EXHIBIT B
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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RICHARD MORALES :
PLAINTIFF, :
: CV 96 0225
- VS -
:
INCOMNET, INC. AND : STIPULATION OF SETTLEMENT
SAM D. SCHWARTZ,
:
DEFENDANTS.
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IT IS HEREBY STIPULATED AND AGREED to by and between the Parties hereto
and their respective attorneys, as follows:
SETTLEMENT AGREEMENT
THIS SETTLEMENT AGREEMENT (the "Agreement") is entered into this 5th day of
June 1996 by and between Sam D. Schwartz, an individual ("Schwartz"), and
Incomnet, Inc., a California corporation ("Incomnet"), with respect to the
following facts.
R E C I T A L S
A. Schwartz and Incomnet have agreed upon the amount of short-swing
profits ("Short-Swing Profits") owed by Schwartz to Incomnet pursuant
to Section 16(b) of the Securities and Exchange Act of 1934, as
amended (the "Exchange Act"), as the result of disclosed purchases and
sales of Incomnet's common stock made by Schwartz from December 27,
1993 until September 1, 1995 while he was the President, Chief
Executive Officer and Chairman of the Board of Directors of Incomnet.
B. Schwartz and Incomnet have been named as defendants in the pending
lawsuit entitled RICHARD MORALES VERSUS INCOMNET, INC. AND SAM D.
SCHWARTZ, Case Number CV 96-0225, filed in the United States District
Court in the Southern District of New York (the "Court") in January
1996 (the "Lawsuit").
C. The short-swing profits alleged in the Lawsuit by plaintiff (the
"Plaintiff") are equal to the Short-Swing Profits agreed upon by
Incomnet and Schwartz in this Agreement.
D. Schwartz presently owns approximately 1,998,500 shares of Incomnet's
Common Stock. Schwartz has no other significant liquid assets from
which to pay Short-Swing Profits, and is subject to significant bank
debt, other monetary obligations, and contingent liabilities,
including but not limited to claims made in a pending class action
lawsuit and related lawsuits naming Incomnet and Schwartz as
defendants, and in an ongoing investigation by the Securities and
Exchange Commission. Incomnet, in its business judgment, believes
that the terms and conditions for payment of the Short-Swing Profits
set forth in this Agreement are the best and most efficient means of
collecting the Short-Swing Profits from Schwartz.
E. This Agreement is entered into by Incomnet and Schwartz for the
purpose of settling all claims made in the Lawsuit and Incomnet's
claims for payment of the Short-Swing Profits by Schwartz. This
Agreement is also made in compliance with the Severance Agreement
entered into by Schwartz and Incomnet, dated November 30, 1995, and in
particular as a resolution of all issues under Section 5 of said
Severance Agreement (the "Severance Agreement"). This Agreement and
the scope of the term "Short-Swing Profits" covers the transactions
disclosed by Schwartz on Form 4 and Form 5 filings with the Securities
and Exchange Commission for the period from December 27, 1993 until
September 1, 1995 (the "Period"). Any undisclosed transactions would
be subject to an entirely separate calculation and, if appropriate,
additional obligation by Schwartz pursuant to Section 16(b) of the
Exchange Act outside the scope of this Agreement.
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NOW THEREFORE, for good and valuable consideration the receipt and
sufficiency of which are hereby acknowledged by the parties, the parties hereby
agree as follows:
1. AMOUNT OF SHORT-SWING PROFITS AND INTEREST
Incomnet and Schwartz agree that the amount of the Short-Swing Profits is
$2,128,872. The outstanding Short-Swing Profits accrue interest at the simple
rate equal to 8.25% per annum through April 30, 1996 and thereafter equal to the
prime rate of interest quoted from time to time by the Bank of America in Los
Angeles, California (the "Prime Rate"). The accrued interest on the outstanding
Short-Swing Profits as of May 1, 1996 is $174,976. Incomnet hereby agrees to
credit Schwartz with $36,000 of interest at 8% per annum which he previously
waived on his $900,000 convertible note while it was outstanding, issued to him
on February 8, 1995. Therefore, as of May 1, 1996, the total outstanding
liability to Incomnet for Short-Swing Profits plus interest is $2,267,848, and
this liability will thereafter bear simple interest at the Prime Rate, as
adjusted from time to time. Schwartz agrees to pay the amount of Short-Swing
Profits plus interest to Incomnet in accordance with the terms of this
Agreement. Schwartz represents and warrants that he has disclosed on Form 4 and
Form 5 filings with the Securities and Exchange Commission all transactions made
by him or for his benefit in Incomnet's stock during the Period.
2. PAYMENT OF SHORT-SWING PROFITS
Schwartz agrees to pay the Short-Swing Profits plus accrued but unpaid
interest thereon in cash or pursuant to the redemption of his shares of
Incomnet Common Stock, based on the average of the last sale price of
Incomnet's Common Stock on the NASDAQ on the five trading days immediately
preceding the date of his elected redemption, according to the following
schedule, subject to Incomnet's rights in Section 4 of this Agreement: At
least 30% of the total outstanding principal liability plus total accrued but
unpaid interest on the Effective Date of this Agreement, as provided and as
hereafter defined in Section 5 of this Agreement, at least 10% of the total
outstanding principal liability plus total accrued but unpaid interest 90
days after the Effective Date, at least 10% of the total outstanding
principal liability plus total accrued but unpaid interest 180 days after the
Effective Date, at least 10% of the total outstanding principal liability
plus the accrued but unpaid interest 270 days after the Effective Date, at
least 10% of the total outstanding principal liability plus total accrued but
unpaid interest 360 days after the Effective Date, at least 10% of the total
outstanding principal liability plus total accrued but unpaid interest 450
days after the Effective Date, at least 10% of the total outstanding
principal liability plus total accrued but unpaid interest 540 days after the
Effective Date, and the balance of the total outstanding principal liability
plus total accrued but unpaid interest on or before a date 630 days after the
Effective Date. Incomnet may in its sole discretion at any time require that
Schwartz sell any shares which would otherwise be tendered to Incomnet for
redemption and cancellation pursuant to the terms of this Agreement, and
remit the amount owed by Schwartz to Incomnet in cash as payment on
Schwartz's obligations to Incomnet hereunder in lieu of redeeming and
cancelling said shares. Schwartz covenants to cooperate fully with
Incomnet's requests for sales of shares in lieu of redemption and
cancellation. Schwartz may prepay the Short-Swing Profits plus interest to
Incomnet in whole or in part at any time without penalty or premium.
Notwithstanding anything else herein to the contrary, if for any reason by
630 days after the Effective Date Incomnet has not received full payment of
the Short-Swing Profits plus interest from Schwartz either in cash or through
the redemption of shares and the Note pursuant to the terms of this
Agreement, then Incomnet is entitled to have additional shares redeemed and
cancelled or sold in accordance with this Agreement, either from the Escrow
Account (as defined in Section 4 herein) or, if sufficient shares are not
available in the Escrow Account, from additional shares tendered by Schwartz
into the Escrow Account for the benefit of Incomnet.
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3. SECURITY FOR THE PAYMENT OF SHORT-SWING PROFITS
As a first priority perfected security interest for Schwartz's
obligation to pay Short-Swing Profits to Incomnet under this Agreement,
Schwartz agrees to deposit 400,000 shares of the Common Stock of Incomnet,
with duly executed stock transfer powers containing certified signatures,
into an escrow account jointly administered by legal counsel for Incomnet and
legal counsel for Schwartz (the "Escrow Account"), in addition to and at the
same time that the first installment on the Short-Swing obligation is paid to
Incomnet pursuant to Section 2 of this Agreement. Said legal counsel will
follow the written instructions of Schwartz, subject to his minimum
obligations to Incomnet in this Agreement, including but not limited to
Schwartz's obligation to sell shares and remit cash proceeds in lieu of
having the shares redeemed and cancelled as provided in Section 2 of this
Agreement. If the last sale price quoted for Incomnet's Common Stock on the
NASDAQ (or other public trading market if not then traded on the NASDAQ) is
below $4.50 per share for ten consecutive trading days, then Schwartz is
obligated to deposit additional shares of Incomnet's Common Stock, duly
endorsed and certified, into the Escrow Account on an ongoing basis so that
the value of the shares in the Escrow Account equals or exceeds the
outstanding balance of Short-Swing Profits plus Interest owed to Incomnet. If
Schwartz does not make said deposit within ten days after his obligation to
do so, Incomnet may immediately redeem and cancel the balance of the shares
held in the Escrow Account, crediting Schwartz with payment equal to the
value of said shares based on the average last sale price of the stock on the
NASDAQ (or other public trading market if not then traded on the NASDAQ)
during the five trading days immediately preceding said redemption, and
Schwartz will continue to owe the balance of any remaining unpaid Short-Swing
Profits plus interest. In the event that Schwartz voluntarily files, or is
subject to an involuntary filing of, a petition for bankruptcy or similar
proceeding in any federal or state court, then Incomnet will have the right
to immediately redeem and cancel the Note and all shares remaining in the
Escrow Account, or at Incomnet's written election, to immediately have said
legal counsel sell all said shares for the benefit of Incomnet and remit the
net proceeds to Incomnet as soon as they are available. At all times under
this Agreement, payments by Schwartz will be credited first to outstanding
unpaid interest and then to the outstanding principal balance of Short-Swing
Profits.
4. REVERSAL OF REDEMPTION AND CANCELLATION OF STOCK OPTIONS
The cancellation and redemption of the 250,000 stock options tendered by
Schwartz on August 18, 1995 and September 1, 1995 to the Company as payment on
the Short-Swing Profit obligation is hereby revoked and said stock options are
deemed outstanding in full as of said date. The terms and conditions of said
options are as they were on the respective tender dates (i.e. the options will
vest and thereby become exercisable upon National Telephone Communications, Inc.
earning an aggregate of $15,000,000 in pre-tax profits in any four consecutive
fiscal quarters until December 31, 1997, the exercise price will be $11.00 per
share, and the options will be exercisable for a period of three years after
they vest). The cancellation of the redemption of the options shall not be
deemed to be a transaction under Section 16(b) of the Exchange Act, and is made
as consideration for the overall facilitation of the settlements embodied in
this Agreement. Incomnet will file a registration statement under the
Securities Act of 1933, as amended, covering the shares purchased upon the
exercise of the options within 90 days after all of the options have been
exercised, and will thereafter seek to have the registration statement declared
effective as soon as feasible. Schwartz may pay
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the exercise price of the options in cash or pursuant to a noninterest
bearing promissory note payable to the Company on the effective date of the
registration statement covering said shares; provided, that the shares
issuable upon the exercise of the options will not be issued to Schwartz
until the full exercise price is paid in cash in full.
5. CONDITIONS TO EFFECTIVENESS OF AGREEMENT
This Agreement will become effective upon its execution by Incomnet and
Schwartz and its approval by the Court, provided, that this Agreement shall
be effective as between Schwartz and Incomnet even if the Lawsuit is
dismissed without Court approval of this Agreement (the "Effective Date").
6. SATISFACTION OF THE SEVERANCE AGREEMENT
The effectiveness of this Agreement will be deemed to satisfy and supersede
the provisions of Section 5 of the Severance Agreement.
7. RELEASE OF CLAIMS AND DISMISSAL OF LAWSUIT
7.1 INCOMNET AND SCHWARTZ
Effective on the date of full payment of the Short-Swing Profits by
Schwartz to Incomnet pursuant to the terms of this Agreement, Incomnet fully and
forever releases and discharges Schwartz from any and all claims, demands,
obligations, losses, damages, or causes of action of any nature relating to any
obligation by Mr. Schwartz to pay the Short-Swing Profits accrued during the
Period to Incomnet pursuant to Section 16(b) of the Securities and Exchange Act
of 1934, as amended. Effective on the date of the approval of this Agreement by
Court order, Schwartz hereby releases and forever discharges Incomnet and any of
its past, present and future affiliates, employees, officers, directors,
shareholders, attorneys, accountants, successors and predecessors, from any and
all claims, demands, obligations, losses, damages, or causes of action of any
nature relating to Section 5 of the Severance Agreement and the payment of
Short-Swing Profits.
7.2 THE LAWSUIT
Effective on the date of the approval of this Agreement by Court order, (a)
Plaintiff fully and forever releases and discharges Incomnet and Schwartz from
any and all claims, demands, obligations, losses, damages, or causes of action
of any nature relating to any obligation by Schwartz to pay the Short-Swing
Profits accrued during the period to Incomnet pursuant to Section 16(b) of the
Securities and Exchange Act of 1934, as amended, and (b) Plaintiff agrees to
dismiss the Lawsuit with prejudice, and to execute any documents and take any
action necessary or appropriate in order to effect such dismissals.
7.3 REPRESENTATIONS AND AGREEMENTS
The undersigned agree that these releases shall not be considered
admissions by any party of any liability or wrongdoing. The undersigned warrant
that no promise or inducement has been offered except as herein set forth. The
undersigned are of legal age and legally competent to execute this release and
accept full responsibility therefor. The undersigned declare that the terms of
this full and final release of claims for payment of the Short-Swing Profits
have been completely read by the undersigned and are fully understood and
voluntarily accepted for the purpose of making a full and final compromise and
settlement. Incomnet,
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Schwartz and Plaintiff represent and warrant that they have not assigned any
of their above referenced released claims to any third party.
8. INJUNCTIVE RELIEF
8.1 DAMAGES INADEQUATE
Each party acknowledges that it would be impossible to measure in money the
damages to the other party if there is a failure to comply with any covenants
and provisions of this Agreement, and agrees that in the event of any breach of
any covenant or provision, the other party to this Agreement will not have an
adequate remedy at law.
8.2 INJUNCTIVE RELIEF
It is therefore agreed that the other party to this Agreement who is
entitled to the benefit of the covenants and provisions of this Agreement which
have been breached, in addition to any other rights or remedies which they may
have, shall be entitled to immediate injunctive relief to enforce such covenants
and provisions, and that in the event that any such action or proceeding is
brought in equity to enforce them, the defaulting or breaching party will not
urge a defense that there is an adequate remedy at law.
9. WAIVERS
If any party shall at any time waive any rights hereunder resulting from
any breach by the other party of any of the provisions of this Agreement, such
waiver is not to be construed as a continuing waiver of other breaches of the
same or other provisions of this Agreement. Resort to any remedies referred to
herein shall not be construed as a waiver of any other rights and remedies to
which such party is entitled under this Agreement or otherwise.
10. SUCCESSORS AND ASSIGNS
Each covenant and representation of this Agreement shall inure to the
benefit of and be binding upon each of the parties, their personal
representatives, assigns and other successors in interest.
11. ENTIRE AND SOLE AGREEMENT
This Agreement constitutes the entire agreement between the parties and
supersedes all other agreements, representations, warranties, statements,
promises and undertakings, whether oral or written, with respect to the subject
matter of this Agreement. This Agreement may be modified only by a written
agreement signed by all parties.
12. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the
laws of the State of California, and the venue for any action hereunder shall be
in the appropriate forum in the County of Los Angeles, State of California.
13. COUNTERPARTS
This Agreement may be executed simultaneously in any number of
counterparts, each of which counterparts shall be deemed to be an original, and
such counterparts shall constitute but one and the same instrument.
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14. ATTORNEYS' FEES AND COSTS
In the event that either party must resort to legal action in order to
enforce the provisions of this Agreement or to defend such action, the
prevailing party shall be entitled to receive reimbursement from the
nonprevailing party for all reasonable attorneys' fees and all other costs
incurred in commencing or defending such action, or in enforcing this Agreement,
including but not limited to post judgment costs.
IN WITNESS WHEREOF, this Agreement has been entered into as of the date
first above written.
INCOMNET: INCOMNET, INC.
By:
---------------------------------
Melvyn Reznick, President
Date:
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Mark J. Richardson, Esq.
Attorney for Incomnet, Inc.
1299 Ocean Avenue, Suite 900
Santa Monica, California 90401
(310) 393-9992
SCHWARTZ:
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Sam D. Schwartz
Date:
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SHEPPARD, MULLIN, RICHTER AND HAMPTON LLP
Attorneys for Sam D. Schwartz
333 South Hope Street, 48th Floor
Los Angeles, California 90071-1448
BY:
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James L. Sanders, Esq.
PLAINTIFF: ACKNOWLEDGED AND AGREED:
-----------------------------------------
Richard Morales
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David Lopez, Esq.
Attorney for Richard Morales
171 Edge of Woods Road
P.O. Box 323
Southampton, New York 11968
SO ORDERED:
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U.S. DISTRICT JUDGE
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