-----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, RYpHnuD77A59CaqcKi2ee5uT/AD4Cej7qTprsMNV2VTrbaJPNQ1W//kC/FgayErl hjlv/SH7JiblMRvCnYxZbw== 0000912057-97-027955.txt : 19970815 0000912057-97-027955.hdr.sgml : 19970815 ACCESSION NUMBER: 0000912057-97-027955 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INCOMNET INC CENTRAL INDEX KEY: 0000353356 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 952871296 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-12386 FILM NUMBER: 97662134 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: 21031 VENTURA BLVD STREET 2: SUITE 1100 CITY: WOODLAND HILLS STATE: CA ZIP: 91364 FORMER COMPANY: FORMER CONFORMED NAME: INTELLIGENT COMMUNICATIONS NETWORKS INC DATE OF NAME CHANGE: 19860805 10-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 COMMISSION FILE NO. 0-12386 INCOMNET, INC. A California IRS Employer No. Corporation 95-2871296 21031 Ventura Blvd., Suite 1100 Woodland Hills, California 91364 Telephone no. (818) 887-3400 Securities registered pursuant to Section 12(b) of the Act:................None Securities registered pursuant to Section 12(g) of the Act:........Common Stock, No Par Value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO__ Number of shares of registrant's common stock outstanding as of June 30, 1997.......................................................13,554,239 -1- ITEM 1. FINANCIAL STATEMENTS INCOMNET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (UNAUDITED) (DOLLARS IN 000S) JUNE 30, DECEMBER 31, 1997 1996 -------- -------------- ASSETS CURRENT ASSETS: Cash & cash equivalents $ 1,601 $ 2,214 Accounts receivable, including $277,680 and $267,000 due from related party at June 30, 1997 and December 31, 1996, respectively and less allowance for doubtful accounts of $1,140,000 at June 30, 1997 and $1,993,000 at December 31, 1996 19,074 13,137 Notes receivable - current portion 454 323 Notes receivable from officers & shareholders, net of reserves of $209,000 1,218 438 Inventories 395 2,760 Other current assets 1,133 1,332 ------- ------ Total current assets 23,875 20,204 Property, plant and equipment, at cost, net 13,957 14,357 Patent rights, net 1,241 Goodwill, net 6,709 4,542 Building construction/remodeling 2,418 -- Deposits, investments and other assets 879 243 ------- ------ Total assets $47,838 $40,587 ------- ------ ------- ------ -2- INCOMNET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (UNAUDITED) (CONT'D) (DOLLARS IN 000S) JUNE 30, DECEMBER 31, 1997 1996 -------- -------------- LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $14,455 $14,746 Accrued expenses 7,996 8,217 Current portion of notes payable 5,198 3,918 Deferred income 3,485 4,040 ------- ------ Total current liabilities 31,134 30,921 Liabilities in excess of asset 3,600 -- Notes payable -- 1,041 Notes payable - CIC 1,919 -- Commitments (Note 12) SHAREHOLDERS' EQUITY: Common stock, no par value; 20,000,000 shares authorized; and 13,554,239 shares at June 30, 1997 and 13,369,681 shares issued and outstanding at December 31, 1996 61,847 61,320 Preferred stock, no par value; 100,000 shares authorized; 2,075 shares issued and outstanding at June 30, 1997 and 2,440 shares issued and outstanding at December 31, 1997 1,990 2,355 Treasury stock (5,492) (5,492) Accumulated deficit (47,160) (49,557) ------- ------ Total shareholders' equity 11,185 8,626 ------- ------ Total liabilities, & shareholders' equity $ 47,838 $ 40,587 ------- ------ ------- ------ See accompanying "Notes to Consolidated Financial Statements." -3- INCOMNET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED JUNE 30, (DOLLARS IN 000s) 1997 1996 ---- ---- SALES $ 34,855 $ 25,305 ---------- ---------- OPERATING COSTS & EXPENSES: Cost of sales 24,610 15,461 General & administrative 7,851 7,537 Depreciation & amortization 732 465 Bad debt expense 152 1,444 Other (income)/expense 67 721 ---------- ---------- Total operating costs and expenses 33,411 25,628 ---------- ---------- Income/(loss) before income taxes & minority interest 1,443 (323) INCOME TAXES 101 93 ---------- ---------- Income/(loss) before minority interest 1,342 (416) MINORITY INTEREST -- 646 ----------- ---------- Net income 1,342 $ 230 =========== ========== INCOME PER COMMON SHARE AND COMMON SHARE EQUIVALENTS: Income before extraordinary items $ 0.10 $ 0.02 Extraordinary items -- -- ----------- ---------- Net income $ 0.10 $ 0.02 =========== ========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON SHARE EQUIVALENTS OUTSTANDING 13,600,000 13,294,324 =========== ========== See accompanying "Notes to Consolidated Financial Statements." 4 INCOMNET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) SIX MONTHS ENDED JUNE 30, (DOLLARS IN 000s) 1997 1996 ---- ---- SALES $ 66,023 $ 49,705 ---------- ---------- OPERATING COSTS & EXPENSES: Cost of sales 46,141 31,367 General & administrative 14,010 13,829 Depreciation & amortization 1,397 894 Bad debt expense 1,848 2,537 Other (income)/expense 59 1,370 ---------- ---------- Total operating costs and expenses 63,455 48,797 ---------- ---------- Income/(loss) before income taxes, extraordinary items & minority interest 2,569 (292) INCOME TAXES 208 187 ---------- ---------- Income/(loss) before extraordinary items & minority interest 2,361 (477) MINORITY INTEREST -- 1,127 EXTRAORDINARY ITEMS 9 -- ---------- ---------- Net income 2,370 $ 648 ========== ========== INCOME PER COMMON SHARE AND COMMON SHARE EQUIVALENTS: Income before extraordinary items $ 0.18 $ 0.05 Extraordinary items -- -- ---------- ---------- Net income $ 0.18 $ 0.05 ========== ========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON SHARE EQUIVALENTS OUTSTANDING 13,500,000 13,286,283 ========== ========== See accompanying "Notes to Consolidated Financial Statements." 5 INCOMNET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED JUNE 30, (Dollars in 000s) 1997 1996 ------ ------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $2,370 $(477) Depreciation & amortization 1,397 894 Minority interest -- 1,127 Other - net -- 52 ------- ------ Net cash inflow/(outflow) from operating activities 3,767 1,596 ------- ------ CASH FLOWS FROM (INCREASE)/DECREASE IN OPERATING ASSETS: Accounts receivable (5,937) (1,156) Notes receivable - current portion (131) (81) Notes receivable - due from officers and shareholders (780) (65) Inventories 2,365 (521) Prepaid expenses & other 199 (467) Notes receivable - long term -- 155 Deposits & other (636) (6) ------ ------ Net cash inflow/(outflow) from changes in operating assets (4,920) (2,143) ------ ------ CASH FLOWS FROM INCREASE/(DECREASE) IN OPERATING LIABILITIES: Accounts payable (291) 1,541 Accrued expenses (221) (652) Deferred income (555) 715 ------ ------ Net cash inflow/(outflow) from changes in operating liabilities (1,067) 1,605 ------ ------ Net cash inflow/(outflow) from operations (2,220) 1,058 ------ ------ CASH FLOWS FROM (INCREASE)/DECREASE IN INVESTING ACTIVITIES: Acquisition of plant & equipment (3,415) (3,390) Patents/intangible assets 1,241 (106) Investment in Lab Tech -- 17 Liability in excess of assets 3,600 -- Goodwill (2,167) 148 ------ ------ Net cash inflow/(outflow) from investing activities (741) (3,331) ------ ------ See accompanying "Notes to Consolidated Financial Statements." -6- INCOMNET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONT'D) SIX MONTHS ENDED JUNE 30, (Dollars in 000s) 1997 1996 ------ ------ CASH FLOWS FROM INCREASE/(DECREASE) IN FINANCING ACTIVITIES: Notes payable - current 1,280 2,803 Sale of common stock, net 527 148 Loans from a major shareholder -- 320 Notes payable - long term 818 (808) Other - net 88 46 Preferred stock (365) -- ------ ------ Net cash inflow/(outflow) from financing activities 2,348 2,509 ------ ------ Net increase/(decrease) in cash & cash equivalents $ (613) $ 236 ------ ------ ------ ------ See accompanying "Notes to Consolidated Financial Statements." -7- INCOMNET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 1997 1. MANAGEMENT'S REPRESENTATION: The consolidated financial statements included herein have been prepared by the management of Incomnet, Inc. (the "Company") without audit. Certain information and note disclosures normally included in the consolidated financial statements prepared in accordance with generally accepted accounting principles have been omitted. In the opinion of the management of the Company, all adjustments considered necessary for fair presentation of the consolidated financial statements have been included and were of a normal recurring nature, and the accompanying consolidated financial statements present fairly the financial position as of June 30, 1997, and the results of operations for the three months and six ended June 30, 1997 and 1996, and cash flows for the six months June 30, 1997 and 1996. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes for the three years ended December 31, 1996, included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 15, 1997. The interim results are not necessarily indicative of the results for a full year. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, National Telephone & Communications-Registered Trademark-, Inc. (NTC) and California Interactive Computing, Inc. (CIC) (see Item 5. Acquisition of California Interactive Computing, Inc.). The statements do not include consolidated results of Rapid Cast, Inc., the Company's 35%-owned subsidiary, which is accounted for using the equity method of accounting under FASB Statement No. 94. The Company accounted for RCI using the consolidated method of accounting from the third quarter of 1995 until December 31, 1996 because the Company owned 51% of RCI. In January 1997, the Company's ownership changed from 51% of RCI to 35% and, as a result, the method of accounting has changed to the equity method under FASB Statement No. 94. REVENUE RECOGNITION - The Company recognizes revenue during the month in which services or products are delivered, as follows: (1) NTC's long distance telecommunications service revenues are generated when customers make long distance telephone calls from their business or residential telephones or by using any of NTC's telephone calling cards. Proceeds from prepaid telephone calling cards are recorded as deferred revenues when the cash is received, and recognized as revenue as the telephone service is utilized. The reserve for deferred revenues is carried on the balance sheet as an accrued liability. Long distance telephone service sales in the three and six months ending June 30, 1997 totaled $29.7 million and $54.8 million, respectively versus long distance telephone service sales of $20.2 million and $40.5 million, respectively in the three and six months ending June 30, 1996. (2) NTC's marketing-related revenues are derived from programs and material sold to the Company's base of independent sales representatives, including forms and supplies, fees for representative and certified trainer renewals, and the Company's Certified Trainer, Independent Representative and Long Distance University programs. The Company requires that all such services and materials be paid at the time of purchase. Revenues from marketing-related materials, net of amounts deferred for future services provided to the representatives, are booked as cash sales when the revenues are received. A portion of the revenues from marketing related programs and materials is deferred and recognized over a twelve month period to accrue the Company's obligation to provide customer support to its independent representatives. For the three months and six months ending June 30, 1997, marketing sales totaled $4.3 million and $10 million, respectively versus marketing sales of $3.5 million and $6.1 million, respectively for the three months and six months ended June 30, 1996. (3) The Company's network service revenues from its AutoNETWORK service are recognized as sales as the service is delivered. Network service sales in the three months and six months ending June 30, 1997 totaled $371,564 and $741,092, respectively versus $363,844 and $701,034, respectively in the three months ending June 30, 1996. -8- INCOMNET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 1997 (4) Revenues from the Company's CIC subsidiary are derived from the sale of computer software and from related services, such as software maintenance fees, custom programming and customer training. Revenues are recognized when software is shipped to customers and when services are performed and invoiced. Because the Company acquired CIC on May 2, 1997, revenues and earnings only reflect CIC's operations from May 2, 1997. For the first two months of operation commencing on May 2, 1997, CIC had revenues of $447,043. CONCENTRATION OF CREDIT RISK - The Company sells its telephone and network services to individuals and small businesses throughout the United States and does not require collateral. Rapid Cast sells its optical products both domestically and internationally. Reserves for uncollectible amounts are provided, which management believes are sufficient. COMPUTER HARDWARE, FURNITURE AND OFFICE EQUIPMENT - Computer hardware, furniture and office equipment are stated at cost. Depreciation is provided by the straight-line method over the assets' estimated useful lives of 5 to 10 years. COMPUTER SOFTWARE - The Company capitalizes the costs associated with purchasing, developing and enhancing its computer software. All software costs are amortized using the straight-line method over the assets' estimated useful lives of 3 to 10 years. LEASEHOLD IMPROVEMENTS - All leasehold improvements are stated at cost and are amortized using the straight-line method over the expected lease term. NET INCOME PER SHARE - Net income per common share is based on the weighted average number of common shares for 1997, and common shares and common share equivalents for 1996. ACQUISITION AMORTIZATION - The excess of purchase price over net assets of NTC has been recorded as an intangible asset and is being amortized by the straight-line method over twenty years. DEFERRED TAX LIABILITY - Deferred income taxes result from temporary differences in the basis of assets and liabilities reported for financial statement and income tax purposes. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. FUNDING OF MARKETING COMMISSIONS AND DEFERRED INCOME: The Company's subsidiary, NTC, maintains separate bank accounts for the payment of marketing commissions. Funding of these accounts is adjusted regularly to provide for management's estimates of required reserve balances. NTC estimates the total commissions owed to active independent representatives ("IR Earned Compensation") each week for all monies collected that week due to the efforts of those active independent representatives. All IR Earned Compensation is then paid to the independent representatives, when due, directly out of the separate bank account. IMPAIRMENT OF LONG LIVED ASSETS: In accordance with the provisions of SFAS No. 121, the Company regularly reviews long-lived assets and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount to the assets may not be recoverable. CURRENT ACCOUNTING PRONOUNCEMENTS: The Financial Accounting Standards Board has issued SFAS No. 123, "Accounting for Stock-Based Compensation," which encourages companies to account for stock compensation awards based on their fair value at the date the awards are granted. This statement does not require the application of fair value method and allows the continuance of current accounting method, which requires accounting for stock compensation awards based on their intrinsic value as of the grant date. However, SFAS No. 123 requires pro forma disclosure of net income and, if presented, earnings -9- INCOMNET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 1997 per share, as if the fair value based method of accounting defined in this statement has been applied. The accounting and disclosure requirements of this statement are effective for financial statements for fiscal years beginning after December 15, 1995, although earlier adoption is encouraged. The Company has elected not to adopt the fair value provisions of this statement. 4. NOTES PAYABLE: Notes payable consist of the following as of June 30, 1997: Notes payable to founding stockholders of CIC, interest at 8%, due beginning in May 1998 $1,918,533 Note payable to bank for line of credit to NTC, interest at prime plus 1%, due as current liability $4,010,686 Capitalized lease obligations $1,187,371 ------------- $7,116,590 ------------- ------------- 5. NETWORK MARKETING COSTS: During the three and six months ending June 30, 1997, NTC's net costs to operate its network marketing program were $0.4 million and $0.6 million, respectively, as summarized below (in $ millions):
3 Months Ending 6 Months Ending June 30, 1997 June 30, 1997 --------------- --------------- Sales $ 4.3 $ 10.0 Cost of sales 3.3 8.2 Operating expenses for support services 1.4 2.4 ------- -------- Total marketing-related costs 4.7 10.6 ------- -------- Net marketing cost $ 0.4 $ 0.6 % of total NTC (long distance & marketing) sales 1.2% 0.9% ------- -------- ------- --------
Marketing sales of $4.3 million and $10.0 million, during the three and six month periods ending June 30, 1997, respectively, were generated by the sale of materials, training and support services to assist NTC independent sales representatives in selling new retail customers and enrolling other representatives in the NTC program. Beginning in January, 1996, NTC commenced reserving a portion of all marketing revenues in order to provide a fund from which to draw estimated future refunds of marketing proceeds. These reserved marketing revenues are reflected as deferred income on the Company's balance sheet and are amortized over the succeeding twelve months. The marketing-related costs include commissions paid to independent sales representatives for acquiring new retail telephone customers, as well as the cost of sales materials, salaries and wages of marketing department personnel, services required to support the independent sales representatives, and other directly identifiable support costs, but do not include residual commissions paid on continuing long distance telephone usage or the typical indirect cost allocations, such as floor-space and supporting departments. When the three and six month marketing-related costs of $4.7 million and $10.6 million, respectively, are compared against marketing-related revenues of $4.3 million and $10.0 million for the same periods, the result is a net loss in marketing-related activities of $0.4 million and $0.6 million or 1.2% and 0.9% of total NTC sales, respectively. -10- INCOMNET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 1997 6. COMPENSATION OF INDEPENDENT SALES REPRESENTATIVES: The Company's subsidiary, NTC, compensates its independent sales representatives by an earned commission structure based upon signing up new telephone customers and based upon the telephone usage generated by those customers. In the three and six months ending June 30, 1997, expenses associated with commissions, bonuses and overrides paid out to NTC's independent representatives were $4.8 million and $10.9 million, respectively versus $3.8 million and $7.3 million, respectively in the three and six months ended June 30, 1996. 7. COMMITMENTS AND CONTINGENCIES: LITIGATION: The Company is a defendant in a class action matter and related lawsuits alleging securities law violations with respect to alleged false denial and non-disclosure of a Securities and Exchange Commission investigation and alleged non-disclosure of purchases and sales of the Company's stock by the former Chairman of the Board and one of his affiliates. Counsel for the Company is unable to estimate the ultimate outcome of these matters and is unable to predict a range of potential loss. Accordingly, no amounts have been provided for the class action or related lawsuits in the accompanying financial statements. The Company is under investigation by the Securities and Exchange Commission under a non-public "formal order of private investigation." Management has furnished all information requested by the Commission and does not believe that the matter will have a material adverse impact on its financial position or results of operations. EXTENSION OF LEASE: In April 1997, NTC entered into an agreement to extend the lease on its headquarters building at 2801 Main Street, Irvine, California. According to the terms of this agreement, NTC would be obligated to pay formula based monthly lease payments estimated to be approximately $57,000 per month during 1997 and increasing to approximately $72,000 per month for the remainder of the initial five year lease term. In addition, in February 1997, NTC entered into a ten year lease for office space in Honolulu, Hawaii, with the lease expiring in 2007. The monthly payments on the lease in Honolulu commence at $36,698 per month in 1997 and 1998, and increase on a bi-annual basis through the term of the lease to $43,536 per month in 2006 and 2007. 8. ACQUISITION OF CALIFORNIA INTERACTIVE COMPUTING. INC. (CIC): GENERAL: On May 2, 1997, Incomnet, Inc. ("Company") acquired 88,370.5 shares representing 100% of the outstanding common stock of California Interactive Computing, Inc. ("CIC"), a private corporation headquartered in Valencia, California. The Company agreed to pay a total of $1,758,302 in cash, payable over a five year period of time. See Item 5. Other Information - Acquisition of California Interactive Computing, Inc. - Schedule of Payments." In addition, the Company has agreed to assume the outstanding balance of $418,527.91 for loans to CIC made by two of CIC's shareholders. The transaction has been accounted for using the purchase method of accounting. The Company has also signed an employment agreement for a period of two years with Jerry C. Buckley, CIC's former president and CEO, pursuant to which it will pay Mr. Buckley $10,000 per month in consideration for Mr. Buckley's services as the Director of Strategic Planning for CIC. The Company has also agreed to provide 10,000 and 20,000 stock options, respectively, in CIC to two former shareholders when a plan is established for CIC's officers, directors, employees and key consultants. CIC is engaged in the development and marketing of software that is used to process insurance-related claims, including workers compensation, disability, general medical and property & casualty. Its software is leased to -11- companies who provide their own insurance and claims administration, to insurance companies, and to third-party administrators who process claims for either self-insured companies or insurance companies. CIC was incorporated in 1977 in California and has provided software for claims processing for 20 years. SCHEDULE OF PAYMENTS: At the close of the transaction on May 2, 1997, the Company paid a total of $249,818 to the former shareholders of CIC, $84,818 of which was paid to acquire CIC's stock and $165,000 of which was utilized to pay down loans to two former CIC shareholders. The Company has signed promissory notes in the aggregate principal amount of $1,927,016.91 to four former shareholders of CIC to repay the balance of the loans owed by CIC ($253,527.91 as of May 2, 1997) and to pay the balance of the price to purchase their CIC stock by the Company ($1,674,489 as of May 2, 1997). These notes bear interest at the rate of 8% per annum. The stock of CIC purchased by the Company is held in an escrow account until the promisory notes issued by the Company to CIC former shareholders are repaid in full. The outstanding balances owed on these notes can be repaid at any time, which would lower the total amount of scheduled payments, including interest. During the first year after the acquisition, the Company has agreed to pay $27,859 to one shareholder in 12 equal monthly payments of principal and interest. During the 13th - 24th month after the acquisition, the Company has contracted to pay a total of $591,175 of principal and interest, of which $369,136 is scheduled to be paid for the purchase of CIC stock from four former shareholders and of which $222,039 is scheduled to pay down the outstanding loans owed by CIC to two former shareholders. During the 25th - 36th month after the acquisition, the Company has contracted to pay a total of $559,662 of principal and interest, of which $514,662 is scheduled to be paid for the purchase of CIC stock from four former CIC shareholders and of which $45,000 is scheduled to pay off the remaining balance of the loans owed by CIC to two former CIC shareholders. During the 37th - 48th month after the acquisition, the Company is contracted to pay a total of $574,572 of principal and interest for the purchase of CIC stock from four former shareholders. During the 49th - 60th month after the acquisition, the Company is contracted to pay a total of $514,662 of principal and interest for the purchase of CIC stock from four former shareholders. DIRECTORS OF CIC: The former directors of CIC tendered their resignation, effective at the acquisition. The Company has named Melvyn Reznick, its President and CEO, Stephen A. Caswell, its Vice President and Corporate Secretary, and Jerry C. Buckley, CIC's former President and CEO, to serve on CIC's Board of Directors. Mr. Reznick will serve as Chairman, President, CEO and CFO of CIC. Mr. Caswell will serve as Executive Vice President and Secretary of CIC. Mr. Buckley will serve as a director. See the Company's Report on Form 8-K, dated May 13, 1997. PRODUCTS & SERVICES: CIC develops and markets a trademarked line of software products designed to handle insurance-related claims processing. Insurance-related products include GenCOMP-TM-, GenMED-TM-, GenDIS-TM-, GenPAC-TM-, GenRISK-TM-, GenIRIS-TM- and Top Rate-TM-. In addition, CIC also offers several computer and service-related products, including GenARS-TM-, which is an optical disk-based information storage and retrieval system, and GenSERVE-TM-, which is a maintenance and service program for customers. -12- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW: The following is management's discussion and analysis of certain significant factors which have affected the results of operations and financial condition of the Company during the period included in the accompanying financial statements. This discussion should be read in conjunction with the financial statements and associated notes. The discussion herein is qualified by reference to the Cautionary Statements. See "Part II. Cautionary Statements". LIQUIDITY AND CAPITAL RESOURCES: GENERAL - Overall, the Company achieved negative cash flows of $613,000 during the first six months of 1997 versus positive cash flow of $236,000 during the first six months of 1996. The negative cash flows resulted from negative cash flows from operations of $2.2 million and negative cash flows from investing activities of $0.7 million, which were offset by positive cash flows from financing activities of $2.3 million as discussed below: CASH FLOW FROM OPERATIONS - The Company generated $2.2 million in negative cash flow from operations during the six months ended June 30, 1997, compared to $1.1 million in positive cash flow from operations during the prior year's comparable period. This decrease in cash flow from operations resulted primarily from: (1) a $3.8 million inflow of cash from net income and depreciation & amortization, offset by (2) a $5.9 million increase in accounts receivable and a $2.4 million decrease in inventories. During this period, operating liabilities decreased by $1.1 million. CASH FLOW FROM INVESTING - The Company generated negative cash flows from investing activities of $0.7 million in the six months ended June 30, 1997 versus negative cash flows $3.3 million in the first six months of 1996. In the first six months of 1997, the Company increased its acquisition of plant & equipment by $3.4 million. Goodwill also increased by $2.2 million associated with the Company's acquisition of CIC. The increase in plant & equipment was primarily due to capital expenditures of $1.5 million in tenant improvements for NTC`s Honolulu, Hawaii office space. The Company expects NTC to continue making improvements to its headquarters building and to purchase additional equipment commensurate with the expansion of its business. The Company also anticipates investing in software development at CIC. As an offset to the Company's negative cash flows from investing activities, the Company experienced positive cash flows from investing activities due to a $1.2 million decrease in patents/intangible assets and a $3.6 million decrease in liability in excess of assets associated with the write-off of the Company's investment in RCI. CASH FLOW FROM FINANCING - The Company had net cash inflow of $2.4 million in the six months ended June 30, 1997 versus net cash inflow of $2.5 million in the six months ended June 30, 1997. Significant items include an increase of $1.3 million in notes payable - current and $0.8 million in notes payable - long term, as well as an increase of $0.5 million due to the sale of common stock. LITIGATION - The Company is subject to pending litigation and an investigation by the Securities and Exchange Commission. Management is not yet able to predict the impact of the pending litigation on its financial condition and results of operations. Management does not believe that the investigation by the Securities and Exchange Commission will result in a material impact on the Company's financial condition or results of operations. See "Part II. Item 1. Legal Proceedings." RESULTS OF OPERATIONS: SALES - Second quarter, 1997 sales of $34.9 million increased 38% over the second quarter, 1996 sales of $25.3 million. The majority of this increase was attributable to NTC's sales increase to $34 million from $23.6 million in the three months ending June 30, 1997 versus 1996, respectively. A secondary cause of the -13- increase in sales was the inclusion of $447,043 in sales from two months of operations of the Company's newly-acquired subsidiary, CIC (see Item 5. Other Information.- Acquisition of California Interactive Computing, Inc.). The following table summarizes the Company's sales performance by subsidiary and segment during the comparable second quarters in 1997 and 1996: $ in millions ----------------- Subsidiary Segment 1997 1996 - ---------- --------------------------------------- ------- ------- NTC Telephone (telecommunications services) $ 29.7 $ 20.2 NTC Telephone (marketing programs) 4.3 3.4 RCI Optical -- 1.3 CIC Computer Software 0.5 -- AutoNETWORK Network 0.4 0.4 ------- ------- Total Company Sales $ 34.9 $ 25.3 ------- ------- ------- ------- COST OF SALES - Total Company cost of sales increased to $24.6 million or 70% of sales during the quarter ending June 30, 1997 verses $15.5 million or 61% of sales during the comparable prior year quarter. The increase in cost of sales resulted largely from an increase in carrier costs associated with increased telephone service sales by NTC. The increase in costs as a percent of sales was largely generated by a drop in NTC's telecommunication service gross profits due to a special limited-time offer of attractive international rates. The following table summarizes the changes in three major cost components from the second quarter ended June 30, 1997 and 1996, respectively: $ in millions ----------------- 1997 1996 ------- ------- Commissions paid to NTC independent sales reps $ 4.8 $ 3.8 Carrier costs for NTC's long distance telephone service 18.6 10.2 All other costs of sales 1.2 1.5 ------- ------- Total Company Cost of Sales $ 24.6 $ 15.5 ------- ------- ------- ------- NTC's total commission expense increased to $4.8 million in the second quarter of 1997 compared to $3.8 million in the same quarter of 1996. NTC's carrier costs to deliver long distance telephone service to its telephone customers increased to $18.6 million in the second quarter of 1997 compared to $10.2 million in the second quarter of 1996. This increase in carrier costs reflects the increased growth in telephone sales, although these costs have grown at a faster pace than sales, thus reflecting a decline in gross profits from telephone service. The third cost component shown in the table above is "all other costs of sales" which represents: (1) NTC's costs of producing sales materials for its independent sales representatives, (2) CIC's costs of producing its computer software and providing related services, and (3) AutoNETWORK costs of providing communications network products and services. GENERAL & ADMINISTRATIVE - Total general and administrative costs increased to $7.9 million or 23% of sales in the quarter ending June 30, 1997 compared to $7.5 million or 30% of sales in the same prior year quarter. General and administrative expenses for the six months ended June 30, 1997 increased to $14 million or 21% of sales versus $13.8 million or 28% of sales in the second quarter of 1996. General and administrative costs generally include the costs of employee salaries, fringe benefits, supplies, and related support costs which are -14- required in order to provide such operating functions as customer service, billing, marketing, product development, information systems, collections of accounts receivable, and accounting. This decrease in general and administrative expenses as a percentage of sales in the three month and six month periods was caused by improved efficiencies at NTC and by no longer consolidating the financial statements of RCI. In the second quarter of 1996, RCI's general and administrative expenses represented 11% of total general and administrative expenses. DEPRECIATION & AMORTIZATION - Total Company depreciation and amortization expense increased to approximately $732,000 in the three months ended June 30, 1997 verses $464,896 in three months ended June 30, 1996. Depreciation and amortization expense increased to $1.4 million in the six months ended June 30, 1997 versus approximately $894,000 in the same period of 1996. This increase was primarily caused by greater investment by NTC in computer hardware and software, furniture and equipment, and leasehold improvements required to support its rapid expansion in sales. BAD DEBT EXPENSE - Total Company bad debt expense decreased to approximately $152,000 in the second quarter of 1997 compared to $1.4 million in the same prior year quarter. Bad debt expense for the six months ended June 30, 1997 decreased to $1.8 million from $2.5 million in the six months ended June 30, 1996. The decrease was due primarily to decreases in NTC's LEC-billed bad debt. OTHER INCOME & EXPENSE - The Company's other income and expense declined to net other expense of approximately $67,000 in the second quarter of 1997 verses net other income of approximately $721,000 during the comparable prior year quarter. The Company's other income and expense declined to net other expense of approximately $59,000 in the six months ended June 30, 1997 verses net other income of approximately $1.3 million during the six months ended June 30, 1996. This net decline was primarily caused by no longer booking acquisition costs associated with the acquisition of the Company's 35%-owned subsidiary, RCI. In the six month period ended June 30, 1996, the Company booked acquisition expense of $1.1 million associated with its acquisition of RCI. MINORITY INTEREST - Beginning on July 1, 1995, the Company converted from the equity method to the consolidated method of accounting for its 51% ownership in RCI. As a result, $646,265 or 49% of RCI's losses from April 1 through June 30, 1996 (the "minority interest") was eliminated from the Company's "Consolidated Statements of Operations" for 1996. On January 1, 1997, the Company converted back to the equity method of accounting. NET INCOME - Total Company net income increased to $1.3 million or 3.8% of sales in the second quarter of 1997 as compared to net income of $230,429 or 0.9% of sales in the same quarter of 1996. Net income increased to $2.4 million in the six months ended June 30, 1997 from $648,003 in the six months ended June 30, 1996. The increase in net income resulted from: (1) no longer booking losses associated with the acquisition and operations of RCI, (2) reserving for anticipated legal fees associated with lawsuits against the Company and (3) slightly increased earnings at NTC. In the six months ended June 30, 1997, earnings at NTC were $2.8 million versus $2.7 million for the six months ended June 30, 1996. -15- PART II - OTHER INFORMATION CAUTIONARY STATEMENTS: This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company intends that such forward-looking statements be subject to the safe harbors created by such statutes. The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties. Accordingly, to the extent that this Quarterly Report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of the Company and its subsidiaries, please be advised that the Company and its subsidiaries' actual financial condition, operating results and business performance may differ materially from that projected or estimated by the Company in forward-looking statements. The differences may be caused by a variety of factors, including but not limited to adverse economic conditions, intense competition, including intensification of price competition and entry of new competitors and products, adverse federal, state and local government regulation, inadequate capital, unexpected costs and operating deficits, increases in general and administrative costs, lower sales and revenues than forecast, loss of customers, customer returns of products sold to them by the Company or its subsidiaries, disadvantageous currency exchange rates, termination of contracts, loss of supplies, technological obsolescence of the Company's or its subsidiaries' products, technical problems with the Company's or its subsidiaries' products, price increases for supplies and components, inability to raise prices, failure to obtain new customers, litigation and administrative proceedings involving the Company, including the pending class action and related lawsuits and SEC investigation, the possible acquisition of new businesses that result in operating losses or that do not perform as anticipated, resulting in unanticipated losses, the possible fluctuation and volatility of the Company's operating results, financial condition and stock price, losses incurred in litigating and settling cases, dilution in the Company's ownership of its subsidiaries and businesses, adverse publicity and news coverage, inability to carry out marketing and sales plans, challenges to the Company's patents, loss or retirement of key executives, changes in interest rates, inflationary factors, and other specific risks that may be alluded to in this Quarterly Report or in other reports issued by the Company. In addition, the business and operations of the Company are subject to substantial risks which increase the uncertainty inherent in the forward-looking statements. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. ITEM 1. LEGAL PROCEEDINGS SECURITIES AND EXCHANGE COMMISSION INVESTIGATION: The investigation of the Company by the SEC, which was commenced in August 1994, has not experienced any material changes from its status as described in "Item 3. Legal Proceedings" in the Company's Form 10-K for its fiscal year ending December 31, 1996. The Company continues to believe that it has provided substantial documentation to the Commission that demonstrates the propriety of its business operations and that the ultimate result of the investigation will not have a material adverse effect on the Company's financial condition or results of operations. CLASS ACTION AND RELATED LAWSUITS: The status of the pending class action lawsuit described in "Item 3. Legal Proceedings" in the Company's Form 10-K for its fiscal year ending December 31, 1996, known as and updated in "Item 1. Legal Proceedings" in the Company's Form 10-Q for its fiscal quarter ending March 31, 1997, SANDRA GAYLES, ET AL. VS. SAM D. SCHWARTZ AND INCOMNET, INC., Case No. CV95-0399 KMW (BQRx), has materially changed since the filing of the Form 10-K for the fiscal year ending December 31, 1996 and Form 10-Q for the fiscal quarter ending March 31, 1997, in the following manner: -16- On May 6, 1997, the court in the pending class action lawsuit SANDRA GAYLES ET AL. VS. SAM D. SCHWARTZ AND INCOMNET, INC. ruled that approximately 20 former shareholders of the Company have the right to "opt out" of the class action lawsuit and file their own separate lawsuit against the Company and Sam D. Schwartz, the Company's former President. The Company expects these potential plaintiffs to file a separate lawsuit against it and its former President in the near future. The potential plaintiffs purchased the Company's stock in the open market through Everest Securities, a brokerage firm which has since terminated its business. The potential claims are expected to be based on alleged violations of applicable securities laws relating to alleged statements made by the Company's former President to the securities broker at Everest Securities in 1995. The amount of damages to be sought by the potential plaintiffs is not yet known. The Company intends to vigorously defend the claims if they are asserted against it. The Company is presently engaged in settlement discussions with the plaintiff's counsel in the class action lawsuit. There are no assurances that any settlement will be reached. In a hearing on May 5, 1997, the plaintiffs in a lawsuit entitled SILVA RUN WORLDWIDE LIMITED VS. INCOMNET, INC., SAM D. SCHWARTZ, BEAR STEARNS & CO., INC., LESLIE SOLMONSON, RONALD F. SEALE, MARINER RESERVE FUND, COMPANIA DI INVESTIMENTO ANTILLANO, COUTTS & CO. AG, SALVATORE M. FRANZELLA, PETER G. EMBIRICOS, AND JOS SCHUETZ, filed in the United States District Court for the Southern District of New York and transferred in March 1997 to the same court in California which is hearing the pending class action lawsuit, were allowed to continue as a separate pleading from the class action lawsuit. As such, the Company anticipates that it will be involved in a separate lawsuit with the SILVA RUN WORLDWIDE LIMITED plaintiffs as described in "Item 3. Legal Proceedings" in the Company's Form 10-K for its fiscal year ending December 31, 1996. INCOMNET, INC. VS. SAM D. SCHWARTZ: On April 25, 1997, the Company filed a lawsuit against Sam D. Schwartz, its prior President and Chairman of the Board, alleging fraud, breach of fiduciary duty, negligence, declaratory relief, breach of contract and imposition of constructive trust. The lawsuit was filed in the Superior Court of California in the County of Los Angeles. In the lawsuit, the Company alleges that Mr. Schwartz failed to disclose to the Company or its board of directors that he would obtain a direct financial benefit in connection with certain transactions considered or entered into by the Company during the period from 1993 to 1995. The Company further alleges that Mr. Schwartz fraudulently induced the Company to enter into a Severance Agreement between him and the Company in November 30, 1995 (see "Item 1. Business - Employees, Officers and Directors - Officers" in the Company's Form 10-K for the fiscal year ending December 31, 1995), and that he breached his fiduciary duty to the Company by self-dealing, acting in bad faith and concealing material facts. The Company seeks payment from Mr. Schwartz of the actual damages incurred by it as a result of Mr. Schwartz's conduct, as well as interest, punitive damages, attorney's fees and costs and reimbursements of all payments previously made to Mr. Schwartz pursuant to the Severance Agreement. Furthermore, the Company seeks a declaratory order that Mr. Schwartz committed acts or omissions involving known misconduct, the absence of good faith, an improper personal benefit, a reckless disregard of his duties to the Company and its shareholders, an unexcused pattern of inattention, and a violation of Sections 310 and 316 of the California Corporations Code. On June 24, 1997, Mr. Schwartz answered the Company's lawsuit against him denying the allegations and counterclaiming for (i) enforcement of any payments due under his Severance Agreement with the Company, (ii) indemnification against third party claims, and (iii) payment of the same settlement to him as was paid to the prior noteholders who purchased convertible notes from the Company on February 8, 1995 (Mr. Schwartz also purchased convertible notes from the Company on February 8, 1995), even though the Company's settlement with those prior noteholders was based on the misconduct of Mr. Schwartz. See "THE COMPANY - Settlement with Prior Noteholders." The Company intends to vigorously assert its claims against Mr. Schwartz, including possible contribution claims with respect to the Company's proposed settlement payments to the plaintiffs in the class action lawsuit, and to vigorously defend against Mr. Schwartz's counterclaims. The lawsuit against Mr. Schwartz has entered the discovery phase and there is no assurance regarding its outcome. There is no assurance that the case will not have a material adverse impact on the financial condition, operating results and business performance of the Company or its subsidiaries. See "Item 1. Legal Proceedings - INCOMNET, INC. VS. SAM D. SCHWARTZ" in the Company's Form 10-Q for -17- the quarter ended March 31, 1997, and "Item 3. Legal Proceedings - Settlement with Prior Noteholders" in the Company's 1996 Form 10-K. SECTION 16(B) LAWSUIT: In January 1996, the Company was served with a derivative shareholders lawsuit entitled RICHARD MORALES VS. INCOMNET, INC. AND SAM D. SCHWARTZ, 96 Civil 0225 in the United States District Court for the Southern District of New York, alleging violations of Section 16(b) of the Securities Exchange Act of 1934, as amended, and demanding that the Company assert claims against Mr. Schwartz for the payment of short-swing profits plus interest. On July 10, 1997, the United States District Court for the Southern District of New York gave final approval to the settlement of that lawsuit in which Mr. Sam D. Schwartz agreed to pay to the Company cash and stock valued at $4,250,000. In final settlement of the lawsuit, Mr. Schwartz has delivered to the Company 1,047,966 shares of the Company's common stock and $600,000 in cash. Under the agreement, the Company paid $626,450 in attorney's fees and expenses to the shareholder's counsel. LEGAL ACTION AGAINST PRIOR REPRESENTATIVES: The status of the pending lawsuit by NTC against certain of its prior representatives described in "Item 3. Legal Proceedings" in the Company's Form 10-K for its fiscal year ending December 31, 1996 and updated in the filing of the Form 10-Q for the fiscal quarter ending March 31, 1997, has not materially changed since the filing of the Form 10-K. POTENTIAL LAWSUITS: There is no assurance that claims similar to those asserted in the pending class action and related lawsuits, or other claims, will not be asserted against the Company by new parties in the future. In this regard, potential plaintiffs have from time to time orally asserted claims against the Company and its prior directors. Several members of the class in the pending class action lawsuit against the Company have opted out. If such claims are filed as legal complaints, the Company will seek to have them consolidated with other pending lawsuits, if appropriate, or will defend them separately. From time to time, the Company is also involved in litigation arising from the ordinary course of business, the ultimate resolution of which management believes will not have a material adverse effect on the financial condition or results of operations of the Company. ITEM 2. CHANGES IN SECURITIES Item 2 is not applicable for the three months ended June 30, 1997. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Item 3 is not applicable for the three months ended June 30, 1997. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Item 4 is not applicable for the three months ended June 30, 1997. ITEM 5. OTHER INFORMATION ADDITION OF NEW BOARD MEMBERS: On August 7, 1997, the Company entered into an agreement with Stanley C. Weinstein, David Wilstein and Richard M. Horowitz in which all three individuals would join the Company's Board of Directors. On May 5, 1997, Mr. Wilstein and Mr. Horowitz were members of a group that filed a Schedule 13D with the Securities and Exchange Commission ("SEC"), stating that they may be deemed to be a group pursuant to SEC Rule 13d-5(b)(1) promulgated under Sections 13(d) and 13(g) of the Securities and Exchange Act of 1934, as amended. -18- Pursuant to the Agreement, the Company agreed to (1) hold harmless and indemnify all of the members of the Company's Board of Directors to the maximum extent permitted by the General Corporation Law of California, (2) increase directors and officers insurance to $5 million and (3) resolve uncertainties that are merely of a technical nature that may exist in the Company's Articles of Incorporation at the next meeting of the Company's shareholders. As part of the Agreement, Mr. Wilstein and Mr. Horowitz agreed that they would not assert that any other director of the Company should be deemed to be a member of the group that filed the Schedule 13D on May 5, 1997. As part of the Agreement, all parties agreed (1) that it would be the policy of the Board that the Board will not support any derivative lawsuit unless such a suit pleads with particularity facts that give rise to a strong inference that a director or directors acted in violation of his, her or their duty of loyalty or duty of care to the Company, unless a different standard is required, (2) to recommend that the shareholders of the Company approve clarifying amendments to the Company's Articles of Incorporation, deleting reference to the number of directors, (3) to amend the Company's Bylaws so that the Board shall be comprised of seven members, and (4) to take actions to cause the annual meeting to be held on September 22, 1997 and to act together to nominate all seven Board members as the slate for the upcoming meeting of shareholders, provided that all members wish to serve on the Board or resign from the Board and subsequently nominate a different slate of directors. ISSUANCE OF 6% CONVERTIBLE PREFERRED STOCK: In July 1997, the Company issued 1,800 shares of Series B 6% Convertible Preferred Stock to raise $1.8 million, less fees equal to approximately 7% of the capital raised. In connection with the issuance of the Series B Preferred Stock, the Company also issued warrants to purchase 50,000 shares of the Company's common stock at an exercise price of $5.36 per share for a period of two years and an option to acquire an additional 125 Series B Preferred Stock at 88% of the average bid price of the Company's common stock in the five days preceding the date of issuance of the additional Series B Preferred Stock. The basic terms and conditions of the Series B 6% Convertible Preferred Stock are as follows: VOTING. The Series B 6% Convertible Preferred Stock does not have voting rights. DIVIDEND. The Series B 6% Convertible Preferred Stock has a cumulative noncompounded annual dividend of 6% payable in cash or stock at the Company's option upon conversion of the Preferred Stock into Common Stock, and prior to the payment of any dividends on the Common Stock. No dividends may be declared or paid on the Convertible Series B Preferred Stock until all cumulative unpaid dividends have been declared and paid on the outstanding Convertible Series A Preferred Stock. LIQUIDATION PREFERENCE. The Series B 6% Convertible Preferred Stock has a liquidation preference of $1,000 per share plus all cumulative unpaid dividends, whether or not declared by the Company's Board of Directors. Upon any liquidation or change of control of the Company (i.e. transfer of more than 50% of its voting stock), the Preferred Stockholders are entitled to the second priority in payment from the Company's assets, before any payments are made on the Company's Common Stock, until the liquidation preference is paid in full. The Series B 6% Convertible Preferred Stock is junior in preference to Series A 2% Convertible Preferred Stock issued in October 1996 (see the Company's Annual Report of Form 10-K filed on April 15, 1997). No liquidation preference may be paid to the holders of the Convertible Series B Preferred Stock until the full liquidation preference has been paid to the holders of the outstanding Convertible Series A Preferred Stock. CONVERSION. The Preferred Stockholders may convert each share of Series B 6% Convertible Preferred Stock into the number of shares of the Company's Common Stock calculated as follows, at any time upon the earlier of (i) 120 days after the issuance of the Preferred Stock, or (ii) when the shares of Common Stock underlying the Preferred Stock are registered with the Securities and Exchange Commission. The conversion price (the "Conversion Price") for each share of Series B 6% Convertible Preferred Stock is equal to the lesser of (a) 80% of the average bid price for the Company's Common Stock on the public trading market for the five -19- trading days immediately preceding the conversion date, as specified by the Preferred Stockholder, or (b) the bid price of the Company's Common Stock on the funding date (i.e. the issuance date of the Preferred Stock). To calculate the number of shares of Common Stock issuable upon the conversion of the Preferred Stock, the Conversion Price is multiplied by a ratio, the numerator of which is the sum of 1,000 and the accrued but unpaid dividends, and the denominator of which is the Conversion Price. If for any reason a registration statement covering the shares of Common Stock issuable upon the conversion of the Preferred Stock is not in effect with the Securities and Exchange Commission at the time of a valid conversion by a Preferred Stockholder, then the Conversion Price is reduced by 3% per month for each of the first three months that the effectiveness of the registration is late, and thereafter the Company is obligated to pay a cash penalty equal to 3% of the investment per month. The Company has the right to cause a conversion of the Preferred Stock into Common Stock on the same terms at any time after one year after the Preferred Stock is issued. REDEMPTION. The Company has the right to redeem the Preferred Stock for its issuance price plus cumulative unpaid dividends if the Company's stock trades at a price which averages $2.00 per share or less for any period of five consecutive trading days after the Preferred Stock is issued. REGISTRATION RIGHTS. Pursuant to a Registration Rights Agreement entered into by the Company with each purchaser of the Series B 6% Convertible Preferred Stock, the Company is obligated to file a registration statement with the Securities and Exchange Commission covering the shares of Common Stock underlying the Preferred Stock within 30 days after the Preferred Stock is issued, and to have the registration statement declared effective within 120 days after it is filed. ANTIDILUTION PROVISION. The Certificate of Determination for the Series B 6% Convertible Preferred Stock contains comprehensive provisions for adjustments to the Conversion Price and the conversion ratio of the Preferred Stock in the event of stock dividends, asset distributions, reorganizations, recapitalizations, mergers, stock splits or similar transactions by the Company, in order to protect the Preferred Stock from dilution as a result of such transactions. RESTRICTIVE COVENANTS. During the first 90 days after the Series B 6% Convertible Preferred Stock is issued, the Company is not permitted to issue any other securities, except in limited circumstances, including pursuant to the exercise of outstanding options or warrants or pursuant to existing settlement agreements, without first notifying the Preferred Stockholders and giving them a right of first refusal to purchase the securities themselves. While the Series B 6% Convertible Preferred Stock is outstanding or until it is converted into Common Stock, the Company is not permitted to engage in certain transactions, such as the redemption or purchase of its own Common Stock (except in connection with the collection of Section 16(b) short-swing profits), without the prior consent of the Preferred Stockholders. Furthermore, the Company cannot take any action which would modify the rights of the Preferred Stockholders under the Certificate of Determination without the prior consent of the Preferred Stockholder being affected by the modification. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K INDEX TO EXHIBITS: EXHIBIT NO. DESCRIPTION - ----------- ----------------- 10-1 Loan Agreement between National Telephone & Communications, Inc. and First Bank -20- & Trust, Irvine, CA. 10-2 Agreement As To Board Membership Between Incomnet, Inc. and Stanley Weinstein, David Wilstein and Richard Horowitz, dated August 7, 1997. REPORTS ON FORM 8-K, FILED IN 1997 - - ---------------------------------------------------- 20.1 Report on Form 8-K - Election of Dr. Howard Silverman As Director & Amendment to Employment Contract of Melvyn Reznick, filed on February 7, 1997. 20.2 Report on Form 8-K - Reincorporation of National Telephone & Communications, Inc. filed on April 10, 1997. 20.3 Report on Form 8-K - Acquisition of California Interactive Computing, Inc., filed on May 13, 1997. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INCOMNET, INC. Date: August 14, 1997 /s/ MELVYN REZNICK -------------------------- Melvyn Reznick President, CEO & CFO -21- EX-10.1 2 EXHIBIT 10.1 [LOGO] LOAN AGREEMENT
- ------------------------------------------------------------------------------------------ Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials $10,000,000.00 06-30-1998 973000139 110 - ------------------------------------------------------------------------------------------ References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - -----------------------------------------------------------------------------------------
BORROWER: NATIONAL TELEPHONE & LENDER: FIRST BANK & TRUST COMMUNICATIONS, INC. IRVINE REGIONAL OFFICE - 400 2801 MAIN STREET 2400 MICHELSON DRIVE IRVINE, CA 92614 IRVINE, CA 92612 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ THIS LOAN AGREEMENT between NATIONAL TELEPHONE & COMMUNICATIONS, INC. ("Borrower") and FIRST BANK & TRUST ("Lender") is made and executed on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a commercial loan or loans and other financial accommodations, including those which may be described on any exhibit or schedule attached to this Agreement. All such loans and financial accommodations, together with all future loans and financial accommodations from Lender to Borrower, are referred to in this Agreement individually as the "Loan" and collectively as the "Loans." Borrower understands and agrees that: (a) in granting, renewing, or extending any Loan, Lender is relying upon Borrower's representations, warranties, and agreements, as set forth in this Agreement; (b) the granting, renewing, or extending of any Loan by Lender at all times shall be subject to Lender's sole judgment and discretion; and (c) all such Loans shall be and shall remain subject to the following terms and conditions of this Agreement. TERM. This Agreement shall be effective as of March 27, 1997, and shall continue thereafter until all Indebtedness of Borrower to Lender has been performed in full and the parties terminate this Agreement in writing. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. AGREEMENT. The word "Agreement" means this Loan Agreement, as this Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Loan Agreement from time to time. ACCOUNT. The word "Account" means a trade account, account receivable, or other right to payment for goods sold or services rendered owing to Borrower (or to a third party grantor acceptable to Lender). ACCOUNT DEBTOR. The words "Account Debtor" mean the person or entity obligated upon an Account. ADVANCE. The word "Advance" means a disbursement of Loan funds under this Agreement. BORROWER. The word "Borrower" means NATIONAL TELEPHONE & COMMUNICATIONS, INC.. The word "Borrower" also includes, as applicable, all subsidiaries and affiliates of Borrower as provided below in the paragraph titled "Subsidiaries and Affiliates." BORROWING BASE. The words "Borrowing Base" mean, as determined by Lender from time to time, the lesser of (a) $10,000,000.00; or (b) 75.000% of the aggregate amount of Eligible Accounts. BUSINESS DAY. The words "Business Day" mean a day on which commercial banks are open for business in the State of California. CERCLA. The word "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended. CASH FLOW. The words "Cash Flow" mean net income after taxes, and exclusive of extraordinary gains and income, plus depreciation and amortization. COLLATERAL. The word "Collateral" means and includes without limitation all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever whether created by law, contract, or otherwise. The word "Collateral" includes without limitation all collateral described below in the section titled "COLLATERAL." DEBT. The word "Debt" means all of Borrower's liabilities excluding Subordinated Debt. ELIGIBLE ACCOUNTS. The words "Eligible Accounts" mean, at any time, all of Borrower's Accounts which contain selling terms and conditions acceptable to Lender. The net amount of any Eligible Account against which Borrower may borrow shall exclude all returns, discounts, credits, and offsets of any nature. Unless otherwise agreed to by Lender in writing, Eligible Accounts do not include: (a) Accounts with respect to which the Account Debtor is an officer, an employee or agent of Borrower. (b) Accounts with respect to which the Account Debtor is a subsidiary of, or affiliated with or related to Borrower or its shareholders, officers, or directors. (c) Accounts with respect to which goods are placed on consignment, guaranteed sale, or other terms by reason of which the payment by the Account Debtor may be conditional. (d) Accounts with respect to which Borrower is or may become liable to the Account Debtor for goods sold or services rendered by the Account Debtor to Borrower. (e) Accounts which are subject to dispute, counterclaim, or setoff. (f) Accounts with respect to which the goods have not been shipped or delivered, or the services have not been rendered, to the Account Debtor. (g) Accounts with respect to which Lender, in its sole discretion, deems the creditworthiness or financial condition of the Account Debtor to be unsatisfactory. (h) Accounts of any Account Debtor who has filed or has had filed against it a petition in bankruptcy or an application for relief under any provision of any state or federal bankruptcy, insolvency, or debtor-in-relief acts; or who has had appointed a trustee, custodian, or receiver for the assets of such Account Debtor; or who has made an assignment for the benefit of creditors or has become insolvent or fails generally to pay its debts (including its payrolls) as such debts become due. (i) Accounts with respect to which the Account Debtor is the United States government or any department or agency of the United States. (j) Accounts which have not been paid in full with 90 DAYS FROM DATE OF INVOICE from the invoice date. (k) EXCLUDING ALL INTER-COMPANY RECEIVABLES, GOVERNMENT RECEIVABLES, FOREIGN RECEIVABLES AND CONTRA ACCOUNTS. ERISA. The word "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. EVENT OF DEFAULT. The words "Event of Default" mean and include without limitation any of the Events of Default set forth below in the section titled "EVENTS OF DEFAULT." EXPIRATION DATE. The words "Expiration Date" mean the date of termination of the Lender's commitment to lend under this Agreement. GRANTOR. The word "Grantor" means and includes without limitation each and all of the persons or entities granting a Security Interest in any Collateral for the Indebtedness, including without limitation all Borrowers granting such a Security Interest. GUARANTOR. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodation parties in connection with any Indebtedness. INDEBTEDNESS. The word "Indebtedness" means and includes without limitation all Loans, together with all other obligations, debts and liabilities of Borrower to Lender, or any one or more of them, as well as all claims by Lender against Borrower, or any one or more of them; whether now or hereafter existing, voluntary or involuntary, due or not due, absolute or contingent, liquidated or unliquidated; whether Borrower may be liable individually or jointly with others; whether Borrower may be obligated as a guarantor, surety, or otherwise; whether recovery upon such Indebtedness may be or hereafter may become barred by any statute of limitations; and whether such Indebtedness may be or hereafter may 06-26-1997 LOAN AGREEMENT Loan No 973000139 (Continued) Page 2 - ------------------------------------------------------------------------------- become otherwise unenforceable. LENDER. The word "Lender" means FIRST BANK & TRUST, its successors and assigns. LINE OF CREDIT. The words "Line of Credit" mean the credit facility described in the Section titled "LINE OF CREDIT" below. LIQUID ASSETS. The words "Liquid Assets" mean Borrower's cash on hand plus Borrower's readily marketable securities. LOAN. The word "Loan" or "Loans" means and includes without limitation any and all commercial loans and financial accommodations from Lender to Borrower, whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time. NOTE. The word "Note" means and includes without limitation Borrower's promissory note or notes, if any, evidencing Borrower's Loan obligations in favor of Lender, as well as any substitute, replacement or refinancing note or notes therefor. RELATED DOCUMENTS. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guarantees, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. SECURITY AGREEMENT. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. SECURITY INTEREST. The words "Security Interest" mean and include without limitation any type of collateral security, whether in the form of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. SARA. The word "SARA" means the Superfund Amendments and Reauthorization Act of 1986 as now or hereafter amended. SUBORDINATED DEBT. The words "Subordinated Debt" mean indebtedness and liabilities of Borrower which have been subordinated by written agreement to indebtedness owed by Borrower to Lender in form and substance acceptable to Lender. TANGIBLE NET WORTH. The words "Tangible Net Worth" mean Borrower's total assets excluding as intangible assets (i.e., goodwill, trademarks, patents, copyrights, organizational expenses, and similar intangible items, but including leaseholds and leasehold improvements) less total Debt. WORKING CAPITAL. The words "Working Capital" mean Borrower's current assets, excluding prepaid expenses, less Borrower's current liabilities. LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time from the date of this Agreement to the Expiration Date, provided the aggregate amount of such Advances outstanding at any time does not exceed the Borrowing Base. Within the foregoing limits, Borrower may borrow, partially or wholly prepay, and reborrow under this Agreement as follows. CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make any Advance to or for the account of Borrower under this Agreement s subject to the following conditions precedent, with all documents, instruments, opinions, reports, and other items required under this Agreement to be in form and substance satisfactory to Lender: (a) Lender shall have received evidence that this Agreement and all Related Documents have been duly authorized, executed, and delivered by Borrower to Lender. (c) The security interests in the Collateral shall have been duly authorized, created, and perfected with first lien priority and shall be in full force and effect. (f) Borrower shall have paid to Lender all fees, costs, and expenses specified in this Agreement and the Related Documents as are then due and payable. (g) There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement, and Borrower shall have delivered to Lender the compliance certificate called for in the paragraph below titled "Compliance Certificate." MAKING LOAN ADVANCES. Advances under the Line of Credit may be requested orally by authorized persons. All oral requests shall be confirmed in writing on the day of the request. Each Advance shall be conclusively deemed to have been made at the request of and for the benefit of Borrower (a) when credited to any deposit account of Borrower maintained with Lender or (b) when advanced in accordance with the instructions of an authorized person. Lender, at its option, may set a cutoff time, after which all requests for Advances will be treated as having been requested on the next succeeding Business Day. MANDATORY LOAN REPAYMENTS. If at any time the aggregate principal amount of the outstanding Advances shall exceed the applicable Borrowing Base, Borrower, immediately upon written or oral notice from Lender, shall pay to Lender an amount equal to the difference between the outstanding principal balance of the Advances and Borrowing Base. On the Expiration Date, Borrower shall pay to Lender in full the aggregate unpaid principal amount of all Advances then outstanding and all accrued unpaid interest, together with all other applicable fees, costs and charges, if any, not yet paid. LOAN ACCOUNT. Lender shall maintain on its books a record of account in which Lender shall make entries for each Advance and such other debits and credits as shall be appropriate in connection with the credit facility. Lender shall provide Borrower with periodic statements of Borrower's account, which statements shall be considered to be correct and conclusively binding on Borrower unless Borrower notifies Lender to the contrary within thirty (30) days after Borrower's receipt of any such statement which Borrower deems to be incorrect. COLLATERAL. To secure payment of the Line of Credit and performance of all other Loans, obligations and duties owed by Borrower to Lender, Borrower (and others, if required) shall grant to Lender Security Interests in such property and assets as Lender may require (the "Collateral"), including without limitation Borrower's present and future Accounts and general intangibles. Lender's Security Interests in the Collateral shall be continuing liens and shall include the proceeds and products of the Collateral, including without limitation the proceeds of any insurance. With respect to the Collateral, Borrower agrees and represents and warrants to Lender: PERFECTION OF SECURITY INTERESTS. Borrower agrees to execute such financing statements and to take whatever other actions are requested by Lender to perfect and continue Lender's Security Interests in the Collateral. Upon request of Lender, Borrower will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Borrower will note Lender's interest upon any and all chattel paper if not delivered to Lender for possession by Lender. Contemporaneous with the execution or this Agreement, Borrower will execute one or more UCC financing statements and any similar statements as may be required by applicable law, and will file such financing statements and all such similar statements in the appropriate location or locations. Borrower hereby appoints Lender as its irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue any Security Interest. Lender may at any time, and without further authorization from Borrower, file a carbon, photograph, facsimile, or other reproduction of any financing statement for use as a financing statement. Borrower will reimburse Lender for all expenses for the perfection, termination, and the continuation of the perfection of Lender's security interest in the Collateral. Borrower promptly will notify Lender of any change in Borrower's name including any change to the assumed business names of Borrower. Borrower also promptly will notify Lender of any change in Borrower's Social Security Number or Employer Identification Number. Borrower further agrees to notify Lender in writing prior to any change in address or location of Borrower's principal governance office or should Borrower merge or consolidate with any other entity. COLLATERAL RECORDS. Borrower does now, and at all times hereafter shall, keep correct and accurate records of the Collateral, all of which records shall be available to Lender or Lender's representative upon demand for inspection and copying at any reasonable time. With respect to the Accounts, Borrower agrees to keep and maintain such records as Lender may require, including without limitation information concerning Eligible Accounts and Account balances and agings. COLLATERAL SCHEDULES. Concurrently with the execution and delivery of this Agreement, Borrower shall execute and deliver to Lender a schedule of Accounts and Eligible Accounts, in form and substance satisfactory to the Lender. Thereafter and at such frequency as Lender shall require, Borrower shall execute and deliver to Lender such supplemental schedules of Eligible Accounts and such other matters and information relating to Borrower's Accounts as Lender may request. REPRESENTATIONS AND WARRANTIES CONCERNING ACCOUNTS. With respect to the Accounts, Borrower represents and warrants to Lender: (a) Each Account represented by Borrower to be an Eligible Account for purposes of this Agreement conforms to the requirements of the definition of an Eligible Account; (b) All Account information listed on schedules delivered to Lender will be true and correct, subject to immaterial variance, and (c) Lender, its assigns, or agents shall have the right at any time and at Borrower's expense to inspect, examine, and audit Borrower's records and 06-26-1997 LOAN AGREEMENT Page 3 Loan No 973000139 (Continued) - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- to confirm with Account Debtors the accuracy of such Accounts. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of Loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists: ORGANIZATION. Borrower is a corporation which duly organized, validly existing, and in good standing under the laws of the state of Borrower's incorporation and is validly existing and in good standing in all states in which Borrower is doing business. Borrower has the full power and authority to own its properties and to transact the businesses in which it is presently engaged or presently proposes to engage. Borrower also is duly qualified as a foreign corporation and is in good standing in all states in which the failure to so qualify would have a material adverse effect on its businesses or financial condition. AUTHORIZATION. The execution, delivery, and performance of this Agreement and all Related Documents by Borrower, to the extent to be executed, delivered or performed by Borrower, have been duly authorized by all necessary action by Borrower; do not require the consent or approval of any other person, regulatory authority or governmental body; and do not conflict with, result in a violation of, or constitute a default under (a) any provision of its articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (b) any law, governmental regulation, court decree, or order applicable to Borrower. FINANCIAL INFORMATION. Each financial statement of Borrower supplied to Lender truly and completely disclosed Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements. LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement required hereunder to be given by Borrower when delivered will constitute, legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. PROPERTIES. Except for Permitted Liens, Borrower owns and has good title to all of Borrower's properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used, or filed a financing statement under, any other name for at least the last five (5) years. HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous substance," "disposal," "release," and "threatened release," as used in this Agreement, shall have the same meanings as set forth in the "CERCLA," "SARA," the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 2O of the California Health and Safety Code, Section 25100, et seq., or other applicable state or Federal laws, rules, or regulations adopted pursuant to any of the foregoing. Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (a) During the period of Borrower's ownership of the properties, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any hazardous waste or substance by any person on, under, about or from any of the properties. (b) Borrower has no knowledge of, or reason to believe that there has been (i) any use, generation, manufacture, storage, treatment, disposal, release, or threatened release of any hazardous waste or substance on, under, about or from the properties by any prior owners or occupants of any of the properties, or (ii) any actual or threatened litigation or claims of any kind by any person relating to such matters. (c) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the properties shall use, generate, manufacture, store, treat, dispose of, or release any hazardous waste or substance on, under, about or from any of the properties; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation those laws, regulations and ordinances described above. Borrower authorizes Lender and its agents to enter upon the properties to make such inspections and tests as Lender may deem appropriate to determine compliance of the properties with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower's expense and for Lender's purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower's due diligence in investigating the properties for hazardous waste and hazardous substances. Borrower hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under such laws, and (b) agrees to indemnity and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release occurring prior to Borrower's ownership or interest in the properties, whether or not the same was or should have been known to Borrower. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the Indebtedness and the termination or expiration of this Agreement and shall not be affected by Lender's acquisition of any interest in any of the properties, whether by foreclosure or otherwise. LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower's financial condition or properties, other that litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing. TAXES. To the best of Borrower's knowledge, all tax returns and reports of Borrower that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower's Loan and Note, that would be prior or that may in any way be superior to Lender's Security Interests and rights in and to such Collateral. BINDING EFFECT. This Agreement, the Note, all Security Agreements directly or indirectly securing repayment of Borrower's Loan and Note and all of the Related Documents are binding upon Borrower as well as upon Borrower's successors, representatives and assigns, and are legally enforceable in accordance with their respective terms. COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for business or commercial related purposes. EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower may have any liability complies in all material respects with all applicable requirements of law and regulations, and (i) no Reportable Event nor Prohibited Transaction (as defined in ERISA) has occurred with respect to any such plan, (ii) Borrower has not withdrawn from any such plan or initiated steps to do so, (iii) no steps have been taken to terminate any such plan, and (iv) there are no unfunded liabilities other than those previously disclosed to Lender in writing. LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business, or Borrower's Chief executive office, if Borrower has more than one place of business, is located at 2801 MAIN STREET, IRVINE, CA 92614. Unless Borrower has designated in writing this location is also the office or offices where Borrower keeps its records concerning the Collateral. INFORMATION. All information heretofore or contemporaneously herewith furnished by Borrower to Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all information hereafter furnished by or on behalf of Borrower to Lender will be true and accurate in every material respect on the date as of which such information is dated or certified; and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and agrees that Lender, without independent investigation, is relying upon the above representations and warranties in extending Loan Advances to Borrower. Borrower further agrees that the foregoing representations and warranties shall be continuing in nature and shall remain in full force and effect until such time as Borrower's Indebtedness shall be paid in full, or until this Agreements shall be terminated in the manner provided above, whichever is the last to occur. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will: LITIGATION. Promptly inform Lender in writing of (a) all material adverse changes in Borrower's financial condition, and (b) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor. FINANCIAL RECORDS. Maintain its books and records in accordance with generally accepted accounting principles, applied on a consistent basis, and permit Lender to examine and audit Borrower's books and records at all reasonable times. ADDITIONAL INFORMATION. Furnish such additional information and statements, lists of assets and liabilities, agings of receivables and payables, inventory schedules, budgets, forecasts, tax returns, and other reports with respect to Borrower's financial condition and business operations as Lender may request from time to time. FINANCIAL COVENANTS AND RATIOS. Comply with the following covenants and ratios: TANGIBLE NET WORTH. Maintain a minimum Tangible Net Worth of not less than $9,000,000.00. NET WORTH RATIO. Maintain a ratio of Total Liabilities to Tangible Net Worth of less than 3.00 to 1.00. Except as provided above, all computations made to determine compliance with the requirements contained in this paragraph shall be made in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. INSURANCE. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower's properties and operations, in form, amounts, coverages and with insurance companies reasonably acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days' prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans. Borrower will provide Lender with such loss payable or other endorsements as Lender may require. INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the properties insured; (e) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values, and (f) the expiration date of the policy. In addition, upon request of Lender (however not more often than annually) Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower. OTHER AGREEMENTS. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business operations, unless specifically consented to the contrary by Lender in writing. TAXES, CHARGES AND LIENS. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income or profits. Provided however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy, lien or claim so long as (a) the legality of the same shall be contested in good faith by appropriate proceedings, and (b) Borrower shall have established on its books adequate reserves with respect to such contested assessment, tax, charge, levy, lien, or claim in accordance with generally accepted accounting practices. Borrower, upon demand of Lender, will furnish to Lender evidence of payment of the assessments, taxes, charges, levies, liens and claims and will authorize the appropriate governmental official to deliver to Lender at any time a written statement of any assessments, taxes, charges, levies, liens and claims against Borrower's properties, income, or profits. PERFORMANCE. Perform and comply with all terms, conditions, and provisions set forth in this Agreement and in the Related Documents in a timely manner, and promptly notify Lender if Borrower learns of the occurrence of any event which constitutes an Event of Default under this Agreement or under any of the Related Documents. OPERATIONS. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner and in compliance with all applicable federal, state and municipal laws, ordinances, rules and regulations respecting its properties, charters, businesses and operations, including without limitation, compliance with the Americans With Disabilities Act and with all minimum funding standards and other requirements of ERISA and other laws applicable to Borrower's employee benefit plans. INSPECTION. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender at least annually and at the time of each disbursement of Loan proceeds with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement. ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all respects with all environmental protection federal, state and local laws, statutes, regulations and ordinances; not cause or permit to exist, as a result of an intentional or unintentional action or omission on its part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources. ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests. NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender: INDEBTEDNESS AND lIENS. (c) sell with recourse any of Borrower's accounts, except to Lender. CONTINUITY OF OPERATIONS. (a) Engage in any business activities substantially different than those in which Borrower is presently engaged, (b) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change ownership, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, (c) pay any dividends on Borrower's stock (other than dividends payable in its stock, provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a "Subchapter S Corporation" (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of stock of Borrower, or (d) purchase or retire any of Borrower's outstanding shares or alter or amend Borrower's capital structure. LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money or assets, (b) purchase, create or acquire any interest in any other enterprise or entity, or (c) incur any obligation as surely or guarantor other than in the ordinary course of business. CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan Proceeds if: (a) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (c) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; or (d) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any other loan with Lender. ADDITIONAL PROVISIONS. 1. BORROWERS DEBT RATIO (TOTAL LIABILITIES TO TANGIBLE NET WORTH) WILL NOT EXCEED 3.0:1 AS OF 6/30/97. 2.75:1 AS OF 9/30/97 AND 2.50:1 AS OF 12/31/97. 2. NET INCOME AFTER TAX AT DECEMBER 31, 1997 WILL BE AT LEAST $2,000,000.00 3. BORROWER WILL NOT UPSTREAM CASH TO ITS PARENT OR OTHER AFFILIATED COMPANIES IN EXCESS OF $100,000.00 PER MONTH OR $1,200,000.00 ANNUALLY, WITHOUT THE PRIOR WRITTEN CONSENT OF FIRST BANK & TRUST. BORROWER CAN ONLY UPSTREAM CASH UPON MEETING ALL OF ITS FINANCIAL OBLIGATIONS/COMMITMENTS WITH FIRST BANK & TRUST AND ALL OTHERS. A CONDITION OF DEFAULT UNDER ANY NOTE OR CONTRACTUAL AGREEMENT MAY NOT EXIST AT THE TIME OF UPSTREAMING CASH. 4. A DEFAULT UNDER ANY AND ALL CONTRACTUAL AGREEMENTS ENTERED INTO BY AND BETWEEN NATIONAL TELEPHONE & COMMUNICATIONS, INC. AND WILTEL, INC., A DELAWARE CORPORATION, OR WORLDCOM NETWORK SERVICES, INC., WILL BE AN AUTOMATIC DEFAULT UNDER THE SUBJECT LOAN DOCUMENTS AND ANY FUTURE MODIFICATIONS TO THE SUBJECT LOAN DOCUMENTS. 5. BORROWER IS REQUIRED TO NOTIFY FIRST BANK & TRUST OF ALL LEGAL SETTLEMENTS OF $100,000.00 OR MORE AND OPEN LAW SUITS PENDING IN WRITING AS SOON AS ITS MANAGEMENT IS AWARE OF IT. 6. BORROWER AGREES NOT TO GUARANTEE THE OBLIGATIONS OR DEBT OF ANOTHER ENTITY WITHOUT THE PRIOR WRITTEN CONSENT OF FIRST BANK & TRUST. 7. BORROWER AGREES TO AT LEAST ONE ACCOUNTS RECEIVABLE AUDIT ANNUALLY. 8. BORROWER AGREES TO PROVIDE LENDER MONTHLY SUMMARY OF RECEIVABLES, THE DETAIL LEC AGING AND THE LAST PAGE (TOTAL OF THE DETAIL "DIRECT RECEIVABLE" AGING IN ORDER TO SUPPORT AND COMPUTE THE BORROWING BASE BY THE 15TH OF EACH MONTH. 9. BORROWER AGREES TO PROVIDE LENDER NOTIFICATION OF PLEDGE OF RECEIVABLES ACKNOWLEDGED BY PAC BELL AND ZPDI. 10. BORROWER AGREES TO PROVIDE LENDER ANNUAL AUDITED FINANCIAL STATEMENT AND MONTHLY COMPANY PREPARED FINANCIAL 06-26-1997 LOAN AGREEMENT Page 5 LOAN NO 973000139 (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- STATEMENTS ( VCS INITIAL HERE). --------- INTEREST RATE PROVISION. THE INTEREST RATE WILL BE ADJUSTED ACCORDING TO THE DEBT/TNW RATIO: GREATER THAN 3.0 = WALL STREET JOURNAL PRIME PLUS 1.50% 2.5 - 3.0 = WALL STREET JOURNAL PRIME PLUS 1.25% 2.0 - 2.5 = WALL STREET JOURNAL PRIME PLUS 1.00% LESS THAN 2.0 = WALL STREET JOURNAL PRIME PLUS .75% ( VCS INITIAL HERE). --- PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and security interests securing indebtedness owned by Borrower to Lender; (b) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (c) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (d) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled "Indebtedness and Liens"; (e) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (f) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower's assets. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due on the Loans. OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to perform when due any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents, or failure of Borrower to comply with or to perform any other term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents. FALSE STATEMENTS. Any warranty, representation or statement made or furnished to Lender by or on behalf of Borrower or any Grantor under this Agreement or the Related Documents is false or misleading in any material respect at the time made or furnished, or becomes false or misleading at any time thereafter. DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any Security Agreement to create a valid and perfected Security Interest) at any time and for any reason. INSOLVENCY. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower, any creditor of any Grantor against any collateral securing the indebtedness, or by any governmental agency. This includes a garnishment, attachment, or levy on or of any of Borrower's deposit accounts with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower or Grantor, as the case may be, as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding, and if Borrower or Grantor gives Lender written notice of the creditor or forfeiture proceeding and furnishes reserves or a surety bond for the creditor or forfeiture proceeding satisfactory to Lender. EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect to any Guarantor of any of the indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. Lender, at its option, may, but shall not be required to, permit the Guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure the Event of Default. CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower. ADVERSE CHANGE. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. RIGHT TO CURE. If any default, other than a Default on Indebtedness, is curable and if Borrower or Grantor, as the case may be, has not been given a notice of a similar default within the preceding twelve (12) months, it may be cured (and no Event of Default will have occurred) if Borrower or Grantor, as the case may be, after receiving written notice from Lender demanding cure of such default: (a) cures the default within fifteen (15) days; or (b) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make Loan Advances or disbursements), and, at Lender's option, all indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the "Insolvency" subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: AMENDMENTS. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by Lender in the State of California. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Orange County, the State of California. Lender and Borrower hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by either Lender or Borrower against the other. (Initial Here VCS ) This Agreement shall be governed by and construed in --------- accordance with the laws of the State of California. CAPTION HEADINGS. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower under this Agreement shall be joint and several, and all references to Borrower shall mean each and every Borrower. This means that each of the persons signing below is responsible for all obligations in this Agreement. CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's sale or transfer, whether now or later, of one or more participation interests in the Loans to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy it may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loans and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower's obligation under the Loans irrespective of the failure or insolvency of any holder of any interest in the Loans. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender. COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's expenses, including without limitation attorneys' fees, incurred in connection with the preparation, execution, enforcement, modification and collection of this Agreement or in connection with the the Loans made pursuant to this Agreement. Lender may pay someone else to help collect the Loans and to enforce this Agreement, and Borrower will pay that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including attorneys' fees for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. NOTICES. All notices required to be given under this Agreement shall be given in writing, may be sent by telefacsimile, and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage 06-26-1997 LOAN AGREEMENT Page 6 Loan No 973000139 (Continued) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there's more than one Borrower, notice to any Borrower will constitute notice to all Borrowers. For notice purposes, Borrowers will keep Lender informed at all times of Borrower's current address(es). SEVERABILITY. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity however, if the offending provision cannot be so modified it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word "Borrower" as used herein shall include all subsidiaries and affiliates of Borrower. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any subsidiary or affiliate of Borrower. SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on behalf of Borrower shall bind its successors and assigns and shall inure to the benefit of Lender, its successors and assigns. Borrower shall not, however, have the right to assign its rights under this Agreement or any interest therein, without the prior written consent of Lender. SURVIVAL. All warranties, representations and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement shall be considered to have been relied upon by Lender and will survive the making of the Loan and delivery to Lender of the Related Documents, regardless of any investigation made by Lender or on Lender's behalf. TIME IS OF THE ESSENCE. Time is of the essence in the performance of this Agreement. WAIVER. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower or between Lender and any Grantor shall constitute a waiver of any of Lender's rights or of any obligations of Borrower or of any Grantor as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent in subsequent instances where such consent is required, and in all cases such consent may be granted or withheld on the sole discretion of Lender. BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF JUNE 26, 1997. BORROWER: NATIONAL TELEPHONE & COMMUNICATIONS, INC. By: /s/ Victor C. Streufert -------------------------------------------------------- VICTOR C. STREUFERT, CHIEF FINANCIAL OFFICER LENDER: FIRST BANK & TRUST By: /s/ Paul McGraw -------------------------------------------------------- Authorized Officer - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- [LOGO] CHANGE IN TERMS AGREEMENT
- --------------------------------------------------------------------------------------------------------------- Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials 10,000,000.00 06-30-1998 973000139 110 - --------------------------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - ---------------------------------------------------------------------------------------------------------------
BORROWER: NATIONAL TELEPHONE & LENDER: FIRST BANK & TRUST COMMUNICATIONS, INC. Irvine Regional Office - 400 2801 MAIN STREET 2400 Michelson Drive IRVINE, CA 92614 Irvine, CA 92612 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PRINCIPAL AMOUNT: $10,000,000.00 DATE OF AGREEMENT: June 26,1997 DESCRIPTION OF EXISTING INDEBTEDNESS. PROMISSORY NOTE DATED MARCH 27, 1997 IN THE AMOUNT IF $5,000,000.00. DESCRIPTION OF COLLATERAL. UCC FILING RECORDED APRIL 3, 1997 AS INSTRUMENT NUMBER 9710060309 COMMERCIAL SECURITY AGREEMENT DATED MARCH 27,1997. DESCRIPTION OF CHANGE IN TERMS. THE MATURITY DATE IS HEREBY CHANGED TO JUNE 30,1998 FROM A PREVIOUS MATURITY DATE OF APRIL 30, 1998. THE NOTE AMOUNT IS HEREBY INCREASED TO $10,000,000.00 FROM A PREVIOUS AMOUNT OF $5,000,000.00. BORROWER HEREBY ACKNOWLEDGES THAT THE COMMERCIAL SECURITY AGREEMENT DATED MARCH 27, 1997 AS WELL AS THE COMMERCIAL SECURITY AGREEMENT DATED JUNE 26, 1997 REMAINS IN FULL FORCE AND EFFECT. BORROWER AGREES TO THE REPAYMENT TERMS OUTLINED BELOW. ALL OTHER TERMS AND CONDITIONS REMAIN THE SAME. PROMISE TO PAY. NATIONAL TELEPHONE & COMMUNICATIONS, INC. ("Borrower") promises to pay FIRST BANK & TRUST ("Lender"), or order, in lawful money of the United States of America, the principal amount of Ten Million & 00/100 Dollars ($10,000,000.00) or so much as may be outstanding, together with interest on the unpaid outstanding principal balance of each advance. Interest shall be calculated from the date of each advance until repayment of each advance. PAYMENT. Borrower will pay this loan on demand, or if no demand interest is made, in one payment of all outstanding principal plus all accrued unpaid interest on June 30, 1998. In addition, Borrower will pay regular monthly payments of accrued unpaid interest beginning June 27, 1997 and all subsequent interest payments are due on the same day of each month after that. Interest on this Agreement is computed on a 365/360 simple interest basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to accrued unpaid interest, then to principal, and any remaining amount to any unpaid collection costs and late charges. VARIABLE INTEREST RATE. The interest rate on this Agreement is subject to change from time to time based on changes in an independent index which is the Prime rate as published in the Wall Street Journal. When a range of rates has been published, the higher of the rates will be used (the "Index"). The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute Index after notice to Borrower. Lender will tell Borrower the current index rate upon Borrower's request. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each quarter. The Index currently is 8.500% per annum. The interest rate to be applied to the unpaid principal balance of this Agreement will be at a rate of 1.000 percentage point over the Index, resulting in an initial rate of 9.500% per annum. NOTICE: Under no circumstances will the interest rate on this Agreement be more than the maximum rate allowed by applicable law. PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance charges are earned fully as of the date of the loan and will not be subject to refund upon early payment (whether voluntary or as a result of default), except as otherwise required by law. Except for the foregoing, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, they will reduce the principal balance due. LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged 5.000% of the unpaid portion of the regularly scheduled payment or $1.00, whichever is greater. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due. (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to comply with or to perform when due any other term, obligation, covenant, or condition contained in this Agreement or any agreement related to this Agreement, or in any other agreement or loan Borrower has with Lender. (c) Borrower defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this Note or perform Borrower's obligations under this Note or any of the Related Documents. (d) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect either now or at the time made or furnished. (e) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (g) Any guarantor dies or any of the other events described in this default section occurs with respect to any guarantor of this Agreement. (h) A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. If any default, other than a default in payment, is curable and if Borrower has not been given a notice of a breach of the same provision of this Agreement within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Borrower, after receiving written notice from Lender demanding cure of such default: (a) cures the default within fifteen (15) days; or (b) if the cure requires more than fifteen (15) days immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Agreement and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Upon Borrower's failure to pay all amounts declared due pursuant to this section, including failure to pay upon final maturity, Lender, at its option, may also, if permitted under applicable law, increase the variable interest rate in this Agreement to 6.000 percentage points over the Index. Lender may hire or pay someone else to help collect this Agreement if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgement collection services. Borrower also will pay any court costs in addition to all other sums provided by law. This Agreement has been delivered to Lender and accepted by Lender in the State of California. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Orange County, the State of California. Lender and Borrower hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by either Lender or Borrower against the other. (Initial Here /s/ VCS) This Agreement shall be governed by and construed ------- in accordance with the laws of the State of California. DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $15.00 if Borrower makes a payment on Borrower's loan and the check or preauthorized charge with which Borrower pays is later dishonored. LINE OF CREDIT. This Agreement evidences a revolving line of credit. Advances under this Agreement may be requested orally by Borrower or by an authorized person. All oral requests shall be confirmed in writing on the day of the request. All communications, instructions, or directions by telephone or otherwise to Lender are to be directed to Lender's office shown above. The following party or parties are authorized to request advances under the line of credit until Lender receives from Borrower at Lender's address shown above written notice of revocation of their authority. JAMES R. QUANDT, PRESIDENT; VICTOR C. STREUFERT, CHIEF FINANCIAL OFFICER; and JERRY DECICCIO, CONTROLLER. Borrower agrees to be liable for all sums either: (a) advanced in accordance with the instructions of an authorized person or (b) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Agreement at any time may be evidenced by endorsements on this Agreement or by Lender's internal records, including daily computer print-outs. Lender will have no obligation to advance funds under this Agreement if: (a) Borrower or any guarantor is in default under the terms of this Agreement or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Agreement, (b) Borrower or any guarantor ceases doing business or is insolvent, (c) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor's guarantee of this Agreement or any other loan with Lender; or (d) Borrower has applied funds provided pursuant to this Agreement for purposes other than those authorized by Lender. 06-26-1997 CHANGE IN TERMS AGREEMENT Page 2 Loan No 973000139 (Continued) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of the original obligation or obligations, including all agreements evidenced or securing the obligation(s), remain unchanged and in full force and effect. Consent by Lender to this Agreement does not waive Lender's right to strict performance of the obligation(s) as changed, nor obligate Lender to make any future change in terms. Nothing in this Agreement will constitute a satisfaction of the obligation(s). It is the intention of Lender to retain as liable parties all makers and endorsers of the original obligations including accommodation parties, unless a party is expressly released by Lender in writing. Any maker or endorser, including accommodation makers will not be released by virtue of this Agreement. If any person who signed the original obligation does not sign this Agreement below, then all persons signing below acknowledge that this Agreement is given conditionally, based on the representation to Lender that the non-signing party consents to the changes and provisions of this Agreement or otherwise will not be released by it. The waiver applies not only to any initial extension, modification or release, but also to all such subsequent actions. INTEREST RATE PROVISION THE INTEREST RATE WILL BE ADJUSTED ACCORDING TO THE DEBT/TNW RATIO: > 3.0 = WALL STREET JOURNAL PRIME PLUS 1.50% 2.5 - 3.0 = WALL STREET JOURNAL PRIME PLUS 1.25% 2.0 - 2.5 = WALL STREET JOURNAL PRIME PLUS 1.00% < 2.0 = WALL STREET JOURNAL PRIME PLUS .75% (/s/ VCF INITIAL HERE). --------- NON-USE FEE PROVISION. BORROWER AGREES TO A NON-USE FEE OF .2% PAID QUARTERLY. (/s/ VCF INITIAL HERE). --------- MISCELLANEOUS PROVISIONS. This Agreement is payable on demand. The inclusion of specific default provisions or rights of Lender shall not preclude Lender's right to declare payment of this Agreement on its demand. Lender may delay or forgo enforcing any of its rights or remedies under this Agreement without losing them. Borrower and any other person who signs, guarantees or endorses this Agreement, to the extent allowed by law, waive any applicable statute of limitations, presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Agreement, and unless otherwise expressly stated in writing, no party who signs this Agreement, whether as maker, guarantor, accomodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time, this loan, or release any party or guarantor or collateral; or impair, fail to realize, upon or perfect Lender's security interest in the collateral, and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS AGREEMENT, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE AGREEMENT AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE AGREEMENT. BORROWER: NATIONAL TELEPHONE & COMMUNICATIONS, INC. By: /s/Victor C. Streufert ---------------------------------------------------- VICTOR C. STREUFERT, CHIEF FINANCIAL OFFICER [logo] COMMERCIAL SECURITY AGREEMENT
- ------------------------------------------------------------------------------------------- Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials 10,000,000.00 06-30-1998 973000139 110 - -------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or term. - ------------------------------------------------------------------------------- BORROWER: NATIONAL TELEPHONE & COMMUNICATIONS, INC. LENDER: FIRST BANK & TRUST 2801 MAIN STREET IRVINE REGIONAL OFFICE-400 IRVINE, CA 92614 2400 MICHELSON DRIVE IRVINE, CA 92612 - ------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------
THIS COMMERCIAL SECURITY AGREEMENT IS ENTERED INTO BETWEEN NATIONAL TELEPHONE & COMMUNICATIONS, INC. (REFERRED TO BELOW AS "GRANTOR"); AND FIRST BANK & TRUST (REFERRED TO BELOW AS "LENDER"). FOR VALUABLE CONSIDERATION, GRANTOR GRANTS TO LENDER A SECURITY INTEREST IN THE COLLATERAL TO SECURE THE INDEBTEDNESS AND AGREES THAT LENDER SHALL HAVE THE RIGHTS STATED IN THIS AGREEMENT WITH RESPECT TO THE COLLATERAL, IN ADDITION TO ALL OTHER RIGHTS WHICH LENDER MAY HAVE BY LAW. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar anounts shall mean amounts in lawful money of the United States of America. Agreement. The word "Agreement" means this Commercial Security Agreement as this Commercial Security Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Commercial Security Agreement from time to time. COLLATERAL. The word "Collateral" means the following described property of Grantor, whether now owned or hereafter acquired whether existing or hereafter arising, and wherever located: ALL INVENTORY, CHATTEL PAPER, ACCOUNTS, EQUIPMENT AND GENERAL INTANGIBLES, TOGETHER WITH THE FOLLOWING SPECIFICALLY DESCRIBED PROPERTY: EXCLUDING AND EXCEPTING LEASEHOLD IMPROVEMENTS AND CUSTOMER LISTS. In addition, the word "Collateral" includes all the following, whether now owned or hereafter acquired, whether now existing or hereafter arising and wherever located: (a) All attachments, accessions, accessories, tools, parts, supplies, increases, and additions to and all replacements of and substitutions for any property described above. (b) All products and produce of any of the property descibed in this Collateral section. (c) All accounts, general intangibles, instruments, rents, monies, payments, and all other rights, arising out of a sale, lease, or other disposition of any of the property described in this Collateral section. (d) All proceeds (including insurance proceeds) from the sale, destruction, loss, or other disposition of any of the property described in the Collateral section. (e) All records and data relating to any of the property described in this Collateral section, whether in the form of a writing, photograph, microfilm, microfiche, or electronic media, together with all of Grantor's right, title, and interest in and to all computer software required to utilize, create, maintain, and process any such records or data on electronic media. EVENT OF DEFAULT. The words "Event of Default" mean and include without limitation any of the Events of Default set forth below in the section titled "Events of Default." GRANTOR. The word "Grantor" means NATIONAL TELEPHONE & COMMUNICATIONS, INC., its successors and assigns. GUARANTOR. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties and accomodation parties connection with the indebtedness. INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced by the Note, including all principal and interest, together with all other indebtedness and costs and expenses for which Grantor is responsible under this Agreement or under any of the Related Documents. In addition, the word "Indebtedness" includes all other obligations, debts and liabilities, plus interest thereon, of Grantor, or any one or more of them, to Lender, as well as all claims by Lender against Grantor, or any one or more of them, whether existing now or later; whether they are voluntary or involuntary, due or not due, direct or indirect, absolute or contingent, liquidated or unliquidated; whether Grantor may be liable individually or jointly with others; whether Grantor may be obligated as guarantor, surety, accomodation party or otherwise; whether recovery upon such indebtedness may be or hereafter may become banned to any statute of limitations and whether such indebtedness may be and hereafter may become otherwise unenforceable. (Initial Here /s/ VCS ) --------- LENDER. The word "Lender" means FIRST BANK & TRUST, its successors and assigns. NOTE. The word "Note" means the Change in Terms Agreement between Borrower and Lender dated June 26, 1997, which modifies the following described existing indebtedness: PROMISSORY NOTE DATED MARCH 27, 1997 IN THE AMOUNT OF $5,000,000.00. RELATED DOCUMENTS. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the indebtedness. OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows: PERFECTION OF SECURITY INTEREST. Grantor agrees to execute such financing statements and to take whatever other actions are requested by Lender to perfect and continue Lender's security interest in the Collateral. Upon request of Lender, Grantor will deliver to Lender any and all of the documents evidencing or constituing the Collateral, and Grantor will note Lender's interest upon any and all chattel paper if not delivered to Lender for possession by Lender. Grantor hereby appoints Lender as its irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue the security interest granted in this Agreement. Lender may at any time, and without further authorization from Grantor, file a carbon, photographic, or other reproduction of any financing statement or of this Agreement for use as a financing statement. Grantor will reimburse Lender for all expenses for the perfection and the contiuation of the perfection of Lender's security interest in the Collateral. Grantor promptly will notify Lender before any change in Grantor's name including any change to the assumed business names of Grantor. This is a continuing Security Agreement and will continue in effect even though all or any part of the indebtedness is paid in full and even though for a period of time Grantor may not be indebted to Lender. NO VIOLATION. The execution and delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantor is a party, and its certificate or articles of incorporation and bylaws do not prohibit any term or condition of this Agreement. ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of accounts, chattel paper, or general intangibles, the Collateral is enforceable in accordance with its terms, is genuine, and complies with applicable laws concerning form, content and manner of preparation and execution and all persons appearing to be obligated on the Collateral have authority and capacity to contract and are in fact obligated as they appear to be on the Collateral. LOCATION OF THE COLLATERAL. Grantor, upon request of Lender, will deliver to Lender in form satisfactory to Lender a schedule of real properties and Collateral locations relating to Grantor's operations, including without limitation to the following: (a) all real property owned or being purchased by Grantor; (b) all real property being rented or leased by Grantor; (c) all storage facilities owned, rented, leased, or being used by Grantor, and (d) all other properties where Collateral is or may be located. Except in the ordinary course of its business Grantor shall not remove the Collateral from its existing locations without the prior written consent of Lender. REMOVAL OF COLLATERAL. Grantor shall keep the Collateral (or to the extent the Collateral consists of intangible property such as accounts, the records concerning the Collateral) at Grantor's address shown above, or at such other locations as are acceptable to the Lender. Except in the ordinary course of its business, including the sales of inventory, Grantor shall not remove the Collateral from its existing locations without the prior written consent of the Lender. To the extent that the Collateral consists of vehicles, or other titled property, Grantor shall not take or permit any action which would require application for certificates of title for the vehicles outside the State of California, without the prior written consent of Lender. TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or accounts collected in the ordinary course of Grantor's business, Grantor shall 06-26-1997 COMMERCIAL SECURITY AGREEMENT Page 2 LOAN NO 973000139 (CONTINUED) - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- not sell, offer to sell, or otherwise transfer or dispose of the Collateral. While Grantor is not in default under this Agreement, Grantor may sell inventory, but only in the ordinary course of its business and only to buyers who qualify as a buyer in the ordinary course of business. A sale in the ordinary course of Grantor's business does not include a transfer in partial or total satisfaction of a debt or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise permit the Collateral to be subject to any lien, security interest, encumbrance, or charge, other than the security interest provided for in this Agreement, without the prior written consent of Lender. This includes security interests even if junior in right to the security interests granted under this Agreement. Unless waived by Lender, all proceeds from any disposition of the Collateral (for whatever reason) shall be held in trust for Lender and shall not be commingled with any other funds; provided however, this requirement shall not constitute consent by Lender to any sale or other disposition. Upon receipt, Grantor shall immediately deliver any such proceeds to Lender. TITLE. Grantor represents and warrants to Lender that it holds good and marketable title to the Collateral, free and clear of all liens and encumbrances except for the lien of this Agreement. No financing statement covering any of the Collateral is on file in any public office other than those which reflect the security interest created by this Agreement or to which Lender has specifically consented. Grantor shall defend Lender's rights in the Collateral against the claims and demands of all other persons. COLLATERAL SCHEDULES AND LOCATIONS. Insofar as the Collateral consists of inventory, Grantor shall deliver to Lender, as often as Lender shall require, such lists, descriptions, and designations of such Collateral as Lender may require to identify the nature, extent, and location of such Collateral. Such information shall be submitted for Grantor and each of its subsidiaries or related companies. MAINTENANCE AND INSPECTION OF COLLATERAL. Grantor shall maintain all tangible Collateral in good condition and repair. Grantor will not commit or permit damage to or destruction of the Collateral or any part of the Collateral. Lender and its designated representatives and agents shall have the right at all reasonable times to examine, inspect, and audit the Collateral wherever located. Grantor shall immediately notify Lender of all cases involving the return, rejection, repossession, loss or damage of or to any Collateral; of any request for credit or adjustment or of any other dispute arising with respect to the Collateral; and generally of all happenings and events affecting the Collateral or the value or the amount of the Collateral. TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes, assessments and liens upon the Collateral, its use or operation, upon this Agreement, upon any promissory note or notes evidencing the Indebtedness, or upon any of the other Related Documents. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized in Lender's sole opinion. If the Collateral is subjected to a lien which is not discharged within fifteen (15) days, Grantor shall deposit with Lender cash, a sufficient corporate surety bond or other security satisfactory to Lender in an amount adequate to provide for the discharge of the lien plus any interest, costs, attorneys' fees or other charges that could accrue as a result of foreclosure or sale of the Collateral. In any contest Grantor shall defend itself and Lender and shall satisfy any final adverse judgment before enforcement against the Collateral. Grantor shall name Lender as an additional obligee under any surety bond furnished in the contest proceedings. COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply promptly, with all laws, ordinances, rules and regulations of all governmental authorities, now or hereafter in effect, applicable to the ownership, production, disposition, or use of the Collateral. Grantor may contest in good faith any such law, ordinance or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Lender's interest in the Collateral, in Lender's opinion, is not jeopardized. HAZARDOUS SUBSTANCES. Grantor represents and warrants that the Collateral never has been, and never will be so long as this Agreement remains a lien on the Collateral, used for the generation, manufacture, storage, transportation, treatment, disposal, release or threatened release of any hazardous waste or substance, as those terms are defined in the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986 Pub. L. No. 99-499 ("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety Code, Section 25100, et seq. or other applicable state or Federal laws, rules, or regulations adopted pursuant to any of the foregoing. The terms "hazardous waste" and "hazardous substance" shall also include, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos. The representations and warranties contained herein are based on Grantor's due diligence in investigating the Collateral for hazardous wastes and substances. Grantor hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Grantor becomes liable for cleanup or other costs under any such laws, and (b) agrees to indemnify and hold harmless Lender against any and all claims and losses resulting from a breach of this provision of this Agreement. This obligation to indemnify shall survive the payment of the Indebtedness and the satisfaction of this Agreement. MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain all risks, insurance, including without limitation fire, theft and liability coverage together with such other insurance as Lender may require with respect to the Collateral, in form, amounts, coverages and basis reasonably acceptable to Lender and issued by a company or companies reasonably acceptable to Lender. Grantor, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days' prior written notice to Lender and not including any disclaimer of the insurer's liability for failure to give such a notice. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Grantor or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest, Grantor will provide Lender with such loss payable or other endorsements as Lender may require. If Grantor at any time fails to obtain or maintain any insurance as required under this Agreement, Lender may (but shall not be obligated to) obtain such insurance as Lender deems appropriate, including if it so chooses "single interest insurance," which will cover only Lender's interest in the Collateral. APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender of any loss or damage to the Collateral. Lender may make proof of loss if Grantor fails to do so within fifteen (15) days of the casualty. All proceeds of any insurance on the Collateral, including accrued proceeds thereon, shall be held by Lender as part of the Collateral. If Lender consents to repair or replacement of the damaged or destroyed Collateral, Lender shall, upon satisfactory proof of expenditure, pay or reimburse Grantor from the proceeds for the reasonable cost of repair or restoration. If Lender does not consent to repair or replacement of the Collateral, Lender shall retain a sufficient amount of the proceeds to pay all of the Indebtedness, and shall pay the balance to Grantor. Any proceeds which have not been disbursed within six (6) months after their receipt and which Grantor has not committed to the repair or restoration of the Collateral shall be used to prepay the Indebtedness. INSURANCE RESERVES. Lender may require Grantor to maintain with Lender reserves for payment of insurance premiums, which reserves shall be created by monthly payments from Grantor of a sum estimated by Lender to be sufficient to produce, at least fifteen (15) days before the premium due date, amounts at least equal to the insurance premiums to be paid. If fifteen (15) days before payment is due, the reserve funds are insufficient, Grantor shall upon demand pay any deficiency to Lender. The reserve funds shall be held by Lender as a general deposit and shall constitute a non-interest-bearing account which Lender may satisfy by payment of the insurance premiums required to be paid by Grantor as they become due. Lender does not hold the reserve funds in trust for Grantor, and Lender is not the agent of Grantor for payment of the insurance premiums required to be paid by Grantor. The responsibility for the payment of premiums shall remain Grantor's sole responsibility. INSURANCE REPORTS. Grantor, upon request of Lender, shall furnish to Lender reports on each existing policy of insurance showing such information as Lender may reasonably request including the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the property insured; (e) the then current value on the basis of which insurance has been obtained and the manner of determining that value; and (f) the expiration date of the policy. In addition, Grantor shall upon request by Lender (however not more often than annually) have an independent appraiser satisfactory to Lender determine, as applicable, the cash value or replacement cost of the Collateral. GRANTOR'S RIGHT TO POSSESSION. Until default, Grantor may have possession of the tangible personal property and beneficial use of all the Collateral and may use it in any lawful manner not inconsistent with this Agreement or the Related Documents, provided that Grantor's right to possession and beneficial use shall not apply to any Collateral where possession of the Collateral by Lender is required by law to perfect Lender's security interest in such Collateral. If Lender at any time has possession of any Collateral, whether before or after an Event of Default, Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if Lender takes such action for that purpose as Grantor shall request or as Lender, in Lender's sole discretion, shall deem appropriate under the circumstances, but failure to honor any request by Grantor shall not of itself be deemed to be a failure to exercise reasonable care. Lender shall not be required to take any steps necessary to preserve any rights in the Collateral against prior parties, nor to protect, preserve or maintain any security interest given to secure the Indebtedness. EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but shall not be obligated to) discharge or pay any amounts required to be discharged or paid by Grantor under this Agreement, including without limitation all taxes, liens, security interests, encumbrances, and other claims, at any time levied or placed on the Collateral. Lender also may (but shall not be obligated to) pay all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Grantor. All such expenses shall become a part of the Indebtedness and, at Lender's option, will (a) be payable on demand, (b) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (i) the term of any applicable insurance policy or (ii) the remaining term of the Note, or (c) be treated as a balloon payment which will be due and payable at the Note's maturity. This Agreement also will secure payment of these amounts. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon the occurrence of an Event of Default. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: 6-26-1997 COMMERCIAL SECURITY AGREEMENT Page 3 Loan No 973000139 (Continued) - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- OTHER DEFAULTS. Failure of Grantor to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or in any other agreement between Lender and Grantor. DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents. FALSE STATEMENTS. Any warranty, representation or statement made or furnished to Lender by or on behalf of Grantor under this Agreement, the Note or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished. DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral documents to create a valid and perfected security interest or lien) at any time and for any reason. INSOLVENCY. The dissolution or termination of Grantor's existence as a going business, the insolvency of Grantor, the appointment of a receiver for any part of Grantor's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws against Grantor. CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method by any creditor of Grantor or by any governmental agency against the Collateral or any other collateral securing the indebtedness. This includes a garnishment of any of Grantor's deposit accounts with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Grantor as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Grantor gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or such Guarantor dies or becomes incompetent. Lender, at its option, may, but shall not be required to, permit the Guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure the Event of Default. ADVERSE CHANGE. A material adverse change occurs in Grantor's financial condition, or Lender believes the prospect of payment or performance of the indebtedness is impaired. RIGHT TO CURE. If any default, other than a Default on Indebtedness, is curable and if Grantor has not been given a prior notice of a breach of the same provision of this Agreement, it may be cured (and no Event of Default will have occurred) if Grantor, after Lender sends written notice demanding cure of such default, (a) cures the default within fifteen (15) days; or (b), if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this Agreement, at any time thereafter, Lender shall have all the rights of a secured party under the California Uniform Commercial Code. In addition and without limitation, Lender may exercise any one or more of the following rights and remedies: ACCELERATE INDEBTEDNESS. Lender may declare the entire Indebtedness, including any prepayment penalty which Grantor would be required to pay, immediately due and payable, without notice. ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender all or any portion of the Collateral and any and all certificates of title and other documents relating to the Collateral. Lender may require Grantor to assemble the Collateral and make it available to Lender at a place to be designated by Lender. Lender also shall have full power to enter upon the property of Grantor to take possession of and remove the Collateral. If the Collateral contains other goods not covered by this Agreement at the time of repossession, Grantor agrees Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Grantor after repossession. SELL THE COLLATERAL. Lender shall have full power to sell, lease, transfer, or otherwise deal with the Collateral or proceeds thereof in its own name or that of Grantor. Lender may sell the Collateral at public auction or private sale. Unless the Collateral threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender will give Grantor reasonable notice of the time after which any private sale or any other intended disposition of the Collateral is to be made. The requirements of reasonable notice shall be met if such notice is given at least ten (10) days, or such lesser time as required by state law, before the time of the sale or disposition. All expenses relating to the disposition of the Collateral, including without limitation the expenses of retaking, holding, insuring, preparing for sale and selling the Collateral, shall become a part of the indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. APPOINT RECEIVER. To the extent permitted by applicable law, Lender shall have the following rights and remedies regarding the appointment of a receiver: (a) Lender may have a receiver appointed as a matter of right, (b) the receiver may be an employee of Lender and may serve without bond, and (c) all fees of receiver and his or her attorney shall become part of the Indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. COLLECT REVENUES, APPLY ACCOUNTS. Lender, either through itself or through a receiver, may collect the payments, rents, income, and revenues from the Collateral. Lender may at any time in its discretion transfer any Collateral into its own name or that of its nominee and receive the payments, rents, income, and revenues therefrom and hold the same as security for the Indebtedness or apply it to payment of the Indebtedness in such order of preference as the Lender may determine. Insofar as the Collateral consists of accounts, general intangibles, insurance policies, instruments, chattel paper, choses in action, or similar property, Lender may demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on the Collateral as Lender may determine, whether or not Indebtedness or Collateral is then due. For these purposes, Lender may, on behalf of and in the name of Grantor, receive, open and dispose of mail addressed to Grantor, change any address to which mail and payments are to be sent, and endorse notes, checks, drafts, money orders, documents of title, instruments and items pertaining to payment, shipment or storage of any Collateral. To facilitate collection, Lender may notify account debtors and obligors on any Collateral to make payments directly to Lender. OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the Collateral, Lender may obtain a judgment against Grantor for any deficiency remaining on the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this Agreement. Grantor shall be liable for a deficiency even if the transaction described in this subsection is a sale of accounts or chattel paper. OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and remedies of a secured creditor under the provisions of the Uniform Commercial Code, as may be amended from time to time. In addition, Lender shall have and may exercise any or all other rights and remedies it may have available at law, in equity, or otherwise. CUMULATIVE REMEDIES. All of Lender's rights and remedies, whether evidenced by this Agreement or the Related Documents or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and to exercise its remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: AMENDMENTS. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by Lender in the State of California. If there is a lawsuit, Grantor agrees upon Lender's request to submit to the jurisdiction of the courts of Orange County, the State of California. Lender and Grantor hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by either Lender or Grantor against the other. (Initial Here /s/VCS) This Agreement shall be governed by and construed in accordance with the laws of the State of California. ATTORNEYS' FEES; EXPENSES. Grantor agrees to pay upon demand all of Lender's costs and expenses, including attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may pay someone else to help enforce this Agreement, and Grantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (and including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Grantor also shall pay all court costs and such additional fees as may be directed by the court. CAPTION HEADINGS. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Grantor under this Agreement shall be joint and several, and all references to Grantor shall mean each and every Grantor. This means that each of the persons signing below is responsible for all obligations in this Agreement. NOTICES. All notices required to be given under this Agreement shall be given in writing may be sent by telefacsimile and shall be effective when 6-26-1997 COMMERCIAL SECURITY AGREEMENT Page 4 Loan No 973000139 (Continued) - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Grantor, notice to any Grantor will constitute notice to all Grantors. For notice purposes, Grantor will keep Lender informed at all times of Grantor's current address(es.) POWER OF ATTORNEY. Grantor hereby appoints Lender as its true and lawful attorney-in-fact irrevocably, with full power of substitution to do the following: (a) to demand, collect, receive, receipt for, sue and recover all sums of money or other property which may now or hereafter become due, owing or payable from the Collateral; (b) to execute, sign and endorse any and all claims, instruments, receipts, checks, drafts or warrants issued in payment for the Collateral; (c) to settle or compromise any and all claims arising under the Collateral and, in the place and stead of Grantor, to execute and deliver its release and settlement for the claim, and (d) to file any claim or claims or to take any action or institute or take part in any proceedings, either in its own name or in the name of Grantor, or otherwise, which in the discretion of Lender may seem to be necessary or advisable. This power is given as security for the indebtedness and the authority hereby conferred is and shall be irrevocable and shall remain in full force and effect until renounced by Lender. PREFERENCE PAYMENTS. Any monies Lender pays because of an asserted preference claim in Borrower's bankruptcy will become a part of the indebtedness and at Lender's option, shall be payable by Borrower as provided above in the "EXPENDITURES BY LENDER" paragraph. SEVERABILITY. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. SUCCESSOR INTERESTS. Subject to the limitations set forth above on transfer of the Collateral, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns. WAIVER. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Grantor shall constitute a waiver of any of Lender's rights or of any of Grantor's obligations as to any future transactions. Wherever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. WAIVER OF CO-OBLIGOR'S RIGHTS. If more than one person is obligated for the indebtedness, Borrower irrevocably waives, disclaims and relinquishes all claims against such other person which Borrower has or would otherwise have by virtue of payment of the indebtedness or any part thereof, specifically including but not limited to all rights of indemnity, contribution or exoneration. GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED JUNE 26, 1997. GRANTOR: NATIONAL TELEPHONE & COMMUNICATIONS, INC. By: /s/ Victor C. Streufert --------------------------------------------------- VICTOR C. STREUFERT, CHIEF FINANCIAL OFFICER AGREEMENT TO PROVIDE INSURANCE
- -------------------------------------------------------------------------------------------- PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS $10,000,000.00 06-30-1998 973000139 110 - -------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - --------------------------------------------------------------------------------------------
BORROWER: NATIONAL TELEPHONE & LENDER: FIRST BANK & TRUST COMMUNICATIONS, INC. Irvine Regional Office - 400 2801 MAIN STREET 2400 Michelson Drive IRVINE, CA 92614 Irvine, CA 92612 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- INSURANCE REQUIREMENTS. NATIONAL TELEPHONE & COMMUNICATIONS, INC. ("Grantor") understands that insurance coverage is required in connection with the extending of a loan or the providing of other financial accommodations to Grantor by Lender. These requirements are set forth in the security documents. The following minimum insurance coverages must be provided on the following described collateral (the "Collateral"): COLLATERAL: ALL INVENTORY, CHATTEL PAPER, ACCOUNTS, EQUIPMENT AND GENERAL INTANGIBLES, TOGETHER WITH THE FOLLOWING SPECIFICALLY DESCRIBED PROPERTY: EXCLUDING AND EXCEPTING LEASEHOLD IMPROVEMENTS AND CUSTOMER LISTS. TYPE. All risks, including fire, theft and liability. AMOUNT. Full insurable value. BASIS. Replacement value. ENDORSEMENTS. Lender's loss payable clause with stipulation that coverage will not be cancelled or diminished without a minimum of ten (10) days' prior written notice to Lender. INSURANCE COMPANY. Grantor may obtain insurance from any insurance company Grantor may choose that is reasonably acceptable to Lender. Grantor understands that credit may not be denied solely because insurance was not purchased through Lender. INSURANCE MAILING ADDRESS. All documents and other materials relating to insurance for this loan should be mailed, delivered or directed to the following address: FIRST BANK & TRUST - LOAN SERVICING DEPARTMENT 2400 MICHELSON DRIVE IRVINE, CA 92612 (714) 260-0353 FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Lender, ten (10) days from the date of this Agreement, evidence of the required insurance as provided above, with an effective date of June 26, 1997, or earlier. Grantor acknowledges and agrees that if Grantor fails to provide any required insurance or fails to continue such insurance in force, Lender may do so at Grantor's expense as provided in the applicable security document. The cost of any such insurance, at the option of the Lender, shall be payable on demand or shall be added to the indebtedness as provided in the security document. GRANTOR ACKNOWLEDGES THAT IF THE LENDER SO PURCHASES ANY SUCH INSURANCE, THE INSURANCE WILL PROVIDE LIMITED PROTECTION AGAINST PHYSICAL DAMAGE TO THE COLLATERAL, UP TO THE BALANCE OF THE LOAN; HOWEVER, GRANTOR'S EQUITY IN THE COLLATERAL MAY NOT BE INSURED. IN ADDITION, THE INSURANCE MAY NOT PROVIDE ANY PUBLIC LIABILITY OR PROPERTY DAMAGE INDEMNIFICATION AND MAY NOT MEET THE REQUIREMENTS OF ANY FINANCIAL RESPONSIBILITY LAWS. AUTHORIZATION. For purposes of insurance coverage on the Collateral, Grantor authorizes Lender to provide to any person (including any insurance agent or company) all information Lender deems appropriate, whether regarding the Collateral, the loan or other financial accommodations, or both. GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT TO PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED JUNE 26, 1997. GRANTOR: NATIONAL TELEPHONE & COMMUNICATIONS, INC. By: /s/ Victor C. Streufert - ------------------------------------------- VICTOR C. STREUFERT, CHIEF FINANCIAL OFFICER - ------------------------------------------------------------------------------- FOR LENDER USE ONLY INSURANCE VERIFICATION DATE: PHONE: ------------------ ------------- AGENT'S NAME: ---------------------------------------- INSURANCE COMPANY: ------------------------------------------------------------- POLICY NUMBER: ----------------------------------------------------------------- EFFECTIVE DATES: --------------------------------------------------------------- COMMENTS: ---------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- [LOGO] DISBURSEMENT REQUEST AND AUTHORIZATION
- -------------------------------------------------------------------------------------------- PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS $10,000,000.00 06-30-1998 973000139 110 - -------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - --------------------------------------------------------------------------------------------
BORROWER: NATIONAL TELEPHONE & LENDER: FIRST BANK & TRUST COMMUNICATIONS, INC. IRVINE REGIONAL OFFICE - 400 2801 MAIN STREET 2400 MICHELSON DRIVE IRVINE, CA 92614 IRVINE, CA 92612 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- LOAN TYPE. This is a Variable Rate (1.000% over Prime rate as published in the Wall Street Journal. When a range of rates has been published, the higher of the rates will be used, making an initial rate of 9.500%), Revolving Line of Credit Loan to a Corporation for $10,000,000.00 due on June 30, 1998. PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for (please initial): / / PERSONAL, FAMILY, OR HOUSEHOLD PURPOSES OR PERSONAL INVESTMENT. -------- /X/ /s/ VCS BUSINESS (INCLUDING REAL ESTATE INVESTMENT). -------- SPECIFIC PURPOSE. The specific purpose of this loan is: INCREASE AND EXTENSION OF REVOLVING LINE OF CREDIT. DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be disbursed until all of Lender's conditions for making the loan have been satisfied. Please disburse the loan proceeds of $10,000,000.00 as follows: UNDISBURSED FUNDS: $6,000,000.00 AMOUNT PAID ON BORROWER'S ACCOUNT: $4,000,000.00 $4,000,000.00 Payment on Loan # 400973000139 (MODIFY) AMOUNT PAID TO OTHERS ON BORROWER'S BEHALF: $0.00 ---------------- NOTE PRINCIPAL: $10,000,000.00 CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the following charges: PREPAID FINANCE CHARGES PAID IN CASH: $12,500.00 $12,500.00 LOAN FEE ---------------- TOTAL CHARGES PAID IN CASH: $12,500.00 FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND WARRANTS TO LENDER THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND THAT THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IN THE BORROWER'S FINANCIAL CONDITION AS DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO LENDER. THIS AUTHORIZATION IS DATED JUNE 26, 1997. BORROWER: NATIONAL TELEPHONE & COMMUNICATIONS, INC. By: /s/ Victor C. Streufert - ------------------------------------------- VICTOR C. STREUFERT, CHIEF FINANCIAL OFFICER - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NOTICE OF FINAL AGREEMENT - ------------------------------------------------------------------------------------------------------- Principal Loan Date Maturity Loan No Call Collateral Account Officer Initial $10,000,000.00 06-30-1998 973000139 110 - -------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item - -------------------------------------------------------------------------------- Borrower: NATIONAL TELEPHONE Lender: FIRST BANK AND TRUST & COMMUNICATIONS, INC. Irvine Regional Office - 400 2801 MAIN STREET 2400 Michelson Drive IRVINE, CA 92614 Irvine, CA 92612 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- -------------------------------------------------------------------------- BY SIGNING THIS DOCUMENT EACH PARTY REPRESENTS AND AGREES THAT: (A) THE WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES, (B) THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES, AND (C) THE WRITTEN LOAN AGREEMENT MAY NOT BE CONTRADICTED BY EVIDENCE OF ANY PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OR UNDERSTANDINGS OF THE PARTIES. -------------------------------------------------------------------------- As used in this Notice, the following terms have the following meanings: Loan. The term "Loan" means the following described loan: a Variable Rate (1.000% over Prime rate as published in the Wall Street Journal. When a range of rates has been published, the higher of the rates will be used, making an initial rate of 9.500%). Nondisclosable Revolving Line of Credit Loan to a Corporation for $10,000,000.00 due on June 30, 1998. Parties. The term "Parties" means FIRST BANK & TRUST and any and all entities or individuals who are obligated to repay the loan or have pledged property as security for the Loan, including without limitation the following: Borrower: NATIONAL TELEPHONE & COMMUNICATIONS, INC. Loan Agreement. The term "Loan Agreement" means one or more promises, promissory notes, agreements, undertakings, security agreements, deeds of trust or other documents, or commitments, or any combination of those actions or documents, relating to the Loan, including without limitation the following: NECESSARY FORMS Loan Agreement/Negative Pledge Promissory Note/Change in Terms Agr. Security Agreement UCC - 1 Agreement to Provide Insurance Disbursement Request and Authorization Notice of Final Agreement OPTIONAL FORMS Collateral Schedule -------------------------------------------------------------------------- Each Party who signs below, other than FIRST BANK & TRUST, acknowledges, represents, and warrants to FIRST BANK & TRUST that it has received, read and understood this Notice of Final Agreement. This Notice is dated June 26, 1997. BORROWER: NATIONAL TELEPHONE & COMMUNICATIONS, INC. By: /s/ VICTOR C. STREUFERT --------------------------------------------- VICTOR C. STREUFERT, CHIEF FINANCIAL OFFICER LENDER: FIRST BANK & TRUST By: /s/ PAUL McGRAW ---------------------------------------------- Authorized Officer - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- MASTER ADDENDUM TO LOAN DOCUMENTS This MASTER ADDENDUM TO LOAN DOCUMENTS (this "ADDENDUM") dated as of June 26, 1997, is made between National Telephone & Communications, Inc. (the "BORROWER") and First Bank & Trust (the "LENDER"). R E C I T A L S WHEREAS, the Borrower and the Lender are parties to the Loan Agreement, dated as of June 26, 1997 (the "CREDIT AGREEMENT"), pursuant to which the Lender shall extend credit to the Borrower in an aggregate principal amount not exceeding $10,000,000 to finance the purchase of the Borrower's headquarters and for other commercial purposes; WHEREAS, the Borrower shall, contemporaneously with the execution of this Agreement, execute a Change in Terms Agreement (the "CHANGE IN TERMS AGREEMENT"), dated as of June 26, 1997, modifying the Promissory Note, dated as of March 27, 1997, (as modified by the Change in Terms Agreement, the "NOTE") in favor of the Lender in an aggregate principal amount of $10,000,000, and enter into a Commercial Security Agreement, dated as of June 26, 1997 (the "SECURITY AGREEMENT"), pursuant to which the Borrower shall grant to the Lender a security interest in certain property of the Borrower as security for the Borrower's obligations under the Credit Agreement and the Note, as modified by the Change in Terms Agreement; and WHEREAS, the Borrower and the Lender have agreed that the Credit Agreement, the Note, as modified by the Change in Terms Agreement, the Security Agreement and all Related Documents (as defined below) shall be modified and amended in the respects set forth below. NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and agreements set forth below and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: Section 1. DEFINITIONS. Capitalized terms used but not defined in this Addendum shall have the meanings assigned to such terms in the Credit Agreement. Section 2. AMENDMENTS TO THE CREDIT AGREEMENT. 2.01 AMENDMENTS TO "DEFINITIONS". (a) The "Definitions" section of the Credit Agreement is amended by adding the following new definitions in the correct alphabetical order: "INITIAL PUBLIC OFFERING. The words "Initial Public Offering" mean, the initial public offering by Incomnet, Inc. of certain of Borrower's equity as previously disclosed to Lender by Borrower and pursuant to that certain letter agreement dated January 28, 1997 between Borrower and Incomnet, Inc." "TOTAL LIABILITIES. The words "Total Liabilities" mean, as at any date, all liabilities of Borrower as reflected on the Borrower's balance sheet for such date, excluding any and all deferred income and minority interests of Borrower." (b) The "Definitions" section of the Credit Agreement is amended by replacing subsection (e) of the definition of "Permitted Liens" with the following new subsection (e): "(e) liens and security interests of Borrower which are in existence as of the date of this Agreement;" 2.02 AMENDMENTS TO "CONDITIONS PRECEDENT TO EACH ADVANCE". The "Conditions Precedent to Each Advance" section of the Credit Agreement is amended by deleting subsections (b), (d) and (e) of such section. 2.03 AMENDMENTS TO "REPRESENTATIONS AND WARRANTIES". The "Representations and Warranties" section of the Credit Agreement is amended as follows: (a) The "Hazardous Substances" representation is amended by deleting the third and fourth sentences in their entirety. (b) The "Taxes" representation is replaced with the following new representation: "TAXES. To the best of Borrower's knowledge, all tax returns and reports of Borrower that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except (a) those that Borrower believes in good faith are not yet due and payable or those presently being or to be contested by Borrower in good faith in the ordinary course of business and (b) for which adequate reserves have been provided." (c) The "Lien Priority" representation is amended by adding the words", other than Permitted Liens" after the words "Security Interests" in the second line of such representation. (d) The "Commercial Purposes" representation is replaced with the following new representation: "COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for the acquisition of certain real property and other business or commercial related purposes." 2.04 WAIVER OF "CONDITION PRECEDENT TO EACH ADVANCE". Lender hereby agrees that the provision of evidence of insurance as required by subsection (f) of this section may be provided within thirty days subsequent to the date of this Addendum. -2- 2.05 AMENDMENTS TO "AFFIRMATIVE COVENANTS". The "Affirmative Covenants" section of the Credit Agreement is amended as follows: (a) The "Taxes, Charges and Liens" covenant is amended by adding the following words at the beginning of subclause (a) "Borrower believes in good faith such amount is not yet due and payable or; (c) The "Compliance Certificate" covenant is replaced with the following new covenant: "COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender (a) within 45 days of the last day of each of the first three fiscal quarters of Borrower and (b) within 90 days of the last day of the fourth fiscal quarter of Borrower, with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate (or, if stated to be made solely as of an earlier date, were true and correct as of such date) and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement." 2.06 AMENDMENT TO "NEGATIVE COVENANTS". The "Negative Covenants" section of the Credit Agreement is amended as follows: (a) The "Continuity of Operations" section is amended as follows: (i) by deleting the words "change ownership" in subsection (b) of such section, (ii) by adding the words "after the occurrence of an Event of Default," before the words "pay any dividends" in subsection (c) of such section and (iii) by adding at the end of such section the words "other than in connection with the Initial Public Offering"; and (b) The "Loans, Acquisitions and Guaranties" section is amended by adding the words "Except as provided in the "Additional Provisions" section below," at the beginning of subsection (a) of such section. 2.07 AMENDMENT TO "EVENTS OF DEFAULT". The "Events of Default" section of the Credit Agreement is amended by deleting the "Change in Ownership" default. 2.08 AMENDMENT TO "MISCELLANEOUS PROVISIONS". The "Miscellaneous Provisions" section of the Credit Agreement is amended by adding the following new sentence to the end of the "Consent to Loan Participation" section: "Notwithstanding anything to the contrary contained in the foregoing or in this Agreement, Lender agrees to hold at least $10,000,000 of the Loans and remain the "lead bank" or "agent" with respect to the administration of the Loans and the Collateral." - 3 - Section 3. AMENDMENTS TO THE CHANGE IN TERMS AGREEMENT. 3.01 AMENDMENT TO "PAYMENT". The first sentence of the "Payment" section of the Change in Terms Agreement is amended to read as follows: "Borrower will pay this loan in one payment of all outstanding principal (plus all accrued interest not paid pursuant to the following sentence) on June 30, 1998." 3.02 AMENDMENT TO "MISCELLANEOUS PROVISIONS". The "Miscellaneous Provisions" section of the Change in Terms Agreement is amended by deleting the first two sentences of such section. Section 4. AMENDMENTS TO THE SECURITY AGREEMENT. 4.01 AMENDMENT TO "DEFINITIONS". The definition of "Collateral" contained in the "Definitions" section of the Security Agreement is amended by adding the following to the list of excluded property of Borrower: ", ANY ARCHITECTURAL DESIGN AND DEVELOPMENT COSTS AND ANY PRE-PAID COSTS REFLECTED AS AN ASSET ON THE FINANCIAL STATEMENTS OF BORROWER AND RELATED TO THE LEASEHOLD IMPROVEMENTS OR REAL PROPERTY TO BE PURCHASED BY BORROWER, ANY CUSTOMER LISTS AND ALL NOTES RECEIVABLE OF A CERTAIN JIM CARTER TO BORROWER. 4.02 AMENDMENT TO "TITLE". The "Title" section of the Security Agreement is amended (i) by adding the words "and except for Permitted Liens" at the end of the first sentence of such section and (ii) by adding the words "and other than those relating to Permitted Liens" at the end of the second sentence to such section. 4.03 AMENDMENT TO "TAXES, ASSESSMENTS AND LIENS." The "Taxes, Assessments and Liens" section of the Security Agreement is amended by replacing the second sentence of such section with the following: "Grantor may withhold any such payment or may elect to contest any lien if Grantor in good faith believes that such amount is not yet due and payable or Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized in Lender's sole opinion." Section 5. REPRESENTATIONS AND WARRANTIES. Each party represents and warrants as follows: (a) this Addendum constitutes the legal, valid and binding obligation of such party enforceable against such party in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability; and (b) none of the execution and delivery by such party of this Addendum, the consummation of the transactions contemplated by this Addendum - 4 - does or will conflict with, violate any provision of, or require any consent under, the charter or by-laws of such party. Section 6. CONDITIONS TO EFFECTIVENESS. This Addendum shall be and become effective upon the execution and delivery by the parties of this Addendum, the Credit Agreement, the Change in Terms Agreement, the Security Agreement and each Related Document. Section 7. REFERENCE TO AND EFFECT ON THE AFFECTED DOCUMENTS. This Addendum shall be construed as one with the Credit Agreement, the Note, as modified by the Change in Terms Agreement, the Security Agreement and the Related Documents, and each such document shall, where the context requires, be read and construed throughout so as to incorporate this Addendum. Section 8. ENTIRE AGREEMENT. This Addendum, together with the Credit Agreement, the Note, as modified by the Change in Terms Agreement, the Security Agreement and each Related Document supersede all prior agreements and understandings, written or oral, among the parties with respect to the subject matter of this Addendum. No party shall have any duties or responsibilities except those expressly set forth in the Credit Agreement, the Note, as modified by the Change in Terms Agreement, the Security Agreement, and each Related Document (as from time to time amended, including by this Addendum). Section 9. SUCCESSORS AND ASSIGNS. This Addendum shall be binding upon and inure to the benefit of its parties and their respective successors and permitted assigns. Section 10. COUNTERPARTS. This Addendum may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties to this Addendum may execute this Addendum by signing any such counterpart. Section 11. GOVERNING LAW. THIS ADDENDUM HAS BEEN DELIVERED TO BY EACH PARTY HERETO AND ACCEPTED BY SUCH PARTY IN THE STATE OF CALIFORNIA. IF THERE IS A LAWSUIT, EACH PARTY AGREES TO SUBMIT TO THE JURISDICTION OF THE COURTS OF ORANGE COUNTY, THE STATE OF CALIFORNIA. LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST THE OTHER. THIS ADDENDUM SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. -5- IN WITNESS WHEREOF, the parties have caused this Addendum to be duly executed and delivered as of the day and year first above written. NATIONAL TELEPHONE & COMMUNICATIONS, INC. By: /s/ Victor C. Streufert ---------------------------- Name: Victor C. Streufert Title: VP FIRST BANK & TRUST By: /s/ Paul McGraw --------------------------- Name: Paul McGraw Title: VP EX-10.2 3 AGREEMENT AS TO BOARD MEMBERSHIP Exhibit 10-2 AGREEMENT AS TO BOARD MEMBERSHIP THIS AGREEMENT AS TO BOARD MEMBERSHIP (this "Agreement"), dated as of August 7, 1997, is entered into by and among Incomnet, Inc. (the "Company"), Stanley C. Weinstein ("Weinstein"), David Wilstein ("Wilstein") and Richard M. Horowitz ("Horowitz", and together with Weinstein, Wilstein and the Company, the "Parties"). RECITALS A. On May 5, 1997, Wilstein, Horowitz and Messrs. Leonard Wilstein and Jack Gilbert filed a Schedule 13D with the Securities Exchange Commission ("SEC") stating that they may be deemed to be a group pursuant to SEC Rule 13d-5(b)(1) promulgated under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934 (the "Act"). B. Weinstein, Wilstein, Horowitz have expressed a desire to serve the Company as members of the Board of Directors of the Company (the "Board"). C. The Company desires Weinstein, Wilstein and Horowitz to join the Board as directors. NOW, THEREFORE, in consideration of the mutual agreements, covenants, representations and warranties herein contained, the parties hereby agree as follows: 1. CERTAIN DEFINITIONS. "FFHSJ MEMORANDUM" shall mean that certain memorandum dated June 23, 1997 by David Robbins and Karen Seto of Fried, Frank, Harris, Shriver & Jacobson of Los Angeles, California, with regard to the ambiguity in the charter documents of the Company as to the appropriate number of directors to serve on the Company's Board. "GROUP" shall mean a group as referenced in SEC Rule 13d-5 promulgated pursuant to Sections 13(d) and 13(g) of the Act. 2. BOARD COMPOSITION. As of the date hereof, for so long as each of the individuals named herein shall agree to serve and until such time as any successor directors shall be duly elected in accordance with the Company's Bylaws, the Board of the Company shall consist of Mr. Albert Milstein, Ms. Nancy Zivitz, Mr. Howard Silverman, Mr. Melvyn Reznick, Mr. David Wilstein, Mr. Richard M. Horowitz and Mr. Stanley C. Weinstein. 3. LACK OF ASSURANCES The Parties acknowledge the issues raised by the FFHSJ Memorandum. The Parties agree that any issues raised by the FFHSJ Memorandum are merely of a technical nature and the Parties agree to clarify the Company's Articles of Incorporation at the next meeting of the Company's shareholders so as to resolve any existing uncertainty. Notwithstanding anything in this Paragraph 3 to the contrary, 1 the Parties acknowledge and agree that no Party has made any representation to any other Party with respect to the issues raised in the FFHSJ Memorandum as the same may relate to the service of any person on the Board, and that all persons serving on the Board do so at their own risk with respect to any liability in connection with the issues raised in the FFHSJ Memorandum. 4. INDEMNIFICATION. Notwithstanding anything in this Agreement to the contrary, the Company agrees to hold harmless and indemnify all of the persons named as directors in Paragraph 2 hereof, to the maximum extent permitted by the General Corporation Law of California, against any expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any causes of actions, suits or proceedings arising by reason of the fact any such person is or was a director of the Company. 5. D&O INSURANCE. The Company hereby agrees to use best efforts to raise its Directors and Officers Insurance from $1,000,000 to $5,000,000. 6. DISCLAIM GROUP MEMBERSHIP. Wilstein and Horowitz hereby agree that (i) they will not assert that any other director of the Company should be deemed to be a member of the Group referenced in the Schedule 13D filed on May 5, 1997 by Wilstein, Horowitz and the individuals referenced in Recital A hereof solely by virtue of the execution and performance of this Agreement by the parties hereto and (ii) the Company shall not be considered to have endorsed the Group referenced in the Schedule 13D solely by virtue of the execution and performance of this Agreement by the parties hereto. 7. DERIVATIVE SUITS. The parties agree that it shall be the policy of the Board that, in view of the current condition of the Company and the cost and expense of indemnifying officers and directors, the presumption will be that the Board will not support (after a review of all the then relevant facts and circumstances) any derivative action unless such action pleads with particularity facts that give rise to a strong inference that a director or directors acted in violation of his, her or their duty of loyalty or duty of care to the Company, which policy is not applicable to the extent that the exercise of a director's fiduciary duties under applicable law, in light of the then relevant facts and circumstances, requires a different standard for evaluating a specific matter then before the Board. 8. SHAREHOLDER MEETING; ARTICLES AMENDMENT The parties hereto agree (i) to use their best efforts to cause the next annual meeting of the shareholders of the Company to take place on September 22, 1997; (ii) to approve, and recommend that the shareholders of the Company approve, clarifying amendments to the Company's Articles of Incorporation and Bylaws, as recommended to the Board by the Company's counsel and reasonably approved by counsel to Wilstein and Horowitz, stating that the Board shall be comprised of seven (7) members; and (iii) that each director will either (A) support the election, at such meeting of shareholders, of a slate of directors nominated by majority vote of the Board (which slate shall include Wilstein, Horowitz and Weinstein to the extent each of Wilstein, Horowitz and Weinstein shall have not resigned from the Board pursuant to Clause (B) hereof); or (B) resign from the Board and subsequently nominate and support any slate of directors that such persons may choose, provided, however, that, in any case, no party shall be entitled (x) to take any action that would cause the annual meeting to take place subsequent to September 22, 1997 (other than an assertion in an appropriate forum that an party has violated the California General Corporation Law or the federal securities laws in connection with such meeting provided, however, that no assertion shall be made in any forum in opposition to the clarifying amendments described in clause (ii) above) or (y) to solicit proxies in opposition to clarifying amendments described in clause (ii) above. In 2 the event that a director should resign from the Board pursuant to this Section or should be unable or unwilling to continue to serve on the Board, the Board shall then be entitled to fill such vacancy and/or to nominate and support the election to the Board of such other person as the Board shall, in its discretion, determine is appropriate. 9. CHOICE OF LAW. The parties agree that this Agreement shall be governed by and construed in accordance with the laws of the State of California, excluding any laws which would direct application of another jurisdiction. 10. MISCELLANEOUS. (a) This Agreement may not be amended or modified except by written instrument signed by the Company, Weinstein, Horowitz and Wilstein. (b) This Agreement constitutes the entire agreement and understanding among the Parties and supersedes all other prior agreements and undertakings, both written and oral, among the Parties, or any of them, with respect to the subject matter hereof. (c) If any provision of this Agreement shall be held to be illegal, invalid or unenforceable under any applicable law, then such contravention or invalidity shall not invalidate the entire Agreement. Such provision shall be deemed to be modified to the extent necessary to render it legal, valid and enforceable, and if no such modification shall render it legal, valid and enforceable, then this Agreement shall be construed as if not containing the provision held to be invalid, and the rights and obligations of the Paries shall be construed and enforced accordingly. (d) This Agreement may not be assigned. (e) The Headings of the Sections of this Agreement have been inserted for convenience of reference only and do not constitute a part of this Agreement. (f) This Agreement may be executed in any number of counterparts and by the Parties in separate counterparts, with the same effect as if all Parties had signed the same document. All such counterparts shall be deemed an original, shall be construed together and shall constitute one and the same instrument. (g) When the context requires, the gender of all words used herein shall include the masculine, feminine and neuter and the number of all words shall include the singular and plural. 3 IN WITNESS WHEREOF, the Company, Weinstein, Wilstein and Horowitz have caused this Agreement to be executed as of the date first written above. INCOMNET, INC. /s/ MELVYN REZNICK - ------------------------- Melvyn Reznick President and Chief Executive Officer /s/ STANLEY C. WEINSTEIN - ------------------------- Stanley C. Weinstein /s/ DAVID WILSTEIN - ------------------------- David Wilstein /s/ RICHARD M. HOROWITZ - ------------------------- Richard M. Horowitz 4 EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 1,601 0 19,074 1,140 395 23,875 13,957 0 47,838 31,134 0 0 1,990 61,847 0 47,838 34,855 34,855 24,610 33,411 67 152 0 1,342 101 0 0 9 0 1,342 0 0.10
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