-----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, D12LK8Jbd+mw4vs/Ulz/vI0060qRu96/oD2E3R9UBCS59Z7G6Ju/WALpZUqEWgc0 6Z/rnhXTFfMilEQKTQhmpQ== 0001047469-98-041388.txt : 19981123 0001047469-98-041388.hdr.sgml : 19981123 ACCESSION NUMBER: 0001047469-98-041388 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 DATE AS OF CHANGE: 19981120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INCOMNET INC CENTRAL INDEX KEY: 0000353356 STANDARD INDUSTRIAL CLASSIFICATION: 4813 IRS NUMBER: 952871296 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-12386 FILM NUMBER: 98753441 BUSINESS ADDRESS: STREET 1: 2801 MAIN STREET CITY: IRVINE STATE: CA ZIP: 92614 BUSINESS PHONE: 9492518000 MAIL ADDRESS: STREET 1: 2801 MAIN STREET CITY: IRVINE STATE: CA ZIP: 92614 FORMER COMPANY: FORMER CONFORMED NAME: INTELLIGENT COMMUNICATIONS NETWORKS INC DATE OF NAME CHANGE: 19860805 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 COMMISSION FILE NO. 0-12386 INCOMNET, INC. -------------- (Exact name of registrant as specified in its Charter) California 95-2871296 ---------- ---------- (State of Incorporation) (IRS Employer Identification No.) 2801 Main Street, Irvine, CA 92614 ---------------------------------- (Address of Principal Executive Offices) (949) 224-7300 -------------- (Registrant's Telephone number, including area code) 21031 Ventura Blvd. #1100, Woodland Hills, CA 92614 ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Number of shares of registrant's common stock outstanding as of September 30, 1998...................................................20,000,000 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INCOMNET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS) September 30, December 31, 1998 1997 (unaudited) ---- ---- ASSETS Current assets: Cash & cash equivalents $ 1,331 $ 776 Accounts receivable, less allowance for doubtful accounts of $2,830 at Sept. 30, 1998 and $2,764 at Dec. 31, 1997 9,204 13,850 Notes receivable -- 237 Notes receivable from employees & shareholders, net of reserves of $816 at Sept. 30, 1998 and $378 at Dec. 31, 1997 -- 840 Inventories -- 315 Other current assets 557 876 --------- ---------- Total current assets 11,092 16,894 Property, plant and equipment, at cost, net (Note 8) 10,714 16,248 Goodwill, net 4,024 6,484 Investments and other assets 720 888 --------- ---------- Total assets $ 26,550 $40,514 ========= ==========
See accompanying "Notes to Consolidated Financial Statements." 2 INCOMNET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONT'D)
(DOLLARS IN THOUSANDS) September 30, December 31, 1998 1997 (unaudited) ---- ---- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $8,983 $ 9,792 Accrued expenses 6,621 7,366 Current portion of notes payable (Note 4) 8,719 9,383 Deferred income and other liabilities 4,155 1,989 --------- ---------- Total current liabilities 28,478 28,530 Long-term liabilities Notes payable (Note 4) 1,481 2,855 Liabilities in excess of assets of Rapid Cast (Note 9) -- 3,600 Shareholders' equity/(deficit): Preferred stock, no par value; 100,000 shares authorized; 2,045.1 shares issued and outstanding September 30, 1998 and 3,995 shares issued and outstanding at December 31, 1997 (liquidation preference of $2,134 at September 30, 1998) 1,676 3,758 Common stock, no par value; 20,000,000 shares authorized; 20,000,000 shares issued and outstanding at September 30, 1998 and 14,259,000 shares at December 31, 1997 73,205 70,811 Treasury stock (5,492) (5,492) Accumulated deficit (72,798) (63,548) --------- ---------- Total shareholders' equity/(deficit) (3,409) 5,529 --------- ---------- Total liabilities & shareholders' equity/(deficit) $26,550 $ 40,514 ========= ==========
See accompanying "Notes to Consolidated Financial Statements." 3 INCOMNET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED SEPTEMBER 30, (DOLLARS IN THOUSANDS) 1998 1997 ---- ---- SALES (Note 2) $ 12,931 $ 33,318 ---------- ---------- OPERATING COSTS & EXPENSES: Cost of sales 7,999 23,384 General & administrative 8,345 6,730 Depreciation & amortization 916 821 Bad debt expense 859 1,600 Impairment of long-lived assets (Note 8) 4,865 -- Other expense, net 1,712 11,238 ---------- ---------- Total operating costs and expenses 24,696 43,773 Gain on sale of investment in Rapid Cast 2,700 -- Gain on reversal of liability in excess of assets of Rapid Cast (Note 9) 3,600 -- Loss on sale of AutoNETWORK (28) -- ---------- ---------- Loss before income taxes (5,493) (10,455) Income tax (benefits)/expense 48 (887) ---------- ---------- Net loss (5,541) $ (9,568) ========== ========== BASIC AND DILUTED LOSS PER COMMON SHARE: Net loss (Note 2) ($0.28) $ (0.70) ---------- ---------- Weighted average number of common shares outstanding 20,000,000 13,687,977 ========== ==========
See accompanying "Notes to Consolidated Financial Statements." 4 INCOMNET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1998 1997 ---- ---- SALES (Note 2) $ 47,982 $99,341 --------- ---------- OPERATING COSTS & EXPENSES: Cost of sales 30,226 69,525 General & administrative 20,115 20,740 Depreciation & amortization 2,784 2,218 Bad debt expense 3,123 3,448 Impairment of long-lived assets (Note 8) 4,865 -- Other expense, net 2,453 11,297 ---------- ----------- Total operating costs and expenses 63,566 107,228 Gain on sale of investment in Rapid Cast 2,700 -- Gain on reversal of liability in excess of assets of Rapid Cast (Note 9) 3,600 -- Gain on sale of AutoNETWORK 535 -- ---------- ----------- Loss before income taxes (8,749) (7,887) Income tax (benefits) (50) (679) ---------- ----------- Net loss $ (8,699) $ (7,208) ========== =========== BASIC AND DILUTED LOSS PER COMMON SHARE: Net loss $ (0.50) $ (0.53) ========== =========== Weighted average number of common shares outstanding 17,504,000 13,687,977 ========== ===========
See accompanying "Notes to Consolidated Financial Statements." 5 INCOMNET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 1998 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (8,699) $ (7,207) Depreciation & amortization 2,784 2,524 Provisions for receivables, inventories and investments 833 -- Asset impairments 4,865 -- Disposal of assets 1,035 -- Sale of Rapid Cast stock (2,700) -- Sale of AutoNETWORK (535) -- Gain on reversal of liability in excess of assets of Rapid Cast (3,600) -- Other 110 -- --------- ---------- Net cash inflow/(outflow) from operating activities (5,907) (4,683) CASH FLOWS FROM (INCREASE)/DECREASE IN OPERATING ASSETS: Accounts receivable 5,464 (5,777) Notes receivable - current 265 (122) Notes receivable - due from employees and shareholders -- (571) Inventories 468 2,261 Other current assets 58 (1,486) --------- ---------- Net cash inflow/(outflow) from changes in operating assets 6,255 (5,695) CASH FLOWS FROM INCREASE/(DECREASE) IN OPERATING LIABILITIES: Accounts payable (808) (149) Accrued expenses 2,039 (1,715) Deferred income (707) (850) --------- ---------- Net cash inflow/(outflow) from changes in operating liabilities 524 (2,714) --------- ---------- Net cash inflow/(outflow) from operations 872 (13,092) CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of plant and equipment (1,224) (3,725) Goodwill from acquisition of GenSource -- (2,223) Sale of Rapid Cast stock 1,500 -- Sale of AutoNETWORK 1,299 -- Liability in excess of assets of Rapid Cast -- 3,600 Investments and other assets 14 -- --------- ---------- Net cash inflow/(outflow) from investing activities $ 1,589 $ (2,348)
6
1998 1997 ---- ---- CASH FLOWS FROM FINANCING ACTIVITIES: Notes payable - current $ (1,531) $ -- Settlement of class action lawsuit -- 8,651 Sale of common stock, net 185 -- Preferred stock -- 1,343 Notes payable - long term (507) 4,391 Other - net (53) 10 --------- ---------- Net cash inflow/(outflow) from financing activities (1,906) 14,395 --------- ---------- Net cash inflow/(outflow) from investing and financing (317) 12,047 --------- ---------- Net increase/(decrease) in cash and cash equivalents 555 (1,045) Cash at beginning of period 776 2,214 --------- ---------- Cash at end of period $1,331 $ 1,169 ========= ========== SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES The company recorded the following in connection with the change in the method of accounting of Rapid Cast from the consolidated to equity method Accounts receivable $ (1,139) Inventory (2,449) Prepaid expenses and other (245) Property and equipment - net (888) Intangible assets (1,241) Other assets (35) Accounts payable 2,656 Accrued expenses 862 Notes payable 3,630 Cash received from Rapid Cast private placement 2,449 ---------- $3,600 ---------- ----------
See accompanying "Notes to Consolidated Financial Statements." 7 INCOMNET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1998 1. Management's Representation: The management of Incomnet, Inc. (the "Company") has prepared the consolidated financial statements included herein without audit. Certain information and note disclosures normally included in the consolidated financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to the regulations of the SEC for presentation of interim period financial information in Form 10-Q. In the opinion of the management of the Company, all adjustments considered necessary for fair presentation of the consolidated financial statements have been included and were of a normal recurring nature, except for non-recurring items, including the gain on the sale of Rapid Cast stock, the gain on the sale of AutoNETWORK, the gain on the reversal of the liability in excess of assets of Rapid Cast, Inc. ("Rapid Cast"), and charges relating to asset impairments. Management believes that the accompanying consolidated financial statements present fairly the financial position of the Company and its consolidated subsidiaries as of September 30, 1998, and the results of operations for the three months and nine months ended September 30, 1998 and 1997, and cash flows for the nine months ended September 30, 1998 and 1997. It is suggested that these consolidated financial statements be read in conjunction with the consolidated audited financial statements and notes for the three years ended December 31, 1997, included in the Company's Annual Report on Form 10-K/A filed with the Securities and Exchange Commission on April 30, 1998, as amended (the "1997 Annual Report"). The interim results are not necessarily indicative of the results for a full year. 2. Summary of Significant Accounting Policies: PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, National Telephone & Communications-TM-, Inc. ("NTC") and GenSource Corporation-TM- ("GenSource"). REVENUE RECOGNITION - The Company recognizes revenue during the month in which services or products are delivered, as follows: (1) NTC's long distance telecommunications service revenues are generated when customers make long distance telephone calls from their business or residential telephones or by using any of NTC's telephone calling cards. Proceeds from prepaid telephone calling cards are recorded as deferred revenues when the cash is received, and recognized as revenue as the telephone service is utilized. Long distance telephone service sales in the three and nine months ended September 30, 1998 totaled $12.0 million and $44.0 million, respectively, versus long distance telephone service sales of $28.7 million and $83.5 million in the three and nine months ended September 30, 1997, respectively. (2) NTC's marketing-related revenues are derived from programs and material sold to the Company's base of independent sales representatives, including forms and supplies, fees for account executive and training executive renewals, and the Company's account executive and training executive programs. The Company requires that all such services and materials be paid at the time of purchase. Revenues from marketing-related materials, net of amounts deferred for future services provided to the representatives, are booked as revenues when the cash is received. A portion of the revenues from marketing related programs and materials is deferred and recognized over a twelve-month period as the Company provides customer support to its independent representatives. For the three and nine months ended September 30, 1998, marketing sales totaled $0.3 million and $1.5 million, respectively, versus marketing sales of $3.6 million and $13.6 million for the three and nine months ended September 30, 1997. (3) Revenues from the Company's GenSource subsidiary are derived from the sale of computer software and from related services, such as software maintenance fees, custom programming and customer training. Revenues are recognized when software is shipped to customers and when services are performed and accepted by customers. Revenues in the three and nine months ended September 30, 1998 totaled $0.6 million and $2.1 million, respectively, versus revenues of $0.6 million for the three months ended September 30, 1997. Since the Company acquired GenSource in May 1997, revenues for the five months ended September 30, 1997 were $1.1 million. When maintenance or custom programming fees are billed annually or received in advance, the revenues are deferred and recognized when services are rendered. 8 INCOMNET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1998 CONCENTRATION OF CREDIT RISK - The Company sells its telephone, network services and insurance-related software and related services to individuals and small businesses throughout the United States and does not require collateral. Reserves for uncollectible amounts are provided, which management believes are sufficient. COMPUTER HARDWARE, FURNITURE AND OFFICE EQUIPMENT - Computer hardware, furniture and office equipment are stated at cost. Depreciation is provided by the straight-line method over the assets' estimated useful lives of 3 to 10 years. COMPUTER SOFTWARE - The Company capitalizes the costs associated with purchasing, developing and enhancing its computer software. All software costs are amortized using the straight-line method over the assets' estimated useful lives of 3 to 10 years. LEASEHOLD IMPROVEMENTS - All leasehold improvements are stated at cost and are amortized using the straight-line method over the expected lease term. The Company's new management is evaluating the utilization and carrying value of $5.1 million of leasehold improvements at its headquarters in Irvine, California. The Company expects to complete this evaluation in the 4th Quarter of 1998. NET LOSS PER SHARE - Net loss per common share, basic and diluted, is based on the weighted average number of common shares outstanding. Common equivalent shares have been excluded as their effect is anti-dilutive. ACQUISITION AMORTIZATION - The excess of purchase price over net assets of NTC have been recorded as an intangible asset and is being amortized by the straight-line method over twenty years. In the three months ended September 30, 1998, the Company recorded a charge of $2.0 million associated with the excess of purchase price over net assets of GenSource [see Note 8]. DEFERRED TAX LIABILITY - Deferred income taxes result from temporary differences in the basis of assets and liabilities reported for financial statement and income tax purposes. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. IMPAIRMENT OF LONG-LIVED ASSETS - In accordance with the provisions of SFAS No. 121, the Company regularly reviews long-lived assets and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount to the assets may not be recoverable. In the three months ended September 30, 1998, the Company recorded a charge of $4.9 million associated with the impairment of assets [see Note 8]. 3. Funding of Marketing Commissions and Deferred Income: The Company's subsidiary, NTC, maintains separate bank accounts for the payment of marketing commissions. Funding of these accounts is adjusted regularly to provide for management's estimates of required reserve balances. NTC estimates the total commissions owed to active independent representatives ("IR Earned Compensation") each week for all monies collected that week due to the efforts of those active independent representatives. All IR Earned Compensation is then paid to the independent representatives, when due, directly out of the separate bank account. 4. Notes Payable: Short-term and long-term notes payable consist of the following: 9 INCOMNET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1998
($ THOUSANDS) September 30, December 31, 1998 1997 ---- ---- Short-term Notes Payable: Notes payable to founding stockholders of GenSource, interest at 8% $1,240 $ 373 Notes payable to bank for line of credit to NTC, interest at prime plus 1.5%, due as current liability 6,911 8,440 Capitalized lease obligations 568 570 ------- ------- Total Short-term portion of Notes Payable 8,719 9,383 ------- ------- Long-term Notes Payable: Notes payable to founding stockholders of GenSource, interest at 8% 570 1,537 Capitalized lease obligations 911 1,318 ------- ------- Total Long-term portion of Notes Payable 1,481 2,855 ------- ------- Total Notes Payable $10,200 $12,238 ======= =======
Approximately $1.2 million in long-term notes owed to two former owners of GenSource has been reclassified as short-term notes because the Company is in default on paying the notes [see "Note 7. Commitments and Contingencies and Item 1. Legal Proceedings - Lawsuit By Two Former Owners of GenSource Corporation"]. Subsequent to September 30, 1998, NTC has made additional payments on its notes payable to bank for line of credit, so that the remaining balance as of November 13, 1998 is approximately $4.9 million. 5. Network Marketing Costs: Marketing sales of $0.3 million and $1.5 million for the three and nine month periods ended September 30, 1998, respectively, and $3.6 million and $13.6 million for the three and nine month periods ended September 30, 1997, respectively, were generated by the sale of materials, training and support services to assist NTC independent sales representatives in signing up new retail customers and enrolling other representatives in the NTC program. During the three and nine months ended September 30, 1998, NTC's net costs to operate its network marketing program were $0.8 million and $2.3 million, respectively, versus net costs of $0.7 million and $1.7 million for the three and nine months ended September 30, 1997, respectively, as summarized below:
3 Months Ended 3 Months Ended ($ MILLIONS) September 30, 1998 September 30, 1997 ------------------ ------------------ Marketing Sales $0.3 $ 3.6 ------- ----- Cost of marketing sales 0.4 3.0 Operating expenses for support services 0.7 1.3 ------- ----- Total marketing-related costs 1.1 4.3 ------- ----- Net marketing cost $0.8 $ 0.7 ===== =====
10 INCOMNET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1998 % of total NTC (long distance & marketing) sales 6.2% 2.2%
9 Months Ended 9 Months Ended ($ MILLIONS) September 30, 1998 September 30, 1997 ------------------- ------------------ Marketing Sales $1.5 $ 13.6 ------- ----- Cost of marketing sales 1.5 11.2 Operating expenses for support services 2.3 4.1 ------- ----- Total marketing-related costs 3.8 15.3 ------- ----- Net marketing cost $2.3 $ 1.7 ===== ===== % of total NTC (long distance & marketing) sales 4.8% 1.8%
6. COMPENSATION OF INDEPENDENT SALES REPRESENTATIVES: The Company's subsidiary, NTC, compensates its independent sales representatives by an earned commission structure based upon signing up new telephone customers and based upon the telephone usage generated by those customers. In the three and nine months ended September 30, 1998, expenses associated with commissions, bonuses and overrides paid to NTC's independent representatives were $1.1 million and $3.9 million, respectively, versus commissions, bonuses and overrides paid to NTC's independent representatives of $4.4 million and $15.3 million, respectively, for the three months and nine months ended September 30, 1997. 7. COMMITMENTS AND CONTINGENCIES: LITIGATION - The Company is a defendant in a class action matter and related lawsuits that were filed in 1995 and 1996 alleging securities violations with respect to alleged false denial and non-disclosure of a Securities and Exchange Commission investigation and alleged non-disclosure of purchases and sales of the Company's stock by an affiliate of the former Chairman of the Board. In October 1997, the Company reached a settlement of the class action lawsuit and established a reserve of $8.65 million associated with the settlement. In September 1998, the Company's new management renegotiated the settlement on more favorable terms [see "Item 1. Legal Proceedings - Class Action and Related Lawsuits"]. The proposed settlement has not received final Court approval and, unless the Company receives additional financing, it may be unable to make the payment required by the proposed settlement. Accordingly, there are no assurances that the settlement will be completed as proposed. As a result, no changes have been made to the reserve provided in anticipation of the settlement. It does not appear that the Company or NTC has any insurance in place to cover either the cost of the class action matter and related lawsuits or other pending and threatened litigation or the cost of their potential losses. The Company is unable to estimate the outcome of its other lawsuits and is unable to predict a range of potential loss. Accordingly, no amounts have been provided for these additional lawsuits in the accompanying financial statements. WORLDCOM CONTRACT - Since September 1995, the Company's subsidiary, NTC, has had a carrier contract with WorldCom Network Services, Inc. ("WorldCom"). The contract was renegotiated in October 1998 by the Company's new management. The new contract has revised the former minimum purchase requirements in excess of $1.1 billion and also revised wholesale rates. Under the new terms, the Company has agreed to purchase $250 million in telephone service over a three-year period, with the ability to extend the purchase requirement for an additional two years if required. In February 1998, WorldCom extended credit to NTC of up to $3 million at an 11 INCOMNET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1998 interest rate of 18% per annum by allowing NTC to deduct from payments owing to WorldCom under terms of the old carrier contract. NTC is presently in default on obligations to make payments of approximately $3.4 million. On October 30, 1998, NTC and WorldCom entered into an agreement under which WorldCom agreed to forbear from taking any action against NTC and also agreed to reschedule the payment of amounts in default. Under the terms of the forbearance agreement, WorldCom will have a first priority lien on NTC's subscriber base and a second priority lien on accounts receivable as long as the amount in default is outstanding. The forbearance and repayment schedule are contingent upon the Company completing a $20 million secured financing expected to be provided by Ironwood Telecom LLC ("Ironwood") by December 15, 1998 [see "Item 5. Other Information -Funding Commitment From Ironwood Telecom"]. FIRST BANK LOAN - As of September 30, 1998, NTC was in default on a note to First Bank & Trust of Newport Beach ("First Bank") of approximately $6.9 million. NTC has subsequently made several payments to First Bank that reduced the note to approximately $4.9 million as of November 13, 1998. First Bank has a first priority lien on the Company's accounts receivable until the note is repaid. On October 30, 1998, the Company and First Bank reached an agreement under which First Bank agreed to forbear from taking any action against NTC until December 15, 1998. The forbearance and repayment schedule are contingent upon the Company completing a $20 million secured financing expected to be provided by Ironwood by December 15, 1998 [see "Item 5. Other Information - Funding Commitment From Ironwood Telecom"]. NOTES TO FORMER OWNERS OF GENSOURCE CORPORATION -- In May 1997, the Company entered into promissory notes to four former owners of GenSource associated with the acquisition of GenSource in May 1997. The notes obligated the Company to pay the four former owners an aggregate of $1.9 million over a period of five years, plus interest of 8%, with payments commencing in May 1998. In June 1998, the Company defaulted on payments to two of the former owners, who have filed a lawsuit against the Company seeking full payment of their notes, which total approximately $1.2 million. The Company is presently negotiating with the two former owners who have filed the lawsuit to resolve the issue. There can be no assurances that there will be a favorable outcome to these negotiations [see "Item 1. Legal Proceedings - Lawsuit From Former Owners of GenSource"]. The Company is unable to estimate the outcome of this lawsuit and is unable to predict a range of potential loss. Accordingly, no amounts have been provided for this lawsuit in the accompanying financial statements. 8. NON-RECURRING CHARGES: In the three months ended September 30, 1998, the Company completed its evaluation of the recoverability of certain long-lived assets at NTC and GenSource. In connection with this evaluation, the Company has recorded a $4.9 million non-cash write-down of the carrying value of certain long-lived assets to their estimated fair value, consisting primarily of a write-off of $1.6 million at NTC taken for leasehold improvements at one of its facilities, and $3.2 million associated with GenSource, consisting primarily of approximately $2.0 million of goodwill resulting from the Company's acquisition of GenSource and $1.2 million of property, plant and equipment at GenSource. 9. INVESTMENT IN UNCONSOLIDATED AFFILIATE: In the three months ended September 30, 1998, the Company sold 4.5 million shares of its investment in Rapid Cast for $2.7 million. Cash of $1.5 million was received in August 1998 and cash of $1.1 million was received in October 1998. The remaining $0.1 million is to be received in November 1998. In 1997, the basis for accounting for Rapid Cast was changed from the consolidation to the equity method of accounting, when Incomnet's ownership interest diminished from 51% to 33%. At that time, the liabilities of Rapid Cast exceeded its assets, as recorded in the Company's consolidated balance sheet, by approximately $3.6 million. Accordingly, this $3.6 million liability was recorded in 1997. In the three months ended September 30, 1998, management determined that it no longer believes that there would be any further obligation of the Company to Rapid Cast and, in accordance with generally accepted accounting principles for equity investments, the liability amount of $3.6 million was reversed to income. 12 INCOMNET, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1998 10. YEAR 2000 COMPLIANCE: The Company has completed a preliminary assessment for Year 2000 compliance at its NTC and GenSource subsidiaries. The management of GenSource believes that it has achieved Year 2000 compliance in its software products that are currently offered for sale to its customers and has a plan in place to achieve Year 2000 compliance for its internal operations. NTC has identified the major applications and systems that must either be upgraded or replaced in order to achieve Year 2000 compliance. A preliminary budget of $2.6 million has been established at NTC for the necessary changes [see "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Year 2000 Readiness Disclosure"]. The Company has recorded no charge or reserve to achieve Year 2000 compliance and will recognize expense associated with Year 2000 compliance as it occurs. 11. COMPREHENSIVE INCOME: Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"), which establishes standards for reporting and displaying comprehensive income and its components in the financial statements. For the three and nine month periods ended September 30, 1998 and 1997, the Company did not have any components of other comprehensive income as defined in SFAS 130. 12. SUBSEQUENT EVENTS: FUNDING COMMITMENT FROM IRONWOOD TELECOM - On October 30, 1998, the Company received a commitment letter from Ironwood to provide the Company with a secured credit facility of $20 million less certain amounts to be loaned or paid to third parties for the benefit of the Company. As part of the secured credit facility, the Company has already received a bridge loan that is due and payable on December 15, 1998 when the secured credit facility is expected to be funded. Ironwood's commitment is subject to the completion of certain conditions. If the secured financing is completed, the principal amount will be due and payable on December 31, 2000 [see "Item 5. Other Information - Funding Commitment From Ironwood Telecom."]. IRONWOOD LOAN TO CASEY; COHEN OPTION EXERCISE - In connection with the exercise of an option to acquire preferred stock pursuant to a previous agreement reached between the Company's Chairman, John P. Casey and certain preferred stock owners on November 5, 1998, Ironwood loaned Mr. Casey approximately $2.1 million, the proceeds of which were used to exercise the option. The Company will either redeem the preferred stock on or before the one-year anniversary of the date the Company's Articles of Incorporation are amended to increase the number of authorized shares of common stock, if it is financially able, or the preferred stock will be converted to common stock and offered to the Company's shareholders on a pro-rata basis [see "Item 5. Other Information - Ironwood Loan to Casey; Cohen Option Exercise"]. TRANSACTIONS WITH OTHER PREFERRED HOLDERS - On November 4, 1998, Ironwood entered into transactions similar to the Casey Option transaction with five others holders of preferred stock. Under these transactions, Ironwood paid an aggregate amount of approximately $1.1 million to these five holders to purchase shares of preferred stock convertible into an aggregate of approximately 2.3 million shares of the Company's Common Stock or approximately 7% of the Company's Common Stock on a fully diluted basis. The Company will either redeem the preferred stock on or before the one-year anniversary of the date the Company's Articles of Incorporation are amended to increase the number of authorized shares of common stock, if it is financially able, or the preferred stock will be converted to common stock and offered to the Company's shareholders on a pro-rata basis [see "Item 5. Other Information -Transactions with Other Preferred Holders"]. RENEGOTIATION OF SEVERANCE AGREEMENTS WITH FORMER MANAGEMENT; AMENDED EMPLOYMENT AGREEMENT - On October 30, 1998 and November 1, 1998, the Company renegotiated severance agreements with the Company's former President and Chief Executive Officer, NTC's former President and Chief Executive Officer, NTC's former Senior Vice President and Chief Financial Officer and with a present employee of the Company. As a result of these negotiations, the Company's severance payments and employment contractual commitments to those individuals were reduced [see "Item 5. Other Information -- Renegotiation of Severance Agreements With Former Management; Amended Employment Agreement"]. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENTS: This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company intends that such forward-looking statements be subject to the safe harbors created by such statutes. The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties. Accordingly, to the extent that this Quarterly Report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of the Company and its subsidiaries, please be advised that the Company and its subsidiaries' actual financial condition, operating results and business performance may differ materially from that projected or estimated by the Company in forward-looking statements. The differences may be caused by a variety of factors, including but not limited to adverse economic conditions, intense competition, including intensification of price competition and entry of new competitors and products, adverse federal, state and local government and agency regulation, inadequate capital, unexpected costs and operating deficits, increases in general and administrative costs, lower sales and revenues than forecast, loss of customers, loss of suppliers, technical problems with the Company's products, failure to obtain new customers, litigation and administrative proceedings involving the Company, including the pending class action and related lawsuits, the possible acquisition of new businesses that result in operating losses or that do not perform as anticipated, resulting in unanticipated losses, inability of the Company to continue as a going concern, adverse publicity and news coverage, inability to carry out marketing and sales plans, loss of key executives, loss of independent sales representatives, changes in interest rates, inflationary factors, default on indebtedness and other specific risks that may be aluded to in this Quarterly Report or in other reports issued by the Company. The inclusion of forward- looking statements in this Quarterly Report should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. GENERAL: The Company has two subsidiaries, NTC and GenSource. NTC is engaged in the business of providing discount long distance telephone communication services to residential and commercial customers in the United States. GenSource is in the business of developing and marketing software programs used to administer insurance-related claims, such as workers' compensation and short-term and long-term disability. LOSSES AT NTC -- Beginning in August 1997, and continuing through the nine months ended September 30, 1998, NTC has continued to experience declining revenues due to losses in the number of telephone customers and the number of active independent sales representatives. Those losses were the result of a number of factors (the "NTC Loss Factors"), including the following: - Sanctions imposed by the California Public Utilities Commission in the first quarter of 1998 and related compliance obligations imposed under a stipulation among NTC, the California Attorney General and the Orange County District Attorney. The sanctions and compliance obligations followed findings that NTC had engaged in unauthorized switching of customers' interexchange carrier during 1997. The order also required that several former senior executives and directors leave the Company. - NTC's failed attempt at a public offering of its common stock in September 1997. - The termination of the proposed sale of all or substantially all of NTC's assets to a third party as previously disclosed in July 1998. - The operational distraction caused by the Company's focus on the failed IPO and sale of NTC, 14 - The departure of Jerry Ballah, Christopher Mancuso and several key independent sales representatives to form a competitive telecommunications marketing company and their efforts to hire away employees and to induce independent sales representatives and telephone customers to leave NTC and join them in their new operations [see "Item 1. Legal Proceedings - Lawsuit Against Jerry Ballah"]. - The financial difficulties at the Company and NTC as a result of the above factors and the resulting issuance of a going concern opinion by the Company's independent auditors in the 1997 Annual Report. OPPOSITION TO THE SALE OF NTC; CASEY OPTION TO ACQUIRE PREFERRED STOCK - During the second quarter of 1998, John P. Casey, a significant shareholder of the Company, announced his opposition to the proposed sale of NTC. Mr. Casey also announced that he was evaluating his options, including replacement of a majority of the Company's then board members. By mid-July 1998, Mr. Casey owned 6.1 million shares of the Company's common stock, representing 31% of the then outstanding shares, and acquired an option to purchase 1,598 shares of preferred stock, or 78% of the Company's outstanding convertible preferred stock (the "Cohen Preferred Stock"), from 13 holders (collectively, the "Cohen Parties"). Mr. Casey attempted, but was not successful, in obtaining the balance of the outstanding convertible preferred stock (i.e., 445 shares or approximately 22% of the outstanding convertible preferred stock (the "Other Preferred Shares")) from five additional owners (the "Other Preferred Holders"). The Cohen Parties and the Other Preferred Holders (collectively, the "Preferred Holders") had attempted to convert their preferred shares into common stock in June 1998, when the Company's common stock price was in the range of $0.19 per share. The Company did not have sufficient authorized common stock to effect those conversions. If the Company had sufficient authorized common stock in June 1998, the Preferred Holders would have received an aggregate of 11,387,806 shares of the Company's common stock, representing approximately 30% of the Company's common stock on a fully diluted basis. DEFAULTS ON NOTES TO FORMER OWNERS OF GENSOURCE -- In June 1998, the Company defaulted on payments under promissory notes to two former owners of GenSource and has not made any further payments to them under these notes. These two noteholders have sued the Company seeking full payments under their notes of $1.2 million [see "Item 1. Legal Proceedings - Lawsuit By Two Former Owners of GenSource Corporation"]. NTC DEFAULTS - In August 1998, NTC received a notice from WorldCom, the provider of NTC's telecommunications services, that WorldCom intended to disconnect those services if certain conditions could not be satisfied and defaults could not be cured. At the same time, NTC was in default on its loan with its primary lender, First Bank. On August 27, 1998, WorldCom and First Bank informed the Company and NTC that, as a condition to continuing service and forbearance on amounts owed to them, they would require, among other things, that the Company and its former Board of Directors enter into an agreement with John Casey with respect to changing the composition of the Company's Board of Directors. THE BOARD CHANGE AGREEMENT - During August and September 1998, Mr. Casey engaged in negotiations with the Company's board regarding a change in a majority of the board members and management. Those negotiations resulted in a Board Change Agreement that was consummated on September 29, 1998 (the "Board Change Agreement") [see Item 5. Other Information - Change of Control of the Company's Board of Directors and Chief Executive Officer"]. The Board Change Agreement provided for the resignation of five of the Company's six directors and the appointment of Mr. Casey and two of Mr. Casey's designees, John P. Hill, Jr. and Michael A. Stein, as new directors. Howard Silverman agreed to continue to serve as a director of the Company. Since the Board Change Agreement, the new board appointed Denis Richard as the new President and Chief Executive Officer of the Company and NTC. The new board appointed Mr. Richard and R. Scott Eisenberg as additional board members. 15 RECENT DEVELOPMENTS -- In the third quarter of 1998 and since the change in composition of the Company's Board of Directors, the following improvements have taken place in the Company's business activities and operations: - On October 30, 1998, the Company received a commitment from Ironwood, subject to certain conditions, to provide the Company with up to $20 million in a secured credit facility by December 15, 1998 [see "Item 5. Other Information - Funding Commitment From Ironwood Telecom"]. The proceeds from this financing principally will be used to satisfy the Company's obligations to WorldCom and First Bank and pay certain other accrued liabilities. - In September 1998, the Company entered into a revised settlement agreement in connection with its pending class action lawsuit on more favorable terms than those proposed in the original settlement in December 1997 [see "Item 1. Legal Proceedings. Class Action and Related Lawsuits"]. This settlement is subject to final court approval. - In September 1998, the District Attorney of Orange County lifted a restriction that required NTC to wait 24 hours before verifying that a new customer wanted to sign up for NTC's telephone service. Lifting this restriction has eliminated a major disadvantage that NTC had in signing up new telephone customers. - In July 1998, NTC settled a lawsuit with one of its leading former representatives, who has rejoined the Company and is playing an important role in the effort to revitalize NTC's network marketing operations. - In October 1998, NTC renegotiated its contract with WorldCom. The renegotiation has resulted in a decrease of the "take or pay" provisions of the contract from $1.1 billion to $250 million over a three year period, with the ability to extend for two additional years if necessary [see "Notes To Consolidated Financial Statements - Note 7. Commitments and Contingencies"]. The new contract also has resulted in an immediate decrease in the Company's telephone rates, which have been passed on to new customers through the introduction of new marketing programs that management believes are among the most competitive in the industry. - NTC is taking steps to revitalize its network marketing organization, including developing new telecommunications products that are more competitive, working closer with its independent sales representatives to help them better understand the products and services provided by NTC, developing new commission and bonus programs that will make NTC more competitive in attracting new independent sales representatives and expanding its focus on recruiting representatives primarily from Southern California to a nationwide focus. Management is hopeful that the aggressive, new marketing plan will revitalize its recruiting efforts for additional representatives. - As a condition to obtaining financing from Ironwood, the Company has renegotiated severance agreements with former executives of the Company and NTC and with a present employee of the Company [see "Item 5. Other Information - Renegotiation of Severance Agreements With Former Management; Amended Employment Agreement"]. These executives have also agreed to terminate options to purchase stock from the Company. - John P. Casey and Ironwood purchased all of the outstanding convertible preferred stock and associated rights from the Preferred Holders under arrangements that require Mr. Casey and Ironwood to hold the stock for approximately one year to enable the Company to redeem such stock for a price representing no actual profit except, in the case of Ironwood, for a carrying cost factor. That redemption price is currently estimated at $3.9 million (the "Preferred Price"). The Company hopes to redeem the preferred stock, if financially able, prior to expiration of the redemption period. Those transactions have the effect of avoiding a dilution to the Company's shareholders of more than 10 million shares, or approximately 28%, of the Company's common stock on a fully-diluted basis. If the Company is not financially able to redeem the preferred stock, Ironwood and Mr. Casey are obligated to make the common 16 stock underlying the Preferred Stock available for sale to shareholders on a pro-rata basis at the Preferred Price [see "Item 5. Other Information - Ironwood Loan to Casey; Cohen Option Exercise and Transactions With Other Preferred Holders"]. - The Company is pursuing a variety of options in attempting to secure additional sources of equity and debt financing to permit the Company to meet its liquidity needs. The Company currently believes that it will need to secure additional financing during the first quarter of 1999 to continue its operations [see "Liquidity and Capital Resources" in this section]. LIQUIDITY AND CAPITAL RESOURCES: Overall, the Company experienced positive cash flow of $0.6 million during the nine months ended September 30, 1998, resulting from a cash inflow from operations of $0.9 million and cash used in investing and financing activities of $0.3 million. The Company, however, will need to raise additional capital in 1998 and 1999 to repay obligations owing to WorldCom and First Bank, to fund settlement costs related to pending litigation, to pay off severance agreements to former management, to pay for costs incurred associated with the change in the composition of the Company's Board of Directors and to fund the cost of revitalizing the Company's business operations. SHORT-TERM FINANCING -- In September and October 1998, the Company sold 4.5 million shares of its holdings of 10.6 million shares of Rapid Cast, raising a total of $2.7 million. The Company has no immediate plans to sell additonal shares of Rapid Cast stock, although it may do so in the future to meet its liquidity needs. On November 4, 1998, the Company received a commitment from Ironwood Telecom LLC to provide up to $20 million (less amounts loaned or paid to third parties for the benefit of the Company) through a secured credit facility, a portion of which the Company has already received in the form of a bridge loan. The Company anticipates that the secured credit facility will be funded on or before December 15, 1998 [see "Item 5. Other Information - Funding Commitment From Ironwood Telecom"]. The funds from the secured credit facility will be used principally to pay off WorldCom, First Bank and certain other accrued liabilities. The remainder will be used to fund the Company's operations. Completion of the secured credit facility is subject to a number of conditions. No assurance can be given that the Company will be able to complete the secured credit facility. If such facility is not completed, no assurance can be given that the Company will be able to continue in operation in the absence of such a facility. LONG-TERM FINANCING - The secured credit facility to be provided by Ironwood is designed to meet the Company's short-term financing needs. By the first quarter of 1999, the Company anticipates that it will require additional financing to revitalize its operations. To that end, the Company is taking steps to arrange additional financing. Such financing may take the form of either additional debt or equity. If the Company is successful in raising new financing, the Company plans to use the proceeds to revitalize NTC's network marketing organization, to develop new marketing channels and to introduce new telecommunication products. The Company also anticipates selling its remaining ownership of 6.1 million shares of Rapid Cast when appropriate, although it presently has no specific plans to sell such shares. There is no assurance that the Company and NTC will be able to raise sufficient capital or financing to meet their needs through additional sources of funding. There is no assurance that the Company will be able to sell its shares in Rapid Cast, which is a privately held company. Furthermore, there is no assurance that the Company will receive appropriate financing to meet its needs even if NTC receives financing. Finally, there is no assurance that the Company's revitalization plan will succeed even if the Company obtains financing. GENSOURCE CORPORATION - The Company is in default on promissory notes of approximately $1.2 million to two former owners of GenSource. These former owners have filed a lawsuit against the Company for failure to pay the notes [see "Item 1. Legal Proceedings - Lawsuit By Two Former Owners of GenSource Corporation"]. As part of ongoing discussions with these noteholders, the Company is assessing various alternatives, including the possible disposition of its interests in GenSource. In the nine months ended September 30, 1998, the Company funded the development of GenSource's GenCOMP-TM- for Windows workers' compensation claims administration software system. The development of GenCOMP-TM- for Windows has been completed and the product is now actively being sold by GenSource. The Company is negotiating with the former owners of GenSource and with GenSource's management 17 to determine the appropriate steps to resolve the situation regarding the defaulted notes and the Company's commitment to GenSource as a subsidiary. CAPITAL EXPENDITURES - The Company spent approximately $1.2 million in the nine months ended September 30, 1998 for the acquisition of plant and equipment at NTC and GenSource. To meets its capital needs for the future, the Company believes that it will have to spend approximately $2.6 million in the next 12 months to upgrade certain equipment and software used in its operations. These upgrades will also assist the Company in meeting its Year 2000 compliance requirements. Because the Company presently does not have the capital for such anticipated expenditures, it will have to receive loans to finance these expenditures or to raise funds through the sale of equity [see "Long-Term Financing" in this section]. YEAR 2000 READINESS DISCLOSURE -- Many existing computer systems and applications use only two digits to identify a year in their respective date fields without considering the impact of the upcoming change in the century. These systems need to be corrected or replaced with systems that are Year 2000 ("Y2K") compliant. GenSource has completed a preliminary assessment of its Y2K compliance. Management of the Company's GenSource subsidiary, after completion of a Y2K testing program, believes that it has achieved Y2K compliance in the software products that are currently offered for sale to its customers and has taken steps with its customers to have any required software patches or upgrades installed on prior products sold. GenSource has also identified internal systems that may require upgrades to be Y2K compliant and believes that such related costs will not be material. GenSource has already contacted its key software suppliers to receive information on their Y2K compliance plans. No assurance can be given that a Y2K compliance problem will not be discovered in the future relating to GenSource's current products, or to patches and upgrades made on prior products sold. The Company's NTC subsidiary has identified the major applications and systems that must either be upgraded or replaced to better meet the needs of NTC's operations and for Y2K compliance. These changes will result in a combination of software and/or hardware upgrades or replacement. Several key systems that must be addressed by NTC are: its internal financial system, the billing and customer service system, the independent representative tracking and commission system, the calling card system, the Local Exchange Carrier ("LEC") billing system, the internal corporate telephone exchange, the security and HVAC systems at NTC's facilities, and other systems. NTC has established a preliminary budget of $2.6 million for the necessary changes identified to date. NTC has dedicated internal resources to the Y2K problem and has acquired software upgrades to existing equipment. NTC is also considering engaging an outside consulting firm to prepare a final assessment and, possibly, to act as Y2K project manager. NTC has also begun discussions with its key suppliers and vendors with respect to their own Y2K compliance plans, including: WorldCom, its underlying carrier; USBI, a LEC billing clearing house; and GTE and SBC Communications, with whom NTC has direct LEC billing and collection agreements. NTC intends to address its Y2K issues by upgrading or replacing its software and hardware as required, as well as its non-information-technology systems. However, there can be no assurance at this time that NTC will be able to make any such changes, that any of NTC's systems or applications are or will be Y2K compliant, that such upgrades will be completed on a timely basis at reasonable costs, or that such upgrades will be able to anticipate and correct all of the problems triggered by the actual impact of Y2K. There can be no assurance, even if the Company and its subsidiaries achieve Y2K compliance in their own products and services, that systems provided to the Company by outside suppliers will be Y2K compliant. There also can be no assurance that such impact will not result in a material disruption or have a material adverse effect on the Company's business, results of operation or financial condition. The most likely worst case Y2K scenario at NTC which management has identified to date is that, due to unanticipated Y2K compliance problems, NTC may be unable to bill its customers, in full or in part, for services used. Should this occur, it would result in a material loss of some or all gross revenue to NTC for an indeterminable amount of time, which could cause NTC to cease operations. The Company has not yet developed a contingency plan to address this worst case Y2K scenario, but with new anticipated financing, the Company plans to develop such a plan by September 1999. 18 CASH FLOW FROM OPERATIONS - The Company experienced $0.9 million in positive cash flow from operations during the first nine months of 1998 compared to $13.1 million in negative cash flow from operations during the prior year's comparable period. This year-to-year increase in cash flow from operations resulted primarily from (1) a net cash inflow of $6.3 million from changes in operating assets, primarily $5.5 million from accounts receivable, which decline in accounts receivable was caused by the NTC Loss Factors; (2) a net cash inflow of $0.5 million from changes in operating liabilities, primarily a cash inflow of $2.0 million from accrued expenses offset by cash outflows of $0.8 million and $0.7 million, respectively, from accounts payable and deferred income, which were caused by the NTC Loss Factors; and (3) a net cash outflow of $5.9 million from other operating activities, primarily the Company's net loss of $8.7 million, the sale of Rapid Cast stock of $2.7 million and the deferred gain from the write-off of Rapid Cast of $3.6 million, partially offset by asset impairment of $4.9 million, depreciation and amortization of $2.8 million, and disposal of assets of $1.0 million. CASH FLOW FROM INVESTING - The Company experienced a cash inflow from investing activities of $ 1.6 million in the first nine months of 1998 as compared with a negative cash flow of $2.3 million in the first nine months of 1997. The positive cash flow in the first nine months of 1998 resulted primarily from (1) a cash inflow of $1.3 million for the sale of the Company's AutoNETWORK subsidiary in April 1998 and (2) a cash inflow of $1.5 million from the sale of 4.5 million shares of stock in Rapid Cast for $2.7 million in September 1998 versus a cash outflow of $1.2 million for the acquisition of plant and equipment. The remaining $1.2 million for the sale of Rapid Cast stock was booked as a receivable in September 1998, most of which was received in October 1998. CASH FLOW FROM FINANCING - The Company had negative cash flows from financing activities of $1.9 million during the nine months ended September 30, 1998 compared with positive cash flow of $14.4 million during the nine months ended September 30, 1997. The negative cash flow during the first nine months of 1998 resulted primarily from repayments of short-term and long-term debt, including a reduction in debt owed to First Bank from $8.4 million on December 31, 1997 to $6.9 million on September 30, 1998 and a reduction in long-term capital lease obligations from $1.3 million on December 31, 1997 to $0.9 million on September 30, 1998. LITIGATION - The Company is subject to pending litigation. Management is not yet able to predict the impact of the pending litigation on its financial condition and results of operations. Other pending litigation may have a material adverse effect on the Company's financial condition and results of operation [see "Part II. Item 1. Legal Proceedings"]. GOING CONCERN - As a result of the substantial net losses incurred by the Company and its subsidiaries in 1997, and because its current liabilities exceeded its current assets by $11.6 million on December 31, 1997, the Company's independent certified public accountants stated in their report included in the 1997 Annual report, that there is substantial doubt regarding the Company's ability to continue as a going concern. Since current liabilities exceeded current assets by $17.4 million as of September 30, 1998, the Company believes that its independent certified public accountants would issue a similar going concern qualification regarding the Company's financial condition if the accountants were engaged to review and report on the Company's financial status. RESULTS OF OPERATIONS: SALES - Sales of $12.9 million in the third quarter ended September 30, 1998 decreased 61% versus sales of $33.3 million in the third quarter ended September 30, 1997. For the nine months ended September 30, 1998, sales decreased to $48.0 million from $99.3 million in the nine months ended September 30, 1997, a decrease of 52%. This decrease was attributable to a decrease in sales at NTC to $12.3 million in the three months ended September 30, 1998 from sales at NTC of $32.3 million in the three months ended September 30, 1997. The decline in sales is primarily due to the NTC Loss Factors which are discussed in more detail under "General" in this section. For the nine months ended September 30, 1998, sales at NTC decreased to $45.4 million from $97.1 million in the nine months ended September 30, 1997, a decrease of 53%. The following table summarizes the Company's sales performance by subsidiary and segment during the comparable third quarters in 1998 and 1997: 19
$ in millions ---------------------- Subsidiary Segment 1998 1997 - - ------------ ----------------------------------------- ------- ------- NTC Telephone (telecommunications services) $12.0 $ 28.7 NTC Telephone (marketing programs) 0.3 3.6 GenSource Software 0.6 0.6 AutoNETWORK Network -- 0.4 ------ ------- Total Company Sales $12.9 $ 33.3 ====== =======
COST OF SALES - Total Company cost of sales decreased to $8.0 million or 62% of sales during the quarter ended September 30, 1998 verses $23.4 million or 70% of sales during the quarter ended September 30, 1997. For the nine months ended September 30, 1998, cost of sales decreased to $30.2 million from $69.5 million for the nine months ended September 30, 1997. The decrease in cost of sales resulted largely from decreasing carrier costs associated with decreased telephone service sales by NTC and decreasing commissions paid to NTC's independent sales representatives. The following table summarizes the Company's changes in three major cost components for the three months ended September 30, 1998 and 1997, respectively:
($ in millions) -------------------------- September September 30, 1998 30, 1997 ----------- ----------- Commissions paid to NTC independent sales representatives $ 1.1 $ 4.4 Carrier costs for NTC's long distance telephone service 6.4 17.8 All other costs of sales 0.5 1.2 ------- ------- Total Company Cost of Sales $ 8.0 $ 23.4 ======= =======
NTC's total commission expense decreased to $1.1 million in the third quarter of 1998 compared to $4.4 million in the same quarter of 1997. The decrease in commissions is directly related to the decline in NTC's telephone revenues to $12.0 million and to the decline in NTC's marketing revenues to $0.3 million. Representatives receive a percentage of long distance revenues in commissions and receive bonuses when new independent sales representatives sign up a certain number of new telephone customers. NTC's carrier costs to deliver long distance telephone service to its telephone customers decreased to $6.4 million in the third quarter of 1998 compared to $17.8 million in the third quarter of 1997. This decrease in carrier costs reflects a decline in sales. In the third quarter of 1998, the gross margin for telecommunication services was 47%, while in the third quarter of 1997, gross margin was 38%. The increase in gross margin reflects improved margins on both domestic and international rates. 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; and (2) GenSource's cost of producing software products and related services. GENERAL & ADMINISTRATIVE - Total general and administrative costs increased to $8.3 million in the quarter ended September 30, 1998 or 64% of sales compared to $6.7 million for the three months ended September 30, 1997 or 20% of sales. General and administrative expenses were $20.1 million for the nine months ended September 30, 1998 versus $20.7 million for the nine months ended September 30, 1997. 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. The increase in general and administrative 20 costs in the current quarter were primarily attributable to expenses of approximately $1.1 million incurred during the quarter by the Company associated with the change in composition of the Company's Board of Directors [see "Item 5. Other Information - Change of Control of the Company's Board of Directors"] and reserves of approximately $1.8 million for related expenses, including (1) $1.1 million for legal and related expenses and (2) $0.2 million for the severance agreement with the Company's former CEO. Costs for salaries, fringe benefits, supplies and related support costs at NTC decreased to $14.7 million in the nine months ended September 30, 1998 versus $19.5 million for the nine months ended September 30, 1997, a decrease of 25%. In the three month ended September 30, 1998, salaries, fringe benefits, supplies and related support costs at NTC decreased to $4.7 million versus $6.5 million in the three months ended September 30, 1998, a decline of 28%. This decrease reflects NTC's efforts to lower its overhead because of decreasing sales. DEPRECIATION & AMORTIZATION - Total Company depreciation and amortization expense was $0.9 million in the third quarter ended September 30, 1998 versus $0.8 million in the third quarter ended September 30, 1997. Depreciation and amortization expense for the nine months ended June 30, 1998 was $2.8 million versus $2.2 million for the nine months ended September 30, 1997. This increase was caused by increased investment by NTC in computer hardware and software, furniture and equipment, and leasehold improvements in 1997 prior to a decline in its sales and by an increase in investment in computer software and hardware by GenSource. BAD DEBT EXPENSE - Total Company bad debt expense decreased to $0.9 million in the third quarter of 1998 from $1.6 million in the third quarter of 1997, a decrease of 44%. Bad debt expense for the nine months ended September 30, 1998 decreased to $3.1 million versus bad debt of $3.4 million for the nine months ended September 30, 1997, a decrease of 8.8%. The decrease in bad debt expense reflects declined level of telephone sales at NTC. Bad debt expense in the third quarter of 1998 also includes $0.6 million associated with the write-off of a loan to a former officer of NTC. As a percentage of sales, bad debt expense for the nine months ended September 30, 1998 was 6.5% of sales versus 3.5% of sales for the nine months ended September 30, 1997. The increase in the percentage of bad debt expense in relationship to sales is related primarily to the write-off of a loan to a former officer of NTC. IMPAIRMENT OF LONG-LIVED ASSETS - In the three months ended September 30, 1998, the Company completed its evaluation of the recoverability of certain long-lived assets at its NTC and GenSource subsidiaries. In connection with this evaluation, the Company has recorded a $4.9 million non-cash write-down of the carrying value of certain long-lived assets to their estimated fair value. The write-offs include approximately $1.7 million at NTC, primarily leasehold improvements at one of its facilities, and $3.2 million associated with GenSource, consisting primarily of $2.0 million of goodwill resulting from the Company's acquisition of GenSource and $1.2 million of property, plant and equipment at GenSource. OTHER EXPENSE - The Company's other expense was $1.7 million in the quarter ended September 30, 1998 versus an expense of $11.2 million in the third quarter of 1997. Other expense for the nine months ended September 30, 1998 was $2.5 million versus other expenses of $11.3 million for the nine months ended September 30, 1997. Other expense in the third quarter ended September 30, 1998 consisted primarily of write downs of $1.1 million associated with fixed assets and organization cost and interest expense of $0.5 million. For the nine months ended September 30, 1998, other expense of $2.4 million consisted primarily of $1.1 million associated with fixed assets and organization cost, interest expense of $1.1 million and $0.2 million for a legal settlement. For the nine months ended September 30, 1997, the $11.3 million in other expense was primarily related to a charge of $8.7 million taken for the settlement of the class action lawsuit and $1.6 million for the settlement of the civil consumer protection lawsuit against NTC. OTHER - There were certain other non-recurring expenses in the quarter ended September 30, 1998 that consisted primarily of a gain of $3.6 million associated with the reversal of the liability in excess of assets related to the Company's investment in Rapid Cast and a gain of $2.7 million associated with the sale of Rapid Cast stock. 21 NET LOSS - The Company had a net loss of $5.5 million for the three months ended September 30, 1998 compared to a loss of $9.6 million for the three months ended September 30, 1997. For the nine months ended September 30, 1998, the Company had a net loss of $8.7 million versus a net loss of $7.2 million in the nine months ended September 30, 1997. The net loss for the nine months ended September 30, 1998 was due primarily to: (1) a charge of $4.9 million associated with the impairment of assets at the Company's NTC and GenSource subsidiaries; (2) a decline in sales at the Company's NTC subsidiary that has resulted in operating losses at NTC; and (3) expenses associated with the proposed sale of the Company's NTC subsidiary and the change of in composition of the Company's Board of Directors [see "General" in this section and "Item 5. Other Information - Change of Control of the Company's Board of Directors"]. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS SECURITIES AND EXCHANGE COMMISSION INVESTIGATION: The investigation of the Company by the SEC has been settled with respect to the Company and two former directors of the Company, Stephen A. Caswell and Joel W. Greenberg. Mr. Caswell is presently employed by the Company. The SEC's investigation with respect to the Company focused on press releases issued by the Company on January 17 and 18, 1995, and September 6, 1995, which the SEC alleged contained untrue statements of material fact, and a report on Form 8-K issued by the Company on August 28, 1995, which the SEC also alleged contained untrue statements of material fact. On May 14, 1998, the Company, Mr. Caswell and Mr. Greenberg entered into an Offer of Settlement and Order with the Securities and Exchange Commission pursuant to which they agreed, without admitting or denying any wrongdoing, not to violate Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-2, 13a-11 and 13a-13 thereunder of the Securities Exchange Act of 1934 as amended. No civil penalties or other financial sanctions were imposed on any of the parties. The final administrative order was entered by the SEC on July 30, 1998. CLASS ACTION AND RELATED LAWSUITS: The Company has been sued in a class action lawsuit entitled SANDRA GAYLES ET AL., VS. SAM D. SCHWARTZ AND INCOMNET, INC., Case No. CV95-0399 AWT (BQRx), initially filed in January 1995 in the United States District Court for the Central District of California (the "Gayles Class Action Lawsuit"). The Gayles Class Action Lawsuit relates to claims alleging that the Company violated certain sections of the federal securities laws because it did not disclose and falsely denied the existence of the non-public investigation of the Company commenced by the SEC in August 1994. The Gayles Class Action Lawsuit also includes additional claims against Sam D. Schwartz, the Company's former Chairman and Chief Executive Officer. The Gayles Class Action Lawsuit is more fully described in the Company's 1997 Annual Report under "Item 3. Legal Proceedings," which description is hereby incorporated by this reference. In September 1998, the Company entered into a new written settlement agreement with the plaintiffs in the Gayles Class Action Lawsuit. The settlement agreement is subject to court approval and satisfaction of certain other conditions. The terms of the settlement include payment to the plaintiffs of a total of $500,000, reimbursement of certain expenses up to a maximum of $100,000 and issuance of a certain number of shares of the Company's Common Stock based on a formula. The maximum number of shares of Common Stock that will be issued in accordance with the formula under the settlement agreement is 4,125,000, assuming a $1 per share trading price at the time the formula is applied, and the minimum number of shares of Common Stock that will be issued under the settlement agreement is 1,375,000 shares, assuming a $3 per share trading price at the time the formula is applied. Prior to completion of the settlement agreement and issuance of the shares in accordance with that agreement, the Company's shareholders must approve an amendment to the Company's Articles of Incorporation to increase the authorized number of shares of Common Stock. It is anticipated that the closing of the settlement agreement and issuance of shares will occur no earlier than March 1999. No assurance can be given that the settlement agreement will be consummated. Further, no assurance can be given that this lawsuit will not have a material adverse impact on the business, financial condition or results of operation of the Company. 22 In a matter related to the claims alleged in the Gayles Class Action Lawsuit, the Company was sued in an action entitled JAMES A. BELTZ, ET AL, VS. SAMUEL D. SCHWARTZ AND RITA SCHWARTZ; INCOMNET, INC ET AL., filed in the United States District Court, District of Minnesota in July 1997 and also filed as a parallel action in the State Court of Minnesota (collectively, the "Beltz Lawsuit"). The plaintiffs in the Beltz Lawsuit purportedly opted out of the Gayles Class Action Lawsuit and brought similar claims against the Company and its former Chairman and Chief Executive Officer, Mr. Schwartz. The Beltz Lawsuit is more fully described in the Company's 1997 Annual Report under "Item 3. Legal Proceedings," which description is hereby incorporated by this reference. In addition, Mrs. Rita Schwartz has filed a lawsuit against the Company alleging that she is entitled to reimbursement from the Company of expenses she incurred in connection with the Beltz Lawsuit and the above-described SEC investigation. In September 1998, Mr. Caswell, Mr. Greenberg, Mr. Bodner and Mr. Huberfeld were dismissed from the federal action in the Beltz Lawsuit, while the Company was dismissed from all counts in the Beltz federal action except for one count. The Company, Mr. Caswell, Mr. Greenberg, Mr. Huberfeld and Mr. Bodner remain as defendants in the Beltz state court action. No assurance can be given that the Beltz Lawsuit will not have a material adverse impact on the business, financial condition or results of operation of the Company. In another matter related to the claims alleged in the Gayles Class Action Lawsuit, the Company was sued in an action entitled SILVA RUN WORLDWIDE LIMITED VS. INCOMNET, INC., SAM D. SCHWARTZ ET AL., filed in the United States District Court for the Southern District of New York in November 1996 (the "Silva Run Lawsuit"). In 1997, the claims against the Company and Mr. Schwartz were transferred to the same court hearing the Gayles Class Action lawsuit. The plaintiffs in the Silva Run Lawsuit purportedly opted out of the Gayles Class Action Lawsuit and brought claims against the Company and Mr. Schwartz based on alleged violations of the securities laws. The Silva Run Lawsuit is more fully described in the Company's 1997 Annual Report under "Item 3. Legal Proceedings," which description is hereby incorporated by this reference. On November 9, 1998, except for one breach of fiduciary duty claim, the court dismissed all federal and state claims asserted by plaintiffs in the Silva Run Lawsuit on the ground that the Silva Run plaintiffs had failed to properly opt-out of the GAYLES Class Action Lawsuit. In September 1998, Robert Zivitz and Nancy Zivitz, a former member of the Company's Board of Directors filed a lawsuit against Sam D. Schwartz, Rita Schwartz and Joel W. Greenberg, et al. in the United States District Court, Northern District of Illinois. Mr. Schwartz is the former Chairman and Chief Executive Officer of the Company, while Mrs. Schwartz and Mr. Greenberg are former directors of the Company. The lawsuit alleges, among other things, that defendants fraudulently promoted the Company's securities in 1995. The Company is not named in the lawsuit. Mr. Schwartz, Mrs. Schwartz and Mr. Greenberg have requested that the Company indemnify them from the claims brought against them in this lawsuit and that the Company advance them legal fees. The Company is presently reviewing the request for indemnification and advancement of legal fees. INCOMNET, INC. VS. SAM D. SCHWARTZ: The Company filed a lawsuit in April 1997 in the Superior Court of California in the County of Los Angeles against Sam D. Schwartz, the Company's former Chairman and Chief Executive Officer, in an action entitled INCOMNET, INC. VS. SAM D. SCHWARTZ (the "Schwartz Lawsuit"). The Schwartz Lawsuit is more fully described in the Company's 1997 Annual Report under "Item 3. Legal Proceedings," which description is hereby incorporated by this reference. The Company claims in this lawsuit that Mr. Schwartz, among other things, failed to disclose material information to the Company as required by law that resulted in damages to the Company. The Company seeks to recover damages from Mr. Schwartz in the amount of the losses incurred by the Company. LAWSUITS BY FORMER INDEPENDENT SALES REPRESENTATIVES: The Company is involved in three lawsuits by former independent sales representatives filed in the Superior Court of California in the County of Orange. The lawsuits allege that the Company and NTC breached various duties and made material misrepresentations in its dealings with the plaintiffs generally during the period from August 1993 to March 1998, and also allege that the Company failed to pay certain commissions owed to the plaintiffs. The lawsuits seek general damages, compensatory damages, special damages and punitive damages. The Company believes that these claims are without merit and plans to defend itself 23 vigorously against the lawsuits. No assurance can be given that this lawsuit will not have a material adverse impact on the business, financial condition or results of operation of the Company. LAWSUIT AGAINST JERRY BALLAH: In July 1998, NTC sued a former consultant and others in the Orange County Superior Court in a matter entitled NATIONAL TELEPHONE & COMMUNICATIONS, INC. VS. JERRY BALLAH, WORLD TECHNOLOGIES MARKETING, INC., ET AL. (the "Ballah Lawsuit"). The Ballah Lawsuit is more fully described under "Item 1. Legal Proceedings" set forth in the Company's Form 10-Q for its fiscal quarter ended June 30, 1998, as filed with the Securities & Exchange Commission on August 14, 1998, which description is hereby incorporated by this reference. In this lawsuit, NTC is asserting claims against Mr. Ballah and other defendants for breach of contract, misappropriation of trade secrets, intentional interference with business relationships, fraud and related claims in connection with their start-up of a competing business and solicitation of NTC's employees and independent sales representatives, as well as the alleged diversion of NTC's telephone customers to businesses owned or controlled by defendants. In a cross-complaint for damages, Mr. Ballah alleges that NTC breached its consulting agreement with him and World Technologies, Inc. ("World Tech") alleges that NTC breached an agreement under which World Tech would become the exclusive network marketing company for NTC. On July 21, 1998, a stipulated restraining order was entered by the court enjoining the defendants in the Ballah/Mancuso Lawsuit from directly or indirectly attempting to induce any NTC employee or independent sales representative to work or perform services for the defendants. NTC's motion for preliminary injunction is currently scheduled for hearing in December 1998. NTC is subject to potential claims by Mr. Ballah [see "Part 1. Legal Proceedings - Potential Lawsuits - Former Officers of NTC"]. LAWSUIT BY COMMUNICATIONS CONSULTING, INC.: NTC has been sued in an action entitled COMMUNICATIONS CONSULTING, INC. VS. NATIONAL TELEPHONE & COMMUNICATIONS, INC., filed June 1998 in the Superior Court of California in the County of Orange (the "CCI Lawsuit"). The CCI Lawsuit is more fully described under "Item 1. Legal Proceedings" set forth in the Company's Form 10-Q for its fiscal quarter ended June 30, 1998, as filed with the SEC on August 14, 1998, which description is hereby incorporated by this reference. In the CCI Lawsuit, the plaintiff alleges that NTC violated the terms of a consulting agreement entered into between CCI and NTC on July 24, 1996. There has been no material change in the status of this lawsuit. LAWSUIT BY TWO FORMER OWNERS OF GENSOURCE CORPORATION: On September 23, 1998, Jerry C. Buckley and Ralph Flygare, two former owners of GenSource Corporation, filed a lawsuit entitled JERRY BUCKLEY, RALPH FLYGARE ET AL VS. INCOMNET, INC., GENSOURCE CORPORATION AND MARK RICHARDSON, in the Superior Court of the County of Los Angeles (the "GenSource Lawsuit"). In the GenSource Lawsuit, the plaintiffs allege that the Company defaulted on payments under promissory notes between the Company and the plaintiffs, and seek payment of approximately $1.2 million. The Company is presently negotiating with the two former owners to resolve the claims alleged in the lawsuit. There can be no assurances that there will be a favorable outcome to these negotiations or that the lawsuit will not have a material adverse impact on the business, financial condition or results of operations of the Company. POTENTIAL LAWSUITS: From time to time, the Company is also involved in litigation arising from the ordinary course of business, the ultimate resolution of which may or may not have a material adverse effect on the business, financial condition or results of operation of the Company. On June 30, 1998, NTC terminated its employment agreement with Edward Jacobs for cause. Mr. Jacobs has notified NTC that he intends to assert claims under the employment agreement or other agreements between Mr. Jacobs and the Company [see "Certain Relationships and Related Transactions - Settlement Agreement With NTC 24 Directors" in the Company's Proxy Statement, filed with the Securities and Exchange Commission on November 19, 1997]. The Company believes that it has adequate defenses against such potential claims and would defend itself vigorously against such a lawsuit. There is no assurance that such a lawsuit would not have a material adverse impact on the business, financial condition or results of operation of the Company. ITEM 2. CHANGES IN SECURITIES On September 29, 1998, the Company granted: (1) 13 shares of a new class of restricted convertible preferred stock to Denis Richard, the Company's President and Chief Executive Officer, which is convertible into 1.3 million shares of common stock (the "Richard Grant") [see "Item 5. Other Information - Change of Control of the Company's Board of Directors; Appointment of New Chief Executive Officer - Richard Employment Agreement"] and (2) an option to purchase 75,000 shares of the Company's common stock at $2.00 per share (i.e., the closing market price on September 29, 1998) to a consultant to the Company (the "Consultant Option"). The shares of common stock issuable under the Richard Grant and the Consultant Option are subject to approval of the Company's shareholders of an increase in the number of authorized shares of common stock (the "Stock Approval"). The Consultant Option may be exercised at any time during the five-year period following Stock Approval. On September 29 and October 2, 1998 the board approved the grant of an option to purchase 10 shares of a new class of preferred stock to each of the Company's new outside directors (the "Director Options"). The Director Options vest over a two-year period. Each share of preferred stock is convertible into 10,000 shares of common stock, subject to Stock Approval. The exercise price for the Director Options was based on the closing price for the Company's common stock at the time of the grants. In the case of three directors that price is $2.1875 per share and in the case of the fourth director that price is $2.25 per share. The options may be exercised over a ten year period. The Richard Grant, Consultant Option and Director Options were granted pursuant to an exemption form registration under section 4(2) of the Securities Act of 1933 on the basis that each of the recipients had the appropriate investment intent and the offering was targeted to a select group of officers, directors and one consultant. ITEM 3. DEFAULTS UPON SENIOR SECURITIES NTC is in default on notes to WorldCom and First Bank & Trust and the Company is in default on notes to two former owners of GenSource Corporation [see Notes To Consolidated Financial Statement - Note 7. Commitments and contingencies"]. The Company and NTC have reached agreement with WorldCom and First Bank to repay amounts due, pending completion of a Term Loan to be received from Ironwood Telecom LLC [see "Item 5. Other Information - Funding Commitment From Ironwood Telecom"]. The Company is presently negotiating with the former owners of GenSource regarding the repayment of their notes [see "Item 1. Legal Proceedings - Lawsuit By Two Former Owners of GenSource Corporation"]. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Item 4 is not applicable for the three months ended September 30, 1998. ITEM 5. OTHER INFORMATION CHANGE OF CONTROL OF THE COMPANY'S BOARD OF DIRECTORS; APPOINTMENT OF NEW CHIEF EXECUTIVE OFFICER: On September 30, 1998, the Company consummated a change in the composition of the Company's Board of Directors in accordance with a Board Change Agreement that was entered into on August 24, 1998 between John P. Casey and Incomnet's former Board of Directors [see "Report on Form 8-K - Changes in Control of Registrant, dated August 28, 1998 and filed with the Securities and Exchange Commission on August 31, 1998]. A copy of the Board Change Agreement is attached to the Form 8-K filed on August 31, 1998. The description of the Board Change Agreement contained therein is hereby incorporated by reference into this Quarterly Report on Form 10-Q. 25 The Company's new Board of Directors consists of John P. Casey, Scott Eisenberg, John Hill, Jr, Denis Richard, Dr. Howard Silverman and Michael A. Stein. Mr. Casey is the Chairman of the Board. Denis Richard is the President and Chief Executive Officer. As part of the Agreement, Richard Horowitz, Melvyn Reznick, David Wilstein and Nancy Zivitz resigned from the Board of Directors. Melvyn Reznick also resigned as President and Chief Executive Officer [see "Item 5. Other Information - Renegotiation of Severance Agreements With Former Management; Amended Employment Agreement"]. Mr. Casey is the largest shareholder in the Company, owning approximately 31% of the outstanding shares of the Company, not including shares of preferred Stock owned by Mr. Casey, which he is required to hold for redemption or a rights offering. Mr. Richard was previously Vice President, Law & Corporate Affairs of Teleglobe International Corporation, and has over ten years of experience in the telecommunications industry. RICHARD EMPLOYMENT AGREEMENT -- On September 29, 1998, the Company and NTC entered into an employment agreement with Denis Richard (the "Richard Employment Agreement"). The terms of the Richard Employment Agreement are more fully described in the Company's Report on Form 8-K dated September 29, 1998, filed with the Securities and Exchange Commission on October 14, 1998 (the "October 1998 Form 8-K") under the caption "Item 5. Other Information -- Richard Employment Agreement". A copy of the Richard Employment Agreement is attached to the October 1998 Form 8-K. The description of the Richard Employment Agreement contained in, and the entire Richard Employment Agreement attached to, the October 1998 Form 8-K is hereby incorporated by reference into this Quarterly Report on Form 10-Q. The following summary of the Richard Employment Agreement is qualified in its entirety by the full text of that agreement contained in the October 1998 Form 8-K. Under the Richard Employment Agreement, Mr. Richard agreed to serve as the President and Chief Executive Officer of the Company and NTC. Mr. Richard is also a director of Incomnet and the Chairman of the Board of NTC. During the term of the agreement, which terminates on December 31, 2001, Mr. Richard will receive an annual base salary of no less than $325,000. In addition, Mr. Richard is entitled to receive a one-time signing bonus of $353,000 and certain other fringe benefits. Mr. Richard is also entitled to certain severance benefits if his employment is terminated without "Good Reason" as defined in the Richard Employment Agreement. Under the Richard Employment Agreement, the Company has agreed to issue to Mr. Richard 13 shares of the Company's new series of Preferred Stock (the "Richard Preferred Stock") as compensation to him, which will be convertible into an aggregate of 1.3 million shares of the Company's Common Stock at such time as the Company's Articles of Incorporation have been amended to increase the authorized number of shares of the Company's Common Stock to permit such conversion. The holder of the Richard Preferred Stock will be entitled to vote with the holders of the Company's Common Stock on all matters submitted to shareholders on an as-converted-to-Common basis (i.e., the right vote as if the shares of the Richard Preferred Stock were converted into 1.3 million shares of Common Stock). Mr. Richard has certain rights to require the Company to register the Common Stock issuable upon conversion of the Richard Preferred Stock under the Securities Act of 1933, as amended, following the first anniversary of the commencement of his employment with the Company. The Company has a right of first refusal to purchase the shares of the Richard Preferred Stock and the shares of the Company's Common Stock issuable upon conversion thereof. CASEY SERVICES AGREEMENT -- On September 29, 1998, the Company entered into an agreement with Mr. Casey (the "Casey Services Agreement"). The terms of the Casey Services Agreement are more fully described in the Company's October 1998 Form 8-K under the caption "Item 5. Other Information -- Casey Services Agreement". A copy of the Casey Services Agreement is attached to the October 1998 Form 8-K. The description of the Casey Services Agreement contained in, and the entire Casey Services Agreement attached to the October 1998 Form 8-K is hereby incorporated by reference into this Quarterly Report on Form 10-Q. The following summary of the Casey Services Agreement is qualified in its entirety by the full text of that agreement contained in the October 1998 Form 8-K. Under the Casey Services Agreement, Mr. Casey agreed to perform certain duties as the Chairman of the Board of Directors of the Company. The term of the Casey Services Agreement is three years ending on September 29, 2001. However, the agreement does not obligate Mr. Casey to remain as Chairman of the Board nor does it obligate the 26 Company to retain Mr. Casey as Chairman of the Board. Under the Casey Services Agreement, for so long as Mr. Casey acts as Chairman of the Board, Mr. Casey will be entitled to a quarterly service fee based on a certain formula derived from the fair market value of the Company's Common Stock at the end of each fiscal quarter during the term of the agreement. Generally, this formula will result in a $25,000 quarterly service fee payable to Mr. Casey if the market price of the Common Stock is $4, and an additional $25,000 for each additional $4 increase in the market price of the Common Stock. The maximum fee Mr. Casey would be entitled to in any fiscal quarter is $250,000. If Mr. Casey resigns or is not elected or otherwise retained by the Company as Chairman of the Board during the term of the Casey Services Agreement, he will not be entitled to any quarterly services fee after such resignation or termination of services. Under the Casey Services Agreement, Mr. Casey has waived any right to receive retainer fees, meeting fees or other remuneration given to other directors of the Company. DIRECTOR STOCK OPTION GRANTS -- On September 29, 1998, as part of the Change of Control of the Company's Board of Directors, the new Board of Directors granted an option to purchase 10 shares of a new series of the Company's Preferred Stock to each non-employee director of the Company then in office (i.e., options were granted to Mr. Hill, Dr. Silverman and Mr. Stein). On October 2, 1998, the Board of Directors granted an option to purchase 10 shares of the Company's Preferred Stock to Mr. Eisenberg upon his appointment to the Board of Directors (the options granted to Messrs. Hill, Eisenberg and Stein and Dr. Silverman are referred to in this Current Report as the "Nonemployee Director Options"). No options were granted to either Mr. Casey or Mr. Richard. The Nonemployee Director Options have a term of ten years and vest over a two-year period. Each share of Preferred Stock will be convertible into 10,000 shares of the Company's Common Stock. Since all of the Company's authorized Common Stock is currently issued and outstanding, the right to convert the Preferred Stock into Common Stock is subject to the approval by the Company's shareholders of an amendment to the Company's Articles of Incorporation to increase the number of authorized shares of Common Stock available for issuance. For Mr. Hill, Dr. Silverman and Mr. Stein, the exercise price of each share of Preferred Stock is $21,875, which represents $2.1875 per share of the underlying Common Stock into which such Preferred Stock can be converted. The exercise price for these options is based on the closing price per share of the Company's Common Stock as reported by the Nasdaq Stock Market on the second day following the announcement of the change in composition of the Company's Board of Directors (October 1, 1998). For Mr. Eisenberg, the exercise price of each share of Preferred Stock is $22,500, which represents $2.25 per share of the underlying Common Stock into which such Preferred Stock can be converted. The exercise price of Mr. Eisenberg's options is based on the closing price per share of the Company's Common Stock as reported by the Nasdaq Stock Market on the date of grant (October 2, 1998). FUNDING COMMITMENT FROM IRONWOOD TELECOM: On October 30, 1998, the Company received a commitment letter from Ironwood Telecom LLC to provide the Company with a secured credit facility of $20 million, less the amount Ironwood would lend to Mr. Casey to exercise the option to acquire the Cohen Preferred Stock (the "Casey Loan") and the amounts Ironwood would pay to the Other Preferred Holders to acquire the Other Preferred Shares for the benefit of the Company (the "Payments to Other Preferred Holders") [see "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation - The Change in Ownership of the Company's Common Stock"]. Under the commitment letter, Ironwood agreed to provide an aggregate of $5 million by November 4, 1998 and an additional net amount of $15 million by December 15, 1998 for these purposes. The amount provided to the Company on November 4, 1998 was in the form of a secured bridge loan (the "Bridge Loan"), and the amount to be provided to the Company by December 15, 1998 will be in the form of a secured term loan (the "Term Loan"), each of which is described below. THE BRIDGE LOAN -- Ironwood loaned the Company approximately $2.3 million on November 4, 1998 under the Bridge Loan (and loaned Mr. Casey approximately $2.1 million under the Casey Loan and paid $600,000 to certain of the Other Preferred Holders on or about the same date). The proceeds from the Bridge Loan were used to make a partial payment of amounts in default owing by NTC to WorldCom. The Bridge Loan accrues interest at the rate of 15% per annum and principal and accrued interest is due on December 15, 1998. The Bridge Loan is secured by the proceeds from any future sale of capital stock of Rapid Cast currently owned by the Company as well as certain other assets of the Company. For arranging the Bridge Loan and making the Casey Loan and Payments to Other Preferred Holders for the benefit of the Company, 27 Ironwood received an origination fee of $100,000 and warrants to purchase 500,000 shares of the Company's common stock at an exercise price of $1.00. On November 16, 1998, Ironwood made an additional loan of $1 million to the Company under the Bridge Loan, and Ironwood received warrants to purchase 100,000 shares of the Company's common stock at an exercise price of $1.00 relating to this loan. All of the warrants issued in connection with the Bridge Loan have a five-year term. Completion of the Bridge Loan was contingent upon satisfaction of a number of conditions, including (i) renegotiation of severance and employment agreements with former management on terms acceptable to Ironwood, (ii) reaching agreement with the Other Preferred Holders on terms acceptable to Ironwood and (iii) reaching agreement with WorldCom and First Bank to forbear taking action concerning NTC defaults until at least December 15, 1998 on terms acceptable to Ironwood. These conditions were satisfied prior to making the Bridge Loan. THE TERM LOAN -- Upon satisfaction of certain conditions, Ironwood has agreed to provide the Company with a Term Loan of $20 million, less the principal amount of the Casey Loan and the Payments to Other Preferred Holders. The Term Loan will bear interest at the rate of 12%, payable quarterly, and the principal and any unpaid interest will be due on December 31, 2000. Proceeds from the Term Loan will be used, among other things, to pay-off in full amounts owing by NTC to First Bank, to make payments of all amounts in default owing by NTC to WorldCom and for general corporate purposes. For arranging the Term Loan, Ironwood will receive an origination fee of $400,000 and warrants in two tranches. The first tranche of warrants will entitle Ironwood to purchase 2 million shares of the Company's Common Stock at an exercise price of $1.00 per share. These warrants are exercisable immediately and for a period of five years thereafter. The second tranche of warrants will entitle Ironwood to purchase 1 million shares of the Company's Common Stock at an exercise price of $2.25 per share. These warrants will be exercisable on December 15, 1999 and for a period of five years thereafter. The exercise price will be reduced and the number of warrants will be increased on both tranches of warrants if the Company does not meet certain performance targets in the fourth quarter of 1999 and 2000. The Term Loan will be secured by substantially all of the assets of the Company and NTC. Completion of the Term Loan is subject to several conditions, including the dismissal or settlement of the Beltz and Silva Run lawsuits against the Company on terms acceptable to Ironwood [see "Item 1. Legal Proceedings - Class Action and Related Lawsuits"]. IRONWOOD LOAN TO CASEY; COHEN OPTION EXERCISE: In connection with the exercise of an option (the "Cohen Option") to acquire the Cohen Preferred Stock pursuant to a previous agreement reached between Mr. Casey and the Cohen Parties, on November 5, 1998 Ironwood loaned Mr. Casey approximately $2.125 million, the proceeds of which were used to exercise the Cohen Option. The Casey Loan accrues interest at the rate of 18% per annum. Under the Board Change Agreement, Mr. Casey is obligated to allow the Company to redeem the Cohen Preferred Stock at his acquisition cost (approximately $2.4 million in the aggregate or $0.29 per share of Common Stock after conversion) plus expenses, including the interest charged under the Casey Loan. NTC has guaranteed the obligations of Mr. Casey under the Casey Loan. If the Company is not able to redeem the Cohen Preferred Stock by November 5, 1999, under the Board Change Agreement, these share will be converted into Common Stock and offered for sale in a rights offering to the Company's shareholders at a purchase price equal to Mr. Casey's acquisition cost plus expenses. The Cohen Preferred Stock is convertible into approximately 8.5 million shares of the Company's Common Stock or 26% of the Company's Common Stock on a fully diluted basis. TRANSACTIONS WITH OTHER PREFERRED HOLDERS: Ironwood entered into transactions similar to the Casey Option transaction with five holders of Preferred Stock. Under these transactions, Ironwood agreed to purchase shares of Preferred Stock convertible into an aggregate of approximately 2.3 million shares of the Company's Common Stock or approximately 7% of the Company's Common Stock on a fully diluted basis. Ironwood paid an aggregate amount of approximately $1.1 million to these five holders. Under the agreements between the Company and Ironwood, Ironwood is obligated to allow the Company to redeem the Other Preferred Stock at its acquisition cost (approximately $1.1 million in the aggregate or $0.51 per share of Common Stock after conversion) plus expenses, including a carrying charge of 18% per annum on the purchase price paid by Ironwood. If the Company is not able to redeem the Other Preferred Stock by the one-year anniversary of the date the Company's Articles of Incorporation are amended to increase the number of authorized shares of common stock, under these agreements, the Other Preferred Stock will be converted into Common Stock and offered for sale in a rights offering to the Company's shareholders at a purchase price equal to Ironwood's acquisition cost plus expenses. In consideration for the settlement of certain claims against the Company, the Company also issued warrants to purchase 244,870 shares of Common Stock to two holders of Other Preferred 28 Stock, exercisable at $1.00 per share. The Company has also granted to these two holders registration rights which will require the Company to register the Common Stock underlying these warrants under certain circumstances. RENEGOTIATION OF SEVERANCE AGREEMENTS WITH FORMER MANAGEMENT; AMENDED EMPLOYMENT AGREEMENT: On September 29, 1998, the Company reached a severance agreement with its former President and Chief Executive Officer (the "Former CEO") to settle the terms of an employment agreement between the Company and the former CEO that would have required the Company to pay an aggregate of $1.1 million over a period of four years to fulfill terms of the contract. Under the terms of the severance agreement, the former CEO agreed to voluntarily leave his position at the Company in consideration for severance payments of up to $500,000 over a two-year period and he retained approximately 337,000 stock options in the Company. On November 2, 1998, the Company's new management renegotiated the severance agreement with the Former CEO under which he agreed to reduce his severance payments to $162,499, which will be paid in full on December 15, 1998. In addition, the Former CEO agreed to voluntarily terminate all of his stock options, except for 50,000 stock options at an exercise price of $4.37 per share. On July 1, 1998, NTC reached a severance agreement with its former President and Chief Executive Officer (the "Former NTC CEO") to settle the terms of an employment agreement between NTC and the former NTC CEO that would have required NTC to pay an aggregate of $960,000 over a period of two years to fulfill terms of the contract. Under terms of the severance agreement, the former NTC CEO agreed to voluntarily leave his position at NTC in consideration for severance payments of up to $240,000 over a one-year period. On November 2, 1998, the Company's new management renegotiated the severance agreement with the Former NTC CEO under which he agreed to reduce his severance payments to $144,061, which will be paid in full on December 15, 1998. NTC has also agreed to pay the Former NTC CEO a lump sum of $50,000, on or before July 1, 2000, if (1) the Company enters a merger in which the Company or its shareholders retain less than 50% interest in the new Company, (2) the Company sells substantially all of its assets or (3) there is a public offering of the Company's common stock. In addition, the Former NTC CEO agreed to terminate all of his stock options in NTC pursuant to their terms in connection with his voluntary termination of employment with NTC. On July 1, 1998, NTC reached a severance agreement with its former Senior Vice President and Chief Financial Officer (the "Former NTC CFO) to settle the terms of an employment agreement between NTC and the former NTC CFO that would have required NTC to pay an aggregate of $480,000 over a period of two years to fulfill terms of the contract. Under terms of the severance agreement, the former NTC CFO agreed to voluntarily leave his position at NTC in consideration for severance payments of up to $120,000 over a one-year period. On November 2, 1998, the Company's new management renegotiated the severance agreement with the Former NTC CFO under which he agreed to reduce his severance payments to $75,185, which will be paid in full on December 15, 1998. NTC has also agreed to pay the Former CFO a lump sum of $37,500, on or before July 1, 2000, if (1) the Company enters a merger in which the Company or its shareholders retain less than 50% interest in the new Company, (2) the Company sells substantially all of its assets or (3) there is a public offering of the Company's common stock. In addition, the Former NTC CFO agreed to terminate all of his stock options in NTC pursuant to their terms in connection with his voluntary termination of employment with NTC. Under an Employment Agreement between the Company and Stephen A. Caswell, a former officer of the Company and current employee (the "Caswell Employment Agreement"), Mr. Caswell was entitled in October 1998 to severance in the aggregate amount of approximately $260,000, if his employment was terminated without cause. On October 30, 1998, the Company and Mr. Caswell agreed to amend the Caswell Employment Agreement. Under terms of the amended Caswell Employment Agreement, Mr. Caswell will continue to be employed by the Company until April 30, 1999 at a rate of $10,000 per month, after which his employment may be extended at the option of the Company for an additional 6 months or Mr. Caswell will receive a severance in the aggregate amount of $30,000. Mr. Caswell also agreed to cancel all outstanding stock options (90,000 option shares) he held in the Company. LOAN BY THE COMPANY TO FORMER DIRECTOR: 29 On November 5, 1996, the Company extended to a director of the Company a loan of $265,000 at an interest rate of 10% per annum until January 15, 1997. The loan was repaid in full, including interest, in July 1998 and the pledged stock was returned to the director. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS: 3.1 Revised Bylaws of Incomnet, Inc., dated September 30, 1998. 10.1 Commitment Letter provided by Ironwood Capital LLC to Incomnet, Inc., dated October 30, 1998. 10.2 Bridge Loan and Security Agreement between Incomnet, Inc. and Ironwood Telecom LLC, dated November 4, 1998. 10.3 Bridge Loan Note executed by Incomnet, Inc. in favor of Ironwood Telecom LLC, dated November 4, 1998. 10.4 Warrant Agreement between Incomnet, Inc. and Ironwood Telecom LLC, dated November 4, 1998. 10.5 Guaranty executed by National Telephone & Communications, Inc. in favor of Ironwood Telecom LLC, dated November 4, 1998, relating to Incomnet Inc.'s Bridge Loan Note. 10.6 Guaranty executed by National Telephone & Communications, Inc. and Ironwood Telecom LLC, dated November 4, 1998, relating to Mr. Casey's Secured Promissory Note. 10.7 Severance Agreement between Incomnet, Inc. and Melvyn Reznick, dated September 29, 1998, and amendment thereto dated November 1, 1998. 10.8 Separation Agreement between Incomnet, Inc. and James Quandt, dated July 1, 1998, and amendment thereto dated October 30, 1998. 10.9 Separation Agreement between Incomnet, Inc. and Victor Streufert, dated July 1, 1998, and amendment thereto dated October 30, 1998. 10.10 Amendment to Employment Agreement between Incomnet, Inc. and Stephen A. Caswell, dated October 29, 1998. 10.11 Settlement and Release Agreement Among Incomnet, Inc. and the Cohen Parties, including Dr. Robert Cohen, Stefanie Rubin, Allyson Cohen, Jeffrey Cohen, Jeffrey Rubin, Dr. Alan Cohen, Lenore Katz, Broadway Partners and Meryl Cohen, custodian for Gabrielle Cohen, Erica Cohen, Jaclyn Cohen and Nicole Cohen, dated November 5, 1998. 10.12 Settlement and Release Agreement Among Incomnet, Inc., Ironwood Telecom LLC, Ellen Cohen and Martin Fabrikant, dated November 5, 1998. 10.13 Stock Purchase and Release Agreement Among Gary Kaplowitz, Alan Rothstein, S&R Holdings, Ironwood Telecom LLC, Incomnet, Inc. and John P. Casey, dated November 4, 1998. 10.14 Employment Agreement Between Incomnet, Inc. and Denis Richard, dated September 29, 1998. Incorporated by reference as an exhibit to the Company's Form 8-K, as filed with the Securities and Exchange Commission on October 15, 1998. 10.15 Services Agreement Between Incomnet, Inc. and John P. Casey, dated September 29, 1998. Incorporated by reference as an exhibit to the Company's Form 8-K, as filed with the Securities and Exchange Commission on October 15, 1998. 10.16 Board Change Agreement Among Incomnet, Inc., The Directors of Incomnet, Inc. and John P. Casey, dated 28, 1998. Incorporated by reference as an exhibit to the Company's Form 8-K, as filed with the Securities and Exchange Commission on August 31, 1998. 10.17 Sublease Between National Telephone & Communications and Vision Capital Services Corporation and Performance Capital Management, Inc., dated July 28, 1998.
30 27 Financial Data Schedule. (b) REPORTS ON FORM 8-K, FILED IN 1998: 20.1 Report on Form 8-K/A - Stock Purchase Agreements and Promissory Notes Between Incomnet, Inc. and Jerry C. Buckley, Ralph Flygare, Robert Reisbaum, E.V. Schmidt, Diane Orendorff and Nora Kenner Hoffberg, dated April 25, 1997, filed with the Securities and Exchange Commission on January 16, 1998. 20.2 Report on Form 8-K/A - Escrow Agreements Between Incomnet, Inc. and Jerry C. Buckley, Ralph Flygare, Robert Reisbaum, and E.V. Schmidt, dated April 25, 1997, filed with the Securities and Exchange Commission on January 21, 1998. 20.3 Report on Form 8-K - Agreement To Sell The Assets of National Telephone & Communications, Inc. (NTC) Between NTC and NTC Acquisition, Inc., dated March 31, 1998, filed with the Securities and Exchange Commission on April 9, 1998. 20.4 Report on Form 8-K - Conversion of Convertible Preferred Stock Into The Company's Common Stock Shares, dated June 10 and June 11, 1998 and filed with the Securities and Exchange Commission on June 17, 1998. 20.5 Report of Form 8-K - Changes in Control of Registrant, dated August 28, 1998 and filed with the Securities and Exchange Commission on August 31, 1998. 20.6 Report on Form 8-K - Changes in Control of Registrant, dated September 29, 1998 and filed with the Securities and Exchange Commission on October 15, 1998.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INCOMNET, INC. Date: November 16, 1998 /s/ Denis Richard ------------------- ------------------ President, Chief Executive Officer & Interim Chief Accounting Officer 31 EX-3.1 2 EXHIBIT 3.1 Exhibit 3-1 -- Amended and Restated Bylaws of Incomnet, Inc. as of September 30, 1998 AMENDED AND RESTATED BYLAWS OF INCOMNET, INC. (As of September 30, 1998) TABLE OF CONTENTS
Page ---- ARTICLE I OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Section 1. PRINCIPAL OFFICES. . . . . . . . . . . . . . . . . . . . . . 3 Section 2. OTHER OFFICES. . . . . . . . . . . . . . . . . . . . . . . . 3 ARTICLE II MEETINGS OF SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . 3 Section 1. PLACE OF MEETINGS. . . . . . . . . . . . . . . . . . . . . . 3 Section 2. ANNUAL MEETINGS OF SHAREHOLDERS. . . . . . . . . . . . . . . 3 Section 3. SPECIAL MEETINGS . . . . . . . . . . . . . . . . . . . . . . 3 Section 4. NOTICE OF SHAREHOLDERS' MEETINGS.. . . . . . . . . . . . . . 3 Section 5. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE . . . . . . . . 4 Section 6. QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Section 7. ADJOURNED MEETING AND NOTICE THEREOF . . . . . . . . . . . . 4 Section 8. VOTING . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Section 9. WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDERS . . . . . 5 Section 10. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING . . 5 Section 11. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING, AND GIVING CONSENTS. . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 12. PROXIES . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 13. INSPECTORS OF ELECTION. . . . . . . . . . . . . . . . . . . 6 ARTICLE III DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 1. POWERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 2. NUMBER OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . 8 Section 3. ELECTION AND TERM OF OFFICE OF DIRECTORS . . . . . . . . . . 8 Section 3A. NOMINATION OF DIRECTORS. . . . . . . . . . . . . . . . . . 9 Section 4. VACANCIES. . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 5. PLACE OF MEETINGS AND TELEPHONIC MEETINGS. . . . . . . . . . 9 Section 6. ANNUAL MEETINGS. . . . . . . . . . . . . . . . . . . . . . . 9 Section 7. OTHER REGULAR MEETINGS . . . . . . . . . . . . . . . . . . . 9 Section 8. SPECIAL MEETINGS . . . . . . . . . . . . . . . . . . . . . . 9 Section 9. DISPENSING WITH NOTICE . . . . . . . . . . . . . . . . . . . 9 Section 10. QUORUM. . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 11. ADJOURNMENT . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 12. NOTICE OF ADJOURNMENT . . . . . . . . . . . . . . . . . . . 10 Section 13. ACTION WITHOUT MEETING. . . . . . . . . . . . . . . . . . . 10 Section 14. FEES AND COMPENSATION OF DIRECTORS. . . . . . . . . . . . . 10 ARTICLE IV COMMITTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 1. COMMITTEES OF DIRECTORS. . . . . . . . . . . . . . . . . . . 10 Section 2. MEETINGS AND ACTION OF COMMITTEES. . . . . . . . . . . . . . 11 ARTICLE V OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 1. OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 2. ELECTION OF OFFICERS . . . . . . . . . . . . . . . . . . . . 11 Section 3. SUBORDINATE OFFICERS, ETC. . . . . . . . . . . . . . . . . . 11 Section 4. REMOVAL AND RESIGNATION OF OFFICERS. . . . . . . . . . . . . 11 Section 5. VACANCIES IN OFFICES . . . . . . . . . . . . . . . . . . . . 12 Section 6. CHAIRMAN OF THE BOARD. . . . . . . . . . . . . . . . . . . . 12 Section 7. PRESIDENT. . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 8. VICE PRESIDENTS. . . . . . . . . . . . . . . . . . . . . . . 12 Section 9. SECRETARY. . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 10. CHIEF FINANCIAL OFFICER . . . . . . . . . . . . . . . . . . 12 ARTICLE VI INDEMNIFICATION AND INSURANCE. . . . . . . . . . . . . . . . . . 13 ARTICLE VII RECORDS AND REPORTS . . . . . . . . . . . . . . . . . . . . . . 14 Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER . . . . . . . . 14 Section 2. MAINTENANCE AND INSPECTION OF BYLAWS . . . . . . . . . . . . 14 Section 3. MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. . . . 14 Section 4. INSPECTION BY DIRECTORS. . . . . . . . . . . . . . . . . . . 15 Section 5. ANNUAL REPORT TO SHAREHOLDERS. . . . . . . . . . . . . . . . 15 Section 6. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . 15 Section 7. ANNUAL STATEMENT OF GENERAL INFORMATION. . . . . . . . . . . 16 ARTICLE VIII GENERAL CORPORATE MATTERS. . . . . . . . . . . . . . . . . . . 16 Section 1. RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. . . . 16 Section 2. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. . . . . . . . . . 16 Section 3. CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED. . . . . . 16 Section 4. CERTIFICATES FOR SHARES. . . . . . . . . . . . . . . . . . . 16 Section 5. LOST CERTIFICATES. . . . . . . . . . . . . . . . . . . . . . 16 Section 6. REPRESENTATION OF SHARES OF OTHER CORPORATIONS . . . . . . . 17 ARTICLE IX AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 1. AMENDMENT BY SHAREHOLDERS. . . . . . . . . . . . . . . . . . 17 Section 2. AMENDMENT BY DIRECTORS . . . . . . . . . . . . . . . . . . . 17 ARTICLE X GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 1. GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . 17 Section 2. CONSTRUCTION AND DEFINITIONS . . . . . . . . . . . . . . . . 17
2 ARTICLE I OFFICES PRINCIPAL OFFICES. The Board of Directors shall fix the location of the principal executive office of the corporation at any place within or outside the State of California. If the principal executive office is located outside this state, and the corporation has one or more business offices in this state, the Board of Directors shall likewise fix and designate a principal business office in the State of California. OTHER OFFICES. The Board of Directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business ARTICLE II MEETINGS OF SHAREHOLDERS PLACE OF MEETINGS. Meetings of shareholders shall be held at any place within or outside the State of California designated by the Board of Directors. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the corporation. ANNUAL MEETINGS OF SHAREHOLDERS. The annual meeting of shareholders shall be held each year on a date and at a time designated by the Board of Directors. At each annual meeting directors shall be elected and any other proper business may be transacted. SPECIAL MEETINGS. A special meeting of the shareholders may be called at any time by the Board of Directors, or by the Chairman of the Board, or by the President, or by one or more shareholders holding shares in the aggregate entitled to cast not less than 10% of the votes at any such meeting. If a special meeting is called by any person or persons other than the Board of Directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the Chairman of the Board, the President, any Vice President or the Secretary of the corporation. The officer receiving such request forthwith shall cause notice to be given to the shareholders entitled to vote, in accordance with the provisions of Sections 4 and 5 of this Article II, that a meeting will be held at the time requested by the person or persons calling the meeting, not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 3 shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the Board of Directors may be held. NOTICE OF SHAREHOLDERS' MEETINGS. All notices of meetings of shareholders shall be sent or otherwise given in accordance with Section 5 of this Article II not less than ten (10) nor more than sixty (60) days before the date of the meeting being noticed. The notice shall specify the place, date and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted, or (ii) in the case of the annual meeting those matters which the Board of Directors, at the time of giving the notice, intends to present for action by the shareholders. The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees which, at the time of the notice, management intends to present for election. If action is proposed to be taken at any meeting for approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California, (ii) an amendment of the Articles of Incorporation, pursuant to Section 902 of such Code, (iii) a 3 reorganization of the corporation, pursuant to Section 1201 of such Code, (iv) a voluntary dissolution of the corporation, pursuant to Section 1900 of such Code, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares pursuant to Section 2007 of such Code, the notice shall also state the general nature of such proposal. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any meeting of shareholders shall be given either personally or by first-class mail or telegraphic or other written communication, charges prepaid, addressed to the shareholder at the address of such shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or has been so given, notice shall be deemed to have been given if sent by first-class mail or telegraphic or other written communication to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where such office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a shareholder at the address of such shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at such address, all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available to the shareholder upon written demand of the shareholder at the principal executive office of the corporation for a period of one year from the date of the giving of such notice. An affidavit of the mailing or other means of giving any notice of any shareholders' meeting shall be executed by the Secretary, Assistant Secretary or any transfer agent of the corporation giving such notice, and shall be filed and maintained in the minute book of the corporation. QUORUM. The presence in person or by proxy of the holders of a majority of the shares entitled to vote at any meeting of shareholders shall constitute a quorum for the transaction of business. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do Business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. ADJOURNED MEETING AND NOTICE THEREOF. Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at such meeting, either in person or by proxy, but in the absence of a quorum, no other business may be transacted at such meeting, except as provided in Section 6 of this Article II. When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at a meeting at which the adjournment is taken, unless a new record date for the adjourned meeting is fixed, or unless the adjournment is for more than forty-five (45) days from the date set for the original meeting, in which case the Board of Directors shall set a new record date. Notice of any such adjourned meeting, if required, shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 4 and 5 of this Article 11. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. VOTING. The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of Section 11 of this Article II, subject to the provisions of Sections 702 to 704, inclusive, of the Corporations Code of California (relating to voting shares held by a fiduciary, in the name of a corporation or in joint ownership). Such vote may be by voice vote or by ballot; provided, however, that all elections for directors must be by ballot upon demand by a shareholder at any election and before the voting begins. Any shareholder entitled to vote on any matter (other than the election of directors) may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, but, if the shareholder fails to specify the number of shares such shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares such shareholder is entitled to vote. If a quorum is present, 4 the affirmative vote of the majority of the shares represented at the meeting and voting on any matter (other than the election of directors), provided that the shares voting affirmatively must also constitute at least a majority of the required quorum, shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by the California General Corporation Law or the Articles of Incorporation. At a shareholders' meeting involving the election of directors, no shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of the shareholder's shares) unless such candidate or candidates' names have been placed in nomination prior to commencement of the voting and a shareholder has given notice prior to commencement of the voting of the shareholder's intention to cumulate votes. If any shareholder has given such notice, then every shareholder entitled to vote may cumulate such shareholder's votes for candidates in nomination and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which such shareholder's shares are entitled, or distribute the shareholder's votes on the same principle among any or all of the candidates, as the shareholder thinks fit. The candidates receiving the highest number of votes, up to the number of directors to be elected, shall be elected. WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDERS. The transactions of any meeting of shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each person entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to a holding of the meeting, or an approval of the minutes thereof. The waiver of notice or consent need not specify either the business to be transacted or the purpose of any annual or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 4 of this Article II, the waiver of notice or consent shall state the general nature of such proposal. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance of a person at a meeting shall also constitute a waiver of notice of such meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened, and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters not included in the notice of the meeting if such objection is expressly made at the meeting. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. In the case of election of directors, such consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors; provided, however, that a director may be elected at any time to fill a vacancy not filled by the directors by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of directors. All such consents shall be filed with the Secretary of the corporation and shall be maintained in the corporate records. Any shareholder giving a written consent, or the shareholder's proxy holders, or a transferee of the shares or a personal representative of the shareholder or their respective proxy holder, may revoke the consent by a writing received by the Secretary of the corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary. If the consents of all shareholders entitled to vote have not been solicited in writing, and if the unanimous written consent of all such shareholders shall not have been received, the Secretary shall give prompt notice of the corporate action approved by the shareholders without a meeting. Such notice shall be given in the manner specified in Section 5 of this Article II. In the case of approval of (i) contracts or transactions in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California, (ii) indemnification of agents of the corporation, pursuant to Section 317 of such Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of such Code, or (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares pursuant to Section 2007 of such Code, such notice shall be given at least ten (10) days before the consummation of any such action authorized by any such approval. 5 RECORD DATE FOR SHAREHOLDER NOTICE, VOTING, AND GIVING CONSENTS. For purposes of determining the shareholders entitled to notice of any meeting or to vote or entitled to give consent to corporate action without a meeting, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days prior to the date of any such meeting nor more than sixty (60) days prior to such action without a meeting, and in such case only shareholders of record at the close of business on the date so fixed are entitled to notice and to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date fixed as aforesaid, except as otherwise provided in the California General Corporation Law. If the Board of Directors does not so fix a record date: (a) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. (b) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, (i) when no prior action by the Board has been taken, shall be the day on which the first written consent is given, or (ii) when prior action of the Board has been taken, shall be at the close of business on the day on which the Board adopts the resolution relating thereto, or the sixtieth (60th) day prior to the date of such other action, whichever is later. PROXIES. Every person entitled to vote for directors or on any other matter shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the Secretary of the corporation. A proxy shall be deemed signed if the shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the shareholder or the shareholder's attorney in fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) revoked by the person executing it, prior to the vote pursuant thereto, by a writing delivered to the corporation stating that the proxy is revoked or by a subsequent proxy presented to the meeting and executed by, or attendance at the meeting and voting in person by, the person executing the proxy; or (ii) written notice of the death or incapacity of the maker of such proxy is received by the corporation before the vote pursuant thereto is counted; provided, however, that no such proxy shall be valid after the expiration of eleven (11) months from the date of such proxy, unless otherwise provided in the proxy. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 705(e) and (f) of the Corporations Code of California. INSPECTORS OF ELECTION. Before any meeting of shareholders, the Board of Directors may appoint any persons other than nominees for office to act as inspectors of election at the meeting or its adjournment. If no inspectors of election are so appointed, the chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting on the request of one or more shareholders or proxies, the holders of a majority of shares or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and upon the request of any shareholder or a shareholder's proxy shall, appoint a person to fill such vacancy. The duties of these inspectors shall be as follows: 20.3.1 Determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies; 20.3.2 Receive votes, ballots or consents; 20.3.3 Hear and determine all challenges and questions in any way arising in connection with the right to vote; 6 20.3.4 Count and tabulate all votes or consents; 20.3.5 Determine when the polls shall close; 20.3.6 Determine the result; and 20.3.7 Do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. ARTICLE III DIRECTORS POWERS. Subject to the provisions of the California General Corporation Law and any limitations in the Articles of Incorporation and these Bylaws relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. Without prejudice to such general powers, but subject to the same limitations, it is hereby expressly declared that the directors shall have the power and authority to: 20.3.8 Select and remove all officers, agents, and employees of the corporation, prescribe such powers and duties for them as may not be inconsistent with law, the Articles of Incorporation or these Bylaws, fix their compensation, and require from them security for faithful service. 20.3.9 Change the principal executive office or the principal business office in the State of California from one location to another; cause the corporation to be qualified to do business in any other state, territory, dependency, or foreign country and conduct business within or outside the State of California; designate any place within or without the State for the holding of any shareholders' meeting or meetings, including annual meetings; adopt, make and use a corporate seal, and prescribe the forms of certificates of stock, and alter the form of such seal and of such certificates from time to time as in their judgment they may deem best, provided that such forms shall at all times comply with the provisions of law. 20.3.10 Authorize the issuance of shares of stock of the corporation from time to time, upon such terms as may be lawful, in consideration of money paid, labor done or services actually rendered, debts or securities cancelled or tangible or intangible property actually received. 20.3.11 Borrow money and incur indebtedness for the purposes of the corporation, and cause to be executed and delivered therefor, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations, or other evidences of debt and securities therefor. 7 NUMBER OF DIRECTORS. The number of directors of the corporation shall be not less than five (5) nor more than nine (9). The exact number of directors shall be seven (7) until changed, within the limits specified above, by a Bylaw amending this Section 2, duly adopted by the Board of Directors or by the shareholders. Such indefinite number of directors may be changed, or a definite number fixed without provision for an indefinite number, by a duly adopted amendment to the Articles of Incorporation or by an amendment to this Bylaw duly adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however that an amendment reducing the number or the minimum number of directors to a number less than five cannot BE adopted if the votes cast against its adoption at a meeting of the shareholders, or the shares not consenting in the case of action by written consent, are equal to more than 16-2/3% of the outstanding shares entitled to vote. No amendment may change the states maximum number of authorized directors to a number greater than two times the stated minimum number of directors minus one. ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors shall be elected at each annual meeting of the shareholders to hold office until the next annual meeting. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. Section 3A. NOMINATION OF DIRECTORS. Only persons who are nominated in accordance with the procedures set forth in this Section 3A shall be eligible for election as, and to serve as, directors. Nominations of persons for election to the Board of Directors may be made at a meeting of the stockholders at which directors are to be elected (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Corporation who is a stockholder of record at the time of the giving of such stockholder's notice provided for in this Section 3A, who shall be entitled to vote at such meeting in the election of directors and who complies with the requirements of this Section 3A. Such nominations, other than those made by or at the direction of the Board of Directors. shall be preceded by timely advance notice in writing to the Secretary of the Corporation. To be timely, a stockholders' notice shall be delivered to, or mailed and received at, the principal executive offices of the Corporation (i) with respect to an election to be held at the annual meeting of the stockholders of the Corporation, not later than the close of business on the 90th day prior to the first anniversary of the preceding year's annual meeting; PROVIDED, HOWEVER, that with respect to the annual meeting of stockholders to be held in 1997 or in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the stockholder to be timely must be so delivered not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by the Corporation. and (ii) with respect to an election to be held at a special meeting of stockholders of the Corporation for the election of directors, not later than the close of business on the tenth day following the day on which notice of the date of the special meeting was mailed to stockholders of the Corporation or public disclosure of the date of the special meeting was made, whichever first occurs. Any such stockholder's notice to the Secretary of the Corporation shall set forth (x) as to each person whom the stockholder proposes to nominate for election or re-election as a director: (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the number of shares of each class of capital stock of the Corporation beneficially owned by such person, (iv) the written consent of such person to having such person's name placed in nomination at the meeting and to serve as a director if elected and (v) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, pursuant to Regulation 14A under the Securities Exchange Act, and (y) as to the stockholder giving the notice, (i) the name and address, as they appear on the Corporation's books, of such stockholder and (ii) the number of shares of each class of voting stock of the Corporation which are then beneficially owned by such stockholder. The presiding officer of the meeting of stockholders shall determine whether the requirements of this Section 3A have been met with respect to any nomination or intended nomination. If the presiding officer determines that any nomination was not made in accordance with the requirements of this Section 3A, he shall so declare at the meeting and the defective nomination shall be disregarded. Notwithstanding the foregoing provisions of this Section 3A, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 3A. VACANCIES. Vacancies in the Board of Directors may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, except that a vacancy created by the removal of a director by the 8 vote or written consent of the shareholders or by court order may be filled only by the vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present, or by the written consent of holders of all outstanding shares entitled to vote. Each director so elected shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified. A vacancy or vacancies in the Board of Directors shall be deemed to exist in the case of the death, resignation or removal of any director, or if the Board of Directors by resolution declares vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony, or if the authorized number of directors be increased, or if the shareholders fail, at any meeting of shareholders at which any director or directors are elected, to elect the full authorized number of directors to be voted for at that meeting. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors but any such election by written consent shall require the consent of a majority of the outstanding shares entitled to vote. Any director may resign upon giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors. A resignation shall be effective upon the giving of the notice, unless the notice specifies a later time for its effectiveness. If the resignation of a director is effective at a future time, the Board of Directors may elect a successor to take office when the resignation becomes effective. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of his term of office. PLACE OF MEETINGS AND TELEPHONIC MEETINGS. Regular meetings of the Board of Directors may be held at any place within or without the State that has been designated from time to time by resolution of the Board. In the absence of such designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the Board shall be held at any place within or without the State that has been designated in the notice of the meeting or, if not stated in the notice or there is no notice, at the principal executive office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in such meeting can hear one another, and all such directors shall be deemed to be present in person at such meeting. ANNUAL MEETINGS. Immediately following each annual meeting of shareholders, the Board of Directors shall hold a regular meeting for the purpose of organization, any desired election of officers and the transaction of other business. Notice of this meeting shall not be required. OTHER REGULAR MEETINGS. Other regular meetings of the Board of Directors shall be held without call at such time as shall from time to time be fixed by the Board of Directors. Such regular meetings may be held without notice. SPECIAL MEETINGS. Special meetings of the Board of Directors for any purpose or purposes may be called at any time by the Chairman of the Board or the President or any Vice President or the Secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at his or her address as it is shown upon the records of the corporation. In case such notice is mailed, it shall be deposited in the United States mail at least four (4) days prior to the time of the holding of the meeting. In case such notice is delivered personally, or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours prior to the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated to either the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose of the meeting nor the place if the meeting is to be held at the principal executive office of the corporation. DISPENSING WITH NOTICE. The transactions of any meeting of the Board of Directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice if a 9 quorum be present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding the meeting or an approval of the minutes thereof. The waiver of notice or consent need not specify the purpose of the meeting. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Notice of a meeting need not be given to any director who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director. QUORUM. A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as hereinafter provided. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board of Directors, subject to the provisions of Section 310 of the Corporations Code of California (approval of contracts or transactions in which a director has a direct or indirect material financial interest), Section 311 (appointment of committees), and Section 317(e) (indemnification of directors). A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. ADJOURNMENT. A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. NOTICE OF ADJOURNMENT. Notice of the time and place of holding an adjourned meeting need not be given, unless the meeting is adjourned for more than twenty-four (24) hours, in which case notice of such time and place shall be given prior to the time of the adjourned meeting, in the manner specified in Section 8 of this Article III, to the directors who were not present at the time of the adjournment. ACTION WITHOUT MEETING. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if all members of the Board shall individually or collectively consent in writing to such action. Such action by written consent shall have the same force and effect as a unanimous vote of the Board of Directors. Such written consent or consents shall be filed with the minutes of the proceedings of the Board. FEES AND COMPENSATION OF DIRECTORS. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement of expenses, as may be fixed or determined by resolution of the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise, and receiving compensation for such services. ARTICLE IV COMMITTEES COMMITTEES OF DIRECTORS. The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of two or more directors, to serve at the pleasure of the Board. The Board may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. Any such committee, to the extent provided in the resolution of the Board, shall have all the authority of the Board, except with respect to: 20.3.12 the approval of any action which, under the General Corporation Law of California, also requires shareholders' approval or approval of the outstanding shares; 20.3.13 the filling of vacancies on the Board of Directors or in any committee; 20.3.14 the fixing of compensation of the directors for serving on the Board or on any committee; 20.3.15 the amendment or repeal of Bylaws or the adoption of new Bylaws; 10 20.3.16 the amendment or repeal of any resolution of the Board of Directors which by its express terms is not so amendable or repealable; 20.3.17 a distribution to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the Board of Directors; or 20.3.18 the appointment of any other committees of the Board of Directors or the members thereof. ARTICLE V OFFICERS OFFICERS. The officers of the corporation shall be a President, a Secretary and a Chief Financial Officer. The corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board, one or more Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article V. Any number of offices may be held by the same person. ELECTION OF OFFICERS. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 3 of this Article V, shall be chosen by the Board of Directors, and each shall serve at the pleasure of the Board, subject to the rights, if any, of an officer under any contract of employment. SUBORDINATE OFFICERS, ETC. The Board of Directors may appoint, and may empower the President to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the Bylaws or as the Board of Directors may from time to time determine. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the Board of Directors, at any regular or special meeting thereof, or, except in case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors. Any officer may resign at any time by giving written notice to the corporation. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Any such resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 11 VACANCIES IN OFFICES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws for regular appointments to such office. CHAIRMAN OF THE BOARD. The Chairman of the Board, if such an officer be elected, shall, if present, preside at all meetings of the Board of Directors and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by the Bylaws. If there is no President, the Chairman of the Board shall in addition be the Chief Executive Officer of the corporation and shall have the powers and duties prescribed in Section 7 of this Article V. PRESIDENT. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the President shall be the Chief Executive Officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and the officers of the corporation. He shall preside at all meetings of the shareholders and, in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board of Directors. He shall have the general powers and duties of management usually vested in the office of President of a corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or the Bylaws. VICE PRESIDENTS. In the absence or disability of the President, the Vice Presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked, a Vice President designated by the Board of Directors, shall perform all the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors or the Bylaws, the President or the Chairman of the Board if there is no President. SECRETARY. The Secretary shall keep or cause to be kept, at the principal executive office or such other place as the Board of Directors may order, a book of minutes of all meetings and actions of directors, committees of directors and shareholders, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice thereof given, the names of those present at directors' and committee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings thereof. The Secretary shall keep, or cause to be kept, at the principal executive office or at the office of the corporation's transfer agent or registrar, as determined by resolution of the Board of Directors, a share register, or a duplicate share register, showing the names of all shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the Board of Directors required by the Bylaws or by law to be given, and he shall keep the seal of the corporation, if one be adopted, in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by the Bylaws. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. The books of account shall be open at all reasonable times to inspection by any director. The Chief Financial Officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the Board of Directors. He shall disburse the funds of the corporation as may be ordered by the Board of Directors, shall render to the President and directors, whenever they request it, an account of all of his transactions as Chief Financial Officer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the Board of Directors or the Bylaws. 12 ARTICLE VI INDEMNIFICATION AND INSURANCE (a) RIGHT TO INDEMNIFICATION. Each person who was or is made a party to or is threatened to be made a party to or is involuntarily involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "Proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the corporation or is or was serving (during such person's tenure as director or officer) at the request of the corporation, any other corporation, partnership, joint venture, trust or other enterprise in any capacity, whether the basis of a Proceeding is an alleged action in an official capacity as a director or officer or in any other capacity while serving as a director or officer, shall be indemnified and held harmless by the corporation to the fullest extent authorized by California General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than said law permitted the corporation to provide prior to such amendment), against all expenses, liability and loss (including attorneys' fees, judgments, fines, or penalties and amounts to be paid in settlement) reasonably incurred or suffered by such person in connection therewith. The right to indemnification conferred in this Section shall be a contract right and shall include the right to be paid by the corporation the expenses incurred in defending a Proceeding in advance of its final disposition; provided, however, that, if California General Corporation Law requires, the payment of such expenses in advance of the final disposition of a Proceeding shall be made only upon receipt by the corporation of an undertaking by or on behalf of such director or officer to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Section or otherwise. No amendment to or repealof this Article VI shall apply to or have any effect on any right to indemnification provided hereunder with respect to any acts or omissions occurring prior to such amendment or repeal. (b) RIGHT OF CLAIMANT TO BRING SUIT. If a claim for indemnity under paragraph (a) of this Section is not paid in full by the corporation within ninety days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall also be entitled to be paid the expense of prosecuting such claim including reasonable attorneys' fees incurred in connection therewith. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending a Proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the corporation) that the claimant has not met the standards of conduct which make it permissible under California General Corporation Law for the corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the corporation. Neither the failure of the corporation (including its Board of Directors, independent legal counsel, or its shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in California General Corporation Law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel, or its shareholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. (c) NON-EXCLUSIVITY OF RIGHTS. The rights conferred in this Section shall not be exclusive of any other rights which any director, officer, employee or agent may have or hereafter acquire under any statute, provision of the Articles of Incorporation, bylaw, agreement, vote of shareholders or disinterested directors or otherwise, to the extent the additional rights to indemnification are authorized in the Articles of Incorporation of the corporation. (d) INSURANCE. In furtherance and not in limitation of the powers conferred by statute: (i) the corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the 13 corporation would have the power to indemnify the person against that expense, liability or loss under the California General Corporation Law. (ii) the corporation may create a trust fund, grant a security interest and/or use other means (including, without limitation, letters of credit, surety bonds and/or other similar arrangements), as well as enter into contracts providing indemnification to the full extent authorized or permitted by law and including as part thereof provisions with respect to any or all of the foregoing to ensure the payment of such amounts as may become necessary to effect indemnification as provided therein, or elsewhere. (e) Indemnification of Employees and Agents of the Corporation. The corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification, including the right to be paid by the corporation the expenses incurred in defending a Proceeding in advance of its final disposition, to any employee or agent of the corporation to the fullest extent of the provisions of this Section or otherwise with respect to the indemnification and advancement of expenses of directors and officers of the corporation. ARTICLE VII RECORDS AND REPORTS MAINTENANCE AND INSPECTION OF SHARE REGISTER. The corporation shall keep at its principal executive office, or at the office of its transfer agent or registrar, if either be appointed and as determined by resolution of the Board of Directors, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of shares held by each shareholder. A shareholder or shareholders of the corporation holding at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation may (i) inspect and copy the records of shareholders' names and addresses and shareholdings during usual business hours upon five days' prior written demand upon the corporation, and/or (ii) obtain from the transfer agent of the corporation, upon written demand and upon the tender of such transfer agent's usual charges for such list, a list of the shareholders' names and addresses, who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which such list has been compiled or as of a date specified by the shareholder subsequent to the date of demand. Such list shall be made available to such shareholder or shareholders by the transfer agent on or before the later of five (5) days after the demand is received or the date specified therein as the date as of which the list is to be compiled. The record of shareholders shall also be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any time during usual business hours, for a purpose reasonably related to such holder's interests as a shareholder or as the holder of a voting trust certificate. Any inspection and copying under this Section 1 may be made in person or by an agent or attorney of the shareholder or holder of a voting trust certificate making such demand. MAINTENANCE AND INSPECTION OF BYLAWS. The corporation shall keep at its principal executive office, or if its principal executive office is not in the State of California at its principal business office in this state, the original or a copy of the Bylaws as amended to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside this state and the corporation has no principal business office in this state, the Secretary shall, upon the written request of any shareholder, furnish to such shareholder a copy of the Bylaws as amended to date. MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. The accounting books and records and minutes of proceedings of the shareholders and the Board of Directors and any committee or committees of the Board of Directors shall be kept at such place or places designated by the Board of Directors, or, in the absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form and the accounting books and records shall be kept either in written form or in any other form capable 14 of being converted into written form. Such minutes and accounting books and records shall be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to such holder's interests as a shareholder or as the holder of a voting trust certificate. Such inspection may be made in person or by an agent or attorney, and shall include the right to copy and make extracts. The foregoing rights of inspection shall extend to the records of each subsidiary corporation of the corporation. INSPECTION BY DIRECTORS. Every director shall have the absolute right at any reasonable time to inspect all books, records and documents of every kind and the physical properties of the corporation and each of its subsidiary corporations. Such inspection by a director may be made in person or by agent or attorney and the right of inspection includes the right to copy and make extracts. ANNUAL REPORT TO SHAREHOLDERS. The annual report to shareholders referred to in Section 1501 of the General Corporation Law is expressly dispensed with, but nothing herein shall be interpreted as prohibiting the Board of Directors from issuing annual or other periodic reports to the shareholders of the corporations as they deem appropriate. FINANCIAL STATEMENTS. A copy of any annual financial statement and any income statement of the corporation for each quarterly period of each fiscal year, and any accompanying balance sheet of the corporation as of the end of each such period, that has been prepared by the corporation shall be kept on file in the principal executive office of the corporation for twelve (12) months and each such statement shall be exhibited at all reasonable times to any shareholder demanding an examination of any such statement or a copy shall be mailed to any such shareholder. If a shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of stock of the corporation make a written request to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the current fiscal year ended more than thirty (30) days prior to the date of the request, and a balance sheet of the corporation as of the end of such period, the Chief Financial Officer shall cause such statement to be prepared, if not already prepared, and shall deliver personally or mail such statement or statements to the person making the request within thirty (30) days after the receipt of such request. If the corporation has not sent to the shareholders its annual report for the last fiscal year, this report shall likewise be delivered or mailed to such shareholder or shareholders within thirty (30) days after such request. The corporation also shall, upon the written request of any shareholder, mail to the shareholder a copy of the last annual, semi-annual or quarterly income statement which it has prepared and a balance sheet as of the end of such period. The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report thereon, if any, of the independent accountants engaged by the corporation or the certificate of an authorized officer of the corporation that such financial statements were prepared without audit from the books and records of the corporation. 15 ANNUAL STATEMENT OF GENERAL INFORMATION. The corporation shall each year during the calendar month in which its Articles of Incorporation were originally filed with the California Secretary of State, or at any time during the immediately preceding five (5) calendar months, file with the Secretary of State of the State of California, on the prescribed form, a statement setting forth the authorized number of directors, the names and complete business or residence addresses of all incumbent directors, the names and complete business or residence addresses of the Chief Executive Officer, Secretary and Chief Financial Officer, the street address of its principal executive office or principal business office in this state and the general type of business constituting the principal business activity of the corporation, together with a designation of the agent of the corporation for the purpose of service of process, all in compliance with Section 1502 of the Corporations Code of California. ARTICLE VIII GENERAL CORPORATE MATTERS RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action, (other than action by shareholders by written consent without a meeting) the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) days prior to any such action, and in such case only shareholders of record on the date so fixed are entitled to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date fixed as aforesaid, except as otherwise provided in the California General Corporation Law. If the Board of Directors does not so fix a record date, the record date for determining shareholders for any such purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto, or the sixtieth (60th) day prior to the date of such action, whichever is later. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks, drafts or other orders for payment of money, notes or other evidences of indebtedness, issued in the name of or payable to the corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board of Directors. CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The Board of Directors, except as otherwise provided in these Bylaws, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances; and, unless so authorized or ratified by the Board of Directors or within the agency power of an officer, no ' officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or to any amount. CERTIFICATES FOR SHARES. A certificate or certificates for shares of the capital stock of the corporation shall be issued to each shareholder when any such shares are fully paid, and the Board of Directors may authorize the issuance of certificates or shares as partly paid provided that such certificates shall state the amount of the consideration to be paid therefor and the amount paid thereon. All certificates shall be signed in the name of the corporation by the Chairman of the Board or the President or Vice President and by the Chief Financial Officer or an Assistant Treasurer or the Secretary or any Assistant Secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. LOST CERTIFICATES. Except as hereinafter in this Section 5 provided, no new certificates for shares shall be issued in lieu of an old certificate unless the latter is surrendered to the corporation and canceled at the same time. The Board of Directors may in case any share certificate or certificate for any other security is lost, stolen or 16 destroyed, authorize the issuance of a new certificate in lieu thereof, upon such terms and conditions as the Board may require, including provision for indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of such certificate or the issuance of such new certificate. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The Chairman of the Board, the President, or any Vice President, or any other person authorized by resolution of the Board of Directors or by any of the foregoing designated officers, is authorized to vote on behalf of the corporation any and all shares of any other corporation or corporations, foreign or domestic, standing in the name of the corporation. The authority herein granted to said officers to vote or represent on behalf of the corporation any and all shares held by the corporation in any other corporation or corporations may be exercised by any such officer in person or by any person authorized to do so by proxy duly executed by said officer. ARTICLE IX AMENDMENTS AMENDMENT BY SHAREHOLDERS. New Bylaws may be adopted or these Bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the Articles of Incorporation of the corporation set forth the number of authorized directors of the corporation, the authorized number of directors may be changed only by an amendment of the Articles of Incorporation. AMENDMENT BY DIRECTORS. Subject to the rights of the shareholders as provided in Section I of this Article IX, Bylaws, other than a Bylaw or an amendment thereof changing the authorized number of directors, may be adopted, amended or repealed by the Board of Directors. ARTICLE X GENERAL GOVERNING LAW. This corporation is organized under the provisions of the California General Corporation Law (Corporations Code Sections 100-2319) as in effect on the date of filing of its original Articles of Incorporation, namely January 31, 1974. Upon such filing the California Secretary of State assigned the following corporation number to this corporation: 0697800. The corporate affairs of this corporation shall be governed by and conducted in accordance with the provisions of the California General Corporation Law, as the same presently exist and are from time to time hereafter amended or superseded, except in those instances where the Articles of Incorporation or Bylaws of this corporation, now or through amendment hereafter, may adopt alternative rules which are permissible under the California General Corporation Law. Any provision (or portion thereof) in these Bylaws which is not permissible under the California General Corporation Law or is inconsistent with the Articles of Incorporation of this corporation (as they may from time to time be amended and supplemented) is void, but the balance of these Bylaws shall nevertheless be valid and effective. CONSTRUCTION AND DEFINITIONS. Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the California General Corporation Law shall govern the construction of these Bylaws. Without limiting the generality of the foregoing, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. 17 EX-10.1 3 EXHIBIT 10.1 Exhibit 10.1 - Commitment Letter provided by Ironwood Telecom LLC to Incomnet, Inc., dated October 30, 1998 Ironwood Telecom 555 Zang Street Suite 300 Lakewood, CO 80228 October 30, 1998 Incomnet, Inc. 2801 Main Street Irvine, California 92614 Attention: Mr. Denis Richard President and Chief Executive Officer Re: Commitment to Fund Dear Denis: Set forth below are the terms and conditions upon which Ironwood Telecom LLC ("Ironwood") is willing to commit to provide Incomnet, Inc. ("Incomnet") with a secured credit facility. The facility has two tranches, referred to in this letter as the "Bridge Loan" and the "Term Loan," under which Ironwood will provide a total of $20 million in secured financing. If Incomnet agrees with the terms and conditions set forth in this letter, it should countersign this letter as provided below, after which this letter will constitute a binding agreement enforceable against Ironwood and Incomnet in accordance with its terms and conditions. As part of its commitment to provide $20 million in secured financing, Ironwood will make a loan (the "Casey Loan") to John P. Casey, for the benefit of Incomnet, to facilitate the exercise of Casey's option to purchase outstanding Preferred Stock of Incomnet (the "Cohen Preferred") from Dr. Robert Cohen and certain other parties (the "Cohen Group"). Casey is obligated to tender the Cohen Preferred to Incomnet for redemption at his acquisition cost (including financing charges and legal fees) when Incomnet is legally permitted to redeem such stock (and hold such stock for a one-year period pending redemption), in accordance with the Board Change Agreement dated August 28, 1998, among Incomnet, Casey and certain other parties (the "Board Change Agreement"). If Incomnet is not legally permitted to redeem the Cohen Preferred prior to expiration of the one-year period Casey is obligated to hold the Cohen Preferred awaiting redemption, then thereafter Casey is obligated to undertake a rights offering and offer Incomnet's shareholders the opportunity to purchase such stock on a pro rata basis at his acquisition cost (including financing charges and legal fees), in accordance with the Board Change Agreement. The Casey Loan will be secured by the Cohen Preferred and accrue interest at the rate of 18% per annum (with a default rate of 21% per annum). Incomnet and its subsidiary, National Telephone & Communications, Inc. ("NTC"), will guarantee Casey's obligations under the Casey Loan. Principal and interest will be due and payable on redemption of the Cohen Preferred or the closing of a rights offering relating to such stock. As part of its commitment to provide $20 million in secured financing, Ironwood is willing to purchase outstanding Preferred Stock (the "Other Preferred Stock") from certain holders other than the Cohen Group (the "Other Preferred Holders"), for the benefit of Incomnet, and tender such stock for redemption by Incomnet when Incomnet is legally permitted to redeem such stock, or undertake a rights offering to Incomnet's shareholders, all on the same terms Casey is obligated to do so under the Board Change Agreement. The redemption price of the Other Preferred Stock (or price at which the stock will be offered to shareholders in a rights offering) that will be payable to Ironwood will equal the purchase price paid by Ironwood to acquire such stock, plus a financing charge equal to 18% per annum and all legal and other costs associated with such purchase, redemption and rights offering incurred by Ironwood. FUNDING COMMITMENT; PREFERRED STOCK PURCHASE COMMITMENT 1 Subject to the terms and conditions set forth herein, (i) Ironwood agrees to fund the Bridge Loan to Incomnet, and Incomnet agrees to accept funds under the Bridge Loan from Ironwood, on November 4, 1998, (ii) Ironwood agrees to fund the Casey Loan to Casey on November 4, 1998, (iii) Ironwood agrees to fund the Term Loan to Incomnet, and Incomnet agrees to accept funds under the Term Loan from Ironwood, on December 15, 1998 and (iv) Ironwood agrees to purchase the Other Preferred Stock on terms to be agreed upon among Incomnet, Ironwood and the Other Preferred Holders, and tender such stock for redemption or offer such stock in a rights offering to Incomnet's shareholders, on the same terms set forth in the Board Change Agreement. BRIDGE LOAN Incomnet and Ironwood agree that the Bridge Loan shall have the following terms: Principal Amount: $5 million less the principal amount of the Casey Loan and purchase price of Other Preferred Stock Interest Rate: 15% (Accrue only) Default Rate: 18% Maturity; Payment: Principal and Accrued Interest due on funding of Term Loan (December 15, 1998) Warrants: Warrants to purchase 500,000 shares of Incomnet's Common Stock, at an exercise price equal to the lesser of (i) 50% of the closing price of Incomnet's Common Stock on the Nasdaq Stock Market on October 29, 1998 and (ii) $1.00; customary anti-dilution protection for stock splits, stock dividends and recapitalizations; S-3 demand/shelf registration rights one-year after issuance, with unlimited piggyback registration rights (pari passu with other piggyback rights) Origination Fee: $150,000 payable on closing of the Bridge Loan Collateral: Proceeds from any future sale of Rapid Cast, Inc. stock owned by Incomnet (with the delivery of stock certificates representing those shares to be held in trust by Ironwood); all bank and other accounts of Incomnet, general intangibles of Incomnet and any equipment or furniture of Incomnet; NTC will guarantee Incomnet's obligations under the Bridge Loan Use of Proceeds: To be "downstreamed" to NTC; Payment by NTC to WorldCom of current trade payables; Thereafter, For NTC's General Corporate Purposes Other: Such other terms and conditions as may agreed upon by Incomnet and Ironwood TERM LOAN Incomnet and Ironwood agree that the Term Loan shall have the following terms: Principal Amount: $20 million less principal amount of Casey Loan and purchase price of Other Preferred Stock 2 Interest Rate: 12% (Payable Quarterly) Default Rate: 15% Maturity; Payment: Principal (and Accrued and Unpaid Interest) due on December 31, 2000 Warrants: FIRST TRANCHE: Warrants to purchase 2 million shares of Incomnet's Common Stock, at an exercise price equal to the lesser of (i) 50% of the closing price of Incomnet's Common Stock on the Nasdaq Stock Market on October 29, 1998 and (ii) $1.00, exercisable immediately and for five years thereafter, with the number of Warrants and the exercise price subject to pro rata adjustment if NTC's annualized fourth quarter 1999 gross revenue is less than $98 million; customary anti-dilution protection for stock splits, stock dividends and recapitalizations; S-3 demand/shelf registration rights one-year after issuance, with unlimited piggyback registration rights (pari passu with other piggyback rights) SECOND TRANCHE: Warrants to purchase 1 million shares of Incomnet's Common Stock, at an exercise price of $2.25 per share, exercisable on first anniversary of issuance and for five years thereafter, with the number of Warrants and the exercise price subject to pro rata adjustment if annualized fourth quarter 2000 gross revenue target is less than $222.9 million; customary anti-dilution protection for stock splits, stock dividends and recapitalizations; S-3 demand/shelf registration rights one-year after issuance, with unlimited piggyback registration rights (pari passu with other piggyback rights) Origination Fee: $350,000 payable on closing of the Term Loan Collateral: Substantially all the assets of Incomnet (excluding the capital stock of Rapid Cast, Inc. and GenSource, but including the capital stock of NTC owned by Incomnet); substantially all the assets of NTC (provided that WorldCom will have a lien on the customer accounts of NTC and will release such lien upon payment to WorldCom of certain amounts and the change of credit terms extended to NTC by WorldCom to net 30 days); and proceeds from any future sale of Rapid Cast, Inc. stock owned by Incomnet; NTC will guarantee obligations under the Term Loan; at Ironwood's option, Ironwood may elect to utilize a portion of the amount which would otherwise have constituted part of the Term Loan to pay-off First Bank and WorldCom directly in exchange for an assignment of all of their rights against NTC under the appropriate documents, such payoff advances shall also be guaranteed by NTC Use of Proceeds: To be "downstreamed" to Incomnet's subsidiary, National Telephone & Communications, Inc. ("NTC"); subject to the terms set forth above regarding direct payment to First Bank by Ironwood, pay-off of First Bank by NTC; subject to the terms set forth above regarding direct payment to WorldCom 3 by Ironwood, payment by NTC of balance of amounts in default plus accrued interest thereon owing to WorldCom (approximately $1.65 million, $550,000 of which payable on 1/15/99, 2/15/99 and 3/15/99) subject to the terms set forth above; thereafter For NTC's General Corporate Purposes Other: Such other terms and conditions as may agreed upon by Incomnet and Ironwood COVENANTS Under both the Bridge Loan and the Term Loan, Incomnet will be required to meet operating covenants relating to its (i) net worth and (ii) earnings before interest, taxes, depreciation and amortization (EBITDA), both of which at such levels to be agreed upon by the parties. Incomnet will also be prohibited under the Bridge Loan and the Term Loan from undertaking certain actions without the prior written consent of Ironwood, as are customary and reasonable for the type of loan being made, including being prohibited from selling any Rapid Cast stock owned by Incomnet without the prior written consent of Ironwood. CONDITIONS The Bridge Loan shall be conditioned upon the occurrence of the following events: (i) the renegotiation of severance arrangements with former management of Incomnet and NTC (Messrs. Reznick, Caswell, Quandt and Streufort) on terms that are acceptable to Ironwood, and termination of stock options previously granted to Messrs. Reznick, Caswell, Greenberg and Richardson; (ii) the agreement of the Other Preferred Holders to sell the Other Preferred Stock to Ironwood, on terms that are acceptable to Ironwood, such purchase to be made for the benefit of Incomnet and obligate Ironwood to tender such stock for redemption by Incomnet when Incomnet is legally permitted to redeem such stock, or undertake a rights offering to Incomnet's shareholders, all on the same terms Casey is obligated to do so under the Board Change Agreement; (iii) the negotiation and preparation of definitive documents relating to the Bridge Loan that are mutually acceptable to Ironwood and Incomnet; (iv) the consent of First Bank and WorldCom to the terms of the Bridge Loan and the Term Loan and the agreement of First Bank and WorldCom to forbear from taking any actions concerning defaults by NTC until December 15, 1998; and (v) the agreement of WorldCom to release its lien on NTC's customer accounts and any other assets of NTC on December 15, 1998 (or as soon thereafter as the following conditions are met) if (A) payment has been made of all amounts in default and interest thereon (approximately $3.3 million) and (B) NTC changes WorldCom's vendor credit terms to net 30 days. The Term Loan shall be conditioned upon the occurrence of the following events: (i) funding of the Bridge Loan; (ii) the dismissal or settlement of claims brought by the two groups of shareholders (the "Beltz Group" and the "Silva Run Group") who opted out of the class action entitled SANDRA GAYLES ET. AL V. SAM D. SCHWARTZ AND INCOMNET, INC. (CASE NO. CV95-0399 AWT (BQRX) (the "Class Action Lawsuit"), on terms that are acceptable to Ironwood; and (iii) the absence of a breach by plaintiffs in the Class Action Lawsuit under the settlement agreement relating to that action that would cause Ironwood to conclude, in its reasonable judgment, that the settlement agreement will not close on the terms set forth therein; and (iv) the negotiation and preparation of definitive documents relating to the Term Loan that are mutually acceptable to Ironwood and Incomnet. GOVERNING LAW This Agreement and any definitive documents evidencing the Bridge Loan or the Term Loan shall be deemed for all purposes to have been made in the State of Colorado and shall be governed by and interpreted in accordance with the laws of such state, except that no doctrine of choice of law shall be used to apply the laws of any other state or jurisdiction. If Incomnet agrees with the terms and conditions set forth in this letter, please so signify by signing below and returning the countersigned copy to Ironwood, after which this letter will constitute a binding agreement enforceable against Ironwood and Incomnet in accordance with its terms and conditions. 4 Very truly yours, /s/ Donald V. Berlanti ---------------------- ACKNOWLEDGED AND AGREED: INCOMNET, INC. By: /s/ Denis Richard ------------------- President and Chief Executive Officer 5 EX-10.2 4 EXHIBIT 10.2 EXHIBIT 10.2 - BRIDGE LOAN AND SECURITY AGREEMENT BETWEEN INCOMNET, INC. AND IRONWOOD TELECOM LLC, DATED NOVEMBER 4, 1998. BRIDGE LOAN AND SECURITY AGREEMENT DATED NOVEMBER 4, 1998 BETWEEN INCOMNET, INC. AND IRONWOOD TELECOM LLC TABLE OF CONTENTS
Page ---- 1. DEFINITIONS AND TERMS . . . . . . . . . . . . . . . 1 1.1. Definitions. . . . . . . . . . . . . . . . . 1 1.2. Accounting Terms.. . . . . . . . . . . . . . 5 1.3. Other Terms. . . . . . . . . . . . . . . . . 6 2. LOANS.. . . . . . . . . . . . . . . . . . . . . . . 6 2.1. Term Loan. . . . . . . . . . . . . . . . . . 6 3. INTEREST AND OTHER CHARGES. . . . . . . . . . . . . 6 3.1. Interest.. . . . . . . . . . . . . . . . . . 6 3.2. Maximum Interest Rate. . . . . . . . . . . . 6 3.3. Origination Fee. . . . . . . . . . . . . . . 6 4. PAYMENTS AND PREPAYMENTS. . . . . . . . . . . . . . 7 4.1. Repayment of Bridge Loan.. . . . . . . . . . 7 4.2. Voluntary Prepayments of Bridge Loan . . . . 7 4.3. Place and Form of Payments; Extension of Time. . . . . . . . . . . . . . . . . . . 7 4.4. Application and Reversal of Payments.. . . . 7 4.5. Indemnity for Returned Payments. . . . . . . 7 5. LENDER'S BOOKS AND RECORDS; QUARTERLY STATEMENTS. . 7 6. COLLATERAL. . . . . . . . . . . . . . . . . . . . . 8 6.1. Grant of Security Interest.. . . . . . . . . 8 6.2. Perfection and Protection of Security Interest. . . . . . . . . . . . . . . . . . 8 6.3. Location of Collateral.. . . . . . . . . . . 9 6.4. Title to, Liens on, and Sale and Use of, Collateral. . . . . . . . . . . . . . . . . 9 6.5. Access and Examination.. . . . . . . . . . . 9 ii 6.6. Insurance. . . . . . . . . . . . . . . . . . 9 6.7. Equipment. . . . . . . . . . . . . . . . . . 10 6.8. Documents, Instruments, and Chattel Paper. . 10 6.9. Right to Cure. . . . . . . . . . . . . . . . 10 6.10. Lender's Rights, Duties and Liabilities.. . 11 7. BOOKS AND RECORDS; FINANCIAL INFORMATION; NOTICES . 11 7.1. Books and Records. . . . . . . . . . . . . . 11 7.2. Financial Information. . . . . . . . . . . . 11 7.3. Notices to the Lender. . . . . . . . . . . . 11 8. GENERAL WARRANTIES AND REPRESENTATIONS. . . . . . . 12 8.1. Authorization, Validity, and Enforceability of this Agreement and the Loan Documents. . 12 8.2. Validity and Priority of Security Interest.. 13 8.3. Organization and Qualification.. . . . . . . 13 8.4. Corporate Name; Prior Transactions.. . . . . 13 8.5. Subsidiaries and Affiliates. . . . . . . . . 13 8.6. Use of Proceeds. . . . . . . . . . . . . . . 13 8.7. Public Disclosure. . . . . . . . . . . . . . 13 9. AFFIRMATIVE AND NEGATIVE COVENANTS. . . . . . . . . 14 9.1. Taxes and Other Obligations. . . . . . . . . 14 9.2. Corporate Existence and Good Standing. . . . 14 9.3. Maintenance of Property and Insurance. . . . 14 9.4. Mergers, Consolidations, Acquisitions, or Sales . . . . . . . . . . . . . . . . . . 14 9.5. Transactions Affecting Collateral or Obligations. . . . . . . . . . . . . . . . . 14 9.6. Guaranties.. . . . . . . . . . . . . . . . . 14 9.7. Debt.. . . . . . . . . . . . . . . . . . . . 15 9.8. Prepayment.. . . . . . . . . . . . . . . . . 15 9.9. Transactions with Affiliates.. . . . . . . . 15 iii 9.10. Liens. . . . . . . . . . . . . . . . . . . . . . 15 9.11. Restricted Investments. . . . . . . . . . . . . . 15 9.12. EBITDA. . . . . . . . . . . . . . . . . . . . . . 15 9.13. Equity Sales. . . . . . . . . . . . . . . . . . . 15 9.14. Further Assurances. . . . . . . . . . . . . . . . 15 10. CLOSING; CONDITIONS TO CLOSING . . . . . . . . . . . . . 16 10.1. Representations and Warranties; Covenants; Events . . . . . . . . . . . . . . . . . . . . . 16 10.2. Delivery of Documents . . . . . . . . . . . . . . 16 10.3. Warrant to Purchase Common Stock. . . . . . . . . 16 11. DEFAULT; REMEDIES. . . . . . . . . . . . . . . . . . . . 16 11.1. Events of Default.. . . . . . . . . . . . . . . . 16 11.2. Remedies. . . . . . . . . . . . . . . . . . . . . 17 12. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . 18 12.1. Cumulative Remedies; No Prior Recourse to Collateral . . . . . . . . . . . . . . . . . . . 18 12.2. No Implied Waivers. . . . . . . . . . . . . . . . 18 12.3. Severability. . . . . . . . . . . . . . . . . . . 19 12.4. Governing Law.. . . . . . . . . . . . . . . . . . 19 12.5. Consent to Jurisdiction and Venue; Service of Process. . . . . . . . . . . . . . . . . . . .19 12.6. Waivers.. . . . . . . . . . . . . . . . . . . . . 19 12.7. Survival of Representations and Warranties. . . . 19 12.8. Indemnification.. . . . . . . . . . . . . . . . . 19 12.9. Other Security and Guaranties.. . . . . . . . . . 20 12.10. Notices. . . . . . . . . . . . . . . . . . . . . 20 12.11. Waiver of Notices. . . . . . . . . . . . . . . . 21 12.12. Binding Effect; Assignment; Disclosure.. . . . . 21 12.13. Modification.. . . . . . . . . . . . . . . . . . 21 12.14. Counterparts.. . . . . . . . . . . . . . . . . . 21 iv 12.15. Captions.. . . . . . . . . . . . . . . . . . . . 21 12.16. Right of Set-Off.. . . . . . . . . . . . . . . . 22 12.17. Fees and Expenses. . . . . . . . . . . . . . . . 22
v EXHIBITS Exhibit A - Bridge Loan Note (Section 2.1.1) Exhibit B - Form of Warrant (Section 2.1.1) Exhibit C - Location of Collateral (Section 6.3) Exhibit D - Fictitious Names; Names of Acquired Persons (Section 8.4) Exhibit E - Subsidiaries (Section 8.5) Exhibit F - Form of UCC-1 (Section 21.2) Exhibit G - Registration Rights Agreement (Section 10.3) Exhibit H - Permitted Liens (Section 1.1) Exhibit I - Permitted Debt (Section 9.7) vi THIS BRIDGE LOAN AND SECURITY AGREEMENT (THE "AGREEMENT") IS MADE AND ENTERED INTO AS OF NOVEMBER 4, 1998, BY AND BETWEEN INCOMNET, INC., A CALIFORNIA CORPORATION (THE "BORROWER"), AND IRONWOOD TELECOM LLC, A COLORADO LIMITED LIABILITY COMPANY (THE "LENDER"). BACKGROUND The Lender has agreed to make to the Borrower, and the Borrower has agreed to accept from the Lender, a secured term loan (the "Bridge Loan") in the aggregate principal amount of $1,785,470 on the terms and conditions set forth below. The proceeds of the Bridge Loan are to be used for (i) capital contributions to the Borrower's subsidiary National Telephone & Communications, Inc. ("NTC"), (ii) payment of NTC's current trade payables and (iii) for NTC's general corporate purposes. The Bridge Loan will be made pursuant to the Lender's commitment to fund dated October 30, 1998 pursuant to which the Lender is committed, subject to certain terms and conditions to (a) make the Bridge Loan, (b) make a secured term loan to Mr. John P. Casey for the benefit of the Borrower to finance Mr. Casey's purchase of the outstanding preferred stock of the Borrower and (c) make a secured term loan (the "Term Loan") to the Borrower on or before December 15, 1998 in the amount of $20,000,000 (less the principal amount of the loan to Mr. Casey and certain other payments the Lender has agreed to make or may elect to make for the benefit of the Borrower) for the purpose of paying off in full all principal of and interest on the Bridge Loan and other corporate purposes. AGREEMENT In consideration of the mutual conditions and agreements set forth in this Agreement, and for good and valuable consideration, the receipt of which is hereby acknowledged, the Borrower and the Lenders hereby agree as follows: 1. DEFINITIONS AND TERMS. 1.1. DEFINITIONS. As used herein: "AFFILIATE" means a Person (a) which, directly or indirectly, controls, is controlled by or is under common control with, the Borrower; (b) which beneficially owns or holds, directly or indirectly, five percent or more of any class of voting stock of the Borrower; or (c) five percent or more of any class of the voting stock (or if such Person is not a corporation, five percent or more of the equity interest) of which is beneficially owned or held, directly or indirectly, by the Borrower. The term control (including the terms "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of the Person in question. "BRIDGE LOAN NOTE" has the meaning specified in Section 2.1.1. "BUSINESS DAY" means any day that is not a Saturday, Sunday, or a day on which banks in Los Angeles, California or Denver, Colorado, are required or permitted to close. "CLOSING DATE" means the date of this Agreement, being the date first above written. "CODE" means the Internal Revenue Code of 1986, as amended from time to time. "COLLATERAL" has the meaning given to such term in Section 6.1.1. "CONTRACT RIGHTS" means, collectively, all of the Borrower's rights and remedies under, and all moneys and claims for money due or to become due to the Borrower under all material contracts and agreements to which the Borrower is a party and any and all amendments, supplements, extensions, and renewals thereof. 1 "DEBT" means all liabilities, obligations and indebtedness of the Borrower to any Person, of any kind or nature, now or hereafter owing, arising, due or payable, howsoever evidenced, created, incurred, acquired or owing, whether primary, secondary, direct, contingent, fixed or otherwise. Without in any way limiting the generality of the foregoing, Debt shall specifically include the following: (i) the Borrower's liabilities and obligations to trade creditors; (ii) all Obligations; (iii) all obligations and liabilities of any Person secured by any Lien on the Borrower's Property, even though the Borrower shall not have assumed or become liable for the payment thereof; PROVIDED, HOWEVER, that all such obligations and liabilities which are limited in recourse to such Property shall be included in Debt only to the extent of the book value of such Property as would be shown on a balance sheet of the Borrower prepared in accordance with GAAP; (iv) all obligations and liabilities created or arising under any Capital Lease or conditional sale or other title retention agreement with respect to Property used or acquired by the Borrower, even if the rights and remedies of the lessor, seller or lender thereunder are limited to repossession of such Property; PROVIDED, HOWEVER, that all such obligations and liabilities which are limited in recourse to such Property shall be included in Debt only to the extent of the book value of such Property as would be shown on a balance sheet of the Borrower prepared in accordance with GAAP; (v) all accrued pension fund and other employee benefit plan obligations and liabilities; (vi) all obligations and liabilities under Guaranties; and (vii) deferred taxes. "EBITDA" means in any fiscal period, Borrower's consolidated net income (other than extraordinary or non-recurring items of Borrower for such period), plus (i) the amount of all interest expense, income tax expense, depreciation expense, and amortization expense of Borrower for such period, on a consolidated basis, and plus or minus (as the case may be) (ii) any other non-cash charges which have been added or subtracted, as the case may be, in calculating Borrower's consolidated net income for such period. "EQUIPMENT" means all of the Borrower's now owned and hereafter acquired machinery, equipment, furniture, furnishings, fixtures, and other tangible personal property (except Inventory), including, without limitation, data processing hardware and software, motor vehicles, aircraft, dies, tools, jigs, and office equipment, as well as all of such types of property leased by the Borrower and all of the Borrower's rights and interests with respect thereto under such leases (including, without limitation, options to purchase); together with all present and future additions and accessions thereto, replacements therefor, component and auxiliary parts and supplies used or to be used in connection therewith, and all substitutes for any of the foregoing, and all manuals, drawings, instructions, warranties and rights with respect thereto wherever any of the foregoing is located. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "EVENT" means any event or condition which, with notice, the passage of time, the happening of any other condition or event, or any combination thereof, would constitute an Event of Default. "EVENT OF DEFAULT" has the meaning given to such term in Section 11.1. "FISCAL YEAR" means the Borrower's fiscal year for financial accounting purposes. The current Fiscal Year of the Borrower will end on December 31, 1998. "GAAP" means at any particular time generally accepted accounting principles as in effect at such time. "GENERAL INTANGIBLES" means all general intangibles of Borrower, whether now owned or hereafter created or acquired by Borrower, including, without limitation, all choses in action, causes of action, corporate or other business records, deposit accounts, investment property, inventions, designs, drawings, blueprints, patents, patent applications, trademarks and the goodwill of the business symbolized thereby, names, trade names, trade secrets, goodwill, copyrights, registrations, licenses, franchises, customer lists, security and other deposits, rights in all litigation presently or hereafter pending for any cause or claim (whether in contract, tort or otherwise), and all judgments now or hereafter arising therefrom, all claims of Borrower against the Lender, rights to purchase or sell real or personal property, rights as a licensor or licensee of any kind, royalties, telephone numbers, proprietary information, purchase orders, and all insurance policies and claims (including without limitation life insurance, key 2 man insurance, credit insurance, liability insurance, property insurance and other insurance), tax refunds and claims, computer programs, discs, tapes and tape files, claims under guaranties, security interests or other security held by or granted to Borrower, all rights to indemnification and all other intangible property of every kind and nature (other than Receivables). "GUARANTY" by any Person means all obligations of such Person which in any manner directly or indirectly guarantee the payment or performance of any indebtedness or other obligation of any other Person (the "guaranteed obligations"), or assure or in effect assure the holder of the guaranteed obligations against loss in respect thereof, including, without limitation, any such obligations incurred through an agreement, (a) to purchase the guaranteed obligations or any Property constituting security therefor or (b) to advance or supply funds for the purchase or payment of the guaranteed obligations or to maintain a working capital or other balance sheet condition. "INTERCOMPANY ACCOUNTS" means all assets and liabilities, however arising, which are due to the Borrower from, which are due from the Borrower to, or which otherwise arise from any transaction by the Borrower with, any Affiliate. "INVENTORY" means all of the Borrower's now owned and hereafter acquired inventory, goods, merchandise, and other personal property, wherever located, to be furnished under any contract of service or held for sale or lease, all raw materials, work-in-process, finished goods, returned and repossessed goods, and materials and supplies of any kind, nature or description which are or might be used or consumed in the Borrower's business or used in connection with the manufacture, packing, shipping, advertising, selling or finishing of such inventory, goods, merchandise and other personal property, and all documents of title or other documents representing them. "IRS" means the Internal Revenue Service or any successor agency. "LIEN" means: any interest in property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute, or contract, and includes, without limitation, a security interest, charge, claim, or lien arising from a mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment, deposit arrangement, agreement, or conditional sale, or a lease, consignment or bailment for security purposes, or any reservation, exception, encroachment, easement, right-of-way, condition, restrictment, lease or other title exception or encumbrance affecting Property. "LOAN DOCUMENTS" means this Agreement, the Bridge Loan Note, the Warrant, and all other agreements, instruments, and documents heretofore, now or hereafter evidencing, securing, guaranteeing or otherwise relating to the Obligations, the Collateral, the Security Interest, or any other aspect of the transactions contemplated by this Agreement. "MATERIAL ADVERSE CHANGE" means a material and adverse change in the Property, business, operations or condition (financial or otherwise) of the Borrower and its Subsidiaries taken as a whole. "NTC" means National Telephone & Communications, Inc., a Delaware corporation. "OBLIGATIONS" means all present and future loans, advances, liabilities, obligations, covenants, duties, and Debts owing by the Borrower to the Lender, whether or not arising under this Agreement, whether or not evidenced by any note or other instrument or document, whether arising from an extension of credit, opening of a letter of credit, acceptance, loan, guaranty, indemnification or otherwise, whether direct or indirect (including, without limitation, those acquired by assignment from others, and any participation by the Lender in the Borrower's debts owing to others), absolute or contingent, due or to become due, primary or secondary, as principal or guarantor, and including, without limitation, all interest, charges, expenses, fees, attorneys' fees, filing fees and any other sums chargeable to the Borrower hereunder, under another Loan Document, or under any other agreement or instrument with the Lender. "PBGC" means the Pension Benefit Guaranty Corporation or any Person succeeding to the functions thereof. 3 "PERMITTED LIENS" means: (a) Liens for taxes not yet payable or Liens for taxes being contested in good faith and by proper proceedings diligently pursued, provided that a reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made therefor and that a stay of enforcement of any such Lien is in effect; (b) Liens in favor of the Lender; (c) Liens upon Equipment granted in connection with the acquisition of such Equipment by the Borrower after the date hereof; (d) reservations, exceptions, encroachments, easements, rights of way, covenants, conditions, restrictions, leases and other similar title exceptions or encumbrances affecting the Real Property, PROVIDED that they do not in the aggregate materially detract from the value of said Properties or materially interfere with their use in the ordinary conduct of the Borrower's business; (e) deposits under workmen's compensation, unemployment insurance, social security and other similar laws; (f) liens relating to statutory obligations with respect to surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; and (g) Liens described on Exhibit "H". "PERSON" means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, Public Authority, or any other entity. "PLAN" means any pension or other employee benefit plan which is subject to Title IV of ERISA, and which is: (a) a plan maintained by the Borrower or any Related Company; (b) a plan to which the Borrower or any Related Company contributes or is required to contribute; (c) a plan to which the Borrower or any Related Company was required to make contributions at any time during the five (5) calendar years preceding the date of this Agreement; or (d) any other plan with respect to which the Borrower or any Related Company has incurred or may incur liability, including contingent liability, under Title IV of ERISA, either to such plan or to the PBGC. "PREMISES" means all of Borrower's rights, title, and interest in the real property now owned or leased or hereafter acquired, including all rights and easements in connection therewith and all buildings and improvements now or hereafter constructed thereon. "PROCEEDS" means all products and proceeds, including rentals, of any Collateral, and all proceeds of such proceeds and products, including, without limitation, all cash and credit balances, all Payments under any indemnity, warranty, or guaranty payable with respect to any Collateral, all awards for taking by eminent domain, all proceeds of fire or other insurance, and all money and other Property obtained as a result of any claims against third parties or any legal action or proceeding with respect to Collateral. "PROPERTY" means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "PUBLIC AUTHORITY" means the government of any country or sovereign state, or of any state, province, municipality, or other political subdivision thereof, or any department, agency, public corporation or other instrumentality of any of the foregoing. "REAL PROPERTY" means all of the Borrower's rights, title, and interest, other than leasehold interests, in real property now owned or hereafter acquired by the Borrower, including all rights and easements in connection therewith and all buildings and improvements now or hereafter constructed thereon. "RECEIVABLES" means all of the Borrower's now owned and hereafter arising or acquired: accounts (whether or not earned by performance), including accounts owed to the Borrower by any of its Subsidiaries or Affiliates, together with all interest, late charges, penalties, collection fees, and other sums which shall be due and payable in connection with any account; proceeds of any letters of credit naming the Borrower as beneficiary; contract rights, chattel instruments, documents, general intangibles (including, without limitation, choices in action, causes of action, tax refunds, tax refund claims, Reversions and other amounts payable to the Borrower from pension and employee benefit plans, rights and claims against shippers and carriers, rights to indemnification and business interruption insurance), and all forms of obligations owing to the Borrower (including, without limitation, obligations owing to the Borrower by Subsidiaries and Affiliates); guarantees and other security for any of the foregoing; and rights of stoppage in transit, replevin, and reclamation; and other rights or remedies of an unpaid vendor, lienor, or secured party. 4 "RELATED COMPANY" means any member of any controlled group of corporations (as defined in Section 414 of the Code) of which the Borrower is a part, or any trade or business (whether or not incorporated) which together with the Borrower would be treated as a single employer under Section 4001 of ERISA. "REPORTABLE EVENT" shall have the meaning assigned to that term in Title IV of ERISA, including, without limitation, a reportable event described in Section 4043 of ERISA or the regulations thereunder, a withdrawal from a Plan described in Section 4063 of ERISA, or a cessation of operations described in Section 4062(e) of ERISA. "RESTRICTED INVESTMENT" means any acquisition of Property by the Borrower or any of its Subsidiaries in exchange for cash or other Property, whether in the form of an acquisition of stock, indebtedness or other obligation, or by loan, advance, capital contribution, or otherwise, except the following: (a) Property to be used in the business of the Borrower; (b) current assets arising from the sale or lease of goods or rendition of services in the ordinary course of business of the Borrower; (c) direct obligations of the United States of America, or any agency thereof, or obligations guaranteed by the United States of America, provided that such obligations mature within one (1) year from the date of acquisition thereof; (d) certificates of deposit maturing within one (1) year from the date of acquisition, bankers' acceptances, Eurodollar bank deposits, or overnight bank deposits, in each case issued by, created by, or with a bank or trust company organized under the laws of the United States or any state thereof having capital and surplus aggregating at least $100,000,000; and (e) Commercial paper given the highest rating by a national credit rating agency and maturing not more than two hundred seventy (270) days from the date of creation thereof; and (f) investments in any of Borrower's Subsidiaries (by capital contribution or otherwise) or purchase or repurchase of any stock or indebtedness, or any Property, of any of Borrower's Subsidiaries. "REVERSIONS" means any funds which may become due to the Borrower in connection with the termination of any Plan or other employee benefit plan. "SECURITY INTEREST" means, collectively, the Liens granted to the Lender in the Collateral pursuant to this Agreement, the other Loan Documents, or any other agreement. "SUBSIDIARY" means any present or future corporation of which the Borrower owns, directly or indirectly, more than 50% of the voting stock. "TERM LOAN" has the meaning specified in the Background section of this Agreement. "TERMINATION EVENT" means: (a) a Reportable Event with respect to a Plan described in Section 4043 of ERISA and the regulations issued thereunder (other than a Reportable Event not subject to the provision for thirty (30) days' notice to the PBGC under such regulations); (b) the withdrawal of the Borrower or any Related Company from a Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA; (c) the filing of a notice of intent to terminate a Plan or the treatment of a Plan amendment as a termination under Section 4041 of ERISA; (d) the institution of proceedings by the PBGC to terminate or have a trustee appointed to administer a Plan; (e) any other event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan; or (f) the partial or complete withdrawal of the Borrower or any Related Company from a Multiemployer Plan. "UCC" means the Uniform Commercial Code (or any successor statute) of the State of California or of any other state the laws of which are required by Section 9-103 thereof to be applied in connection with the issue of perfection of security interests, as such statutes are in effect during the term hereof. 1.2. ACCOUNTING TERMS. Any accounting term used in this Agreement shall have, unless otherwise specifically provided herein, the meaning customarily given in accordance with GAAP, and all financial computations hereunder shall be computed, unless otherwise specifically provided herein, in accordance with GAAP as consistently applied. 5 1.3. OTHER TERMS. All other undefined terms contained in this Agreement shall, unless the context indicates otherwise, have the meanings provided for by the UCC to the extent the same are used or defined therein. Wherever appropriate in the context, terms used herein in the singular also include the plural, and vice versa, and each masculine, feminine, or neuter pronoun shall also include the other genders. 2. LOANS. 2.1. TERM LOAN. 2.1.1. The Lender will make a term loan (the "Bridge Loan") to the Borrower in the principal amount of One Million Eight Five Thousand Four Hundred Seventy Dollars ($1,785,470). The proceeds of the Bridge Loan will be disbursed to the Borrower on the Closing Date. The Bridge Loan will be repayable in accordance with the terms of the promissory note (the "Bridge Loan Note") which will be authorized, issued and delivered by Borrower to Lender, in the form attached as Exhibit "A" and made a part hereof. On the Closing Date, the Borrower shall issue the Warrant in the form of Exhibit "B" to the Lender. 3. INTEREST AND OTHER CHARGES. 3.1. INTEREST. 3.1.1. INTEREST FORMULA. The Borrower shall pay to the Lender interest on the unpaid principal balance of the Bridge Loan at a per annum rate equal to 15%. Interest charges shall be computed on the basis of a year of 360 days and actual days elapsed and shall be payable to the Lender on the earlier of December 15, 1998 and the date of repayment in full of the principal amount of the Bridge Loan. 3.1.2. DEFAULT INTEREST RATES. If any Event of Default occurs, then, from the date such Event of Default occurs and until it is cured, or until all Obligations are paid and performed in full, whichever first occurs, the Borrower shall pay interest on the unpaid principal balance of the Bridge Loan at a per annum rate equal to 3% plus the rate of interest otherwise specified herein as applicable to such loan (the "Default Rate"). 3.2. MAXIMUM INTEREST RATE. In no event shall the interest rate and other charges hereunder exceed the highest rate permissible under any law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto. If a court determines that the Lender has received interest and other charges hereunder in excess of the highest rate applicable hereto, such excess shall be deemed to have been received on account of, and shall automatically be applied to reduce, the Obligations, other than interest, in the inverse order of maturity, and the provisions hereof shall be deemed amended to provide for the highest permissible rate. If there are no Obligations outstanding, the Lender shall refund to the Borrower such excess. 3.3. ORIGINATION FEE. On the Closing Date, the Borrower shall pay to the Lender an Origination Fee in the amount of $100,000. 6 4. PAYMENTS AND PREPAYMENTS. 4.1. REPAYMENT OF BRIDGE LOAN. The Borrower shall repay the principal of the Bridge Loan in full on the earlier of December 15, 1998 and the closing date of the Term Loan. 4.2. VOLUNTARY PREPAYMENTS OF BRIDGE LOAN. 4.2.1. The Borrower may prepay the principal of the Bridge Loan in whole or in part at any time and from time to time, upon at least two (2) Business Days' prior written notice to the Lenders. All prepayments of the principal of the Bridge Loan shall be accompanied by the payment of all accrued but unpaid interest on the prepaid principal amount of the Bridge Loan to the date of prepayment. 4.2.2. Any prepayment under this section of less than all of the outstanding principal of the Bridge Loan shall be applied, first, to accrued but unpaid interest on the Bridge Loan and, second, to the principal amount of the Bridge Loan to be prepaid. 4.3. PLACE AND FORM OF PAYMENTS; EXTENSION OF TIME. All payments of principal, interest, and other sums due to the Lender shall be made at Lender's address set forth in the Bridge Loan Note held by the Lender. Except for Proceeds received directly by the Lender, all such payment shall be made in immediately available funds. If any payment of principal, interest, or other sum to be made hereunder becomes due and payable on a day other than a Business Day, the due date of such payment shall be extended to the next succeeding Business Day and interest thereon shall be payable at the applicable interest rate during such extension. 4.4. APPLICATION AND REVERSAL OF PAYMENTS. The Lender shall have the continuing and exclusive right to apply and reverse and reapply any and all Proceeds of Collateral and payments that the Lender receives to any portion of the Obligations. 4.5. INDEMNITY FOR RETURNED PAYMENTS. If after receipt of any payment of, or Proceeds applied to the payment of, all or any part of the Obligations, the Lender is for any reason required to surrender such payment or Proceeds to any Person, because such payment or Proceeds is invalidated, declared fraudulent, set aside, determined to be void or voidable as a preference, or a diversion of trust funds, or for any other reason, then: the Obligations or part thereof intended to be satisfied shall be revived and continue and this Agreement shall continue in full force as if such payment or Proceeds had not been received by the Lender and the Borrower shall be liable to pay to the Lender, and hereby does indemnify the Lender and holds the Lender harmless for the amount of such payment or Proceeds surrendered. The provisions of this section shall be effective notwithstanding any contrary action which may have been taken by the Lender in reliance upon such payment or Proceeds, and any such contrary action so taken shall be without prejudice to the Lender's rights under this Agreement and shall be deemed to have been conditioned upon such payment or Proceeds having become final and irrevocable. The provisions of this section shall survive the termination of this Agreement. 5. LENDER'S BOOKS AND RECORDS; QUARTERLY STATEMENTS. The Borrower agrees that the books and records of the Lender showing the Obligations and the transactions pursuant to this Agreement and the other Loan Documents shall be admissible in any action or proceeding arising therefrom, and shall constitute prima facie proof thereof, irrespective of whether any Obligation is also evidenced by a promissory note or other instrument. The Lender will provide to the Borrower a quarterly statement of Loans, payments, and other transactions pursuant to this Agreement. Such statement shall be deemed 7 correct, accurate, and binding on the Borrower and as an account stated (except for reversals and reapplications of payments made as provided in Section 4.5 and corrections of errors discovered by the Lender), unless the Borrower notifies the Lender in writing to the contrary within thirty (30) days after such statement is rendered. In the event a timely written notice of objections is given by the Borrower, only the items to which exception is expressly made will be considered to be disputed by the Borrower. 6. COLLATERAL. 6.1. GRANT OF SECURITY INTEREST. 6.1.1. As security for the Obligations, the Borrower hereby grants to the Lender a continuing security interest in, lien on, and assignment of: (i) all Contract Rights, Equipment, General Intangibles, Inventory, Receivables and Proceeds, wherever located and whether now existing or hereafter arising or acquired; (ii) all proceeds of the sale of any equity securities of Rapid Cast, Inc. of which the Borrower is the owner (beneficial or otherwise), (iii) all moneys, securities and other property and the Proceeds thereof, now or hereafter held or received by, or in transit to, the Lender from or for the Borrower, whether for safekeeping, pledge, custody, transmission, collection or otherwise, including, without limitation, all of the Borrower's deposit accounts, credits, and balances with any bank and all claims of the Borrower against any bank at any time existing and all claims of the Borrower's deposit accounts with any financial institution with which the Borrower maintains deposits; (iv) all of Borrower's deposit accounts with any financial institutions with which Borrower maintains deposits; and (v) all books, records and other Property relating to or referring to any of the foregoing, including, without limitation, all books, records, ledger cards, data processing records, computer software and other Property and general intangibles at any time evidencing or relating to the Equipment, General Tangibles, Proceeds, and other property referred to above (all of the foregoing, together with the Premises and all other Property in which the Lender may at any time be granted a Lien, being herein collectively referred to as the "COLLATERAL"). The Lender shall have all of the rights of a secured party with respect to the Collateral under the UCC and other applicable laws. 6.1.2. All Obligations shall constitute a single loan secured by the Collateral. The Lender may except as otherwise provided in the Loan Documents, in its sole discretion, (i) exchange, waive, or release any of the Collateral, (ii) apply Collateral and direct the order or manner of sale thereof as the Lender may determine, and (iii) settle, compromise, collect, or otherwise liquidate any Collateral in any manner, all without affecting the Obligations or the Lender's right to take any other action with respect to any other Collateral. 6.2. PERFECTION AND PROTECTION OF SECURITY INTEREST. 6.2.1. The Borrower shall, at its expense, perform all steps requested by the Lender at any time to perfect, maintain, protect, and enforce the Security Interest, including, without limitation: (i) executing and filing financing or continuation statements, and amendments thereof, in form and substance satisfactory to the Lender; (ii) delivering to the Lender the originals of all instruments, documents, and chattel paper, and all other Collateral of which the Lender determines it should have physical possession in order to perfect and protect the Security Interest therein, duly endorsed or assigned to the Lender without restriction; (iii) placing notations on the Borrower's books of account to disclose the Security Interest; (iv) delivering to the Lender all letters of credit on which the Borrower is named beneficiary; and (v) taking such other steps as are deemed necessary by the Lender to maintain the Security Interest. 6.2.2. The Lender may file, without the Borrower's signature, one or more financing statements disclosing the Security Interest. The Borrower agrees that a carbon, photographic, photostatic, or other reproduction of this Agreement or of a financing statement is sufficient as a financing statement. If any Collateral is at any time in the possession or control of any warehouseman, bailee or any of the Borrower's agents or processors, then the Borrower shall notify the Lender thereof and shall notify such Person of the Security Interest in such Collateral and, upon the Lender's request, instruct such Person to hold all such Collateral for the Lender's account subject to the Lender's instructions. If at any time any Collateral is located on any Premises that are not owned by the Borrower, then the Borrower shall obtain written waivers, in form and substance satisfactory to the Lender, of all present and future Liens to which the owner or lessor or any mortgagee of such Premises may be entitled to assert against the Collateral. From time to time, the Borrower shall, upon the Lender's request, execute and deliver 8 confirmatory written instruments pledging the Collateral to the Lender but the Borrower's failure to do so shall not affect or limit the Security Interest. So long as this Agreement is in effect, and until all Obligations have been fully satisfied, the Security Interest shall continue in full force and effect in all Collateral. Concurrently herewith the Borrower shall deliver to the Lender certificates representing the Rapid Cast, Inc. equity securities, the sales proceeds of which are pledged as security for the Obligations pursuant to Section 6.1. The Lender shall hold these certificates as security for the Borrower's covenant not to sell the securities represented by such certificates without the prior consent of the Lender. 6.3. LOCATION OF COLLATERAL. The Borrower represents and warrants to the Lender that: (a) Exhibit "C" hereto is a correct and complete list of the Borrower's chief executive office, the location of its books and records, the locations of the Collateral, and the locations of all of its other places of business; and (b) Exhibit "C" correctly identifies any of such facilities and locations that are not owned by the Borrower and sets forth the names of the owners and lessors of, and, to the best of the Borrower's knowledge, the holders of any mortgages on such facilities and locations. The Borrower agrees that it will not maintain any Collateral at any location other than those listed on Exhibit "C", and that it will not otherwise change or add to any of such locations, unless it gives the Lender at least thirty (30) days' prior written notice and executes such financing statements and other documents that the Lender requests in connection therewith. 6.4. TITLE TO, LIENS ON, AND SALE AND USE OF, COLLATERAL. The Borrower represents, warrants and covenants to the Lender that: (i) all Collateral is and will continue to be owned by the Borrower free and clear of all Liens whatsoever, except for the Security Interest and other Permitted Liens; (ii) the Security Interest will not be subject to any prior Lien except Permitted Liens, if any; (iii) the Borrower will use, store, and maintain the Collateral with all reasonable care and will use the Collateral for lawful purposes only; (iv) the Borrower will not, without the Lender's prior written approval, sell, or dispose of, or permit the sale or disposition of any Collateral except in the ordinary course of business; and (v) the Borrower will not, without the Lender's prior written approval, sell, dispose of, transfer or assign any equity securities of Rapid Cast, Inc., now or hereafter owned by the Borrower (beneficially or otherwise). The inclusion of Proceeds in the Collateral shall not be deemed the Lender's consent to any sale or other disposition of the Collateral except as expressly permitted herein. 6.5. ACCESS AND EXAMINATION. The Lender shall at all reasonable times have access to, examine, audit, make extracts from and inspect the Borrower's records, files, and books of account and the Collateral and may discuss the Borrower's affairs with the Borrower's officers and management. The Borrower shall deliver to the Lender any instrument necessary for the Lender to obtain records from any service bureau maintaining records for the Borrower. The Lender may, at any time when an Event of Default exists, and at the Borrower's expense, make copies of all of the Borrower's books and records, or require the Borrower to deliver such copies to the Lender. The Lender may, without expense to the Lender, use such of the Borrower's personnel, supplies, and premises as may be reasonably necessary for maintaining or enforcing the Security Interest. 6.6. INSURANCE. 6.6.1. The Borrower shall insure the Collateral against loss or damage by fire with extended coverage, theft, burglary, pilferage, loss in transit, and such other hazards as the Lender shall specify, in amounts, under policies and by insurers acceptable to the Lender. The Borrower shall also maintain flood insurance, in the event of a designation of the area in which any Real Property is located as "flood prone" or a "flood risk area," as defined by the Flood Disaster Protection Act of 1973, in an amount to be reasonably determined by the Lender, and shall comply with the additional requirements of the National Flood Insurance Program as set forth therein. The Borrower shall cause the Lender to be named in each such policy as secured party or mortgagee and loss payee or additional insured, in a manner acceptable to the Lender. Each policy of insurance shall contain a clause or endorsement requiring the insurer to give not less than thirty (30) days' prior written notice to the Lender in the 9 event of cancellation of the policy for any reason whatsoever and a clause or endorsement stating that the interest of the Lender shall not be impaired or invalidated by any act or neglect of the Borrower or the owner of any Premises where Collateral is located nor by the use of such Premises for purposes more hazardous than are permitted by such policy. All premiums for such insurance shall be paid by the Borrower when due, and certificates of insurance and, if requested, photocopies of the policies shall be delivered to the Lender. If the Borrower fails to procure such insurance or to pay the premiums therefor when due, the Lender may (but shall not be required to) do so and charge the costs thereof to the Borrower's loan account. The Borrower shall promptly notify the Lender of any loss, damage, or destruction to the Collateral or arising from its use, whether or not covered by insurance. 6.6.2. The Lender is hereby authorized to collect all insurance proceeds directly. After deducting from such proceeds the expenses, if any, incurred by the Lender in the collection or handling thereof, the Lender may apply such proceeds to the reduction of the Obligations, in such order as the Lender determines, or, at the Lender's option, may permit or require the Borrower to use such money, or any part thereof, to replace, repair, restore or rebuild the Collateral in a diligent and expeditious manner with materials and workmanship of substantially the same quality as existed before the loss, damage or destruction. 6.7. EQUIPMENT. The Borrower represents and warrants to the Lender that all of the Equipment is and will be used or held for use in the Borrower's business. The Borrower shall keep and maintain the Equipment in good operating condition and repair (ordinary wear and tear excepted) and shall make all necessary replacements thereof. The Borrower shall promptly inform the Lender of any material additions to or deletions from the Equipment. The Borrower shall not permit any Equipment to become a fixture to real property or an accession to other personal property, unless the Lender has a valid, perfected, and first priority Security Interest in such real or personal property. The Borrower shall not, without the Lender's prior written consent, sell, lease as a lessor, or otherwise dispose of any of the Equipment; PROVIDED, HOWEVER, that the Borrower may dispose of obsolete or unusable Equipment having an orderly liquidation value no greater than $1000.00 individually, and $10,000.00 in the aggregate in any Fiscal Year, without the Lender's consent, subject to the conditions set forth below. In the event any of the Equipment is sold, transferred or otherwise disposed of with the Lender's prior written consent or as otherwise permitted hereby and: (i) such sale, transfer or disposition is effected without replacement of such Equipment, or such Equipment is replaced by Equipment leased by the Borrower, or by Equipment purchased by the Borrower subject to a lien or other right constituting a Permitted Lien, then the Borrower shall deliver all of the cash proceeds of any such sale, transfer or disposition to the Lender, which proceeds shall be applied to the repayment of the Obligations; or (ii) such sale, transfer or disposition is made in connection with the purchase by the Borrower of replacement Equipment (other than subject to a Permitted Lien), then the Borrower shall use the proceeds of such sale, transfer or disposition to finance the purchase by the Borrower of replacement Equipment and shall deliver to the Lender written evidence of the use of the proceeds for such purchase. All replacement Equipment purchased by the Borrower shall be free and clear of all liens, claims and encumbrances, except for the Security Interest and other Permitted Liens. 6.8. DOCUMENTS, INSTRUMENTS, AND CHATTEL PAPER. The Borrower represents and warrants to the Lender that: (a) all documents, instruments, and chattel paper describing, evidencing, or constituting Collateral, and all signatures and endorsements thereon, are and will be complete, valid, and genuine, and (b) all are and will be owned by the Borrower free and clear of all Liens other than Permitted Liens. 6.9. RIGHT TO CURE. The Lender may, in its sole discretion, pay any amount or do any act required of the Borrower hereunder in order to preserve, protect, maintain or enforce the Obligations, the Collateral or the Security Interest, and which the Borrower fails to pay or do, including, without limitation, payment of any judgment against the Borrower, any insurance premium, any warehouse charge, processing charge, any landlord's claim, and any other Lien upon the Collateral. All payments that the Lender makes under this section and all out-of-pocket costs and expenses that the Lender pays or incurs in connection with any action taken by it hereunder shall be charged to the 10 Borrower's loan account. Any payment made or other action taken by the Lender under this section shall be without prejudice to any right to assert an Event of Default hereunder and to proceed accordingly. Lender and the Lender's designees as the Borrower's attorney, shall have the power: (a) to endorse the Borrower's name on any checks, notes, acceptances, money orders, or other forms of payment or security that come into the Lender's possession; (b) to sign the Borrower's name on any document of title relating to any Collateral; and (c) to do all things necessary to carry out this Agreement. The Borrower ratifies and approves all acts of such attorney. Neither the Lender nor the attorney will be liable for any acts or omissions or for any error of judgment or mistake of fact or law. This power, being coupled with an interest, is irrevocable until this Agreement has been terminated and the Obligations have been fully satisfied. 6.10. LENDER'S RIGHTS, DUTIES AND LIABILITIES. The Borrower assumes all responsibility and liability arising from or relating to the use, sale, or other disposition of the Collateral. Neither the Lender nor any of its officers, directors, employees, or agents shall be liable or responsible in any way for the safekeeping of any of the Collateral, or for any act or failure to act with respect to the Collateral, or for any diminution in the value thereof, all of which shall be at the Borrower's sole risk. The Obligations shall not be affected by any failure to the Lender to take any steps to perfect the Security Interest or to collect or realize upon the Collateral, nor shall loss of or damage to the Collateral. 7. BOOKS AND RECORDS; FINANCIAL INFORMATION; NOTICES. 7.1. BOOKS AND RECORDS. The Borrower shall maintain, at all times, correct and complete books, records and accounts in which complete, correct and timely entries are made of its transactions in accordance with GAAP. The Borrower shall, by means of appropriate entries, reflect in such accounts and in all financial statements proper liabilities and reserves for all taxes and proper provision for depreciation and amortization of Property and bad debts, all in accordance with GAAP. The Borrower shall maintain at all times books and records pertaining to the Collateral in such detail, form, and scope as the Lender shall reasonably require. 7.2. FINANCIAL INFORMATION. The Borrower shall promptly furnish to the Lender all such financial information as the Lender shall reasonably request, and notify its auditors and accountants that the Lender is authorized to obtain such information directly from them. Without limiting the foregoing, the Borrower and its Subsidiaries will furnish to the Lender: 7.2.1. Promptly upon their becoming available, copies of each proxy statement, financial statement, and report which the Borrower sends to its shareholders; 7.2.2. Promptly after filing with the PBGC and the IRS a copy of each annual report or other filing filed with respect to each Plan of the Borrower or any Related Company; and 7.2.3. Such additional information as the Lender may from time to time reasonably request regarding the financial and business affairs of the Borrower or any Subsidiary. 7.3. NOTICES TO THE LENDER. The Borrower shall notify the Lender in writing of the following matters at the following times: 7.3.1. Immediately after becoming aware of the existence of any Event of Default; 7.3.2. Within two (2) days after becoming aware that the holder of any capital stock of the Borrower or of any Debt has given notice or taken any action with respect to a claimed default; 11 7.3.3. Within two (2) days after becoming aware of any material adverse change in the Borrower's Property, business, operations, or condition (financial or otherwise); 7.3.4. Within two (2) days after becoming aware of any pending or threatened action, proceeding, or counterclaim by any Person, or any pending or threatened investigation by a Public Authority, which may materially and adversely affect the Collateral, the repayment of the Obligations, the Lender's rights under the Loan Documents, or the Borrower's Property, business, operations, or condition (financial or otherwise); 7.3.5. Within two (2) days after becoming aware of any pending or threatened strike, work stoppage, material unfair labor practice claim, or other material labor dispute affecting the Borrower or any of its Subsidiaries; 7.3.6. Within two (2) days after becoming aware of any violation of any law, statute, regulation, or ordinance of a Public Authority applicable to the Borrower, which may materially and adversely affect the Collateral, the repayment of the Obligations, the Lender's rights under the Loan Documents, or the Borrower's Property, business, operations, or condition (financial or otherwise); 7.3.7. Immediately after becoming aware of any Termination Event with respect to a Plan, or any other Reportable Event with respect to a Plan, accompanied by any materials required to be filed with the PBGC with respect thereto; immediately after the Borrower's receipt of any notice concerning the imposition of any withdrawal liability under Section 4042 of ERISA with respect to a Plan; immediately upon the establishment of any Plan not existing at the Closing Date or the commencement of contributions by the Borrower to any Plan to which the Borrower was not contributing at the Closing Date; and immediately upon becoming aware of any other event or condition regarding a Plan or the Borrower's or a Related Company's compliance with ERISA which may materially and adversely affect the Borrower's Property, business, operation, or condition (financial or otherwise); and 7.3.8. Thirty (30) days prior to the Borrower changing its name. Each notice given under this section shall describe the subject matter thereof in reasonable detail and shall set forth the action that the Borrower has taken or proposes to take with respect thereto. 8. GENERAL WARRANTIES AND REPRESENTATIONS. The Borrower continuously warrants and represents to the Lender, at all times during the term of this Agreement and until all Obligations have been satisfied, that, except as hereafter disclosed to and accepted by the Lender in writing: 8.1. AUTHORIZATION, VALIDITY, AND ENFORCEABILITY OF THIS AGREEMENT AND THE LOAN DOCUMENTS. The Borrower has the corporate power and authority to execute, deliver and perform this Agreement and the other Loan Documents, to incur the Obligations, and to grant the Security Interest. The Borrower has taken all necessary corporate action (including, without limitation, obtaining approval of its stockholders) to authorize its execution, delivery, and performance of this Agreement and the other Loan Documents. No consent, approval, or authorization of, or filing with, any Public Authority, and no consent of any other Person, is required in connection with the Borrower's execution, delivery, and performance of this Agreement and the other Loan Documents, except for those already duly obtained. This Agreement and the other Loan Documents have been duly executed and delivered by the Borrower and constitute legal, valid and binding obligations of the Borrower, enforceable against it in accordance with their respective terms, without defense, setoff, or counterclaim. The Borrower's execution, delivery, and performance of this Agreement and the other Loan Documents do not and will not conflict with, or constitute a violation or breach of, or constitute a default under, or result in the creation or imposition of any Lien upon the Property of the Borrower or any of its Subsidiaries (except as contemplated by this Agreement and the other Loan Documents) by reason of the terms of (a) any mortgage, lease, agreement, or instrument to which the Borrower or any of its Subsidiaries is a party or which is binding upon the Borrower or any of its Subsidiaries, (b) any judgment, law, statute, rule or governmental regulation applicable to 12 the Borrower or any of its Subsidiaries, or (c) the Certificate or Articles of Incorporation or By-Laws of the Borrower or any of its Subsidiaries. 8.2. VALIDITY AND PRIORITY OF SECURITY INTEREST. The provisions of this Agreement and the other Loan Documents create legal and valid Liens on all the Collateral in the Lender's favor, and when all proper filings, recordings, and other actions necessary to perfect such Liens have been made or taken, such Liens will constitute perfected and continuing Liens on all the Collateral except for Permitted Liens securing all the Obligations, and will be enforceable against the Borrower and all third parties. 8.3. ORGANIZATION AND QUALIFICATION. The Borrower: (a) is duly incorporated and organized and validly existing in good standing under the laws of the State of California; (b) is qualified to do business as a foreign corporation and is in good standing in the States of Arizona, Nevada, Oregon and Washington, which are the only states in which qualification is necessary in order for it to own or lease its Property and conduct its business; and (c) has all requisite power and authority to conduct its business and to own its Property, including, but not limited to, all governmental permits, licenses and authorizations needed to conduct its business. 8.4. CORPORATE NAME; PRIOR TRANSACTIONS. The Borrower has not, during the past five (5) years, been known by or used any other corporate or fictitious name, or been a party to any merger or consolidation, or acquired all or substantially all of the assets of any Person, or acquired any of its Property out of the ordinary course of business, except as set forth on Exhibit "D". 8.5. SUBSIDIARIES AND AFFILIATES. Exhibit "E" is a correct and complete list of the name and relationship to the Borrower of each and all of the Borrower's Subsidiaries and other Affiliates. Each Subsidiary and Affiliate is (a) duly incorporated and organized and validly existing in good standing under the laws of its state of incorporation set forth on Exhibit "E" and (b) qualified to do business as a foreign corporation and in good standing in the states set forth opposite its name on Exhibit "E", which are the only states in which such qualification is necessary in order for it to own or lease its Property and conduct its business. 8.6. USE OF PROCEEDS. 8.6.1. None of the transactions contemplated in this Agreement (including, without limitation, the use of certain proceeds from such Loans) will violate or result in the violation of Section 7 of the Securities Exchange Act of 1934, as amended, or any regulations issued pursuant thereto, including, without limitation, Regulations G, T, U and X of the Board of Governors of the Federal Reserve System ("Federal Reserve Board"), 12 C.F.R., Chapter II. The Borrower does not own or intend to carry or purchase any "margin stock" within the meaning of said Regulation G. None of the proceeds of the Loans will be used, directly or indirectly, to purchase or carry (or refinance any borrowing, the proceeds of which were used to purchase or carry) any "margin stock" within the meaning of the Securities Exchange Act of 1934, as amended. 8.6.2. The Borrower will use the proceeds of the Bridge Loan for no purposes other than (i) to pay the Origination Fee to the Lender pursuant to Section 3.3; (ii) to make payments to certain shareholders; and (iii) to make capital contributions to NTC. The Borrower shall cause NTC to use the proceeds from such capital contributions to pay current trade payables of NTC and for NTC's general corporate purposes. 8.7. PUBLIC DISCLOSURE. 13 To the Borrower's knowledge, at the time of filing, no document filed by the Borrower with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended, contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements contained herein or therein not misleading. 9. AFFIRMATIVE AND NEGATIVE COVENANTS. The Borrower covenants that, so long as any of the Obligations remains outstanding or this Agreement is in effect: 9.1. TAXES AND OTHER OBLIGATIONS. The Borrower shall: (a) file when due all tax returns and other reports which it is required to file, pay when due all taxes, fees, assessments and other governmental charges against it or upon its Property, income, and franchises, make all required withholding and other tax deposits, and establish adequate reserves for the payment of all such items, and shall provide to the Lender, upon request, satisfactory evidence of its timely compliance with the foregoing; and (b) pay when due all Debt owed by it and perform and discharge in a timely manner all other obligations undertaken by it; provided, however, that the Borrower need not pay any tax, fee, assessment, governmental charge, or Debt, or perform or discharge any other obligation, that it is contesting in good faith by appropriate proceedings diligently pursued and with respect to which prior notice has been given to the Lender and reserves satisfactory to the Lender have been provided or a bond satisfactory to the Lender has been posted. 9.2. CORPORATE EXISTENCE AND GOOD STANDING. The Borrower and each of its Subsidiaries shall maintain its corporate existence and its qualification and good standing in all states necessary to conduct its business and own its Property, and shall obtain and maintain all licenses, permits, franchises and governmental authorizations necessary to conduct its business and own its Property. 9.3. MAINTENANCE OF PROPERTY AND INSURANCE. The Borrower and each of its Subsidiaries shall: (a) maintain all of its Property necessary and useful in its business in good operating condition and repair, ordinary wear and tear excepted; and (b) maintain with financially sound and reputable insurers such other insurance with respect to its Property and business against casualties and contingencies of such types (including, without limitation, business interruption, environmental liability, public liability, product liability, and larceny, embezzlement or other criminal misappropriation) and in such amounts as is customary for Persons of established reputation engaged in the same or a similar business and similarly situated, naming the Lender, at its request, as additional insured under each such policy. 9.4. MERGERS, CONSOLIDATIONS, ACQUISITIONS, OR SALES. Except with the prior written consent of the Lender, neither the Borrower nor any of its Subsidiaries shall enter into any transaction of merger, reorganization, or consolidation, or transfer, sell, assign, lease, or otherwise dispose of all or any part of its Property other than in the ordinary course of business, or windup, liquidate or dissolve, or agree to do any of the foregoing. 9.5. TRANSACTIONS AFFECTING COLLATERAL OR OBLIGATIONS. Neither the Borrower nor any of the Subsidiaries shall enter into any transaction which materially and adversely affects the Collateral or the Borrower's ability to repay the Obligations. 9.6. GUARANTIES. 14 Neither the Borrower nor any of the Subsidiaries shall make, issue, or become liable on any Guaranty, except Guaranties in favor of the Lender. 9.7. DEBT. Neither the Borrower nor any of the Subsidiaries shall incur or maintain any Debt, other than: (a) the Obligations; (b) trade payables and other contractual obligations to suppliers and customers incurred in the ordinary course of business; (c) Debt incurred to finance the purchase of equipment; (d) other Debt set forth on Exhibit "I"; and (e) intercompany accounts. 9.8. PREPAYMENT. Neither the Borrower nor any of the Subsidiaries shall voluntarily prepay any Debt, except the Obligations in accordance with their terms. 9.9. TRANSACTIONS WITH AFFILIATES. Except as set forth below, or, as otherwise contemplated under this Agreement, neither the Borrower nor any of the Subsidiaries shall: sell, transfer, distribute, or pay any money or Property to any Affiliate, or lend or advance money or Property to any Affiliate, or invest in (by capital contribution or otherwise) or purchase or repurchase any stock or indebtedness, or any Property, of any Affiliate, or become liable on any Guaranty of the indebtedness, dividends, or other obligations of any Affiliate. Notwithstanding the foregoing: the Borrower may (i) pay compensation to employees, (ii) invest in any of its Subsidiaries (by capital contribution or otherwise), (iii) purchase or repurchase any stock or indebtedness, or any Property, of any of its Subsidiaries, (iv) provide the Guaranty by NTC of the obligations of John P. Casey ("Casey") under the Secured Promissory Note issued by Casey to the Lender on the date hereof or (v) make the possible redemption by Borrower of stock owned by Casey and Lender; and if no Event of Default has occurred and is continuing, the Borrower and its Subsidiaries may engage in transactions with Affiliates in the normal course of business, in amounts and upon terms fully disclosed to the Lender, provided that such terms are no less favorable to the Borrower or the Subsidiary, as the case may be, than those which would be obtainable in a comparable arm's length transaction with a third party who is not an Affiliate. 9.10. LIENS. Neither the Borrower nor any of the Subsidiaries shall create, incur, assume, or permit to exist any Lien on any Property now owned or hereafter acquired by any of them, except Permitted Liens. 9.11. RESTRICTED INVESTMENTS. Neither the Borrower nor any of the Subsidiaries shall make any Restricted Investment. 9.12. EBITDA. The Borrower shall not permit EBITDA for any fiscal month to be less than -$800,000. 9.13. EQUITY SALES. The Borrower shall not sell any equity securities or grant any option or other rights to purchase or acquire any equity securities without the prior consent of the Lender. 9.14. FURTHER ASSURANCES. The Borrower shall execute and deliver, or cause to be executed and delivered, to the Lender such documents and agreements, and shall take or cause to be taken such actions, as the Lender may, from time to time, request, to carry out the terms and conditions of this Agreement and the other Loan Documents. 15 10. CLOSING; CONDITIONS TO CLOSING. The Lender will not be obligated to make the Bridge Loan, unless the following conditions precedent have been satisfied as determined by the Lender: 10.1. REPRESENTATIONS AND WARRANTIES; COVENANTS; EVENTS. The Borrower's representations and warranties contained in this Agreement and the other Loan Documents shall be correct and complete as of the Closing Date; the Borrower shall have performed and complied with all covenants, agreements, and conditions contained herein and in the other Loan Documents which are required to have been performed or complied with on or before the Closing Date; and there shall exist no Event or Event of Default on the Closing Date. 10.2. DELIVERY OF DOCUMENTS. The Borrower shall have delivered, or cause to be delivered, to the Lender (i) the Bridge Loan Note in the form of Exhibit "A" and (ii) a UCC-1 financing statement in the form of Exhibit "F". 10.3. WARRANT TO PURCHASE COMMON STOCK. The Borrower shall have issued to the Lender the Warrant to Purchase Common Stock in the form of Exhibit "B" hereto. The Borrower and the Lender shall have entered into a Registration Right Agreement substantially in the form of Exhibit G hereto. 11. DEFAULT; REMEDIES. 11.1. EVENTS OF DEFAULT. It shall constitute an event of default ("EVENT OF DEFAULT") if any one or more of the following shall occur for any reason: 11.1.1. any failure to make payment of principal, interest or fees on any of the Obligations when due; 11.1.2. any representation or warranty made by the Borrower in this Agreement, any of the other Loan Documents, or any certificate furnished by the Borrower or any of its Subsidiaries at any time to the Lender shall prove to be untrue in any material respect as of the date when made or furnished; 11.1.3. default shall occur in the observance or performance of any of the covenants and agreements contained in this Agreement, the Bridge Loan Note, any other Loan Document, or any other agreement entered into at any time to which the Borrower or any of its Subsidiaries and the Lender are party, or if any such agreement or document shall terminate (other than in accordance with its terms or the terms hereof or with the written consent of the Lender) or become void or unenforceable without the written consent of the Lender; 11.1.4. any default by the Borrower or NTC under any material agreement or instrument (other than an agreement, or instrument evidencing the lending of money or requiring the payment of money), and such default continues for ten (10) days after such breach first occurs; provided, however, that such grace period shall not apply, and an Event of Default shall exist promptly upon such breach, if such breach may not, in the Lender's reasonable determination, be cured by the Borrower during such ten (10) day grace period; 11.1.5. other than the defaults on obligations to WorldCom, Inc., First Bank & Trust, Milbank, Tweed Hadley & McCloy, the Federal Universal Service Fund, and Denis Richard and with respect to the pay phone surcharge, existing on the date hereof, any default by the Borrower or NTC in any payment of principal or of interest on any indebtedness (other than the Obligations) for borrowed money beyond any period of grace provided with 16 respect thereto or in the performance of any other agreement, term or condition contained in any agreement under which any such obligation is created if the effect of such default is to cause, or permit the holder or holders of such obligation to cause, such obligation to become due prior to its stated maturity; 11.1.6. the Borrower or NTC shall make a general assignment for benefit of creditors; or any proceeding shall be instituted by the Borrower seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection relief, or composition of it or its debts under law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking entry of an order for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property or the Borrower or NTC, as the case may be, shall take any corporate action to authorize any of the actions set forth above in this subsection; 11.1.7. an involuntary petition shall be filed or an action or proceeding otherwise commenced against the Borrower or NTC seeking reorganization, arrangement or readjustment of the Borrower's or NTC's debts or for any other relief under the Federal Bankruptcy Code, as amended, or under any other bankruptcy or insolvency act or law, state or federal, now or hereafter existing and remain undismissed or unvacated for a period of thirty (30) days; 11.1.8. a receiver, assignee, liquidator, trustee or similar officer for the Borrower or NTC or for all or any part of their Property shall be appointed involuntarily; 11.1.9. the Borrower or NTC shall file a certificate of dissolution under applicable state law or shall be liquidated, dissolved or wound-up or shall commence or have commenced against it any action or proceeding for dissolution, winding-up or liquidation, or shall take any corporate action in furtherance thereof; Borrower or NTC shall be nationalized, expropriated or condemned, seized or otherwise appropriated, or custody or control of such Property or of the Borrower or NTC shall be assumed by any Public Authority or any court of competent jurisdiction at the instance of any Public Authority, except where contested in good faith by proper proceedings diligently pursued where a stay of enforcement is in effect; 11.1.10. any guaranty of the Obligations shall be terminated, revoked or declared void or invalid; 11.1.11. one or more final judgments for the payment of money shall be rendered against the Borrower or NTC and the Borrower or NTC shall fail to discharge the same within thirty (30) days from the date of notice of entry thereof or to appeal therefrom; 11.1.12. any loss, theft, damage or destruction of any item or items of Collateral occurs which: (i) materially and adversely affects the operation of the Borrower's business; or (ii) is material in amount and is not adequately covered by insurance; 11.1.13. Borrower ceases to control NTC (the term control having the meaning given to it in the definition of Affiliate herein); 11.1.14. any event or condition shall occur or exist with respect to a Plan that could, in the Lender's reasonable judgment, subject the Borrower or any of its Subsidiaries to any tax, penalty or other liabilities under ERISA or the Code in the aggregate material in relation to the business, operations, Property or financial or other condition of the Borrower and its Subsidiaries, taken as a whole; 11.1.15. the Borrower or NTC shall generally not pay its debts as debts become due or shall admit its inability to pay its debts generally; 11.1.16. a Material Adverse Change shall occur. 11.2. REMEDIES. 17 11.2.1. If an Event of Default exists, the Lender may, without notice to or demand on the Borrower, do one or more of the following at any time or times and in any order: (i) terminate this Agreement; (ii) declare any or all Obligations to be immediately due and payable (provided, however, that upon the occurrence of any Event of Default described in Sections 9.1.4, 9.1.5, 9.1.6 or 9.1.7, all Obligations shall automatically become immediately due and payable without any action by the Lender); and (iii) pursue its other rights and remedies under the Loan Documents and applicable law. 11.2.2. If an Event of Default exists: (i) the Lender shall have, in addition to all other rights, the rights and remedies of a secured party under the UCC; (ii) the Lender may, at any time, take possession of the Collateral and make it available to the Lender at a place or places reasonably convenient to the Lender; and (iii) the Lender may sell and deliver any Collateral at public or private sales, for cash, upon credit or otherwise, at such prices and upon such terms as the Lender deems advisable, in its sole discretion, and may, if the Lender deems it reasonable, postpone or adjourn any sale of the Collateral by an announcement at the time and place of sale or such postponed or adjourned sale without giving a new notice of sale. Without in any way requiring notice to be given in the following manner, the Borrower agrees that any notice by the Lender of sale, disposition or other intended action hereunder or in connection herewith, whether required by the UCC or otherwise, shall constitute reasonable notice to the Borrower if such notice is mailed by registered or certified mail, return receipt requested, postage prepaid, or is delivered personally against receipt, at least five (5) days prior to such action to the Borrower's address specified in or pursuant to Section 10.5. If any Collateral is sold on terms other than payment in full at the time of sale, no credit shall be given against the Obligations until the Lender receives payment, and if the buyer defaults in payment, the Lender may resell the Collateral without further notice to the Borrower. In the event the Lender seeks to take possession of all or any portion of the Collateral by judicial process, the Borrower irrevocably waives: (a) the posting of any bond, surety or security with respect thereto which might otherwise be required; (b) any demand for possession prior to the commencement of any suit or action to recover the Collateral; and (c) any requirement that the Lender retain possession and not dispose of any Collateral until after trial or final judgment. The Borrower agrees that the Lender has no obligation to preserve rights to the Collateral or marshal any Collateral for the benefit of any Person. The Lender is hereby granted a license or other right to use, without charge, the Borrower's and NTC's labels, patents, copyrights, name, trade secrets, trade names, trademarks, and advertising matter, or any similar property, in completing production of, advertising or selling any Collateral, and the Borrower's rights under all licenses and all franchise agreements shall inure to the Lender's benefit. The proceeds of sale shall be applied first to all expenses of sale, including attorneys' fees, and second, in whatever order the Lender elects, to all Obligations. The Lender shall return any excess to the Borrower and the Borrower shall remain liable for any deficiency. 11.2.3. If an Event of Default occurs, the Borrower hereby waives all rights to notice and hearing prior to the exercise by the Lender of the Lender's rights to repossess the Collateral without judicial process or to replevy, attach or levy upon the Collateral without notice or hearing. 12. MISCELLANEOUS. 12.1. CUMULATIVE REMEDIES; NO PRIOR RECOURSE TO COLLATERAL. The enumeration herein of the Lender's rights and remedies is not intended to be exclusive, and such rights and remedies are in addition to and not by way of limitation of any other rights or remedies that the Lender may have under the UCC or other applicable law. The Lender shall have the right, in its sole discretion, to determine which rights and remedies are to be exercised and in which order. The exercise of one right or remedy shall not preclude the exercise of any others, all of which shall be cumulative. To the extent permitted by law, the Lender may, without limitation, proceed directly against the Borrower to collect the Obligations without any prior recourse to the Collateral. 12.2. NO IMPLIED WAIVERS. No act, failure or delay by the Lender shall constitute a waiver of any of its rights and remedies. No single or partial waiver by the Lender of any provision of this Agreement, or any other Loan Document, or of breach or default hereunder or thereunder, or of any right or remedy which the Lender may have, shall operate as a 18 waiver of any other provision, breach, default, right or remedy or of the same provision, breach, default, right or remedy on a future occasion. No waiver by the Lender shall affect its right to require strict performance of this Agreement except as to the matter waived. 12.3. SEVERABILITY. Any provision of this Agreement which is prohibited or invalid under applicable law of any jurisdiction shall be ineffective to the extent of such prohibition or unenforceability, without invalidating the remainder of this Agreement, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 12.4. GOVERNING LAW. This Agreement shall be deemed to have been made in the State of Colorado and shall be governed by and interpreted in accordance with the laws of such state, except that no doctrine of choice of law shall be used to apply the laws of any other state or jurisdiction and except to the extent that the law of the location of the Collateral would govern, and in that case that law shall govern with respect to issues concerning perfection and remedies available with respect to the Collateral located there only. 12.5. CONSENT TO JURISDICTION AND VENUE; SERVICE OF PROCESS. The Borrower agrees that, in addition to any other courts that may have jurisdiction under applicable laws, any action or proceeding to enforce or arising out of this Agreement or any of the other Loan Documents may be commenced in the state court of original jurisdiction of the State of Colorado for Jefferson County, or in the United States District Court for Colorado, and the Borrower consents and submits in advance to such jurisdiction, agrees that venue will be proper in such courts on any such matter and irrevocably waives, and agrees not to plead or claim, any objection that it may ever have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court. The Borrower hereby waives personal service of process and agrees that a summons and complaint commencing an action or proceeding in any such court shall be properly served and shall confer personal jurisdiction if served by registered or certified mail to the Borrower. Should the Borrower fail to appear or answer any summons, complaint, process or papers so served within thirty (30) days after the mailing or other service thereof, it shall be deemed in default and an order or judgment may be entered against it as demanded or prayed for in such summons, complaint, process or papers. The choice of forum set forth in this section shall not be deemed to preclude the enforcement of any judgment obtained in such forum, or the taking of any action under this Agreement to enforce the same, in any appropriate jurisdiction. 12.6. WAIVERS. THE BORROWER HEREBY WAIVES TRIAL BY JURY, RIGHTS OF SETOFF, AND THE RIGHT TO INTERPOSE COUNTERCLAIMS IN ANY LITIGATION IN ANY COURT WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, THE OBLIGATIONS OR THE COLLATERAL, OR ANY INSTRUMENT OR DOCUMENT DELIVERED PURSUANT HERETO OR THERETO, OR ANY OTHER CLAIM OR DISPUTE HOWSOEVER ARISING, BETWEEN THE BORROWER AND THE LENDER. THE BORROWER CONFIRMS THAT THE FOREGOING WAIVERS ARE INFORMED AND FREELY MADE. 12.7. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the Borrower's representations and warranties contained in this Agreement shall survive the execution, delivery, and acceptance thereof by the parties, notwithstanding any investigation by the Lender or its agents. 12.8. INDEMNIFICATION. 19 The Borrower hereby indemnifies, defends and holds the Lender, and its directors, officers, agents, employees and counsel, harmless from and against any and all losses, claims, damages, liabilities, expenses, deficiencies, judgments or penalties imposed on, incurred by or asserted against any of them, whether direct, indirect or consequential, arising out of or by reason of any litigation, investigations, claims, or proceedings (whether based on any federal, state or local laws or other statutes or regulations, including, without limitation, securities, environmental, or commercial laws and regulations, under common law or at equitable cause, or on contract or otherwise) commenced or threatened, which arise out of or in any way based upon the negotiation, preparation, execution, delivery, enforcement, performance or administration of this Agreement, any other Loan Document, or any undertaking or proceeding related to any of the transactions contemplated hereby or any act, omission to act, event or transaction related or attendant thereto, including, without limitation, amounts paid in settlement, court costs, and the fees and expenses of counsel reasonably incurred in connection with any such litigation, investigation, claim or proceeding. Without limiting the foregoing, if, by reason of any suit or proceeding of any kind, nature, or description against the Borrower, or by the Borrower or any other party against the Lender, which in the Lender's sole discretion makes it advisable for the Lender to seek counsel for protection and preservation of its liens and security assets, or to defend its own interest, such expenses and counsel fees shall be allowed to the Lender. To the extent that the undertaking to indemnify, pay and hold harmless set forth in this section may be unenforceable because it is violative of any law or public policy, the Borrower shall contribute the maximum portion which it is permitted to pay and satisfy under applicable law, to the payment and satisfaction of all indemnified matters incurrd by the Lender. The foregoing indemnity shall survive the payment of the Obligations and the termination of this Agreement. All of the foregoing costs and expenses shall be part of the Obligations and secured by the Collateral. 12.9. OTHER SECURITY AND GUARANTIES. The Lender may, without notice or demand and without affecting the Borrower's obligations hereunder, from time to time: (a) take from any Person and hold collateral (other than the Collateral) for the payment of all or any part of the Obligations and exchange, enforce or release such collateral or any part thereof; and (b) accept and hold any endorsement or guaranty of payment of all or any part of the Obligations and release any such endorser or guarantor, or any Person who has given any Lien in any other collateral as security for the payment of all or any part of the Obligations, or any other Person in any way obligated to pay all or any part of the Obligations. 12.10. NOTICES. All notices, demands and requests that either party is required or elects to give to the other shall be in writing, shall be delivered personally against receipt, or sent by recognized overnight courier service, or mailed by registered or certified mail, return receipt requested, postage prepaid, or sent by telex or telecopy, and shall be addressed to the party to be notified as follows: If to the Lender: Ironwood Telecom LLC 555 Zang Street, Suite 300 Lakewood, Colorado 80228 Attention: Mr. John P. Hill Telecopier: (303) 985-5875 with a copy to: Howrey & Simon 1299 Pennsylvania Ave., N.W. Washington, D.C. 20004-2402 Attention: Roger A. Klein, Esquire Telecopier: (202) 383-6610 20 If to the Borrower: Incomnet, Inc. 2801 Main Street Irvine, California 92614 Attention: Mr. Denis Richard Telecopier: (949) 224-7474 with a copy to: Heller Ehrman White & McAuliffe 601 South Figueroa Street, 40th Floor Los Angeles, California 90017 Attention: Paul H. Greiner, Esquire Telecopier: (213) 614-1868 or to such other address as each party may designate for itself by like notice. Any such notice, demand, or request shall be deemed given when received if personally delivered or sent by overnight courier, or when deposited in the United States mails, postage paid, if sent by registered or certified mail, or when answerback received, if sent by telex or telecopier. 12.11. WAIVER OF NOTICES. Unless otherwise expressly provided herein, the Borrower waives presentment, protest and notice of demand or dishonor and protest as to any instrument, as well as any and all other notices to which it might otherwise be entitled. No notice to or demand on the Borrower which the Lender may elect to give shall entitle the Borrower to any further notice or demand in the same, similar or other circumstances. 12.12. BINDING EFFECT; ASSIGNMENT; DISCLOSURE. The provisions of this Agreement shall be binding upon and inure to the benefit of the respective representatives, successors and assigns of the parties hereto; provided, however, that no interest herein may be assigned by the Borrower without the prior written consent of the Lender. The rights and benefits of the Lender hereunder shall, if the Lender so agrees, inure to any party acquiring any interest in the Obligations or any part thereof. The Borrower agrees that the Lender may use the Borrower's name in advertising and promotional materials and in conjunction therewith disclose the general terms of this Agreement. 12.13. MODIFICATION. This Agreement is intended by the Borrower and the Lender to be the final, complete, and exclusive expression of the agreement between them. This Agreement supersedes any and all prior and contemporaneous oral or written agreements relating to the subject matter hereof. No modification, rescission, waiver, release, or amendment of any provision of this Agreement shall be made, except by a written agreement signed by the Borrower and a duly authorized officer of the Lender. 12.14. COUNTERPARTS. This Agreement may be executed in any number of counterparts, and by the Lender and the Borrower in separate counterparts, each of which shall be an original, but all of which shall together constitute one and the same agreement. 12.15. CAPTIONS. The captions contained in this Agreement are for convenience only, are without substantive meaning and should not be construed to modify, enlarge, or restrict any provision. 21 12.16. RIGHT OF SET-OFF. Whenever an Event of Default exists, the Lender is hereby authorized at any time, and from time to time, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Lender or any affiliate of the Lender to or for the credit or the account of the Borrower against any and all of the Obligations, whether or not then due and payable. The Lender agrees promptly to notify the Borrower after any such set-off and application made by the Lender, provided that the failure to give such notice shall not affect the validity of such set-off and application. 12.17. FEES AND EXPENSES. The Borrower shall pay to the Lender on demand all costs and expenses that the Lender pays or incurs in connection with the negotiation, preparation, consummation, administration, enforcement, and termination of this Agreement, including, without limitation reasonable attorneys' and paralegals' fees and disbursements of counsel to the Lender. IN WITNESS WHEREOF, the parties have entered into this Agreement on the date first above written. INCOMNET, INC. By /s/ DENIS RICHARD ---------------------------------------- Title: President and Chief Executive Officer ---------------------------------------- IRONWOOD TELECOM LLC By /s/ DONALD V. BERLANTI ---------------------------------------- Title ---------------------------------- 22 EX-10.3 5 EXHIBIT 10.3 EXHIBIT 10.3 - BRIDGE LOAN NOTE EXECUTED BY INCOMNET, INC. IN FAVOR OF IRONWOOD TELECOM, LLC, DATED NOVEMBER 4, 1998 BRIDGE LOAN NOTE $2,275,210.00 November 4, 1998 FOR VALUE RECEIVED, the undersigned, Incomnet, Inc., a California corporation (the "Borrower"), HEREBY UNCONDITIONALLY PROMISES TO PAY to the order of Ironwood Telecom, LLC, a Colorado limited liability company (the "Lender"), the principal sum of TWO MILLION TWO HUNDRED SEVENTY FIVE THOUSAND TWO HUNDRED TEN DOLLARS ($2,275,210.00) (the "Principal Amount") plus all accrued and unpaid interest and fees thereon on the Maturity Date (defined below). 1. PAYMENTS 1.1. As set forth above, the Principal Amount and all accrued and unpaid interest and fees thereon shall be due and payable on the Maturity Date. As used herein, "Maturity Date" means the earlier of (i) December 15, 1998 and (ii) closing date of a secured term loan by the Lender to the Borrower in the principal amount of $20,000,000.00 (less the principal amount of the loan to Mr. John P. Casey made on the dare hereof and certain other payments the Lender has agreed to make for the benefit of the Borrower). 1.2. The Borrower shall pay to the Lender interest on the unpaid Principal Amount at a per annum rate equal to 15%. Interest charges shall be computed on the basis of a year of 360 days and actual days elapsed and shall be payable to the Lender on the Maturity Date. 1.3. If any Event of Default occurs, then, from the date such Event of Default occurs and until it is cured, or until all Obligations are paid and performed in full, whichever first occurs, the Borrower shall pay interest on the unpaid Principal Amount at a per annum rate equal to 3% plus the rate of interest otherwise specified herein as applicable to such loan. 1.4. In no event shall the interest rate and other charges hereunder exceed the highest rate permissible under any law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto. If a court determines that the Lender has received interest and other charges hereunder in excess of the highest rate applicable hereto, such excess shall be deemed to have been received on account of, and shall automatically be applied to reduce, the Principal Amount, in the inverse order of maturity, and the provisions hereof shall be deemed amended to provide for the highest permissible rate. If there is no Principal Amount outstanding, the Lender shall refund to the Borrower such excess. 1.5. The Borrower may prepay the Principal Amount in whole or in part at any time and from time to time, upon at least two (2) Business Days' prior written notice to the Lender. All prepayments of the principal of the Principal Amount shall be accompanied by the payment of all accrued but unpaid interest on the prepaid principal amount of the Principal Amount to the date of prepayment. Any prepayment under this section of less than all of the 1 outstanding Principal Amount shall be applied, first, to accrued but unpaid interest on the Principal Amount and, second, to the Principal Amount to be prepaid. 1.6. All payments of principal, interest, and other sums due to the Lender shall be made at the following address: Ironwood Telecom LLC 555 Zang Street, Suite 300 Lakewood, Colorado 80228 Attention: John P. Hill or such other address or bank account as may be designated by the Lender in writing from time to time. 1.7. This Bridge Loan Note is the Bridge Loan Note referred to in the Bridge Loan and Security Agreement, dated the date hereof, between the Borrower and the Lender (the "Bridge Loan Agreement"). All terms and conditions set forth in the Bridge Loan Agreement are incorporated herein and made a part hereof. The Bridge Loan Agreement is secured by certain collateral more specifically described in the Bridge Loan Agreement. All capitalized terms not otherwise defined herein shall have the meaning given such term in the Bridge Loan Agreement. 2. EVENTS OF DEFAULT Upon and after the occurrence of an Event of Default, the Lender shall have all of the rights and remedies set forth in Section 11.2 of the Bridge loan Agreement. 3. FEES AND COSTS The Borrower shall pay to the Lender on demand all costs and expenses that the Lender pays or incurs in connection with the negotiation, preparation, consummation, administration, enforcement, and termination of this Agreement, including, without limitation reasonable attorneys' and paralegals' fees and disbursements of counsel to the Lender. 4. GOVERNING LAW THIS PROMISSORY NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF COLORADO. EXCEPT THAT NO DOCTRINE OF CHOICE OF LAW SHALL BE USED OT APPLY THE LAWS OF ANY OTHER STATE OR JURISDICTION. INCOMNET, INC. By: /s/ Denis Richard Its: PRESIDENT AND CHIEF EXECUTIVE OFFICER 2 EX-10.4 6 EXHIBIT 10.4 EXHIBIT 10.4 - WARRANT AGREEMENT BETWEEN INCOMNET, INC. AND IRONWOOD TELECOM LLC, DATED NOVEMBER 4, 1998 WARRANT AGREEMENT This WARRANT AGREEMENT (this "Agreement") is made and entered into as of November 4, 1998, by and between Incomnet, Inc., a California corporation (the "Company"), and Ironwood Telecom LLC, a Colorado limited liability company (the "Investor"). BACKGROUND The Company is authorized to issue one class of Common Stock and three classes of Preferred Stock. Pursuant to this Agreement, the Company shall issue 500,000 warrants to the Investor entitling the Investor to purchase an aggregate of 500,000 shares of Common Stock of the Company representing not less than 2% of the outstanding shares of Common Stock of the Company. Concurrently herewith the Company and the Investor are entering into a Bridge Loan and Security Agreement pursuant to which the Investor has agreed to make a secured term loan to the Company in the original principal amount of $3,000,000. Issuance of the warrants described herein is a condition to the effectiveness of the Investor's obligations under such Bridge Loan and Security Agreement. AGREEMENT NOW, THEREFORE, the Company and the Investor agree as follows: 1. DEFINITIONS 1.1. CERTAIN DEFINED TERMS. The following terms used in this Agreement have the following meanings: "ACCREDITED INVESTOR" has the meaning given to that term in Section 501(a) of Regulation D promulgated under the Act. "ACT" means the Securities Act of 1933, as amended from time to time, or any successor statute. "BRIDGE LOAN" has the meaning given to that term in the Bridge Loan and Security Agreement. "BRIDGE LOAN AND SECURITY AGREEMENT" means the Bridge Loan and Security Agreement, dated the date hereof, between the Company and the Investor. "BRIDGE LOAN NOTE" has the meaning given to that term in the Bridge Loan and Security Agreement. "CHARTER DOCUMENTS" of a Person means the articles or certificate of incorporation, the by-laws and any other charter documents of such Person, including without limitation any certificate of designation, as amended or restated and as in effect as of the Closing Date. "COMMON STOCK" means the Company's Common Stock, no par value. "CLOSING DATE" means the date on which the proceeds of the Bridge Loan Note are disbursed in accordance with the Bridge Loan and Security Agreement. "CODE" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute. "COMMISSION" means the Securities and Exchange Commission or any other federal agency at the time administering the Act. "CURRENT EXERCISE PRICE" means the Exercise Price immediately before the occurrence of any event which, pursuant to Article 4, causes an adjustment to the Exercise Price. "DISTRIBUTION" means any transfer of cash or property by a Person to the Investor without consideration, whether by way of dividend or otherwise, or the purchase or redemption by such Person of its shares for cash or other property. 1 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time, or any successor statute. "EXERCISE PRICE" means the price of $1.00 per share, adjusted from time to time as provided in Article 4. "EXPIRATION DATE" means 5:00 p.m., Los Angeles time, on November 4, 2003, subject to extensions pursuant to Section 2.1. "PERSON" means and includes natural persons, corporations, limited partnerships, general partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts and other organizations, whether or not legal entities, and governments and agencies and political subdivisions thereof. "SUBSIDIARY" of any Person means a corporation of which more than fifty percent (50%) of the outstanding shares of capital stock of each class having ordinary voting power is owned by such Person, by one or more Subsidiaries of such Person, or by such Person and one or more of its Subsidiaries. "TRANSFER" means the sale, pledge, assignment or other transfer of the Warrants or the Warrant Shares, in whole or in part, and of the rights of the Investors under this Agreement. "WARRANT CERTIFICATE" means the certificate representing the Warrants, registered in the name of the Investor, substantially in the form of EXHIBIT A. "WARRANTS" means the warrants issued pursuant to this Agreement, which, when exercised, give the Investor the right to obtain one share of Common Stock per warrant, subject to adjustment as provided herein. "WARRANT SHARES" means the shares of Common Stock acquired or acquirable upon exercise of the Warrants, any shares of Common Stock issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, such shares of Common Stock and any other interest in the Company that has been or may be acquired upon exercise of the Warrants; provided, however, that a Warrant Share will no longer be a Warrant Share when such share is sold to a Person acquiring such share from a selling Investor in a sale by such Investor pursuant to a registered public offering or an offering made to the public that is exempted from registration by rule or regulation of the Commission, including Rules 144 and 144A under the Act or any successor rule or regulation. 1.2. INTERPRETATION Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular, to the singular include the plural, and to the part include the whole. The term "including" is not limiting and the term "or" has the inclusive meaning represented by the term "and/or." The words "hereof," "herein," "hereunder," and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. References to "Articles," "Sections," "Subsections," "Exhibits," and "Schedules" are to Articles, Sections, Subsections, Exhibits and Schedules, respectively, of this Agreement, unless otherwise specifically provided. Terms defined herein may be used in the singular or the plural. Any capitalized terms used herein which are not specifically defined herein have the meaning given to them in the Loan Agreement. 2. THE WARRANTS 2.1. ISSUANCE OF WARRANTS On the Closing Date, in consideration of the purchase by the Investor of the Bridge Loan Note, the Company shall issue to the Investor Five Hundred Thousand (500,000) Warrants and shall deliver to the Investor a Warrant Certificate representing such Warrants. 2.2. EXECUTION OF WARRANT CERTIFICATES Warrant Certificates may be signed on behalf of the Company by any person authorized by the Company to do so. Any person who, on the actual date of the execution of a Warrant Certificate, is authorized by 2 the Company to sign the Warrant Certificate, may sign on the Company's behalf even if such person was not authorized to do so on the Closing Date. 2.3. REGISTRATION The Company may deem and treat the registered Investor of a Warrant Certificate as the absolute owner for all purposes, notwithstanding any notation of ownership or other writing thereon made by anyone. 2.4. TRANSFERS The Warrants may not be Transferred without the prior written consent of the Company. 2.5. EXCHANGES At the option of the Investor, any Warrant Certificate may be exchanged when surrendered at the principal office of the Company for one or more Warrant Certificates representing in the aggregate a Warrant or Warrants to acquire a like number and kind of shares of Common Stock in the Company by the Investor. Warrant Certificates surrendered for exchange shall be canceled by the Company. 2.6. MUTILATED OR MISSING WARRANT CERTIFICATES If any of the Warrant Certificates shall be mutilated, lost, stolen or destroyed, the Company shall issue, in exchange and substitution for and upon cancellation of such Warrant Certificate, a new Warrant Certificate representing an equivalent number of Warrants, but only upon receipt of evidence of such loss, theft or destruction reasonably satisfactory to the Company or, if requested by the Company, upon receipt of a duly executed indemnification agreement reasonably satisfactory to the Company; provided, however, that the Investor shall not be required to deliver an indemnity bond. 2.7. TERM AND EXERCISABILITY OF WARRANTS The Warrants shall be exercisable, in whole or in part, at any time and from time to time in number described in Section 2.1 and in the manner provided in Section 2.8; provided, however, that at the Expiration Date (as reset from time to time pursuant to Section 2.1) any unexercised Warrants shall become void and all rights of the Investor as a Investor of the Warrants shall cease. 2.8. MANNER OF EXERCISE OF WARRANTS Subject to the provisions of this Agreement, the Investor shall have the right to purchase from the Company, and the Company shall issue and sell to such Investor, one share of Common Stock for each Warrant exercised, upon surrender to the Company at its principal office of the Warrant Certificate representing such Warrant, together with a Form of Warrant Subscription in substantially the form of EXHIBIT A-2 completed and signed, and upon payment to the Company of the Exercise Price in lawful money of the United States of America. 2.9. ISSUANCE OF SHARES UPON EXERCISE Upon exercise of a Warrant, the Company shall issue and cause to be delivered to the Investor, registered in such name or names as the Investor may designate, a certificate representing the share or shares of Common Stock issuable upon the exercise of such Warrant. The Warrants shall be exercisable, at the election of the Investor thereof, either as an entirety or for part only of the number of Warrants specified in the Warrant Certificate representing such Warrants. If less than all of the Warrants evidenced by a Warrant Certificate are exercised at any time prior to the Expiration Date, a new Warrant Certificate or Certificates shall be issued by the Company, to the Investor representing the remaining unexercised number of Warrants evidenced by the Warrant Certificate so surrendered. All Warrant Certificates surrendered upon exercise of Warrants shall be canceled by the Company. 3 2.10. PAYMENT OF FEES, EXPENSES AND TAXES The Investor shall pay all expenses and taxes imposed by law or any governmental agency, including any documentary stamp taxes, attributable to the issuance of Warrant Shares upon the exercise of Warrant. The Borrower shall pay to the Lender on demand all costs and expenses that the Lender pays or incurs in connection with the negotiation, preparation, consummation, administration, enforcement, and termination of this Warrant Agreement, including, without limitation reasonable attorneys' and paralegals' fees and disbursements of counsel to the Lender. 2.11. RESERVATION OF SHARES The Company covenants and agrees that, so long as any Warrants remain outstanding, the Company shall at all times have authorized and reserved a number of shares of Common Stock sufficient to provide for the exercise of the Warrants. 2.12. FRACTIONAL SHARES The Company need not issue fractional shares upon the exercise of Warrants but in lieu thereof may pay to the Investor the Fair Value of such fractional shares; provided, however, that in the event that the Company undertakes a reduction in the number of shares of Common Stock outstanding, it shall be required to issue fractional shares to the Investor which exercises all or any part of its Warrants. 3. REPRESENTATIONS AND WARRANTIES 3.1. BY THE COMPANY The Company represents and warrants to the Investor as follows: 3.1.1. LEGAL STATUS The Company and its Subsidiaries are corporations duly formed and existing under the laws of the state where organized. 3.1.2. VALID ISSUE. All shares of Common Stock, which may be issued upon exercise of the Warrants are duly authorized and, upon issuance in accordance with the provisions of this Agreement, shall be validly issued, fully paid and nonassessable and free from all taxes, liens, charges and security interests. 3.1.3. AUTHORITY; NO CONFLICTS. This Agreement, and any instrument or agreement required hereunder, are within the Company's powers, have been duly authorized, and do not conflict with any of its Charter Documents. 3.1.4. BINDING AND ENFORCEABLE. This Agreement is a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject, as to enforcement, (i) to bankruptcy, insolvency, reorganization, arrangement, moratorium and other laws of general applicability relating to or affecting creditors' rights and (ii) to general principles of equity, whether such enforcement is considered in a proceeding at law or in equity. 3.1.5. CONFLICT. 4 This Agreement does not conflict with any law, agreement, or obligation by which the Company or any of its Subsidiaries is bound. 3.2. SECURITIES LAW REPRESENTATIONS OF THE INVESTOR The Investor represents, warrants and acknowledges to the Company as follows: 3.2.1. INVESTMENT. The Warrants issued to the Investor, and the Warrant Shares to be issued to the Investor upon exercise of the Warrants, are being acquired for investment for the Investor's own account, not as a nominee or agent, and not with a view to or for sale in connection with the distribution thereof. The Investor has not been contacted concerning the acquisition of the Warrants or Warrant Shares by means of any advertisement. 3.2.2. SOPHISTICATION. The Investor has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the Investor's investment in the Warrants and the Warrant Shares; the Investor has the ability to bear the economic risks of such investment; the Investor has the capacity to protect its own interests in connection with the transactions contemplated by this Agreement; and the Investor has had an opportunity to ask questions of management of the Company and to obtain such financial and other information from the Company as the Investor deems necessary or appropriate in connection with evaluating the merits of the investment in the Warrants and the Warrant Shares. The Investor acknowledges that the Warrants have not been and will not be registered under the Act and may not be transferred except in compliance with the Act and with the prior consent of the Company. 3.2.3. TRANSFER RESTRICTIONS. There are no more than 10 members of the Investor and each member will agree to appropriate restrictions. 4. ANTI-DILUTION PROTECTION 4.1. STOCK SPLITS, CONSOLIDATIONS, DIVIDENDS AND DISTRIBUTIONS If the outstanding shares of Common Stock are subdivided into a greater number of shares of Common Stock or if the Company makes a dividend in the form of stock or other Distribution of its stock to stock Investors, the Current Exercise Price shall, simultaneously with the effectiveness of such subdivision, dividend or Distribution, be proportionately reduced, and conversely, if the outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, the Current Exercise Price shall, simultaneously with the effectiveness of such combination, be proportionately increased. 4.2. SUCCESSIVE CHANGES The provisions of this Article shall apply to successive dividends or other Distributions, subdivisions and combinations on or of shares of Common Stock after the date of this Agreement. 4.3. ADJUSTMENT OF SHARES ISSUABLE UPON EXERCISE OF WARRANTS Upon each adjustment of the Exercise Price as a result of the calculations made pursuant to this Article 4, each Warrant outstanding prior to the making of the adjustment in the Exercise Price shall thereafter be treated as that number of Warrants, and shall evidence the right to purchase, at the adjusted Exercise Price, that number of shares of Common Stock (calculated to the nearest hundredths), obtained by (i) multiplying the number of shares of Common Stock purchasable upon exercise of a Warrant prior to adjustment by the Exercise Price in effect prior to 5 adjustment, and (ii) dividing the product so obtained by the Exercise Price in effect after such adjustment of the Exercise Price. 4.4. NOTICE OF ADJUSTMENT TO INVESTORS Upon the occurrence of each adjustment or readjustment of the Exercise Price, the Company shall compute such adjustment or readjustment in accordance with the terms hereof. The Company shall furnish the Investor with a certificate signed by the Company's chief financial officer setting forth in reasonable detail (i) the Exercise Price after such adjustment or readjustment, (ii) the method of calculation and the facts upon which such calculation is based and (iii) the number of shares of Common Stock purchasable upon exercise of a Warrant after such adjustment or readjustment. 5. MISCELLANEOUS 5.1. NOTICES In order to be effective, any notice or other communication required or permitted hereunder shall be in the form, and transmitted in the manner, required under the Secured Promissory Note. 5.2. SUCCESSORS AND ASSIGNS This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Investor may not Transfer any of the Warrants without the prior written consent of the Company. 5.3. GOVERNING LAW This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado applicable to contracts entered into and to be performed wholly within Colorado by Colorado residents. 5.4. CONSENT TO JURISDICTION The Company hereby consents to the non-exclusive jurisdiction, venue and forum of any state or federal court in Colorado with respect to any action, whether commenced by the Investor or any other Person, which, in whole or in part, in any way arises under or relates to this Agreement. 5.5. EXECUTION IN COUNTERPARTS This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which, when so executed, shall be deemed to be an original and all of which, when taken together, shall constitute but one and the same agreement. 5.6. REMEDIES In the event of a breach by the Company of this Agreement, any Investor injured by such breach, in addition to being entitled to exercise all rights granted by law, including recovery of damages, shall be entitled to specific performance of its rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach of this Agreement by the Company and hereby waives the defense in any action for specific performance that a remedy at law would be adequate. 5.7. INCORPORATION OF EXHIBITS AND SCHEDULES BY REFERENCE All Exhibits and Schedules to this Agreement are incorporated herein by this reference. 6 5.8. ENTIRE AGREEMENT; AMENDMENT This Agreement (including the Exhibits, Schedules and the parts of the Bridge Loan and Security Agreement incorporated by reference herein) is issued pursuant to the letter agreement, dated October 30, 1998, between the Company and the Investor and constitutes the entire agreement between the Company and the Investor with respect to the subject matter hereof, superseding all prior or contemporaneous negotiations, communications, discussions and correspondence concerning the subject matter hereof. This Agreement may be modified or amended or any provision hereof may be waived only with the written consent of the Company and the Investor. 7 EX-10.5 7 EXHIBIT 10.5 EXHIBIT 10.5 - GUARANTY EXECUTED BY NATIONAL TELEPHONE & COMMUNICATIONS, INC. IN FAVOR OF IRONWOOD TELECOM LLC, DATED NOVEMBER 4, 1998 GUARANTY This Guaranty (the "Guaranty") is made and entered into as of November 4, 1998, (the "Effective Date"), by National Telephone & Communications, Inc., a Delaware corporation ("Guarantor"), in favor of Ironwood Telecom LLC, a Colorado limited liability company ("Lender"). This Guaranty is executed and delivered in connection with a Bridge Loan Note in the original principal amount of $3,000,000 also dated as of the Effective Date (the "Bridge Loan Note") and secured by the Loan and Security Agreement dated as of the Effective Date (the "Loan Agreement") given to Lender by Incomnet, Inc., a California corporation ("Borrower"). The Bridge Loan Note, Guaranty, and Loan Agreement are collectively referred to as the Loan Documents. Guarantor, for the benefit of Lender, agrees as set forth below. 1. DEFINITIONS. Any capitalized term not otherwise defined in this Guaranty shall have the meaning given to the term in the Loan Agreement. 2. GUARANTY. Guarantor unconditionally guaranties to Lender the timely (whether as scheduled or upon acceleration) payment and performance by Borrower of the following (the "Guarantied Obligations"): 2.1. The principal, interest and other charges or amounts due under the Bridge Loan Note and the other Loan Documents (whether by acceleration or otherwise) and all renewals, extensions, modifications and rearrangements of any of the Loan Documents; 2.2. The other obligations set forth in or arising out of the Bridge Loan Note and the other Loan Documents; 2.3. Any of the forgoing arising out of or in connection with any renewal, extension or other modification of the Bridge Loan Note or any of the other Loan Documents; 2.4. Any of the foregoing arising after Borrower has commenced or become subject to any proceeding under the Bankruptcy Code, including any advances made to Borrower, any interest that accrues after the filing of the bankruptcy petition (even if the interest cannot be collected in the proceeding under the Bankruptcy Code), and attorneys fees. If Borrower fails to pay or perform any of the Guarantied Obligations, Guarantor will immediately pay or perform the obligation upon the written request of the Lender. 1 3. LENDER'S DIRECT RIGHTS. 3.1. This is a guaranty of payment and performance and is not a guaranty of collection. 3.2. In the event that Borrower fails timely to pay or perform under the Bridge Loan Note or any of the other Guarantied Obligations, Lender may enforce its rights under this Guaranty without first seeking to obtain payment or performance from: 3.2.1. Borrower; 3.2.2. Any other guarantor; 3.2.3. Any collateral Lender may hold for the Bridge Loan Note or any of the other Loan Documents or any guaranty of the Bridge Loan Note or any of the other Loan Documents, including this one; or 3.2.4. Exercise of any other remedy or right that Lender may have. 3.3. In the event Borrower becomes subject to a voluntary or involuntary proceeding under the Bankruptcy Code, Lender may immediately pursue its rights under this Guaranty, even though Lender may be stayed from accelerating or collecting the Guarantied Obligations as against Borrower. 4. CONTINUING GUARANTY. This is a continuing guaranty of the Guarantied Obligations and may not be terminated. 5. NO NOTICE REQUIRED. Lender does not have to notify Guarantor of any of the following events and Guarantor will not be released or exonerated from its obligations under this Guaranty if it is not notified of these events: 5.1. Borrower's failure to pay timely any amount owed under the Bridge Loan Note or any of the other Loan Documents or to pay or perform any of the other Guarantied Obligations; 5.2. Borrower's failure to perform any other obligation under the Bridge Loan Note, Loan Agreement, or any other Loan Document; 5.3. Any sale or other disposition of any collateral for the Bridge Loan Note, for the other Guarantied Obligations, or for any guaranty of the Bridge Loan Note or any of the Guarantied Obligations; 2 5.4. Lender's acceptance of this Guaranty; 5.5. Any renewal, extension or other modification of the Bridge Loan Note, any other Loan Document, or any of the other Guarantied Obligations; or 5.6. All other notices to which it might be entitled. 6. GUARANTOR'S ADDITIONAL WAIVERS. Guarantor waives any right it may have to any of the following acts: 6.1. Demand; 6.2. Presentment; 6.3. Diligence; 6.4. Protest; 6.5. Notice of dishonor; and 6.6. Any other notice to which it may be entitled. 7. NO RELEASE OF GUARANTOR. Lender may do any of the following, by action or inaction, without releasing or exonerating Guarantor from any of its obligations under this Guaranty: 7.1. Renew, extend or otherwise modify or alter the Bridge Loan Note, the Loan Agreement, any other Loan Document or any of the other Guarantied Obligations; 7.2. Release Borrower from any of the Guarantied Obligations; 7.3. Sell, release, subordinate, impair, waive or otherwise fail to obtain or perfect a security interest in, or realize upon, any collateral for the Bridge Loan Note, any of the other Guarantied Obligations, or any other guaranty of the Bridge Loan Note; 7.4. Advance additional funds in its discretion for purposes related to the purposes set forth in the Loan Agreement; 7.5. From time to time and without first requiring performance on the part of Borrower and without being required to exhaust any or all security held by Lender, to look to and require performance by Guarantor of any obligation on the part of Guarantor to be performed pursuant to the terms hereof, by action at law or in equity or both, and further to collect in any such action its costs and expenses, including reasonable attorneys' fees incurred in enforcing its rights hereunder; 3 7.6. Foreclose on any collateral for the Bridge Loan Note or a guaranty of the Bridge Loan Note in a manner that diminishes, impairs or precludes the right of Guarantor to enjoy any rights of subrogation against Borrower or any other guarantor, or to obtain reimbursement, performance, or indemnification for payment or performance under this Guaranty; 7.7. Make an election under Bankruptcy Code Section 1111(b)(2); 7.8. Permit or suffer the creation of secured or unsecured credit or debt under Bankruptcy Code Section 364; 7.9. Permit or suffer the disallowance, avoidance or subordination of any of the Guarantied Obligations or collateral for any of the Guarantied Obligations; 7.10. Fail to exercise any right or remedy it may have with respect to the payment or performance of the Bridge Loan Note, any of the other Loan Documents or any of the other Guarantied Obligations; or 7.11. Fail to obtain a guaranty, other assurance of payment, or credit enhancement from any other person. 8. NO SUBROGATION, ETC. Guarantor waives and shall not seek to exercise any of the following rights that it may have against Borrower, any other guarantor, or any collateral provided by Borrower or any other guarantor, for any amounts paid by it, or acts performed by it, under this Guaranty: 8.1. Subrogation; 8.2. Reimbursement; 8.3. Performance; 8.4. Indemnification (including any rights to indemnification set forth in this Guaranty). 9. SUBORDINATION OF GUARANTOR. 9.1. SUBORDINATION OF CLAIMS. All principal and interest on all existing and future indebtedness, liabilities, and obligations of Borrower to Guarantor, whether fixed or contingent, matured or unmatured, and liquidated or unliquidated (the "Subordinated Debt") shall at all times be subordinated in right of payment to the payment and performance of the Bridge Loan Note, the other Loan Documents and the other Guarantied Obligations. 9.2. PAYMENTS. Upon the occurrence of any default, event of default or Event of Default under any of the Loan Documents, Guarantor will not accept any payments on any of the Subordinated Debt. If no default, event of default or Event of Default has occurred under any of the Loan Documents and Guarantor receives any payment on the Subordinated Debt, it will hold such payment in trust for the benefit of Lender; if any default, event of default or Event of Default has occurred under any of the Loan Documents and Guarantor receives any payment on the Subordinated Debt, it 4 shall immediately deliver such payment to Lender, but, in either event, without otherwise reducing or affecting in any manner the liability of Guarantor under the other provisions of this Guaranty. 9.3. ATTORNEY-IN-FACT. Guarantor appoints Lender Guarantor's attorney-in-fact to file claims, and receive payments, on behalf of Guarantor with respect to any of the Subordinated Debt in any proceeding by or against Borrower under the Bankruptcy Code (including Chapters 7 or 11), any assignment for the benefit of Lenders made by Borrower, or in any other reorganization or insolvency proceeding. 10. MISCELLANEOUS. 10.1. REVIVAL OF DEBT. Guarantor's obligations under this Guaranty shall again include amount returned by Lender in the event that Lender must return any amount paid by Borrower or any other guarantor of the Bridge Loan Note or of any of the other Guarantied Obligations because of the application of: 10.1.1. the Bankruptcy Code; 10.1.2. any fraudulent transfer law; or 10.1.3. any law respecting preferences. 10.2. NO MARSHALLING. Lender has no obligation to marshall any assets in favor of Guarantor, or against or in payment of: 10.2.1. the Bridge Loan Note, 10.2.2. any of the other Guarantied Obligations, or 10.2.3. any other obligation owed to Lender by Guarantor, Borrower, or any other person. 10.3. FEES AND COSTS. Guarantor will pay all of Lender's fees and costs incurred in enforcing this Guaranty, including Lender's reasonable attorneys' fees. 10.4. ASSIGNMENT. Guarantor may not assign his obligations or liabilities under this Guaranty. Subject to the preceding sentence, this Guaranty shall be binding upon the parties hereto and their respective heirs, executors, successors, representatives and assigns and shall inure to the benefit of the parties hereto and their respective successors and assigns. Lender may assign its rights under this Guaranty. 5 10.5. APPLICABLE LAW. The law of the state of Colorado will apply to the interpretation and enforcement of this Guaranty except that no doctrine of choice of law shall be and to apply the laws of any other state or jurisdiction. 10.6. INDEMNIFICATION BY BORROWER. Borrower will indemnify Guarantor against, and hold it harmless from, all payments which Guarantor may at any time be required to make to Lender under this Guaranty. 10.7. INTEGRATION. This Guaranty is the entire agreement of Borrower and Guarantor with respect to the subject matter of this Guaranty. 10.8. RIGHTS CUMULATIVE. All of Lender's rights under this Guaranty are cumulative. The exercise of any one right does not exclude the exercise of any other right given in this Guaranty or any other right of Lender not set forth in this Guaranty. 10.9. RULES OF CONSTRUCTION. The following rules shall apply in interpreting the meaning of this Guaranty: 10.9.1. "Includes" and "including" are not limiting; 10.9.2. "Or" is not exclusive; and 10.9.3. "All" includes "any" and "any" includes "all." 10.10. SEVERABILITY. If any provision of this Guaranty is unenforceable, or otherwise invalid, the remaining provisions of this Guaranty shall be enforced to the fullest possible extent. 10.11. NOTICES. Lender may give any notice to Guarantor at the following address, until changed in writing by notice given by Borrower: National Telephone & Communications, Inc. 2801 Main Street Irvine, California 92614 Telecopy: (949) 251-8085 Attention: Mr. Denis Richard 6 10.12. JOINT AND SEVERAL LIABILITY. The obligations hereunder of the persons and/or entities constituting Guarantor under this Guaranty are joint and several. 10.13. HEADINGS; NUMBER; GENDER. Section headings used in this Guaranty are for convenience only. They are not a part of this Guaranty and shall not be used in construing it. Wherever appropriate in this Guaranty, the singular shall be deemed to also refer to the plural, and the plural to the singular, and pronouns of certain genders shall be deemed to include either or both of the other genders. 10.14. REVIEW OF DOCUMENTS. Guarantor acknowledges that he has copies of and is fully familiar with each and every Loan Document. 10.15. COUNTERPARTS. This Guaranty may be executed in counterparts, each of which shall be deemed an original, but all of which, when taken together, shall be deemed one and the same agreement. 10.16. ACKNOWLEDGMENT OF WAIVERS. Guarantor acknowledges that certain provisions of this Guaranty operate as waivers of rights that Guarantor would otherwise have under applicable law. IN WITNESS WHEREOF, the undersigned have executed this Guaranty as of the date first above written. "Guarantor" NATIONAL TELEPHONE & COMMUNICATIONS, INC. By: /s/ DENIS RICHARD -------------------------------------- Denis Richard President and Chief Executive Officer 7 AGREEMENT OF BORROWER Incomnet, Inc., a California corporation, hereby agrees to indemnify National Telephone & Communications, Inc. as set forth in Section 10.6 to the foregoing Guaranty. INCOMNET, INC., a California corporation By: /s/ DENIS RICHARD -------------------------------------- Denis Richard President and Chief Executive Officer 8 EX-10.6 8 EXHIBIT 10.6 EXHIBIT 10.6 - GUARANTY EXECUTED BY NATIONAL TELEPHONE & COMMUNICATIONS, INC. IN FAVOR OF IRONWOOD TELECOM LLC, DATED NOVEMBER 4, 1998, RELATING TO MR. CASEY'S SECURED PROMISSORY NOTE GUARANTY This Guaranty (the "Guaranty") is made and entered into as of November 4, 1998, (the "Effective Date"), by National Telephone & Communications, Inc., a Delaware corporation ("Guarantor"), in favor of Ironwood Telecom LLC, a Colorado limited liability company ("Lender"). This Guaranty is executed and delivered in connection with a Secured Promissory Note in the original principal amount of $2,124,790 also dated as of the Effective Date (the "Secured Promissory Note") and secured by the Stock Pledge Agreement dated as of the Effective Date (the "Loan Agreement") given to Lender by John P. Casey ("Borrower"). The Secured Promissory Note, Guaranty, and Loan Agreement are collectively referred to as the Loan Documents. Guarantor, for the benefit of Lender, agrees as set forth below. 1. DEFINITIONS. Any capitalized term not otherwise defined in this Guaranty shall have the meaning given to the term in the Loan Agreement. 2. GUARANTY. Guarantor unconditionally guaranties to Lender the timely (whether as scheduled or upon acceleration) payment and performance by Borrower of the following (the "Guarantied Obligations"): 2.1.1. The principal, interest and other charges or amounts due under the Secured Promissory Note and the other Loan Documents (whether by acceleration or otherwise) and all renewals, extensions, modifications and rearrangements of any of the Loan Documents; 2.1.2. The other obligations set forth in or arising out of the Secured Promissory Note and the other Loan Documents; 2.1.3. Any of the forgoing arising out of or in connection with any renewal, extension or other modification of the Secured Promissory Note or any of the other Loan Documents; 2.1.4. Any of the foregoing arising after Borrower has commenced or become subject to any proceeding under the Bankruptcy Code, including any advances made to Borrower, any interest that accrues after the filing of the bankruptcy petition (even if the interest cannot be collected in the proceeding under the Bankruptcy Code), and attorneys fees. If Borrower fails to pay or perform any of the Guarantied Obligations, Guarantor will immediately pay or perform the obligation upon the written request of the Lender. 1 3. LENDER'S DIRECT RIGHTS. 3.1. This is a guaranty of payment and performance and is not a guaranty of collection. 3.2. In the event that Borrower fails timely to pay or perform under the Secured Promissory Note or any of the other Guarantied Obligations, Lender may enforce its rights under this Guaranty without first seeking to obtain payment or performance from: 3.2.1. Borrower; 3.2.2. Any other guarantor; 3.2.3. Any collateral Lender may hold for the Secured Promissory Note or any of the other Loan Documents or any guaranty of the Secured Promissory Note or any of the other Loan Documents, including this one; or 3.2.4. Exercise of any other remedy or right that Lender may have. 3.3. In the event Borrower becomes subject to a voluntary or involuntary proceeding under the Bankruptcy Code, Lender may immediately pursue its rights under this Guaranty, even though Lender may be stayed from accelerating or collecting the Guarantied Obligations as against Borrower. 4. CONTINUING GUARANTY. This is a continuing guaranty of the Guarantied Obligations and may not be terminated. 5. NO NOTICE REQUIRED. Lender does not have to notify Guarantor of any of the following events and Guarantor will not be released or exonerated from its obligations under this Guaranty if it is not notified of these events: 5.1. Borrower's failure to pay timely any amount owed under the Secured Promissory Note or any of the other Loan Documents or to pay or perform any of the other Guarantied Obligations; 5.2. Borrower's failure to perform any other obligation under the Secured Promissory Note, Loan Agreement, or any other Loan Document; 5.3. Any sale or other disposition of any collateral for the Secured Promissory Note, for the other Guarantied Obligations, or for any guaranty of the Secured Promissory Note or any of the Guarantied Obligations; 2 5.4. Lender's acceptance of this Guaranty; 5.5. Any renewal, extension or other modification of the Secured Promissory Note, any other Loan Document, or any of the other Guarantied Obligations; or 5.6. All other notices to which it might be entitled. 6. GUARANTOR'S ADDITIONAL WAIVERS. Guarantor waives any right it may have to any of the following acts: 6.1. Demand; 6.2. Presentment; 6.3. Diligence; 6.4. Protest; 6.5. Notice of dishonor; and 6.6. Any other notice to which it may be entitled. 7. NO RELEASE OF GUARANTOR. Lender may do any of the following, by action or inaction, without releasing or exonerating Guarantor from any of its obligations under this Guaranty: 7.1. Renew, extend or otherwise modify or alter the Secured Promissory Note, the Loan Agreement, any other Loan Document or any of the other Guarantied Obligations; 7.2. Release Borrower from any of the Guarantied Obligations; 7.3. Sell, release, subordinate, impair, waive or otherwise fail to obtain or perfect a security interest in, or realize upon, any collateral for the Secured Promissory Note, any of the other Guarantied Obligations, or any other guaranty of the Secured Promissory Note; 7.4. Advance additional funds in its discretion for purposes related to the purposes set forth in the Loan Agreement; 7.5. From time to time and without first requiring performance on the part of Borrower and without being required to exhaust any or all security held by Lender, to look to and require performance by Guarantor of any obligation on the part of Guarantor to be performed pursuant to the terms hereof, by action at law or in equity or both, and further to collect in any such action its costs and expenses, including reasonable attorneys' fees incurred in enforcing its rights hereunder; 3 7.6. Foreclose on any collateral for the Secured Promissory Note or a guaranty of the Secured Promissory Note in a manner that diminishes, impairs or precludes the right of Guarantor to enjoy any rights of subrogation against Borrower or any other guarantor, or to obtain reimbursement, performance, or indemnification for payment or performance under this Guaranty; 7.7. Make an election under Bankruptcy Code Section 1111(b)(2); 7.8. Permit or suffer the creation of secured or unsecured credit or debt under Bankruptcy Code Section 364; 7.9. Permit or suffer the disallowance, avoidance or subordination of any of the Guarantied Obligations or collateral for any of the Guarantied Obligations; 7.10. Fail to exercise any right or remedy it may have with respect to the payment or performance of the Secured Promissory Note, any of the other Loan Documents or any of the other Guarantied Obligations; or 7.11. Fail to obtain a guaranty, other assurance of payment, or credit enhancement from any other person; 8. NO SUBROGATION, ETC. Guarantor waives and shall not seek to exercise any of the following rights that it may have against Borrower, any other guarantor, or any collateral provided by Borrower or any other guarantor, for any amounts paid by it, or acts performed by it, under this Guaranty: 8.1. Subrogation; 8.2. Reimbursement; 8.3. Performance; 8.4. Indemnification (including any rights to indemnification set forth in this Guaranty). 9. SUBORDINATION OF GUARANTOR. 9.1. SUBORDINATION OF CLAIMS. All principal and interest on all existing and future indebtedness, liabilities, and obligations of Borrower to Guarantor, whether fixed or contingent, matured or unmatured, and liquidated or unliquidated (the "Subordinated Debt") shall at all times be subordinated in right of payment to the payment and performance of the Secured Promissory Note, the other Loan Documents and the other Guarantied Obligations. 9.2. PAYMENTS. Upon the occurrence of any default, event of default or Event of Default under any of the Loan Documents, Guarantor will not accept any payments on any of the Subordinated Debt. If no default, event of default or Event of Default has occurred under any of the Loan Documents and Guarantor receives any payment on the Subordinated Debt, it will hold such payment in trust for the benefit of Lender; if any default, event of default or Event of Default has occurred under any of the Loan Documents and Guarantor receives any payment on the Subordinated Debt, it 4 shall immediately deliver such payment to Lender, but, in either event, without otherwise reducing or affecting in any manner the liability of Guarantor under the other provisions of this Guaranty. 9.3. ATTORNEY-IN-FACT. Guarantor appoints Lender Guarantor's attorney-in-fact to file claims, and receive payments, on behalf of Guarantor with respect to any of the Subordinated Debt in any proceeding by or against Borrower under the Bankruptcy Code (including Chapters 7 or 11), any assignment for the benefit of Lenders made by Borrower, or in any other reorganization or insolvency proceeding. 10. MISCELLANEOUS. 10.1. REVIVAL OF DEBT. Guarantor's obligations under this Guaranty shall again include amount returned by Lender in the event that Lender must return any amount paid by Borrower or any other guarantor of the Secured Promissory Note or of any of the other Guarantied Obligations because of the application of: 10.1.1. the Bankruptcy Code; 10.1.2. any fraudulent transfer law; or 10.1.3. any law respecting preferences. 10.2. NO MARSHALLING. Lender has no obligation to marshall any assets in favor of Guarantor, or against or in payment of: 10.2.1. the Secured Promissory Note, 10.2.2. any of the other Guarantied Obligations, or 10.2.3. any other obligation owed to Lender by Guarantor, Borrower, or any other person. 10.3. FEES AND COSTS. Guarantor will pay all of Lender's fees and costs incurred in enforcing this Guaranty, including Lender's reasonable attorneys' fees. 10.4. ASSIGNMENT. Guarantor may not assign his obligations or liabilities under this Guaranty. Subject to the preceding sentence, this Guaranty shall be binding upon the parties hereto and their respective heirs, executors, successors, representatives and assigns and shall inure to the benefit of the parties hereto and their respective successors and assigns. Lender may assign its rights under this Guaranty. 5 10.5. APPLICABLE LAW. The law of the state of Colorado will apply to the interpretation and enforcement of this Guaranty except that no doctrine of choice of law shall be and to apply the laws of any other state or jurisdiction. 10.6. INDEMNIFICATION BY BORROWER. Borrower will indemnify Guarantor against, and hold it harmless from, all payments which Guarantor may at any time be required to make to Lender under this Guaranty. 10.7. INTEGRATION. This Guaranty is the entire agreement of Borrower and Guarantor with respect to the subject matter of this Guaranty. 10.8. RIGHTS CUMULATIVE. All of Lender's rights under this Guaranty are cumulative. The exercise of any one right does not exclude the exercise of any other right given in this Guaranty or any other right of Lender not set forth in this Guaranty. 10.9. RULES OF CONSTRUCTION. The following rules shall apply in interpreting the meaning of this Guaranty: 10.9.1. "Includes" and "including" are not limiting; 10.9.2. "Or" is not exclusive; and 10.9.3. "All" includes "any" and "any" includes "all." 10.10. SEVERABILITY. If any provision of this Guaranty is unenforceable, or otherwise invalid, the remaining provisions of this Guaranty shall be enforced to the fullest possible extent. 10.11. NOTICES. Lender may give any notice to Guarantor at the following address, until changed in writing by notice given by Borrower: National Telephone & Communications, Inc. 2801 Main Street Irvine, California 92614 Telecopy: (949) 251-8085 Attention: Mr. Denis Richard 6 10.12. JOINT AND SEVERAL LIABILITY. The obligations hereunder of the persons and/or entities constituting Guarantor under this Guaranty are joint and several. 10.13. HEADINGS; NUMBER; GENDER. Section headings used in this Guaranty are for convenience only. They are not a part of this Guaranty and shall not be used in construing it. Wherever appropriate in this Guaranty, the singular shall be deemed to also refer to the plural, and the plural to the singular, and pronouns of certain genders shall be deemed to include either or both of the other genders. 10.14. REVIEW OF DOCUMENTS. Guarantor acknowledges that he has copies of and is fully familiar with each and every Loan Document. 10.15. COUNTERPARTS. This Guaranty may be executed in counterparts, each of which shall be deemed an original, but all of which, when taken together, shall be deemed one and the same agreement. 10.16. ACKNOWLEDGMENT OF WAIVERS. Guarantor acknowledges that certain provisions of this Guaranty operate as waivers of rights that Guarantor would otherwise have under applicable law. IN WITNESS WHEREOF, the undersigned have executed this Guaranty as of the date first above written. "Guarantor" NATIONAL TELEPHONE & COMMUNICATIONS, INC. By: /s/ DENIS RICHARD ----------------- Denis Richard President and Chief Executive Officer 7 AGREEMENT OF BORROWER John P. Casey hereby agrees to indemnify National Telephone & Communications, Inc. as set forth in Section 10.6 to the foregoing Guaranty. /s/ JOHN P. CASEY --------------------------- John P. Casey 8 EX-10.7 9 EXHIBIT 10.7 EXHIBIT 10.7 -- SEVERANCE AGREEMENT BETWEEN INCOMNET, INC. AND MELVYN REZNICK, DATED SEPTEMBER 29, 1998, AND AMENDMENT THERETO DATED NOVEMBER 1, 1998. INCOMNET, INC. 2801 Main Street Irvine, California 92614 November 1, 1998 BY FACSIMILE Mr. Melvyn Reznick Dear Mr. Reznick: This letter, when executed by you, will constitute our agreement as to the amended terms of your settlement arrangements with Incomnet, Inc., National Telephone & Communications, Inc. and GenSource Corporation (collectively, the "Company"), which, with the exception of paragraph 6 below, shall become effective upon the indefeasible payment to Melvyn Reznick of all of the sums set forth in paragraph 1 below. 1. In lieu of the settlement payments otherwise due and owing to you under Section 3 of your settlement agreement with the Company dated August 31, 1998, as amended on September 29, 1998 (the "Settlement Agreement"), you shall be entitled to receive your monthly severance payment of $20,833.33 during the months of October, November and December 1998 and, on or before December 15, 1998, you shall receive a lump sum payment of $100,000. All of the foregoing payments shall be made no later than December 15, 1998. 2. All benefits, including health, automobile allowance and insurance, as outlined in the Severance Agreement, shall be terminated as of December 31, 1998. You will have the opportunity to continue your health insurance coverage consistent with the requirements under COBRA. 3. All stock options set forth in Section 5 of the Settlement Agreement, as amended, shall terminate as of December 15, 1998, except those stock options (the "Continuing Options") to purchase 50,000 shares of Incomnet, Inc.'s Common Stock initially granted on November 30, 1995, at an exercise price of $4.37 per share, expiring on September 1, 2003, shall remain in full force and effect on the same terms as established when those stock options were granted; provided, however, that if, in the judgment of the Company you do not cooperate with the Company or its representatives, or are otherwise unavailable to assist the Company or its representatives, in connection with preparing for or giving deposition testimony relating to any litigation or other proceeding involving the Company, then, the Company may unilaterally terminate the Continuing Options upon written notice to you informing you of such termination of the Continuing Options. 4. The consulting services contemplated by Section 6 of the Settlement Agreement shall terminate as of December 31, 1998. In lieu thereof, you shall be entitled to receive $100 per hour, plus reimbursement of expenses for time spent by you in preparing for or giving deposition or trial testimony in connection with any litigation or other proceeding relating to the Company. 5. If the Company defaults on its payment obligations under this letter agreement, you shall be entitled to receive all payments and options under the Settlement Agreement. 6. Except as expressly set forth herein, the provisions of the Settlement Agreement, including without limitation the release and indemnity provisions thereof, shall remain in full force and effect, unaffected by the terms and conditions of our agreement set forth in this letter. If the terms outlined by this arrangement are acceptable, please sign in the space provided below and return the signed copy to me by facsimile. My fax number is (949) 224-7474. This offer terminates at 5:00 p.m. on November 1, 1998. 1 Very truly yours, /s/ Denis Richard ----------------- President and Chief Executive Officer AGREED AND ACCEPTED /s/ Melvyn Reznick - - ------------------ 2 SETTLEMENT AGREEMENT This Settlement Agreement (the "Agreement") is made as of this 31st day of August 1998 by and between Incomnet, Inc., a California corporation (the "Company"), National Telephone 8 Communications, Inc., a Delaware corporation ("NTC"), GenSource Corporation, a California corporation ("GenSource"), and Melvyn Reznick, an individual ("Reznick"), with respect to the following facts: RECITALS A. Reznick is the Chief Executive Officer, President and Chairman of the Board of Directors of the Company. Reznick has been the Chief Executive Officer, President and a director of the Company since November 1995, and has been the Chairman of the Board of Directors of the Company since May 1996. Reznick was also a director of NTC from May 9, 1996 until June 30, 1998, and has been an officer and director of GenSource since May 1997. B. The Company and Reznick are parties to that certain Employment Agreement dated as of November 27, 1995, as amended by that certain Amendment to Employment Agreement dated September 3, 1996 and as further amended by that certain Amendment to Employment Agreement dated June 5, 1997 (collectively, the "Employment Agreement"), which Employment Agreement sets forth the terms and conditions of Reznick's employment by the Company. C. The Company and Reznick desire to terminate the Employment Agreement and Reznick's position as an officer and director of the Company, and GenSource and Reznick desire to terminate Reznick's position as an officer and director of GenSource, upon the terms and conditions more fully set forth herein. The Company has requested that Reznick remain an employee of the Company through the Effective Date (defined below). D. This Agreement does not constitute an admission of wrongdoing or breach of the Employment Agreement by any of the parties hereto. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, THE PARTIES HERETO AGREE AS FOLLOWS: 1. TERMINATION OF EMPLOYMENT AGREEMENT AND WITHDRAWAL AS OFFICER AND DIRECTOR Subject to the terms and conditions of this Agreement, the Company and Reznick agree that, effective October 1, 1998 (the "Effective Date), except as expressly provided herein, the Employment Agreement shall be deemed terminated and, as of the Effective Date, Reznick shall cease to serve in any capacity as an officer, director or employee of the Company and -1- GenSource. Notwithstanding anything else herein to the contrary, Reznick agrees to withdraw as a director and Chairman of the Board of Directors and CEO of the Company and as an officer and director of GenSource prior to October 1, 1998 upon a change of control of the Company's Board of Directors. 2. CONTINUED EFFECTIVENESS OF EMPLOYMENT AGREEMENT UNTIL EFFECTIVE DATE Until the Effective Date, the Employment Agreement shall remain in full force and effect and the Company shall continue to timely perform all of its obligations thereunder including, without limitation, the payment of compensation, benefits, expense reimbursements and allowances. On the Effective Date, the Company shall pay to Reznick all accrued compensation, benefits and reimbursements due to Reznick as of the Effective Date including, without limitation, all accrued vacation pay. 3. SETTLEMENT PAYMENTS The Company covenants to pay to Reznick (or to his beneficiaries, heirs, successors or assigns in the event of Reznick's death or incapacity) settlement payments as follows: (a) for the period from October 1, 1998 to September 30, 2000, the Company will pay to Reznick annual compensation at the rate of $250,000 per year, payable in equal installments on the 15" and the last day of each month less withholding for federal, state or local taxes, and (b) for the period from October 1, 1998 to September 30, 2000, the Company will pay to Reznick a monthly automobile allowance equal to $650, subject to mitigation as described below, payable in equal installments on the 15th and the last day of each month without any withholding for federal, state or local taxes; provided, however, that to the extent Reznick actually receives employment, consulting or severance compensation from a source other than the Company, whether or not said source is affiliated with Reznick or if Reznick is self employed, during the period from October 1, 1999 to September 30, 2000 (the "Second Period"), that compensation shall be credited against, and shall reduce the compensation payable by the Company pursuant to Section 3(a) above during the Second Period as and when such compensation is actually received by Reznick; and provided further that to the extent that, during the Second Period, Reznick actually receives an automobile allowance or mileage reimbursement from a source other than the Company, whether for ongoing employment or consulting work, or in connection with another severance arrangement, said reimbursements shall be credited against, and shall reduce the reimbursement payable by the Company pursuant to Section 3(b) above during the Second Period as and when such reimbursements are actually received by Reznick. Reznick will be entitled to the severance compensation set forth in Section 3(a) above for the period from October 1, 1998 to September 30, 1999 regardless of whether, during that period, Reznick is employed by another emploer or receiving employment, consulting or severance compensation from another source, and regardless of whether or not said source is an affiliate of Reznick; provided, however, that Reznick covenants to use his best efforts to find other employment to mitigate during the Second Period. 4. INSURANCE BENEFITS In addition to the severance payments provided in Section 3 of this Agreement, the Company agrees to reimburse Reznick through September 30, 2000 for the cost he incurs to maintain and pay for the existing health insurance policies covering Reznick and his family for which the Company presently reimburses Reznick; provided, however, that the reimbursement will not exceed $2,064 per year, and provided further, that Reznick will not be entitled to be reimbursed for said health coverage by the Company at any time that Reznick is receiving health insurance coverage at another party's expense, whether or not said party is an affiliate of Reznick. -2- 5. STOCK OPTIONS Reznick will be entitled to retain and exercise all vested stock options (the "Retained Stock Options") which he holds as of October 1, 1998 to purchase the common stock of the Company, and to exercise them in accordance with their existing terms and conditions including termination dates (subject to the effect of future stock splits, reverse stock splits, business combinations and similar transactions involving the Company), during the exercise periods in effect as of October 1, 1998. After October 1, 1998, Reznick will not be entitled to retain or to be granted any stock options to purchase the common stock of the Company which have not vested by said date, nor shall he be entitled to retain or to exercise any stock options to purchase the common stock or any convertible securities of NTC or GenSource, whether vested or unvested. Reznick hereby tenders to NTC all stock options to purchase the common stock of NTC for cancellation, and they shall be deemed canceled on the Effective Date of this Agreement. The Company covenants to register the shares of stock underlying the Retained Stock Options with the Securities and Exchange Commission ("SEC") on the next registration statement on Form S-S filed by the Company with the SEC pursuant to the Securities Act of 1933, as amended, and to maintain the effectiveness of said registration statement during the entire term of Reznick's Retained Stock Options. The following table summarizes the Retained Stock Options which are vested as of September 1,1998:
Number Exercise Price Per Share Date of Expiration ------ ------------------------ ------------------ 25,000 $4.87 2/28/2001 100,000 4.37 4/05/2001 25,000 4.87 5/31/2001 25,000 4.87 8/31/2001 25,000 4.87 11/30/2001 25,000 4.37 2/28/2002 25,000 4.37 2/28/2002 50,000 4.87 9/01/2003 37,500 4.87 9/29/2003 -------- 337,500
(See Amendment attached) The Retained Stock Options shall continue to be governed by the 1996 Incomnet, Inc. Stock Option Plan for Directors, Officers and Key Consultants of Incomnet, Inc. and its Subsidiaries (the "Plan"), and the related Stock Option Agreements, which shall remain in full force and effect with respect to the Retained Stock Options, except that the dates of expiration of the Retained Stock Options shall be as set forth in Section 5 of this Agreement. In the event that the Plan is discontinued for any reason, the Retained Stock Options shall remain in full force and effect in accordance with their original terms and conditions, as amended by the Employment Agreement and this Agreement. 6. CONSULTING SERVICES As partial consideration for the compensation payable to Reznick pursuant to Section 3 of this Agreement, Reznick agrees to provide consulting services to the Company, Rapid Cast, Inc., NTC and GenSource on an "as-needed" basis as reasonably requested and with -3- reasonable notice by the Company, as follows: (1) during the period from October 1, 1998 until September 30, 1999 ("First Period"), Reznick will provide consulting services to the Company for a period of up to 40 hours per month during reasonable business hours on a noncumulative basis, and (2) during the Second Period, Reznick will provide consulting services to the Company for a period of up to 10 hours per month during reasonable hours on a noncumulative basis, whether or not Reznick is entitled to receive any settlement payments pursuant to Section 3 of this Agreement. Reznick shall be entitled to receive the payments provided for in Section 3 of this Agreement (subject to the limitations in Section 3 of this Agreement) irrespective of the number of consulting hours actually performed by Reznick during the First Period or the Second Period, unless Reznick is in material default with respect to his obligation to provide consulting services under Section 6 of this Agreement. If the consulting hours exceed 40 hours or 10 hours per month, as the case may be, during the above-referenced respective periods, then the Company will compensate Reznick as an independent consultant at the rate of $150 per hour. To the extent that the Company requests less than 40 hours per month of consulting services from Reznick during the First Period and less than 10 hours per month of consulting services from Reznick during the Second Period, then the Company will not be entitled to accumulate those unused hours, and Reznick will not in any event be obligated to provide more than 40 hours per month of consulting services for the Company during the First Period and more than 10 hours per month of consulting services for the Company during the Second Period. The consulting services will include, at the sole discretion of the Company's Board of Directors, having Reznick remain on the Board of Directors of Rapid Cast, Inc. (subject to the continued effectiveness of a reasonably acceptable directors' and officers' liability insurance policy provided by Rapid Cast, Inc.), if requested by the Company and permitted by Rapid Cast, Inc. Reznick will also assist the Company, GenSource, Rapid Cast, Inc. and NTC in any litigation matters including, but not limited to, assisting with preparation for trial, depositions, and serving as a witness in judicial or administrative proceedings. The Company will also reimburse Reznick for the reasonable verifiable expenses incurred by him in performing said consulting services, consistent with the Company's then existing policy relating to expense reimbursements. 7. INDEMNIFICATION OF REZNICK FOR ACTIONS BY THIRD PARTIES A. The Company hereby agrees to indemnify and hold Reznick harmless from any liability, claims, damages, losses, expenses, judgments or settlements actually incurred by him, including but not limited to reasonable attorneys' fees and costs actually incurred by him resulting from Reznick being made a party to, or being threatened to be made a party to, any present or future proceeding (other than an action by, or in the right of the Company, which is addressed in Section 8A of this Agreement), relating to actions Reznick has taken which were within the scope of his employment and authority as the Chief Executive Officer and Chairman of the Board of Directors or agent of the Company, provided that Reznick acted in good faith and in a manner he reasonably believed to be in the best interest of the Company and, in the case of a criminal proceeding, had no reasonable cause to believe his conduct was unlawful; and provided further, that the conduct is within the scope of the indemnification permitted by Sections 204 and 317 of the California Corporations Code. As part of this indemnification agreement, the Company agrees to reimburse Reznick for reasonable legal fees and costs to Reznick as they are incurred for any actions for which the Company is obligated to indemnify Reznick pursuant to the terms of this Agreement. If the Company provides a defense for Reznick at its expense pursuant to Section 7A of this Agreement and there is no actual or potential conflict of interest, then Reznick may not seek - 4 - indemnification from the Company for the fees or costs of any separate counsel which he may engage. If there is an actual or reasonable likelihood of an actual conflict of interest under those circumstances, then Reznick may retain separate counsel and the Company will reimburse Reznick for the reasonable legal fees and costs incurred by Reznick in such actions if they are covered by the Company's indemnification obligation under this Agreement. B. NTC hereby agrees to indemnify and hold Reznick harmless from any liability, claims, damages, losses, expenses, judgments or settlements actually incurred by him, including but not limited to reasonable attorneys' fees and costs actually incurred by him resulting from Reznick being made a party to, or being threatened to be made a party to, any present or future proceeding (other than an action by, or in the right of NTC, which is addressed in Section 8B of this Agreement), relating to actions Reznick has taken which were within the scope of his authority as a director or agent of NTC, provided that Reznick acted in good faith and in a manner he reasonably believed to be in the best interest of NTC and, in the case of a criminal proceeding, had no reasonable cause to believe his conduct was unlawful; and provided further, that the conduct is within the scope of the indemnification permitted by Sections 204 and 317 of the California Corporations Code. As part of this indemnification agreement, NTC agrees to reimburse Reznick for reasonable legal fees and costs to Reznick as they are incurred for any actions of which NTC is obligated to indemnify Reznick pursuant to the terms of this Agreement. If NTC provides a defense for Reznick at its expense pursuant to Section 7B of this Agreement and there is no actual or potential conflict of interest, then Reznick may not seek indemnification from NTC for the fees or costs or any separate counsel which he may engage. If there is an actual or reasonable likelihood of an actual conflict of interest under those circumstances, then Reznick may retain separate counsel and NTC will reimburse Reznick for the reasonable legal fees and costs incurred by Reznick in such actions if they are covered by NTC's indemnification obligation under this Agreement. C. GenSource hereby agrees to indemnify and hold Reznick harmless from any liability, claims, damages, losses, expenses, judgments or settlements actually incurred by him, including but not limited to reasonable attorneys' fees and costs actually incurred by him resulting from Reznick being made a party to, or being threatened to be made a party to, any present or future proceeding (other than an action by, or in the right of GenSource, which is addressed in Section 8C of this Agreement), relating to actions Reznick has taken which were within the scope of his authority as an officer, director or agent of GenSource, provided that Reznick acted in good faith and in a manner he reasonably believed to be in the best interest of GenSource and, in the case of a criminal proceeding, had no reasonable cause to believe his conduct was unlawful; and provided further, that the conduct is within the scope of the indemnification permitted by Sections 204 and 317 of the California Corporations Code. As part of this indemnification agreement, GenSource agrees to reimburse Reznick for reasonable legal fees and costs to Reznick as they are incurred for any actions of which GenSource is obligated to indemnify Reznick pursuant to the terms of this Agreement. If GenSource provides a defense for Reznick at its expense pursuant to Section 7C of this Agreement and there is no actual or potential conflict of interest, then Reznick may not seek indemnification from GenSource for the fees of costs or any separate counsel which he may engage. If there is an actual or reasonable likelihood of an actual conflict of interest under those circumstances, then Reznick may retain separate counsel and GenSource will reimburse Reznick for the reasonable legal fees and costs incurred by Reznick in such actions if they are covered by GenSource's indemnification obligation under this Agreement. -5- 8. INDEMNIFICATION OF REZNICK FOR ACTIONS IN THE RIGHT OF THE COMPANY, NTC OR GENSOURCE A. The Company hereby agrees to indemnify and hold Reznick harmless from any liability, claims, damages, losses, expenses, judgments or settlements actually incurred by him, including but not limited to reasonable attorneys' fees and costs actually incurred by him resulting from Reznick being made a party to, or being threatened to be made a party to, any proceeding by or in the right of the Company to procure a judgment in its favor by reason of any action taken by Reznick as an officer, director or agent of the Company, provided that Reznick acted in good faith in a manner he believed to be in the best interests of the Company and its shareholders; provided, that such indemnification will be coextensive with and not beyond the scope of the indemnification permitted by Sections 204 and 317 of the California Corporations Code, and in particular will not be (i) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law, (ii) for acts or omissions that Reznick believed to be contrary to the best interests of the Company or its shareholders or that involve the absence of good faith on the part of Reznick, (iii) for any transaction from which Reznick derived an improper personal benefit, (iv) for acts or omissions that show a reckless disregard by Reznick of his duties to the Company or its shareholders in circumstances in which Reznick was aware, or should have been aware, in the ordinary course of performing his duties, of a risk of serious injury to the Company or its shareholders, (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of Reznick's duty to the Company or its shareholders, (vi) for any violation by Reznick of Section 310 of the California Corporations Code or (vii) for any violation by Reznick of Section 316 of the California Corporations Code. As part of this indemnification agreement, the Company agrees to reimburse Reznick for reasonable legal fees and costs as they are incurred for any actions for whic the Company is obligated to indemnify Reznick pursuant to the terms of this Agreement. B. NTC hereby agrees to indemnify and hold Reznick harmless from any liability, claims, damages, losses, expenses, judgments or settlements actually incurred by him, including but not limited to reasonable attorneys' fees and costs actually incurred by him, resulting from Reznick being made a party to, or being threatened to be made a party to, any proceeding by or in the right of NTC to procure a judgment in its favor by reason of any action taken by Reznick as a director or agent of NTC, provided that Reznick acted in good faith in a manner he reasonably believed to be in the best interests of NTC and its shareholders; provided, that such indemnification will be coextensive with and not beyond the scope of the indemnification permitted by Sections 204 and 317 of the California Corporations Code, and in particular will not be (i) for acts or omissions that involved intentional misconduct or a knowing and culpable violation of law, (ii) for acts or omissions that Reznick believed to be contrary to the best interests of the Company or its shareholders or that involve the absence of good faith on the part of Reznick, (iii) for any transaction from which Reznick derived an improper personal benefit, (iv) for acts of omissions that show a reckless disregard by Reznick of his duties to NTC or its shareholders in circumstances in which Reznick was aware, or should have been aware, in the ordinary course of performing his duties, of a risk of serious injury to NTC or its shareholders, (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of Reznick's duty to NTC or its shareholders, (vi) for any violation by Reznick of Section 310 of the California Corporations Code or (vii) for any violation by Reznick of Section 316 of the California Corporations Code. As part of this indemnification agreement, NTC agrees to reimburse Reznick for reasonable legal fees and -6- costs as they are incurred for any actions for which NTC is obligated to indemnify Reznick pursuant to the terms of this Agreement. C. GenSource hereby agrees to indemnify and hold Reznick harmless from any liability, claims, damages, losses, expenses, judgments or settlements actually incurred by him, including but not limited to reasonable attorneys' fees and costs actually incurred by him, resulting from Reznick being made a party to, or being threatened to be made a party to, any proceeding by or in the right of GenSource to procure a judgment in its favor by reason of any action taken by Reznick as a director or agent of GenSource, provided that Reznick acted in good faith in a manner he reasonably believed to be in the best interests of GenSource and its shareholders; provided, that such indemnification will be coextensive with and not beyond the scope of the indemnification permitted by Sections 204 and 317 of the California Corporations Code, and in particular will not be (i) for acts or omissions that involved intentional misconduct or a knowing and culpable violation of law, (ii) for acts or omissions that Reznick believed to be contrary to the best interests of the Company or its shareholders or that involve the absence of good faith on the part of Reznick, (iii) for any transaction from which Reznick derived an improper personal benefit, (iv) for acts of omissions that show a reckless disregard by Reznick of his duties to GenSource or its shareholders in circumstances in which Reznick was aware, or should have been aware, in the ordinary course of performing his duties, of a risk of serious injury to GenSource or its shareholders, (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of Reznick's duty to GenSource or its shareholders, (vi) for any violation by Reznick of Section 310 of the California Corporations Code or (vii) for any violation by Reznick of Section 316 of the California Corporations Code. As part of this indemnification agreement, GenSource agrees to reimburse Reznick for reasonable legal fees and costs as they are incurred for any actions for which GenSource is obligated to indemnify Reznick pursuant to the terms of this Agreement. 9. REIMBURSEMENT In the event that it is determined that Reznick is not entitled to indemnification by the Company, NTC or GenSource, as the case may be, pursuant to Sections 7 or 8 of this Agreement, then Reznick is obligated to reimburse the Company, NTC or GenSource, as the case may be, for all amounts paid by the Company, NTC or GenSource, as the case may be, on behalf of Reznick pursuant to the indemnification provisions of this Agreement. In the event that Reznick is successful on the merits in the defense of any proceeding referred to in Sections 7 or 8 of this Agreement, or any related claim, issue or matter, then the Company, NTC or GenSource, as the case may be, will indemnify and hold Reznick harmless from all fees, costs and expenses actually incurred by him in connection with the defense of any such proceeding, claim, issue or matter which have not otherwise already been advanced to Reznick by the Company in accordance with this Agreement. Notwithstanding the foregoing, the obligations of the Company, NTC or GenSource to pay legal fees and costs on behalf of Reznick pursuant to Sections 7 and 8 above shall not be contingent or dependent upon the successful defense of any proceeding covered by the indemnification provisions set forth in those sections. -7- 10. MUTUAL GENERAL RELEASE A. Effective immediately with the Effective Date, Reznick and the Company each hereby fully and forever releases and discharges each other and such party's past, present and future officers, directors, employees, successors and predecessors from any and all claims, demands, obligations, losses, or causes of action of any nature relating to the Company, the Employment Agreement, Reznick's employment with the Company, Reznick's position as a director of the Company, 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; provided, however, that this release by each party will not extend to a breach of this Agreement by a party to this Agreement or obligations expressly preserved by this Agreement. The Company and Reznick agree that this release shall not be considered admissions by any party of any liability. The Company and Reznick warrant that no promise or inducement has been offered except as herein set forth. The parties to this Agreement are of legal age and legally competent to execute this release and accept full responsibility therefor. The parties hereto further agree that all rights under Section 1542 of the Civil Code of California, and any similar law of any state or territory of the United States or other jurisdiction, are hereby expressly waived. Said Section reads as follows. "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." The Company and Reznick declare that the terms of this full and final release of all claims by the parties to this Agreement 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. Each party to this Agreement has consulted with its own legal counsel who has reviewed this Agreement and advised each respective party of the meaning and effect of the Agreement. Notwithstanding anything herein to the contrary, upon a material default under this Agreement by the Company, Reznick shall be entitled to assert and pursue any and all claims against the Company which he may have under this Agreement, under his Employment Agreement, or related to any position he held with the Company, including, without limitation, any and all claims that the Employment Agreement has been improperly terminated by the Company and that Reznick is entitled to assert a claim therefor based on Section 15 of the Employment Agreement. A material default shall expressly include the failure by the Company to make any payment under Section 3 of this Agreement within ten (10) days of the date upon which such payment is due under this Agreement. The Company and Reznick agree that if, except as expressly permitted by this Agreement, they hereafter commence, join in, or in any manner seek relief through any suit arising out of, based upon, or related to any of the claims released hereunder by said party or in any manner assert against the other party any of the claims released hereunder, said party will pay to the releasees against whom such claim(s) are asserted, in addition to any other damages caused thereby, all attorneys' fees incurred by such releasees in defending or otherwise -8- responding to said suit or claim. The Company and Reznick represent and warrant to each other that there has been no assignment or other transfer of any interest in any of the claims within the scope of the release set forth in this Section 10A, and each party agrees to indemnify and hold each other party harmless from any liability, claims, demands, damages, costs, or expenses and attorneys' fees incurred as a result of any person asserting any such assignment or transfer of any rights or any claims under any such assignment or transfer. B. Effective immediately with the Effective Date, Reznick and NTC each hereby fully and forever releases and discharges each other and such party's past, present and future officers, directors, employees, successors and predecessors from any and all claims, demands, obligations, losses, or causes of action of any nature relating to NTC and Reznick's position as a director of NTC, 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; provided, however, that this release by each party will not extend to a breach of this Agreement by a party to this Agreement or obligations expressly preserved by this Agreement. NTC and Reznick agree that this release shall not be considered admissions by any party of any liability. NTC and Reznick warrant that no promise or inducement has been offered except as herein set forth. The parties to this Agreement are of legal age and legally competent to execute this release and accept full responsibility therefor. The parties hereto 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." NTC and Reznick declare that the terms of this full and final release of all claims by the parties to this Agreement 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. Each party to this Agreement has consulted with its own legal counsel who has reviewed this Agreement and advised each respective party of the meaning and effect of the Agreement. Notwithstanding anything herein to the contrary, upon a material default under this Agreement by NTC, Reznick shall be entitled to assert and pursue any and all claims against NTC which he may have under this Agreement or related to any position he held with NTC. NTC and Reznick agree that if, except as expressly permitted by this Agreement, they hereafter commence, join in, or in any manner seek relief through any suit arising out of, based upon, or related to any of the claims released hereunder by said party or in any manner assert against the other party any of the claims released hereunder, said party will pay to the releasees against whom such claim(s) are asserted, in addition to any other damages caused thereby, all attorneys' fees incurred by such releasees in defending or otherwise responding to said -9- suit or claim. NTC and Reznick represent and warrant to each other that there has been no assignment or other transfer of any interest in any of the claims within the scope of the release set forth in this Section 10B, and each party agrees to indemnify and hold each other party harmless from any liability, claims, demands, damages, costs, or expenses and attorneys' fees incurred as a result of any person asserting any such assignment or transfer of any rights or any claims under any such assignment or transfer. C. Effective immediately with the Effective Date, Reznick and GenSource each hereby fully and forever releases and discharges each other and such party's past, present and future officers, directors, employees, successors and predecessors from any and all claims, demands, obligations, losses, or causes of action of any nature relating to GenSource or Reznick's position as a director of GenSource, 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; provided, however, that this release by each party will not extend to a breach of this Agreement by a party to this Agreement or obligations expressly preserved by this Agreement. GenSource and Reznick agree that this release shall not be considered admissions by any party of any liability. GenSource and Reznick warrant that no promise or inducement has been offered except as herein set forth. The parties to this Agreement are of legal age and legally competent to execute this release and accept full responsibility therefor. The parties hereto 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." GenSource and Reznick declare that the terms of this full and final release of all claims by the parties to this Agreement 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. Each party to this Agreement has consulted with its own legal counsel who has reviewed this Agreement and advised each respective party of the meaning and effect of the Agreement. Notwithstanding anything herein to the contrary, upon a material default under this Agreement by GenSource, Reznick shall be entitled to assert and pursue any and all claims against GenSource, which he may have under this Agreement, or related to any position he held with GenSource. GenSource and Reznick agree that if, except as expressly permitted by this Agreement, they hereafter commence, join in, or in any manner seek relief through any suit arising out of, based upon, or related to any of the claims released hereunder by said party or in any manner assert against the other party any of the claims released hereunder, said party will pay to the releasees against whom such claim(s) are asserted, in addition to any other damages caused thereby, all attorneys' fees incurred by such releasees in defending or otherwise responding to said suit or claim. -10- GenSource and Reznick represent and warrant to each other that there has been no assignment or other transfer of any interest in any of the claims within the scope of the release set forth in this Section 10C, and each party agrees to indemnify and hold each other party harmless from any liability, claims, demands, damages, costs, or expenses and attorneys' fees incurred as a result of any person asserting any such assignment or transfer of any rights or any claims under any such assignment or transfer. 11. PUBLIC ANNOUNCEMENTS Except for disclosures required by the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, including, but not limited to, disclosure required on Form 8-K, Form 10-Q, or Form 10-K, the GenSource agrees not to make any public announcement regarding the resignation of Reznick as an officer and director of the GenSource until a copy of the announcement is provided to Reznick. Reznick will not have the right to prohibit such public announcement. 12. NOTICE Notice will deemed to be given by one party to the other parties of this Agreement upon personal delivery by messenger, air courier, express mail or certified registered mail, return receipt requested, or upon facsimile or telegram, or three days after mailing by first class mail by the party giving the notice, addressed to the parties as follows, or to any other address or facsimile numbers provided to the parties in writing in accordance with this Agreement by the party making the change: IF TO THE COMPANY: Incomnet, Inc. 20501 Ventura Boulevard, Suite 265 Woodland Hills, California 91364-2313 Attention: President Facsimile No. (818) 587-5691 IF TO NTC: National Telephone & Communications, Inc. 2801 Main Street Irvine, California 92065 Attention: President Facsimile No. (949) 224-7474 IF TO GENSOURCE: GenSource Corporation 25572 Avenue Stanford Valencia, California 91355-1102 Attention: President Facsimile No. (805) 294-1310 IF TO REZNICK: Melvyn Reznick ____________________________ ____________________________ Facsimile No. ______________ - 11 - 13. 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. 14. 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. 15. ATTORNEY'S FEES In the event that any 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 attorney's fees and all other costs incurred in commencing or defending such action, or in enforcing this Agreement, including but not limited to post judgement costs. 16. ENTIRE AND SOLE AGREEMENT This Agreement constitutes the entire agreement between the parties and supersedes all 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. 17. GOVERNING LAW This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to contracts entered into and performed entirely in the State of California and without regard to conflicts of law. The venue for any legal proceedings under this Agreement will be in the appropriate forum in the County of Los Angeles, State of California. 18. BINDING ARBITRATION Any dispute under this Agreement will be resolved by binding arbitration conducted in accordance with the rules and procedures of the American Arbitration Association as they are then in effect in the County of Los Angeles, State of California. In order to select an arbitrator, each party to the dispute will select an arbitrator of its choice, and those selected arbitrators will then select by mutual agreement a single arbitrator for the proceeding. The decision of the arbitrator shall be final and binding on the parties to this Agreement, and judgment thereon may be entered in the Superior Court for the County of Los Angeles or any other court having jurisdiction. The Company will advance the arbitrator's fees; however, all costs of the arbitration proceeding to enforce this Agreement, including attorneys' fees and witness expenses, shall be paid by the party - 12 - against whom the arbitrator rules. It is expressly agreed that the parties to any such arbitration may take discovery as contemplated and provided for by California Code of Civil Procedure Section 1283.05. Notwithstanding anything herein to the contrary, the parties hereto shall not be required to submit a claim to arbitration if the claim is for temporary or preliminary equitable or injunctive relief that could not practicably be heard in a timely fashion through the arbitration process. 19. RIGHTS CUMULATIVE All rights and remedies under this Agreement are cumulative, and none is intended to be exclusive of another. No delay or omission in insisting upon the strict observance of performance of any provision of this Agreement, or in exercising any right or remedy, shall be construed as a waiver or relinquishment of such provision, nor shall it impair such right or remedy. Every right and remedy may be exercised from time to time and as often as deemed expedient. 20. CAPTIONS The paragraph and other headings contained in this Agreement are for reference purposes only, and shall not limit or otherwise affect the meaning hereof. 21. LEGAL HOLIDAYS In the case where the date on which any action required to be taken, document required to be delivered or payment required to be made is not a business day in Los Angeles, California, such action, delivery or payment need not be made on that date, but may be made on the next succeeding business day. 22. 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. 23. PARTIES This Agreement shall inure solely to the benefit of and shall be binding upon the parties hereto and their respective successors, legal representatives and assigns, and no other person shall have or be construed to have any equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provision contained herein. 24. AUTHORITY Each signatory to this Agreement does hereby represent and warrant that he has the authority to execute this Agreement on behalf of the party to this Agreement for whom he is executing this Agreement. - 13 - 25. DIRECTOR AND OFFICER INSURANCE COVERAGE The Company and NTC shall, to the extent that such policies are available for and applicable to former officers and directors, maintain in force for a period of not less than two (2) years following the Effective Date, the director and officer insurance coverage on substantially the same terms as currently in effect, and at the present levels of coverage, provided such coverage is available at commercially reasonable rates. THE COMPANY: INCOMNET, INC. By: /s/ Mark J. Richardson ---------------------------------------------- Mark . Richarson, Corporate Secretary NTC: NATIONAL TELEPHONE & COMMUNICATIONS, INC.* By /s/ Michael Keebaugh ---------------------------------------------- Michael Keebaugh, Executive Vice President GenSource: GENSOURCE CORPORATION** By ---------------------------------------------- Eric Hoffberg, President Reznick: /s/ Melvyn Reznick ------------------------------------------------- Melvyn Reznick *With respect only to the stock option, release, indemnification and insurance provisions in Sections 5, 7B, 8B, 10B and 25 of this Agreement. **With respect only to the termination, release and indemnification provisions in Sections 1, 7C, 8C and 10C of this Agreement. - 14 - 25. DIRECTOR AND OFFICER INSURANCE COVERAGE The Company and NTC shall, to the extent that such policies are available for and applicable to former officers and directors, maintain in force for a period of not less than two (2) years following the Effective Date, the director and officer insurance coverage on substantially the same terms as currently in effect, and at the present levels of coverage, provided such coverage is available at commercially reasonable rates. THE COMPANY: INCOMNET, INC. By: /s/ Mark J. Richardson ---------------------------------------------- Mark . Richarson, Corporate Secretary NTC: NATIONAL TELEPHONE & COMMUNICATIONS, INC.* By ---------------------------------------------- Michael Keebaugh, Executive Vice President GENSOURCE: GENSOURCE CORPORATION** By /s/ Eric Hoffberg ---------------------------------------------- Eric Hoffberg, President REZNICK: /s/ Melvyn Reznick ------------------------------------------------- Melvyn Reznick *With respect only to the stock option, release, indemnification and insurance provisions in Sections 5, 7B, 8B, 10B and 25 of this Agreement. **With respect only to the termination, release and indemnification provisions in Sections 1, 7C, 8C and 10C of this Agreement. - 14 - It has been a sincere pleasure working with you over the past few years. You are a true asset to the Company and I know that you will perform admirably in your new position at NTC. I hope the future will not only be considerably more productive and far less troublesome than the past but that it will also be supremely profitable for all concerned. Sincerely, /s/ Melvyn Reznick Melvyn Reznick Enclosures: Settlement Agreement and Amendment to Settlement Agreement Payroll receipts of 8/14/98 and 8/31/98 AMENDMENT TO SETTLEMENT AGREEMENT This Amendment to Settlement Agreement is made as of this 29th day of September, 1998 by and between Incomnet, Inc., a California corporation (the "Company"), and Melvyn Reznick, an individual ("Reznick"), with respect to the following facts: RECITALS A. The sale of an additional 2,000,000 shares of Rapid Cast, Inc. by the Company was completed on September 29, 1998. B. As a result of the sale, 37,050 additional stock options granted to Reznick have vested in accordance with his employment agreement with the Company. C. The Company and Reznick entered into a Settlement Agreement, dated as of August 31, 1998 (the "Original Settlement Agreement"), and wish to amend it by this Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, THE PARTIES HERETO AGREE AS FOLLOWS: 1. The following options are added to Section 5 of the Original Settlement Agreement:
Number Exercise Price Per Share Date of Expiration ------ ------------------------ ------------------ 37,050 $4.87 9/29/2003
2. Except as modified herein, the Original Settlement Agreement remains in full force and effect. THE COMPANY: INCOMNET, INC. By: /s/ Mark J. Richardson ------------------------------------------- Mark J. Richardson, Corporate Secretary REZNICK: By: /s/ Melvyn Reznick ------------------------------------------- Melvyn Reznick EX-10.8 10 EXHIBIT 10.8 EXHIBIT 10.8 -- SEPARATION AGREEMENT BETWEEN INCOMNET, INC. AND JAMES R. QUANDT, DATED JULY 1, 1998, AND AMENDMENT THERETO DATED OCTOBER 30, 1998 NATIONAL TELEPHONE & COMMUNICATIONS, INC. 2801 Main Street Irvine, California 92614 October 30, 1998 BY FACSIMILE Mr. James R. Quandt 17 Cherry Hills Drive Coto De Caza, California 92679 Dear Mr. Quandt: This letter, when countersigned by you, will constitute an agreement between you and the Company as to the revised terms of your separation arrangements with National Telephone & Communications, Inc. (the "Company"). 1. In lieu of the severance payments provided under Section 2 of your Confidential Separation Agreement, entered into as of July 1, 1998 (the "Separation Agreement"), you shall receive a lump sum payment of $105,538 on or before December 15, 1998. 2. Section 2 of the Separation Agreement will be amended to provide that all payments in respect of medical coverage shall terminate December 15, 1998 although, you shall be entitled, to the extent you have made timely elections, to make payments for continuing medical coverage under COBRA. 3. In lieu of the $100,000 bonus provided for under Section 7 of your Separation Agreement, the Company shall pay to you a lump sun of $50,000 but only in the event that one of the following occur on or before July 1, 2000: (i) a merger to which the Company is a party and in which Incomnet, Inc. or its shareholders retain less than 50% interest in the Company, (ii) a sale of substantially all of the Company's assets, or (iii) a public offering of the Company's Common Stock. 4. If the Company defaults on its payment obligations set forth herein, you shall be entitled to all rights under the Separation Agreement. Please acknowledge your agreement to the terms set forth in this letter by signing below where indicated and return it to me by facsimile. This offer expires at 5:00 p.m. on October 30, 1998. Very truly yours, /s/ Denis Richard ----------------- President and Chief Executive Officer AGREED AND ACCEPTED /s/ James R. Quandt - - ------------------- 1 CONFIDENTIAL SEPARATION AGREEMENT THIS CONFIDENTIAL SEPARATION AGREEMENT ("Agreement") is made and entered into as of July 1, 1998, (the "Date of this Agreement") by and between James R. Quandt ("Employee") and National Telephone & Communications, Inc., a California corporation (the "Company") (collectively, the "Parties"). RECITALS A. Employee is currently employed by the Company as President and Chief Executive Officer, pursuant to an Agreement dated June 25, 1997, (the "Employment Agreement"). B. Under the terms of the Employment Agreement, Employee is entitled to resign for "Good Cause" and receive substantial payments in the event of a change in control of the Company or its parent, Incomnet, or in the event of his termination by the Company, other than for cause. C. Employee and the Company desire to specify the terms of Employee's continuing his employment with the Company and separation therefrom, without subjecting the Company to liability under the Employment Agreement for termination by the Company other than for cause, or termination by the Employee for "Good Cause." AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals, the mutual promises contained herein, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: 1. TERM OF EMPLOYMENT. Employee shall continue his employment with the Company through August 31, 1998. Employee shall continue to receive all compensation and benefits in accordance with the terms of the Employment Agreement through August 31, 1998. Neither party may terminate the employment relationship during that period, except that in the event that a new Chief Executive Officer is retained prior to that date, Employee may terminate employment at his option. After August 31, 1998 (unless Employee has elected to terminate his employment if a new Chief Executive Officer is retained prior to that date), Employee shall continue to be employed on an "at-will" basis which means that either party may terminate the employment relationship at any time, with or without cause and with or without notice. 2. SEVERANCE PAYMENT. After the termination of employment, the Company shall pay Employee $20,000 monthly for a period of 12 months, payable on a bi-weekly basis, commencing on the last regular Company payday of the month following the month in which Employee's employment is terminated. So long as Employee makes a timely election, the Company shall also make Employee's payments for continuing his current medical coverage under COBRA upon termination of his employment for the lesser of 6 months or the date on which Employee is eligible for coverage under a subsequent employer's medical care plan. 3. RELEASES. Concurrently with the execution of this Agreement, Employee will execute a release of all claims against the Company in the form attached hereto as Exhibit "A." This Agreement shall be null and void in its entirety if Employee fails to execute a release of all claims in the form attached hereto as Exhibit "A." Said release shall be null and void in its entirety in the event the Company fails to make any payment required under Section 2 above after the Company has received written notice of its alleged failure to make any such payment and has failed thereafter to make such payment within fifteen business days. Concurrently with the execution of this Agreement, the Company shall execute a release of claims in the form 2 attached hereto as Exhibit "B." In the event that the Company fails timely to execute the release in the form attached hereto as Exhibit "B," this Agreement shall be null and void in its entirety. 4. SEVERABILITY. The provisions of this Agreement are severable, and if any part of it is found to be unenforceable, the other paragraphs shall remain fully valid and enforceable. 5. ATTORNEYS' FEES. The Company shall reimburse Employee up to $7,500.00 for attorneys' fees incurred in connection with the negotiations and drafting of this Agreement. Payment shall be made within thirty (30) days of the receipt of a bill(s) for such services. This amount shall be reduced by any amount paid on behalf of Victor Streufert in connection with the negotiation and drafting of his separation agreement. 6. INDEMNIFICATION. The Company shall defend and indemnify Employee in connection with any and all claims arising out of or related to his service as an employee, officer or director of the Company, to the fullest extent permitted under and subject to any conditions required by applicable law; and the Company shall take any and all actions necessary to permit such indemnification. With respect to any claim for which the Company has in effect Director and Officer Insurance coverage which actually provides coverage for such claim to Employee, the Company's obligation hereunder shall be satisfied to the extent such coverage reimburses Employee for or pays for Employee's defense or liability in connection with such claim; however, any uncovered amount shall be paid by the Company. Any obligation of the Company to indemnify Employee is conditioned upon Employee's reasonable cooperation with the Company in the defense of any matter subject to this indemnification. Employee's duty to cooperate with the Company in the defense of any claims asserted against the Company shall exist both during and following Employee's employment by the Company. Employee shall, upon reasonable notice, and subject to Employee's other professional commitments or employment obligations, furnish such information and assistance to the Company as may 3 reasonably be required by the Company in connection with any litigation or governmental investigation in which it or any of its subsidiaries or affiliates, is, or may become, a party. If Employee is a party in any action, Employee shall not be entitled to any additional compensation for furnishing such information and assistance pursuant to this Article. If Employee is not a party in any such action and is no longer an Employee of the Company or receiving compensation from the Company pursuant to Section 8 of this Agreement or otherwise, Employee shall be paid a reasonable consulting fee for his services. The Company shall maintain in force for a period of not less than two (2) years following the date of Employee's termination of employment, Director and Officer Insurance coverage on substantially the same terms as currently in force, and at the present levels of coverage, provided coverage is available at commercially reasonable rates. 7. BONUS. In the event that the Company or a successor in interest makes a public offering of securities, is acquired, or all or substantially all of its assets are acquired within two years of July 1, 1998, within thirty (30) days of such event Employee shall be paid $100,000 by the Company. 8. CONTINUING SERVICE. For a period of six (6) months following his termination of employment, Employee shall be available by telephone not more than 2 hours per week to consult with the Company concerning his knowledge of the Company's business or operations during his period of Employment. Unused hours from one week shall not roll over to any subsequent period. The failure of the Company to utilize any or all of the hours Employee is available per week shall not excuse or reduce the amount due hereunder. Employee shall be paid $1,600 per month for such services, payable an the last day of the month in which such services are rendered. The Company may terminate this consulting arrangement prior to the end of the six (6) month period upon written notice to Employee. Employee shall serve as a director of the Company through December 31, 1998 if the Company so desires, provided that current levels of 4 director and officer insurance is maintained. In the event such insurance is not maintained, Employee shall have no obligation to continue to serve as a director. Employee shall be paid a fee equal to the fee paid to outside directors as of June 1, 1998. 9. NO ADMISSION. Nothing contained in this Agreement shall be construed in any way as an admission by the Company or Employee that it or he has acted wrongfully with respect to the other or with respect to any other person, and the Company or Employee specifically disclaims any liability to, or wrongful acts against the other, on the part of itself or its or his representatives, affiliates, associates, employees or agents. 10. NO CLAIMS. Employee and the Company represent and agree that he and it have not filed any notices, complaints, charges or lawsuits of any kind whatsoever against the other with any court, any governmental agency or any other regulatory body, and will not do so at any time hereafter with regard to any matter related to or arising out of Employee's employment by the Company or its affiliates, or his resignation thereof; provided, however, that the foregoing shall not preclude or limit Employee or the Company in any way from enforcing his or its rights under this Agreement or from taking any actions required by law to be taken by him or it, nor shall this Agreement prohibit Employee from seeking unemployment compensation which the Company will not contest, provided the claim is lawful. 11. ARBITRATION. Except for claims for temporary or preliminary equitable or injunctive relief that could not practicably be heard in a timely fashion through this arbitration process, the parties hereby agree to submit any claim or dispute arising out of the terms of this Agreement (including exhibits) and/or any dispute relating in any way to Employee's employment with the Company to private and confidential arbitration by a single neutral arbitrator. Subject to the terms of this paragraph, the arbitration proceedings shall be governed by the then current JAMS Employment Arbitration Rules, and shall take place in Orange County, California. The arbitrator shall be selected as follows: JAMS shall provide the parties with a list 5 of eleven (11) arbitrators drawn from its panel of employment dispute arbitrators; each party may strike all names on the list it deems unacceptable. If only one common name remains on the lists of all parties, that individual shall be designated as the arbitrator. If more than one common name remains on the lists of all parties, the parties shall strike names alternately from the list of common names until only one remains. The party who did not initiate the claim shall strike first. If no common name exists on the lists of the parties, then the parties shall strike alternately from a second list, with the party initiating the claim striking first, until only one name remains. That person shall be designated as the arbitrator. The decision of the arbitrator shall be final and binding on all parties to this Agreement, and judgment thereon may be entered in any court having jurisdiction. The Company will advance the arbitrator's fee; however, all costs of the arbitration proceeding or litigation to enforce this Agreement, including attorneys' fees and witness expenses, shall be paid by the party against whom the arbitrator or court rules. Except for claims for temporary or preliminary equitable or injunctive relief that could not practicably be heard in a timely fashion through this arbitration process, this arbitration procedure is intended to be the exclusive method of resolving any claim relating to the obligations set forth in this Agreement (including Exhibits "A" and "B"). 12. ENTIRE AGREEMENT. This Agreement represents the sole and entire agreement among the parties and supersedes all prior agreements, negotiations, and discussions between the parties hereto and/or their respective counsel with respect to the subject matters covered hereby, including without limitation, any obligations of the Company to Employee and Employee to the Company under the Employment Agreement; provided, however, that in the event the Company fails to make timely payments of the amounts set forth in Section 2 hereof, and Employee's release has become null and void as provided in Section 3 hereof, Employee shall be entitled to seek recovery under paragraphs 11.3 and 11.4 of the Employment Agreement in accordance with the terms thereof. Any amendment to this Agreement must be in writing, 6 signed by duly authorized representatives of the parties, and stating the intent of the parties to amend this Agreement. This Agreement shall not supersede the Indemnification Agreement dated September 12, 1997, which shall survive this Agreement. 13. ASSIGNMENT/SUCCESSORS. This Agreement shall be binding upon the Company's successors. Neither party may assign his or its rights or responsibilities under this Agreement unless such assignment has been approved by the other party, which approval shall not unreasonably be withheld. 14. CHOICE OF LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California. 15. NOT READ AGAINST DRAFTER. Because both parties have had an opportunity to be represented by counsel and this Agreement was negotiated at arms length, the usual presumption that an agreement be interpreted against the drafter shall not apply. 16. NOTICES. All notices required to be given under this Agreement shall be made by certified mail and directed to the addresses below or such other address as specified in writing by the person to receive such notice: If to the Company: National Telephone & Communications, Inc. 2801 Main Street Irvine, California 92614 With a copy to: Dale DeForge, Esq. 2801 Main Street Irvine, California 92614 If to Employee: James R. Quandt 7 With a copy to: Joseph B. Farrell, Esq. Latham & Watkins 650 Town Center Drive, 20th Floor Costa Mesa, California 92626 Such notice shall be deemed received three (3) days after it is sent. WHEREOF, the parties hereto have each executed this Agreement as of the date first above written. /s/ James R. Quandt ----------------------------------------- James R. Quandt National Telephone & Communications, Inc. By: /s/ Michael L. Tenzer -------------------------------------- Michael L. Tenzer Director NTC, Inc. 8 GENERAL RELEASE For a valuable consideration, the receipt and adequacy of which are hereby acknowledged, James R. Quandt ("Employee") (collectively the "Parties") does hereby release and forever discharge the "Releasees" herein, consisting of National Telephone & Communication, Inc. (the "Company") its parents, subsidiaries, and affiliates, and each of their parents, subsidiaries, affiliates, associates, owners, stockholders, predecessors, successors, heirs, assigns, agents, directors, officers, partners, employees, representatives, lawyers, and all persons acting by, through, under, or in concert with them, or any of them, of and from any and all manner of action or actions, causes or causes of action, in law or in equity, suits, debts, liens, contracts, agreements, promises, liabilities, claims, demands, damages, losses, costs or expenses, of any nature whatsoever, known or unknown, fixed or contingent (hereinafter called "Claims"), which he now has or may hereafter have against the Releasees by reason of any and all acts, omissions, events or facts occurring or existing prior to the date hereof, except as expressly provided herein. The Claims released hereunder include, without limitation, any alleged breach of any employment agreement; any alleged breach of any covenant of good faith and fair dealing, express or implied; any alleged torts or other alleged legal restrictions relating to the Employee's employment and the termination thereof; and any alleged violation of any federal, state or local statute or ordinance including, without limitation, Title VII of the Civil Rights Act of 1964, as amended, the federal Age Discrimination in Employment Act of 1967, as amended, and the California Fair Employment and Housing Act. This Release shall also not apply to Employee's right to retirement and/or employee welfare benefits that have vested and accrued prior to his separation from employment with the Company. IN ACCORDANCE WITH THE OLDER WORKERS BENEFIT PROTECTION ACT OF 1990, EMPLOYEE IS HEREBY ADVISED AS FOLLOWS: Employee agrees and expressly acknowledges that this Agreement includes a waiver and release of all claims which Employee has or may have under the Age Discrimination in Employment Act of 1967, as amended, 29 U.S.C. Section 621, ET SEQ. ("ADEA"). The following terms and conditions apply to and are part of the waiver and release of the ADEA claims under this Agreement: (a) That this paragraph and this Agreement are written in a manner calculated to be understood by Employee. (b) The waiver and release of claims under the ADEA contained in this Agreement do not cover rights or claims that may arise after the date on which Employee signs this Agreement. (c) This Agreement provides in Section 7 for consideration in addition to anything of value to which Employee is already entitled. 1 EXHIBIT "A" (d) Employee is advised to consult an attorney before signing this Agreement. (e) Employee is granted twenty-one (21) days after Employee is presented with this Agreement to decide whether or not to sign this Agreement. If Employee executes this Agreement prior to the expiration of such period, Employee does so voluntarily and after having had the opportunity to consult with an attorney. (f) Employee will have the right to revoke the waiver and release of claims under the ADEA within seven (7) days of signing this Agreement. Section 7 of this Agreement provides the consideration for the waiver and release of any claims Employee may have under the ADEA and accordingly Section 7 shall not become effective or enforceable unless and until that revocation period has expired without there having a revocation. ALL OTHER PROVISIONS OF THIS AGREEMENT SHALL BECOME EFFECTIVE IMMEDIATELY UPON ITS EXECUTION. In order to revoke this Release, Employee shall notify the Company's Vice President of Human Resources in writing that Employee wishes to revoke this Release. The writing must be delivered to the offices of the Company on or before the seventh (7) day following Employee's execution of this Release. EMPLOYEE ACKNOWLEDGES THAT HE IS FAMILIAR WITH THE PROVISIONS OF CALIFORNIA CIVIL CODE SECTION 1542, WHICH PROVIDES AS FOLLOWS: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH, IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." EMPLOYEE BEING AWARE OF SAID CODE SECTION, HEREBY EXPRESSLY WAIVES ANY RIGHTS HE MAY HAVE THEREUNDER, AS WELL AS UNDER ANY OTHER STATUTES OR COMMON LAW PRINCIPLES OF SIMILAR EFFECT. Employee represents and warrants to the Releasees that there has been no assignment or other transfer of any interest in any Claim which he may have against such Releasees, or any of them, and he agrees to indemnify and hold the Releasees harmless from any liability, claims, demands, damages, costs, expenses and attorneys' fees incurred as a result of any person asserting any such assignment or transfer of any rights or Claims under any such assignment or transfer. 2 EXHIBIT "A" Employee agrees that if he hereafter commences, joins in, or in any manner seeks relief through any suit arising out of, based upon, or relating to any of the Claims released hereunder or in any manner asserts against the Releasees any of the Claims released hereunder, then he will pay to the Releasees against whom such claim(s) is asserted, in addition to any other damages caused thereby, all attorneys' fees incurred by such Releasees in defending or otherwise responding to said suit or Claim. Employee understands and agrees that neither the payment of money nor the execution of this Release shall constitute or be construed as an admission of any liability whatsoever by the Releasees. /s/ James R. Quandt 7-8-98 ------------------------------ ------------ James R. Quandt Date National Telephone & Communications, Inc. /s/ Michael L. Tenzer 7/12/98 ------------------------------ ------------ By: Michael L. Tenzer Date Director, NTC Inc. 3 EXHIBIT "A" GENERAL RELEASE For a valuable consideration, the receipt and adequacy of which are hereby acknowledged, National Telephone & Communications, Inc. (the "Company"), does hereby release and forever discharge the "Releasees" herein, consisting of James R. Quandt ("Employee"), his successors, heirs, assigns, agents, partners, employees, representatives, lawyers, and all persons acting by, through, under, or in concert with them, or any of them, of and from any and all manner of action or actions, causes or causes of action, in law or in equity, suits, debts, liens, contracts, agreements, promises, liabilities, claims, demands, damages, losses, costs or expenses, of any nature whatsoever, known or unknown, fixed or contingent (hereinafter called "Claims"), which it now has or may hereafter have against the Releasees by reason of any and all acts, omissions, events or facts occurring or existing prior to the date hereof, except as expressly provided herein. The Claims released hereunder include, without limitation, any alleged breach of any employment agreement; any alleged breach of any covenant of good faith and fair dealing, express or implied; any alleged torts or other alleged legal restrictions relating to the Employee's employment and the termination thereof; and any alleged violation of any federal, state or local statute or ordinance. THE COMPANY ACKNOWLEDGES THAT IT IS FAMILIAR WITH THE PROVISIONS OF CALIFORNIA CIVIL CODE SECTION 1542, WHICH PROVIDES AS FOLLOWS: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN ITS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH, IF KNOWN BY IT MUST HAVE MATERIALLY AFFECTED ITS SETTLEMENT WITH THE DEBTOR." THE COMPANY BEING AWARE OF SAID CODE SECTION, HEREBY EXPRESSLY WAIVES ANY RIGHTS IT MAY HAVE THEREUNDER, AS WELL AS UNDER ANY OTHER STATUTES OR COMMON LAW PRINCIPLES OF SIMILAR EFFECT. The Company represents and warrants to the Releasees that there has been no assignment or other transfer of any interest in any Claim which it may have against such Releasees, or any of them, and it agrees to indemnify and hold the Releasees harmless from any liability, claims, demands, damages, costs, expenses and attorneys' fees incurred as a result of any person asserting any such assignment or transfer of any rights or Claims under any such assignment or transfer. 1 EXHIBIT "B" The Company agrees that if it hereafter commences, joins in, or in any manner seeks relief through any suit arising out of, based upon, or relating to any of the Claims released hereunder or in any manner asserts against the Releasees any of the Claims released hereunder, then it will pay to the Releasees against whom such claim(s) is asserted, in addition to any other damages caused thereby, all attorneys' fees incurred by such Releasees in defending or otherwise responding to said suit or Claim. The Company understands and agrees that neither the payment of money nor the execution of this Release shall constitute or be construed as an admission of any liability whatsoever by the Releasees. /s/ James R. Quandt 7-8-98 ------------------------------ ------------ James R. Quandt Date National Telephone & Communications, Inc. /s/ Michael L. Tenzer 7/12/98 ------------------------------ ------------ By: Michael L. Tenzer Date Director, NTC 2 EXHIBIT "B" EX-10.9 11 EXHIBIT 10.9 EXHIBIT 10.9 -- SEPARATION AGREEMENT BETWEEN INCOMNET, INC. AND VICTOR C. STREUFERT, DATED JULY 1, 1998 AND AMENDMENT THERETO DATED OCTOBER 30, 1998 NATIONAL TELEPHONE & COMMUNICATIONS, INC. 2801 Main Street Irvine, California 92614 October 30, 1998 BY FACSIMILE: Mr. Victor C. Streufert 5 San Miguel Coto De Caza, California 92679 Dear Mr. Streufert: This letter, when countersigned by you, will constitute an agreement between you and the Company as to the revised terms of your separation arrangements with National Telephone & Communications, Inc. (the "Company"). 1. In lieu of the severance payments provided under Section 2 of your Confidential Separation Agreement, entered into as of July 1, 1998 (the "Separation Agreement"), you shall receive a lump sum payment of $52,016 on or before December 15, 1998. 2. The provisions in Section 2 of the Separation Agreement relating to the continuation of medical coverage under COBRA shall remain in full force and effect. 3. In lieu of the $75,000 bonus provided for under Section 7 of your Separation Agreement, the Company shall pay to you a lump sun of $37, 500 but only in the event that one of the following occur on or before July 1, 2000: (i) a merger to which the Company is a party and in which Incomnet, Inc. or its shareholders retain less than 50% interest in the Company, (ii) a sale of substantially all of the Company's assets, or (iii) a public offering of the Company's Common Stock. 4. All your obligations to provide continuing services under paragraph 8 of Separation Agreement shall terminate on December 15, 1998. 5. All your obligations to refrain from competing against the Company set forth in Section 12.0 of your Amended and Restated Employment Agreement dated June 25, 1997, shall terminate on December 15, 1998. 6. If the Company defaults on its payment obligations set forth herein, you shall be entitled to all rights under the Separation Agreement. Please acknowledge your agreement to the terms set forth in this letter by signing below where indicated and return it to me by facsimile. This offer expires at 5:00 p.m. on October 30, 1998. You may fax your acceptance to the undersigned at (949) 224-7474. Very truly yours, /s/ Denis Richard ----------------- President and Chief Executive Officer AGREED AND ACCEPTED /s/ Victor C. Streufert - - ----------------------- Victor C. Streufert CONFIDENTIAL SEPARATION AGREEMENT THIS CONFIDENTIAL SEPARATION AGREEMENT ("Agreement") is made and entered into as of July 1, 1998, (the "Date of this Agreement") by and between Victor C. Streufert ("Employee") and National Telephone & Communications, Inc., a California corporation (the "Company") (collectively, the "Parties"). RECITALS A. Employee is currently employed by the Company as Chief Financial Officer, pursuant to an Agreement dated June 25, 1997, (the "Employment Agreement"). B. Under the terms of the Employment Agreement, Employee is entitled to resign for "Good Cause" and receive substantial payments in the event of a change in control of the Company or its parent, Incomnet, or in the event of his termination by the Company, other than for cause. C. Employee and the Company desire to specify the terms of Employee's continuing his employment with the Company and separation therefrom, without subjecting the Company to liability under the Employment Agreement for termination by the Company other than for cause, or termination by the Employee for "Good Cause." AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals, the mutual promises contained herein, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: 1. TERM OF EMPLOYMENT. Employee shall continue his employment with the Company through July 31, 1998. Employee shall continue to receive all compensation and benefits in accordance with the terms of the Employment Agreement through July 31, 1998. Neither party may terminate the employment relationship during that period, except that in the event that a new Chief Financial Officer is retained prior to that date, Employee may terminate employment at his option. After August 31, 1998 (unless Employee has elected to terminate his employment if a new Chief Financial Officer is retained prior to that date), Employee shall continue to be employed on an "at-will" basis which means that either party may terminate the employment relationship at any time, with or without cause and with or without notice. 2. SEVERANCE PAYMENT. After the termination of employment, the Company shall pay Employee $10,000 monthly for a period of 12 months, payable on a bi-weekly basis, commencing on the last regular Company payday of the month following the month in which Employee's employment is terminated. So long as Employee makes a timely election, the Company shall also make Employee's payments for continuing his current medical coverage under COBRA upon termination of his employment for the lesser of 6 months or the date on which Employee is eligible for coverage under a subsequent employer's medical care plan. 3. RELEASES. Concurrently with the execution of this Agreement, Employee will execute a release of all claims against the Company in the form attached hereto as Exhibit "A." This Agreement shall be null and void in its entirety if Employee fails to execute a release of all claims in the form attached hereto as Exhibit "A." Said release shall be null and void in its entirety in the event the Company fails to make any payment required under Section 2 above after the Company has received written notice of its alleged failure to make any such payment and has failed thereafter to make such payment within fifteen business days. Concurrently with the execution of this Agreement, the Company shall execute a release of claims in the form 2 attached hereto as Exhibit "B." In the event that the Company fails timely to execute the release in the form attached hereto as Exhibit "B," this Agreement shall be null and void in its entirety. 4. SEVERABILITY. The provisions of this Agreement are severable, and if any part of it is found to be unenforceable, the other paragraphs shall remain fully valid and enforceable. 5. ATTORNEYS' FEES. The Company shall reimburse Employee up to $7,500.00 for attorneys' fees incurred in connection with the negotiations and drafting of this Agreement. Payment shall be made within thirty (30) days of the receipt of a bill(s) for such services. This amount shall be reduced by any amount paid on behalf of James Quandt in connection with the negotiation and drafting of his separation agreement. 6. INDEMNIFICATION. The Company shall defend and indemnify Employee in connection with any and all claims arising out of or related to his service as an employee, officer or director of the Company, to the fullest extent permitted under and subject to any conditions required by applicable law; and the Company shall take any and all actions necessary to permit such indemnification. With respect to any claim for which the Company has in effect Director and Officer Insurance coverage which actually provides coverage for such claim to Employee, the Company's obligation hereunder shall be satisfied to the extent such coverage reimburses Employee for or pays for Employee's defense or liability in connection with such claim; however, any uncovered amount shall be paid by the Company. Any obligation of the Company to indemnify Employee is conditioned upon Employee's reasonable cooperation with the Company in the defense of any matter subject to this indemnification. Employee's duty to cooperate with the Company in the defense of any claims asserted against the Company shall exist both during and following Employee's employment by the Company. Employee shall, upon reasonable notice, and subject to Employee's other professional commitments or employment obligations, furnish such information and assistance to the Company as may 3 reasonably be required by the Company in connection with any litigation or governmental investigation in which it or any of its subsidiaries or affiliates, is, or may become, a party. If Employee is a party in any action, Employee shall not be entitled to any additional compensation for furnishing such information and assistance pursuant to this Article. If Employee is not a party in any such action and is no longer an Employee of the Company or receiving compensation from the Company pursuant to Section 8 of this Agreement or otherwise, Employee shall be paid a reasonable consulting fee for his services. The Company shall maintain in force for a period of not less than two (2) years following the date of Employee's termination of employment, Director and Officer Insurance coverage on substantially the same terms as currently in force, and at the present levels of coverage, provided coverage is available at commercially reasonable rates. 7. BONUS. In the event that the Company or a successor in interest makes a public offering of securities, is acquired, or all or substantially all of its assets are acquired within two years of July 1, 1998, within thirty (30) days of such event Employee shall be paid $75,000 by the Company. 8. CONTINUING SERVICE. For a period of six (6) months following his termination of employment, Employee shall be available by telephone not more than 2 hours per week to consult with the Company concerning his knowledge of the Company's business or operations during his period of Employment. Unused hours from one week shall not roll over to any subsequent period. The failure of the Company to utilize any or all of the hours Employee is available per week shall not excuse or reduce the amount due hereunder. Employee shall be paid $1,200 per month for such services, payable on the last day of the month in which such services are rendered. The Company may terminate this consulting arrangement prior to the end of the six (6) month period upon written notice to Employee. 4 9. NO ADMISSION. Nothing contained in this Agreement shall be construed in any way as an admission by the Company or Employee that it or he has acted wrongfully with respect to the other or with respect to any other person, and the Company or Employee specifically disclaims any liability to, or wrongful acts against the other, on the part of itself or its or his representatives, affiliates, associates, employees or agents. 10. NO CLAIMS. Employee and the Company represent and agree that he and it have not filed any notices, complaints, charges or lawsuits of any kind whatsoever against the other with any court, any governmental agency or any other regulatory body, and will not do so at any time hereafter with regard to any matter related to or arising out of Employee's employment by the Company or its affiliates, or his resignation thereof; provided, however, that the foregoing shall not preclude or limit Employee or the Company in any way from enforcing his or its rights under this Agreement or from taking any actions required by law to be taken by him or it, nor shall this Agreement prohibit Employee from seeking unemployment compensation which the Company will not contest, provided the claim is lawful. 11. ARBITRATION. Except for claims for temporary or preliminary equitable or injunctive relief that could not practicably be heard in a timely fashion through this arbitration process, the parties hereby agree to submit any claim or dispute arising out of the terms of this Agreement (including exhibits) and/or any dispute relating in any way to Employee's employment with the Company to private and confidential arbitration by a single neutral arbitrator. Subject to the terms of this paragraph, the arbitration proceedings shall be governed by the then current JAMS Employment Arbitration Rules, and shall take place in Orange County, California. The arbitrator shall be selected as follows: JAMS shall provide the parties with a list of eleven (11) arbitrators drawn from its panel of employment dispute arbitrators; each party may strike all names on the list it deems unacceptable. If only one common name remains on the lists of all parties, that individual shall be designated as the arbitrator. If more than one common 5 name remains on the lists of all parties, the parties shall strike names alternately from the list of common names until only one remains. The party who did not initiate the claim shall strike first. If no common name exists on the lists of the parties, then the parties shall strike alternately from a second list, with the party initiating the claim striking first, until only one name remains. That person shall be designated as the arbitrator. The decision of the arbitrator shall be final and binding on all parties to this Agreement, and judgment thereon may be entered in any court having jurisdiction. The Company will advance the arbitrator's fee; however, all costs of the arbitration proceeding or litigation to enforce this Agreement, including attorneys' fees and witness expenses, shall be paid by the party against whom the arbitrator or court rules. Except for claims for temporary or preliminary equitable or injunctive relief that could not practicably be heard in a timely fashion through this arbitration process, this arbitration procedure is intended to be the exclusive method of resolving any claim relating to the obligations set forth in this Agreement (including Exhibits "A" and "B"). 12. ENTIRE AGREEMENT. This Agreement represents the sole and entire agreement among the parties and supersedes all prior agreements, negotiations, and discussions between the parties hereto and/or their respective counsel with respect to the subject matters covered hereby, including without limitation, any obligations of the Company to Employee and Employee to the Company under the Employment Agreement; provided, however, that in the event the Company fails to make timely payments of the amounts set forth in Section 2 hereof, and Employee's release has become null and void as provided in Section 3 hereof, Employee shall be entitled to seek recovery under paragraphs 10.3 and 10.4 of the Employment Agreement in accordance with the terms thereof. Any amendment to this Agreement must be in writing, signed by duly authorized representatives of the parties, and stating the intent of the parties to amend this Agreement. This Agreement shall not supersede the Indemnification Agreement dated September 12, 1997, which shall survive this Agreement. 6 13. ASSIGNMENT/SUCCESSORS. This Agreement shall be binding upon the Company's successors. Neither party may assign his or its rights or responsibilities under this Agreement unless such assignment has been approved by the other party, which approval shall not unreasonably be withheld. 14. CHOICE OF LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California. 15. NOT READ AGAINST DRAFTER. Because both parties have had an opportunity to be represented by counsel and this Agreement was negotiated at arms length, the usual presumption that an agreement be interpreted against the drafter shall not apply. 16. NOTICES. All notices required to be given under this Agreement shall be made by certified mail and directed to the addresses below or such other address as specified in writing by the person to receive such notice: If to the Company: National Telephone & Communications, Inc. 2801 Main Street Irvine, California 92614 With a copy to: Dale DeForge, Esq. 2801 Main Street Irvine, California 92614 If to Employee: Victor C. Streufert With a copy to: Joseph B. Farrell, Esq. Latham & Watkins 650 Town Center Drive, 20th Floor Costa Mesa, California 92626 7 Such notice shall be deemed received three (3) days after it is sent. WHEREOF, the parties hereto have each executed this Agreement as of the date first above written. /s/ Victor C. Struefert ------------------------------------------ Victor C. Streufert National Telephone & Communications, Inc. By: /s/ Michael L. Tenzer --------------------------------------- Michael L. Tenzer Director, NTC 8 GENERAL RELEASE For a valuable consideration, the receipt and adequacy of which are hereby acknowledged, Victor C. Streufert ("Employee") (collectively the "Parties") does hereby release and forever discharge the "Releasees" herein, consisting of National Telephone & Communication, Inc. (the "Company") its parents, subsidiaries, and affiliates, and each of their parents, subsidiaries, affiliates, associates, owners, stockholders, predecessors, successors, heirs, assigns, agents, directors, officers, partners, employees, representatives, lawyers, and all persons acting by, through, under, or in concert with them, or any of them, of and from any and all manner of action or actions, causes or causes of action, in law or in equity, suits, debts, liens, contracts, agreements, promises, liabilities, claims, demands, damages, losses, costs or expenses, of any nature whatsoever, known or unknown, fixed or contingent (hereinafter called "Claims"), which he now has or may hereafter have against the Releasees by reason of any and all acts, omissions, events or facts occurring or existing prior to the date hereof, except as expressly provided herein. The Claims released hereunder include, without limitation, any alleged breach of any employment agreement; any alleged breach of any covenant of good faith and fair dealing, express or implied; any alleged torts or other alleged legal restrictions relating to the Employee's employment and the termination thereof; and any alleged violation of any federal, state or local statute or ordinance including, without limitation, Title VII of the Civil Rights Act of 1964, as amended, the federal Age Discrimination in Employment Act of 1967, as amended, and the California Fair Employment and Housing Act. This Release shall also not apply to Employee's right to retirement and/or employee welfare benefits that have vested and accrued prior to his separation from employment with the Company. IN ACCORDANCE WITH THE OLDER WORKERS BENEFIT PROTECTION ACT OF 1990, EMPLOYEE IS HEREBY ADVISED AS FOLLOWS: Employee agrees and expressly acknowledges that this Agreement includes a waiver and release of all claims which Employee has or may have under the Age Discrimination in Employment Act of 1967, as amended, 29 U.S.C. Section 621, ET SEQ. ("ADEA"). The following terms and conditions apply to and are part of the waiver and release of the ADEA claims under this Agreement: (a) That this paragraph and this Agreement are written in a manner calculated to be understood by Employee. (b) The waiver and release of claims under the ADEA contained in this Agreement do not cover rights or claims that may arise after the date on which Employee signs this Agreement. 1 EXHIBIT "A" (c) This Agreement provides in Section 7 for consideration in addition to anything of value to which Employee is already entitled. (d) Employee is advised to consult an attorney before signing this Agreement. (e) Employee is granted twenty-one (21) days after Employee is presented with this Agreement to decide whether or not to sign this Agreement. If Employee executes this Agreement prior to the expiration of such period, Employee does so voluntarily and after having had the opportunity to consult with an attorney. (f) Employee will have the right to revoke the waiver and release of claims under the ADEA within seven (7) days of signing this Agreement. Section 7 of this Agreement provides the consideration for the waiver and release of any claims Employee may have under the ADEA and accordingly Section 7 shall not become effective or enforceable unless and until that revocation period has expired without there having a revocation. ALL OTHER PROVISIONS OF THIS AGREEMENT SHALL BECOME EFFECTIVE IMMEDIATELY UPON ITS EXECUTION. In order to revoke this Release, Employee shall notify the Company's Vice President of Human Resources in writing that Employee wishes to revoke this Release. The writing must be delivered to the offices of the Company on or before the seventh (7) day following Employee's execution of this Release. EMPLOYEE ACKNOWLEDGES THAT HE IS FAMILIAR WITH THE PROVISIONS OF CALIFORNIA CIVIL CODE SECTION 1542, WHICH PROVIDES AS FOLLOWS: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH, IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." EMPLOYEE BEING AWARE OF SAID CODE SECTION, HEREBY EXPRESSLY WAIVES ANY RIGHTS HE MAY HAVE THEREUNDER, AS WELL AS UNDER ANY OTHER STATUTES OR COMMON LAW PRINCIPLES OF SIMILAR EFFECT. Employee represents and warrants to the Releasees that there has been no assignment or other transfer of any interest in any Claim which he may have against such Releasees, or any of them, and he agrees to indemnify and hold the Releasees harmless from any liability, claims, demands, damages, costs, expenses and attorneys' fees incurred as a result of 2 EXHIBIT "A" any person asserting any such assignment or transfer of any rights or Claims under any such assignment or transfer. Employee agrees that if he hereafter commences, joins in, or in any manner seeks relief through any suit arising out of, based upon, or relating to any of the Claims released hereunder or in any manner asserts against the Releasees any of the Claims released hereunder, then he will pay to the Releasees against whom such claim(s) is asserted, in addition to any other damages caused thereby, all attorneys' fees incurred by such Releasees in defending or otherwise responding to said suit or Claim. Employee understands and agrees that neither the payment of money nor the execution of this Release shall constitute or be construed as an admission of any liability whatsoever by the Releasees. /s/ Victor C. Streufert 7/8/98 ---------------------------------- ----------- Victor C. Streufert Date National Telephone & Communication, Inc. /s/ Michael L. Tenzer 7/12/98 ---------------------------------- ----------- By: Michael L. Tenzer Date Director NTC, Inc. 3 EXHIBIT "A" GENERAL RELEASE --------------- For a valuable consideration, the receipt and adequacy of which are hereby acknowledged, National Telephone & Communications, Inc. (the "Company"), does hereby release and forever discharge the "Releasees" herein, consisting of Victor C. Streufert ("Employee"), his successors, heirs, assigns, agents, partners, employees, representatives, lawyers, and all persons acting by, through, under, or in concert with them, or any of them, of and from any and all manner of action or actions, causes or causes of action, in law or in equity, suits, debts, liens, contracts, agreements, promises, liabilities, claims, demands, damages, losses, costs or expenses, of any nature whatsoever, known or unknown, fixed or contingent (hereinafter called "Claims"), which it now has or may hereafter have against the Releasees by reason of any and all acts, omissions, events or facts occurring or existing prior to the date hereof, except as expressly provided herein. The Claims released hereunder include, without limitation, any alleged breach of any employment agreement; any alleged breach of any covenant of good faith and fair dealing, express or implied; any alleged torts or other alleged legal restrictions relating to the Employee's employment and the termination thereof; and any alleged violation of any federal, state or local statute or ordinance. THE COMPANY ACKNOWLEDGES THAT IT IS FAMILIAR WITH THE PROVISIONS OF CALIFORNIA CIVIL CODE SECTION 1542, WHICH PROVIDES AS FOLLOWS: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN ITS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH, IF KNOWN BY IT MUST HAVE MATERIALLY AFFECTED ITS SETTLEMENT WITH THE DEBTOR." THE COMPANY BEING AWARE OF SAID CODE SECTION, HEREBY EXPRESSLY WAIVES ANY RIGHTS IT MAY HAVE THEREUNDER, AS WELL AS UNDER ANY OTHER STATUTES OR COMMON LAW PRINCIPLES OF SIMILAR EFFECT. The Company represents and warrants to the Releasees that there has been no assignment or other transfer of any interest in any Claim which it may have against such Releasees, or any of them, and it agrees to indemnify and hold the Releasees harmless from any liability, claims, demands, damages, costs, expenses and attorneys' fees incurred as a result of any person asserting any such assignment or transfer of any rights or Claims under any such assignment or transfer. 1 EXHIBIT "B" The Company agrees that if it hereafter commences, joins in, or in any manner seeks relief through any suit arising out of, based upon, or relating to any of the Claims released hereunder or in any manner asserts against the Releasees any of the Claims released hereunder, then it will pay to the Releasees against whom such claim(s) is asserted, in addition to any other damages caused thereby, all attorney's fees incurred by such Releasees in defending or otherwise responding to said suit or Claim. The Company understands and agrees that neither the payment of money nor the execution of this Release shall constitute or be construed as an admission of any liability whatsoever by the Releasees. /s/ Victor C. Streufert 7/8/98 ---------------------------------- ----------- Victor C. Streufert Date National Telephone & Communication, Inc. /s/ Michael L. Tenzer 7/12/98 ---------------------------------- ----------- By: Michael L. Tenzer Date Director NTC, Inc. 2 EXHIBIT "B" EX-10.10 12 EXHIBIT 10.10 EXHIBIT 10.10 -- AMENDMENT TO EMPLOYMENT AGREEMENT BETWEEN INCOMNET, INC. AND STEPHEN A. CASWELL INCOMNET, INC. 2801 Main Street Irvine, CA 92614 October 29, 1998 Mr. Stephen A. Caswell 1893 Sunnydale Avenue Simi Valley, California 93065 Dear Mr. Caswell: This letter, when executed by you, will constitute our agreement as to the amended terms of your employment arrangements with Incomnet, Inc. (the "Company"). 1. In lieu of amounts otherwise due and owing to you under Sections 6 and 7 of your Employment Agreement dated June 5, 1997 (the "Employment Agreement"), the Company shall pay to you a salary of $10,000 per month and continue your existing benefits through April 30, 1999. All stock options currently outstanding shall be cancelled as of the date hereof. 2. Your office will be located at home. You agree however to work out of Incomnet's Irvine office at least three days per week. The Company will reimburse you for reasonable expenses including housing near it's headquarters, if for any reason (such as weather, work load, timing of deliverables, etc.) it becomes impractical (in the reasonable opinion of both the Company and yourself) for you to travel to Irvine or if it becomes necessary for you to spend more than three days a week at the headquarters. We will require your approval (not to be unreasonably withheld) to extend beyond three days per week your presence at the headquarters. 3. In lieu of the severance and termination rights and obligations under Sections 13 and 14 of the Employment Agreement, by notice on or before April 20, 1999 the Company may elect to extend your employment arrangements for an additional six months with a salary of $10,000 per month. At the end of such six month period, all salary, bonus and benefit payments and obligations shall cease and no severance payment shall be owed to you. If, however, as of April 20, 1999, the Company has not extended your employment for an additional six months, then the Company shall pay to you severance in the amount of $10,000 per month for the months of May, June and July 1999. Upon receipt of such payments, no further amounts of salary, bonus, severance or benefits shall be due and owing to you. 4. If, for any reason, you desire to terminate your employment arrangement with the Company, no severance or compensation payments will be due and owing by the Company other than accrued salary and vacation payments through the date of termination by you. 5. If the Company defaults on its payment obligations set forth in this letter, you shall be entitled to all payments set fort under Sections 6, 7, 13 and 14 of your Employment Agreement. If the terms of this arrangement as outlined above are acceptable, please sign in the space provided below. This offer terminates at 5:00 p.m. on October 30, 1998. Very truly yours, /s/ Denis Richard ----------------- President and Chief Executive Officer AGREED AND ACCEPTED Stephen A. Caswell October 29, 1998 Page 2 /s/ Stephen A. Caswell - - ---------------------- Stephen A. Caswell 2 EX-10.11 13 EXHIBIT 10.11 EXHIBIT 10.11 -- SETTLEMENT AND RELEASE AGREEMENT BETWEEN INCOMNET, INC. AND THE COHEN PARTIES, INCLUDING DR. ROBERT COHEN, STEFANIE RUBIN, ALLYSON COHEN, JEFFREY COHEN, JEFFREY RUBIN, DR. ALAN COHEN, LENORE KATZ, BROADWAY PARTNERS AND MERYL COHEN, CUSTODIAN FOR GABRIELLE COHEN, ERICA COHEN, JACLYN COHEN AND NICOLE COHEN. SETTLEMENT AND RELEASE AGREEMENT THIS SETTLEMENT AND RELEASE AGREEMENT (the "SETTLEMENT AGREEMENT") is entered into this 5th day of November, 1998, by and among Dr. Robert Cohen, an individual, Stefanie Rubin, an individual, Allyson Cohen, an individual, Jeffrey Cohen, an individual, Jeffrey Rubin, an individual, Dr. Alan Cohen, an individual, Lenore Katz, an individual, Broadway Partners, a general partnership, and Meryl Cohen, an individual and as custodian for Gabrielle Cohen, Jaclyn Cohen, Erica Cohen and Nicole Cohen (collectively the "COHEN PARTIES"), and Incomnet, Inc., a California corporation (the "COMPANY"). R E C I T A L S WHEREAS, the Company has granted to the Cohen Parties warrants to purchase the Company's common stock, options to purchase preferred stock, various rights under an agreement dated January 21, 1997 and certain registration rights (collectively, the "OLD SECURITIES RIGHTS"); WHEREAS, the Company and the Cohen Parties desire to clarify and to settle all rights of the Cohen Parties in respect of securities of the Company and registration rights relating thereto by replacing the Old Securities Rights with the rights and obligations set forth in this Settlement Agreement (the "NEW SECURITIES RIGHTS"); WHEREAS, the Company deems it to be in the best interests of all shareholders to obtain certainty and to document the outstanding rights of the Cohen Parties by replacing the Old Securities Rights with the New Securities Rights set forth in this Settlement 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. WARRANTS A list of all warrants currently held by the Cohen Parties is set forth on EXHIBIT A hereto (the "WARRANTS"). The agreements evidencing the Warrants are set forth in EXHIBIT B hereto (the "WARRANT AGREEMENTS"). Dr. Robert Cohen agrees that the Warrant Agreement in his name for 16,666 shares at an exercise price of $3.50 per share should have been in the name of Lenore Katz as specified on EXHIBIT A and is hereby deemed to be in the name of Lenore Katz. Jeffrey Rubin agrees that the Warrant Agreement in his name for 10,000 shares at an exercise price of $3.50 per share should have been in the name of Stefanie Rubin as specified on EXHIBIT A and is hereby deemed to be in the name of Stefanie Rubin. The Warrant Agreements shall continue to govern the terms of the Warrants except as modified by Section 2 of this Settlement Agreement. 2. EXERCISE PERIOD FOR THE WARRANTS The last date on which each of the Warrants may be exercised shall be the later of: (i) the date on which the Company's common stock ("COMMON STOCK") underlying such Warrant has been registered under an effective registration statement for a period of 120 days (whether or not consecutive), provided, however, (i) such 120-day period does not commence unless and until the Company has amended its Articles of Incorporation to increase the number of authorized shares of Common Stock to allow for issuance of a sufficient number of shares of Common Stock underlying the Warrants; (ii) such 120-day period shall be tolled for the number of days that the Cohen Party holding such Warrant is restricted or prohibited by the Company, any underwriter or by law from selling their Registrable Securities or the registration statement covering the Registrable 1 Securities is not effective; and (iii) such 120-day period shall be tolled until the closing price for the Company's Common Stock is greater than the Warrant exercise price for 20 trading days (each, a "Pricing Day") (of which at least five Pricing Days must be consecutive trading days); or (ii) 11:59 p.m. (Pacific Time) on the last exercise date as set forth in EXHIBIT A hereto for such Warrant. 3. OPTIONS TO PURCHASE PREFERRED STOCK Stefanie Rubin currently holds an option to purchase 200 shares of the Company's Series B Preferred Stock (the "SERIES B OPTION") and an option to purchase 250 shares of a new class of Preferred Stock of the Company designated as Series C Preferred Stock (the "SERIES C OPTION"). Stefanie Rubin shall sell to the Company and the Company shall purchase the Series B and Series C Options from Stefanie Rubin for an aggregate purchase price of $85,000 payable on or before November 5, 1998 (the "OPTION PAYMENT"). The Option Payment shall be delivered to Robert Matlin of Camhy Karlinsky & Stein LLP and, upon receipt of such payment, the Series B and Series C Options shall terminate and Stefanie Rubin shall have no further rights in respect of such Series B and Series C Options. 4. REDEMPTION OF WARRANTS In the event that at the next meeting of the Company's shareholders, which is expected to occur no later than April 30, 1999 (the "SHAREHOLDERS MEETING"), the shareholders do not approve an increase in the number of authorized shares of Common Stock that is sufficient to permit the exercise of the Warrants, the holders of the Warrants shall be entitled to have the Company redeem all or any part of their Warrants, at the holders' sole option, at any time during the 120 days following the earlier of April 30, 1999 or the Shareholders Meeting (the "REDEMPTION PERIOD"). The holders of the Warrant shall elect to redeem by sending a notice to the Company's President (the "REDEMPTION NOTICE"). To be effective, the Redemption Notice must be received by the Company's President by personal delivery, facsimile, overnight delivery service or certified mail during the Redemption Period. The Redemption Notice shall be deemed received on the day of delivery if sent by personal delivery or facsimile sent prior to 5:00 p.m. (Pacific Time), the next business day following deposit with an overnight delivery service or facsimile sent after 5:00 p.m. (Pacific Time) and on the date of receipt if sent by certified mail. In the event that the Company's shareholders do not approve an increase in the number of authorized shares of Common Stock sufficient enough to cover the Common Stock underlying the Warrants at the next Shareholders Meeting, the Company shall proceed at each subsequent annual and special meeting to include a proposal to increase the number of authorized shares of Common Stock until such approval is obtained. The redemption price for the Warrants shall be the difference between the Warrant exercise price set forth in EXHIBIT A and the average closing price for the Company's Common Stock during the 20 trading days prior to the date of receipt of the Redemption Notice (the "REDEMPTION PRICE"). The Company shall not be obligated to redeem the Warrants if it is not permitted to do so under applicable law, including applicable provisions of the California Corporations Code, and the Redemption Period shall be tolled until the Company is legally permitted to complete the redemption. If the Company is legally permitted to redeem some, but not all of the Warrants tendered for redemption, the Company shall redeem such Warrants in the order of receipt of the Redemption Notices. To the extent that the Company cannot redeem all Warrants that are the subject of a Redemption Notice on a single date, the Company shall redeem such Warrants on a pro-rata basis among the tendering holders and the Company shall extend the Redemption Period on the balance of the Warrants tendered for redemption until the date that the Company is permitted to redeem the balance of the Warrants. In any event, the Redemption Price shall be the price as calculated on the date of receipt of the Redemption Notice. 5. REGISTRATION RIGHTS. The Cohen Parties owning Warrants shall have the registration rights set forth below in respect of the Warrants and shares of Common Stock underlying the Warrants (the "REGISTRABLE SECURITIES"). These registration rights are granted to the holders of the Warrants 2 and may not be transferred to any other person without the prior written consent of the Company unless such transfer is to another member of the Cohen Parties. (a) SHELF REGISTRATION. (i) At the Company's election or (ii) upon the written request of the holders of not less than 50% of the Registrable Securities at any time following August 5, 1999 and provided that the Company is eligible to use Form S-3 (or a comparable form permitting substantial incorporation by reference), the Company shall file a "shelf" registration statement on any appropriate form pursuant to Rule 415 (or similar rule that may be adopted by the SEC) under the Securities Act (a "SHELF REGISTRATION") for all of the then Registrable Securities, subject to the request of any holder to exclude any Registrable Securities as provided below. Within ten (10) days after receipt of a request for a Shelf Registration, the Company shall give written notice of such registration (i) to all holders of Registrable Securities in the event of an election by the Company or (ii) to all non-requesting holders of Registrable Securities in the event of a request by the holders. The Company shall exclude from such registration all Registrable Securities with respect to which the Company received written requests for exclusion therefrom within fifteen (15) days after the receipt of the notice by the applicable holder. The Company hereby agrees to file such Shelf Registration as promptly as practicable, but not later than forty-five (45) days following the request therefor and thereafter to use its best efforts to cause such Shelf Registration to become effective as soon as possible. The Company further agrees to keep the Shelf Registration continuously effective for a period of 120 days following the date that the Securities and Exchange Commission ("SEC") declares the Shelf Registration effective, or such shorter period as shall terminate on the date on which all the Registrable Securities covered by the Shelf Registration have been sold pursuant to such Shelf Registration. If the Shelf Registration is not effective at any time during such 120-day period, the Company shall use its best efforts to make it effective as soon as possible. The Company shall only be obligated to file one Shelf Registration and the tolling of the exercise period for all Warrants under Section 2 of this Settlement Agreement on account of Section 2(i)shall terminate upon the conclusion of the 120 day registration period regardless of whether all Underlying Common were included in such registration unless such failure to be included was at the Company's election. The Company further agrees to supplement or make amendments to the Shelf Registration, if required by the rules, regulations or instructions applicable to the registration form utilized by the Company or by the Securities Act or rules and regulations thereunder for shelf registration or requested by the holders of a majority of the Registrable Securities covered by such registration or any underwriter of the Registrable Securities. If the holders of a majority of the Registrable Securities being registered so elect, the offering of Registrable Securities pursuant to a Shelf Registration shall be in the form of a registration in which the Registrable Securities are sold to an underwriter (an "UNDERWRITTEN OFFERING"). If the managing underwriter or underwriters of such offering advise the Company and the holders of Registrable Securities in writing that in their opinion the number of shares of Registrable Securities requested to be included in such offering is too large and would materially and adversely affect the success of such offering, the Company will include in such offering the aggregate number of Registrable Securities which in the opinion of such managing underwriter or underwriters can be sold without any such material adverse effect and the amount to be offered for the accounts of all of such holders shall be reduced pro rata (according to the Registrable Securities beneficially owned by such holders) to the extent necessary to reduce the total amount of securities to be included in such offering to the amount recommended by such managing underwriter or underwriters. To the extent that the underwriter excludes any Registrable Securities, the holders of such Registrable Securities shall not lose any other registration rights. Unless the holders of a majority of the Registrable Securities to be included in such offering shall consent in writing, no other party, including the Company, shall be permitted to offer securities in any such offering. (b) DEMAND REGISTRATION. If all of the Registrable Securities have not been registered before May 5, 2001, then at any time after May 5, 2001, the holders of not less than 50% of the Registrable Securities may make a written request (the "DEMAND NOTICE") for registration under the Securities Act (a "DEMAND REGISTRATION") of the Registrable Securities held by them; PROVIDED, HOWEVER, that in lieu of making such Demand Registration, the Company may, at its election, by notice to the holders of such Registrable Securities, redeem the Warrants for cash in an amount equal to the difference between (i) the fair market value of the Registrable Securities and (ii) the exercise price for such Warrants as set forth in EXHIBIT A. For purposes of this Settlement Agreement, the fair market value of the Registrable Securities shall be determined as follows: 3 (i) if the security is listed on any established stock exchange or a national market system, including, without limitation, the National Market System or the SmallCap Market of the National Association of Securities Dealers Automated Quotation System, its fair market value shall be the average closing sales price (or the closing bid if no sales were reported) for the 20 trading days prior to the date of receipt of the Demand Notice as reported in THE WALL STREET JOURNAL or similar publication; (ii) if the security is regularly quoted by a recognized securities dealer but selling prices are not reported, its fair market value shall be the average of the mean between the high bid and low asked prices for the security for the 20 trading days prior to the date of receipt of the Demand Notice; or (iii) in the absence of an established market for the security, the fair market value shall be determined in good faith by the Company's Board of Directors, with reference to the Company's net worth, prospective earning power, dividend-paying capacity and other relevant factors, including the goodwill of the Company, the economic outlook in the Company's industry, the Company's position in the industry and its management and the values of stock of other corporations in the same or a similar line of business (all of such factors determined as of the date of the Demand Notice). Within ten (10) days after receipt of each Demand Notice, the Company shall give written notice of such registration request to all non-requesting holders of Registrable Securities and shall, subject to the provisions of the following paragraph, include in such registration all Registrable Securities with respect to which the Company received written requests for inclusion therein within fifteen (15) days after the receipt of the notice of such demand registration request by the applicable holder. Both the Demand Notice and any request to have Registrable Securities included in a Demand Registration will specify the number of shares of Registrable Securities proposed to be sold and will also specify the intended method of disposition thereof. Unless the holders of a majority of the Registrable Securities to be included in such registration shall consent in writing, no other party, including the Company, shall be permitted to offer securities under any such Demand Registration. The Company shall not be obligated to effect more than one Demand Registration under this Section 5(b), PROVIDED, HOWEVER, that if the Shelf Registration is declared effective by the SEC in accordance with Section 5(a), then the Company shall not be obligated to effect any Demand Registrations under this Section 5(b) unless a holder of Registrable Securities was excluded from the Shelf Registration. A registration requested pursuant to this Section 5(b) will not be deemed to have been effected unless the Registration Statement relating thereto has become effective under the Securities Act; provided, however , that if, after such Registration Statement has become effective, the offering of the Registrable Securities pursuant to such registration is interfered with by any stop order, injunction or other order or requirement of the SEC or other governmental agency or court, such registration will be deemed not to have been effected. Holders of a majority of the Registrable Securities with respect to which registration has been requested pursuant to this Section 5(b) may, at any time prior to the effective date of the Registration Statement relating to such registration, revoke such request with respect to their Registrable Securities by providing a written notice to the Company revoking such request; PROVIDED, HOWEVER, that the Company shall have no further obligation to register such Registrable Securities that are the subject of a revocation pursuant to Section 5(b), but all other registration rights under Section 5(c) shall remain in effect. If the holders of a majority of the Registrable Securities being registered so elect, the offering of Registrable Securities pursuant to a Demand Registration shall be in the form of an Underwritten Offering. If the managing underwriter or underwriters of such offering advise the Company and the holders of Registrable Securities in writing that in their opinion the number of shares of Registrable Securities requested to be included in such offering is sufficiently large to materially and adversely affect the success of such offering, the Company will include in such registration the aggregate number of Registrable Securities which in the opinion of such managing underwriter or underwriters can be sold without any such material adverse effect, and the amount of Registrable Securities to be offered for the accounts of all of such holders shall be reduced pro rata (according to the Registrable Securities beneficially owned by such holders) to the extent necessary to reduce the total amount of securities to be included in such offering to the amount recommended by such managing underwriter or underwriters. 4 (c) INCIDENTAL REGISTRATION. If at any time prior to the date that all Registrable Securities have been registered (and provided that the Company has not already registered the Registrable Securities for 120 days), the Company proposes to file a registration statement under the Securities Act (other than in connection with the Shelf Registration, or a Registration Statement on Form S-4 or S-8, or any form substituting therefor) with respect to an offering of any class of security by the Company for its own account or for the account of any of its security holders, then the Company shall give written notice of such proposed filing to the holders of the Registrable Securities as soon as practicable (but in no event less than thirty days before the anticipated filing date), and such notice shall offer such holders the opportunity to register such number of Registrable Securities as each such holder may request. Each holder of Registrable Securities desiring to have its Registrable Securities registered under this subsection 5(c) shall so advise the Company in writing within 20 days after the date of receipt of such notice from the Company (which request shall set forth the number of Registrable Securities for which registration is requested). The Company shall include in such Registration Statement all such Registrable Securities so requested to be included therein, and, if such registration is an Underwritten Registration, the Company shall use its best efforts to cause the managing underwriter or underwriters to permit the Registrable Securities requested to be included in the Registration Statement for such offering to be included (on the same terms and conditions as similar securities of the Company included therein to the extent appropriate); provided, however, that if the managing underwriter or underwriters of such offering deliver a written opinion to the holders of such Registrable Securities that the total number of securities that the Company, the holders of Registrable Securities, or such other persons propose to include in suc offering is such that the success of the offering would be materially and adversely affected by inclusion of the securities requested to be included, then the amount of securities to be offered for the accounts of the Company, the holders of Registrable Securities and other holders registering securities pursuant to registration rights shall be allocated as follows: (i) if such registration has been initiated by the Company as a primary offering, FIRST to the securities sought to be included by the Company, and SECOND to the Registrable Securities sought to be included by the holders thereof and the securities sought to be included by other holders of registration rights, pro rata, on the basis of the number of securities owned by each such holder; and (ii) if such registration has been initiated by another holder of registration rights, FIRST to the securities sought to be included by such demanding holder, SECOND to the securities sought to be included by the Company, and third to the Registrable Securities sought to be included by the holders thereof and to all other securities sought to be included by other holders of registration rights, pro rata, on the basis of the number of securities owned by each such holder. 6. HOLD-BACK AGREEMENTS. (a) RESTRICTIONS ON PUBLIC SALE BY HOLDER OF REGISTRABLE SECURITIES. Each holder of Registrable Securities whose Registrable Securities are covered by a Registration Statement filed pursuant to Section 5 hereof agrees, if requested in writing by the managing underwriters in an Underwritten Offering, not to effect any public sale or distribution of securities of the Company of the same class as the securities included in such Registration Statement, including a sale pursuant to Rule 144 under the Securities Act (except as part of such Underwritten Registration), during the 10-day period prior to the filing of a Registration Statement with respect to such Underwritten Offering, and during the 90-day period beginning on the closing date of each Underwritten Offering made pursuant to such Registration Statement (the "Block-Out Period"), to the extent timely notified in writing by the Company or the managing underwriters. (b) RESTRICTIONS ON SALE OF SECURITIES BY THE COMPANY. The Company agrees not to effect any public sale or distribution of any securities similar to those being registered, or any securities convertible into or exchangeable or exercisable for such securities (except pursuant to a registration statement on Form S-4 or S-8, or any substitute form that may be adopted by the SEC) during the ten days prior to the filing of a registration statement with respect to such Underwritten Offering, and during the 90-day period beginning on the effective date of any Registration Statement (except as part of such registration statement (x) where the holders of a majority of the shares of Registrable Securities to be included in such registration statement consent or (y) where holders of Registrable Securities are participating in such registration statement pursuant to Section 5(c) hereof, such registration statement was filed by the Company with respect to the sale of securities by the Company, and no holder 5 is simultaneously participating in a registration statement pursuant to Section 5(b) hereof) or the commencement of a public distribution of Registrable Securities pursuant to such registration statement. 7. REGISTRATION PROCEDURES. In connection with the Company's registration obligations pursuant to Section 5 hereof, the Company will use its best efforts to effect such registration to permit the sale of such Registrable Securities in accordance with the intended method or methods of distribution thereof, and pursuant thereto the Company will as expeditiously as possible: (a) prepare and file with the SEC, as soon as practicable, a Registration Statement relating to the applicable registration on any appropriate form under the Securities Act, which forms shall be available for the sale of the Registrable Securities in accordance with the intended method or methods of distribution thereof and shall include all financial statements of the Company, and use its best efforts to cause such Registration Statement to become effective; provided that before filing a Registration Statement or Prospectus or any amendments or supplements thereto, including documents incorporated by reference after the initial filing of the Registration Statement, the Company will furnish one counsel selected by the holders of a majority of the shares of Registrable Securities covered by such registration statement, and the underwriters, if any, copies of all such documents proposed to be filed, which documents will be subject to the review of such counsel and underwriters, and the Company will not file any Registration Statement or amendment thereto or any prospectus or any supplement thereto (including such documents incorporated by reference) to which such counsel or the underwriters, if any, shall reasonably object; (b) prepare and file with the SEC such amendments and post-effective amendments to the Registration Statement as may be necessary to keep the Registration Statement effective for the applicable period, or such shorter period which will terminate when all Registrable Securities covered by such Registration Statement have been sold; cause the Prospectus to be supplemented by any required prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Securities Act; and comply with the provisions of all securities covered by such Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the sellers thereof set forth in such Registration Statement or supplement to the prospectus; the Company shall not be deemed to have used its best efforts to keep a Registration Statement effective during the applicable period if it voluntarily takes any action that would result in the holders of the Registrable Securities covered thereby not being able to sell such Registrable Securities during that period unless such action is required under applicable law; provided that the foregoing shall not apply to actions taken by the Company in good faith and for valid business reasons, including without limitation the acquisition or divestiture of assets, so long as the Company promptly thereafter complies with the requirements of Section 7(l) hereof, if applicable; (c) notify the selling holders of Registrable Securities and the managing underwriters, if any, promptly, and confirm such advice in writing, (1) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to the Registration Statement or any post-effective amendment, when the same has become effective, (2) of any request by the SEC for amendments or supplements to the Registration Statement or the Prospectus or for additional information, (3) of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose, (4) if at any time the representations and warranties of the Company contemplated by paragraph (n) below cease to be true and correct, (5) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose and (6) of the happening of any event which makes any statement made in the Registration Statement, the Prospectus or any document incorporated therein by reference untrue or which requires the making of any changes in the Registration Statement, the Prospectus or any document incorporated therein by reference in order to make the statements therein not misleading; (d) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of the Registration Statement at the earliest possible moment; (e) if reasonably requested by the managing underwriter or underwriters or a holder of Registrable Securities being sold in connection with an Underwritten Offering, promptly incorporate in a Prospectus supplement or post-effective amendment such information as the managing underwriters and the holders of a 6 majority in number of the Registrable Securities being sold agree should be included therein relating to the sale of the Registrable Securities, including, without limitation, information with respect to the number of Registrable Securities being sold to such underwriters, the purchase price being paid therefor by such underwriters and with respect to any other terms of the Underwritten (or best efforts underwritten) Offering of the Registrable Securities to be sold in such offering; and make all required filings of such prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such prospectus supplement or post-effective amendment; (f) promptly prior to the filing of any document which is to be incorporated by reference into the Registration Statement or the prospectus (after initial filing of the Registration Statement), make available representatives of the Company for discussion of such document and make such changes in such document prior to the filing thereof as counsel for such selling holders or underwriters may reasonably request; (g) furnish to each selling holder of Registrable Securities and each managing underwriter, without charge, at least one signed copy of the Registration Statement and any post-effective amendment thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits (including those incorporated by reference); (h) deliver to each selling holder of Registrable Securities and the underwriters, if any, without charge, as many copies of the prospectus (including each preliminary prospectus) and any amendment or supplement thereto as such Persons may reasonably request; the Company consents to the use of the prospectus or any amendment or supplement thereto by each of the selling holders of Registrable Securities and the underwriters, if any, in connection with the offering and sale of the Registrable Securities covered by the prospectus or any amendment or supplement thereto; (i) prior to any public offering of Registrable Securities, register or qualify or cooperate with the selling holders of Registrable Securities, the underwriters, if any, and their respective counsel in connection with the registration or qualification of such Registrable Securities for offer and sale under the securities or blue sky laws of such jurisdictions as any seller or underwriter reasonably requests in writing and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by the Registration Statement; (j) cooperate with the selling holders of Registrable Securities and the managing underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends; and enable such Registrable Securities to be in such denominations and registered in such names as the managing underwriters may request at least two business days prior to any sale of Registrable Securities to the underwriters; (k) cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof or the underwriters, if any, to consummate the disposition of such Registrable Securities; (1) upon the occurrence of any event contemplated by Section 7(c)(6) above, prepare a supplement or post-effective amendment to the Registration Statement or the related prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, the prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading; (m) cause all Registrable Securities covered by the Registration Statement to be listed on each securities exchange on which similar securities issued by the Company are then listed; (n) enter into such agreements (including an underwriting agreement) and take all such other actions in connection therewith in order to expedite or facilitate the disposition of such Registrable Securities and in connection therewith, whether or not an underwriting agreement is entered into and whether or not the registration is an Underwritten Registration, (1) make such representations and warranties to the holders of such Registrable Securities and the underwriters, if any, in form, substance and scope as are customarily made by issuers to 7 underwriters in primary underwritten offerings; (2) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managing underwriters, if any, and the holders of a majority of the Registrable Securities included in such registration, covering the matters customarily covered in opinions requested in Underwritten Offerings and such other matters as may be reasonably requested by such holders and underwriters); (3) obtain "cold comfort" letters and updates thereof from the Company's independent certified public accountants addressed to the selling holders of Registrable Securities and the underwriters, if any, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters by underwriters in connection with primary Underwritten Offerings; (4) if an underwriting agreement is entered into, the same shall set forth in full the indemnification provisions and procedures of Section 9 hereof with respect to all parties to be indemnified pursuant to said Section; and (5) the Company shall deliver such documents and certificates as may be requested by the holders of a majority of the Registrable Securities being sold and the managing underwriters, if any, to evidence compliance with clause (1) above and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. The above shall be done at each closing under such underwriting or similar agreement or as and to the extent required thereunder; (o) make available for inspection by a representative of the holders of the Registrable Securities, any underwriter participating in any disposition pursuant to such registration, and any attorney or accountant retained by the sellers or underwriter, all financial and other records, pertinent corporate documents and properties of the Company and cause the Company's officers, directors and employees to supply all information reasonably requested by any such representative, underwriter, attorney or accountant in connection with such registration; provided that any records, information or documents that are designated by the Company in writing as confidential shall be kept confidential by such Persons unless disclosure of such records, information or documents is required by court or administrative order; (p) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering a period of 12 months, beginning within three months after the effective date of the registration statement, which earnings statement shall satisfy the provisions of section 11(a) of the Securities Act; and (q) cooperate with each seller of Registrable Securities and each underwriter participating in the disposition of such Registrable Securities and their respective counsel in connection with any filings required to be made with the National Association of Securities Dealers, Inc. (the "NASD"). The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish to the Company such information regarding the distribution of such securities as the Company may from time to time reasonably request in writing. Each holder of Registrable Securities agrees by acquisition of such Registrable Securities that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 7(l) hereof, such holder will forthwith discontinue disposition of Registrable Securities until such holder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 7(l) hereof, or until it is advised in writing (the "ADVICE") by the Company that the use of the prospectus may be resumed, and has received copies of any additional or supplemental filings which are incorporated by reference in the prospectus, and, if so directed by the Company such holder will deliver to the Company (at the Company's expense), all copies, other than permanent file copies then in such holder's possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice. In the event the Company shall give any such notice, the time periods regarding the effectiveness of Registration Statements set forth in Section 5 hereof and Section 7(b) hereof shall be extended by the number of days during the period from and including the date of the giving of such notice pursuant to Section 7(c)(6) hereof to the date when the selling holders of Registrable Securities covered by such registration statement shall receive copies of the supplemented or amended prospectus contemplated by Section 7(l) hereof or the Advice. 8. REGISTRATION EXPENSES. All expenses incident to the Company's performance of or compliance with this Settlement Agreement, including without limitation: all registration and filing fees; fees with respect to filings required to be made with the NASD; fees and expenses of compliance with 8 securities or blue sky laws (including fees and disbursements of counsel for the underwriters of Registrable Securities in connection with blue sky qualifications of the Registrable Securities and determination of their eligibility for investment under the laws of such jurisdictions as the managing underwriters or holders of a majority of the Registrable Securities being sold may designate); printing expenses, messenger, telephone and delivery expenses; fees and disbursements of counsel for the Company and customary fees and expenses for independent certified public accountants retained by the Company (including the expenses of any comfort letters or costs associated with the delivery by independent certified public accountants of a comfort letter or comfort letters requested pursuant to Section 7(n) hereof); securities acts liability insurance, if the Company so desires; all internal expenses of the Company (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties); the expense of any annual audit; the fees and expenses incurred in connection with the listing of the securities to be registered on each securities exchange on which similar securities issued by the Company are then listed; and the fees and expenses of any person, including special experts, retained by the Company (all such expenses being herein called "REGISTRATION EXPENSES") will be borne by the Company regardless of whether the Registration Statement becomes effective. The Company shall not have any obligation to pay any underwriting discounts, commissions or similar fees attributable to the sale of Registrable Securities, or any legal fees and expenses of counsel to the holders of Registrable Securities. 9. INDEMNIFICATION: CONTRIBUTION. (a) INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify and hold harmless each holder of Registrable Securities and its partners, and their respective partners, officers, directors, employees and agents, and each person who controls such person (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) against all losses, claims, damages, liabilities and expenses arising out of or based upon any untrue or alleged untrue statement of a material fact contained in any Registration Statement, prospectus or preliminary prospectus or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information furnished in writing to the Company by the holders of Registrable Securities expressly for use therein. The Company will also indemnify underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, their officers and directors and each person who controls such persons (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) to the same extent as provided above with respect to the indemnification of the holders of Registrable Securities, if requested. (b) INDEMNIFICATION BY HOLDER OF REGISTRABLE SECURITIES. Each holder of Registrable Securities agrees to indemnify and hold harmless the Company and its directors, officers, employees and agents, and each person who controls the Company (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) against any losses, claims, damages, liabilities and expenses resulting from any untrue statement of a material fact or any omission of a material fact required to be stated in the Registration Statement or prospectus or preliminary prospectus or necessary to make the statements therein not misleading, to the extent, but only to the extent, that such untrue statement or omission is contained in any information or affidavit so furnished in writing by such holder to the Company specifically for inclusion in such Registration Statement or prospectus. In no event shall the liability of any selling holder of Registrable Securities hereunder be greater in amount than the dollar amount of the proceeds received by such holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, to the same extent as provided above with respect to information so furnished in writing by such persons specifically for inclusion in any prospectus or Registration Statement. (c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. Any Person entitled to indemnification hereunder will (i) give prompt notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party; provided, however , that any person entitled to indemnification hereunder shall have the right to employ separate counsel and to participate in the defense of such claim, but the fees and expenses of such counsel shall be at the expense of such person unless (a) the indemnifying party has agreed to 9 pay such fees or expenses, (b) the indemnifying party shall have failed to assume the defense of such claim and employ counsel reasonably satisfactory to such person or (c) based upon written advice of counsel to such person, there shall be one or more defenses available to such person that are not available to the indemnifying party or there shall exist conflicts of interest pursuant to applicable rules of professional conduct between such person and the indemnifying party (in which case, if the person notifies the indemnifying party in writing that such person elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such claim on behalf of such person), in each of which events the fees and expenses of such counsel shall be at the expense of the indemnifying party. The indemnifying party will not be subject to any liability for any settlement made without its consent (but such consent will not be unreasonably withheld), but if settled with its written consent, or if there be a final judgment for the plaintiff in any such action or proceeding, the indemnifying party shall indemnify and hold harmless the indemnified parties from and against any loss or liability (to the extent stated above) by reason of such settlement or judgment. No indemnified party will be required to consent to entry of any judgment or enter into any settleent which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. (d) CONTRIBUTION. If for any reason the indemnification provided for in the preceding clauses (a) and (b) is unavailable to an indemnified party or insufficient to hold it harmless as contemplated by the preceding clauses (a) and (b), then the indemnifying party shall contribute to the amount paid or payable by the indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect not only the relative benefits received by the indemnified party and the indemnifying party, but also the relative fault of the indemnified party and the indemnifying party, as well as any other relevant equitable considerations, provided, that no holder of Registrable Securities shall be required to contribute an amount greater than the dollar amount of the proceeds received by such holder with respect to the sale of the Registrable Securities giving rise to such indemnification obligation. The relative fault of the Company on the one hand and of the selling holders on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such party, and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 10(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentations. 10. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. (a) If any of the Registrable Securities covered by the Shelf Registration are to be sold in an Underwritten Offering, the investment banker or investment bankers and manager or managers that will administer the offering will be selected by the holders of a majority of the Registrable Securities included in such offering; provided that such investment bankers and managers must be reasonably satisfactory to the Company. (b) No Person may participate in any underwritten registration hereunder unless such person (i) agrees to sell such person's securities on the basis provided in any underwriting arrangements approved by the persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. Nothing in this Section 10 shall be construed to create any additional rights regarding the registration of Registrable Securities in any Person otherwise than as set forth herein. 11. EFFECT OF AGREEMENT This Settlement Agreement supersedes all prior oral or written agreements relating to the Old Securities Rights, including but not limited that certain agreement dated January 27, 1997, by and between the Company and Jeff Rubin, a copy of which is attached to this Settlement Agreement as EXHIBIT C. The Cohen Parties and the Company agree that other than the Preferred Stock that is being transferred on November 5, 1998 pursuant to the agreement between the Cohen Parties and John P. Casey dated as of July 15, 1998, as extended, and as set forth in this Settlement Agreement, the Cohen Parties, as of the date of this Settlement Agreement: (i) do not own and are not entitled to be granted any options, warrants, Preferred Stock or convertible securities of the Company, (ii) are not entitled to be issued any additional securities in the Company, (iii) are not entitled to registration rights in 10 respect of any of the Company's securities and (iv) are not owed any fees or other compensation by the Company, GenSource Corporation or National Telephone & Communications, Inc. 12. RELEASE OF CLAIMS Upon the execution of this Settlement Agreement and receipt of the Option Payment as set forth in Section 3 hereof, the Cohen Parties fully and forever release and discharge the Company and any of its past, present and future affiliates, employees, officers, directors, shareholders, attorneys, accountants, successors and predecessors from any and all claims, demands, obligations, losses, damages or cause of action of any nature relating to the Old Securities Rights (other than for a breach of this Settlement Agreement by the Company), 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 and actions occurring prior to the effective date of this release. The Cohen Parties agree that this release shall not be considered an admission by any party of any liability or wrongdoing. The Cohen Parties warrant that no promises or inducement has been offered except as set forth herein. The Cohen Parties are of legal age (or are represented by a guardian who is of legal age) and are legally competent (or their legal guardian is legally competent) to execute this release and accept full responsibility therefor. The Cohen Parties declare that the terms of this full and final release of claims have been completely read by the Cohen Parties and are fully understood and voluntarily accepted for the purpose of making a full and final compromise and settlement. The Cohen Parties hereby represent and warrant that they have not assigned and will not assign any of their above referenced released claims to any third party. The Cohen Parties acknowledge that they are familiar with Section 1542 of the California Civil Code, which reads as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." The Cohen Parties acknowledge that they are releasing unknown claims and waive all rights they have or may have under California Civil Code Section 1542 or any other statute or common law principles of similar effect. However, the Cohen Parties are not waiving any rights or claims that may arise out of acts or events that may occur after the date of this Settlement Agreement or which do not arise out of or relate to the Old Securities Rights. 13. WAIVERS If any party shall at any time waive any rights thereunder resulting from any breach by the other party of any of the provisions of this Settlement Agreement, such waiver is not to be construed as a continuing waiver of other breaches of the same or other provisions of this Settlement 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 Settlement Agreement or otherwise. 14. SUCCESSORS AND ASSIGNS Each covenant and representation of this Settlement Agreement shall inure to the benefit of and be binding upon each of the parties, their personal representatives, assigns and other successors in interest. 15. ENTIRE AGREEMENT This Settlement 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 Settlement Agreement. This Settlement Agreement may be modified only by a written agreement signed by all parties. 11 16. GOVERNING LAW This Settlement 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. 17. COUNTERPARTS This Settlement Agreement may be executed simultaneously in any number of counterparts and by facsimile, each of which counterparts shall be deemed to be an original, and such counterparts shall constitute but one and the same instrument. 18. ATTORNEYS' FEES AND COSTS In the event that either party must resort to legal action in order to enforce the provisions of this Settlement 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 Settlement Agreement, including but not limited to post judgment costs. 19. FURTHER ACTS The parties to this Settlement 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 Settlement Agreement. 20. TIME OF ESSENCE Time is of the essence in the performance of the obligations under this Settlement Agreement. 21. AUTHORIZED SIGNATURES Each party to this Settlement Agreement hereby represents that the person signing below are duly authorized to execute this Settlement Agreement on behalf of their respective party. IN WITNESS WHEREOF, this Settlement Agreement has been entered into as of the date first above written. THE "COMPANY" INCOMNET, INC., a California corporation By: /s/ Denis Richard ----------------- Denis Richard, President "COHEN PARTIES": Robert Cohen By: /s/ Dr. Robert Cohen -------------------- Dr. Robert Cohen 12 Stefanie Rubin By: /s/ Dr. Robert Cohen -------------------- Dr. Robert Cohen, Attorney-in-Fact Allyson Cohen By: /s/ Dr. Robert Cohen -------------------- Dr. Robert Cohen, Attorney-in-Fact Jeffrey Cohen By: /s/ Dr. Robert Cohen -------------------- Dr. Robert Cohen, Attorney-in-Fact Jeffrey Rubin By: /s/ Dr. Robert Cohen -------------------- Dr. Robert Cohen, Attorney-in-Fact Alan Cohen By: /s/ Dr. Robert Cohen -------------------- Dr. Robert Cohen, Attorney-in-Fact Lenore Katz By: /s/ Dr. Robert Cohen -------------------- Dr. Robert Cohen, Attorney-in-Fact BROADWAY PARTNERS Jeffrey Cohen, Partner By: /s/ Dr. Robert Cohen -------------------- Dr. Robert Cohen, Attorney-in-Fact Meryl Cohen By: /s/ Dr. Robert Cohen -------------------- Dr. Robert Cohen, Attorney-in-Fact Meryl Cohen as custodian for Gabrielle Cohen By: /s/ Dr. Robert Cohen -------------------- Dr. Robert Cohen, Attorney-in-Fact Meryl Cohen as custodian for Jaclyn Cohen By: /s/ Dr. Robert Cohen -------------------- Dr. Robert Cohen, Attorney-in-Fact Meryl Cohen as custodian for Erica Cohen By: /s/ Dr. Robert Cohen -------------------- Dr. Robert Cohen, Attorney-in-Fact 13 Meryl Cohen as custodian for Nicole Cohen By: /s/ Dr. Robert Cohen -------------------- Dr. Robert Cohen, Attorney-in-Fact 14 EXHIBIT A WARRANTS
Number of Original Number of Underlying Exercise Exercise Name of Warrantholder Warrants Shares Price Period --------------------- --------- ---------- -------- -------- Dr. Robert Cohen 100,000 100,000 $3.75 12/9/96 - 12/9/99 Dr. Alan Cohen 100,000 100,000 $3.75 12/9/96 - 12/9/99 Jeffrey Cohen 50,000 50,000 $3.75 12/9/96 - 12/9/99 Stefanie 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 Stefanie Rubin 16,667 16,667 $3.50 7/29/97 - 7/29/99 Lenore Katz 16,666 16,666 $3.50 7/29/97 - 7/29/99 Stefanie Rubin 55,000 55,000 $2.00 11/3/97 - 11/3/99 Jeff Rubin 6,000 6,000 $1.09 1/20/98 - 1/21/2001 Dr. Robert Cohen 6,000 6,000 $1.09 1/20/98 - 1/21/2001 Dr. Alan Cohen 6,000 6,000 $1.09 1/20/98 - 1/21/2001 ------- ------- Total 466,333 466,333
15 EX-10.12 14 EXHIBIT 10.12 EXHIBIT 10.12 -- SETTLEMENT AND RELEASE AGREEMENT AMONGST INCOMNET, INC., IRONWOOD TELECOM LLC, ELLEN COHEN AND MARTIN FABRIKANT, DATED NOVEMBER 5, 1998. SETTLEMENT AGREEMENT This Settlement Agreement ("SETTLEMENT AGREEMENT") is made and entered into as of November 5, 1998, by and among Ellen Cohen, an individual ("COHEN"), Martin Fabrikant, an individual ("FABRIKANT") (collectively the "PREFERRED HOLDERS"), Ironwood Telecom LLC, a Colorado limited liability company ("LENDER") and Incomnet, Inc., a California corporation (the "COMPANY"). R E C I T A L S WHEREAS, on June 10, 1998, Fabrikant notified the Company of his election to convert all of the Company's Series A Preferred Stock then owned by him into shares of the Company's common stock ("COMMON STOCK"); WHEREAS, on June 11, 1998, Cohen notified the Company of her election to convert all of the Company's Series B Preferred Stock then owned by her into Common Stock; WHEREAS, shortly after receiving the notices of election to convert by the Preferred Holders on June 10 and June 11, 1998, the Company informed the Preferred Holders that the Company had insufficient authorized Common Stock to effect all of the conversions of the Series A and B Preferred tendered by the Preferred Holders (the "UNCONVERTIBLE PREFERRED"); WHEREAS, on or about June 18, 1998, Cohen and Fabrikant rescinded their elections to convert their Unconvertible Preferred due to the Company's failure to have a sufficient number of authorized shares of Common Stock to accommodate the conversion and with a reservation of all rights; WHEREAS, on September 29, 1998 the Company closed the Board Change Agreement entered into on August 28, 1998 among the Company, John P. Casey and the then members of the Company's Board which resulted in changes in the membership of the Company's Board of Directors and management; WHEREAS, the Company's new management is in the process of obtaining new financing by Lender and Lender is requiring as a condition to the Company obtaining new financing that this Settlement Agreement be entered into; WHEREAS, the Company desires to resolve the status of the attempted conversions in June, 1998 and obtain financing from the Lender; and WHEREAS, the Preferred Holders desire to settle their claims in respect of the Unconvertible Preferred. NOW, THEREFORE, in consideration of the foregoing and intending to be legally bound, the parties agree as follows: 1. Cash Payments and Warrants to Preferred Holders. On November 5, 1998 (i) Lender shall pay to each of the Preferred Holders the "cash payment" amount set forth opposite such Preferred Holder's name on EXHIBIT A hereto (the "CASH PAYMENT"); (ii) the Company shall issue to the Preferred Holders the Warrants also listed on EXHIBIT A hereto (the "WARRANTS"); and (iii) the Company shall execute a warrant agreement with each Preferred Holder in the form of EXHIBIT B hereto (the 1 "WARRANT AGREEMENT") in exchange for a transfer by each of the Preferred Holders to Lender of all of the Preferred Holders' right, title and interest in respect of such Preferred Holders' Unconvertible Preferred, including such Preferred Holders' rights, if any, to receive Common Stock in respect of the Unconvertible Preferred and any claims in respect of the Company's inability to deliver Common Stock upon the tender of a conversion notice in June, 1998 (the "PREFERRED STOCK RIGHTS"). Each of the Preferred Holders shall deliver a certificate representing their Unconvertible Preferred Shares with an assignment of such certificate to Lender on or before November 5, 1998. In accordance with the terms of the Warrant Agreement, each Warrant shall entitle the holder to purchase one (1) share of Common Stock at an exercise price of $1.00 per share. The Warrants may be exercised at any time during the five-year period after a meeting of the Company's shareholders at which shareholders approve an increase in the authorized number of shares of Common Stock to permit the issuance of common stock underlying the Warrants. The Cash Payment shall be delivered by wire transfer to Camhy Karlinsky & Stein LLP to the attention of Robert S. Matlin (the "Camhy Firm") and the Camhy Firm shall be responsible for distributing the Cash Payments to the Preferred Holders. 2. Assignment by Lender. Lender hereby assigns the Preferred Stock Rights to the Company on condition that (a) the Company is financially able to redeem the Preferred Stock Rights, (b) the Company reimburses Lender for the amount of the Cash Payment plus interest on the amount of the Cash Payment at an annualized rate of 18% plus reasonable out of pocket legal and other costs associated with entering into this Settlement Agreement (collectively, the "LENDER REIMBURSEMENT PAYMENT"). For purposes of determining whether the Company is financially able to redeem the Preferred Stock Rights, the Company must have cash on hand necessary to undertake such a transaction taking into account the other cash requirements of the Company and its subsidiaries and also meet all requirements under applicable law, including, if applicable, section 500 et seq. of the California General Corporation's Law and any applicable contractual restrictions. If the Company is not financially able to redeem the Preferred Stock Rights during the two-year period following the date of this Settlement Agreement, Lender shall tender the Preferred Stock Rights to the Company and the Company shall convert the Preferred Stock Rights into 1,359,265 shares of Common Stock (the "SETTLEMENT COMMON STOCK"). As soon as practicable thereafter, Lender agrees to offer such Settlement Common Stock to all shareholders on a pro rata basis. The aggregate price for the Settlement Common Stock shall be the sum of all costs attributable to the offering of the Settlement Common Stock, including SEC registration fees, state securities fees, attorneys and accounting fees and the Lender Reimbursement Payment. To the extent that the Settlement Common Stock is undersubscribed for during the initial round of the offering, Lender shall be obligated in such offering to make a second round offer on a pro rata basis to the subscribing record holders. If the offering is not fully subscribed after the second round, Lender shall be entitled to offer the balance of the Settlement Common Stock to the parties designated by it, including itself and its affiliates, in its sole discretion. Lender shall have no obligations or liabilities to the Preferred Holders, except to make the Cash Payments and to perform in accordance with the terms of Sections 1 and 2 of this Settlement Agreement. 3. Releases. Effective upon receipt of Cash Payment, delivery of the Warrant Agreements and a signed copy of this Settlement Agreement, each of the Preferred Holders agrees to forever release and discharge the Company and any of its past, present, and future affiliates, employees, officers, directors, shareholders, attorneys, accountants, successors and predecessor from any and all claims, demands, obligations, losses, damages or causes of action of any nature relating to their respective Preferred Stock Rights (other than for a breach of this Agreement or the Warrant Agreement by the Company), whether based in tort, contract or 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. The parties agree that this release shall not be considered an admission by any party of any liability or wrongdoing. The parties warrant that no promise or inducement has been offered except as set forth herein. The Preferred Holders are of legal age and legally competent to execute this release and accept full responsibility therefor. The Preferred Holders declare that the terms of this full and final release of claims have been completely read by them and are fully understood and voluntarily accepted for purposes of making a full and 2 final compromise and settlement. The Preferred Holders hereby represent and warrant that they have not assigned and will not assign any of their above-referenced released claims to any third parties. Effective upon receipt of the stock certificates representing the Unconvertible Preferred Shares, endorsed for transfer to Lender, and a signed copy of this Settlement Agreement by each of the Preferred Holders, the Company agrees to forever release and discharge the Preferred Holders from any and all claims, demands, obligations, losses, damages or causes of action of any nature relating to their respective ownership, purchase and sale of Common Stock and Series A and Series B Preferred Stock of the Company (and Common Stock underlying such Preferred Stock) (other than for breach of this Settlement Agreement), whether based on tort, contract or 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. The Company agrees that this release will not be considered an admission by any party of any liability or wrongdoing. The Company warrants that no promise or inducement has been offered except as set forth herein. The Company declares that the terms of this full and final release of claims has been completely read by it and is fully understood and voluntarily accepted for purposes of making a full and final compromise and settlement. 4. Waiver of Section 1542 of the California Civil Code. The parties further agree that in connection with the foregoing releases, that the rights under Section 1542 of the Civil Code of California, any similar law of any state or territory of the United States or any other jurisdiction, are hereby expressly waived. That 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." 5. Registration Rights. The Preferred Holders shall have the registration rights set forth below in respect of the shares of Common Stock underlying the Warrants (the "REGISTRABLE SECURITIES"). These registration rights are granted to the Preferred Holders and may not be transferred to any other person without the prior written consent of the Company which will not be unreasonably withheld, except that, such registration rights may be transferred to any affiliate of the Preferred Holders, the "COHEN PARTIES" (as defined in the Settlement and Release Agreement dated November 5, 1998 between the Company and the Cohen Parties) or any affiliates of the Cohen Parties. (a) SHELF REGISTRATION. (i) At the Company's election or (ii) upon the written request of the holders of not less than 50% of the Registrable Securities at any time following August 5, 1999 and provided that the Company is eligible to use Form S-3 (or a comparable form permitting substantial incorporation by reference), the Company shall file a "shelf" registration statement on any appropriate form pursuant to Rule 415 (or similar rule that may be adopted by the SEC) under the Securities Act (a "SHELF REGISTRATION") for all of the then Registrable Securities, subject to the request of any holder to exclude any Registrable Securities as provided below. Within ten (10) days after receipt of a request for a Shelf Registration, the Company shall give written notice of such registration request to all non-requesting holders of Registrable Securities. The Company shall exclude from such registration all Registrable Securities with respect to which the Company received written requests for exclusion therefrom within fifteen (15) days after the receipt of the notice by the applicable holder. The Company hereby agrees to file such Shelf Registration as promptly as practicable but not later than forty-five (45) days following the request therefor and thereafter to use its best efforts to cause such Shelf Registration to become effective as soon as possible. The Company further agrees to keep the Shelf Registration continuously effective for a period of 120 days following the date that the Securities and Exchange Commission ("SEC") declares the Shelf Registration effective, or such shorter period as shall terminate on the date on which all the Registrable Securities covered by the Shelf Registration have been sold pursuant to such Shelf Registration. The 3 Company shall only be obligated to file one Shelf Registration. If the Shelf Registration is not effective at any time during such 120-day period, the Company shall use its best efforts to make it effective as soon as possible. The Company shall have no further obligation to register such Registrable Securities once the Company has offered to register the Registrable Securities on a Shelf Registration The Company further agrees to supplement or make amendments to the Shelf Registration, if required by the rules, regulations or instructions applicable to the registration form utilized by the Company or by the Securities Act or rules and regulations thereunder for shelf registration or requested by the holders of a majority of the Registrable Securities covered by such registration or any underwriter of the Registrable Securities. If the holders of a majority of the Registrable Securities being registered so elect, the offering of Registrable Securities pursuant to a Shelf Registration shall be in the form of a registration in which the Registrable Securities are sold to an underwriter (an "UNDERWRITTEN OFFERING"). If the managing underwriter or underwriters of such offering advise the Company and the holders of Registrable Securities in writing that in their opinion the number of shares of Registrable Securities requested to be included in such offering is sufficiently large to materially and adversely affect the success of such offering, the Company will include in such offering the aggregate number of Registrable Securities which in the opinion of such managing underwriter or underwriters can be sold without any such material adverse effect and the amount to be offered for the accounts of all of such holders shall be reduced pro rata (according to the Registrable Securities beneficially owned by such holders) to the extent necessary to reduce the total amount of securities to be included in such offering to the amount recommended by such managing underwriter or underwriters. To the extent that the underwriter excludes any Registrable Securities, the holders of such Registrable Securities shall not loose any other registration rights. Unless the holders of a majority of the Registrable Securities to be included in such offering shall consent in writing, no other party, including the Company, shall be permitted to offer securities in any such offering. (b) DEMAND REGISTRATION. If all of the Registrable Securities have not been registered before May 5, 2001, then at any time after May 5, 2001, the holders of not less than 50% of the Registrable Securities may make a written request (the "DEMAND NOTICE") for registration under the Securities Act (a "DEMAND REGISTRATION") of the Registrable Securities held by them; PROVIDED, HOWEVER, that in lieu of making such Demand Registration, the Company may, at its election, by notice to the holders of such Registrable Securities, redeem the Warrants for cash in an amount equal to the difference between (i) the fair market value of the Registrable Securities and (ii) the exercise price for such Warrants. For purposes of this Agreement, the fair market value of the Registrable Securities shall be determined as follows: (i) if the security is listed on any established stock exchange or a national market system, including, without limitation, the National Market System or the SmallCap Market of the National Association of Securities Dealers Automated Quotation System, its fair market value shall be the average closing sales price (or the closing bid if no sales were reported) for the 20 trading days prior to the date of receipt of the Demand Notice as reported in THE WALL STREET JOURNAL or similar publication; (ii) if the security is regularly quoted by a recognized securities dealer but selling prices are not reported, its fair market value shall be the average of the mean between the high bid and low asked prices for the security for the 20 trading days prior to the date of receipt of the Demand Notice; or (iii) in the absence of an established market for the security, the fair market value shall be determined in good faith by the Company's Board of Directors, with reference to the Company's net worth, prospective earning power, dividend-paying capacity and other relevant factors, including the goodwill of the Company, the economic outlook in the Company's industry, the Company's position in the industry and its management and the values of stock of other corporations in the same or a similar line of business (all of such factors determined as of the date of the Demand Notice). Within ten (10) days after receipt of each Demand Notice, the Company shall give written notice of such registration request to the non-requesting holder of Registrable Securities and shall, subject to the provisions of the following paragraph, include in such registration all Registrable Securities with respect to which the Company received written requests for inclusion therein within fifteen (15) days after the receipt of the notice of such demand 4 registration request by the applicable holder. Both the Demand Notice and any request to have Registrable Securities included in a Demand Registration will specify the number of shares of Registrable Securities proposed to be sold and will also specify the intended method of disposition thereof. Unless the holders of a majority of the Registrable Securities to be included in such registration shall consent in writing, no other party, including the Company, shall be permitted to offer securities under any such Demand Registration. The Company shall not be obligated to effect more than one Demand Registration under this Section 5(b), PROVIDED, HOWEVER, that if the Shelf Registration is declared effective by the SEC in accordance with Section 5(a), then the Company shall not be obligated to effect any Demand Registrations under this Section 5(b) unless a holder of Registrable Securities was excluded from participating in the Shelf Registration. A registration requested pursuant to this Section 5(b) will not be deemed to have been effected unless the Registration Statement relating thereto has become effective under the Securities Act; provided, however, that if, after such Registration Statement has become effective, the offering of the Registrable Securities pursuant to such registration is interfered with by any stop order, injunction or other order or requirement of the SEC or other governmental agency or court, such registration will be deemed not to have been effected. Holders of a majority of the Registrable Securities with respect to which registration has been requested pursuant to this Section 5(b) may, at any time prior to the effective date of the Registration Statement relating to such registration, revoke such request with respect to their Registrable Securities by providing a written notice to the Company revoking such request; PROVIDED, HOWEVER, that the Company shall have no further obligation to register such Registrable Securities that are the subject of a revocation pursuant to Section 5(b), but all other registration rights under Section 5(c) shall remain in effect. If the holders of a majority of the Registrable Securities being registered so elect, the offering of Registrable Securities pursuant to a Demand Registration shall be in the form of an Underwritten Offering. If the managing underwriter or underwriters of such offering advise the Company and the holders of Registrable Securities in writing that in their opinion the number of shares of Registrable Securities requested to be included in such offering is sufficiently large to materially and adversely affect the success of such offering, the Company will include in such registration the aggregate number of Registrable Securities which in the opinion of such managing underwriter or underwriters can be sold without any such material adverse effect, and the amount of Registrable Securities to be offered for the accounts of all of such holders shall be reduced pro rata (according to the Registrable Securities beneficially owned by such holders) to the extent necessary to reduce the total amount of securities to be included in such offering to the amount recommended by such managing underwriter or underwriters. (c) INCIDENTAL REGISTRATION. If at any time prior to the date that all Registrable Securities have been registered (and provided that the Company has not already registered the Registrable Securities for 120 days), the Company proposes to file a registration statement under the Securities Act (other than in connection with the Shelf Registration or a Registration Statement on Form S-4 or S-8, or any form substituting therefor) with respect to an offering of any class of security by the Company for its own account or for the account of any of its security holders, then the Company shall give written notice of such proposed filing to the holders of the Registrable Securities as soon as practicable (but in no event less than thirty days before the anticipated filing date), and such notice shall offer such holders the opportunity to register such number of Registrable Securities as each such holder may request. Each holder of Registrable Securities desiring to have its Registrable Securities registered under this subsection 5(c) shall so advise the Company in writing within 20 days after the date of receipt of such notice from the Company (which request shall set forth the number of Registrable Securities for which registration is requested). The Company shall include in such Registration Statement all such Registrable Securities so requested to be included therein, and, if such registration is an Underwritten Registration, the Company shall use its best efforts to cause the managing underwriter or underwriters to permit the Registrable Securities requested to be included in the Registration Statement for such offering to be included (on the same terms and conditions as similar securities of the Company included therein to the extent appropriate); provided, however, that if the managing underwriter or underwriters of such offering deliver a written opinion to the holders of such Registrable Securities that the total number of securities that the Company, the holders of Registrable Securities, or such other persons propose to include in suchoffering is such that the success of the offering would be materially and adversely affected by inclusion of the securities requested to be included, then the amount of securities to be offered for the accounts of the Company, the holders of Registrable Securities and other holders registering securities pursuant to registration rights shall be allocated as follows: 5 (i) if such registration has been initiated by the Company as a primary offering, FIRST to the securities sought to be included by the Company, and SECOND to the Registrable Securities sought to be included by the Preferred Holders and the securities sought to be included by other holders of registration rights, pro rata, on the basis of the number of securities owned by each such holder; and (ii) if such registration has been initiated by another holder of registration rights, FIRST to the securities sought to be included by such other holder, SECOND to the securities sought to be included by the Company, and THIRD to the Registrable Securities sought to be included by the Preferred Holders and to all other securities sought to be included by other holders of registration rights, pro rata, on the basis of the number of securities owned by each such holder. 6. Hold-Back Agreements. (a) RESTRICTIONS ON PUBLIC SALE BY HOLDER OF REGISTRABLE SECURITIES. Each holder of Registrable Securities whose Registrable Securities are covered by a Registration Statement filed pursuant to Section 5 hereof agrees, if requested in writing by the managing underwriters in an Underwritten Offering, not to effect any public sale or distribution of securities of the Company of the same class as the securities included in such Registration Statement, including a sale pursuant to Rule 144 under the Securities Act (except as part of such Underwritten Registration), during the 10-day period prior to the filing of a Registration Statement with respect to such Underwritten Offering, and during the 90-day period beginning on the closing date of each Underwritten Offering made pursuant to such Registration Statement, to the extent timely notified in writing by the Company or the managing underwriters. (b) RESTRICTIONS ON SALE OF SECURITIES BY THE COMPANY. The Company agrees not to effect any public sale or distribution of any securities similar to those being registered, or any securities convertible into or exchangeable or exercisable for such securities (except pursuant to a registration statement on Form S-4 or S-8, or any substitute form that may be adopted by the SEC) during the ten days prior to the filing of a registration statement with respect to such Underwritten Offering, and during the 90-day period beginning on the effective date of any Registration Statement (except as part of such registration statement (x) where the holders of a majority of the shares of Registrable Securities to be included in such registration statement consent or (y) where holders of Registrable Securities are participating in such registration statement pursuant to Section 5(c) hereof, such registration statement was filed by the Company with respect to the sale of securities by the Company, and no holder is simultaneously participating in a registration statement pursuant to Section 5(b) hereof) or the commencement of a public distribution of Registrable Securities pursuant to such registration statement. 7. Registration Procedures. In connection with the Company's registration obligations pursuant to Section 5 hereof, the Company will use its best efforts to effect such registration to permit the sale of such Registrable Securities in accordance with the intended method or methods of distribution thereof, and pursuant thereto the Company will as expeditiously as possible: (a) prepare and file with the SEC, as soon as practicable, a Registration Statement relating to the applicable registration on any appropriate form under the Securities Act, which forms shall be available for the sale of the Registrable Securities in accordance with the intended method or methods of distribution thereof and shall include all financial statements of the Company, and use its best efforts to cause such Registration Statement to become effective; provided that before filing a Registration Statement or Prospectus or any amendments or supplements thereto, including documents incorporated by reference after the initial filing of the Registration Statement, the Company will furnish one counsel selected by the holders of a majority of the shares of Registrable Securities covered by such registration statement, and the underwriters, if any, copies of all such documents proposed to be filed, which documents will be subject to the review of such counsel and underwriters, and the Company will not file any Registration Statement or amendment thereto or any prospectus or any supplement thereto (including such documents incorporated by reference) to which such counsel or the underwriters, if any, shall reasonably object; 6 (b) prepare and file with the SEC such amendments and post-effective amendments to the Registration Statement as may be necessary to keep the Registration Statement effective for the applicable period, or such shorter period which will terminate when all Registrable Securities covered by such Registration Statement have been sold; cause the Prospectus to be supplemented by any required prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Securities Act; and comply with the provisions of all securities covered by such Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the sellers thereof set forth in such Registration Statement or supplement to the prospectus; the Company shall not be deemed to have used its best efforts to keep a Registration Statement effective during the applicable period if it voluntarily takes any action that would result in selling holders of the Registrable Securities covered thereby not being able to sell such Registrable Securities during that period unless such action is required under applicable law; provided that the foregoing shall not apply to actions taken by the Company in good faith and for valid business reasons, including without limitation the acquisition or divestiture of assets, so long as the Company promptly thereafter complies with the requirements of Section 7(l) hereof, if applicable; (c) notify the selling holders of Registrable Securities and the managing underwriters, if any, promptly, and confirm such advice in writing, (1) when the prospectus or any prospectus supplement or post-effective amendment has been filed, and, with respect to the Registration Statement or any post-effective amendment, when the same has become effective, (2) of any request by the SEC for amendments or supplements to the registration statement or the prospectus or for additional information, (3) of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose, (4) if at any time the representations and warranties of the Company contemplated by paragraph (n) below cease to be true and correct, (5) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose and (6) of the happening of any event which makes any statement made in the Registration Statement, the prospectus or any document incorporated therein by reference untrue or which requires the making of any changes in the Registration Statement, the Prospectus or any document incorporated therein by reference in order to make the statements therein not misleading; (d) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of the Registration Statement at the earliest possible moment; (e) if reasonably requested by the managing underwriter or underwriters or a holder of Registrable Securities being sold in connection with an Underwritten Offering, promptly incorporate in a prospectus supplement or post-effective amendment such information as the managing underwriters and the holders of a majority in number of the Registrable Securities being sold agree should be included therein relating to the sale of the Registrable Securities, including, without limitation, information with respect to the number of Registrable Securities being sold to such underwriters, the purchase price being paid therefor by such underwriters and with respect to any other terms of the Underwritten (or best efforts underwritten) Offering of the Registrable Securities to be sold in such offering; and make all required filings of such prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such prospectus supplement or post-effective amendment; (f) promptly prior to the filing of any document which is to be incorporated by reference into the Registration Statement or the prospectus (after initial filing of the Registration Statement), make available representatives of the Company for discussion of such document and make such changes in such document prior to the filing thereof as counsel for such selling holders or underwriters may reasonably request; (g) furnish to each selling holder of Registrable Securities and each managing underwriter, without charge, at least one signed copy of the Registration Statement and any post-effective amendment thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits (including those incorporated by reference); (h) deliver to each selling holder of Registrable Securities and the underwriters, if any, without charge, as many copies of the prospectus (including each preliminary prospectus) and any amendment or supplement thereto as such Persons may reasonably request; the Company consents to the use of the prospectus or any amendment or supplement thereto by each of the selling holders of Registrable Securities and the underwriters, 7 if any, in connection with the offering and sale of the Registrable Securities covered by the prospectus or any amendment or supplement thereto; (i) prior to any public offering of Registrable Securities, register or qualify or cooperate with the selling holders of Registrable Securities, the underwriters, if any, and their respective counsel in connection with the registration or qualification of such Registrable Securities for offer and sale under the securities or blue sky laws of such jurisdictions as any seller or underwriter reasonably requests in writing and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by the Registration Statement; (j) cooperate with the selling holders of Registrable Securities and the managing underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends; and enable such Registrable Securities to be in such denominations and registered in such names as the managing underwriters may request at least two business days prior to any sale of Registrable Securities to the underwriters; (k) cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof or the underwriters, if any, to consummate the disposition of such Registrable Securities; (1) upon the occurrence of any event contemplated by Section 7c) (6) above, prepare a supplement or post-effective amendment to the Registration Statement or the related prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, the prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading; (m) cause all Registrable Securities covered by the Registration Statement to be listed on each securities exchange on which similar securities issued by the Company are then listed; (n) enter into such agreements (including an underwriting agreement) and take all such other actions in connection therewith in order to expedite or facilitate the disposition of such Registrable Securities and in connection therewith, whether or not an underwriting agreement is entered into and whether or not the registration is an Underwritten Registration, (1) make such representations and warranties to the holders of such Registrable Securities and the underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in primary underwritten offerings; (2) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managing underwriters, if any, and the holders of a majority of the Registrable Securities included in such registration, covering the matters customarily covered in opinions requested in Underwritten Offerings and such other matters as may be reasonably requested by such holders and underwriters); (3) obtain "cold comfort" letters and updates thereof from the Company's independent certified public accountants addressed to the selling holders of Registrable Securities and the underwriters, if any, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters by underwriters in connection with primary Underwritten Offerings; (4) if an underwriting agreement is entered into, the same shall set forth in full the indemnification provisions and procedures of Section 9 hereof with respect to all parties to be indemnified pursuant to said Section; and (5) the Company shall deliver such documents and certificates as may be requested by the holders of a majority of the Registrable Securities being sold and the managing underwriters, if any, to evidence compliance with clause (1) above and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. The above shall be done at each closing under such underwriting or similar agreement or as and to the extent required thereunder; (o) make available for inspection by a representative of the holders of the Registrable Securities, any underwriter participating in any disposition pursuant to such registration, and any attorney or accountant retained by the sellers or underwriter, all financial and other records, pertinent corporate documents and properties of the Company and cause the Company's officers, directors and employees to supply all information reasonably requested by any such representative, underwriter, attorney or accountant in connection with such 8 registration; provided that any records, information or documents that are designated by the Company in writing as confidential shall be kept confidential by such Persons unless disclosure of such records, information or documents is required by court or administrative order; (p) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering a period of 12 months, beginning within three months after the effective date of the registration statement, which earnings statement shall satisfy the provisions of section 11(a) of the Securities Act; and (q) cooperate with each seller of Registrable Securities and each underwriter participating in the disposition of such Registrable Securities and their respective counsel in connection with any filings required to be made with the National Association of Securities Dealers, Inc. (the "NASD"). The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish to the Company such information regarding the distribution of such securities as the Company may from time to time reasonably request in writing. Each holder of Registrable Securities agrees by acquisition of such Registrable Securities that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 7(l) hereof, such holder will forthwith discontinue disposition of Registrable Securities until such holder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 7(l) hereof, or until it is advised in writing (the "ADVICE") by the Company that the use of the prospectus may be resumed, and has received copies of any additional or supplemental filings which are incorporated by reference in the prospectus, and, if so directed by the Company such holder will deliver to the Company, (at the Company's expense), all copies, other than permanent file copies then in such holder's possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice. In the event the Company shall give any such notice, the time periods regarding the effectiveness of Registration Statements set forth in Section 5 hereof and Section 7(b) hereof shall be extended by the number of days during the period from and including the date of the giving of such notice pursuant to Section 7(c)(6) hereof to the date when the selling holders of Registrable Securities covered by such registration statement shall receive copies of the supplemented or amended prospectus contemplated by Section 7(l) hereof or the Advice. 8. Registration Expenses. All expenses incident to the Company's performance of or compliance with this Settlement Agreement, including without limitation: all registration and filing fees; fees with respect to filings required to be made with the NASD; fees and expenses of compliance with securities or blue sky laws (including fees and disbursements of counsel for the underwriters of Registrable Securities in connection with blue sky qualifications of the Registrable Securities and determination of their eligibility for investment under the laws of such jurisdictions as the managing underwriters or holders of a majority of the Registrable Securities being sold may designate); printing expenses, messenger, telephone and delivery expenses; fees and disbursements of counsel for the Company and customary fees and expenses for independent certified public accountants retained by the Company (including the expenses of any comfort letters or costs associated with the delivery by independent certified public accountants of a comfort letter or comfort letters requested pursuant to Section 7(n) hereof); securities acts liability insurance, if the Company so desires; all internal expenses of the Company (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties); the expense of any annual audit; the fees and expenses incurred in connection with the listing of the securities to be registered on each securities exchange on which similar securities issued by the Company are then listed; and the fees and expenses of any person, including special experts, retained by the Company (all such expenses being herein called "REGISTRATION EXPENSES") will be borne by the Company regardless of whether the Registration Statement becomes effective. The Company shall not have any obligation to pay any underwriting discounts, commissions or similar fees attributable to the sale of Registrable Securities, or any legal fees and expenses of counsel to the holders of Registrable Securities. 9. Indemnification: Contribution. 9 (a) INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify and hold harmless each holder of Registrable Securities against all losses, claims, damages, liabilities and expenses arising out of or based upon any untrue or alleged untrue statement of a material fact contained in any Registration Statement, prospectus or preliminary prospectus or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information furnished in writing to the Company by the holders of Registrable Securities expressly for use therein. The Company will also indemnify underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, their officers and directors and each person who controls such persons (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) to the same extent as provided above with respect to the indemnification of the holders of Registrable Securities, if requested. (b) INDEMNIFICATION BY HOLDER OF REGISTRABLE SECURITIES. Each holder of Registrable Securities agrees to indemnify and hold harmless the Company and its directors, officers, employees and agents, and each person who controls the Company (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) against any losses, claims, damages, liabilities and expenses resulting from any untrue statement of a material fact or any omission of a material fact required to be stated in the Registration Statement or prospectus or preliminary prospectus or necessary to make the statements therein not misleading, to the extent, but only to the extent, that such untrue statement or omission is contained in any information or affidavit so furnished in writing by such holder to the Company specifically for inclusion in such Registration Statement or prospectus. In no event shall the liability of any selling holder of Registrable Securities hereunder be greater in amount than the dollar amount of the proceeds received by such holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, to the same extent as provided above with respect to information so furnished in writing by such persons specifically for inclusion in any prospectus or Registration Statement. (c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. Any Person entitled to indemnification hereunder will (i) give prompt notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party; provided, however, that any person entitled to indemnification hereunder shall have the right to employ separate counsel and to participate in the defense of such claim, but the fees and expenses of such counsel shall be at the expense of such person unless (a) the indemnifying party has agreed to pay such fees or expenses, (b) the indemnifying party shall have failed to assume the defense of such claim and employ counsel reasonably satisfactory to such person or (c) based upon written advice of counsel to such person, there shall be one or more defenses available to such person that are not available to the indemnifying party or there shall exist conflicts of interest pursuant to applicable rules of professional conduct between such person and the indemnifying party (in which case, if the person notifies the indemnifying party in writing that such person elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such claim on behalf of such person), in each of which events the fees and expenses of such counsel shall be at the expense of the indemnifying party. The indemnifying party will not be subject to any liability for any settlement made without its consent (but such consent will not be unreasonably withheld), but if settled with its written consent, or if there be a final judgment for the plaintiff in any such action or proceeding, the indemnifying party shall indemnify and hold harmless the indemnified parties from and against any loss or liability (to the extent stated above) by reason of such settlement or judgment. No indemnified party will be required to consent to entry of any judgment or enter into any settleent which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. (d) CONTRIBUTION. If for any reason the indemnification provided for in the preceding clauses (a) and (b) is unavailable to an indemnified party or insufficient to hold it harmless as contemplated by the preceding clauses (a) and (b), then the indemnifying party shall contribute to the amount paid or payable by the indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect not only the relative benefits received by the indemnified party and the indemnifying party, but also the relative fault of the indemnified party and the indemnifying party, as well as any other relevant equitable considerations, provided, that no holder of Registrable Securities shall be required to contribute an amount greater than the dollar amount of the 10 proceeds received by such holder with respect to the sale of the Registrable Securities giving rise to such indemnification obligation. The relative fault of the Company on the one hand and of the selling holders on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such party, and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 10(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentations. 10. Participation in Underwritten Registrations. (a) If any of the Registrable Securities covered by the Shelf Registration are to be sold in an Underwritten Offering, the investment banker or investment bankers and manager or managers that will administer the offering will be selected by the holders of a majority of the Registrable Securities included in such offering; provided that such investment bankers and managers must be reasonably satisfactory to the Company. (b) No Preferred Holder may participate in any underwritten registration hereunder unless such person (i) agrees to sell such person's securities on the basis provided in any underwriting arrangements approved by the persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. Nothing in this Section 10 shall be construed to create any additional rights regarding the registration of Registrable Securities in any person otherwise than as set forth herein 11. Representations and Warranties by Preferred Holders. The Preferred Holders represent and warrant to Lenders and the Company that they are the sole, true, lawful, record and beneficial owners of their Unconvertible Preferred Shares listed opposite their names on EXHIBIT A hereto, free and clear of all encumbrances and without restrictions on voting rights or rights of disposition other than pursuant to this Settlement Agreement. Each Preferred Holder's Unconvertible Preferred Shares are such Preferred Holder's sole and separate property and the execution of a spousal consent to the transactions contemplated by this Settlement Agreement is not required. There are no legends or encumbrances on the Unconvertible Preferred Shares other than the standard Securities Act legend. The Unconvertible Preferred Shares are all of the shares of preferred stock of the Company owned by the Preferred Holders. Except for this Settlement Agreement, each of the Preferred Holders has not entered into any contract relating to the issuance, sale, or transfer of any of the Unconvertible Preferred Shares or rights relating thereto. The Preferred Holders will each convey to Lender good and valid title to the Unconvertible Preferred Shares, free and clear of all liens, claims, charges, encumbrances and security interests. 12. Successors and Assigns. Each covenant and representation of this Settlement Agreement shall inure to the benefit and be binding upon each of the parties, their personal representatives, assigns and other successors in interest. 13. Entire and Sole Agreement. This Settlement 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 Settlement Agreement. This Settlement Agreement may be modified only by written agreement signed by all parties. 14. Governing Law. 11 This Settlement 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 form in the County of Los Angeles, State of California. 12 15. Counterparts. This Settlement Agreement may be executed simultaneously in any number of counterparts and by facsimile, each of which counterpart shall be deemed to be an original and such counterpart shall constitute one and the same instrument. 16. Attorneys' Fees and Costs. In the event that either party must resort to legal action in order to enforce the provisions of this Settlement 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 Settlement Agreement, including but not limited to post judgment costs. 17. Further Acts of the Parties. The parties to this Settlement Agreement hereby agree to execute any other documents and to take further actions which are reasonably necessary and appropriate in order to implement the transactions contemplated by this Settlement Agreement. 18. Time of the Essence. Time is of the essence in the performance of the obligations under this Settlement Agreement. 19. Authorized Signatures. Each of the parties to this Settlement Agreement hereby represents that the person signing below are authorized to execute this Settlement Agreement on behalf of their respective party. IN WITNESS WHEREOF, this Settlement Agreement has been entered into as of the date first written above. "COMPANY" Incomnet, Inc. By: /s/ Denis Richard -------------------------------- Denis Richard, President and Chief Executive Officer "LENDER" Ironwood Telecom LLC By: /s/ Daniel V. Berlanti -------------------------------- Its: Member "PREFERRED HOLDERS" 13 By: /s/ Ellen Cohen --------------- Ellen Cohen By: /s/ Martin Fabrikant -------------------- Martin Fabrikant 14 EXHIBIT A
Unconvertible Cash Number of Preferred Holder Preferred Shares Payment Warrants - - ---------------- ---------------- --------- --------- Ellen Cohen 168.03 $336,060 168,030 Series B Martin Fabrikant 76.840 $153,680 76,840 Series A
15 EXHIBIT B FORM OF WARRANT AGREEMENT THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN EXEMPTION FROM SUCH REGISTRATION. No. WA-A -1 Warrant to Purchase [XXXXX] Shares of Common Stock (subject to adjustment) WARRANT TO PURCHASE COMMON STOCK OF INCOMNET, INC. This certifies that, for value received, [NAME] and her registered assigns ("Holder") is entitled, subject to the terms set forth below, to purchase from INCOMNET, INC., a California corporation (the "Company"), [XXXXX] shares of the Common Stock of the Company, on the date the Company's Articles of Incorporation are amended to provide for a sufficient number of authorized shares of Common Stock to allow for the issuance of the number of shares of Common Stock underlying this Warrant (the date of such amendment, the "Initial Exercise Date"), upon surrender hereof, at the principal office of the Company referred to below, with the Notice of Exercise form attached hereto (the "Notice of Exercise") duly executed, and simultaneous payment therefor in lawful money of the United States as hereinafter provided, at the Exercise Price as set forth in Section 2 below. The number, character and Exercise Price of such shares of Common Stock are subject to adjustment as provided below. The term "Warrant" as used herein shall include this Warrant and any warrants delivered in substitution or exchange therefor as provided herein. This Warrant is issued in connection with the transactions described in Section 1 of Settlement Agreement dated as of November 5, 1998 (the "Settlement Agreement"), between the Company, the Holder and the other party identified therein. 1. Term of Warrant. Subject to the terms and conditions set forth herein, this Warrant shall be exercisable, in whole or in part, during the term commencing on the Initial Exercise Date and ending at 5:00 p.m., Pacific Standard Time, on the five-year anniversary of the Initial Exercise Date, and shall be void thereafter. 2. Exercise Price. The Exercise Price at which this Warrant may be exercised shall be $1.00 per share of Common Stock, as adjusted from time to time pursuant to Section 11 hereof. 3. Exercise of Warrant. 3.1 Notice of Exercise. The purchase rights represented by this Warrant are exercisable by the holder in whole or in part, but not for less than 10,000 shares at a time (or such lesser number of shares which may then constitute the maximum number purchasable; such number being subject to adjustment as provided in Section 11 below), at any time, or from time to time, during the term hereof as described in Section 1 above, by the surrender of this Warrant and the Notice of Exercise duly completed and executed on behalf of the Holder, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Holder at the address of the Holder appearing on the books of the Company), upon payment in cash or by check acceptable to the Company of the purchase price of the shares to be purchased. 16 3.2 Issuance of Stock. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the shares of Common Stock issuable upon such exercise shall be treated for all purposes as the holder of record of such shares as of the close of business on such date. As promptly as practicable on or after such date and in any event within ten (10) days thereafter, the Company at its expense shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of shares issuable upon such exercise. In the event that this Warrant is exercised in part, the Company at its expense will execute and deliver a new Warrant of like tenor exercisable for the number of shares for which this Warrant may then be exercised. 4. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. In lieu of any fractional share to which the Holder would otherwise be entitled, the Company shall make a cash payment equal to the Exercise Price multiplied by such fraction. 5. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and substance to the Company or, in the case of mutilation, on surrender and cancellation of this Warrant, the Company at its expense shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor and amount. 6. Rights of Shareholders. Subject to Sections 9 and 11 of this Warrant, the Holder shall not be entitled to vote or receive dividends or be deemed the holder of Common Stock or any other securities of the Company that may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the Holder, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until the Warrant shall have been exercised as provided herein. 7. Transfer of Warrant. 7.1 Warrant Register. The Company will maintain a register (the "Warrant Register") containing the names and addresses of the Holder or Holders. Any Holder of this Warrant or any portion thereof may change his or her address as shown on the Warrant Register by written notice to the Company requesting such change. Any notice or written communication required or permitted to be given to the Holder may be delivered or given by mail to such Holder as shown on the Warrant Register and at the address shown on the Warrant Register. Until this Warrant is transferred on the Warrant Register of the Company, the Company may treat the Holder as shown on the Warrant Register as the absolute owner of this Warrant for all purposes, notwithstanding any notice to the contrary. 7.2 Warrant Agent. The Company may, by written notice to the Holder, appoint an agent for the purpose of maintaining the Warrant Register referred to in Section 7(a) above, issuing the Common Stock or other securities then issuable upon the exercise of this Warrant, exchanging this Warrant, replacing this Warrant, or any or all of the foregoing. Thereafter, any such registration, issuance, exchange, or replacement, as the case may be, shall be made at the office of such agent. 7.3 Transferability and Non-Negotiability of Warrant. This Warrant may not be transferred or assigned in whole or in part without compliance with all applicable federal and state securities laws by the transferor and the transferee (including the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, if such are requested by the Company), provided, however, that this Warrant may not be transferred in part unless such transfer is to a transferee who pursuant to such transfer receives 17 the right to purchase at least 10,000 shares hereunder. Subject to the provisions of this Warrant with respect to compliance with the Securities Act of 1933, as amended (the "Act"), title to this Warrant may be transferred by endorsement (by the Holder executing the Assignment Form attached hereto (the "Assignment Form") and delivery in the same manner as a negotiable instrument transferable by endorsement and delivery. 7.4 Exchange of Warrant Upon a Transfer. On surrender of this Warrant for exchange, properly endorsed on the Assignment Form and subject to the provisions of this Warrant with respect to compliance with the Act and with the limitations on assignments and transfers and contained in this Section 7, the Company at its expense shall issue to or on the order of the Holder a new warrant or warrants of like tenor, in the name of the Holder or as the Holder (on payment by the Holder of any applicable transfer taxes) may direct, for the number of shares issuable upon exercise hereof. 7.5 Compliance with Securities Laws. (i) The Holder of this Warrant, by acceptance hereof, acknowledges that this Warrant and the shares of Common Stock or Common Stock to be issued upon exercise hereof are being acquired solely for the Holder's own account and not as a nominee for any other party, and for investment, and that the Holder will not offer, sell or otherwise dispose of this Warrant or any shares of Common Stock to be issued upon exercise hereof except under circumstances that will not result in a violation of the Act or any state securities laws. Upon exercise of this Warrant, the Holder shall, if requested by the Company, confirm in writing, in a form satisfactory to the Company, that the shares of Common Stock so purchased are being acquired solely for the Holder's own account and not as a nominee for any other party, for investment, and not with a view toward distribution or resale. (ii) This Warrant and all shares of Common Stock issued upon exercise hereof shall be stamped or imprinted with a legend in substantially the following form (in addition to any legend required by state securities laws): THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SECURITIES AND ANY SECURITIES OR SHARES ISSUED HEREUNDER OR THEREUNDER MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT. COPIES OF THE AGREEMENT COVERING THE PURCHASE OF THESE SECURITIES AND RESTRICTING THEIR TRANSFER OR SALE MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OR RECORD HEREOF TO THE SECRETARY OF THE COMPANY AT THE PRINCIPAL EXECUTIVE OFFICES OF THE COMPANY. 8. Reservation of Stock. The Company covenants that during the term this Warrant is exercisable, the Company will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of Common Stock upon the exercise of this Warrant and, from time to time, will take all steps necessary to amend its Articles of Incorporation (the "Articles") to provide sufficient reserves of shares of Common Stock issuable upon exercise of this Warrant; provided, however, that as of the November 5, 1998 the Company does not have any shares of Common Stock available for issuance upon the exercise of this Warrant, and the Holder hereby acknowledges that she understands that shares of Common Stock are so unavailable; provided, further, that the Company hereby covenants and agrees to request that its shareholders approve of a proposal at the next annual meeting of shareholders to amend the Articles to increase the Company's authorized Common Stock in sufficient number to provide for the issuance of all securities of the Company outstanding as of the Initial Exercise Date exercisable or convertible into Common Stock. The Company further covenants that all shares that may be issued upon the exercise of rights represented by this Warrant, upon exercise of the rights represented by this Warrant and payment of the Exercise Price, all as set forth herein, will be free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously or otherwise specified herein). 18 The Company agrees that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock upon the exercise of this Warrant. 9. Notices. Upon the written request of the holder, whenever the Exercise Price or number of shares purchasable hereunder shall be adjusted pursuant to Section 11 hereof, the Company shall issue a certificate signed by its Chief Financial Officer setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Exercise Price and number of shares purchasable hereunder after giving effect to such adjustment, and shall cause a copy of such certificate to be mailed (by first-class mail, postage prepaid) to the Holder of this Warrant. All notices and requests required under this Warrant shall be in writing and shall be deemed to have been given for all purposes (a) upon personal delivery, (b) one day after being sent, when sent by professional overnight courier service from and to locations within the continental United States, (c) five days after posting when sent by registered or certified mail, or (d) on the date of transmission (if transmitted during normal business hours otherwise on the next succeeding business day) when sent by telegram, telegraph, telex or telecopier, addressed to the Holder at his or her addresses set forth on the Warrant Register, and addressed to the Company at 2801 Main Street, Irvine, California 92614, Telecopier No. (949) 224-7474. The Holder or the Company may from time to time by notice in writing delivered as provided herein, designate a different mailing address to which such notices or requests shall thereafter be delivered. 10. Amendments. 10.1 Amendment. Any term of this Warrant may be amended with the written consent of the Company and the Holder. Any amendment effected in accordance with this Section 10 shall be binding upon the Company and each future holder of this Warrant. 10.2 Waiver. No waivers of, or exceptions to, any term, condition or provision of this Warrant, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, condition or provision. 11. Adjustments. The Exercise Price and the number of shares purchasable hereunder are subject to adjustment from time to time as follows: 11.1 Merger, Sale of Assets, etc. If at any time while this Warrant, or any portion thereof, is outstanding and unexpired there shall be (i) a reorganization (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein), (ii) a merger or consolidation of the Company with or into another corporation in which the Company is not the surviving entity, or a reverse triangular merger in which the Company is the surviving entity but the shares of the Company's capital stock outstanding immediately prior to the merger are converted by virtue of the merger into other property, whether in the form of securities, cash, or otherwise, or (iii) a sale or transfer of the Company's properties and assets as, or substantially as, an entirety to any other person, then, as a part of such reorganization, merger, consolidation, sale or transfer, lawful provision shall be made so that the holder of this Warrant shall thereafter be entitled to receive upon exercise of this Warrant, during the period specified herein and upon payment of the Exercise Price then in effect, the number of shares of stock or other securities or property of the successor corporation resulting from such reorganization, merger, consolidation, sale or transfer that a holder of the shares deliverable upon exercise of this Warrant would have been entitled to receive in such reorganization, consolidation, merger, sale or transfer if this Warrant had been exercised immediately before such reorganization, merger, consolidation, sale or transfer, all subject to further adjustment as provided in this Section 11. The foregoing provisions of this Section 11.1 shall similarly apply to successive reorganizations, consolidations, mergers, sales and transfers and to the stock or securities of any other corporation that are at the time receivable upon the exercise of this Warrant. If the per-share consideration payable to the holder hereof for shares in connection with any such transaction is in a form other than cash or marketable securities, then the value of such consideration shall be determined in good faith by the Company's Board of Directors. In all 19 events, appropriate adjustment (as determined in good faith by the Company's Board of Directors) shall be made in the application of the provisions of this Warrant with respect to the rights and interests of the Holder after the transaction, to the end that the provisions of this Warrant shall be applicable after that event, as near as reasonably may be, in relation to any shares or other property deliverable after that event upon exercise of this Warrant. 11.2 Reclassification, etc. If the Company, at any time while this Warrant, or any portion thereof, remains outstanding and unexpired by reclassification of securities or otherwise, shall change any of the securities as to which purchase rights under this Warrant exist into the same or a different number of securities of any other class or classes, this Warrant shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities that were subject to the purchase rights under this Warrant immediately prior to such reclassification or other change and the Exercise Price therefor shall be appropriately adjusted, all subject to further adjustment as provided in this Section 11. 11.3 Split, Subdivision or Combination of Shares. If the Company at any time while this Warrant, or any portion thereof, remains outstanding and unexpired shall split, subdivide or combine the securities as to which purchase rights under this Warrant exist, into a different number of securities of the same class, the Exercise Price for such securities shall be proportionately decreased in the case of a split or subdivision or proportionately increased in the case of a combination. 11.4 Adjustments for Dividends in Stock or Other Securities or Property. If while this Warrant, or any portion hereof, remains outstanding and unexpired the holders of the securities as to which purchase rights under this Warrant exist at the time shall have received, or, on or after the record date fixed for the determination of eligible shareholders, shall have become entitled to receive, without payment therefor, other or additional stock or other securities or property (other than cash) of the Company by way of dividend, then and in each case, this Warrant shall represent the right to acquire, in addition to the number of shares of the security receivable upon exercise of this Warrant, and without payment of any additional consideration therefor, the amount of such other or additional stock or other securities or property (other than cash) of the Company that such holder would hold on the date of such exercise had it been the holder of record of the security receivable upon exercise of this Warrant on the date hereof and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and/or all other additional stock available by it as aforesaid during such period, giving effect to all adjustments called for during such period by the provisions of this Section 11. 11.5 Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment pursuant to this Section 11, the Company shall, upon the written request, at any time, of any Holder of this Warrant, furnish or cause to be furnished to such Holder a like certificate setting forth: (i) adjustments and readjustments in accordance with the terms hereof; (ii) the Exercise Price at the time in effect; and (iii) the number of shares and the amount, if any, of other property that at the time would be received upon the exercise of the Warrant. 12. Registration Rights. Upon exercise of this Warrant, the Holder shall have and be entitled to exercise, together with all other holders of "Registrable Securities" (as defined in the Settlement Agreement among Ellen Cohen, Martin Fabrikant, Ironwood Telecom LLC and the Company dated November 5, 1998 (the "Settlement Agreement")) possessing registration rights under the Settlement Agreement, the rights of registration granted under the Settlement Agreement to Registrable Securities (with respect to the shares issued on exercise of this Warrant). By its receipt of this Warrant, Holder agrees to be bound by the Settlement Agreement upon exercise of this Warrant as a party thereto. 13. Miscellaneous. 20 (a) Attorneys' Fees. In any action at law or in equity to enforce any of the provisions or rights under this Warrant, the unsuccessful party to such litigation, as determined by the court in a final judgment or decree, shall pay the successful party all costs, expenses and reasonable attorneys' fees incurred by the successful party (including, without limitation, costs, expenses and fees on any appeal). (b) Governing Law; Venue. This Warrant and the legal relations between the Holder and the Company shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made and performed in such State and without regard to conflicts of law doctrines of any other State or country. In the event of any action at law or equity to enforce any of the provisions or rights under this Agreement, the parties agree that the proper venue for such action is Los Angeles, California and that the parties may bring such an action to enforce their respective rights under this Agreement only in a court located within the County of Los Angeles, State of California. The parties further agree that such court shall have personal jurisdiction over each of the parties to this Agreement. IN WITNESS WHEREOF, INCOMNET, INC. has caused this Warrant to be executed by its officers thereunto duly authorized. Dated: November 5, 1998 INCOMNET, INC. By: /s/ Denis Richard ----------------- Denis Richard President and Chief Executive Officer ATTEST: By: /s/ Michael Keebaugh -------------------- Michael Keebaugh Assistant Secretary 21 NOTICE OF EXERCISE To: INCOMNET, INC. (1) The undersigned hereby elects to purchase ______ shares of Common Stock of INCOMNET, INC., pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price for such shares in full. (2) In exercising this Warrant, the undersigned hereby confirms and acknowledges that the shares of Common Stock or the Common Stock are being acquired solely for the account of the undersigned and not as a nominee for any other party, and for investment, and that the undersigned will not offer, sell or otherwise dispose of any such shares of Common Stock or Common Stock except under circumstances that will not result in a violation of the Securities Act of 1933, as amended, or any state securities laws. (3) Please issue a certificate or certificates representing those shares of Common Stock in the name of the undersigned or in such other name as is specified below: ----------------------------------------- (Name) ----------------------------------------- (Name) (4) Please issue a new Warrant for the unexercised portion of the attached Warrant in the name of the undersigned or in such other name as is specified below: ----------------------------------------- (Name) - - ------------------------- ----------------------------------------- (Date) (Signature) 22 ASSIGNMENT FORM FOR VALUE RECEIVED, the undersigned registered owner of this Warrant hereby sells, assigns and transfers unto the Assignee named below all of the rights of the undersigned under the within Warrant, with respect to the number of shares of Common Stock (or Common Stock) set forth below: NAME OF ASSIGNEE ADDRESS NO. OF SHARES and does hereby irrevocably constitute and appoint ________________________ as Attorney-in-Fact to make such transfer on the books of INCOMNET, INC., maintained for the purpose, with full power of substitution in the premises. The undersigned also represents that, by assignment hereof, the Assignee acknowledges that this Warrant and the shares of stock to be issued upon exercise hereof or conversion thereof are being acquired for investment and that the Assignee will not offer, sell or otherwise dispose of this Warrant or any shares of stock to be issued upon exercise hereof or conversion thereof except under circumstances which will not result in a violation of the Securities Act of 1933, as amended, or any state securities laws. Further, the Assignee has acknowledged that upon exercise of this Warrant, the Assignee shall, if requested by the Company, confirm in writing, in a form satisfactory to the Company, that the shares of stock so purchased are being acquired for investment and not with a view toward distribution or resale. Dated: ------------------- ------------------------------------- Signature of Holder ATTEST: - - ------------------------------- Signature of Assignee 23 EX-10.13 15 EXHIBIT 10.13 EXHIBIT 10.13 -- STOCK PURCHASE AND RELEASE AGREEMENT AMONG GARY KAPLOWITZ, ALAN ROTHSTEIN, S&R HOLDINGS, IRONWOOD TELECOM LLC AND JOHN P. CASEY INCOMNET, INC. 2801 Main Street Irvine, California 92614 November 4, 1998 BY FACSIMILE Gary Kaplowitz Alan Rothstein S&R Holdings Ironwood Telecom LLC John P. Casey Re: STOCK PURCHASE AND RELEASE AGREEMENT Gentlemen: As you know, Gary Kaplowitz ("Kaplowitz"), Alan Rothstein ("Rothstein") and S&R Holdings ("S&R Holdings" and with Kaplowitz and Rothstein, the "Preferred Holders") acquired a certain number of Series B Preferred Stock ("Preferred Stock") of Incomnet, Inc. ("Company") on or about July 29, 1997. The Preferred Stock is convertible into shares of the Company's Common Stock. On June 10, 1998, the Preferred Holders notified the Company of their election to convert all of the Preferred Stock then owned by them which, based on the conversion price on the date of the notice, would have entitled them to receive an aggregate of 1,568,571 shares of Common Stock (for Kaplowitz - 81.390 shares of Preferred Stock convertible into 632,044 shares of Common Stock; for Rothstein - 81.390 shares of Preferred Stock convertible into 632,044 shares of Common Stock; for S&R - 39.243 shares of Preferred Stock convertible into 304,483 shares of Common Stock). Shortly after receiving the notices of election to convert by the Preferred Holders on June 10, 1998, the Company informed the Preferred Holders that the Company had insufficient authorized Common Stock to effect the conversion of the Preferred Holders' Stock. Except for 77.277 shares of Preferred Stock and the rights relating thereto to be issued 600,000 shares of Common Stock when a sufficient authorized number of shares become available (which the Preferred Holders will retain, the "Retained Shares"), the Preferred Holders will sell and transfer all of their Preferred Stock and all rights relating thereto (an aggregate of 124.746 shares of Preferred Stock convertible into 968,571 shares of Common Stock, the "Ironwood Shares") to Ironwood Telecom LLC ("Ironwood") for $600,000 in cash. In connection with the prior conversion of the Retained Shares, the Company agrees to issue 600,000 shares of Common Stock to the Preferred Holders upon tender of the stock certificates representing the Retained Shares, within five business days following the approval of its shareholders to amend the Company's Articles of Incorporation to increase the authorized Common Stock of the Company (the "Amendment Proposal"). Since these shares were privately placed without registration under the Securities Act of 1933 (the "Securities Act"), the certificates issued to the Preferred Holders evidencing the Retained Shares will contain a restrictive legend that they may be sold only if registered or pursuant to an exemption from registration under the Securities Act. The Company will consider the Retained Shares as being issued on July 29, 1997. Therefore, the one-year holding period under Rule 144 of the Securities Act will have been met and the Preferred Holders may sell the Retained Shares in accordance with the exemption from the Securities Act registration requirements provided under Rule 144. Upon delivery of a broker's certification or other documents reasonably requested by the Company or its counsel, the Company shall cause to be delivered to its transfer agent a Rule 144 legal opinion satisfactory to the transfer agent. Approval by shareholders of the Amendment Proposal is anticipated to be obtained at the Company's annual meeting scheduled for March or April 1999. The Company is aware of agreements between shareholders November 4, 1998 Page 2 who own approximately 35% of the outstanding voting stock of the Company and third parties which require those shareholders to vote in favor of a proposal to increase the authorized number of shares of Common Stock at the next annual meeting. The Preferred Holders agree to vote in favor of the Amendment Proposal, if legally permitted, and that Ironwood is the intended beneficiary of the Preferred Holders' agreement to vote in favor of that proposal. To effect the sale and transfer of the Ironwood Shares by the Preferred Holders to Ironwood, the Preferred Holders agree to execute a general assignment and an assignment separate from certificate relating to the Ironwood Shares, to be delivered and effective upon receipt of the $600,000. The Company shall deliver to the Preferred Holders within 10 business days of this letter a copy of the unanimous written consent of the Company's Board of Directors signed by each director approving of the transactions contemplated in this letter. In addition, the Preferred Holders, the Company, Ironwood and John P. Casey (a shareholder of the Company, "Casey"), agree to enter into mutual releases relating to claims they may have against each other in connection with the Preferred Stock. The terms of the mutual releases will be set forth in another document. If the Preferred Holders, Ironwood and Casey agree with the terms and conditions set forth in this letter, please so signify by signing below and returning the countersigned copy to the Company, after which this letter will constitute a binding agreement enforceable against the Company, the Preferred Holders, Ironwood and Casey, in accordance with its terms and conditions. This letter may be countersigned in counterparts by the parties but will constitute one agreement among all parties Very truly yours, /s/ DENIS RICHARD -------------------------------------- Denis Richard President and Chief Executive Officer ACKNOWLEDGED AND AGREED: /s/ GARY KAPLOWITZ IRONWOOD TELECOM LLC - - ---------------------------- GARY KAPLOWITZ /s/ ALAN ROTHSTEIN By: /s/ DONALD V. BERLANTI - - ---------------------------- --------------------------------- ALAN ROTHSTEIN Donald V. Berlanti Member S&R HOLDINGS LLC By: /s/ STEVEN SHAPERO /s/ JOHN P. CASEY ---------------------- --------------------------------- Steven L. Shapero JOHN P. CASEY Managing Partner 2 EX-10.17 16 EXHIBIT 10.17 Exhibit 10.17 [LOGO] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD SUBLEASE (LONG-FORM TO BE USED WITH PRE-1996 AIR LEASES) 1. PARTIES. This Sublease, dated, for reference purposes only, July 28, 1998, is made by and between NATIONAL TELEPHONE & COMMUNICATIONS, INC., a Delaware corporation ("SUBLESSOR") and VISION CAPITAL SERVICES CORPORATION, a California corporation and PERFORMANCE CAPITAL MANAGEMENT, INC., a California corporation (jointly and severally "SUBLESSEE"). 2. PREMISES. Sublessor hereby subleases to Sublessee and Sublessee hereby subleases from Sublessor for the term, at the rental, and upon all of the conditions set forth herein, that certain real property, including all improvements therein, and commonly known by the street address of 2811 E. Main Street, Irvine located in the County of Orange, State of California and generally described as (describe briefly the nature of the property) an industrial building containing approximately 18,320 rentable square feet as more particularly described in Exhibit A hereto ("Premises"). 3. TERM. 3.1 TERM. The term of this Sublease shall be for approximately forty-four (44) months commencing on September 10, 1998 and ending on April 30, 2002 unless sooner terminated pursuant to any provision hereof. 3.2 (See Addendum) 4. RENT. 4.1 BASE RENT. Sublessee shall pay to Sublessor as Base Rent for the Premises equal monthly payments of $20,152.00 in advance, on the first day of each month of the term hereof. Sublessee shall pay Sublessor upon the execution hereof $40,304.00 as Base Rent for September, 1998 and September, 2000. Base Rent for any period during the term hereof which is for less than one month shall be a pro rata portion of the monthly installment. 4.2 RENT DEFINED. All monetary obligations of Sublessee to Sublessor under the terms of this Sublease (except for the Security Deposit) are deemed to be rent ("RENT"). Rent shall be payable in lawful money of the United States to Sublessor at the address stated herein or to such other persons or at such other places as Sublessor may designate in writing. 5. SECURITY DEPOSIT. Sublessee shall deposit with Sublessor upon execution hereof $22,167.20 as security for Sublessee's faithful performance of Sublessee's obligations hereunder. If Sublessee fails to pay Rent or other changes due hereunder, or otherwise defaults with respect to any provision of this Sublease, Sublessor may use, apply or retain all or any portion of said deposit for the payment of any Rent or other charge in default or for the payment of any other sum to which Sublessor may become obligated by reason of Sublessee's default, or to compensate Sublessor for any loss or damage which Sublessor may suffer thereby. If Sublessor so uses or applies all or any portion of said deposit, Sublessee shall within ten days after written demand therefore forward to Sublessor an amount sufficient to restore said Deposit to the full amount provided for herein and Sublessee's failure to do so shall be a material breach of this Sublease. Sublessor shall not be required to keep said Deposit separate from its general accounts. If Sublessee performs all of Sublessee's obligations hereunder, said Deposit, or so much thereof as has not therefore been applied by Sublessor, shall be returned, without payment of interest to Sublessee (or at Sublessor's option, to the last assignee, if any, of Sublessee's interest hereunder) at the expiration of the term hereof, and after Sublessee has vacated the Premises. No trust relationship is created herein between Sublessor and Sublessee with respect to said Security Deposit. 6. USE. 6.1 AGREED USE. The Premises shall be used and occupied only for general office use and for no other purpose. 6.2 (See Addendum) Page 1 of 4 6.3 ACCEPTANCE OF PREMISES. Sublessee acknowledges that: (a) it has been advised by Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with *), and their suitability for Sublessee's intended use, (b) Sublessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises, and (c) neither Sublessor, Sublessor's agents, nor any Broker has made any oral or written representations or warranties with respect to said matters other than as set forth in this Sublease. 7. MASTER LEASE 7.1 Sublessor is the lessee of the Premises by virtue of a lease, hereinafter the "MASTER LEASE", a copy of which is attached hereto marked Exhibit 1, wherein The Carter Family Investment Partnership L.P., A California Limited Partnership is the lessor, hereinafter the "MASTER LESSOR". 7.2 This Sublease is and shall be at all times subject and subordinate to the Master Lease. 7.3 The terms, conditions and respective obligations of Sublessor and Sublessee to each other under this Sublease shall be the terms and conditions of the Master Lease except for those provisions of the Master Lease which are directly contradicted by this Sublease in which event the terms of this Sublease document shall control over the Master Lease. Therefore, for the purposes of this Sublease, wherever in the Master Lease the word "Lessor" is used it shall be deemed to mean the Sublessor herein and wherever in the Master lease the word "Lessee" is used it shall be deemed to mean the Sublessee herein. 7.4 During the term of this Sublease and for all periods subsequent for obligations which have arisen prior to the termination of this Sublease, Sublessee does hereby expressly assume and agree to perform and comply with, for the benefit of Sublessor and Master Lessor, each and every obligation of Sublessor under the Master Lease except for the following paragraphs which are excluded therefrom: 1.5, 1.7, 5, Lease Addendum Items 1, 5, 6, 18, 32, 38, and Exhibit B. 7.5 The obligations that Sublessee has assumed under paragraph 7.4 hereof are hereinafter referred to as the "SUBLESSEE'S ASSUMED OBLIGATIONS". The obligations that sublessee has not assumed under paragraph 7.4 hereof are hereinafter referred to as the "SUBLESSOR'S REMAINING OBLIGATIONS". 7.6 Sublessee shall hold Sublessor free and harmless from all liability, judgments, costs, damages, claims or demands, including reasonable attorneys fees, arising out of Sublessee's failure to comply with or perform Sublessee's Assumed Obligations. 7.7 Sublessor agrees to maintain the Master Lease during the entire term of this Sublease, subject, however, to any earlier termination of the Master Lease without the fault of the Sublessor, and to comply with or perform Sublessor's Remaining Obligations and to hold Sublessee free and harmless from all liability, judgments, costs, damages, claims or demands arising out of Sublessor's failure to comply with or perform Sublessor's Remaining Obligations. 7.8 Sublessor represents to Sublessee that the Master Lease is in full force and effect and that to Sublessor's actual knowledge no default exists on the part of any Party to the Master Lease. 8. ASSIGNMENT OF SUBLEASE AND DEFAULT. 8.1 Sublessor hereby assigns and transfers to Master Lessor the Sublessor's interest in this Sublease, subject however to the provisions of Paragraph 8.2 hereof. 8.2 Master Lessor, by executing this document, agrees that until a Default shall occur in the performance of Sublessor's Obligations under the Master Lease, that Sublessor may receive, collect and enjoy the Rent accruing under this Sublease. However, if Sublessor shall Default in the performance of its obligations to Master Lessor then Master Lessor may, at its option, receive and collect, directly from Sublessee, all Rent owing and to be owed under this Sublease. Master Lessor shall not, by reason of this assignment of the Sublease nor by reason of the collection of the Rent from the Sublessee, be deemed liable to Sublessee for any failure of the Sublessor to perform and comply with Sublessor's Remaining Obligations. Page 2 of 4 8.3 Sublessor hereby irrevocably authorizes and directs Sublessee upon receipt of any written notices from the Master Lessor stating that a Default exists in the performance of Sublessor's obligations under the Master Lease, to pay to Master Lessor the Rent due and to become due under the Sublease. Sublessor agrees that Sublessee shall have the right to rely upon any such statement and request from Master Lessor, and that Sublessee shall pay such Rent to Master Lessor without any obligation or right to inquire as to whether such Default exists and notwithstanding any notice from or claim from Sublessor to the contrary and Sublessor shall have no right or claim against Sublessee for any such Rent so paid by Sublessee. 8.4 No changes or modifications shall be made to this Sublease without the consent of Master Lessor. 9. CONSENT OF MASTER LESSOR. (See Addendum) 10. BROKERS 10.1 Sublessor shall pay to Cushman Realty Corporation a licensed real estate broker, ("BROKER"), a fee as set forth in a separate agreement between Sublessor and Broker. 11. ATTORNEY'S FEES. If any party or the Broker named herein brings an action to enforce the terms hereof or to declare rights hereunder, the prevailing party in any such action, on trial and appeal, shall be entitled to his reasonable attorney's fees to be paid by the losing party as fixed by the Court. 12. ADDITIONAL PROVISIONS. (See Addendum) Page 3 of 4 - - ------------------------------------------------------------------------------- ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY REAL ESTATE BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS SUBLEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO: 1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS SUBLEASE. 2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PROPERTY, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY OF THE PREMISES FOR SUBLESSEE'S INTENDED USE. WARNING: IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE SUBLEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PROPERTY IS LOCATED. - - ------------------------------------------------------------------------------- NATIONAL TELEPHONE & COMMUNICATIONS, Executed at: INC., a Delaware corporation ---------------------------- [ILLEGIBLE] By /s/ Victor Streufert ---------------------------- ---------------------------------- Address: By /s/ James Quandt ------------------------------- ---------------------------------- "Sublessor" (Corporate Seal) VISION CAPITAL SERVICES CORPORATION, Executed at: a California corporation ---------------------------- [ILLEGIBLE] By /s/ Vincent Galewick ---------------------------- ---------------------------------- Address: By /s/ Vincent Galewick ------------------------------- ---------------------------------- "Sublessee" (Corporate Seal) PERFORMANCE CAPITAL MANAGEMENT, INC., Executed at: a California corporation ---------------------------- [ILLEGIBLE] By /s/ Vincent Galewick ---------------------------- ---------------------------------- Address: By /s/ Vincent Galewick ------------------------------- ---------------------------------- "Sublessee" (Corporate Seal) NOTE: THESE FORMS ARE OFTEN MODIFIED TO MEET CHANGING REQUIREMENTS OF LAW AND NEEDS OF THE INDUSTRY. ALWAYS WRITE OR CALL TO MAKE SURE YOU ARE UTILIZING THE MOST CURRENT FORM: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 SO. FLOWER ST., SUITE 600, LOS ANGELES, CA 90017, (213) 687-8777. Page 4 of 4 MASTER LEASE EXHIBIT 1 TO STANDARD SUBLEASE FIRST AMENDMENT TO LEASE This FIRST AMENDMENT TO LEASE ("First Amendment") is entered into as of this 25th day of April, 1997, between THE CARTER FAMILY INVESTMENT PARTNERSHIP, L.P., a California limited partnership ("Lessor") and NATIONAL TELEPHONE & COMMUNICATIONS, INC., a Delaware corporation ("Lessee"). RECITALS: WHEREAS, Lessor as the lessor entered into that certain Standard Industrial/Commercial Single-Tenant Lease-Net dated April 18, 1997 (the "Lease") with Lessee, as lessee, with respect to those certain premises more particularly described in the Lease (the "Premises"); and WHEREAS, Lessor and Lessee entered into the Lease as part of a series of transactions required by the terms of a Memorandum of Agreement dated March 27, 1997 (the "Memorandum Agreement"); and WHEREAS, the parties now desire to modify certain of the terms and provisions of the Lease; and WHEREAS, the parties now desire to modify the Lease as a consequence of Lessee having waived certain conditions and covenants of the Memorandum Agreement; and WHEREAS, Lessor has borrowed the amount of $5,004,000 from Lessee, which loan is secured by a first deed of trust ("NTC Loan") encumbering the Premises and Lessee desires that the NTC Loan be discharged in whole or in part with the proceeds of a new loan to be obtained from First Bank & Trust Co. et al. in the amount of $5,000,000 to be secured by a first trust deed encumbering the Premises ("First Bank Loan"); and WHEREAS, Lessor is desirous of obtaining financing on terms different from the First Bank Loan and Lessee desires to have the NTC Loan repaid as soon as possible; NOW, THEREFORE, in consideration of the mutual covenants herein conveyed and the willingness of Lessor accepting the First Bank Loan to pay the NTC Loan, the parties hereto agree as follows: 1. DEFINED TERMS: Defined terms herein which appear as defined terms in the Lease shall have the meaning given to such terms in the Lease except as herein provided. 2. ADDITIONAL INSURANCE. Lessee shall obtain earthquake and flood damage insurance for the Premises in an amount equal to the full replacement value of the Premises, but in no event less than the principal balance of the First Bank Loan and the Lessee's Note. Lessee shall be relieved of the obligation to maintain such insurance on the earlier of the date on which Lessor's obligations become "non-recourse" pursuant to the terms of the First Bank Loan and the date on which Lessor obtains a non-recourse loan with respect to the Premises. Except for the foregoing, all provisions contained in Section 8 of the Lease shall continue in full force and effect. 3. EXERCISE OF OPTION. The time by which Lessee must exercise any option to extend the term of the Lease shall be twenty-four (24) months prior to expiration of the Lease. 4. LEASE MODIFICATION FOR FINANCING. Provided that Lessee's obligations or liability under the Lease are not increased in any material respect as a result thereof, Lessee shall execute such reasonable modifications to the Lease as may be required by any institutional lender making a non-recourse loan to Lessor secured by a first trust deed encumbering the Premises having a principal balance of $5,000,000. Any such institutional lender shall provide Lessee with a non-disturbance agreement reasonably satisfactory to Lessee in the event such lender requires that the Lease be subordinate to the lien of such lender's deed of trust. If Lessee considers the requirements of any such lender to be unreasonable, the reasonableness of such requirements shall be submitted to arbitration in accordance with the terms of the Lease. 5. INCREASED SECURITY DEPOSIT. At the commencement of each extension, Lessee shall increase its deposit to an amount equal to one month's Base Rent for the first month of such extension term. 6. ESTOPPEL/RENT ACKNOWLEDGMENT. On May 1 of each calendar year, or such time as any lender or Lessor may request, the parties will execute an acknowledgement of the amount of monthly rent to be paid during the succeeding twelve (12) calendar month period in accordance with the rent formula set forth on EXHIBIT "B" of the Lease. 7. RESERVED. 8. RENT ABATEMENT. The rent abatement allowed pursuant to Item 15 of the Addendum to the Lease shall be conditioned upon Lessor receiving insurance for rental interruption which shall pay Lessor the amount of such abatement unless the event giving rise to the right of abatement is the result of Lessor's willful misconduct. 9. COOPERATION WITH LENDER. Lessee shall provide reasonable, non-privileged information as a prospective lender of Lessor may reasonably require as a condition of making such loan, including an inspection of the Premises, and providing current financial information on Lessee. Lessee shall provide such information reasonably requested by Lessor or a prospective Lender making such request, but no later than twenty (20) days. 10. LATE CHARGES. Item 23 of the Lease Addendum referring to Paragraph 13.4 of the Lease shall be further amended to provide that in lieu of the late charge imposed by said Paragraph, there shall be imposed a late charge equal to One Thousand Two Hundred Fifty Dollars ($1,250) plus any penalty or increased interest on the First Bank Loan, if any, charged by the Lender solely as a result of a Base Rent payment not being made by Lessee when due and Lessor's consequent failure to make timely payment to First Bank. The parties acknowledge that Lessor is depending on the income stream from the rent to pay debt service on the First Bank -2- Loan, and that the amount of any late charge reflects the actual losses sustained by Lessor as a result of the inability to timely make payment on the First Bank Loan. Upon the termination (repayment) of the First Bank loan, all references to First Bank or Lenders shall mean and refer to any lender making any replacement loan (refinancing). 11. RIGHT OF FIRST REFUSAL. If Lessee exercises the right of first refusal contained in Item 38 of the Addendum to the Lease, such exercise shall be in writing and delivered to Lessor within such thirty (30) day period and shall be subject to the following: the amount of any earnest money deposit shall be delivered to Lessor upon the exercise of Lessee's right of first refusal and Lessee shall waive any due diligence contingencies and/or Seller's warranties concerning the condition of the Premises. Title shall be transferred to Lessee in such condition as existed at the inception of the Lease unless any additional exceptions to title are approved by Lessor. 12. NO VIOLATION OF LOAN. Lessee hereby agrees that the lease terms pertaining to the use of casualty and condemnation proceeds shall be subject to the terms and conditions of the First Bank Loan. Lessee will not commit any act which would constitute a default under any deed of trust encumbering the Premises which secures the loan of an institutional lender to Lessor. 13. SUPERSEDING AGREEMENT. This First Amendment shall modify the Lease and supersede all terms and conditions contained therein. Furthermore, the terms of the Lease and this First Amendment shall modify the agreement of March 27, 1997 to the extent any terms are inconsistent therewith. IN WITNESS WHEREOF, the parties hereto have executed this first amendment on the 25th day of April, 1997 at Irvine, California. LESSEE: NATIONAL TELEPHONE & COMMUNICATIONS, INC., a Delaware corporation By: /s/ Ed Jacobs --------------------------------------- Ed Jacobs, Chairman of the Board LESSOR: THE CARTER FAMILY INVESTMENT PARTNERSHIP, L.P., a California limited partnership By: /s/ James C. Carter --------------------------------------- James C. Carter, General Partner -3- SECOND AMENDMENT TO LEASE AGREEMENT ----------------------------------- This Second Amendment to Lease Agreement ("Amendment") is made this __ day of November 1997 by and between The Carter Family Investment Partnership L.P., a California Limited Partnership ("Lessor") and National Telephone & Communications, Inc., a Delaware corporation ("Lessee"). 1. DEFINITIONS: The definitions used in this Amendment shall have the same meanings as those used in the Lease dated April 18,1997, as amended by that certain First Amendment to Lease Agreement dated April 25, 1997. 2. COMMENCEMENT OF AGREEMENT: The provisions of this Amendment shall become effective upon the funding of a loan to the Lessor from Allstate Life Insurance Company ("Allstate"). 3. BASE RENT: Exhibit B, Item (b) of the lease shall be deleted and replaced with the following: (b) Forty-Two Thousand Eight-Hundred Nineteen Dollars and Nine Cents ($42,819.09) 4. MODIFICATION; SURVIVAL. Any modification of the provisions of this Amendment shall require the prior written consent of Allstate. The provisions of this Amendment shall survive any acquisition by Allstate of the property of which the Premises are a part, including, but not limited to acquisition by judicial foreclosure, non-judicial foreclosure or deed-in-lieu of foreclosure. 5. SUPERSEDING PROVISIONS: In the event of a conflict between the term(s) of this Amendment and the original terms of the Lease, such term(s) of this Amendment shall control. IN WITNESS WHEREOF, Lessor and Lessee have executed this Second Amendment to Lease Agreement on the date hereinabove stated at Irvine, California. LESSEE: LESSOR: National Telephone & Communications The Carter Family Investment Partnership Inc., A Delaware Corporation L.P., a California Limited Partnership By: /s/ Victor C. Streufert By: /s/ James C. Carter ------------------------------- ---------------------------------- Victor C. Streufert, Sr VP James C. Carter Address: 8424 Paseo Del Ocaso La Jolla, CA 92037 By: ------------------------------- , Secretary Address: 2801 East Main St. Irvine, CA 92714 ADDENDUM TO STANDARD SUBLEASE ----------------------------- This ADDENDUM TO STANDARD SUBLEASE ("Addendum") is attached to, incorporated into and amends and supplements that certain Standard Sublease (the "Sublease") dated as of the 28th day of July, 1998 by and between NATIONAL TELEPHONE & COMMUNICATIONS, INC., a Delaware corporation ("Sublessor"), and VISION CAPITAL SERVICES CORPORATION, a California corporation, and PERFORMANCE CAPITAL MANAGEMENT, INC., a California corporation (jointly and severally, "Sublessee"). Sublessor and Sublessee agree that notwithstanding anything contained in the Sublease to the contrary, the Sublease as modified by the provisions set forth in this Addendum represents the full negotiated agreement of the parties, and the provisions of this Addendum will be deemed to be a part of the Sublease and will supersede any contrary or conflicting provision in the Sublease and prevail and control for all purposes. This Addendum, together with the Sublease itself, and all other Exhibits, Riders and Addenda attached thereto represents the fully integrated and binding agreement of the parties. All references in the Sublease and in this Addendum to "Sublease" are to be construed to mean the Sublease as amended and supplemented by this Addendum. All terms used in this Addendum, unless specifically defined in this Addendum, have the same meaning as such terms have in the Sublease. 2. PREMISES. The Premises shall be delivered by Sublessor to Sublessee in their present As-Is condition and initially shall be improved by Sublessee by the demolition of certain demising walls as depicted on Schedule X attached hereto and the repair of dry wall damaged by such removal and repainting and installation of carpet (herein, the "Initial Tenant Improvements"). The Initial Tenant Improvements installation shall be governed by the provisions of the Work Letter Agreement attached and made a part hereof as EXHIBIT "C" the ("Work Letter") (except that Paragraph 4 of the Work Letter shall not apply to the Initial Tenant Improvements) and the provisions of the Master Lease governing alterations and improvements. Any and all costs of the Initial Tenant Improvements shall be borne solely by Sublessee. Sublessor shall have no obligation whatsoever to improve the Premises in conjunction with this Sublease. Any subsequent alterations shall be installed in accordance with the provisions of the Work Letter, the Sublease and the Master Lease. Any alterations which do not require the consent of the Master Lessor under the Master Lease shall also not require the consent of Sublessor under the Sublease. 3.2 DELIVERY OF POSSESSION. Sublessor shall use commercially reasonable efforts to deliver and Sublessee shall accept possession of the Premises AS-IS, in broom clean condition on the date (the "Delivery Date") which is the later of (a) the date Sublessor obtains Master Lessor's consent to this Sublease or (b) August 10, 1998. From and after the Delivery Date, Sublessee shall have the right to occupy the Premises for purposes of completing the improvements described in the Work Letter. Such period of early occupancy shall be subject in all respects to the terms and conditions of this Sublease and of the Master Lease except for the payment of Rent. 4.2 RENT. As set forth in Section 12.5 hereinafter, Sublessee shall be obligated to pay Sublessee's share of Operating Expenses for the Project. Such amount shall be due and payable as Rent hereunder. 6.1 AGREED USE. Sublessee agrees that in no event shall any of the Premises be used for offices for any telecommunications service company or telecommunications services including, without limitation, paging and internet services. 6.2 COMPLIANCE. Sublessee shall comply with the provisions of Section 6 of the Master Lease as said provision applies to the Premises, including, without limitation the provisions of Title III of the Americans With Disabilities Act of 1990, as same has been or may be amended hereafter (the "ADA") as it pertains to Sublessee's use, occupancy, improvement and alteration of the Premises. Sublessee hereby acknowledges: (a) that it has satisfied itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, elevator access, environmental aspects, seismic and earthquake requirements, and compliance with the ADA and applicable zoning, municipal, county, state and federal laws, ordinances and regulations and any covenants or restrictions of record and the present and future suitability of the Premises for Sublessee's intended use; (b) that Sublessee has made such investigation as it deems necessary with reference to such matters, is satisfied with reference thereto, and assumes all responsibility therefore as the same relate to Sublessee's occupancy and use of the Premises and/or the terms of this Sublease; and (c) that neither Sublessor, nor any of Sublessor's agents, has made any oral or written representations or warranties with respect to said matters. Notwithstanding any contrary provision hereinabove, Sublessor warrants to its actual knowledge, without any independent investigation or inquiry, that the Premises do not contain levels of Hazardous Substances (as defined in the Master Lease) in violation of Applicable Requirements. 9. OMITTED. -------- 12.1 SIGNS. Subject to Sublessee obtaining all necessary governmental permits and approvals and Master Lessor's approval (collectively, the "Approvals"), Sublessee, at its sole cost and expense, shall have the exclusive right to install and maintain upon the building throughout the Sublease term, two (2) building-top signs on the exterior of the Premises plus a sign in the lobby of the Premises behind the reception desk bearing either the name "VISION CAPITAL SERVICES CORPORATION" or the name "PERFORMANCE CAPITAL MANAGEMENT, INC." All costs of design, fabrication, acquisition, installation, maintenance, repair and removal of Sublessee's signs, and all other costs associated with such signs, including, without limitation, utility charges and hook-up fees, and permits, shall be the sole responsibility of Sublessee. Upon the expiration or earlier termination of this Sublease, Sublessee shall, at its sole cost and expense, remove Sublessee's signs from the exterior and interior of the Premises and shall cause the Premises to be restored to the condition existing prior to the placement of Sublessee's signs. The sign rights granted herein are personal to Vision Capital Services Corporation and Performance Capital Management, Inc. (collectively, "Vision Capital") and may not be assigned, voluntarily or involuntarily, by any person or entity other than Vision Capital. The rights granted to Vision Capital hereunder are not assignable separate and apart from the Sublease, nor may any right granted herein be separated from the Sublease in any manner, either by reservation or otherwise. Sublessee acknowledges that Sublessor has no control over the placement of signs on the Premises and agrees that Sublessor shall have no obligation to procure any one or all of the Approvals, Sublessee being solely responsible therefor. 12.2 PARKING. Sublessee shall have the non-exclusive right in common with Sublessor and other tenants of the Project to use up to a maximum of ninety-one (91) parking spaces at no charge during the term of this Sublease. Of such ninety one (91) spaces, twelve (12) spaces in the area facing Jamboree may be reserved at Sublessee's election for Sublessee's exclusive use. If Sublessee requires additional parking spaces and such spaces are not designated for use by others and are therefore available for Sublessee's use, Sublessee may rent such additional spaces as are available from time to time and desired by Sublessee at the rate of $30.00 per stall per month. Such parking fees shall be due and payable by Sublessee as additional rent concurrently with Sublessee's monthly payments of Base Rent to Sublessor. 12.3 INSURANCE. Sublessee agrees that it shall name Sublessor and Master Lessor as additional insureds on all insurance carried by Sublessee as required under Section 8 of the Master Lease. 12.4 PROJECT. The Premises are part of that certain development consisting of the parcel(s) of real property located at 2801-2811 Main Street, Irvine, County of Orange, State of California, which are legally described on EXHIBIT "B" hereto (the "Property"), and all buildings, improvements and facilities, now or subsequently located on the Property from time to time, including, without limitation, the three (3) buildings (including the Premises) currently located on the Property (the "Project"). The aggregate rentable square feet of the three (3) buildings (including the Premises) located within the Project is approximately 64,730 rentable square feet. -2- 12.5 COMMON AREAS: OPERATING EXPENSES. --------------------------------- 12.5.1 DEFINITIONS; SUBLESSEE'S RIGHTS. During the Term of this Sublease, Sublessee shall have the non-exclusive right to use, in common with other tenants in the Project, and subject to the rules and regulations referred to Paragraph 40 of the Master Lease, those portions of the Project (the "Common Areas") not leased or designated for lease to tenants that are provided for use in common by Sublessor, Sublessee and any other tenants of the Project (or by the Sublessee's agents, employees, customers invitees, guests or licensees of any such party), whether or not those areas are open to the general public. The Common Areas shall include, without limitation, the outdoor patio area at the southern end of the Project, any fixtures, systems, decor, facilities and landscaping contained, maintained or used in connection with those areas, and shall be deemed to include any city sidewalks adjacent to the Project, any pedestrian walkway system, park or other facilities located on the Property and open to the general public, the parking areas, roadways, sidewalks, walkways, parkways, and driveways on the Property. 12.5.2 SUBLESSOR'S RESERVED RIGHTS. Sublessor reserves the right from time to time to use any of the Common Areas and to do any of the following, as long as such acts do not unreasonably interfere with Sublessee's use of or access to the Premises: (a) construct or alter other buildings or improvements on the Property; (b) make any changes, additions, improvements, repairs or replacements in or to the Project, the Common Areas and/or the Premises (if required to do so by any law or regulation) and the fixtures and equipment thereof, including, without limitation: (i) maintenance, replacement and relocation of pipes, ducts, conduits, wires and meters; and (ii) changes in the location, size, shape and number of driveways, entrances, stairways, elevators, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas and walkways and parking spaces and parking areas; (c) close temporarily any of the Common Areas while engaged in making repairs, improvements or alterations to the Project or any portion thereof; and (d) perform such other acts and make such other changes with respect to the Project or Common Areas, as Sublessor may, in the exercise of good faith business judgment, deem to be appropriate. 12.5.3 EXPENSES. In addition to the Base Rent required to be paid by Sublessee hereunder, during each month during the term of this Sublease, Sublessee shall pay to Sublessor as a reimbursement to Sublessor of "Operating Expenses" associated with Sublessee's use and occupancy of the Premises, the amount of $0.30 per month per square foot, such amount to be increased annually by four percent (4%) per annum effective as of each anniversary of the commencement of the Sublease. 12.5.4 DEFINITION OF OPERATING EXPENSES. As used in this Sublease, the term "Operating Expenses" shall consist of all costs and expenses of operation and maintenance of the Common Areas and the Property, as determined by standard accounting practices, calculated assuming the Project is one hundred percent (100%) occupied, including the following costs by way of illustration but not limitation: (a) Real Property Taxes (as defined in the Master Lease) and any taxes or assessments imposed in lieu thereof; (b) any and all assessments imposed with respect to the Premises, Common Areas, and/or Property pursuant to any covenants, conditions and restrictions affecting the Property; (c) water and sewer charges and the costs of electricity, heating, ventilating, air conditioning and other utilities for the Common Areas; (d) utilities surcharges and any other costs, levies or assessments resulting from statutes or regulations promulgated by any government authority in correction with the use or occupancy of the Project or the Common Areas; (e) costs of insurance obtained by Sublessor pursuant to this Sublease; (f) waste disposal services; (g) roof maintenance; (h) costs incurred in the management of the Project and Common Areas, including, without limitation: (1) supplies, (2) wages and salaries (and payroll taxes and similar governmental charges related thereto) of employees used in the operation and maintenance of the Property and Common Areas, and (3) a management/administrative fee not to exceed five percent (5%) of the annual gross receipts of the Project; (i) supplies, materials, equipment and tools; (j) repair and maintenance of the elevators and the structural portions of the Premises, including the plumbing, heating, ventilating, air-conditioning and electrical systems; (k) maintenance, costs and upkeep of all Common Areas; -3- (l) amortization on a straight-line basis over the useful life together with interest at ten percent (10%) on the unamortized balance of all costs of a capital nature (including, without limitation, capital improvements, capital replacements, capital repairs, capital equipment and capital tools): (1) reasonably intended to produce a reduction in operating charges or energy consumption; or (2) required after the date of this Sublease under any governmental law or regulation that was not applicable to the Project at the time it was originally constructed; or (3) for repair or replacement of any equipment needed to operate the Common Areas at the same quality levels as prior to the replacement; (m) costs and expenses of gardening and landscaping; (n) maintenance of signs (other than Sublessee's signs); (o) personal property taxes levied on or attributable to personal property used in connection with the Premises, the Common Areas and/or the Property; and (p) costs and expenses of repairs, resurfacing, repairing, maintenance, painting, lighting, cleaning, refuse removal, security and similar items, including appropriate reserves. 12.6 FURNITURE. Sublessee shall lease for the Sublease term at the rate of One Thousand Dollars ($1,000.00) per month, the furniture and other personal property of Sublessor described on SCHEDULE 1 hereto (the "Furniture"). Such amount shall be due and payable as additional rent concurrently with Sublessee's monthly payments of Base Rent hereunder. The Furniture is leased to Sublessee on an AS-IS basis and shall be surrendered to Sublessor upon the expiration or sooner termination of this Sublease in good condition, reasonable wear and tear excepted. 12.7 RIGHT TO LEASE ADDITIONAL SPACE. (a) Subject to the terms of this Section 12.7, throughout the Term of the Sublease, Sublessee shall have a continuing right to lease ("Sublessee's Right to Lease") any space in the building in the Project commonly known as 2801 Main Street (the "2801 Building") to the extent any such space becomes available for lease to third parties (all such space being referred to herein as "First Offer Space"). Sublessee's Right to Lease is subject and subordinate to the rights of all other existing tenants of the 2801 Building with prior expansion or lease rights relative to any such First Offer Space. (b) Sublessor will give Sublessee written notice of the availability of such First Offer Space setting forth the basic economic terms, including, but not limited to, the Base Rent, and all other economic terms and conditions (collectively, the "Economic Terms"), upon which Sublessor is willing to lease the First Offer Space to Sublessee including the date the existing tenant or occupant, if any, is expected to vacate such space ("Sublessor's Availability Notice"). (c) Within five (5) business days after Sublessee's receipt of Sublessor's Availability Notice, Sublessee must give Sublessor written notice pursuant to which Sublessee shall elect to either: (i) lease such First Offer Space upon the Economic Terms set forth in Sublessor's Availability Notice and the same non-Economic Terms as set forth in the Sublease with respect to the Premises; or (ii) refuse to lease such First Offer Space. Sublessee's failure to timely choose either clause (i) or clause (ii) above will be deemed to be Sublessee's choice of clause (ii) above. (d) If Sublessee chooses (or is deemed to have chosen) clause (c)(ii) above, Sublessee's Right to Lease such First Offer Space will be null and void. If Sublessee exercises its Right to Lease as provided herein, the parties will promptly thereafter execute an amendment to this Lease to include the First Offer Space in the Premises and to document the lease terms thereof. (e) As provided above, Sublessee's Right to Lease is subject to all expansion and extension rights and other rights to lease, as applicable, which Sublessor may have granted to other tenants prior to the date of this Sublease or following any refusal by Sublessee to lease First Offer Space as set forth above. Thus, Sublessor's Economic Terms will be delivered to Sublessee only after Sublessor has appropriately notified and received negative responses from all other tenants with rights in the First Offer Space superior to Sublessee's rights, if any. The Right to Lease granted herein is personal to the original Sublessee executing this Sublease and any successor in interest to Sublessee provided such successor has been approved by the Master Lessor if so required and such successor has a net worth which is equal to or greater than the net worth of Sublessee as of the date hereof (such a successor being described herein as a "Permitted Successor"). The Right to Lease granted herein may be -4- exercised only by the original Sublessee executing this Sublease or a Permitted Successor while occupying the entire Premises and without the intent of thereafter subletting the Premises and may not be exercised or be assigned, voluntarily or involuntarily, by any person or entity other than the original Sublessee executing this Sublease or a Permitted Successor. Sublessee's Right to Lease is not assignable separate and apart from this Sublease, nor may the Right to Lease be separated from this Sublease in any manner, either by reservation or otherwise. Sublessee will have no right to exercise its Right to Lease, notwithstanding any provision of the grant hereinabove to the contrary, and Sublessee's exercise of the Right to Lease may be nullified by Sublessor and deemed of no further force or effect, if (i) Sublessee is in default of any monetary obligation or material non-monetary obligation under the terms of this Sublease or the Master Lease (or if Sublessee would be in such default under this Sublease or the Master Lease but for the passage of time or the giving of notice, or both) as of Sublessee's exercise of the Right to Lease or at any time after the exercise thereof, or (ii) Landlord has given Tenant two (2) or more notices of default, whether or not such defaults are subsequently cured, during any twelve (12) consecutive month period of this Sublease. 12.8 ASSIGNMENT AND SUBLETTING. Notwithstanding any contrary provision in the Master Lease, Sublessee shall have no right whatsoever to voluntarily or by operation of law, assign, transfer, mortgage, pledge or otherwise transfer or encumber or sublet all or any part of Sublessee's interest in the Premises and/or this Sublease. 12.9 RENEWAL. Notwithstanding any contrary provision in the Master Lease, including, without limitation, Item 1 of the Lease Addendum, Sublessee shall have no option to extend the Sublease term. IN WITNESS WHEREOF, the parties hereto have executed this Addendum as of the day and year of execution of the Sublease. SUBLESSEE: SUBLESSOR: VISION CAPITAL SERVICES NATIONAL TELEPHONE & CORPORATION, a California corporation COMMUNICATIONS, INC., a Delaware corporation By: /s/ Vincent Galewick ---------------------------------- Print Name: Vincent Galewick By: /s/ Vincent Galewick --------------------- ----------------------------------- (Vice) President Print Name: Vincent Galewick ----------------------- SVP CFO By: /s/ Vincent Galewick ---------------------------------- Print Name: Vincent Galewick By: /s/ James Quandt --------------------- ----------------------------------- (Assistant) Secretary Print Name: James Quandt ----------------------- PRESIDENT & C.E.O. PERFORMANCE CAPITAL MANAGEMENT, INC., a California corporation By: /s/ Vincent Galewick ----------------------------------- Print Name: Vincent Galewick ----------------------- (Vice) President By: /s/ Vincent Galewick ----------------------------------- Print Name: Vincent Galewick ----------------------- (Assistant) Secretary -5- EX-27 17 EXHIBIT 27
5 1,000 9-MOS DEC-31-1998 SEP-30-1998 1,331 0 9,204 0 0 11,092 10,714 2,784 26,550 28,478 0 0 1,842 73,205 (5,492) 26,550 47,982 47,982 30,226 63,567 2,454 3,123 0 (8,749) (50) 0 0 0 0 (8,699) (0.79) (0.79)
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