-----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, Ij/RD0zU5bh6QhizN7KkYPSxc2GnTqf8p/ub0YgBcMy37MUT6WgB3QuFfIkYIOfu WioyzHFWm/KFNF7cyuXSfw== 0000912057-96-023327.txt : 19961023 0000912057-96-023327.hdr.sgml : 19961022 ACCESSION NUMBER: 0000912057-96-023327 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19961021 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: S-3/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-03635 FILM NUMBER: 96645742 BUSINESS ADDRESS: STREET 1: 21031 VENTURA BLVD STREET 2: STE 1100 CITY: WOODLAND HILLS STATE: CA ZIP: 91364 BUSINESS PHONE: 8188873400 MAIL ADDRESS: STREET 1: 2801 NORTH MAIN ST CITY: IRVINE STATE: CA ZIP: 92714-5901 FORMER COMPANY: FORMER CONFORMED NAME: INTELLIGENT COMMUNICATIONS NETWORKS INC DATE OF NAME CHANGE: 19860805 S-3/A 1 S-3/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 18, 1996 REGISTRATION NO. 333-3635 -------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- PRE-EFFECTIVE AMENDMENT NO. 1 TO THE FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ----------------- INCOMNET, INC. ----------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) CALIFORNIA 7375 95-2871296 - ------------------- ---------------------------- --------------------- (State or Other (Primary Standard Industrial (IRS Employer Jurisdiction of Classification Code Number) Identification Number) Incorporation or Organization) 21031 VENTURA BOULEVARD, SUITE 1100 WOODLAND HILLS, CALIFORNIA 91364 (818) 887-3400 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) -------------------- MELVYN REZNICK, PRESIDENT INCOMNET, INC. 21031 VENTURA BOULEVARD, SUITE 1100 WOODLAND HILLS, CALIFORNIA 91364 (818) 887-3400 (NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: MARK J. RICHARDSON, ESQ. 1299 OCEAN AVENUE, SUITE 900 SANTA MONICA, CALIFORNIA 90401 (310) 393-9992 ----------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT IS DECLARED EFFECTIVE. IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE BEING OFFERED ON A DELAYED OR CONTINUOUS BASIS PURSUANT RULE 415 UNDER THE SECURITIES ACT OF 1933, CHECK THE FOLLOWING BOX: [X] ----------------------- CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS AMOUNT TO BE PROPOSED PROPOSED MAXIMUM AMOUNT OF OF SECURITIES REGISTERED(1) MAXIMUM OFFERING AGGREGATE OFFERING REGISTRATION FEE TO BE REGISTERED PRICE PER SHARE PRICE - ------------------------------------------------------------------------------------------------ Common Stock . . . . 214,000 $ 4.40 $ 941,600 $ 350.51 157,500 12.00 1,890,000 651.72 32,500 12.00 390,000 134.48 31,000 5.00 155,000 53.45 190,000 10.00 1,900,000 655.17 - ------------------------------------------------------------------------------------------------- Common Stock Underlying 75,000 4.50 337,500 116.38 Warrants to Purchase Common Stock(1). . . Common Stock Underlying Convertible Preferred Stock(1) . . . . . . 88,500 4.125 365,062 125.88 ------ ----- ------- ------ Total . . . . 788,500 - $ 6,054,062 $ 2,061.77* ------- ------ ----------- ---------- ------- ------ ----------- ----------
- -------------------------------- (1) Pursuant to Rule 416, there are also being registered such additional shares of Common Stock as may become issuable pursuant to the anti-dilution provisions of the Warrants or the Series A Convertible Preferred Stock. * This fee has already been paid. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. PROSPECTUS SUBJECT TO COMPLETION, DATED OCTOBER 18, 1996 INCOMNET, INC. 788,500 SHARES OF COMMON STOCK The shares covered by this Prospectus are comprised of (i) 75,000 shares of the Common Stock of Incomnet, Inc., a California corporation (the "Company") which may be purchased upon the exercise of 75,000 warrants (the "Warrants") held by a prior consultant to the Company (the "Warrantholder"), (ii) 451,000 shares of the Common Stock of the Company (the "Outstanding Shares") which were issued to several investors in prior private placements or conversions of privately placed convertible promissory notes, (iii) 88,500 shares of the Common Stock of the Company which may be issued upon the conversion of 365 shares of Series A 2% Convertible Preferred Stock, and (iv) 214,000 shares of the Company's Common Stock (the "Shares"), some or all of which may be issued in connection with settlement agreements with existing shareholders and, to the extent Shares remain after paying settlement amounts, may be issued upon the conversion of outstanding Series A 2% Convertible Preferred Stock ("Series A Preferred"), or offered and sold from time to time at the prevailing market price through a registered member of the National Association of Securities Dealers, Inc. (the "Underwriter"). The Underwriter for the offer and sale of the Shares is J. Alexander Securities, Inc. The shares of Common Stock issuable upon the exercise of the Warrants or the conversion of outstanding Series A Preferred are referred to herein as the "Underlying Shares." The holders of the Underlying Shares, when issued, and the Outstanding Shares are herein referred to as the "Shareholders." The Outstanding and Underlying Shares are being offered for resale by the Shareholders and not pursuant to an initial issuance of stock by the Company. The Warrants and Series A Preferred have not been separately registered and are not offered by this Prospectus. The Warrants, Outstanding Shares and Series A Preferred were issued in private placements pursuant to Section 4(2) of the Securities Act of 1933, as amended. See "DESCRIPTION OF CAPITAL STOCK" and "SELLING SECURITY HOLDERS." The Company's Common Stock is traded on the NASDAQ Small Capital Market ("NASDAQ/Small Cap") under the symbol "ICNT." The last reported sale price of the Common Stock on the NASDAQ/Small Cap on October 15, 1996 was $4.43 per share. See "PRICE RANGE OF COMMON STOCK AND DIVIDENDS." ---------- See "RISK FACTORS" for certain factors that should be considered by prospective investors. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Price Underwriting Proceeds to Discounts and to Public Commissions(1) Company - --------------------------------------------------------------------------------- PER UNDERLYING SHARE-WARRANTS (2). . . . . . $ 4.50 $0 $ 337,500 PER UNDERLYING SHARE-SERIES A PREFERRED (2) . $ 4.125 $0 $ 365,000 PER SHARE (3). . . . . . . . . . . . . . . . $ --- $--- $ --- TOTAL (4). . . . . . . . . . . . . . . . . . $ --- $--- $ ---
- ------------------------------------------- (1) No underwriters will be involved in the exercise of Warrants or the conversion of Series A Preferred, nor were any underwriters involved in the issuance of the Warrants, the Outstanding Shares or the Series A Preferred. The Shareholders do not have any specific plan of distribution with respect to the Outstanding Shares or Underlying Shares. The sale of the Outstanding Shares and Underlying Shares may be made in the open market through broker-dealers or in individual negotiated transactions. (2) The price per share for the Underlying Shares relating to the Warrants reflects the exercise price of the Warrants. The price per share for the Underlying Shares relating to the Series A Preferred reflects the maximum conversion price at which the Series A Preferred is convertible. The conversion price may be less depending on the average bid price for the Company's Common Stock on the public trading market for the five trading days immediately preceding the conversion date. See "THE COMPANY - Issuance of Convertible Preferred Stock - Conversion." The Company received proceeds of $365,000 from the issuance of the Series A Preferred covered by this Prospectus. (3) Those Shares which are not issued as part of existing settlement agreements may be issued from time to time upon the conversion of outstanding Series A Preferred, or at the prevailing market price through the Underwriter. The price per Share and underwriting commission are therefore undetermined at this time. (4) The total proceeds to the Company will equal the aggregate exercise price of 75,000 Warrants and the original issuance price of the Series A Preferred and the Shares. The proceeds from the sale of the Shares is not known at this time since the number of Shares remaining after the finalization of the settlement agreements will not be known until five business days after the effective date of the registration statement encompassing this Prospectus. Furthermore, the remaining Shares, if any, may be issued from time to time upon the conversion of outstanding Series A Preferred, or at the prevailing market price through the Underwriter. The amount of underwriting discounts and commissions on the sale of the Shares is also not known at this time. See "THE COMPANY - Settlement Agreements with Prior Noteholders" and "THE COMPANY - Issuance of Convertible Preferred Stock." The Shareholders will receive all net proceeds from the sale of their respective Outstanding Shares and Underlying Shares. AVAILABLE INFORMATION Incomnet, Inc. is subject to the information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith file reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). Copies of such reports, proxy statements and other information can be obtained, upon payment of prescribed fees, from the SEC at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. In addition, such reports, proxy statements and other information can be inspected at the SEC's facilities referred to above and at the SEC's Regional Office at 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036-3648. The Company's Common Stock is reported on the National Association of Securities Dealers Automated Quotation Small Capital System and such reports, proxy statements and other information regarding Incomnet are available for inspection and copying at 33 Whitehall, New York, New York 10004. The Company has filed with the SEC a Registration Statement on Form S-3 (together with any amendments thereto, the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Underlying Shares. This Prospectus does not contain all the information set forth in the Registration Statement. Such additional information may be obtained from the SEC's principal office in Washington, D.C. Statements contained in this Prospectus or in any document incorporated by reference in this Prospectus as to the contents of any contract or other document referred to herein or therein are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement or such other document, each such statement being qualified in all respects by such reference. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed with the SEC are incorporated in this Prospectus by reference: (a) The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 filed on April 8, 1996 (provided that the information referred to in Item 402(a)(8) of Regulation S-K shall not be deemed to be specifically incorporated herein). -2- (b) The Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996 filed on May 12, 1996. (c) The Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1996 filed on August 14, 1996. (d) The Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1995, filed on November 14, 1995. (e) The Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1995, filed on August 2, 1995. (f) The Company's Current Report on Form 8-K filed on July 25, 1995, its Current Report on Form 8-K filed on August 18, 1995, its Current Report on Form 8-K filed on November 15, 1995, its Current Report on Form 8-K filed on November 30, 1995, its Current Report on Form 8-K filed on February 9, 1996, its Current Report on Form 8-K filed on April 29, 1996, its Current Report on Form 8-K filed on June 7, 1996, its Current Report on Form 8-K filed on August 8, 1996, its Current Report on Form 8-K filed on February 8, 1995, its Current Report on Form 8-K filed on May 13, 1992 and amended on October 9, 1992, and its Current Report on Form 8-K filed on January 12, 1994 and amended on February 14, 1994, July 22, 1994 and September 20, 1994 regarding the change of the Company's Certifying Accountant. (g) The Company's definitive Proxy Statement on Schedule 14A, dated July 29, 1996 and filed with the Securities and Exchange Commission on June 21, 1996. (h) All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus. Any statement contained in a document incorporated herein by reference will be deemed to be modified or superseded for the purpose of this Prospectus to the extent that a statement contained herein or in a subsequently filed document modifies or supersedes such statement. Any such statement so modified or superseded will not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. This Prospectus incorporates documents by reference which are not presented herein or delivered with this Prospectus. Such documents relating to the Company are available without charge upon request made to Incomnet, Inc., 21031 Ventura Boulevard, Suite 1100, Woodland Hills, California 91364 (telephone (818) 887- 3400), attention: Melvyn Reznick, President. No person is authorized to give any information or to make any representations other than as contained herein and, if given or made, such information or representations must not be relied upon as having been authorized. This Prospectus does not constitute an offer or solicitation by anyone in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such an offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any distribution of securities made hereunder shall under any circumstances create an implication that there has been no change in the affairs of the Company since the date hereof or that the information herein is correct as of any time subsequent to the date of this Prospectus. -3- PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. THE COMPANY Incomnet, Inc. (the "Company" or "Incomnet") and its two subsidiaries, National Telephone Communications, Inc. ("NTC") and Rapid Cast, Inc. ("RCI"), are engaged in three types of businesses: (i) interactive computer networking products and services, (ii) discount long distance telephone communications services to residential and commercial customers in the United States, and (iii) manufacture and marketing of the Fast CastTM LenSystem that allows retail optical stores and wholesale optical lens manufacturing laboratories to produce single vision, flat-top bifocal and progressive multifocal lenses rapidly on demand. NTC is a wholly-owned subsidiary of the Company and RCI is 51% owned by the Company. Incomnet, Inc. was incorporated under the laws of the State of California on January 31, 1974. The Company acquires and develops computer hardware and software for interactive communications networks. It currently operates a communications network under the tradename "AutoNETWORK" for several hundred automobile dismantling companies in California, Colorado, Nevada, Arizona, Oregon and Washington. The network permits the subscribers to share information simultaneously and to communicate electronically on a real-time basis through individual computer workstations linked by the Company's proprietary software, central message switching computer and front-end network processor. The Company is evaluating other business applications for its communications technology in order to establish more subscriber-based communications networks. The Company's principal executive office is located at 21031 Ventura Boulevard, Suite 1100, Woodland Hills, California, 91364. Its telephone number is (818) 887-3400. National Telephone Communications, Inc. was incorporated under the laws of the State of Nevada on September 6, 1984. Since July 1989 NTC has operated as an inter-exchange carrier and reseller of long distance telephone service, providing nationwide long distance telephone access to its residential and commercial customers. NTC purchases large blocks of time from long distance national and regional telecommunications carriers at rates based upon high volume usage. NTC resells the time to its customers at discounted telecommunications retail rates. In general, NTC provides its customers with rates that are 5% to 50% below the published retail rates of major national carriers like AT&T and MCI with complete domestic and international coverage. NTC's products include (i) fixed rate per minute services called Call$aver, (ii) a prepaid calling card product, Sure$aver, which eliminates calling card surcharges such as those imposed by AT&T, MCI and Sprint, (iii) a measured rate Dial-1 service that is interconnected to local telephone companies throughout the United States, and (iv) the Easy-1 service in which a single telephone bill is provided to the customers for local and long distance telephone calls through the local exchange carriers. NTC is licensed to provide telecommunication services by the Public Utilities Commissions of numerous states. NTC markets its services through referral marketing agents and affinity groups on a nationwide basis. NTC's offices are located at 2801 North Main Street, Irvine, California, 92714. Its telephone number is (714) 251-8000. Rapid Cast, Inc. was incorporated under the laws of the State of Delaware February 12, 1994. RCI owns 100% of the issued and outstanding stock of Q2100, Inc. ("Q2100"), which it acquired from Pearle, Inc. on February 8, 1995. The Company acquired 51% of the issued and outstanding stock of RCI on February 8, 1995, as well. Q2100 owns certain domestic and -4- foreign patents and patent applications relating to a new technology, commonly known as Thick Film Radiation Cured Polymer Technology (the "Technology"), which enables retail optical stores, small to mid-sized wholesale optical lens manufacturing laboratories and other dispensers of prescription ophthalmic lenses to produce lenses on site rapidly and at a cost generally lower than if they were purchased from third party manufacturers and distributors. RCI is currently manufacturing and marketing this technology through the sale of casting machines and liquid monomer under the name Rapid Cast or the Fast Cast Lensystem. RCI's principal executive office is located at 1500 Hempstead Turnpike, East Meadow, New York 11554 and its telephone number is (516) 465-7312. RCI also has executive offices located at 4415 Poplar Level Road, Louisville, Kentucky 40233, where its telephone number is (502) 458-5500. THE OFFERING Type of Security Registered. . . . . . . . . Common Stock, no par value Number of Outstanding Shares.. . . . . . . . 451,000 Number of Underlying Shares-Warrants . . . . . . . . . 75,000 Minimum Number of Underlying Shares-Series A Preferred . . . . 88,485 Number of Shares . . . . . . . . . . . . . . 214,000 Selling Security Holders. . . . . . . . . . . The Outstanding Shares are held primarily by affiliates of the Company or RCI who purchased them in a private placement made on June 30, 1995, or who converted 8% convertible promissory notes (issued in February 1995 to finance the acquisition of a controlling interest in RCI) into shares in July 1995. The holders of the Outstanding Shares also include other investors in the 8% convertible promissory notes who converted their notes into shares or who were issued shares pursuant to settlement agreements. The Underlying Shares are issuable upon the exercise of 75,000 Warrants held by Price International, Inc., and the conversion of 365 outstanding shares of Series A Preferred issued by the Company in October 1996. See SELLING SECURITY HOLDERS. Terms of the Warrants. . . . . . . . . . . . The 75,000 Warrants entitle Price International, Inc. to purchase 75,000 shares of the Company's Common Stock at an exercise price of $4.50 per share, exercisable until December 31, 1998. See SELLING SECURITY HOLDERS. -5- Terms of the Series A Preferred. . . . . . . The Series A Preferred entitles the holders to convert their Preferred Stock into the Company's Common Stock at any time upon the earlier of (i) 60 days from the effective date of the registration statement covering the Underlying Shares, or (ii) 90 days after the date that the Series A Preferred is issued. The conversion ratio is equal to the lesser of (i) 80% of the average bid price of the Company's Common Stock on the public trading market on the five trading days immediately preceding the conversion date, divided by the original purchase price of the Series A Preferred, or (ii) the bid price of the Company's Common Stock on the date that the Series A Preferred is issued, divided by the original purchase price of the Series A Preferred. The cumulative 2% per annum dividend is also payable on the conversion date. The bid price on the date of funding of the Series A Preferred covered by this Prospectus is $4.125 per share. See THE COMPANY - Issuance of Convertible Preferred Stock. Issuance of Shares . . . . . . . . . . . . . The unissued Shares are reserved for issuance pursuant to settlement agreements entered into with certain existing shareholders, depending on the average public market price of the Company's Common Stock during the five trading days immediately preceding or following the effective date of this Prospectus. To the extent that Shares remain unissued after the satisfaction of the settlement agreements, the Company may issue them from time to time through the Underwriter in open market transactions in accordance with Rule 415, or may issue them upon the conversion of Series A Preferred, if necessary. The amount of net proceeds to be received by the Company from the sale of the Shares, if any, is not known at this time because it depends on the number of unissued Shares remaining after the settlement with certain existing shareholders, the prevailing market price of the Company's Common Stock on the dates that it elects to sell the Shares, if any, and whether or not Shares are issued pursuant to the conversion of Series A Preferred. See THE COMPANY-Settlement With Prior Noteholders. Assuming an average market price of $5.00 per share for the purpose of calculating the settlement amounts, an additional 45,500 Shares would be required to -6- be issued pursuant to the settlement agreements. Assuming a net sale price of $5.00 per Share for all remaining Shares sold by the Company through the Underwriter, the Company would receive net proceeds of $842,500 from the sale of 168,500 Shares. See SELLING SECURITY HOLDERS. Shares of Common Stock to be Outstanding After Issuance of Shares, Conversion of Series A Preferred and Exercise of Warrants . . . . . 13,671,919 Voting Rights. . . . . . . . . . . . . . . . Each Share and Underlying Share of Common Stock will have one vote per share, if and when issued, and each Outstanding Share has one vote.The Warrants and Series A Preferred do not have any voting rights associated with them. Use of Proceeds. . . . . . . . . . . . . . . The Company would receive net proceeds of $337,500 from the exercise of all 75,000 Warrants.The Company has received net proceeds of $365,000 from the issuance of the Series A Preferred covered by this Prospectus. The amount of net proceeds to be received by the Company from the sale of the Shares, if any, is not known at this time.The Company will not receive any proceeds from the sale of the Outstanding Shares or the Underlying Shares.The Company expects to use the net proceeds from the exercise of the Warrants and sale of Shares, if any, for general working capital purposes.There is no assurance that the Warrants will be exercised or that any Shares will be sold by the Company through the Underwriter.See USE OF PROCEEDS. NASDAQ Symbol. . . . . . . . . . . . . . . . ICNT -7- SUMMARY CONSOLIDATED FINANCIAL DATA INCOMNET, INC., NATIONAL TELEPHONE COMMUNICATIONS, INC. AND RAPID CAST, INC.
SIX MONTHS ENDED JUNE 30 YEAR ENDED DECEMBER 31 ------------------------ ------------------------------------------------------------------------ 1996 1995 1995 1994 1993 1992 (2) 1991 ---- ---- ---- ---- ---- -------- ---- STATEMENT OF REVENUES Revenues $49,704,51 $39,463,173 $86,564,917 $46,815,057 $11,298,972 $5,534,874 $1,898,071 Income (Loss) before income taxes and extraordinary items and minority interest (291,801) 3,113,002 856,543 4,000,242 (1,606,844) (2,264,597) 397,631 Income (Loss) before extraordinary items (478,608) 2,904,290 1,366,025 3,999,187 (1,606,844) (2,461,697) 1,322 Net Income (Loss)(3) 648,003 2,904,290 1,366,025 4,071,194 (948,769) (2,021,333) 1,322 PER COMMON SHARE DATA Net Income (Loss) .05 .25 .11 .42 (.12) (.28) 0 Cash Dividends 0 0 0 0 0 0 0 Book Value 3.27 3.44 3.21 1.58 .48 .13 .20 Number of Shares 13,286,283 11,843,989 13,262,648 10,482,854 8,183,877 7,189,671 6,936,311 BALANCE SHEET DATA Total Assets 77,478,075 52,590,825 74,105,629 26,158,346 8,665,839 6,744,994 2,174,428 Long-Term Debt 8,907,094(1) 1,000 8,459,772(1) 900 20,000 176,000 83,334 Shareholders' Equity 43,389,457 40,789,098 42,548,056 16,535,153 3,929,148 1,047,125 1,396,000
- ---------------------------------------------------------------------- (1) Long term liabilities include $8,449,050 of deferred tax liability at December 31, 1995 and $8,186,725 of deferred tax liability at June 30, 1996 arising from the nondeductibility of the RCI patent rights, which will be eliminated in accordance with Statement of Financial Accounting Standards No. 109, as the underlying patent rights are amortized to expense. -8- FINANCIAL RATIOS AND OTHER DATA:
SIX MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993 - ------------------------------------------------------------------------------------------------------------------- Operating Cash Flow $1,595,907 $1,378,839 $3,083,887 ($1,237,225) Capital Expenditures 3,390,225 7,389,419 1,693,534 636,266 Operating cash flow less capital expenditures (1,794,318) ( 6,010,580) 1,390,353 (1,873,491) Capital expenditures as percentage of operating cash flow 212% 536% 55% (5) Operating cash flow to interest expense, net of interest income 936.1% 896.3% (4) (5) Operating cash flow less capital expenditures to interest expense, net of interest income (6) (6) (4) (5) - -------------------------------------------------------------------------------------------------------------------
- --------------------------------------------- 1. In 1991 the Company wrote-off its entire investment in Incomnet India Limited. See footnote 12 to the Notes to Consolidated Financial Statements of Incomnet in its 1994 Form 10-K for an explanation of the investment and the write-off of the investment in Incomnet India Limited. See also "Item 14. Financial Statements" in the Company's 1994 Form 10-K. 2. The historical financial information of the Company is consolidated with the financial information of NTC commencing in 1992 to reflect the acquisition by the Company of a majority of the outstanding shares of NTC in February 1992. See "Item 14. Financial Statements" in the Company's 1994 Form 10-K. No provision for minority interest is made in the consolidated financial statements because NTC has a negative shareholders' equity. 3. After provision for income taxes. 4. The Company had no net interest expense during the year ended December 31, 1994. 5. During the twelve month period ended December 31, 1993, the Company had a negative operating cash flow. Interest expense was $51,455 for the year ended December 31, 1993. 6. During the twelve month period ended December 31, 1995 and the six months ended June 30, 1996, the Company had capital expenditures substantially in excess of operating cash flow, as indicated in the table. -9- RISK FACTORS Prospective investors should consider carefully, in addition to the other information contained in this Prospectus, the following factors before purchasing the Shares, the Outstanding Shares or the Underlying Shares. OVERVIEW - CAUTIONARY STATEMENTS The following are cautionary statements made pursuant to the Private Securities Litigation Reform Act of 1995 in order for the Company to avail itself of the "safe harbor" provisions of the Reform Act. The discussions and information in this Prospectus may contain both historical and forward-looking statements. To the extent that the Prospectus 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, lower sales and revenues than forecast, loss of customers, disadvantageous currency exchange rates, termination of contracts, loss of supplies, technological obsolescence of the Company's 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, 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 Prospectus or in other reports issued by the Company. RISKS RELATING TO INCOMNET, INC. AND NTC POSSIBLE DEFICIENCIES IN CARRIER SERVICE. The telecommunications business is extremely competitive and its success depends upon several factors, including high quality technology, effective marketing, accurate billing and responsive customer service. As a "switchless" reseller of long distance telephone service registered with the Federal Communications Commission and state public utility commissions, the Company provides billing and customer service directly. The Company is, however, dependent upon services provided to it and its customers by telecommunications carriers. The Company has the right to provide long distance telephone service to its customers through any telecommunications carriers that it chooses. At present, the Company has contracts with several carriers. The two main carriers which provide service to the Company are Wiltel, which handles most calls in the mainland United States, and U.S. Sprint, which handles calls from Hawaii to the United States. The Company is subject to the risk that its carriers may not provide high quality telephone service to the Company's customers, along with accurate, timely billing records of that service to the Company. RISK OF TERMINATION OF CARRIER SERVICE. The Company's newest contract with Wiltel commenced on June 17, 1996 as an amendment to the contract entered into on September 15, 1995 (service had been provided under a prior arrangement since July 1992). The Wiltel Carrier Switched Services Agreement expires by its terms on June 15, 2001. Wiltel may terminate its -10- carrier agreement with the Company or modify the charges upon 60 days prior written notice to the Company. The Company may not terminate the new Wiltel contract without a cancellation charge (the cancellation charge would be 100% of the minimum purchase requirement for the remaining term of the agreement) unless Wiltel increases its rates under the agreement by an amount the effect of which would be to cause total charges for the three months immediately preceding the rate increase to be 5% greater than they were with the original discounts. The Sprint contract commenced on April 7, 1993 and is terminable by either party upon 30 days prior notice. The termination of the contracts with either of these carriers or an increase in rates would have an adverse impact on the Company's financial condition and operating results if the Company could not replace either carrier with similar service at an equivalent price. The Company could lose its carrier contracts for reasons beyond its control. While the Company has the right to switch its customers to other carriers in its discretion, there is no assurance that the Company could replace its carrier contracts on substantially similar terms if its current contracts were terminated or were not renewed upon their expiration. Should the Company lose its contracts and not be able to replace them, it would have a significant adverse impact on both the Company's telephone and marketing related revenues because the Company would not be able to sign on new customers. There is also no assurance that the Company will continue to have the capital available and retain the qualified personnel that are required to maintain a satisfactory level of services to its customers. See "THE COMPANY - Recent Developments" and "Item 1. Business" in the Company's 1995 Form 10-K. MINIMUM PURCHASE REQUIREMENT. Pursuant to its new Carrier Service Agreement with Wiltel, the Company is obligated to purchase a minimum amount of telephone time on a "take-or-pay" basis. If the Company is not able to use the minimum amount of telephone time under the new agreement, then it must pay to Wiltel the difference between the actual usage and the minimum usage requirement in cash. The Company could experience operating losses as the result of the minimum purchase requirement in the new carrier contract. The Company currently relies on purchases by an unaffiliated party under the Wiltel agreement (at no profit to the Company) in order to meet the minimum purchase requirement. If the unaffiliated co-purchaser ceases to purchase telephone time under the agreement, the Company could experience significant operating losses. See "Item 1. Business - Contract with Wiltel" in the Company's 1995 Form 10-K." SEC INVESTIGATION AND RELATED LAWSUITS. In August 1994, the Company was notified by the Pacific regional office of the Securities and Exchange Commission that the Commission had initiated a confidential investigation of the Company. In September 1994 the Commission issued a formal order of private investigation. The Commission stated in its correspondence to the Company that the investigation "should not be construed as an adverse reflection on any person, entity or security, or as an indication by the Commission or its staff that any violation of law has occurred." In August and September 1994, the Company supplied copies of its books and records to the Commission, and the Company's present and prior independent certified public accounting firms submitted their working papers pursuant to the Commission's subpoena. In February 1995, the Company provided to the Commission pursuant to its subpoena additional documents associated with NTC's regulatory authorizations and with the Company's recent acquisition of a controlling interest in RCI. The Company continues to fully cooperate with the Commission. While the Company believes that the outcome of the fact finding investigation will not have a material adverse effect on the financial condition or operating results of the Company, no assurance can be given on this matter until the investigation is concluded. See "Item 3. Legal Proceedings - Securities and Exchange Commission Investigation" in the Company's 1995 Form 10-K, as updated in the Company's Form 10-Q for the quarter ended June 30, 1996 under "Item 1. Legal Proceedings - Securities and Exchange Commission Investigation." -11- On January 20, 1995, a class action lawsuit was filed in the United States District Court of the Central District of California against Incomnet, Inc. and Sam D. Schwartz, known as ISABEL M. SPERBER VS. INCOMNET, INC AND SAM D. SCHWARTZ, alleging violations of federal securities laws. In particular, the suit alleges that the defendants violated Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, as amended, by not disclosing in August 1994 that the Securities and Exchange Commission had initiated a confidential investigation of the Company. The suit also alleges that the Company issued false and misleading press releases on January 17, 1995 and January 18, 1995. On October 17, 1995, the complaint was amended to add claims that the Company and its former Chairman, Sam D. Schwartz, violated federal and state securities laws because Mr. Schwartz did not disclose purchases and sales of the Company's stock made in the open market by him and his affiliates. Two additional civil lawsuits were filed in federal district court in Georgia making similar claims and allegations, both of which have been transferred to the same California court as the SPERBER case. On July 22, 1996, the Company was served with a complaint in the lawsuit CHARLES STEVENS VS. SAM D. SCHWARTZ AND INCOMNET, INC., Civil Action No. 96-4906 RMT (VAPx), filed in the United States District Court for the Central District of California, Western Division. The complaint alleges that the Company and its former Chairman, Sam D. Schwartz, violated Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, as amended, and Section 25400 of the California Corporations Code, as a result of false and misleading statements made by defendants and undisclosed trading in the Company's stock engaged in by Mr. Schwartz and his affiliates. The claims are similar to those made in the pending class action lawsuit. In July 1996, the Company became aware of a complaint in the 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 ANTILLIANO, 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. The complaint states that the plaintiff was a purchaser of the Company's stock in July 1995. The complaint alleges that the Company and its former Chairman violated Sections 10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934, as amended, as a result of false and misleading statements made by the defendants and undisclosed trading in the Company's stock engaged in by Mr. Schwartz and his affiliate. The plaintiff also alleges that Mr. Schwartz and his affiliate owed a fiduciary duty to the plaintiff and breached it by their conduct, and that these defendants committed common law fraud. The complaint also alleges other causes of action against other unrelated defendants. The suits seek recision and damages on behalf of the plaintiffs. Litigation has been threatened by other potential claimants. There is no assurance that these pending and threatened lawsuits will not have a material adverse effect on the Company and its financial condition and operating results. See "Item 3. Legal Proceedings" in the Company's 1995 Form 10-K, as updated under "Item 1. Legal Proceedings - Class Action and Related Lawsuits" in the Company's Form 10-Q for the quarter ended June 30, 1996, and "RISK FACTORS - Risks Relating to Incomnet and NTC - Status of Settlement Agreements." RISKS INHERENT IN NETWORK MARKETING PROGRAMS. The Company sells its telephone service through a network marketing program in which independent sales representatives sign up both new independent sales representatives and telecommunications customers. The independent sales representatives are independent contractors, not employees of the Company, and pay all their own expenses. New independent representatives purchase sales materials, training and limited product inventories from the Company. As the representatives sign up new representatives, who themselves also sign up new representatives, the initial representative builds a "downline" of representatives that can reach through multiple levels. The Company's marketing plan allows a representative to build a network down to seven levels. Representatives do not receive commissions for bringing in new representatives. Representatives only receive commissions, overrides and bonuses based on bringing telephone customers and revenues to the Company. -12- While the development of a strong network marketing program can result in a stable base of independent sales representatives who generate revenues from signing up both new customers and new representatives, there are risks inherent in network marketing. Because the representatives are structured in downlines, there is a much higher risk associated with competitive programs designed to attract the Company's existing base of representatives. If representatives decide to leave the Company's program for a competitive program, there is a strong incentive for those representatives to bring other representatives in their downlines to the new program, all of whom will also try to move their telephone customers to the new program. As the momentum of representatives switching to new programs builds, the Company would experience a substantial loss of both representatives and customers. As a result, a sales force based upon network marketing has the inherent risk of eroding more rapidly than would otherwise occur if the Company operated through a base of representatives who worked directly for the Company. There are no assurances that the Company can keep its marketing plan competitive against competitive plans. Consequently, there is a risk that the Company's base of representatives and customers could decline in a manner that would have a serious impact on the Company's revenues and earnings. RECENT LOSS OF INDEPENDENT SALES REPRESENTATIVES. In February 1994, a group of approximately ten independent sales representatives in Northern California left the Company to market a competitive telephone service using a multi-level marketing approach. These representatives attempted to recruit other representatives and telephone customers away from the Company to their competitive program. The Company believes that these representatives took proprietary lists of the Company's representatives and customers with the intention of soliciting them to join their program, which was in direct violation of contracts that these representatives signed when they joined the Company's marketing program. As a result, the Company has filed suit against the representatives for damages of $500,000 for the loss of customers who were obtained through the taking of proprietary lists from the Company. The Company also sought and received a temporary restraining order against the representatives from continuing to use the Company's proprietary materials to solicit customers from the Company. The Company estimates that it has lost under 100 representatives and under 1,000 customers as a result of actions by the former marketing representatives. The Company's request for a permanent injunction was denied by the court on the grounds that the Company had not sustained enough continuing damages to warrant a permanent injunction. There are no assurances that the losses will remain at the current level. The defendants have filed a cross-complaint against NTC and the Company claiming that NTC failed to meet its contractual obligations to the defendants, and that the actions taken by the defendants were legal. The cross-complaint seeks compensatory and special damages, along with general and punitive damages. There is no assurance that the Company will prevail in its lawsuit to recover damages or that it may not lose more representatives and customers in the future, or that the defendants will not be successful with their cross-complaint. See "Item 3. Legal Proceedings - Legal Action Against Prior Representatives" in the Company's 1995 Form 10-K, as updated under "Item 1. Legal Proceedings - Legal Action Against Prior Representatives" in the Company's Form 10-Q for the quarter ended June 30, 1996. RISKS OF BILLING THROUGH LOCAL EXCHANGE CARRIERS. NTC is offering a long distance telephone service called Easy-1 pursuant to which customers receive a single bill from their local telephone company for both local and long distance telephone service (NTC offers only long distance service). As a result, the local exchange carriers handle NTC's long distance billings and collections. Theoretically, billing through the local exchange carrier is supposed to enhance collection rates and lower NTC's billing costs, while offering a convenience for customers. The local exchange carriers charge a fee for their billing and collection services. There is no assurance that the cost savings and collections from the services provided by local exchange -13- carriers will justify the charges being incurred by NTC for those services. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." QUALIFICATION OF PRIOR AUDIT REPORTS. The reports of the independent certified public accountants with respect to the Company's financial statements for the fiscal year ending December 31, 1995 include an explanatory paragraph with respect to uncertainties related to the pending shareholders' class action matter. The reports of the independent certified public accountants with respect to the Company's financial statements for the fiscal years ending December 31, 1992 and 1993 raised substantial doubts regarding the Company's ability to continue as going concerns because the current liabilities of the Company exceeded current assets by a significant margin. In addition, the scope of Grant Thornton's audit report with respect to Incomnet for the fiscal year ending December 31, 1990 was limited to the extent that it was not able to verify certain amounts with respect to Incomnet's investment in Incomnet, India, Ltd. In 1991 Incomnet wrote-off its entire investment in Incomnet India, Ltd. POSSIBLE NEED FOR ADDITIONAL FINANCING - DILUTION OF OWNERSHIP IN RCI. The Company may need additional capital in order to finance its anticipated growth, especially the growth of its subsidiaries, NTC and RCI. NTC must purchase and install more computer hardware and software to add capacity. Unforeseen events such as the unexpected loss of customers or expenditures which were not budgeted could also require the Company to seek additional capital. Since April 1996 the Company, from the proceeds of loans made or arranged for it by Melvyn Reznick, the President of the Company, and from advances made to it by NTC, has loaned approximately $1,600,000 to RCI to fund its pro rata portion of loans being made to RCI by its shareholders to finance its operations. In January 1996 the Company also loaned $326,400 to RCI pursuant to a three year 8% convertible note. There is no assurance that the Company's loans to RCI will be repaid or that RCI will be able to raise additional capital. If RCI needs additional financing and the Company does not have the funds available to make its pro rata share of the advances, the Company's percentage ownership in RCI could be significantly diluted. Furthermore, if RCI needs additional financing or capital and cannot obtain it, its operations could be severely hampered, resulting in a material adverse impact on the operating results and financial condition of the Company. There is no assurance that the Company or its subsidiaries can obtain additional capital or financing, if necessary, or obtain it on acceptable terms. The shareholders of the Company may experience substantial dilution in their ownership of the Company as a result of financings or capitalizations done by the Company in order to obtain necessary funding. See "RISK FACTORS - Adverse Effects of Issuance of Preferred Stock." Furthermore, as a result of the issuance of stock options and warrants by RCI since the acquisition of a controlling interest in it by the Company on February 8, 1996, partially to raise capital, the Company's ownership interest in RCI has been reduced to approximately 43.8% on a fully diluted basis. NO ASSURANCE OF PROFITABILITY - RECENT LOSSES. In the past the Company and its wholly owned subsidiary, NTC, have incurred substantial operating losses and have only recently achieved profitability. RCI and its wholly owned subsidiary, Q2100, have only recently emerged from the development stage and have incurred substantial operating losses since their inception. See "RISK FACTORS - Risks Relating to RCI - Recent Emergence From Development Stage." There is no assurance that the Company's consolidated revenues will continue to grow or be earned at current levels, or that the Company will continue to be profitable. For the fiscal year ending December 31, 1993 the Company had a net loss of $948,769 on a consolidated basis and NTC had a net loss of $1,033,232, although the Company had net income on a consolidated basis of $4,071,194 for the year ended December 31, 1994. For the fiscal year ending December 31, 1995, the Company had a net income on a consolidated basis of $1,366,025. As of December 31, 1995, NTC had an accumulated shareholders' deficit of approximately -14- $2,602,340 and RCI had an accumulated shareholders' deficit of approximately $1,450,085. There is no assurance that RCI will ever be profitable, or that NTC will continue to be profitable. There is no assurance that the Company will not incur operating deficits in the future. See "SELECTED CONSOLIDATED FINANCIAL INFORMATION", "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS", and "Item 14. Financial Statements" in the Company's 1995 Form 10-K, and the Company's Form 10-Q for the quarter ended June 30, 1996. COMPETITION. The telephone and telecommunications industries are extremely competitive, especially the provision of long distance telephone services. In its long distance telephone business, the Company competes with several long distance carriers such as AT&T, MCI, Sprint and others, which have substantially greater financial, marketing and other resources than the Company. The Company depends on independent marketing representatives in order to obtain customers for its long distance telephone services. Several other network marketing firms also utilize independent marketing representatives to sell long distance telephone services, and may compete with the Company for marketing representatives. Independent marketing representatives may leave the Company to work for competitors from time to time, adversely affecting the Company's business. The Company's network telecommunications business is also subject to competition, and both business segments may experience competition from new competitors in the future. Many of the Company's competitors have higher national, regional and local recognition than the Company. There is no assurance that the Company will be able to continue to successfully compete in the long distance telephone or network telecommunications businesses. See "THE COMPANY" and "Item 1. Business - Operations" in the Company's 1995 Form 10-K. ADVERSE IMPACT OF GOVERNMENT REGULATION. The Company's businesses are subject to government regulation in several respects which could cause additional operating costs and which must be monitored for compliance. NTC, the Company's wholly owned subsidiary, must comply with advertising and disclosure rules relating to its sale of long distance telephone services to the public. Its retail marketing program utilizing independent representatives to recruit retail customers and additional representatives is subject to state laws regulating public network marketing programs. NTC must be registered with the public utility commissions of most states in order to provide telephone service in those states. While NTC's registrations are effective in most of those states, it continues to operate through agency contracts in certain states where its registrations are pending. NTC anticipates that the balance of its pending registrations will be approved. NO DIVIDENDS ON COMMON STOCK. The Company has not paid dividends on its Common Stock in the past and does not anticipate the payment of any cash dividends in the near future. See "PRICE RANGE OF COMMON STOCK AND DIVIDENDS." STATUS OF SETTLEMENT AGREEMENTS. The Company entered into a series of settlement agreements with former holders of the 8% convertible promissory notes issued by the Company on February 8, 1995 to finance the acquisition of 51% of RCI. The settlements provide for the issuance of additional shares of the Company's Common Stock depending on the prevailing average market price of the Company's Common Stock on the NASDAQ on the five trading days immediately preceding or following the effective date of this Prospectus. There is no assurance regarding the number of additional shares which the Company may have to issue under those settlement agreements. See "THE COMPANY - Settlement With Prior Noteholders" and "Item 3. Legal Proceedings - Claims By Prior Noteholders" in the Company's 1995 Form 10-K, as updated in "Item 1. Legal Proceedings - Claims By Prior Noteholders" in the Company's Form 10-Q for the quarter ending June 30, 1996. -15- CONTROL BY THE PRINCIPAL STOCKHOLDERS. The principal stockholders own in the aggregate approximately 8% of the combined voting power of the Company's Common Stock, not including those shares owned by its prior Chairman and President, Sam D. Schwartz (who owns approximately 14.7% of the outstanding shares). Accordingly, the principal stockholders are able to exercise significant control of the vote on matters submitted to a vote of the Company's stockholders. Such control by the principal stockholders may have the effect of discouraging certain types of transactions involving an actual or potential change of control of the Company, including transactions in which the holders of Common Stock might otherwise receive a premium for their shares over then current market prices. See "PRINCIPAL STOCKHOLDERS." SHORT-TERM LOANS TO THE COMPANY. In order to finance its operations and make its pro rata share of loans to RCI, the Company has borrowed a total of $1,000,000 from NTC pursuant to interest bearing demand notes. Furthermore, the Company has borrowed $1,020,000 from Melvyn Reznick, the President of the Company, pursuant to short term loans bearing interest at the same interest rate being charged by the bank which provided a portion of the funds to Mr. Reznick to lend to the Company. The loans by Mr. Reznick are secured by the Company's notes receivable payable by RCI. As of October 17, 1996 the Company had repaid the outstanding loan to Mr. Reznick with interest. There is no assurance, however, that the Company will have the funds available to repay other outstanding short-term loans. If Mr. Reznick loans funds to the Company again in the future, as a creditor of the Company and its Chairman and Chief Executive Officer, Mr. Reznick may have conflicts of interest, especially if there is a default on the debt owed to him. See "Certain Relationships and Related Transactions - Loan to Company By Melvyn Reznick" in the Company's Proxy Statement for the 1996 Annual Meeting of the Shareholders. SHORT-SWING PROFITS PAYABLE TO THE COMPANY. As asserted in the pending lawsuit filed against the Company and Sam D. Schwartz, the Company's prior President, entitled RICHARD MORALES VS. INCOMNET, INC. AND SAM D. SCHWARTZ, 96 Civil 0225, filed in January 1996 in the United States District Court in the Southern District of New York, the Company is owed substantial short-swing profits by Mr. Schwartz pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended. The Company is conducting discovery to ascertain the amount of short-swing profits. The payment of the short-swing profits may be made by the redemption of a sufficient number of shares of the Company's Common Stock owned by Mr. Schwartz to equal the amount of the short-swing profits plus interest owed to the Company. See "Item 3. Legal Proceedings - Section 16(b) Lawsuit" in the Company's 1995 Form 10-K, as updated in "Item 1. Legal Proceedings - Section 16(b) Lawsuit" in the Company's Form 10-Q for the quarter ended June 30, 1996. There is no assurance regarding if or when the short-swing profits owed to the Company will be paid. RISKS RELATING TO RCI RECENT EMERGENCE FROM DEVELOPMENT STAGE. RCI recently emerged from its development stage. RCI was incorporated in February 1994 and did not commence marketing its products until after a controlling interest in it was acquired by the Company on February 8, 1995. RCI has a limited operating history and only began shipping its products in April 1995. RCI and Q2100 have incurred substantial operating losses since their inception. As of December 31, 1995, they had a consolidated shareholders' deficiency accumulated during their development stage of $1,450,085. The likelihood of RCI's success must be considered in light of the foregoing facts, together with the expenses, difficulties, uncertainties and delays frequently encountered in connection with the early phases of a new business. Unanticipated difficulties relating to marketing, manufacturing or competition, for instance, could materially adversely affect RCI's ability to achieve its business objectives. See "Item 1. Business - Rapid Cast, Inc." -16- RISK OF UNCERTAIN MARKET ACCEPTANCE; COST OF LENSYSTEM. RCI's success depends substantially upon the acceptance of the LenSystem as an alternative to traditional methods of purchasing and fabricating eyeglass lenses. Factors that may adversely affect market acceptance include potential customers' unfamiliarity with the Company's relatively new technology, lens making processes, products, lens designs and materials, their reluctance to change current methods of purchasing and fabricating lenses, and the initial capital investment in purchasing the LenSystem. Furthermore, potential customers may be reluctant to purchase the LenSystem because it cannot currently manufacture all possible prescriptions and lens types. In addition, lens dispensers can obtain single vision lenses (approximately 50% of the lens type dispensed) at prices competitive with or lower than the cost of producing such lenses utilizing the LenSystem. After LenSystems are purchased, there can be no assurance that customers will continue to use their LenSystem to fabricate lenses. Consequently, there can be no assurance that customers will accept RCI's products as an alternative to traditional methods of purchasing and fabricating optical lenses. Moreover, market acceptance of the LenSystem will depend, in large part, upon its pricing (of both the LenSystem and the Rapid Cast Liquid Monomer) and RCI's ability to demonstrate the advantages of the LenSystem over competing products, technologies, and current distribution channels. See "Item 1. Business - Rapid Cast, Inc." in the Company's 1995 Form 10-K. OPERATING LOSSES; NEED FOR ADDITIONAL FINANCING; UNCERTAINTY OF ADDITIONAL FINANCING. RCI's operations to date have consumed substantial amounts of capital, and RCI expects its capital and operating expenditures to increase in the next few years. Such operating expenses are currently, and may continue to, exceed RCI's revenues. RCI has not been profitable since its inception. There is no assurance that RCI will be able to obtain additional financing or capital from any source. RCI's need for additional financing will depend upon numerous factors, including, but not limited to, the extent that and duration of RCI's future operating losses, the level and timing of future revenues and expenditures, market acceptance of new products, the results of ongoing research and development projects, competing technologies, market developments, and the ability of RCI to maintain and develop additional collaborative arrangements and international distribution agreements. Except for a credit line of up to $500,000 with Bank Leumi Trust, which is fully drawn as of October 17, 1996, the Company currently has no committed external source of funds. To the extent that existing resources are insufficient to fund RCI's activities, RCI may seek to raise additional funds through public or private financings. There can be no assurances that additional financing will be available or, if available, that it will be available on acceptable terms. If additional funds are raised by issuing equity securities, further dilution to then existing stockholders may result. If adequate funds are not available, RCI's results of operation may be adversely affected. See "Item 1. Business - Rapid Cast, Inc." in the Company's 1995 Form 10-K. LOANS FROM RCI FOUNDERS. As of October 10, 1996, RCI owed approximately $1,463,334 to the founding stockholders of RCI, which does not include an additional $3,486,683 loaned or to be loaned to RCI during the period from January 1996 to August 1996 by its existing shareholders and executives, including the Company, which loaned its pro rata share of $1,934,396. See "THE COMPANY - Loans to Rapid Cast, Inc." The $1,463,334 indebtedness to the RCI founders accrues interest at the rate of 7% per annum and is due July 31, 1996, subject to certain conditions. With respect to the balance of the debt, $648,000 of it is due on December 31, 1999 and the balance is due one year from the date of the loan. No funds are presently available to repay the indebtedness. See "Item 1. Business - Acquisition of Rapid Cast, Inc." in the Company's 1995 Form 10-K. -17- COMPETITION. The vision care industry is subject to intense competition from a variety of sources. RCI competes with conventional channels of distribution, including lens manufacturers and wholesale lens laboratories and, to a lesser extent, with manufacturers of point of sale lens fabrication systems, manufacturers of contact lenses and providers of equipment related to medical treatments to correct refractive disorders. Many of RCI's competitors have significantly greater financial, technological, marketing and other resources than RCI, which could enable such competitors to develop new processes or products that could render RCI's products obsolete or less competitive. In addition, many of RCI's competitors have significantly greater experience than RCI in developing new lenses, lens materials and fabrication technologies, and there can be no assurance that RCI will be able to compete effectively with such competitors. The effects of such competition could have a material adverse effect on RCI's financial condition and results of operations. RAPID TECHNOLOGICAL CHANGE. The potential market for the LenSystem is one characterized by rapidly changing technology, and many of RCI's competitors have substantially greater resources for the research and development of new technologies than RCI will have for such purposes. There can be no assurance that technologies or medical advances, including, without limitation, laser vision correction, Radial Keratotomy (RK) and new ophthalmic drugs which could obviate the need for prescription lenses, will not render the LenSystem uncompetitive or obsolete. RCI's ability to anticipate changes in technology, and then to improve the Technology or development or acquire new technologies in response to such changes, will therefore be a critical factor affecting RCI's ability to grow and become profitable. There accordingly can be no assurance that the Technology will not be subject to the development or widespread acceptance of any new processes or products that cause the Technology to become noncompetitive, incompatible, or result in early product obsolescence, or that RCI's business will not be materially adversely affected as a result. Substantial research and development is being conducted by competitors and others with respect to lens fabrication systems that could enable eyewear dispensers to fabricate plastic eyeglass lenses at the point of sale. RCI believes that this research and development will continue and may intensify and accelerate. The development or widespread acceptance of any new process or products, including new lens shapes, sizes, coatings and materials that cause RCI's products to become obsolete, noncompetitive or incompatible, would have a material adverse effect on RCI's financial condition and results of operations. THE OPTICAL MARKETPLACE. RCI's success will depend, in significant part, on its ability to anticipate trends and changes in the optical marketplace and to develop or acquire technology capable of satisfying the demands of the marketplace in connection with such trends and changes. Among the factors RCI must be aware of are fashion, lens material, lens coatings and treatments. Some or all of the changes required to be made in response to these factors may not be adaptable to an onsite lens manufacturing environment and could have a material adverse effect on RCI's financial condition and results of operations. PATENTS AND PROPRIETARY RIGHTS. In February 1995, RCI acquired all of the capital stock of Q2100 and thus all of Q2100's issued patents and patent applications that relate to the Technology. As of the date of this Prospectus, five United States patents have issued, eight United States patent applications are pending, and over 20 foreign applications are pending. RCI's success depends, in significant part, on its ability to obtain patent protection for its products, both in the United States and in other countries, to preserve its intellectual property rights and to operate without infringing on the rights of third parties. There can be no assurances that RCI will be able to protect its intellectual property rights adequately, that competitors will not be able to develop similar technology independently, that the claims allowed on any patents held by RCI will be sufficiently broad to protect RCI's technology or that RCI's -18- patents will provide a significant competitive advantage for its products. Moreover, RCI believes that obtaining foreign patents may be more difficult than obtaining domestic patents because of differences in patent laws. In addition, the protection provided by foreign patents, once they are obtained, may be weaker than the protection provided by United States patents. The failure by RCI to protect adequately its intellectual property rights could have a material adverse effect on RCI's financial condition and results of operations. RCI has been the subject certain legal disputes involving the intellectual property rights of others. See "Item 3. Legal Proceedings - Patent Infringement Lawsuit" in the Company's 1995 Form 10-K, as updated in "Item 1. Legal Proceedings - Patent Infringement Lawsuit" in the Company's Form 10-Q for the quarter ended June 30, 1996. Any litigation in the future to enforce patents issued to RCI, to protect trade secrets or know-how possessed by RCI or to defend RCI against claimed infringement of the rights of others would be time-consuming and costly, and could have a material adverse effect on RCI's financial condition and results of operations. Additionally, the manufacture and sale of products that RCI develops or markets may involve the use of processes, products or information, the rights to which may be held by others. There can be no assurance that RCI will be able, for financial reasons or otherwise, to obtain ownership or license rights with regard to the use of such processes, products or information or, if obtained, that the use of such rights will be on terms favorable to RCI. Failure to obtain such rights, if any, could have a material adverse effect upon the financial condition and results of operations of RCI. RCI also relies, and will continue to rely, on trade secrets and proprietary known-how which it seeks to protect, in part, by secrecy agreements with its employees, consultants, licensees, potential strategic partners and others. There can be no assurance that any such agreements will not be breached, that RCI would have adequate remedies for any such breach, or that RCI's trade secrets are not already known to, or will not otherwise become known to, or be independently developed by, RCI's competitors. To the extent that consultants, licensees or other third parties (such as prospective joint venture partners or subcontractors engaged to manufacture the LenSystem) participate in RCI's projects, technological information independently developed by them or by others may be the subject of disputes as to the proprietary rights to such information, which disputes may not be resolved in favor of RCI. The LenSystem uses as its raw material the Rapid Cast Liquid Monomer, which is injected into a lens mold and then cured (i.e., hardened) into a finished lens. The Rapid Cast Liquid Monomer is a proprietary trade secret which is not protected by any issued patents nor the subject of any patent applications. RCI does not currently intend to seek patent protection for the Rapid Cast Liquid Monomer. See "Item 1. Business - Rapid Cast, Inc. - Technical Overview of the Rapid Cast LenSystem" in the Company's 1995 Form 10-K. MANUFACTURING UNCERTAINTIES. RCI currently does not have the facilities to manufacture the LenSystem's equipment components and raw materials (i.e., the Rapid Cast Liquid Monomer) and has no plans to develop its own manufacturing capabilities. RCI engages subcontractors and licensees to produce such components and raw materials. RCI is at present substantially dependent upon four suppliers from which it purchases different components and the Rapid Cast Liquid Monomer. RCI believes that it could take in excess of six months to secure alternatives for its suppliers in the event of the loss of RCI's current suppliers. The glass molds utilized by the LenSystem to produce a specific progressive multifocal design are available from only one supplier. Alternative suppliers for those glass molds or any other component of the LenSystem may not be available. RCI has certain of its components and tooling manufactured abroad and may have additional components provided by foreign suppliers in the future. The loss of a supplier for any material or component used by RCI or the inability of a supplier to fulfill RCI's requirements might cause significant delays in deliveries and the incurrence of additional costs. Such delays or increased costs could have a material adverse effect on RCI's financial condition and results of operations. -19- MARKETING UNCERTAINTIES, DOMESTIC. RCI's marketing efforts in the United States have relied primarily on trade journals, trade shows and conventions to present its products to the marketplace. RCI has not expended significant funds on direct or other marketing campaigns and has a dedicated sales and marketing staff of four persons. There can be no assurance that the implementation of RCI's future marketing plans will be effective or that RCI will not be required to expend more than it currently anticipates in order to market its products. MARKETING UNCERTAINTIES; INTERNATIONAL. RCI generally markets its LenSystem internationally through exclusive local distributors and has entered into several exclusive distribution agreements worldwide. There can be no assurance that the purchase commitments and other obligations contained in these agreements will be honored. Nor can there be any assurance that suitable distributors for other countries to which RCI is not currently distributing will be found. Laws and regulations imposed by foreign countries may also adversely affect the marketing or commercial viability of the LenSystem and the Rapid Cast Liquid Monomer. Additionally, significant fluctuations in the value of the United States dollar could adversely affect future demand for the LenSystem in foreign countries. PRODUCT LIABILITY CLAIMS AND UNINSURED RISKS. The manufacturing, marketing and sale of prescription ophthalmic lenses entail the inherent risk of exposure to product liability claims. These claims might be made by, among others, consumers who purchase lenses manufactured by, or businesses that utilize, the Lensystem. Currently, RCI maintains product liability insurance which provides coverage of $6,000,000 per occurrence and $7,000,000 in the aggregate. There can be no assurance that RCI will be able to maintain such insurance at commercially reasonable rates, if at all, or that the coverage provided thereby is sufficient to fully protect RCI against liability. RCI's inability or failure to protect itself adequately against such liabilities could have a material adverse effect upon its prospects, financial condition and results of operations. EQUIPMENT INSTALLATION AND SERVICE. RCI does not presently have any contracts or arrangements with qualified companies to install and service the LenSystem, currently relying on its staff of installers and technicians. Furthermore, equipment malfunctions may cause RCI to incur unanticipated operating expenses that may not be covered by component manufacturers' warranties. DEPENDENCE UPON KEY PERSONNEL. The success of RCI will be largely dependent upon the continuing services and efforts of certain of its directors and executive officers. The loss of the services of Jeffrey Rubin, Galen Powers or Dr. Omar Buazza could have a material adverse effect upon RCI's ability to achieve its business objectives. RCI has entered into employment agreements with certain of its officers, including Jeffrey Rubin, Dr. Omar Buazza, Galen Powers, Steve Luetke and Thomas Freedman. It has also entered into an employment agreement with Dr. Larry Joel which is expected to be replaced by a consulting agreement. RCI may enter into employment agreements with some of its other existing officers. RCI expects that its ability to achieve its business objectives will also depend in large part upon its ability to attract and retain highly qualified management personnel in the future, including sales, marketing and scientific staff. There can be no assurance that RCI will be able to attract and retain personnel with the requisite skills and experience necessary to successfully manage RCI's business and operations. REGULATORY CONSIDERATIONS. The lenses produced by the LenSystem are regarded by the United States Food and Drug Administration (the "FDA") as medical "devices" within the meaning of the Federal Food, Drug, and Cosmetic Act (the "Food and Drug Act"), but the lenses may be marketed without pre-market notification, review, approval or clearance by the -20- FDA. Other requirements, principally those concerning impact resistance, current good manufacturing practices, labeling and reporting of certain allegedly device-related adverse effects will apply. RCI believes that the LenSystem, as manufacturing equipment, is itself not a "medical device" under the Food and Drug Act. If the LenSystem is itself a medical device, RCI believes that LenSystem may be marketed without premarket notification, review, approval, or clearance by the FDA, although other requirements, principally those concerning current good manufacturing practices, labeling, and reporting of certain allegedly device-related adverse affects, and of device malfunctions in certain circumstances, would apply. In any event, certain state and local government authorities (such as the State of California) also regulate medical device manufacturers. Depending upon where LenSystem equipment is manufactured, RCI may be subject to such additional state regulations. Although there can be no assurance in this regard, RCI does not anticipate that compliance with such governmental regulation will have an adverse effect upon its business. Failure to comply with FDA, and in some cases, the state requirements, could result in civil sanctions, e.g., product seizure, injunction versus product manufacturing or distribution, or criminal prosecution and conviction. In addition, certain legal impediments and foreign regulatory restrictions may affect the sale and exportation of the LenSystem to countries other than the United States. PAYMENT OF ACQUISITION PRICE OF RCI. The Company issued 600,000 shares of restricted Common Stock to the founding shareholders of RCI to complete the payment of the purchase price of 51% of RCI in lieu of issuing up to 750,000 shares of performance based stock. RCI's financial performance during the twelve month period ending March 31, 1996 indicates that the founding shareholders of RCI would not have been issued any additional shares of the Company's common stock under the original stock purchase agreement. See "Item 1. Business - Acquisition of Rapid Cast, Inc." in the Company's 1995 Form 10-K. NO ANTICIPATED DIVIDENDS. Since inception, RCI has not declared or paid any cash dividends on its common stock and does not anticipate paying any cash or other dividends on its common stock in the foreseeable future. The declaration and payment of any cash dividends in the future will be determined solely by the Board of Directors of RCI (which will, for the foreseeable future, be elected by RCI's current stockholders, including the Company). AUTHORIZATION OF ADDITIONAL SECURITIES. RCI's Certificate of Incorporation authorizes the issuance of up to 30,000,000 shares of common stock. RCI's Board of Directors has the power to issue any and all of such shares without stockholder approval. RCI may issue a substantial number of additional shares in the future. In this regard, RCI plans to make a private placement of its securities in the near future to raise additional capital which would result in a significant dilution of the Company's ownership in RCI. To the extent that additional shares of common stock are issued, dilution of the interests of RCI's stockholders, including the Company, will occur. OPTION PLAN. Pursuant to its stock option plan, RCI may grant options to purchase up to 2,500,000 shares of its common stock to directors, officers and employees of, and consultants to, RCI. RCI has issued options to purchase 2,192,000 shares of common stock under the option plan. During the respective exercise periods of the above-mentioned options, the holders thereof are given an opportunity to profit from a rise in the market price of the common stock (if RCI's stock becomes publicly traded), with a resultant dilution of the interests of the then existing stockholders. As a result, the terms upon which RCI may obtain additional equity financing during such periods could be adversely affected. These holders may be expected to exercise their rights to acquire common stock at a time when RCI would, in all likelihood, be able to obtain needed capital through a new offering of securities on terms more favorable than those provided by these options. -21- GENERAL RISKS BUSINESS DEPENDENT ON KEY PERSONNEL. The Company's business is partially dependent upon the performance of certain key individuals, including its President and Chief Executive Officer, certain executives of its wholly-owned subsidiary, NTC, and certain executives of its 51% owned subsidiary, RCI. The Company has entered into a four year employment agreement (i.e. expiring on November 30, 1999) with Melvyn Reznick, its President and Chief Executive Officer, a three year employment agreement with Edward R. Jacobs, the President of NTC, and employment agreements with Larry Joel and Jeff Rubin, executive officers of RCI. RCI is entering into long term employment agreements with four other of its executives. The Company does not anticipate a termination of its employment relationships with any of its key executives, other than Larry Joel, who has indicated his intention to resign as an officer and director of RCI. The loss of one or more key executives of the Company, NTC or RCI could have an adverse impact on the Company's business. See "Item 1. Business - Employees" in the Company's 1995 Form 10-K. DILUTION CAUSED BY FUTURE SALES OF SHARES. As of October 10, 1996, the Company has approximately 3,807,200 shares of Common Stock (not including the Shares, the Underlying Shares or outstanding shares of Series A Preferred Stock in addition to the ones covered by this Prospectus) issued and outstanding which may be deemed "restricted securities" as that term is defined under Rule 144 of the Securities Act of 1933, as amended (the "Securities Act"). The restricted securities may be sold in the future in compliance with Rule 144 or Regulation S of the Securities Act. Ordinarily, under Rule 144 a person who is an affiliate of the Company (as that term is defined in Rule 144) and has beneficially owned restricted securities for a period of two years may, every three months, sell in brokerage transactions an amount that does not exceed the greater of (i) 1% of the outstanding class of such securities or (ii) the average weekly trading volume in such securities on all national exchanges or reported through the automated quotation system of a registered securities association during the four weeks prior to the filing of a notice of sale by a securities holder. A person who is not an affiliate of the Company who beneficially owns restricted securities is also subject to the foregoing volume limitations but may, after the expiration of three years, sell unlimited amounts of such securities under certain circumstances. Pursuant to Regulation S, foreign shareholders may resell their shares without restriction after the expiration of 40 days from the date of the sale of the stock to them. The Company can make no prediction as to the effect, if any, that sales of shares of Common Stock, or the availability of shares for future sale, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock (including the Shares and the Underlying Shares) in the public market, or the perception that such sales could occur, could depress prevailing market prices for the Company's Common Stock. Such sales may also make it more difficult for the Company to sell equity securities or equity-related securities in the future at a time and price which it deems appropriate. DILUTION CAUSED BY FUTURE ISSUANCES OF STOCK BY THE COMPANY. The Company's Certificate of Incorporation, as amended, authorizes the issuance of 20,000,000 shares of Common Stock and 100,000 shares of preferred stock. The Company currently has 13,294,434 shares of Common Stock outstanding and 1,640 shares of the Series A Preferred Stock outstanding. Assuming the issuance of all of the Shares and Underlying Shares covered by this Prospectus, the Company would have 13,671,934 shares of its Common Stock outstanding. The remaining shares of Common Stock not issued or reserved for specific purposes may be issued without any action or approval of the Company's stockholders. Although there are no present plans, agreements or undertakings involving the issuance of such shares, except as disclosed in this Prospectus, any such issuance could be used as a method of discouraging, delaying or preventing a change in control of the Company or could dilute the public ownership of the Company. There can be no assurance that the Company will not undertake to issue such shares if it deems it appropriate to do so. See "DESCRIPTION OF CAPITAL STOCK." -22- POSSIBLE ADVERSE EFFECTS OF ISSUANCE OF PREFERRED STOCK. The Company's Certificate of Incorporation, as amended, authorizes the issuance of a maximum of 100,000 shares of Preferred Stock on terms that may be established by the Company's Board of Directors without further stockholder action. In September and October 1996 the Company issued $1,640,000 of Series A 2% Convertible Preferred Stock (as of October 15, 1996), which is convertible into the Company's Common Stock based on a price equal to the lesser of the bid price of the Company's Common Stock on the date of funding (i.e. ranging from $4.125 to $4.43 per share), or 80% of the average bid price during the five trading days immediately preceding the date of the conversion. Consequently, the Common Stockholders will experience dilution from the conversion of the Preferred Stock. The dilution will be greater to the extent that the bid price of the Company's Common Stock is lower at the time of conversion, since more shares of Common Stock will be issued for each share of outstanding Series A Preferred. Furthermore, while the Preferred Stock remains outstanding, the Company is subject to certain restrictive covenants. See "THE COMPANY - Issuance of Convertible Preferred Stock." The terms of any other series of Preferred Stock, which may include priority claims to assets and dividends and special voting rights, could also adversely affect the rights of holders of the Common Stock. To date, no Preferred Stock other than the Series A 2% Convertible Preferred Stock has been issued by the Company, although the Company may issue another $680,000 of Series A 2% Convertible Preferred Stock in the future. The issuance of Preferred Stock could make the possible takeover of the Company or the removal of the Company's management more difficult, or otherwise dilute the rights of holders of Common Stock and the market price of the Common Stock. See "DESCRIPTION OF CAPITAL STOCK - Preferred Stock." THE COMPANY GENERAL The Company, its wholly-owned subsidiary, NTC, and its 51% owned subsidiary, RCI, are engaged in three businesses: (i) interactive communications networking services by the Company, (ii) the provision of long distance telephone services by NTC, and (iii) the manufacture and marketing of the Fast CastTM Lensystem that allows retail optical stores and wholesale optical lens manufacturing laboratories to produce single vision, flat-top bifocal and progressive bifocal and multifocal lenses rapidly on demand. The Company provides interactive communications networking services using its proprietary communications software, a central message switching computer and front-end network processor. All subscribers to Incomnet's communications network can simultaneously access the information on the system, can communicate on the system on a real-time basis and can leave electronic messages. The technology is particularly well suited to networks of buyers and sellers because requests for quotes can be broadcast to all participants simultaneously, while responses and subsequent negotiations associated with the quote can be done privately. The Company's major network is the Auto Dismantler Network, known under the tradename "AutoNETWORK," which currently links several hundred licensed automobile dismantlers in California, Colorado, Nevada, Arizona, Oregon and Washington. AutoNETWORK is a monthly subscription service that automobile dismantlers utilize to buy, sell and trade used parts that have been salvaged from automobiles damaged in traffic collisions. The Company continually evaluates other applications for its telecommunications networking technology, including other industries where electronic broadcast and point-to-point communications would add value to the conduct of their business. See "Item 1. Business - AutoNETWORK" and "Item 1. Business - Network Services" in the Company's 1995 Form 10-K. -23- The Company was incorporated under the laws of the State of California in 1974. Its principal place of business is located at 21031 Ventura Boulevard, Suite 1100, Woodland Hills, California 91364. Its telephone number is (818) 887-3400. Additional information about the Company is included in documents incorporated by reference in this Prospectus. See "AVAILABLE INFORMATION" and "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE." The Company's wholly owned subsidiary, NTC, is an inter-exchange carrier and reseller of long distance telephone services and provides nationwide long distance telephone access to commercial and residential customers across the United States. Customers of NTC purchase and pay for specific amounts of time either through direct billing from NTC, billing from the customer's local telephone company, or by prepaying for the use of NTC calling cards. NTC's primary products are its Call $aver Calling Card, its Sure $aver Calling Card, its Dial-1 Telephone Service and its Easy-1 Telephone Service. In order to provide these NTC services, NTC purchases large amounts of long distance time from national and regional carriers at rates based upon high volume usage. NTC then resells this time to customers at discounted retail rates. Its calling cards also eliminate the calling card surcharges generally imposed by AT&T, MCI and Sprint. NTC utilizes a multi-level marketing network of independent sales representatives to market its long distance telephone services to retail customers. NTC was incorporated under the laws of the State of Nevada on September 6, 1984. Its principal offices are located at 2801 North Main Street, Irvine, California 92714 and its telephone number is (714) 251-8000. See "Item 1. Business - Acquisition of National Telephone Communications, Inc. - Operations." See also "AVAILABLE INFORMATION" and "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE." The Company's 51% owned subsidiary, RCI, manufactures and markets the Fast CastTM LenSystem that allows retail optical stores and wholesale optical lens manufacturing laboratories to produce single vision, flat-top bifocal and progressive bifocal lenses on demand, and in minutes. The Fast CastTM LenSystem uses a series of high-accuracy prescription glass molds that are filled with a proprietary liquid monomer (plastic). When exposed to ultraviolet light within the system's curing chamber, the monomer undergoes a chemical reaction that rapidly "cures" or hardens the lens in 15 minutes. RCI commenced assembling and marketing the Rapid Cast equipment, molds and liquid monomer for the Fast CastTM LenSystem in February 1995, when it acquired 100% of the outstanding stock of Q2100, Inc. from Pearle, Inc., and when the Company acquired its controlling interest in RCI. See "Item 1. Business - Acquisition of Rapid Cast, Inc." and "Item 1. Business - Rapid Cast, Inc." in the Company's 1995 Form 10-K. SETTLEMENT WITH PRIOR NOTEHOLDERS Commencing in January 1996 the Company entered into a series of settlement agreements with certain prior holders of 8% convertible promissory notes issued by the Company on February 8, 1995 to finance the acquisition of 51% of RCI. See "Item 1. Business - Acquisition of RCI" in the Company's 1995 Form 10-K. Settlement agreements have been executed by all seven of the prior noteholders who held $825,000 of convertible notes. Pursuant to the settlement agreements, the Company may have to issue additional shares of its Common Stock to these prior noteholders depending on the average quoted price of the Company's stock on the NASDAQ market during the five trading days immediately preceding or following the effective date of this Prospectus. The shares covered by this Prospectus are reserved for possible issuance to the prior noteholders who are parties to signed settlement agreements. See "SELLING SECURITY HOLDERS." If the average market price of the Company's Common Stock on the NASDAQ market is $5.00 per share during the relevant five -24- day trading periods, the Company would not be obligated to issue any additional shares to Jules Nordlicht, and would be obligated to issue a total of 45,500 shares of its Common Stock to the other six prior noteholders. If the average market price of the Company's Common Stock on the NASDAQ market is $12 or more during the relevant five day trading period, then the Company will not be obligated to issue any additional shares of its Common Stock to any of the prior noteholders. Pursuant to one of the settlement agreements with a prior noteholder who invested $100,000 in the convertible notes, if the registration statement covering this Prospectus is not effective by October 31, 1996, then the Company would be obligated to redeem his 10,000 shares of Incomnet Common Stock for $125,000 in cash in lieu of the standard arrangement, no additional shares would be issued, and he would have no shares to be included in this Prospectus. See "SELLING SECURITY HOLDER." See also "Item 3. Legal Proceedings - - Claims By Prior Noteholders" in the Company's 1995 Form 10-K, as updated under "Item 1. Legal Proceedings - Claims By Prior Noteholders" in the Company's Form 10-Q for the quarter ended June 30, 1996. PROPOSED SETTLEMENT WITH PRICE INTERNATIONAL On August 15, 1996, the Company proposed a settlement agreement to Price International pursuant to which the Company agreed to lower the exercise price of Price International's Warrants from $11.25 per share to $4.50 per share (the last sale price of the Company's stock on August 15, 1996), and to extend the expiration date of the Warrants from November 15, 1997 until December 31, 1998. The Company also agreed to register the Underlying Shares. In consideration for the modification to the terms and conditions of the Warrants, the Company proposed that (a) Price International be required to exercise at least 25,000 of the Warrants once the trading price of the Company' stock averages $5.30 per share during any 30 day period, provided that the Underlying Shares are effectively registered at such time, and (b) that Price International releases and forever discharges the Company from all claims it may have had against the Company for events occurring prior to the date of the settlement agreement. The settlement agreement signed by the Company has been delivered to Price International, but the Company has not yet received the agreement signed by Price International. There is no assurance that the settlement agreement will ever be signed and agreed to by Price International, or that Price International will not file a lawsuit against the Company instead of settling its claims as proposed by the Company. ISSUANCE OF CONVERTIBLE PREFERRED STOCK From September 20, 1996 to October 15, 1996, the Company issued 1,640 shares of Series A 2% Convertible Preferred Stock to nine accredited investors in a private placement pursuant to Regulation D of the Securities Act of 1933, as amended. The shares of Series A 2% Convertible Preferred Stock were purchased by four affiliated individuals, an agent of the Underwriter, and four unaffiliated investors. The Company raised $1,640,000 in capital from the issuance of the Preferred Stock, approximately 65% of which it utilized to repay advances made to it by Melvyn Reznick, the Company's Chairman and Chief Executive Officer, who in turn owed approximately $723,000 to a bank on a loan with a maturity date of September 16, 1996. Mr. Reznick had borrowed these funds from the bank in order to make a substantial portion of his loan to the Company, which enabled the Company to make its pro rata share of loans to RCI. See "THE COMPANY - Loans to RCI." The balance of the proceeds is expected to be used for general working capital and costs, and to make short-term advances to its subsidiary, Rapid Cast, Inc., for its working capital purposes. The Company paid a referral fee to Newport Capital Partners, an unaffiliated financial consultant, equal to 5% of the capital raised through its referrals, which is one million dollars to date. The Company has therefore paid $50,000 of referrals fees to Newport Capital Partners to date. The basic terms and conditions of the Series A 2% Convertible Preferred Stock are described in the following paragraphs: -25- VOTING. The Series A 2% Convertible Preferred Stock does not have voting rights. DIVIDEND. The Series A 2% Convertible Preferred Stock has a cumulative noncompounded annual dividend of 2% payable in cash or stock at the Company's option upon conversion of the Preferred Stock into Common Stock, and prior to the payment of any dividends on the Common Stock. LIQUIDATION PREFERENCE. The Series A 2% 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 first 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. CONVERSION. The Preferred Stockholders may convert each share of Series A 2% 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) 90 days after the issuance of the Preferred Stock, or (ii) 60 days after 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 A 2% 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 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. 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 A 2% 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 75 days after it is filed. The Underlying Shares issuable upon the conversion of the first 365 shares of Series A 2% Convertible Preferred Stock issued by the Company are covered by this Prospectus. The balance of the shares of Common Stock issuable upon the conversion of outstanding Series A 2% Convertible Preferred Stock are planned to be included in a second registration statement filed by the Company within the next 30 days. -26- ANTIDILUTION PROVISION. The Certificate of Determination for the Series A 2% 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 A 2% 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 A 2% 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. LOANS TO RCI In January 1996, most of the shareholders of RCI made their pro rata share of a total loan of $648,000 to RCI to finance its operations. In consideration for their loans, the RCI shareholders who made the advances received convertible notes bearing simple interest at the rate of 8% per annum, payable quarterly, with all principal and accrued but unpaid interest due in full on December 31, 1999. The notes are convertible into shares of RCI common stock at a conversion price of $.80 per share at any time. The Company loaned $326,400 as its pro rata share of the total loan made by the RCI stockholders. In April, May, June and August 1996, the existing shareholders and executives of RCI or their affiliates made or agreed to make one year loans aggregating $2,838,683 to RCI to finance its operations. Incomnet, Inc. loaned its pro rata share of the total advance by lending an additional $1,607,996 to RCI. The loans bear simple interest at the rate of 10% per annum, with interest payable monthly and principal payable in full upon the earlier of (i) one year from the date of the advance, or (ii) upon RCI receiving equity or debt financing from another source totalling $3,000,000 or more. As additional consideration for making the loans, the stockholders of RCI were issued seven year warrants to purchase up to 1,853,683 additional shares of RCI common stock for an exercise price of $2.25 per share with respect to 1,838,683 of the warrants, and for an exercise price of $4.00 per share with respect to the other 15,000 warrants. The warrantholders have certain piggyback and demand registration rights with respect to the shares underlying these RCI warrants. The Company made a substantial portion of its pro rata share of the loan from the proceeds of an advance made to the Company by its President, Melvyn Reznick, from a line of credit he obtained personally from a bank. See "Certain Relationships and Related Transactions - Loans to the Company by Melvyn Reznick" in the Company's Proxy Statement for the 1996 Annual Meeting of the Shareholders. The balance of the loans was made from the proceeds of short term loans made to the Company by NTC. See "RISK FACTORS - Risks Relating to Incomnet, Inc. and NTC - Short-Term Loans to the Company." -27- RECENT DEVELOPMENTS In May 1996, NTC entered into a new carrier contract with Wiltel, Inc. of Tulsa, Oklahoma, a subsidiary of WorldCom, Inc., covering a potential volume purchase of one billion dollars of long distance telephone time over a five year period commencing in June 1996. As in the prior carrier contract with Wiltel, Inc., NTC commits to purchase the designated volume of telephone time in accordance with a schedule over the term of the contract. NTC currently relies on the purchases of another unaffiliated long distance telephone service provider to meet its volume purchase requirements under the new contract. Effective May 9, 1996, Joel Greenberg resigned as a director of the Company pursuant to a settlement agreement entered into by Mr. Greenberg and the Company. The Company's Board of Directors was elected at the annual meeting of the shareholders held on July 29, 1996. The Board has three members and one vacancy, since Gerald Katell decided not to serve even though he was nominated and elected. See the Company's Proxy Statement for the 1996 Annual Meeting of the Shareholders, its Form 8-K filed on June 7, 1996 and its Form 8-K filed on August 8, 1996. On September 3, 1996, the Company and Melvyn Reznick, the Chairman and Chief Executive Officer of the Company, extended the term of Mr. Reznick's employment agreement from November 30, 1997 until November 30, 1999. DIRECTORS AND EXECUTIVE OFFICERS OF RCI THE DIRECTORS AND EXECUTIVE OFFICERS OF RCI. The directors and executive officers have held their positions with RCI since its inception, except for Melvyn Reznick who became a director of RCI in November 1995, Henry Dachowitz, who became an officer in March 1995, and Steve Luetke, Dr. Omar Buazza and Dr. Shawn Zimberg, who became officers in April 1995. RCI's officers serve at the discretion of its Board of Directors. See "Item 1. Business-Acquisition of Rapid Cast, Inc." in the Company's 1995 Form 10-K, for the rights of the Company to designate directors of RCI, and for the Company's designation of Melvyn Reznick as a director of RCI. Mr. Joel Greenberg resigned as a director of RCI, NTC and the Company effective May 9, 1996. See the Company's Proxy Statement for the 1996 Annual Meeting of the Shareholders and the Company's Form 8-K, filed on June 7, 1996, for additional information regarding Mr. Greenberg's resignation and the related mutual settlement of claims. NAME AGE POSITION WITH RCI Larry Joel, O.D.(1) 50 Chairman of the Board of Directors, Chief Executive Officer and President Robert Cohen, O.D.(2) 53 Director Alan Cohen, O.D. 45 Vice-President, Treasurer and Director Melvyn Reznick(2) 53 Director Jeffrey Rubin 29 Executive Vice President and Secretary Omar Buazza, Ph.D. 44 Vice President of Research and Development Henry Dachowitz 40 Chief Financial Officer and Treasurer Thomas Freedman 43 Chief Operating Officer Shawn Zimberg, M.D. 30 Vice President of Strategic Planning Steve C. Luetke 42 Director of Products Development -28- ________________________ (1) Dr. Joel has indicated that he may resign as an officer and director of RCI. In connection with his resignation, his employment agreement with RCI may be replaced by a consulting agreement. RCI believes that it will be able to hire a replacement for Dr. Joel. See "RISK FACTORS -General Risks - Business Dependent on Key Personnel." (2) These persons are the administrators of RCI's Amended and Restated Stock Option Plan. Robert Cohen and Alan Cohen are brothers. Jeffrey Rubin is married to Robert Cohen's daughter. There are no other family relationships between any of the directors or executive officers of RCI. RCI has obtained "key person" life insurance in the amount of $1,000,000 on the lives of each of Jeffrey Rubin, Dr. Omar Buazza and Steve Luetke. LARRY JOEL, O.D. Since 1983, Dr. Joel has been Chairman of the Board of Vision Centers of America, which is engaged in the retail optical business. Dr. Joel was a founder and principal stockholder of ORGIC and has served as its Chairman since 1989. Under his direction, ORGIC developed the Technology which was sold to Q2100 (a subsidiary of Pearle) in 1991. Dr. Joel has also served as President of Q2100 since 1991. In 1969, Dr. Joel received a Bachelor of Science degree and a Doctor of Optometry degree from the Illinois College of Optometry. ROBERT COHEN, O.D. Dr. Cohen has been engaged in the retail and wholesale optical business since 1968. He has been the President, a director and a significant stockholder of Cohen's Fashion Optical since its formation in 1970. Cohen's Fashion Optical, an operator and franchisor of approximately 110 retail optical stores, is one of the nation's top ten retailers of eyewear products, as measured by 1992 sales. Since 1992, Dr. Cohen also has been the Chairman of the Board, Chief Executive Officer and a significant shareholder of Sterling Vision. Sterling Vision is an operator, franchisor and licensor of approximately 235 retail optical stores. Dr. Cohen additionally is a significant stockholder of and a consultant to Neolens, Inc. which manufactures and markets polycarbonate prescription ophthalmic lenses. In 1968, Dr. Cohen received a Bachelor of Science Degree and a Doctor of Optometry degree from the Pennsylvania College of Optometry. ALAN COHEN, O.D. Dr. Cohen has been engaged in the retail and wholesale optical business since 1974. He has been a director, Executive Vice President and significant stockholder of Cohen's Fashion Optical since 1975. Since 1992, Dr. Cohen has also been the Chief Operating Officer, a director and a significant stockholder of Sterling Vision. Dr. Cohen is also a significant stockholder of and a consultant to Neolens, Inc. In 1974, Dr. Cohen received a Bachelor of Science degree and a Doctor of Optometry degree from the Pennsylvania College of Optometry. MELVYN REZNICK. Mr. Reznick was appointed President and Chief Executive Officer of Incomnet, Inc. in November 1995 and Chairman of the Board of Directors effective May 9, 1996. He has 30 years experience in engineering, manufacturing, management, marketing, real estate and corporate development. From 1977 to November 1995, Mr. Reznick served as President of Property Research and Management Co., a Los Angeles-based company engaged in the business of real estate syndication, development and management. He is a member of the National Association of Corporate Directors (NACD). He received both his Bachelor of Science and Master of Science degrees in Mechanical Engineering Science from the Massachusetts Institute of Technology. -29- JEFFREY RUBIN. From 1989 to January 1994, Mr. Rubin served as a Vice President of American European, Inc., an international import and export firm. Since 1993, Mr. Rubin has been an Executive Vice-President and significant stockholder of Lensco, a firm that provides consulting services to the optical industry. Mr. Rubin has also been a significant stockholder of and a consultant to Neolens since 1993. See "RISK FACTORS - Risks Relating to RCI - Conflicts of Interest." He received a Bachelor of Arts degree in Political Science from the University of Michigan, Ann Arbor, in 1989 and studied at the London School of Economics. OMAR BUAZZA, PH.D. From 1985 until he joined RCI in February 1995, Dr. Buazza worked at the University of Louisville on developing methods for photopolymerizing eyeglass lenses. Prior to joining RCI in February 1995, Dr. Buazza was employed by ORGIC since its inception in 1988. Dr. Buazza received his Ph.D. in Polymer Chemistry from the University of Louisville in 1987 and his Master of Science in Chemistry from the same University in 1978. His undergraduate work was completed at the University of Tripoli where he received a Bachelor of Science degree in Chemistry. HENRY M. DACHOWITZ. From 1992 until joining RCI in February 1995, Mr. Dachowitz was Chief Financial Officer of Pharmos Corporation, a company engaged in the business of developing pharmaceutical products. Prior to assuming his position with Pharmos Corporation in 1992, Mr. Dachowitz was Director of Financial Service Management Consulting for Richard A. Eisner & Company. From 1988 to 1992, Mr. Dachowitz was a Vice President at Bankers Trust. Mr. Dachowitz is a Certified Public Accountant. He received his Bachelor of Science in Accounting from Brooklyn College in 1977 and his Masters in Business Administration from Harvard Business School in 1980. THOMAS FREEDMAN. Prior to joining RCI in March 1996, Mr. Freedman was the Vice-President of Operations at Travel Related Services, Inc., a subsidiary of American Express, in its North Carolina Regional Operations Center from October 1993 until February 1996. Mr. Freedman was the Vice-President of Quality Control and Vice-President of Operations and Engineering for Pearle Vision, Inc., a subsidiary of Grand Metropolitan, PLC, from September 1991 until October 1993. Prior to his position with Pearle Vision, Inc., Mr. Freedman was a Plant Operations Manager, Senior Industrial Engineer and Production Manager with Frito-Lay, Inc., a subsidiary of Pepsico, Inc., from May 1982 until September 1991. Mr. Freedman has a Bachelors of Science in Industrial Engineering and Operations Research which he received from Cornell University, College of Engineering in 1974, and a Masters in Business Administration in Operations Management from the University of Pittsburgh, Graduate School of Business, which he received in 1975. SHAWN ZIMBERG, M.D. Prior to joining RCI on a full time basis in March 1995, Dr. Zimberg had served as a consultant to RCI since its inception from April 1994 to March 5, 1995. Dr. Zimberg also served as a consultant to Integrated Financial Strategies, Inc., a company that invests in the equity securities of small to middle sized capitalization companies in the medical, bio-technology and computer industries. In 1986, he also was founder of DNA Software, Inc., a vertical market software firm. Dr. Zimberg serves as a consultant and Director of MediVisions, Inc., a medical instrument manufacturer. Dr. Zimberg received his Bachelors of Science and M.D. from the University of Michigan in 1991, and completed his specialty training in Radiation Oncology at Memorial Sloan - Kettering Cancer Center. -30- STEVE C. LUETKE. From 1988 until he joined RCI in February 1995, Mr. Luetke worked at ORGIC on the development of the LenSystem. He is named as an inventor on three patent applications filed by ORGIC related to ultraviolet lens curing technology. Mr. Luetke began his career as a Dispensing Optician and then served as a District Manager for D&K Optical in Minnesota through the early 1980's. He was General Manager of Mobile Eye Care Inc. from 1986 through 1988. Mr. Luetke holds a Bachelor of Science degree in Business Administration from Butler University in Indianapolis. All of RCI's current directors will hold office until the annual meeting of stockholders to be held with respect to RCI's fiscal year ended March 31, 1996 (the "1996 Annual Meeting"), which is expected to be held in October 1996, and until their successors are duly elected and qualified. RCI DIRECTOR COMPENSATION RCI reimburses its directors for reasonable travel and other expenses incurred in connection with their activities on behalf of RCI, including attendance at Board meetings, but does not pay its directors any fees for Board participation (although it may do so in the future). RCI EXECUTIVE COMPENSATION For the fiscal year ended March 31, 1996, the President and four most highly compensated executive officers of RCI in the aggregate were paid approximately $497,250. The following table sets forth information concerning the cash and other compensation paid by RCI during the fiscal year ended March 31, 1996, and being paid during the current fiscal year, to its President and each of its four other most highly compensated executive officers. The compensation being paid to the officers during the current fiscal year is subject to change by resolution of the Board of Directors and concurrence by RCI's Compensation Committee. -31- SUMMARY COMPENSATION TABLE
NAME AND PRINCIPAL POSITION ANNUAL COMPENSATION LONG-TERM ALL OTHER SALARY ($) BONUS ($) COMPENSATION- COMPENSATION SECURITIES UNDERLYING OPTIONS(1) - ----------------------------------------------------------------------------------- Larry Joel, Chairman and $150,000 $- 0 - - 0 - $- 0 - President Thomas Freedman, Chief $5,000 $- 0 - - 0 - $- 0 - Operating Officer(2) Jeffrey Rubin, Executive $125,000 $- 0 - - 0 - $- 0 - Vice-President & Secretary Henry Dachowitz, Chief $108,750 $10,000 200,000 $- 0 - Financial Officer & Treasurer(4) Shawn Zimberg, Vice- $90,000 $- 0 - 200,000 $8,500(3) President of Strategic Planning(5) - -----------------------------------------------------------------------------------
(1) Represents incentive stock options and nonqualified stock options granted pursuant to RCI's 1994 Stock Option Plan. See the table immediately below and "THE COMPANY - RCI 1994 Stock Option Plan." (2) Mr. Freedman joined RCI in March 1996. Mr. Freedman's current salary is $120,000 on an annualized basis. (3) Mr. Rubin's current salary is $125,000 on an annualized basis. (4) Mr. Dachowitz's current salary is $135,000 on an annualized basis. (5) The other compensation for Dr. Zimberg reflects automobile and parking allowances. RCI OPTION GRANTS The following table sets forth for each of the named executive officers of RCI certain information concerning stock options granted by RCI through October 10, 1996. The table does not include warrants to purchase RCI common stock issued by RCI from January 1996 until August 1996. See "THE COMPANY - Warrants Issued by RCI." -32-
NAME NUMBER OF PERCENT OF TOTAL EXERCISE PRICE EXPIRATION SECURITIES OPTIONS GRANTED TO PER SHARE(3) DATE(4) UNDERLYING OPTIONS EMPLOYEES(2) GRANTED(1) - ------------------------------------------------------------------------------------- Larry Joel 0 0% 0 - Thomas Freedman 200,000 9.1% $2.00 4/1/2006 Jeffrey Rubin 0 22.8% $2.25 7/15/2006 Henry Dachowitz 200,000 9.1% $2.00 11/15/2005 Shawn Zimberg 200,000 9.1% $2.00 11/15/2005
- -------------------------------------- (1) These options include 50,000 incentive stock options each for Mr. Dachowitz and Dr. Zimberg, and 150,000 nonqualified stock options for each of them granted pursuant to RCI's 1994 Stock Option Plan. See "THE COMPANY - RCI 1994 Stock Option Plan." (2) During the period from April 1, 1995 through October 10, 1996, RCI granted options to purchase an aggregate of 2,192,000 shares of its Common Stock. (3) In determining the fair market value of the RCI common stock, the Board of Directors considered various factors, including RCI's financial condition and results of operations, the book and tangible value of its assets, the absence of a market for its Common Stock and the risks normally associated with high technology companies. (4) Options may terminate before their expiration dates if the optionee's status as an employee is terminated, or within a certain period of time after the optionee's death or disability. RCI COMMON STOCK UNDERLYING UNEXERCISED OPTIONS The following table sets forth for each of the named officers of RCI the number of shares of RCI common stock subject to both exercisable and unexercisable stock options as of October 10, 1996. All of such options are incentive stock options granted pursuant to RCI's 1994 Stock Option Plan. None of the named officers has exercised any options to date, and none of the exercisable or unexercisable stock options held by them as of that date represented "in-the-money" options. See "THE COMPANY - RCI 1994 Stock Option Plan." -33- NUMBER OF SHARES OF COMMON STOCK UNDERLYING UNEXERCISED OPTIONS AT OCTOBER 10, 1996 ------------------- Name Exercisable Unexercisable ----------------------------------------------------- Larry Joel 0 0 Thomas Freedman 200,000 0 Jeffrey Rubin 500,000 0 Henry Dachowitz 200,000 0 Shawn Zimberg 200,000 0 WARRANTS ISSUED BY RCI During the period from April 1996 until August 1996, RCI issued warrants to purchase 1,838,683 shares of RCI common stock at an exercise price of $2.25 per share, and warrants to purchase 15,000 shares of RCI common stock at an exercise price of $4.00 per share, which were issued to the RCI stockholders in consideration for a total of $2,838,683 of loans made by them during the period from January until August 1996 to finance RCI's operations while it seeks additional equity financing. The warrants are exercisable at any time during the seven year period after they are issued. The warrantholders, including the Company, have certain registration rights with respect to the warrants in the event that RCI becomes a publicly traded company. See "Certain Relationships and Related Transactions - Loan to Company By Melvyn Reznick" in the Company's Proxy Statement for the 1996 Annual Meeting of the Shareholders. RCI EMPLOYMENT AGREEMENTS LARRY JOEL. In February 1995, RCI entered into an employment agreement with Dr. Larry Joel, its Chairman of the Board and President, which expires on December 31, 1999. Under this agreement, Dr. Joel will generally be required to devote his full time to RCI's affairs and is entitled to an annual salary of $150,000. He is also entitled to participate in the option plan referred to below and to receive such insurance, vacation, disability and other benefits as will be made generally available to RCI's executive officers. The agreement requires that all confidential information developed by or made known to Dr. Joel during the course of his employment is to be kept confidential and not disclosed to third parties, except in certain circumstances, and that all inventions conceived by Dr. Joel during his employment relating to RCI's business shall be its exclusive property. The agreement also provides that RCI will be the exclusive owner of all information relating to the RCI Technology or the LenSystem which was developed by or made known to Dr. Joel prior to the term of his employment agreement. Under the agreement, Dr. Joel is also prohibited, subject to certain terms and conditions, from engaging in business activities competitive with RCI's business for a period of three years following the expiration of the agreement. Dr. Joel has indicated that he may resign as an officer and director of RCI. The terms of such a resignation, if it occurs, have not yet been agreed upon by Dr. Joel and RCI. -34- JEFFREY RUBIN. In February 1995, RCI entered into an employment agreement with Jeffrey Rubin, its Executive Vice President and Secretary, which will expire on December 31, 1997. This agreement has terms and conditions substantially identical to those of Dr. Joel's employment agreement, except that Mr. Rubin's annual salary is established at $125,000. RCI COMPENSATION COMMITTEE From the formation of RCI in February 1994 until the election of Sam D. Schwartz and Joel W. Greenberg as directors in February 1995, RCI's Board of Directors did not have a separate Compensation Committee. Accordingly, each of the members of the Board of Directors (then comprised of Dr. Larry Joel, Dr. Robert Cohen, Dr. Alan Cohen and Jeffrey Rubin) participated during that period in deliberations regarding compensation that would be payable including, in the case of Dr. Joel and Mr. Rubin, deliberations regarding their own compensation. In April 1995, the RCI Board established a Compensation Committee consisting solely of nonemployee directors, namely Mr. Schwartz and Robert Cohen. Upon Mr. Schwartz's resignation from the RCI Board of Directors in November 1995 and Melvyn Reznick's appointment as his replacement, Mr. Reznick also replaced Mr. Schwartz on the RCI Compensation Committee. The Compensation Committee makes recommendations concerning salaries, benefits and incentive compensation (including grants under RCI's Stock Option Plan) for directors, officers, employees and consultants of RCI. RCI STOCK OPTION PLAN In February 1994, RCI's Board of Directors and its stockholders adopted RCI's 1994 Stock Option Plan (the "Plan"). The purpose of the Plan is to attract key employees, officers and directors and to encourage their continued employment and their increased stock ownership in RCI. The Board of Directors believes that the granting of stock options under the Plan will promote continuity of management, and will result in increased incentives for those who are or may become responsible for managing RCI. The Plan provides for the grant of options to purchase up to 2,500,000 shares of RCI common stock. If any options expire or terminate without having been exercised in full, the unpurchased shares will again be available for issuance under the Plan. The Plan is administered by a committee of at least two directors (the "Administrators") of RCI who are disinterested with the meaning of Rule 16b-3(c)(2)(i) under the Securities Exchange Act of 1934, as amended. To be disinterested, a director may not have received options under any of RCI's stock option plans, except pursuant to a formula, during the prior one-year period. Currently, Robert Cohen and Melvyn Reznick are the Administrators of the Plan. Options which qualify as Incentive Stock Options ("ISO's") under the Internal Revenue Code of 1986, as amended (the "Code"), and non-qualifying options ("NQSO's") may be issued under the Plan. The Plan provides for a two-prong method for calculating the number of options to be granted based upon a formula and upon the discretion of the Administrators. Formula grants of options to purchase that number of shares of RCI common stock having a fair market value of $25,000 are made to each of the Administrators once each calendar year following RCI's Annual Meeting of Stockholders. The formula provisions of the Plan may be amended not more than once every six months other than to comport with changes in IRS and ERISA rules and regulations. The purchase price of RCI common stock subject to each option issued under the Plan will be determined by the Administrators, but in the case of an ISO (or NQSO issued pursuant to a formula grant under the Plan) may not be less than (i) the fair market value of the RCI common stock subject to the option on the date of grant or (ii) in the case of an option granted to an employee who, at the time the option is granted, owns (within the meaning of the Code) more than 10% of the total combined voting power of all classes of stock of RCI, 110% of the -35- fair market value of the RCI common stock subject to the option on the date of grant. Options under the Plan may be exercised in a manner and at such times fixed by the Board of Directors, but may not be exercised for a term of more than 10 years, or for a term of five years in the case of an employee who, at the time an ISO is granted, owns (within the meaning of the Code) more than 10% of the total combined voting power of all classes of stock of RCI. In no event may ISO's which are exercisable for stock having an aggregate fair market value of more than $100,000 (together with all ISO's granted under any other Plan) be granted which first become exercisable in any one calendar year. Options are not transferable except by will or intestacy on the death of the optionee. In general, options granted under the Plan terminate when an optionee ceases to be employed by RCI or within a specified period after the termination of employment depending upon the reason for such termination. The Plan terminates and no further options can be granted on February 16, 2004. During the fiscal year ended March 31, 1995, no options were granted under the Plan. During the fiscal year ended March 31, 1996, options were granted in respect of an aggregate of 1,142,000 shares of RCI common stock. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS. As permitted by the Delaware General Corporation Law (the "Delaware Law"), RCI's Certificate of Incorporation includes a provision that eliminates, to the maximum extent permitted by the Delaware Law, any director's personal liability to RCI or its stockholders for monetary damages in respect of any breach by such director of his fiduciary duty. The Delaware Law does not permit a director's personal liability to be eliminated (i) for any breach of a director's duty of loyalty to RCI or its stockholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock repurchases or redemptions, as provided in Section 174 of the Delaware Law, or (iv) for any transaction from which the director derived an improper personal benefit. In addition, as permitted by Section 145 of the Delaware Law, the By-Laws of RCI provide that RCI shall indemnify its directors and executive officers to the fullest extent permitted by the Delaware Law, including those circumstances in which indemnification would otherwise be discretionary, subject to certain exceptions. The By-Laws also provide that RCI will advance expenses to directors and executive officers incurred in connection with an action or proceeding as to which they may be entitled to indemnification, subject to certain exceptions. RCI currently carries director and officer liability insurance. RCI has entered or will enter into indemnity agreements with each of its directors and executive officers that provide the maximum indemnity allowed to directors and executive officers by the Delaware Law and RCI's By-Laws, subject to certain exceptions, as well as certain additional procedural protection. In addition, the indemnity agreements provide generally that RCI will advance expenses incurred by directors and executive officers in any action or proceeding as to which they may be entitled to indemnification, subject to certain exceptions. RCI currently carries director and officer liability insurance. PRINCIPAL STOCKHOLDERS OF RCI. The table below sets forth, as of October 10, 1996, the number of shares of common stock beneficially owned (which includes the number of warrants to purchase common stock) by (i) each of the RCI directors and executive officers, (ii) each person known by RCI to be the beneficial owner of five percent or more of its outstanding shares of common stock and (iii) all directors and executive officers of RCI as a group. Unless otherwise indicated, RCI believes that the beneficial owner has sole voting power over such shares. -36- NAME AND ADDRESS OF BENEFICIAL NUMBER OF SHARES PERCENTAGE OWNER(1) BENEFICIALLY OF SHARES OWNED(2) OWNED(3) - ---------------------------------------------------------------------------- Larry Joel(4) 3,266,667 16.1% Jeffrey Rubin(5) 1,088,889 5.4% Alan Cohen(6)(7) 1,088,889 5.4% Robert Cohen(7) 1,088,889 5.4% Melvyn Reznick(8) 10,200,000 50.4% Incomnet, Inc.(9) 10,200,000 50.4% Steve C. Luetke(10) 0 0.0% Omar Buazza (10) 0 0.0% Henry M. Dachowitz(10) 0 0.0% Shawn H. Zimberg(10) 0 0.0% Laura Huberfeld(11) 1,633,334 8.1% Naomi Bodner(12) 1,633,334 8.1% All directors and executive officers as a group (10 persons) 16,733,332 82.6% - ------------------------------ (1) The address for each named individual or entity is in care of Rapid Cast, Inc., 1500 Hempstead Turnpike, East Meadow, New York 11554, except that (i) Incomnet, Inc. and Melvyn Reznick have an address at Incomnet, Inc., 21031 Ventura Boulevard, Suite 1100, Woodland Hills, California 91364, and (ii) Laura Huberfeld and Naomi Bodner have an address at 152 West 57th Street, New York, New York 10019. (2) Unless otherwise indicated, RCI believes that all persons and entities named in the table have sole voting and investment power with respect to all shares of Common Stock beneficially owned by them, except to the extent authority is shared by spouses under applicable law. A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from the date of this Prospectus upon the exercise of options, warrants or convertible securities. Each beneficial owner's percentage ownership is determined by assuming that options, warrants or convertible securities that are held by such person (but not those held by any other person) and which are exercisable within 60 days of the date of this Prospectus have been exercised and converted. The table does not include any shares issuable (a) upon the exercise of RCI warrants issued on February 8, 1995 in connection with the Company's issuance of 8% convertible notes to finance the acquisition of a controlling interest in RCI, or (b) upon the exercise of options granted under the 1994 RCI Stock Option Plan, or (c) upon the conversion of 8% convertible notes issued by RCI in January 1996 to RCI stockholders who made loans to RCI at that time, or (d) upon the exercise of warrants issued to RCI stockholders who participated in the loans to RCI during the period from April 1996 to August 1996. See "THE COMPANY - Loans to RCI" and "THE COMPANY - Warrants Issued by RCI." -37- (3) Assumes a total of 20,250,000 shares outstanding, not including any stock options granted under the RCI 1994 Stock Option Plan, and not including 1,000,000 shares which may be acquired pursuant to the exercise of 1,000,000 outstanding warrants to purchase RCI common stock at a price equal to 50% of the average of the last reported sales price during the first 30 business days after the date RCI's common stock first becomes publicly traded. See "THE COMPANY - RCI Option Grants During the Fiscal Year Ended March 31, 1996" and "Item 1. Business - Acquisition of Rapid Cast, Inc. - Financing" in the Company's 1995 Form 10-K. The total shares outstanding also do not include any shares issuable upon the conversion of 8% convertible notes issued by the Company in January 1996, or upon the exercise of warrants issued by RCI in April, May, July and August 1996 in connection with loans made to RCI by is shareholders during that period. See "THE COMPANY - Loans to RCI." (4) Dr. Joel has indicated that he may sell a portion of his shares if he resigns as an officer and director of RCI. See "THE COMPANY - Directors and Officers of RCI." (5) Includes 290,370 shares of RCI common stock beneficially owned by a trust the sole beneficiary of which is Mr. Rubin's wife, Stephanie Cohen Rubin, as to which shares Mr. Rubin disclaims all beneficial interest. (6) Includes 435,555 shares of RCI common stock beneficially owned by each of Alan Cohen's two minor children, Jacqueline Cohen and Gabrielle Cohen, as to which shares Mr. Cohen disclaims all beneficial interest. Does not include 70,000 shares of RCI Common Stock issuable upon the exercise of RCI warrants issued on February 8, 1995. (7) Does not include 60,000 shares owned by Broadway Partners, a partnership comprised of the children of Alan Cohen and Robert Cohen, as to which Robert Cohen disclaims all beneficial interest. Does not include 70,000 shares of RCI Common Stock issuable upon the exercise of RCI warrants issued on February 8, 1995. (8) Consists of shares of RCI common stock beneficially owned by Incomnet by virtue of Mr. Reznick's position as the President and Chief Executive Officer of Incomnet. Does not include shares issuable upon the conversion of 8% promissory notes issued by RCI in January 1996 or warrants to purchase RCI common stock issued by RCI in April, May, June and August 1996. (9) Incomnet acquired 10,200,000 shares of RCI common stock as part of a private placement of securities which was consummated in February 1995. See "Item 1. Business - Acquisition of Rapid Cast, Inc." in the Company's 1995 Form 10-K. Does not include shares issuable upon the conversion of 8% promissory notes issued by RCI in January 1996 or warrants to purchase RCI common stock issued by RCI in April, May, July and August 1996. (10) Does not include 200,000 shares of RCI common stock issuable upon the exercise of stock options granted under the RCI 1994 Stock Option Plan. (11) Includes 544,444 shares of RCI common stock beneficially owned by each of Laura Huberfeld's two minor children, Jessica Huberfeld and Rachel Huberfeld, as to which shares Mrs. Huberfeld disclaims all beneficial interest. Laura Huberfeld is the wife of Murray Huberfeld, a principal of Broad Capital Associates, Inc. (12) Includes 163,333 shares of RCI common stock beneficially owned by each of Naomi Bodner's eight minor children, Moshe Bodner, Aaron Bodner, Elizar Bodner, Tzypporah Bodner, Mordechi Bodner, Yaakov Bodner, Rachel Bodner, and Yissochar Bodner, as to which shares Mrs. Bodner disclaims all beneficial interest. Naomi Bodner is the wife of David Bodner, a principal of Broad Capital Associates, Inc. -38- SECURITIES OF RCI RCI is authorized to issue 30,000,000 shares of common stock, par value $.001 per share. As of October 10, 1996, 20,250,000 shares of RCI common stock are issued and outstanding, warrants to purchase 1,853,683 shares of RCI common stock are issued and outstanding pursuant to the issuance of short-term notes by RCI in April, May, July and August 1996, convertible notes convertible into 810,000 shares of RCI common stock are issued and outstanding, and options to purchase 2,192,000 shares of common stock are issued and outstanding. All issued and outstanding shares of common stock are fully paid and nonassessable. Holders of shares of common stock, as such, have no conversion, preemptive or other subscription rights. There are no redemption provisions applicable to the common stock. The holders of common stock are entitled to receive dividends when, as if declared by the Board of Directors out of funds legally available therefor, subject to the prior rights of holders of preferred stock, if any. In the event of liquidation, dissolution or winding up of RCI, the holders of common stock are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision has been made for each class of stock (if any) having preference over the common stock. The holders of common stock are entitled to one vote for each share held of record on all matters to be voted on by the stockholders. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares of common stock voting for the election of directors can elect all of the directors then being elected. RCI has outstanding warrants to purchase 1,000,000 shares of common stock issued on February 8, 1995 (the "RCI Warrants"). The RCI Warrants are exercisable to purchase shares of common stock commencing on the 35th business day after any date before December 31, 1998 (the "Start Date") on which securities of RCI are first traded publicly. The exercise price of the RCI Warrants will be equal to 50% of the average of the last reported sales price on the first 30 business days after the Start Date. The RCI Warrants will expire 180 days after the date, if any, on which they first become exercisable. See "Item 1. Business - Financing of Acquisition of RCI" in the Company's 1995 Form 10-K. RCI has outstanding warrants to purchase an additional 1,853,683 shares of common stock issued in April, May and July 1996 ("RCI Additional Warrants"). The RCI Additional Warrants confer on the holders the right to purchase a total of 1,853,683 shares of RCI common stock at any time for a period of seven years at a price of $2.25 per share. In August 1996, the shareholders loaned an additional $1,000,000 to RCI to finance its operations. In consideration for the additional $1,000,000 short-term loans to RCI, RCI issued 15,000 warrants to purchase 15,000 additional shares of RCI common stock at any time for a period of seven years at an exercise price of $4.00 per share. See "THE COMPANY - Loans to RCI." CERTAIN RCI TRANSACTIONS RCI leases office space in two locations from companies owned by certain of its stockholders. See "Item 1. Business - Rapid Cast, Inc. - Facilities" in the Company's 1995 Form 10-K. Cohen's Fashion Optical, Sterling Vision and Vision Centers of America are affiliates of certain of RCI's directors and executive officers. See "THE COMPANY - Directors and Executive Officers of RCI." Retail optical stores that are owned by those companies have purchased 37 LenSystems and $229,116 of Rapid Cast Liquid Monomer and other ancillary supplies. RCI anticipates that retail optical stores that are operated by or are franchisees of those companies may seek to purchase or lease an undeterminable number of additional LenSystems and Rapid Cast Liquid Monomer from RCI. Except for Vision Centers of America, which has committed to purchase 50 of the LenSystems, which obligation is guaranteed by Dr. Larry Joel, Chairman of the Board and President of RCI, none of such companies or their -39- respective franchisees have made any commitments or executed any contracts to purchase the LenSystem, and there can be no assurance that any additional sales will be agreed upon or consummated. RCI will make the LenSystem available to such users upon terms and conditions comparable to all other purchasers with orders of similar size and nature. The founding stockholders of RCI (not including Incomnet) own 9,800,000 shares of RCI common stock and acquired these shares at a purchase price of approximately $.03 per share. The RCI founding stockholders and their affiliates had, as of September 10, 1996, loaned approximately $1,463,334 to RCI, not including loans made to RCI pursuant to rights offerings in January, April, May, July and August, 1996. See "THE COMPANY - Loans to RCI." The loan, together with any additional loans which are thereafter made by them (other than the loans made in January, April, May, July and August 1996 in consideration for convertible notes or warrants to purchase RCI common stock), are due and payable on July 31, 1996, together with interest at 7% per annum, subject to the following restrictions: until RCI's revenues from continuing operations aggregate at least $1,000,000 in any three consecutive months, RCI may repay these loans only if the lenders furnish or guaranty equivalent lines of credit. In connection with a private placement of RCI units by Incomnet (each unit consisting of one 8% convertible promissory note in the principal amount of $1,000,000 and one RCI Warrant to purchase 100,000 shares of RCI common stock) in February 1995, affiliates of Broad Capital Associates, Inc. purchased 3-1/3 units. In addition, Larry Joel and Robert and Alan Cohen and certain of their affiliates purchased 2-1/2 units. Sam D. Schwartz, the former President and Chairman of the Board of Incomnet, purchased 0.9 units. These purchasers waived interest accrual on the notes included in their units. In connection with this private placement, Incomnet also issued to the RCI founding stockholders 750,000 shares of Incomnet's Common Stock. Incomnet originally agreed to issue to the RCI founding stockholders a maximum of 750,000 additional shares of Incomnet's Common Stock depending on RCI's pre-tax earnings during the first fiscal year after RCI's February 1995 acquisition of Q2100. On June 16, 1995, Incomnet agreed to issue 600,000 additional shares of its Common Stock to the RCI founding stockholders without registration rights in exchange for their relinquishment of their rights to be issued any of the 750,000 shares. See "Item 1. Business - Acquisition of Rapid Cast, Inc. - Certain Transactions" in the Company's 1995 Form 10-K. In January 1996 RCI raised $648,000 in additional capital pursuant to an offering of convertible notes to its existing shareholders and an executive. Incomnet, Inc. loaned $326,400 to RCI in January 1996 as its pro rata share of the loan pursuant to which the Company has the right to convert the note into 408,000 shares of RCI common stock. In April, May, July and August 1996, RCI raised and is in the process of raising $2,838,683 in additional capital pursuant to the issuance of short-term notes and seven year warrants. Incomnet, Inc. has loaned $1,607,996 to RCI as its pro rata share of the April, May, July and August loans to RCI. See "THE COMPANY - Directors and Officers of RCI" for information on certain directors and officers of RCI who are also affiliated with potential users of the LenSystem. SEE "Item 1. Business - Rapid Cast, Inc. - Development of Technology" in the Company's 1995 Form 10-K for information on the involvement of Dr. Larry Joel in the development of the Technology and in the sale of the Technology to Pearle. See "THE COMPANY - Directors and Officers of RCI" for information on the current employment of Dr. Joel as President of Q2100. -40- ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW The Company is a Delaware corporation and thus subject to Section 203 of the Delaware General Corporation Law ("Section 203"), which is generally viewed as an anti-takeover statute. In general, Section 203 prohibits a Delaware corporation from engaging in any "business combination" (as defined) with any "interested stockholder" (as defined) for a period of three years following the date that such stockholder became an interested stockholder, unless (i) prior to such date, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; (ii) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (a) by persons who are directors and also officers and (b) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (iii) on or subsequent to such date, the business combination is approved by the board of directors and authorized at an annual or special meeting stockholders, and not by written consent, by the affirmative vote of at least 66-2/3% of the outstanding voting stock which is not owned by the interested stockholder. In general, Section 203 defines a "business combination" to include: (i) any merger or consolidation involving the corporation and the interested stockholder; (ii) any sale, transfer, pledge or other disposition involving the interested stockholder of 10% or more of the assets of the corporation; (iii) (subject to certain exceptions) any transaction which results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; (iv) any transaction involving the corporation which has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or (v) the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an "interested stockholder" as (a) any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation or (b) any entity or person affiliated with or controlling or controlled by such entity or person. The existence of Section 203 would be expected to have the effect of discouraging takeover attempts involving RCI, including attempts that might result in a premium over the market price of RCI's common stock (if it is then publicly traded). USE OF PROCEEDS The Company will not receive any net proceeds from the sale of the Outstanding Shares or the Underlying Shares, if and when issued. The Company would receive $337,500 of net proceeds from the exercise of the Warrants, if and when they are exercised, and has received net proceeds of $365,000 from the issuance of the Series A Preferred covered by this Prospectus. The amount of net proceeds to be received from the sale of Shares by the Company is uncertain and depends on (i) whether any Shares remain after the issuance of Shares in accordance with the settlement agreements entered into by the Company with certain prior holders of the 8% convertible promissory notes issued by the Company in February 1995, (ii) the price at which Shares are sold through the Underwriter in the NASDAQ over-the-counter market from time to time, (iii) the conversion price of the Series A Preferred. The net proceeds received from the sale of the Shares and the exercise of the Warrants, if any, will be used by the Company for general working capital purposes. See "DESCRIPTION OF CAPITAL STOCK." -41- PRICE RANGE OF COMMON STOCK AND DIVIDENDS The Company's Common Stock is quoted on the NASDAQ Small Capital Market System under the symbol "ICNT." The following table sets forth, for the calendar quarters indicated, the actual high and low sale prices of the Company's Common Stock as reported on the NASDAQ/Small Capital Market commencing for the first quarter of 1994. The approximate number of record holders of Common Stock on October 10, 1996 was 789. HIGH LOW LAST SALE ---- --- --------- 1994 First Quarter 7.25 6.00 6.75 Second Quarter 11.12 6.37 9.75 Third Quarter 12.50 8.00 11.37 Fourth Quarter 14.62 9.94 13.25 1995 First Quarter 16.25 12.25 14.25 Second Quarter 15.87 11.25 15.25 Third Quarter 23.50 15.25 22.25 Fourth Quarter 11.25 2.50 4.56 1996 First Quarter 6.20 4.25 5.12 Second Quarter 6.25 4.37 4.75 Third Quarter 5.31 4.50 4.75 Fourth Quarter(a) 4.75 4.12 4.43 - --------------------------- (a) Through October 15, 1996. A recent closing sale price for the Common Stock as reported in published financial sources is set forth on the cover page of this Prospectus. There is no public trading market for the Warrants nor is one expected to develop. The Company intends to retain future earnings for use in its business and does not anticipate paying any dividends on shares of its Common Stock in the foreseeable future. -42- CAPITALIZATION The following table sets forth the actual capitalization of the Company at June 30, 1996 and the capitalization of the Company reflecting (i) the issuance of 75,000 Underlying Shares assuming the exercise of all 75,000 Warrants, (ii) the issuance of 88,500 Underlying Shares pursuant to the conversion of 365 outstanding shares the Series A Preferred, and (iii) no issuance of Shares. June 30, 1996 --------------- Actual As Adjusted ------ ----------- Long-Term Debt:(1) $ 8,907,094 $ 8,907,094 Minority Interest $ 5,779,371 $ 5,779,371 Stockholders' Equity (Deficiency) Preferred Stock, no par value; 100,000 shares authorized, no shares issued and outstanding -- 365,000 (365 as adjusted) Common Stock, no par value; 20,000,000 shares $61,031,361 $61,368,861 authorized, 13,224,434 shares issued and outstanding (13,387,934 as adjusted)(2) Retained earnings (accumulated deficit) (12,150,059) (12,150,059) Treasury Stock (5,491,845) (5,491,845) ----------- ----------- Total stockholders' equity (deficiency) 43,389,457 44,091,957 ------------ ------------ Total capitalization $58,075,922 $58,778,422 ------------ ----------- ------------ ----------- - ----------------------------- (1) Excludes current portion of long-term debt. See the Company's Balance Sheet in its Form 10-Q for the fiscal quarter ended June 30, 1996, which is incorporated in this Prospectus by reference. The long term debt includes $8,186,725 of net deferred tax liability arising from the nondeductibility of the RCI patent rights, which will be eliminated in accordance with Statement of Financial Accounting Standards No. 109, as the underlying patent rights are amortized to expense. (2) Assumes a total of 75,000 Underlying Shares of the Company's Common Stock is issued pursuant to the exercise of the Warrants, and a total of 88,500 Underlying Shares of the Company's Common Stock is issued pursuant to the conversion of 365 shares of the outstanding Series A Preferred (including payment of the 2% cumulative dividend in Common Stock). Does not include 1,275 other outstanding shares of Series A Preferred which were issued by the Company in October 1996, or any shares of Common Stock issuable upon the conversion of those shares. The adjusted shares of Common Stock assume that 365 shares of Series A Preferred are converted into Common Stock at a conversion price of $4.125 per share. The conversion price may be less, depending on the average bid price of the Company's Common Stock prior to the conversion date. If the conversion price of the Series A Preferred is less than $4.125 per share, more dilution would be incurred by the existing Common Stockholders. See "THE COMPANY -Issuance of Convertible Preferred Stock" and "RISK FACTORS - Possible Adverse Effects of Issuance of Preferred Stock." -43- SELECTED CONSOLIDATED FINANCIAL INFORMATION The selected consolidated financial information for the Company presented under the captions "Statement of Operations Data" and "Balance Sheet Data" for, and as of the end of, each of the years in the five-year period ended December 31, 1995, and the six months ended June 30, 1996, is derived from the Company's Consolidated Financial Statements. The Company's Consolidated Financial Statements as of December 31, 1993, 1994, and 1995 and for each of the years in the three-year period ended December 31, 1995, and the report thereon, and as of June 30, 1996 and June 30, 1995 and for the six months ended June 30, 1995 and June 30, 1996, have been incorporated in this Prospectus by reference. This selected consolidated financial information should be read in conjunction with the Company's Consolidated Financial Statements and the related notes thereto included in the Company's 1995 Form 10-K and the Company's Form 10-Q for the fiscal quarter ended June 30, 1996, incorporated herein by reference, and with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in this Prospectus. -44- INCOMNET, INC. STATEMENT OF OPERATIONS DATA:
Six Months Ended June 30 Year Ended December 31 -------------------------- ---------------------------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- ---- Revenues $49,704,511 $39,463,173 $86,564,917 $46,815,057 $11,298,972 $5,534,874 $1,898,071 Income (Loss) before income taxes, extra- ordinary items and minority interest ( 291,801) 3,113,002 957,044 4,000,242 (1,606,844) (2,264,597) 397,631 Income (Loss) before extra- ordinary item and minority interest ( 478,608) 2,904,290 856,543 3,999,187 (1,606,844) (2,461,697) 1,322 Minority Interest 1,126,611 - 509,482 - - - - Net Income (Loss) 648,003 2,904,290 1,366,025 4,071,194 (948,769) (2,021,333) 1,322 Net Income (Loss) per share before extraordinary items .05 .25 0.11 0.42 (0.20) (0.34) 0 Net Income (Loss) per share .05 .25 0.11 0.42 (0.12) (0.28) 0 Cash dividends per common share 0 0 0 0 0 0 0 Weighted average number of shares 13,286,283 11,843,989 12,706,401 9,593,207 8,183,877 7,189,671 6,936,316 BALANCE SHEET DATA: At June 30 At December 31 ---------- -------------------------------------------------------- 1996 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Total assets $77,478,075 $74,105,629 $26,158,346 $8,665,839 $6,744,944 $2,174,428 Long-term obligations(1) 8,907,094 8,459,772 900 20,000 176,000 83,334
- ---------------------------------- (1) The long term obligations include $8,186,725 at June 30, 1996 and $8,449,050 at December 31, 1995 of net deferred tax liability arising from the nondeductibility of the RCI patent rights, which will be eliminated in accordance with Statement of Financial Accounting Standards No. 109, as the underlying patent rights are amortized to expense. -45- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONSOLIDATED RESULTS OF OPERATIONS GENERAL Gross revenues from NTC's operations have been increasing steadily since the Company acquired a controlling interest and commenced advancing working capital to NTC in early 1992. Upon acquiring control of NTC, the Company implemented a new marketing plan for NTC pursuant to which compensation payments to the independent marketing representatives were calculated and paid on a more timely basis. NTC uses a network marketing program of independent representatives to sell its telecommunications-related services to retail customers. The growth in NTC's telecommunications-related revenues is directly tied to its network marketing program. NTC's independent representatives typically purchase materials, training and services from NTC to assist them in selling new retail customers and enrolling other representatives in the NTC program. NTC pays the independent representatives a residual monthly commission on the telecommunications revenue. In addition, the network marketing program pays various bonuses and overrides when and if new representatives obtain a minimum number of new telephone customers, typically 10, within a 30 to 60 day period. This program has been designed to bring NTC new retail telephone customers even if little or no growth occurs in the marketing program revenues itself. The new telecommunications revenue generally lags the marketing program revenues by one to six weeks. When the marketing program revenues increase, an increase in NTC's telecommunications-related revenues is expected to follow. As part of NTC's new management program, the billing system was enhanced to allow for multiple billing cycles each month. An arrangement has also been made to use local exchange carriers with the goal of reducing billing costs, improving collections and terminating telephone service more rapidly when invoices are in arrears. See "RISK FACTORS - Risk of Billing Through Local Exchange Carriers." NTC believes that the pre-paid calling card products now offered by it significantly reduce losses due to uncollectible accounts receivable. NTC's long distance telephone services and marketing programs subject the Company to the regulatory control of the Federal Communications Commission and various state regulatory agencies, including but not necessarily limited to state Public Utility Commissions or equivalent, state attorney general offices, and state consumer relations and protection offices. From time-to-time in the normal course of business, NTC receives inquiries, requests and demands from such agencies for information and action. Management does not believe any such inquiries, requests or demands received by the Company to date have had, or are reasonably likely to have in the future, any material impact on NTC's business. The Company's current emphasis with respect to NTC is to continue to ensure that (i) processing capacity is maintained and increased to handle growing sales, (ii) the independent marketing force continues to expand, resulting in a growing base of telephone customers, and (iii) the business is operated efficiently with reliable reporting. While the improved computer processing system is expected to reduce operating expenses as a percentage of gross revenues due in part to increased speed and decreased errors, on-going costs in 1996 for expansion of NTC's infrastructure and more emphasis on local exchange carrier billing may result in expenses in 1996 which are comparable to or higher than expenses in 1995 and 1994, as a percentage of gross revenues, depending upon the rate of NTC's growth. -46- In addition to the focus on NTC, the Company anticipates that it will receive more revenues and potential profits in the future from its acquisition of Rapid Cast, Inc. on February 8, 1995. See "Item 1. Business - Acquisition of Rapid Cast, Inc." and "Item 1. Business - Rapid Cast, Inc." in the Company's 1995 Form 10-K. The Company continues to seek more business for AutoNETWORK, its interactive computer network and electronic bulletin board system. Although no specific plans have been made, the Company may seek to make an acquisition of a computer network or long distance telephone-related business in the future. SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995 SALES. Sales of $49,704,511 in the first six months of 1996 represented an increase of 26% over sales of $39,463,173 in the first six months of 1995. The majority of this increase was attributable to NTC's sales increase to $46,597,425 in the six months of 1996 from $38,740,827 in the six months ending June 30, 1995. A secondary cause of the increase in sales was the inclusion of $2,406,052 of RCI sales during the first six months of 1996 verses no sales included for RCI during the first six months of 1995. This inclusion of sales during 1996 and exclusion of sales in 1995 resulted from the shift from the equity method of accounting for RCI during the first and second quarters of 1995 to the consolidation method of accounting, which occurred during the third quarter of 1995. The following table summarizes the Company's sales performance by subsidiary and segment during the comparable first six months in 1996 and 1995: SUBSIDIARY SEGMENT DOLLARS IN MILLIONS 1996 1995 ---- ---- NTC Telephone (telecommunications services) $40.5 $32.6 NTC Telephone (marketing programs) 6.1 6.2 RCI Optical 2.4 ---- AutoNETWORK Network 0.7 0.7 ------- ------- Total Company Sales $ 49.7 $ 39.5 ------- ------- ------- ------- COST OF SALES. Total Company cost of sales increased to $31,367,166 or 63% of sales during the six months ending June 30, 1996 verses $26,964,267 or 68% of sales during the comparable prior year period. The increase in cost of sales resulted largely from two factors. First is the inclusion of RCI costs in the first six months of 1996 which were not included in the first six months of 1995 consolidation, due to the shift from equity method accounting for RCI to the consolidation method accounting, as discussed above. A second factor in the increasing cost of sales was the increase in carrier costs associated with increased telephone service sales by NTC. The improvement in costs as a percent to sales was largely generated by improvements in NTC's telecommunication service gross profits resulting from: (1) lower long-distance transport costs from NTC's carriers and, (2) continuing improvements in the mix of sales in the higher profit product lines. The following table summarizes the Company's changes in two major cost components from the first six months of 1995 to the first six months of 1996: DOLLARS IN MILLIONS 1996 1995 ---- ---- Commissions paid to NTC independent sales representatives $ 7.2 $ 6.2 All other costs of sales 24.2 20.8 ------- ------- Total Company Cost of Sales $ 31.4 $ 27.0 ------- ------- ------- ------- -47- NTC's total commission expense increased to $7,292,358 in the first six months of 1996 compared to $6,248,513 in the same period of 1995. The second cost component shown in the table above is "all other costs of sales" which represents: (1) NTC's carrier costs, (2) NTC's costs of producing sales materials for its independent sales representatives, (3) RCI's costs of producing optical systems and ancillary goods, and (4) AutoNETWORK costs of providing communications network products and services. The increase in carrier costs reflects the growth in telephone sales, although these costs have grown at a slower pace than sales, thus reflecting improvements in overall telephone gross profits. GENERAL & ADMINISTRATIVE. Total general and administrative costs increased to $13,828,562 or 28% of sales in the first six months ending June 30, 1996 compared to $7,387,475 or 19% of sales in the same period in the prior year. General and administrative costs generally include the costs of employee salaries, fringe benefits, supplies, and related support costs which are required in order to provide such operating functions as customer service, billing, marketing, product development, information systems, collections of accounts receivable, and accounting. NTC's general and administrative costs increased to 23% of its sales in the first six months of 1996 from 18% of its sales in the first six months of 1995. This increase was caused largely by: (1) increases in fees paid to local exchange carriers (LEC's) to process NTC's billing and collection of its LEC- billed long distance telephone service, and (2) increases in compensation and fringe benefits expended as NTC continues to build infrastructure to support anticipated future sales growth. RCI's general & administrative costs in the first six months of 1996 represented 105% of its sales, thus continuing to reflect the startup nature of its operations. RCI's general and administrative costs which were incurred in the same period of the prior year were not included in the consolidation for the first six months of 1995, due to the shift from equity method accounting for RCI to consolidation method accounting, as discussed above. DEPRECIATION & AMORTIZATION. Total Company depreciation and amortization expense increased to $894,118 in the first six months of 1996 verses $375,593 in the first six months of 1995. 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 expansion in sales. BAD DEBT EXPENSE. Total Company bad debt expense increased to $2,537,021 in the first six months of 1996 compared to $1,137,158 in the first six months of 1995. The increase in bad debt was caused primarily by increased provisioning of NTC's LEC billed receivables. OTHER INCOME & EXPENSE. The Company's other income and expense declined to net other expense of $170,481 in the first six months of 1996 verses net other income of $58,327 during the comparable prior year period. This $228,808 net decline was primarily caused by: (1) $121,850 of interest expense on notes payable by RCI in 1996, (2) a $40,406 nonrecurring loss incurred by NTC on the sale of its in-house telephone system in May 1996, and (3) $33,086 of interest income on cash investments by the Company in 1995 which did not recur in 1996. ACQUISITION COSTS & EXPENSES. Acquisition costs increased to $1,198,964 during the first six months of 1996 compared to $544,005 during the first six months of 1995. Virtually the entire increase is due to a $813,890 increase in patent right amortization expense in 1996 relating to the RCI acquisition. These comparisons are influenced by the conversion on July 1, 1995 from the equity method to the consolidated method of accounting for the RCI acquisition, causing 100% of RCI's sales and expenses to be reported on various lines of the 1996 "Consolidated Statements of Operations" with a single line elimination of the 49% "Minority -48- Interest," verses the 1995 equity method treatment which reflected the 51% net value of the Company's "equity in (profit)/loss of unconsolidated subsidiary" as a single line item on the 1995 "Consolidated Statements of Operations." 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, $1,126,611 or 49% of RCI's losses from January 1, 1996 through June 30, 1996 (the "minority interest") was eliminated from the Company's "Consolidated Statements of Operations" for 1996. NET INCOME. Total Company net income declined to $648,003 or 1.3% of sales in the first six months of 1996 as compared to net income of $2,904,290 or 7.4% of sales in the same period of 1995. The decline in net income resulted from: (1) significantly higher losses from RCI in 1996 caused by operating costs incurred to build infrastructure for future sales growth, (2) higher losses at the Company's headquarters which were caused by higher legal fees and increased amortization of costs related to the RCI acquisition, and (3) a decline in NTC profits caused by increased general and administrative expenses, depreciation and amortization expenses, and bad debt expenses as discussed above. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 SALES. Total 1995 sales increased by 85% from $46.8 million in 1994 to $86.6 million in 1995. The majority of this increase was attributable to NTC's sales increase from $45.6 million in 1994 to $83.1 million in 1995. The following table summarizes the Company's year-to-year sales performance by subsidiary and segment: SUBSIDIARY SEGMENT DOLLARS IN MILLIONS 1995 1994 ---- ---- NTC Telephone (telecommunications services) $70.0 $34.2 NTC Telephone (marketing programs) 13.1 11.4 RCI Optical 2.0 ---- AutoNETWORK Network 1.5 1.2 ----- ---- Total Company Sales $ 86.6 $ 46.8 ------- ------- ------- ------- NTC's sales increase was driven largely by continued expansion of the customer base for its telecommunications services. As a result of this continuing expansion, NTC's telecommunication service revenues represented 84% of NTC's total 1995 revenues with the remaining 16% generated by sales of NTC's marketing programs. This 1995 revenue mix compares to NTC's 1994 mix of 75% from telecommunication services and 25% from marketing programs. The consolidation of RCI in the third and fourth quarters of 1995 added $2.0 million of optical product sales to the total year results. COST OF SALES. Total Company cost of sales, which tends to vary directly with sales, increased from $31.2 million or 67% of sales in 1994 to $57.9 million or 67% sales in 1995. The following table summarizes the Company's year-to-year changes in two major cost components: -49- DOLLARS IN MILLIONS 1995 1994 ------- ------ Commissions paid to NTC independent sales representatives $ 14.2 $ 7.7 All other costs of sales 43.7 23.5 ------- ------ Total Company Cost of Sales $ 57.9 $ 31.2 ------- ------- ------- ------- NTC's total commission expense increased from $7.7 million in 1994 to $14.2 million in 1995. The most significant single factor in this year-to-year change was an annual increase of $3.0 million in residual monthly sales commissions paid to independent sales representatives on NTC's expanding telecommunication service revenues. The remainder of the year-to-year change was caused by increases in various bonuses and overrides paid to sales representatives who signed up new telephone service customers for NTC. The second cost component shown in the table above is "all other costs of sales" which represents (1) NTC's long distance carrier costs, (2) NTC's costs of producing sales materials for its independent sales representatives, (3) RCI's costs of producing optical systems and ancillary goods, and (4) AutoNETWORK's costs of providing communications network products and services. GENERAL AND ADMINISTRATIVE. Total general and administrative costs increased from $9.4 million or 20% of sales in 1994 to $19.8 million or 23% of sales in 1995. General and administrative costs generally include the costs of employee salaries, fringe benefits, supplies, and related support costs which are required in order to provide such operating functions as customer service, billing, marketing, product development, information systems, collections of accounts receivable, and accounting. NTC's general and administrative costs increased during 1995 in order to: (1) support its continuing sales growth in 1995 and, (2) build stronger infrastructure to accommodate still greater sales growth and improved cost efficiencies in the future. RCI incurred substantial general and administrative costs in 1995 relating to its startup of operations. DEPRECIATION AND AMORTIZATION. Total Company depreciation and amortization expense increased from $0.4 million in 1994 to $1.0 million in 1995. This increase was caused by greater investment by NTC in computer hardware and software, furniture and equipment, and leasehold improvements required to support its rapid expansion in sales. BAD DEBT EXPENSE. Total Company bad debt expense increased from $1.8 million or 3.8% of sales in 1994 to $4.1 million or 4.8% of sales in 1995. The year-to-year increase in bad debt was caused primarily by increased provisioning of NTC's Dial-1 receivables and secondarily by the Company's establishment of a bad debt reserve for a potentially uncollectible note receivable from a Company shareholder. OTHER INCOME AND EXPENSE. The Company's net income and expense declined from net other income of $0.3 million in 1994 to net other expense of $1.0 million in 1995. This $1.3 million net decline was primarily caused by: (1) a $382,500 settlement with convertible noteholders relating to the acquisition of RCI, (2) a $244,010 settlement with a former Company officer, and (3) a $337,500 write-off of marketable securities by NTC. -50- ACQUISITION COSTS AND EXPENSES. Acquisition costs increased from $0.3 million in 1994 to $1.7 million in 1995. This increase in costs was caused almost entirely by the acquisition of RCI and includes (1) $1,228,206 of amortization expense relating to the acquisition of RCI patent rights, (2) $118,743 of interest expense on notes used to finance the RCI acquisition and related legal costs, and (3) $107,841 of equity in RCI's losses from February 1995 (date of acquisition) through June, 1995 (the period during which the Company's 51% ownership of RCI was recorded under the equity method of accounting). MINORITY INTEREST. Beginning on July 1, 1995, the Company converted from the equity method to the consolidated method of accounting for its 51% ownership in RCI. As a result, 49% of RCI's losses from July 1, 1995 through December 31, 1995 (the "minority interest") were eliminated from the Company's "Consolidated Statements of Operations" for 1995. NET INCOME. Total Company net income declined from $4.1 million or 8.7% of sales in 1994 to $1.4 million or 1.6% of sales in 1995. Although NTC's year-to- year net income increased substantially, those increases were more than offset by losses sustained from the Company's internal operations and from RCI's operations. YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993. In 1994, total revenues were $46,815,057 as compared to $11,298,972 in 1993, an increase of $35,516,085 or 314%. Telecommunications-related revenues (including revenue for the Company's AutoNETWORK business) increased to $35,397,830 in 1994 from $7,022,716 in 1993, an increase of $28,375,114 or 404%, while marketing-related revenues increased to $11,417,227 from $4,260,942 in 1993, an increase of $7,156,285 or 167%. The growth of the Company's telecommunications-related revenues was associated with the increase in the base of marketing representatives, which results in the signing of new telephone customers. The growth of the Company's marketing-related revenues was due to a marketing program involving the sale of marketing programs and materials to independent sales representatives. Operating costs from communication products and services, including commissions to independent sales representatives, increased to $31,220,780 in 1994 from $9,521,803 in 1993, an increase of $21,626,970 or 227%. Expenses associated with commissions, bonuses and overrides paid to NTC's independent representatives for 1994 were $7,658,904 versus $2,339,517 in 1993, an increase of $5,319,389 or 227%. Other increases in expenses were primarily attributable to the increased costs of communication services from NTC's primary carriers and in the increased investment being made in NTC's customer service, marketing support services, billing and other related operations. Selling, general and administrative costs were $9,437,851 in 1994 versus $2,643,583 in 1993, an increase of $6,794,268 or 257%. This increase is attributable to substantial growth in NTC's telecommunications and marketing revenues, which has necessitated substantial increases in the Company's selling, general and administrative operations. The increase in these operations, however, is lower as a percentage increase than the increase in revenues, reflecting an improved economy of scale in the Company's operations. Depreciation and amortization increased to $709,857 in 1994 from $514,598 in 1993, an increase of $195,259 or 38%. This increase is due to the increased investment in capital goods required to conduct and expand operations. -51- Bad debt expense increased to $1,788,772 in 1994 from $174,377 in 1993, an increase of $1,614,395 or 925%. The increase in bad debt was due to the rapid growth in telecommunications revenues in 1994 versus 1993, although the rate of growth of bad debt from 1993 to 1994 reflects an over-reserve for bad debt in 1992 of $1,078,428, which was applied against bad debt in 1993. The actual rate of growth of bad debt in 1994 was commensurate with the rate of growth in telecommunications revenues from 1993 to 1994. Other (income) expense changed from an expense of $51,455 in 1993 to income of $342,445 in 1994, a gain of $393,900, or 765%. The increase is due to the decreased need for the Company to borrow funds in 1994 versus 1993, along with the increase in the Company's cash position, which has resulted in interest gains on funds held in cash accounts. The Company experienced net profit of $4,071,194 in 1994 versus a loss of $948,769 in 1993, an increase of $5,019,963 or 529%. The Company's net profit reflects the improved and profitable operations at NTC in 1994. YEAR ENDED DECEMBER 31, 1993 COMPARED TO YEAR ENDED DECEMBER 31, 1992. Total revenues for 1993 were $11,298,972 as compared to $5,534,874 in 1992, an increase of $5,764,098 or 104%. Communications products and services revenues increased to $7,022,716 from $4,702,521 in 1992, an increase of $2,320,195 or 49%. Marketing services revenues increased to $4,260,942 from $732,372 in 1992, an increase of $3,528,570 or 481%. The increase in communications services revenues reflects the growth in NTC's base of telephone service users, while the increase in marketing services revenues reflects the growing success of NTC in attracting independent representatives to market its products. The Company had an extraordinary gain in 1993 of $658,075, attributable to a settlement with creditors. Communications products and services operating costs increased to $9,521,803 in 1993 from $3,387,922 in 1992, an increase of $6,138,109 or 181%. This increase was primarily attributable to the increased costs of communication services from NTC's primary carriers and in the increased investment being made in NTC's customer service, marketing support services, billing and other related operations. Research and development costs decreased to $69,966 in 1993 from $91,212 in 1992, a decrease of $21,246. This decrease was due to cost controls placed on expenditures and to the Company's focus on improving the operation of existing products. Selling, general and administrative costs were $2,643,583 in 1993 versus $2,762,746 in 1992, a decrease of $258,297 or 10%. This decrease is attributable to improved cost controls in NTC's marketing operations, whose revenues increased from $732,372 to $4,260,942 with no appreciable increase in costs associated with sales. Depreciation and amortization increased to $514,598 in 1993 from $392,230 in 1992, an increase of $122,368 or 31%. This increase is due to the increased investment in capital goods required to conduct and expand operations. Bad debt expense decreased to $174,377 in 1993 from $1,078,428 in 1992, a decrease of $904,051 or 83%. The decrease in bad debt was due to improved customer service and billing operations, particularly the process of submitting call records to Local Exchange Carriers for billing when customers do not pay their telephone bills promptly. Interest expense increased to $211,835 in 1993 from $31,989 in 1992, an increase of $179,846 or 562%. The increase is due to the increased amount of funds loaned to NTC in 1993. -52- The Company experienced a loss of $1,606,844 before extraordinary items in 1993 versus a loss of $2,461,697 before extraordinary items in 1992, a decrease of $854,853 or 34%. While the loss reflects that NTC's operations were not profitable for the 1993 calendar year, the decrease of the loss reflects improvement in NTC's operations. LIQUIDITY AND CAPITAL RESOURCES Overall, the Company achieved slightly positive cash flows of $235,864 during the first six months of 1996 resulting from positive cash flows from operations ($1,058,156) and from financing activities ($2,508,598) which were partially offset by negative cash flows from investing activities ($3,330,890). The Company generated $1,058,156 in positive cash flow from operations during the first six months of 1996, compared to $1,742,064 in positive cash flow from operations during the prior year's comparable period. This decrease in positive cash flow from operations resulted primarily from: (1) a $2,041,418 decrease in profits adjusted from non-cash expense, (2) a $1,111,712 increase in cash generated from the collection of accounts receivable, (3) a $571,546 increase in cash from increased use of accounts payable, (4) an $829,757 decrease in cash from a reduction in accrued expenses, and (5) a $526,612 increase in cash generated by increased reserves for deferred income on NTC's prepaid telephone calling cards. The Company generated negative cash flows from investing activities of $3,330,890 in the first six months of 1996 and $30,990,395 in the first six months of 1995. The 1996 negative cash flow resulted primarily from continuing investment by NTC in plant and equipment to support its continuing growth in sales. The 1995 negative cash flow resulted primarily from the Company's purchase of a 51% ownership interest in RCI on February 8, 1995. Positive cash flows from financing activities totaled $2,508,598 during the first six months of 1996 and $22,084,512 during the first six months of 1995. The 1996 positive cash flow resulted primarily from RCI entering into various loan agreements to finance the building of infrastructure to support its anticipated future sales growth. The 1995 positive cash flow was generated by a $26,199,174 sale of common stock, which was partially offset by an outflow of $4,776,638 from the Company's purchase of treasury stock. For the year ended December 31, 1995, the Company had a net profit of $1,366,025 and, at that date, current assets exceeded current liabilities by $1,440,515. Since the Company acquired a controlling interest in NTC in early 1992, the Company's capital needs have primarily been satisfied from outside sources such as the private placement of securities, the exercise of warrants and options, and loans and bank credit lines guaranteed by its principal shareholders. Cash flow from operations did not provide net working capital to the Company during the period from February 1992 to May 1994. While cash flow from operations on a consolidated basis has generally been positive since June 1994, the increasing capital needs of RCI and legal costs are likely to require the Company to raise additional capital from outside sources in the third quarter of 1996. The Company had net working capital of $1,440,515 at December 31, 1995, as compared to net working capital of $8,798,793 at December 31, 1994. During 1995, net cash flow from operations was $1,378,839 compared to net cash flow from operations of $3,083,887 in 1994. -53- During 1995, the Company's cash requirements were met through a combination of a cash flow from operations, exercise of warrants to purchase the Company's common stock and private placements of its Common Stock. In 1995, the Company raised $29,058,773 in either private placements or from the exercise of warrants. The Company anticipates that it will continue to attain cash flow sufficient to meet the Company's cash requirements in 1996 through a combination of operations, bank borrowings, private placements of its common stock and the exercise of warrants to purchase the Company's Common Stock. On February 5, 1996, Melvyn Reznick, the President and a director of the Company, personally guaranteed and arranged for a $500,000 bank line of credit for the Company, which may be expanded to a range of $750,000 to $1,000,000 in the near future. As of April 30, 1996, the line had been drawn upon to the extent of $515,000 to fund loans to RCI pursuant to a rights offering made to RCI's stockholders. See "THE COMPANY - Loans to RCI." The Company anticipates that during 1996 it and RCI will need financing in addition to their respective cash flows to fund operations and, in the case of RCI, to finance the growth of its business. The Company had no material commitments for capital expenditures at December 31, 1995, but does expect to continue expanding the NTC headquarters building and purchasing additional equipment commensurate with the requirements of its customer base. During 1995, the Company had capital expenditures of $7,389,419 for plant and equipment. Effective February 12, 1992, the Company entered into a Letter of Agreement (the "Agreement") with NTC to ultimately acquire a controlling interest in NTC. The Company loaned NTC $2,850,000 during 1992, collateralized by substantially all the assets of NTC, from its available working capital resources. In 1993, the Company loaned an additional $1,935,961 to NTC, bringing the total to $4,785,961. In 1994, the Company loaned NTC an additional $308,879, bringing the total to $5,094,810. All loans to NTC were converted into an additional equity investment in NTC at the end of 1994. No further loans were made to NTC during 1995. In May 1992, as settlement with a creditor on a past due accounts payable of approximately $725,000, the Company entered into a non-interest bearing credit facility of approximately $432,000, resulting in a gain of approximately $293,000 ($.04 per common share). The contract was payable in monthly installments of $12,000 for the first twelve months and monthly installments of $16,000 thereafter through November 1994. Maturities of the contract were $84,000 in 1992, $172,000 in 1993 and $176,000 in 1994. This obligation was paid in full in 1994 At December 31, 1995, the Company had net operating loss carryforwards for federal income tax purposes of approximately $16,800,000, which are expected to be available to offset taxable income in future years. The Company and its subsidiaries are engaged in legal proceedings where the ultimate outcome cannot presently be determined. This information is described at "Item 3. Legal Proceedings" in the Company's 1995 Form 10-K. PRINCIPAL STOCKHOLDERS The following table sets forth information concerning the beneficial ownership of the Company's Common Stock as of October 17, 1996. Persons and groups named in the table represent (i) each person known by the Company to own beneficially more than 5% of the Company's Common Stock, (ii) each director of the Company or its NTC subsidiary, (iii) each executive officer of the Company or its NTC subsidiary, and (iv) all directors and executive officers of the Company and its NTC subsidiary as a group. -54- NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENTAGE OF SHARES OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) COMMON STOCK OUTSTANDING(9) - ------------------- ----------------------- --------------------------- Melvyn Reznick 230,300(2) 1.68% 21031 Ventura Boulevard Suite 1100 Woodland Hills, CA 91364 Sam D. Schwartz 1,998,500(3) 14.58% 21031 Ventura Boulevard Suite 1100 Woodland Hills, CA 91364 Nancy Zivitz 669,300(4) 4.88% 7234 Silverbell Drive Sarasota, Florida 34241 Albert Milstein 48,000(5) 0.35% 21031 Ventura Boulevard Suite 1100 Woodland Hills, CA 91364 Edward R. Jacobs 30,000 0.22% 2801 Main Street Irvine, CA 92715 Stephen A. Caswell 21031 Ventura Boulevard 20,000(6) 0.15% Suite 1100 Woodland Hills, CA 91364 Jerry W. Ballah 0 0% 2801 Main Street Irvine, California 92715 William D. Savage 51,000(7) 0.37% 2801 Main Street Irvine, California 92715 Richard A. Marting 55,000(8) 0.4% 2801 Main Street Irvine, California 92715 All directors and officers 1,103,600 8.03% as a group (eight persons) -55- - ------------------------------- (1) See the Company's Proxy Statement for the 1996 Annual Meeting of the Shareholders for additional information regarding outstanding stock options and warrants to purchase the Company's Common Stock. (2) Includes stock options to purchase 25,000 shares at an exercise price of $4.87 per share, exercisable at any time until February 28, 2001, stock options to purchase 25,000 shares at an exercise price of $4.87 per share, exercisable at any time until May 31, 2001, stock options to purchase 25,000 shares at an exercise price of $4.87 per share, exercisable at any time until August 31, 2001, and stock options to purchase 100,000 shares at an exercise price of $4.37 per share, exercisable at any time until April 5, 2001. Does not include stock options to purchase 200,000 shares at an exercise price of $4.87 per share, which do not vest until RCI achieves certain financial performance goals, stock options to purchase 50,000 shares at an exercise price of $4.37 per share, which do not vest until RCI becomes a public company, and stock options to purchase an additional 75,000 shares at exercise prices ranging from $4.37 to $4.87 per share, which do not vest until later dates in 1996 and 1997. See "Ratification of 1996 Stock Option Program for Directors, Officers and Key Consultants" in the Company's Proxy Statement for its 1996 Annual Meeting of the Shareholders. (3) Excludes 90,000 shares owned by Rita L. Schwartz, which are her sole and separate property, in which Mr. Schwartz disclaims any beneficial interest. Includes 90,000 shares acquired upon the conversion of 8% convertible promissory notes. (4) Includes 644,300 shares owned by Clarence R. Zivitz, Nancy Zivitz' husband, and stock options to purchase 25,000 shares owned by Nancy Zivitz, a member of the Company's Board of Directors, at an exercise price of $4.37 per share at any time until February 28, 2001. (5) Includes stock options to purchase 25,000 shares at an exercise price of $4.37 per share at any time until April 5, 2001. (6) Does not include stock options to purchase 50,000 shares at an exercise price of $4.37 per share, which do not vest until RCI achieves certain financial performance goals. (7) Includes warrants to purchase 50,000 shares at an exercise price of $8.50 per share, expiring on May 27, 1997. (8) Includes warrants to purchase 50,000 shares at an exercise price of $8.50 per share, expiring on May 27, 1997. (9) Assumes 13,741,024 shares outstanding, including 517,000 shares issuable upon the exercise of stock options and warrants which have vested, but which do not include any Shares or Underlying Shares. Based upon the Company's review of Forms 3, 4 and 5 and any amendments thereto furnished to the Company in compliance with Section 16 of the Securities Exchange Act of 1934, as amended, all of such Forms were filed on a timely basis by such reporting persons, other than: (1) a report on Form 4 due from Joel W. Greenberg, the Company's former Chairman of the Board on or before May 10, 1996 with respect to 25,000 stock options which vested on April 5, 1996, (2) certain officers of National Telephone & Communications, Inc. were late in their Form 3 filings when they became executive officers in February 1996, and a director of that subsidiary is late in Form 4 and Form 5 filings for 1995, but the Form 3 filings have been brought current, and (3) reports on Form 4 and Form 5 of transactions occurring from January 1993 until July 1995 were reported late by Sam D. Schwartz, the Company's former Chairman, President and Chief Executive Officer. There may be additional transactions in the Company's stock by Mr. Schwartz and his affiliates during that period and at other times that have not been reported. The Company is currently conducting an investigation to ascertain the scope of unreported transactions. -56- DESCRIPTION OF CAPITAL STOCK The following summaries of certain provisions of the Articles of Incorporation, as amended, and Bylaws of the Company do not purport to be complete and are qualified in their entirety by reference to such instruments, each of which is incorporated by reference as an exhibit to the Registration Statement of which this Prospectus is a part. See "AVAILABLE INFORMATION." GENERAL The Company's authorized capital stock consists of 20,000,000 shares of Common Stock and 100,000 shares of Preferred Stock, without par value. As of October 10, 1996, there were 13,224,434 shares of the Company's Common Stock outstanding, excluding any Shares or Underlying Shares issuable upon the exercise of Warrants or the conversion of outstanding Series A Preferred. As of October 10, 1996, 1,640 shares of the Company's Preferred Stock were issued and outstanding and no Common Stock or Preferred Stock was held as treasury stock. See "THE COMPANY - Issuance of Convertible Preferred Stock." COMMON STOCK DIVIDENDS. Subject to the rights of holders of the Company's Preferred Stock, if any, to receive certain dividends prior to the declaration of dividends on shares of the Company's Common Stock, when and as dividends are declared by the Company's Board of Directors payable in cash, stock or other property, the holders of the Company's Common Stock are entitled to share ratably in such dividends. VOTING RIGHTS. Each holder of the Company's Common Stock has one vote for each share held on matters presented for consideration by the shareholders. PREEMPTIVE RIGHTS. The holders of the Company's Common Stock have no preemptive rights to acquire any additional shares of the Company. ISSUANCE OF STOCK. Under California law the Company's Board of Directors generally may issue authorized shares of the Company's Common Stock or Preferred Stock without shareholder approval. LIQUIDATION RIGHTS. In the event of the liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders of the Company's Common Stock will be entitled to share ratably in any of its assets or funds that are available for distribution to its shareholders after the satisfaction of its liabilities (or after adequate provision is made therefor) and after payment of the liquidation preferences of outstanding Preferred Stock, if any. PREFERRED STOCK The Company's authorized Preferred Stock may be issued from time to time as a class without series, or if so determined by the Board of Directors, in one or more series. The voting rights, dividend rights, conversion rights, redemption rights and liquidation preferences of any Preferred Stock, the number of shares constituting any such series and the terms and conditions of the issue of the Preferred Stock may be fixed by resolution of the Company's Board of Directors. The Company's Preferred Stock, as, if and when issued, has and will have a preference over the Company's Common Stock with respect to the payment of dividends and the distribution of assets in the event of the liquidation of the Company, and such other preferences as may be fixed by the Board of Directors. See "THE COMPANY - Issuance of Convertible Preferred Stock." -57- WARRANTS AND OPTIONS In November 1994, the Company approved the Incomnet 1994 Stock Option Plan for the directors, employees and key outside consultants of the Company and its subsidiaries, which provided for the issuance of stock options covering up to 1,500,000 shares of the Company's Common Stock. In November 1994, options to purchase 1,200,000 shares of the Company's Common Stock were granted at an exercise price of $10 per share provided, that the stock options vest and become exercisable only upon NTC earning at least $15 million in pre-tax profits during any continuous four audited quarterly periods until December 31, 1997. See footnote 6, "Shareholders' Equity - Stock Options" in the Consolidated Financial Statements of the Company included in "Item 8. Financial Statements" in the Company's 1995 Form 10-K. On February 6, 1996, the Company entered into a Management Incentive Agreement pursuant to which Edward R. Jacobs, the grantee of the 1,200,000 stock options issued under the 1994 Stock Option Plan, agreed to cancel all of those options upon adoption of a new stock option plan for NTC, to be effective once NTC becomes a publicly traded company. No additional stock options are intended to be issued under the 1994 Stock Option Plan. On November 30, 1995, the Company issued 300,000 stock options to Melvyn Reznick, the President and Chief Executive Officer of the Company, pursuant to the Employment Agreement entered into by the Company and Mr. Reznick on that date. See "Item 1. Business -Employees, Officers and Directors - Officers" in the Company's 1995 Form 10-K. On February 5, 1996, as modified on March 13, 1996, April 25, 1996 and June 11, 1996, the Company's Board of Directors adopted the Incomnet 1996 Stock Option Plan for the directors, officers and key outside consultants of the Company pursuant to which an aggregate of 1,500,000 stock options are authorized to be granted, 780,000 of which have been granted (365,000 of which are vested and 415,000 of which are not yet vested), including the 300,000 stock options issued pursuant to Mr. Reznick's Employment Agreement. The Company's 1996 Stock Option Plan was ratified by the Company's Shareholders at their annual meeting on July 29, 1996 See "Ratification of 1996 Stock Option Program for Directors, Officers and Key Consultants" in the Company's Proxy Statement for the 1996 Annual Meeting of the Shareholders. In July 1995, ten year stock options held by Sam D. Schwartz (250,000), Rita Schwartz (35,000), Joel Greenberg (35,000) and Stephen A. Caswell (25,000) were converted into three year warrants expiring on August 29, 1997. Mr. Schwartz' 250,000 warrants were cancelled on August 18, 1995 and September 1, 1995 as part of his tender of short-swing profits pursuant to Section 16(b) of the Securities and Exchange Act of 1934, as amended. See "Item 3. Legal Proceedings -Section 16(b) Lawsuit" in the Company's 1995 Form 10-K. On April 8, 1996, Stephen A. Caswell and the Company agreed to cancel his 25,000 warrants exercisable at $4.87 per share in consideration for the issuance of an additional 20,000 stock options under the Incomnet 1996 Stock Option Plan. Stock options and warrants for the purchase of an additional 107,000 shares of the Company's Common Stock (i.e. 50,000 held by Richard Marting, 50,000 held by William Savage and 7,000 held by four other employees), other than stock options recently granted pursuant to Incomnet's 1996 Stock Option Plan and the performance-based stock options issued under its 1994 Stock Option Plan (which may be cancelled in the future pursuant to the Management Incentive Agreement entered into by the Company with NTC on February 6, 1996), remain outstanding with different exercise prices and expiration dates. See footnote 6, "Shareholders' Equity - Warrants" to the Company's Consolidated Financial Statements included in "Item 8. Financial Statements" of the Company's 1995 Form 10-K. -58- The holders of warrants and options do not have any voting rights until they exercise the warrants or options and receive voting shares of Common Stock pursuant to such exercise. The number of shares of Common Stock which can be purchased upon the exercise of the warrants and options and the exercise price are subject to adjustment in certain events, such as a stock split, reverse stock split, stock dividend or similar event, in order to prevent dilution to the warrant and option holders under those circumstances. SIZE OF BOARD OF DIRECTORS The Company's Bylaws provide that the Company's Board of Directors will consist of no fewer than four and no more than nine members. The Company's Board of Directors presently has three directors and there is one vacancy. CUMULATIVE VOTING Pursuant to the Company's Bylaws and in accordance with the California Corporations Code, each shareholder is entitled to one vote for each share of the Company's Common Stock held, and such holders may be entitled to cumulative voting rights in the election of directors. Under the California Corporations Code, cumulative voting is not required unless, at the annual meeting and prior to the voting, at least one shareholder gives notice of his intention to cumulate his votes. If one shareholder give notice of an intention to cumulate votes, then all shareholders have cumulative voting rights in the election of directors. If no such notice is given, voting for directors is noncumulative, which means that a simple majority of the shares voting may elect all of the directors. Under cumulative voting, each shareholder entitled to vote has the right to give one candidate a number of votes equal to the number of authorized directors multiplied by the number of votes to which his shares are entitled, or to distribute his votes on the same principle among as many candidates as he desires. As a result, each share of the Company's Common Stock has a number of votes equal to the number of authorized directors. The California cumulative voting law applies only to the election of directors and not to any other matters as to which shareholders may vote. DIRECTOR'S LIABILITY The California Corporations Code and the Company's Bylaws provide that a director of the Company will have no personal liability to the Company or its shareholders for monetary damages for breach of fiduciary duty as a director except (i) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law, (ii) for acts or omissions that a director believes to be contrary to the best interests of the corporation or its shareholders or that involve the absence of good faith on the part of the director, (iii) for any transaction from which a director derived an improper personal benefit, (iv) for acts or omissions that show a reckless disregard for the director's duty to the corporation or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to the corporation or its shareholders, (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the corporation or its shareholders, or (vi) for an unlawful dividend, distribution, stock repurchase or redemption. This provision would generally absolve directors of personal liability for negligence in the performance of duties, including gross negligence. -59- INDEMNIFICATION The Company's Bylaws and Sections 204 and 317 of the California Corporations Code contain comprehensive provisions for indemnification of directors, officers and agents of California corporations against expenses, judgments, fines and settlements in connection with litigation. Under the California Corporations Code, other than an action brought by or in the right of the Company, such indemnification is available if it is determined that the proposed indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, has no reasonable cause to believe his conduct was unlawful. In actions brought by or in the right of the Company, such indemnification is limited to expenses (including attorneys' fees) actually and reasonably incurred if the indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company. No indemnification may be made, however, in respect of any claim, issue or matter as to which such person is adjudged to be liable to the Company unless and only to the extent that the court in which the action was brought determines that in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper. To the extent that the proposed indemnitee has been successful in defense of any action, suit or proceeding, he must be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the action. The Company's Articles of Incorporation, as amended, provide for indemnification of the directors and officers of the Company against liabilities to the maximum extent provided by California law. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is therefore unenforceable. AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS Under the California Corporations Code, a corporation's certificate of incorporation can be amended by the affirmative vote of the holders of a majority of the outstanding shares entitled to vote, and a majority of the outstanding stock of each class entitled to vote as a class, unless the certificate requires the vote of a larger portion of the stock. The Company's Articles of Incorporation, as amended, do not require a larger percentage affirmative vote. As is permitted by the California Corporations Code, the Company's Bylaws give its Board of Directors the power to adopt, amend or repeal the Company's Bylaws. The Company's shareholders entitled to vote have concurrent power to adopt, amend or repeal the Company's Bylaws. DIVIDENDS The California Corporations Code provides that, subject to any restrictions in the corporation's articles of incorporation, dividends may be declared from the corporation's surplus or, if there is no surplus, from its net profits for the fiscal year in which the dividend is declared and the preceding fiscal year. Dividends may not be declared, however, if the corporation's capital has been diminished to an amount less than the aggregate amount of all capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets. -60- TRANSFER AGENT The Transfer Agent and Registrar for the capital stock of the Company is American Stock Transfer Company. SELLING SECURITY HOLDERS THE PRIOR NOTEHOLDERS. The selling security holders include ten persons who previously held an aggregate of $2,225,000 of 8% convertible promissory notes issued by the Company on February 8, 1995 to finance the acquisition of 51% of RCI. All of the prior noteholders except Jules Nordlicht converted their notes into shares of the Company's Common Stock at the rate of one share for every $10 of outstanding original principal amount of notes. The Outstanding Shares relating to the notes and any additional Shares which may be issued pursuant to the settlement agreements entered into with certain prior noteholders are therefore being offered for resale by the prior noteholders and not pursuant to an initial issuance of stock by the Company. The following table lists the selling security holders who are prior noteholders, the original amount of notes purchased by them, and their position with respect to the Company. See "THE COMPANY - Settlement With Prior Noteholders" and "Item 1. Business - Acquisition of Rapid Cast, Inc. - Financing of Acquisition" in the Company's 1995 Form 10-K.
- ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------ ORIGINAL AMOUNT OF 8% CONVERTIBLE NOTES NUMBER OF NAME OF NOTEHOLDER OUTSTANDING SHARES - ------------------------------------------------------------------------------------------ Jules Nordlicht 500,000 31,000(3) - ------------------------------------------------------------------------------------------ Moshe Mueller 25,000 2,500(4) - ------------------------------------------------------------------------------------------ Alan Cohen (5)* 500,000 50,000(5) - ------------------------------------------------------------------------------------------ Robert Cohen (5)* 500,000 50,000(5) - ------------------------------------------------------------------------------------------ Sam D. Schwartz (1)* 900,000 90,000 - ------------------------------------------------------------------------------------------ Rita Folger 50,000 5,000(4) - ------------------------------------------------------------------------------------------ Kenneth Lebow 75,000 7,500(4) - ------------------------------------------------------------------------------------------ Richard C. Jaffe 50,000 5,000(4) - ------------------------------------------------------------------------------------------ Lenore Katz 25,000 2,500(4) - ------------------------------------------------------------------------------------------ Arthur Caplan 100,000 10,000(4) - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------
___________________________________ * These persons have not been offered settlement agreements by the Company. They are affiliates of the Company or RCI, one of its subsidiaries. (1) Sam D. Schwartz is the prior President and Chairman of the Board of Directors of the Company who resigned on November 30, 1995. -61- (2) All of these notes were converted into shares of the Company's Common Stock in July 1995 at a conversion price of $10 per share, other than Mr. Nordlicht's note which was repaid in full on January 31, 1996. See "Item 3. Legal Proceedings - Claims By Prior Noteholders" in the Company's 1995 Form 10-K, and "Item 1. Legal Proceedings - Claims By Prior Noteholders" in the Company's Form 10-Q for the quarter ended June 30, 1996. (3) Pursuant to the settlement agreement with Mr. Nordlicht, the Company is obligated to issue additional Shares to Mr. Nordlicht if the average last sale price on the NASDAQ on the five trading days immediately proceeding the date of this Prospectus is less than $5.00 per share. See "Item 3. Legal Proceedings - Claims By Prior Noteholders" in the Company's 1995 Form 10-K, and "Item 1. Legal Proceedings - Claims By Prior Noteholders" in the Company's Form 10-Q for the quarter ended June 30, 1996. (4) Pursuant to the settlement agreements with these prior noteholders, the Company is obligated to issue additional Shares to these persons if the average last sale price on the NASDAQ on the five trading days immediately preceding the date of this Prospectus is less than $12.00 per share. See "Item 3. Legal Proceedings - Claims By Prior Noteholders" in the Company's 1995 Form 10-K, and "Item 1. Legal Proceedings - Claims By Prior Noteholders" in the Company's Form 10-Q for the quarter ended June 30, 1996. (5) Alan Cohen and Robert Cohen are brothers and officers, directors and founding shareholders of RCI. They also own optical stores which have placed orders for RCI's LenSystem. THE WARRANTHOLDER. The selling security holders include Price International, Inc., the holder of 75,000 Warrants to purchase 75,000 Underlying Shares at an exercise price of $4.50 per share, exercisable at any time until December 31, 1998. These Underlying Shares are therefore being offered for resale by the Warrantholder if and when it exercises its Warrants and not pursuant to an initial issuance of stock by the Company. See "Item 1. Business - - Agreement With Price International" and "Item 3. Legal Proceedings - Potential Lawsuits" in the Company's 1995 Form 10-K, and "THE COMPANY - Settlement With Price International." THE SERIES A PREFERRED HOLDERS. The selling security holders include three individuals who purchased a total of 365 shares of Series A Preferred in September 1996. The holders are as follows: (1) Jack Gilbert, a registered representative with the Underwriter, who purchased 300 shares of Series A Preferred for $300,000, convertible into a minimum of 72,727 shares of the Company's Common Stock assuming that the average bid price of the Company's Common Stock for the five trading days immediately preceding the conversion date is at least $5.16 per share (i.e. 20% higher than the bid price on the date of issuance of the Series A Preferred to Mr. Gilbert); (2) Stephanie Cohen, the wife of Jeffrey Cohen, a director and executive officer of Rapid Cast, Inc., a subsidiary of the Company, who purchased 40 shares of Series A Preferred for $40,000, convertible into a minimum of 9,697 shares of the Company's Common Stock based on the same assumption applicable to Mr. Gilbert; and (3) Mark J. Richardson, corporate counsel to the Company, who purchased 25 shares of Series A Preferred for $25,000, convertible into a minimum of 6,061 shares of the Company's Common Stock based on the same assumption applicable to Mr. Gilbert and Mrs. Cohen. The Underwriter was not and is not expected to be involved in the issuance of the Warrants, the Series A Preferred or the Underlying Shares. THE OUTSTANDING SHAREHOLDERS. The selling shareholders include seven investors who purchased units of the Company's securities in a private placement on June 30, 1995 at a price of $12.00 per unit pursuant to Section 4(2) of the Securities Act of 1933, as amended. Each unit consisted of one share of Common -62- Stock and one warrant to purchase one share of Common Stock for a price of $14.00 per share at any time until December 31, 1995. All of the $14 warrants expired unexercised. See footnote 6, "Shareholders' Equity - Private Placements," to the Consolidated Financial Statements of the Company included in "Item 8. Financial Statements" in the Company's 1995 Form 10-K. The following table lists the selling security holders who are Outstanding Shareholders and the number of Outstanding Shares owned by them. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NAME OF OUTSTANDING SHAREHOLDER NUMBER OF SHARES - ------------------------------------------------------------------------------- Lenore Katz(1) 1,750 - ------------------------------------------------------------------------------- Broadway Partners(1) 7,000 - ------------------------------------------------------------------------------- Dr. Alan Cohen(1) 8,750 - ------------------------------------------------------------------------------- Dr. Robert Cohen(1) 8,750 - ------------------------------------------------------------------------------- Mueller Trading LP 52,500 - ------------------------------------------------------------------------------- Delton Trading SA 52,500 - ------------------------------------------------------------------------------- Ace Foundation, Inc. 26,250 - ------------------------------------------------------------------------------- - -------------------------------------------------------- (1) Dr. Alan Cohen and Dr. Robert Cohen are officers and directors of RCI. Broadway Partners is a partnership comprised of Alan Cohen's and Robert Cohen's children. SHARES ELIGIBLE FOR FUTURE SALE As of October 10, 1996, the Company has approximately 3,807,200 shares of its Common Stock (not including the Shares or the Underlying Shares issuable upon the exercise of the Warrants or the Series A Preferred covered by this Prospectus, but including all other shares of the Company's Common Stock which can be acquired pursuant to the exercise of other vested outstanding warrants and options) issued and outstanding which may be deemed to be "restricted securities" as that term is defined in Rule 144 of the Securities Act. These restricted securities may be sold in the future in compliance with Rule 144 or Regulation S of the Securities Act. The Company can make no prediction as to the effect, if any, that sales of shares of Common Stock, or the availability of shares for future sale, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock (including shares issued upon the exercise of warrants or options) in the public market, or the perception that such sales could occur, could depress the prevailing market price for the Common Stock. Such sales may also make it more difficult for the Company to sell equity securities or equity-related securities in the future at a time and price which it deems appropriate. See "RISK FACTORS - -General Risks - Dilution Caused by Future Sales of Shares." -63- LEGAL MATTERS The validity of the issuance of the shares of Common Stock covered by this Prospectus will be passed upon for the Company by Mark J. Richardson, Esq., Counsel to the Company, 1299 Ocean Avenue, Suite 900, Santa Monica, California, 90401. In consideration for certain legal services, the Company has issued to Mr. Richardson options to purchase 30,000 shares of the Company's Common Stock at a purchase price of $4.37 per share, 15,000 of which have vested and are exercisable at any time until April 5, 2001, and 15,000 of which vest on January 1, 1997 and are exercisable at any time until January 1, 2002. Mr. Richardson also purchased 25 shares of the Company's Series A 2% Convertible Preferred Stock for $25,000 in cash on the same terms and conditions as the other purchasers of the Preferred Stock. See "THE COMPANY - Issuance of Convertible Preferred Stock." EXPERTS The financial statements of the Company, included and incorporated by reference from the Company's Annual Report (Form 10-K) for the years ended December 31, 1995, 1994 and 1993, have been audited by Stonefield Josephson, independent auditors, as set forth in their reports thereon and incorporated herein by reference. Such financial statements are incorporated herein by reference in reliance upon such reports given upon the authority of such firms as experts in accounting and auditing. -64- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. __________ TABLE OF CONTENTS Available Information 2 Incorporation of Certain Documents by Reference 2 Prospectus Summary 4 Risk Factors 10 The Company 23 Use of Proceeds 41 Price Range of Common Stock and Dividends 42 Capitalization 43 Selected Consolidated Financial Information 44 Management's Discussion and Analysis of Financial Condition and Results of Operations 46 Principal Stockholders 54 Description of Capital Stock 57 Selling Security Holders 61 Shares Eligible for Future Sale 63 Legal Matters 64 Experts 64 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 788,500 Shares INCOMNET, INC. Common Stock __________ PROSPECTUS October 18, 1996 __________ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- -65- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the expenses (other than underwriting discounts and commissions) expected to be incurred in connection with the offering described in this Registration Statement. All amounts are estimated except the registration fees. Registration Fee $ 2,061.77 ------------ Printing Costs for Registration Statement, Prospectus and related documents $ 5,000.00 Accounting Fees and Expenses $ 5,000.00 Legal Fees and Expenses $ 35,000.00 Blue Sky Fees and Expenses $ 5,000.00 ------------ Total $ 52,061.77 ------------ ------------ __________ ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. See "DESCRIPTION OF CAPITAL STOCK - Indemnification" in the Prospectus. ITEM 16. EXHIBITS. Exhibit No. Description - --- ----------- 3.1 The Articles of Incorporation, as amended, of Incomnet, Inc. (A) 3.2 The Bylaws of Incomnet, Inc. (A) 3.3 Certificate of Determination for Series A 2% Convertible Preferred Stock. 4.1 Warrant to Purchase 500,000 Shares of Incomnet, Inc., dated January 17, 1994. (C) 4.2 Warrant to Purchase 500,000 Shares of Incomnet, Inc., dated May 27, 1994. (D) 4.3 Form of Warrant to Purchase 986,667 Shares of Incomnet, Inc. (E) 4.4 Form of Warrant to Purchase 75,000 Shares of Incomnet, Inc. (I) 4.5 Form of Warrant to Purchase 510,000 Shares of RCI Common Stock with Registration Rights Agreement, dated April 19, 1996. (I) 4.6 Form of Warrant to Purchase RCI Common Stock, dated February 8, 1995. (I) 5.1 Form of Legal Opinion and Consent of Mark J. Richardson, Esq. with respect to securities being registered. II - 1 10.1 Agreement by and between Broad Capital Associates, Inc. and Incomnet, Inc., dated February 14, 1994. (C) 10.2 Agreement by and between Broad Capital Associates, Inc. and Incomnet, Inc., dated May 10, 1994. (C) 10.3 Agreement and Plan of Exchange by and between Incomnet, Inc. and National Telephone Communications, Inc., dated May 12, 1994. (B) 10.4 Consulting Agreement by and between Broad Capital Associates, Inc. and Incomnet, Inc., dated January 17, 1994. (C) 10.5 Agreement by and between Broad Capital Associates, Inc. and Incomnet, Inc., dated August 17, 1994. (C) 10.6 Carrier Switched Services Agreement with Wiltel, Inc., dated September 30, 1993. (B)(1) 10.7 Network Wats Enrollment Form with U.S. Sprint, dated April 7, 1993. (B) 10.8 Carrier Switched Services Agreement with Wiltel, Inc., dated November 15, 1994. (D)(1) 10.9 The Stock Purchase Agreement for the acquisition of RCI, dated January 18, 1995. (F) 10.10 The Stock Purchase Agreement for the acquisition of Q2100, dated October 29, 1994. (F) 10.11 Stock Pledge Agreement, dated February 8, 1995. (F) 10.12 Form of 8% Convertible Secured Promissory Note, dated February 8, 1995. (F) 10.13 Agreement for Promotion of Pagers between NTC and Page Prompt.(I) 10.14 Carrier Switched Services Agreement Wiltel, Inc, dated September 15, 1995. (I)(1) 10.15 Amendment to Stock Purchase Agreement Between Incomnet, Inc. and Rapid Cast, Inc., Dated June 15, 1995. (I) 10.16 Agreement for Promotion of Internet Access Services Between NTC and EarthLink Network. (I) 10.17 Severance Agreement Between Incomnet, Inc. and Sam D. Schwartz, dated November 30, 1995. (G) 10.18 Employment Agreement Between Incomnet, Inc. and Melvyn Reznick, dated November 30, 1995. (G) 10.19 Management Incentive Agreement, dated February 6, 1996, between Incomnet, Inc. and National Telephone Communications, Inc. (H) 10.20 Settlement Agreements and Proposed Settlement Agreements With Prior Noteholders. (I) II - 2 10.21 Form of 8% Convertible Note Issued By RCI in January 1996. (I) 10.22 Form of Short-Term 10% Note Issued By RCI in April 1996. (I) 10.23 Amended Carrier Switched Services Agreement with Wiltel, Inc., dated June 17, 1996.(1) 10.24 Settlement Agreement Between Joel Greenberg and Incomnet, Inc., dated as of May 9, 1996 and executed on June 6, 1996. (J) 10.25 Form of Registration Rights Agreement Between Incomnet, Inc. and Purchasers of Series A Convertible Preferred Stock. 10.26 Form of Purchase Agreement for the Series A 2% Convertible Preferred Stock. 13.1 The Annual Report on Form 10-K for the fiscal year ending December 31, 1995 for Incomnet, Inc.(I) 13.2 The Quarterly Report on Form 10-Q for the fiscal quarter ending March 31, 1996 for Incomnet, Inc. 13.3 The Quarterly Report on Form 10-Q for the fiscal quarter ending June 30, 1996 for Incomnet, Inc. 13.4 The definitive Proxy Statement for the 1996 Annual Meeting of Incomnet's Shareholders, dated July 29, 1996. 16. Letter re Change in Certifying Accountant. (B) 21. Subsidiaries of the Registrant. (A) 23.1 Consent of Stonefield Josephson, independent Certified Public Accountants, relating to the financial statements. 23.2 Consent of Mark J. Richardson, Esq. is included in his opinion. 24. Power of Attorney is included on the signature page of this Registration Statement. _______________________________ (1) Certain information has been deleted from this agreement pursuant to a request for confidential treatment under Rule 406. (A) Incorporated by reference from Incomnet, Inc.'s Annual Report on Form 10-K for the year ending December 31, 1994. (B) Incorporated by reference from Incomnet Inc.'s Registration Statement on Form S-4 filed with the Securities and Exchange Commission on May 12, 1994, and declared effective on October 27, 1994. (C) Incorporated by reference from the Registration Statement on Form S-3 filed with the Securities and Exchange Commission on June 17, 1994 and declared effective on October 27, 1994. II - 3 (D) Incorporated by reference from Incomnet's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on December 12, 1994 and declared effective on December 22, 1994. (E) Incorporated by reference from Incomnet's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on January 5, 1995 and declared effective on January 9, 1995. (F) Incorporated by reference from the Company's Report on Form 8-K, dated February 8, 1995, relating to the Company's acquisition of a controlling interest in RCI. (G) Incorporated by reference from the Company's Report on Form 8-K dated November 30, 1995, relating to the resignation of Sam D. Schwartz and employment of Melvyn Reznick. (H) Incorporated by reference from the Company's Report on Form 8-K, dated February 9, 1996, relating to the management incentive agreement between Incomnet and NTC. (I) Incorporated by reference from the Company's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on May 10, 1996. (J) Incorporated by reference from the Company's Report on Form 8-K, dated June 7, 1996, relating to the settlement agreement with Joel W. Greenberg and his resignation as a director of the Company. ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the provision described in Item 15 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. RULE 430A UNDERTAKINGS. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of Prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act 1933 shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II - 4 RULE 415 UNDERTAKINGS. The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (i) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (ii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement; (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, the President of the Registrant duly thereunto authorized, in the City of Woodland Hills, State of California, on the 18th day of October, 1996. INCOMNET, INC. Registrant By:/s/ Melvyn Reznick ------------------------------------- Melvyn Reznick, President and Chief Executive Officer II - 5 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Mark J. Richardson his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might do in person, hereby ratifying and confirming all that said attorneys-in- fact and agents of each of them, or their or his substitutes, may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below on the 18th day of October, 1996, by the following persons in the capacities indicated. Signatures Title - ---------- ----- /s/ Melvyn Reznick President, Chief Executive - ------------------------------ Officer and Director Melvyn Reznick (Chief Executive Officer and Principal Financial Officer) /s/ Stephen A. Caswell Vice President of Information - ------------------------------ Systems, Secretary (Principal Stephen A. Caswell Accounting Officer) /s/ Albert Milstein Director - ------------------------------ Albert Milstein /s/ Nancy Zivitz Director - ------------------------------ Nancy Zivitz II - 6 INDEX TO THE EXHIBIT VOLUME TO REGISTRATION STATEMENT ON FORM S-3 3.1 The Articles of Incorporation, as amended, of Incomnet, Inc. (A) 3.2 The Bylaws of Incomnet, Inc. (A) 3.3 Certificate of Determination for Series A 2% Convertible Preferred Stock. 4.1 Warrant to Purchase 500,000 Shares of Incomnet, Inc., dated January 17, 1994. (C) 4.2 Warrant to Purchase 500,000 Shares of Incomnet, Inc., dated May 27, 1994. (D) 4.3 Form of Warrant to Purchase 986,667 Shares of Incomnet, Inc. (E) 4.4 Form of Warrant to Purchase 75,000 Shares of Incomnet, Inc. (I) 4.5 Form of Warrant to Purchase 510,000 Shares of RCI Common Stock with Registration Rights Agreement, dated April 19, 1996. (I) 4.6 Form of Warrant to Purchase RCI Common Stock, dated February 8, 1995. (I) 5.1 Form of Legal Opinion and Consent of Mark J. Richardson, Esq. with respect to securities being registered. 10.1 Agreement by and between Broad Capital Associates, Inc. and Incomnet, Inc., dated February 14, 1994. (C) 10.2 Agreement by and between Broad Capital Associates, Inc. and Incomnet, Inc., dated May 10, 1994. (C) 10.3 Agreement and Plan of Exchange by and between Incomnet, Inc. and National Telephone Communications, Inc., dated May 12, 1994. (B) 10.4 Consulting Agreement by and between Broad Capital Associates, Inc. and Incomnet, Inc., dated January 17, 1994. (C) 10.5 Agreement by and between Broad Capital Associates, Inc. and Incomnet, Inc., dated August 17, 1994. (C) 10.6 Carrier Switched Services Agreement with Wiltel, Inc., dated September 30, 1993. (B)(1) 10.7 Network Wats Enrollment Form with U.S. Sprint, dated April 7, 1993. (B) 10.8 Carrier Switched Services Agreement with Wiltel, Inc., dated November 15, 1994. (D)(1) 10.9 The Stock Purchase Agreement for the acquisition of RCI, dated January 18, 1995. (F) 10.10 The Stock Purchase Agreement for the acquisition of Q2100, dated October 28, 1994. (F) 10.11 Stock Pledge Agreement, dated February 8, 1995. (F) 10.12 Form of 8% Convertible Secured Promissory Note, dated February 8, 1995. (F) 10.13 Agreement for Promotion of Pagers between NTC and Page Prompt. (I) 10.14 Carrier Switched Services Agreement with Wiltel, Inc, dated September 15, 1995. (I)(1) 10.15 Amendment to Stock Purchase Agreement Between Incomnet, Inc. and Rapid Cast, Inc., Dated June 15, 1996. (I) 10.16 Agreement for Promotion of Internet Access Services Between NTC and EarthLink Network. (I) 10.17 Severance Agreement Between Incomnet, Inc. and Sam D. Schwartz, dated November 30, 1995. (G) 10.18 Employment Agreement Between Incomnet, Inc. and Melvyn Reznick, dated November 30, 1995. (G) 10.19 Management Incentive Agreement, dated February 6, 1996, between Incomnet, Inc. and National Telephone Communications, Inc. (H) 10.20 Settlement Agreements and Proposed Settlement Agreements With Prior Noteholders. (I) 10.21 Form of 8% Convertible Note Issued By RCI in January 1996. (I) 10.22 Form of Short-Term 10% Note Issued By RCI in April 1996. (I) 10.23 Amended Carrier Switched Services Agreement with Wiltel, Inc. dated June 17, 1996.(1) 10.24 Settlement Agreement Between Joel w. Greenberg and Incomnet, Inc. dated as of May 9, 1996 and executed on June 6, 1996. (J) 10.25 Form of Registration Rights Agreement Between Incomnet, Inc. and Purchasers of Series A Convertible Preferred Stock. 10.26 Form of Purchase Agreement for the Series A 2% Convertible Preferred Stock. 13.1 The Annual Report on Form 10-K for the fiscal year ending December 31, 1995 for Incomnet, Inc.(I) 13.2 The Quarterly Report on Form 10-Q for the fiscal quarter ending March 31, 1996 for Incomnet, Inc. 13.3 The Quarterly Report on Form 10-Q for the fiscal quarter ending June 30, 1996 for Incomnet, Inc. 13.4 The definitive Proxy Statement for the 1996 Annual Meeting of Incomnet's Shareholders, dated July 29, 1996. 16. Letter re Change in Certifying Accountant. (B) 21. Subsidiaries of the Registrant. (A) 23.1 Consent of Stonefield Josephson, independent Certified Public Accountants, relating to the financial statements. 23.2 Consent of Mark J. Richardson, Esq. is included in his opinion. 24. Power of Attorney is included on the signature page of this Registration Statement. __________________________ (1) Certain information has been deleted from this agreement pursuant to a request for confidential treatment pursuant to Rule 406. (A) Incorporated by reference from Incomnet, Inc.'s Annual Report on Form 10-K for the year ending December 31, 1994. (B) Incorporated by reference from Incomnet Inc.'s Registration Statement on Form S-4 filed with the Securities and Exchange Commission on May 12, 1994, and declared effective on October 27, 1994. (C) Incorporated by reference from the Registration Statement on Form S-3 filed with the Securities and Exchange Commission on June 17, 1994 and declared effective on October 27, 1994. (D) Incorporated by reference from Incomnet's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on December 12, 1994 and declared effective on December 22, 1994. (E) Incorporated by reference from Incomnet's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on January 5, 1995 and declared effective on January 9, 1995. (F) Incorporated by reference from the Company's Report on Form 8-K, dated February 8, 1995, relating to the Company's acquisition of a controlling interest in RCI. (G) Incorporated by reference from the Company's Report on Form 8-K, dated November 30, 1995, relating to the resignation of Sam D. Schwartz and employment of Melvyn Reznick. (H) Incorporated by reference from the Company's Report on Form 8-K, dated February 9, 1996, relating to the management incentive agreement between Incomnet and NTC. (I) Incorporated by reference from the Company's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on May 10, 1996. (J) Incorporated by reference from the Company's Report on Form 8-K, dated June 7, 1996, relating to the settlement agreement with Joel W. Greenberg and his resignation as a director of the Company. EX-3.3 2 CERTIFICATE OF DETERMINATION EXHIBIT 3.3 CERTIFICATE OF DETERMINATION FOR THE SERIES A 2% CONVERTIBLE PREFERRED STOCK EXHIBIT A CERTIFICATE OF DESIGNATION OF SERIES A CONVERTIBLE PREFERRED STOCK OF INCOMNET INC. The undersigned, Melvyn Reznick and Stephen Caswell, hereby certify that: I. They are the duly elected and acting President and Secretary, respectively, of Incomnet Inc., a California corporation (the "Company"). II. The Certificate of Incorporation of the Company authorizes 100,000 shares of preferred stock, no par value per share, of which the following have been authorized and are issued and outstanding: Series A Cumulative Convertible Preferred Stock, 4,000 authorized and none outstanding. III. The following is a true and correct copy of resolutions duly adopted by the Board of Directors at a meeting duly held Tuesday, September 3, 1996, which constituted all requisite action on the part of the Company for adoption of such resolutions. RESOLUTIONS WHEREAS, the Board of Directors of the Company (the "Board of Directors") is authorized to provide for the issuance of the shares of Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of California, to establish from time to time the number of shares to be included in each such series, and to fix the designations, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof; WHEREAS, the Board of Directors desires, pursuant to its authority as aforesaid, to designate a new series of preferred stock, set the number of shares constituting such series and fix the rights, preferences, privileges and restrictions of such series. NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby designates a new series of preferred stock and the number of shares constituting such series, and fixes the rights, preferences, privileges and restrictions relating to such series as follows: DESIGNATION, AMOUNT AND PAR VALUE. The series of Preferred Stock shall be designated as the Series A Convertible Preferred Stock (the "Preferred Stock"), and the number of shares so designated shall be 4,000. The par value of each share of Preferred Stock shall be $0.00. Each share of Preferred Stock shall have a stated value of $1,000.00 per share (the "Stated Value"). Section 2. DIVIDENDS. (a) Holders of Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors out of funds legally available therefor, and the Company shall pay, cumulative dividends at the rate per share (as a percentage of the Stated Value per share) equal to 2% per annum, payable, in cash or shares of Common Stock, in arrears on the Conversion Date (as hereinafter defined). Dividends on the Preferred Stock shall accrue daily commencing the Original Issue Date (as defined in Section 6) and shall be deemed to accrue on such date whether or not earned or declared and whether or not there are profits, surplus or other funds of the Company legally available for the payment of dividends. The party that holds the Preferred Stock on an applicable record date for any dividend payment will be entitled to receive such dividend payment and any other accrued and unpaid dividends which accrued prior to such dividend payment date, without regard to any sale or disposition of such Preferred Stock subsequent to the applicable record date but prior to the applicable dividend payment date. Except as otherwise provided herein, if at any time the Company pays less than the total amount of dividends then accrued to any class of Preferred Stock, such payment shall be distributed ratably among the holders of such class based upon the number of shares held by each holder. (b) So long as any Preferred shall remain outstanding, neither the Company nor any subsidiary thereof shall redeem, purchase or otherwise acquire directly or indirectly any Junior Securities (as defined in Section 6), except the redemption of shares in payment of short swing profits payable to the Company pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended, nor shall the Company directly or indirectly pay or declare any cash dividend or make any cash distribution (other than a dividend or distribution described in Section 5) upon, nor shall any cash distribution be made in respect of, any Junior Securities, nor shall any monies be set aside for or applied to the purchase or redemption (through a sinking fund or otherwise) of any Junior Securities, except as described above, unless all dividends on the Preferred Stock for all past dividend periods shall have been paid. Section 3. VOTING RIGHTS. Except as otherwise provided herein and as otherwise provided by law, the Preferred Stock shall have no voting rights. However, so long as any shares of Preferred Stock are outstanding, the Company shall not, without the affirmative vote of the holders of a majority of the shares of the Preferred Stock then outstanding, (i) alter or change adversely the powers, preferences or rights given to the Preferred Stock or (ii) authorize or create any class of stock ranking as to dividends or distribution of assets upon a Liquidation (as defined below) senior to, prior to or PARI PASSU with the Preferred Stock. Section 4. LIQUIDATION. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary (a "Liquidation"), the holders of shares of Preferred Stock shall be entitled to receive out of the assets of the Company, whether such assets are capital or surplus, for each share of Preferred Stock an amount equal to the Stated Value, plus an amount equal to accrued but unpaid dividends per share, whether declared or not, but without interest, before any distribution or payment shall be made to the holders of any Junior Securities, and if the 2 assets of the Company shall be insufficient to pay in full such amounts, then the entire assets to be distributed shall be distributed among the holders of Preferred Stock ratably in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full. A sale, conveyance or disposition of all or substantially all of the assets of the Company or the effectuation by the Company of a transaction or series of related transactions in which more than 50% of the voting power of the Company is disposed of shall be deemed a Liquidation; PROVIDED that, a consolidation or merger of the Company with or into any other company or companies shall not be treated as a Liquidation, but instead shall be subject to the provisions of Section 5. The Company shall mail written notice of any such liquidation, not less than 60 days prior to the payment date stated therein, to each record holder of Preferred Stock. Section 5. CONVERSION. (a) Each share of Preferred Stock shall be convertible into shares of Common Stock at the Conversion Ratio at the option of the holder in whole or in part at any time after the expiration of the earlier to occur of (i) 120 days after the Original Issue Date or (ii) 60 days after the date that the Commission declares effective under the Securities Act the registration statement contemplated by the Registration Rights Agreement, dated the Original Issue Date (the "Registration Rights Agreement"), by and between the Company and the original holder of Preferred Stock relating to the Preferred Stock and the shares of Common Stock into which the Preferred Stock is convertible in accordance with the terms hereof. Any conversion under this Section 5(a) shall be of a minimum amount of at least 50 shares of Preferred Stock. The holder shall effect conversions by surrendering the certificate or certificates representing the shares of Preferred Stock to be converted to the Company, together with the form of conversion notice attached hereto as EXHIBIT A (the "Holder Conversion Notice") in the manner set forth in Section 5(j). Each Holder Conversion Notice shall specify the number of shares of Preferred Stock to be converted and the date on which such conversion is to be effected, which date may not be prior to the date the Holder delivers such Notice by facsimile (the "Holder Conversion Date"). Subject to Section 5(c) and, as to the original Holder (or its sole designee), subject to Section 4.13 of the Purchase Agreement (as defined in Section 6), each Holder Conversion Notice, once given, shall be irrevocable. If the holder is converting less than all shares of Preferred Stock represented by the certificate or certificates tendered by the holder with the Holder Conversion Notice, the Company shall promptly deliver to the holder a certificate for such number of shares as have not been converted. (b) Provided that ten (10) Trading Days shall have elapsed from the date the Securities and Exchange Commission (the "Commission") declared the registration statement contemplated by the Registration Rights Agreement effective under the Securities Act, each share of the Preferred Stock shall be convertible into shares of Common Stock at the Conversion Ratio at the option of the Company in whole or in part at any time on or after the expiration of one year after the Original Issue Date; provided, however, that the Company is not permitted to deliver a Company Conversion Notice (as defined below) within 10 days of issuing any press release or other public statement relating to such conversion. The Company shall effect such conversion by 3 delivering to the holders of such shares of Preferred Stock to be converted a written notice in the form attached hereto as EXHIBIT B (the "Company Conversion Notice"), which Company Conversion Notice, once given, shall be irrevocable. Each Company Conversion Notice shall specify the number of shares of Preferred Stock to be converted and the date on which such conversion is to be effected, which date will be at least one Trading Day after the date the Company delivers such Notice by facsimile to the holder (the "Company Conversion Date"). The Company shall give such Company Conversion Notice in accordance with Section 5(j) below at least one Trading Day before the Company Conversion Date. Any such conversion shall be effected on a pro rata basis among the holders of Preferred Stock. Upon the conversion of shares of Preferred Stock pursuant to a Company Conversion Notice, the holders of the Preferred Stock shall surrender the certificates representing such shares at the office of the Company or of any transfer agent for the Preferred Stock or Common Stock. If the Company is converting less than all shares of the Preferred, the Company shall, upon conversion of such shares subject to such Company Conversion Notice and receipt of the certificate or certificates representing such shares of Preferred Stock deliver to the holder or holders a certificate for such number of shares of Preferred Stock as have not been converted. Each of a Holder Conversion Notice and a Company Conversion Notice is sometimes referred to herein as a "Conversion Notice," and each of a "Holder Conversion Date" and a "Company Conversion Date" is sometimes referred to herein as a "Conversion Date." (c) (i) If the average of the Per Share Market Value for the five (5) Trading Days immediately preceding the date that the Company receives any Holder Conversion Notice is less than $2.00, then the Company shall have the right, exercisable by notice to the tendering Holder by the close of business on the Business Day following the Company's receipt of such Conversion Notice, to redeem the Preferred Stock tendered for conversion pursuant to such Holder Conversion Notice at a price equal to the product of (i) the average of the Per Share Market Value for the five (5) Trading Days immediately preceding the Conversion Date, (ii) the number of shares of Preferred Stock which would then be converted but for this section, and (iii) the Conversion Ratio, which redemption price will be paid by the Company within ten (10) Business Days of its receipt of such Holder Conversion Notice. If the Company fails for any reason to pay such redemption price within such period, the Company shall effect the conversion of Preferred Shares subject to such Holder Conversion Notice at the lesser of the Conversion Price measured on the Conversion Date indicated in the Holder Conversion Notice and the Conversion Price measured at the end of such ten (10) Business Day period. The Holder shall have the right, exercisable at any time when the Per Share Market Value is such that the Company would have the right of redemption contemplated in this section were it to receive a Holder Conversion Notice, to deliver to the Company (by facsimile) a letter inquiring whether the Company would exercise such redemption right if it received a Holder Conversion Notice within five (5) calendar days of its receipt of such letter, which such inquiry letter shall set forth the number of shares that would be subject to such Holder Conversion Notice. The Company shall respond to the inquiry letter (by facsimile) by the close of business on the Business Day after which it is received, which response shall be binding upon it with respect to the Conversion Notice that is subject to such inquiry letter. The Company shall be deemed to have waived its 4 redemption right if it fails for any reason to respond by facsimile to the Holder delivering such inquiry letter by the close of business on the Business Day after its receipt of the inquiry letter. (ii) Not later than three Trading Days after the Conversion Date, the Company will deliver to the holder (i) a certificate or certificates which shall be free of restrictive legends and trading restrictions (other than those then required by law and as set forth in the Purchase Agreement), representing the number of shares of Common Stock being acquired upon the conversion of shares of Preferred Stock and (ii) one or more certificates representing the number of shares of Preferred Stock not converted; provided, however that the Company shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon conversion of any shares of Preferred Stock until certificates evidencing such shares of Preferred Stock are either delivered for conversion to the Company or any transfer agent for the Preferred Stock or Common Stock, or the holder notifies the Company that such certificates have been lost, stolen or destroyed and provides a bond (or other adequate security reasonably acceptable to the Company) satisfactory to the Company to indemnify the Company from any loss incurred by it in connection therewith. The Company shall, upon request of the holder, use its best efforts to deliver any certificate or certificates required to be delivered by the Company under this Section 5(c) electronically through the Depository Trust Corporation or another established clearing corporation performing similar functions. In the case of a conversion pursuant to a Holder Conversion Notice, if such certificate or certificates are not delivered by the date required under this Section 5(c), the holder shall be entitled by written notice to the Company at any time on or before such holder's receipt of such certificate or certificates thereafter, to rescind such conversion, in which event the Company shall immediately return the certificates representing the shares of Preferred Stock tendered for conversion. (d) (i) The conversion price for each share of Preferred Stock (the "Conversion Price") in effect on any Conversion Date shall be the LESSER of X OR Y; where X is the GREATER of (a) [$(BID PRICE AT FUNDING) ] or (b) [ C ] / [ ( { C / F } + 1.50 ) / 2 ] where C = the average Per Share Market Value for the five (5) Trading Days immediately preceding the Conversion Date and F = the Per Share Market Value on the Trading Day immediately preceding the Original Issue Date; and Y = 80% of the average Per Share Market Value for the five (5) Trading Days immediately preceding the Conversion Date; provided, however, if the registration statement to be filed by the Company in accordance with the Registration Rights Agreement is not declared effective by the Commission for any reason by the Effective Date (as defined in the Registration Rights Agreement), then for each of the first three months after such Effective Date that such registration statement shall not have been so declared effective, clause (a) and (b) above shall be decreased by 3% (i.e., a reduction of 3% at the end of the first such month and 6% at the end of the second such month). (ii) If the Company, at any time while any shares of Preferred Stock are outstanding, (a) shall pay a stock dividend or otherwise make a distribution or distributions on shares of its Junior Securities payable in shares of its capital stock (whether payable in shares of its Common Stock or of capital stock of any class), (b) subdivide outstanding shares of Common 5 Stock into a larger number of shares, (c) combine outstanding shares of Common Stock into a smaller number of shares, or (d) issue by reclassification of shares of Common Stock any shares of capital stock of the Company, the Conversion Price designated in Section 5(d)(i) shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock outstanding before such event and of which the denominator shall be the number of shares of Common Stock outstanding after such event. Any adjustment made pursuant to this Section 5(d)(ii) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification. (iii) If the Company, at any time while any shares of Preferred Stock are outstanding, shall issue rights or warrants to all holders of Common Stock entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the Per Share Market Value of Common Stock at the record date mentioned below, the Conversion Price designated in Section 5(d)(i) shall be multiplied by a fraction, of which the denominator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding on the date of issuance of such rights or warrants plus the number of additional shares of Common Stock offered for subscription or purchase, and of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding on the date of issuance of such rights or warrants plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at such Per Share Market Value. Such adjustment shall be made whenever such rights or warrants are issued, and shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights or warrants. However, upon the expiration of any right or warrant to purchase Common Stock the issuance of which resulted in an adjustment in the Conversion Price designated in Section 5(d)(i) pursuant to this Section 5(d)(iii), if any such right or warrant shall expire and shall not have been exercised, the Conversion Price designated in Section 5(d)(i) shall immediately upon such expiration be recomputed and effective immediately upon such expiration be increased to the price which it would have been (but reflecting any other adjustments in the Conversion Price made pursuant to the provisions of this Section 5 after the issuance of such rights or warrants) had the adjustment of the Conversion Price made upon the issuance of such rights or warrants been made on the basis of offering for subscription or purchase only that number of shares of Common Stock actually purchased upon the exercise of such rights or warrants actually exercised. (iv) If the Company, at any time while shares of Preferred Stock are outstanding, shall distribute to all holders of Common Stock (and not to holders of Preferred Stock) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security (excluding those referred to in Section 5(d)(iii) above) then in each such case the Conversion Price at which each share of Preferred Stock shall thereafter be convertible shall be determined by multiplying the Conversion Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the Per Share Market Value of Common Stock determined as of the record date mentioned above, and of which the numerator shall be such Per Share Market Value 6 of the Common Stock on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of Common Stock as determined by the Board of Directors in good faith; provided, however that in the event of a distribution exceeding ten percent (10%) of the net assets of the Company, such fair market value shall be determined by a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Company) (an "Appraiser") selected in good faith by the holders of a majority in interest of the shares of Preferred Stock; and provided, further that the Company, after receipt of the determination by such Appraiser shall have the right to select an additional Appraiser, in which case the fair market value shall be equal to the average of the determinations by each such Appraiser. In either case the adjustments shall be described in a statement provided to all holders of Preferred Stock of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above. (v) All calculations under this Section 5 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. (vi) Whenever the Conversion Price is adjusted pursuant to Section 5(d)(ii),(iii), (iv) or (v), the Company shall promptly mail to each holder of Preferred Stock, a notice setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. (vii) In case of any reclassification of the Common Stock, any consolidation or merger of the Company with or into another person, the sale or transfer of all or substantially all of the assets of the Company or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, the holders of the Preferred Stock then outstanding shall have the right thereafter to convert such shares only into the shares of stock and other securities and property receivable upon or deemed to be held by holders of Common Stock following such reclassification, consolidation, merger, sale, transfer or share exchange, and the holders of the Preferred Stock shall be entitled upon such event to receive such amount of securities or property as the shares of the Common Stock of the Company into which such shares of Preferred Stock could have been converted immediately prior to such reclassification, consolidation, merger, sale, transfer or share exchange would have been entitled. The terms of any such consolidation, merger, sale, transfer or share exchange shall include such terms so as to continue to give to the holder of Preferred Stock the right to receive the securities or property set forth in this Section 5(d)(vii) upon any conversion following such consolidation, merger, sale, transfer or share exchange. This provision shall similarly apply to successive reclassifications, consolidations, mergers, sales, transfers or share exchanges. 7 (viii) If: (a) the Company shall declare a dividend (or any other distribution) on its Common Stock; or (b) the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or (c) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; or (d) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock of the Company (other than a subdivision or combination of the outstanding shares of Common Stock), any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or (e) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding-up of the affairs of the Company; then the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of Preferred Stock, and shall cause to be mailed to the holders of Preferred Stock at their last addresses as they shall appear upon the stock books of the Company, at least 30 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined, or (y) the date on which such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding-up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding-up; provided, however, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. 8 (e) If at any time conditions shall arise by reason of action taken by the Company which in the opinion of the Board of Directors are not adequately covered by the other provisions hereof and which might materially and adversely affect the rights of the holders of Preferred Stock (different than or distinguished from the effect generally on rights of holders of any class of the Company's capital stock) or if at any time any such conditions are expected to arise by reason of any action contemplated by the Company, the Company shall mail a written notice briefly describing the action contemplated and the material adverse effects of such action on the rights of the holders of Preferred Stock at least 30 calendar days prior to the effective date of such action, and an Appraiser selected by the holders of majority in interest of the Preferred Stock shall give its opinion as to the adjustment, if any (not inconsistent with the standards established in this Section 5), of the Conversion Price (including, if necessary, any adjustment as to the securities into which shares of Preferred Stock may thereafter be convertible) and any distribution which is or would be required to preserve without diluting the rights of the holders of shares of Preferred Stock; PROVIDED, however, that the Company, after receipt of the determination by such Appraiser, shall have the right to select an additional Appraiser, in which case the adjustment shall be equal to the average of the adjustments recommended by each such Appraiser. The Board of Directors shall make the adjustment recommended forthwith upon the receipt of such opinion or opinions or the taking of any such action contemplated, as the case may be; PROVIDED, however, that no such adjustment of the Conversion Price shall be made which in the opinion of the Appraiser(s) giving the aforesaid opinion or opinions would result in an increase of the Conversion Price to more than the Conversion Price then in effect. (f) The Company covenants that it will at all times reserve and keep available out of its authorized and unissued Common Stock solely for the purpose of issuance upon conversion of Preferred Stock as herein provided, free from preemptive rights or any other actual contingent purchase rights of persons other than the holders of Preferred Stock, such number of shares of Common Stock as shall be issuable (taking into account the adjustments and restrictions of Section 5(b) and Section 5(d) hereof) upon the conversion of all outstanding shares of Preferred Stock. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly and validly authorized, issued and fully paid and nonassessable. (g) Upon a conversion hereunder the Company shall not be required to issue stock certificates representing fractions of shares of Common Stock, but may if otherwise permitted, make a cash payment in respect of any final fraction of a share based on the Per Share Market Value at such time. If the Company elects not, or is unable, to make such a cash payment, the holder of a share of Preferred Stock shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock. (h) The issuance of certificates for shares of Common Stock on conversion of Preferred Stock shall be made without charge to the holders thereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate, provided that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name 9 other than that of the holder of such shares of Preferred Stock so converted and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. (i) Shares of Preferred Stock converted into Common Stock shall be canceled and shall have the status of authorized but unissued shares of preferred stock. (j) Each Holder Conversion Notice shall be given by facsimile and by mail, postage prepaid, addressed to the attention of the Chief Financial Officer of the Company at the facsimile telephone number and address of the principal place of business of the Company. Each Company Conversion Notice shall be given by facsimile and by mail, postage prepaid, addressed to each holder of Preferred Stock at the facsimile telephone number and address of such holder appearing on the books of the Company or provided to the Company by such holder for the purpose of such Company Conversion Notice, or if no such facsimile telephone number or address appears or is so provided, at the principal place of business of the holder. Any such notice shall be deemed given and effective upon the earliest to occur of (i)(a) if such Conversion Notice is delivered via facsimile at the facsimile telephone number specified in this Section 5(j) prior to 4:30 p.m. (Eastern Standard Time) on any date, such date (or, in the case of a Company Conversion Notice, the next Trading Day) or such later date as is specified in the Conversion Notice, and (b) if such Conversion Notice is delivered via facsimile at the facsimile telephone number specified in this Section 5(j) after 4:30 p.m. (Eastern Standard Time) on any date, the next date (or, in the case of a Company Conversion Notice, the next Trading Day after such next day) or such later date as is specified in the Conversion Notice, (ii) five days after deposit in the United States mails or (iii) upon actual receipt by the party to whom such notice is required to be given. Section 6. DEFINITIONS. For the purposes hereof, the following terms shall have the following meanings: "Common Stock" means shares now or hereafter authorized of the class of Common Stock, no par value, of the Company and stock of any other class into which such shares may hereafter have been reclassified or changed. "Conversion Ratio" means, at any time, a fraction, of which the numerator is Stated Value plus accrued but unpaid dividends, and of which the denominator is the Conversion Price at such time. "Junior Securities" means the Common Stock and all other equity securities of the Company, except the Company's Series A Cumulative Convertible Preferred Stock. 10 "Original Issue Date" shall mean the date of the first issuance of any shares of the Preferred Stock regardless of the number transfers of any particular shares of Preferred Stock and regardless of the number of certificates which may be issued to evidence such Preferred Stock. "Per Share Market Value" means on any particular date (a) the closing bid price per share of the Common Stock on such date on The Nasdaq Stock Market or other stock exchange on which the Common Stock has been listed or if there is no such price on such date, then the closing bid price on such exchange on the date nearest preceding such date, or (b) if the Common Stock is not listed on The Nasdaq Stock Market or any stock exchange, the closing bid for a share of Common Stock in the over-the-counter market, as reported by the NASD at the close of business on such date, or (c) if the Common Stock is not quoted on the NASD, the closing bid price for a share of Common Stock in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or similar organization or agency succeeding to its functions of reporting prices), or (d) if the Common Stock is no longer publicly traded the fair market value of a share of Common Stock as determined by an Appraiser (as defined in Section 5(d)(iv) above) selected in good faith by the holders of a majority in interest of the shares of the Preferred Stock; PROVIDED, however, that the Company, after receipt of the determination by such Appraiser, shall have the right to select an additional Appraiser, in which case, the fair market value shall be equal to the average of the determinations by each such Appraiser. "Person" means a corporation, an association, a partnership, organization, a business, an individual, a government or political subdivision thereof or a governmental agency. "Purchase Agreement" means the Convertible Preferred Stock Purchase Agreement, dated as of the Original Issue Date, between the Company and the original holder of the Preferred Stock. "Trading Day" means (a) a day on which the Common Stock is traded on NASDAQ or principal stock exchange on which the Common Stock has been listed, or (b) if the Common Stock is not listed on NASDAQ or any stock exchange, a day on which the Common Stock is traded in the over-the-counter market, as reported by the NASD, or (c) if the Common Stock is not quoted on the NASD, a day on which the Common Stock is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices). RESOLVED FURTHER, that the President and Secretary of the Company be, and they hereby are, authorized and directed to prepare, execute, verify, and file in California, a Certificate of Designation in accordance with these resolutions and as required by law. 11 EXHIBIT A NOTICE OF CONVERSION AT THE ELECTION OF HOLDER (To be Executed by the Registered Holder in order to Convert shares of Preferred Stock) The undersigned hereby irrevocably elects to convert the number of shares of Series A Convertible Preferred Stock indicated below, into shares of Common Stock, no par value per share (the "Common Stock"), of Incomnet Inc. (the "Company") according to the conditions hereof, as of the date written below. If shares are to be issued in the name of a person other than undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the Holder for any conversion, except for such transfer taxes, if any. Conversion calculations: --------------------------------------------- Date to Effect Conversion --------------------------------------------- Number of shares of Preferred Stock to be Converted --------------------------------------------- Applicable Conversion Price --------------------------------------------- Signature --------------------------------------------- Name: --------------------------------------------- Address: EXHIBIT B NOTICE OF CONVERSION AT THE ELECTION OF THE COMPANY The undersigned in the name and on behalf of Incomnet Inc. (the "Company") hereby notifies the addressee hereof that the Company hereby elects to exercise its right to convert [ ] shares of its Series A Convertible Preferred Stock held by the Holder into shares of Common Stock, no par value per share (the "Common Stock") of the Company according to the terms hereof, as of the date written below. No fee will be charged to the Holder for any conversion hereunder, except for such transfer taxes, if any which may be incurred by the Company if shares are to be issued in the name of a person other than the person to whom this notice is addressed. Conversion calculations: --------------------------------------------- Date to Effect Conversion --------------------------------------------- Number of Shares of Preferred Stock to be Converted --------------------------------------------- Applicable Conversion Price --------------------------------------------- Signature --------------------------------------------- Name: --------------------------------------------- Address: IN WITNESS WHEREOF, Incomnet Inc. has caused its corporate seal to be hereunto affixed and this certificate to be signed by Melvyn Reznick, its President, and attested by Stephen Caswell, its Secretary, this 27th day of September 1996. Incomnet Inc. By: /s/Melvyn Reznick ----------------------------- Melvyn Reznick President Attest: By: /s/Stephen Caswell -------------------------- Stephen Caswell Secretary 12 EX-5.1 3 LEGAL OPINION EXHIBIT 5.1 LEGAL OPINION LAW OFFICES OF MARK J. RICHARDSON WILSHIRE PALISADES BUILDING 1299 OCEAN AVENUE SUITE 900 SANTA MONICA, CALIFORNIA 90401 TELEPHONE (310) 393-9992 FACSIMILE (310) 393-2004 October ___, 1996 Incomnet, Inc. 21031 Ventura Boulevard, Suite 1100 Woodland Hills, California 91364 RE: INCOMNET, INC. - VALIDITY OF ISSUANCE OF SHARES Ladies and Gentlemen: We have acted as special counsel to you in connection with the registration on Form S-3 (File No. 333-3635 under the Securities Act of 1933, as amended ("Registration Statement"), of a total of 788,500 shares of the Common Stock of Incomnet, Inc., no par value, comprised of (i) 75,000 shares (the "Underlying Shares") issuable upon the exercise of 75,000 warrants (the "Warrants") to purchase Common Stock at an exercise price of $4.50 per share at any time until December 31, 1998, (ii) 451,000 outstanding shares (the "Outstanding Shares") issued upon the conversion of 8% convertible promissory notes previously issued by the Company, pursuant to settlement agreements, or in private placements pursuant to Section 4(2) of the Securities Act of 1933, as amended, (iii) a minimum of 88,500 shares (also referred to herein as the "Underlying Shares") issuable upon the conversion of 365 outstanding Series A 2% Convertible Preferred Stock, and (iv) up to 214,000 unissued shares (the "Shares") which may be issued in the future pursuant to settlement agreements or in open market sales under Rule 415 through a registered broker-dealer. You have requested our opinion in connection with the registration of the Shares, the Underlying Shares and the Outstanding Shares covered by the Prospectus, dated October 18, 1996 (the "Prospectus"). In connection with our acting as counsel, we have examined the laws of the State of California together with the form of Warrant attached as Exhibit 4.4 to the Registration Statement, the Certificate of Determination for Series A 2% Convertible Preferred Stock attached as Exhibit 3.3 to the Registration Statement, the Prospectus, and certain other documents and instruments prepared on behalf of Incomnet, Inc. as we have deemed necessary and relevant in the preparation of our opinion as hereinafter set forth. In our examination, we have assumed the genuineness of all signatures on original documents and the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified, conformed or photostatic copies of originals, the authenticity of such latter documents, and the proper execution, delivery and filing of the documents referred to in this opinion. Based upon the foregoing, we are of the opinion that the Shares, the Outstanding Shares and the Underlying Shares issued and to be issued by Incomnet, Inc. pursuant to the exercise of the Warrants, the terms of the settlement agreements, and the terms of the Prospectus have been and will be duly created and have been and will be validly issued shares of the Common Stock, no par value, of Incomnet, Inc. Upon payment for the Shares, the Outstanding Shares and the Underlying Shares and full compliance with all of the terms and conditions relating to the issuance of the Shares and the Underlying Shares and the sale of the Outstanding Shares set forth in the Prospectus and in the Warrants, the Shares, the Outstanding Shares and the Underlying Shares will be fully paid and nonassessable. For the purposes of this opinion we are assuming the proper execution of all Warrants, the Certificate of Determination of Series A 2% Convertible Preferred Stock, the Registration Rights Agreement, the Purchase Agreement for the Series A 2% Convertible Preferred Stock, settlement agreements, subscription agreements and conversion agreements, and that the appropriate certificates are duly filed and recorded in every jurisdiction in which such filing and recordation is required in accordance with the laws of such jurisdictions. We express no opinion as to the laws of any state or jurisdiction other than California. We consent to the use of this opinion as an exhibit to the Registration Statement, and we further consent to the use of our name in the Registration Statement and the Prospectus which is a part of said Registration Statement. Respectfully submitted, Mark J. Richardson, Esq. EX-10.23 4 AMENDED CARRIER SWITCHED SERVICES EXHIBIT 10.23 AMENDED CARRIER SWITCHED SERVICES AGREEMENT WITH WILTEL, INC., DATED JUNE 17, 1996 *Certain information has been deleted from this Agreement pursuant to a request for confidential treatment under Rule 406 of the Securities Act of 1933, as amended. WILMAX AMENDED AND RESTATED PROGRAM ENROLLMENT TERMS [CARRIER] These Amended and Restated Program Enrollment Terms ("PET") are made this 17th day of June, 1996 and are retroactive to February 1, 1996 (THE "EFFECTIVE DATE"), by and between WorldCom Network Services, Inc. d/b/a WilTel ("WILTEL") and National Telephone & Communications, Inc. ("CUSTOMER") and are a part of their agreement for switched services, more particularly identified as TSA#NTC-941101 (THE "TSA"). The TSA and this PET are collectively referred to as the "AGREEMENT". In accordance with the Agreement, charges to Customer for Service obtained thereunder shall be subject to the terms and conditions set forth herein. The parties acknowledge that they previously executed Program Enrollment Terms dated November 15, 1994 (the "PRIOR PET") and Interim Program Enrollment Terms dated as of September 1, 1995, (the "INTERIM PET"). As of the Effective Date, the terms and conditions contained in the Prior PET and the Interim PET will be terminated in their entirety and all switched telecommunications services provided by WilTel to Customer will be provided under the terms and conditions as described in this PET. 1. SERVICE TERM: The Service Term will commence as of February 1, 1996 and will continue for a period through and including January 31, 2002. 2. CUSTOMER'S COMMITMENTS: (A) In consideration of the rates and discounts offered hereunder, Customer agrees as follows: (i) Commencing as of the Effective Date and continuing for a period of twelve (12) months thereafter (the "FIRST COMMITMENT PERIOD"), Customer agrees to maintain, on a take-or-pay basis, Monthly Revenue of at least $9,000,000 ("CUSTOMER'S FIRST COMMITMENT"). Notwithstanding the foregoing, commencing as of the Effective Date and continuing through the June, 1996 billing period (i.e., July, 1996 invoice), Customer will be deemed to have satisfied Customer's First Commitment. (ii) Commencing with the February, 1997 billing period (i.e., March, 1997 invoice), and continuing for a period of six (6) months thereafter (the "SECOND COMMITMENT PERIOD"), Customer agrees to maintain, on a take-or-pay basis, Monthly Revenue of at least $12,000,000 ("CUSTOMER'S SECOND COMMITMENT"). 01/01/96 Page 1 of 6 CONFIDENTIAL (iii) Commencing with the August, 1997 billing period (i.e., September, 1997 invoice), and continuing through the end of the Service Term (including any extensions thereto) (the "CONTRACT COMMITMENT PERIOD"), Customer agrees to maintain, on a take-or-pay basis, Monthly Revenue of at least $15,000,000 ("CUSTOMER'S FINAL COMMITMENT"). (iv) Commencing as of the Effective Date and continuing through the end of the Contract Commitment Period, Customer agrees to maintain, on a take-or-pay basis, cumulative Monthly Revenue in the aggregate equal to at least $1,000,000,000 ("CUSTOMER'S CONTRACT COMMITMENT"). (B) For purposes of this Agreement "MONTHLY REVENUE" will include all gross measured and per call Switched Service charges (i.e., Directory Assistance and both Domestic and International) plus (i) three (3) times Customer's first $300,000 recurring monthly Private Line Interexchange Service charges (i.e., both Domestic and International) from WilTel for the same period, (ii) two (2) times Customer's second $300,000 in recurring monthly Private Line Interexchange Service charges (i.e., both Domestic and International) from WilTel for the same period, and (iii) Customer's recurring monthly Private Line Interexchange Service charges (i.e., both Domestic and International) from WilTel for the same period in excess of $600,000. Monthly Revenue shall exclude any pro rata charges, access charges, ancillary or special feature charges, such as, Authorization codes or CDR Tapes, or any other charges other than those identified by the relevant WilTel invoice as Monthly Recurring Interexchange Service Charges. (C) The parties acknowledge that the rates described in Section 5 below are stated net of all discounts and will be charged by WilTel as stated. In determining if Customer has satisfied its applicable Commitments as described in this Section 2 (i.e., on a gross basis), the following procedures shall apply: (i) Customer's SWITCHED ACCESS Service and DEDICATED ACCESS Service (1+ and 800), interstate traffic only will be multiplied (i.e., "grossed up") by a factor of 1.2. (ii) Customer's TERMINATION Service and 800 ORIGINATION Service, interstate traffic only will be multiplied by a factor of 1.15. (iii) Customer's SWITCHED ACCESS Service, DEDICATED ACCESS Service, TERMINATION Service and 800 ORIGINATION Service, intrastate traffic only will be multiplied by a factor of 1.05. (iv) All of Customer's other traffic, including without limitation, Customer's International Service and Service to and from Hawaii, Alaska, Puerto Rico, the United States Virgin Islands, Canada and Mexico, will be multiplied by a factor of 1.00. 01/01/96 Page 2 of 6 CONFIDENTIAL 3. DEFICIENCY CHARGE: (A) In the event Customer does not maintain Customer's First Commitment, Customer's Second Commitment or Customer's Contract Commitment, whichever is applicable, in any month during the First Commitment Period, the Second Commitment Period or the Contract Commitment Period, whichever is applicable, then for those month(s) only, Customer will pay WilTel the difference between Customer's applicable Minimum Commitment and Customer's actual Monthly Revenue as described in Subsection 2(B) above the (THE "MONTHLY DEFICIENCY CHARGE"). The Monthly Deficiency Charge will be due at the same time payment is due for Service provided to Customer. (B) In the event Customer does not maintain Customer's Contract Commitment during the Service Term, Customer will pay WilTel the difference between Customer's Contract Commitment and Customer's actual cumulative Monthly Revenue obtained under this Agreement during the Service Term (THE "CONTRACT DEFICIENCY CHARGE"). The Contract Deficiency Charge, if any, will be due immediately (i) upon the scheduled expiration of this Agreement, (ii) if Customer cancels all circuits comprising all Service Interconnections as described in the Service Schedule, or (iii) if WilTel terminates this Agreement based on Customer's default. 4. OTHER AGREEMENTS: In consideration of the rates and discounts offered hereunder to Customer, Customer acknowledges and agrees that this Agreement and the Services described herein may not be combined with any other products or services offered by WilTel, WilTel's parent company, or WilTel's affiliates. Therefore, Customer acknowledges and agrees that as of the Effective Date of this Agreement, (i) all switched telecommunications services ("EXISTING SERVICES") offered by WilTel (formerly WilTel, Inc.), WilTel's parent company, WorldCom, Inc. (formerly LDDS Communications, Inc.) or any of WilTel's affiliates, including without limitation, IDB WorldCom Services, Inc. (hereinafter referred to as the "WILTEL GROUP") which are currently being provided Customer (which for purposes of this Section 6 will include Customer's parent company, Customer's subsidiaries and any other entities under common control with Customer; hereinafter referred to as the "CUSTOMER GROUP") pursuant to existing service agreements ("EXISTING AGREEMENTS") will be canceled and not longer in force or effect except for charges or credits due for Existing Services rendered as of the Effective Date of this Agreement, and (ii) all Existing Service (excluding rates and discounts) provided a member of the Customer Group by a member of the WilTel Group will be provisioned under the terms and conditions of this Agreement. The parties further agree that the rates shown on the Pricing Exhibit dated concurrently herewith and the discounts described herein shall become effective for all Existing Service on or before the first day of the third full month following the Effective Date. Simultaneous with the execution of this Agreement, if applicable, Customer shall cause all members of the Customer Group to agree to the cancellation of such Existing Agreements and the provision of Existing Services under the terms and conditions of this Agreement and Customer agrees to provide WilTel with reasonable documentation evidencing such agreement. 01/01/96 Page 3 of 6 CONFIDENTIAL 5. RATES: In consideration of Customer's Commitments as described in Section 3 above, notwithstanding anything to the contrary contained in this Agreement or the Pricing Exhibit attached hereto, commencing July 1, 1996 (i.e., August 1, 1996 invoice), Customer's rates for Services provided hereunder will be the rates set forth on Attachment "A" hereto which rates are not subject to any further discount. Notwithstanding anything to the contrary contained in Subsection 5(D) of the TSA, WilTel may modify the International rates set forth on Attachment "A" upon not less than thirty (30) days prior written notice to Customer, which notice shall state the effective date for the charge modification. In the event WilTel modifies such International rates, WilTel and Customer agree to negotiate in good faith concerning Customer's applicable commitments described in Section 2 above. In the event WilTel modifies its WilMax rates or programs (i.e., "postalized" rates for Services provided), which rates or programs are generally available to its other carrier customers, WilTel agrees to negotiate in good faith with Customer concerning any modification to Customer's rates hereunder. 6. PAYMENT: The parties agree to substitute Subsection 5(A) of the TSA to read in its entirety as follows: (A) PAYMENT WilTel billings for Service are made on a monthly basis (or such other basis as may be mutually agreed to by the parties) following Start of Service. Subject to Subsection 5(D) below, Service shall be billed at the rates set forth in the PET dated effective as of February 1, 1996, and Service Requests, as the case may be. Customer agrees to wire transfer to WilTel all amounts owed within fifty-five (55) days of the invoice date set forth on each WilTel invoice to Customer ("DUE DATE"). If payment is not received by WilTel on or before the Due Date, WilTel agrees to give Customer three (3) business days notice and opportunity to cure such nonpayment; unless such nonpayment is due solely to Services obtained by NTC hereunder for the sole use and benefit of AmeriVision Communications, Inc. ("AmeriVision"), in which case NTC may either (i) pay the amount attributable to AmeriVision, or (ii) provide WilTel with adequate assurance of the amount attributable to AmeriVision which assurance may be in the form of a fully secured promissory note acceptable to WilTel with a term not to exceed sixty (60) days or other means reasonably acceptable to WilTel. If payment is not received in full from WilTel within such three-day cure period or WilTel has not received payment or adequate assurance of payment from NTC with respect to Services obtained for AmeriVision, notwithstanding anything to the contrary contained in the TSA (including without limitation, Sections 7 & 8), WilTel may immediately terminate this Agreement which termination shall not relieve Customer for payment of applicable cancellation charges as described in Section 2 above. Further, if such invoice is not paid in full on or before the Due Date, Customer shall also pay a late fee in the amount of the lesser of one and one-half percent (1 1/2%) of the unpaid balance of the Service charges per month or the maximum lawful rate under applicable state law. 01/01/96 Page 4 of 6 CONFIDENTIAL 7. SECURITY INTERESTS: (A) In order to secure any payment that may be due WilTel under this Agreement, Customer hereby agrees to execute (i) a security agreement (a form of which is attached hereto as Attachment "2" and incorporated herein by reference) granting WilTel an irrevocable security interest (the "CUSTOMER SECURITY INTEREST") in Customer's customer base, customer lists and contract rights associated with the provision of service to such customer base (excluding Customer's accounts receivable associated with such customer base), and (ii) a Uniform Commercial Code-Financing Statement-Form UCC-1 in favor of WilTel in order to perfect the Security Interest. Further, Customer agrees to execute any other documents reasonably required by WilTel that are necessary to perfect the Customer Security Interest. (B) The parties acknowledge that certain of the Services obtained by Customer hereunder are for the direct use and benefit of AmeriVision Communications, Inc. ("AMERIVISION"). AmeriVision has agreed to execute a Payment Agreement between AmeriVision, Customer and WilTel (a form of which is attached hereto as Attachment "3") whereby AmeriVision will make direct payment to WilTel and guarantee payment of all amounts owed WilTel for Services provided to Customer for the benefit and use of AmeriVision. Further, in order to secure any payment that may be due WilTel under the Payment Agreement, as a condition to this Agreement, WilTel shall receive from AmeriVision (i) a security agreement (a form of which is attached hereto as Attachment "4" and incorporated herein by reference) granting WilTel an irrevocable security interest (the "AMERIVISION SECURITY INTEREST") in AmeriVision's customer base, customer lists and contract rights associated with the provision of service to such customer base, and (ii) a Uniform Commercial Code-Financing Statement-Form UCC-1 in favor of WilTel in order to perfect the Security Interest. Further, AmeriVision shall agree to execute any other documents reasonably required by WilTel that are necessary to perfect the AmeriVision Security Interest. Finally, Customer agrees that AmeriVision may pay WilTel directly (without any further notice or consent required from Customer) for Services provided Customer for the use and benefit of AmeriVision. 8. CREDIT: In consideration of Customer's Commitments described in Section 2 above, WilTel agrees to provide Customer a credit, in an amount equal to and to be applied in accordance with, the terms set forth in that certain letter from WilTel to Customer dated concurrently herewith. 01/01/96 Page 5 of 6 CONFIDENTIAL IN WITNESS WHEREOF, the parties have executed these Program Enrollment Terms on the date first written above. WORLDCOM NETWORK SERVICES, INC. NATIONAL TELEPHONE & D/B/A WILTEL COMMUNICATIONS, INC. BY: /s/ R.A. Wilkins BY: /s/ Ed Jacobs ----------------------------- ------------------------------- (SIGNATURE) (SIGNATURE) R.A. Wilkins Ed Jacobs ----------------------------- ------------------------------- (PRINT NAME) (PRINT NAME) President President ----------------------------- ------------------------------- (TITLE) (TITLE) 01/01/96 Page 6 of 6 CONFIDENTIAL "THIS MATERIAL HAS BEEN DELETED PURSUANT TO A REQUEST FOR CONFI- DENTIAL TREATMENT PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED." "THIS MATERIAL HAS BEEN DELETED PURSUANT TO A REQUEST FOR CONFI- DENTIAL TREATMENT PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED." "THIS MATERIAL HAS BEEN DELETED PURSUANT TO A REQUEST FOR CONFI- DENTIAL TREATMENT PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED." "THIS MATERIAL HAS BEEN DELETED PURSUANT TO A REQUEST FOR CONFI- DENTIAL TREATMENT PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED." "THIS MATERIAL HAS BEEN DELETED PURSUANT TO A REQUEST FOR CONFI- DENTIAL TREATMENT PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED." "THIS MATERIAL HAS BEEN DELETED PURSUANT TO A REQUEST FOR CONFI- DENTIAL TREATMENT PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED." "THIS MATERIAL HAS BEEN DELETED PURSUANT TO A REQUEST FOR CONFI- DENTIAL TREATMENT PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED." "THIS MATERIAL HAS BEEN DELETED PURSUANT TO A REQUEST FOR CONFI- DENTIAL TREATMENT PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED." "THIS MATERIAL HAS BEEN DELETED PURSUANT TO A REQUEST FOR CONFI- DENTIAL TREATMENT PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED." "THIS MATERIAL HAS BEEN DELETED PURSUANT TO A REQUEST FOR CONFI- DENTIAL TREATMENT PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED." "THIS MATERIAL HAS BEEN DELETED PURSUANT TO A REQUEST FOR CONFI- DENTIAL TREATMENT PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED." "THIS MATERIAL HAS BEEN DELETED PURSUANT TO A REQUEST FOR CONFI- DENTIAL TREATMENT PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED." "THIS MATERIAL HAS BEEN DELETED PURSUANT TO A REQUEST FOR CONFI- DENTIAL TREATMENT PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED." "THIS MATERIAL HAS BEEN DELETED PURSUANT TO A REQUEST FOR CONFI- DENTIAL TREATMENT PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED." "THIS MATERIAL HAS BEEN DELETED PURSUANT TO A REQUEST FOR CONFI- DENTIAL TREATMENT PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED." EX-10.25 5 REGISTRATION RIGHTS AMENDMENT EXHIBIT 10.25 FORM OF REGISTRATION RIGHTS AGREEMENT BETWEEN INCOMNET, INC. AND PURCHASERS OF SERIES A CONVERTIBLE PREFERRED STOCK EXHIBIT B REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "AGREEMENT")is made and entered into as of September 27, 1996, by and among Incomnet Inc., a California corporation (the "COMPANY"), and ______________________________(the "PURCHASER"). This Agreement is made pursuant to the Convertible Preferred Stock Purchase Agreement, dated as of September 27, 1996 by and among the Company and the Purchaser (the "PURCHASE AGREEMENT"). The execution of this Agreement is a condition to the closing of the transactions contemplated by the Purchase Agreement. The parties hereby agree as follows: 1. DEFINITIONS Capitalized terms used and not otherwise defined herein shall have the meanings given such terms in the Purchase Agreement. As used in this Agreement, the following terms shall have the following meanings: "ADVICE" shall have meaning set forth in SECTION 4(o). "AFFILIATE" means, with respect to any Person, any other Person that directly or indirectly controls or is controlled by or under common control with such Person. For the purposes of this definition, "CONTROL," when used with respect to any Person, means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise; and the terms of "AFFILIATED," "CONTROLLING" and "CONTROLLED" have meanings correlative to the foregoing. "BLACKOUT" shall have the meaning set forth in SECTION 3(b). "BUSINESS DAY" means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the state of California generally are authorized or required by law or other government actions to close. "CLOSING DATE" shall have the meaning set forth in the Purchase Agreement. "COMMISSION" means the Securities and Exchange Commission. "COMMON STOCK" means the Company's Common Stock, no par value. "EFFECTIVENESS DATE" means the 75th day following the Closing Date. "EFFECTIVENESS PERIOD" shall have the meaning set forth in SECTION 2(a). "EVENT" shall have the meaning set forth in SECTION 5. "EVENT DATE" shall have the meaning set forth in SECTION 5. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "FILING DATE" means the 30th day following the Closing Date. "HOLDER" or "HOLDERS" means the holder or holders, as the case may be, from time to time of Registrable Securities. "INDEMNIFIED PARTY" shall have the meaning set forth in SECTION 7(c). "INDEMNIFYING PARTY" shall have the meaning set forth in SECTION 7(c). "LOSSES" shall have the meaning set forth in SECTION 7(a). "CALIFORNIA COURTS" shall have the meaning set forth in SECTION 9(i). "PERSON" means an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind. "PROCEEDING" means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened. "PROSPECTUS" means the prospectus included in the Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under to the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus. "REGISTRABLE SECURITIES" means the shares of Series A Preferred purchased by the Purchaser pursuant to the Purchase Agreement and the shares of Common Stock into which such shares of Series A Preferred are convertible pursuant to the Purchase Agreement. "REGISTRATION STATEMENT" means the registration statement, contemplated by SECTION 2(a), including the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement. "RULE 144" means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "RULE 144A" means Rule 144A promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation 2 hereafter adopted by the Commission having substantially the same effect as such Rule. "RULE 158" means Rule 158 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "RULE 415" means Rule 415 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "SECURITIES ACT" means the Securities Act of 1933, as amended. "SPECIAL COUNSEL" means any special counsel to the Holders, for which the Holders will be reimbursed by the Company pursuant to SECTION 5. "UNDERWRITTEN REGISTRATION OR UNDERWRITTEN OFFERING" means a registration in connection with which securities of the Company are sold to an underwriter for reoffering to the public pursuant to an effective registration statement. 2. SHELF REGISTRATION (a) On or prior to the Filing Date, the Company shall prepare and file with the Commission a "shelf" Registration Statement covering all Registrable Securities (which Registrable Securities shall include 560,000 shares of Common Stock or such other number of shares agreed to by the parties to the Purchase Agreement) for an offering to be made on a continuous basis pursuant to Rule 415. The Registration Statement shall be on Form [S-3] or another appropriate form permitting registration of Registrable Securities for resale by the Holders in the manner or manners designated by them (including, without limitation, public or private sales and one or more underwritten offerings). The Company shall use its best efforts to cause the Registration Statement to be declared effective under the Securities Act as promptly as practicable after the filing thereof, but in any event prior to the Effectiveness Date, and to keep such Registration Statement continuously effective under the Securities Act until the date which is three years after the Closing Date or such earlier date when all Registrable Securities covered by such Registration Statement have been sold or may be sold pursuant to Rule 144(A) as determined by the counsel to the Company pursuant to a written opinion letter, addressed to the Holders, to such effect (the "EFFECTIVENESS PERIOD"); PROVIDED, HOWEVER, that the Company shall not be deemed to have used its best efforts to keep the Registration Statement effective during the Effectiveness Period if it voluntarily takes any action that would result in the Holders not being able to sell the Registrable Securities covered by such Registration Statement during the Effectiveness Period, unless such action is required under applicable law or the Company has filed a post-effective amendment to the Registration Statement and the Commission has not declared it effective or except as otherwise permitted by SECTION 3(a). (b) If the Holders of a majority of the Registrable Securities so elect, an offering of Registrable Securities pursuant to the Registration Statement may be effected in the form of an underwritten offering. In such event, and if the managing underwriters advise the Company and such Holders in writing that in their opinion the amount of Registrable Securities proposed to be sold in such offering exceeds the amount of Registrable Securities which can be sold in such offering, there shall be included in such underwritten offering the amount of such Registrable Securities which in the opinion of such managing underwriters can be sold, and such 3 amount shall be allocated PRO RATA among the Holders proposing to sell Registrable Securities in such underwritten offering. (c) If any of the Registrable Securities are to be sold in an underwritten offering, the investment banker or investment bankers and manager or managers that will administer the offering will be selected by the Holders of a majority of the Registrable Securities included in such offering. No Holder may participate in any underwritten offering hereunder unless such Person (i) agrees to sell its Registrable Securities on the basis provided in any underwriting agreements approved by the Persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such arrangements. 3. HOLD-BACK AGREEMENTS (a) RESTRICTIONS ON PUBLIC SALE BY THE HOLDERS. Subject to paragraph (b) of this SECTION 3, the Purchaser hereby understands and agrees that the registration rights of the Purchaser pursuant to this Agreement and its ability to offer and sell Registrable Securities pursuant to the Registration Statement are limited by the provisions of the immediately following sentence. If the Company determines in its good faith judgment that the filing of the Registration Statement in accordance with SECTION 2 or the use of any Prospectus would require the disclosure of material information which the Company has a bona fide business purpose for preserving as confidential or the disclosure of which would impede the Company's ability to consummate a significant transaction, upon written notice of such determination by the Company, the rights of the Purchaser to offer, sell, or distribute any Registrable Securities pursuant to the Registration Statement or to require the Company to take action with respect to the registration or sale of any Registrable Securities pursuant to the Registration Statement (including any action contemplated by SECTION 4) will for up to 60 days in any 12-month period be suspended until the date upon which the Company notifies the Holders in writing that suspension of such rights for the grounds set forth in this SECTION 3(a) is no longer necessary; PROVIDED that there may be no such further suspension after the initial twelve-month period in which such suspension has occurred. (b) LIMITATION ON BLACKOUTS. Notwithstanding anything contained herein to the contrary, the aggregate number of days (whether or not consecutive) during which the Company may delay the effectiveness of the Registration Statement or prevent offerings, sales or distributions by the Purchaser pursuant to paragraph (a) above or the last paragraph of SECTION 4 (collectively, a "BLACKOUT") shall in no event exceed 90 days during any 12-month period and no Blackout may continue in consecutive 12 month periods. 4. REGISTRATION PROCEDURES In connection with the Company's registration obligations hereunder, the Company shall: (a) Prepare and file with the Commission within the time period set forth in SECTION 2 a Registration Statement on Form S-3 in accordance with the method or methods of distribution thereof as specified by the Holders, and cause the Registration Statement to become effective and remain effective as provided herein; PROVIDED, HOWEVER, that not less than [5] Business Days prior to the filing of the Registration Statement or any related Prospectus or any amendment or supplement thereto (including any document that would be incorporated or deemed to be incorporated therein by reference), the Company shall (i) furnish to the Holders, 4 their Special Counsel and any managing underwriters, copies of all such documents proposed to be filed, which documents (other than those incorporated or deemed to be incorporated by reference) will be subject to the review of such Holders, their Special Counsel and such managing underwriters, and (ii) cause its officers and directors, counsel and independent certified public accountants to respond to such inquiries as shall be necessary, in the opinion of respective counsel to such Holders and such underwriters, to conduct a reasonable investigation within the meaning of the Securities Act. The Company shall not file the Registration Statement or any such Prospectus or any amendments or supplements thereto to which the Holders of a majority of the Registrable Securities, their Special Counsel, or any managing underwriters, shall reasonably object on a timely basis. (b) (i) Prepare and file with the Commission such amendments, including post-effective amendments, to the Registration Statement as may be necessary to keep the Registration Statement continuously effective for the applicable time period; (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement, and as so supplemented or amended to be filed pursuant to Rule 424 (or any similar provisions then in force) promulgated under the Securities Act; (iii) respond as promptly as practicable to any comments received from the Commission with respect to the Registration Statement or any amendment thereto; and (iv) comply with the provisions of the Securities Act and the Exchange Act with respect to the disposition of all Registrable Securities covered by the Registration Statement during the applicable period in accordance with the intended methods of disposition by the Holders thereof set forth in the Registration Statement as so amended or in such Prospectus as so supplemented. (c) Notify the Holders of Registrable Securities to be sold, their Special Counsel and any managing underwriters immediately (and, in the case of (i)(A) below, not less than [5] days prior to such filing) and (if requested by any such Person) confirm such notice in writing no later than one Business Day following the day (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to the Registration Statement is proposed to be filed and, (B) with respect to the Registration Statement or any post-effective amendment when the same has become effective; (ii) of any request by the Commission or any other Federal or state governmental authority for amendments or supplements to the Registration Statement or Prospectus or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) if at any time any of the representations and warranties of the Company contained in any agreement (including any underwriting agreement) contemplated hereby ceases to be true and correct in all material respects; (v) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; and (vi) of the occurrence of any event that makes any statement made in the Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to the Registration Statement, Prospectus or other documents so that, in the case of the Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (d) Use its best efforts to avoid the issuance of, or, if issued, obtain the withdrawal of (i) any order suspending the effectiveness of the Registration Statement or (ii) any 5 suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest practicable moment. (e) If requested by any managing underwriter or the Holders of a majority of the Registrable Securities to be sold in connection with an underwritten offering, (i) promptly incorporate in a Prospectus supplement or post-effective amendment to the Registration Statement such information as such managing underwriters and such Holders reasonably agree should be included therein and (ii) make all required filings of such Prospectus supplement or such post-effective amendment as soon as practicable after the Company has received notification of the matters to be incorporated in such Prospectus supplement or post-effective amendment; PROVIDED, HOWEVER, that the Company shall not be required to take any action pursuant to this SECTION 4(e) that would, in the opinion of counsel for the Company, violate applicable law. (f) Furnish to each Holder, their Special Counsel and any managing underwriters, without charge, at least one executed copy of each Registration Statement and each amendment thereto, including financial statements and schedules, all documents incorporated or deemed to be incorporated therein by reference, and all exhibits to the extent requested by such Person (including those previously furnished or incorporated by reference) promptly after the filing of such documents with the Commission. (g) Promptly deliver to each Holder, their Special Counsel, and any managing underwriters, without charge, as many copies of the Prospectus or Prospectuses (including each form of prospectus) and each amendment or supplement thereto as such Persons may reasonably request; and the Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders and any underwriters in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto. (h) Prior to any public offering of Registrable Securities, use its best efforts to register or qualify or cooperate with the selling Holders, any underwriters and their respective counsel in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions within the United States as any Holder or underwriter requests in writing, to keep each such registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by a Registration Statement; PROVIDED, HOWEVER, that the Company shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject or subject the Company to any material tax in any such jurisdiction where it is not then so subject. (i) Cooperate with the Holders and any managing underwriters to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold, which certificates shall be free of all restrictive legends, and to enable such Registrable Securities to be in such denominations and registered in such names as any such managing underwriters or Holders may request at least two Business Days prior to any sale of Registrable Securities. (j) Upon the occurrence of any event contemplated by SECTION 4(c)(vi), as promptly as practicable, prepare a supplement or amendment, including a post-effective amendment, to the Registration Statement or a supplement to the related Prospectus or any 6 document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither the Registration Statement nor such Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (k) Use its best efforts to cause all Registrable Securities relating to such Registration Statement to be listed on each securities exchange or market, if any, on which similar securities issued by the Company are then listed. (l) Enter into such agreements (including an underwriting agreement in form, scope and substance as is customary in underwritten offerings) and take all such other actions in connection therewith (including those reasonably requested by any managing underwriters and the Holders of a majority of the Registrable Securities being sold) in order to expedite or facilitate the disposition of such Registrable Securities, and whether or not an underwriting agreement is entered into, (i) make such representations and warranties to such Holders and such underwriters as are customarily made by issuers to underwriters in underwritten public offerings, and confirm the same if and when requested; (ii) obtain and deliver copies thereof to each Holder and the managing underwriters, if any, of opinions of counsel to the Company and updates thereof addressed to each selling Holder and each such underwriter, in form, scope and substance reasonably satisfactory to any such managing underwriters and Special Counsel to the selling Holders covering the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such Special Counsel and underwriters; (iii) immediately prior to the effectiveness of the Registration Statement, and, in the case of an underwritten offering, at the time of delivery of any Registrable Securities sold pursuant thereto, obtain and deliver copies to the Holders and the managing underwriters, if any, of "cold comfort" letters and updates thereof from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data is, or is required to be, included in the Registration Statement), addressed to each selling Holder and each of the underwriters, if any, in form and substance as are customary in connection with underwritten offerings; (iv) if an underwriting agreement is entered into, the same shall contain indemnification provisions and procedures no less favorable to the selling Holders and the underwriters, if any, than those set forth in SECTION 7 (or such other provisions and procedures acceptable to the managing underwriters, if any, and holders of a majority of Registrable Securities participating in such underwritten offering; and (v) deliver such documents and certificates as may be reasonably requested by the Holders of a majority of the Registrable Securities being sold, their Special Counsel and any managing underwriters to evidence the continued validity of the representations and warranties made pursuant to clause 4(l)(i) above and to evidence compliance with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. (m) Make available for inspection by the selling Holders, any representative of such Holders, any underwriter participating in any disposition of Registrable Securities, and any attorney or accountant retained by such selling Holders or underwriters, at the offices where normally kept, during reasonable business hours, all financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries, and cause the officers, directors, agents and employees of the Company and its subsidiaries to supply all information in each case requested by any such Holder, representative, underwriter, attorney or accountant in connection with the Registration Statement; PROVIDED, HOWEVER, that any information that is 7 determined in good faith by the Company in writing to be of a confidential nature at the time of delivery of such information shall be kept confidential by such Persons, unless (i) disclosure of such information is required by court or administrative order or is necessary to respond to inquiries of regulatory authorities; (ii) disclosure of such information, in the opinion of counsel to such Person, is required by law; (iii) such information becomes generally available to the public other than as a result of a disclosure or failure to safeguard by such Person; or (iv) such information becomes available to such Person from a source other than the Company and such source is not bound by a confidentiality agreement. (n) Comply with all applicable rules and regulations of the Commission and make generally available to its securityholders earning statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 not later than 45 days after the end of any 12-month period (or 90 days after the end of any 12-month period if such period is a fiscal year) (i) commencing at the end of any fiscal quarter in which Registrable Securities are sold to underwriters in a firm commitment or best efforts underwritten offering and (ii) if not sold to underwriters in such an offering, commencing on the first day of the first fiscal quarter of the Company after the effective date of the Registration Statement, which statement shall cover said 12-month period, or end shorter periods as is consistent with the requirements of Rule 158. (o) Provide a CUSIP number for all Registrable Securities, not later than the effective date of the Registration Statement. The Company may require each selling Holder to furnish to the Company such information regarding the distribution of such Registrable Securities as is required by law to be disclosed in the Registration Statement and the Company may exclude from such registration the Registrable Securities of any such Holder who unreasonably fails to furnish such information within a reasonable time after receiving such request. If the Registration Statement refers to any Holder by name or otherwise as the holder of any securities of the Company, then such Holder shall have the right to require (i) the inclusion therein of language, in form and substance reasonably satisfactory to such Holder, to the effect that the ownership by such Holder of such securities is not to be construed as a recommendation by such Holder of the investment quality of the Company's securities covered thereby and that such ownership does not imply that such Holder will assist in meeting any future financial requirements of the Company, or (ii) if such reference to such Holder by name or otherwise is not required by the Securities Act or any similar Federal statute then in force, the deletion of the reference to such Holder in any amendment or supplement to the Registration Statement filed or prepared subsequent to the time that such reference ceases to be required. Each Purchaser covenants and agrees that (i) it will not offer or sell any Registrable Securities under the Registration Statement until it has received copies of the Prospectus as then amended or supplemented as contemplated in SECTION 4(g) and notice from the Company that such Registration Statement and any post-effective amendments thereto have become effective as contemplated by SECTION 4(c) and (ii) the Purchaser and its officers, directors or Affiliates, if any, will comply with the prospectus delivery requirements of the Securities Act as applicable to them in connection with sales of Registrable Securities pursuant to the Registration Statement. Each Holder agrees by its acquisition of such Registrable Securities that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in 8 SECTION 4(c)(ii), 4(c)(iii), 4(c)(iv), 4(c)(v) or 4(c)(vi), such Holder will forthwith discontinue disposition of such Registrable Securities until such Holder's receipt of the copies of supplemented Prospectus and/or amended Registration Statement contemplated by SECTION 4(i), or until it is advised in writing (the "ADVICE") by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement. 5. LIQUIDATED DAMAGES. The Company acknowledges and agrees that the Holders will suffer damages, and that it would not be feasible to ascertain the extent of such damages with precision, if the Company fails to fulfill its obligations hereunder and (a) a Registration Statement is not filed with the Commission on or prior to the Filing Date, (b) a Registration Statement is not declared effective by the Commission on or prior to the Effectiveness Date or (c) a Registration Statement is filed and declared effective but thereafter ceases to be effective at any time during the Effectiveness Period without being succeeded within 30 days by a subsequent Registration Statement filed with and declared effective by the Commission (any such failure being hereinafter referred to as an "EVENT", and for purposes of clauses (a) and (b) the date on which such Event occurs, or for purposes of clause (c) the date on which such 30-day limit is exceeded, being hereinafter referred to as an "EVENT DATE"). Upon the occurrence of an Event, the Company agrees to decrease the Conversion Price applicable to a conversion of Series A Preferred in accordance with Section 5(d)(i) of the Certificate of Designation by three percent (3%) per month for each of the first three months after each Event Date. Commencing on the fourth month after an Event Date, the three percent (3%) monthly penalty shall be paid to the Holder in cash. Such increase in discount and/or payment in cash, as the case may be, shall be paid as liquidated damages, and not as a penalty, to each Holder; PROVIDED, that such liquidated damages will, in each case, cease to accrue (subject to the occurrence of another Event) on the date in which the applicable Registration Statement is no longer subject to an order suspending the effectiveness thereof or Proceedings relating thereto or a subsequent Shelf Registration is declared effective. The Company shall notify each Holder within ten days of each Event and Event Date. The Company shall pay the liquidated damage due on the Registrable Securities to each Holder of record as at the Event Date on the third Business Day of each month in which such liquidated damages shall accrue by check delivered to the address for notice of such Holder set forth herein. 6. Registration Expenses (a) All fees and expenses incident to the performance of or compliance with this Agreement by the Company shall be borne by the Company whether or not the Registration Statement is filed or becomes effective and whether or not any Registrable Securities are sold pursuant to the Registration Statement. The fees and expenses referred to in the foregoing sentence shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses (A) with respect to filings required to be made with the National Association of Securities Dealers, Inc. and (B) in compliance with state securities or Blue Sky laws (including, without limitation, disbursements of counsel for the underwriters or Holders in connection with Blue Sky qualifications of the Registrable Securities and determination of the eligibility of the Registrable Securities for investment under the laws of such jurisdictions as the managing underwriters, if any, or Holders of a majority of Registrable Securities may designate, 9 not to exceed a total of $5,000)), (ii) printing expenses including, without limitation, expenses of printing certificates for Registrable Securities and of printing prospectuses if the printing of prospectuses is requested by the managing underwriters, if any, or by the holders of a majority of the Registrable Securities included in the Registration Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company and Special Counsel for the Holders (subject to the provisions of SECTION 6(b)), (v) fees and disbursements of all independent certified public accountants referred to in SECTION 4(l)(iii) (including, without limitation, the expenses of any special audit and "cold comfort" letters required by or incident to such performance), (vi) Securities Act liability insurance, if the Company so desires such insurance, and (vii) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement. In addition, the Company shall be responsible for all of its internal expenses incurred in connection with the consummation of the transactions contemplated by this Agreement (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, the fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange on which similar securities issued by the Company are then listed. (b) In connection with the Registration Statement, the Company shall reimburse the Holders for the reasonable fees and disbursements of one firm of attorneys chosen by the Holders of a majority of the Registrable Securities, to a maximum of $5,000.00, except in the event of unforeseeable circumstances. 7. Indemnification (a) Indemnification by the Company. The Company shall, notwithstanding termination of this Agreement and without limitation as to time, indemnify and hold harmless each Holder, the officers, directors, agents, brokers, investment advisors and employees of each of them, each Person who controls any such Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, agents and employees of each such controlling Person, to the fullest extent permitted by applicable law, from and against any and all losses, claims, damages, liabilities, costs (including, without limitation, costs of preparation and attorneys' fees) and expenses (collectively, "LOSSES"), as incurred, arising out of or relating to any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any Prospectus or any form of prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or form of prospectus or supplement thereto, in light of the circumstances under which they were made) not misleading, except to the extent, but only to the extent, that such untrue statements or omissions are based solely upon information regarding such Holder furnished in writing to the Company by or on behalf of such Holder expressly for use therein, which information was reasonably relied on by the Company for use therein or to the extent that such information relates to such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement, such Prospectus or such form of Prospectus or in any amendment or supplement thereto. The Company shall notify the Holders promptly of the institution, threat or assertion of any Proceeding of which the Company is aware in connection with the transactions contemplated by this Agreement. (b) INDEMNIFICATION BY HOLDERS. In connection with the Registration 10 Statement, each Holder shall furnish to the Company in writing such information as the Company reasonably requests for use in connection with the Registration Statement or any Prospectus and agrees, jointly and not severally, to indemnify and hold harmless the Company, their directors, officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling Persons, to the fullest extent permitted by applicable law, from and against all Losses (as determined by a court of competent jurisdiction in a final judgment not subject to appeal or review) arising solely out of or based solely upon any untrue statement of a material fact contained in the Registration Statement, any Prospectus, or any form of prospectus, or arising solely out of or based solely upon any omission of a material fact required to be stated therein or necessary to make the statements therein not misleading to the extent, but only to the extent, that such untrue statement or omission is contained in any information so furnished in writing by such Holder to the Company specifically for inclusion in the Registration Statement or such Prospectus and that such imformation was reasonably relied upon by the Company for use in the Registration Statement, such Prospectus or such form of prospectus or to the extent that such information relates to such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement, such Prospectus or such form of Prospectus. In no event shall the liability of any selling Holder hereunder be greater in amount than the dollar amount of the proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. (c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. If any Proceeding shall be brought or asserted against any Person entitled to indemnity hereunder (an "INDEMNIFIED PARTY"), such Indemnified Party promptly shall notify the Person from whom indemnity is sought (the "INDEMNIFYING PARTY") in writing, and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof; provided that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have proximately and materially adversely prejudiced the Indemnifying Party. An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed to pay such fees and expenses; or (2) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3) the named parties to any such Proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall have been advised by counsel that a conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and such counsel shall be at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending Proceeding in respect of which any Indemnified Party 11 is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding. All fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within 10 Business Days of written notice thereof to the Indemnifying Party (regardless of whether it is ultimately determined that an Indemnified Party is not entitled to indemnification hereunder; PROVIDED, that the Indemnifying Party may require such Indemnified Party to undertake to reimburse all such fees and expenses to the extent it is finally judicially determined that such Indemnified Party is not entitled to indemnification hereunder). (d) CONTRIBUTION. If a claim for indemnification under SECTION 7(a) or 7(b) is unavailable to an Indemnified Party or is insufficient to hold such Indemnified Party harmless for any Losses in respect of which this Section would apply by its terms (other than by reason of exceptions provided in this Section), then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omissions or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in SECTION 7(c), any attorneys' or other fees or expenses incurred by such party in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party. The parties hereto agree that it would not be just and equitable if contribution pursuant to this SECTION 7(d) were determined by PRO RATA allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this SECTION 7(d), the Purchaser shall not be required to contribute, in the aggregate, any amount in excess of the amount by which the proceeds actually received by the Purchaser from the sale of the Registrable Securities subject to the Proceeding exceeds the amount of any damages that the Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. The indemnity and contribution agreements contained in this Section are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties. 8. Rule 144 The Company shall file the reports required to be filed by it under the Securities Act and the Exchange Act in a timely manner and, if at any time the Company is not required to 12 file such reports, they will, upon the request of any Holder, make publicly available other information so long as necessary to permit sales of its securities pursuant to Rule 144. The Company further covenants that it will take such further action as any Holder may reasonably request, all to the extent required from time to time to enable such Holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by Rule 144. Upon the request of any Holder, the Company shall deliver to such Holder a written certification of a duly authorized officer as to whether it has complied with such requirements. 9. MISCELLANEOUS (a) REMEDIES. In the event of a breach by the Company or by a Holder, of any of their obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company and each Holder agree that monetary damages would not provide adequate compensation for any losses incurred by reason of a breach by it of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for specific performance in respect of such breach, it shall waive the defense that a remedy at law would be adequate. (b) NO INCONSISTENT AGREEMENTS. Except as specifically set forth in Schedule 3.1 to the Purchase Agreement, none of the Company nor any of its subsidiaries has, as of the date hereof, nor shall the Company or any of its subsidiaries, on or after the date of this Agreement, enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. Except as set specifically forth in Schedule 3.1 to the Purchase Agreement, none of the Company nor any of its subsidiaries has previously entered into any agreement granting any registration rights with respect to any of its securities to any Person. Without limiting the generality of the foregoing, without the written consent of the Holders of a majority of the then outstanding Registrable Securities, the Company shall not grant to any Person the right to request the Company to register any securities of the Company under the Securities Act unless the rights so granted are subject in all respects to the prior rights in full of the Holders set forth herein, and are not otherwise in conflict or inconsistent with the provisions of this Agreement. (c) ENTIRE AGREEMENT; AMENDMENTS. This Agreement, together with the Exhibits, Annexes and Schedules hereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters. (d) AMENDMENTS AND WAIVERS. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and the Holders of at least a majority of the then outstanding Registrable Securities; PROVIDED, HOWEVER, that, for the purposes of this sentence, Registrable Securities that are owned, directly or indirectly, by the Company, or an Affiliate of the Company are not deemed outstanding. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders and that does not directly or indirectly affect the rights of other Holders may be given by Holders of at least a majority of the Registrable Securities to which such waiver or consent relates; PROVIDED, HOWEVER, that the provisions of this sentence may not be amended, modified, or supplemented 13 except in accordance with the provisions of the immediately preceding sentence. (e) NOTICES. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be deemed to have been received (a) upon hand delivery (receipt acknowledged) or delivery by telex (with correct answer back received), telecopy or facsimile (with transmission confirmation report) at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be: If to the Company: Incomnet, Inc. 21031 Ventura Blvd. #1100 Woodland Hills, CA 91364 With Copies to: Mark J. Richardson Wilshire Palisades Bldg. 1299 Ocean Ave. #900 Santa Monica, CA 90401 If to the Purchaser: (f) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder. The Company may not assign its rights or obligations hereunder without the prior written consent of each Holder. (g) COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof. (h) GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without regard to principles of conflicts of law. The Company hereby irrevocably submits to the jurisdiction of any California state court or any federal court sitting in the state of California collectively, the "CALIFORNIA COURTS") in respect of any Proceeding arising out of or relating to this Agreement, and irrevocably accepts for itself and in respect of its property, generally and unconditionally, jurisdiction of the California Courts. The Company irrevocably 14 waives to the fullest extent it may effectively do so under applicable law any objection that it may now or hereafter have to the laying of the venue of any such Proceeding brought in any California Court and any claim that any such Proceeding brought in any California Court has been brought in an inconvenient forum. Nothing herein shall affect the right of any Holder to serve process in any manner permitted by law or to commence legal proceedings or otherwise proceed against the company in any other jurisdiction. (i) CUMULATIVE REMEDIES. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. (j) SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (k) HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (l) SHARES HELD BY THE COMPANY AND ITS AFFILIATES. Whenever the consent or approval of Holders of a specified percentage of Registrable Securities is required hereunder, Registrable Securities held by the Company or its Affiliates (other than the Purchaser or transferees or successors or assigns thereof if such persons are deemed to be Affiliates solely by reason of their holdings of such Registrable Securities) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. 15 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. Incomnet, Inc. By:/s/Melvyn Reznick ------------------------------------ Name: Melvyn Reznick Title: President and CEO Purchaser By_____________________________________ EX-10.26 6 PURCHASE AGREEMENT EXHIBIT 10.26 FORM OF PURCHASE AGREEMENT FOR THE SERIES A 2% CONVERTIBLE PREFERRED STOCK - -------------------------------------------------------------------------------- CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT By and Among Incomnet Inc. and - ----------------------- Purchaser Dated as of September 27, 1996 - ------------------------------- - -------------------------------------------------------------------------------- TABLES OF CONTENTS Page ---- ARTICLE I CERTAIN DEFINITIONS. . . . . . . . . . . . . . . . . . . . . 1 Section 1.1. Certain Definitions. . . . . . . . . . . . . . . . . . . 1 ARTICLE II PURCHASE OF SHARES . . . . . . . . . . . . . . . . . . . . . . 3 Section 2.1. Purchase of Shares; Closing. . . . . . . . . . . . . . . 3 ARTICLE III REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . 4 Section 3.1. Representations and Warranties of the Company. . . . . . 4 Section 3.2. Representations and Warranties of the Purchaser. . . . . 8 ARTICLE IV OTHER AGREEMENTS OF THE PARTIES. . . . . . . . . . . . . . . . 10 Section 4.1. Transfer Restrictions . . . . . . . . . . . . . . . . . 10 Section 4.2. Stop Transfer Instruction . . . . . . . . . . . . . . . 11 Section 4.3. Furnishing of Information . . . . . . . . . . . . . . . 11 Section 4.4. Notice of Certain Events. . . . . . . . . . . . . . . . 11 Section 4.5. Copies and Use of Disclosure Materials. . . . . . . . . 12 Section 4.6. Modifications to Disclosure Materials . . . . . . . . . 12 Section 4.7. Blue Sky Laws . . . . . . . . . . . . . . . . . . . . . 12 Section 4.8. Integration . . . . . . . . . . . . . . . . . . . . . . 12 Section 4.9. Furnishing of Rule 144A Materials . . . . . . . . . . . 13 Section 4.10. Solicitation Materials. . . . . . . . . . . . . . . . . 13 Section 4.11. Subsequent Financial Statements . . . . . . . . . . . . 13 Section 4.12. Right of First Refusal. . . . . . . . . . . . . . . . . 13 Section 4.13. Purchaser Ownership of Common Stock . . . . . . . . . . 14 Section 4.14. Listing of Underlying Shares. . . . . . . . . . . . . . 15 Section 4.15. Conversion Procedures . . . . . . . . . . . . . . . . . 15 ARTICLE V CONDITIONS PRECEDENT TO CLOSING. . . . . . . . . . . . . . . 15 Section 5.1. Conditions Precedent to Obligations of the Purchaser. . 15 Section 5.2. Conditions Precedent to Obligations of the Company. . . 17 ARTICLE VI TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . 17 i Section 6.1. Termination by Mutual Consent . . . . . . . . . . . . . 17 Section 6.2. Termination by the Company or the Purchaser . . . . . . 18 Section 6.3. Termination by the Company. . . . . . . . . . . . . . . 18 Section 6.4. Termination by the Purchaser. . . . . . . . . . . . . . 18 ARTICLE VII MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 7.1. Fees and Expenses . . . . . . . . . . . . . . . . . . . 19 Section 7.2. Entire Agreement; Amendments. . . . . . . . . . . . . . 19 Section 7.3. Notices. . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 7.4. Amendments, Waivers . . . . . . . . . . . . . . . . . . 20 Section 7.5. Headings. . . . . . . . . . . . . . . . . . . . . . . . 21 Section 7.6. Successors and Assigns. . . . . . . . . . . . . . . . . 21 Section 7.7. No Third Party Beneficiaries. . . . . . . . . . . . . . 21 Section 7.8. Governing Law . . . . . . . . . . . . . . . . . . . . . 21 Section 7.9. Survival. . . . . . . . . . . . . . . . . . . . . . . . 21 Section 7.10. Counterpart Signatures. . . . . . . . . . . . . . . . . 21 Section 7.11. Publicity . . . . . . . . . . . . . . . . . . . . . . . 22 Section 7.12. Severability. . . . . . . . . . . . . . . . . . . . . . 22 Section 7.13. Remedies. . . . . . . . . . . . . . . . . . . . . . . . 22 Exhibit A Certificate of Designation Exhibit B Registration Rights Agreement Exhibit C Form of Opinion of Mark J. Richardson, counsel for the Company Exhibit D Conversion Procedures Exhibit E Certificate of Officers of Incomnet, Inc. Schedule 3.1(a) Subsidiaries Schedule 3.1(c) Capitalization Schedule 3.1(f) Required Consents and Approvals Schedule 3.1(g) Litigation ii CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT, dated as of September 27, 1996 (this "AGREEMENT"), by and among Incomnet Inc., a California corporation (the "COMPANY"),and ________________________ (the "PURCHASER"). WHEREAS, the Company desires to issue and sell to the Purchaser and the Purchaser desires to acquire shares of the Company's Series A Convertible Preferred Stock, no par value per share (the "PREFERRED STOCK"). IN CONSIDERATION of the mutual covenants and agreements set forth herein and for good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: CERTAIN DEFINITIONS Section 1.1 CERTAIN DEFINITIONS. As used in this Agreement, and unless the context requires a different meaning, the following terms have the meanings indicated: "AFFILIATE" means, with respect to any Person, any Person that, directly or indirectly, controls, is controlled by or is under common control with such Person. For the purposes of this definition, "CONTROL" (including, with correlative meaning, the terms "CONTROLLED BY" and "UNDER COMMON CONTROL WITH") shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. "BUSINESS DAY" means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the state of New York are authorized or required by law or other government actions to close. "CLOSING" shall have the meaning set forth in SECTION 2.1(b). "CLOSING DATE" shall have the meaning set forth in SECTION 2.1(b). "CERTIFICATE OF DESIGNATION" shall have the meaning set forth in SECTION 2.1(a). "CODE" means the Internal Revenue Code of 1986, as amended, and the rules and regulations thereunder as in effect on the date hereof. "COMMISSION" means the Securities and Exchange Commission. "COMMON STOCK" means the Company's common stock par value [$. ] per share. "DISCLOSURE MATERIALS" means, collectively, the SEC Documents, the disclosure package delivered to the Purchaser in connection with the offering by the Company of the Shares and the Schedules to this Agreement furnished by or on behalf of the Company pursuant to Section 3.1. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "LIEN" means, with respect to any asset, any mortgage, lien pledge, encumbrance, charge or security interest of any kind in or on such asset or the revenues or income thereon or therefrom. "MATERIAL ADVERSE EFFECT" shall have the meaning set forth in SECTION 3.1(a). "NASD" means the National Association of Securities Dealers, Inc. "PER SHARE CONSIDERATION" shall have the meaning set forth in SECTION 2.1(a). "PERSON" means an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind. "PREFERRED STOCK" shall have the meaning set forth in the recitals hereto. "PURCHASE PRICE" shall have the meaning set forth in SECTION 2.1(a). "REGISTRATION RIGHTS AGREEMENT" mean the registration rights agreement, substantially in the form of EXHIBIT B, as the same may be amended, supplemented or otherwise modified in accordance with its term. "REQUIRED APPROVALS" shall have the meaning set forth in SECTION 3.1(f). "SEC DOCUMENTS" shall have the meaning set forth in SECTION 3.1(l). "SECURITIES ACT" means the Securities Act of 1933, as amended. "SHARES" means the shares of Preferred Stock purchased by the Purchaser pursuant to this Agreement. "SUBSIDIARIES" shall have the meaning set forth in SECTION 3.1(a). "UNDERLYING SHARES" means the shares of Common Stock into which the Shares are convertible in accordance with the term hereof and the Certificate of Designation. 2 ARTICLE II PURCHASE OF SHARES Section 2.1 PURCHASE OF SHARES; CLOSING. (a) Subject to the terms and conditions herein set forth, the Company shall issue and sell to the Purchaser, and the Purchaser shall purchase from the Company on the Closing Date ______ Shares, with a commitment by Purchaser to purchase an additional ______ shares when Company offers them for sale, which shall have the respective rights, preferences and privileges set forth in EXHIBIT A (the "CERTIFICATE OF DESIGNATION"), at a price per Share of US$1,000.00 (the "PER SHARE CONSIDERATION"). The Per Share Consideration multiplied by the number of Shares to be purchased by the Purchaser hereunder is hereinafter referred to as the "PURCHASE PRICE." (b) The closing of the purchase and sale of the Shares (the "CLOSING") shall take place at the offices of GEM Advisors, Inc., immediately following the execution hereof, or at such other time and/or place as the Purchaser and the Company may agree, PROVIDED, however, in no case shall the Closing take place later than the fifth day after the last of the conditions listed in ARTICLE V is satisfied or waived by the appropriate party. The date of Closing is hereinafter referred to as the "CLOSING DATE". (c) At the Closing, (i) the Company shall deliver to the Purchaser (A) one or more stock certificates representing the Shares purchased hereunder, registered in the name of the Purchaser and (B) all documents, instruments and writings required to have been delivered at or prior to Closing by the Company pursuant to this Agreement, (ii) the Purchaser shall deliver to the Company (A) the Purchase Price as determined pursuant to this ARTICLE I in United States dollars in immediately available funds by wire transfer to an account designated in writing by the Company prior to the Closing and (B) all documents, instruments and writings required to have been delivered at or prior to Closing by the Purchaser pursuant to this Agreement. ARTICLE II REPRESENTATIONS AND WARRANTIES 3 (a) ORGANIZATION AND QUALIFICATION. The Company is a corporation, duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation, with the requisite corporate power and authority to own and use its properties and assets and to carry on its business as currently conducted. The Company has no subsidiaries other than as set forth in the SECURITIES EXCHANGE COMMISSION Documents or in SCHEDULE 3.1(a) (collectively, the "SUBSIDIARIES"). Each of the Subsidiaries is a corporation, duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation, with the full corporate power and authority to own and use its properties and assets and to carry on its business as currently conducted. Each of the Company and the Subsidiaries is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not reasonably be expected to have, individually or in the aggregate, a material adverse effect on the results of operations, assets, prospects, or financial condition of the Company and the Subsidiaries, taken as a whole (a "MATERIAL ADVERSE EFFECT"). (b) AUTHORIZATION; ENFORCEMENT. The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated hereby and by the Registration Rights Agreement and otherwise to carry out its obligations hereunder and thereunder. The execution and delivery of this Agreement and the Registration Rights Agreement by the Company and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary action on the part of the Company. Each of this Agreement and the Registration Rights Agreement had been duly executed and delivered by the Company and constitutes the valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application. (c) CAPITALIZATION. The authorized, issued and outstanding capital stock of the Company and each of the Subsidiaries is set forth in the SECURITIES EXCHANGE COMMISSION Documents (as defined in paragraph 3.1(l) herein). No shares of Common Stock are entitled to preemptive or similar rights. Except as specifically disclosed in the SECURITIES EXCHANGE COMMISSION Documents, there are no outstanding options, warrants, scrip rights to subscribe to, calls or commitments of any character whatsoever relating to, or, except as a result of the purchase and sale of the Shares hereunder, securities, rights or obligations convertible into or exchangeable for, or giving any person any right to subscribe for or acquire any shares of Common STOCK, or contracts, commitments, understandings, or arrangements by which the Company or any Subsidiary is or may become bound to issue additional shares of Common Stock, or securities or rights convertible or exchangeable into shares of Common Stock. Neither the Company nor any Subsidiary is in violation of any of the provisions of its respective certificate of incorporation, bylaws or other charter documents. 4 (d) ISSUANCE OF SHARES. The Shares are duly authorized and, when paid for in accordance with the terms hereof, shall be validly issued, fully paid and nonassessable. The Company has and at all times while the Shares are outstanding will maintain an adequate reserve of shares of Common STOCK to enable it to perform its obligations under this agreement and the Certificate of Designation. When issued in accordance with the terms hereof, the Underlying Shares will be duly authorized, validly issued, fully paid and nonassessable. (e) NO CONFLICTS. The execution, delivery and performance of this AGREEMENT and the Registration Rights Agreement by the Company and the consummation by the Company of the transactions contemplated hereby and thereby do not and will not (i) conflict with or violate any provision of its certificate of incorporation or bylaws or (ii) subject to obtaining the consents referred to in SECTION 3.1(f), conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company is a party, or (iii) to the knowledge of the Company result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company is subject (including Federal and state securities laws and regulation), or by which any property or asset of the Company is bound or affected, except in the case of each of clauses (ii) and (iii), such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect. The business of the Company is not being conducted in violation of any law, ordinance or regulation of any governmental authority, except for violations which, individually or in the aggregate, do not have a Material Adverse Effect. (f) CONSENTS AND APPROVALS. Except as specifically set forth in SCHEDULE 3.1(f), neither the Company nor any Subsidiary is required to obtain any consent, waiver, authorization or order of, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other Person in connection with the execution, delivery and performance by the Company of this Agreement and the Registration Rights AGREEMENT, other than the filing of the registration statement covering the Underlying Shares with the Commission and the making of the applicable blue-sky filings under state securities laws, each as contemplated by the Registration Rights AGREEMENT and other than, in all cases, where the failure to obtain such consent, waiver, authorization or order, or to give or make such notice or filing, would not materially impair or delay the ability of the Company to effect the Closing and deliver to the Purchaser the Shares free and clear of all Liens (collectively, the "REQUIRED APPROVALS"). (g) LITIGATION; PROCEEDINGS. Except as specifically disclosed in the Disclosure Materials or in SCHEDULE 3.1(g), there is no action, suit, notice of violation, proceeding or investigation pending or, to the best knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries or any of their respective properties before or by any court, governmental or administrative agency or regulatory authority (Federal, State, county, local or foreign) which (i) relates to or challenges the legality, validity or enforceability of this Agree- 5 ment, the Registration Rights Agreement or the Shares (ii) could, individually or in the aggregate, have a Material Adverse Effect or (iii) could, individually or in the aggregate, materially impair the ability of the Company to perform fully on a timely basis its obligations under this Agreement or the Registration Rights Agreement. (h) NO DEFAULT OR VIOLATION. Neither the Company nor any Subsidiary (i) is in default under or in violation of any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound, except such conflicts or defaults as do not have a Material Adverse Effect, (ii) is in violation of any order of any court, arbitrator or governmental body, except for such violations as do not have a Material Adverse Effect, or (iii) is in violation of any statute, rule or regulation of any governmental authority which could (individually or in the aggregate) (x) adversely affect the legality, validity or enforceability of this Agreement or the Registration Rights Agreement, (y) have a Material Adverse Effect or (z) adversely impair the Company's ability or obligation to perform fully on a timely basis its obligations under this Agreement or the Registration Rights Agreement. (i) CERTAIN FEES. No fees or commission will be payable by the Company to any broker, finder, investment banker or bank with respect to the consummation of the transactions contemplated hereby. (j) DISCLOSURE MATERIALS. The Disclosure Materials do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. (k) PRIVATE OFFERING. Neither the Company nor any Person acting on its behalf has taken or will take any action (including, without limitation, any offering of any securities of the Company under circumstances which would require the integration of such offering with the offering of the Shares under the Securities Act) which might subject the offering, issuance or sale of the Shares to the registration requirements of Section 5 of the Securities Act. (l) SEC DOCUMENTS. The Company has filed all reports required to be filed by it under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the two years preceding the date hereof (or such shorter period as the Company was required by law to file such material) (the foregoing materials being collectively referred to herein as the "SEC DOCUMENTS") on a timely basis, or has received a valid extension of such time of filing. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the Commission promulgated thereunder, and none of the SEC Documents, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC 6 Documents comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the Commission with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved, except as may be otherwise indicated in such financial statements or the notes thereto, and fairly present in all material respects the financial position of the Company as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal year-end audit adjustments. Since the date of the financial statements included in the Company's last filed Quarterly Report on Form 10-Q, there has been no event, occurrence or development that has had a Material Adverse Effect which is not specifically disclosed in any of the Disclosure Materials. Section 3.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser hereby represents and warrants to the Company as follows: (a) ORGANIZATION; AUTHORITY. The Purchaser is a corporation duly and validly existing and in good standing under the laws of the jurisdiction of its incorporation. The Purchaser has the requisite power and authority to enter into and to consummate the transactions contemplated hereby and by the Registration Rights Agreement and otherwise to carry out its obligations hereunder and thereunder. The purchase of the Shares by the Purchaser hereunder has been duly authorized by all necessary action on the part of the Purchaser. Each of this Agreement and the Registration Rights Agreement has been duly executed and delivered by the Purchaser or on its behalf and constitutes the valid and legally binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights generally and to general principles of equity. (b) INVESTMENT INTENT. The Purchaser is acquiring the Shares and the Underlying Shares for its own account (and/or on behalf of managed accounts who are purchasing solely for their own accounts for investment) for investment purposes only and not with a view to or for distributing or reselling such Shares or Underlying Shares or any part thereof or interest therein, without prejudice, however, to the Purchaser's right, subject to the provisions of this Agreement and the Registration Rights Agreement, at all times to sell or otherwise dispose of all or any part of such Shares or Underlying Shares under an effective registration statement under the Securities Act and in compliance with applicable State securities laws or under an exemption from such registration. (c) PURCHASER STATUS. At the time the Purchaser (and any account for which it is purchasing) was offered the Shares, it (and any account for which it is purchasing) was, and at the date hereof, it (and any account for which it is purchasing) is, and at the Closing Date, it (and any account for which it is purchasing) will be, an "accredited investor" as defined in Rule 501(a) under the Securities Act. 7 (d) EXPERIENCE OF PURCHASER. The Purchaser, either alone or together with its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Shares, and has so evaluated the merits and risks of such investment. (e) ABILITY OF PURCHASER TO BEAR RISK OF INVESTMENT. The Purchaser is able to bear the economic risk of an investment in the Shares and, at the present time, is able to afford a complete loss of such investment. (f) PROHIBITED TRANSACTIONS. The Shares to be purchased by the Purchaser are not being acquired, directly or indirectly, with the assets of any "employee benefit plan", within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended. (g) ACCESS TO INFORMATION. The Purchaser acknowledges receipt of the Disclosure Materials and further acknowledges that it has been afforded (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of the offering of the Shares and the merits and risks of investing in the Shares; (ii) access to information about the Company and the Company's financial condition, results of operations, business, properties, management and prospects sufficient to enable it to evaluate its investment in the Common Stock; and (iii) the opportunity to obtain such additional information which the Company possesses or can acquire without unreasonable effort or expense that is necessary to make an informed investment decision with respect to the Shares and to verify the accuracy and completeness of the information contained in the Disclosure Materials. (h) RELIANCE. The Purchaser understands and acknowledges that (i) the Shares are being offered and sold, and the Underlying Shares are being offered, to it without registration under the Securities Act in a private placement that is exempt from the registration provisions of the Securities Act and (ii) the availability of such exemption, depends in part on, and that the Company will rely upon the accuracy and truthfulness of, the foregoing representations and the Purchaser hereby consents to such reliance. The Company acknowledges and agrees that the Purchaser makes no representation or warranty with respect to the transactions contemplated hereby other than those specifically set forth in ARTICLE III herein. 8 ARTICLE IV OTHER AGREEMENTS OF THE PARTIES Section 4.1 TRANSFER RESTRICTIONS. If the Purchaser should decide to dispose of any of the Shares to be purchased by it hereunder (and upon conversion thereof, any Underlying Shares), the Purchaser understands and agrees that it may do so only (i) pursuant to an effective registration statement under the Securities Act, (ii) to the Company or (iii) pursuant to an available exemption from registration under the Securities Act. In connection with any transfer of any Shares other than pursuant to an effective registration statement or to the Company, the Company may require that the transferor of such Shares provide to the Company an opinion of counsel experienced in the area of United States securities laws selected by the transferor, the form and substance of which opinion shall be, reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such Shares under the Securities Act or any State securities laws. The Purchaser agrees to the imprinting, so long as appropriate, of the following legend on certificates representing the Shares: NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, THEY MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACCEPTANCE HEREOF, THE HOLDER OF THESE SECURITIES AGREES THAT IT WILL NOT RESELL, PLEDGE OR OTHERWISE TRANSFER THESE SECURITIES OR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE, EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, OR (B) PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT. IF THE PROPOSED TRANSFER IS TO BE MADE OTHER THAN PURSUANT TO CLAUSE (A) OR (B) ABOVE, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE COMPANY AND THE TRANSFER AGENT SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS THEY MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. AS USED HEREIN, THE TERMS "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY RULE 902 PROMULGATED UNDER THE SECURITIES ACT. 9 The legend set forth above may be removed if and when the Shares represented by such certificate or the Underlying Shares, as the case may be, are disposed of pursuant to an effective registration statement under the Securities Act or in the opinion of counsel to the Company experienced in the area of United States securities laws such legend is no longer required under applicable requirements of the Securities Act. The stock certificates representing the Shares and the Underlying Shares shall also bear any other legends required by applicable Federal or state securities laws, which legends may be removed when, in the opinion of counsel to the Company experienced in the applicable securities laws, such legends are no longer required under the applicable requirements of such securities laws. The Company agrees that it will provide the Purchaser, upon request, with a substitute stock certificate or certificates, free from such legend at such time as such legend is no longer applicable. The Purchaser agrees that, in connection with any transfer of Shares or Underlying Shares by it pursuant to an effective registration statement under the Securities Act, it Purchaser will comply with all prospectus delivery requirements of the Securities Act. The Company makes no representation, warranty or agreement as to the availability of any exemption from registration under the Securities Act with respect to any resale of Shares or Underlying Shares. Section 4.2 STOP TRANSFER INSTRUCTION. The Purchaser agrees that the Company shall be entitled to make a notation on its records and give instructions to any transfer agent of the Company in order to implement the restrictions on transfer set forth in this Agreement. Section 4.3 FURNISHING OF INFORMATION. As long as the Purchaser owns Shares or Underlying Shares, the Company will promptly furnish to it all reports filed by the Company pursuant to Section 13(a) or 15(d) of the Exchange Act (of if the Company is not at the time required to file reports pursuant to such sections, annual and quarterly reports comparable to those required by Section 13(a) or 15(d) of the Exchange Act). Section 4.4 NOTICE OF CERTAIN EVENTS. The Company shall (i) advise the Purchaser promptly after obtaining knowledge thereof, and, if requested by the Purchaser, confirm such advice in writing, of (A) the issuance by any state securities commission of any stop order suspending the qualification or exemption from qualification of the Shares or the Common Stock for offering or sale in any jurisdiction, or the initiation of any proceeding for such purpose by any state securities commission or other regulatory authority, or (B) any event that makes any statement of a material fact made in the Disclosure Materials untrue or that requires the making of any additions to or changes in the Disclosure Materials in order to make the statements therein, in the light of the circumstances under which they are made, not misleading, (ii) use its best efforts to prevent the issuance of any stop order or order suspending the qualification or exemption from qualification of the Shares or the Common Stock under any state securities or Blue Sky laws, and (iii) if at any time any state securities commission or other regulatory authority shall issue an order suspending the qualification or exemption from qualification of the Shares or the Common Stock under any such laws, use its best efforts to obtain the withdrawal or lifting of such order at the earliest possible time. 10 Section 4.5 COPIES AND USE OF DISCLOSURE MATERIALS. The Company shall furnish the Purchaser, without charge, as many copies of the Disclosure Materials, and any amendments or supplements thereto, as the Purchaser may reasonably request. The Company consents to the use of the Disclosure Materials, and any amendments and supplements thereto, by the Purchaser in connection with resales of the Shares or the Underlying Shares other than pursuant to an effective registration statement. Section 4.6 MODIFICATIONS TO DISCLOSURE MATERIALS. If any event shall occur as a result of which, in the reasonable judgment of the Company or the Purchaser, it becomes necessary or advisable to amend or supplement the Disclosure Materials in order to make the statements therein, in the light of the circumstances at the time the Disclosure Materials were delivered to the Purchaser, not misleading, or if it is necessary to amend or supplement the Disclosure Materials to comply with applicable law, the Company shall promptly prepare an appropriate amendment or supplement to the Disclosure Materials (in form and substance reasonably satisfactory to the Purchaser) so that (i) as so amended or supplemented the Disclosure Materials will not include an untrue statement of material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time it is delivered to Purchaser, not misleading and (ii) the Disclosure Materials will comply with applicable law. Section 4.7 BLUE SKY LAWS. The Company shall cooperate with the Purchaser in connection with the qualification of the Shares and the Underlying Shares under the securities or Blue Sky laws of such jurisdictions as the Purchaser may request and to continue such qualification at all times through the third anniversary of the Closing Date; PROVIDED, HOWEVER, that neither the Company nor its Subsidiaries shall be required in connection therewith to qualify as a foreign corporation where they are not now so qualified. Section 4.8 INTEGRATION. The Company shall not and shall use its best efforts to ensure that no Affiliate shall sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Shares or the Underlying Shares in a manner that would require the registration under the Securities Act of the sale of the Shares or Underlying Shares to the Purchaser. Section 4.9 FURNISHING OF RULE 144A MATERIALS. The Company shall, for so long as any of the Shares or Underlying Shares remain outstanding and during any period in which it is not subject to Section 13 or 15(d) of the Exchange Act, make available to any registered holder of Shares or Underlying Shares in connection with any sale thereof and any prospective purchaser of such Shares or Underlying Shares from such Person, the following information in accordance with Rule 144A(d)(4) under the Securities Act: a brief statement of the nature of the business of the Company and the products and services it offers and the Company's most recent audited balance sheet and profit and loss and retained earnings statements, and similar audited financial statements for such part of the two preceding fiscal years as the Company has been in operation. 11 Section 4.10 SOLICITATION MATERIALS. The Company shall not (i) distribute any offering materials in connection with the offering and sale of the Shares or Underlying Shares other than the Disclosure Materials and any amendments and supplements thereto prepared in compliance herewith or (ii) solicit any offer to buy or sell the Shares or Underlying Shares by means of any form of general solicitation or advertising. Section 4.11 SUBSEQUENT FINANCIAL STATEMENTS. The Company shall furnish to the Purchaser, promptly after they are filed with the Commission, a copy of all financial statements for any period subsequent to the period covered by the financial statements included in the Disclosure Materials. Section 4.12 RIGHT OF FIRST REFUSAL. The Company shall not directly or indirectly, without the prior consent of the Purchaser, offer, sell, grant any option to purchase, or otherwise dispose (or announce any offer, sale, grant or any option to purchase or other disposition) of any of its or its Affiliates' equity or equity-equivalent securities (a "Subsequent Sale") for a period of 90 days after Closing Date, except (i) the granting of options to employees, officers and directors under, and the issuance of shares upon exercise of options granted under, any stock option plan heretofore or hereinafter adopted by the Company, (ii) shares issued upon exercise of any currently outstanding warrants and upon conversion of any currently outstanding convertible preferred stock, and (iii) up to 150,000 shares to be issued pursuant to settlement obligations evidenced by existing signed Settlement Agreements; shares of Common Stock issued upon conversion of Shares in accordance herewith, unless (A) the Company provides the Purchaser a written notice (the "Subsequent Financing Notice") of its intention to effect such Subsequent Financing, which Subsequent Financing Notice shall describe in reasonable detail the proposed terms of such Subsequent Financing and the amount of proceeds intended to be raised thereunder and (B) the Purchaser shall not have notified the Company within forty-eight (48) hours of its receipt of the Subsequent Financing Notice of its willingness to enter into good faith negotiations to provide (or to cause its sole designee to provide) financing to the Company on substantially the terms set forth in the Subsequent Financing Notice. If the Purchaser shall fail to notify the Company of its intention to enter into such negotiations within such forty-eight (48) hour period, the Company may effect the Subsequent Financing substantially upon the terms set forth in the Subsequent Financing Notice; PROVIDED, that the Company shall provide the Purchaser with a second Subsequent Financing Notice, and the Purchaser shall again have the right of first refusal set forth above in this paragraph (a), if the Subsequent Financing subject to the initial Subsequent Financing Notice shall not have been consummated for any reason on the terms set forth in such Subsequent Financing Notice within 30 days after the date of the initial Subsequent Financing Notice. (b) From the date hereof through the Closing Date, the Company shall not and shall cause the Subsidiaries not to, without the consent of the Purchaser, (i) amend its Certificate of Incorporation, bylaws or other charter documents so as to adversely affect any rights of the 12 Purchaser; (ii) split, combine or reclassify its outstanding capital stock; (iii) declare, authorize, set aside or pay any dividend or other distribution with respect to the Common Stock; (iv) redeem, repurchase or offer to repurchase or otherwise acquire shares of its Common Stock other than in payment of short swing profits owed to the Company pursuant to Section 16(b) of the Exchange Act; or (v) enter into any agreement with respect to any of the foregoing. Section 4.13 LISTING OF UNDERLYING SHARES. The Company shall take all steps necessary to cause the Underlying Shares to be approved for listing in The NASDAQ national market (or other national securities exchange or market on which the Common Stock is listed) no later than the first day after which shares may be converted hereunder by the Purchaser, and shall provide to the Purchaser evidence of such listing. Section 4.14 CONVERSION PROCEDURES. EXHIBIT D attached hereto sets forth the procedures with respect to the conversion of the Shares, including the forms of conversion notice to be provided upon conversion, instructions as to the procedures for conversion, the form of legal opinion, if necessary, that shall be rendered to the Company's transfer agent and such other information and instructions as may be reasonably necessary to enable the Purchaser to exercise its right of conversion smoothly and expeditiously. Section 4.15 NO SHORT SELLING. Prior to 120 days following the Original Issue Date or during the five-day trading period in which the conversion price is calculated, as defined in the Certificate of Designation for The Series A Convertible Preferred Stock, Purchaser convenants that neither it nor its advisors nor any of its affiliates will sell short any shares of the Company's stock at any time. ARTICLE V CONDITIONS PRECEDENT TO CLOSING Section 5.1 CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PURCHASER. The obligation of the Purchaser to purchase the Shares is subject to the satisfaction or waiver by the Purchaser, at or prior to the Closing, of each of the following conditions: (a) LEGAL OPINION. The Purchaser shall have received the legal opinion, addressed to it and dated the Closing Date, of Mark J. Richardson, Esq., counsel for the Company, substantially in the form of EXHIBIT C; (b) ACCURACY OF THE COMPANY'S REPRESENTATION AND WARRANTIES. The representations and warranties of the Company contained herein and in the Registration Rights 13 Agreement shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at that time (except that representations and warranties that are made as of a specific date need to be true in all material respects as of such date); (c) PERFORMANCE BY THE COMPANY. The Company shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement and the Registration Rights Agreement to be performed, satisfied or complied with by the Company at or prior to the Closing; (d) NO MATERIAL ADVERSE EFFECT. Since the date of the financial statements included in the Company's last filed Quarterly Report on Form 10-Q, no event which had a Material Adverse Effect shall have occurred which is not disclosed in the Disclosure Materials; (e) NO PROHIBITIONS. The purchase of and payment for the Shares (and upon conversion thereof, the Underlying Shares) hereunder (i) shall not be prohibited or enjoined (temporarily or permanently) by any appliable law or governmental regulation and (ii) shall not subject the Purchaser to any penalty, or in its reasonable judgment, other onerous condition under or pursuant to any applicable law or governmental regulation that would materially reduce the benefits to the Purchaser of the purchase of the Shares or the Underlying Shares (provided, however, that such regulation, law or onerous condition was not in effect in such form at the date of this Agreement); (f) COMPANY CERTIFICATES. The Purchaser shall have received a certificate, dated the Closing Date, signed by the Secretary or an Assistant Secretary of the Company and certifying (i) that attached thereto is a true, correct and complete copy of (A) the Company's Certificate of Incorporation, as amended to the date thereof, (B) the Company's By-Laws, as amended to the date thereof, and (C) resolutions duly adopted by the Board of Directors of the Company authorizing the execution and delivery of this Agreement and the Registration Rights Agreement and the issuance and sale of the Shares and the Underlying Shares and (ii) the incumbency of officers executing this Agreement and the Registration Rights Agreement; (g) REGISTRATION RIGHTS AGREEMENT. The Company shall have executed the Registration Rights Agreement; (h) NO SUSPENSIONS OF TRADING IN COMMON STOCK. Trading in the Common Stock shall not have been suspended by the Commission or the NASD or other exchange or market on which the Common Stock is listed or quoted (except for any suspension of trading of limited duration solely to permit dissemination of material information regarding the Company); (i) REQUIRED APPROVALS. All Required Approvals shall have been obtained; and 14 (j) DELIVERY OF STOCK CERTIFICATES. The Company shall have delivered to the Purchaser the stock certificate(s) representing the Shares, registered in the name of the Purchaser, each in form satisfactory to the Purchaser. Section 5.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY. The obligation of the Company to issue and sell the Shares hereunder is subject to the satisfaction or waiver by the Company, at or to the Closing, of each of the following conditions: (a) ACCURACY OF THE PURCHASER'S REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Purchaser shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at that time (except that representations and warranties that are made as of a specific date need be true in all material respects only as of such date); (b) PERFORMANCE BY THE PURCHASER. The Purchaser shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement and the Registration Rights Agreement to be performed, satisfied or complied with by it at or prior to the Closing; and (c) NO PROHIBITIONS. The sale of the Shares (and upon conversion thereof, the Underlying Shares) hereunder (i) shall not be prohibited or enjoined (temporarily or permanently) by any applicable law or governmental regulation and (ii) shall not subject the Company to any penalty, or in its reasonable judgment, any other onerous condition under or pursuant to any applicable law or governmental regulation that would materially reduce the benefits to the Company of the sale of Shares or the Underlying Shares to the Purchaser (provided, however, that such regulation, law or onerous condition was not in effect in such form at the date of this Agreement). ARTICLE V TERMINATION Section 6.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated at any time prior to Closing by the mutual consent of the Company and the Purchaser. Section 6.2 TERMINATION BY THE COMPANY OR THE PURCHASER. This Agreement may be terminated prior to Closing by the Company or the Purchaser, by giving written notice of such termination to the other party, if: 15 (a) the Closing shall not have occurred by September_, 1996; PROVIDED THAT the terminating party is not then in material breach of its obligations under this Agreement in any manner that shall have caused the failure referred to this paragraph (a); (b) there shall be in effect any statute, rule, law or regulation that prohibits the consummation of the Closing or if the consummation of the Closing would violate any non-appealable final judgment, order, decree, ruling or injunction of any court of or governmental authority having competent jurisdiction; or (c) there shall have been an amendment to Regulation D or an interpretive release promulgated or issued thereunder, which, in the reasonable judgment of the terminating party, would materially adversely affect the transactions contemplated hereby and by the Registration Rights Agreement. Section 6.3 TERMINATION BY THE COMPANY. This Agreement may be terminated prior to Closing by the Company, by giving notice of such termination to the Purchaser, if the Purchaser has materially breached any representation, warranty, covenant or agreement contained in this Agreement or the Registration Rights Agreement and such breach is not cured within five business days following receipt by the Purchaser of notice of such breach. Section 6.4 TERMINATION BY THE PURCHASER. This Agreement may be terminated prior to Closing by the Purchaser, by giving notice of such termination to the Company, if: (a) the Company has breached any representation, warranty, covenant or agreement contained in this Agreement or the Registration Rights Agreement and such breach is not cured within five business days following receipt by the Company of notice of such breach; (b) there has occurred an event since the date of the financial statements included in the Company's last filed Quarterly Report on Form 10-Q which could reasonably be expected to have a Material Adverse Effect and which is not disclosed in the Disclosure Materials; or (c) trading in the Common Stock has been suspended by the Commission or the NASD or other exchange or market on which the Common Stock is listed or quoted (except for any suspension of trading of limited duration solely to permit dissemination of material information regarding the Company). 16 ARTICLE VII MISCELLANEOUS Section 7.1 FEES AND EXPENSES. Each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement. The Company shall pay all stamp and other taxes and duties levied in connection with the issuance of the Shares (and upon conversion thereof, the Underlying Shares) pursuant hereto. The Purchaser shall be responsible for its own tax liability that may arise as a result of the investment hereunder or the transactions contemplated by this Agreement. Whether or not the transactions contemplated by this Agreement are consummated or this Agreement is terminated, the Company shall pay (i) all costs, expenses, fees and all taxes incident to and in connection with: (A) the preparation, printing and distribution of the Disclosure Materials and all amendments and supplements thereto (including, without limitation, financial statements and exhibits), and all preliminary and final Blue Sky memoranda and all other agreements, memoranda, correspondence and other documents prepared and delivered in connection herewith (B) the issuance and delivery of the Shares and, upon conversion thereof, the Underlying Shares, (C) the qualification of the Shares and, upon conversion thereof, the Underlying Shares for offer and sale under the securities or Blue Sky laws of the several states (including, without limitation, the fees and disbursements of the Purchasers' counsel relating to such registration or qualification, not to exceed a total of $5,000), (D) furnishing such copies of the Disclosure Materials and all amendments and supplements thereto, as may reasonably be requested for use in connection, with resales of the Shares and, upon conversion thereof, the Underlying Shares, and (E) the preparation of certificates for the Shares and, upon conversion thereof, the Underlying Shares (including, without limitation, printing and engraving thereof), (ii) all fees and expenses of the counsel and accountants of the Company and (iii) all expenses and listing fees in connection with the application for quotation of the underlying Shares in the NASDAQ National Market. Section 7.2 ENTIRE AGREEMENT; AMENDMENTS. This Agreement, together with the Exhibits, Annexes and Schedules hereto, and the Registration Rights Agreement contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters. Section 7.3 NOTICES. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be deemed to have been received (a) upon hand delivery (receipt acknowledged) or delivery by telex (with correct answer back received), telecopy or facsimile (with transmission confirmation report) at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second 17 business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be: If to the Company: Incomnet Inc. 21031 Ventura Blvd., Suite 1100 Woodland Hills, CA 91364 Attn: Melvyn Reznick, President With copies to: Mark J. Richardson, Esq. Wilshire Palisades Bldg. 1299 Ocean Ave. #900 Santa Monica, CA 90401 If to the Purchaser: or such other address as may be designated in writing hereafter, in the same manner, by such person. Section 7.4 AMENDMENTS; WAIVERS. No provision of this Agreement may be waived or amended except in a written instrument signed, in the case of an amendment, by both the Company and the Purchaser, or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter. Section 7.5 HEADINGS. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. Section 7.6 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. Neither the Company nor the Purchaser may assign this Agreement or any rights or obligations hereunder without the prior written consent of the other. The assignment by a party of this Agreement or any rights hereunder shall not affect the obligations of such party under this Agreement. 18 Section 7.7 NO THIRD PARTY BENEFICIARIES. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other person. Section 7.8 GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York without regard to the principles of conflicts of law thereof. Section 7.9 SURVIVAL. The representatives and warranties of the Company and the Purchaser contained in ARTICLE III and the agreements and covenants of the parties contained in ARTICLE IV and this ARTICLE VII shall survive the Closing (or any earlier termination of this Agreement) and any conversion of Shares hereunder. Section 7.10 COUNTERPART SIGNATURES. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature page were an original thereof. Section 7.11 PUBLICITY. The Company and the Purchaser shall consult with each other in issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby and neither party shall issue any such press release or otherwise make any such public statement without the prior written consent of the other, which consent shall not be unreasonably withheld or delayed. Section 7.12 SEVERABILITY. In case any one or more of the provisions of this Agreement shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affecting or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision which shall be a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement. Section 7.13 REMEDIES. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, the Purchaser will be entitled to specific performance of the obligations of the Company under this Agreement and the Company will be entitled to specific performance of the obligations of the Purchaser hereunder with respect to the subsequent transfer of Shares and the Underlying Shares. Each of the Company and the Purchaser agrees that monetary damages would not be adequate compensation for any loss incurred by reason of any breach of its obligations described in the foregoing sentence 19 and hereby agrees to waive in any action for specific performance of any such obligation the defense that a remedy at law would be adequate. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first indicated above. Company: Incomnet, Inc. By: /s/ Melvyn Reznick ------------------------------------ Name: Melvyn Reznick Title: President & CEO Purchaser: By: /s/ ------------------------------------ Name: Title: 20 EX-23.1 7 CONSENT OF STONEFIELD JOSEPHSON EXHIBIT 23.1 CONSENT OF STONEFIELD JOSEPHSON INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The undersigned independent certified public accounting firm hereby consents to the inclusion of its report on the financial statements of Incomnet, Inc. for the years ending December 31, 1995, 1994 and 1993, and to the reference to it as experts in accounting and auditing relating to said financial statements, in the Registration Statement for Incomnet, Inc., dated October 18, 1996. /s/ Stonefield Josephson Accountancy Corporation - --------------------------------------------------- STONEFIELD JOSEPHSON ACCOUNTANCY CORPORATION Santa Monica, California October 18, 1996 -----END PRIVACY-ENHANCED MESSAGE-----