estate and corporate development. Since 1978, he has been a partner in two real estate companies, Property Research and Management Co. and PRM Realty. Prior to entering the real estate industry, he was an engineer in the aerospace industry. He has a Bachelor of Science and a Master of Science in Mechanical Engineering from the Massachusetts Institute of Technology and is a member of the Society of Sigma Xi. He is also an active member of the National Association of Corporate Directors (NACD). NANCY S. ZIVITZ, 47, joined the Company's Board of Directors in November 1995. From 1987 - 1991, she was Senior Vice President of City National Bank in Washington, DC where she was head of the Retail Banking Unit. From 1991 to the present, she has been involved in community service for such organizations as the Coalition of Christians and Jews and the Association of Professional Women. She has a Bachelor of Business Administration from George Washington University. MARK RICHARDSON, 42, is the Company's corporate counsel. He specializes in corporate law, securities, corporate finance, mergers and acquisitions, contracts and other transactional work. From 1990 to June 1993, he was a partner with the law firm of Hill, Farrer & Burrill. In June 1993, he established his own practice. He received a Bachelor of Science from the School of Natural Resources at the University of Michigan in 1975 where he graduated with Phi Beta Kappa honors. He received his Juris Doctor from the University of Michigan Law School in 1978. GERALD L. KATELL, 56, has more than 30 years of real estate development and construction experience. From 1983 - 1992, he was the President of Katell Properties, Inc., a real estate development firm specializing in business parks. In 1992, Katell Properties became a proprietorship under Mr. Katell's ownership. He has a Bachelor of Science in Civil Engineering from Massachusetts Institute of Technology and a Masters of Business Administration from Stanford University. NOMINATION OF ALBERT MILSTEIN Albert Milstein, who was appointed to the Board in November 1995, was nominated by the Board of Directors to stand for reelection, but declined the nomination because he told the Company that he wishes not to be involved in a proxy election contest. Mr. Milstein's resume is as follows: ALBERT MILSTEIN, 49, joined the Company's Board of Directors in November 1995. He is a partner with the law firm of Winston & Strawn, for whom he has worked since 1972. He specializes in the representation of nursing homes and other long-term care facilities. He received his Juris Doctor from Chicago Law School in 1972 and received a Bachelor of Arts from Yeshiva University in 1969. -3- DECISION NOT TO RENOMINATE JOEL W. GREENBERG On April 8, 1996, the Board of Directors of Incomnet, Inc. ("the Company") held a meeting telephonically to nominate individuals to stand for election to the Company's Board of Directors. The Board unanimously renominated Melvyn Reznick, President and Chief Executive Officer of the Company; and Nancy Zivitz and Albert Milstein, who are both present Board members. Mr. Reznick was also nominated to stand for election as the new Chairman of the Board of Directors. The Board also nominated Gerald Katell, a successful real estate executive and business leader, to serve as a member of the Board. Mr. Katell is a graduate of MIT with a Bachelor of Science and of Stanford University with a Masters Degree in Business Administration. The attendees of the Board meeting unanimously declined to renominate Joel W. Greenberg, the present Chairman of the Board. The Board declined to renominate Mr. Greenberg because it believes that Mr. Greenberg's request for compensation in the form of cash payments and stock options are excessive in light of the compensation guidelines promulgated by the National Association of Corporate Directors ("NACD") and considering the number of stock options contemplated for other directors. Mr. Greenberg did not attend the meeting. Mr. Greenberg, who lives in Chicago, IL, presently receives cash compensation of $24,000 per year as the Chairman of the Board. Mr. Greenberg initially requested cash compensation at the rate of $72,000 per year and was paid $6,000 in November 1995. This salary was reduced to $24,000 per year after further review. Mr. Greenberg also originally asked for options to purchase 300,000 shares of the Company's stock to vest over a period of two years, and including certain performance criteria, but reduced his request to 250,000 stock options with the same vesting period and performance criteria. Mr. Greenberg told the Board that he would find unacceptable any compensation below 250,000 stock options. He further stated that he would consider launching a proxy contest if the Board did not agree to the stock option request. Since the Company believed that the maximum it could compensate Mr. Greenberg based upon NACD guidelines was 75,000 stock options, the Board denied the request and could not renominate Mr. Greenberg to stand for reelection. In addition, Board members were concerned that Mr. Greenberg has not yet repaid previously disclosed short-swing profits for which payment was requested by the Company on February 22, 1996 pursuant to Section 16(b) of the Securities and Exchange Act, as amended. Payment was due on April 22, 1996. On or about May 2, 1996, the Company filed a lawsuit against Mr. Greenberg to collect the unpaid short swing profits pursuant to Section 16(b) of the Securities and Exchange Act, as amended. Mr. Greenberg is also not expected to be reelected to the Boards of either of the Company's subsidiaries, National Telephone & Communications, Inc. and Rapid Cast, Inc. Mr. Greenberg notified the Company an April 24, 1996 that he intends to pursue a proxy election contest in connection with the upcoming meeting. Mr. Greenberg's resume is as follows: JOEL W. GREENBERG, 58, is an independent investment counselor in Chicago, Illinois. Mr. Greenberg is a member of the Chicago Mercantile Exchange and the International Monetary Market. From 1987 to 1989, Mr. Greenberg was a vice president of Shearson Lehman Hutton in Chicago, Illinois. From 1985 to 1987, Mr. Greenberg was a vice president of Bear Stearns & Co., Inc. in Chicago, Illinois. Mr. Greenberg has been a director since April 1988. Mr. Greenberg is a director of Smithfield Foods, Inc., a public company. MEETINGS AND COMPENSATION OF BOARD OF DIRECTORS The Board of Directors of the Company held three meetings during the year ended December 31, 1995. Each director attended all meetings for which he or she was eligible to attend. The Company does not have standing audit or nominating committees of the Board of Directors, or committees performing similar functions. The Company has a standing compensation committee. Board members are reimbursed for out-of-pocket expenses and, upon approval of Shareholders, will receive stock options as defined in the Company's proposed stock option program [see "Ratification of Stock Option Program for Officers, Directors, Employees and Key Consultants"]. EXECUTIVE OFFICERS The executive officers of the Company, its National Telephone Communications, Inc. (NTC) subsidiary and their respective positions are set forth below. Name Positions - ---- ---------- Melvyn Reznick President and Chief Executive Officer, Incomnet Stephen A. Caswell Vice President and Secretary, Incomnet Edward R. Jacobs President and Chief Executive Officer, NTC Jerry W. Ballah Executive Vice President, NTC Richard A. Marting Vice President of Finance and Administration and Chief Financial Officer, NTC William D. Savage Vice President of Operations, NTC -4- The biographies of executive officers not already included in the section on directors, including certain additional information, are set forth below. STEPHEN A. CASWELL, 46, is Vice President of Incomnet. He joined the Company in August 1987 and has been Secretary since August 1989, and a director since April 1988. Mr. Caswell is a leading expert in electronic messaging networks. From 1982 to 1987, Mr. Caswell had his own consulting firm that specialized in designing PC-based networking systems. He has an M.A. in Communications from American University in Washington, DC and a B.A. in Philosophy from Tufts University. EDWARD R. JACOBS, 58, is President and Chief Executive Officer of NTC. He has in excess of 20 years experience in management with Fortune 500 firms such as CCH- Computax and McDonnell Douglas. For the five prior years before joining the Company in March 1992, he managed his own investment banking firm. Prior to that, he co-founded Dataccount Corporation, one of the largest privately held computerized financial services companies in Southern California. JERRY W. BALLAH, 56, is Executive Vice President of NTC. He joined NTC in January 1993 as Director of Marketing. From September 1991 to October 1992, he was National Marketing Director for NCN Communications, Inc, a telephone reseller in Gilbert, AZ. From February 1991 to September 1991, he was National Marketing Director for Images International, Inc. of Salem, UT. From September 1989 to February 1991, he was an independent consultant with Classic Van Conversions of Kansas City, KS. RICHARD A. MARTING, 46, is Vice President of Finance and Administration and Chief Financial Officer of NTC. From 1991 to when he joined the Company in December 1993, he worked as Director of Finance and Administration for Under Sea Industries, Inc. From 1989 to 1990, he was Vice President of Finance & CFO of Birchwood of Los Angeles. From 1981 to 1989, he was the Chief Financial Officer of American National Corporation. WILLIAM D. SAVAGE, 53, is Vice President of Operations. He joined NTC in February 1994 as Director of Operations. From 1991 until joining the Company, he was Vice President of Sales Administration and Customer Support for Excel Telecommunications. From 1987 to 1991, he was senior manager of Sales and Local Exchange Carrier Services for Allnet Communications. Mr. Savage has a strong background in operations and managing high level data processing. EXECUTIVE COMPENSATION The following tables set forth certain information concerning cash and stock option compensation paid or accrued by the Company for the years ended December 31, 1995, 1994 and 1993 to the Chief Executive Officer and to each of the five most highly compensated executives of the Company whose aggregate cash compensation, bonuses and stock option compensation exceeded $100,000. During 1995, Sam D. Schwartz, the Company's former Chairman, President and Chief Executive Officer, received cash compensation of $220,000 based upon 11 months of service. In addition, he received cash compensation of $240,000 as part of a severance agreement with the Company [see "Certain Transactions - Reconstitution of the Board of Directors"]. TOTAL CASH COMPENSATION
Name of Individual Position 1995 1994 1993 - ----------------- ----------------------------- ---------- ---------- ---------- Jerry W. Ballah Executive Vice President, NTC $360,537(1) $335,193(1) $120,000(2) Edward R. Jacobs President and Chief Executive Officer, NTC $292,499(3) $114,919(2) $120,000(2) Richard A. Marting Vice President, Finance and Administration, NTC $134,229(3) $102,998(2) -- William D. Savage Director of Operations, NTC $134,542(3) -- -- Stephen A. Caswell Vice President, Incomnet $80,000(2) $70,000(2) $65,000(2) Melvyn Reznick President and Chief Executive Officer, Incomnet $15,234(4) -- --
(1) Includes cash bonuses of $120,537 in 1995 and $95,193 in 1994. (2) All compensation was received as cash in the form of salary. (3) Includes cash bonus and taxable portion of premiums on life insurance policies of $57,526 for Mr. Jacobs, $14,229 for Mr. Marting and $14,542 for Mr. Savage. (4) Consists of cash compensation for one month of service based upon an annual salary of $182,800 per year. -5-
TOTAL STOCK OPTION COMPENSATION Name of Individual Position 1995 1994 1993 - ----------------- ----------------------------- ---------- ---------- ---------- Edward R. Jacobs President and Chief Executive Officer, NTC $2,343,759(1) -- -- Stephen A. Caswell Vice President, Incomnet $996,599(2) -- -- Jerry W. Ballah Executive Vice President, NTC $441,000(3) -- --
(1) Consists of 150,000 stock options at $5.00 per share exercised on July 25, 1995 when the stock was priced at 20-5/8, bringing the Company $750,000. This stock was not sold at the time of exercise. The Company issued a loan to the employee associated with this transaction [see "Certain Relationships and Related Transactions - Notes Receivable from Officers"]. (2) Consists of 89,582 stock options exercised at $5.00 per share on April 4, 1995 when the stock was priced at 16-1/8, bringing the Company $447,910. This stock was not sold at the time of exercise. The Company issued a loan to the employee associated with this transaction [see "Certain Relationships and Related Transactions - Notes Receivable from Officers"]. (3) Consists of 100,00 stock options exercised at $8.50 per share on May 26, 1995 when the stock was priced at 12-29/32, bringing the Company $850,000. This stock was not sold at the time of exercise. The Company issued a loan to the employee associated with this transaction [see "Certain Relationships and Related Transactions - Notes Receivable from Officers"]. STOCK OPTIONS & WARRANTS In August 1994, the Company authorized a stock option plan for executives, directors, key employees and key consultants that allowed 1,800,000 shares to be granted. This stock option plan was approved by shareholders at its Annual Meeting held on May 16, 1995. On February 5, 1996, the Board of Directors authorized to replace the prior stock option plan with a new plan. All stock options approved in the previous plan have either been or are expected to be returned to the Company. -6- Options approved under the previous plan are as follows:
Employee Number Base Price Disposition and terms - -------- ------ ---------- --------------------- Edward Jacobs 1,200,000 $10.00 Still held. These options will be returned upon the adoption of a separate stock option program for National Telephone & Communications that is a part of a recent agreement that NTC will become a public corporation (see "Certain Relationships -- Management Incentive Agreement With National Telephone Communications, Inc. (NTC)"). In any event, these options do not vest unless and until NTC earns at least $15 million in pre-tax earnings in four continuous audited quarters by December 31, 1997. Sam D. Schwartz 250,000 $11.00 Returned to Company as a part of the payment of short- swing profits (see "Certain Relationships and Related Transactions -- Reconstitution of the Board of Directors."). Joel W. Greenberg 35,000 $10.00 Returned to the Company. Were reissued as warrants with an exercise price of $4.87 per share. Rita Schwartz 35,000 $10.00 Returned to the Company. Were reissued as warrants with an exercise price of $4.87 per share. Stephen A. Caswell 25,000 $10.00 Returned to the Company.
HOLDINGS AND GRANTS The following stock options and warrants are held by the following directors and executives. The table does not include 1,200,000 stock options held by Edward R. Jacobs as disclosed above that the Company expects will be returned upon adoption of a separate stock option plan by National telephone & Communications, Inc. [see "Certain Relationships - Management Incentive Agreement With National Telephone Communications, Inc. (NTC)."].
Potential Realizable Value at Assumed Annual Rates of Stock Price Exercise or Date of Appreciation for Term Employee Type Number Base Price Expiration 5% 10% - -------- ------- ------ ----------- --------------------- -------- -------- Melvyn Reznick options 25,000 (1) 4.87 2/28/01 $ 33,637 $ 74,330 options 100,000 (2) 4.37 4/5/01 120,736 266,792 options 25,000 (1) 4.87 5/31/01 33,637 74,330 options 25,000 (1) 4.87 8/31/01 33,637 74,330 options 25,000 (1) 4.87 11/30/01 33,637 74,330 options 25,000 (2) 4.37 2/28/02 30,184 66,698 options 25,000 (2) 4.37 5/31/02 30,184 66,698 options 50,000 (3) 4.37 5 years from vesting 60,368 133,396 options 200,000 (1)(4) 4.87 4/5/01 269,098 594,637 Stephen A. Caswell options 50,000 (4) 4.37 5 years from vesting 60,368 133,396 Joel Greenberg options 25,000 4.37 4/5/01 30,184 66,698 Albert Millstein options 25,000 4.37 4/5/01 30,184 66,698 Mark Richardson options 15,000 4.37 4/5/01 18,110 40,018 35,000 4.37 1/1/02 42,258 93,377 Nancy Zivitz options 25,000 4.37 2/5/01 30,184 66,698 25,000 4.37 1/1/02 30,184 66,698 Richard A. Marting warrants 50,000 8.50 5/27/97 66,991 140,675 William D. Savage warrants 50,000 8.50 5/27/97 66,991 140,675
(1) These options were issued on November 30, 1995 pursuant to an employment contract between Mr. Reznick and Incomnet (see "Employment Agreement Between Melvyn Reznick and Incomnet"). All other options listed in this table were granted under the Incomnet 1996 Stock Option Plan (see "Ratification of the Stock Option Program for Officers, Directors and Key Consultants"). (2) These options were issued for service to the Company and because Mr. Reznick has signed a personal guarantee for a line of credit for the Company in the amount of $750,000. As of April 26, 1996, the Company has drawn down $515,000 on this line of credit (see "Certain Relationships and Related Transactions - Loan to Company By Melvyn Reznick".) -7- (3) These options do not vest until Rapid Cast, Inc. becomes a publicly-traded company. (see "Ratification of the Stock Option Program for Officers, Directors and Key Consultants"). (4) These options do not vest until Rapid Cast, Inc. achieves certain financial performance goals. (see "Ratification of the Stock Option Program for Officers, Directors and Key Consultants"). BOARD REPORT ON EXECUTIVE COMPENSATION The Executive Compensation Committee (the "Committee") is responsible for developing the Company's executive compensation strategy . The Committee is composed of Stephen A. Caswell, Albert Milstein and Nancy Zivitz. The Committee is charged with reviewing and approving compensation of the Company's executives each year. The Committee's recommendations are implemented and administered by management. Recommendations of base salary are based upon the performance of the individual. In 1995, the Company signed an employment contract with Melvyn Reznick, the President of Incomnet (see " Employment Agreement Between Melvyn Reznick and Incomnet"). The Company has one other employment contracts with an employee, Edward R. Jacobs, which was signed in 1994. Because Mr. Milstein and Ms. Zivitz joined the Board in November 1995, the Compensation Committee did not negotiate the contract with Mr. Reznick. In addition to base salaries, the Committee recommends the grant of restricted stock warrants as a means of rewarding performance and providing incentives for future performance and, in 1994, approved an incentive stock option program for officers, directors, employees, and key outside consultants (see "Stock Option Program for Officers, Directors, Employees and Key Consultants"). Warrants were granted in 1995 to two executives and outside directors for future performance. The Chief Executive Officer of the Company is Melvyn Reznick. The chart on Company's stock performance (see "Company Performance") shows a graph of the cumulative total return of the Company's stock January 1988. Submitted by the Compensation Committee Stephen A. Caswell Albert Milstein -8- Nancy Zivitz COMPANY PERFORMANCE The following graph shows a seven year comparison of cumulative total returns for the Company's common stock, the NASDAQ Composite Stock Index and the NASDAQ Telecommunications Stock ("NASDAQ-Telecom") index. The comparison shows the percentage increase of the indices as of the end of each quarter from December 31, 1987 through December 31, 1994, with each index beginning with a value of 100. The total cumulative return on investment (percentage change in the year end stock price plus reinvested dividends) for each of the periods for the Company's common stock, the NASDAQ Composite Index and the NASDAQ-Telecom index is based on the stock price or composite index at the end of 1987.
Dec 87 Mar 88 Jun 88 Sep 88 Dec 88 Mar 89 Jun 89 Sep 89 Dec 89 Mar 90 Jun 90 Sep 90 Dec 90 NASDAQ 100 113.9 121.1 120.3 118.7 127.5 137.4 149.6 143.9 139 148.2 111.3 122.2 NASDAQ Telecom 100 108.2 121.9 137.3 147.8 178.9 218.4 239.7 232.9 195 211.9 146.2 156.9 Incomnet 100 200 200 333.3 433.3 500 500 600 566.7 486.7 355.7 300 286.7 Mar 91 Jun 91 Sep 91 Dec 91 Mar 92 Jun 92 Sep 92 Dec 92 Mar 93 Jun 93 Sep 93 Dec 93 Mar 94 NASDAQ 158.7 156.9 175.1 198.1 202.2 188.3 195.9 228 232.3 238.7 256.5 260.2 249.5 NASDAQ Telecom 187.1 183.5 207.4 215.5 221.6 220.2 226 265.9 295.5 339.4 399.6 409.8 353.4 Incomnet 300 533.3 533.3 1267 1433 1257 1357 1767 1500 2267 1967 2100 2267 Jun 94 Sep 94 Dec 94 Mar 95 Jun 95 Sep 95 Dec 95 NASDAQ 237.5 257.5 254.6 284 324.6 384 366.3 NASDAQ Telecom 339.4 370.3 339.5 353 373.3 425.1 405.3 Incomnet 3257 3800 4857 4800 5000 3587 1533
EMPLOYMENT AGREEMENT BETWEEN MELVYN REZNICK AND INCOMNET On November 30, 1995, the Company entered into a two year Employment Agreement with Melvyn Reznick pursuant to which Mr. Reznick became the President and a director of the Company. Mr. Reznick is also a director of RCI. Pursuant to the Employment Agreement, Mr. Reznick is paid an annual salary of $175,000 and has been granted stock options to purchase 300,000 shares of the Company's common stock at an exercise price of $4.87 per share for a period of five years from the date of vesting. The stock options vest according to the following schedule: 25,000 options on February 28, 1996, 25,000 on May 31, 1996, 25,000 on August 31, 1996, 25,000 on November 30, 1996, 100,000 upon RCI earning cumulative net profits in four or less consecutive fiscal quarters of $1.5 million before taxes and before the Company's acquisition amortization relating to RCI, and 100,000 upon RCI earning cumulative net profits in four or less consecutive fiscal quarters of $2 million before taxes and before the Company's acquisition amortization relating to RCI. The vesting of the 200,000 options, which are based on the financial performance of RCI, may accelerate upon a sale, spin-off or similar transaction relating to RCI. The Company has agreed to indemnify Mr. Reznick to the extent that indemnification of officers and directors is permitted under California law. -9- RATIFICATION OF STOCK OPTION PROGRAM FOR OFFICERS, DIRECTORS, EMPLOYEES AND KEY CONSULTANTS At the 1995 Annual Meeting of Shareholders held on May 16, 1995, the shareholders approved Stock Option Program for Officers, Directors, Employees and Key Consultants ("Option Plan") that was adopted by the Company's Board of Directors on August 29, 1994. The Board of Directors has adopted a new plan that will replace the previous plan. The Board proposes to terminate the Stock Option Program for Officers, Directors, Employees and Key Consultants adopted on May 16, 1995 and to adopt a new Stock Option Program for Officers, Directors, Employees and Key Consultants. The new plan is as follows: INCOMNET, INC. STOCK OPTION PLAN FOR DIRECTORS AND EMPLOYEES OF AND KEY CONSULTANTS TO INCOMNET, INC. AND ITS SUBSIDIARIES 1. PURPOSE. The purpose of this Stock Option Plan is to promote the interests of Incomnet, Inc. ("Company") and its shareholders by enabling it to offer stock options to better attract, retain, and reward directors and employees of and key consultants to the Company, its present subsidiaries, National Telephone Communications, Inc. and Rapid Cast, Inc. and any other future subsidiaries that may qualify under the terms of this Plan. The goal is to strengthen the mutuality of interests between those persons and the shareholders of the Company by providing those persons with a proprietary interest in pursuing the Company's long-term growth and financial success. 2. DEFINITIONS. For purposes of this Plan, the following terms shall have the meanings set forth below. (a) "Board" means the Board of Directors of Incomnet, Inc. (b) "Code" means the Internal Revenue Code of 1986, as amended. Reference to any specific section of the Code shall be deemed to be a reference to any successor provision of the Code. (c) "Committee" means the administrative committee of this Plan that is provided in Section 1 below. (d) "Common Stock" means the common stock of the Company or any security issued in substitution, exchange, or in lieu thereof. (e) "Company" means Incomnet, Inc., a California corporation, or any successor corporation. Except where the context indicates otherwise, the term "Company" shall include its Parent and Subsidiaries. (f) "Director" means any person who serves as a member of the Board of Directors of Incomnet, Inc. "Outside Director" means any person who serves as a member of the Board of Directors of Incomnet, Inc. and is not a full-time employee of Incomnet, Inc. or its subsidiaries. (g) "Disabled" means permanent and total disability, as defined in Code Section 22(e)(3). (h) "Employee" means any person who is employed by Incomnet, Inc. or its subsidiaries on a full or part-time basis, so that they have income taxes withheld and are eligible to participate in employee benefits programs. (i) "Exchange Act" means the Securities Exchange Act of 1934. (j) "Fair Market Value" per share means, on any given date: (i) The last sale price of the Common Stock on the National Association of Securities Dealers Automated Quotation National Market System ("NMS") or in case no such reported sale takes place, the average of the closing bid and ask prices on such date; or (ii) If not quoted on the NMS, the average of the closing bid and ask prices of the Common Stock on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") or any comparable system. -10- (k) "Incentive Stock Option" means an option to purchase shares of Common Stock that is intended to be an incentive stock option within the meaning of Section 422 of the Code. (l) "Insider" means a person who is subject to the provisions of Section 16 of the Exchange Act. (m) "Key Consultant" means a person who is engaged by Incomnet, Inc. or its Subsidiaries as a non-employee to perform tasks on a contractual basis over a sufficient period of time that he or she satisfies the eligibility criteria set forth by the Securities and Exchange Commission for a non-employee to participate in a registered stock option plan. (n) "Non-Qualified Stock Option" means any option to purchase shares of Common Stock that is not an Incentive Stock Option. (o) "Officer" is an employee of Incomnet, Inc. or its Subsidiaries who is granted the authority to commit the corporation to binding agreements and to function as one of the executives of Incomnet or its Subsidiaries. (p) "Option" means an Incentive Stock Option or a Non-Qualified Stock Option. (q) "Parent" shall mean any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of the corporations (other than the Company) owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in the chain, as determined in accordance with the rules of Section 424(e) of the Code. (r) "Participant" means a person who has been granted an Option. (s) "Plan" means this Incomnet, Inc. Stock Option Plan for Directors and Employees of and Key Consultants to Incomnet, Inc. and its Subsidiaries, as it may be amended from time to time. (t) "Severance" means, with respect to a Participant, the termination of the Participant's provision of services to the Company as an employee or director, whether by reason of death, disability, or any other reason. A Participant who is on a leave of absence that exceeds ninety (90) days will be considered to have incurred a Severance on the ninety- first (91st) day of the leave of absence, unless the Participant's rights to reemployment or reappointment are guaranteed by statute or contract. (u) "Subsidiary" means any corporation or entity in which the Company, directly or indirectly, controls fifty percent (50%) or more of the total voting power of all classes of its stock having voting power, as determined in accordance with the rules of Code Section 424(f). (v) "Ten Percent Shareholder" means any person who owns (after taking into account the constructive ownership rules of Section 424(d) of the Code) more than ten percent (10%) of the stock of the Company. 3. ADMINISTRATION. (a) This Plan shall be administered by a Committee appointed by the Board. The Board may remove members from, or add members to, the Committee at any time. (b) The Committee shall be composed of the members of the Compensation Committee of the Company's Board of Directors and any other members that the Board of Directors sees fit to appoint. Because the members of the Committee may not meet the requirements as "Disinterested Persons" within the meaning of Rule 16(b) promulgated under the Exchange Act, all stock option awards to officers of the Company, whether incentive or non-qualified options, will be defined within a formula as set forth under Rule 16(b)-3(c)(2)(ii), or the Committee will be reconstituted with different members in order to satisfy the requirement for "Disinterested Persons" to approve all stock option awards which are not based on a formula, as required by Rule 16(b)-3(c)(2)(i). (c) The Committee may conduct its meetings in person or by telephone. A majority of the members of the Committee shall constitute a quorum, and any action shall constitute action of the Committee if it is authorized by: (i) A majority of the members present at any meeting; or (ii) The unanimous consent of all of the members in writing without a meeting. -11- (d) The Committee is authorized to interpret this Plan and to adopt rules and procedures relating to the administration of this Plan. All actions of the Committee in connection with the interpretation and administration of this Plan shall be binding upon all parties. (e) The Committee may designate persons other than members of the Committee to carry out its responsibilities under such conditions and limitations as it may prescribe, except that the Committee may not delegate its authority with regard to the granting of Options to Insiders. (f) Subject to the limitations of Section 13 below, the Committee is expressly authorized to make such modifications to this Plan as are necessary to effectuate the intent of this Plan as a result of any changes in the tax, accounting, or securities laws treatment of Participants and the Plan. 4. DURATION OF PLAN. (a) This Plan shall be effective as of February 5, 1996, the date of its adoption by the Board, provided this Plan is approved by the majority of the Company's shareholders, in accordance with the provisions of Code Section 422, on or prior to twelve (12) months after its adoption. In the event that this Plan is not so approved, this Plan shall terminate and any Options granted under this Plan to an Insider shall be void and have no further effect if the issuance of those Options would result in Section 16(b) liability to the Insider. (b) This Plan shall terminate on February 5, 2006, except with respect to Options then outstanding. 5. NUMBER OF SHARES. (a) The aggregate number of shares of Common Stock which may be issued pursuant to this Plan shall be one million three hundred thousand (1,300,000). This aggregate number may be adjusted from time to time as set forth in Section 13 of this Plan. (b) Upon the expiration or termination of an outstanding Option which shall not have been exercised in full, any shares of Common Stock remaining unissued shall again become available for the granting of additional Options. 6. ELIGIBILITY. Persons eligible for Options under this Plan shall be limited to the directors and employees of and key consultants to Incomnet, Inc. and its Subsidiaries. 7. FORM OF OPTIONS. Options granted under this Plan may be Incentive Stock Options or Non-Qualified Stock Options. Options shall be subject to the following terms and conditions: (a) Options may be granted under this Plan on such terms and in such form as the Committee may approve, which conditions shall not be inconsistent with the provisions of this Plan. (b) The exercise price per share of Common Stock purchasable under an Option shall be set forth in the Option. The exercise price of an option, determined on the date of the grant, shall be no less than: (i) One hundred ten percent (110%) of the Fair Market Value of the Common Stock in the case of a Ten Percent Shareholder; or (ii) One hundred percent (100%) of the Fair Market Value of the Common Stock in the case of any other employee. (c) An Option shall be exercisable at such time or times and be subject to such terms and conditions as may be set forth in the Option. (d) The Committee may modify an existing Option, including the right to: (i) Accelerate the right to exercise it; (ii) Extend or renew it; or (iii) Cancel it and issue a new Option. -12- (e) No modification may be made pursuant to Paragraph (d) above to an Option that would impair the rights of the Participant holding the Option without his or her consent. (i) Whether a modification of an existing Incentive Stock Option will be treated as the issuance of a new Incentive Stock Option will be determined in accordance with the rules of Section 424(h) of the Code. (ii) Whether a modification of an existing Option will require shareholder approval will be determined in accordance with Rule 16(b)-3. (f) The aggregate Fair Market Value (determined as of the date of grant) of the number of shares of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by a Participant during any calendar year shall not exceed one hundred thousand dollars ($100,000) or such other limit as may be required by Code Section 422. Should anyone exercise Incentive Stock Options that exceed this limit, such options will be treated as non-qualified stock options for tax purposes. 8. ISSUANCE OF OPTIONS. (a) The following Incentive Stock Options are hereby granted to the persons and on the terms and conditions set forth in the following table and its footnotes:
NAME OF GRANTEE NUMBER OF DATE OF VESTING EXERCISE EXPIRATION OPTIONS GRANTS SCHEDULE PRICE DATE Joel Greenberg 25,000 2/5/96 25,000: 4/5/96 $4.37(1) 3/5/2001 Melvyn Reznick 500,000 11/30/95 25,000: 2/28/96* $4.87(2) 2/28/2001 2/5/96 100,000: 4/5/96* $4.37(1) 4/5/2001 11/30/95 25,000: 5/31/96* $4.87(2) 5/31/2001 11/30/95 25,000: 8/31/96* $4.87(2) 8/31/2001 11/30/95 25,000: 11/30/96* $4.87(2) 11/30/2001 2/5/96 25,000: 2/28/97* $4.37(1) 2/28/2002 2/5/96 25,000: 5/31/97* $4.37(1) 5/31/2002 2/5/96 50,000: (4) $4.37(1) (4) 11/30/95 100,000: (3) $4.87(2) (3) 11/30/95 100,000: (3) $4.87(2) (3) Nancy Zivitz 50,000 2/5/96 25,000: 2/5/96 $4.37(1) 2/5/2001 25,000: 1/1/97 1/1/2002 Albert Milstein 25,000 2/5/96 25,000: 4/5/96 $4.37(1) 3/5/2001 Stephen A. Caswell 50,000 2/5/96 25,000: (3) (3) 25,000: (3) (3) Mark Richardson 50,000 2/5/96 15,000: 4/5/96 $4.37(1) 3/5/2001 35,000: 1/1/97 1/1/2002
* See footnote 2, subparagraphs (a) and (b) for circumstances under which the vesting of these options may accelerate. -13- (1) The exercise price is equal to the last sale price of the stock on the over-the-counter NASDAQ Small Capital Market on the date of the issuance of the options. Each stock option will confer upon the holder the right to purchase one share of the Company's common stock for a price of $4.37 per share at any time from the vesting date to the expiration date. (2) The exercise price is equal to the last sale price of the stock on the over-the-counter NASDAQ Small Capital Market on the date of the issuance of the options. These stock options were granted to Melvyn Reznick on November 30, 1995 pursuant to his Employment Agreement and confer upon the holder the right to purchase one share of the Company's common stock for a price of $4.87 per share at any time from the vesting date to the expiration date. (3) These Options are exercisable for a period of five years after the Options vest (and thereby become exercisable) as described below. The Options granted to the grantee will vest and thereby become exercisable according to the following schedule, provided that in order for the Options to vest in each case, grantee must, at the time of scheduled vesting, be providing services to the Company as an officer or director, and in the case of Melvyn Reznick, his Employment Agreement must not have been terminated other than as described in Section 15 of said Agreement: 100,000 Options in the case of Mr. Reznick and 25,000 Options in the case of Mr. Caswell, upon Rapid Cast, Inc. ("RCI") earning cumulative net profits in four or less consecutive fiscal quarters (commencing on October 1, 1996) aggregating $1.5 million before taxes and before the Company's acquisition amortization relating to RCI, and 100,000 Options in the case of Mr. Reznick and 25,000 Options in the case of Mr. Caswell, upon RCI earning cumulative net profits in four or less consecutive fiscal quarters aggregating $2 million before taxes and before the Company's acquisition amortization relating to RCI; provided, however, that (a) in the case of Mr. Reznick, all nonvested Options which do not depend on the financial performance of RCI shall immediately become vested and thereby exercisable upon the sale or spin-off of 51% or more of the outstanding capital stock or assets of the Company other than RCI assets, or the merger of the Company, so long as such transaction is specifically authorized by the Company's Board of Directors and, if required by law, the Company's shareholders; and (b) in the case of Mr. Reznick, to the extent that less than 51% of the outstanding capital stock or assets of the Company other than RCI assets are sold or spun-off, a pro rata portion of the unvested Options, not including those Options where vesting depends on the financial performance of RCI, shall immediately become vested (beginning with Options scheduled to be vested on November 30, 1996 and progressing from that date to earlier vesting dates on a sequential basis) equal to a ratio, the numerator of which is the percentage of outstanding capital stock or assets of the Company sold or spun-off, and the denominator of which is 51%; and (c) in the case of Mr. Reznick and Mr. Caswell, if the Company sells or spins-off 100% of its ownership of RCI, then all of their nonvested Options where vesting depends on the financial performance of RCI will immediately become vested and thereby exercisable, and to the extent that less than 100% of the Company's ownership of RCI is sold or spun-off, a pro rata portion of the nonvested Options which depend on the financial performance of RCI shall immediately become vested (beginning with those tied to $1.5 million in net profits and progressing to those tied to $2.0 million in net profits) equal to a ratio, the numerator of which is the percentage of the Company's ownership of RCI which is sold or spun-off, and the denominator of which is 100% of the Company's ownership of RCI. Options which vest because of the occurrence of a transaction will vest at least 30 days prior to the record date for shareholders to be deemed to own their shares for the purpose of the transaction to enable the holders of the stock Options to exercise them prior to said record date. Once Mr. Caswell ceases to be an officer or director, or Mr. Reznick's Employment Agreement is terminated otherwise than as described in Section 15 of said agreement respectively, then in each respective case, their nonvested Options will automatically and immediately be cancelled and be of no further force or effect. Mr. Reznick's Options are otherwise subject to his Employment Agreement with the Company, dated as of November 27, 1995, as amended on February 5, 1996. (4) These Options vest when the registration statement for RCI's initial public offering becomes effective with the Securities and Exchange Commission, and expire five years thereafter. (b) The terms and conditions of any other Options granted pursuant to this Plan, and whether or not said Options will be Incentive Stock Options or Non-Qualified Stock Options, will be determined by the Committee and the full Board of Directors, in compliance with Rule 16(b)-3(c)(2)(i) or Rule 16(b)-3(c)(2)(ii) - Disinterested Administration. (c) The provisions in Section 8 may not be amended more than once every six months, other than to comply with changes in relevant federal statutes as specified in Rule 16(b)-3(c)(2)(i) - Disinterested Administration. 9. VESTING REQUIREMENT AND PERFORMANCE THRESHOLD. The vesting requirements, performance thresholds and other terms and conditions of additional Options which may be granted under this Plan from time to time, if any, will be determined and approved by the Committee and the full Board of Directors and, if required, (i) the Committee will be composed of "Disinterested Persons" as required by Rule 16(b)-3(c)(2)(i), or the option awards will be based on a formula as required by Rule 16(b)-3(c)(2)(ii); provided, that in all cases unvested Options will automatically expire and be cancelled on the date of the Severance of an Employee or Insider who holds such Options. 10. TERMINATION OF OPTIONS. -14- (a) Except to the extent the terms of an Option require its prior termination, each Option shall terminate on the earliest of the following dates. (i) The date which is ten (10) years from the date on which the Option is granted or five (5) years from the date of grant in the case of an Incentive Stock Option granted to a Ten Percent Shareholder. (ii) If the Participant was Disabled at the time of Severance, the date of the Severance of the Participant to whom the Option was granted, with respect to unvested Options, and the date which is one (1) year from the date of the Severance, with respect to vested Options. (iii) The date of Severance of the Participant to whom the Option was granted, with respect to unvested Options, and the date which is one (1) year from the date of the Severance of the Participant to whom the Option was granted, with respect to vested Options, if his or her death occurs: A. While he or she is employed by the Company; or B. Within three (3) months following his or her Severance with respect to vested Options. (iv) In the case of any Severance other than one described in Subparagraphs (ii) or (iii) above, the date of the Participant's Severance, with respect to unvested Options, and the date that is three (3) months from the date of the Participant's Severance, with respect to vested Options. 11. NONTRANSFERABILITY OF OPTIONS. (a) During the lifetime of the Participant, each Option is exercisable only by the Participant. (b) No Option under this Plan shall be assignable or transferable, except by will or the laws of descent and distribution. 12. ADJUSTMENTS. (a) In the event of any change in the capitalization of the Company affecting its Common Stock (e.g., a stock split, reverse stock split, stock dividend, combination, recapitalization, or reclassification), the Committee shall authorize such adjustments as it may deem appropriate with respect to: (i) The aggregate number of shares of Common Stock for which Options may be granted under this Plan; (ii) The number of shares of Common Stock covered by each outstanding Option; and (iii) The exercise price per share in respect of each outstanding Option. (b) The Committee may also make such adjustments in the event of a spin-off or other distribution (other than normal cash dividends) of Company assets to shareholders. 13. AMENDMENT AND TERMINATION. The Board may at any time amend or terminate this Plan. The Board may not, however, without the approval of the majority-in-interest of the shareholders of the Company, amend the provisions of this Plan regarding: (a) The class of individuals entitled to receive Incentive Stock Options. (b) The aggregate number of shares of Common Stock that may be issued under the Plan, except as provided in Section 12 of this Plan. (c) To the extent necessary to comply with Rule 16(b)-3 under the Exchange Act, the Board may not make any amendment without approval of the majority-in-interest of the shareholders of the Company that would: -15- (i) Materially increase the aggregate number of shares of Common Stock which may be issued to Insiders (except for adjustments under Section 12 of this Plan); (ii) Materially modify the requirements as to the eligibility of Insiders to participate; or (iii) Materially increase the benefits accruing to Insiders under this Plan. 14. TAX WITHHOLDING. (a) The Company shall have the right to take such actions as may be necessary to satisfy its tax withholding obligations relating to the operation of this Plan. (b) If Common Stock is used to satisfy the Company's tax withholding obligations, the stock shall be valued based on its Fair Market Value when the tax withholding is required to be made. 15. NO ADDITIONAL RIGHTS. (a) The existence of this Plan and the Options granted hereunder shall not affect or restrict in any way the power of the Company to undertake any corporate action otherwise permitted under applicable law. (b) Neither the adoption of this Plan nor the granting of any Option shall confer upon any Participant the right to continue performing services for the Company, nor shall it interfere in any way with the right of the Company to terminate the services of any Participant at any time, with or without cause. (c) No Participant shall have any rights as a shareholder with respect to any shares covered by an Option until the date a certificate for such shares has been issued to the Participant following the exercise of the Option. 16. SECURITIES LAW RESTRICTIONS. (a) No shares of Common Stock shall be issued under this Plan unless the Committee shall be satisfied that the issuance will be in compliance with applicable federal and state securities laws. (b) The Committee may require certain investment or other representations and undertakings by the Participant (or other person acquiring the right to exercise the Option by reason of the death of the Participant) in order to comply with applicable law. (c) Certificates for shares of Common Stock delivered under this Plan may be subject to such restrictions as the Committee may deem advisable. The Committee may cause a legend to be placed on the certificates to refer to these restrictions. 17. INDEMNIFICATION. To the maximum extent permitted by law, the Company shall indemnify each member of the Board and of the Committee, as well as any other Employee of or Key Consultant to the Company with duties under this Plan, against expenses (including any amount paid in settlement) reasonably incurred by him or her in connection with any claims against him or her by reason of the performance of his or her duties under this Plan, unless the losses are due to the individual's gross negligence or lack of good faith. 18. GOVERNING LAW. This Plan and all actions taken thereunder shall be governed by and construed in accordance with the laws of the State of California. INCOMNET, INC. a California Corporation THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE APPROVAL OF THE OPTION PLAN. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS LOAN TO COMPANY BY MELVYN REZNICK On February 2, 1996, Melvyn Reznick, the Company's President, Chief Executive Officer and a director, arranged for a line of credit under his personal guarantee to be made available to the Company in the amount up to $750,000 from a bank in Los Angeles, CA. The line of credit may be expanded to $1,000,000 in the future. When the line is drawn, the loans are made to Mr. Reznick and Mr. Reznick subsequently advances the funds to the Company on the same terms and conditions. As of April 26, 1996, the line of credit has been drawn down by $515,000. The proceeds of the line of credit are being used to make the Company's pro rata share of a short term $1,000,000 advance made to Rapid Cast, Inc, by its shareholders to finance the manufacture and shipment of FastCast-TM- LenSystem machines to customers to fill orders. The advance is expected to be repaid upon completion of a private or public equity financing of Rapid Cast, Inc. in 1996, or within one year of the advance, whichever occurs first. In addition to repayment of the advance with monthly interest at the rate of 10% per annum, the Company is being issued warrants to purchase 510,000 shares of Rapid Cast, Inc. at a price of $2.25 per share, exercisable at any time during the next seven years. RETURN OF SHORT SWING PROFITS BY JOEL W. GREENBERG On February 29, 1996, the Company delivered a written demand to Joel Greenberg, the Chairman of the Board of Directors, to pay short swing profits of $46,500 to the Company pursuant to Section 16(b) of the Exchange Act. The Company expected the short swing profits to be paid on or before April 22, 1996. As of April 26, 1996, Mr. Greenberg has not paid the short swing profits to the Company. As a result, the Company intends to file a lawsuit against Mr. Greenberg seeking the return of these profits. On or about May 2, 1996, the Company fiiled a lawsuit against Mr. Greenberg to collect the unpaid short swing profits pursuant to Section 16(b) of the Securities and Exchange Act, as amended. MANAGEMENT INCENTIVE AGREEMENT WITH NATIONAL TELEPHONE COMMUNICATIONS, INC. (NTC) On February 6, 1996, the Company entered into an agreement with its 100 percent- owned subsidiary, National Telephone & Communications, Inc. NTC pursuant to which it agreed to permit NTC to do a public underwriting of its common stock in the future. -16- The underwriting would be implemented if NTC receives a firm commitment from a reputable regional or national investment banking firm. The Company also agreed to create three stock option plans for the management, employees and independent sales representatives of NTC. The exercise price of all options issued under such plans will be the higher of $5.00 per share or the fair market appraisal value of NTC shares as of the date of the grant of the options. The options will be granted and become exercisable only if NTC becomes a public reporting company and its stock is publicly traded. The options will be granted pursuant to a stock option plan meeting the requirements of Section 16(b)(3) of the Securities Exchange Act of 1934, as amended, and the plans will be registered on Form S-8 under the Securities Act of 1933, as amended. Pursuant to one plan, up to 15% of NTC's outstanding shares, after taking into account the issuance of all shares pursuant to all three plans, will be reserved for issuance pursuant to options granted to key independent sales representatives of NTC. The options under this plan will vest as follows: one- third when NTC achieves gross revenues in excess of $30 million in any calendar quarter prior to January 1, 1997, and the remaining two-thirds only if NTC achieves (a) revenues in excess of $115 million in any calendar quarter ending prior to January 1, 1998, or (b) revenues in excess of $600 million in calendar year 1998. If neither threshold is achieved but revenues for calendar year 1998 exceed $300 million, then the remaining two-thirds of the options will vest according to the following schedule: 60% of the remaining options, if $500,000 million of revenues are achieved in 1998, 30% of the remaining options, if $400 million in revenues are achieved in 1998, and 10% of the remaining options, if $300 million in revenues are achieved in 1998. The Board of Directors will determine the grantees of the stock options under this plan. Pursuant to the second plan, up to 10% of NTC's outstanding shares, after taking into account the issuance of all shares pursuant to all three plans, will be reserved for issuance to two senior executive officers and a key consultant of NTC. The options issued to the two senior executive officers will be fully vested on the date of grant (i.e. the date NTC's stock first becomes publicly traded), while one-third of the options to be granted to the key consultant will vest immediately upon grant, and two-thirds of such options will vest in accordance with a schedule to be determined by NTC's Board of Directors. Pursuant to the third plan, up to 10% of NTC's outstanding shares, taking into account the issuance of all shares pursuant to all three plans, will be reserved for issuance to current and future executive officers, employees and key consultants of NTC. The options, once granted, will vest one-third based on the time of service and two-thirds only if NTC achieves a total of $10 million in pre-tax profits in any four consecutive calendar quarters prior to January 1, 1998. Only 25% of the options eligible for grant under this third plan may be issued to the senior executive officers and consultant who are the beneficiaries of the second stock option plan. The Board of Directors of NTC will determine the grantees of the stock options under this plan. Upon the creation of the three plans and issuance of options to Ed Jacobs and Jerry Ballah, Mr. Jacobs will waive his rights to the remaining outstanding warrants and options to purchase the Company's common stock which are provided for in Mr. Jacobs' Employment Agreement and adopted by shareholders at the 1996 Annual Meeting of Shareholders as "Stock Option Program For Officers, Directors, Employees and Key Consultants." See the Company's Proxy Statement for its 1996 Annual Meeting of Shareholders, filed with the Securities and Exchange Commission on or about April 30, 1996. The agreement with NTC also provides that upon NTC becoming a publicly traded company, it will add four new independent outside directors to the existing Board, which currently consists of three individuals. Initially, the Company will have the right to select two of the new independent directors and NTC will have the right to select the other two. After NTC's initial public offering, the NTC Board of Directors will select future nominees for the NTC Board. The independent directors will constitute the Audit and Compensation Committees of NTC's Board of Directors. Until NTC becomes publicly traded, the NTC Board will remain as currently constituted and certain transactions will require the unanimous consent of the NTC Board members, including the terms of any public offering of NTC's stock. The NTC Board currently consists of Edward Jacobs, Jerry Ballah and Joel W. Greenberg, the Company's designee. Upon election of its slate of directors at the Annual Meeting to be held on June 12, 1996, the Company anticipates that the new Board would name a designee other that Joel W. greenberg to serve on the Board of NTC, The Company has agreed to vote its shareholdings in NTC for the NTC management slate of nominees. The timing and terms of any public offering of NTC's stock is not known at this time, and there is no assurance regarding when or if NTC will do its initial public offering. NOTES RECEIVABLE FROM OFFICERS Notes receivable from officers and shareholders arise from aggregate loans of $1,072,240 made to three officers in connection with the exercise of their options to purchase the Company's common stock. Two of the notes bear interest at the rate of 5.65% and the third note is non-interest bearing. All three notes are due on demand and are partially secured by the stock acquired upon the exercise of the options. For one of the officer loans, the Company agreed to look only to the shares held by the officer as a source of loan repayment. Accordingly, a reserve of $208,800 was provided in the fourth quarter of 1995, representing the difference between the market value of the shares held by the officer, and the amount of the loan. In addition, Rapid Cast, Inc. ("RCI") has a receivable of approximately $542,000 due from companies controlled by Larry Joel, the President of Rapid Cast, Inc., who is also a shareholder of Incomnet and a founding stockholder of RCI. The receivable relates to the purchase of RCI's optical lens manufacturing equipment. RECONSTITUTION OF THE BOARD OF DIRECTORS On October 26, 1995, the NASDAQ Listing Qualification Committee determined that it was inadvisable to continue the Company's listing on the Small Capital Market, but also advised that the termination was delayed for a period of 45 days pending a review by the NASDAQ Hearing Review Committee. The Board of Directors of Incomnet requested a reconsideration by the Qualifications Committee of its determination and immediately took action to address the concerns raised by the Qualifications Committee as follows: (a) On November 15, 1995, the Board reconstituted itself with several changes. Rita L. Schwartz and Stephen A. Caswell resigned from the Board and Sam D. Schwartz resigned as Chairman of the Board. Melvyn Reznick, Nancy Zivitz and Albert Milstein were appointed to the Board and Joel W. Greenberg was named Chairman of the Board. Rita L. Schwartz served on the Company's Board from January 1988 until November 1995 and, for her service to the Company, holds stock warrants to purchase 35,000 shares of the Company's common stock. These warrants were originally written with an exercise price of $10, but were changed to an exercise price of $4.87 by the Company's present Board of Directors because of Mrs. Schwartz's eight years of service to the Board. The warrants expire on May 29, 1997. (b) On November 15, 1995, the Board of Directors established a policy that all Board members and senior officers must receive permission before purchasing stock in the Company. The Board has established a compliance committee to 1) review requests of senior officers to buy stock in the Company, 2) review contracts with outside consultants and 3) set up procedures for communications with the general public. (c) On November 30, 1995, Sam D. Schwartz resigned as President and Chief Executive Officer of Incomnet and Melvyn Reznick was appointed as President and Chief Executive Officer. On November 30, 1995, the Company entered into a Severance Agreement with Mr. Schwartz pursuant to his resignation. Under the terms of the Severance Agreement, the Company agreed to pay Mr. Schwartz severance compensation of $20,000 per month for a twelve month period, and to indemnify him to the extent generally available to officers and directors of companies under California law. Under the Severance Agreement, the Company is reviewing the tender of short-swing profits made by Mr. Schwartz to the Company on August 18, 1995 and September 1, 1995 pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended. Mr. Schwartz holds stock options to purchase 250,000 shares of the Company's stock at $11.00 per share subject to a performance option under which NTC must generate $15 million in pre-tax profits during any four consecutive quarters up to December 31, 1997 for the shares to be vested. These options have been returned to the Company as part of the tender of short-swing profits made by Mr. Schwartz to the Company on August 18,1995 and September 1, 1995. In December 1995, the Company was notified by the NASDAQ Listing Qualification Committee that after further consideration, the steps taken by the Company were satisfactory and that the Company's stock would remain listed on the NASDAQ Small Capital Market. ACQUISITION OF RAPID CAST, INC. ACQUISITION - On February 8, 1995, the Company acquired 10,200,000 shares representing 51% of the outstanding common stock of Rapid Cast, Inc. ("RCI"), a private corporation headquartered in Louisville, Kentucky, for $15,000,000 cash paid to RCI, 750,000 shares of the Company's common stock issued to RCI's current stockholders ("Founding Stockholders"), and an additional 750,000 shares of the Company's common stock that could be earned by RCI's Founding Stockholders based upon the earnings of RCI during its first four full fiscal quarters. On June 30, 1995 the Company's purchase agreement for RCI was amended to provide for the immediate issuance of 600,000 shares of the Company's common stock to the Founding Shareholders in lieu of their right to potentially earn up to 750,000 shares. See "Acquisition of Rapid Cast, Inc.- Certain Transactions." As part of the acquisition, the Company agreed that after the end of the fiscal quarter in which RCI achieves cumulative pre-tax earnings of $1,250,000, provided such earnings are achieved during the first four quarters after the acquisition, it will spin off ("Spin Off") RCI as a public company by registering RCI's shares with the Securities and Exchange Commission and by providing to the Company's shareholders a dividend of a minimum of 25% of the common stock of RCI now owned by the Company. In such event, RCI agreed to take all reasonable steps in order to permit public trading of the Spin -17- Off shares. RCI did not achieve the cumulative pre-tax earnings threshold in its first three fiscal quarters after the acquisition, which would have required the Company to implement the Spin-Off. RCI has used $14,000,000 of the funds it received to acquire all of the outstanding capital stock of Q2100, Inc. ("Q2100"), a company that owns a proprietary technology for manufacturing single focal and bifocal eyeglass lenses ("Lensystem"), as well as 15 fully assembled and 66 partially assembled production line machines which incorporate this technology and which are suitable for installation in retail optical stores. The system is named the FastCast-TM- LenSystem. Q2100 was previously owned by Pearle, Inc. ("Pearle"), which entered into a stock purchase agreement for the sale of 100% of Q2100 to RCI on October 28, 1994. The purchase price payable by RCI under the stock purchase agreement with Pearle was $15,000,000 in cash (less certain expenses), of which $1,000,000 was paid by RCI on October 28, 1994 as a deposit, and the balance of $14,000,000 was paid on the closing of the acquisition on February 8, 1995 from the proceeds of its stock issuance to the Company. As part of the agreement, Pearle has assumed or discharged all liabilities of Q2100 prior to the acquisition closing. As part of the agreement, RCI has also agreed that after the acquisition it will make the technology available to Pearle and its affiliates on a most favored nation basis. RCI is using the remaining $1,000,000 from the issuance of its stock to the Company to fund its operations. FINANCING OF ACQUISITION - In order to pay the purchase price of the stock of RCI, the Company provided $5,000,000 in cash and financed the balance by a private placement of securities consisting of 10 Units. Each Unit consisted of one convertible Note issued by the Company and one Warrant to purchase 100,000 shares of RCI common stock. Each Note was in the principal amount of $1,000,000 or fraction thereof, matured on January 31, 1996, and accrued interest at the rate of 8% per annum. Interest was payable quarterly and at maturity or upon conversion. Purchasers of seven of the Units, who are affiliates of RCI or shareholders of the Company, waived interest accruals on the Notes included in their Units. On June 30, 1995, units representing $9,350,000 of the notes were converted at a rate of $10 per share into 935,000 shares of the Company's common stock. An additional $150,000 of the notes were converted at the rate of $10 per share into 15,000 shares at the Company's common stock in July 1995. In January 1995, the remaining Note for $500,000 was repaid in full. The Company is obligated to register the shares of its common stock issued upon the conversion of the Notes which were not otherwise sold by those shareholders in transactions under Regulation S in 1995. See footnote 11 to the Company's consolidated financial statements. The Company is in the process of registering under the Securities Act of 1933, as amended, the remaining 122,500 shares held by the original Noteholders. In addition, in order to settle potential claims by certain of those shareholders and the one Noteholder who did not convert his Note into Shares, which could have been asserted because of the Company's failure to register the underlying shares in 1995 as it had agreed, the Company agreed to (i) issue and register 31,000 additional shares of common stock and convey a Warrant to purchase 5,000 shares of RCI common stock to the Noteholder who did not convert his shares, (ii) issue sufficient additional shares to said prior Noteholder, if necessary, to ensure that on the effective date of the registration of these shares, the prior Noteholder has $155,000 worth of the Company's common stock, including the 31,000 shares, based on the average closing market price of the Company's stock on the five trading days immediately following the effective date of the registration statement, and (iii) to issue to the holders of 32,500 shares who did convert their Notes, sufficient additional shares of the Company's common stock, if necessary, to ensure that they have an aggregate of $390,000 worth of the Company's stock on the effective date of the registration statement, based on the average closing market price of the Company's stock on the five trading days immediately preceding the effective date of the registration statement. See "Item 3. Legal Proceedings - Claims By Prior Noteholders." The Warrants to purchase shares of RCI common stock are exercisable commencing with the 35th business day (the "Start Date") on which securities of RCI are first traded publicly, provided that the Start Date must occur on or before December 31, 1998. The exercise price of the Warrants will be equal to 50% of the average of the last reported sales price during the first 30 business days after the Start Date. Securities of RCI will become publicly traded only if RCI is spun off as a public corporation as anticipated under the terms of the acquisition, or if RCI in its discretion determines to consummate a public offering of its securities. The Warrants will expire 180 days after the date, if any, on which they first become exercisable. RCI will make such filings under the securities laws as are required to effectuate the Spin Off. In addition, prior to the Spin Off (or the date on which a Spin Off would have been required were shares of RCI not traded publicly already), RCI will file a registration statement on Form S-1 for the public sale of the shares issuable on exercise of the Warrants (the "RCI Registration Statement"). RCI will use reasonable efforts to cause the RCI Registration Statement to become effective simultaneously with the Spin Off, and to cause the RCI Registration Statement to remain effective for not less than two years following initial effectiveness except for periods during which the prospectus included in the RCI Registration Statement is required to be amended or supplemented. The registration will be accompanied by blue sky clearances in New York, New Jersey and in up to five additional states selected by RCI. RCI will pay all expenses of such registration other than underwriting discounts or the fees of personal counsel to the Warrant Holders. RCI will supply to Warrant Holders a reasonable number of copies of all registration materials and prospectuses. REGISTRATION RIGHTS - RCI has granted to the Company the right to demand registration at RCI's cost of all of the Company's RCI shares which have not been included in the Spin Off. The Company may demand this right only after RCI's securities are publicly traded (whether as a result of the Spin Off or otherwise) and only as to one-third of these shares in each of 1996, 1997 and 1998 on a cumulative basis. RCI has also granted to the Company piggyback registration rights with respect to these shares after RCI's securities are publicly traded. -18- RIGHT TO DESIGNATE DIRECTORS - The Company has the right to elect two of RCI's five directors until the Spin Off, and one of RCI's five directors after the Spin Off. Melvyn Reznick and Joel W. Greenberg are the Company's two designees on the Board of RCI. CERTAIN TRANSACTIONS - The current stockholders of RCI (the "Founding Stockholders")other than the Company consist of persons related to Broad Capital Associates, Inc. (the "Broad Group") who own 3,266,666 shares of RCI common stock, and Larry Joel, Robert Cohen and persons related to them (the "CRJ Group") who own 6,533,334 of RCI common stock. The Founding Stockholders acquired these shares at a purchase price of approximately $.03 per share. The Founding Stockholders and their affiliates as of December 31, 1994 loaned approximately $1,348,982 to RCI, which amounts, together with any additional loans which are thereafter made by them, will be payable July 31, 1996, together with interest at 7% per annum. RCI may determine to prepay this indebtedness, whether from the proceeds of the placement of the Units or otherwise. However, until RCI's revenues from continuing operations aggregate at least $1,000,000 in any three consecutive months, RCI may repay these loans only if the lenders receiving repayment furnish or guaranty equivalent lines of credit for the period until RCI achieves at least $1,000,000 in aggregate revenues over a period of three consecutive months. As part of the purchase price for the acquisition of 10,200,000 shares of RCI common stock by the Company, the Company issued 750,000 shares of its common stock to the Founding Stockholders on February 8, 1995. The Company also agreed to issue to the Founding Stockholders a maximum of 750,000 additional shares of the Company's common stock depending on RCI's pre-tax earnings during the first four full fiscal quarters after the acquisition closing, which occurred on February 8, 1995. On June 30, 1995, the Company renegotiated the terms of the Agreement and issued to RCI's Founding Stockholders 600,000 unregistered shares of its common stock in lieu of the maximum of 750,000 shares that were to be issued based upon performance factors. The Company made this issuance because, in its opinion, it believed that it was likely that RCI would meet its performance requirements and, hence, attempted to reduce the potential dilution of the Company's stock by 150,000 shares. Based on RCI's actual performance during its first three fiscal quarters, no additional shares would have been issued to the Founding Stockholders. The exact number of additional shares of the Company's common stock which would have been issuable to the Founding Stockholders under the original terms of the acquisition agreement was to be calculated on the last day of each of RCI's first and fourth fiscal quarters following the acquisition closing as follows: (i) for the first quarter, by multiplying $7.5 million by a fraction, the numerator of which was the net pre-tax earnings generated by RCI during such first full fiscal quarter, and the denominator of which is $4.5 million, and (ii) for the first four full fiscal quarters, by multiplying $7.5 million by a fraction, the numerator of which was the aggregate net pre-tax earnings generated by RCI during such four full fiscal quarters less the net pre-tax earnings generated by RCI in the first full quarter, and the denominator of which was $4.5 million. The products determined in (i) and (ii) above were then to be divided by $12.50 per share to determine the number of additional shares issuable to the Founding Stockholders, provided, that if any time during the first four full fiscal quarters after February 8, 1995, RCI earned more than $5.5 million in net pre-tax earnings, the value of each additional share for calculation purposes would have been $10.00 rather than $12.50. No additional shares will be issued. -19- RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS The Board of Directors, subject to Shareholder approval, has selected Stonefield Josephson LLP as the Company's independent auditors for the year ending December 31, 1996. Stonefield Josephson was also the Company's independent auditors for the years ended December 31, 1995, 1994 and 1993. A representative of the accounting firm is expected to be present at the Annual Meeting, and will have an opportunity to make a statement, if desired, and will be available to respond to appropriate questions. The approval of Stonefield Josephson LLP as the independent auditors requires the affirmative vote of a majority of votes entitled to be cast by those present in person or represented by proxy at the meeting. The Board of Directors recommends that the shareholders vote FOR this proposal. PROPOSALS BY SHAREHOLDERS Proposals of Shareholders intended to be presented at the 1996 Annual Meeting must be received at the principal offices of the Company, 21031 Ventura Boulevard, Suite 1100, Woodland Hills, California 91364, on or before December 31, 1995, in order to be included in the Proxy Statement relating to the next succeeding Annual Meeting of Shareholders. Shareholder proposals must comply with the applicable rules and regulations of the Securities and Exchange Commission relating to such inclusion. If the date of the 1996 Annual Meeting of Shareholders is subsequently changed to a date other than May 10, 1996, the Company will notify Shareholders of the new meeting date and the new date by which Shareholder proposals must be received. OTHER MATTERS WHICH MAY COME BEFORE THE MEETING While the Board of Directors has no reason to believe that any other matters will come before the 1995 Annual Meeting of Shareholders, the proxies will be voted as to such matters in accordance with the best judgment of the persons authorized therein. -20- By Order of the Board of Directors __________________________________________ Stephen A. Caswell Secretary May 2, 1996 Woodland Hills, California ACCOMPANYING THIS PROXY STATEMENT IS A COPY OF THE COMPANY'S ANNUAL REPORT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. -21- PROXY CARD Incomnet, Inc. 21031 Ventura Blvd. Woodland Hills, CA 91364 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF INCOMNET, INC. The undersigned hereby appoints Melvyn Reznick and Stephen A. Caswell as Proxies, each with the power to appoint his substitute, and hereby authorizes them to represent and to vote, as designated below, all shares of Common Stock of Incomnet, Inc., held of record by the undersigned on May 10, 1996 at the Annual Meeting of Shareholders to be held on June 14, 1996 at 10:00 am Pacific Time, or any adjournment thereof, at the Marriott Hotel, 28159 Oxnard St., Woodland Hills, CA. 1. ELECTION OF DIRECTORS ___ FOR all nominees listed below (except as marked to the contrary below) ___ WITHHOLD AUTHORITY to vote for all nominees listed below (INSTRUCTION: To withhold authority to vote for any individual nominee, mark the box next to the nominee's name below: ___ Melvyn Reznick ___ Nancy Zivitz ___ Mark Richardson ___ Gerald Katell 2. RATIFICATION OF STOCK OPTION PROGRAM FOR OFFICERS, DIRECTORS, EMPLOYEES AND KEY CONSULTANTS ___ FOR the proposed Stock Option Plan ___ AGAINST the proposed Stock Option Plan At the 1995 Annual Meeting of Shareholders held on May 16, 1995, the shareholders approved the Stock Option Program for Officers, Directors on August 29, 1994. The Board of Directors has adopted a new plan that will replace the previous plan. The Board proposes to terminate the Stock Option Program for Officers, Directors, Employees and Key Consultants adopted on May 16, 1995 and to adopt a new Stock Option Program for Officers, Directors, Employees and Key Consultants. The purpose of this Stock Option Plan is to promote the interests of Incomnet, Inc. ("Company") and its shareholders by enabling it to offer stock options to better attract, retain, and reward directors and employees of and key consultants to the Company, its present subsidiaries, National Telephone Communications, Inc. and Rapid Cast, Inc. and any other future subsidiaries that may qualify under the terms of this Plan. The goal is to strengthen the mutuality of interests between those persons and the shareholders of the Company by providing those persons with a proprietary interest in pursuing the Company's long-term growth and financial success. The new plan authorizes 1,300,000 shares of common stock that is available for distribution. Of these available shares, 725,000 are scheduled to be issued to directors and officers of the Company during the next two years. Of these 725,000 scheduled shares, 125,000 are issued subject to performance requirements that the Company's Rapid Cast, Inc. (RCI) subsidiary generates cumulative net profits in four or less consecutive fiscal quarters aggregating $1.5 million in net profit before taxes and before the Company's acquisition amortization relating to RCI, and 125,000 options are issued subject to performance requirements that the Company's Rapid Cast, Inc. (RCI) subsidiary generates cumulative net profits in four or less consecutive fiscal quarters aggregating $2 million before taxes and before the Company's acquisition amortization relating to RCI. The remaining 445,000 options are vested over a period of two years, with $310,000 options vesting in 1996 and 135,000 options vesting in 1997. The exercise of price of these options is between $4.37 per share and $4.87 per share. 3. RATIFICATION OF STONEFIELD JOSEPHSON AS THE COMPANY'S INDEPENDENT AUDITORS ___ FOR Stonefield Josephson as the Company's Independent Auditors ___ AGAINST Stonefield Josephson as the Company's Independent Auditors INSTRUCTION: To vote FOR or AGAINST the proposal, mark the appropriate box. For a more detailed description plan, see "Ratification of Stock Option Program for Officers, Directors, Employees and Key Consultants" in the Company's Proxy Statement that accompanied this ballot. This proxy when properly executed will be voted in the manner directed herein by the undersigned stockholder. If no direction is made, the proxy will be voted FOR proposals 1 and 2. Please sign exactly as name appears below. When shares are held by joint tenants, both should sign. When signing as attorney, as executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by President or other authorized officer. If a partnership, please sign in partnership name by authorized person. Dated: ______________, 1996 ___________________________ signature ___________________________ signature if held jointly EX-23.1 15 EXHIBIT 23.1 CONSENT OF ACCOUNTANTS EXHIBIT 23.1 CONSENT OF STONEFIELD JOSEPHSON INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The undersigned independent certified public accounting firm hereby consents to the inclusion of its report on the financial statements of Incomnet, Inc. for the years ending December 31, 1995, 1994 and 1993, and to the reference to it as experts in accounting and auditing relating to said financial statements, in the Registration Statement for Incomnet, Inc., dated May 9, 1996. /s/ Stonefield Josephson Accountancy Corporation - ------------------------------------------------- STONEFIELD JOSEPHSON ACCOUNTANCY CORPORATION Santa Monica, California May 9, 1996 -----END PRIVACY-ENHANCED MESSAGE-----