INCOMNET, INC.
1995
FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 COMMISSION FILE NO. 0-12386
INCOMNET, INC.
A California IRS Employer No.
Corporation 95-2871296
21031 Ventura Blvd., Suite 1100
Woodland Hills, California 91364
Telephone no. (818) 887-3400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:................None
SECURITIES REGISTERED
PURSUANT TO SECTION 12(g) OF THE ACT:..............Common Stock, No Par Value
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. [ ]
Aggregate market value of voting common stock held by
non-affiliates of the registrant (based upon the average
of the closing bid and ask prices of $5 3/8 and $5 5/8
respectively, as reported by the NASDAQ System on March 27, 1996) $55,939,956
Number of shares of registrant's common stock outstanding as of
March 27, 1996........................................................13,224,024
DOCUMENTS INCORPORATED BY REFERENCE: Portions of registrant's proxy
statements relating to registrant's 1996 annual meeting of shareholders have
been incorporated by reference into Part III hereof.
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1 - BUSINESS
General 5
Telephone Services 5
Optical Systems 5
Network Products and Services 5
National Telephone & Communications, Inc. (NTC) 6
Products 6
Network Marketing Program 6
Disclosure of Independent Representative Organizations
Related to NTC Executives 7
Pager Agreement 7
Wiltel Contract 8
Management Incentive Agreement 8
Acquisition of Rapid Cast, Inc. (RCI) 9
Acquisition 9
Financing of Acquisition 10
Registration Rights 11
Right to Designate Directors 11
Certain Transactions 11
Agreement with Martin Price 12
Rapid Cast, Inc. (RCI) 12
General 12
The Optical Marketplace 12
The Production and Dispensing of Prescription
Eyeglass Lenses 13
The Rapid Cast LenSystem 15
Technical Overview of the Rapid Cast LenSystem 15
Marketing and Pricing Strategy 16
Manufacturing Strategy 17
Research and Development Strategy 17
Maintenance, Warranty and Insurance 17
Competition 17
Patents and Proprietary Rights 18
Governmental Regulation 19
Acquisition of LabTech, Inc. 19
Nonissuer Sales of Stock Pursuant to Regulation S 20
Agreement with Price International, Inc. 20
Network Services 21
Employees, Officers and Directors 21
Employees 21
Officers 22
Reconstitution of Board of Directors 22
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TABLE OF CONTENTS (CONT'D)
PAGE
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ITEM 2 - PROPERTIES 23
ITEM 3 - LEGAL PROCEEDINGS 24
Securities & Exchange Commission Investigation 24
Class Action and Related Lawsuits 24
Section 16 (b) Lawsuit 25
Patent Infringement Lawsuit 26
Legal Action Against Prior Representatives 26
Claims by Prior Noteholders 27
Potential Lawsuits 27
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 28
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS 29
Market Information 29
Dividends 30
ITEM 6 - SELECTED FINANCIAL DATA 30
Statements of Operations Data 30
Balance Sheet Data 31
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 31
Liquidity and Capital Resources 31
Results of Operations - 1995 Compared to 1994 33
Results of Operations - 1994 Compared to 1993 35
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 36
PART III
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS OF THE REGISTRANT 37
ITEM 11 - EXECUTIVE COMPENSATION 37
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 37
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 37
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K 38
Index to Financial Statements 38
Index to Exhibits 39
Report of Independent Auditors 41
Consolidated Balance Sheets 42
3
TABLE OF CONTENTS (CONT'D)
PAGE
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Consolidated Statements of Operations 44
Consolidated Statements of Shareholders' Equity 45
Consolidated Statements of Cash Flows 46
Notes to Consolidated Financial Statements 48
Note 1 - Summary of Significant Accounting Policies 48
Note 2 - Funding of Marketing Commissions and
Deferred Income 49
Note 3 - Related Party Transactions 50
Note 4 - Notes Payable 50
Note 5 - Deferred Tax Liability 51
Note 6 - Shareholders' Equity 52
Note 7 - Commitments and Contingencies 55
Note 8 - Network Marketing Costs 56
Note 9 - Segment Information 57
Note 10 - Gain on Settlement with Creditors 59
Note 11 - Acquisition of Rapid Cast, Inc. 59
Note 12 - Fourth Quarter Adjustments 59
Schedule II - Valuation and Qualifying Accounts 60
Exhibit 3.2 - Amendment to Bylaws Regarding Directors 61
Exhibit 10.2 - Lease Agreement 62
Exhibit 21 - Subsidiaries of the Registrant 69
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PART I
ITEM 1. BUSINESS
GENERAL:
Incomnet, Inc. (the "Company") was incorporated under the laws of the State
of California on January 31, 1974. The Company is engaged in the following
businesses:
TELEPHONE SERVICES - The Company, through its wholly-owned subsidiary,
National Telephone & Communications,-Registered Trademark- Inc. (NTC),
markets long distance telecommunications services to commercial and
residential customers in the United States. Service is provided by procuring
long distance telecommunications transmission services from long distance
communication carriers at high volume wholesale rates and reselling those
services at retail rates. NTC uses a network marketing program of
independent representatives to sell its telecommunications-related services
to retail customers. NTC does not sign up telephone customers directly. The
growth in NTC's telecommunications-related revenues is directly tied to its
network marketing program. NTC's independent representatives typically pay an
annual fee in order to purchase materials, training and/or annual services
from NTC to assist them in selling new retail customers and enrolling other
representatives in the NTC program. NTC pays the independent representatives
a residual monthly commission on the telecommunications revenue. In addition,
the network marketing program pays various bonuses and overrides when and if
representatives obtain a minimum number of new telephone customers within a
specific 30 to 60 day period. This program has been designed to bring NTC new
retail telephone customers even if little or no growth occurs in the
marketing program revenues. The new telecommunications revenues generally lag
the new marketing program revenues by one to three months. Sales from this
segment accounted for 96% of the Company's total 1995 sales.
OPTICAL SYSTEMS - The Company, through its 51%-owned subsidiary Rapid Cast,
Inc. (RCI), acquired in February 1995 (see "Acquisition of Rapid Cast,Inc."),
manufactures and markets the FastCast-TM- LenSystem that allows retail optical
stores and wholesale optical lens manufacturing laboratories to produce
single vision, flat-top bifocal and progressive bifocal lenses on demand, in
approximately 30 minutes. The FastCast-TM- LenSystem uses a series of
high-accuracy prescription glass molds that are filled with a proprietary
liquid monomer (plastic). When exposed to ultraviolet light within the
system's curing chamber, the monomer undergoes a chemical reaction that
rapidly "cures" or hardens the lens. Sales from this segment accounted for
2.3% of the Company's total 1995 sales. Rapid Cast's operating results are
included in the accompanying financial statements.
NETWORK PRODUCTS AND SERVICES - The Company acquires and/or develops hardware
and software, primarily for interactive data communications networks. In
this regard, the Company operates a communications network known under the
tradename "AutoNETWORK" that services the automotive dismantling industry in
California, Nevada, Arizona, Oregon and Washington. Sales from this segment
accounted for 1.7% of the Company's total 1995 sales.
5
NATIONAL TELEPHONE & COMMUNICATIONS, INC. (NTC):
PRODUCTS - NTC is an inter-exchange carrier and reseller of long distance
telephone services to residential and small business customers throughout the
United States. NTC's primary product is its Dial-1 Telephone Service. Its
other long distance telephone products are 800-Number Services and Calling
Card Services, which include the Flag Card, Sure$aver Card, Sure$aver Gold
card and Call$aver Card.
In order to provide these products, NTC generally contracts to purchase long
distance telephone time from national carriers at wholesale rates based upon
high volume usage. NTC then resells this time to its customers at its own
discounted retail rates which are generally 10% to 60% below AT&T's
published, tariffed MTS rates. NTC's Dial-1 Service is transparent to its
customers once a customer's long distance service has been converted to NTC.
NTC's calling card products operate similarly to the calling card products
offered by the major carriers. NTC's customers pay for their long distance
calling usage either through direct billing from NTC , through billing from
the customer's local exchange carrier ("LEC"), through direct billing by NTC
of the customer's major credit card, or by prepaying for long distance time
in the case of certain NTC calling card products. In certain states, NTC has
an agency agreement with an unaffiliated company which bills customers' local
intrastate calls through the local telephone company. Commencing in the
second quarter of 1996, NTC intends to increase its use of LECs to bill and
collect telephone service accounts receivable. The planned increase in the
use of LECs is expected to increase the amount of time that it takes for NTC
to receive payment on its accounts receivable.
NETWORK MARKETING PROGRAM - NTC markets its products on a nationwide basis
through a multi-level, network marketing program of independent sales
representatives. NTC authorizes and trains the independent representatives to
resell its services to residential and small business customers, and allows
the individual representatives to build up their own "downline" sales force
of other independent representatives. NTC currently has in excess of 40,000
independent representatives in its network marketing program. Once an
independent representative has signed up a long distance telephone customer
on one or more of NTC's services/products, the customer becomes an NTC
customer. NTC takes over the servicing and billing of the customer as well as
the collection of monies owed by the customer for the use of the NTC
telephone services/products. NTC pays each independent representative a
commission on the telephone usage monies collected from those retail
telephone customers who are directly signed up by that representative. NTC
also pays override commissions to each independent representative on the
monies collected from those telephone customers signed up by the
representative's downline as well as a bonus percentage of all telephone
monies collected by NTC from the retail telephone customers collectively
signed up by all independent representatives, if certain minimums of retail
telephone business are personally achieved by the representative. In
addition, NTC pays sales bonuses to independent representatives for assisting
other representatives to obtain certain minimums of new retail long distance
telephone business. NTC does not pay any monies to independent
representatives simply for recruiting other representatives into NTC's
network marketing program. NTC generally maintains communications with its
independent representatives through (1) NTC's proprietary communications
systems, (2) NTC's internal
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personnel dedicated to the support of the independent representatives, (3)
various NTC manuals, newsletters and other publications that are periodically
and continually sent to the independent representatives, (4) NTC's network of
senior independent representatives, and (5) various training programs offered
by NTC and its senior independent representatives throughout the United
States.
NTC believes it is in compliance with all State and Federal regulations
governing multi-level marketing companies. However, to ensure the Company has
objective and knowledgeable outside legal opinion in this area, NTC has
formed a Regulatory Compliance Committee consisting of four former State
Attorneys General that periodically reviews NTC's marketing programs for such
compliance.
DISCLOSURE OF INDEPENDENT REPRESENTATIVE ORGANIZATIONS RELATED TO NTC
EXECUTIVES - In order to eliminate potential conflicts of interest, at the
end of 1992, NTC implemented its current policy that no senior,
decision-making NTC executive or officer may have a downline organization of
independent representatives involved with the selling of NTC's long distance
telephone services and/or marketing programs ("Executive Downlines").
Violation of this policy subjects such an NTC officer/executive to immediate
termination and forfeiture of all past and future commissions from such
disallowed Executive Downlines. To the best of the Company's knowledge, none
of NTC's senior officers/executives have an Executive Downline, including Ed
Jacobs (President and CEO), Jerry Ballah (Executive Vice President), Richard
Marting (Vice President of Finance and Administration) and William Savage
(Vice President of Operations).
In addition, NTC's current policy requires full disclosure by all senior NTC
officers/executives of any NTC downline organizations headed by an immediate
family member of such senior officer/executive as well as disclosure of the
personal involvement of an immediate family member in the sale of NTC's long
distance telephone services to retail customers ("Immediate Family
Customers/Downlines"). To the best of the Company's knowledge, none of
NTC's senior officers/executives have Immediate Family Customers/Downlines
with the exception of Jerry Ballah. Mr. Ballah has previously disclosed the
existence of Immediate Family Customers/Downlines, at the time each such
customer base and/or downline was being initiated by the specific family
member, for his mother and his two sons. In addition, although not required
by NTC's current policy, Mr. Ballah voluntarily disclosed, at the time each
such customer base and/or downline was being initiated, that certain members
of the immediate family of Mr. Ballah's fiance have Immediate Family
Customers/Downlines. It is also NTC's policy to periodically have the
activities and income of such Immediate Family Customers/Downline reviewed by
an NTC company committee headed by NTC's President and CEO (and from which
the related senior officer/executive is excluded) for the purpose of
determining that all of NTC's policies and procedures are being strictly
followed.
PAGER AGREEMENT - In June 1995, NTC entered into additional promotional
agreements with a publicly-traded, personal pager company and a
privately-held Internet access service provider. Under the terms of these
agreements, (i) NTC will use certain merchandise and services offered by
these two companies to enhance NTC's marketing of long distance services, and
(ii) NTC will be compensated by the two companies for each subscriber added
to their respective services and for the development of certain promotional
programs.
7
WILTEL CONTRACT - In September 1995, NTC entered into a new carrier
contract with Wiltel, Inc. of Tulsa, Oklahoma, a subsidiary of WorldCom,
Inc., covering a potential volume purchase of $600 million of long distance
telephone time over a five year period commencing in November 1995. As in the
prior carrier contract with Wiltel, Inc., NTC commits to purchase the
designated volume of telephone time in accordance with a schedule over the
term of the contract. NTC currently relies on the purchases of another
unaffiliated long distance telephone service provider to meet its volume
purchase requirements under the new contract.
MANAGEMENT INCENTIVE AGREEMENT - On February 6, 1996, the Company entered
into an agreement with NTC pursuant to which it agreed to permit NTC to do a
public underwriting of its (NTC's) common stock in the future. The
underwriting would be implemented if NTC receives a firm commitment from a
reputable regional or national investment banking firm. The Company also
agreed to create three stock option plans for the management, employees and
independent sales representatives of NTC. The exercise price of all options
issued under such plans will be based on the fair market appraisal value of
NTC shares as of the date of the grant of the options. The options will be
granted and become exercisable only if NTC becomes a public reporting company
and its stock is publicly traded. The options will be granted pursuant to a
stock option plan meeting the requirements of Section 16(b)(3) of the
Securities Exchange Act of 1934, as amended, and the plans will be registered
on Form S-8 under the Securities Act of 1933, as amended.
Pursuant to one plan, up to 15% of NTC's outstanding shares, after taking
into account the issuance of all shares pursuant to all three plans and the
underwriting, will be reserved for issuance pursuant to options granted to
current and/or future key independent sales representatives of NTC and will
only be vested conditioned upon NTC's achieving certain specific minimum
revenue levels prior to January 1, 1999. The NTC Board of Directors will
determine the grantees of the stock options under this plan.
Pursuant to the second plan, up to 10% of NTC's outstanding shares, after
taking into account the issuance of all shares pursuant to all three plans
and the underwriting, will be reserved for issuance to two senior
executive officers and a key consultant of NTC. The options issued to the two
senior executive officers will be fully vested on the date of grant (i.e. the
date NTC's stock first becomes publicly traded), while one-third of the
options to be granted to the key consultant will vest immediately upon grant,
and two-thirds of such options will vest in accordance with a schedule to be
determined by NTC's Board of Directors.
Pursuant to the third plan, up to 10% of NTC's outstanding shares, taking
into account the issuance of all shares pursuant to all three plans, will be
reserved for issuance to current and future executive officers, employees and
key consultants of NTC. The options, once granted, will vest one-third based
on the time of service and two-thirds only if NTC achieves a total of $10
million in pre-tax profits in any four consecutive calendar quarters prior to
January 1, 1998. Only 25% of the options eligible for grant under this third
plan may be issued to the senior executive officers who are the beneficiaries
of the second stock option plan. The Board of Directors of NTC will determine
the grantees of the stock options under this plan.
8
Upon the creation of the three plans and issuance of options to Ed
Jacobs and Jerry Ballah, Mr. Jacobs will waive his rights to the remaining
outstanding warrants and options to purchase the Company's common stock which
are provided for in Mr. Jacobs' Employment Agreement. See the Company's Proxy
Statement for its 1996 Annual Meeting of Shareholders, filed with the
Securities and Exchange Commission on or about April 30, 1996.
The agreement with NTC also provides that upon NTC becoming a publicly traded
company, it will add four new independent outside directors to the existing
Board, which currently consists of three individuals. Initially, the Company
will have the right to select two of the new independent directors and NTC
will have the right to select the other two. After NTC's initial public
offering, the NTC Board of Directors will select future nominees for the NTC
Board. The independent directors will constitute the Audit and Compensation
Committees of NTC's Board of Directors. Until NTC becomes publicly traded,
the NTC Board will remain as currently constituted and certain transactions
will require the unanimous consent of the NTC Board members, including the
terms of any public offering of NTC's stock. The NTC Board currently consists
of Edward Jacobs, Jerry Ballah and Joel W. Greenberg, the Company's designee.
The Company has agreed to vote its shareholdings in NTC for the NTC
management slate of nominees. The timing and terms of any public offering of
NTC's stock is not known at this time, and there is no assurance regarding
when or if NTC will do its initial public offering.
ACQUISITION OF RAPID CAST, INC. (RCI):
ACQUISITION - On February 8, 1995, the Company acquired 10,200,000 shares
representing approximately 51% of the outstanding common stock of Rapid Cast,
Inc. ("RCI"),a private corporation headquartered in Louisville, Kentucky, for
$15,000,000 cash paid to RCI, 750,000 shares of the Company's common stock
issued to RCI's current stockholders ("Founding Stockholders"). The
purchase agreement also originally provided that an additional 750,000 shares
of the Company's common stock that could be earned by RCI's Founding
Stockholders based upon the earnings of RCI during its first four full fiscal
quarters. On June 30, 1995 the Company's purchase agreement for RCI was
amended to provide for the immediate issuance of 600,000 shares of the
Company's common stock to the Founding Shareholders in lieu of their right to
potentially earn up to 750,000 shares. See "Acquisition of Rapid Cast,Inc.-
Certain Transactions." As part of the acquisition, the Company agreed that
after the end of the fiscal quarter in which RCI achieves cumulative pre-tax
earnings of $1,250,000, provided such earnings are achieved during the first
four quarters after the acquisition, it will spin off ("Spin Off") RCI as a
public company by registering RCI's shares with the Securities and Exchange
Commission and by providing to the Company's shareholders a dividend of a
minimum of 25% of the common stock of RCI now owned by the Company. In such
event, RCI agreed to take all reasonable steps in order to permit public
trading of the Spin Off shares. RCI did not achieve the cumulative pre-tax
earnings threshold in its first three fiscal quarters after the acquisition,
and the Company is therefore not obligated to implement the Spin-Off.
RCI has used about $14,000,000 of the funds it received to acquire all of the
outstanding capital stock of Q2100, Inc. ("Q2100"), a company that owns a
proprietary technology for manufacturing single focal , bifocal and
progressive eyeglass lenses ("LenSystem"), as well as 15 fully assembled and
66 partially assembled production line machines which incorporate this
9
technology and which are suitable for installation in retail optical
stores. The system is named the FastCast-TM- LenSystem. Q2100 was previously
owned by Pearle, Inc.("Pearle"), which entered into a stock purchase
agreement on October 28, 1994 for the sale of 100% of Q2100 to RCI. The
purchase price payable by RCI under the stock purchase agreement with
Pearle was $15,000,000 in cash (less certain expenses), of which $1,000,000
was paid by RCI on October 28, 1994 as a deposit, and the balance of
$14,000,000 was paid on the closing of the acquisition on February 8, 1995
from the proceeds of its stock issuance to the Company. As part of the
agreement, Pearle has assumed or discharged all liabilities of Q2100 prior to
the acquisition closing. As part of the agreement, RCI has also agreed that
after the acquisition it will make the technology available to Pearle and its
affiliates on a most favored nation basis. RCI used the remaining $1,000,000
from the issuance of its stock to the Company to fund its operations.
FINANCING OF ACQUISITION - In order to pay the purchase price of the stock of
RCI, the Company provided $5,000,000 in cash and financed the balance by a
private placement of securities consisting of 10 Units. Each Unit consisted
of one convertible Note issued by the Company and one Warrant to purchase
100,000 shares of RCI common stock. Each Note was in the principal amount of
$1,000,000 or fraction thereof, matured on January 31, 1996, and accrued
interest at the rate of 8% per annum. Interest was payable quarterly and at
maturity or upon conversion. Purchasers of seven of the Units, who are
affiliates of RCI or shareholders of the Company, waived interest accruals on
the Notes included in their Units.
On June 30, 1995, Units representing $9,350,000 of the Notes were converted
at a rate of $10 per share into 935,000 shares of the Company's common stock.
An additional $150,000 of the notes were converted at the rate of $10 per
share into 15,000 shares of the Company's common stock in July 1995. In
January 1995, the remaining Note for $500,000 was repaid in full. The Company
is obligated to register the shares of its common stock issued upon the
conversion of the Notes which were not otherwise sold in 1995 by those
shareholders in transactions under Regulation S. See Item 1-Business, "Rapid
Cast, Inc.", "Nonissuer Sales of Stock Pursuant to Regulation S." The Company
is in the process of registering under the Securities Act of 1933,as amended,
the remaining shares held by the original Noteholders. In addition, in order
to settle potential claims by certain of those shareholders and the one
Noteholder who did not convert his Note into shares, which could have been
asserted because of the Company's failure to register the underlying shares
in 1995, the Company agreed to (i) issue and register 31,000 additional
shares of common stock and to convey a Warrant to purchase 5,000 shares of
RCI common stock to the Noteholder who did not convert his shares, (ii) issue
sufficient additional shares to said prior Noteholder, if necessary, to
ensure that on the effective date of the registration of these shares, the
prior Noteholder has $155,000 worth of the Company's common stock, including
the 31,000 shares, based on the average closing market price of the Company's
stock on the five trading days immediately following the effective date of
the registration statement, and (iii) to issue to the holders of 32,500
shares who did convert their Notes, sufficient additional shares of the
Company's common stock, if necessary, to ensure that they have an aggregate
of $390,000 worth of the Company's stock on the effective date of the
registration statement, based on the average closing market price of the
Company's stock on the five trading days immediately preceding the effective
date of the registration statement. See "Item 3. Legal Proceedings -Claims
By Prior Noteholders."
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The Warrants to purchase shares of RCI common stock are exercisable
commencing with the 35th business day (the "Start Date") on which securities
of RCI are first traded publicly, provided that the Start Date must occur on
or before December 31, 1998. The exercise price of the Warrants will be equal
to 50% of the average of the last reported sales price during the first 30
business days after the Start Date. Securities of RCI will become publicly
traded only if RCI is spun off as a public corporation as anticipated under
the terms of the acquisition, or if RCI in its discretion determines to
consummate a public offering of its securities. The Warrants will expire 180
days after the date, if any, on which they first become exercisable.
REGISTRATION RIGHTS - RCI granted to the Company the right to demand
registration at RCI's cost of all of the Company's RCI shares. The Company
may demand this right only after RCI's securities are publicly traded
(whether as a result of the Spin Off or otherwise) and only as to one-third
of these shares in each of 1996, 1997 and 1998 on a cumulative basis. RCI has
also granted to the Company piggyback registration rights with respect to
these shares after RCI's securities are publicly traded.
RIGHT TO DESIGNATE DIRECTORS - The Company has the right to elect two of
RCI's five directors until the Spin Off, and one of RCI's five directors
after the Spin Off. Melvyn Reznick and Joel W. Greenberg are the Company's
two designees on the Board of RCI.
CERTAIN TRANSACTIONS - The current stockholders of RCI (the "Founding
Stockholders") other than the Company consist, among others, of persons
related to Broad Capital Associates, Inc. (the "Broad Group") who own
3,266,666 shares of RCI common stock, and Larry Joel, Robert Cohen and
persons related to them (the "CRJ Group") who own 6,533,334 of RCI common
stock. The Founding Stockholders acquired these shares at a purchase price of
approximately $.03 per share. The Founding Stockholders and their affiliates
as of December 31, 1995 loaned approximately $1,463,334 to RCI, which
amounts, together with any additional loans which are thereafter made by
them, will be payable July 31, 1996, together with interest at 7% per annum.
RCI may determine to prepay this indebtedness, whether from the proceeds of
the placement of the Units or otherwise.
As part of the purchase price for the acquisition of 10,200,000 shares of
RCI common stock by the Company, the Company issued 750,000 shares of its
common stock to the Founding Stockholders on February 8, 1995. The Company
also agreed to issue to the Founding Stockholders a maximum of 750,000
additional shares of the Company's common stock depending on RCI's pre-tax
earnings during the first four full fiscal quarters after the acquisition
closing, which occurred on February 8, 1995. On June 30, 1995, the Company
renegotiated the terms of the Agreement and issued to RCI's Founding
Stockholders 600,000 unregistered shares of its common stock in lieu of the
maximum of 750,000 shares that were to be issued based upon performance
factors. The Company made this issuance because, in its opinion, it believed
that it was likely that RCI would meet its performance requirements and,
hence, attempted to reduce the potential dilution of the Company's stock by
150,000 shares. Based on RCI's actual performance during its first three
fiscal quarters, no additional shares would have been issued to the Founding
Stockholders.
11
The exact number of additional shares of the Company's common stock which
would have been issuable to the Founding Stockholders under the original
terms of the acquisition agreement was to be calculated on the last day of
each of RCI's first and fourth fiscal quarters following the acquisition
closing as follows: (i) for the first quarter, by multiplying $7.5 million by
a fraction, the numerator of which was the net pre-tax earnings generated by
RCI during such first full fiscal quarter, and the denominator of which is
$4.5 million, and (ii) for the first four full fiscal quarters, by
multiplying $7.5 million by a fraction, the numerator of which was the
aggregate net pre-tax earnings generated by RCI during such four full fiscal
quarters less the net pre-tax earnings generated by RCI in the first full
quarter, and the denominator of which was $4.5 million. The products
determined in (i) and (ii) above were then to be divided by $12.50 per share
to determine the number of additional shares issuable to the Founding
Stockholders, provided, that if any time during the first four full fiscal
quarters after February 8, 1995, RCI earned more than $5.5 million in net
pre-tax earnings, the value of each additional share for calculation purposes
would have been $10.00 rather than $12.50.
AGREEMENT WITH MARTIN PRICE. On August 31, 1995, RCI entered into an
agreement with Martin Price pursuant to which it issued 250,000 shares of RCI
common stock and paid $150,000 to Mr. Price ($100,000 in cash and $50,000
pursuant to a note) in consideration for the cancellation of a net profit
interest in RCI's business which Mr. Price previously owned. Accordingly, RCI
currently has 20,250,000 shares of common stock issued and outstanding.
RAPID CAST, INC. (RCI):
GENERAL. RCI is a Delaware corporation formed in February 1994 which acquired
100% of the outstanding capital stock of Q2100, Inc. ("Q2100") from Pearle,
Inc., an unaffiliated subsidiary of Grand Metropolitan, Ltd., a United
Kingdom conglomerate. Q2100 owns certain domestic and foreign patents and
patent applications relating to a new technology, commonly known as Thick
Film Radiation Cured Polymer Technology (the "Technology"), which enables
retail optical stores and wholesale optical lens manufacturing laboratories
to produce many prescription ophthalmic lenses on site at a cost generally lower
than if they were purchased from third party manufacturers or distributors.
RCI is marketing the Technology under the name Fast Cast-TM- LenSystem.
THE OPTICAL MARKETPLACE. Nearly 60% of the United States population
(approximately 151 million people) required some form of vision correction in
1992, according to CENSUS INTERNATIONAL '93: THE OPTICAL INDUSTRY FACT BOOK
("Census93"). It is estimated that, by the year 2000, the United States
prescription eyewear population will rise to approximately 164 million people
and that, in the following decade, over 180 million people will use
prescription eyewear products. Census93 reports that, in the approximately
$11.9 billion United States retail optical market in 1992, the average
optical retailer's breakdown of dollar revenue by product category was: (a)
approximately 47% (or nearly $5.6 billion) from the sale of eyeglass lenses
and lens treatments (e.g., the application of scratch-resistant and
ultraviolet coatings), (b) approximately 38% from the sale of eyeglass frames
and sunglasses, and (c) approximately 15% from the sale of contact lenses.
Census93 reports that, out of the approximately 80 million pairs of
prescription eyeglass lenses sold in the United States in 1992, an estimated
55% to 60% were single vision lenses, while an estimated 40% to 45% were
multifocal lenses (i.e., bifocal, trifocal and cataract lenses). According
12
to Census93, bifocal lenses currently constitute the substantial majority of
consumer purchases of multifocal lenses, representing an estimated average of
approximately 84% of all multifocal lenses purchased in the years 1987, 1989
and 1991. Multifocal lenses are produced as either "flat-top" or
"progressive" lenses. Progressive lenses are distinguished from flat-top lens
by the absence of visible horizontal lines separating the different
corrective prescription areas. Census93 reports that, by the end of 1992,
flat-top bifocal and trifocal lenses held approximately 79% of the multifocal
market, while approximately 21% of this market consisted of progressive
lenses. The LenSystem is capable of producing single vision, flat-top bifocal
and progressive bifocal lenses. Although no assurance can be given in this
regard, RCI believes that the market for progressive bifocal lenses offers
particularly great opportunities, both because of the potential to convert
persons currently wearing flat-top bifocals to the "no-line" option offered
by progressive lenses, and because the bulk of the baby boomer generation
(ages 30 to 49 in 1994) has not yet reached their early 40s, when people
typically first experience the presbyopia that requires correction by
bifocals.
Single vision and multifocal prescription eyeglass lenses are currently
manufactured using one of three basic types of materials. According to
Census93, the two conventional materials, glass and hard-resin plastic,
accounted respectively for approximately 13% and 64% of 1993 United States
prescription lens sales, while the newer premium materials such as
polycarbonates, high index plastic and high index glass, accounted for
approximately 23% of such sales.
Within the categories of single vision and multifocal lenses, there are many
types of premium lenses (generally designed to be especially thin, strong,
and light) that the LenSystem currently cannot manufacture: (a) high index
plastic and high index glass lenses, which generally are very thin,
lightweight lenses used to reduce the thickness of very high strength
prescription lenses; (b) polycarbonate lenses, which are made from a material
with superior impact resistance and are typically used for sports and other
eye-safety purposes; and (c) aspheric lenses, which are made to have flatter
curves than conventional spherical lenses, thereby improving visual acuity
and the appearance of the eyes through the lenses. Census93 estimates that
aspheric lenses represented about 1% of 1992 United States sales of
prescription lenses. RCI anticipates that sales of high index lenses will
continue to grow steadily over the next several years.
During the years 1990 through 1992, the United States market of contact lens
wearers remained basically flat, according to Census93, at approximately 25
million users. There can be no assurance, however, that technological
developments, medical advances, changes in consumer tastes or other factors
will not cause the use of contact lenses to grow significantly in the future
at the expense of prescription eyeglass lenses. Census93 reports that,
despite the recent flat rate of overall contact lens use, a Bausch & Lomb
study has found that first-time usage of disposable contact lenses grew at a
compounded annual growth rate of 47% from 1989 through 1992.
THE PRODUCTION AND DISPENSING OF PRESCRIPTION EYEGLASS LENSES. As previously
noted, approximately 77% of all conventional single vision and multifocal
prescription eyeglass lenses are currently manufactured from glass or
hard-resin plastic. According to Census93, during the years 1991 through 1993
hard-resin plastic was used in the manufacturing of approximately 82% of all
prescription lenses made from conventional materials. Although there can be
no assurance in this regard, RCI anticipates that the use of glass in
manufacturing conventional lenses will decrease
13
over time due to a variety of factors, including its relatively greater
weight and inferior impact resistance.
After being prescribed for an individual by his or her medical doctor
(ophthalmologist) or optometrist, prescription eyeglass lenses reach the
consumer through three traditional channels: independent dispensers
(consisting of thousands of private sector optometrists, opticians and
ophthalmologists), retail optical chain stores (i.e., retailers having at
least four stores, including so-called "superoptical" stores or
"superstores", mass merchandisers and warehouse membership clubs), and
miscellaneous third party and other dispensers. Census93 estimates that
independent dispensers accounted for approximately 62% of 1992 United States
optical sales, retail optical chain stores accounted for approximately 33% of
such sales, and third party and other dispensers accounted for approximately
5% of such sales.
The substantial majority of glass and hard-resin plastic prescription lenses
purchased in the United States are currently obtained from lens dispensers
(such as independent optometrists, opticians, ophthalmologists and retail
chain stores) who do not manufacture the lenses on-site. They instead obtain
lenses from third party manufacturers and distributors, including hundreds of
large factories and large, mid-sized and small wholesale manufacturing
laboratories. These manufacturers and distributors have invested in the space
and equipment required to grind glass or plastic lenses into a specific
prescription and then to finish (i.e., polish) the lenses in order to provide
clarity. In the case of plastic lenses, these manufacturers additionally
possess the molds and other machinery required in order to form and then
"cure" (i.e., harden) such lenses. Conventional curing processes utilize
heat-driven reactions to harden the plastic. Heat-curing processes are
relatively time-consuming, generally requiring between approximately six and
16 hours, depending upon the specific type of plastic involved.
In most cases, a retail lens dispenser who obtains finished lenses from third
party manufacturers and distributors cannot offer consumers "same day"
service unless that retailer maintains a relatively large, mostly idle and
generally expensive inventory of lens blanks. This inventory generally has
consisted principally of single vision and flat-top bifocal lenses, due to
the historically greater demand for such lenses. Even a retailer who
maintains a very extensive inventory of lens blanks typically must place
special orders for the majority of lenses required to fill more complex
prescriptions and for most premium lenses. Filling any such order generally
takes one or more days.
Largely as a result of these limitations in the ability of retail lens
dispensers to provide consumers with same day service for certain lenses,
full service eyeglass lens manufacturing began to move into retail optical
outlets in the form of the so-called "superoptical store". Many of these
superstores are operated by the large retail optical chain stores, such as
LensCrafters, Opti-World, Pearle Express and D&K Optical (of which Dr. Larry
Joel, a shareholder, officer and director of RCI, is Chairman of the Board
and a significant stockholder). A "superoptical store" is generally
understood in the United States optical industry to be a retail store with
the on-site equipment necessary to produce the great majority of finished
prescription lenses in about one hour. The required equipment generally
consists of a surfacing (or grinding) laboratory and a finishing machine.
According to Census93, superoptical stores rarely fall below 1,900 square
feet in total
14
area. In addition to an investment in equipment and space, a superoptical
store typically requires the maintenance of a largely idle inventory of
semi-finished lens blanks.
THE RAPID CAST LENSYSTEM. The LenSystem incorporates a new technology called
Thick Film Radiation Cured Polymer Technology, which uses ultraviolet light
instead of heat to initiate the chemical reaction that hardens the Rapid Cast
Liquid Monomer into a plastic lens. The Technology resulted from a research
program that was initially begun in 1985 by the University of Louisville. In
1988, Dr. Larry Joel and others formed ORGIC, which contracted with the
University of Kentucky to sponsor and continue that research program in
return for the ownership of all resulting patents and discoveries. By 1990,
ORGIC (then majority-owned by Dr. Joel and the predecessor of Q2100) had
developed and tested a new liquid monomer, an ultraviolet curing unit and a
lens casting machine. ORGIC believed that equipment utilizing the Technology
could permit on-site production of prescription eyeglass lenses at a low cost
and in a very short amount of time. ORGIC also believed that, in order to
commercialize the use of such equipment and effectively bring it to the
marketplace, financial and other resources would be required that ORGIC did
not possess. In 1991, ORGIC, with the Technology (together with all related
issued patents and patent applications), was sold to Pearle and subsequently
renamed Q2100, Inc. On February 8, 1995, RCI purchased 100% of Q2100 from
Pearle, and the Company purchased 51% of RCI. See "Item 1. Business
- - Acquisition of Rapid Cast, Inc."
TECHNICAL OVERVIEW OF THE RAPID CAST LENSYSTEM. The Rapid Cast LenSystem
consists of three primary components: The Rapid Cast Mold and Gasket Library,
the Rapid Cast Liquid Monomer (the "Monomer"), and the Rapid Cast Ultraviolet
Curing Unit (the "Curing Unit"). The Rapid Cast Mold and Gasket Library is
used to create the actual mold assembly from which a lens will be made. Once
the type of lens (i.e., single vision, flat-top bifocal or progressive
bifocal) and prescription to be produced are known, a front mold and a back
mold are selected from an easy to read wall chart. A gasket is used to hold
the front and back molds in place, creating a mold assembly consisting of a
hollow cavity. This cavity is then filled with the Rapid Cast Liquid Monomer.
The Rapid Cast Liquid Monomer is a proprietary monomer that is injected in
liquid form into the mold assembly using a standard squeeze bottle. This
Monomer is a "thick film" monomer, meaning that its thickness is best
measured in parts of centimeters (as opposed to thin film monomers, which are
measured in parts of millimeters). The Rapid Cast Liquid Monomer is
chemically inert and, because it is cured by ultraviolet light, does not
require the addition of a separate chemical initiator for the hardening
process. As a result of its chemical stability, the Rapid Cast Liquid Monomer
has a shelf-life of many years and does not require special shipping and
storage precautions. These advantages are not generally realized by
conventional lens manufacturing processes which use hard-resin monomers to
produce plastic lenses. These conventional monomers (such as the CR-39
Monomer, which has long been the substance most commonly used in
manufacturing plastic lenses) require the addition of chemical initiators
prior to being cured, and those initiators are in some cases flammable or
explosive prior to being mixed with the monomer. Temperature-controlled
shipping and storage arrangements must accordingly be made, and cold storage
facilities must be utilized even after the monomer and initiator are mixed,
since the resulting substance hardens and becomes useless when exposed for an
extended period to temperatures above approximately 25 degrees fahrenheit.
15
The Curing Unit controls the chemical reaction that occurs when the
Rapid Cast Liquid Monomer is exposed to ultraviolet light. It
monitors the exact temperature of the lens during this reaction, utilizing
multiple cold air jets to control the temperature of each sector of a
lens. The Curing Unit also continuously monitors the energy output of the
ultraviolet light in order to maintain a constant output, even with
fluctuations in electrical current. RCI currently intends to utilize two
versions of the Curing Unit, which differ only in the quantity of the
lenses that can be produced at one time. The Premier Curing Unit will
cure two pairs of lenses within approximately 30 minutes. The smaller
Deluxe Curing Unit will cure one pair of lenses in the same amount of time.
In addition, the front mold assembly may be coated with a scratch resistant
coating and then cured with high intensity UV light onto the mold surface.
This coating then adheres to the lens during the curing process.
A lens produced by the LenSystem can be subjected to the application
of various additional treatments (such as scratch resistant, anti-reflective
and ultraviolet coatings) using the same materials and process now
employed to apply such coatings to conventional plastic lenses. Scratch
resistant and ultraviolet coatings can generally be applied on site in
under ten minutes, whereas the application of an anti-reflective coating
requires that the lens be sent out to a third party service company. If
inadequacies appear in the LenSystem during day to day operation, there
is no assurance that any such inadequacies can be corrected at commercially
acceptable cost, or at all.
MARKETING AND PRICING STRATEGY. RCI expects that initially the bulk of
RCI's revenues will be derived from sales of equipment and that as the
installed base of equipment stabilizes, an increasing share of revenues will
be derived from Monomer sales. RCI is initially seeking to market
the LenSystem principally to operators of retail optical stores and
small to mid-sized wholesale lens manufacturing laboratories, both inside
and outside the United States. Currently the sale price for a single
LenSystem with one set of molds is approximately $37,000 for a smaller
unit and $43,000 for a larger unit. Operators may be able to lease RCI
equipment from third party lessors for approximately $750 to $950 per month
at current interest rates over a 60 month period. RCI expects that each
purchaser or lessee of a LenSystem will at least initially use RCI's Rapid
Cast Liquid Monomer.
RCI does not believe that, in the short term, marketing of the LenSystem
will require the purchase of significant print, television, radio or
other advertising. RCI instead anticipates that the LenSystem will receive
a large amount of nonpaid publicity within trade magazines that
regularly report on technological changes in the optical industry. RCI may
nonetheless utilize limited print advertising in optical industry trade
magazines for the purpose of highlighting the LenSystem's perceived
advantages.
RCI currently intends to focus its marketing resources in the short term
on the introduction and demonstration of the LenSystem at one or more
optical industry conventions and trade shows. RCI believes that such
conventions will provide an attractive forum for exhibiting the
LenSystem's limited space requirements, ease of use and high quality
output. By the end of the third quarter of 1995, RCI had also hired four
employees to market the LenSystem, primarily in the United States. RCI
pays these employees salaries and commissions, and reimburses them for
expenses in connection with their marketing services.
16
MANUFACTURING STRATEGY. RCI currently does not have the facilities or the
experience to manufacture the components of the LenSystem and has no plans to
develop its own manufacturing capabilities. RCI currently intends to have
such components manufactured through subcontractors.
RESEARCH AND DEVELOPMENT STRATEGY. RCI anticipates that, if and to the
extent funds become available from future revenues (if any) or other
sources, its research and development efforts will emphasize the further
development and enhancement of the Technology and the LenSystem,
generally in response to potential future changes in technologies,
customer preferences and optical industry standards. Should RCI be unable to
anticipate these changes (whether because of a lack of adequate research
and development funding or otherwise) or fail to improve the LenSystem or
develop new technologies in response to these changes, RCI's ability to grow
and become profitable could be materially adversely affected.
More specifically, RCI believes that, in addition to single vision, flat-top
bifocal and progressive bifocal lenses, the Technology could be enhanced to
enable it to produce other existing types of prescription lenses as well as
new lens designs that may be developed in the future. If and to the extent
funds become available, RCI accordingly expects that it might seek to improve
the LenSystem so as to broaden the range of low cost, high quality lenses it
can produce. There can be no assurance, however, that RCI will in fact ever
undertake to develop any such improvements or that any effort to do so would
be successful or commercially viable. RCI does not currently anticipate that
it will conduct future research and development relating to technologies or
products that are not related to the on-site production of prescription
eyeglass lenses. There can be no assurance that, if conducted in the future,
any of RCI's research and development efforts will be successful, be
completed in a timely manner, improve RCI's profitability, or enable it to
respond effectively to technological or medical advances or new product
developments by competitors.
MAINTENANCE, WARRANTY AND INSURANCE. Initial sales of LenSystems are
supported by sales and technical representatives who provide installation and
training services. RCI provides its customers with a complete operations
manual and training videos. RCI currently offers the LenSystem with a one
year warranty for parts and labor. RCI currently maintains product liability
insurance which provides coverage of $6,000,000 per occurrence and $7,000,000
in the aggregate. There can be no assurance that the coverage provided by
those policies is sufficient to protect RCI against liability. RCI's
inability or failure to protect itself adequately against such liabilities
could have a material adverse effect upon its prospects, financial condition
and results of operations.
COMPETITION. The prescription ophthalmic lens industry is intensely
competitive. Numerous manufacturers and distributors currently supply
United States lens dispensers, including such dispensers as retail optical
stores and small to mid-sized wholesale optical lens manufacturing
laboratories. These are the customers to whom RCI initially intends to
market the LenSystem. Many of these manufacturers and distributors are
currently capable of supplying lenses to a lens dispenser within 24 hours
after receipt of the dispenser's order, and, in many cases they can do so
at prices competitive with the cost of producing such lenses utilizing the
LenSystem. Innotech Corporation is one competitor of RCI which uses
plastic to produce lenses. RCI believes that the LenSystem has superior
quality (i.e. better durability) and equivalent pricing to other manufacturers
17
of single vision lenses, and both superior quality and lower pricing with
respect to flat-top bifocal and progressive bifocal lenses.
If RCI is successful in marketing the LenSystem, it anticipates that
other companies or entities will attempt to develop competitive lens casting
systems capable of being placed in retail optical store locations.
Potential competitors may include companies that own large optical lens
manufacturing factories, owners of chains of retail optical stores, large
wholesale optical lens manufacturing laboratories, mass merchandisers and
warehouse membership clubs that have entered or may enter the retail optical
industry, companies in the optical instrument business, companies in the
contact lens industry, pharmaceutical and chemical companies that have
entered or may enter the retail optical industry or the optical lens
manufacturing industry, and universities and public research organizations.
Many of these competitors have substantially greater financial,
technological, research, product development, manufacturing, sales, marketing
and human resources than RCI.
There can be no assurance that one or more of these competitors will
not develop a system for on-site production of prescription ophthalmic
lenses which is competitive with or superior to the LenSystem, or that RCI
will have the technological, marketing or financial resources or flexibility
to respond to any such development. The development of such a system
would, in all likelihood, exert adverse price pressures on the LenSystem and
could render it obsolete and unmarketable.
PATENTS AND PROPRIETARY RIGHTS. In February 1995 RCI acquired all of
the capital stock of Q2100 and thus all of Q2100's issued patents and
patent applications that relate to the Technology. RCI is not aware that any
party,in the United States or elsewhere, has challenged the validity or
enforceability of the issued patents relating to the Technology, other
than the patent dispute with Ronald D. Blum O.D. See "Item 3. Legal
Proceedings - Patent Infringement Lawsuit."
The status of pending patent applications involves complex legal and
factual questions, and the scope and breadth of claims to be allowed is
uncertain. Accordingly, there can be no assurance that pending patent
applications, or patent applications that may be filed by RCI in the
future, will result in patents being issued, or that any patents that may
be issued in the future will afford protection against competitors with
similar technology. Patent applications in the United States are maintained
in secrecy until patents are issued and, since publication of
discoveries in the scientific or patent literature tends to lag behind
actual discoveries by several months or even years, there can be no
assurance with respect to pending patent applications that the covered
inventions were not first created by other parties, or that such applications
were the first to be filed on such inventions. In addition, patents
relating to the Technology that have been or may be issued in some foreign
countries may not afford the same protection to RCI as is provided under
the patent laws of the United States.
No assurance can be given that the issued patents relating to the
Technology will afford protection against competitors with similar
technology, or that any of such patents will not be infringed,
designed around by others or invalidated. Applications of the Technology
(or future technologies RCI may develop) may infringe patents or
proprietary rights of others. If any licenses are found to be required
in order for RCI to use the Technology or other processes or products, such
licenses may not be available on acceptable terms, if at all. Furthermore,
there can be no assurance that challenges will not be instituted against the
validity or enforceability of any patent owned by RCI
18
or, if instituted, that such challenges will not be successful. The cost of
litigation to uphold the validity and prevent infringement of a patent can be
substantial and could have a material adverse effect upon RCI's financial
condition and results of operations.
In addition to potential patent protection, RCI will rely upon the laws
of unfair competition and trade secrets to protect its proprietary rights.
RCI currently intends to seek to protect its trade secrets and other
proprietary information in part by entering into appropriate
confidentiality and nondisclosure agreements with its future employees,
consultants, suppliers, joint venturers, subcontractors, licensees,
scientific collaborators, sponsored researchers and others. These
agreements will generally provide that all confidential information
developed by or made known to the other party during the course of the
relationship with RCI is to be kept confidential and not disclosed
to third parties, except in certain circumstances. In the case
of employees, consultants, scientific collaborators and sponsored
researchers, the agreements will generally provide that all inventions
conceived by them relating to the business of RCI will be the exclusive
property of RCI. There can be no assurance, however, that any such
agreements will provide meaningful protection for RCI's trade secrets in the
event of unauthorized use or disclosure of such information.
Although RCI intends to protect its rights vigorously, there can be no
assurance that trade secrets will be established or maintained, that
secrecy, confidentiality or nondisclosure agreements will be honored, or
that others will not independently develop similar or superior
technologies. To the extent that employees, consultants or other third
parties (such as prospective joint venturers or subcontractors) apply
technological information to RCI's projects which has been independently
developed by them or others, disputes may arise as to the proprietary rights
to such information, which disputes may not be resolved in favor of RCI.
RCI was advised by the previous owner of Q2100 that it believes that
Q2100 owns the trademark "Fast Cast." RCI may use the Fast Cast mark,
"OMB-91," "Rapidcast," or "LenSystem." None of these marks have been
federally registered. A prior user of one of these marks could
successfully challenge RCI's ownership or use of the mark.
GOVERNMENTAL REGULATION. It is the opinion of special counsel to RCI that
the lenses produced by the LenSystem are medical "devices" within the
meaning of the Federal Food, Drug and Cosmetic Act (the "Food and Drug
Act"), but that the lenses may be marketed without pre-market notification,
review, approval or clearance by the Federal Food and Drug
Administration ("FDA"). Other requirements, principally those
concerning impact resistance, good manufacturing practices, labeling
and reporting of certain alleged adverse effects will apply. Although
the FDA may disagree, such counsel is also of the opinion that the LenSystem
is itself not a "medical device" under the Food and Drug Act. However,
certain state and local governmental authorities (such as the State of
California) also regulate medical device manufacturers. Depending upon
where LenSystem equipment is manufactured, RCI may be subject to such
additional regulations. Although there can be no assurance in this regard,
RCI does not anticipate that compliance with such governmental
regulation will have an adverse effect upon its business.
ACQUISITION OF LABTECH, INC. - In September 1995, RCI acquired the assets
of LabTech, Inc. for $75,000 in cash and a three year interest bearing note
for $50,000, and a royalty on future sales using LabTech technology. The
$50,000 note was paid in full in December, 1995. The LabTech
19
assets include proprietary technology which accelerates the photochromatic
process of tinting lenses in response to changes in light. RCI intends to
incorporate this technology into its lens and monomer manufacturing system.
NONISSUER SALES OF STOCK PURSUANT TO REGULATION S - Shareholders of
the Company who had received shares of the Company's common stock in
private placements made in connection with the Company's acquisition and
financing of a controlling interest in Rapid Cast, Inc. (i.e. purchasers
of convertible notes and the founding shareholders of Rapid Cast, Inc.)
sold a substantial portion of such shares in offshore sales pursuant to Rule
904 of Regulation S of the Securities Act of 1933, as amended. The
Company estimates that approximately 1,650,000 of such shares were sold
pursuant to Rule 904 of Regulations S. The Company's obligation to
register those shares with the Securities and Exchange Commission under
the terms and conditions of the convertible notes and purchase agreement for
the controlling interest in Rapid Cast, Inc. terminated when the shares
were sold to the offshore buyers. See Item 1. Business - "Acquisition of
Rapid Cast, Inc." The Company did not sell any shares pursuant to
Regulation S.
AGREEMENT WITH PRICE INTERNATIONAL, INC.:
On October 27, 1994, the Company entered into an exclusive agreement
with Price International, Inc. ("PRI") of Boca Raton, FL, to provide
production, management and marketing services for sports-oriented
private label and collectible telephone calling cards. PRI's parent
corporation, Price International Ltd. of Toronto, Ontario, Canada has a
license with the National Hockey League Players' Association (NHLPA) to
provide telephone calling cards of NHLPA players. The Company has already
produced and is marketing the first edition of cards under the agreement
and is actively working on additional editions. Under the terms of the
agreement, PRI has received a warrant that expires on December 31,1997 to
purchase 100,000 shares of the Company's common stock at $11.25 per share
under the following terms: (i) 25,000 shares were vested on the day the
agreement was effective, and (ii) 75,000 shares can be vested based upon a
performance requirement in which one share will be vested for every $10 in
pre-tax profits earned by the Company from products issued under the
agreement during any continuous four audited quarterly periods, up to a
maximum of 75,000 shares.
In May 1995, PRI and the company entered into another agreement pursuant
to which PRI exercised 25,000 warrants at $11.25 per share before
their expiration date at the request of the Company and, for the early
exercise and other considerations, was vested to exercise the remaining
75,000 warrants at $11.25 per share. The Company agreed to register
the 75,000 shares underlying the warrants in a registration statement
with the Securities and Exchange Commission that was anticipated to be
filed by the Company in 1995. As part of its agreement with the Company,
PRI agreed to exercise an additional 25,000 warrants within 30 days of
the stock being registered, provided that the price of the stock was at $13
or higher. PRI also agreed to extend the license period with the NHLPA at
PRI's expense until the end of June 1996 and also agreed to allow the joint
venture to use the trade name Parkhurst in association with the NHLPA phone
cards. PRI has the right to use the name Parkhurst, which is a leading
manufacturer of trading cards in the hockey market.
20
In December 1995, the Company entered into discussions with PRI to voluntarily
terminate the entire agreement due to lower sales than anticipated. The
Company does not believe that the agreement with PRI has been profitable. The
Company is also in discussions with PRI associated with the remaining 75,000
warrants that were not registered in 1995 as agreed upon by the Company.
NETWORK SERVICES:
The Company's major network service is the Auto Dismantler Network (known
under the tradename "AutoNETWORK") that currently links several hundred
licensed automobile dismantlers in California, Nevada, Arizona, Utah, Oregon
and Washington. AutoNETWORK is a monthly subscription service that auto
dismantlers utilize to buy, sell and trade used parts that have been salvaged
from automobiles damaged in traffic collisions.
The Company evaluates on a continual basis other applications that could use the
Company's broadcast and point-to-point business communications technologies.
AutoNETWORK allows automobile dismantlers to buy, sell and trade used
automobile parts. By entering a parts request into a personal computer, the
request is transmitted to the communications message switching system, which
in turn broadcasts the request within seconds to every dismantler on the
network or to a selected local or regional subgroup of dismantlers. Those
dismantlers who have the requested part in stock and wish to sell it then
transmit private messages and enter into private negotiations to sell the
part. Generally, a dismantler using AutoNETWORK can locate a part, if
available, within minutes of entering his request. The majority of
dismantlers on the network generate substantially increased parts sales per
month using the network.
During September 1989, the Company agreed to a joint venture with Dismantlers
Exchange, a privately-owned, Fairfield, California-based operator of voice
telephone hotlines used by more than 200 auto dismantlers to locate auto
parts throughout Central and Northern California, Oregon and Washington.
Under the joint venture agreement, Dismantlers Exchange markets its own
version of the Company's computerized parts locator network in its marketing
area under the tradename "DX PC Network". Although both companies operate
their networks separately, customers of each network are able to receive
appropriate parts requests and send private messages to each other.
Dismantlers Exchange also operates a central clearinghouse so that customers
of either network can search for parts on each network as required.
In 1996, the Company intends to invest approximately $30,000 into the
AutoNETWORK business to enhance the services provided to the automobile
dismantlers in the network.
EMPLOYEES, OFFICERS AND DIRECTORS:
EMPLOYEES - As of March 22, 1996, the Company, including its subsidiaries,
NTC and RCI, employed 267 full-time people, consisting of 32 general and
administrative, 48 marketing and sales, and 187 operations and customer
service personnel.
21
None of the Company's employees are subject to a collective bargaining
agreement, and the Company has not experienced any slow-downs, strikes or
work stoppages due to labor difficulties. The Company considers its employee
relations to be satisfactory.
OFFICERS - The success of the Company is heavily dependent on the Company's
President and Chief Executive Officer, Melvyn Reznick, and the President of
the Company's NTC subsidiary, Edward R. Jacobs.
The Company has a three-year employment contract with Mr. Jacobs that expires
on July 25, 1997. Should Mr. Jacobs become unavailable or incapable of
performing his duties and functions, the Company could suffer material
adverse consequences. There can be no assurance that the Company would be
able to attract a competent replacement on a timely basis should the Company
find it necessary to replace Mr. Jacobs.
On November 30, 1995, the Company entered into a Severance Agreement with Sam
D. Schwartz, the prior Chief Executive Officer of the Company, pursuant to
which Mr. Schwartz resigned as an officer and director of the Company.
Pursuant to the Severance Agreement, the Company agreed to pay Mr. Schwartz
severance compensation of $20,000 per month for a twelve month period, and to
indemnify him to the extent generally available to officers and directors of
companies under California law. Pursuant to the Severance Agreement, the
Company currently is reviewing the tender of short-swing profits made by Mr.
Schwartz to the Company on August 18, 1995 and September 1, 1995 pursuant to
Section 16(b) of the Securities Exchange Act of 1934, as amended. The amount
of short-swing profits and the value of the stock options tendered by Mr.
Schwartz may be recalculated based on the Company's review procedures. See
"Item 3. Legal Proceedings -Section 16(b) Lawsuit" and Note 5 - "Short Swing
Profits" in the "Notes to Consolidated Financial Statements."
On November 30, 1995, the Company entered into a two year Employment
Agreement with Melvyn Reznick pursuant to which Mr. Reznick became the
President and a director of the Company. Mr. Reznick is also a director of
RCI. Pursuant to the Employment Agreement, Mr. Reznick is paid an annual
salary of $175,000 and has been granted stock options to purchase 300,000
shares of the Company's common stock at an exercise price of $4.87 per share
for a period of five years from the date of vesting. The stock options vest
according to the following schedule: 25,000 options on February 28, 1996,
25,000 on May 31, 1996, 25,000 on August 31, 1996, 25,000 on November 30,
1996, 100,000 upon RCI earning cumulative net profits in four or less
consecutive fiscal quarters of $1.5 million before taxes and before the
Company's acquisition amortization relating to RCI, and 100,000 upon RCI
earning cumulative net profits in four or less consecutive fiscal quarters of
$2 million before taxes and before the Company's acquisition amortization
relating to RCI. The vesting of the 200,000 options which are based on the
financial performance of RCI may accelerate upon a sale, spin-off or similar
transaction relating to RCI. The Company has agreed to indemnify Mr. Reznick
to the extent that indemnification of officers and directors is permitted
under California law.
RECONSTITUTION OF BOARD OF DIRECTORS - On October 26, 1995, the NASDAQ
Listing Qualification Committee determined that it was inadvisable to
continue the Company's listing on the Small Capital Market, but also advised
that the termination was delayed for a period of 45 days pending
22
a review by the NASDAQ Hearing Review Committee. The Board of Directors of
Incomnet requested a reconsideration by the Qualifications Committee of its
determination and immediately took action to address the concerns raised by
the Qualifications Committee as follows:
(a) On November 15, 1995, the Board reconstituted itself with several
changes. Rita L. Schwartz and Stephen A. Caswell resigned from the Board and
Sam D. Schwartz resigned as Chairman of the Board. Melvyn Reznick, Nancy
Zivitz and Albert Milstein were appointed to the Board and Joel W. Greenberg
was named Chairman of the Board.
(b) On November 15, 1995, the Board of Directors established a policy
that all Board members and senior officers must receive permission before
purchasing stock in the Company. The Board established a compliance committee
to 1) review requests of senior officers to buy stock in the Company, 2)
review contracts with outside consultants and 3) set up procedures for
communications with the general public.
(c) On November 30, 1995, Sam D. Schwartz resigned as President and
Chief Executive Officer of Incomnet and Melvyn Reznick was appointed as
President and Chief Executive Officer.
In December 1995, the Company was notified by the NASDAQ Listing
Qualification Committee that after further consideration, the steps taken by
the Company were satisfactory and that the Company's stock would remain
listed on the NASDAQ Small Capital Market.
ITEM 2. PROPERTIES
The Company does not own any real estate. The Company leases approximately
6,224 square feet of office facilities at 21031 Ventura Boulevard, Suite
1100, Woodland Hills, California 91364. The Company was obligated to make
lease payments at the rate of $8,215 per month through April 1995, and at the
rate of $8,713 per month from May 1995 through July 1998.
The Company's subsidiary, NTC, currently occupies 70,281 square feet of
office space at three sites in Irvine, California which are covered by
several lease agreements. Two of these leases are short-term agreements for
satellite facilities which will terminate during 1996. NTC is presently
nearing completion of negotiations to extend the lease on its headquarters
buildings at 2801 Main Street., Irvine, California through June, 2004.
Currently, lease payments for the three sites total $59,577 per month.
According to the terms of existing leases and the proposed lease extension,
NTC would be obligated to pay monthly lease payments averaging $48,912 during
1996, and $49,269 during 1997, with subsequent monthly lease payments
increasing by $1,000 to $2,000 each year, reaching average lease payments of
$63,957 during 2004.
The Company's subsidiary, Rapid Cast, has entered into a lease on
approximately 12,250 square feet of office research and development space for
its facilities in Louisville, Kentucky, expiring on May 30, 2000. RCI is
obligated to make lease payments at the rate of $8,167 per month through
December 31, 1997, $8,322 per month in 1998, and $8,433 per month from
January 1999 through May 2000. RCI also
23
leases approximately 1,700 square feet of office space in East Rockaway, New
York, from an affiliated party on a month-to-month basis for $2,000 per month.
ITEM 3. LEGAL PROCEEDINGS
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION:
On August 9, 1994, the Company was notified by the Pacific Regional Office of
the Securities and Exchange Commission that the Commission had initiated an
informal investigation of the Company and its subsidiary, NTC. The inquiry is
fact-finding in nature. In September 1994, the order was changed to a "formal
order of private non-public investigation." The Commission stated in its
correspondence to the Company that the investigation "should not be construed
as an adverse reflection on any person, entity or security, or as an
indication by the Commission or its staff that any violation of law has
occurred." The Company believes that the investigation was prompted by
erroneous reports in the press in June 1994 that the Company's NTC subsidiary
was engaged in unethical business practices associated with its marketing
program. In August 1994,the Company voluntarily and promptly supplied copious
and substantial copies of its books and records to the Commission, and the
Company's present and prior independent certified public accounting firms
submitted their working papers. The Commission has taken investigative
testimony from several current and former officers and directors of the
Company and NTC. The Company has responded promptly to all requests for
information from the Commission.
The Company believes that it has provided substantial documentation to the
Commission that verifies the propriety of its business operations and
believes that the ultimate result of the fact-finding investigation will not
have a material adverse effect on the Company's financial condition or
results of operations.
CLASS ACTION AND RELATED LAWSUITS:
On October 17, 1995, the Company was served with an amended complaint in the
class action lawsuit entitled SANDRA GAYLES; THOMAS COMISKEY, AS TRUSTEE FBO
THOMAS COMISKEY, IRA; CHARLES KOWAL; ARTHUR KALTER; MATTHEW G. HYDE; ARTHUR
WIRTH; AND ISABEL SPERBER, VS. SAM D. SCHWARTZ AND INCOMNET, INC., Case No.
CV95-0399 AWT (BQRx), filed in the United States District Court for the
Central District of California, Western Division, which was originally filed
in January 1995. The amended complaint retains the claim alleging that the
Company violated Sections (10)b and 20(a) of the Securities Exchange Act of
1934, as amended, and Rule 10b-5 promulgated under Section 10(b) of the
Exchange Act, because it did not disclose and falsely denied the existence of
the non-public investigation of the Company commenced by the Securities and
Exchange Commission in August 1994. The complaint adds claims that the
Company and its former Chairman, Sam D. Schwartz, violated Sections 10,
16(a), 20(a) and 23(a) of the Exchange Act, and Section 25400 of the
California Corporations Code, because they did not disclose until August 1995
purchases and sales of the Company's stock made in the open market by an
affiliate of Mr. Schwartz between September 1994 and August 1995. The amended
complaint seeks (I) certification of the class, (ii) compensatory damages,
(iii) damages pursuant to Section 25500 of the California Corporations Code,
(iv) interest and attorneys' fees and costs, and (v) other extraordinary,
equitable and injunctive relief as may be appropriate. The Company
24
believes that the prior President's purchases and sales were made in
substantial compliance with Rule 10b-18 promulgated under Section 10(b) of
the Exchange Act. On January 11, 1996 the case was certified as a class
action pursuant to the parties' stipulation. The Company has answered the
complaint and the lawsuit is currently in the discovery phase.
In October 1995, the Company was served with a civil lawsuit entitled HERBERT
M. SCHWARTZ ET AL. V. INCOMNET, INC. SAM D. SCHWARTZ AND KALIBER MANAGEMENT
CORPORATION, CV 96-9776 LGB (SHX), now pending in the United States District
Court, Central District of California. The case was originally filed in the
Northern District of Georgia but the Company successfully moved to transfer
it to the Central District of California, the situs of the class action. In
February 1996, the Company was served with an additional lawsuit entitled
BRENT ABRAHAM, ET AL, V. INCOMNET, INC., SAM D. SCHWARTZ AND KALIBER
MANAGEMENT CORPORATION, Civil Action No. 1-96-CV-0051-CC pending in the
United States District Court, Northern District of Georgia.
These two lawsuits were filed against the Company, its former Chairman and
his affiliate by current and prior shareholders of the Company and both
allege claims under federal and state law pertaining to misrepresentations,
omissions to disclose material facts and undisclosed insider trading which
adversely affected the market price for the Company's securities. The
complaints allege that the plaintiffs suffered losses in the market value of
their stock as a result of the alleged violations. The company's motion to
strike two of the plaintiffs claims is pending in the HERBERT SCHWARTZ case.
The Company is also seeking to have the ABRAHM case transferred to the same
California court and consolidated with the HERBERT SCHWARTZ case which is in
the initial stages of discovery. The Company intends to vigorously defend
against these lawsuits.
SECTION 16(B) LAWSUIT:
In January 1996, the Company was served with a derivative shareholders
lawsuit entitled RICHARD MORALES VS. INCOMNET, INC. AND SAM D. SCHWARTZ, 96
Civil 0225 in the United States District Court for the Southern District of
New York, alleging violations of Section 16(b) of the Securities Exchange Act
of 1934, as amended, and demanding that the Company assert claims against Mr.
Schwartz for the payment of short-swing profits plus interest. Mr. Schwartz
has retained separate counsel for this action. Plaintiff's Fourth Amended
Complaints alleges short-swing profits to be approximately $2,128,000. The
Company's latest calculations indicate short-swing profits of approximately
$2,074,000. The Company is currently reviewing the plaintiff's calculation to
determine the reason for the difference, and has forwarded the information to
Mr. Schwartz's counsel. The plaintiff also asserts that the 250,000 stock
options tendered by Mr. Schwartz on August 20, 1995 and September 1, 1995 as
payment of the short-swing profits should be accorded no value because of
alleged manipulative and undisclosed trading in the Company's stock by Mr.
Schwartz and his affiliate. The parties have not yet agreed on the value of
the tendered stock options. The Company's time to respond to the complaint
has been extended until early April 1996 while settlement discussions
proceed. Mr. Schwartz has not yet answered the complaint. The Company intends
to attempt to settle this action and to collect the unpaid amount of the
short-swing profits plus interest from Mr. Schwartz. There is no assurance
regarding whether a settlement will be reached, whether the short-swing
profits plus interest will be collected, the timing of a settlement or
collection, or the amount of legal costs which may be incurred in connection
with the lawsuit. See "Item 1. Employees - Severance Agreement with Sam D.
Schwartz."
25
PATENT INFRINGEMENT LAWSUIT:
In July 1995 Rapid Cast, Inc. was served with a lawsuit entitled RONALD D.
BLUM, O.D. VS. RAPID CAST, INC., Case No. 95-CV5113, filed in the United
States District Court in the Southern District of New York. The complaint
alleges that Rapid Cast, Inc. has infringed on the plaintiff's patent for
curing plastic lenses by virtue of employing its technology in the FastCast-TM-
LenSystem. On July 28, 1995, Rapid Cast, Inc. filed an Answer and
Counterclaim for Declaratory Judgment denying the plaintiff's allegations,
asserting that the FastCast-TM- LenSystem does not infringe on the plaintiff's
patent, alleging that claims in the plaintiff's patent are invalid and
unenforceable, and requesting that plaintiff be enjoined from threatening or
commencing any litigation against Rapid Cast, Inc. or any of it suppliers,
customers or prospective customers. The litigation is presently in the
discovery phase. The parties are also actively engaged in settlement
discussions. There is no assurance that a final settlement agreement will be
made.
LEGAL ACTION AGAINST PRIOR REPRESENTATIVES:
On July 28, 1994, NTC filed a lawsuit against six prior independent marketing
representatives who terminated their relationship with NTC on March 31, 1994.
The lawsuit alleges that the defendants breached their agreements with NTC
after terminating their representative status by (i) soliciting NTC's
customers to leave NTC and sign up with a competitor, (ii) soliciting NTC's
other independent marketing representatives to leave NTC and work for a
competitor, (iii) misappropriating and failing to return the NTC customer and
independent sales representative lists, (iv) disclosing NTC's customers,
representatives and other trade secrets to a competitor and (v) willfully and
maliciously conspiring to injure NTC's business in order to improve their own
business. The causes of action against the defendants are breach of contract,
misappropriation of trade secrets and intentional interference with NTC's
economic relationships. NTC sought injunctive relief and is seeking monetary
damages of at least $500,000, as well as punitive damages in an unspecified
amount. On August 31, 1994, the court awarded NTC a temporary injunction
against the defendants, enjoining them from disclosing or utilizing any of
NTC's trade secrets, including its list of customers and independent sales
representatives. A permanent injunction was subsequently denied by the court
on the basis that NTC had failed to demonstrate irreparable harm. All of the
defendants were located in Northern California. The Company believes that as
a result of the defendants' wrongful actions, NTC lost independent marketing
representatives in Northern California and retail customers. While these
actions slowed the growth rate of NTC's customers and marketing
representatives in the Spring of 1994, growth is continuing. The rate at
which NTC is signing new representatives, especially from other parts of the
United States, is also increasing, which may result in an increased rate of
growth in the customer base in the future. On August 30, 1994, the defendants
filed a cross-complaint against NTC and the Company, claiming that NTC failed
to meet its contractual obligations to the defendants and that actions taken
by the defendants as a result were proper and legal. The cross-complaints are
seeking compensatory and special damages, along with general and punitive
damages. Management cannot predict the ultimate resolution of the lawsuit or
its impact on the Company at this time.
26
CLAIMS BY PRIOR NOTEHOLDERS:
In January 1996 a civil action was filed against the Company and Sam D.
Schwartz in the United States District Court for the Eastern District of New
York, entitled JULES NORDLICHT VS. INCOMNET, INC. AND SAM D. SCHWARTZ, Case
No. CV 95-5134, alleging breach of contract and material misrepresentations
and nondisclosures in connection with the issuance and conversion of
promissory notes by the Company in a private placement. The complaint sought
damages of $750,000. In early February 1996 the Company entered into a
settlement agreement with Mr. Nordlicht pursuant to which the Company agreed
to issue to Mr. Nordlicht and register 31,000 shares of the Company's common
stock, repay the outstanding balance of his note, and issue him 5,000
additional warrants to purchase shares of Rapid Cast, Inc. (if and when it
goes public) which the Company had received pursuant to the redemption of
another convertible promissory note previously issued by the Company.
Pursuant to the settlement, the Company is obligated to file the registration
statement by May 12, 1996 or it is required to pay a $100,000 penalty to Mr.
Nordlicht. In addition, the Company may be obligated to issue additional
shares to Mr. Nordlicht if, during the five trading days immediately
following the effective date of the registration statement, the average last
sale price of the Company's common stock on the NASDAQ Small Capital Market
is less than $5.00 per share. Accordingly, on the effective date of the
registration statement, Mr. Nordlicht is entitled to $155,000 worth of
Incomnet, Inc. stock, with a minimum of 31,000 shares which have already been
issued to him. The settlement agreement has been filed with the court and the
case has been dismissed with prejudice, subject to compliance with the
settlement agreement.
Claims similar to Mr. Nordlicht's could be asserted against the Company by
other holders of shares acquired upon the conversion of privately placed 8%
convertible notes which were issued in February 1995 and converted into
shares by the holders in July 1995. The Company has had settlement
discussions with six such shareholders holding 32,500 shares, and there are
additional conversion shares held by prior or current officers or directors
of the Company or RCI. Settlement agreements have been sent to all six
holders and four covering 20,000 shares have been executed and returned.
There is no assurance that the other two settlement agreements will be
executed. If the settlement agreements are not signed and a suit is filed,
the Company will vigorously defend the action. The settlement agreements call
for the Company to register the outstanding shares held by the six holders,
and to issue them sufficient additional shares upon the effective date of the
registration statement to result in the six holders having free trading
shares with a value equal to 120% of the amount of their original investment,
based on the average trading price of the Company's common stock for the five
trading days immediately preceding the effective date.
POTENTIAL LAWSUITS:
Price International, Inc. (PRI) may assert a claim for breach of contract and
federal securities laws violations in connection with the exercise of 25,000
warrants at $11.25 per share by it allegedly based on statements made to it
by the Company (See Agreement with Price International, Inc.). PRI asserted
this claim in a letter written to the Company by its counsel in October 1995.
The Company has communicated directly with Price International and agreed to
register the shares underlying the remaining 75,000 warrants held by Price
International. No settlement agreement was, however, entered into and no
further threats by Price International have been made.
27
Two clients of a broker-dealer firm have asserted claims against the Company
and its prior President alleging misrepresentations in the course of
providing information to the shareholders of the Company and alleging
omissions to state material facts. These two potential plaintiffs have
asserted their claims informally that they purchased the Company's securities
through a registered broker-dealer firm in the open market. They claim to
have purchased several million dollars worth of the Company's common stock
and to have suffered losses because of the acts and/or omissions of the
Company and its prior President. If these claims are filed as a legal
complaint, the Company will seek to consolidate them with the HERBERT
SCHWARTZ and/or the class action lawsuits.
From time to time, the Company is involved in litigation arising from the
ordinary course of business, the ultimate resolution of which management
believes will not have a material adverse effect on the financial condition
or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 1995.
28
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION:
The Company's common stock trades on the Nasdaq Small-Cap Market under the
symbol "ICNT". The following table sets forth the range of bid prices for the
common stock during the periods indicated. Prices represent the actual high
and low sale prices of the Company's stock as provided by Nasdaq real-time
pricing information.
YEAR ENDED DECEMBER 31, 1995:
Quarter High Low Last Sale
------- ------ ------ ---------
4 11 1/4 2 1/2 4 9/16
3 24 1/2 9 11
2 16 3/8 10 7/8 15
1 14 5/8 8 1/4 14 3/8
YEAR ENDED DECEMBER 31, 1994:
Quarter High Low Last Sale
------- ------ ------ ---------
4 14 5/8 9 15/16 14 5/8
3 12 1/2 8 11 3/8
2 11 1/8 6 3/8 9 3/4
1 7 1/4 6 6 3/4
On March 27, 1996, the last sales price per share of the Company's common
stock, as reported by the NASDAQ Stock Market, was $5 1/2.
On March 27, 1996, the Company's 13,224,024 shares of common stock
outstanding were held by approximately 700 shareholders of record.
29
DIVIDENDS:
The Company has not paid cash dividends on its common stock since inception.
Payment of dividends is within the discretion of the Company's Board of
Directors and will depend, among other factors, on earnings, capital
requirements and the operating and financial condition of the Company. At the
present time, the Company's anticipated working capital requirements are such
that it intends to follow a policy of retaining earnings in order to finance
the development of its business. (See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations").
ITEM 6. SELECTED FINANCIAL DATA
A summary of selected financial data for the five years ended December 31,
1995, 1994, 1993, 1992 and 1991, is presented below, and should be read in
conjunction with the audited consolidated financial statements for the years
ended December 31, 1995, 1994 and 1993 at "Item 8. Financial Statements and
Supplementary Data."
STATEMENTS OF OPERATIONS DATA(1):
Fiscal Years Ended December 31,
----------------------------------------------------------------------
1995(4) 1994(4) 1993(4) 1992(3,4) 1991(2)
------------ ------------ ------------ ------------ ----------
Sales $86,564,917 $46,815,057 $11,298,972 $ 5,534,874 $1,898,071
Income/(loss) before
income taxes,
extraordinary items &
minority interest 957,044 4,000,242 (1,606,844) (2,264,597) 397,631
Income/(loss) before
extraordinary items &
minority interest 856,543 3,999,187 (1,606,844) (2,461,697) 1,322
Net income/(loss) 1,366,025 4,071,194 (948,769) (2,021,333) 1,322
Per common share
and common
share equivalents:
Net income/(loss) before
extraordinary items 0.11 0.42 (0.20) (0.34) .00
Net income/(loss) 0.11 0.42 (0.12) (0.28) .00
30
BALANCE SHEET DATA:(1)
December 31,
------------------------------------------------------------
1995(4) 1994(4) 1993(4) 1992(3)(4) 1991(2)
----------- ----------- ---------- ---------- ----------
Total assets $74,105,629 $26,158,346 $8,665,839 $6,744,994 $2,174,428
Long-term obligations 8,459,772 900 20,000 176,000 83,334
- --------------
(1) Segment information is presented at "Item 1. Business - Segment
Information."
(2) In 1991, the Company wrote off its entire investment in Incomnet
India Limited.
(3) In 1992, the Company acquired a controlling interest in National
Telephone & Communications, Inc. This information is described in
"Item 1. Business - Acquisition of National Telephone &
Communications, Inc. (NTC)."
(4) The Company is engaged in legal proceedings where the ultimate outcome
cannot presently be determined. This information is described at
"Item 3. Legal Proceedings."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES:
For the year ended December 31, 1995, the Company had a net profit of
$1,366,025 and, at that date, current assets exceeded current liabilities by
$1,440,515. Since the Company acquired a controlling interest in NTC in early
1992, the Company's capital needs have been satisfied from outside sources
such as the private placement of securities, the exercise of warrants and
options, and loans and bank credit lines guaranteed by its principal
shareholders. Cash flow from operations did not provide net working capital
to the Company during the period from February 1992 to May 1994, but has been
positive since that date.
The Company had net working capital of $1,440,515 at December 31, 1995, as
compared to net working capital of $8,798,793 at December 31, 1994. During
1995, net cash flow from operations was $1,378,839 compared to net cash flow
from operations of $3,083,887 in 1994.
During 1995, the Company's cash requirements were met through a combination
of cash flow from operations, exercise of warrants to purchase the Company's
common stock and private placements of its common stock. In 1995, the Company
raised $29,058,773 in either private placements or from the exercise of
warrants. The Company anticipates that it will continue to attain cash flow
sufficient to meet the Company's cash requirements in 1996 through a
combination of operations, bank borrowings, private placements of its common
stock and the exercise of warrants to purchase the Company's common stock. On
February 5, 1996, Melvyn Reznick, the President and a director of the
Company, personally guaranteed and arranged for a $500,000 bank line of
credit for the Company, which may be expanded to a range of $750,000 to
31
$1,000,000 in the near future. As of March 22, 1996, the line had not been
drawn upon, although the Company expects to draw on it in the future to fund
operating expenses at the parent company level, or to fund capital
contributions to Rapid Cast, Inc. ("RCI") when the shareholders of RCI are
called upon to provide additional funds to RCI for its operations. In this
regard, the Company made an additional capital contribution of $324,000 to
RCI in January 1996 pursuant to a private rights offering made by RCI. The
Company anticipates that during 1996 it and RCI will need financing in
addition to their respective cash flows to fund operations and, in the case
of RCI, to finance the growth of its business.
The Company had no material commitments for capital expenditures at December
31, 1995, but does expect to continue expanding the NTC headquarters building
and purchasing additional equipment commensurate with the requirements of its
customer base. During 1995, the Company had capital expenditures of
$7,389,419 for plant and equipment.
Effective February 12, 1992, the Company entered into a Letter of Agreement
(the "Agreement") with National Telephone Communications, Inc. ("NTC"), to
ultimately acquire a controlling interest in NTC. NTC is a public company
that resells long distance telecommunications services. The Company loaned
NTC $2,850,000 during 1992, collateralized by substantially all the assets of
NTC, from its available working capital resources. In 1993, the Company
loaned an additional $1,935,961 to NTC, bringing the total to $4,785,961. In
1994, the Company loaned NTC an additional $308,879, bringing the total to
$5,094,810. All loans to NTC were converted into an additional equity
investment in NTC at the end of 1994. No further loans were made to NTC
during 1995.
In May 1992, as settlement with a creditor on a past due accounts payable of
approximately $725,000, the Company entered into a non-interest bearing
credit facility of approximately $432,000, resulting in a gain of
approximately $293,000 ($.04 per common share). The contract was payable in
monthly installments of $12,000 for the first twelve months and monthly
installments of $16,000 thereafter through November 1994. Maturities of the
contract were $84,000 in 1992, $172,000 in 1993 and $176,000 in 1994. This
obligation was paid in full in 1994.
At December 31, 1995, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $16,800,000, which are expected
to be available to offset taxable income for the next several years. The
Company's subsidiary is engaged in legal proceedings where the ultimate
outcome cannot presently be determined. This information is described at
"Item 3. Legal Proceedings."
32
RESULTS OF OPERATIONS - 1995 COMPARED TO 1994:
SALES - Total 1995 sales increased by 85% from $46.8 million in 1994 to $86.6
million in 1995. The majority of this increase was attributable to NTC's
sales increase from $45.6 million in 1994 to $83.1 million in 1995. The
following table summarizes the Company's year-to-year sales performance by
subsidiary and segment:
$ in millions
-------------------
Subsidiary Segment 1995 1994
- ----------- --------------------------------------- ----- -----
NTC Telephone (telecommunications services) $70.0 $34.2
NTC Telephone (marketing programs) 13.1 11.4
RCI Optical 2.0 --
AutoNETWORK Network 1.5 1.2
----- -----
Total Company Sales $86.6 $46.8
----- -----
----- -----
NTC's sales increase was driven largely by continued expansion of the
customer base for its telecommunication services. As a result of this
continuing expansion, NTC's telecommunication service revenues represented
84% of NTC's total 1995 revenues with the remaining 16% generated by sales of
NTC's marketing programs. This 1995 revenue mix compares to NTC's 1994 mix
of 75% from telecommunication services and 25% from marketing programs.
The consolidation of RCI in the third and fourth quarters of 1995 added $2.0
million of optical product sales to the total year results.
COST OF SALES - Total Company cost of sales, which tends to vary directly
with sales, increased from $31.2 million or 67% of sales in 1994 to $57.9
million or 67% of sales in 1995. The following table summarizes the
Company's year-to-year changes in two major cost components:
$ in millions
------------------
1995 1994
------ -------
Commissions paid to NTC independent sales reps $14.2 $ 7.7
All other costs of sales 43.7 23.5
----- -----
Total Company Cost of Sales $57.9 $31.2
----- -----
----- -----
NTC's total commission expense increased from $7.7 million in 1994 to $14.2
million in 1995. The most significant single factor in this year-to-year
change was an annual increase of $3.0 million in residual monthly sales
commissions paid to independent sales representatives on NTC's expanding
telecommunication service revenues. The remainder of the year-to-year change
was caused by increases in various bonuses and overrides paid to sales
representatives who signed up new telephone service customers for NTC.
The second cost component shown in the table above is "all other costs of
sales" which represents: (1) NTC's long distance carrier costs, (2) NTC's
costs of producing sales materials
33
for its independent sales representatives, (3) RCI's costs of producing
optical systems and anscillary goods, and(4) AutoNETWORK costs of providing
communications network products and services.
GENERAL AND ADMINISTRATIVE - Total G&A costs increased from $9.4 million or
20% of sales in 1994 to $19.8 million or 23% of sales in 1995. G&A costs
generally include the costs of employee salaries, fringe benefits, supplies,
and related support costs which are required in order to provide such
operating functions as customer service, billing, marketing, product
development, information systems, collections of accounts receivable, and
accounting.
NTC's G&A costs increased during 1995 in order to: (1) support its continuing
sales growth in 1995 and, (2) build stronger infrastructure to accommodate
still greater sales growth and improved cost efficiencies in the future. RCI
incurred substantial G&A costs in 1995 relating to its startup of operations.
DEPRECIATION AND AMORTIZATION - Total Company depreciation and amortization
expense increased from $0.4 million in 1994 to $1.0 million in 1995. This
increase was caused by greater investment by NTC in computer hardware and
software, furniture and equipment, and leasehold improvements required to
support its rapid expansion in sales.
BAD DEBT EXPENSE - Total Company bad debt expense increased from $1.8
million or 3.8% of sales in 1994 to $4.1 million or 4.8% of sales in 1995.
The year-to-year increase in bad debt was caused primarily by increased
provisioning of NTC's Dial-1 receivables and secondarily by the Company's
establishment of a bad debt reserve for a potentially uncollectible note
receivable from a Company shareholder.
OTHER INCOME AND EXPENSE - The Company's net income and expense declined from
net other income of $0.3 million in 1994 to net other expense of $1.0 million
in 1995. This $1.3 million net decline was primarily caused by: (1) a
$382,500 settlement with convertible noteholders relating to the acquisition
of RCI, (2) a $244,010 settlement with a former Company officer, and (3) a
$337,500 write-off of marketable securities by NTC.
ACQUISITION COSTS AND EXPENSES - Acquisition costs increased from $ .3
million in 1994 to $1.7 million in 1995. This increase in costs was caused
almost entirely by the acquisition of RCI and includes: (1) $1,228,206 of
amortization expense relating to the acquisition of RCI patent rights, (2)
$118,743 of interest expense on notes used to finance the RCI acquisition and
related legal costs, and (3) $107,841 of equity in RCI's losses from
February, 1995 (date of acquisition) through June, 1995 (the period during
which the Company's 51% ownership of RCI was recorded under the equity method
of accounting).
MINORITY INTEREST - Beginning on July 1, 1995, the Company converted from the
equity method to the consolidated method of accounting for its 51% ownership
in RCI. As a result, 49% of RCI's losses from July 1 through December 31,
1995 (the "minority interest") were eliminated from the Company's
"Consolidated Statements of Operations" for 1995.
34
NET INCOME - Total Company net income declined from $4.1 million or 8.7% of
sales in 1994 to $1.4 million or 1.6% of sales in 1995. Although NTC's
year-to-year net income increased substantially, those increases were more
than offset by losses sustained from the Company's internal operations and
from RCI's operations.
RESULTS OF OPERATIONS - 1994 COMPARED TO 1993:
SALES - In 1994, total revenues were $46.8 million as compared to $11.3
million in 1993, an increase of $35.5 million or 314%.
Telecommunications-related revenues increased to $35.4 million in 1994 from
$7.0 million in 1993, an increase of $28.4 million or 404%, while
marketing-related revenues increased to $11.4 million from $4.3 million in
1993, an increase of $7.1 million or 167%. The growth of the Company's
telecommunications-related revenues was associated with the increase in the
base of marketing representatives, which results in the signing of new
telephone customers. The growth of the Company's marketing-related revenues
was due to a marketing program involving the sale of marketing programs and
materials to independent sales representatives.
COST OF SALES - Total Company cost of sales, including commissions to
independent sales representatives, increased to $31.2 million in 1994 from
$9.5 million in 1993, an increase of $21.7 million or 227%. Expenses
associated with commissions, bonuses and overrides paid to NTC's independent
representatives for 1994 were $7.7 million versus $2.3 million in 1993, an
increase of $5.4 million or 227%. Other increases in expenses were primarily
attributable to the increased costs of communication services from NTC's
primary carriers.
GENERAL AND ADMINISTRATIVE - General and administrative costs were $9.4
million in 1994 versus $2.6 million in 1993, an increase of $6.8 million or
257%. This increase was attributable to substantial growth in NTC's
telecommunications and marketing revenues, which necessitated substantial
increases in the Company's selling, general and administrative operations.
The increase in these operations, however, was lower as a percentage increase
than the increase in revenues, reflecting an improved economy of scale in the
Company's operations.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization increased to
$0.7 million in 1994 from $0.5 million in 1993, an increase of $0.2 million
or 38%. This increase was due to the increased investment in capital goods
required to conduct and expand operations.
BAD DEBT EXPENSE - Total Company bad debt expense increase to $1.8 million in
1994 from $0.2 million in 1993, an increase of $1.6 million or 925%. The
increase in bad debt was due to the rapid growth in telecommunications
revenues in 1994 versus 1993, although the rate of growth of bad debt from
1993 to 1994 reflects an over-reserve for bad debt in 1992 of $1.1 million,
which was applied against bad debt in 1993. The actual rate of growth of bad
debt in 1994 was commensurate with the rate of growth in telecommunications
revenues from 1993 to 1994.
OTHER INCOME AND EXPENSE - Total Company other income and expense changed
from a net expense of $0.1 million in 1993 to net income of $0.3 million in
1994, a gain of $0.4 million, or 765%. The increase was due to the decreased
need for the Company to borrow funds in 1994
35
versus 1993, along with the increase in the Company's cash position, which
resulted in interest gains on funds held in cash accounts.
NET INCOME - The Company generated net income of $4.1 million in 1994 versus
a loss of $0.9 million in 1993, an increase of $5.0 million or 529%. The
Company's net income reflects the improved and profitable operations at NTC
in 1994.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary financial information
which are required to be filed under this item are presented under
"Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K" in
this document, and are incorporated herein by reference.
36
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF
THE REGISTRANT
The information required under this Item is contained in the definitive Proxy
Statement for the Company's 1996 Annual Meeting of Shareholders to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A by
April 30, 1996, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this Item is contained in the definitive Proxy
Statement for the Company's 1996 Annual Meeting of Shareholders to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A by
April 30, 1996, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this Item is contained in the definitive Proxy
Statement for the Company's 1996 Annual Meeting of Shareholders to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A by
April 30, 1996, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this Item is contained in the definitive Proxy
Statement for the Company's 1996 Annual Meeting of Shareholders to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A by
April 30, 1996, and is incorporated herein by reference.
37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
INDEX TO FINANCIAL STATEMENTS:
Page No.
--------
Report of Independent Auditors....................................... 41
Consolidated Balance Sheets - December 31, 1995 and 1994............. 42
Consolidated Statements of Operations - Years Ended December 31,
1995, 1994 and 1993................................................. 44
Consolidated Statements of Shareholders' Equity - Years Ended
December 31, 1995, 1994 and 1993.................................... 45
Consolidated Statements of Cash Flows - Years Ended December 31,
1995, 1994 and 1993................................................. 46
Notes to Consolidated Financial Statements........................... 48
Schedule II - Valuation and Qualifying Accounts - December 31,
1995 and 1994....................................................... 60
38
INDEX TO EXHIBITS:
Exhibits designated by the symbol * are filed with this Annual Report on Form
10-K. All exhibits not so designated are incorporated by reference to a prior
filing as indicated.
Exhibits designated by the symbol ** are management contracts or compensatory
plans or arrangements that are required to be filed with this report pursuant
to this Item 14.
The Company undertakes to furnish to any shareholder so requesting a copy of
any of the following exhibits upon payment to the Company of the reasonable
costs incurred by the Company in furnishing any such exhibit.
EXHIBIT DESCRIPTION
NO.
3.2* Proposed Amendment to Bylaws Regarding Directors.
10.1 Contract between Wiltel, Inc. and National Telephone Communications, Inc.
dated November 15, 1994, previously filed as an Exhibit to Registration
Statement on Form S-3 #33-87302 declared effective on December 22, 1994.
10.2* Standard Office Lease Between William B. Bellis, Sr. And Rapid Cast,
Inc. from May 31, 1995 to May 30, 2000 for property on 4510-12 Robards
Lane, Louisville, KY.
21* Subsidiaries of the Registrant
REPORTS ON FORM 8-K, FILED IN 1995:
20.1 Report on Form 8-K - Acquisition of Rapid Cast, Inc. dated and filed on
February 8, 1995.
20.2 Report on Form 8-K - Stock Purchase Agreement for Rapid Cast, Inc.,
previously filed as Exhibit A dated and filed on February 8, 1995.
20.3 Report on Form 8-K - Stock Purchase Agreement for Q2100, Inc., previously
filed as Exhibit B dated and filed on February 8, 1995.
20.4 Report on Form 8-K - Stock Pledge Agreement, previously filed as
Exhibit C dated and filed on February 8, 1995.
20.5 Report on Form 8-K - Form of Convertible Note, previously filed as
Exhibit D dated and filed on February 8, 1995.
20.6 Report on Form 8-K - Amendment to the Quarterly Report of Form 10-Q for
three months ended March 31, 1995, dated July 25, 1995 and filed on
July 25, 1995.
39
20.7 Report on Form 8-K - Irrevocable Tender of Payment to Company to Return
Short Swing Profits by Sam D. Schwartz dated August 18, 1995 and filed on
August 18, 1995.
20.8 Report on Form 8-K - Changes to the Board of Directors of Incomnet dated
and filed on November 15, 1995.
20.9 Report on Form 8-K - Change in the President and Chief Executive Officer
of Incomnet dated November 30, 1995 and filed on November 15, 1995.
20.10 Report on Form 8-K - Employment Agreement between Incomnet and Melvyn
Reznick, President of Incomnet, Inc. dated November 27, 1995 and filed
on November 30, 1995.
20.11 Report on Form 8-K - Severance Agreement between Incomnet, Inc. and
Sam D. Schwartz, former Chairman and President of Incomnet, Inc. dated
November 30, 1995 and filed on November 30, 1995.
20.12 Report on Form 8-K - Agreement with National Telephone & Communications,
Inc. (NTC) for incentive stock option program and for a public offering
of NTC's stock dated February 6, 1996 and filed on February 9, 1996.
40
Stonefield Josephson
[Letterhead]
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Incomnet, Inc.
We have audited the consolidated balance sheets of Incomnet, Inc. and
subsidiaries as of December 31, 1995 and 1994 and the related
consolidated statements of operations, stockholder's equity and cash flow
for each of the three years in the period ended December 31, 1995, and the
schedule listed in Item 14. These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
and schedule are free of material misstatement. An audit included
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements and schedule. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Incomnet,
Inc. at December 31, 1995 and 1994, the results of its operations and its
cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
As discussed in Note 7 to the financial statements, the Company is a party
to a class action matter, claiming losses arising from alleged
securities violations based upon the denial and non-disclosure of a pending
investigation by the Securities and Exchange Commission and on
alleged securities transactions by its former President. Legal counsel
to the Company has advised that the ultimate outcome of this matter and a
range of potential loss cannot presently be determined. Accordingly, no
provision for any liability that may result upon adjudication has been
made in accompanying financial statements.
/s/ Stonefield Josephson
ACCOUNTANCY CORPORATION
Santa Monica, California
March 8, 1996
41
INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995
1995 1994
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash & cash equivalents $ 1,644,968 $ 9,694,900
Accounts receivable, less allowance for doubtful accounts of $3,154,241 at
December 31, 1995 and $1,530,217 at December 31, 1994 12,177,257 8,603,577
Notes receivable - current portion 102,594 --
Notes receivable from officers & shareholders - net of reserves of $208,800 863,440 --
Inventories 1,646,829 28,362
Prepaid expenses and other 1,197,245 94,247
-------------- --------------
Total current assets 17,632,333 18,421,086
-------------- --------------
PLANT AND EQUIPMENT:
Computer hardware & software 5,113,588 3,513,433
Furniture & office equipment 1,878,439 682,650
Leasehold improvements 4,133,885 400,935
-------------- --------------
Total plant & equipment (gross) 11,125,912 4,597,018
Less accumulated depreciation (1,979,858) (1,994,553)
-------------- --------------
Total plant & equipment (net) 9,146,054 2,602,465
-------------- --------------
OTHER ASSETS:
Excess of purchase price over net assets of NTC, less accumulated amortization
of $941,644 at December 31, 1995 and $663,524 at December 31, 1994 4,838,610 4,667,704
Patent rights from the acquisition of RCI less accumulated amortization of
$2,019,233 at December 31, 1995 41,688,844 --
Investment in Lab Tech 130,725 --
Investment in marketable securities 190,714 337,500
Notes receivable - long term 155,000 --
Deposits and other 323,349 129,591
-------------- --------------
Total other assets 47,327,242 5,134,795
-------------- --------------
Total assets $ 74,105,629 $ 26,158,346
-------------- --------------
-------------- --------------
See accompanying "Notes to Consolidated Financial Statements."
42
INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995
1995 1994
--------------- ---------------
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,783,797 $ 5,813,813
Accrued expenses 3,686,661 1,700,213
Current portion of notes payable 2,530,886 21,494
Deferred income 1,190,474 2,086,773
--------------- ---------------
Total current liabilities 16,191,818 9,622,293
--------------- ---------------
LONG-TERM LIABILITIES:
Notes Payable 9,622 --
Deposits & other 1,100 900
Deferred tax liability (net) 8,449,050 --
--------------- ---------------
Total long-term liabilities 8,459,772 900
--------------- ---------------
Total liabilities 24,651,590 9,623,193
--------------- ---------------
MINORITY INTEREST 6,905,983 --
--------------- ---------------
SHAREHOLDERS' EQUITY:
Common stock, no par value; 20,000,000 shares authorized; issued and
outstanding 13,262,648 shares at December 31, 1995 and 10,482,854 shares at
December 31, 1994 60,883,892 31,376,094
Treasury stock (5,491,845) (665,208)
Accumulated deficit (12,843,991) (14,175,733)
--------------- ---------------
Total shareholders' equity 42,548,056 16,535,153
--------------- ---------------
Total liabilities, minority interest & shareholders' equity $ 74,105,629 $ 26,158,346
--------------- ---------------
--------------- ---------------
See accompanying "Notes to Consolidated Financial Statements."
43
INCOMNET, INC. AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
1995 1994 1993
-------------- -------------- --------------
SALES $ 86,564,917 $ 46,815,057 $ 11,298,972
-------------- -------------- --------------
OPERATING COSTS & EXPENSES:
Cost of sales 57,948,207 31,220,780 9,521,803
General & administrative 19,792,906 9,437,851 2,643,583
Depreciation & amortization 1,006,978 444,486 474,022
Bad debt expense 4,124,589 1,788,772 174,377
Other (income)/expense 1,002,283 (342,445) 51,455
-------------- -------------- --------------
Total operating costs and expenses 83,874,963 42,549,444 12,865,240
-------------- -------------- --------------
ACQUISITION COSTS & EXPENSES:
NTC Acquisition - goodwill amortization 278,120 265,371 40,576
RCI Acquisition - patent rights amortization 1,228,206 -- --
RCI Acquisition - interest and legal 118,743 -- --
RCI Acquisition - equity in (profit)/loss of unconsolidated
subsidiary 107,841 -- --
-------------- -------------- --------------
Total acquisition costs & expenses 1,732,910 265,371 40,576
-------------- -------------- --------------
Income/(loss) before income taxes, extraordinary items &
minority interest 957,044 4,000,242 (1,606,844)
INCOME TAXES 100,501 1,055 --
-------------- -------------- --------------
Income/(loss) before extraordinary items & minority interest 856,543 3,999,187 (1,606,844)
EXTRAORDINARY ITEMS:
Gain/(loss) on settlement with creditors -- 72,007 658,075
MINORITY INTEREST 509,482 -- --
-------------- -------------- --------------
Net income/(loss) $ 1,366,025 $ 4,071,194 $ (948,769)
-------------- -------------- --------------
-------------- -------------- --------------
INCOME/(LOSS) PER COMMON SHARE AND COMMON SHARE EQUIVALENTS:
Income/(loss) before extraordinary items $ 0.11 $ 0.42 $ (0.20)
Extraordinary items -- -- 0.08
-------------- -------------- --------------
Net income/(loss) $ 0.11 $ 0.42 $ (0.12)
-------------- -------------- --------------
-------------- -------------- --------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND FOR 1995, COMMON
SHARE EQUIVALENTS OUTSTANDING 12,706,401 9,593,207 8,183,877
-------------- -------------- --------------
-------------- -------------- --------------
See accompanying "Notes to Consolidated Financial Statements."
44
INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
DECEMBER 31, 1995, 1994 AND 1993
COMMON STOCK
SHARES AMOUNT GAIN/(DEFICIT) TOTAL
-------------- -------------- --------------- --------------
BALANCE AT DECEMBER 31, 1993 9,061,382 $ 22,176,075 $ (18,246,927) $ 3,929,148
Common stock issued upon exercise of warrants 1,308,833 8,544,862 8,544,862
Common stock issued under private placement 100,000 500,000 500,000
Common stock issued in exchange for NTC
shares 82,639 155,157 155,157
Repurchase of treasury shares (70,000) (665,208) (665,208)
Net income 4,071,194 4,071,194
-------------- -------------- --------------- --------------
BALANCE AT DECEMBER 31, 1994 10,482,854 $ 30,710,886 $ (14,175,733) $ 16,535,153
Common stock issued upon exercise of warrants 489,582 4,343,262 4,343,262
Common stock issued under private placement 157,500 1,890,000 1,890,000
Common stock issued under upon conversion of
note 2,300,000 22,664,000 22,664,000
Common stock issued in exchange for NTC
shares 253,712 507,424 507,424
Repurchase of treasury shares (451,000) (5,085,025) (5,085,025)
Treasury shares sold 30,000 361,500 361,500
Change in valuation of marketable securities (34,283) (34,283)
Net income 1,366,025 1,366,025
-------------- -------------- --------------- --------------
BALANCE AT DECEMBER 31, 1995 13,262,648 $ 55,392,047 $ (12,843,991) $ 42,548,056
-------------- -------------- --------------- --------------
-------------- -------------- --------------- --------------
See accompanying "Notes to Consolidated Financial Statements."
45
INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
1995 1994 1993
------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
After tax profit/(loss) $ 856,543 $ 4,071,194 $ (948,769)
Depreciation & amortization - operations 1,413,447 444,486 474,022
Depreciation & amortization - acquisitions 1,099,859 265,371 40,576
Loss from disposition of furniture & equipment -- -- 5,363
Gain on settlement with creditors -- -- (658,075)
------------- ------------ ------------
Net cash inflow/(outflow) from operating activities 3,369,849 4,781,051 (1,086,883)
------------- ------------ ------------
CASH FLOWS FROM (INCREASE)/DECREASE IN OPERATING ASSETS:
Accounts receivable (2,784,363) (6,717,705) (1,024,444)
Notes receivable - current portion (102,594) -- --
Notes receivable - due from shareholder (863,440) -- --
Inventories (400,875) 41,615 (62,451)
Prepaid expenses & other (999,831) (82,247) (10,136)
Notes receivable - long term (155,000) -- --
Deposits & other (193,758) (53,591) 6,354
------------- ------------ ------------
Net cash inflow/(outflow) from changes in
operating assets (5,499,861) (6,811,928) (1,090,677)
------------- ------------ ------------
CASH FLOWS FROM INCREASE/(DECREASE)
IN OPERATING LIABILITIES:
Accounts payable 2,571,096 3,315,686 1,105,917
Accrued expenses 1,834,054 149,874 165,242
Deferred income (896,299) 1,649,204 (330,824)
------------- ------------ ------------
Net cash inflow/(outflow) from changes in
operating liabilities 3,508,851 5,114,764 940,335
------------- ------------ ------------
Net cash inflow/(outflow) from operations 1,378,839 3,083,887 (1,237,225)
------------- ------------ ------------
CASH FLOWS FROM (INCREASE)/DECREASE
IN INVESTING ACTIVITIES:
Acquisition of plant & equipment (7,389,419) (1,693,534) (636,266)
Patents/intangible assets (663,721) -- --
Investment in Lab Tech (130,725) -- --
Investment in marketable securities 146,786 (262,500) (118,507)
Goodwill from acquisition of NTC (449,026) (144,430) --
Patent rights from acquisition of RCI (20,338,022) -- --
------------- ------------ ------------
Net cash inflow/(outflow) from investing
activities (28,824,127) (2,100,464) (754,773)
------------- ------------ ------------
See accompanying "Notes to Consolidated Financial Statements."
46
INCOMNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, (CONT'D)
1995 1994 1993
------------- ------------ ------------
CASH FLOWS FROM INCREASE/(DECREASE)
IN FINANCING ACTIVITIES:
Bank overdraft $ (56,770) $ 56,770 $ (45,005)
Minority interest (7,718,137) -- --
Notes payable - current 1,306,198 (264,606) (550,333)
Sale of common stock, net 29,507,799 8,069,392 3,267,680
Treasury stock (4,826,638) 465,419 --
Loans from a major shareholder -- (21,125) (600,100)
Notes payable - long term 9,822 -- --
Paid in capital 500,000 -- --
Repayment of short-swing profits by a director -- -- 25,726
Prior period adjustment to retainer earnings (1) 698 --
Change in valuation allowance (34,286) -- --
------------- ----------- -----------
Net cash inflow/(outflow) from financing activities 18,687,987 8,306,548 2,097,968
------------- ----------- -----------
Net cash inflow/(outflow) from investing & financing (10,136,140) 6,206,084 1,343,195
------------- ----------- -----------
Net increase/(decrease) in cash & cash equivalents (8,757,301) 9,289,971 105,970
Cash & cash equivalents at beginning of year 10,402,268 404,929 298,959
------------- ----------- -----------
Cash & cash equivalents at end of year $ 1,644,968 $9,694,900 $ 404,929
------------- ----------- -----------
------------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 132,644 $ 1,295 $ 211,835
Income taxes 574,162 1,055 800
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Common stock subscriptions receivable, recorded
as addition to common stock -- -- $ 199,998
See accompanying "Notes to Consolidated Financial Statements."
47
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company, its wholly-owned subsidiary National
Telephone & Communications-Registered Trademark-, Inc. (NTC), and its
51%-owned subsidiary Rapid Cast, Inc. (RCI). As a company with a controlling
interest in RCI, the Company is accounting for RCI using the consolidation
method of accounting. The Company shifted from the equity method of
accounting for RCI under FASB Statement No. 94 in the first and second
quarters of 1995 to the consolidation method because it controls RCI and it
is not certain when the Company will cease to hold a controlling interest in
RCI by virtue of a spin-off or otherwise. All significant intercompany
accounts and transactions have been eliminated in consolidation.
REVENUE RECOGNITION - The Company recognizes revenue during the month in
which services or products are delivered, as follows:
(1) NTC's long distance telecommunications service revenues are
generated when customers make long distance telephone calls from their
business or residential telephones or by using any of NTC's telephone
calling cards. Proceeds from prepaid telephone calling cards are
recorded as deferred revenues when the cash is received, and recognized as
revenue as the telephone service is utilized. The reserve for deferred
revenues is carried on the balance sheet as an accrued liability. Total
1995 long distance telephone service sales totaled $69,994,580.
(2) NTC's marketing-related revenues are derived from programs and
material sold to the Company's base of independent sales representatives,
including forms and supplies, fees for representative and certified
trainer renewals, and the Company's Certified Trainer and Customer
Representative programs. The Company requires that all such services and
materials be paid at the time of purchase. Revenues from marketing-related
materials are booked as cash sales when the revenues are received. For the
fiscal year ended December 31, 1995, marketing sales totaled $13,132,563.
(3) RCI's optical-related revenues are derived from the sale of the
Company's optical lens manufacturing system and related supplies.
Revenues from optical-related systems and supplies are recognized as sales
at the time the products are shipped to the customer. For the
six-month period ending December 31, 1995, during which time the Company
recorded RCI sales using the consolidation method of accounting, optical
product sales totaled $1,992,578.
(4) The Company's network service revenues are recognized as sales as
the service is delivered. Total 1995 network service sales totaled
$1,445,199.
CONCENTRATION OF CREDIT RISK - The Company maintains cash balances or invests
in U.S. treasury bills at various financial institutions, which are insured
up to $100,000 by the Federal Deposit Insurance Corporation. Balances at one
of these institutions aggregated approximately $570,910 at December 31, 1995,
and $4,087,627 at December 31, 1994. The Company sells its telephone and
network services to individuals and small businesses throughout the United
States and does not require collateral. It sells its
48
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1995
optical products both domestically and internationally. Reserves for
uncollectible amounts are provided, which management believes are sufficient.
COMPUTER HARDWARE, FURNITURE AND OFFICE EQUIPMENT - Computer hardware,
furniture and office equipment are stated at cost. Depreciation is provided
by the straight-line method over the assets' estimated useful lives of 5 to
10 years.
COMPUTER SOFTWARE - The Company capitalizes the costs associated with
purchasing, developing and enhancing its computer software. All software
costs are amortized using the straight-line method over the assets'
estimated useful lives of 5 to 10 years
LEASEHOLD IMPROVEMENTS - All leasehold improvements are stated at cost and
are amortized using the straight-line method over the building lease term
of 10 years.
NET INCOME/(LOSS) PER SHARE - Net income/(loss) per common share is based
on the weighted average number of common shares and common share
equivalents in 1995. Common share equivalents have been excluded in 1994
and 1993 either because their effect was immaterial (1994) or antidilutive
(1993).
ACQUISITION AMORTIZATION - The excess of purchase price over net assets of
NTC has been recorded as an intangible asset and is being amortized by
the straight-line method over twenty years. The excess of purchase price
over the value of patent rights acquired with the purchase of the 51%
ownership of RCI has been recorded as an intangible asset and is being
amortized using the straight-line method over seventeen years.
DEFERRED TAX LIABILITY - Deferred income taxes result from temporary
differences in the basis of assets and liabilities reported for
financial statement and income tax purposes.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
2. FUNDING OF MARKETING COMMISSIONS AND DEFERRED INCOME:
The Company's subsidiary, NTC, maintains separate bank accounts for the
deposit of funds related to the reserve of deferred income from the sale
of prepaid calling cards and for the payment of marketing commissions.
Funding of these accounts is adjusted regularly to provide for management's
estimates of required reserve balances. For the marketing commission
account, NTC estimates the total commissions owed to active independent
representatives ("IR Earned Compensation") each week for all monies collected
that week due to the efforts of those active independent representatives.
All IR Earned Compensation is then paid to the independent representatives,
when due, directly out of the separate marketing bank account.
49
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,1995
3. RELATED PARTY TRANSACTIONS:
Notes receivable from officers and shareholders arise from aggregate loans
of $1,072,240 made to three officers in connection with the exercise of
their options to purchase the Company's common stock. Two of the
notes bear interest at the rate of 5.65% and the third note is non-interest
bearing. All three notes are due on demand and are partially secured
by the stock acquired upon the exercise of the options. For one of the
officer loans, the Company agreed to look only to the shares held by the
officer as a source of loan repayment. Accordingly, a reserve of $208,800
was provided in the fourth quarter of 1995, representing the difference
between the market value of the shares held by the officer, and the amount of
the loan.
Included in accounts receivable is approximately $542,000 due from
companies controlled by an individual who is an Incomnet shareholder and
a founding stockholder of RCI.
4. NOTES PAYABLE:
In May 1992, as settlement with a creditor on a past due accounts payable
of approximately $725,000, the Company entered into a non-interest bearing
credit facility of approximately $432,000 payable to the creditor,
resulting in an extraordinary gain of approximately $293,000 ($.04 per
common share). The contract was payable in monthly installments of
$12,000 for the first twelve months and monthly installments of $16,000
thereafter through December 1994. Maturities of the contract were $124,000
in 1993 and $224,000 in 1994, totaling $348,000. The contract was completed
in December 1994.
Notes payable consists of the following as of December 31, 1995:
Note payable in connection with financing of RCI
acquisition, interest at 8%, repaid in January 1996 (see Part I,
Item 1, "Acquisition of Rapid Cast, Inc.,-Financing of Acquisition") $ 500,000
Notes payable to founding stockholders of RCI,
interest at 7%, due in July 1996 1,517,759
Revolving line of credit of RCI, interest at bank reference
rate (approximately 10% at December 31, 1995) 490,000
Other 32,749
----------
$2,540,508
----------
----------
Total 1995 interest expense of $153,840 resulted primarily from interest paid
on notes used to acquire RCI and from interest paid by RCI on its bank
revolving line of credit
50
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
5. DEFERRED TAX LIABILITY:
On February 15, 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 109 "Accounting for
Income Taxes". Effective January 1, 1993, the Company adopted SFAS No, 109,
the effect of which was immaterial to the Company's financial statements in
1994 and resulted in a deferred tax liability in 1995.
Temporary differences between the financial statement carrying amounts and
tax bases of assets and liabilities that give rise to significant portions of
the deferred income tax assets and liabilities are as follows:
December 31,
--------------------------
1995 1994
----------- -----------
Deferred tax assets
Allowance for doubtful accounts $ 1,360,000 $ 612,000
Financing costs -- 190,000
Non deductible reserves -- 65,000
Net operating loss carryforwards 7,503,000 7,120,000
Other 113,000 --
----------- -----------
Subtotal 8,976,000 7,987,000
----------- -----------
Deferred tax liabilities
Property and equipment, principally
due to differences in depreciation 676,000 267,000
Patent rights 8,449,050 --
----------- -----------
Subtotal 9,125,050 267,000
----------- -----------
Total (176,050) 7,720,000
Less valuation allowance (8,273,000) (7,720,000)
----------- -----------
Net deferred tax liability $ 8,449,050 $ - 0 -
----------- -----------
----------- -----------
The deferred taxes at December 31, 1995 are presented in the accompanying
balance sheet as deferred tax assets-current (included in prepaid expenses
and other) of $384,000 and deferred tax liability-noncurrent of $8,449,050.
51
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
The following is a reconciliation of the federal statutory tax rate and the
effective tax rate:
1995 1994 1993
---- ---- -----
Federal statutory tax rate 34.0% 34.0% (34.0%)
Goodwill 9.9 2.0 9.0
Loss producing no current tax benefit -- -- 25.0
State taxes, net of federal benefits 38.2 -- --
Benefit from net operating loss carryforward (71.5) (36.0) --
Other, net -- -- --
---- ---- -----
Effective tax rate 10.6% 0% 0%
---- ---- -----
---- ---- -----
Income tax benefits are recognized only when their realization is assured.
Accordingly, potential future income tax benefits resulting from net
operating losses incurred to date are not reflected in the consolidated
financial statements.
At December 31, 1995, Incomnet had available net operating loss carryforwards
for federal income tax purposes of approximately $16,800,000, expiring in
various years between 2000 and 2008, and Rapid Cast had a carryforward of
approximately $1,900,000 expiring through 2012. The company files combined
income tax returns for Incomnet and NTC and separate returns for RCI.
Accordingly, the federal net operating loss carryforwards of each corporation
are available to offset taxable income only of each separate corporation.
6. SHAREHOLDERS' EQUITY:
STOCK OPTIONS - The Company has an incentive stock option plan which was
adopted in 1994 (the "1994 Plan") for key employees and directors. The plan
provides for the issuance of options covering an aggregate of 1,500,000
shares of common stock. In 1996, the Company intends to replace the 1994
stock option plan with a new stock option plan for the executive officers,
directors and key consultants of the Company, primarily at the parent company
level. The Company's subsidiaries have or are expected to adopt their own
separate stock option plans to be implemented when those companies become
publicly traded. No additional stock options are expected to be granted under
the 1994 stock option plan.
In November 1994, the Company approved the 1994 plan for directors,
employees, and key outside consultants of the Company that provided for the
issuance of up to 1,500,000 shares of common stock. The plan requires that
the option price must be at least 100% of the fair market value of the shares
on the date the option is granted. In November 1994, options to purchase
1,200,000 shares of the Company's common stock were granted at exercise
prices of $10 per share. These options will be vested based upon a
performance requirement in which National
52
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
Telephone & Communications, Inc. must earn at least $15 million in pre-tax
profits during any continuous four audited quarterly periods until
December 31, 1997.
WARRANTS - Since 1993, the Company has issued warrants to purchase the
Company's common stock to key employees, directors or other individuals or
organizations as follows:
Dollar Cancelled or
Issued Number Price Exercised Amount Expired Expiration
------ ------ ----- --------- ------ ------- ----------
9/18/93 375,000 5.00 150,000 $750,000 225,000
9/18/93 15,000 5.00 15,000
9/18/93 5,000 5.00 5,000 25,000
9/18/93 5,000 5.00 5,000
11/18/93 75,000 5.00 75,000 375,000
1-17-94 500,000 7.00 500,000 3,500,000
5/27/94 500,000 10.00 500,000 5,000,000
5/27/94 100,000 8.50 100,000 850,000
5/27/94 100,000 8.50 100,000 850,000
5/27/94 50,000 8.50 5/27/97
5/27/94 50,000 8.50 5/27/97
8/14/94 10,000 8.50 10,000 85,000
11/15/94 100,000 11.25 25,000 281,250
11/15/94 10,000 11.25 10,000 112,500
6/30/95 900,000 14.00 900,000
8/29/95 250,000 11.00 250,000
8/29/95 35,000 4.875 (2) 8/29/97
8/29/95 35,000 4.875 (2) 8/29/97
8/29/95 25,000 4.875 (2) 8/29/97
11/27/95 300,000 4.875 5 years from date of vesting (1)
12/20/95 2,000 5.125 (2) 12/31/96
12/20/95 3,000 5.125 (2) 12/31/96
12/20/95 1,000 5.125 (2) 12/31/96
12/20/95 1,000 5.125 (2) 12/31/96
--------- --------- ----------- ---------
3,447,000 1,475,000 $11,828,750 1,395,000
- --------------------------------------------------------------------------------------
(1) These options vest as follows: 25,000 on February 28, 1996; 25,000 on
May 31, 1996; 25,000 on August 31, 1996; and 25,000 on November 30, 1996,
with an additional 200,000 upon Rapid Cast, Inc. achieving certain
financial goals.
(2) The exercise price on these options was adjusted pursuant to a redemption
of old stock options and a reissuance of an equivalent number of new stock
options with the same expiration date.
Since 1993, the Company has issued warrants to purchase a total of 3,447,000
shares of the Company's common stock. At March 22, 1996, warrants to purchase
1,475,000 of those shares
53
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
have been exercised bringing the Company $11,828,750; warrants to purchase
1,395,000 shares have been canceled and warrants remain outstanding to
purchase 577,000 shares of the Company's common stock at prices ranging from
$4.875 to $11.25 per share.
COMMON STOCK - On August 5, 1994, the Company announced that its Board of
Directors authorized the repurchase of up to 1,000,000 shares of its common
stock from time to time on the open market or in private transactions. The
Company's Chief Executive Officer was given the discretion to decide when and
if the Company would repurchase shares and to effect such transactions. As of
March 27, 1996, the Company has repurchased a net of 486,000 shares of common
stock with a value of $5,491,845 under the terms of the repurchase
authorization as follows:
Years ended Shares
December 31, Repurchased Cost
------------ ----------- ----------
1994 70,000 $ 665,208
----------- ----------
1995 416,000 4,826,637
----------- ----------
486,000 $5,491,845
----------- ----------
----------- ----------
PRIVATE PLACEMENT - On June 30, 1995, the Company initiated a private
placement of 900,000 shares of the Company's restricted common stock at $12
per share and warrants to purchase 900,000 additional shares of the Company's
common stock at $14 per share. The warrants were exercisable for a period of
six months until December 31, 1995. The aggregate purchase price of the stock
and warrants was paid $1,890,000 in cash and subscription notes for a total
of $8,910,000 payable upon the registration of the shares and shares
underlying the warrants with the Securities and Exchange Commission. As the
Company did not register the shares, the Company issued only a total of
157,500 shares in consideration for the contributions of cash made by the
investors. The warrants were not exercised and expired on December 31, 1995.
The Company's balance sheet reflects the issuance of 157,500 shares of the
Company's common stock in exchange for $1,890,000 in capital. The Company is
using the proceeds of the private placement to finance the growth
requirements of its operating subsidiaries.
SHORT SWING PROFITS - On August 18, 1995, the Company filed a Form 8-K
disclosing the tender of short swing profits to the Company by its former
President and Chief Executive Officer pursuant to Section 16(b) of the
Securities Exchange Act of 1934, as amended. After adjustments and a
preliminary review of all purchases and sales of the Company's common stock
through September 1, 1995, the amount of short swing profits was calculated
to be $972,870. On August 18, 1995 and, including adjustments, on September
1, 1995, the Company's former President tendered the short swing profits by
cancellation of all his options to purchase 250,000 shares of the Company's
common stock. Pursuant to the Severance Agreement entered into by the Company
with Mr. Schwartz on November 30, 1995, the parties contemplated a review of
the short swing profit calculations and an independent appraisal of the stock
options tendered by Mr. Schwartz pursuant to Section 16(b) of the Exchange
Act. In addition, the Company was served with a derivative shareholder
lawsuit asserting claims against Mr. Schwartz for the
54
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
payment of the short swing profits, and seeking an order that the Company
collect those profits from Mr. Schwartz. Based on the Company's latest
calculations, which include additional transactions disclosed by Mr. Schwartz
in filings with the commission in March, 1996, the short swing profits appear
to be approximately $2,074,000. The plaintiffs in the shareholder derivative
lawsuit calculate short swing profits to be approximately $2,128,000. The
value of the tendered stock options has not yet been agreed upon or
appraised. There are no assurances, however regarding a final determination
of the amount of the short swing profits or the value of the tendered stock
options.
On February 29, 1996, the Company delivered a demand to Joel Greenberg, the
Chairman of the Board of Directors, to pay short swing profits of $46,500 to
the Company pursuant to Section 16(b) of the Exchange Act. The Company
expects the short swing profits to be paid on or before April 30, 1996.
7. COMMITMENTS AND CONTINGENCIES:
LITIGATION - The Company is a defendant in a class action matter alleging
securities violation with respect to alleged false denial and non-disclosure
of a Securities and Exchange Commission investigation and alleged
non-disclosure of purchases and sales of the Company's stock by an affiliate
of the former Chairman of the Board. Counsel for the company is unable to
estimate the ultimate outcome of this matter and is unable to predict a range
of potential loss. Accordingly, no amounts have been provided for the class
action lawsuit, in the accompanying financial statements.
The Company is under investigation by the Securities and Exchange Commission
under a non-public "formal order of private investigation." Management has
furnished all information requested by the Commission and does not believe
that the matter will have a material adverse impact on its financial position
or results of operations.
BUILDING LEASES - Rent expense for the years ended December 31, 1995, 1994
and 1993 was $800,694, $277,712 and $204,760, respectively.
The Company leases its office and operating facility in Woodland Hills ,
California under a noncancellable operating lease expiring July 1998. The
aggregate future minimum annual rental payments required under the operating
lease are as follows:
Years ending
December 31,
------------
1996 $104,556
1997 104,556
1998 60,991
--------
$270,103
--------
--------
55
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
The Company's subsidiary, NTC, leases its office and operating facilities in
Irvine, California under several noncancellable operating leases as described
in Part I, Item 2, "Properties." The aggregate future minimum annual rental
payments required under these operating leases and under the proposed
extension are as follows:
Years ending
December 31,
------------
1996 $ 586,943
1997 591,231
1998 603,632
1999 616,406
2000 629,562
2001 643,114
2002 657,072
2003 671,449
2004 383,742
----------
$5,383,151
----------
----------
The Company's 51%-owned subsidiary, RCI, leases its facility in Louisville,
Kentucky under a noncancellable operating lease as described in Part I, Item
2, "Properties." The aggregate future minimum annual rental payments required
under the operating lease are:
Years ending
December 31,
------------
1996 $ 98,004
1997 98,004
1998 99,864
1999 101,196
2000 42,165
--------
$439,233
--------
--------
8. NETWORK MARKETING COSTS:
During 1995, NTC's net cost to operate its network marketing program was $1.9
million as summarized below (in $ millions):
1995
-----
Sales $13.1
Cost of sales 11.2
56
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
Operating expenses for support services 3.8
-----
Total marketing-related costs 15.0
-----
Net marketing cost $ 1.9
-----
-----
% of total NTC (long distance & marketing) sales 2.3%
Marketing sales of $13.1 million were generated by the sale of materials,
training and support services to assist NTC independent sales representatives
in selling new retail customers and enrolling other representatives in the
NTC program. The marketing-related costs include commissions paid to
independent sales representatives for acquiring new retail telephone
customers, as well as the cost of sales materials, salaries and wages of
marketing department personnel, services required to support the independent
sales representatives, and other directly identifiable support costs, but do
not include residual commissions paid on continuing long distance telephone
usage or the typical indirect cost allocations, such as floor-space and
supporting departments. When the marketing-related costs of $15.0 million are
compared against marketing-related revenues of $13.1 million, the result is a
net loss in marketing-related activities of $1.9 million or 2.3% of total NTC
sales.
9. SEGMENT INFORMATION:
In 1993 and 1994, the Company conducted its business operations in two
industry segments, including Network Services and Telephone Services. In
1995, because of the acquisition of RCI, the Company conducted business in
three segments, including Network Services, Telephone Services and Optical
Systems. No one customer accounted for as much as 10% of the revenues of any
segment in 1995, 1994 or 1993.
57
INCOMNET, INC. AND SUBSIDIARIES
SEGMENT INFORMATION
Telephone Optical Network General
YEAR ENDED DECEMBER 31, 1995 Services Systems Services Corporate Consolidated
- ---------------------------- ----------- ----------- ----------- ----------- ------------
Sales $83,127,140 $ 1,992,578 $ 1,445,199 $ -- $86,564,917
----------- ----------- ----------- ----------- -----------
Income/(loss) before income taxes, extraordinary
items & minority interest 5,059,758 (1,039,760) (1,184,327) (1,878,627) 957,044
Income taxes 365,101 -- (102,311) $ (162,289) 100,501
----------- ----------- ----------- ----------- -----------
Income/(loss) before extraordinary items & minority
interest $ 4,694,657 $(1,039,760) $(1,082,016) $(1,716,338) $ 856,543
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Identifiable assets $21,757,624 $25,345,466 $ 1,568,668 $25,433,871 $74,105,629
Depreciation and amortization 704,642 429,719 279,086 $ 1,099,856 2,513,303
Capital expenditures 6,681,148 198,665 509,606 -- 7,389,419
Telephone Optical Network General
YEAR ENDED DECEMBER 31, 1995 Services Systems Services Corporate Consolidated
- ---------------------------- ----------- ----------- ----------- ----------- ------------
Sales $45,608,753 $ -- $ 1,206,304 $ -- $46,815,057
----------- ----------- ----------- ----------- -----------
Income/(loss) before income taxes & extraordinary
items 3,741,972 -- 154,325 103,945 4,000,242
Income taxes -- -- 1,055 -- 1,055
----------- ----------- ----------- ----------- -----------
Income/(loss) before extraordinary items $ 3,741,972 $ -- $ 153,270 $ 103,945 $ 3,999,187
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Identifiable assets $12,830,140 $ -- $ 4,271,190 $ 9,057,016 $26,158,346
Depreciation and amortization 220,457 -- 489,400 -- 709,857
Capital expenditures 1,546,708 -- 146,826 -- 1,693,534
Telephone Optical Network General
YEAR ENDED DECEMBER 31, 1995 Services Systems Services Corporate Consolidated
- ---------------------------- ----------- ----------- ----------- ----------- ------------
Sales $10,031,232 $ -- $ 1,267,740 $ -- $11,298,972
----------- ----------- ----------- ----------- -----------
Income/(loss) before income taxes & extraordinary
items (1,604,794) -- 238,685 (240,735) (1,606,844)
Income taxes -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Income/(loss) before extraordinary items $(1,604,794) $ -- $ 238,685 $ (240,735) $(1,606,844)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Identifiable assets $ 2,431,339 $ -- $ 905,000 $ 5,329,500 $ 8,665,839
Depreciation and amortization 308,776 -- 205,822 -- 514,598
Capital expenditures 461,563 -- 129,330 -- 590,893
58
INCOMNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
10. GAIN ON SETTLEMENT WITH CREDITORS:
During 1993, the Company settled certain past due trade accounts payable of
the NTC subsidiary with a face amount of $877,000 in exchange for an
agreement to pay $218,925. The transaction resulted in an extraordinary gain
on settlement with creditors of $658,075.
11. ACQUISITION OF RAPID CAST, INC.:
On February 8, 1995, the Company acquired a 51% ownership in Rapid Cast, Inc.
for $28,164,000, in a transaction accounted for using the purchase method of
accounting. The acquisition resulted in the recognition of intangible patent
assets of $20.3 million, which are being amortized over 17 years.
The following summary, prepared on a pro forma basis, combines the
consolidated results of operations as if RCI had been acquired as of the
beginning of the periods presented, after including the impact of certain
adjustments, such as minority interest, equity in loss of unconsolidated
subsidiary and patent amortization. (Dollars in thousands, except per share
amounts).
1995 1994
------- -------
Sales $87,860 $46,815
Net income $ 1,080 $ 4,071
Net income per share $ .08 $ 0.42
The pro forma results are not necessarily indicative of what would have
occurred if the acquisition had been in effect for the entire periods
presented. In addition, they are not intended to be a projection of future
results and do not reflect any synergy that might be achieved from combined
operations.
12. FOURTH QUARTER ADJUSTMENTS:
During the fourth quarter of 1995, the Company recorded adjustments having
the effect of reducing net income by approximately $3.1 million or $.24 per
share. These adjustments resulted primarily from reserve provisioning related
to settlements with shareholders and with the Company's former Chairman,
revisions of management's estimates regarding the collectibility of accounts
receivable, write-off of marketable securities and inventory, and reserve
provisioning for estimated legal fees.
59
SCHEDULE II
INCOMNET, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1995 AND 1994
Column A Column B Column C Column D Column E
- -------- -------- -------- -------- --------
Additions
----------------------------- (2)
Balance at Charged to Charged to (1) Balance
beginning costs and other accounts Deductions at end
Classification of period expenses - describe - describe of period
- -------------- ---------- ---------- -------------- ---------- ---------
Allowance for
doubtful accounts:
December 31, 1994 $3,263,659 $4,576,237 -- $4,309,679 $3,530,217
December 31, 1995 $3,530,217 $7,899,168 -- $7,842,435 $3,586,950
(1) Represents write-offs of specific balances determined to be uncollectible.
(2) Balance at December 31, 1995 includes $487,678 of other allowances, such
as reserves for marketable securities, inventory and notes receivable.
60
EXHIBIT 3.2
INCOMNET, INC.
AMENDMENT TO BYLAWS REGARDING DIRECTORS
The Board of Directors recommends that the Bylaws of the Corporation be
amended in such a way that the Board of Directors consists of not less than
four (4) nor more than nine (9) directors, with no fixed number of directors.
At present, the Bylaws state that the Board of Directors consists of not less
than five (5) nor more than (9) directors, and has been fixed by the Board of
Directors at five (5). The proposed Amendment cannot be passed if more than
16.67% of the shareholders vote against the amendment.
The Board of Directors proposes that Section 2 of the Bylaws of Incomnet,
Inc. be amended to read as follows:
Section 2. NUMBER OF DIRECTORS. The number of directors of the
Corporation shall not be less than four (4) nor more than nine (9). The exact
number of directors shall be unspecified until changed, within the limits
specified above, by a Bylaw amending this Section 2, duly adopted by the
Board of Directors or by the Shareholders. Such indefinite number of
directors may be changed, or a definite number fixed with provision for a
specific number, by a duly adopted amendment to the Articles of Incorporation
or by an amendment to this Bylaw duly adopted by the vote or written consent
of holders of a majority of the outstanding shares entitled to vote;
provided, however that an amendment reducing the number or the minimum number
of directors to a number less than four cannot be adopted if the voters cast
against its adoption at a meeting of the shareholders, or the shares not
consenting in the case of action by written consent, are equal to more than
16.66% of the outstanding shares entitled to vote. No amendment may change
the stated maximum number of authorized directors to a number greater than two
times the stated number of directors minus one.
The present Section 2 of the Bylaws of Incomnet reads as follows:
Section 2. NUMBER OF DIRECTORS. The number of directors of the
Corporation shall not be less than five (5) nor more than nine (9). The exact
number of directors shall be five (5) until changed, within the limits
specified above, by a Bylaw amending this Section 2, duly adopted by the
Board of Directors or by the Shareholders. Such indefinite number of
directors may be changed, or a definite number fixed with provision for a
specific number, by a duly adopted amendment to the Articles of Incorporation
or by an amendment to this Bylaw duly adopted by the vote or written consent
of holders of a majority of the outstanding shares entitled to vote;
provided, however that an amendment reducing the number or the minimum number
of directors to a number less than four cannot be adopted if the voters cast
against its adoption at a meeting of the shareholders, or the shares not
consenting in the case of action by written consent, are equal to more than
16.66% of the outstanding shares entitled to vote. No amendment may change
the stated maximum number of authorized directors to a number greater than two
times the stated number of directors minus one.
61
EXHIBIT 10.2
LEASE AGREEMENT
THIS LEASE AGREEMENT made this day by and between WILLIAM B. BELLIS, SR.,
whose address is 10691 Brentlinger Lane, Louisville, Kentucky 40291,
hereinafter "Lessor"; and RAPID CAST, INC., a Delaware corporation authorized
to do business in, and in good standing in the Commonwealth of Kentucky,
whose address is: 4510-12 Robards Lane, Louisville, Kentucky 40218,
hereinafter "Lessee";
WITNESSETH: That Lessor hereby leases to Lessee, and Lessee hereby rents from
Lessor, upon the mutual agreements and covenants and subject to the terms and
conditions hereinafter set out, the real estate commonly known as 4610-12
Robards Lane, Louisville, Kentucky 40218, containing approximately 1.3 acres
with improvements thereon, and more particularly described in Exhibit A
annexed hereto, as part hereof.
It is further mutually agreed between the parties as follows:
1. TERM. The term of this lease is a period of five (5) years,
commencing May 31st, 1995 and expiring May 30th, 2000.
2. POSSESSION. Possession shall be delivered to Lessee upon execution
of this lease by both parties. Provided, however, that Lessor reserves the
right of exclusive use of the executive office contained in the leased
premises for a period not to exceed 90 days from the date of execution
hereof. Lessee shall be entitled to a credit against the rent stipulated
herein for the actual number of days during which Lessor occupies the
executive office, calculated on the basis of $8.00 per square foot per year
plus Lessor's prorate share of its utilities. At time of execution of this
lease, Lessee shall pay to Lessor the sum of $8,166.67, being the installment
of rent due May 31st, 1995.
3. RENT. Lessee binds itself to pay as fixed rent for the leased
premises the sum of $496,400.00, being at the rate of $98,000.00 annually for
the first three lease years and at the rate of $101,200.00 annually for the
fourth and fifth years, payable in monthly installments on or before the
first day of each month during the term hereof, the first 36 monthly
installments to be in the amount of $8,166.67 per month and the remaining 24
monthly installments to be in the amount of $8,433.33 per month. All
payments of rent shall be made to Lessor at his address stated above, or at
such other place as he may direct in writing from time to time. If any
installment of rent or other sum due from Lessee is not received by Lessor
within five (5) days after such amount is due, Lessee shall pay Lessor a late
charge equal to 10% of such overdue amount. The parties agree that such late
charge represents a fair and reasonable estimate of the cost Lessor will
incur by reason of late payment by Lessee. Lessor's acceptance of such late
charge shall in no event constitute a waiver of Lessee's default with
respect to such overdue amount, or prevent Lessor from exercising any other
right or remedy granted hereunder.
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4. USE OF PREMISES. The leased premises shall be used for the
manufacture and distribution of equipment and machinery for the casting of
eyeglass lenses and kindred items, and for training in the use of said
equipment and machinery, and not otherwise. So long as Lessee shall pay the
rent and perform all of the terms of this lease, Lessee shall peaceably and
quietly enjoy the leased premises without any disturbance from Lessor or any
person claiming through Lessor.
5. SURRENDER OF PREMISES. Lessee shall deliver and surrender to
Lessor, possession of the leased premises upon expiration of this lease or
its earlier termination, or at the expiration of any extention or renewal
hereof, broom clean and in as good condition and repair as at the
commencement of the term, or as may have been put by Lessor or Lessee during
the term, ordinary wear and tear and insured damage by fire or the elements
beyond Lessee's control excepted. Lessee shall not, at any time, cause,
permit or suffer any waste, nor erect or permit to be erected or conducted on
the premises any nuisance.
6. DAMAGE OR DESTRUCTION TO PREMISES. In case the premises herein
leased or any part thereof shall, during the term of this lease, be destroyed
or damaged by fire or other casualty, so that the same shall thereby be
rendered unfit for habitation or for the purpose designed, which is to be
determined by the Lessor, then and in that event the Lessor may, at any time
within five (5) days after the happening of such casualty, by notice in
writing to the Lessee or those having estate in the premises, determine (or
cancel) this lease, and unless it be so determined, the rent hereinbefore
stipulated to be paid or a just and proportional part thereof shall be
suspended or abated until the premises shall have been by the Lessor rebuilt
or repaired and put in proper condition for use and habitation, and the rent
shall thereupon recommence immediately after said rebuilding or repairing
shall have been completed, but in any event the rent shall be paid up to the
day of said fire or casualty.
7. ASSIGNMENT AND SUBLEASING. The premises shall not be underlet, or
the term, in whole or in part, assigned, transferred or set over by the act of
the Lessee, by process or operation of law or in any other manner whatsoever,
without the prior written consent of the Lessor, which consent shall not be
unreasonably withheld, and for a violation of this stipulation, in addition
to the forfeiture provided for herein, the rent shall be doubled while the
default continues.
8. TAXES AND INSURANCE. Lessor shall pay all real estate taxes on the
leased premises. Lessee shall pay all taxes on its contents in the leased
premises. Lessor shall pay for all insurance on the improvements. Lessee
shall not at any time use the premises, or permit them to be used in such a
manner as to increase the rate of insurance thereon. Lessee shall pay, as
additional rent, any increase in insurance cost caused by its use of the
premises, and any increase in real estate taxes and/or insurance premiums in
excess of those paid by Lessor during the first lease year.
9. HOLDING OVER. Should the Lessee continue to occupy the premises
after the expiration of said term or any renewal or extension thereof, or
after a forfeiture incurred, whether
63
with or against the consent of the Lessor, such tenancy shall be in
accordance with the terms of this lease except that Lessee shall be subject
to removal at any time.
10. RECOVERY OF PREMISES. Should the Lessor at any time rightfully
seek to recover possession of the premises and be obstructed or resisted
therein, and any litigation thereon ensue, the Lessee shall pay and discharge
all costs and attorney fees and expenses that shall arise from enforcing the
covenants of this indenture by Lessor. After service of notice or the
commencement of a suit, or after final judgment for possession of said
premises, the Lessor may receive and collect any rent due, or that may
accrue, and the payment of said rent shall not waive or affect said notice or
said suit or said judgment or judgments.
11. ACCESS BY LANDLORD. The Lessor shall have free access to the
premises herein leased for the purpose of examining or exhibiting same, or to
make any needful repairs or alteration of said premises which said Lessor may
deem necessary.
12. SIGNS. No signs shall be installed, written or painted upon the
leased premises without the prior written consent of Lessor, and when done
by agreement, Lessee shall, if requested by Lessor, remove at Lessee's
expense all such signs, writings and paintings at the expiration or
termination of the term and repair any damage done by any removal. Lessee may
use the existing monument sign, but shall be responsible for its maintenance
and repair. All signs erected by Lessee shall be at Lessee's expense and
shall comply with any applicable zoning or other regulations.
13. SEVERABILITY. If any one or more of the provisions of this lease
are deemed to be unenforceable, the remaining provisions of the lease shall
remain in full fore and effect.
14. TIME. Time is of the essence.
15. MAINTENANCE AND REPAIRS. Lessee shall at all times, at Lessee's
cost: maintain the leased premises and all public areas adjoining the leased
premises, clear of any litter or debris; comply with all laws, ordinances and
requirements of all governmental authorities concerning the leased premises
and concerning the use and occupancy thereof; install any utility services
that Lease may require, and pay for all telephone, gas, electric, water,
sewer and other utility charges, trash removal, janitorial services, common
area maintenance and lawn and landscape mowing and upkeep; pay for and
maintain the leased premises in good condition and in good order and repair
at all times; pay for and maintain all mechanical, electrical and other
equipment and systems, including the heating and air-conditioning systems, in
good operating condition; maintain public liability insurance, protecting
both Lessor (who shall be made an additional named insured) and Lessee in the
amounts of not less than $1,000,000.00/$1,000,000.00/$1,000,000,000.00; carry
fire and casualty insurance on all personal property brought upon the premises
by anyone. Lessee shall indemnify and hold harmless Lessor, Manager, and their
respective agents and employees, from and against any and all liabilities,
damages, claims, demands, costs and expenses of every kind and nature
(including reasonable attorneys fees), including those arising from any
injury or damage to any person (including death), property or business
(a) sustained in or about the Premises, (b) resulting from
64
the negligence or willful act of Lessee, its employees, servants, agents,
invitees, licensees or subtenants, or (c) resulting from the failure of
Lessee to perform any obligation under this Lease; provided, however,
Lessee's obligation under this paragraph shall not apply to injury or damages
resulting from the gross negligence or willful act of Lessor, Manager or
their respective agents or employees. Lessor shall be responsible for all
major repairs, replacement of mechanical systems and building structural
components.
16. IMPROVEMENTS AND ALTERATIONS. Lessee shall not make any structural
change, modification or alteration nor any decoration, without the prior
written consent of Lessor. All fixtures and improvements which may be made or
installed by lessee shall become the property of Lessor at the termination of
this lease unless Lessor shall request the removal of same, in which event
Lessee shall remove same at Lessee's cost, Lessee to repair any damage caused
thereby.
17. STORAGE AND USE. Lessee shall not store or use any combustible or
explosive materials in the leased buildings which may create an unnecessary
hazard or affect the insurance rates on the leased premises. Lessee shall
put, keep, and use the leased premises in full compliance with all federal,
state and local laws, rules and regulations pertaining to the leased
premises, including but not limited to those relating to any hazardous or
toxic substance, material or waste which is or becomes regulated by any local
authority, the State of Kentucky or the United States Government, or any
agency of any of same. Lessee shall indemnify and hold Lessor harmless from
any and all claims, judgments, damages, penalties, fines, costs, liabilities
and attorney fees incurred in connection with any investigation of site
conditions or any clean up, remedial, removal or restoration work required by
any federal, state or local governmental agency or authority, and losses
(including, without limitation, diminution in value or rental value of the
leased premises, sums paid in settlement of claims, attorney fees,
consultants' fees and experts' fees) which Lessor shall incur or sustain,
during or after the expiration of the lease term and any renewals or
extensions thereof, caused by or resulting from any act or omission of Lessee.
18. WAIVER OF DEFAULT. The waiver of any default committed by Lessee
shall not constitute or be held to be a waiver of any subsequent or other
default.
19. CONDEMNATION. If any part or all of the premises shall be taken
(or acquired) for any public of quasi-public use under power of eminent
domain or like power, or by private purchase in lieu thereof, this lease
shall automatically terminate as to the premises so taken as of the date of
possession by the acquiring authority. In the event of a partial taking, and
the remainder of the premises shall be suitable for occupancy by Lessee, this
lease shall continue as to the remainder and the rent shall be adjusted on a
square foot basis; but if the remainder shall not be suitable for such
occupancy, then this lease shall terminate in its entirety. All awards of
damages for each taking or acquisition shall belong to Lessor, free of any claim
of Lessee.
20. SECURITY DEPOSIT. With the execution of this lease, Lessee has
deposited with Lessor, the sum of $8,166.67, which sum shall be retained by
Lessor as security for the faithful performance of obligations and payment of
rents by Lessee, and as security for damage to the
65
property. Lessor may exhaust any and all other remedies against Lessee before
resorting to said deposit, but nothing herein contained shall require or be
deemed to require Lessor to do so. If the deposit shall not be utilized for
any such purposes, then same shall be returned to Lessee within twenty (20)
days after the expiration of the term of this lease or any renewal or
extension thereof. Lessor shall not be required to pay any interest on said
deposit.
21. DEFAULT. If Lessee shall abandon the premises, permit the rent to
become in arrears or violate any other obligation herein, Lessor may, at his
option, cancel this lease or cancel or modify any portion hereof, or enter
the premises as agent of Lessee, by force or otherwise, without being liable
in any way therefor, and relet the premises with or without any furniture or
equipment that may be therein, as agent of Lessee, at such price and upon
such terms, and for such duration of time, as Lessor may determine, and
receive the rent therefor, applying same first to the expenses of retaking
and reletting (including any court costs, attorneys fees and broker's or
realtor's fees) and then to the payment of the rent due hereunder, and if
the rental realized by Lessor shall be less than the expenses of retaking
and reletting and the rent herein provided, Lessee shall pay any deficiency.
If Lessor cancels lease, then Lessee shall be liable for damages for
breaching this agreement for the difference between the rental provided for
the canceled portion of the term and the amount of rent actually received by
Lessor during that period of time, plus all expenses, costs and attorney
fees which may be incurred by Lessor. Any default by Lessee shall
automatically cancel and extinguish all rights of Lessee under paragraphs
23 and 24 hereof.
22. ENTIRE AGREEMENT. Lessee acknowledges that Lessor has made no
representations, agreements, or inducements whatsoever except as may be
set forth in this instrument contains the entire agreement between the
parties. All prior agreements and understandings are superseded by this
instrument. This instrument shall be construed and governed by the laws
of the Commonwealth of Kentucky.
23. OPTION TO EXTEND LEASE. Lessee may extend this lease upon the
expiration of its initial term, provided that this lease is then in full
force and effect and Lessee has at all times fully performed all of its
terms and conditions. The extended term shall be for five (5) years,
commencing on May 1, 2000, and shall be upon the same terms and conditions
as the initial term, except that rent during the extension term, in
addition to any increases in taxes and/or insurance, shall be as follows:
the rent for the first year of the extension term shall be $101,200.00,
and the rent for each year thereafter shall be increased by an amount
equal to the increase of each prior year in the Consumer Price Index,
United States City Average, All Urban Consumers, of the Bureau of Labor
Statistics of the United States Department of Labor. If publication of
said index is discontinued, the parties shall substitute the most closely
related Index published by any agency of the United States Government.
Lessee shall exercise the option for such extended term by delivering
written notice thereof to Lessor at least six (6) months or more prior
to the expiration of the initial term.
24. PURCHASE OPTION. Lessee shall have the option during the
first lease year to purchase the leased premises, provided that the lease
is there in full force and effect and that Lessee has at all times fully
complied with all terms and conditions herein. The purchase price
66
shall be $950,000.00, payable at the closing in cash or in immediately
available funds. Lessor shall convey title by a deed of General Warranty,
free and clear of encumbrances but subject to any easements, restrictions
and stipulations of record affecting the property, zoning laws and
regulations and taxes which may be a lien against the property but which
are not due and payable at the time of closing. All taxes for the year of
closing shall be prorated between the parties on a calendar year basis. If
Lessee elects to exercise such option, it shall deliver written notice
thereof to Lessor and the closing shall take place within ninety (90) days
thereafter.
25. BROKER'S COMMISSION. Lessor and Lessee agree, represent and
acknowledge that Lane Consultants and Harry K. Moore Company are the only
brokers with whom they have dealt in connection with the leased premises.
Lessor shall be responsible only for the payment of all brokerage
commissions in connection with the original term of this lease and in
connection with any sale pursuant to paragraph 24 hereof.
26. MISCELLANEOUS
26.1 The captions of this lease are for convenience only, and are
not part of the lease, and do not in any way limit or amplify its terms
and provisions.
26.2 The provisions of this lease shall be binding on and inure to
the benefit of the parties, their legal representatives, successors and
permitted assigns.
26.3 This lease may not be changed orally, but only by an agreement
in writing and signed by the party against whom enforcement of any waiver,
change, modification or discharge is sought.
26.4 If any provision of this lease shall be declared invalid or
unenforceable, the remainder of this lease shall continue in full force
and effect.
26.5 This lease expresses the mutual intent of the parties, and
no presumption or burden of proof shall arise favoring or disfavoring
either party by virtue of the authorship of any of the provisions herein.
IN TESTIMONY WHEREOF, witness the signatures of the parties hereto,
duly authorized thereunto, this 31st day of May, 1995.
/s/ WILLIAM B. BELLIS, SR.
---------------------------------------
WILLIAM S. BELLIS, SR. -- Lessor
RAPID CAST, INC. -- Lessee
By /s/ Larry Joel
------------------------------------
Title: President -- Chairman
67
GUARANTY
To induce William B. Bellis, Sr., as Lessor, to enter into the foregoing
Lease, to which this Guaranty is attached, and in consideration thereof, Larry
Joel, O.D. ("Guarantor"), a resident of the State of Kentucky, whose address
is 4510 Robards Lane, Louisville, Kentucky, 40218, guarantees the punctual
payment and prompt performance of any and all indebtedness and obligations
of any kind of Lessee under the foregoing Lease, together with interest
thereon and all attorneys fees, costs and expenses of collection or other
enforcement of the provisions of this Lease incurred by Lessor. Guarantor
hereby expressly waives notice of any default by Lessee under the foregoing
Lease. Guarantor shall remain bound under this Guaranty notwithstanding any
extension of time of performance to, the granting of any other indulgence to,
or any other modification including any increase, of any obligation of Lessee,
and the acceptance, alteration or release of any security. This is a
continuing, indivisible guarantee by Guarantor of every debt and obligation
of Lessee under the foregoing Lease, whenever incurred. This Guaranty shall
apply to any renewal or extension of the foregoing Guaranty shall be directly
enforceable against Guarantor without resorting to any party otherwise
liable and without exhausting any and all remedies against them. Any
litigation concerning this Guaranty shall only be brought in the State of
Kentucky, and Guarantor hereby appoints the Secretary of State of Kentucky
as a process agent regarding any such litigation. Provided, however, that in
the event Rapid Cast, Inc. is able to institute a public stock offering that
is successful in raising a minimum of $5,000,000, in capital or its retained
earnings exceed $5,000,000, then upon the happening of said event, this
guaranty shall become void and of no further effect. Rapid Cast, Inc. shall
certify to Lessor the occurrence of either of the above and shall provide
such documentation as Lessor may require to verify the occurrence.
IN TESTIMONY WHEREOF, witness the signature of the Guarantor by its
duly authorized representative, this 31st day of May, 1995.
/s/ Larry Joel
---------------------------------------
Larry Joel, O.D.
68
EXHIBIT 21
INCOMNET, INC.
SUBSIDIARIES OF THE REGISTRANT
MARCH 27, 1996
State or other
jurisdiction of Percentage of
incorporation or voting securities
Name organization owned
- ---- ------------------ -----------------
Incomnet India Limited India 32%
Rapid Cast, Inc. New Jersey 51%
National Telephone &
Communications, Inc. Nevada 100%
69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Dated: April 8, 1995
INCOMNET, INC.
---------------------------------------
(Registrant)
By: /s/ MELVYN REZNICK
------------------------------------
MELVYN REZNICK
President and
Chief Executive Officer
Pursuant to requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated:
Signature Capacity Date
--------- -------- ----
/s/ MELVYN REZNICK President, Chief Executive April 8, 1996
- -------------------------- Officer, and Director
MELVYN REZNICK
/s/ JOEL W. GREENBERG Chairman, Board of Directors April 8, 1996
- --------------------------
JOEL W. GREENBERG
/s/ RICHARD A. MARTING Vice President of Finance April 8, 1996
- -------------------------- and Administration (NTC)
RICHARD A. MARTING
/s/ NANCY ZIVITZ Director April 8, 1996
- --------------------------
NANCY ZIVITZ
/s/ ALBERT MILSTEIN Director April 8, 1996
- --------------------------
ALBERT MILSTEIN
70