-----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, UwHMV29jNEoEUw96T4NU4hvcJoHEVH4JwQsA1pWVJ9GTbd31+Vowuh0xAjpiInRM kgrS5UoqTkFsw+sDi3WZYA== 0000912057-97-009841.txt : 19970325 0000912057-97-009841.hdr.sgml : 19970325 ACCESSION NUMBER: 0000912057-97-009841 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19970324 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: 333-16629 FILM NUMBER: 97561457 BUSINESS ADDRESS: STREET 1: 21031 VENTURA BLVD STREET 2: STE 1100 CITY: WOODLAND HILLS STATE: CA ZIP: 91364 BUSINESS PHONE: 8188873400 MAIL ADDRESS: STREET 1: 21031 VENTURA BLVD STREET 2: SUITE 1100 CITY: WOODLAND HILLS STATE: CA ZIP: 91364 FORMER COMPANY: FORMER CONFORMED NAME: INTELLIGENT COMMUNICATIONS NETWORKS INC DATE OF NAME CHANGE: 19860805 S-3/A 1 S-3/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 19, 1997 REGISTRATION NO. 333-16629 --------- 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 Jurisdiction (Primary Standard Industrial (IRS Employer of Incorporation or Classification Code Number) Identification Organization) Number) 21031 VENTURA BOULEVARD, SUITE 1100 WOODLAND HILLS, CALIFORNIA 91364 (818) 887-3400 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) -------------------- MELVYN REZNICK, PRESIDENT INCOMNET, INC. 21031 VENTURA BOULEVARD, SUITE 1100 WOODLAND HILLS, CALIFORNIA 91364 (818) 887-3400 (NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: MARK J. RICHARDSON, ESQ. 1299 OCEAN AVENUE, SUITE 900 SANTA MONICA, CALIFORNIA 90401 (310) 393-9992 ----------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT IS DECLARED EFFECTIVE. IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE BEING OFFERED ON A DELAYED OR CONTINUOUS BASIS PURSUANT RULE 415 UNDER THE SECURITIES ACT OF 1933, CHECK THE FOLLOWING BOX: /X/ ----------------------- CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- TITLE OF EACH CLASS AMOUNT TO BE PROPOSED PROPOSED MAXIMUM AMOUNT OF OF SECURITIES TO BE REGISTERED(1) MAXIMUM OFFERING AGGREGATE OFFERING REGISTRATION FEE REGISTERED PRICE PER SHARE PRICE - -------------------------------------------------------------------------------------------------- Common Stock . . . . . . 500,000 $ 3.00 1,500,000 $ 468.75 - -------------------------------------------------------------------------------------------------- Common Stock Underlying Warrants to Purchase Common Stock(1). . . . . 360,000 3.75 1,350,000 421.88 - -------------------------------------------------------------------------------------------------- Common Stock Underlying Warrants to Purchase Common Stock(1). . . . . 12,500 2.94 36,500 11.40 - -------------------------------------------------------------------------------------------------- Common Stock Underlying Convertible Preferred Stock(1) . . . . . . . . 950,000 3.00 2,850,000 982.76 - -------------------------------------------------------------------------------------------------- Total . . . . . . 1,822,500 - $ 5,986,500 $ 1,884.79* - -------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------
- ------------------------- (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. * $1,024.14 of 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 MARCH 19, 1997 INCOMNET, INC. 1,822,500 SHARES OF COMMON STOCK The shares covered by this Prospectus are comprised of (i) 372,500 shares of the Common Stock of Incomnet, Inc., a California corporation (the "Company") which may be purchased upon the exercise of 372,500 warrants (the "Warrants") which were issued to certain affiliates of a subsidiary of the Company and other private investors (the "Warrantholders"), (ii) 43,826 shares of the Common Stock of the Company (the "Outstanding Shares") which were issued to several investors upon the prior conversion by them of Series A 2% Convertible Preferred Stock and in a private placement, (iii) 950,000 shares of the Common Stock of the Company which may be issued upon the conversion of 2,075 shares of Series A 2% Convertible Preferred Stock, and (iv) 456,174 shares of the Company's Common Stock (the "Shares"), some or all of which 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 Continental Pacific 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 March 17, 1997 was $3.00 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). . . . . . . . . $ 3.75 $ 0 $ 1,350,000 - ---------------------------------------------------------------------------------------------------------- PER UNDERLYING SHARE-SERIES A PREFERRED (2). . . . $ 4.44 $ 0 $ 1,990,000 - ---------------------------------------------------------------------------------------------------------- PER UNDERLYING SHARE-WARRANTS(2) . . . . . . . . . $ 2.94 $ 0 $ 36,500 - ---------------------------------------------------------------------------------------------------------- PER SHARE (3). . . . . . . . . . . . . . . . . . . $ --- $ --- $ --- - ---------------------------------------------------------------------------------------------------------- TOTAL (4). . . . . . . . . . . . . . . . . . . . . $ --- $ --- $ 3,376,500 - ---------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------
- ------------------------- (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. A referral fee equal to 5% of the gross proceeds of the placement of the Series A Preferred was paid by the Company to an unaffiliated referral source. 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. -1- (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 average 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 net proceeds of $1,990,000 from the issuance of the Series A Preferred covered by this Prospectus. (3) Those Shares which are not issued upon the conversion of outstanding Series A Preferred may be issued from time to time at the prevailing market price through the Underwriter. The price per Share and underwriting commission are therefore undetermined at this time. (4) The total proceeds to the Company will equal the aggregate exercise price of 372,500 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 (a) the number of Shares remaining after the conversion of all outstanding Series A Preferred is not yet known, (b) the market price at which the remaining Shares, if any, are sold through the Underwriter is not yet known, and (c) the amount of underwriting discounts and commissions on the sale of the Shares is not known at this time. See "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 Current Report on Form 8-K filed on January 12, 1994 and amended on February 14, 1994, July 22, 1994 and September 20, 1994, its Current Report on Form 8-K filed on February 8, 1995, its 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, and its Current Report on Form 8-K filed on January 28, 1997. (f) 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. (g) All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus. Any statement contained in a document incorporated herein by reference will be deemed to be modified or superseded for the purpose of this Prospectus to the extent that a statement contained herein or in a subsequently filed document modifies or supersedes such statement. Any such statement so modified or superseded will not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. This Prospectus incorporates documents by reference which are not presented herein or delivered with this Prospectus. Such documents relating to the Company are available without charge upon request made to Incomnet, Inc., 21031 Ventura Boulevard, Suite 1100, Woodland Hills, California 91364 (telephone (818) 887- 3400), attention: Melvyn Reznick, President. No person is authorized to give any information or to make any representations other than as contained herein and, if given or made, such information or representations must not be relied upon as having been authorized. This Prospectus does not constitute an offer or solicitation by anyone in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such an offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any distribution of securities made hereunder shall under any circumstances create an implication that there has been no change in the affairs of the Company since the date hereof or that the information herein is correct as of any time subsequent to the date of this Prospectus. -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) the manufacture and marketing of the Fast Cast-TM- LenSystem that allows retail optical stores and wholesale optical lens manufacturing laboratories to produce single vision, flat-top bifocal and progressive multifocal lenses rapidly on demand. NTC is a wholly-owned subsidiary of the Company and RCI is approximately 35% 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. The Company's percentage ownership of RCI was reduced to approximately 35% of its total issued and outstanding stock on January 16, 1997 when RCI issued 8,000,000 shares of 7% Convertible Preferred Stock in a private placement to certain unaffiliated institutional investors. See "THE COMPANY - Recent Capitalization of RCI." Q2100 owns certain -4- domestic and foreign patents and patent applications relating to a new technology, commonly known as Thick Film Radiation Cured Polymer Technology (the "Technology"), which enables retail optical stores, small to mid-sized wholesale optical lens manufacturing laboratories and other dispensers of prescription ophthalmic lenses to produce lenses on site rapidly and at a cost generally lower than if they were purchased from third party manufacturers and distributors. RCI is currently manufacturing and marketing this technology through the sale of casting machines and liquid monomer under the name Rapid Cast or the Fast Cast Lensystem. RCI's principal executive office is located at 1500 Hempstead Turnpike, East Meadow, New York 11554 and its telephone number is (516) 465-7312. RCI also has executive offices located at 4415 Poplar Level Road, Louisville, Kentucky 40233, where its telephone number is (502) 458-5500. THE OFFERING Type of Security Registered. . . . Common Stock, no par value. Number of Outstanding Shares . . . 43,826 Number of Underlying Shares-Warrants . . . . 372,500 Minimum Number of Underlying Shares-Series A Preferred. . . . . . . . . . . . 467,385 Number of Shares . . . . . . . . . 456,174 Selling Security Holders . . . . . The Outstanding Shares are held by three investors who purchased shares of Series A Preferred in September 1996 and converted a portion of them on December 31, 1996 into 10,826 shares of Common Stock, and certain affiliates of RCI who purchased 33,000 shares of Common Stock in a private placement in January 1997. The Underlying Shares are issuable upon the exercise of 372,500 Warrants held by certain affiliates of RCI and other private investors, and the conversion of 2,075 outstanding shares of Series A Preferred issued by the Company in October 1996. See "SELLING SECURITY HOLDERS." Terms of the Warrants. . . . . . . The Warrants include 360,000 Warrants which entitle those Warrantholders to purchase 360,000 shares of the Company's Common Stock at an exercise price of $3.75 per share, exercisable until December 9, 1999, and 12,500 Warrants which entitle those Warrantholders to purchase 12,500 shares of the Company's Common Stock at a purchase price of $2.94 per share, exercisable at any time until December 16, 2001. 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 ranges from $4.00 to $4.75 per share. See "THE COMPANY - Issuance of Convertible Preferred Stock." Issuance of Shares . . . . . . . . The unissued Shares (not including the Underlying Shares which are reserved for issuance upon the exercise of Warrants and the conversion of Series A Preferred) are reserved for issuance from time to time through the Underwriter in open market transactions in accordance with Rule 415, or 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 conversion of Series A Preferred, the prevailing market price of the Company's Common Stock on the dates that it elects to sell the Shares, if any, and the amount of the Underwriter's discounts and commissions. Shares of Common Stock to be Outstanding After Issuance of Shares, Conversion of Series A Preferred and Exercise of Warrants . . . . . . . . . . . . . 14,759,149 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 $1,386,750 from the exercise of all 372,500 -6- Warrants. The Company has received net proceeds of $36,000 from the issuance of the Warrants and $1,990,000 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.
NINE MONTHS ENDED SEPTEMBER 30 YEAR ENDED DECEMBER 31 -------------------------------- ------------------------------------------------------------------- 1996 1995 1995 1994 1993 1992(2) 1991 ---- ---- ---- ---- ---- ------- ---- STATEMENT OF REVENUES Revenues $77,295,795 $62,123,598 $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 (11,202,321) 3,572,612 856,543 4,000,242 (1,606,844) (2,264,597) 397,631 Income (Loss) before extraordinary items (10,522,741) 3,286,492 1,366,025 3,999,187 (1,606,844) (2,461,697) 1,322 Net Income (Loss)(3) (8,614,808) 3,469,133 1,366,025 4,071,194 (948,769) (2,021,333) 1,322 PER COMMON SHARE DATA Net Income (Loss) (0.65) 0.28 .11 .42 (.12) (.28) 0 Cash Dividends 0 0 0 0 0 0 0 Book Value 2.59 3.57 3.21 1.58 .48 .13 .20 Number of Shares 13,268,050 12,435,980 13,262,648 10,482,854 8,183,877 7,189,671 6,936,311 BALANCE SHEET DATA Total Assets 69,564,043 74,105,629 74,105,629 26,158,346 8,665,839 6,744,994 2,174,428 Long-Term Debt 8,708,181(1) 9,979,000 8,459,772(1) 900 20,000 176,000 83,334 Shareholders' Equity 34,414,968 44,440,550 42,548,056 16,535,153 3,929,148 1,047,125 1,396,000
- ------------------------------ (1) Long term liabilities include approximately $8,800,000 of deferred tax liability at September 30, 1995, $8,449,050 of deferred tax liability at December 31, 1995 and $8,055,562 of deferred tax liability at September 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- 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, increases in general and administrative costs, 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, dilution in the Company's ownership of its subsidiaries and businesses, adverse publicity and news coverage, inability to carry out marketing and sales plans, challenges to the Company's patents, loss or retirement of key executives, changes in interest rates, inflationary factors, and other specific risks that may be alluded to in this 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 carrier agreement with the Company or modify the charges upon 60 days prior written notice to the Company. The -9- 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 September 30, 1996 under "Item 1. Legal Proceedings - Securities and Exchange Commission Investigation." 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 -10- 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. The Company has settled the two Georgia lawsuits and the STEVENS case. The Company believes that Mr. Schwartz is in the process of settling the Georgia lawsuits but is not aware of any settlement discussions between Mr. Schwartz and Mr. Stevens. See "THE COMPANY - Settlement of The Atlanta Lawsuits" and THE COMPANY-Settlement of the Stevens 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. The Company was served with the complaint in the SILVA RUN lawsuit in October 1996. Litigation has been threatened by other potential claimants, including a motion by certain members of the class in the ISABEL M. SPERBER class action lawsuit to elect to leave the class and file their own separate lawsuit. 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 September 30, 1996. 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 pay all their own expenses and are treated by the Company as independent contractors. 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. 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 -11- 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. 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 September 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 carriers will justify the charges being incurred by NTC for those services. The amount of cost savings to NTC will depend on how successful and expeditious local exchange carriers are in collecting for NTC. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." CONTENTS 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 "emphasis of the matter" 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 -12- 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. In 1996 and early 1997, the Company and certain of its affiliates made substantial loans to RCI, most of which were repaid in January 1997, and a portion of which were converted into RCI common stock. 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 convertible preferred stock, warrants and stock options by RCI since the acquisition of a controlling interest in it by the Company on February 8, 1995, partially to raise capital, the Company's ownership interest in RCI has been reduced to approximately 35% on a current basis and approximately 29% on a fully diluted basis. Recent investors in RCI have an option to purchase more of RCI's 7% convertible preferred stock, which would further dilute the Company's ownership of RCI. See "THE COMPANY - Recent Capitalization of RCI." NO ASSURANCE OF PROFITABILITY - RECENT LOSSES. In the past the Company and its wholly owned subsidiary, NTC, have incurred substantial operating losses and have only recently achieved profitability. RCI and its wholly owned subsidiary, Q2100, have only recently emerged from the development stage and have incurred substantial operating losses since their inception. See "RISK FACTORS - Risks Relating to RCI - Recent Emergence From Development Stage." There is no assurance that the Company's consolidated revenues will continue to grow or be earned at current levels, or that the Company will continue to be profitable. For the fiscal year ending December 31, 1993 the Company had a net loss of $948,769 on a consolidated basis and NTC had a net loss of $1,033,232, although the Company had net income on a consolidated basis of $4,071,194 for the year ended December 31, 1994. For the fiscal year ending December 31, 1995, the Company had a net income on a consolidated basis of $1,366,025. As of December 31, 1995, NTC had an accumulated shareholders' deficit of approximately $2,602,340 and RCI had an accumulated shareholders' deficit of approximately $1,450,085. There is no assurance that 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 September 30, 1996. -13- 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 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. 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. The payment of cash dividends on the Common Stock is restricted pursuant to the terms and conditions of the outstanding Series A Preferred. See "THE COMPANY - Issuance of Convertible Preferred Stock" and "PRICE RANGE OF COMMON STOCK AND DIVIDENDS." 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 13.5% 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-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 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 September 30, 1996. There is no assurance regarding if or when the short-swing profits owed to the Company will be paid. -14- 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. Certain of RCI's customers have experienced technical and mechanical difficulties with the casting machines. RCI has had to make service calls on those machines and is making design modifications to its equipment and components. There is no assurance that design modifications will solve problems that have arisen and may arise in the future. See "Item 1. Business - Rapid Cast, Inc." RISK OF UNCERTAIN MARKET ACCEPTANCE; COST OF LENSYSTEM. RCI's success depends substantially upon the acceptance of the LenSystem as an alternative to traditional methods of purchasing and fabricating eyeglass lenses. Factors that may adversely affect market acceptance include potential customers' unfamiliarity with the Company's relatively new technology, lens making processes, products, lens designs and materials, their reluctance to change current methods of purchasing and fabricating lenses, and the initial capital investment in purchasing the LenSystem. Furthermore, potential customers may be reluctant to purchase the LenSystem because it cannot currently manufacture all possible prescriptions and lens types. In addition, lens dispensers can obtain single vision lenses (approximately 50% of the lens type dispensed) at prices competitive with or lower than the cost of producing such lenses utilizing the LenSystem. After LenSystems are purchased, there can be no assurance that customers will continue to use their LenSystem to fabricate lenses. Consequently, there can be no assurance that customers will accept RCI's products as an alternative to traditional methods of purchasing and fabricating optical lenses. Moreover, market acceptance of the LenSystem will depend, in large part, upon its pricing (of both the LenSystem and the Rapid Cast Liquid Monomer) and RCI's ability to demonstrate the advantages of the LenSystem over competing products, technologies, and current distribution channels. See "Item 1. Business - Rapid Cast, Inc." in the Company's 1995 Form 10-K. 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. While RCI recently received a substantial capital investment from a group of private institutional investors, these investors are not obligated to invest additional capital in RCI and there is no assurance that the capital invested to date will be adequate for RCI's needs. See "THE COMPANY - Recent Capitalization of RCI." There is no assurance that RCI will be able to obtain additional financing or capital from any other 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. 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 the 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. -15- 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 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 -16- 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 September 30, 1996. The patent infringement suit entitled RONALD BLUM O.D. VS. RAPID CAST, INC., ET AL. has been settled. See "THE COMPANY - Settlement of Patent Infringement Lawsuit by RCI." 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 know-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. 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. -17- 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 have caused and may in the future cause RCI to incur unanticipated operating expenses that may not be covered by component manufacturers' warranties. See "RISK FACTORS - Risks Relating to RCI - Recent Emergence From Development Stage." 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 Frank Pipp, John Vidovich, 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. RCI may enter into employment agreements with some of its other existing officers. RCI expects that its ability to achieve its business objectives will also depend in large part upon its ability to attract and retain highly qualified management personnel in the future, including sales, marketing and scientific staff. There can be no assurance that RCI will be able to attract and retain personnel with the requisite skills and experience necessary to successfully manage RCI's business and operations. REGULATORY CONSIDERATIONS. The lenses produced by the LenSystem are regarded by the United States Food and Drug Administration (the "FDA") as medical "devices" within the meaning of the Federal Food, Drug, and Cosmetic Act (the "Food and Drug Act"), but the lenses may be marketed without pre-market notification, review, approval or clearance by the FDA. Other requirements, principally those concerning impact resistance, current good manufacturing practices, labeling and reporting of certain allegedly device-related adverse effects will apply. RCI believes that the LenSystem, as manufacturing equipment, is itself not a "medical device" under the Food and Drug Act. If the LenSystem is itself a medical device, RCI believes that LenSystem may be marketed without premarket notification, review, approval, or clearance by the FDA, although other requirements, principally those concerning current good manufacturing practices, labeling, and reporting of certain allegedly device- related adverse affects, and of device malfunctions in certain circumstances, would apply. In any event, certain state and local government authorities (such as the State of California) also regulate medical device manufacturers. Depending upon where LenSystem equipment is manufactured, RCI may be subject to such additional state regulations. Although there can be no assurance in this regard, RCI does not anticipate that compliance with such governmental regulation will have an adverse effect upon its -18- 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 AND ISSUANCE OF ADDITIONAL SECURITIES. RCI's Certificate of Incorporation authorizes the issuance of up to 30,000,000 shares of common stock and 5,000,000 shares of preferred 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 including additional shares of convertible preferred stock to existing investors, not including the Company, who have an option to purchase more shares of RCI's preferred stock. See "THE COMPANY - Recent Capitalization of RCI.". Furthermore, there are outstanding a substantial number of warrants and options to purchase a substantial number of additional shares of the common stock of RCI, the exercise of which would result in a significant dilution of the Company's ownership in RCI. To the extent that additional shares of common or preferred 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 4,514,732 shares of its common stock to directors, officers and employees of, and consultants to, RCI. RCI has issued options to purchase 3,260,000 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. See "THE COMPANY - Recent Capitalization of RCI." 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 minority 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. NTC has entered into three year employment agreements with Edward R. Jacobs, the Chief Executive Officer of NTC (i.e. expiring on July 25, 1997), and James R. Quandt, a new President of NTC (i.e. expiring January 6, 2000). RCI has -19- entered into employment agreements with several of its executives. The Company and its subsidiaries do not anticipate a termination of their employment relationships with any of their key executives. RCI does not yet have a permanent Chief Executive Officer and is utilizing the services of an independent consultant and its newly appointed Chairman of the Board to fill that role until a permanent Chief Executive Officer is hired. While the independent consultant to RCI is currently its acting Chief Executive Officer, there is no assurance that RCI will be able to hire a permanent Chief Executive Officer, or that the absence of a permanent Chief Executive Officer will not have a material adverse effect on RCI's financial condition or results of operation. Furthermore, the loss of one or more key executives of the Company, NTC or RCI could have an adverse impact on the Company's and its subsidiaries' business. See "Item 1. Business - Employees" in the Company's 1995 Form 10-K. DILUTION CAUSED BY FUTURE SALES OF SHARES. As of March 17, 1997, 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 13,475,263 shares of Common Stock outstanding and 2,075 shares of the Series A Preferred Stock outstanding. Assuming the issuance of all of the Shares covered by this Prospectus and the number of Underlying Shares assuming the exercise of all Warrants and the conversion of Series A Preferred at the maximum conversion price of $4.44 per share, the Company would have 14,758,819 shares of its Common Stock outstanding, not including shares issuable upon the exercise of other outstanding options and warrants. 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." -20- 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 $2,440,000 of Series A 2% Convertible Preferred Stock 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 $4.75 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 more 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 minority 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. -21- 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 minority owned subsidiary, RCI, manufactures and markets the Fast Cast-TM- LenSystem that allows retail optical stores and wholesale optical lens manufacturing laboratories to produce single vision, flat-top bifocal and progressive bifocal lenses on demand, and in minutes. The Fast Cast-TM- LenSystem uses a series of high-accuracy prescription glass molds that are filled with a proprietary liquid monomer (plastic). When exposed to ultraviolet light within the system's curing chamber, the monomer undergoes a chemical reaction that rapidly "cures" or hardens the lens in 15 minutes. RCI commenced assembling and marketing the Rapid Cast equipment, molds and liquid monomer for the Fast Cast-TM- LenSystem in February 1995, when it acquired 100% of the outstanding stock of Q2100, Inc. from Pearle, Inc., and when the Company acquired its ownership 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. APPOINTMENT OF NEW DIRECTOR BY THE COMPANY On January 20, 1997, the Company's Board of Directors appointed Dr. Howard Silverman to fill a vacancy and become a member of the Board of Directors. Since March 1996, Dr. Silverman has been consulting for various companies in the optical and financial areas, including Andrew, Alexander, Wise & Company in New York, and Rapid Cast, Inc. From August 1995 to March 1996, Dr. Silverman served as a Vice-President of Corporate Finance for Rickel & Associates, an investment banking firm. From 1991 until he joined Rickel & Associates in 1995, Dr. Silverman was an independent business consultant specializing in early stage and mid-size operating companies. From 1985 to 1991, Dr. Silverman was the founder and Chairman of the Board of Directors of Vision Sciences, Inc., a company that developed, manufactured and sold in-office lens casting systems, which enabled the optical retailer to cast his own finished plastic optical lenses. Dr. Silverman was a member of the Board of Directors and the director of business development for Staar Surgical Co., Inc., a publicly owned company, from 1984 to 1990. He was the co-founder and Chief Operating Officer of Hydro- Optics, Inc., a manufacturer of hydrophilic contact lens, from 1974 until 1984. Dr. Silverman has also been the Vice President and Chief Operating Officer of Diversified Health Industries, Inc. and the President and Chief Executive Officer of Precision Contact Lens, Inc. Dr. Silverman had a private optometric practice in New York City from 1968 to 1972, specializing in contact lenses. Dr. Silverman earned a Bachelor of Science in Chemical Engineering from the college of the City of New York in 1965 and a Doctor of Optometry from Illinois College of Optometry in 1968. See the Company's Report on Form 8-K, dated January 20, 1997. -22- APPOINTMENT OF NEW EXECUTIVE OFFICER OF NTC On January 6, 1997, NTC entered into an employment agreement with James R. Quandt pursuant to which Mr. Quandt is serving as the President of NTC's newly formed operating division, and will be nominated to become a member of NTC's Board of Directors. The employment agreement contemplates that Mr. Quandt will eventually become the Chief Executive Officer of NTC upon the retirement of Edward Jacobs, the current Chief Executive Officer, which is presently scheduled for January 1, 1999. Mr. Quandt's employment agreement commenced on January 6, 1997 and has a term of three years. The employment agreement provides for Mr. Quandt to implement a separation of the functions of the Company into an operating division, with primary responsibility for the telephone business, and a marketing division, with primary responsibility for the independent sales representatives. Until Mr. Quandt becomes the Chief Executive Officer of NTC (which is contemplated but not guaranteed), he and the President of the newly formed marketing division will report to Mr. Jacobs. The employment agreement recites that Mr. Jacobs also contemplates retiring as the Chairman of the Board of Directors of NTC on July 25, 1999, although such retirement is not contractually mandated. The employment agreement contemplates that Mr. Quandt may be nominated to become the Chairman of the Board of Directors of NTC upon Mr. Jacobs' retirement from that position. Pursuant to the employment agreement, Mr. Quandt is entitled to the following compensation: (1) A base salary of $40,000 per month, (2) an incentive bonus equal to one and one-half (1.5%) of the quarterly net profit earned by NTC, provided that the quarterly net profit is at least $1,250,000, the payment of the bonus does not cause the quarterly net profit of NTC to be less than $1,250,000, and NTC's pretax profit for the succeeding calendar quarter is reasonably expected to exceed the minimum quarterly net profit of $1,250,000, and (3) nonqualified stock options to purchase 600,000 shares of the common stock of NTC. The stock options will have an exercise price determined by the Board of Directors of NTC in accordance with the NTC Stock Option Plan, but in no event greater than the higher of $5.00 per share or the fair market value of NTC's stock at the time of the grant. See "THE COMPANY - Amendment to NTC Management Incentive Agreement." The stock options will have an exercise period of five years from the date of grant. The stock options will vest as follows: (1) 250,000 stock options will vest upon Mr. Quandt completing 15 months of employment for NTC under the employment agreement, and (2) 350,000 stock options will vest only in the event NTC achieves cumulative pretax profits which total a minimum of $10,000,000 in any four contiguous calendar quarters prior to January 1, 1998. In addition to the base salary, regular bonus and stock options, Mr. Quandt will earn a hiring bonus equal to $225,000, payable if NTC's quarterly net profits exceed $1,250,000, but in any event no later than December 31, 1997 with respect to $150,000 of the guaranteed hiring bonus, and the balance by no later than June 30, 1998. The hiring bonus will be paid at the rate of 1.5% of quarterly pre-tax profits of NTC in excess of $1,250,000, and if not earned in that manner, will be paid in full in two installments as follows: $150,000 by December 31, 1997 and the balance by June 30, 1998. To the extent that the regular bonus and guaranteed hiring bonuses are paid to Mr. Quandt pursuant to his employment agreement, Mr. Jacobs has agreed to waive any remaining portion of the quarterly incentive bonus payable by NTC to Mr. Jacobs (i.e. 1.5% of the pre-tax net profits in excess of $1,250,000 of net profits of NTC per calendar quarter) pursuant to Mr. Jacobs' current employment agreement with NTC. Under the employment agreement, Mr. Quandt is entitled to a significant severance payment if his employment terminates prior to the agreement's termination date because of his death, disability, or for a reason other than cause, or because of a voluntary resignation by Mr. Quandt for "good cause", as defined in the employment agreement. Mr. Quandt has agreed not to compete with NTC during the term of his employment agreement and for a period of one year after the agreement terminates for any -23- reason. The effectiveness of Mr. Quandt's employment agreement is conditioned on its approval by the NTC Board of Directors, which is expected to be given in the near future. Prior to assuming his executive position with NTC, Mr. Quandt was the Chairman of the Board of Directors of Global Financial Information Corporation, a privately held group of companies in the financial information and technology industry. Global Financial Information Corporation operates from a base of 27 offices internationally, with a staff of approximately 840 professionals. From 1991 to 1995, Mr. Quandt was the President and Chief Executive Officer of Standard & Poors Financial Information Services, a subsidiary of McGraw Hill Corporation in New York, New York. At Standard & Poors, Mr. Quandt was responsible for all executive, administrative and operational functions of nine domestic and international companies that comprised the Standard & Poors Group. From 1980 to 1991, Mr. Quandt was an executive officer in various capacities with Security Pacific Bank in Los Angeles, California. Mr. Quandt was the Senior Vice President and Group Division Head of Security Pacific Bank's Financial Management & Trust Services Group from 1988 to 1991. From 1983 to 1990, Mr. Quandt was the President and Chief Executive Officer of Security Pacific Brokerage, Inc., a subsidiary of Security Pacific Bank, for which he negotiated the sale in 1990 to Fidelity Investments. Mr. Quandt was Group Vice President of Security Pacific Financial Management Centers from 1980 to 1983. From 1976 to 1980, Mr. Quandt was a Second Vice President with Smith, Barney, Harris, Upham & Co. in Los Angeles, California, and from 1972 to 1976, he was a Senior Account Executive with the Bank of America. Mr. Quandt earned a Bachelor of Science in Economic and Business Administration from Saint Mary's College of California in 1971 and completed the program at the Graduate School of Business, Management Policy Institute, at the University of Southern California. Mr. Quandt is a member of the Board of Regents of Saint Mary's College of California and the Alumni Council Board of the American Bankers Association. Mr. Quandt is also a member of the New York Municipal Forum. GRANT OF STOCK OPTIONS AND OTHER COMPENSATION BY THE COMPANY The Company's Board of Directors approved the following executive compensation for the President and Secretary of the Company at its Board meeting on January 21, 1997, pursuant to the recommendation of the Company's Compensation Committee: (1) Melvyn Reznick's annual salary for the twelve month period commencing on December 1, 1996 and ending on December 1, 1997 was increased to $250,000. Mr. Reznick was granted a cash bonus of $40,000. He was also granted options to purchase a certain number of shares of NTC common stock from the Company. The number of options will be calculated based on the fair market value of NTC's stock as of December 31, 1996, which is being determined pursuant to a Duff & Phelps appraisal expected to be completed in the near future. The number of options to purchase NTC stock will equal $135,000 divided by the fair market value of each share of NTC stock on December 31, 1996. The exercise price will equal the fair market value of NTC stock and the term of the options will be three years. The Company's Compensation Committee also recommended that Mr. Reznick's bonus for 1997 be $100,000, subject to the approval of the Company's Board of Directors early next year, provided that the Board determines that Mr. Reznick satisfies the following criteria: The Company completes the spin-off of 10% of the common stock of NTC that it owns, the pending investigation of the Company by the Securities and Exchange Commission is settled and terminated, the Company's legal and regulatory issues are under control and, if possible, resolved, the Company expands its corporate communications activities so that its stock is presented properly to the investment community, the Company develops a new source of revenues and profits so that Incomnet, Inc. has a clear potential to cover its costs independent of NTC and RCI, and there is significant appreciation in the value of the Company's stock. -24- (2) Stephen A. Caswell's annual salary for the twelve month period commencing on January 1, 1997 was increased to $115,000. Mr. Caswell was granted a cash bonus of $10,000. He was also granted options to purchase a certain number of shares of NTC common stock from the Company, calculated in the same manner as for Mr. Reznick, except that the dollar amount of options is $40,000 rather than $135,000. The compensation Committee recommended and the Board of Directors approved a potential cash bonus of $35,000 for Mr. Caswell for 1997, provided that the Company achieves the same goals as are applicable to Mr. Reznick's potential 1997 bonus. On January 21, 1997, the Board of Directors granted the following stock options to the following officers, directors and consultants to the Company pursuant to Incomnet, Inc.'s 1996 Stock Option Plan:
Number Potential Realizable value of Stock Exercise at Assumed Annual Rates of Stock Name Options Price Date of Expiration Price Appreciation for Term - ---- -------- -------- ------------------ -------------------------------- 5% 10% ---- ------- Howard Silverman 35,000 $4.25 1/21/2002 $ 0 $20,353 Albert Milstein 35,000 $4.25 1/21/2002 $ 0 $20,353 Nancy Zivitz 35,000 $4.25 1/21/2002 $ 0 $20,353 Stephen Caswell 40,000(1) $4.25 1/21/2002 $ 0 $23,261 Mark Richardson(2) 20,000 $4.25 1/21/2002 $ 0 $11,630
- ------------------------------ (1) These stock options are pledged to the Company as additional collateral to secure the nonrecourse loan by the Company to Mr. Caswell made on November 15, 1995, which is also secured by 20,000 shares of the Company's Common Stock owned by Mr. Caswell. The current outstanding balance of the loan is approximately $320,000. (2) Mr. Richardson is corporate legal counsel to the Company. See "LEGAL MATTERS." (3) The assumed appreciation is calculated from the last sale price of the Company's Common Stock on the NASDAQ over-the-counter market on March 17, 1997, which was $3.00 per share. The members of the Compensation Committee are Albert Milstein, Nancy Zivitz and Stephen Caswell, with Dr. Howard Silverman joining the Committee upon his appointment as a director of the Company on January 20, 1997. Dr. Silverman did not participate in the issuance of the report by the Compensation Committee relating to the recommendations for compensation for Mr. Reznick and Mr. Caswell, as described above, which were adopted by the full Board of Directors on January 21, 1997. Mr. Caswell did not vote on the recommendations of the Compensation Committee relating to his compensation from the Company. In approving the recommendations to the Board of Directors for Mr. Reznick's and Mr. Caswell's compensation, the Compensation Committee in its report noted extraordinary work performed by these executives under difficult conditions. Mr. Reznick performed an important role in financing and procuring the equity financing for Rapid Cast, Inc., one of the Company's subsidiaries. Mr. Reznick personally made and guaranteed bridge loans to Rapid Cast, Inc. as well as coordinating negotiations with J.P. Morgan and The Clipper Group to complete the institutional financing of Rapid Cast, Inc. Mr. Reznick is serving a key role on the Board of Directors, Audit -25- Committee and Compensation Committee for Rapid Cast, Inc. He also works extensively with the research and development department of Rapid Cast, Inc. The Compensation Committee and the Board of Directors believes that the institutional financing of Rapid Cast, Inc. may not have been accomplished without the financial and managerial involvement of Mr. Reznick. The Compensation Committee noted that Mr. Reznick was also instrumental in resolving the issues with National Telephone & Communications, Inc., the Company's 100% owned subsidiary, including initiating the procedures necessary to accomplish the eventual spin-off of a portion of the Company's NTC shares. The current management incentive agreement with NTC provides Incomnet, Inc. with a reliable source of working capital in 1997. The Compensation Committee also noted that Mr. Reznick served as an effective leader in resolving and making progress in resolving difficult legal and regulatory issues affecting the Company. The Compensation Committee made a comparative analysis of Mr. Reznick's annual salary in relation to the salaries of chief executive officers of public companies of approximately the same size, as well as the salaries of the chief executive officers of NTC and RCI, and determined that the recommendation for Mr. Reznick's compensation was fair and reasonable. The Compensation Committee also issued a report with respect to Mr. Caswell which noted his valuable work in providing support for the Company's litigation tasks, including his assistance in the pending legal action for the recovery of short swing profits for the Company in MORALES VS. INCOMNET, INC. AND SAM D. SCHWARTZ. Mr. Caswell performed critical tasks in connection with the Company raising $2,440,000 in the private placement of the Series A 2% Convertible Preferred Stock. Mr. Caswell was also instrumental in establishing an investor relations program for the Company including the hiring of Fi.Comm, Ltd., the Company's investor relations firm. The Compensation Committee made a comparative analysis of Mr. Caswell's annual salary in relation to the salaries of corporate secretaries of public companies of approximately the same size, and determined that the recommendation for Mr. Caswell's compensation was fair and reasonable. APPOINTMENT OF COMMITTEE MEMBERS The current members of the Audit Committee of the Company's Board of Directors are Albert Milstein, Nancy Zivitz and Dr. Howard Silverman. The current members of the Compliance Committee of the Company's Board of Directors are Melvyn Reznick, Mark Richardson, Albert Milstein and Nancy Zivitz. The current members of the Compensation Committee of the Company's Board of Directors are Albert Milstein, Nancy Zivitz, Stephen Caswell and Dr. Howard Silverman. AGREEMENTS WITH NTC AND ITS MANAGEMENT In November 1996 the Company entered into a new management incentive agreement with NTC pursuant to which the Company agreed to spin-off 10% of the shares it owns in NTC, to establish stock option programs for the senior executives, employees and key independent sales representatives of NTC, and to vote its shares for NTC management's slate of director nominees. The new management incentive agreement entirely superseded the incentive agreement entered into by the Company with NTC in February 1996. See "Item 5. Other Information - Agreement with NTC Management" in the Company's Form 10-Q for the quarter ended September 30, 1996. The Company also entered into settlement agreements with Edward Jacobs, the Chairman of the Board Directors and President of NTC, and Jerry Ballah, the Executive Vice President and a director of NTC, pursuant to which mutual general releases were given. The Company agreed to assume certain debt obligations of Mr. Jacobs and Mr. Ballah to NTC, as well as to make a cash payment to them to cover their tax liabilities from the debt forgiveness. See "Item 5. Other Information - Settlement Agreement with NTC Directors" in the Company's Form 10-Q for the quarter ended September 30, 1996. -26- On January 28, 1997, the Company entered into an amended and restated management incentive agreement with NTC which entirely supersedes the agreement entered into in November 1996. The amended and restated management incentive agreement essentially contains the same terms and conditions as the agreement entered into in November 1996, except as follows: The Company and NTC agree that the Company, as the owner of 100% of the total issued and outstanding stock of NTC, owns ten million shares of NTC. The three NTC stock option plans previously agreed to have been revised. The Company and NTC have now agreed that there will be three stock option plans and one convertible debt plan. The exercise price of all stock options issued under the option plans will not be less than the fair market value of NTC common stock on the date of the grant, and the conversion price of the convertible debt issued under the convertible debt plan will not be less than the fair market value of NTC common stock on the date of the issuance of the convertible debenture. Shares issuable pursuant to the plans are expected to be registered with the Securities and Exchange Commission no later than at the time of NTC's planned public offering. Upon the creation of the plans and first grant of options and convertible debt units pursuant to the plans, Edward Jacobs will waive his rights to all remaining outstanding unexercised warrants and options issued to him by the Company pursuant to his employment agreement, dated December 28, 1994. The first stock option plan is the one for key independent sales representatives. A total of 2,884,615 shares are reserved for issuance under this plan. Options to purchase 961,538 shares of NTC common stock will be granted to key independent sales representatives who are Corporate Team members, 480,769 of which will vest on June 30, 1998, subject to acceleration if NTC's public offering occurs prior to January 1, 1998. Options to purchase the other 480,769 shares will vest on June 30, 1999. The remaining 1,923,077 shares reserved for issuance pursuant to stock options granted under this plan may be granted to key independent sales representatives after each of June 30, 1997, December 31, 1997, June 30, 1998 and December 31, 1998 if NTC's gross revenues for the three month periods ending on each of such dates exceed NTC's gross revenues for the corresponding three month periods ending December 31, 1996, June 30, 1997, December 31, 1997 and June 30, 1998, by the percentage amounts indicated on the following table: Percentage Increase in NTC Gross Revenues Number of Options Available For Grant In Comparative Three Month Periods At End of Each Period(1) - ----------------------------------------- ------------------------------------- 30% 125,000 40% 250,000 50% 500,000(1) - ------------------------------ (1) Stock options in the amount indicated may be granted at the end of each of the four comparative three month periods. If the percentage increase for all four of the comparative periods is 50% or more, then the total stock options available for grant in the fourth period would be 423,077 instead of 500,000 because there are 1,923,077 (not 2,000,000) options available for grant under this portion of the key independent sales representatives' stock option plan. These stock options, once granted, will vest in four equal annual installments on each anniversary date after the stock option grant date. The NTC Board of Directors will determine when and to whom these stock options will be granted. -27- The second stock option plan is the one for NTC executives, employees and key consultants. A total of 2,523,077 shares are reserved for issuance under this plan. Options representing one-third of these reserved shares will be subject only to a time-in-service vesting requirement, but in no event will such options vest prior to January 1, 1998. Options representing the remaining two- thirds of the reserved shares will vest in four equal annual installments on each anniversary date of the option grant date, subject to the acceleration of vesting in the event that NTC achieves certain income targets in 1997, to be determined by the NTC Board of Directors. No more than 480,770 shares issuable pursuant to options granted under this plan may be issued to persons eligible to receive convertible debt units under the Senior Executive and Consultant Convertible Debt Plan described below in this section. The NTC Board of Directors will determine when and to whom these stock options will be granted. The third stock option plan is the one for members of NTC's Board of Directors. A total of 300,000 shares are reserved for issuance under this plan. Each director of NTC will receive an option to purchase 25,000 shares of NTC common stock which will vest in four equal annual installments on each anniversary date of the option grant date. The fourth option plan is the Senior Executive and Consultant Convertible Debt Plan for Edward Jacobs, Jerry Ballah, Chris Mancuso and other senior executives and consultants approved by the NTC Board of Directors. A total of 3,846,155 shares are reserved for issuance under this plan. Mr. Jacobs and Mr. Ballah will collectively receive convertible debt units which may be converted into 3,069,231 shares of NTC common stock, to be allocated between them as determined by the NTC Board of Directors. These units will vest upon grant. Mr. Mancuso is eligible to be granted 100,000 convertible debt units convertible into 100,000 shares of NTC common stock, which will vest upon grant. Mr. Mancuso is also eligible to receive up to an additional 100,000 convertible debt units convertible into 100,000 additional shares of NTC common stock if certain financial performance goals are achieved, as determined by the NTC Board of Directors. Any convertible debt units reserved for Mr. Mancuso which are not granted to him may be granted to other beneficiaries of this plan in amounts determined by the NTC Board of Directors. A portion of the convertible debt units granted under this plan may be assignable. An additional 576,924 shares will be reserved under this plan for issuance upon the conversion of convertible debt units granted to each of Mr. Jacobs and Mr. Ballah in equal amounts. These convertible debt units will be granted upon the creation of the plan but will not vest until January 31, 2002, except that the vesting of these convertible debt units will accelerate in the following amounts if NTC achieves revenues which exceed the following amounts for any calendar quarter ending prior to January 1, 2000. QUARTERLY REVENUES NUMBER OF SHARES VESTING ------------------ ------------------------ $100 million 192,308 $125 million 192,308 $180 million 192,308 The amended and restated NTC management incentive agreement provides that, until four additional independent directors are appointed to the NTC Board of Directors, if a vacancy is created on the NTC Board of Directors by reason of the death, resignation or removal, with or without cause, of Mr. Jacobs or Mr. Ballah, then the Company has agreed to vote its shares for the individual nominated by the remaining NTC management director. In addition to the regular members of the NTC Board of Directors, a key independent sales representative may be nominated and elected to the NTC Board of Directors on a rotating basis, such that the same sales representative cannot serve consecutive terms. NTC has agreed to make total cash payments to the Company on or before December 31, 1997 equal to $2,200,000, of which $1,200,000 of payments have already been made as of March 17, 1997. The cash payments of up to $2,200,000 by NTC to Incomnet, Inc. will be treated as a return of capital to the -28- Company. NTC may make advances to Incomnet, Inc. in excess of its cash payment obligation of $2,200,000, which Incomnet, Inc. will be obligated to repay with interest upon demand. Any charge to earnings or taxable income associated with advances made by NTC to Incomnet, Inc. or costs incurred in the spin-off of NTC shares will be incurred by Incomnet, Inc. for financial reporting purposes rather than by NTC. SETTLEMENT WITH RCI PARTIES As of December 9, 1996, the Company entered into a Settlement and Mutual Release Agreement with Robert Cohen, Alan Cohen, Jeff Rubin, Jeff Cohen, Broadway Partners, a partnership comprised of the children of Alan and Robert Cohen, and Lenore Katz (the "RCI Parties"). Robert Cohen is a director and shareholder of Rapid Cast, Inc. and Jeff Rubin is a director, shareholder and executive officer of Rapid Cast, Inc. Jeff Cohen is the son-in-law of Robert Cohen. See "SELLING SECURITY HOLDERS." Pursuant to the settlement agreement, the RCI Parties purchased 360,000 Warrants entitling them to purchase 360,000 shares of the Common Stock of the Company for an exercise price of $3.75 per share at any time until December 9, 1999. The RCI Parties paid a total of $36,000 in cash to the Company for the Warrants. Certain of the RCI Parties also purchased a total of 33,000 shares of the Common Stock of the Company for an aggregate purchase price of $100,000. The Company is registering those shares and the shares issuable upon the exercise of the Warrants pursuant to the registration statement encompassing this Prospectus in accordance with its agreement to do so in the Settlement and Mutual Release Agreement. See "SELLING SECURITY HOLDERS." The Company and the RCI Parties also mutually released each other from all claims, if any, which they may have had against each other, and the RCI Parties assigned all of the claims which they may have against Sam and Rita Schwartz, prior directors of the Company, to the Company. STATUS OF THE CLASS ACTION LAWSUIT The plaintiffs in the class action lawsuit SAUNDRA GAYLES VS. INCOMNET, INC. AND SAM D. SCHWARTZ have conducted written discovery and taken the deposition of the Company's custodian of records. The discovery phase of the case is scheduled to close on May 31, 1997. A hearing is scheduled for March 3, 1997 to determine whether a specific group of investors who filed a motion to elect not to be part of the class will be entitled to opt-out of the class action lawsuit and commence their own lawsuit. The plaintiffs and the Company have filed motions opposing the request for opt-out status by those investors, who filed their election forms after the deadline established for such elections. Several other parties have timely filed elections to be separate from the class, but none have filed separate lawsuits to date. The Company is not certain whether any of those potential plaintiffs will file separate lawsuits against the Company or any of the other defendants. STATUS OF SECTION 16(b) ACTION On February 21, 1997, the plaintiffs and Sam Schwartz in the pending lawsuit entitled RICHARD MORALES VS. INCOMNET, INC. AND SAM D. SCHWARTZ, entered into a stipulated settlement pursuant to which Mr. Schwartz agreed to pay $4,250,000 to the Company as full payment of his short swing profit obligation to the Company. The plaintiff's lawyer indicated that he would request a fee of $850,000 plus reimbursement of $65,000 of expenses, to be paid by the Company from the proceeds of the recovery. Under the stipulated settlement, the disgorgement of short-swing profits would be payable $600,000 in cash and the balance by cancellation of shares of the Company's Common Stock owned by Mr. Schwartz, based on 90% of the average between the bid and the asked price of the Company's Common Stock on the NASDAQ market during the 30 calendar days immediately preceding the date that the court enters an order approving the settlement. Since the stipulated settlement does not provide for an adequate release of the Company from claims from Sam D. Schwartz relating to the Section 16(b) litigation, the Company has objected to the stipulation as written, but has indicated that it would accept the payment -29- amount and terms. The court also indicated that it would not approve the settlement without a complete release of the Company by Mr. Schwartz. There is no assurance whether or not the plaintiff and Mr. Schwartz will enter into a new stipulated settlement which will be acceptable to the Company and the court, or whether the Company will recover the short-swing profits from Mr. Schwartz. See "RISK FACTORS -Short-Swing Profits Payable To The Company." SETTLEMENT OF THE ATLANTA LAWSUITS In February 1997, the Company completed a settlement and release agreement with the plaintiffs in the pending lawsuits entitled HERBERT M. SCHWARTZ ET AL. VS. INCOMNET, INC., SAM D. SCHWARTZ AND KALIBER MANAGEMENT CORP. and BRENT ABRAHM ET AL. VS. INCOMNET, INC., SAM D. SCHWARTZ AND KALIBER MANAGEMENT CORP. pursuant to which the lawsuit against the Company is being dismissed and an order is being entered barring indemnification or contribution between the Company and Sam D. Schwartz. In consideration for the payment of $400,000 in cash and the issuance of a note in the principal amount of $400,000 to the plaintiffs, the plaintiffs have released the Company from all claims and dismissed their lawsuits against the Company with prejudice. The $400,000 note was issued as of January 1, 1997 and bears interest at the rate of 12% per annum from January 1, 1997 to January 22, 1997, and 8% per annum thereafter until December 31, 1997, when the note is due and payable in full. The note is secured by a certificate of deposit in the amount of $415,000 purchased by the Company, which the Company has the right to replace with a number of registered shares of its Common Stock equivalent in value to the certificate of deposit as collateral for the note. The Company may use a portion of the shelf shares covered by this Prospectus to pledge as collateral for the note in place of the $415,000 certificate of deposit. The Company believes that Mr. Schwartz is in separate settlement discussions with the plaintiffs. SETTLEMENT OF THE STEVENS LAWSUIT In January 1997, the Company entered into a Settlement Agreement and Mutual Release of all claims in the pending lawsuit entitled CHARLES STEVENS VS. SAM D. SCHWARTZ AND INCOMNET, INC. Pursuant to the settlement, the Company paid $7,500 in cash to the plaintiff and issued 12,500 Warrants to purchase 12,500 shares of the Company's Common Stock at an exercise price of $2.94 per share, exercisable at any time until December 17, 2001. The Company agreed to register the shares underlying the 12,500 Warrants issued to Mr. Stevens and his legal counsel. In consideration for the issuance of Warrants and payment of cash, the plaintiff released the Company from all claims and dismissed the lawsuit against the Company with prejudice. The settlement did not include Sam D. Schwartz. 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. The registration statement covering the prior noteholders' outstanding shares and newly issued settlement shares issued pursuant to the settlement agreements was declared effective by the Securities and Exchange Commission on October 31, 1996. See also "Item 3. Legal Proceedings - Claims by Prior Noteholders" in the Company's 1995 Form 10-K. SETTLEMENT WITH PRICE INTERNATIONAL In August 1996, the Company entered into a settlement agreement with Price International pursuant to which the Company agreed to lower the exercise price of Price International's 75,000 warrants from $11.25 per share to $4.50 per share, and to extend the expiration date of the warrants from -30- November 15, 1997 until December 31, 1998. The Company also agreed to register the 75,000 shares issuable upon the exercise of the warrants. Those shares were registered by the Company in the registration statement which was declared effective by the Securities and Exchange Commission on October 31, 1996. In consideration for the modification to the terms and conditions of the warrants, Price International agreed that (a) it would be required to exercise at least 25,000 of the warrants once the trading price of the Company's stock averages $5.30 per share during any 30 day period, and (b) it 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. Price International has not yet exercised any of the warrants issued to it in its settlement agreement with the Company. ISSUANCE OF CONVERTIBLE PREFERRED STOCK From September 20, 1996 to October 25, 1996, the Company issued 2,440 shares of Series A 2% Convertible Preferred Stock to 12 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 and eight unaffiliated investors. The Company raised $2,440,000 in capital from the issuance of the Preferred Stock, a portion 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 "Item 5. Other Information - Loan to Company By Melvyn Reznick" in the Company's Form 10-Q for the fiscal quarter ending September 30, 1996. The balance of the proceeds is being utilized and is expected to be utilized for general working capital and to pay the costs of settling pending litigation. 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 was $1,700,000. The Company has therefore paid $85,000 of referral fees to Newport Capital Partners. The basic terms and conditions of the Series A 2% Convertible Preferred Stock are described in the following paragraphs: 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 -31- 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 were covered by a prior registration statement declared effective by the Securities and Exchange Commission on October 31, 1996. The balance of the shares of Common Stock issuable upon the conversion of outstanding Series A 2% Convertible Preferred Stock are covered by this Prospectus. 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 is not permitted to pay cash dividends on its Common Stock unless all cumulative unpaid dividends on the Series A 2% Convertible Preferred Stock is paid. 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. RECENT CAPITALIZATION OF RCI On January 16, 1997, Rapid Cast, Inc., a minority owned subsidiary of the Company, issued 8,000,000 shares of Series A and Series B 7% Convertible Preferred Stock to institutional investors in a private placement pursuant to Regulation D of the Securities Act of 1933, as amended. The investors contributed $12,000,000 in capital in consideration for the issuance of 7,275,000 shares of voting Series A 7% Convertible Preferred Stock and 725,000 shares of nonvoting Series B 7% Convertible Preferred Stock. The investors also have the option to purchase up to an additional 6,666,666 shares of voting or nonvoting 7% Convertible Preferred Stock from RCI for a purchase price $1.50 per share, exercisable with respect to 3,333,333 of the shares upon the sooner to occur of (i) the appointment of a permanent -32- Chief Executive Officer of RCI, or (ii) July 16, 1997, or the option relating to those shares will expire unexercised. The option with respect to the remaining 3,333,333 shares must be exercised on or before July 16, 1998, or the option with respect to those shares will expire unexercised. Frank Pipp, the new Chairman of the Board of Directors of RCI, also has an option to purchase up to 1,333,333 shares of Series A 7% Preferred Stock at any time until July 16, 1998 for a price of $1.50 per share. The proceeds of the issuance of the Series A and Series B 7% Convertible Preferred Stock were utilized by RCI (i) to repay short-term bridge loans made to RCI by its shareholders, including Incomnet, Inc., in the approximate total amount of $3,705,430; (ii) to repurchase 1,200,000 shares of RCI common stock from Dr. Larry Joel for a redemption price of $1.28 per share; (iii) to make the final settlement payment of $325,000 on the patent infringement lawsuit known as RONALD BLUM, O.D. VS. RAPID CAST, INC., ET AL., which has been dismissed; (iv) to repay the bank line of credit with Bank Leumi in the approximate outstanding amount of $500,000 plus interest; (v) to pay placement costs of approximately $500,000; (vi) to pay all trade payables in the approximate outstanding amount of $2,000,000, and (vii) the balance for working capital. The outstanding RCI founder loans in the approximate outstanding balance of $1,680,000 on the date of the closing, the other RCI shareholder bridge loans which were not repaid from the proceeds of the private placement of the Series A and Series B 7% Convertible Preferred Stock, and the outstanding 8% convertible notes in the approximate outstanding balance of $648,000 (which were convertible into RCI common stock at a price of $.80 per share), were all converted into newly issued RCI common stock and Series C 7% Convertible Preferred Stock as follows: No. of Shares of Series C No. of Shares Name of RCI Shareholder Preferred Stock(1) of Common Stock (2) - ----------------------- ------------------ ------------------- Robert Cohen 121,543 260,708(3) Alan Cohen 120,194 260,708(5) Jeff Rubin 122,260 45,752 Sean Zimberg 111,781 135,252 Dr. Larry Joel(6) 0 255,099 Huberfeld Bodner Partnership 0 543,390 Martin Price 27,485 53,856 Incomnet, Inc. 0 428,570 - ------------------------------ (1) Issued at a price of $1.50 per share. (2) Issued at a price of $.80 per share with respect to the conversion of the outstanding principal balance of the 8% convertible promissory notes, and $1.28 with respect to the conversion of the RCI founder loans and the accrued but unpaid interest on the 8% convertible promissory notes. (3) Includes 36,602 shares issued in the name of Robert Cohen's children. (4) Includes 120,194 shares issued in the name of Alan Cohen's children. (5) Includes 36,602 shares issued in the name of Alan Cohen's children. (6) In September 1996 Dr. Joel surrendered 142,222 shares of RCI common stock to RCI as the settlement payment for $448,000 of liabilities owed by Dr. Joel to RCI. -33- From the proceeds of the capitalization of RCI on January 16, 1997, Incomnet, Inc. was repaid $2,647,348 of principal and accrued interest on its short term bridge loans which it made to RCI during the period from April 1996 through January 1997. RCI also issued 428,570 shares of its common stock to Incomnet, Inc. in exchange for the conversion by Incomnet, Inc. of $326,400 of 8% convertible promissory notes purchased by it from RCI in January 1996. Incomnet, Inc. now owns 10,628,570 shares of RCI common stock. Melvyn Reznick was repaid $80,000 plus interest at the rate of 10% per annum for the loan he made to RCI in late December 1996, and Stephen Caswell was repaid $12,500 plus interest at the rate of 10% per annum for the loan he made to RCI in early January 1997. Pursuant to its Amended and Restated Certificate of Incorporation filed on January 16, 1997, RCI is authorized to issue a total of 60,000,000 shares of common stock, 22,000,000 shares of which are nonvoting common stock, and 42,500,000 shares of preferred stock, all having a par value of $.001 per share. As of March 17, 1997, RCI has a total of 22,091,113 shares of common stock issued and outstanding, 10,628,570 of which are owned by Incomnet, Inc., 7,275,000 shares of voting Series A 7% Convertible Preferred Stock, 725,000 shares of nonvoting Series B 7% Convertible Preferred Stock, and 503,264 voting Series C 7% Convertible Preferred Stock. Incomnet, Inc. does not own any outstanding RCI preferred stock. Each share of issued and outstanding Series A, Series B and Series C Preferred Stock is convertible into one share of RCI common stock (subject to adjustment) at any time at the option of the preferred stockholder, and automatically upon the occurrence of a "qualified public offering" by RCI, as that term is defined in the Certificate of Determination of Rights, References and Privileges for all outstanding series of RCI preferred stock. The terms of conversion and other rights of the outstanding RCI preferred stock are all subject to customary adjustments and antidilution provisions in the event of stock splits, certain stock dividends, stock combinations, reorganizations, recapitalizations and similar events. A "qualified public offering" by RCI occurs when RCI makes a public offering of its securities having gross proceeds of at least $20,000,000 and an offering price of at least $1.90 per share if it occurs on or prior to December 31, 1997, $2.14 per share if it occurs on or prior to June 30, 1998, $2.40 per share if it occurs on or prior to December 31, 1998, $2.69 per share if it occurs on or prior to June 30, 1999, $3.02 per share if it occurs on or prior to December 31, 1999, $3.40 per share it occurs on or prior to June 30, 2000, $3.81 per share if it occurs on or prior to December 31, 2000, $4.29 per share if it occurs on or prior to June 30, 2001, $4.82 per share if it occurs on or prior to December 31, 2001, $5.41 per share it if occurs on or prior to June 30, 2002, and $6.08 per share if it occurs after June 30, 2002, in each case as adjusted for stock splits, certain stock dividends, stock combinations and similar events. The Series A, Series B and Series C 7% Convertible Preferred Stock have a liquidation preference of $1.50 per share. All outstanding RCI preferred stock have a cumulative noncompounded dividend of 7% per annum which must be declared and paid in full before any dividends may be declared or paid on the RCI common stock. All dividends on outstanding RCI preferred stock, regardless of whether Series A, Series B or Series C, must be declared and paid ratably on all such outstanding preferred stock. Each holder of outstanding RCI preferred stock has the right to be paid the 7% dividend, when declared, either in cash, in shares of Series A, Series B or Series C Preferred Stock (at a price of $1.50 per preferred share, subject to adjustment), or in a combination of cash and preferred stock. The cumulative unpaid dividend on the outstanding RCI preferred stock must be paid in full in shares of RCI common stock (at a price of $1.50 per common share, subject to adjustment) or in cash, at the option of the preferred stockholder, upon the conversion of the preferred stock into common stock. The preferred stockholder may require RCI to redeem the outstanding preferred stock beginning after January 1, 2003 if the preferred stock has not otherwise been converted. The redemption price would equal the original issue price plus cumulative unpaid dividends. The Certificate of Determination for the outstanding RCI preferred stock contains numerous restrictive covenants applicable to RCI with respect to the incurrence of debt, sale of assets, issuance of shares, mergers, reorganizations, recapitalizations, affiliate transactions, and similar transactions by RCI. -34- In connection with the issuance of the preferred stock by RCI, RCI and its shareholders entered into a Registration Rights Agreement, a Shareholders Agreement and related agreements governing the outstanding RCI shares and the management of RCI. Pursuant to the Registration Rights Agreements, the Series A and Series B Preferred Stockholders have priority demand and piggyback registration rights with respect to the shares of RCI common stock issuable upon the conversion of the preferred stock, and issuable upon the exercise of warrants held by them. The Series A and Series B Preferred Stockholders are the only RCI shareholders with demand registration rights, of which they have three for less than $5,000,000 of proposed sales and an unlimited number of proposed sales in excess of $5,000,000. With respect to piggyback registration rights, the holders of Series A and Series B Preferred Stock are entitled to 80% of the available registration of shares for selling security holders on a pro rata basis, and the other existing RCI shareholders are entitled to 20% of the available share registration for selling security holders on a pro rata basis, subject to other conditions and limitations. Pursuant to the RCI Shareholders Agreement, the RCI shareholders and RCI are granted certain first rights of refusal to purchase RCI stock proposed for sale by other RCI shareholders. The RCI Shareholders Agreement imposes certain other restrictions on the transferability of RCI shares, except for Rule 144 sales, a sale of shares in a public offering pursuant to the Registration Rights Agreement, and a transfer to RCI. The RCI shareholders also agree to vote their shares so that (i) the RCI Board of Directors will consist of nine members, (ii) subject to certain conditions, the RCI Board of Directors will consist of two members designated by J.P.Morgan Investment Corporation and its related investors, two members designated by Clipper Capital Associates, L.P. and its related investors, one member designated by Incomnet, Inc., provided, that if Incomnet, Inc. undergoes a "change of control" (defined as the cessation of Melvyn Reznick's service on the RCI Board of Directors for any reason or certain other changes in the Incomnet, Inc. Board of Directors or the stock ownership of Incomnet, Inc.), then the Incomnet designee must be approved by a majority of the other members of the RCI Board of Directors, one member designated by Jeff Rubin, one member designated by Robert Cohen, one member (initially Frank Pipp) designated by a majority of the RCI Board of Directors who qualify as outside directors and approved by a majority of the RCI shareholders, and one member who is the interim or permanent Chief Executive Officer of RCI. RCI has established Executive, Audit and Compensation Committees. The following persons are the current members of the RCI Board of Directors and its Committees: I. BOARD OF DIRECTORS(1) Molly F., Ashby (J.P. Morgan Designee) Robert Cohen Patrick H. Ganett (J.P. Morgan Designee) Kevin A. Macdonald (Clipper Designee) Frank Pipp (Chairman and Interim Chief Executive Officer)(2) Melvyn Reznick (Incomnet Designee) Jeff Rubin II. EXECUTIVE COMMITTEE Molly F., Ashby (Chairman) Kevin A. Macdonald Frank Pipp -35- III. COMPENSATION COMMITTEE Patrick H. Ganett (Chairman) Kevin A. Macdonald Frank Pipp Melvyn Reznick IV. AUDIT COMMITTEE Melvyn Reznick (Chairman) Patrick H. Ganett Kevin A. Macdonald - ------------------------------ (1) The Board of Directors currently has one vacancy which is reserved for the permanent Chief Executive Officer when he is hired. (2) John L. Vidovich is currently a consultant and acting co-Chief Executive Officer of RCI with Frank Pipp. Mr. Vidovich may become the permanent Chief Executive Officer of RCI. The permanent Chief Executive Officer of RCI is expected to join the RCI Board of Directors and may join one or more of its Committees. Upon the completion of a "qualified public offering" by RCI, as that term is defined in the Certificate of Determination for the outstanding RCI preferred stock and as described above, the voting and transferability restrictions in the RCI Shareholders Agreement generally terminate, except that the RCI shareholders agree to vote for one director designee each for J.P. Morgan and Clipper after the "qualified public offering" as long as their investors hold a specified minimum number of shares of RCI. The RCI Shareholders Agreement grants the RCI shareholders pro rata preemptive rights to purchase new securities proposed to be issued by RCI, except in circumstances such as when RCI makes a public offering, issues stock to acquire another company in a purchase, merger or other reorganization, issues stock pursuant to outstanding conversion rights, options or warrants, issues up to 120,000 shares to John L. Vidovich or 450,000 shares to Frank Pipp, implements a stock split or stock dividend, or issues stock after a "qualified public offering" by RCI. In connection with the short term bridge loans made to RCI from April 1996 to January 1997 and the issuance of the preferred stock by RCI on January 16, 1997, RCI issued options and warrants to purchase its common stock, and amended and restated its 1994 Stock Option Plan. The RCI 1994 Stock Option Plan was amended to authorize and reserve up to 4,514,732 shares of its common stock for issuance upon the exercise of stock options granted and which may be granted by the RCI Board of Directors in the future. Under the RCI 1994 Stock Option Plan, a total of 3,260,000 stock options have been granted to various officers, directors, employees and key consultants of RCI. The exercise price of 908,000 of the stock options is $2.25 per share and the exercise price of 1,842,000 of the stock options is $2.00 per share. These stock options have vested (subject to continued employment) and are exercisable at any time from the date of grant until dates ranging from November 1, 2005 until July 31, 2006. Melvyn Reznick was granted 100,000 of these options by RCI, having an exercise price of $2.25 per share and exercisable at any time until July 31, 2006. Frank Pipp was granted 450,000 of these stock options to purchase a total of 450,000 shares of RCI common stock at any time until January 20, 2007, 225,000 to which may be purchased at an exercise price of $1.28 per share and 225,000 of which may be purchased at an exercise price of $4.00 per share. RCI also granted to John L. Vidovich 60,000 of these stock options to purchase 60,000 common stock at any time until January 20, 2007 at an exercise price of $1.28 per share. -36- RCI issued to the purchasers of the Series A and Series B Preferred Stock warrants to purchase 1,400,000 shares of RCI common stock at an exercise price of $1.74 per share, exercisable at any time until January 16, 2004. The holders of these warrants have certain registration rights under the Registration Rights Agreement described above, and customary adjustment and antidilution protection. In connection with short term bridge loans made to RCI by its shareholders and others during the period from April 1996 until early January 1997, RCI issued a total of 4,441,933 warrants to purchase 4,441,933 shares of RCI common stock at any time until dates ranging from September 30, 2003 to December 31, 2003. The exercise price of 1,853,683 of the warrants is $2.25 per share, the exercise price of 302,500 of the warrants is $1.28 per share, and the exercise price of 2,285,750 of the warrants is $.75 per share. Incomnet, Inc. holds 841,416 of these warrants to purchase 841,416 shares of RCI common stock at an exercise price of $2.25 per share at any time until September 30, 2003, 480,000 of these warrants to purchase 480,000 shares of RCI common stock at an exercise price of $.75 per share at any time until December 30, 2003, 150,000 of these warrants to purchase 150,000 shares of RCI common stock at an exercise price of $1.28 per share at any time until December 31, 2003, and 1,090,000 of these warrants to purchase 1,090,000 shares of RCI common stock at an exercise price of $.75 per share at any time until November 30, 2003. In consideration for personal loans and loan guarantees, Melvyn Reznick holds 175,000 of these warrants to purchase 175,000 shares of RCI common stock at an exercise price of $2.25 per share at any time until September 30, 2003, and 160,000 of these warrants to purchase 160,000 shares of RCI common stock at an exercise price of $.75 per share at any time until December 31, 2003. In consideration for personal loans to RCI, Albert Milstein was issued 25,000 warrants to purchase 25,000 shares of RCI common stock at an exercise price of $1.28 per share at any time until December 31, 2003. In consideration for personal loans to RCI, Steve Caswell was issued 12,500 of these warrants to purchase 12,500 shares of RCI common stock at an exercise price of $1.28 per share at any time until December 31, 2003. RCI also has a total of 1,000,000 additional warrants outstanding which entitle their holders to purchase a total of 1,000,000 shares of RCI common stock at an exercise price equal to 50% of the average of the last reported sales price of RCI shares during the first 30 business days after the shares of RCI first become publicly traded, provided that they become publicly traded on or before December 31, 1998. If RCI becomes publicly traded on or before December 31, 1998, these warrants are then exercisable for a period of 180 days after the public trading commencement date. These 1,000,000 RCI warrants were issued on February 8, 1995 in connection with the issuance of 8% convertible promissory notes by Incomnet, Inc. on that date to finance its acquisition of a controlling interest in RCI. See "Item 1. Business - Acquisition of Rapid Cast, Inc." in the Company's Form 10-K for the fiscal year ending December 31, 1995. SETTLEMENT OF RCI PATENT INFRINGEMENT CASE On January 16, 1997, RCI completed the settlement of the lawsuit entitled RONALD BLUM, O.D. VS. RAPID CAST, INC., ET AL. and the lawsuit has been dismissed. In consideration for a total cash payment of $525,000 in cash to Dr. Blum and the release by RCI of all claims which it may have had against Dr. Blum, RCI received a release of all claims by Dr. Blum. See "Item 1. Legal Proceedings - Patent Infringement Lawsuit" in the Company's Form 10-Q for the fiscal quarter ending September 30, 1996. RCI - 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 -37- 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. RCI - ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW RCI 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). -38- 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 $1,386,750 of net proceeds from the exercise of the Warrants, if and when they are exercised, and has received net proceeds of $1,990,000 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 are sold and if so, how many Shares are sold, (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 and whether Shares are needed to cover conversion, and (iv) the amount of commissions and discounts paid to the Underwriter in connection with the sale of the Shares. 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." 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 March 17, 1997 was 797. 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 4.75 4.12 4.43 1997 First Quarter(a) 5.06 2.87 3.00 - ------------------------------ (a) Through March 17, 1997. -39- 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 or the Series A Preferred 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. Furthermore, pursuant to the Certificate of Determination for the Series A Preferred, no cash dividends or cash distributions may be made on the Company's Common Stock unless all cumulative unpaid dividends on the Series A Preferred are paid. CAPITALIZATION The following table sets forth the actual capitalization of the Company at September 30, 1996 and the capitalization of the Company reflecting (i) the issuance of 372,500 Underlying Shares assuming the exercise of all 372,500 Warrants, (ii) the issuance of 467,385 Underlying Shares pursuant to the conversion of 2,075 outstanding shares the Series A Preferred, and (iii) no issuance of Shares.
September 30, 1996 -------------------------- Actual As Adjusted ------ ----------- Long-Term Debt:(1) $ 8,708,181 $ 8,708,181 Minority Interest $ 4,998,099 $ 4,998,099 Stockholders' Equity (Deficiency) Preferred Stock, no par value; 100,000 shares authorized, no shares issued and outstanding --- 1,990,000 (2,075 as adjusted) Common Stock, no par value; 20,000,000 shares $61,019,979 $62,418,479 authorized, 13,294,764 shares issued and outstanding (14,134,649 as adjusted)(2) Retained earnings (accumulated deficit) (21,413,166) (21,413,166) Treasury Stock (5,491,845) (5,491,845) ------------ ------------ Total stockholders' equity (deficiency) 34,414,968 37,790,968 ------------ ------------ Total capitalization $ 47,821,248 $ 51,233,998 ------------ ------------ ------------ ------------
- ------------------------------ (1) Excludes current portion of long-term debt. See the Company's Balance Sheet in its Form 10-Q for the fiscal quarter ended September 30, 1996, which is incorporated in this Prospectus by reference. The long term debt includes $8,055,562 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 372,500 Underlying Shares of the Company's Common Stock is issued pursuant to the exercise of the Warrants, and a total of 467,385 Underlying Shares of the Company's Common Stock is issued pursuant to the conversion of 2,075 shares of the outstanding Series A Preferred (including payment -40- of the 2% cumulative dividend in Common Stock). Includes $36,000 paid for the Warrants. Does not include 365 other outstanding shares of Series A Preferred which were issued by the Company in September 1996, and converted into shares of Common Stock on December 31, 1996 at a conversion price of $2.42 per share. The adjusted shares also do not include 30,000 shares of Common Stock sold by the Company in January 1997 in a private placement pursuant to Regulation D of the Securities Act of 1933, as amended, at a price of $3.03 per share. See "THE COMPANY - Settlement with RCI Parties." The adjusted shares of Common Stock assume that 2,075 shares of Series A Preferred are converted into Common Stock at an average conversion price of $4.44 per share. The average conversion price may be less, depending on the average bid price of the Company's Common Stock prior to the conversion date. If the average conversion price of the Series A Preferred is less than $4.44 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." 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 nine months ended September 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 September 30, 1996 and September 30, 1995 and for the nine months ended September 30, 1995 and September 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 September 30, 1996, incorporated herein by reference, and with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in this Prospectus. -41- INCOMNET, INC. STATEMENT OF OPERATIONS DATA:
Nine Months Ended September 30 Year Ended December 31 ------------------------------ --------------------------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- ---- Revenues $77,295,795 $62,123,548 $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 (11,202,321) 3,572,612 957,044 4,000,242 (1,606,844) (2,264,597) 397,631 Income (Loss) before extra- ordinary item and minority interest (10,522,741) 3,286,492 856,543 3,999,187 (1,606,844) (2,461,697) 1,322 Minority Interest 781,273 182,641 509,482 - - - - Net Income (Loss) (9,262,761) 564,845 1,366,025 4,071,194 (948,769) (2,021,333) 1,322 Net Income (Loss) per share before extraordinary items (.65) .04 0.11 0.42 (0.20) (0.34) 0 Net Income (Loss) per share (.65) .04 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 13,268,050 13,566,743 12,706,401 9,593,207 8,183,877 7,189,671 6,936,316 BALANCE SHEET DATA: At September 30 At December 31 -------------------------- -------------------------------------------------------- 1996 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- Total assets $69,564,043 $74,105,629 $26,158,346 $8,665,839 $6,744,944 $2,174,428 Long-term obligations(1) 8,708,181 8,459,772 900 20,000 176,000 83,334
- ------------------------------ (1) The long term obligations include $8,055,562 at September 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. -42- 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." The expected savings from utilizing local exchange carriers to bill and collect for NTC will be realized if the local exchange carriers successfully and expeditiously collect the invoices on behalf of NTC. While a modest improvement in collections has been experienced through local exchange carriers, NTC still establishes significant reserves for its direct-billed Dial- one receivables. 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. -43- In addition to the focus on NTC, the Company anticipates that it will receive more revenues in the future from its acquisition of Rapid Cast, Inc. on February 8, 1995, although RCI is not expected to achieve profitability in the short-term. 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. THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1995 SALES. Sales of $27,591,284 for the three months ended September 30, 1996 represented an increase of 22% over the sales of $22,660,377 for the three months ended September 30, 1995. The majority of this increase was attributable to NTC's sales increase to $25,790,559 from $21,381,603 in the three months ending September 30, 1996 compared to the three months ending September 30, 1995, respectively. The following table summarizes the Company's sales performance by subsidiary and segment during the comparable third quarters in 1996 and 1995:
SUBSIDIARY SEGMENT DOLLARS IN MILLIONS 1996 1995 ---- ---- NTC Telephone (telecommunications services) $ 21.1 $ 17.5 NTC Telephone (marketing programs) 4.7 3.9 RCI Optical 1.4 0.9 AutoNETWORK Network 0.4 0.4 ------- ------- Total Company Sales $ 27.6 $ 22.7 ------- ------- ------- -------
COST OF SALES. Total Company cost of sales increased to $17,777,193 or 64% of sales during the quarter ending September 30, 1996 compared to $15,733,118 or 69% of sales during the comparable prior year quarter. The quarter-to-quarter increase in cost of sales resulted largely from two factors. The first factor in the increasing cost of sales was the increase in carrier costs associated with increased telephone service sales by NTC. A second factor was a rapid rise in RCI costs of sales. The improvement in costs as a percentage of 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 three major cost components for the third quarter:
SUBSIDIARY SEGMENT DOLLARS IN MILLIONS ---------- ------- 1996 1995 ---- ---- NTC Commissions paid to NTC independent sales representatives $ 5.0 $ 4.4 NTC Carrier costs for NTC's long distance telephone service 11.0 10.3 NTC/RCI/AutoNETWORK All other costs of sales: 1.8 1.0 ------- -------- Total NTC Cost of Sales: $ 17.8 $ 15.7 ------- -------- ------- --------
-44- NTC's total commission expense increased to $4,994,396 in the third quarter of 1996 compared to $4,381,233 in the same quarter of 1995. NTC's carrier costs to deliver long distance telephone service to its telephone customers increased to $10,993,771 in the third quarter of 1996 compared to $10,331,142 in the third quarter of 1995. This increase in carrier costs reflects the year-to-year growth in telephone sales, although these costs have grown at a slower pace than sales, thus reflecting improvements in overall telephone gross profits. The third cost component shown in the table above is "all other costs of sales" which represents: (1) NTC's costs of producing sales materials for its independent sales representatives, (2) RCI's costs of producing optical systems and ancillary goods, and (3) AutoNETWORK costs of providing communications network products and services. GENERAL AND ADMINISTRATIVE. Total general and administrative costs increased to $8,253,785 or 30% of sales in the quarter ending September 30, 1996 compared to $4,953,698 or 22% of sales in the same prior year quarter. 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 25% of sales in the third quarter of 1996 from 19% of sales in the third quarter 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 and administrative costs increased to 92% of sales in the third quarter of 1996 from 76% of sales in the third quarter of 1995, thus continuing to reflect the startup nature of its operations. The Company provided reserves of $1,056,565 during the third quarter ended September 30, 1996 related to the settlement of claims by certain officers of NTC against the Company. In addition, the Company reserved $208,800 at December 31, 1995 as a result of converting a note payable by an officer of the Company from recourse to non-recourse, secured by shares of the Company's common stock owned by the officer. DEPRECIATION & AMORTIZATION. Total Company depreciation and amortization expense was $501,787 in the third quarter of 1996 compared to $475,023 in the third quarter of 1995. This increase was caused by continuing investment by NTC in computer hardware and software, furniture and equipment, and leasehold improvements required to support its anticipated expansion in sales. BAD DEBT EXPENSE. Total Company bad debt expense increased to $1,291,763 in the third quarter of 1996 compared to $636,166 in the same prior year quarter. The quarter-to-quarter 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 deteriorated to net other expense of $10,051,243 in the third quarter of 1996 compared to net other expense of $11,793 during the comparable prior year quarter. This $10,039,450 net deterioration was primarily caused by: (1) an $8,000,000 reserve to reflect a lower value for the Company's investment in RCI, and (2) a $2,000,000 reserve by Incomnet, Inc. for settlement costs associated with claims by directors and officers of NTC. ACQUISITION COSTS & EXPENSES. Acquisition costs increased to $645,572 during the third quarter of 1996 compared to $390,967 during the third quarter of 1995. This increase was primarily caused by a reclassification of RCI's patent amortization which is categorized in 1996 as an acquisition cost and was categorized in 1995 as amortization from operations. If the acquisition costs and expenses for the third -45- quarter ended September 30, 1995 were restated to include RCI's patent amortization, the restated total Company acquisition costs and expenses would equal $593,721, thus reflecting a $51,851 increase in 1996 third quarter acquisition costs and expenses compared to the third quarter ended September 30, 1995. This increase was caused by the higher cost of monthly patent amortization by RCI in 1996 than in 1995. 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% (the "minority interest") of RCI's losses during the three months ending September 30, 1995 and during the three months and nine months ending September 30, 1996 has been eliminated from the Company's "Consolidated Statements of Operations" for 1996 and 1995. The increase in the minority interest elimination from $182,641 to $781,273 during the third quarters of 1995 and 1996, respectively, reflects the same year-to-year percentage (49%) of RCI's increase in losses. NET INCOME. Total Company net income declined to a loss of $9,262,761 or 33.6% of sales in the third quarter of 1996 compared to net income of $564,845 or 2.5% of sales in the same quarter of 1995. The quarter-to-quarter decline in net income resulted from: (1) higher losses from RCI in 1996 caused by significantly increased operating costs incurred to build infrastructure for future potential sales growth, and (2) higher losses caused by the establishment of reserves for the lowered value of the Company's investment in RCI and the establishment of reserves for settlement costs. 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 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: -46- 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. -47- 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 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. -48- 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 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. -49- 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 GENERAL. Overall, the Company achieved slightly negative cash flows of $28,347 during the first nine months of 1996 resulting from cash flows from operations of $2,251,211 which were almost entirely offset by negative cash flows from investing ($5,033,203) and positive cash flow from financing activities of $2,751,645. The Company may need to raise additional capital in 1997 to fund settlement costs relating to pending litigation or to make a business acquisition, although specific needs have not yet been identified. Pursuant to its management incentive agreement with NTC, the Company receives cash distributions from NTC on a periodic basis, which are scheduled to be made until December 31, 1997. See "THE COMPANY - Agreements with NTC and its Management." The Company does not expect to have to make loans to RCI in 1997, and RCI's capital needs in the short-term have been met through its private placement of preferred stock and warrants in January 1997. See "THE COMPANY - The Recent Capitalization of RCI." NTC is expected to have sufficient capital and financing to fund its requirements in 1997, including funds required for the establishment of its branch marketing offices, one of which is currently being built in leased premises in Honolulu, Hawaii. There is no assurance that the cash distributions by NTC to the Company or the cash flow from AutoNetwork will be sufficient to meet the Company's future funding requirements, or that RCI or NTC will have sufficient capital or financing to meet their needs. See "RISK FACTORS." CASH FLOW FROM OPERATIONS. The Company generated $2,253,211 in positive cash flow from operations during the first nine months of 1996, compared to $3,732,269 in positive cash flow from operations during the prior year's comparable period. This year-to-year decrease in cash flow from operations reflects increases in reserves for NTC's direct billed Dial-one receivables which have been submitted to collection agencies for collection. With regard to the collection of accounts receivable, the Company increased its allowance for doubtful accounts to 29.8% of gross receivables as of September 30, 1996 compared to 20.6% of gross receivables as of December 31, 1995. This increased provisioning reflects NTC's aggressive reserves for all direct-billed Dial-one receivables which have been submitted to collection agencies for collection and a modest improvement in collection rates for LEC- billed and calling card products. The Company anticipates that its shift from direct-billed to LEC-billed long distance telephone service will improve its overall collection of accounts receivable, thereby decreasing the future relationship of allowances for doubtful accounts versus gross receivables. CASH FLOW FROM INVESTING. The Company incurred negative cash flows from investing activities of $5,033,203 in the first nine months of 1996 and $26,953,780 in the first nine months of 1995. The 1995 negative cash flow resulted primarily from the Company's purchase of a 51% ownership in RCI on February 8, 1995. CASH FLOW FROM FINANCING. Positive cash flows from financing activities totaled $2,751,645 during the first nine months of 1996 and $17,556,822 during the first nine 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. In September 1996, the Company also raised $365,000 from the sale of 365 shares of Series A 2% Convertible Preferred Stock, and raised an additional $2,075,000 in October 1996 through the placement of additional shares of Series A 2% Convertible Preferred Stock. The Company paid aggregate referral fees equal to approximately 5% of the capital raised from the placement of the Series A 2% Convertible Preferred Stock. The 1995 positive -50- cash flow was generated by a $29,101,901 sale of common stock, which was partially offset by an outflow of $4,776,638 from the Company's purchase of treasury stock. LITIGATION. The Company is subject to pending litigation and an investigation by the Securities & Exchange Commission. Management is not yet able to predict the impact of the pending litigation on its financial condition and results of operations. Management does not believe that the investigation by the Securities & Exchange Commission will result in a material impact on the Company's financial condition or results of operations. See "Item 3. Legal Proceedings" in the Company's Form 10-K for 1995, as updated under "Item 1. Legal Proceedings" in the Company's Form 10-Q for the fiscal quarter ending September 30, 1996. YEAR ENDED DECEMBER 31, 1995. 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 may require the Company to raise additional capital from outside sources in the future. The Company had net working capital of $1,440,515 at December 31, 1995, compared to net working capital of $8,798,793 at December 31, 1994. During 1995, net cash flow from operations was $1,378,839 compared to net cash flow from operations of $3,083,887 in 1994. During 1995, the Company's allowance for doubtful accounts increased to 20.6% of gross accounts receivable from 15.1% in the prior year. This increased provisioning related primarily to slower collections of NTC's direct-billed and LEC-billed Dial-one products which was partially offset by improved collections of NTC's calling card business. 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. 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 was eventually expanded to $700,000. Mr. Reznick also loaned the Company an additional amount of approximately $320,000. 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. 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. Furthermore, the Company is subject to an investigation by the Securities & Exchange Commission. Management is not yet able to predict the impact of the pending litigation on its financial condition and results of operations. Management does not believe that the investigation by the Securities & Exchange Commission will result in a material impact on the Company's financial condition or results of operations. See "Item 3. Legal Proceedings" in the Company's 1995 Form 10-K. -51- PRINCIPAL STOCKHOLDERS The following table sets forth information concerning the beneficial ownership of the Company's Common Stock as of March 17, 1997. Persons and groups named in the table represent (i) each person known by the Company to own beneficially more than 5% of the Company's Common Stock, (ii) each director of the Company or its NTC subsidiary, (iii) each executive officer of the Company or its NTC subsidiary, and (iv) all directors and executive officers of the Company and its NTC subsidiary as a group.
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENTAGE OF SHARES OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) COMMON STOCK OUTSTANDING(8) - ------------------- ----------------------- --------------------------- Melvyn Reznick 255,300(2) 1.75% 21031 Ventura Boulevard Suite 1100 Woodland Hills, CA 91364 Sam D. Schwartz 1,968,610(3) 13.5% 16032 Valley Meadow Place Encino, CA 91364 Nancy Zivitz 729,300(4) 4.99% 7234 Silverbell Drive Sarasota, Florida 34241 Albert Milstein 115,000(5) 0.79% 21031 Ventura Boulevard Suite 1100 Woodland Hills, CA 91364 Howard Silverman 35,000(6) 0.24% 21031 Ventura Boulevard Suite 1100 Woodland Hills, CA 91364 Edward R. Jacobs 0 0.0% 2801 Main Street Irvine, CA 92715 Stephen A. Caswell 20,000(7) 0.14% 21031 Ventura Boulevard Suite 1100 Woodland Hills, CA 91364 Jerry W. Ballah 0 0% 2801 Main Street Irvine, California 92715 All directors and officers as 1,144,600 7.83% a group (eight persons)
-52- - ------------------------------ (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, stock options to purchase 25,000 shares at an exercise price of $4.87 per share exercisable at any time until November 30, 2001, and stock options to purchase 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 50,000 shares at an exercise price of $4.37 per share, which do not vest until later dates in 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 85,000 shares owned by Nancy Zivitz, a member of the Company's Board of Directors, 50,000 of which have an exercise price of $4.37 per share and 35,000 of which have an exercise price of $4.25 per share. The stock options are exercisable as follows: 25,000 at any time until February 28, 2001, 25,000 at any time until January 1, 2002, and 35,000 at any time until January 22, 2002. (5) Includes stock options to purchase 25,000 shares at an exercise price of $4.37 per share exercisable at any time until April 5, 2001, stock options to purchase 25,000 at an exercise price of $4.37 per share exercisable at any time until January 1, 2002, and stock options to purchase 35,000 shares at an exercise price of $4.25 per share exercisable at any time January 22, 2002. (6) Reflects 35,000 stock options to purchase 35,000 shares of the Company's Common Stock at an exercise price of $4.25 per share, exercisable at any time until January 22, 2002. (7) Does not include stock options to purchase 50,000 shares at an exercise price of $4.37 per share, which do not vest until RCI achieves certain financial performance goals, and stock options to purchase 40,000 shares at an exercise price of $4.25 per share, exercisable at any time until January 22, 2002, which are pledged to the Company as additional collateral for a nonrecourse loan previously made to Mr. Caswell. See "THE COMPANY - Grant of Stock Options by the Company." (8) Assumes 14,625,593 shares outstanding, including 1,150,000 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 -53- 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. 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 March 17, 1997, there were 13,475,593 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 March 17, 1997, 2,440 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, -54- 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." 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, 935,000 of which have been granted (635,000 of which are vested and 300,000 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. See also "THE COMPANY - Grant of Stock Options by the Company." 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 -55- 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. 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. The Company has a policy of providing indemnification for its executive officers, directors and members of its Committees, within the scope of the California Corporations Code. 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. -56- 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. TRANSFER AGENT The Transfer Agent and Registrar for the capital stock of the Company is American Stock Transfer Company. SELLING SECURITY HOLDERS THE WARRANTHOLDERS. The selling security holders include the individuals and entities listed on the table below who purchased 360,000 Warrants for a price of $.10 per Warrant in connection with a settlement agreement entered into with the Company on December 9, 1996. See "THE COMPANY - Settlement with RCI Parties." The selling security holders also include Charles Stevens and his legal counsel, who were issued a total of 12,500 Warrants in connection with the settlement of the lawsuit known as CHARLES STEVENS V. INCOMNET, INC. AND SAM D. SCHWARTZ. See "THE COMPANY - Settlement of the Stevens Lawsuit." They are also listed on the following table: -57-
NUMBER OF NUMBER OF UNDERLYING NAME OF WARRANTHOLDER WARRANTS SHARES EXERCISE PRICE EXERCISE PERIOD Dr. Robert Cohen(1) 100,000 100,000 $3.75 12/9/96 - 12/9/99 Dr. Alan Cohen(3) 100,000 100,000 $3.75 12/9/96 - 12/9/99 Jeff Cohen(3) 50,000 50,000 $3.75 12/9/96 - 12/9/99 Jeff Rubin(2) 10,000 10,000 $3.75 12/9/96 - 12/9/99 Lenore Katz 10,000 10,000 $3.75 12/9/96 - 12/9/99 Allyson Cohen(4) 50,000 50,000 $3.75 12/9/96 - 12/9/99 Broadway Partners(5) 40,000 40,000 $3.75 12/9/96 - 12/9/99 Charles Stevens 9,375 9,375 $2.94 12/17/96 - 12/17/01 Peter Dion-Kindem(7) 3,125 3,125 $2.94 12/17/96 - 12/17/01
- ------------------------------ (1) Dr. Robert Cohen is a director of Rapid Cast, Inc., a subsidiary of the Company. (2) Jeff Rubin is a director and Executive Vice President of Rapid Cast, Inc., a subsidiary of the Company. (3) Dr. Alan Cohen and Dr. Robert Cohen are brothers. (4) Jeff Cohen is the son-in-law of Dr. Robert Cohen. (5) Allyson Cohen is Dr. Robert Cohen's daughter. (6) Broadway Partners is a partnership composed of the children of Drs. Robert and Alan Cohen. (7) Mr. Dion-Kindem is legal counsel to Charles Stevens. These Underlying Shares are therefore being offered for resale by the Warrantholders if and when they exercise their Warrants and not pursuant to an initial issuance of stock by the Company. THE SERIES A PREFERRED HOLDERS. The selling security holders include five individuals and four entities which purchased a total of 2,075 shares of Series A Preferred in October 1996. The following table sets forth the name of each Series A Preferred holder, the number of shares of Series A Preferred owned by the holder, the amount of their investment, and the number of shares of the Company's Common Stock into which the Series A Preferred is convertible assuming that the average bid price of the Company's Common Stock for the five trading days immediately preceding the conversion date for each holder is at least 20% higher than the bid price on the date of the issuance of the Series A Preferred (i.e., the highest possible conversion price resulting in the minimum number of shares of Common Stock issuable upon the conversion of the Series A Preferred). If the average bid price prior to the conversion date is less than that amount, then more shares of the Company's Common Stock would be issued upon the conversion of the Series A Preferred, causing more dilution to the Company's Common Stockholders. See "RISK FACTORS - General Risks - Possible Adverse Effects of Issuance of Preferred Stock." -58-
Minimum Number of Number of Shares of Common Name of Series A Series A Preferred Amount of Stock Issuable Preferred Holder Shares Investment Upon Conversion - ----------------------------------------------------------------------------------------- David and Susan Wilstein 100 $ 100,000 25,000 Charles Shapiro 25 25,000 5,882 Buchanan Partners 500 500,000 112,676 Buchanan Fund Ltd. 500 500,000 112,676 Wood Gundy 500 500,000 105,263 Dr. Robert Cohen(1) 125 125,000 30,303 Lenore Katz 25 25,000 6,060 Leonard Wilstein 100 100,000 23,175 Faisal Financial 200 200,000 46,350 ---------- ---------- ---------- TOTAL 2,075 $2,075,000 467,385 ---------- ---------- ---------- ---------- ---------- ----------
- ------------------------------ (1) Robert Cohen is a director of Rapid Cast, Inc., a subsidiary of the Company. THE OUTSTANDING SHAREHOLDERS. The selling shareholders include three investors who purchased 365 shares of Series A Preferred Stock in September 1996 and converted them into a total of 150,826 shares of Common Stock on December 31, 1996, 140,000 of which were registered with the Securities and Exchange Commission on October 31, 1996, and the balance of which are covered by this Prospectus. The selling shareholders also include two investors who purchased 30,000 shares of the Company's Common Stock for $3.03 per share in January 1997 in connection with the settlement agreement made between the Company and certain affiliates of Rapid Cast, Inc. See "THE COMPANY - Settlement with RCI Parties." The following table lists the selling security holders who are Outstanding Shareholders and the number of Outstanding Shares owned by them. -59- NAME OF OUTSTANDING SHAREHOLDER NUMBER OF SHARES ------------------------------- ---------------- Stefanie Rubin(1) 9,157 Dr. Robert Cohen(2) 25,000 Jack Gilbert(3) 8,927 Mark Richardson(4) 742 - ------------------------------ (1) Stefanie Rubin is the wife of Jeff Rubin who is an officer and director of RCI. Ms. Rubin purchased 40 shares of Series A Preferred and converted them into 16,529 shares of the Company's Common Stock, 1,157 of which are covered by this Prospectus. Stefanie also purchased 8,000 shares of the Company's Common Stock in January 1997 in a private placement for $3.03 per share. See "THE COMPANY - Settlement with RCI Parties." (2) Dr. Robert Cohen is a director of RCI. These shares were purchased from the Company for a price of $3.03 per share in a private placement in January 1997. See "THE COMPANY - Settlement with RCI Parties." (3) Jack Gilbert purchased 300 shares of Series A Preferred and converted them into 123,967 shares of the Company's Common Stock, 8,927 of which are covered by this Prospectus. (4) Mark Richardson purchased 25 shares of Series A Preferred Stock and converted them into 10,331 shares of the Company's Common Stock, 742 of which are covered by this Prospectus. Mr. Richardson is corporate counsel to the Company. See "LEGAL MATTERS." SHARES ELIGIBLE FOR FUTURE SALE As of March 17, 1997, 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." -60- LEGAL MATTERS The validity of the issuance of the shares of Common Stock covered by this Prospectus will be passed upon for the Company by Mark J. Richardson, Esq., counsel to the Company, 1299 Ocean Avenue, Suite 900, Santa Monica, California, 90401. In consideration for certain legal services, the Company has issued to Mr. Richardson options to purchase 50,000 shares of the Company's Common Stock, 30,000 of which are exercisable at a purchase price of $4.37 per share, and 20,000 of which are exercisable at a purchase price of $4.25 per share. The stock options are exercisable as follows: 15,000 at any time until April 5, 2001, 15,000 at any time until January 1, 2002, and 20,000 at any time until January 22, 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. -61- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-SENTATIONS 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 9 THE COMPANY 21 USE OF PROCEEDS 38 PRICE RANGE OF COMMON STOCK AND DIVIDENDS 38 CAPITALIZATION 40 SELECTED CONSOLIDATED FINANCIAL INFORMATION 41 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 43 PRINCIPAL STOCKHOLDERS 52 DESCRIPTION OF CAPITAL STOCK 54 SELLING SECURITY HOLDERS 58 SHARES ELIGIBLE FOR FUTURE SALE 60 LEGAL MATTERS 61 EXPERTS 61 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1,822,500 SHARES INCOMNET, INC. COMMON STOCK --------------- PROSPECTUS MARCH 19, 1997 --------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- -62- 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 $ 1,884.79 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 $ 51,884.79 ----------- ----------- ---------- 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. (M) 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) 4.7 Form of Warrant to Purchase 360,000 Shares of Incomnet, Inc. 4.8 Form of Warrant to Purchase 12,500 Shares of Incomnet, Inc. II-1 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 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) II-2 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.(K)(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.(K) 10.26 Form of Purchase Agreement for the Series A 2% Convertible Preferred Stock.(K) 10.27 Management Incentive Agreement With NTC, dated October 14, 1996.(M) 10.28 Settlement Agreements With Edward Jacobs and Jerry Ballah, dated November 14, 1996.(M) 10.29 Shareholders Agreement for Rapid Cast, Inc., dated January 16, 1997. 10.30 Registration Rights Agreement for Rapid Cast, Inc., dated January 16, 1997. 10.31 Amended and Restated Management Incentive Agreement Between NTC and Incomnet, Inc., dated January 28, 1997. 10.32 Employment Agreement Between NTC and James R. Quandt, dated January 6, 1997. 10.33 Settlement Agreement and Mutual Release Between Incomnet, Inc. and the RCI Parties, dated December 9, 1996. 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.(K) 13.3 The Quarterly Report on Form 10-Q for the fiscal quarter ending June 30, 1996 for Incomnet, Inc.(K) 13.4 The definitive Proxy Statement for the 1996 Annual Meeting of Incomnet's Shareholders, dated July 29, 1996.(K) 13.5 The Quarterly Report on Form 10-Q for the fiscal quarter ending September 30, 1996 for Incomnet, Inc. (L) 13.6 The Annual Report on Form 10-KA for the fiscal year ending December 31, 1995 for Incomnet, Inc. 13.7 The Quarterly Report on Form 10-QA for the fiscal quarter ending September 30, 1996 for Incomnet, Inc. II-3 16. Letter re Change in Certifying Accountant. (B) 21. Subsidiaries of the Registrant. (A) 23.1 Consent of Stonefield Josephson, independent Certified Public Accountants, relating to the financial statements. 23.2 Consent of Mark J. Richardson, Esq. is included in his opinion. 24. Power of Attorney is included on the signature page of this Registration Statement. - ------------------------- (1) Certain information has been deleted from this agreement pursuant to a request for confidential treatment under Rule 406. (A) Incorporated by reference from Incomnet, Inc.'s Annual Report on Form 10- K for the year ending December 31, 1994. (B) Incorporated by reference from Incomnet Inc.'s Registration Statement on Form S-4 filed with the Securities and Exchange Commission on May 12, 1994, and declared effective on October 27, 1994. (C) Incorporated by reference from the Registration Statement on Form S-3 filed with the Securities and Exchange Commission on June 17, 1994 and declared effective on October 27, 1994. (D) Incorporated by reference from Incomnet's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on December 12, 1994 and declared effective on December 22, 1994. (E) Incorporated by reference from Incomnet's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on January 5, 1995 and declared effective on January 9, 1995. (F) Incorporated by reference from the Company's Report on Form 8-K, dated February 8, 1995, relating to the Company's acquisition of a controlling interest in RCI. (G) Incorporated by reference from the Company's Report on Form 8-K dated November 30, 1995, relating to the resignation of Sam D. Schwartz and employment of Melvyn Reznick. (H) Incorporated by reference from the Company's Report on Form 8-K, dated February 9, 1996, relating to the management incentive agreement between Incomnet and NTC. (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. II-4 (K) Incorporated by reference from Incomnet's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on May 10, 1996 and declared effective on October 31, 1996, or incorporated by reference from the Company's filings with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. (L) Incorporated by reference from the filing of the Form 10-Q for the fiscal quarter ending September 30, 1996, as filed with the Securities and Exchange Commission on November 14, 1996. (M) Incorporated by reference from the original filing of this Registration Statement on Form S-3 filed with the Securities and Exchange Commission on November 22, 1996. ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the provision described in Item 15 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. RULE 430A UNDERTAKINGS. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of Prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act 1933 shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. RULE 415 UNDERTAKINGS. The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) 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-5 (iii) 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 19th day of March, 1997. INCOMNET, INC. Registrant By:/s/ Melvyn Reznick ---------------------------------------- Melvyn Reznick, President and Chief Executive Officer II-6 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 19th day of March, 1997, 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 Accounting Officer) Stephen A. Caswell /s/ Albert Milstein Director - ------------------------------ Albert Milstein /s/ Nancy Zivitz Director - ------------------------------ Nancy Zivitz /s/ Howard Silverman Director - ------------------------------ Howard Silverman II-7 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. (M) 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) 4.7 Form of Warrant to Purchase 360,000 Shares of Incomnet, Inc. 4.8 Form of Warrant to Purchase 12,500 Shares of Incomnet, Inc. 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.(K)(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.(K) 10.26 Form of Purchase Agreement for the Series A 2% Convertible Preferred Stock.(K) 10.27 Management Incentive Agreement With NTC, dated October 14, 1996.(M) 10.28 Settlement Agreements With Edward Jacobs and Jerry Ballah, dated November 14, 1996.(M) 10.29 Shareholders Agreement for Rapid Cast, Inc., dated January 16, 1997. 10.30 Registration Rights Agreement for Rapid Cast, Inc., dated January 16, 1997. 10.31 Amended and Restated Management Incentive Agreement Between NTC and Incomnet, Inc., dated January 28, 1997. II-2 10.32 Employment Agreement Between NTC and James R. Quandt, dated January 6, 1997. 10.33 Settlement Agreement and Mutual Release Between Incomnet, Inc. and the RCI Parties, dated December 9, 1996. 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.(K) 13.3 The Quarterly Report on Form 10-Q for the fiscal quarter ending June 30, 1996 for Incomnet, Inc.(K) 13.4 The definitive Proxy Statement for the 1996 Annual Meeting of Incomnet's Shareholders, dated July 29, 1996.(K) 13.5 The Quarterly Report on Form 10-Q for the fiscal quarter ending September 30, 1996 for Incomnet, Inc. (L) 13.6 The Annual Report on Form 10-KA for the fiscal year ending December 31, 1995 for Incomnet, Inc. 13.7 The Quarterly Report on Form 10-QA for the fiscal quarter ending September 30, 1996 for Incomnet, Inc. 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. (K) Incorporated by reference from Incomnet's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on May 10, 1996 and declared effective on October 31, 1996, or incorporated by reference from the Company's filings with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. (L) Incorporated by reference from the filing of the Form 10-Q for the fiscal quarter ending September 30, 1996, as filed with the Securities and Exchange Commission on November 14, 1996. (M) Incorporated by reference from the original filing of this Registration Statement on Form S-3 filed with the Securities and Exchange Commission on November 22, 1996. EX-4.7 2 EXHIBIT 4.7 THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND HAVE BEEN TAKEN FOR INVESTMENT PURPOSES ONLY AND NOT WITH A VIEW TO THE DISTRIBUTION THEREOF, AND SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT OR REGULATION. TRANSFER OF THIS WARRANT IS RESTRICTED Warrant to Purchase ______ Shares WARRANT OF INCOMNET, INC. December 9, 1996 Void After December 9, 1999 This certifies that, for value received ____________________ ("Holder"), or registered assigns, is entitled, subject to the terms set forth below, at any time until December 9, 1999, to purchase from Incomnet, Inc. (the "Company"), a California corporation, _____ shares of Common Stock of the Company, at a price per share of $3.75, (the "Purchase Price"), subject to adjustment. 1. EXERCISE (a) The Warrant may be exercised in whole or in part, at any time or from time to time until December 9, 1999 upon surrender to the Company at its principal office, or at such other office or agency as the Company may designate, together with the form of subscription attached hereto, duly executed by the holder and accompanied by payment in cash or check, in lawful money of the United States in an amount equal to the product of the Purchase Price and the number of shares to be acquired on such exercise. Upon any partial exercise, the Company shall promptly issue and deliver to the holder hereof a new Warrant or Warrants of like tenor and dated the date hereof, in the name of the such holder and providing for the right to purchase the number of shares with respect to which this Warrant has not been exercised. (b) Upon the exercise of this Warrant, in whole or in part, the holder shall be entitled to receive a certificate or certificates for the number of fully paid and nonassessable shares of the Common Stock of the Company purchasable upon such exercise. If a fraction of a share would be issuable on any exercise of this Warrant, in lieu of the issuance of such fractional share, the Company will pay the cash value of that fractional share, as determined in good faith by its Board of Directors. -1- (c) The Company will at all time reserve and keep available, solely for issuance on exercise of the Warrant, all shares of Common Stock issuable on such exercise. (d) The Company will pay all taxes and other governmental charges that may be imposed in respect of the issue or delivery of shares of Common Stock on exercise of this Warrant. The Company shall not be required, however, to pay any tax or other charge imposed in connection with any transfer involved in the issue of any certificate for shares of Common Stock in any name other than that of the registered holder of the Warrant surrendered in connection with the purchase of such shares, and in such case the Company shall not be required to issue or deliver any stock certificate until such tax or other charge has been paid or it has been established to the Company's satisfaction that no tax or other charge is due. 2. RIGHTS OF HOLDERS No holder of the Warrant, by virtue of the ownership of this Warrant, shall be considered a shareholder of the Company for any purpose, nor shall anything in this Warrant be construed to confer on any holder of this Warrant any rights of a shareholder of the Company, including, without limitation, any right to vote, give or withhold consent to any corporation action, receive notice of meetings of shareholders or receive dividends. 3. ADJUSTMENTS IN THE PURCHASE PRICE AND NUMBER OF SHARES (a) In case the outstanding shares of Common Stock of the Company shall be subdivided into a greater number of shares of Common Stock or dividend in stock shall be paid on the Common Stock, the Purchase Price in effect immediately prior to such subdivision or at the record date of such dividend shall, simultaneously with the effectiveness of such subdivision or immediately after the record date of such dividend, be proportionately reduced and, conversely, in case the outstanding shares of Common Stock shall be combined into a small number of shares of Common Stock, the Purchase Price in effect immediately prior to such combination shall, simultaneously with the effectiveness of such combination, be proportionately increased. (b) No adjustment of the Purchase Price shall be made if the amount of such adjustment shall be less than five cents per share, but in such case any adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment of the Purchase Price which, together with any adjustment so carried forward, shall amount to five cents per share or more. (c) When any adjustment is required to be made in the Purchase Price, the number of shares of Common Stock purchasable upon exercise of the Warrant shall be changed to the number determined by dividing (i) an amount equal to the number of shares issuable pursuant to exercise of the Warrant immediately prior to such adjustment, multiplied by the Purchase Price in effect immediately prior to such adjustment, by (ii) the Purchase Price in effect immediately after such adjustment. -2- (d) In the event of the merger or consolidation of the Company where the Company is not the surviving corporation or becomes a wholly-owned subsidiary, the Company will have the right to call and cancel the Warrant upon 30 days prior written notice to the Holder. The Holder will have the right to exercise the Warrant during such period. In case of any other change in the Common Stock of the Company through merger, consolidation, reclassification, reorganization, recapitalization, or other change in the capital structure of the Company or in the case of a sale of all or substantially all of the property of the Company, appropriate adjustment shall be made so that the holder of the Warrant shall have the right thereafter to receive upon exercise of the Warrant the kind and amount of shares of stock or other securities or property to which he would have been entitled if, immediately prior to such merger, consolidation, reclassification, reorganization, recapitalization, or other change in the capital structure of the Company or in the case of a sale of all or substantially all of the property of the Company, he had held the number of shares of Common Stock which were then purchasable upon the exercise of this Warrant. In any such case, appropriate adjustment shall be made in the application of the provisions set forth herein with respect to the rights and interests thereafter of the holder of this Warrant, to the end that the provisions set forth herein (including provisions with respect to adjustments of the Purchase Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the exercise of this Warrant. (e) When any adjustment is required to be made in the Purchase Price, the Company shall forthwith determine the new Purchase Price and (i) prepare and retain on file a statement describing in reasonable detail the method used in arriving at the new Purchase Price; and (ii) cause a copy of such statement to be mailed to the registered owner or owners of the Warrants, as of the date within ten (10) days after the date when the circumstances giving rise to the adjustment occurred. 4. TRANSFER AND EXCHANGE (a) This Warrant and all rights hereunder may be transferred, subject to compliance with the legend set forth on page one of this Warrant, in whole or in part, by surrender of this Warrant properly endorsed to the Company at its principal office, or at such other office or agency as the Company may designate, and upon payment of any necessary transfer taxes. Upon any partial transfer, the Company will issue and deliver to the holder hereof a new Warrant and Warrants with respect to the shares of Common Stock not so transferred. (b) Until this Warrant is transferred on the books of the Company, the Company may treat the registered holder of this Warrant as the absolute owner for all purposes, notwithstanding any notice to the contrary. (c) This Warrant is exchangeable at such office or agency for Warrants for the same aggregate number of shares of Common Stock, each new Warrant to represent the right to purchase such number of shares as the holder hereof shall designate at the time of such exchange. -3- 5. NOTICES (a) All notices and other communications from the Company to the holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, to the address furnished to the Company in writing by the last holder of this Warrant who shall have furnished an address to the Company in writing. 6. HEADINGS The headings in this Warrant are for purposes of convenience in reference only, and shall not be deemed to constitute a part hereof. 7. GOVERNING LAW This Warrant shall be governed by, and construed and enforced in accordance with, the laws of the State of California applicable to contracts made and to be performed wholly within that state. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its authorized officer as of the date first set forth above. INCOMNET, INC. By: By: -------------------------------- -------------------------------- Name: Melvyn Reznick Name: Stephen A. Caswell Title: Chairman Title: Secretary -4- SUBSCRIPTION FORM TO: INCOMNET INC. The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise the purchase rights represented by said Warrant for, and to purchase under said Warrant, _________________ shares of Common Stock of Incomnet, Inc., and herewith make payment therefor, all at the price and on the terms and conditions specified in the within Warrant. DATED: By: ------------------------ ------------------------------- -5- EX-4.8 3 EXHIBIT 4.8 EXHIBIT 4.8 THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND HAVE BEEN TAKEN FOR INVESTMENT PURPOSES ONLY AND NOT WITH A VIEW TO THE DISTRIBUTION THEREOF, AND SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT OR REGULATION. TRANSFER OF THIS WARRANT IS RESTRICTED Warrant to Purchase _____ Shares WARRANT OF INCOMNET, INC. December 17, 1996 Void After December 17, 2001 This certifies that, for value received ___________________ ("Holder"), or registered assigns, is entitled, subject to the terms set forth below, at any time until December 17, 2001, to purchase from Incomnet, Inc. (the "Company") a California corporation, _____ shares of Common Stock of the Company, at a price per share of $2.94, (the "Purchase Price"), subject to adjustment. 1. EXERCISE (a) The Warrant may be exercised in whole or in part, at any time or from time to time until December 17, 2001 upon surrender to the Company at its principal office, or at such other office or agency as the Company may designate, together with the form of subscription attached hereto, duly executed by the holder and accompanied by payment in cash or check, in lawful money of the United States in an amount equal to the product of the Purchase Price and the number of shares to be acquired on such exercise. Upon any partial exercise, the Company shall promptly issue and deliver to the holder hereof a new Warrant or Warrants of like tenor and dated the date hereof, in the name of the such holder and providing for the right to purchase the number of shares with respect to which this Warrant has not been exercised. (b) Upon the exercise of this Warrant, in whole or in part, the holder shall be entitled to receive a certificate or certificates for the number of fully paid and nonassessable shares of the Common Stock of the Company purchasable upon such exercise. If a fraction of a share would be issuable on any exercise of this Warrant, in lieu of the issuance of such fractional share, the Company will pay the cash value of that fractional share, as determined in good faith by its Board of Directors. -1- -2- (c) The Company will at all time reserve and keep available, solely for issuance on exercise of the Warrant, all shares of Common Stock issuable on such exercise. (d) The Company will pay all taxes and other governmental charges that may be imposed in respect of the issue or delivery of shares of Common Stock on exercise of this Warrant. The Company shall not be required, however, to pay any tax or other charge imposed in connection with any transfer involved in the issue of any certificate for shares of Common Stock in any name other than that of the registered holder of the Warrant surrendered in connection with the purchase of such shares, and in such case the Company shall not be required to issue or deliver any stock certificate until such tax or other charge has been paid or it has been established to the Company's satisfaction that no tax or other charge is due. 2. RIGHTS OF HOLDERS No holder of the Warrant, by virtue of the ownership of this Warrant, shall be considered a shareholder of the Company for any purpose, nor shall anything in this Warrant be construed to confer on any holder of this Warrant any rights of a shareholder of the Company, including, without limitation, any right to vote, give or withhold consent to any corporation action, receive notice of meetings of shareholders or receive dividends. 3. ADJUSTMENTS IN THE PURCHASE PRICE AND NUMBER OF SHARES (a) In case the outstanding shares of Common Stock of the Company shall be subdivided into a greater number of shares of Common Stock or dividend in stock shall be paid on the Common Stock, the Purchase Price in effect immediately prior to such subdivision or at the record date of such dividend shall, simultaneously with the effectiveness of such subdivision or immediately after the record date of such dividend, be proportionately reduced and, conversely, in case the outstanding shares of Common Stock shall be combined into a small number of shares of Common Stock, the Purchase Price in effect immediately prior to such combination shall, simultaneously with the effectiveness of such combination, be proportionately increased. (b) No adjustment of the Purchase Price shall be made if the amount of such adjustment shall be less than five cents per share, but in such case any adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment of the Purchase Price which, together with any adjustment so carried forward, shall amount to five cents per share or more. (c) When any adjustment is required to be made in the Purchase Price, the number of shares of Common Stock purchasable upon exercise of the Warrant shall be changed to the number determined by dividing (i) an amount equal to the number of shares issuable pursuant to exercise of the Warrant immediately prior to such adjustment, multiplied by the Purchase Price in effect immediately prior to such adjustment, by (ii) the Purchase Price in effect immediately after such adjustment. -3- (d) In the event of the merger or consolidation of the Company where the Company is not the surviving corporation or becomes a wholly-owned subsidiary, the Company will have the right to call and cancel the Warrant upon 30 days prior written notice to the Holder. The Holder will have the right to exercise the Warrant during such period. In case of any other change in the Common Stock of the Company through merger, consolidation, reclassification, reorganization, recapitalization, or other change in the capital structure of the Company or in the case of a sale of all or substantially all of the property of the Company, appropriate adjustment shall be made so that the holder of the Warrant shall have the right thereafter to receive upon exercise of the Warrant the kind and amount of shares of stock or other securities or property to which he would have been entitled if, immediately prior to such merger, consolidation, reclassification, reorganization, recapitalization, or other change in the capital structure of the Company or in the case of a sale of all or substantially all of the property of the Company, he had held the number of shares of Common Stock which were then purchasable upon the exercise of this Warrant. In any such case, appropriate adjustment shall be made in the application of the provisions set forth herein with respect to the rights and interests thereafter of the holder of this Warrant, to the end that the provisions set forth herein (including provisions with respect to adjustments of the Purchase Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the exercise of this Warrant. (e) When any adjustment is required to be made in the Purchase Price, the Company shall forthwith determine the new Purchase Price and (i) prepare and retain on file a statement describing in reasonable detail the method used in arriving at the new Purchase Price; and (ii) cause a copy of such statement to be mailed to the registered owner or owners of the Warrants, as of the date within ten (10) days after the date when the circumstances giving rise to the adjustment occurred. 4. TRANSFER AND EXCHANGE (a) This Warrant and all rights hereunder may be transferred, subject to compliance with the legend set forth on page one of this Warrant, in whole or in part, by surrender of this Warrant properly endorsed to the Company at its principal office, or at such other office or agency as the Company may designate, and upon payment of any necessary transfer taxes. Upon any partial transfer, the Company will issue and deliver to the holder hereof a new Warrant and Warrants with respect to the shares of Common Stock not so transferred. (b) Until this Warrant is transferred on the books of the Company, the Company may treat the registered holder of this Warrant as the absolute owner for all purposes, notwithstanding any notice to the contrary. (c) This Warrant is exchangeable at such office or agency for Warrants for the same aggregate number of shares of Common Stock, each new Warrant to represent the right to purchase such number of shares as the holder hereof shall designate at the time of such exchange. 5. NOTICES -4- (a) All notices and other communications from the Company to the holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, to the address furnished to the Company in writing by the last holder of this Warrant who shall have furnished an address to the Company in writing. 6. HEADINGS The headings in this Warrant are for purposes of convenience in reference only, and shall not be deemed to constitute a part hereof. 7. GOVERNING LAW This Warrant shall be governed by, and construed and enforced in accordance with, the laws of the State of California applicable to contracts made and to be performed wholly within that state. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its authorized officer as of the date first set forth above. INCOMNET, INC. By: By: -------------------------------- -------------------------------- Name: Melvyn Reznick Name: Stephen A. Caswell Title: Chairman Title: Secretary -5- SUBSCRIPTION FORM TO: INCOMNET INC. The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise the purchase rights represented by said Warrant for, and to purchase under said Warrant, _________________ shares of Common Stock of Incomnet, Inc., and herewith make payment therefor, all at the price and on the terms and conditions specified in the within Warrant. DATED: By: ------------------------ ------------------------------- -6- EX-5.1 4 EXHIBIT 5.1 EXHIBIT 5.1 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 March ____, 1997 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. 333-16629 under the Securities Act of 1933, as amended ("Registration Statement"), of a total of 1,822,500 shares of the Common Stock of Incomnet, Inc., no par value, comprised of (i) 372,500 shares (the "Underlying Shares") issuable upon the exercise of 372,500 warrants (the "Warrants") to purchase Common Stock at an exercise price of $3.75 per share at any time until December 9, 1999, with respect to 360,000 of the Warrants, and at an exercise price of $2.94 per share at any time until December 16, 2001, with respect to 12,500 of the Warrants, (ii) 43,826 outstanding shares (the "Outstanding Shares") issued upon the conversion of Series A 2% Convertible Preferred Stock previously issued by the Company, or new stock issued in a private placement pursuant to Section 4(2) of the Securities Act of 1933, as amended (the "Act"), (iii) a minimum of 467,385 shares (also referred to herein as the "Underlying Shares") issuable upon the conversion of 2,075 outstanding Series A 2% Convertible Preferred Stock, and (iv) up to 456,174 unissued shares (the "Shares") which may be issued in the future pursuant to the conversion of Series A 2% Convertible Preferred Stock or in open market sales under Rule 415 of the Act 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 March 19, 1997 (the "Prospectus"). In connection with our acting as counsel, we have examined the laws of the State of California together with the forms of Warrants attached as Exhibits 4.7 and 4.8 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 conversion of Series A 2% Convertible Preferred Stock, 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 relating to the Series A 2% Convertible Preferred Stock, the Purchase Agreement for the Series A 2% Convertible Preferred Stock, 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-10.29 5 EXHIBIT 10.29 RAPID CAST, INC. ---------------- SHAREHOLDERS AGREEMENT ---------------------- JANUARY 15, 1997 TABLE OF CONTENTS Section Page - ------- ---- Prefatory Language . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2. Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.1 Board of Directors. . . . . . . . . . . . . . . . . . . . . . 11 2.2 Committees of the Board of Directors. . . . . . . . . . . . . 20 2.3 Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 2.4 Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . 24 2.5 No Proxies. . . . . . . . . . . . . . . . . . . . . . . . . . 24 2.6 Voting by the JPM Investors and Clipper Investors . . . . . . 25 2.7 Director Expenses . . . . . . . . . . . . . . . . . . . . . . 26 2.8 Further Assurances. . . . . . . . . . . . . . . . . . . . . . 26 2.9 Termination of Voting Provisions. . . . . . . . . . . . . . . 27 2.10 Schedule 13D. . . . . . . . . . . . . . . . . . . . . . . . . 28 2.11 Indemnification . . . . . . . . . . . . . . . . . . . . . . . 28 3. Restrictions on Transfer of Shares of the Company. . . . . . . . . 29 3.1 Transfer Restricted . . . . . . . . . . . . . . . . . . . . . 29 3.2 Certain Permitted Transfers . . . . . . . . . . . . . . . . . 31 3.3 First Offer Rights. . . . . . . . . . . . . . . . . . . . . . 33 3.4 Right to Join in Sale . . . . . . . . . . . . . . . . . . . . 43 3.5 Control Block . . . . . . . . . . . . . . . . . . . . . . . . 46 4. Preemptive Rights. . . . . . . . . . . . . . . . . . . . . . . . . 47 4.1 "Pro Rata Share". . . . . . . . . . . . . . . . . . . . . . . 47 4.2 "New Securities". . . . . . . . . . . . . . . . . . . . . . . 48 4.3 Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . 49 4.4 Nonvoting Securities. . . . . . . . . . . . . . . . . . . . . 50 4.5 Failure to Exercise Preemptive Rights . . . . . . . . . . . . 50 4.6 Termination of Preemptive Rights. . . . . . . . . . . . . . . 50 5. Representations and Warranties . . . . . . . . . . . . . . . . . . 51 6. Termination of Existing Voting Agreements. . . . . . . . . . . . . 52 7. Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . . 53 8. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . 54 8.1 Injunctive Relief . . . . . . . . . . . . . . . . . . . . . . 54 8.2 Further Assurances. . . . . . . . . . . . . . . . . . . . . . 55 8.3 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . 55 8.4 Entire Agreement; Amendment; Waiver . . . . . . . . . . . . . 55 8.5 Binding Effect. . . . . . . . . . . . . . . . . . . . . . . . 56 8.6 Invalidity of Provision . . . . . . . . . . . . . . . . . . . 56 8.7 Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 8.8 Headings; Execution in Counterparts . . . . . . . . . . . . . 57 8.9 Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . 57 8.10 Additional Investors. . . . . . . . . . . . . . . . . . . . . 58 i SHAREHOLDERS AGREEMENT SHAREHOLDERS AGREEMENT, dated as of January 15, 1997, by and among Rapid Cast, Inc., a Delaware corporation (the "Company"), J.P. Morgan Investment Corporation, a Delaware corporation ("JPMIC"), Sixty Wall Street SBIC Fund, L.P., a Delaware limited partnership ("Sixty Wall" and, together with JPMIC, the "JPM Investors"), those persons listed on the signature pages hereto under the caption "Clipper Investors" (collectively, the "Clipper Investors"), those other persons (if any) listed on the signature pages hereto under the caption "Other Investors" (the "Other Investors" and, together with the JPM Investors and the Clipper Investors, the "Investors"), and those other persons listed on the signature pages hereto under the caption "Existing Stockholders" (collectively, the "Existing Stockholders" and, together with the Investors, the "Stockholders"). W I T N E S S E T H : WHEREAS, concurrently with the execution and delivery of this Agreement, the Company is issuing and selling to the Investors, and the Investors are purchasing from the Company (it being acknowledged and agreed that it is JPMIC's intention to subsequently allocate and assign a portion of its securities to Sixty Wall upon such terms and conditions as they may hereafter agree), (i) 7,275,000 shares of Series A Convertible Preferred Stock, par value $0.001 per share, of the Company (the "Series A Stock"), (ii) 725,000 shares of Series B Nonvoting Convertible Preferred Stock, par value $0.001 per share, of the Company (the "Series B Stock") and (iii) 1,400,000 warrants (expiring five years from the date of issuance) which entitle the holder thereof to purchase shares of (x) common stock, par value $0.001 per share, of the Company (the "Common Stock") or (y) nonvoting common stock, par value $0.001 per share, of the Company (the "Non-Voting Common Stock"), at an initial exercise price of $1.74 per share (collectively, the "Warrants"), in each case, upon the terms and conditions set forth in that certain Series A Convertible Preferred Stock and Warrants Purchase Agreement, dated of even date herewith (the "Purchase Agreement"), by and among the Company, the Investors and, solely to the extent therein indicated, Dr. Larry Joel and Incomnet, Inc., a Delaware corporation ("Incomnet"); and WHEREAS, it is a condition precedent to the obligations of the Investors under the Purchase Agreement that the Company, the Existing Stockholders and the Investors enter into this Shareholders Agreement; and WHEREAS, the Company, the Existing Stockholders and the Investors desire to enter into this Shareholders Agreement for the purpose of regulating certain aspects of the relationship of the Existing Stockholders and the Investors as stockholders of the Company, and concurrently to terminate certain existing 2 stockholders agreements by and among the Company and the Existing Stockholders; and WHEREAS, it is in the best interests of the Company and the Stockholders that such aspects of their relationship be so regulated; NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and agreements contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: Section 1. DEFINITIONS. Unless otherwise defined in this Agreement, terms defined in the Purchase Agreement are used herein as therein defined. As used in this Agreement, the following terms shall have the following respective meanings (such meanings being equally applicable to both the singular and plural form of the terms defined). "AFFILIATE" means, with respect to any Person, any other Person that directly or indirectly through one or more intermediaries Controls, is controlled by or is under common control with such Person and, as to any Person that is an individual, such individual's spouse, parents, siblings and lineal descendants. 3 "AGREEMENT" means this Shareholders Agreement, including all amendments, modifications and supplements hereto and any exhibits or schedules to any of the foregoing, and shall refer to this Agreement as the same may be in effect at the time such reference becomes operative. "AUDIT COMMITTEE" means the Audit Committee of the Board of Directors of the Company. "BY-LAWS" means the Amended and Restated By-Laws of the Company in the form of Exhibit I to the Purchase Agreement. "CEO SEARCH COMMITTEE" means the CEO Search Committee of the Board of Directors of the Company. "CERTIFICATE OF INCORPORATION" means the Restated Certificate of Incorporation of the Company in the form of Exhibit A to the Purchase Agreement. "CHARTER DOCUMENTS" means, collectively, the Certificate of Incorporation and the By-Laws. "CLASS VOTING" means that the Certificate of Incorporation provides that the holders of the Series A Stock shall be entitled to elect four (4) directors and the holders of the Common Stock shall be entitled to elect five (5) directors. "CLIPPER RELATED INVESTORS" means, collectively, the Clipper Investors and, with respect to Common Shares or Preferred 4 Shares transferred by a Clipper Investor to a Permitted Transferee of such Clipper Investor, such Permitted Transferee(s). "COHEN RELATED SHAREHOLDERS" means, collectively, Dr. Robert Cohen ("Dr. Cohen"), those Persons identified on the signature pages hereto as Cohen Related Shareholders (such Persons, together with Dr. Cohen, are hereinafter referred to collectively as the "Cohen Shareholders"), and, with respect to Common Shares or Preferred Shares transferred by a Cohen Shareholder to a Permitted Transferee of such Cohen Shareholder, such Permitted Transferee(s). "COMMITTEES" has the meaning ascribed thereto in Section 2.2 hereof. "COMMON SHARE EQUIVALENTS" means shares of Common Stock and Non-Voting Common Stock at the time outstanding or issuable upon conversion of shares of Series A Stock, Series B Stock or Series C Stock at the time outstanding. "COMMON SHARES" means, collectively, the Common Stock and Non-Voting Common Stock. "COMPENSATION COMMITTEE" means the Compensation Committee of the Board of Directors of the Company. "CONTROL BLOCK" has the meaning ascribed thereto in Section 3.5 hereof. 5 "CONTROLS" including, with correlative meanings, the terms "controlled by" and "under common control with," means, as to any Person, 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, by contract or otherwise. "CONVERTIBLE SECURITIES" means any evidence of indebtedness, shares (other than Common Shares) or other securities convertible into or exchangeable for Common Shares. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "EXECUTIVE COMMITTEE" means the Executive Committee of the Board of Directors of the Company. "GOVERNMENTAL AUTHORITY" means any nation or government, any state or other political subdivision thereof and any Person exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "INCOMNET CHANGE OF CONTROL" means (i) Mr. Melvyn Reznick shall cease for any reason whatsoever to serve as the designee of Incomnet on the Board of Directors of the Company, (ii) any Person or "group" (within the meaning of Rules 13(d)-3 and 13(d)-5 under the Securities Exchange Act of 1934 as in effect on the date hereof) shall (A) have acquired beneficial 6 ownership of 20% or more on a fully diluted basis of the voting and/or economic interest in Incomnet's capital stock or (B) obtained the power (whether or not exercised) to elect a majority of Incomnet's directors or (iii) during any period of twelve consecutive months, individuals who at the beginning of such period constituted the Board of Directors of Incomnet (together with any new directors whose election by such Board or whose nomination for election by the stockholders of Incomnet was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved), cease for any reason to constitute a majority of the Board of Directors of Incomnet then in office. "INCOMNET RELATED SHAREHOLDERS" means, collectively, Incomnet and, with respect to Common Shares or Preferred Shares transferred by Incomnet to a Permitted Transferee of Incomnet, such Permitted Transferee(s). "INDIVIDUAL EXISTING STOCKHOLDER" means any Existing Stockholder or Other Investor who is a natural person. "INSTITUTIONAL INVESTOR" means any JPM Investor, Clipper Investor, Other Investor or, with respect to Common Shares or Preferred Shares transferred by any such Investor to a Permitted Transferee of such Investor, such Permitted Transferee(s). 7 "INSTITUTIONAL PREFERRED SHARES" means, collectively, Series A Stock and Series B Stock. "INTERIM CEO" has the meaning ascribed thereto in Section 2.1(b)(vii) hereof. "INTERIM DIRECTOR" has the meaning ascribed thereto in Section 2.1(b)(vii) hereof. "JPM DESIGNEES" has the meaning ascribed thereto in Section 2.1(b)(i) hereof. "JPM RELATED INVESTORS" means, collectively, the JPM Investors and, with respect to Common Shares or Preferred Shares transferred by a JPM Investor to a Permitted Transferee of such JPM Investor, such Permitted Transferee(s). "MINIMUM SHARE AMOUNT" has the meaning ascribed thereto in Section 2.1(b)(i) hereof. "NON-STOCKHOLDER DESIGNATED DIRECTOR" means any director of the Company designated pursuant to Section 2.1(b)(vi) or (vii) hereof. "OPERATIVE DOCUMENTS" means, collectively, this Agreement, the Purchase Agreement, the Registration Rights Agreement and the Charter Documents. "OUTSIDE DIRECTOR" means any director of the Company (i) who is not and who has not been an officer or employee of the 8 Company, any subsidiary of the Company or any Institutional Investor, and who is not in the Family Group of, or under common control with, any such officer or employee and (ii) who has not received (directly or indirectly) any compensation from the Company or any such subsidiary (other than customary director fees and reimbursement for travel and related expenses), including, without limitation, compensation or remuneration of the type which the Company would be required to disclose pursuant to Item 404 of Regulation S-K as promulgated under the Exchange Act if the Company was subject to the reporting requirements of such Act; PROVIDED, HOWEVER, notwithstanding the foregoing, Mr. Frank Pipp shall be deemed to qualify as an Outside Director. "PERMANENT CEO" means the person selected by the CEO Search Committee and approved by a majority of the Board of Directors of the Company to serve as the chief executive officer and a director of the Company. "PERMITTED TRANSFEREES" has the meaning ascribed thereto in Section 3.2 hereof. "PERSON" means an individual or a corporation, limited liability company, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, Governmental Authority or other entity of any kind. "PREFERRED SHARES" means, collectively, the Series A Stock, the Series B Stock and the Series C Stock. 9 "QUALIFIED PUBLIC OFFERING" means any sale of Common Stock in a public offering which results in the automatic conversion of Preferred Shares into Common Shares pursuant to subsection 4(b) of Paragraph B of Article IV of the Certificate of Incorporation. "RUBIN" means Mr. Jeffrey Rubin, a natural person. "RUBIN RELATED SHAREHOLDERS" means, collectively, Rubin, those Persons identified on the signature pages hereto as Rubin Related Shareholders (such Persons, together with Rubin, are hereinafter referred to collectively as the "Rubin Shareholders") and, with respect to Common Shares or Preferred Shares transferred by a Rubin Shareholder to a Permitted Transferee of such Rubin Shareholder, such Permitted Transferee(s). "RULE 144 SALES" means open market sales pursuant to Rule 144 under the Securities Act (or any successor rule or regulation) and in compliance with the requirements of paragraphs (c), (e) and (f) of such Rule, without giving effect to paragraph (k) of such Rule. "SECURITIES ACT" means the Securities Act of 1933, as amended. "SERIES C STOCK" means the Series C Nonvoting Convertible Preferred Stock, par value $0.001 per share, of the Company. 10 "VOTING STOCK" means capital stock of any class or classes of the Company, the holders of which are entitled to participate generally in the election of the members of the Company's board of directors, and shall include, without limitation, the Common Stock and Series A Stock. "VOTING STOCK EQUIVALENTS" means (i) shares of Common Stock at the time outstanding and (ii) shares of Common Stock issuable upon conversion of shares of Series A Stock at the time outstanding. Section 2 VOTING. 2.1 BOARD OF DIRECTORS. Each Stockholder shall vote (or shall cause to be voted) all shares of Voting Stock owned or controlled by such Stockholder (including any shares of Voting Stock hereafter acquired), at any regular or special meeting of stockholders of the Company, shall take all action by written consent in lieu of such meeting of stockholders, and shall take all other actions necessary, to ensure: (a) that the Board of Directors of the Company and each subsidiary of the Company shall consist of nine (9) members; and (b) that there shall be elected as members of each such Board of Directors: 11 (i) two (2) individuals (the "JPM Designees") designated by the JPM Related Investors holding a majority of the shares of Voting Stock Equivalents held by the JPM Related Investors; PROVIDED, HOWEVER, that (x) for so long as the Certificate of Incorporation shall provide for Class Voting and there shall be outstanding Series A Stock, only those Stockholders that hold shares of Series A Stock shall be required to vote, or take action by consent, in accordance with this clause 2.1(b)(i); (y) if any individual designated by the JPM Related Investors shall become Interim CEO or Permanent CEO, such individual shall be deemed to have been designated as a director pursuant to clause 2.1(b)(vii) and the JPM Related Investors shall thereafter be entitled to designate a new designee pursuant to this clause 2.1(b)(i); and (z) if the JPM Related Investors at any time own Common Share Equivalents with an aggregate original purchase price (including, without limitation, the purchase price of Preferred Shares which are convertible, or have been converted, into Common Shares) of less than $2,000,000 (the "Minimum Share Amount"), then (I) if at the time the Certificate of Incorporation provides for Class Voting and there is Series A Stock outstanding, and if the Clipper Related Investors own at least the Minimum Share Amount, then the right of the JPM Related Investors to designate (A) two (2) directors pursuant to this clause 2.1(b)(i) and (B) one director pursuant to Section 2.2 hereof to serve on each Committee (a "JPM Committee Designee") shall terminate, and the right of the Clipper Related Investors 12 to designate directors pursuant to clause 2.1(b)(ii) shall be increased from two (2) directors to four (4) directors and the Clipper Related Investors also shall be entitled to designate one additional director to serve on each Committee in lieu of a JPM Committee Designee, (II) if at the time the Certificate of Incorporation provides for Class Voting and there is Series A Stock outstanding, and if the Clipper Related Investors own less than the Minimum Share Amount, then the JPM Related Investors shall continue to have the right to designate (A) two (2) directors pursuant to this clause 2.1(b)(i) and (B) a JPM Committee Designee, and (III) if at the time the Certificate of Incorporation does not provide for Class Voting or there is no Series A Stock outstanding, then the right of the JPM Related Investors to designate (A) two (2) directors pursuant to this clause 2.1(b)(i) and (B) the JPM Committee Designee, shall terminate; and PROVIDED, FURTHER, that as provided in clause 2.1(b)(ii)(z)(I) and in the penultimate proviso to clause 2.1(b)(ii), the right of the JPM Related Investors to designate directors pursuant to this clause 2.1(b)(i) may be increased from two (2) directors to four (4) directors and the right of JPM Related Investors to designate directors to serve on Committees may be increased from one (1) to two (2) directors; and PROVIDED, FURTHER, that if the JPM Investors elect to transfer Preferred Shares and/or Common Shares to any of their Affiliates that is a "Regulation Y Stockholder" (as defined in the Certificate of Incorporation), then at the election of the JPM Investors, the 13 right of the JPM Related Investors to designate directors pursuant to this clause 2.1(b)(i) and Section 2.2 shall terminate, and the right of the Clipper Related Investors to designate directors pursuant to clause 2.1(b)(ii) shall be increased from two (2) directors to four (4) directors and to designate directors to serve on Committees pursuant to Section 2.2 hereof shall be increased from one (1) to two (2) directors, and thereafter, the JPM Investors no longer shall be parties to, or enjoy the benefits of or be entitled to enforce, and no longer shall be subject to or bound by, this Section 2; (ii) two (2) individuals (the "Clipper Designees") designated by the Clipper Related Investors holding a majority of the Voting Stock Equivalents held by the Clipper Related Investors; PROVIDED, HOWEVER, that (x) for so long as the Certificate of Incorporation shall provide for Class Voting and there shall be outstanding Series A Stock, only those Stockholders that hold shares of Series A Stock shall be required to vote, or take action by consent, in accordance with this clause 2.1(b)(ii); (y) if any individual designated by the Clipper Related Investors shall become Interim CEO or Permanent CEO, such individual shall be deemed to have been designated as a director pursuant to clause 2.1(b)(vii) and the Clipper Related Investors shall thereafter be entitled to designate a new designee pursuant to this clause 2.1(b)(ii); and (z) if the Clipper Related Investors at any time own less than the Minimum 14 Share Amount, then (I) if at the time the Certificate of Incorporation provides for Class Voting and there is Series A Stock outstanding, and if the JPM Related Investors own at least the Minimum Share Amount, then the right of the Clipper Related Investors to designate (A) two (2) directors pursuant to this clause 2.1(b)(ii) and (B) one (1) director pursuant to Section 2.2 hereof to serve on each Committee (a "Clipper Committee Designee"), shall terminate, and the right of the JPM Related Investors to designate directors pursuant to clause 2.1(b)(i) shall be increased from two (2) directors to four (4) directors and the JPM Related Investors also shall be entitled to designate one additional director to serve on each Committee in lieu of a Clipper Committee Designee, (II) if at the time the Certificate of Incorporation provides for Class Voting and there is Series A Stock outstanding, and if the JPM Related Investors own less than the Minimum Share Amount, then the Clipper Related Investors shall continue to have the right to designate (A) two (2) directors pursuant to this clause 2.1(b)(ii) and (B) a Clipper Committee Designee, and (III) if at the time the Certificate of Incorporation does not provide for Class Voting or there is no Series A Stock outstanding, then the right of the Clipper Related Investors to (A) designate two (2) directors pursuant to this clause 2.1(b)(ii) and (B) a Clipper Committee Designee, shall terminate; and PROVIDED, FURTHER, that as provided in clause 2.1(b)(i)(z)(I) and the final proviso to clause 2.1(b)(i), the right of the Clipper Related Investors to designate directors 15 pursuant to this clause 2.1(b)(ii) may be increased from two (2) directors to four (4) directors and the right of the Clipper Related Investors to designate directors to serve on Committees may be increased from one (1) to two (2) directors; and PROVIDED, FURTHER, that if Clipper Capital Associates, L.P. or any of its Affiliates shall cease to control the Clipper Related Investors, the right of the Clipper Related Investors to designate directors pursuant to this clause 2.1(b)(ii) and Section 2.2 shall terminate, and the right of the JPM Related Investors to designate directors pursuant to clause 2.1(b)(i) shall be increased from two (2) directors to four (4) directors and the right of the JPM Related Investors to designate directors to serve on Committees pursuant to Section 2.2 hereof shall be increased from one (1) to two (2) directors; and, PROVIDED, FURTHER, that, notwithstanding the foregoing, the designation of at least one (1) of the directors to be designated by the Clipper Investors shall be made by Clipper Equity Partners I, L.P. (or, if Clipper Equity Partners I, L.P. shall no longer own any Voting Stock Equivalents, then Clipper Capital Associates, L.P. or such other Person as Clipper Capital Associates, L.P. shall designate); (iii) one (1) individual designated by the Incomnet Related Shareholders holding a majority of the shares of Voting Stock Equivalents held by the Incomnet Related Shareholders; PROVIDED, HOWEVER, that (x) only those Stockholders 16 that hold shares of Common Stock (in respect of such shares of Common Stock) shall be required to vote, or take action by consent, in accordance with this clause 2.1(b)(iii); (y) if the Incomnet Related Shareholders at any time own less than twenty-five percent (25%) of the Common Shares owned by Incomnet on the date hereof, then the right of the Incomnet Related Shareholders to designate (I) a director pursuant to this clause 2.1(b)(iii) and (II) one director pursuant to Section 2.2 hereof to serve on the Audit Committee and the Compensation Committee shall terminate; and (z) if an Incomnet Change of Control shall have occurred, then the individual designated by Incomnet to serve as a director also must be approved by a majority of the remaining members of the Board of Directors of the Company, such approval to be granted or withheld based on the reasonable business judgment of such remaining directors; (iv) one (1) individual designated by the Rubin Related Shareholders holding a majority of the Voting Stock Equivalents held by the Rubin Related Shareholders; PROVIDED, HOWEVER, that (x) only those Stockholders that hold shares of Common Stock (in respect of such shares of Common Stock) shall be required to vote, or take action by consent, in accordance with this clause 2.1(b)(iv); (y) the right of the Rubin Related Shareholders to designate a director pursuant to this clause 2.1(b)(iv) shall terminate if (I) for any reason whatsoever Rubin ceases to be actively employed as a senior executive officer of 17 the Company and/or its subsidiaries or (II) the Rubin Related Shareholders at any time own less than fifty percent (50%) of the Common Shares owned by them on the date hereof; and (z) for so long as the Rubin Related Shareholders shall be entitled to designate a director pursuant to this clause 2.1(b)(iv), such director shall be Rubin; (v) one (1) individual designated by the Cohen Related Shareholders holding a majority of the Voting Stock Equivalents held by the Cohen Related Shareholders; PROVIDED, HOWEVER, that (x) only those Stockholders that hold shares of Common Stock (in respect of such shares of Common Stock) shall be required to vote, or take action by consent, in accordance with this clause 2.1(b)(v); (y) if the Cohen Related Shareholders at any time own less than fifty percent (50%) of the Common Shares owned by them on the date hereof, then the right of the Cohen Related Shareholders to designate (i) a director pursuant to this clause 2.1.1(b)(v) and (ii) one director pursuant to Section 2.2 hereof to serve on the Executive Committee, shall terminate; and (z) for so long as the Cohen Related Shareholders shall be entitled to designate a director pursuant to this clause 2.1(b)(v) and Dr. Cohen shall be alive and not permanently disabled, Dr. Cohen shall serve as the designee of the Cohen Related Shareholders; (vi) one (1) individual (initially Mr. Frank Pipp) designated by a majority of the members of the Board of 18 Directors of the Company who qualifies as an Outside Director and who is approved by (x) those Persons holding a majority of the Common Share Equivalents held by the Investors and their respective Permitted Transferees and (y) those Persons holding a majority of the Common Share Equivalents held by the Existing Investors and their respective Permitted Transferees; PROVIDED, HOWEVER, that only those Stockholders who hold shares of Common Stock (in respect of such shares of Common Stock) shall be required to vote, or take action by consent, in accordance with this clause 2.1(b)(vi); and (vii) the Permanent CEO; PROVIDED, HOWEVER, that (x) only those Stockholders who hold shares of Common Stock (in respect of such shares of Common Stock) shall be required to vote, or take action by consent, in accordance with this clause 2.1(b)(vii) and (y) if at any time there shall not be a Permanent CEO, at the option of the CEO Search Committee, an individual selected by the CEO Search Committee shall serve as an additional director of the Company and each of its subsidiaries (the "Interim Director") and/or interim Chief Executive Officer of the Company (the "Interim CEO"), and, PROVIDED, FURTHER, that the Interim Director shall be replaced as a member of the Board of Directors of the Company and each of its subsidiaries simultaneously with the designation of the Permanent CEO; and in the case of each of clauses 2.1(b)(i) (except as otherwise provided therein), (b)(ii) (except as otherwise provided 19 therein), (b)(iii), (b)(iv) and (b)(v), any director(s) whom a specified group of Stockholders ceases to be entitled to designate instead shall be designated by Stockholders holding a majority of the Voting Stock Equivalents held by the Stockholders. 2.2 COMMITTEES OF THE BOARD OF DIRECTORS. The Company shall establish the following committees (collectively, the "Committees") of the Board of Directors: an Executive Committee, a CEO Search Committee, an Audit Committee and a Compensation Committee. Such Committees shall have the powers and duties set forth in the resolutions of the Board of Directors of the Company authorizing the establishment of such Committees. Each Stockholder shall direct any director designated by such Stockholder, and otherwise take all actions necessary or desirable, to ensure: (a) that the following persons shall be appointed to serve on the committees of the Board of Directors of the Company: (i) in the case of the Executive Committee, one (1) JPM Designee (for so long as the JPM Related Investors have representation on the Board of Directors), who initially shall be Ms. Molly F. Ashby, one (1) Clipper Designee (for so long as the Clipper Related Investors have representation on the Board of Directors), who initially shall be Mr. Kevin A. Macdonald, and Mr. Frank Pipp (for so long as he is a director of 20 the Company), and the JPM Designee (for so long as the JPM Related Investors have representation on the Board of Directors) shall serve as the chairperson of the Executive Committee; PROVIDED, HOWEVER, at such time as a Permanent CEO shall have been designated, then, at the option of the JPM Related Investors holding a majority of the shares of Voting Stock Equivalents held by the JPM Related Investors and the Clipper Related Investors holding a majority of the Voting Stock Equivalents held by the Clipper Related Investors, (x) the Executive Committee shall be dissolved or (y) the number of persons serving on the Executive Committee shall be increased from three (3) to six (6) and such new members shall be Dr. Cohen (for so long as he is a director of the Company), Mr. Melvyn Reznick (for so long as he is a director of the Company) and the Permanent CEO; (ii) in the case of the CEO Search Committee, one (1) JPM Designee (for so long as the JPM Related Investors have representation on the Board of Directors), who initially shall be Ms. Molly F. Ashby, one (1) Clipper Designee (for so long as the Clipper Related Investors have representation on the Board of Directors), who initially shall be Mr. Kevin A. Macdonald, and an Outside Director, who initially shall be Mr. Frank Pipp, and the Outside Director shall serve as the chairperson of the CEO Search Committee; (iii) in the case of the Audit Committee, one (1) JPM Designee (for so long as the JPM Related Investors 21 have representation on the Board of Directors), who initially shall be Mr. Patrick H. Garrett, one (1) Clipper Designee (for so long as the Clipper Related Investors have representation on the Board of Directors), who initially shall be Mr. Kevin A. Macdonald, the Permanent CEO (if any), and Mr. Melvyn Reznick (for so long as he is a director of the Company), and Mr. Reznick shall serve as the chairperson of the Audit Committee; and (iv) in the case of the Compensation Committee, one (1) JPM Designee (for so long as the JPM Related Investors have representation on the Board of Directors), who initially shall be Mr. Patrick H. Garrett, one (1) Clipper Designee (for so long as the Clipper Related Investors have representation on the Board of Directors), who initially shall be Mr. Kevin A. Macdonald, Mr. Melvyn Reznick (for so long as he is a director of the Company) and the Permanent CEO (if any), and the JPM Designee (for so long as the JPM Related Investors have representation on the Board of Directors) shall serve as the chairperson of the Compensation Committee; and (b) that except as otherwise provided in Sections 2.1(b)(i) and (ii), any director(s) serving on any Committee who a specified group of Stockholders ceases to be entitled to designate instead shall be designated by Stockholders holding a majority of the Voting Stock Equivalents held by the Stockholders. 22 2.3 REMOVAL. A director designated by the JPM Related Investors, the Clipper Related Investors, the Incomnet Related Shareholders, the Rubin Related Shareholders or the Cohen Related Shareholders and elected pursuant to Sections 2.1 and 2.2 shall be removed (with or without cause), if (i) those Stockholders holding a majority of the Voting Stock Equivalents owned by the group of Stockholders who designated such director so requests such removal by written notice to the Company or (ii) if the right of such group of Stockholders to designate one (1) or more directors pursuant to Sections 2.1 and 2.2 shall terminate. Such removal shall be effected upon the affirmative vote or action by written consent of holders of a majority of the then outstanding shares of Series A Stock or Common Stock, as applicable, and each holder of shares of such Voting Stock hereby agrees to vote all such shares then owned or held of record by him, or to take action by written consent, to effect such removal. Any Non- Stockholder Designated Director may be removed with or without cause by the affirmative vote of a majority of the members of the Board of Directors of the Company (other than such Non-Stockholder Designated Director). Any director (regardless of how designated) may be removed for cause, and the group of Stockholders entitled to designate any such director agrees to vote or take action by written consent to effect such removal upon a determination by the Board of Directors that such cause exists. 23 2.4 VACANCIES. In the event that a vacancy is created on the Board of Directors of the Company or any of its subsidiaries by the death, disability, retirement, resignation or removal (with or without cause) of a director or otherwise there shall exist or occur any vacancy on the Board of Directors of the Company or any of its subsidiaries, each Stockholder hereby agrees to vote or take action by written consent, in each case, to the extent such Stockholder shall be entitled to do so, and to use his best efforts to cause the remaining directors to vote or take action by written consent, for the election of a nominee to be designated by the entity or group which had designated or was entitled to designate the director whose position has become vacant, provided that such designee was not previously a director of the Company or any of its subsidiaries who was removed for cause from the Board of Directors of the Company or any of its subsidiaries. 2.5 NO PROXIES. Each Stockholder covenants and agrees that, except (i) as a result of transfers expressly permitted by, and pursuant to and in accordance with, this Agreement, (ii) the voting agreement between the JPM Investors and the Clipper Investors described in Section 2.6 hereof and (iii) as otherwise provided in the last sentence of Section 2.8 hereof, such Stockholder will have sole voting power with respect to such Stockholder's Voting Stock and will not grant any proxy with respect to such Voting Stock, enter into any voting trust or 24 other voting agreement or arrangement with respect to such Voting Stock or grant any other rights to vote such Voting Stock other than the agreement to vote such Voting Stock set forth herein. 2.6 VOTING BY THE JPM INVESTORS AND CLIPPER INVESTORS. Notwithstanding anything in any Operative Document to the contrary, each JPM Investor hereby covenants and agrees with the Clipper Investors, for so long as the Clipper Related Investors shall own the Minimum Share Amount, and each Clipper Investor hereby covenants and agrees with the JPM Investors, for so long as the JPM Related Investors shall own the Minimum Share Amount, that it shall not (i) vote in favor of, or consent to, any amendment or waiver of the Operative Documents which amendment or waiver requires the vote or consent of a specified percentage of the Investors or of the holders of Preferred Shares, unless, in the case of any such amendment or waiver to be approved by any such JPM Related Investor, it also is approved by the Clipper Related Investors holding a majority of the Common Share Equivalents then held by the Clipper Related Investors (the "Requisite Clipper Investors") and, in the case of any amendment or waiver to be approved by any such Clipper Related Investor, it also is approved by the JPM Related Investors holding a majority of the Common Share Equivalents then held by the JPM Related Investors (the "Requisite JPM Investors"), as the case may be. In addition, at any time at which the Clipper Related Investors shall cease to own the Minimum Share Amount or the JPM Related 25 Investors shall cease to own the Minimum Share Amount, without the consent of the Requisite Clipper Investors or the Requisite JPM Investors, as the case may be, no JPM Investor or Clipper Investor shall vote in favor of, or consent to, any such amendment or waiver (x) which would be adverse to and result in non- uniform treatment of the Clipper Related Investors as compared to the JPM Related Investors or the JPM Related Investors as compared to the Clipper Related Investors, as applicable, or (y) if any such JPM Related Investor or Clipper Related Investor (or their respective Affiliates) has a disproportionate interest in the transaction or otherwise has a conflicting interest with respect to the matter which gives rise to the necessity for such amendment or waiver. This Section 2.6 shall benefit and shall be binding upon the JPM Related Investors and the Clipper Related Investors only, and may be amended or waived by the Requisite JPM Investors and Requisite Clipper Investors. 2.7 DIRECTOR EXPENSES. The Company shall bear all travel and related expenses incurred by the JPM Designees and the Clipper Designees associated with attending meetings. 2.8 FURTHER ASSURANCES. In order to effectuate the provisions of this Section 2, the Stockholders hereby agree that when any action or vote is required to be taken by such Stockholders pursuant to this Agreement, such Stockholders shall use their respective best efforts to call, or cause the 26 appropriate officers and directors of the Company to call, a special or annual meeting of stockholders of the Company, as the case may be, or execute or cause to be executed a consent in writing in lieu of any such meetings pursuant to the General Corporation Law of the State of Delaware, to effectuate such stockholder action. In addition, if any Stockholder shall fail to vote as required by the specific terms of this Section 2, such Stockholder shall be deemed to have irrevocably constituted and appointed the other Stockholders as his proxy coupled with an interest to vote such Stockholder's Voting Stock Equivalents on a pro rata basis in accordance with the terms of this Section 2. 2.9 TERMINATION OF VOTING PROVISIONS. Except for Section 2.7 and as otherwise provided in the following sentence, the voting agreements and rights to designate directors as provided in this Section 2 shall terminate upon the completion by the Company of a Qualified Public Offering. Notwithstanding the foregoing, following the completion of a Qualified Public Offering and for so long as the JPM Related Investors and the Clipper Related Investors shall continue to beneficially own (as such term is used in Rule 13(d)-3 promulgated under the Exchange Act as in effect on the date hereof) or control any Common Share Equivalents, each Stockholder shall vote (or cause to be voted) all shares of Voting Stock owned or controlled by such Stockholder (including any shares of Voting Stock hereafter acquired), at any regular or special meeting of stockholders of 27 the Company, shall take all action by written consent in lieu of such meeting of stockholders, and shall take all other action that may be necessary, to ensure that there shall be elected to the Board of Directors of the Company and each subsidiary of the Company one (1) JPM Designee and one (1) Clipper Designee; PROVIDED, HOWEVER, that the Requisite JPM Investors or the Requisite Clipper Investors may at any time elect to terminate the right of the JPM Related Investors or the Clipper Related Investors, respectively, to designate a director pursuant to this paragraph 2.9, and thereafter, the JPM Related Investors or the Clipper Related Investors, as applicable, no longer shall be parties to, or enjoy the benefits of or be entitled to enforce this Section 2.9. 2.10 SCHEDULE 13D. If required by applicable law, each Stockholder, severally and not jointly, agrees to cooperate in the preparation of, and to execute, a joint filing on Schedule 13D. The Company shall bear all reasonable expenses incurred by each such Stockholder in connection with the preparation and filing of such Schedule 13D. 2.11 INDEMNIFICATION. Without the prior written consent of the JPM Investors and the Clipper Investors, neither the Company nor any Stockholder shall take any action to amend Article VIII of the By-Laws in any manner adverse to the rights of the JPM Designees or the Clipper Designees. 28 Section 3. RESTRICTIONS ON TRANSFER OF SHARES OF THE COMPANY. 3.1 TRANSFER RESTRICTED. 3.1.1 No Common Shares or Preferred Shares, or any interest therein, shall be sold, assigned, transferred, pledged or otherwise encumbered or disposed of, directly or indirectly, except in accordance with or as otherwise specifically permitted by the provisions of this Agreement. The Company shall not transfer upon its books and records any Common Shares or Preferred Shares purported to be transferred to any Person in violation of this Agreement. 3.1.2 In addition to each other restriction on transfer contained in this Agreement, except for Rule 144 Sales, a sale of shares in a public offering pursuant to the Registration Rights Agreement and a transfer to the Company, no Stockholder shall sell, assign, transfer, pledge, or otherwise encumber or dispose of any Common Shares or Preferred Shares or any interest therein to any Person (regardless of the manner in which such Stockholder initially acquired such Common Shares or Preferred Shares), unless (a) the certificates representing the shares issued to the transferee bear appropriate legends reflecting the restrictions on transfer contained in this Agreement substantially to the following effect: 29 "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE PROVISIONS OF A SHAREHOLDERS AGREEMENT DATED AS OF JANUARY 15, 1997 (A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY) AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE WITH THE PROVISIONS OF SUCH SHAREHOLDERS AGREEMENT." and (b) the transferee shall have executed and delivered to the Company, as a condition to its acquisition of the Common Shares or Preferred Shares, as the case may be, an appropriate document confirming that such transferee takes such shares subject to all the terms and conditions of this Agreement. 3.1.3 In addition to each other restriction on transfer contained in this Agreement, no Stockholder shall sell, assign, transfer, pledge or otherwise encumber or dispose of any Common Shares or Preferred Shares, or any interest therein, to any Person unless such sale, assignment, transfer, pledge or other encumbrance or disposition is pursuant to an effective registration statement under the Securities Act and under applicable state securities laws or an exemption from such registration is available. 3.1.4 The restrictions on transfer contained in this Agreement are in addition to, and not in limitation of, 30 each other restriction on transfer contained in any other agreement between the Company and any Stockholder. 3.2 CERTAIN PERMITTED TRANSFERS. Notwithstanding anything in this Agreement to the contrary, the restrictions contained in Sections 3.3, 3.4 and 3.5 of this Agreement with respect to transfers of Common Shares and Preferred Shares shall not apply to: (a) any transfer without consideration by an Individual Existing Stockholder to the spouse or issue of such Individual Existing Stockholder or to a trust of which there are no principal beneficiaries other than the spouse or issue of such Individual Existing Stockholder; (b) any transfer to a legal representative in the event any Individual Existing Stockholder becomes mentally incompetent; (c) any transfer by a JPM Investor to any other JPM Investor and any transfer by a Clipper Investor to any other Clipper Investor; (d) any transfer by an Institutional Investor (i) that is a partnership to one or more of its present partners or to another partnership under common control with such Institutional Investor or (ii) to an Affiliate of such Institutional Investor; 31 (e) any transfer by a Stockholder to the Company pursuant to any agreement between the Company and that Stockholder; and (f) any transfer by a Stockholder which is a corporation to its ultimate parent corporation (a "Parent") or to any wholly owned direct or indirect subsidiary of such Parent (a "Controlled Subsidiary"), it being understood with respect to such Controlled Subsidiary that the later sale, liquidation or spin-off of such Controlled Subsidiary or other transaction in which the Parent ceases to control, directly or indirectly, 100% of the equity of the Controlled Subsidiary would constitute an indirect sale of Common Shares or Preferred Shares, as the case may be, which sale may only be made in compliance with the terms and restrictions set forth in this Agreement; PROVIDED THAT in each of cases (a) through (f) each transferee agrees in writing to take subject to and to comply with the restrictions on transfer contained in this Agreement. In addition, none of the restrictions on transfers of shares contained in this Agreement shall apply to a transfer by an Individual Existing Stockholder upon his or her death, by will, by the laws of descent or by operation of law, except that any such transferee shall be deemed to take such shares subject to all provisions of this Agreement applicable to the transferor. Any transfer of Common Shares or Preferred Shares pursuant to and 32 in compliance with this Section 3.2 shall be a permitted transfer under this Agreement, and any transferee of Common Shares or Preferred Shares pursuant to and in compliance with this Section 3.2 (other than the Company) is herein referred to as a "Permitted Transferee." Each Permitted Transferee (other than the Company), if not previously a Stockholder, shall, upon consummation of the transfer, be deemed a Stockholder, and each such Permitted Transferee of a JPM Related Investor, Clipper Related Investor, Incomnet Related Shareholder, Rubin Related Shareholder or Cohen Related Shareholder shall, with respect to such transferred shares upon consummation of the transfer, be deemed a JPM Related Investor, Clipper Related Investor, Incomnet Related Shareholder, Rubin Related Shareholder or Cohen Related Shareholder, as the case may be, for purposes of this Agreement. 3.3 FIRST OFFER RIGHTS. Except as otherwise permitted under Section 3.2 of this Agreement, and except for Rule 144 Sales and sales of shares in public offerings, a Stockholder may sell or otherwise transfer Common Shares and Preferred Shares only in compliance with the provisions of this Section 3.3. 3.3.1 A Stockholder desiring to sell or otherwise transfer Common Shares or Preferred Shares in compliance with this Section 3.3 (a "Selling Stockholder") shall first deliver written notice to the Company (hereinafter referred to as the "Notice of Offer") which Notice of Offer shall specify (i) the number of Common Shares and/or Preferred Shares owned by the 33 Selling Stockholder which such Selling Stockholder wishes to sell (the "Offered Shares"); (ii) the proposed cash purchase price per share for the Offered Shares (the "Offer Price"); and (iii) all other terms and conditions of the offer. The Notice of Offer shall constitute an irrevocable offer by the Selling Stockholder to sell to the other Stockholders and the Company the Offered Shares at the Offer Price, as hereinafter provided. Within five business days of its receipt of the Notice of Offer, the Company shall send a copy of such Notice to each of the Stockholders of record. 3.3.2 Within 30 days following the Company's receipt of the Notice of Offer, (i) each other Stockholder of record shall notify the Company and the Selling Stockholder as to the number of Offered Shares, if any, it is electing to purchase (such notification is hereinafter referred to as the "Stockholder's Acceptance" and such Stockholder electing to purchase Offered Shares, an "Accepting Stockholder") and (ii) the Company shall notify the Selling Stockholder as to the number of Offered Shares, if any, that it is electing to purchase (such notification is hereinafter referred to as the "Company's Acceptance" and, together with the Stockholder's Acceptance, as an "Acceptance"); PROVIDED; HOWEVER, that the Company shall not be entitled to purchase Offered Shares (and the Company's Acceptance shall be appropriately limited) if, and to the extent that, (x) at the time of such purchase any Preferred Shares or 34 Common Shares are held by a Regulation Y Stockholder, and the effect of such purchase would be to increase above 24.9% the percentage of equity of the Company owned, held or controlled by such Regulation Y Stockholder, (y) the effect of such purchase would be to create a Control Block or (z) such purchase would be prohibited by the Certificate of Incorporation. If any Stockholder does not provide a Stockholder's Acceptance to the Company and the Selling Stockholder, or if the Company does not deliver a Company Acceptance to the Selling Stockholder, within such period, such Stockholder or the Company, as applicable, shall be deemed to have declined to purchase any of the Offered Shares. A Stockholder's Acceptance and the Company's Acceptance each shall be deemed to be an irrevocable commitment to purchase from the Selling Stockholder the number of Offered Shares which such Stockholder or the Company has elected to purchase pursuant to its Acceptance, subject to allocation of the Offered Shares among Stockholders accepting the Notice of Offer, and the Company if it has accepted the Notice of Offer, as hereinafter provided. The election by the Company to purchase Offered Shares shall be made on behalf of the Company by a majority of those members of the Board of Directors of the Company who have not been designated by, and are not affiliated or associated with, the Selling Stockholder. 3.3.3. If the Stockholders (other than the Selling Stockholder) and the Company have elected to purchase a 35 number of Offered Shares that in the aggregate exceeds the total number of Offered Shares, the Offered Shares shall be allocated among the Accepting Stockholders, if any, and the Company, as follows: (a) In the case of a sale of Institutional Preferred Shares, (i) first, among the Institutional Investors that are Accepting Stockholders, as nearly as possible in proportion to the number of Common Share Equivalents held by such Institutional Investors (provided that for purposes of this Section 3.3.3(a), the JPM Related Investors shall be deemed to be a single Institutional Investor and the Clipper Related Investors shall be deemed to be a single Institutional Investor and may, in each case, allocate among themselves the total number of Offered Shares purchasable by Persons within each such group); (ii) second, among those Institutional Investors, if any, that are Accepting Stockholders and that elected to purchase more Preferred Shares than the number to which they are entitled under clause (i), as nearly as possible in proportion to the number of Common Share Equivalents held by such Institutional Investors; (iii) third, among any other Accepting Stockholders, if any, as nearly as possible in proportion to the number of Common Share Equivalents then held by such other Accepting Stockholders; (iv) fourth, among those other Accepting Stockholders that elected to purchase more Preferred Shares than the number to which they are entitled under clause (iii), as nearly as possible in proportion 36 to the number of Common Share Equivalents held by such Accepting Stockholders; and (v) last, any remainder to the Company (subject to the limitations on purchases by the Company set forth in Section 3.3.2); (b) In the case of a sale of Common Shares or shares of Series C Stock by a Selling Stockholder that is an Existing Stockholder (or a Permitted Transferee of an Existing Stockholder), (i) first, the Company shall be entitled to purchase the number of Offered Shares it elected to purchase in the Company Acceptance (subject to the limitations on purchases by the Company set forth in Section 3.3.2); (ii) second, among the Existing Stockholders (and their Permitted Transferees) that are Accepting Stockholders, as nearly as possible in proportion to the number of Common Share Equivalents then held by such Existing Stockholders (and their Permitted Transferees); (iii) third, among those Existing Stockholders (and their Permitted Transferees), if any, that are Accepting Stockholders and that elected to purchase more Common Shares or shares of Series C Stock, as the case may be, than the number to which they are entitled under clause (ii), as nearly as possible in proportion to the number of Common Share Equivalents held by such Accepting Stockholders; (iv) fourth, among any other Accepting Stockholders, if any, as nearly as possible in proportion to the number of Common Share Equivalents then held by such other Accepting Stockholders (provided that for purposes of this 37 Section 3.3.3(b), the JPM Related Investors that are Accepting Stockholders shall be deemed to be a single Accepting Stockholder and the Clipper Related Investors that are Accepting Stockholders shall be deemed to be a single Accepting Stockholder and may, in each case, allocate among themselves the total number of Offered Shares purchasable by Persons within each such group); and (v) any remainder among those other Accepting Stockholders, if any, that elected to purchase more Common Shares or shares of Series C Stock, as the case may be, than the number to which they are entitled under clause (iv), as nearly as possible in proportion to the number of Common Share Equivalents held by such Accepting Stockholders; and (c) In the case of a sale of Common Shares by a Selling Stockholder other than an Existing Stockholder (or its Permitted Transferee), (i) first, the Company shall be entitled to purchase the number of Offered Shares it elected to purchase in the Company Acceptance (subject to the limitations on purchases by the Company set forth in Section 3.3.2); (ii) second, among the Investors (and their Permitted Transferees), that are Accepting Stockholders as nearly as possible in proportion to the number of Common Share Equivalents then held by such Investors (and their Permitted Transferees) (provided that for purposes of this Section 3.3.3(c), the JPM Related Investors that are Accepting Stockholders shall be deemed to be a single Accepting Stockholder and the Clipper Related Investors that are Accepting Stockholders 38 shall be deemed to be a single Accepting Stockholder and may, in each case, allocate among themselves the total number of Offered Shares purchasable by Persons within each such group); (iii) third, among those Investors (and their Permitted Transferees), if any, that are Accepting Stockholders and that elected to purchase more Common Shares than the number to which they are entitled under clause (ii), as nearly as possible in proportion to the number of Common Share Equivalents held by such Accepting Stockholders; (iv) fourth, among any other Accepting Stockholders, if any, as nearly as possible in proportion to the number of Common Share Equivalents then held by such Accepting Stockholders; and (v) any remainder among those other Accepting Stockholders, if any, that elected to purchase more Common Shares than the number to which they are entitled under clause (iv), as nearly as possible in proportion to the number of Common Share Equivalents held by such Accepting Stockholders. This Section 3.3.3 shall be construed and given effect in such manner that no Stockholder nor the Company shall be required or entitled to purchase a number of Offered Shares greater than the number set forth in its Stockholder Acceptance or Company Acceptance, as applicable. The Company shall promptly notify each Accepting Stockholder, if any, of the number of shares allocated to it, and each such Accepting Stockholder shall be obligated to purchase at the Offer Price such shares, and the Company shall be obligated to purchase at the Offer Price the 39 number of shares allocated to it in accordance with the foregoing provisions, at a closing as set forth in Section 3.3.5. 3.3.4 If the Accepting Stockholders and the Company do not elect to purchase all of the Offered Shares available for purchase under this Section 3.3, the Selling Stockholder (a) shall be under no obligation to sell any of the Offered Shares to any other Stockholder or the Company, unless the Selling Stockholder so elects, and (b) may, within a period of six months from the date of the Notice of Offer, subject to the provisions of Section 3.4 if applicable, and subject to the approval of the Board of Directors of the Company as described below, sell the Offered Shares to one or more third parties (each a "Third Party Transferee") for cash at a price per share not less than the Offer Price, and on such other terms and conditions as are no more favorable to the proposed Third Party Transferee than those specified in the Notice of Offer; PROVIDED, HOWEVER, that the right of any Stockholder to sell any Offered Shares to any proposed Third Party Transferee pursuant to this Section 3.3 shall be subject to the right of the Company, acting by the vote of a majority of the members of the Board of Directors who have not been designated by, and are not affiliated or associated with the Selling Stockholder or the proposed Third Party Transferee, to disapprove such proposed Third Party Transferee based on a reasonable determination by such members of the Board of Directors of the Company that such proposed Third Party Transferee's ownership of Offered Shares would be substantially 40 detrimental to the business of the Company. Upon any such sale, the Third Party Transferee of such Offered Shares shall execute an agreement in form and substance reasonably satisfactory to the Company and the Stockholders pursuant to which such Third Party Transferee agrees that the Offered Shares it acquired from the Selling Stockholder are subject to the provisions of this Agreement. Any Third Party Transferee to whom Offered Shares are transferred pursuant to and in compliance with this Section 3.3.4 shall, with respect to such shares upon consummation of such transfer, be deemed a Stockholder, and any such Third Party Transferee of an Institutional Investor shall, upon consummation of such transfer, be deemed an Institutional Investor for purposes of this Agreement (subject to the last sentence of Section 8.5 hereof). If the Selling Stockholder does not complete the sale of the Offered Shares within such six-month period, the provisions of this Section 3.3 shall again apply, and no sale of such Offered Shares by the Selling Stockholder shall be made otherwise than in accordance with the terms of this Agreement. 3.3.5 The closing of purchases of Offered Shares by the Company and/or other Stockholders pursuant to this Section 3.3 shall take place no later than 60 days after the date of the Notice of Offer, at 10:00 A.M. local time at the principal offices of the Company, or at such other date, time or place as the parties to the sale may agree. At least five (5) business days prior to such closing, the Company shall notify the Selling 41 Stockholder(s) in writing of the names of purchasers and the portion of the Offered Shares to be purchased by each. At such closing, the Selling Stockholder(s) shall sell, transfer and deliver to each purchaser full right, title and interest in and to the Offered Shares so purchased by such purchaser, free and clear of all liens, security interests, adverse claims or restrictions of any kind and nature (except as otherwise set forth in this Agreement and the other Operative Documents), and shall deliver to each purchaser a certificate or certificates representing the Offered Shares sold to such purchaser, in each case duly endorsed for transfer or accompanied by appropriate stock transfer powers duly endorsed with signatures guaranteed by a commercial bank, trust company or registered broker dealer and any other documents necessary for transfer. Simultaneously with delivery of such certificates, each purchaser of the Offered Shares shall deliver to the Selling Stockholder(s), by wire transfer of immediately available funds to such bank account as the Selling Stockholder(s) shall designate, a cash amount equal to the product of the Offer Price and the number of Offered Shares being acquired by such purchaser, in full payment of the purchase price of the Offered Shares purchased. 3.3.6 The rights of first offer provided under this Section 3.3 shall terminate upon the completion by the Company of a Qualified Public Offering. 3.3.7 Notwithstanding anything in this Section 3.3 to the contrary, (i) if any Existing Stockholder (or its 42 Permitted Transferee) shall purchase any shares of Series A Stock or Series B Stock pursuant to this Section 3.3, then as a condition precedent to the consummation of such purchase, such Existing Stockholder (or its Permitted Transferee) shall immediately convert any shares of Series A Stock or Series B Stock (after first converting such shares into Series A Stock) so purchased into a like number of shares of Series C Stock or (ii) if any Regulation Y Stockholder shall have the right to purchase any shares of Series A Stock, Series C Stock or Common Stock pursuant to this Section 3.3, then such Regulation Y Stockholder shall have the right under this Section 3.3 to purchase, in lieu of any such voting securities, an identical number of shares of Series B Stock or Non-Voting Common Stock, as the case may be, and the Selling Stockholder(s), at the request of any such Regulation Y Stockholder, shall cause any shares of Series A Stock, Series C Stock or Common Stock to be converted into a like number of Series B Stock or Non-Voting Common Stock, as the case may be, prior to consummation of such purchase. 3.4 RIGHT TO JOIN IN SALE. 3.4.1 If any one or more Stockholders (the "Selling Stockholders") propose in a single transaction or series of related transactions to transfer a number of Common Shares and/or Preferred Shares, as the case may be, representing 5% or more of the Common Share Equivalents held by the Stockholders (a "Transaction"), including, without limitation, pursuant to Section 3.3 (including a transfer to the Company, to the other 43 Stockholders or to a third party), then the Selling Stockholders shall refrain from effecting a Transaction unless, prior to the consummation thereof, each Stockholder (in the case of a transfer of Common Shares) or each Stockholder holding Preferred Shares (in the case of a transfer of Preferred Shares) other than the Selling Stockholders shall have been afforded the opportunity to join in such transfer on a pro rata basis, as hereinafter provided. Any purported transfer subject to this Section 3.4 not made in compliance with this Section 3.4 shall be void and shall not be consummated upon the books and records of the Company. 3.4.2 Prior to the consummation of any Transaction, the Selling Stockholders shall cause each person or persons that propose to acquire Common Shares or Preferred Shares in the Transaction (the "Proposed Purchasers") to offer (the "Purchase Offer") in writing to each other Stockholder (in the case of a transfer of Common Shares) or each other Stockholder holding Preferred Shares (in the case of a transfer of Preferred Shares) to purchase that number of Common Shares (or, at the election of such other Stockholder, Common Share Equivalents) (in the case of a transfer of Common Shares) or Preferred Shares (in the case of a transfer of Preferred Shares) from each such other Stockholder that constitutes the same percentage of the aggregate Common Share Equivalents (in the case of a transfer of Common Shares) or Preferred Shares (in the case of a transfer of Preferred Shares) held by such other Stockholder as the percentage determined by dividing the number of Common Shares (in 44 the case of a transfer of Common Shares) or Preferred Shares (in the case of a transfer of Preferred Shares) to be purchased from the Selling Stockholders by the aggregate number of Common Share Equivalents (in the case of a transfer of Common Shares) or Preferred Shares (in the case of a transfer of Preferred Shares) held by the Selling Stockholders, at the same price per share (the "Joining Price"), and on such other terms and conditions (the "Joining Terms"), as the Proposed Purchaser has offered to purchase Common Shares or Preferred Shares, as the case may be, to be sold by the Selling Stockholders. Notwithstanding the foregoing, if the Proposed Purchasers are acquiring Common Shares or Preferred Shares in a series of related transactions, or in a single transaction or series of related transactions from multiple Selling Stockholders, (i) the Joining Price shall be the highest of the prices offered by any Proposed Purchaser to any Selling Stockholder in any one of such transactions, and (ii) the Joining Terms shall be those terms offered by any Proposed Purchaser to any Selling Stockholder in any one of such transactions which are most favorable to the offeree. Each Stockholder shall have at least 30 days from the receipt of the Purchase Offer in which to accept the Purchase Offer and, to the extent any such Stockholder accepts such Purchase Offer in accordance with the terms hereof, the number of Common Shares or Preferred Shares, as the case may be, to be sold by the Selling Stockholders shall be reduced. 45 3.4.3 The provisions of this Section 3.4 shall not apply to (w) Rule 144 Sales, (x) a sale of shares in a public offering, (y) any redemption of shares of Preferred Stock by the Company in accordance with the Certificate of Incorporation or (z) transfers to Permitted Transferees in accordance with Section 3.2. In the event that a transfer subject to this Section 3.4 is proposed to be made to a Person other than a Stockholder or the Company, the Selling Stockholders shall notify such Person that the transfer is subject to this Agreement and shall ensure that no transfer is consummated without compliance with this Section 3 or the Company. 3.5 CONTROL BLOCK. In addition to each other restriction on transfer contained in this Agreement, no Stockholder shall (i) sell, assign, transfer or otherwise dispose of any Common Shares or Preferred Shares or (ii) purchase or otherwise acquire any Common Shares or Preferred Shares if, as a result of such transaction, any Person or group of Affiliated Persons would own more than 49.9% of the Voting Stock Equivalents then outstanding (a "Control Block"). In addition, the Company will not, directly or indirectly, redeem, sell, purchase or take any other action affecting the Common Shares or Preferred Shares which would result in any Person or group of Affiliated Persons owning a Control Block. Nothing in this Section 3.5 shall preclude (x) any sale of all or substantially all of the Common Shares or Preferred Shares in connection with a proposed sale of the Company to any third party or (y) any merger or consolidation 46 of the Company with or into any other entity which, in either case, has been approved by the Board of Directors of the Company and in which one or more third parties would acquire beneficial ownership of 50.1% or more of the Common Shares or Preferred Shares. This Section 3.5 shall terminate upon the completion by the Company of a Qualified Public Offering. Section 4. PREEMPTIVE RIGHTS. The Company hereby grants to each Stockholder a preemptive right to purchase all or any part of such Stockholder's "pro rata share" (as defined in this Section 4) of any "New Securities" (as defined in this Section 4) that the Company may, from time to time, propose to sell or issue. Such preemptive right shall be subject to the following provisions of this Section 4. 4.1 "PRO RATA SHARE". A Stockholder's "pro rata share," for purposes of this Section 4, is the ratio that (i) the number of Common Share Equivalents then held by such Stockholder bears to (ii) the total number of Common Share Equivalents then held by all Stockholders; PROVIDED, HOWEVER, that for purposes of the determination of a Stockholder's "pro rata share" pursuant to this Section 4, the JPM Related Investors shall be deemed to be a single Stockholder and the Clipper Related Investors shall be deemed to be a single Stockholder and may, in each case, allocate among themselves the total number of New Securities purchasable by Persons within each such group. 47 4.2 "NEW SECURITIES". "New Securities" shall mean any shares of capital stock of the Company, including Common Shares and Preferred Shares, whether now authorized or not, and any rights, options or warrants to purchase such Common Shares or Preferred Shares, and any Convertible Securities of any type whatsoever; PROVIDED, HOWEVER, that "New Securities" shall not include (i) securities issuable upon exercise or conversion of securities outstanding on the date hereof, (ii) securities sold by the Company pursuant to Section 1.3 of the Purchase Agreement (and any securities issuable upon conversion of such securities), (iii) securities offered to the public generally pursuant to an effective registration statement under the Securities Act, (iv) securities issued pursuant to the acquisition of another corporation by the Company by merger, purchase of shares, purchase of substantially all of the assets, or other reorganization whereby the Company acquires not less than fifty-one percent (51%) of the voting power of such corporation, (v) Common Shares issued to officers, directors or employees of, or consultants to, the Company pursuant to stock options outstanding on the date hereof or stock options granted after the date hereof on terms approved by the Board of Directors of the Company (including a majority of the members of the Board of Directors who are not officers or employees of the Company (or any relative thereof)), up to a maximum of 2,750,000 Common Shares in the aggregate or such greater amount as may be approved by the Requisite Investors (as adjusted for any stock splits, stock dividends or stock combinations), (vi) up to 120,000 Common 48 Shares issued to Mr. John L. Vidovich upon exercise of stock options granted pursuant to that certain letter agreement, dated as of January 15, 1997 between the Company and Mr. Vidovich, (vii) up to 450,000 Common Shares issued to Mr. Frank Pipp upon exercise of stock options granted to Mr. Pipp upon such terms and conditions as shall be approved by the Compensation Committee, (viii) shares of the Company's capital stock issued pursuant to any rights or agreements including, without limitation, Convertible Securities, provided that the preemptive rights established by this Section 4 apply with respect to the initial sale or grant by the Company of such rights or agreements, (ix) shares of the Company's capital stock issued in connection with any stock split, stock dividend, or recapitalization by the Company or (x) Common Shares issuable upon exercise of stock options to be granted to the chief executive officer of the Company on or prior to December 31, 1997 upon such terms and conditions as shall be approved by (i) the Compensation Committee of the Board of Directors of the Company and (ii) Investors holding a majority of the Common Share Equivalents then held by the Investors. 4.3 PROCEDURE. In the event that the Company proposes to undertake an issuance of New Securities, the Company shall give each Stockholder written notice of its intention, describing the type of New Securities and the price and general terms upon 49 which the Company proposes to issue the same. Each Stockholder shall have fifteen (15) days from the date any such notice is given to agree to purchase all or any part of its pro rata share of such New Securities for the price and upon the general terms specified in the notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased. 4.4 NONVOTING SECURITIES. In the event that the New Securities to be issued are voting securities, a Regulation Y Stockholder shall have the right under this Section 4 to purchase, in lieu of its pro rata share of such voting securities, an identical number of non-voting securities that have the same dividend and liquidation rights as such voting securities and that are convertible, in whole or in part, on a share-for-share basis, into such voting securities at the option of such Regulation Y Stockholder in the same manner and to the same extent that Nonvoting Common Stock is convertible into Common Stock. 4.5 FAILURE TO EXERCISE PREEMPTIVE RIGHTS. In the event that any Stockholder fails to exercise in full its preemptive right within such fifteen (15) day period, the Company shall have ninety (90) days thereafter to sell the New Securities with respect to which any such Stockholder's preemptive rights were not exercised, at a price and upon general terms no more favorable to the purchasers thereof than specified in the Company's notice. In the event the Company has not sold the New 50 Securities within such ninety (90) day period, the Company shall not thereafter issue or sell any New Securities, without first offering such securities to the Stockholders in the manner provided above. 4.6 TERMINATION OF PREEMPTIVE RIGHTS. The preemptive right granted under this Section 4 shall expire upon the completion by the Company of a Qualified Public Offering. Section 5. REPRESENTATIONS AND WARRANTIES. Each of the parties hereto severally, as to itself or himself, and not jointly hereby represents and warrants to each of the other parties to this Agreement that: (i) such party has the full right, power and authority to execute, deliver and perform this Agreement (and any other agreements or instruments to be executed by such party in connection herewith) and to bind all persons or entities, if any, for which it is acting pursuant to this Agreement; (ii) this Agreement has been duly executed and delivered by or on behalf of such party and constitutes (and each other agreement or instrument to be executed by such party in connection herewith will, upon such execution, have been duly executed and delivered by or on behalf of such party and will constitute) a legal, valid and binding obligation of such party and all persons or entities, if any, for which such party is acting, enforceable against such party, and all such persons or entities, if any, for which it is acting, in accordance with its 51 terms, except as enforceability may be limited by bankruptcy, insolvency or other similar laws affecting the rights of creditors generally or by the application of general equity principles; (iii) no consent, approval, authorization or order of any Person is required for the execution, delivery or performance of this Agreement (or any such other agreement or instrument) by such party or any such persons or entities, if any, for which it is acting; and (iv) neither the execution, delivery nor performance of this Agreement (or any such other agreement or instrument) by such party or any such persons or entities, if any, for which it is acting will (A) conflict with, or result in a breach of, or constitute a default under, or result in a violation of, any agreement or instrument to which such party or any such persons or entities, if any, for which it is acting is a party or by which such party or any such persons or entities, if any, for which it is acting or their property is bound, or (B) result in the violation of any applicable law or order, judgment, writ, injunction, decree or award or any Governmental Authority. Each of the parties hereto agrees that the representations and warranties set forth in this Section 5 shall survive the execution and delivery of this Agreement. Section 6. TERMINATION OF EXISTING VOTING AGREEMENTS. By executing this Agreement, each Existing 52 Stockholder and the Company agree that any "stockholders agreement," "voting agreement," proxy or similar agreement or arrangement relating to the Company or the securities of the Company to which such Stockholder or the Company is a party or by which such Stockholder or the Company may be bound are hereby terminated. The Company hereby represents and warrants to the Investors that no other "stockholder agreements," "voting agreement," proxy or similar agreement or arrangement to which the Company is a party or by which it is bound exists on the date hereof. Each Existing Stockholder hereby represents and warrants to the Investors that no other "stockholder agreements," "voting agreement," proxy or similar agreement or arrangement relating to the Company or the securities of the Company to which such Stockholder is a party or by which such Stockholder is bound exists on the date hereof. Section 7. CONFIDENTIALITY. 7.1.1 Each Stockholder agrees that, unless the Company otherwise consents, such Stockholder will maintain the confidentiality of any confidential information relating to, and provided to it by, the Company or any of its subsidiaries; PROVIDED, HOWEVER, that any Stockholder may disclose any such information (i) to such Stockholder's Affiliates, and to such Stockholder's and such Affiliates' officers, directors, employees, partners, agents, accountants, counsel and other professional advisors, (ii) that is or has become generally available to the public, (iii) as may be required or appropriate 53 in any filing, report, statement or testimony submitted to any Governmental Authority, (iv) as may be required or appropriate in response to any summons or subpoena or in connection with any litigation, (v) to comply with any law, order, regulation or ruling applicable to such Stockholder, and (vi) to any prospective transferee in connection with any contemplated transfer of any of the Common Shares or Preferred Shares (or any interest therein), as the case may be, by such Stockholder, provided that such prospective transferee agrees to be bound by this Section 7 to the same extent as such Stockholder; and PROVIDED, FURTHER, that Clipper Capital Associates, L.P. or its Affiliates also may disclose any such information to current or prospective investors in connection with any fund raising activities sponsored by Clipper Capital Associates, L.P. or such Affiliates. 7.1.2 Nothing in this Section 7 is intended to or shall amend, modify or otherwise impair any other agreement between the Company and any of the Stockholders which may contain more restrictive provisions with respect to non-disclosure of confidential information with respect to the Company and its subsidiaries. Section 8. MISCELLANEOUS. 8.1 INJUNCTIVE RELIEF. Each party hereto acknowledges that it will be impossible to measure in money the damages that would be suffered if any party fails to comply with any of the 54 obligations herein imposed on such party and that in the event of any such failure, an aggrieved person will be irreparably damaged and will not have an adequate remedy at law. Any such Person shall, therefore, be entitled to injunctive relief and/or specific performance to enforce such obligations, and if any action should be brought in equity to enforce any of the provisions of this Agreement, none of the parties hereto shall raise the defense that there is an adequate remedy at law. 8.2 FURTHER ASSURANCES. Each party hereto shall do and perform or cause to be done and performed all such further acts and things and shall execute and deliver all such other agreements, certificates, instruments, and documents as any other party hereto reasonably may request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. 8.3 GOVERNING LAW. This Agreement and the rights and obligations of the parties hereunder shall be governed by, and construed and interpreted in accordance with, the laws of the State of Delaware without giving effect to the choice of law principles thereof. 8.4 ENTIRE AGREEMENT; AMENDMENT; WAIVER. This Agreement: (a) contains the entire agreement among the parties hereto with respect to the subject matter hereof, (b) supersedes all prior written agreements and negotiations and oral understandings, if any, with respect thereto, and (c) may not be 55 amended or supplemented except by an instrument or counterparts thereof in writing signed by the Company and by (i) Existing Stockholders holding a majority of the shares of Common Stock held by the Existing Stockholders and (ii) subject to Section 2.6, Investors holding a majority of the Common Share Equivalents then held by the Investors. No waiver of any term or provision of this Agreement shall be effective unless in writing signed by the party to be charged. The waiver by any party of a breach of any term or provision of this Agreement shall not be construed as a waiver of any subsequent breach. 8.5 BINDING EFFECT. This Agreement shall be binding on and inure to the benefit of the parties hereto and their respective legal representatives, successors and assigns. The rights and obligations arising from this Agreement shall be transferred in connection with the transfer by a Stockholder to any Person of any shares of Common Stock or Preferred Shares in compliance with this Agreement, other than in a registered public offering or in Rule 144 Sales, and any such Person shall conclusively be deemed to have agreed to be bound by this Agreement. Notwithstanding the foregoing, none of the rights of any Stockholder or group of Stockholders to designate director(s) under the provisions of Section 2 hereof shall be transferable, except to the extent provided in Sections 2.1(b)(i) and 2.1.(b)(ii) hereof. 8.6 INVALIDITY OF PROVISION. The invalidity or unenforceability of any provision of this Agreement in any 56 jurisdiction shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of this Agreement, including that provision, in any other jurisdiction. 8.7 NOTICE. All notices and other communications provided for herein shall be dated and in writing and shall be deemed to have been duly given (x) on the date of delivery, if delivered personally or by telecopier, receipt confirmed, (y) on the second following business day, if delivered by a recognized overnight courier service, or (z) seven days after mailing, if sent by registered or certified mail, return receipt requested, postage prepaid, in each case, to the party to whom it is directed at the address set forth opposite his or its name on the signature pages hereto (or at such other address as any party hereto shall hereafter specify by notice in writing to the other parties hereto). 8.8 HEADINGS; EXECUTION IN COUNTERPARTS. The headings and captions contained herein are for convenience of reference only and shall not control or affect the meaning or construction of any provision hereof. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument. 8.9 ATTORNEYS' FEES. If any action at law or in equity is necessary to enforce or interpret the terms of this 57 Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 8.10 ADDITIONAL INVESTORS. (a) Pursuant to Section 1.3(b) of the Purchase Agreement, at any time on or before April 30, 1997, the Company may sell up to an additional 1,333,333 shares of Series A Stock to such persons as may be approved by the Board of Directors of the Company. Any such persons who become "Investors" under the Purchase Agreement shall execute a counterpart of this Agreement and thereafter shall be deemed to be "Other Investors" for all purposes of this Agreement. (b) As a condition precedent to the future grant of any stock option and/or stock award by the Company to any person who is not then a party to this Agreement, such person shall execute a counterpart of this Agreement and thereafter shall be deemed to be an "Existing Stockholder" for all purposes of this Agreement. 58 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. COMPANY: ADDRESS: RAPID CAST, INC. 1500 Hempstead Turnpike East Meadow, NY Attn: President Telecopy: (516) 465-7317 By: -------------------------------------- Name: Jeffrey Rubin Title: Executive Vice President INVESTORS: JPM INVESTORS ADDRESS: J.P. MORGAN INVESTMENT CORPORATION 60 Wall Street New York, NY 10260 Attn: Ms. Molly F. Ashby By: Telecopy: (212) 648-5032 -------------------------------------- Name: Molly F. Ashby Title: Manager ADDRESS: SIXTY WALL STREET SBIC FUND, L.P. 60 Wall Street New York, NY 10260 Attn: Ms. Molly F. Ashby By: Telecopy: (212) 648-5032 -------------------------------------- Name: Molly F. Ashby Title: Manager CLIPPER INVESTORS ADDRESS: CLIPPER CAPITAL ASSOCIATES, L.P. c/o Clipper Capital Partners, L.P. By: Clipper Capital Associates, Inc. 11 Madison Avenue its general partner 26th Floor New York, NY 10010 Attn: Mr. Kevin Macdonald By: Telecopy: (212) 448-5464 -------------------------------------- Name: Daniel V. Cahillane Title: Treasurer 59 ADDRESS: CLIPPER/MERCHANT PARTNERS, L.P. c/o Clipper Capital Partners, L.P. By: Clipper Capital Associates, L.P. 11 Madison Avenue its general partner 26th Floor New York, NY 10010 By: Clipper Capital Associates, Attn: Mr. Kevin Macdonald Inc., its general partner Telecopy: (212) 448-5464 By: -------------------------------------- Name: Daniel V. Cahillane Title: Treasurer ADDRESS: CLIPPER/MERBAN, L.P. c/o CITCO Curacao International Trust By: Clipper Capital Associates, L.P. Company, N.V. its general partner De Ruyterkade 62 Willemstad, Curacao By: Clipper Capital Associates, P.O. Box 812 Inc., its general partner Curacao Netherland Antilles Attn: Mr. Wim Langeveld Telecopy: 011 5999 322 500 By: --------------------------------- Name: Daniel V. Cahillane Title: Treasurer ADDRESS: CLIPPER EQUITY PARTNERS I, L.P. c/o Clipper Capital Partners, L.P. By: Clipper Capital Associates, L.P. 11 Madison Avenue its general partner 26th Floor New York, NY 10010 By: Clipper Capital Associates, Attn: Mr. Kevin Macdonald Inc., its general partner Telecopy: (212) 448-5464 By: --------------------------------- Name: Daniel V. Cahillane Title: Treasurer 60 ADDRESS: CLIPPER/EUROPEAN RE, L.P. c/o CITCO Curacao International Trust By: Clipper Capital Associates, L.P., Company, N.V. its general partner De Ruyterkade 62 Willemstad, Curacao By: Clipper Capital Associates, P.O. Box 812 Inc., its general partner Curacao Netherland Antilles Attn: Mr. Wim Langeveld Telecopy: 011 5999 322 500 By: --------------------------------- Name: Daniel V. Cahillane Title: Treasurer 61 OTHER INVESTORS: ADDRESS: 36 Trails End Road ------------------------------------------- Wilton, CT 06897 Frank Pipp EXISTING STOCKHOLDERS: ADDRESS: INCOMNET, INC. Incomnet, Inc. 21031 Ventura Blvd. Suite 1100 Woodland Hills, CA 91364 By: Attn: Mr. Melvyn Reznick -------------------------------------- Telecopy: (818) 587-5691 Name: Melvyn Reznick Title: President RUBIN RELATED SHAREHOLDERS ADDRESS: c/o Rapid Cast, Inc. 1500 Hempstead Turnpike East Meadow, NY 11554 Attn: Mr. Jeffrey Rubin ------------------------------------------- Telecopy: (516) 465-7317 JEFFREY RUBIN ADDRESS: c/o Rapid Cast, Inc. 1500 Hempstead Turnpike East Meadow, NY 11554 Attn: Mr. Jeffrey Rubin ------------------------------------------- Telecopy: (516) 465-7317 JEFFREY RUBIN as custodian for JORDANA L. RUBIN under the New York UGMA 62 COHEN RELATED SHAREHOLDERS ADDRESS: c/o Rapid Cast, Inc. 1500 Hempstead Turnpike East Meadow, NY 11554 Telecopy: (516) 465-7317 ------------------------------------------- DR. ROBERT S. COHEN ADDRESS: c/o Rapid Cast, Inc. 1500 Hempstead Turnpike East Meadow, NY 11554 Telecopy: (516) 465-7317 ------------------------------------------- ALAN COHEN ADDRESS: c/o Rapid Cast, Inc. 1500 Hempstead Turnpike ------------------------------------------- East Meadow, NY 11554 MERYL COHEN as custodian for NICOLE Telecopy: (516) 465-7317 COHEN and ERICA COHEN under the New York UGMA ADDRESS: c/o Rapid Cast, Inc. 1500 Hempstead Turnpike ------------------------------------------- East Meadow, NY 11554 MERYL COHEN as custodian for JACLYN Telecopy: (516) 465-7317 COHEN and GABRIELLE COHEN under the New York UGMA ADDRESS: THE ALLYSON COHEN IRREVOCABLE TRUST c/o Rapid Cast, Inc. 1500 Hempstead Turnpike East Meadow, NY 11554 Telecopy: (516) 465-7317 ------------------------------------------- By: Arlene Flohr, as Trustee ADDRESS: THE JEFFREY COHEN IRREVOCABLE TRUST c/o Rapid Cast, Inc. 1500 Hempstead Turnpike East Meadow, NY 11554 Telecopy: (516) 465-7317 ------------------------------------------- By: Arlene Flohr, as Trustee 63 ADDRESS: THE STEPHANIE COHEN RUBIN c/o Rapid Cast, Inc. IRREVOCABLE TRUST 1500 Hempstead Turnpike East Meadow, NY 11554 Telecopy: (516) 465-7317 ------------------------------------------- By: Arlene Flohr, as Trustee ADDRESS: 152 West 57th Street 54th Floor New York, NY 10019 Telecopy: (212) 581-0002 ------------------------------------------- NAOMI BODNER ADDRESS: 152 West 57th Street 54th Floor New York, NY 10019 Telecopy: (212) 581-0002 ------------------------------------------- NAOMI BODNER as custodian for MOSHE BODNER, AARON BODNER, ELIZAR BODNER, TZYPPORAH BODNER, MORDECHI BODNER, YAAKOV BODNER, RACHEL BODNER and YISSOCHAR BODNER under the New York UGMA ADDRESS: 152 West 57th Street 54th Floor New York, NY 10019 Telecopy: (212) 581-0002 ------------------------------------------- LAURA HUBERFELD ADDRESS: 152 West 57th Street 54th Floor New York, NY 10019 Telecopy: (212) 581-0002 ------------------------------------------- LAURA HUBERFELD as custodian for JESSICA HUBERFELD and RACHEL HUBERFELD under the New York UGMA 64 152 West 57th Street LAURA HUBERFELD/NAOMI BODNER 54th Floor PARTNERSHIP New York, NY 10019 Telecopy: (212) 581-0002 ------------------------------------------- By: Laura Huberfeld, Partner ------------------------------------------- By: Naomi Bodner, Partner ADDRESS: Fast Cast Corporation 4510 Robards Lane Louisville, KY 40218 Attn: Dr. Larry Joel ------------------------------------------- Telecopy: (502) 458-5919 DR. LARRY JOEL ADDRESS: Rapid Cast, Inc. 1500 Hempstead Turnpike East Meadow, NY 11554 Attn: Dr. Shawn Zimberg ------------------------------------------- Telecopy: (516) 465-7317 DR. SHAWN ZIMBERG ADDRESS: 10200 Hollow Way Road Dallas, Texas 75229 Telecopy: (214) 369-3895 ------------------------------------------- MARTIN PRICE ADDRESS: Incomnet, Inc. 21031 Ventura Blvd. Suite 1100 Woodland Hills, CA 91364 Attn: Mr. Stephen Caswell ------------------------------------------- Telecopy: (818) 587-5691 STEPHEN CASWELL ADDRESS: Winston & Strawn 35 West Wacker Drive Suite 4200 Chicago, IL 60601 Attn: Albert Milstein, Esq. ------------------------------------------- Telecopy (312) 558-5700 ALBERT MILSTEIN 65 ADDRESS: 1 Strawberry Hill Avenue No. 6F Stamford, CT 06902 ------------------------------------------- JOHN L. VIDOVICH 66 EX-10.30 6 EXHIBIT 10.30 REGISTRATION RIGHTS AGREEMENT This REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as of January 15, 1997 among Rapid Cast, Inc., a Delaware corporation (the "Company"), J.P. Morgan Investment Corporation, a Delaware corporation ("JPMIC"), Sixty Wall Street SBIC Fund, L.P., a Delaware limited partnership (the "SBIC Fund" and, together with JPMIC, the "JPM Investors"), those parties listed on the signature pages hereto under the caption "Clipper Investors" (collectively, the "Clipper Investors"), those parties, if any, listed on the signature pages hereto under the caption "Other Investors" (the "Other Investors" and together, with the JPM Investors and the Clipper Investors, the "Investors") and those parties listed on the signature pages hereto under the caption "Founders" (collectively, the "Founders"). RECITALS: A. Concurrently with the execution of this Agreement, the Investors are acquiring from the Company (it being acknowledged and agreed that it is JPMIC's intention to subsequently allocate and assign a portion of its securities to SBIC Fund upon such terms and conditions as they may hereafter agree) shares of the Company's Series A Convertible Preferred Stock, par value $0.001 per share, shares of the Company's Series B Non-Voting Convertible Preferred Stock, par value $0.001 per share and warrants to purchase shares of the Company's Common Stock, par value $0.001 per share, pursuant to the Convertible Preferred Stock and Warrants Purchase Agreement of even date herewith (the "Purchase Agreement"). B. By entering into this Agreement, the Company wishes to provide a further inducement to the Investors to purchase the Company's Series A Stock, Series B Stock and Warrants pursuant to the Purchase Agreement. C. By entering into this Agreement, the Company and the Founders wish to terminate certain registration rights previously granted to the Founders. NOW, THEREFORE, in consideration of the foregoing, the parties agree as follows: 1. DEFINITIONS. For purposes of this Agreement: (a) "COMMON SHARES" means shares of Common Stock, par value $0.001 per share of the Company. (b) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (c) "FORM S-3" means such form under the Securities Act as in effect on the date hereof or any registration form under the Securities Act subsequently adopted by the SEC which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. 2 (d) "FOUNDER WARRANT" means any of the 1,838,683 warrants issued by the Company pursuant to the Subscription Agreement, dated as of April 26, 1996, by and between the Company and the subscribers thereto in connection with the offering of certain bridge financing notes and in connection with the offering of certain additional bridge financing notes in May, June and August, 1996. (e) "HOLDER" means any Person owning or having the right to acquire Registrable Securities, or any assignee thereof in accordance with Section 11. (f) "INITIATING HOLDERS" means the Holder(s) initiating a Qualifying Request. (g) "INVESTOR WARRANT" means any of the warrants issued by the Company pursuant to the Purchase Agreement. (h) "MAJORITY IN INTEREST OF THE INITIATING HOLDERS" means Initiating Holders holding a majority of the Registrable Securities held by all Initiating Holders. (i) "NONVOTING COMMON STOCK" means the Nonvoting Common Stock, par value $0.001 per share, of the Company. (j) "PERSON" means any individual, partnership, limited liability company, joint venture, corporation, association, trust or any other entity or organization. 3 (k) "PREFERRED STOCK" means the Series A Stock, Series B Stock and Series C Stock of the Company. (l) "QUALIFYING REQUEST" means a request from any of the Investors or any of their affiliates, partners or assignees, that in the aggregate possess at least fifty percent (50%) of the Registrable Investor Securities outstanding as of the date of such request; PROVIDED, HOWEVER, that (i) so long as the JPM Investors and their "Permitted Transferees" (as defined in the Shareholders Agreement) continue to own Registrable Investor Securities with an original purchase price of at least $2,000,000 (including, without limitation, the purchase price of shares of Preferred Stock which are convertible, or have been converted, into Common Shares), a request made by the JPM Investors and their Permitted Transferees holding at least fifty percent (50%) of the Registrable Investor Securities then held by the JPM Investors and their Permitted Transferees will on one occasion be deemed to be a Qualifying Request (it being understood and agreed that such a request with respect to an offering that is not consummated for any reason shall not be deemed to constitute a Qualifying Request by the JPM Investors) and (ii) so long as the Clipper Investors and their Permitted Transferees continue to own Registrable Investor Securities with an original purchase price of at least $2,000,000 (including, without limitation, the purchase price of shares of Preferred Stock which are convertible, or have been converted, into Common Shares), a request made by the Clipper Investors and their 4 Permitted Transferees holding at least fifty percent (50%) of the Registrable Investor Securities then held by the Clipper Investors and their Permitted Transferees will on one occasion be deemed to be a Qualifying Request (it being understood and agreed that such a request with respect to an offering that is not consummated for any reason shall not be deemed to constitute a Qualifying Request by the Clipper Investors). (m) "REGISTER," "REGISTERED," and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act, and the declaration or ordering of effectiveness of such registration statement or document. (n) "REGISTRABLE FOUNDER SECURITIES" means (1) any Common Shares owned by the Founders on the date hereof, (2) any Common Shares issuable or issued upon conversion of the Series C Stock, (3) any Common Shares issuable or issued upon exercise of a Founder Warrant or upon exercise of a stock option now or hereafter owned by a Founder and issued to such Founder pursuant to a stock option plan of the Company, (4) any Common Shares issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, or upon conversion of, such Common Shares, Series C Stock, Founder Warrant or stock options, or other warrants, rights or securities, and (5) any Common Shares purchased, or issuable or issued upon conversion of Preferred 5 Stock purchased, by a Founder pursuant to Sections 3.3 or 4 of the Shareholders Agreement; PROVIDED, HOWEVER, that any Registrable Founder Securities sold by a Person in a transaction in which such Person's rights under this Agreement are not assigned pursuant to Section 11 below shall cease to be Registrable Founder Securities from and after the time of such sale. (o) "REGISTRABLE INVESTOR SECURITIES" means (1) any Common Shares issuable (without regard to any restriction on conversion that may be applicable to any particular holder of Preferred Stock or Nonvoting Common Stock) or issued upon conversion of the Series A Stock or the Series B Stock or the Nonvoting Common Stock, (2) any Common Shares issuable (without regard to any restriction on exercise that may be applicable to a particular holder of an Investor Warrant) or issued upon exercise of an Investor Warrant or upon conversion of Nonvoting Common Stock issued upon exercise of an Investor Warrant, (3) any Common Shares issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, or upon conversion of, such Series A Stock, Series B Stock, Common Shares, Investor Warrants, or other warrants, rights or securities, (4) any Common Shares purchased, or issuable or issued upon conversion of Preferred Stock purchased, by an Investor pursuant to Sections 3.3 or 4 of the Shareholders Agreement, (5) up to 120,000 Common Shares issued to 6 Mr. John L. Vidovich upon exercise of stock options granted pursuant to that certain letter agreement, dated as of January 15, 1997, between the Company and Mr. Vidovich and (6) up to 450,000 Common Shares issued to Mr. Frank Pipp upon exercise of stock options granted to Mr. Pipp upon such terms and conditions as shall be approved by the Compensation Committee of the Board of Directors of the Company; PROVIDED, HOWEVER, that any Registrable Investor Securities sold by a Person in a transaction in which such Person's rights under this Agreement are not assigned pursuant to Section 11 below shall cease to be Registrable Investor Securities from and after the time of such sale. (p) "REGISTRABLE SECURITIES" means, collectively, the Registrable Founder Securities and the Registrable Investor Securities. (q) The number of shares of "REGISTRABLE FOUNDER SECURITIES THEN OUTSTANDING" and "REGISTRABLE INVESTOR SECURITIES THEN OUTSTANDING" shall be determined by the number of Common Shares outstanding, and the number of Common Shares issuable, at the time in question, which are Registrable Securities. (r) "REQUISITE INVESTORS" means the Holders of a majority of the Registrable Investor Securities then outstanding; PROVIDED, HOWEVER, that the "Requisite Investors" must in all cases include (x) Clipper Capital Associates, L.P. (or its designee), acting on behalf of the "Clipper Investors", for so 7 long as (A) Clipper Capital Associates, L.P. or any of its affiliates controls the Clipper Investors and (B) the Clipper Investors and their Permitted Transferees (as such term is defined in the Shareholders Agreement) continue to own Registrable Investor Securities with an aggregate original purchase price of at least $2,000,000 (including, without limitation, the purchase price of shares of Preferred Stock which are convertible, or have been converted, into Common Shares) and (y) JPMIC for so long as the JPM Investors and their Permitted Transferees continue to own Registrable Investor Securities with an aggregate original purchase price of at least $2,000,000 (including, without limitation, the purchase price of shares of Preferred Stock which are convertible, or have been converted, into Common Shares). (s) "SEC" means the Securities and Exchange Commission. (t) "SECURITIES ACT" means the Securities Act of 1933, as amended. (u) "SERIES A STOCK" means the Series A Preferred Stock, par value $0.001 per share, of the Company. (v) "SERIES B STOCK" means the Series B Preferred Stock, par value $0.001 per share, of the Company. (w) "SERIES C STOCK" means the Series C Preferred Stock, par value $0.001 per share, of the Company. 8 (x) "SHAREHOLDERS AGREEMENT" means that certain Shareholders Agreement, dated of even date herewith, by and among the Company, the Investors and the Founders. (y) "VIOLATION" means any of the following statements, omissions or violations: (i) any untrue statement or alleged untrue statement of a material fact contained in a registration statement under this Agreement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto or any documents filed under state securities or "blue sky" laws in connection therewith, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law. 2. REQUEST FOR REGISTRATION. (a) If, after the earlier of (i) the second anniversary of the date of this Agreement or (ii) one hundred eighty (180) days after the initial public offering of the Company's securities, the Company shall receive a written Qualifying Request that the Company file a registration statement under the Securities Act, then the Company shall, within ten (10) days of the receipt thereof, give written notice of such request 9 to all Holders and shall, subject to the limitations of Section 2(b) below, use its best efforts to prepare and file with the SEC as expeditiously as practicable, and in any event within sixty (60) days of the receipt of such request, a registration statement under the Securities Act with respect to all Registrable Securities which the Holders request to be registered within twenty (20) days of the mailing of such notice by the Company in accordance with Section 19 below. (b) If Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 2 and the Company shall include such information in the written notice referred to in Section 2(a). In such event, the right of any Holder to include such Holder's Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. A majority in interest of the Initiating Holders shall select the managing underwriter or underwriters in such underwriting subject to approval by the Company, which approval shall not be unreasonably withheld. All Holders proposing to distribute their securities through such underwriting shall (together with the Company as provided in Section 4(f)) enter into an underwriting agreement in customary 10 form with the underwriter or underwriters so selected for such underwriting by a majority in interest of the Initiating Holders; PROVIDED, HOWEVER, that none of the JPM Investors (or any of their Permitted Transferees) or Clipper Investors (or any of their Permitted Transferees) shall be required to make any representations or warranties except as they relate to such Holder's ownership of shares and authority to enter into the underwriting agreement and to such Holder's intended method of distribution, and the liability of such Holder shall be limited to an amount equal to the net proceeds from the offering received by such Holder. Notwithstanding any other provision of this Section 2, if the underwriter advises the Initiating Holders that marketing factors require a limitation of the number of shares to be underwritten, then the Initiating Holders shall so advise the Company and the Company shall so advise all Holders of Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares of Registrable Securities that may be included in the underwriting shall be allocated as follows: (i) eighty percent (80%) of such number of shares shall be allocated among the Holders of Registrable Investor Securities that have elected to participate in such underwritten offering, pro rata according to the number of Registrable Investor Securities held by each such Holder, and (ii) twenty percent (20%) of such number of shares shall be allocated among the Holders of Registrable Founder Securities that have elected to participate in such underwritten offering, pro rata according to the number of Registrable Founder 11 Securities held by each such Holder. Without the consent of a majority in interest of the Initiating Holders, no securities other than Registrable Securities shall be covered by such registration. (c) The Company shall be obligated to effect only three (3) registrations pursuant to this Section 2 (an offering which is not consummated for any reason shall not be counted for this purpose); PROVIDED, HOWEVER, that the Company shall be obligated to effect as many registrations as may be requested by Holders of Registrable Investor Securities pursuant to any Qualifying Request in the event and so long as (i) registration pursuant to Form S-3 or any similar "short-form" registration statement is available and (ii) the registration covers Registrable Securities which, together with other securities of the Company entitled to inclusion in such registration, are proposed to be sold at an aggregate price to the public of not less than five million dollars ($5,000,000). The Company shall not be obligated to effect more than one (1) registration (other than "short-form" registrations pursuant to Form S-3 or any similar "short-form" registration statement) pursuant to this Section 2 in any twelve (12) month period. If any registration is commenced pursuant to this Section 2 and is not consummated for any reason whatsoever (a "Failed Registration"), such Failed Registration shall not be deemed to constitute a registration under this Section 2(c) and the Holders shall retain their rights pursuant to this Section 2 to make Qualifying Requests; PROVIDED, 12 HOWEVER, that expenses in connection with any Failed Registration shall be paid in accordance with Section 6 hereof. (d) Notwithstanding the foregoing, if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 2, a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such registration statement to be filed by reason of a material pending transaction and it is therefore essential to defer the filing of such registration statement, the Company shall have the right to defer such filing for a period of not more than ninety (90) days after receipt of the request of the Initiating Holders; PROVIDED, HOWEVER, that the Company may not utilize this right more than once in any twelve (12) month period. 3. COMPANY REGISTRATION. If (but without any obligation to do so) the Company proposes to register (including for this purpose a registration effected by the Company for shareholders other than the Holders) any of its stock or other securities under the Securities Act in connection with the public offering of such securities solely for cash (other than a registration on Form S-8 (or similar or successor form) relating solely to the sale of securities to participants in a Company stock plan or to other compensatory arrangements to the extent includable on Form S-8 (or similar or successor form), or a registration on Form S-4 (or similar or successor form)), the 13 Company shall, at such time, promptly give each Holder written notice of such registration. Upon the written request of each Holder given within twenty (20) days after mailing of such notice by the Company in accordance with Section 19, the Company shall, subject to the provisions of Section 8, use its reasonable best efforts to cause to be registered under the Securities Act all of the Registrable Securities that each such Holder has requested to be registered. The Company shall have no obligation under this Section 3 to make any offering of its securities, or to complete an offering of its securities that it proposes to make, and shall incur no liability to any Holder for its failure to do so. 4. OBLIGATIONS OF THE COMPANY. Whenever required under this Agreement to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities being registered thereunder, keep such registration statement effective for up to one hundred twenty (120) days or until the Holders have completed the distribution referred to in such registration statement, whichever occurs first (but in any event for at least any period required under the Securities Act); PROVIDED THAT before filing such registration statement or any amendments thereto, the Company 14 will furnish to the Holders copies of all such documents proposed to be filed. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to the Holders such number of copies of such registration statement and of each amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus contained in such registration statement (including each preliminary prospectus and any summary prospectus) and any other prospectus filed under Rule 424 under the Securities Act, in conformity with the requirements of the Securities Act, and such other documents as Holders may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or "blue sky" laws of such states or jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto (i) to qualify to do business in any state or jurisdiction where it would not otherwise be 15 required to qualify but for the requirements of this clause (d), or (ii) to file a general consent to service of process in any such state or jurisdiction. (e) Use its best efforts to cause all Registrable Securities covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary by virtue of the Company's business or operations to enable the seller or sellers thereof to consummate the disposition of such Registrable Securities. (f) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. (g) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (h) Notify each Holder of Registrable Securities covered by such registration statement and such Holder's underwriters, if any, and confirm such advice in writing: 16 (i) when the registration statement has become effective, (ii) when any post- effective amendment to the registration statement becomes effective and (iii) of any request by the SEC for any amendment or supplement to the registration statement or prospectus or for additional information. (i) Notify each Holder of Registrable Securities if at any time the SEC should institute or threaten to institute any proceedings for the purpose of issuing, or should issue, a stop order suspending the effectiveness of the Registration Statement. Upon the occurrence of any of the events mentioned in the preceding sentence, the Company will use its best efforts to prevent the issuance of any such stop order or to obtain the withdrawal thereof as soon as possible. The Company will advise each Holder of Registrable Securities promptly of any order or communication of any public board or body addressed to the Company suspending or threatening to suspend the qualification of any Registrable Securities for sale in any jurisdiction. (j) Furnish, at the request of any Holder requesting registration of Registrable Securities pursuant to this Agreement, (i) on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to this Agreement, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, an opinion, dated such date, of the counsel 17 representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities and (ii) on the date that the registration statement with respect to such securities becomes effective, a "comfort" letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities, and, if such securities are being sold through underwriters, a reaffirmation of such letter on the date that such Registrable Securities are delivered to the underwriters for sale. (k) As soon as practicable after the effective date of the registration statement, and in any event within sixteen (16) months thereafter, have "made generally available to its security holders" (within the meaning of Rule 158 under the Securities Act) an earning statement (which need not be audited) covering a period of at least twelve (12) months beginning after the effective date of the registration statement and otherwise complying with Section 11(a) of the Securities Act. 5. FURNISH INFORMATION. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Agreement with respect to the Registrable 18 Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Holder's Registrable Securities. If any registration statement or comparable statement under the Securities Act refers to an Investor or any of its affiliates, by name or otherwise, as the holder of any securities of the Company then, unless counsel to the Company advises the Company that the Securities Act requires that such reference be included in any such statement, each such holder shall have the right to require the deletion of such reference to itself and its affiliates. 6. EXPENSES OF DEMAND REGISTRATION. All expenses, other than underwriting discounts and commissions relating to Registrable Securities, incurred in connection with registrations, filings or qualifications pursuant to Section 2, including without limitation all registration, filing and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company, and the reasonable fees and disbursements of one counsel (selected by a majority in interest of the Initiating Holders) for the selling Holders shall be borne by the Company; PROVIDED, HOWEVER, that the Company shall not be required to bear such expenses in connection with any registration begun pursuant to Section 2 if the offering is not consummated primarily as a result of any act or omission of any Initiating Holder (in which case any such Initiating Holder 19 shall bear such expenses); PROVIDED FURTHER, HOWEVER, that if at the time of such withdrawal, (a) the Holders have learned of a material adverse change in the condition (financial or otherwise), business or prospects of the Company from that known to the Holders at the time of their request or (b) there has occurred a material adverse change in marketing factors related to the sale of Registrable Securities to the public from those existing at the time of the Holders' request, then the Initiating Holders shall not be required to pay any such expenses and the Company shall bear such expenses. 7. EXPENSES OF COMPANY REGISTRATION. The Company shall bear and pay all expenses incurred in connection with any registration, filing or qualification of Registrable Securities with respect to the registrations pursuant to Section 3 for each Holder, including without limitation all registration, filing and qualification fees, printers' and accounting fees relating or apportionable thereto and the fees and disbursements of one counsel for the selling Holders (selected by the Holders of a majority of the Registrable Securities being registered), but excluding underwriting discounts and commissions relating to Registrable Securities. 8. UNDERWRITING REQUIREMENTS. In connection with any offering initiated by the Company involving an underwriting of shares being issued by the Company, the Company shall not be required under Section 3 to include any Holder's securities in such underwriting unless such Holder accepts the terms of the 20 underwriting as agreed upon between the Company and the underwriters selected by it, and then only in such quantity as will not, in the opinion of the underwriters, exceed the largest number of securities requested to be included in such offering which can be sold without having an adverse effect on such offering by the Company; PROVIDED, HOWEVER, that no Holder participating in such underwriting shall be required to make any representations or warranties except as they relate to such Holder's ownership of shares and authority to enter into the underwriting agreement and to such Holder's intended method of distribution, and the liability of such Holder shall be limited to an amount equal to the net proceeds from the offering received by such Holder. If the total number of securities, including Registrable Securities, requested by shareholders to be included in such offering exceeds the largest number of securities that the underwriters reasonably believe can be sold without having an adverse effect on such offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters believe will not have an adverse effect on such offering. The securities of the shareholders so included shall be allocated as follows: (i) first, (x) eighty percent (80%) of such number of shares shall be allocated among the Holders of Registrable Investor Securities that have elected to participate in such offering, pro rata according to the number of Registrable Investor Securities held by each such Holder, and (y) twenty percent (20%) of such number of shares shall be allocated among 21 the Holders of Registrable Founder Securities that have elected to participate in such offering, pro rata according to the number of Registrable Founder Securities held by each such Holder, and (ii) thereafter, to the extent additional securities may be included in such offering, to other selling shareholders, pro rata according to the total number of securities entitled to be included therein owned by each such other selling shareholder or in such other proportions as shall mutually be agreed to by such other selling shareholders. 9. INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under this Agreement: (a) The Company will indemnify and hold harmless each Holder, its heirs, personal representatives and assigns, each of such Holder's partners, each of such Holder's, and each of such Holder's partners', officers, directors, partners, employees and affiliates, any underwriter (as defined in the Securities Act) for such Holder and each Person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Exchange Act against any losses, claims, damages or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon a Violation (PROVIDED, HOWEVER, that the Company will not be required to indemnify any of the foregoing 22 Persons on account of any losses, claims, damages or liabilities arising from a Violation if and to the extent that such Violation was made in a preliminary prospectus and was corrected in a subsequent prospectus that was required by law to be delivered to the Person making the claim with respect to which indemnification is sought hereunder (and such subsequent prospectus was made available by the Company to permit delivery of such prospectus in a timely manner), and such subsequent prospectus was not so delivered to such Person); and the Company will pay to each such indemnified party, as incurred, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this Section 9(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case to a particular indemnified party for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by or on behalf of such indemnified party. (b) Each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each Person, if any, 23 who controls the Company within the meaning of the Securities Act, any underwriter, any other Holder selling securities in such registration statement and any controlling Person of any such underwriter or other Holder, against any losses, claims, damages or liabilities (joint or several) to which any of the foregoing Persons may become subject, under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by or on behalf of such Holder expressly for use in connection with such registration; and each such Holder will pay, as incurred, any legal or other expenses reasonably incurred by any Person intended to be indemnified pursuant to this Section 9(b), in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this Section 9(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; and provided further, that, in no event shall the liability of any Holder under this Section 9(b) exceed the net proceeds from the offering received by such Holder. 24 (c) Promptly after receipt by an indemnified party under this Section 9 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 9, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; PROVIDED, HOWEVER, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the indemnified party under this Section 9 except if, and only to the extent that, the indemnifying party is actually prejudiced thereby; and such failure to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 9. 25 (d) The obligations of the Company and Holders under this Section 9 shall survive the completion of any offering of Registrable Securities in a registration statement under this Agreement, and otherwise. (e) Any indemnity agreements contained herein shall be in addition to any other rights to indemnification or contribution which any indemnified party may have pursuant to law or contract and shall remain operative and in full force and effect regardless of any investigation made or omitted by or on behalf of any indemnified party. (f) If for any reason the foregoing indemnity is unavailable, then the indemnifying party shall contribute to the amount paid or payable by the indemnified party as a result of such losses, claims, damages, liabilities or expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party on the one hand and the indemnified party on the other (taking into consideration, among other things, the fact that the provision of the registration rights and indemnification hereunder is a material inducement to the Investors to purchase Registrable Investor Securities pursuant to the Purchase Agreement) or (ii) if the allocation provided by clause (i) above is not permitted by applicable law or provides a lesser sum to the indemnified party than the amount hereinafter calculated, in such proportion as is appropriate to reflect not only the relative benefits received by the indemnifying party on the one hand and the indemnified party on 26 the other (taking into consideration, among other things, the fact that the provision of the registration rights and indemnification hereunder is a material inducement to the Investors to purchase Registrable Investor Securities pursuant to the Purchase Agreement) but also the relative fault of the indemnifying party and the indemnified party as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by or on behalf of the indemnifying party or the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or 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. Notwithstanding anything to the contrary in this Section 9, no Holder shall be required, pursuant to this Section 9, to contribute any amount in excess of the net proceeds received by such indemnifying party from the sale of Common Shares in the offering to which the losses, claims, damages, liabilities or expenses of the indemnified party relate. 10. REPORTS UNDER THE EXCHANGE ACT. With a view to making available to the Holders the benefits of Rule 144 under the Securities Act and any other rule or regulation of the SEC 27 that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times after the effective date of the first registration statement filed by the Company for the offering of its securities to the general public; (b) take such action as is necessary to enable the Holders to utilize Form S-3 for the sale of their Registrable Securities; (c) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (d) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144 under the Securities Act (at any time after the effective date of the first registration statement filed by the Company) and the Securities Act and Exchange Act (at any time after it has become subject to such reporting requirements) or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and 28 documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form. 11. ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to register Registrable Securities pursuant to this Agreement may be assigned in whole or in part by a Holder to one or more of its Permitted Transferees (as such term is defined in the Shareholders Agreement) or to one or more transferees or assignees of not less than (i) 250,000 shares of the Registrable Securities owned by such Holder (as adjusted for any stock splits, stock dividends or stock combinations) or (ii) if such Holder shall then own less than 250,000 shares of Registrable Securities, all Registrable Securities then owned by such Holder, provided that such transferee or assignee delivers to the Company a written instrument by which such transferee or assignee agrees to be bound by the obligations imposed on Holders under this Agreement to the same extent as if such transferee or assignee was a party hereto. 12. TERMINATION OF EXISTING REGISTRATION RIGHTS; LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. By executing this Agreement, each Founder and the Company agree that any "registration rights" such Founder may have relating to securities of the Company arising under any other agreement are hereby terminated. The Company represents and warrants to the 29 Holders that no other "registration rights" relating to securities of the Company exist on the date hereof, except for the "piggy back" registration rights granted to Ronald D. Blum, O.D., pursuant to that certain settlement agreement, dated as of November 12, 1996, by and between the Company and Dr. Blum. Each of the Holders represents to each other Holder that it has no other "registration rights" relating to securities of the Company as of the date hereof. From and after the date of this Agreement, the Company shall not, without the prior written consent of the Requisite Investors, enter into any agreement with any holder or prospective holder of any securities of the Company which would allow such holder or prospective holder (a) to include such securities in any registration filed under this Agreement, unless under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of such holder's securities will not reduce the amount of the Registrable Securities of the Holders which is included therein or (b) to request a registration. 13. "MARKET STAND-OFF" AGREEMENT. Each Holder hereby agrees that, during the period of ninety (90) days following the effective date of a registration statement of the Company filed under the Securities Act in connection with an underwritten offering, it shall not, to the extent requested by the Company and such underwriter, sell or otherwise transfer or dispose of (other than to donees or partners who agree to be similarly 30 bound) any Common Shares or any securities of the Company convertible into Common Shares held by it except Common Shares included in such registration. 14. AMENDMENT; WAIVER. Any provision of this Agreement may be amended only with the written consent of the Company, the Requisite Investors and the Holders of a majority of the Registrable Founder Securities then outstanding. The observance of any provision of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the party to be charged, provided that (i) subject to Section 2.6 of the Shareholders Agreement, the Requisite Investors may act on behalf of all Holders of Registrable Investor Securities and (ii) the Holders of a majority of the Registrable Founder Securities then outstanding may act on behalf of all such Holders. Any amendment or waiver effected in accordance with this Section 14 shall be binding upon each Holder of Registrable Securities at the time outstanding, each future Holder of all such securities, and the Company. 15. CHANGES IN REGISTRABLE SECURITIES. If, and as often as, there are any changes in the Registrable Securities by way of stock split, stock dividend, combination or reclassification, or through merger, consolidation, reorganization or recapitalization, or by any other means, appropriate adjustment shall be made in the provisions of this Agreement, as may be required, so that the rights and privileges 31 granted hereby shall continue with respect to the Registrable Securities as so changed. Without limiting the generality of the foregoing, the Company will require any successor by merger or consolidation to assume and agree to be bound by the terms of this Agreement, as a condition to any such merger or consolidation. 16. ENTIRE AGREEMENT. This Agreement constitutes the full and entire understanding and agreement among the parties with regard to the subject matter hereof. Nothing in this Agreement, express or implied, is intended to confer upon any Person, other than the parties hereto and their respective successors and assigns, any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided herein. 17. GOVERNING LAW. This Agreement shall be governed in all respects by the laws of the State of New York as such laws are applied to agreements between New York residents entered into and to be performed entirely within New York, whether or not all parties hereto are residents of New York. 18. SUCCESSORS AND ASSIGNS. The provisions hereof shall inure to the benefit of, and be binding upon, the successors, permitted assigns (as provided in Section 11), heirs, executors and administrators of the parties hereto. 19. NOTICES. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in 32 writing and shall be deemed effectively given upon receipt by the party to be notified or three (3) days after deposit with the United States Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified (a) if to a party other than the Company, at such party's address set forth at the end of this Agreement or at such other address as such party shall have furnished the Company in writing, or, until any such party so furnishes an address to the Company, then to and at the address of the last holder of the shares covered by this Agreement who has so furnished an address to the Company, or (b) if to the Company, at its address set forth at the end of this Agreement, or at such other address as the Company shall have furnished to the parties in writing. 20. SEVERABILITY. Any invalidity, illegality or limitation on the enforceability of this Agreement or any part thereof, by any party whether arising by reason of the law of the respective party's domicile or otherwise, shall in no way affect or impair the validity, legality or enforceability of this Agreement with respect to other parties. If any provision of this Agreement shall be judicially determined to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 21. TITLES AND SUBTITLES. The titles of the Sections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 33 22. DELAYS OR OMISSIONS; REMEDIES CUMULATIVE. It is agreed that no delay or omission to exercise any right, power or remedy accruing to the parties, upon any breach or default of the Company under this Agreement, shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach or default, or any acquiescence therein, or of any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. It is further agreed that any waiver, permit, consent or approval of any kind or character by a party of any breach or default under this Agreement, or any waiver by a party of any provisions or conditions of this Agreement must be in writing and shall be effective only to the extent specifically set forth in writing and that all remedies, either under this Agreement, or by law or otherwise afforded to a party, shall be cumulative and not alternative. 23. ATTORNEYS' FEES. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 24. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 34 25. ADDITIONAL INVESTORS AND FOUNDERS. (a) Pursuant to Section 1.3(b) of the Purchase Agreement, at any time on or before April 30, 1997, the Company may sell up to an additional 1,333,333 shares of Series A Stock to such persons as may be approved by the Board of Directors of the Company. Any such persons who become "Investors" under the Purchase Agreement shall execute a counterpart of this Agreement and thereafter shall be deemed to be "Investors" for all purposes of this Agreement. (b) As a condition precedent to the future grant of any stock option and/or stock award by the Company to any person who is not then a party to this Agreement, such person shall execute a counterpart of this Agreement and thereafter shall be deemed to be a "Founder" for all purposes of this Agreement. 35 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. "COMPANY" RAPID CAST INC., ADDRESS: a Delaware corporation 1500 Hempstead Turnpike East Meadow, NY 11554 By: Attention: President -------------------------------------- Telecopy: (516) 465-7317 Name: Jeffrey Rubin Title: Executive Vice President "INVESTORS" JPM INVESTORS: J.P. MORGAN INVESTMENT CORPORATION ADDRESS: 60 Wall Street By: New York, NY 10260 -------------------------------------- Attention: Ms. Molly F. Ashby Name: Molly F. Ashby Telecopy: (212) 648-5032 Title: Manager SIXTY WALL STREET SBIC FUND, L.P. ADDRESS: By: Sixty Wall Street SBIC 60 Wall Street Corporation, its General Partner New York, NY 10260 Attention: Ms. Molly F. Ashby By: Telecopy: (212) 648-5032 -------------------------------------- Name: Molly F. Ashby Title: Manager CLIPPER INVESTORS: CLIPPER CAPITAL ASSOCIATES, L.P. ADDRESS: c/o Clipper Capital By: Clipper Capital Associates, Partners, L.P. Inc., its general partner 11 Madison Avenue 26th Floor By: New York, New York 10010 --------------------------------- Attention: Mr. Kevin Macdonald Name: Daniel V. Cahillane Telecopy: (212)448-5464 Title: Treasurer 36 CLIPPER/MERCHANT PARTNERS, L.P. ADDRESS: c/o Clipper Capital By: Clipper Capital Associates, Partners, L.P. L.P., its general partner 11 Madison Avenue 26th Floor By: Clipper Capital Associates, New York, New York 10010 Inc., its general partner Attention: Mr. Kevin Macdonald Telecopy: (212)448-5464 By: ---------------------------- Name: Daniel V. Cahillane Title: Treasurer CLIPPER/MERBAN, L.P. ADDRESS: c/o CITCO By: Clipper Capital Associates, Curacao International Trust L.P., its general partner Company, N.V. De Ruyterkade 62 By: Clipper Capital Associates, Willemstad, Curacao Inc., its general partner P.O. Box 812 Curacao Netherland Antilles By: Attention: Mr. Wim Langeveld ---------------------------- Telecopy: 011 5999 322 500 Name: Daniel V. Cahillane Title: Treasurer CLIPPER EQUITY PARTNERS I, L.P. ADDRESS: c/o Clipper Capital By: Clipper Capital Associates, L.P., Partners, L.P. its general partner 11 Madison Avenue 26th Floor By: Clipper Capital Associates, New York, New York 10010 Inc., its general partner Attention: Mr. Kevin Macdonald Telecopy: (212)448-5464 By: ---------------------------- Name: Daniel V. Cahillane Title: Treasurer CLIPPER/EUROPEAN RE, L.P. ADDRESS: c/o CITCO By: Clipper Capital Associates, Curacao International Trust L.P., its general partner Company, N.V. 62 De Ruyterkade By: Clipper Capital Associates Willemstad, Curacao Inc., its general partner P.O. Box 812 Curacao Netherland Antilles Attention: Mr. Wim Langeveld By: Telecopy: 011 5999 322 500 ---------------------------- Name: Daniel V. Cahillane Title: Treasurer 37 OTHER INVESTORS: ADDRESS: ------------------------------------------- 5 Forest View Drive FRANK PIPP Gladstone, New Jersey 07934 "FOUNDERS" ADDRESS: INCOMNET, INC. Incomnet, Inc. 21031 Ventura Blvd. By: Suite 1100 -------------------------------------- Woodland Hills, CA 91364 Name: Melvyn Reznick Attention: Mr. Melvyn Reznick Title: President Telecopy: (818) 587-5691 ADDRESS: ------------------------------------------- c/o Rapid Cast, Inc. JEFFREY RUBIN 1500 Hempstead Turnpike East Meadow, New York 11554 Attention: Mr. Jeffrey Rubin Telecopy: (516) 465-7317 ADDRESS: ------------------------------------------- c/o Fast Cast Corporation LARRY JOEL 4510 Robards Lane Louisville, Kentucky 40218 Attention: Dr. Larry Joel Telecopy: (502) 458-5919 ADDRESS: ------------------------------------------- c/o Rapid Cast, Inc. ROBERT S. COHEN 1500 Hempstead Turnpike East Meadow, New York 11554 Telecopy: (516) 465-7317 38 ADDRESS: ------------------------------------------- c/o Rapid Cast, Inc. ALAN COHEN 1500 Hempstead Turnpike East Meadow, New York 11554 Telecopy: (516) 465-7317 ADDRESS: ------------------------------------------- c/o Rapid Cast, Inc. MERYL COHEN as custodian for NICOLE COHEN 1500 Hempstead Turnpike and ERICA COHEN under the New York UGMA East Meadow, New York 11554 Telecopy: (516) 465-7317 ADDRESS: ------------------------------------------- c/o Rapid Cast, Inc. MERYL COHEN as custodian for JACLYN 1500 Hempstead Turnpike COHEN and GABRIELLE COHEN under the East Meadow, New York 11554 New York UGMA Telecopy: (516) 465-7317 ADDRESS: THE ALLYSON COHEN IRREVOCABLE TRUST c/o Rapid Cast, Inc. 1500 Hempstead Turnpike East Meadow, New York 11554 ------------------------------------------- Telecopy: (516) 465-7317 By: Arlene Flohr, Trustee ADDRESS: THE JEFFREY COHEN IRREVOCABLE TRUST c/o Rapid Cast, Inc. 1500 Hempstead Turnpike East Meadow, New York 11554 ------------------------------------------- Telecopy: (516) 465-7317 By: Arlene Flohr, Trustee ADDRESS: THE STEPHANIE COHEN RUBIN c/o Rapid Cast, Inc. IRREVOCABLE TRUST 1500 Hempstead Turnpike East Meadow, New York 11554 Telecopy: (516) 465-7317 ------------------------------------------- By: Arlene Flohr, Trustee ADDRESS: ------------------------------------------- 152 West 57th Street NAOMI BODNER 54th Floor New York, New York 10019 Telecopy: (212) 581-0002 39 ADDRESS: ------------------------------------------- 152 West 57th Street NAOMI BODNER as custodian for MOSHE 54th Floor BODNER, AARON BODNER, ELIZAR BODNER, New York, New York 10019 TZYPPORAH BODNER, MORDECHI BODNER, Telecopy: (212) 581-0002 YAAKOV BODNER, RACHEL BODNER and YISSOCHAR BODNER under the New York UGMA ADDRESS: ------------------------------------------- 152 West 57th Street LAURA HUBERFELD 54th Floor New York, New York 10019 Telecopy: (212) 581-0002 ADDRESS: ------------------------------------------- 152 West 57th Street LAURA HUBERFELD as custodian for 54th Floor JESSICA HUBERFELD and RACHEL HUBERFELD New York, New York 10019 under the New York UGMA Telecopy: (212) 581-0002 ADDRESS: LAURA HUBERFELD/NAOMI BODNER PARTNERSHIP 152 West 57th Street 54th Floor New York, New York 10019 ------------------------------------------- Telecopy: (212) 581-0002 By: Laura Huberfeld, Partner ------------------------------------------- By: Naomi Bodner, Partner ADDRESS: ------------------------------------------- 10200 Hollow Way Road MARTIN PRICE Dallas, Texas 75229 Telecopy: (214) 369-3895 ADDRESS: ------------------------------------------- c/o Rapid Cast, Inc. DR. SHAWN ZIMBERG 1500 Hempstead Turnpike East Meadow, New York 11554 Attention: Dr. Shawn Zimberg Telecopy: (516) 465-7317 40 ADDRESS: ------------------------------------------- c/o Rapid Cast, Inc. JEFFREY RUBIN as custodian for JORDANA L. 1500 Hempstead Turnpike RUBIN under the New York UGMA East Meadow, New York 11554 Attention: Mr. Jeffrey Rubin Telecopy: (516) 465-7317 ADDRESS: ------------------------------------------- Incomnet, Inc. STEPHEN CASWELL 21031 Ventura Blvd. Suite 1100 Woodland Hills, CA 91364 Attention: Mr. Stephen Caswell Telecopy: (818) 587-5691 ADDRESS: ------------------------------------------- Winston & Strawn ALBERT MILSTEIN 35 West Wacker Drive Suite 4200 Chicago, IL 60601 Attention: Albert Milstein, Esq. Telecopy: (312) 558-5700 ADDRESS: ------------------------------------------- 1 Strawberry Hill Avenue JOHN L. VIDOVICH No. 6F Stamford, CT 36902 41 EX-10.31 7 EXHIBIT 10.31 [LOGO] January 28, 1997 Mr. Melvyn Reznick President and Chief Executive Officer Incomnet, Inc. 21031 Ventura Boulevard Woodland Hills, CA 91364 Dear Mr. Reznick: The following sets forth certain agreements reached between Incomnet, Inc. ("ICNT") and National Telephone & Communications, Inc. ("NTC"), subject only to the approvals of the Board of Directors of ICNT and of NTC in the forms attached hereto as Exhibits 1 and 2. When approved by the Boards of both Companies, this Letter Agreement shall supersede and replace the Letter Agreements dated October 14, 1996 and February 6, 1996 regarding NTC becoming a public company. All share numbers referred to herein are predicated upon NTC having ten (10) million shares of common stock issued and outstanding. Prior to NTC becoming a public company, NTC will reincorporate itself in the State of Delaware. In connection with this reincorporation, the total issued and outstanding shares of NTC common stock, $.01 par value per share (the "Common Stock"), will be reduced to 10,000,000 shares, all of which will be owned by ICNT. ICNT will transfer to NTC for cancellation all of its current shares of NTC common stock, $.001 par value per share, in exchange for a new certificate(s) representing 10,000,000 shares of Common Stock. All revenue and profit numbers used herein shall be as defined by the NTC Board and are subject to confirmation by NTC's independent accounting firm. All public financial statements will be prepared in accordance with generally accepted accounting principles. I. ICNT SPIN-OFF A. ICNT will spin-off to its shareholders one (1) million shares of NTC Common Stock owned by ICNT (the "Spin-Off") as soon as practicable pursuant to a "no-action" letter from the U.S. Securities and Exchange Commission or in such other manner as may be necessary to expeditiously achieve such a spin-off. ICNT promptly will request the no-action letter from the SEC and will work diligently to complete the spin-off during 1997. ICNT shall not be deemed in default of this provision if, through no fault of ICNT, the spin-off is not completed during 1997 but is completed within a reasonable time thereafter. B. Fractional shares of NTC Common Stock will not be distributed. Such fractional shares will be aggregated and sold in the public market by the Distribution Agent and the Mr. Melvyn Reznick January 28, 1997 Page 2 aggregate net cash proceeds will be distributed ratably to those stockholders entitled to fractional interests. II. NTC PUBLIC OFFERING As soon as practicable after it has obtained a commitment for a firm commitment underwriting by a reputable regional or national investment banking firm or firms, NTC will sell up to twenty (20) percent of its shares (after taking into account the public offering) in a public offering (the "Public Offering"). The actual number of shares sold will be determined by the underwriter and NTC. ICNT will be permitted to sell shares in the offering provided the underwriter agrees to such inclusion. Further, if the underwriter requires, ICNT will sell shares representing up to an additional ten (10) percent (1.25 Million Shares) of NTC's outstanding shares (after taking into account the public offering), in addition to the twenty (20) percent block to be sold by NTC. NTC will work diligently to complete this public offering prior to December 31, 1997, and presently expects the offering to occur during the third quarter of 1997. III. DISTRIBUTION AND SALE LIMITATIONS A. Notwithstanding any other provision of this Letter Agreement, without NTC's prior written consent: 1. ICNT will not spin-off, sell, pledge, hypothecate or otherwise dispose of more than twenty (20) percent of NTC's then issued and outstanding shares prior to the earlier of January 1, 1998 or the date of NTC's Public Offering under Section II. 2. ICNT will not spin-off, sell, pledge, hypothecate or otherwise dispose of more than ten (10) percent of NTC's then issued and outstanding shares to any single person or entity, or affiliated persons or entities, or persons or entities controlling, controlled by or under common control with any such person or entity, and ICNT will, upon no less than thirty (30) days written notice, provide NTC first right of refusal to acquire any such shares that ICNT proposes to sell in excess of five (5) percent on the same terms and conditions proposed for such sale by ICNT. At such time as ICNT intends to sell more than five (5) percent of NTC's then issued and outstanding shares to any single person or entity, or affiliated persons or entities, or persons controlling, controlled by or under common control with any such person or entity, ICNT shall provide written notice ("Notice") to the President of Mr. Melvyn Reznick January 28, 1997 Page 3 NTC notifying and disclosing to NTC the identity of the proposed purchaser or purchasers and the terms and conditions of the proposed sale. NTC shall have ten (10) days after receipt of such written Notice to notify ICNT in writing that it elects to purchase the shares being offered for sale by ICNT. If NTC does not provide written notice within such ten (10) day period to ICNT of its election to purchase such shares on the same terms and conditions, NTC shall be deemed to have elected not to exercise its right of first refusal to purchase such shares. ICNT shall then have the right to proceed with the sale to the person and on the terms and conditions included in its Notice to NTC. If NTC provides written notice to ICNT that it has elected to purchase the shares proposed for sale in the Notice, NTC shall have thirty (30) days after providing such notice to purchase such shares on the same terms and conditions as set forth in the Notice. If NTC does not pay the purchase price within the thirty (30) day period, ICNT shall be entitled to proceed with the sale of the shares to the person or persons and on the terms and conditions set forth in its Notice to NTC. B. Subsequent to the Public Offering under Section II, ICNT will not sell, pledge, hypothecate or otherwise dispose of more than one (1) million shares of NTC stock in 1997 and one (1) million shares in 1998, respectively, without the express written permission of NTC. Further, through December 31, 1998, ICNT will coordinate with NTC and NTC will coordinate with ICNT (but neither shall require the approval of the other) with respect to any sales, issuance or other disposition of NTC stock in excess of five (5) percent of NTC's then issued and outstanding shares, other than provided for in Sections I, II and IV of this Letter Agreement, so as to assure the maintenance of an orderly market and to minimize market disruptions with respect to the trading of NTC stock. IV. OPTION PLANS NTC will create four separate plans, including three stock option plans and one convertible debt plan (collectively, the "Plans"). Except as noted below, the exercise price of all options issued under the option plans will be not less than the fair-market value of NTC shares as of the date of grant, and the grant price of a convertible debt unit under the convertible debt plan will be not less than the fair market value of a share of Common Stock on the date of grant. To the extent feasible, options will be issued pursuant to qualified incentive option plans. (If Mr. Melvyn Reznick January 28, 1997 Page 4 necessary to qualify for favorable tax treatment, additional plans may be created; all such plans will be consistent with the requirements set forth herein). Shares issuable pursuant to the Plans will be registered under the Securities Act of 1933, as amended (the "Securities Act") no later than the time of NTC's Public Offering under Section II hereof. All terms and conditions of the Plans not summarized below will be determined by NTC's Board of Directors. Upon the creation of such Plans and the issuance of options and convertible debt units thereunder to Jacobs and Ballah, Jacobs will waive the right to the remaining outstanding unexercised warrants and options under Jacobs' employment agreement dated December 28, 1994. 1. KEY INDEPENDENT REPRESENTATIVE PLAN Up to 2,884,615 shares will be reserved for issuance under this plan. Beneficiaries will be key independent representatives of NTC who are Corporate Team Members. Options to purchase 961,538 shares of Common Stock will be granted to key independent respresentatives who are Corporate Team members. Options to purchase 480,769 of such shares will vest on June 30, 1998, subject to acceleration if the Public Offering pursuant to Section II occurs prior to January 1, 1998. Options to purchase 480,769 of such shares will vest on June 30, 1999. Of the remaining 1,923,077 shares reserved for issuance under this plan, the number of reserved shares set forth in the following table may be issued under this plan to key independent representatives after each of June 30, 1997, December 31, 1997, June 30, 1998 and December 31, 1998 if NTC's gross revenues for the three month period ending on each of such dates exceed NTC's gross revenues for the three-month periods ending December 31, 1996, June 30, 1997, and December 31, 1997, respectively, by the percentage amounts set forth in the following table: Gross Revenues for Three Month Period Exceed Gross Revenues for Preceding Period By: Number of Shares to be Issued - -------------------- ----------------------------- 30% 125,000 40% 250,000 50% 500,000 These options vest in four, equal annual installments on each anniversary of the option grant date. Mr. Melvyn Reznick January 28, 1997 Page 5 2. 1996 SENIOR EXECUTIVE AND CONSULTANT CONVERTIBLE DEBT PLAN Up to 3,269,231 shares will be reserved for issuance upon conversion of convertible debt units granted under this plan. Beneficiaries will be Ed Jacobs ("Jacobs"), Jerry Ballah ("Ballah") and Chris Mancuso ("Mancuso"), or their affiliated entities through which consulting services are provided to NTC and certain other senior executives and consultants. Jacobs and Ballah collectively will receive convertible debt units which may be converted into 3,069,231 shares of Common Stock, to be allocated between them as determined by the NTC Board of Directors. Mancuso will receive convertible debt units which may be converted into 100,000 shares of Common Stock. Mancuso is also eligible to receive additional convertible debt units which may be converted into 100,000 shares of Common Stock upon satisfaction of incentive conditions to be determined by NTC's Board of Directors. Any Mancuso convertible debt units that do not vest may be distributed to other beneficiaries of this plan in amounts determined by the NTC Board of Directors. An additional 576,924 shares will be reserved for issuance upon conversion of convertible debt units granted under this plan in equal amounts to Jacobs and Ballah. These convertible debt units will be issued to Jacobs and Ballah but will vest on January 31, 2002. Vesting will accelerate in the following amounts if NTC achieves revenues which exceed the following amounts for any calendar quarter ending prior to January 1, 2000. QUARTERLY REVENUES NUMBER OF SHARES VESTING ------------------ ------------------------ $ 100 million 192,308 $ 125 million 192,308 $ 180 million 192,308 3. 1996 STOCK OPTION PLAN Up to 2,523,077 shares will be reserved for issuance under this plan. Beneficiaries will be current and future NTC executives, employees and consultants. Options representing one-third of the reserved shares will be subject only to a time-in-service vesting requirement, but in no event will such options vest prior to January 1, 1998. Options representing the remainder of the reserved shares will vest in four, equal annual installments on each anniversary of the Mr. Melvyn Reznick January 28, 1997 Page 6 option grant date, subject to the acceleration of vesting in the event that NTC achieves certain income targets in 1997. No more than 480,770 shares issuable pursuant to options granted under this plan may be issued to persons eligible to receive convertible debt units under the Senior Executive and Consultant Convertible Debt Plan. 4. DIRECTORS STOCK OPTION PLAN. Up to 300,000 shares will be reserved for issuance under this plan to members of NTC's Board of Directors. Each Director will receive an option to purchase 25,000 shares which will vest in four, equal annual installments on each anniversary of the option grant date. V. NTC CONTROL NTC's day to day operations will continue to be controlled by its Chairman, under the direction of its Board of Directors, subject to the following: 1. Four Independent Directors are to be selected at the time of or in preparation for the Public Offering under Section II to serve together with the current directors, including any replacements thereof pursuant to Paragraph 5. below. These independent directors initially will be selected from two nominees of ICNT and two of the NTC Board of Directors. All such candidates must be people of high stature who have been unaffiliated with ICNT, its officers and directors or with NTC and its officers and directors for a period of ten years prior to their nomination to the Board of Directors of NTC. To the extent feasible, the Independent Directors shall consist of a former State Attorney General , a former Commissioner or high ranking staff member of the Federal Communications Commission or Federal Trade Commission, a former Board member or high ranking executive of a major telephone or cable (or related) company and a person with investment banking or comparable experience. After the four Independent Directors are added to the Board, the Board will select the management slate of directors. 2. After the four Independent Directors referenced in Paragraph 1 are added to the NTC Board, no officer or director of ICNT shall serve as a director of NTC. Mr. Melvyn Reznick January 28, 1997 Page 7 3. After the four Independent Directors referenced in Paragraph 1 are added to the NTC Board, Independent Directors will constitute the Audit and Compensation committees. 4. After the four Independent Directors referenced in Paragraph 1 are added to the NTC Board, all related party transactions will be required to be approved by one of the committees described in Paragraph 3 above, including, but not limited to, salary and bonuses, loans to officers or directors, and employment agreements. 5. Until the four Independent Directors referenced in Paragraph 1 are added to the NTC Board, the NTC Board of Directors will remain as currently constituted (the "Current Board"), except that a key independent representative and an experienced current or former CEO of a financial rating company may be added to the Board, and except for matters previously approved by the NTC Board, unanimous Board of Directors approval will be required for (i) related party transactions, (ii) the issuance of NTC shares, options, warrants or convertible securities (other than the options and shares issuable thereunder pursuant to the Plans described in Section IV), (iii) the selection of a successor to Jacobs if he is no longer serving in any senior executive capacity or as a director of NTC, and (iv) the terms of the Public Offering referenced in Section II. Notwithstanding the immediately preceding sentence, in the event of a vacancy created by the death, resignation or removal, with or without cause, of Jacobs or Ballah (the "NTC Management Directors") ICNT will vote its shares for the individual nominated by the remaining NTC Management Director. 6. Until the four Independent Directors referenced in Paragraph 1 are added to the NTC Board, ICNT will vote its shares for the NTC Management Directors, including any replacement thereof or addition thereto pursuant to Paragraph 5 above, and a representative of ICNT as members of the Board of Directors of NTC. Thereafter and until such time that Jacobs is no longer a member of the NTC board by reason of his death, resignation or removal, with or without cause, ICNT will vote its shares for the management slate of nominees for NTC's Board of Directors. 7. In addition to the regular board of directors positions, a key independent representative may be nominated and elected to the board of directors on a rotating basis (a "Rotating Director"), such that the same person cannot serve consecutive terms. Mr. Melvyn Reznick January 28, 1997 Page 8 VI. FLOW OF CASH BETWEEN NTC AND INCOMNET A. NTC and ICNT acknowledge and agree that NTC has advanced $1,000,000 to ICNT prior to October 14, 1996. Assuming that NTC has excess cash available to it, NTC will advance to ICNT at periodic intervals and for specific identifiable corporate purposes approved by NTC (together with the prior $1,000,000 in advances, the "Advances") up to $100,000 per month between November 1, 1996 and the date of the Public Offering under Section II. Any Advances in excess of $2,200,000 (including the Advances made prior to October 14, 1996) shall be evidenced by demand notes, bear interest at the prime rate as set forth in THE WALL STREET JOURNAL plus 2%, and shall be fully collateralized with shares of NTC stock owned by ICNT which shares shall be valued at Five (5) Dollars per share for purposes of determining the number of shares required to collateralize the Advances referenced above. NTC shall provide ICNT with no less than thirty (30) days notice to pay off any or all such Advances before demanding payment, and no payment shall be due prior to the date of the Public Offering under Section II. ICNT shall have the option of paying off the Advances in cash or with the shares of NTC stock used to secure the Advances to ICNT. Excess cash means any cash available to NTC after taking into account all current and projected obligations. Such projected obligations includes anticipated capital expenditures required to achieve the revenue and earnings levels needed to meet the contingencies for all the Plans. Notwithstanding anything herein to the contrary, a total of $2,200,000 has been or will be advanced to ICNT by NTC no later than December 31, 1997. B. ICNT shall have no obligation to repay $2,200,000 of Advances referenced in Section VI.A. Any Advances in excess of $2,200,000 will be repaid by ICNT in accordance with Section VI.A. C. All costs and expenses incurred or paid by NTC, on behalf of itself and/or ICNT, in connection with the Spin-Off and the Public Offering under Section II, including but not limited to, all legal fees and expenses, registration and filing fees, investment banking and similar fees, accounting fees and expenses and printing (the "Expenses") shall be considered Advances for purposes of Section VI.A. only with respect to Advances in excess of $2,200,000. D. ICNT and NTC agree that the accounting and tax treatment of the Advances will be as follows: (i) up to $2,200,000 of the Advances will be treated as a return of ICNT's previously invested capital in NTC rather than as a loan and (ii) any Advances in excess of $2,200,000, including the Expenses in Section VI.C., will be treated as an intercompany loan to ICNT by NTC, to be repaid in accordance with Section VI.A. Any charge to earnings or taxable income associated with any of the Advances will be incurred by ICNT, not NTC. VII. MISCELLANEOUS Any and all assets relating to NTC, owned, controlled, possessed, held or applied for by ICNT shall be assigned to NTC, free and clear of all liens, restrictions, leases, security interests, Mr. Melvyn Reznick January 28, 1997 Page 9 claims, charges or encumbrances whatsoever, on or before December 31, 1996. Such assets shall include, without limitation, all intellectual property including without limitation any and all inventions, trademarks, trade names, copyrights, applications therefor, patents thereon, registrations thereof and licenses thereof, royalty rights, any and all goodwill associated with the NTC business or represented by such assets, trade secrets, and confidential information, know-how, and all similar property of any nature, tangible or intangible. VIII. APPROVALS Upon the execution of this letter by ICNT, the same will be submitted for approval by ICNT's and NTC's Boards of Directors, in the forms attached hereto as Exhibits 1 and 2, within seven (7) days after such execution by ICNT. If such Board approvals have not been obtained within such seven (7) day period, this Letter Agreement may, at the option of either NTC or ICNT, be terminated. Following such approvals, documentation of the transactions contemplated hereby will be drafted under the direction of NTC's Board of Directors and will be subject to further approval by ICNT only if the terms thereof are inconsistent with the provisions of this Letter Agreement. IX. FURTHER ASSURANCES Each party agrees to take such further action as may be necessary or desirable to implement the terms of this Letter Agreement. X. ASSIGNMENT; SUCCESSORS AND ASSIGNS This Letter Agreement may not be assigned by either party without the prior written consent of the other party hereto and shall inure to the benefit of and be binding upon the parties hereto and their respective affiliates, successors and assigns. [Balance of page intentionally left blank] Mr. Melvyn Reznick January 28, 1997 Page 10 If the foregoing accurately expresses our agreement, please so indicate by signing and returning to the undersigned one copy of this Letter Agreement. Very truly yours, NATIONAL TELEPHONE & COMMUNICATIONS, INC. By: /s/ Edward R. Jacobs ----------------------------------------- Edward R. Jacobs, President and Chief Executive Officer AGREED AND ACCEPTED: INCOMNET, INC. By: /s/ Melvyn Reznick --------------------------------- Melvyn Reznick, President and Chief Executive Officer Dated: 1/28/97 ------------------------------ EX-10.32 8 EXHIBIT 10.32 EXHIBIT 10.32 EMPLOYMENT AGREEMENT between NTC AND JAMES R. QUANDT January 6, 1997 This Employment Agreement ("Agreement") is between National Telephone & Communications, Inc., a Nevada corporation located at 2801 Main Street, Irvine, California 92614 ("NTC") and James R. Quandt, an individual ("Quandt"), and is entered into by the parties with reference to the following facts. A. NTC is a rapidly growing telecommunications services company that markets its products on a nationwide basis with a network of independent sales representatives. B. NTC is currently a wholly-owned subsidiary of a public company, Incomnet, Inc. ("Incomnet") and has recently reached an agreement with Incomnet under which NTC shall become a separate public company, independent from Incomnet. C. NTC's current President and Chief Executive Officer ("CEO") is Ed Jacobs ("Jacobs") who has been the senior executive at NTC since the middle of 1992 when Incomnet acquired a controlling interest in NTC and who has announced his plans to retire from NTC no later than July 25, 1999, his sixty-second birthday. D. Because of Jacobs' planned retirement and NTC's upcoming plans to be a public company, NTC desires to employ an experienced executive capable of (i) successfully assisting NTC in implementing and operating its public- company plans, and (ii) taking over the senior executive position when Jacobs retires. E. Quandt is such an experienced executive and is desirous of assisting NTC with its public-company plans taking over the senior executive position at NTC when Jacobs retires. NOW THEREFORE, in consideration of the mutual promises contained herein, the parties agree as follows: 1.0 OFFER OF EMPLOYMENT ------------------- 1.1 NTC hereby offers to employ Quandt in an executive position in accordance with the terms and conditions set forth herein, and Quandt hereby accepts such offer of employment in accordance with the terms and conditions set forth herein. 1 2.0 THE EXECUTIVE POSITION ---------------------- 2.1 On or before the date on which Quandt's employment at NTC begins, as set forth hereunder, NTC shall separate the functions and responsibilities of the company into an operating division ("Operating Division") and a marketing division ("Marketing Division"). The Operating Division shall include, without limitation, the responsibilities and functions of NTC's current departments of Operations, Information Services and Finance and Administration. 2.2 On the date on which Quandt's employment at NTC begins, as set forth herein, Quandt shall be employed as the President of the Operating Division ("Executive Position") and shall be appointed as an officer of NTC by NTC's Board of Directors. Said Executive Position shall report directly to the CEO. Quandt shall faithfully and competently perform such duties as are prescribed by the By-Laws of NTC and shall also perform and discharge such other executive employment duties and responsibilities consistent with the business requirements of the Executive Position as NTC's CEO and Board of Directors from time to time reasonably prescribe. Quandt shall perform his duties in the Executive position at such places and times as NTC's CEO and/or Board of Directors may reasonably prescribe. Except as may otherwise by approved in Advance by NTC's CEO or Board of Directors, and except during vacation periods and reasonable period of absence due to sickness, personal injury and other disability, Quandt shall devote his full time during normal business hours throughout his term of employment, as set forth herein, and shall use his best efforts, judgment and energy to improve and advance the business interests of NTC in a manner consistent with his duties and responsibilities in the Executive Position. 2.3 On or about the date on which Quandt's employment at NTC begins, NTC's CEO shall nominate Quandt for the position of Vice Chairman of NTC's Board of Directors. Quandt acknowledges that NTC cannot guarantee he will be elected to such position, however, the CEO shall (i) diligently and in good faith work for Quandt's election as Vice Chairman, and (ii) vote in favor of Quandt's election as Vice Chairman. 2.4 Quandt acknowledges and agrees that another individual, who is currently a senior executive at NTC, shall be appointed as the President of NTC's Marketing Division and shall be responsible for the marketing functions of NTC. Said President of the Marketing Division will also report directly to the CEO and will also be nominated by the CEO to serve on NTC's Board of Directors as a Vice Chairman, with a status on the Board of Directors equivalent to Quandt's position. 3.0 SALARY ------ 3.1 As compensation for Quandt's complete and satisfactory performance of his services in both the Executive Position and the Vice Chairman position during the term of his employment set forth herein, NTC shall pay Quandt a base salary of forty thousand dollars ($40,000) per month (said amount, together with any incremental increases 2 thereto as may be determined from time to time by the NTC Board of Directors, being hereinafter referred to as "Salary"). Any Salary payable hereunder shall be paid in regular intervals, but in no event less frequently than monthly, in accordance with NTC's payroll practices from time to time in effect. 4.0 INCENTIVE BONUS 4.1 As an incentive for Quandt to optimize NTC's profits for the benefit of NTC's shareholders in the performance of his duties set forth herein, NTC agrees to pay an incentive bonus to Quandt during the term of Quandt's employment by NTC ("Bonus") subject to Quandt earning such Bonus in accordance with the terms and conditions set forth below in Paragraph 4.2. 4.2 During the terms of Quandt's employment as set forth herein, NTC agrees that for any and all calendar quarters for which NTC achieves a pretax profit in excess of one million two hundred fifty thousand dollars ($1,250,000) for such calendar quarter ("Minimum Quarterly Profit"), then Quandt shall earn a Bonus of one and one-half percent (1.5%) of NTC's pretax profits over and above the Minimum quarterly Profit for that calendar quarter, provided (i) that payment of the Bonus shall not cause NTC's pretax profit to fall below the Minimum Quarterly Profit for the quarter in which such Bonus is earned, and (ii) that NTC's pretax profit for the succeeding calendar quarter (i.e., the quarter immediately following the calendar quarter in which the Bonus is earned) is reasonably expected to also exceed the Minimum Quarterly Profit. In the event the Bonus is earned for a calendar quarter but the amount of such Bonus would cause NTC's pretax profits for that quarter to fall below the Minimum Quarterly Profit, then the Bonus for that calendar quarter shall be reduced by such an amount that the pretax profit shall exactly equal one million two hundred fifty thousand dollars ($1,250,000) after the payment of such reduced Bonus. 4.3 The parties agree that NTC's quarterly pretax profits shall be established by (i) quarterly, unaudited financial statements internally prepared by NTC management in accordance with generally accepted accounting principles for the first three (3) calendar quarters of NTC's fiscal year, and (ii) year- end, audited financial statements prepared by NTC's outside auditing firm for the fourth (4th) quarter of NTC's fiscal year. 4.4 The parties agree that the Bonus, if earned for a specific calendar quarter, shall be paid to Quandt at the end of the calendar month in which NTC's quarterly financial statements for that specific quarter are incorporated in NTC's appropriate 10Q or 10K report and such report has been properly submitted by NTC to the Securities & Exchange Commission. 4.5 The parties agree that nothing containd herein with regard to any bonus and no action taken in respect to any bonus, including without limitation the Bonus and the Hiring Bonus (as defined below in Paragraphs 9.2 and 9.3), shall create or be construed to create a trust of any kind. Quandt's right to receive any bonus pursuant to this Agreement shall be no greater than the right of an unsecured general creditor of NTC to 3 receive payment from NTC. Any bonus paid to Quandt under this Agreement shall be paid from NTC's general funds, and no special or separate fund shall be established, and no segregation of assets shall be made, to assure payment of any bonus set forth herein. 4.6 The parties understand and acknowledge that Jacobs will be executing a separate agreement with NTC under which, at the time of the Start Date through the duration of NTC's employment of Quandt as set forth herein, Jacobs shall waive one- half of the quarterly incentive bonus to which Jacobs is entitled under his current employment contract with NTC (i.e., an incentive bonus which is currently three percent (3%) of the pretax profits of NTC in excess of the Minimum Quarterly Profits). 5.0 EMPLOYEE BENEFITS ----------------- 5.1 During the term of Quandt's employment hereunder, Quandt shall; (i) be eligible to participate in Employee fringe benefits and pension and/or profit sharing plans that may be provided by NTC for its senior executive employees in accordance with the provisions of any such plans, as the same may be in effect from time to time; (ii) be eligible to participate in any medical and health plans or other employee welfare benefit plans that may be provided by NTC for its senior executive employees in accordance with the provisions of any such plans, as the same may be in effect from time to time; (ii) be entitled to annual paid vacation in accordance with NTC's policy that may be applicable to senior executive employees, as the same may be in effect from time to time; (iv) be entitled to sick leave, sick pay and disability benefits in accordance with NTC's policy that may be applicable to senior executive employees, as the same may be in effect from time to time; and (v) be entitled to reimbursement for all reasonable and necessary out-of-pocket business expenses incurred by Quandt in the performance of his duties hereunder in accordance with NTC's policy that may be applicable thereto to senior executive employees, as the same may be effect from time to time. 6.0 WITHHOLDING 6.1 The payment of any Salary, employee benefits and bonuses hereunder shall be subject to applicable withholding and payroll taxes and such other deductions as may be required under NTC's employee benefit program. 7.0 STOCK OPTION PLAN 7.1 Under the execution of this Agreement and subject to the approval of NTC's Board of Directors, NTC shall grant to Quandt a non-qualified stock option to purchase up to six hundred thousand (600,000) shares of NTC common stock at a per-share purchase price to be established by NTC's Board of Directors in accordance with a NTC stock option program for executives and employees ("NTC Stock Option Plan") but in no case to be greater than (i) five dollar ($5.00) or (ii) fair-market value at the time of grant, whichever is the higher price ("Basic Option"). 4 7.2 The exercise period for the Basic Option shall be five (5) years from the date of grant. However, the parties agree that Quandt shall vest in the right to purchase such Basic Option shares only in the vent the contingencies set forth below in Paragraphs 7.3 and 7.4 occur. 7.3 Quandt shall vest in the right to purchase two hundred fifty thousand (250,000) shares of the Basic Option stock if and when he completes fifteen (15) months of employment by NTC in the Executive Position as set forth herein ("Time-Related Option"), subject to the terms and conditions set forth below in Paragraph 11.1.e, 11.2.d, 11.3.c, 11.4.f, and 11.5.c, and subject to the terms and conditions of the NTC Stock Option Plan. 7.4 Quandt shall vest in the right to purchase the remaining three hundred fifty thousand (350,000) shares of the Basic Option stock ("Profit-Related Option") only in the event NTC achieves cumulative pretax profits which total a minimum of ten million dollars ($10,000,000) in any four (4) contiguous calendar quarters prior to January 1, 1998 ("Minimum Option Profit") in accordance with the terms and conditions of the NTC Stock Option Plan. Quandt shall vest in the right to purchase such Profit-Related Option shares if and when NTC achieves the Minimum Option Profit, whether or not Quandt has yet vested in the right to purchase the Time Related Option stock, subject to the terms and conditions set forth below in Paragraphs 11.1.e, 11.2.d, 11.3.c, 11.4.f, and 11.5.c. 8.0 FUTURE EXPECTATIONS ------------------- 8.1 On or before January 1, 1997, NTC reasonably expects but does not guarantee that Jacobs shall enter into a new employment agreement with NTC under which Jacobs will remain with NTC, in a senior executive position and/or in a position as a member of NTC's Board of Directors, only until July 25, 1999. 8.2 NTC further reasonably expects but does not guarantee that (i) on or before January 1, 1999, Jacobs will retire from the position of CEO, and (ii) on or before July 25, 1999, Jacobs will retire from the position of Chairman of the Board of Directors. 8.3 In the event that the future occurrences set forth above in Paragraphs 8.1 and 8.2 do occur generally as currently expected, then, subject to the future exemplary performance of Quandt in his executive functions at NTC, NTC plans to (i) submit Quandt as the nominee for the position of NTC's CEO on or before the time of Jacobs' announcement of his retirement for such position, and (ii) submit Quandt as the nominee for the position of Chairman of NTC's Board of Directors on or before the time of Jacobs' announcement of his retirement from such position. Quandt acknowledges and agrees that NTC cannot guarantee the plans set forth in this Section 8.0, et al, will be implemented due to the normal and usual uncertainties as business has in predicting the future including without limitation, future events that are unforeseeable by NTC at this time and future events that may be beyond NTC's control. 5 9.0 EMPLOYMENT START DATE 9.1 The parties agree that the date on which Quandt's employment in the Executive Position shall start shall be January 6, 1997. 9.2 If Quandt is formally employed by NTC by January 6, 1997, he shall be entitled to a guaranteed Hiring Bonus to total two hundred twenty-five thousand dollars ($225,000), and shall be due and payable to Quandt on a quarterly basis ("Quarterly Hiring Bonus Payments") contingent upon NTC's pretax profits for each calendar quarter being in excess of the Minimum Quarterly Profit set forth above in Paragraph 4.2 (i.e., in excess of $1,250,000 for the quarter). The Hiring Bonus shall be one and one-half percent (1.5%) of NTC's pre-tax profits in excess of the Minimum Quarterly Profit. In the event that four (4) or more Quarterly Hiring Bonus Payments are required to fully pay the Hiring Bonus and the total amount of the first four (4) Quarterly Hiring Bonus Payments are less than one hundred fifty thousand dollars ($150,000) ("Minimum 1997 Hiring Bonus Payment"), then the Quarterly Hiring Bonus Payment for the fourth (4th) calendar quarter of 1997 shall be increased by the amount required for the first four (4) Quarterly Hiring Bonus Payments to total the Minimum for 1997 Hiring Bonus Payment. In the event that six (6) Quarterly Hiring Bonus Payments are not sufficient to fully pay the Hiring Bonus, and the total of the quarterly Hiring Bonus Payments for the six (6) calendar quarters ending on June 30, 1998, including any amount paid by NTC in order to meet the Minimum 1997 Hiring Bonus Payment, do not equal the total amount of the Hiring Bonus (i.e., a total of $225,000), then the Quarterly Hiring Bonus Payment for the second (2nd) calendar quarter of 1998 shall be increased by the amount required for the total amount of the Hiring Bonus to be fully paid to Quandt no later than the Quarterly Hiring Bonus Payment due for the second (2nd) calendar quarter of 1998. 9.3 The parties understand and acknowledge that in the event of a January 6, 1997 employment date by Quandt, Jacobs will execute a separate agreement with NTC under which Jacobs will agree to waive any remaining portion of the quarterly incentive bonus due to Jacobs under his current employment agreement with NTC (i.e., the one and one- half percent of NTC pretax profits in excess of the Minimum Quarterly Profits which is remaining after the bonus payment reduction described above in Paragraph 4.6) until such time as the Hiring Bonus is fully paid to Quandt as set forth above in Paragraph 9.3. 10.0 TERM OF AGREEMENT/EMPLOYMENT 10.1 The parties agree that the term of this Agreement shall be three (3) years beginning on the Start Date ("Term of Employment"). 11.0 EARLY TERMINATION 11.1 TERMINATION OF QUANDT BY NTC FOR "CAUSE" 11.1.a Quandt's employment by NTC, as set forth in this Agreement, shall immediately terminate upon Quandt's receipt of written notice from NTC that NTC is 6 terminating Quandt's employment for "cause", as "cause" is defined below in Paragraphs 11.1.b and 11.1.c ("For-Cause Termination"). 11.1.b The parties agree that "cause" for termination within the meaning of Paragraph 11.1.a, above, shall constitute any one or more of the following reasons: (i) Quandt's conviction for having committed a felon; (ii) acts of dishonesty or moral turpitude by Quandt that a reasonable person would agree are materially detrimental to NTC; (iii) acts or omissions by Quandt that Quandt knew or reasonably should have known would be likely to materially damage NTC's business; (iv) gross negligence by Quandt in the performance of his obligations as set forth in this Agreement, (v) willful disregard by Quandt of his obligations set forth in this Agreement ("Willful Disregard"); and/or (vi) failure by Quandt to obey the reasonable and lawful orders of NTC's Board of Directors ("Failure to Obey"). 11.1.c The parties also agree that, provided a Willful Disregard and/or a Failure to Obey do not also constitute "cause" under any of clauses (i) through (iv) of Paragraph 11.1.b, above, then a Willful Disregard and/or a Failure to Obey shall not constitute "cause" for termination within the meaning of Paragraph 11.1.b, above, unless and until Quandt shall have received written notice of such Willful Disregard or Failure to Obey and shall have been (i) given a reasonable opportunity to discuss the matter with the NTC Board of Directors, followed by a written notice that the NTC Board of Directors adheres to its position, and (ii) given a reasonable opportunity to cure such Willful Disregard or comply with such Failure to Obey, as the case may be. 11.1.d In the event Quandt's termination is a For-Cause Termination, notwithstanding anything to the contrary expressed or implied herein, except as required by applicable law, NTC shall not be obligated to make any payments to Quandt or make any payments on Quandt's behalf of any kind or nature whatsoever by reason of Quandt's For-Cause Termination, other than (i) such amounts, if any, of the Salary and Bonus as shall have accrued and remain unpaid as of the date of such For-Cause Termination, (ii) such amounts, if any, of the Hiring Bonus as shall remain unpaid, and (iii) such other amounts, if any, which may be then otherwise payable to Quandt from NTC's benefit plans or reimbursement policies. The parties agree that at NTC's option, amounts due to Quandt for the unpaid Hiring Bonus, if any, may be paid on a quarterly basis in accordance with the payment plan set forth above in Paragraph 9.3. 11.1.e In the event Quandt's termination is a For-Cause Termination, then on the date of such termination (i) any and all of the Time-Related Options and/or the Profit-Related Options in which Quandt has not yet vested shall be immediately null and void, and (ii) any and all of the Time-Related Options and/or Profit-Related Options in which Quandt has vested but has not yet exercised shall also be immediately null and void. 11.2 TERMINATION OF QUANDT DUE TO DEATH OR DISABILITY 11.2.a Quandt's employment by NTC, as set forth in this Agreement, shall be immediately terminated upon the occurrence of (i) Quandt's death ("Death"), or (ii) 7 Quandt's inability to perform his duties as set forth in this Agreement on account of his disability or incapacity for a period of one hundred eighty (180) or more days, whether or not consecutive, occurring within any period of twelve (12) consecutive calendar months ("Disability"). 11.2.b The parties agree that in the event of the termination of Quandt's employment by NTC due to Death or Disability, then NTC shall pay to Quandt or shall cause to be paid to Quandt, or to Quandt's personal representative, as the case may be, the amount of the Salary, if any, that Quandt would have otherwise been entitled to receive, as set forth above in paragraph 3.1, from the date of such termination through the end of the Term of Employment. At NTC's option, any amounts payable to Quandt by NTC pursuant to this Paragraph 11.2.b may be paid in equal monthly installment through the end of the Term of Employment. 11.2.c The parties also agree that NTC shall pay to Quandt, or to Quandt's personal representative, as the case may be, (i) such amounts, if any, of the Bonus as shall have accrued and remain unpaid as of the date of such termination due to Death or Disability, (ii) such amounts, if any, of the Hiring Bonus as shall remain unpaid, and (iii) such other amount, if any, which may be then otherwise payable to Quandt, or to Quandt's personal representative, as the case may be, from NTC's benefit plans or reimbursement policies through the date of such termination due to Death or Disability. The parties agree that at NTC's option, amounts due to Quandt for the unpaid Hiring Bonus, if any, may be paid on a quarterly basis in accordance with the payment plan set forth above in Paragraph 9.3. 11.2.d The parties further agree that in the event of the termination of Quandt's employment by NTC due to Death or Disability, then any and all of the Time-Related Options and/or the Profit-Related Options in which Quandt has not yet vested shall be immediately null and void. 11.3 TERMINATION OF QUANDT BY NTC OTHER THAN FOR "CAUSE" 11.3.a The parties agree that in the event of the early termination of Quandt's employment by NTC prior to the end of the Term of Employment for any reason other than (i) for reason of a For-Cause Termination, or (ii) for reason of Death or Disability, (collectively, "Not-For-Cause Termination"), then NTC shall pay to Quandt the amount of the monthly Salary that Quandt would have otherwise been entitled to receive, as set forth above in Paragraph 3.1, (i) for a period of twenty-four (24) months from the date of such For-Cause Termination, or (ii) for a period from the date of such Not-For-Cause Termination, or (ii) for a period from the date of such Not-For-Cause Termination through the end of the Term of Employment, whichever period is the greater. Any amounts payable to Quandt pursuant to this Paragraph 11.3.a shall be paid to Quandt by NTC in equal monthly installment, unreduced by any compensation or other income received by Quandt from other sources following the date of such Not-For-Cause Termination. 8 11.3.b The parties also agree that NTC shall pay Quandt (i) such amounts, if any, of the Bonus as shall have accrued and remain unpaid as of the date of such Not-For-Cause Termination, (ii) such amounts, if any, of the Hiring Bonus as shall remain unpaid, and (iii) such other amounts, if any, which may be then otherwise payable to Quandt from NTC's benefit plans or reimbursement policies through the date of such Not-For-Cause Termination. The parties agree that at NTC's option, amounts due to Quandt for the unpaid Hiring Bonus, if any, may be paid on a quarterly basis in accordance with the payment plan set forth above in Paragraph 9.3. 11.3.c The parties further agree that in the event of a Not-For-Cause Termination, Quandt shall immediately vest in the ownership rights of any of the Time-Related Options and Profit-Related Options, as set forth above in Section 7.0, et al, in which Quandt has not already vested. 11.4 RESIGNATION BY QUANDT FOR "GOOD CAUSE" 11.4.a Quandt's employment by NTC, as set forth in this Agreement, shall immediately terminate upon NTC's receipt of written notice from Quandt that Quandt is resigning his employment for "good cause", as "good cause" is defined below in Paragraphs 11.4.b and 11.4.c ("Good-Cause Resignation"). 11.4.b The parties agree that Quandt's resignation for "good cause" within the meaning of Paragraph 11.4.a, above, shall occur when notice of such resignation is given because (i) a material reduction in the duties and responsibilities of Quandt, as set forth in this Agreement ("Reduction of Duties"), has taken place, and/or (ii) a material breach of this Agreement by NTC ("Breach") has taken place, provided that in either such event Quandt shall have given NTC written notice specifying such Reduction in Duties and/or Breach, stating that Quandt intends to resign by reason thereof, and such Reduction of Duties and/or Breach shall continue without cure for thirty (30) days thereafter. 11.4.c The parties agree that that Quandt's resignation for "good cause" within the meaning of Paragraph 11.4.a, above, shall also occur when notice of such resignation is given within six (6) months following a material change in the ownership of NTC's common stock ("Ownership Change"). The parties agree that such Ownership Change shall occur when an individual, entity or group acquires a sufficient number of shares of NTC's common stock so as to be reasonably able to exercise control over the make-up of NTC's Board of Directors ("Controlling Interest") other than such Controlling Interest as may be owned by NTC's current parent company, Incomnet. 11.4.d The parties agree that in the event of the termination of Quandt's employment due to Quandt's Good Cause Resignation, then NTC shall pay to Quandt the amount of the monthly Salary that Quandt would have otherwise been entitled to receive, as set forth above in Section 3.1, (i) for a period of twenty-four (24) months from the date of such Good Cause Resignation, or (ii) for a period from the date of such Good Cause Resignation through the end of the Term of Employment, whichever period is the greater. Any amounts payable to Quandt pursuant to this Paragraph 11.4.d shall be paid to Quandt 9 by NTC in equal monthly installments, unreduced by any compensation or other income received by Quandt from other sources following the date of such Good Cause Resignation. 11.4.e The parties also agree that NTC shall pay Quandt (i) such amounts, if any, of the Bonus as shall have accrued and remain unpaid as of the date of such Good Cause Resignation, (ii) such amounts, if any, of the Hiring Bonus as shall remain unpaid, and (iii) such other amounts, if any, which may be then otherwise payable to Quandt from NTC's benefit plans or reimbursement policies through the date of such Good Cause Resignation. The parties agree that at NTC's option, amounts due to Quandt for the unpaid Hiring Bonus, if any, may be paid on a quarterly basis in accordance with the payment plan set forth above in Paragraph 9.3. 11.4.f The parties further agree that in the event of a Good Cause Resignation, Quandt shall immediately vest in the ownership rights of any of the Time-Related Options and Profit-Related Options, set forth above in Section 7.0, et al, in which Quandt has not already vested. 11.5 RESIGNATION BY QUANDT OTHER THAN FOR "GOOD CAUSE" 11.5.a Quandt's employment by NTC, as set forth in this Agreement, shall immediately terminate upon NTC's receipt of written notice from Quandt that Quandt is resigning his employment for reasons other than "good cause", as "good cause" is defined above in Paragraphs 11.4.b and 11.4.c ("Not-For-Cause Resignation"). 11.5.b In the event Quandt's termination is a Not-For-Cause Resignation, notwithstanding anything to the contrary expresses or implied herein, except as required by applicable law, NTC shall not be obligated to make any payments to Quandt or make payments on Quandt's behalf of any kind or nature whatsoever by reason of Quandt's Not-For-Cause Resignation, other than (i) such amounts, if any, of the Salary and Bonus as shall have accrued and remain unpaid as of the date of such Not-For Cause Resignation, (ii) such amounts, if any, of the Hiring Bonus as shall remain unpaid, and (iii) such other amounts, if any, which may be then otherwise payable to Quandt from NTC's benefit plans or reimbursement polices. The parties agree that at NTC's option, amounts due to Quandt for the unpaid Hiring Bonus, if any, may be paid on a quarterly basis in accordance with the payment plan set forth above in Paragraph 9.3. 11.5.c In the event Quandt's termination is a Not-For-Cause Resignation, then on the date of such termination (i) any and all of the Time-Related Options and/or the Profit-Related Options in which Quandt has not yet vested shall be immediately null and void, and (ii) any and all of the Time-Related Options and/or Profit-Related Options in which Quandt has vested but has not yet exercised shall also be immediately null and void. 10 12.0 CONFIDENTIAL INFORMATION 12.1 Quandt acknowledges and agrees that he will have access to and will participate in the development of or be acquainted with confidential and/or proprietary information and trade secrets related to the business of NTC or used in the business and operations of NTC which are not made publicly available, including but not limited to: (i) business plans, financial reports, operating data, budgets, wage and salary rates, pricing strategies and information, terms of agreements with suppliers or bankers and others, customer lists, lists of independent sales representatives, patents, devices, software programs, reports, correspondence, tangible property and specifications owned or used by NTC's businesses; (ii) information pertaining to future developments such as but not limited to potential acquisition of other companies or product lines, potential strategic alliance agreements for products or market segments, research and development, public offerings, marketing, distribution, delivery or merchandising plans or ideas, and potential new business locations; and (iii) other tangible and intangible property (collectively, "Confidential Information"). 12.2 Quandt agrees that all Confidential Information shall be the exclusive properties of NTC. Quandt further agrees and warrants that he shall not disclose, use or make known for his or another's benefit any Confidential Information in any way except in the best interests of NTC in the performance of Quandt's duties under this Agreement. However, NTC agrees Quandt may disclose Confidential Information when required by applicable law or judicial process, but only after notice to NTC of Quandt's intention to do so and opportunity for NTC to challenge or limit the scope of the disclosure. 12.3 Quandt acknowledges and agrees that a remedy at law for any breach or threatened breach of the provisions of this Section 12.0, et al, would be inadequate. Therefore, Quandt agrees that NTC shall be entitled to injunctive relief in addition to any other available rights and remedies in case of any such breach or threatened breach, provided, however, that nothing contained herein shall be construed as prohibiting NTC from pursuing any other rights and remedies available for any such breach or threatened breach. 12.4 Quandt agrees that upon termination of his employment by NTC for any reason, Quandt shall forthwith return to NTC any and all Confidential Information obtained in any way by Quandt during the period of his employment by NTC which in any way relates to the business of NTC including not limited to documents, correspondence, notebooks, reports, computer programs, computer discs and other electronic media, and all other materials and copies thereof. 12.5 Quandt agrees that his obligations under this Section 12.0, et al, shall survive the termination of the Terms of Employment and the expiration or termination of this Agreement and shall terminate three (3) years after the last to occur of such events. 11 13.0 AGREEMENT NOT TO COMPETE 13.1 During Quandt's employment by NTC and during a one (1) year period immediately following the termination of Quandt's employment hereunder, for any reason whatsoever, Quandt will not directly or indirectly, as a director, officer, employee, manager, consultant, contractor, advisor or otherwise, engage in competition with, or own any interest in, perform any services for, participate in or be connected with any business or organization which engages in competition with NTC (i) in any geographical area where any business is presently carried on by NTC, or (ii) in any geographical area where any business, during the period of Quandt's employment by NTC, shall be hereafter carried on by NTC, if such business is then being carried on by NTC in any such geographical area. The parties agree, however, that the provisions of this Paragraph 13.1 shall not be deemed to prohibit Quandt's ownership of not more than four percent (4%) of the total shares of all classes of stock outstanding of any publicly held company. 13.2 During Quandt's employment by NTC and during a one (1) year period immediately following the termination of Quandt's employment hereunder, Quandt shall not for any reason whatsoever, (i) directly or indirectly solicit for employment any employee of NTC, or (ii) directly or indirectly advise or recommend to any other person that they employ or solicit for employment any employee of NTC. 13.3 During Quandt's employment by NTC and during a one (1) year period immediately following the termination of Quandt's employment hereunder, for any reason whatsoever, Quandt shall not (i) directly or indirectly solicit for employment, or solicit for services, or solicit for any other business reason any person who was or is an independent sales representative in NTC's marketing program during the period of Quandt's employment by NTC, or (ii) directly or indirectly advise or recommend to any other person that such other person, directly or indirectly, solicit for employment, or solicit for services, or solicit for any other business reason any person who was or is, during the period of Quandt's employment by NTC, an independent sales representative in NTC's marketing program. 13.4 During Quandt's employment by NTC and during a one (1) year period immediately following the termination of Quandt's employment hereunder, for any reason whatsoever, Quandt shall not directly or indirectly hire, engage, send to work to, place orders with, or in any manner be associated with any supplier, contractor, subcontractor, or other person or firm which rendered services to, or sold products to NTC if such actions by Quandt would have a material adverse effect on the business, assets or financial condition of NTC. 13.5 For the purposes of this Section 13.0, et al, a person or entity, including without limitation, Quandt, shall be deemed to be a competitor of NTC, or a person or entity, including without limitation, Quandt, shall be deemed to be engaging in competition with NTC if such person or entity in any way conducts, operates, carries out or engages in (i) the business of marketing long distance telephone services or pager services or Internet access services, and/or (ii) such other business or businesses as NTC 12 may conduct in the future in such geographical areas or area as such business or businesses are conducted. 13.6 In connection with all the above provisions of this Section 13.0, et al, Quandt represents to NTC that his experience, capabilities and circumstances are such that such provisions will not prevent Quandt from earning a livelihood. Quandt agrees and understands that the Covenants he has made in this Section 13.0, et al, shall survive the termination of the Term of Employment and the expiration or termination of this Agreement and shall terminate one (1) year after the last to occur of such events. Quandt further agrees that the limitation, any time or territorial limitations, are reasonable and properly required for the reasonable and adequate protection of the business of NTC. 13.7 Quandt acknowledges and agrees that a remedy at law for any breach or threatened breach by Quandt of any of the provisions of this Section 13.0, et al, would be inadequate. Quandt therefore agrees that NTC shall be entitled to injunctive relief of any such breach or threatened breach, provided however, that nothing contained herein shall be construed as prohibiting NTC from pursuing any other rights and remedies available for any such breach or threatened breach. 14.0 RIGHT TO PAYMENTS 14.1 Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge or hypothecation or to exclusion, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null and void and of no effect. 15.0 APPROVAL BY BOARD OF DIRECTORS 15.1 Quandt understands and agrees that NTC has entered into this Agreement subject to the approval and ratification of NTC's Board of Directors. 16.0 GENERAL PROVISIONS 16.1 DISPUTES AND SELECTION OF VENUE. In the event of any dispute, controversy or claim ("Disputed Matter") between the parties to this Agreement or the breach thereof, the parties agree to and are obligated to submit the Disputed Matter to binding arbitration in accordance with the Rules of the American Arbitration Association. The parties further agree that such arbitration shall be held in the County of Orange in the State of California ("Venue"). By execution of this Agreement, the parties irrevocably and unconditionally submit to the jurisdiction of said arbitration in any such Disputed Matter. Nothing herein shall be construed to limit or restrict the rights of the parties to obtain equitable remedies and relief from any court of competent jurisdiction in said Venue. 16.2 APPLICABLE LAW. This Agreement shall be construed, governed and enforced in accordance with the laws of the State of California. 13 16.3 ATTORNEY FEES. In the event of any Disputed Matter between the parties hereto in connection with this Agreement, the prevailing party or parties shall be entitled to receive from the losing party or parties all of its reasonable costs, fees and expenses including but not limited to court costs and reasonable attorneys' fees. 16.4 AMENDMENT. No amendment, modification, waiver, discharge or change ("Amendment") to this Agreement shall be valid unless such Amendment is in writing and signed by all parties hereto. 16.5 ADDITIONAL DOCUMENTS. Each of the parties hereto specifically agrees to execute such other and further instruments and documents as may reasonably be required to effectuate the terms, conditions and objectives of this Agreement. 16.6 SEVERABILITY AND COMPLIANCE. If any term, condition or provisions of this Agreement is found to be invalid, contrary to law or otherwise unenforceable ("Invalid Provision"), such finding shall in no way affect the validity or enforceability of the other terms, conditions and provisions herein. Such other terms, conditions and provisions shall be valid and enforceable as if the Invalid Provision was never a part hereof. Each party hereto shall be excused without further liability from the performance of any duty, obligation or responsibility hereunder to the extent it is prevented from such performance by applicable laws, rules or regulations or by the order or decision of any regulatory authority. 16.7 WAIVER OF BREACH. The waiver of one party of a breach of any term, condition or provision of this Agreement by the other party or parties shall not operate or be construed as a waiver of any subsequent breach of any type whether of similar or dissimilar nature. 16.8 NOTICES. Any and all notices, demands or other communications ("Notice") given hereunder shall be delivered to the party to whom such Notice is addressed by delivery in person or by delivery through United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to Quandt: James R. Quandt c/o NTC 2801 Main Street Irvine, CA 92614 If to NTC: National Telephone & Communications, Inc. 2801 Main Street Irvine, CA 92614 Attn: Chairman If delivery is by United States mail, notice shall be deemed to have been given three (3) working days after being placed in such mail, as evidenced by a mailing receipt. Any 14 party may change its address for the purpose of this Agreement by giving the other parties written notice of its new address. 16.9 ASSIGNMENTS. Unless specifically granted in a term, condition or provision hereinabove, this Agreement and the rights and obligations granted or agreed to hereunder may not be assigned by any party or parties to this Agreement by sale of business, operation of law or otherwise without first obtaining the written consent of the other party which all parties agree will not be unreasonably withheld unless such an assignment is specifically disallowed in a term, condition or provision hereinabove. The parties further agree that nothing in this Paragraph 16.9 or in Paragraph 14.1 above shall preclude Quandt from designating a beneficiary to receive any benefit payable hereunder upon Quandt's death or incapacity. 16.10 VALID ENTITY. Each party of this Agreement which is a legal entity such as a partnership, corporation or trust or the like represents that it is a validly formed and existing entity, that it has the authority to enter into this Agreement and that all acts necessary to make this Agreement valid and binding have been done. The person or persons executing this Agreement on behalf of such entity represents that they have the right and authority to do so. 16.11 REPRESENTATION BY COUNSEL OF OWN CHOOSING. By executing this Agreement, each party to this Agreement represents and warrants that said party is either represented by counsel of his, her or its choosing, or has been advised to seek such representation, advice or counsel, and has voluntarily and knowingly declined to do so. 16.12 CONSTRUCTION. Any rule of law to the contrary notwithstanding, this Agreement shall be construed as if drafted by all parties regardless of which part or which party's legal counsel either actually drafted this Agreement or printed or physically memorialized this Agreement between the parties. 16.13 CAPTIONS. The captions in this Agreement are inserted for convenience of reference only and do not define, describe or limit the scope or the intent of this Agreement or any of the terms, conditions or provisions hereof. 16.14 NUMBER AND GENDER. The use of neuter, masculine or feminine gender and the singular or plural number in any terms, condition or provision of this Agreement shall be deemed to include the other whenever the context so requires. 16.15 COUNTERPARTS. This Agreement may be executed in one or more counterparts, and each such counterpart shall be deemed an original; but all of such counterparts taken together shall constitute one and the same agreement. 16.16 SURVIVAL. In the event this Agreement provides for a closing or a transfer of possession to or title of property, all terms, covenants, warranties and conditions of this Agreement shall survive such closing or transfer except for payments actually fully made or acts fully performed before or at the time of such closing or transfer. 15 16.17 ENTIRE AGREEMENT. This Agreement sets forth and constitutes the entire agreement between the parties with respect to the subject matter herein and supersedes all previous agreements, promises and representations, either oral or in writing, between the parties hereto with respect to the transactions covered hereby, and contains all the covenants and agreements between the parties. 16.18 BENEFITS. Subject to the restrictions on assignment and transfers, if any, which may be set forth in this Agreement, the terms, conditions and provisions of this Agreement shall inure to the benefit of and be binding on the parties hereto and all their respective successors including but not limited to permitted assigns, executors, administrators, heirs and representatives; and no other person or entity shall have any rights whatsoever under this Agreement. This Agreement is now therefore agreed to on this 6th day of January, 1997 in the County of Orange, State of California. NTC: Quandt: National Telephone & Communications, Inc. By: /s/ Edward R. Jacobs By: /s/ James R. Quandt --------------------------- -------------------------- Edward R. Jacobs James R. Quandt President and CEO 16 EX-10.33 9 EXHIBIT 10.33 SETTLEMENT AND MUTUAL RELEASE AGREEMENT THIS SETTLEMENT AND MUTUAL RELEASE AGREEMENT (the "Agreement") is entered into this 9th day of December 1996 by and between Robert Cohen, an individual, Alan Cohen, an individual, Jeff Rubin, an individual, Jeff Cohen, an individual, Broadway Partners, a partnership comprised of affiliates of Alan and Robert Cohen, Lenore Katz, an individual, and Allyson Cohen, an individual (collectively the "RCI Parties"), and Incomnet, Inc., a California corporation ("Incomnet"), with respect to the following facts. R E C I T A L S A. The RCI Parties purchased convertible promissory notes from the Company in February 1995, and shares of the Common Stock of the Company and warrants to purchase shares of the Common Stock from the Company in July 1995 (collectively, the "Securities"). B. The RCI Parties allege that the Company breached certain covenants and misled the RCI Parties in connection with the sale of the Securities to them. C. The Company may have certain claims (the "Claims") against certain of the RCI Parties in connection with the purchase by the Company of 51% of the outstanding Common Stock of Rapid Cast, Inc. in February 1995, and the sale by the RCI Parties of shares of the Company's Common Stock in 1995. D. The Company and the RCI Parties desire to settle all claims among themselves relating to the Securities and the Claims pursuant to the terms and conditions of this Agreement. NOW THEREFORE, for good and valuable consideration the receipt and sufficiency of which are hereby acknowledged by the parties, the parties hereby agree as follows: 1. PURCHASE OF WARRANTS BY THE RCI PARTIES AND REGISTRATION RIGHTS The RCI Parties agree to purchase and the Company agrees to issue to the RCI Parties, effective on December 9, 1996, the following numbers of warrants to purchase the following number of shares of the Common Stock of the Company (the "Underlying Shares") according to the following schedule, for a purchase price of $.10 per warrant, payable upon the execution of this Agreement by the Company:
NAME OF RCI PARTY NUMBER OF WARRANTS NUMBER OF EXERCISE PRICE EXERCISE PERIOD UNDERLYING SHARES Robert Cohen 100,000 100,000 $3.75 12/9/96 - 12/9/99 Alan Cohen 100,000 100,000 $3.75 12/9/96 - 12/9/99 Jeff Cohen 50,000 50,000 $3.75 12/9/96 - 12/9/99 Jeff Rubin 10,000 10,000 $3.75 12/9/96 - 12/9/99 Lenore Katz 10,000 10,000 $3.75 12/9/96 - 12/9/99 Allyson Cohen 50,000 50,000 $3.75 12/9/96 - 12/9/99 Broadway Partners 40,000 40,000 $3.75 12/9/96 - 12/9/99
2. PURCHASE OF STOCK BY CERTAIN RCI PARTIES The RCI Parties agree to purchase from the Company an aggregate of $100,000 worth of the Company's registered Common stock for a price equal to the last sale price of the Company's Common Stock as quoted on the NASDAQ Small Capital Market on the date that this Agreement is executed by the Company and at least one of the RCI Parties. The purchase price will be payable and the stock will be issuable upon or as soon as practicable after the execution of this Agreement by the Company. 3. RELEASE OF CLAIMS 3.1 THE SECURITIES AND THE CLAIMS Effective on December 9, 1996, each party to this Agreement fully and forever releases and discharges each other and any of the Company's past, present and future affiliates, employees, officers, directors, shareholders, attorneys, accountants, successors and predecessors from any and all claims, demands, obligations, losses, damages, or causes of action of any nature relating to the offer or sale of the Securities by the Company to the RCI Parties, or relating to any of the Claims, whether based in tort, contract or any other theory of recovery, and whether for compensatory or punitive damages, that now exist or may hereafter accrue based on actions occurring prior to the effective date of this release. 3.2 REPRESENTATIONS AND AGREEMENTS The undersigned agree that these releases shall not be considered admissions by any party of any liability or wrongdoing. The undersigned warrant that no promise or inducement has been offered except as herein set forth. The undersigned are of legal age and legally competent to execute this release and accept full responsibility therefor. The undersigned declare that the terms of this full and final release of claims have been completely read by the undersigned and are fully understood and voluntarily accepted for the purpose of making a full and final compromise and settlement. The parties hereto hereby represent and warrant that they have not assigned any of their above referenced released claims to any third party. The undersigned further agree that all rights under Section 1542 of the Civil Code of California, and any similar law of any state or territory of the United States or other jurisdiction, are hereby expressly waived. Said Section reads as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." 4. ASSIGNMENT OF CLAIMS The RCI Parties hereby assign to the Company all claims of any nature whatsoever which they may have against Sam D. Schwartz. The RCI Parties agree to execute any additional documents and take any additional action reasonably requested of them - 2 - by the Company in order to assist the Company in asserting such claims against Sam D. Schwartz. 5. INJUNCTIVE RELIEF 5.1 DAMAGES INADEQUATE Each party acknowledges that it would be impossible to measure in money the damages to the other party if there is a failure to comply with any covenants and provisions of this Agreement, and agrees that in the event of any breach of any covenant or provision, the other party to this Agreement will not have an adequate remedy at law. 5.2 INJUNCTIVE RELIEF It is therefore agreed that the other party to this Agreement who is entitled to the benefit of the covenants and provisions of this Agreement which have been breached, in addition to any other rights or remedies which they may have, shall be entitled to immediate injunctive relief to enforce such covenants and provisions, and that in the event that any such action or proceeding is brought in equity to enforce them, the defaulting or breaching party will not urge a defense that there is an adequate remedy at law. 6. WAIVERS If any party shall at any time waive any rights hereunder resulting from any breach by the other party of any of the provisions of this Agreement, such waiver is not to be construed as a continuing waiver of other breaches of the same or other provisions of this Agreement. Resort to any remedies referred to herein shall not be construed as a waiver of any other rights and remedies to which such party is entitled under this Agreement or otherwise. 7. SUCCESSORS AND ASSIGNS Each covenant and representation of this Agreement shall inure to the benefit of and be binding upon each of the parties, their personal representatives, assigns and other successors in interest. 8. ENTIRE AND SOLE AGREEMENT This Agreement constitutes the entire agreement between the parties and supersedes all other agreements, representations, warranties, statements, promises and undertakings, whether oral or written, with respect to the subject matter of this Agreement. This Agreement may be modified only by a written agreement signed by all parties. 9. GOVERNING LAW This Agreement shall be governed by and construed in accordance with the laws of the State of California, and the venue for any action hereunder shall be in the appropriate forum in the County of Los Angeles, State of California. - 3 - 10. COUNTERPARTS This Agreement may be executed simultaneously in any number of counterparts, each of which counterparts shall be deemed to be an original, and such counterparts shall constitute but one and the same instrument. 11. ATTORNEYS' FEES AND COSTS In the event that either party must resort to legal action in order to enforce the provisions of this Agreement or to defend such action, the prevailing party shall be entitled to receive reimbursement from the nonprevailing party for all reasonable attorneys' fees and all other costs incurred in commencing or defending such action, or in enforcing this Agreement, including but not limited to post judgment costs. 12. FURTHER ACTS The parties to this Agreement hereby agree to execute any other documents and take any further actions which are reasonably necessary or appropriate in order to implement the transactions contemplated by this Agreement. IN WITNESS WHEREOF, this Agreement has been entered into as of the date first above written. INCOMNET: INCOMNET, INC. By: ______________________________________________ Melvyn Reznick, President RCI PARTIES: __________________________________________________ Robert Cohen __________________________________________________ Alan Cohen __________________________________________________ Jeff Rubin __________________________________________________ Jeff Cohen __________________________________________________ Lenore Katz __________________________________________________ Allyson Cohen BROADWAY PARTNERS __________________________________________________ Robert Cohen, Partner __________________________________________________ Alan Cohen, Partner EX-23.1 10 EXHIBIT 23.1 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 March 19, 1997. /s/ Stonefield Josephson Accountancy Corporation - ------------------------------------------------------ STONEFIELD JOSEPHSON ACCOUNTANCY CORPORATION Santa Monica, California March 19, 1997 -----END PRIVACY-ENHANCED MESSAGE-----