Short traders look askance at phone firm Incomnet.

Company officials project 1994 revenues of $35 million

Is Incomnet Inc., a multi-level marketer of long-distance phone service, a bad connection for investors on Wall Street?

Last week, Incomnet stock traded on the NASDAQ at $8.25 a share, with 9.5 million shares outstanding -- for a market capitalization of more than $78 million.

The Woodland Hills-based company reported a net of $970,429 on revenues of $10.0 million in the first half, compared with a loss of $104,093 on revenues of $2.32 million a year earlier.

Company officers have projected total 1994 revenues of about $35 million.

But many short traders (those who bet the price of a stock will go down) point to the less-than-stellar past of Incomnet officers as a reason to hang up on the stock.

Too, say the short traders (who request anonymity so that they can continue to have access to company officials), Incomnet makes its money not by selling long-distance service, but on a multi-level pyramid scheme in which salespeople pay up to $695 for sales kits and the right to sell Incomnet service, and -- most importantly -- the right to sign on new salespeople. (Herbalife and Amway also operate in this multi-level marketing style.)

According to one national business magazine, Incomnet makes almost 40 percent of its revenues not on phone service, but on selling kits to sales reps -- of which the company already claims to have 20,000.

Incomnet Chairman Sam Schwartz, 54, last week said negative stories about his company are being "planted" in the media, and reporters are being "paid off" to write bad stories about Incomnet.

"We run a very clean company," said Schwartz. "All of our financials are reported."

In the interview, Schwartz would not clarify how much of Incomnet revenues are derived from phone service, and how much from selling kits and literature to sales representatives.

Such information cannot be gleaned from the company's recent 10Q or 10K (quarterly and annual financial reports) filings with the Securities and Exchange Commission.

Short traders may have their wallets at heart, but they have raised interesting questions about Incomnet management -- including the 1988 incarceration of Christopher Mancuso, 36, current Incomnet director of product development.

Mancuso was convicted on federal mail fraud charges relating to his role in a multi-level marketing scam known as Culture Farms Inc., in which investors lost more than $40 million. He was ordered by the court to pay restitution of $904,519 and civil penalties of $1.58 million, and served nine months in federal prison.

Topeka, Kan.-based Culture Farms, according to the Kansas state attorney general's office, made money in a multi-level pyramid scheme, in which culture-growing kits were sold.

The kits purportedly produced milk-based cultures to be used in "Cleopatra's Secret" cosmetics. People buying the kits could make money selling cultures to a Culture Farms-arranged buyer, and salespeople could make money by signing up new growers.

State officials contend Culture Farms made money not by buying or selling cultures or cosmetics, but by selling the kits.

Culture Farms' money was transferred offshore and has only been recovered through lengthy actions of a court-appointed trustee, according to court papers.

Incomnet Chairman Schwartz last week said Mancuso's mistakes were made more than 10 years ago, and the slate is clean now.

Jerry Ballah, 54, also now an officer with Incomnet, was part of the Culture Farms management and took the Fifth Amendment in court proceedings regarding that company. He was not charged in the matter.

Ballah, now director of marketing with Incomnet's subsidiary, National Telephone Communications Inc., was also involved with another multi-level marketer of long-distance phone service, Phoenix-based NCN Communications.

As with Culture Farms, now-bankrupt NCN allegedly was making most of its money not selling a service, but selling the supplies and training materials -- and also the right to sell -- to multi-level salespeople, charged regulators in 20 states.

The state attorney general's office of Virginia filed a civil suit against the company, and won a cease-and-desist order from state court there.

The National Association of Securities dealers, a trade and regulatory body, reports that Ballah was also the target in 1985 of a temporary cease and desist order "for registration requirements and fraud in connection with the order and sale of securities." NASD records are mute beyond that.

The California Attorney General's Office said last week it can neither confirm nor deny it is investigating Incomnet's multi-level marketing operations.

Deputy Attorney General Gayle Weller, the unit's expert on multi-level marketing abuses, last week said she has received inquiries about Incomnet, and she said she advised people with questions or comments about Incomnet to contact her office.