Incomnet’s Problems Show in Big Red Numbers

Incomnet in Westlake Village manufactures and maintains complex computer hardware, software and support services. But anybody looking over the company’s books doesn’t even need a pocket calculator to figure out that Incomnet is in big trouble. Since December of 1983, Incomnet has racked up $13 million in losses on only $8 million in revenue.

Former executives and board members--and even the company’s accountants--are wondering how much longer Incomnet can stay in business. “Quite frankly, I’m surprised it’s still in operation,” said Keith Martin, a four-year member of the company’s board who resigned in 1986.

Incomnet’s problems stem from its $10-million investment over four years to develop a network that links computer users so they can message one another from their terminals. But when Incomnet finally introduced its model, the ICN 3000, last year, the market was flooded with other messaging systems manufactured by corporate Goliaths such as Digital Equipment Corp., AT&T;, Western Union and IBM.

(Lt. Col. Oliver North used IBM’s messaging system--called PROFS notes--to send information about the Iran-Contra deal to Rear Adm. John Poindexter and others at the National Security Council. North thought he had deleted the notes but they were recovered by an investigator for the Tower Commission).

These electronic mail systems enable a terminal-to-terminal transfer of everything from office gossip to financial spreadsheets. But the business has been a disappointment to its developers. In the late 1970s, several research organizations predicted that electronic mail would be a multibillion-dollar market by 1985. But the increasing popularity of telefax machines and other telecommunications systems changed those rosy predictions. Eric Arnum, editor of Electronic Mail and Micro Systems, a New Canaan, Conn., newsletter, said sales of hardware and services in Canada and the United States amounted to only $450 million in 1987.

Because Incomnet has not been able to sell a single one of its systems (average price, $60,000) within the United States, President and CEO Charan Lohara has decided the company had better try and sell its product somewhere else.

Lohara, 48, chose India, where he grew up. According to Lohara, India’s banks and other corporations desperately need messaging systems because the country’s telex system is in disrepair. He said Incomnet has virtually no competition in India.

In 1983 Incomnet established an Indian subsidiary and, in 1985, moved most of its operations there. It has slashed its U.S. work force from almost 60 employees three years ago to just 17 today.

So far, though, India has not turned out to be the promised land. Incomnet has sold three systems to an Indian bank for $200,000, although it has received only $50,000 to date. In 1986, Incomnet said it expected to ship at least $3 million worth of messaging systems to India that year. But then the Indian government slapped Incomnet with duties totaling $1.4 million. “It has been a bureaucratic nightmare,” said Robert Potter, Incomnet’s president from January to June.

Last week, however, Incomnet said the tariff had been lifted.

As a result of the company’s problems, last month Incomnet had to sell a stake in its Indian subsidiary because it was strapped for cash. Magnum Telelink of India, a subsidiary of Magnum Enterprises U.S.A. in Rowland Heights, paid only $400,000 for what will eventually become a 50% ownership in the Indian subsidiary. “They’re stealing it,” said Stephen Caswell, Incomnet’s vice president of marketing. “But we were in a situation where we couldn’t do anything about it.”

As of Sept. 30, Incomnet’s current liabilities exceeded its current assets by nearly $1.2 million.

Dependent on Investors

With very little in the way of sales, Incomnet is dependent on investors to stay afloat. Its biggest supporter is Sam Schwartz, president of Kaliber Management, a private Beverly Hills money management company. Schwartz said he and his clients have invested more than $2 million in Incomnet, mostly through private placements. Early this year, Schwartz, his clients and other shareholders will contribute another $250,000 to Incomnet through a private placement, according to Lohara.

Schwartz blames Incomnet’s financial strain on all the money it spent developing the ICN 3000. Now that it is finished, Schwartz is sure it will sell. “We’re very optimistic for 1988,” he said.

When Incomnet went public seven years ago, it was a small but profitable company. It got all of its revenue from a computer network that helps about 300 junkyard owners locate used auto parts. The computer network--developed and serviced by Incomnet--links the owners through their personal computers. When a junkyard dealer needs a head gasket for a 1974 Chevrolet Nova, he can message all the other dealers and ask for one simply by pushing a button.

It wasn’t long before Lohara and other executives decided that lawyers, government officials and other businessmen might be interested in sending messages back and forth, using their computers and Incomnet’s network.

Beginning in 1981, Incomnet started selling shares of its stock to the public to raise the money it needed to upgrade its system to the level necessary to attract larger companies. It had a two-for-one stock split in 1984, but as late as December of 1986 the company’s stock was trading as high as $3.20.

Through public offerings and private placements, Incomnet raised $10 million in all, according to Lohara.

All of it is now gone, and Incomnet still is relying almost solely on the junkyard network for its revenue. “The investors paid millions into research and development and have gotten nothing for it,” said former Incomnet president Potter, who resigned because he was afraid of shareholders’ lawsuits.

Potter is one of five Incomnet executives and three board members who have left the company in the past three years. Former director Martin resigned after a confrontation with Lohara about how investors’ money was being spent.

According to Martin, in 1986 Lohara asked Incomnet’s board for permission to raise even more money from investors. “Several outside board members and I thought there ought to be a plan as to how the money would be used,” Martin said. “He declined to provide it or even discuss it. I thought it was irresponsible.”

Contracts Announced

In 1986, Incomnet announced several lucrative contracts with companies that had agreed to buy or market ICN 3000s.

But of six contracts announced in 1986, four of them in the United States, not a single one materialized. “We started things, but we could never carry them through,” Lohara said. The deals fell apart, he said, because either Incomnet did not have the money to finish the projects, or the purchasers did not have the money to buy them.

“A lot of times in the past we attracted people who were as poor as we were rather than the people who had bucks,” Lohara said.

Incomnet landed one big-name client in 1985, but that deal soured, too. Pacific Bell had signed a $5.7-million contract with Incomnet for a messaging system and other computer hardware. But in December, 1986, the phone company disconnected the deal halfway through the contract, after it had paid Incomnet about $2.5 million.

Pacific Bell still will not disclose why it backed out of the deal. Lohara said he does not know why the utility canceled the contract.

When Incomnet lost Pacific Bell as a customer, Incomnet’s stock fell in two days from $3.20 to $1.25 per share. It has never recovered, and on Monday it closed at 38 cents.

Besides those with the junkyard dealers, the only other current contract is with Louisiana-Pacific, the large Portland, Ore., wood-products firm. It pays Incomnet $300 a month to hook its computers to Incomnet’s messaging system, but it has not decided whether to buy its own system. The junkyard dealers and Louisiana-Pacific deals are both on a month-to-month basis, although, Lohara said, there is no indication that either contract will soon be canceled.

“Fortune 500 companies want to make sure the company is going to be around to support their systems,” Potter said. “You need staying power in this industry, and Incomnet doesn’t have it.”

In March, Incomnet’s accountants, Laventhol & Horwath, qualified its audit and reported that “the company may be unable to continue in existence.”

But Lohara refuses to cry uncle. “We have invested too much money and the technology is too sound to just say, ‘belly up.’ ”