Incomnet Hopes Stock Issue Will Salvage Company
Last week, Incomnet in Westlake Village held its annual shareholders meeting. It figured to be a nasty get-together, but instead it turned out to be a charitable affair, much like a United Way fund-raiser.
Since December, 1982, Incomnet, which owns a computer network that helps 335 junkyard owners locate used auto parts, has lost $15.2 million on sales of just $10.3 million. Its stock has spiraled down from $3.20 a share 18 months ago to 44 cents on Monday. And the company’s accountants have questioned whether Incomnet can continue operating.
Sam Schwartz, Incomnet’s new president, calmly told investors the company needs to raise enough money to pay back $890,000 in bank debts. “If we don’t pay back the bank,” he told shareholders, “there won’t be a company.”
To keep things alive, Schwartz planned a private placement of Incomnet stock and took his sales pitch directly to the 40 or so shareholders at the meeting. Schwartz told the audience that he and Joel Greenberg, a Chicago commodities trader, have bought $590,000 of the new stock. Schwartz was asking investors to pony up the rest, at a minimum of $25,000 an investment, even though, according to Securities and Exchange Commission regulations, the new shares cannot be traded in the public arena for at least two years.
Beleaguered Stockholders
And yet, the beleaguered shareholders started lining up and opened their checkbooks. Schwartz said he raised the entire $300,000 at the meeting.
But not every Incomnet investor was enthused. “I’m not going to invest anymore in Incomnet,” one shocked shareholder remarked. “I’m trying to get out of it.”
Shareholders are betting that Schwartz, who took over as Incomnet president in January, can salvage the company. Schwartz, 48, is president of Kaliber Management, a Beverly Hills mergers and acquisitions company and venture capital firm.
For the three months that ended March 31--the first full quarter Schwartz has been in office--Incomnet’s revenue fell 12% from $396,258 to $348,895. But the company’s losses shrunk by 75% to $115,825 from $472,152 a year earlier.
Schwartz--whose total investment in Incomnet is more than $3 million--blames much of the company’s problems on its previous president, Charan Lohara. “There were a lot of past sins here,” Schwartz told shareholders. “You can cry.”
Schwartz considers Lohara’s January resignation the company’s turning point, and he passed out to shareholders two graphs, each projecting an increase in customers and profits. Each graph begins moving in a positive direction as of January, when Lohara resigned. Or, as the charts read: “Lohara Gets The Boot!”
Contacted at his home, Lohara said, “It makes no difference to me what anybody says.”
Schwartz has eliminated most of the company’s expensive research and development efforts to find new products and added a sales force to concentrate on expanding Incomnet’s core business--the junkyard network.
The computer network--developed and serviced by Incomnet--links junkyard dealers in California and several Western states, via personal computers. When a junkyard dealer needs a cylinder head for a 1977 Camaro, he can message all of the other dealers and ask if they have one. Junkyard owners pay $375 a month for the service (or $325 if they have their own PC).
Since Feb. 1, Incomnet has added 70 junkyards to its system. Schwartz said previous management simply ignored junkyard owners. “The amount of ill will Incomnet built up in its customer base was beyond imagination,” said Stephen Caswell, Incomnet’s vice president of marketing.
But the road ahead still has its bumps. Incomnet’s biggest competitor is Orion Network Enterprises of Omaha, Neb., which dwarfs Incomnet with more than 1,000 customers. Orion’s system costs $25 a month less than Incomnet for comparable service, and links dealers together nationwide.
Dominates State
So far, Incomnet has grabbed a stranglehold on California, the world’s largest auto parts market. But Orion, which at the moment has 100 dealers signed up in California, has made it known it’s going after Incomnet’s customer base and is offering 3 months of free service as an inducement.
Obviously, junkyard owners need to be on a network that is going to help them find the parts they need, and that means being able to message hundreds of other junkyards with requests.
If Orion succeeds, Incomnet could be little more than a shell company (one without significant assets) with $16 million in tax loss credits.
But Schwartz told shareholders he plans on taking advantage of those credits by making a substantial acquisition before the end of the year. That way, any profits of a similar company Incomnet buys could shield its profits from any taxes.
Schwartz declined to say what kind of acquisition he had in mind. But investor Greenberg, who has purchased a 10.65% stake in Incomnet, says: “Once our balance sheet is cleaned up, we’ll be in an attractive situation to look for acquisitions.”
One thing Schwartz has done is cancel the company’s other computer network, called PeopleNet. For the last four years, Incomnet invested millions developing a network that links computer users so they can message one another from their terminals. But when Incomnet finally introduced the system last year, the market was flooded with other electronic messaging systems manufactured by giants such as Digital Equipment Corp., AT&T; and IBM.
Incomnet’s offering did poorly, so Schwartz decided to get out of the business. “This company does not do things that do not guarantee a profit,” Schwartz told shareholders. “It’s a new corporate policy.”
