<PAGE>
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, 1997
Commission file number is 0-27604
PICK COMMUNICATIONS CORP.
-------------------------
(Exact Name of Registrant as Specified in its Charter)
Nevada 75-2107261
(State or other jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or jurisdiction)
155 Route 46 West, Wayne, New Jersey 07470
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 812-7425
- --------------------------------------------------------------- --------------
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 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 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. [X] Yes [ ] 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. [ ]
The aggregate market value of the 22,457,344 shares of voting stock held by
non-affiliates of the Registrant, as of May 15, 1998 was $13,923,553 (assuming
solely for purposes of this calculation that all directors, officers and greater
than 5% stockholders of the Registrant are "affiliates").
The number of shares outstanding of the Registrant's Common Stock, par value
$0.001 per share, as of May 15, 1998 was 36,404,703.
Documents incorporated by reference: None.
<PAGE>
PART I
This Report includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding expected future
revenues and expenses. Forward-looking statements relate to plans and
expectations of the Company and are subject to risks and uncertainties,
including the timely development and acceptance of new products in a constantly
evolving telecommunications industry, the impact of competitive products and
pricing, government regulations and other risks detailed from time to time in
the Company's SEC reports.
Item 1: Business
THE COMPANY
- -----------
PICK Communications Corp. ("PICK" or the "Company") was incorporated in April
1984 under the laws of the State of Utah as S.T.V., Inc. In February 1986, the
Company changed its name to Adolphus Companies, Inc. and to Prime International
Products, Inc. ("Prime") in May, 1988. Prime ceased operations in late 1990.
In July, 1995, Prime changed its state of organization from Utah to Nevada. On
September 12, 1995, Prime executed a Stock Purchase Agreement to exchange
16,500,000 shares of Prime's Common Stock for all of the common stock and
warrants of Public Info/Comm Kiosk, Inc. ("Kiosk"), which made Kiosk a
subsidiary of Prime. Kiosk was incorporated under the laws of New Jersey in
August, 1992. Prime changed its name to PICK Communications Corp. in December
1995. Unless otherwise indicated, all references to "the Company" or "PICK"
hereinafter include the business and operations of Kiosk prior to the September
12, 1995 transaction, and the combined companies thereafter. The transaction was
a reverse acquisition accounted for as a re-capitalization of Kiosk.
GENERAL DEVELOPMENT OF THE BUSINESS
- -----------------------------------
PICK is a telecommunications company headquartered in Wayne, NJ. PICK has two
wholly owned subsidiaries - PICK, Inc., which markets and distributes prepaid
telephone calling cards nationally and PICKNET INC., which provides
international long distance services to other carriers and resellers. The
Company also has a majority ownership of P.C.T. Prepaid Telephone, Inc., which
markets and distributes a patented, prepaid cellular telephone system in the
United States and Canada.
The Company's business strategy is to focus on expanding its facilities-based
network and augmenting its capacity to terminate international traffic
throughout the Middle East, Africa, Asia and Latin America. This expansion is
expected to be facilitated by several reciprocal agreements that the Company has
finalized for delivery of communications services into these regions. Because
PICK is able to obtain termination rates through these contracts which are far
more favorable than those available to the Company's competitors, management
believes the result will be increased revenue and significantly higher gross
profits.
PICK has installed two Siemens Telecom Networks Digital Central Office switches
in New Jersey and Miami as international gateways, and will be deploying four
additional "collection point" switches around the country over the next eighteen
months. PICK has also signed a contract for satellite communications and is
actively negotiating with several providers for Earth Station facilities and
transatlantic, as well as domestic, fiber optic cable systems.
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The Company has increased its sales from $23,000 in 1993 to $1.6 million in
1995, $5.9 million in 1996 and $9.0 million in 1997.
International Long Distance Services
In 1994, industry revenues for international long distance traffic originating
in the U.S. were approximately $13.2 billion and grew at a compound annual rate
of 13%, nearly double the 7% growth rate for the domestic long distance market.
Moreover, international traffic provided revenue and gross profit per minute of
more than five times that of domestic traffic.
The factors driving this growth include:
o Deregulation of the telecommunications industry by the FCC in the United
States.
o New U.S. regulations regarding international settlement rates and direct
agreements.
o Deregulation and privatization of the telecommunications industry in
developing countries.
o Improvement of telecommunications infrastructure here and abroad.
o Worldwide increases in voice and other data communications equipment.
o Globalization of commerce.
Concurrently, major providers such as AT&T, MCI and Sprint have raised the
threshold for wholesalers seeking to participate in the international long
distance market by linking favorable rates to long term contracts, coupled with
substantial commitment levels and hefty deposits. Only resellers able to meet
these requirements have the opportunity to aggregate traffic from smaller
resellers and negotiate even more favorable rates. Management believes that PICK
is in a position to exploit its established presence in this market.
PICK purchases international long distance time from major network-based
carriers and sells this time to other carriers and resellers via direct switch
to switch connections. Carrier customers are straightforward and require little
on-going maintenance, and the carrier segment of the business shares certain
costs with the prepaid telephone calling card segment.
To gain rapid market entry without investment in major capital expenditures or a
technical staff, PICK initially elected to contract for services with an
experienced switch service provider. This strategy also allowed the Company to
concentrate on marketing. However, PICK recently leased two Siemens
Stromberg-Carlson DCO switches and established a technical staff in order to
bring this segment of its business under direct Company control.
In late 1997, the Company entered into a reciprocal telecommunications agreement
for international traffic termination in Africa, the Middle East and Asia, via
satellite, with Gulfsat Communications Company, a communications company located
in the Middle East. In March 1998, the term of the contract was extended to
February 28, 2003. Under the contract, the Company is entitled to terminate up
to 70,000,000 minutes per month in telecommunications services into the above
regions, at rates that are significantly lower than those currently available to
the Company or its competitors. To utilize this capacity, the Company is
exploring access to earth stations in Nova Scotia, London, Puerto Rico and/or
St. Thomas.
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The Company has negotiated competitive rates with other carriers for delivery
into most other areas of the world but continues to investigate lower cost
alternatives, via direct connect, particularly in South and Central America.
In late 1996, the Company entered into a reciprocal telecommunications agreement
with IDT Corporation ("IDT"), one of the Company's customers/carriers. Under the
agreement, IDT agreed to purchase certain telecommunication services from the
Company, and the Company agreed to purchase certain telecommunications services
from IDT for a one year, renewable with consent of both parties.
In February, 1998, the Company amended its reciprocal telecommunications
agreement with IDT. Pursuant to the amendment, IDT agreed to lend the Company
$2,000,000 in working capital financing for one year. In return, the Company
agreed to allow IDT to purchase telecommunications services to specified
countries (up to a maximum of 10,000,000 minutes per month) at a preferred rate
per minute and additional capacity available at the same rate charged to the
Company's other customers. IDT's preferred purchasing arrangement is valid for
one year commencing February 1998,
Primarily because of the attractive rates the Company can offer its customers to
Africa, the Middle East and Asia, many first and second tier carriers have
expressed interest in purchasing from the Company. The Company has finalized
agreements to sell telecommunications services to several of these carriers and
anticipates signing agreements with many of the remaining carriers in 1998.
Prepaid Telephone Calling Cards
For consumers who do not have access to long distance and international
telephone services through a telephone or credit card, prepaid telephone calling
cards represent a convenient and cost-effective way to obtain such access.
Additionally, students, military personnel, foreign and domestic vacationers and
business travelers, immigrants and visitors to the United States are also strong
markets for prepaid telephone calling cards. Many businesses with mobile
workforces now use prepaid telephone calling cards in order to allocate and
budget expenditures on a monthly basis. Additionally, since calling cards are
used extensively throughout the world, they are widely recognized and accepted.
The prepaid telephone calling card market has grown exponentially during recent
years. Atlantic ACM, a research firm, estimated in the October 1997 issue of
Intele-Card News that total prepaid calling card sales grew from $12 million in
1992 to $2.1 billion in 1996 and predicts that the market will grow to
approximately $4.3 billion by the year 2001.
PICK entered the prepaid telephone calling card business in 1993 utilizing its
own branded cards. However, during 1997, the Company concentrated on developing
its international long distance business and did not devote significant
resources to the prepaid telephone calling card market, which resulted in a
reduction of the Company's revenues from prepaid calling cards compared with
1996. In 1998, the Company intends to emphasize the sale of private brand
calling cards through one or more independent distributors, who will pay the
Company for the cards prior to their activation. In order to execute this
strategy, in February, 1998, the Company entered into a two-year agreement with
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a major distributor of prepaid telephone calling cards, Blackstone Calling Card,
Inc. ("Blackstone" and the "Blackstone Agreement"). Under the terms of the
Blackstone Agreement, as amended, after a six month phase-in period commencing
April 27, 1998, Blackstone will purchase a minimum face value of $5,000,000 per
month from the Company, which is expected to result in net revenues of
approximately $3,000,000 per month to the Company. The Blackstone Agreement is
also subject to termination by either party without cause at the end of year
one, upon sixty days prior notice or by Blackstone if the Company fails to
maintain overall network quality.
In addition, based upon inquiries from its contacts in the Middle East, the
Company believes there is a substantial opportunity for the sale of prepaid
calling cards in Africa, the Middle East and Asia. The Company is in active
negotiations to establish relationships to distribute prepaid calling cards in
five countries in the Middle East and Africa and will attempt to expand to other
countries.
Prepaid Cellular Technology
The Company holds a license, from The Next Edge, Inc. ("NEI") for a patented
prepaid cellular technology which utilizes an internal programmable,
tamper-proof chip that allows the phone to operate for a prepaid amount of time,
then switches off the power to the phone when the prepaid time is depleted. The
license commenced in October, 1995, has an initial term of five years and an
option for an additional five years. The agreement requires the Company to pay
NEI a total of $500,000, payable at a rate of $25,000 per quarter for a period
of five years, beginning Janaury 1, 1996. In 1996, the Company purchased
treasury securities, which were used to, in substance, defease this obligation.
The Company is also required to issue a total of 100,000 shares of its common
stock to NEI in increments of 20,000 shares each year for five years beginning
on January 1, 1996.
Customers
PICK's primary customers for its international long distance carrier services
are carriers and resellers such as Athena International LLC, ComTech
International, D.C. Communications, Corp., IDT Corporation, Innovative Telecom
Corporation, Primus Telecommunications, Texcom USA and Trescom USA, Inc. PICK'S
primary customers for its prepaid telephone calling card products are Sirgany
International Corporation, Kwik Trip Corporation, North & South Distributors,
and Prudential Insurance Company of America. In 1997, approximately 19% and 13%
of revenues were from two customers, Trescom USA, Inc.
and D.C. Communications, Corp.
Competition
The international long distance services business is highly competitive and is
affected by rapidly changing per minute rates to key international cities and
countries. The Company's future success will depend upon its ability to compete
with other carriers, providing high quality service at competitive prices. Some
of PICK's competitors in the sale of international long distance services are
other, similar carriers and resellers, such as Athena, ComTech, Ameritech, IDT,
Primus and Trescom, as well as the "big four" (AT&T, MCI, Sprint, WorldCom).
The competition in the marketing and sale of prepaid telephone calling cards is
intense at the retail level. Some telephone calling cards are marketed by
companies which are well-established and have significantly greater financial,
marketing, distribution, and personnel resources than the Company. These large
companies already have name recognition and can implement extensive advertising
5
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and promotional campaigns. Other cards are sold by more transient companies that
only survive for a short time. Many of these small companies advertise low
calling prices. But they offset them with hidden charges. Thus, as previously
stated, the Company will emphasize the sale of private brand calling cards
through independent distributors in 1998.
The prepaid cellular telephone business is also a highly competitive one in
which the ability to succeed depends on the quality of the product, the ease of
its use and the resources available to market and continually improve it. Again,
large companies and companies which have been able to enter the market already
may have an advantage, however, PICK has a patented, proprietary chip-controlled
prepaid cellular product. Recent prepaid cellular conferences and industry
articles have indicated consumer dissatisfaction with the constraints of
switch-based services available.
Patents and Trademarks
The Company and NEI are joint owners of a patent on the technology for a
microprocessor-controlled prepaid cellular telephone system. The Company expects
to implement international patent filings and/or registrations pertaining to
such patent during 1998.
The Company has obtained trademark registrations for the names "Communicard by
PICK(R)", "LOVE CALL(R)", "PICK(R)", "COMMUNICASH(R)", and "Las Americas (R)."
Employees
The Company employs a total of 13 full-time employees and also employs
independent contractors for various purposes. The Company does not have
employment agreements with its officers, and the employees are not represented
by a labor union.
The Company believes that its employee relations are excellent.
Item 2: Properties
The Company leases office space at Wayne Interchange Plaza II, 155 Route 46
West, Third Floor, Wayne, New Jersey 07470 under a lease that expires on
September 30, 2001. In addition, the Company leases space where its digital
central office telephone switching equipment is located in Jersey City, New
Jersey (which expires September 1, 2000) and Miami, Florida (which expires July
1, 2000).
Item 3: Legal Proceedings:
In February 1997, the Company commenced a mediation action against American
Telephone & Telegraph ("AT&T") seeking $10 million in damages for breach of
contract and fraudulent inducement and malicious conduct under a carrier
agreement (the "Carrier Agreement") entered into in February 1996. The Company
contracted with AT&T under the Carrier Agreement for inbound 800 service and
outbound domestic and international long distance service. The Company claims
that AT&T reneged on certain commitments to provide the Company with lower
international rates than the Company was invoiced by AT&T. AT&T has claimed that
the Company owes it in excess of $1,000,000. In 1996, the Company provided for a
non-cash reserve of $1,750,000, which was reduced to $1,100,000 in the third
quarter of 1997 and is a part of the Company's working capital deficiency. After
two mediation sessions, AT&T indicated that it intended to withdraw from the
mediation. Accordingly, on November 5, 1997, the Company filed for arbitration
proceedings against AT&T. There can be no assurance that the Company will be
able to prevail in this arbitration. Any adverse judgment or settlement could
have a material impact on the Company's financial condition.
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In April, 1998, the Company settled (without submitting an answer), a lawsuit
which WorldCom Network Services, Inc. had filed in the Supreme Court, New York
County on January 7, 1998. Under the settlement, PICK agreed to pay outstanding
accounts payable owed to WorldCom of approximately $2.8 million, plus interest
at 18%, in monthly payments to be made between April 27, 1998 and December 28,
1998. WorldCom has offered the Company an on-going contract for
telecommunication services.
Item 4: Submission of Matters to a Vote of Security Holders
On December 11, 1997, the Company held an annual meeting of shareholders to
consider and vote upon (i) a proposal to elect Diego Leiva, Raymond M. Brennan,
Robert R. Sams, Ricardo Maranon and Marilou C. Halvorsen as directors, (ii) an
amendment to the Company's 1996 Employee Stock Option Plan to increase the
number of shares available for issuance upon the exercise of options granted
thereunder from 5,000,000 shares to 7,500,000 shares and (iii) to ratify the
appointment of Durland & Company, CPAs as the Company's auditors. The number of
votes cast for and against each of the foregoing proposals and the number of
abstentions are set forth below.
(i) Proposals to elect Directors:
<TABLE>
<CAPTION>
Withhold
For Authority Abstain
--- --------- -------
<S> <C> <C> <C>
Diego Leiva 26,075,340 97 9
Raymond M. Brennan 26,075,341 97 9
Robert R. Sams 25,910,457 165,000 9
Ricardo Maranon 26,075,437 0 9
Marilou C. Halvorsen 26,075,437 0 9
(ii) To increase the number of shares available for issuance under the 1996 Stock Option Plan:
For Against Abstain
--- ------- -------
22,879,376 382,337 46,250
(iii) To ratify the appointment of Durland & Company, CPAs as the Company's auditors:
For Against Abstain
--- ------- -------
25,860,760 51,106 164,570
</TABLE>
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PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock has been traded on the over-the-counter market and
reported on the OTC Bulletin Board under the symbol "PICK" since September,
1996. The Company's common stock had been traded in the over-the-counter market
and reported on the OTC Bulletin Board under the symbol "PRMF" from August 17,
1995 through September 23, 1996. The following table sets forth the high and low
bid prices of the Company's common stock as reported on the over-the-counter
market for the periods indicated. The prices represent inter-dealer quotations,
without retail mark-up, mark-down or commission, and may not represent actual
transactions.
Bid Prices
----------
Period High Low
- ------ ---- ---
Calendar Year 1996
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First quarter $ 4.50 $ 2.00
Second quarter 4.06 2.44
Third quarter 3.50 0.87
Fourth quarter 0.75 0.19
Calendar Year 1997
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First quarter $ 0.78 $ 0.16
Second quarter 0.33 0.12
Third quarter 0.27 0.05
Fourth quarter 0.51 0.15
Calendar Year 1998
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First quarter $ 0.47 $ 0.20
Second quarter, through
May 15, 1998 1.00 0.71
As of May 15, 1998, there were approximately 200 shareholders of record of the
Company's common stock. The Company reasonably believes that there are in excess
of 300 beneficial owners of its common stock.
The Company has never paid any cash dividends on its common stock and has no
intention of doing so at this time. The Company intends to retain all its
earnings for use in the business.
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Item 6: Selected Financial Data
The following selected financial data should be read in conjunction with the
Consolidated Financial Statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
Report. The selected financial information for and as of the years ended
December 31, 1997, 1996, 1995, 1994 and 1993 are derived from the Consolidated
Financial Statements of the Company, which financial statements have been
audited by Durland & Company, CPAs, P.A., independent certified public
accountants. The Consolidated Balance Sheets as of December 31, 1997 and 1996
and the Consolidated Statements of Operations for the years ended December 31,
1997, 1996 and 1995 and the accountants' reports thereon are included elsewhere
in this Report.
Statement of Operations Data:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $ 9,015,903 $ 5,869,682 $ 1,565,039 $ 529,913 $ 23,301
Cost of sales, excluding
adjustments to reserve for
contingent costs 9,088,749 6,401,231 1,387,459 753,346 10,067
---------- ---------- ---------- -------- -------
Gross profit (loss) before
adjustments to reserve for
contingent costs (72,846) (531,549) 177,580 (223,433) 13,234
Adjustments to reserve for
contingent costs 649,563 (1,749,563) 0 0 0
---------- ----------- -------------- --------------- ---------------
Adjusted gross profit (loss) 576,717 (2,281,112) 177,580 (223,433) 13,234
Operating expenses (2,270,630) (2,952,646) (1,203,625) (1,027,147) (171,340)
Other - net (7,805,889) 6,869,548 (44,996) 0 0
------------ ------------ ------------- ---------------- ---------------
Net loss $(9,499,802) $ 1,635,790 $(1,071,041) $(1,250,580) $ (158,106)
=========== =========== =========== =========== ============
Net loss per share - basic $ (0.26) $ 0.04 $ (0.03)
======= ====== ========
Balance Sheet Data: December 31,
------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Working capital (deficit) $(7,405,608) $(3,152,216) $(1,074,159) $(1,127,590) $(47,129)
=========== =========== =========== =========== ========
Long-term liabilities 794,905 0 400,000 0 0
=========== =========== =========== =========== ========
Stockholders'
equity (deficit) (7,093,114) 869,579 (846,407) (1,021,686) (32,106)
=========== ============ ========= ============ =========
</TABLE>
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Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following should be read in conjunction with the Consolidated Financial
Statements included elsewhere in this Report.
Results of Operations
The Company generates revenues from the sale of telecommunication products and
services, including international long distance services to other carriers and
resellers and prepaid telephone calling cards to distributors for resale to
retail outlets.
Year Ended December 31, 1997 as Compared with Year Ended December 31, 1996
- --------------------------------------------------------------------------
Total revenues amounted to $9,015,903 for the twelve months ended December 31,
1997 ("1997") compared to $5,869,682 for the twelve months ended December 31,
1996 ("1996"). This represents an increase of $3,146,221, or 54%. For 1997, the
Company generated international long distance revenue of $7,669,243 compared to
$4,444,342 for 1996; the international long distance business began in May of
1996. Prepaid telephone calling card revenues were $1,346,660 for 1997, compared
to $1,425,340 for 1996. This represents a decrease of $78,680, or 5.5%. This
decrease reflects reductions in the Company's advertising and market changes
which have resulted in product returns and reductions in repeat sales of calling
cards.
The direct costs of international long distance and calling card services
amounted to $9,088,749 (which excludes a $649,563 credit arising from reversal
of a portion of the previously-provided contingency reserve related to billing
disputes with AT&T - see Note 12 of Notes to the Consolidated Financial
Statements) for 1997 compared to $6,401,231 (which excludes a $1,749,563
provision for contingent costs provided related to billing disputes with AT&T)
for 1996. As a result, the gross margin was negative 0.8% of revenues for 1997,
compared to a negative gross margin of 9.1% in 1996. Including the adjustments
to the contingency reserve, gross margin would be 6.4% for 1997 and negative
38.9% for 1996.
The decrease in selling and marketing expenses were a direct result of a
reduction in product advertising, largely due to market changes. The general and
administrative costs increased primarily due to a need for increased outside
professional assistance. In addition, there was a modest increase in personnel
cost. Bad debt expense increased primarily because of the bankruptcy of one of
the Company's international long distance customers.
The Company's loss from operations improved from $5,233,758 for 1996 to
$1,693,913 for 1997. The primary reasons for this improvement are (i)
improvement in gross margin (other than changes to the contingency reserve) of
approximately $460,000, (ii) changes in amounts charged to the contingency
reserve of approximately $2,400,000 and (iii) reductions in advertising expenses
of approximately $1,040,000, offset by increases in general and administrative
expenses (primarily rent, salaries and professional fees) of approximately
$350,000. Absent changes in charges to the contingency reserve, the Company's
operating loss would have improved by approximately $1,140,000.
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The Company recognized approximately $9,900,000 in non-cash, non-operating
losses in 1997 from losses from disposition of marketable equity securities and
a write-off of the Company's investment in prepaid cellular telephone
technology. The Company recognized approximately $8,400,000 in non-cash,
non-operating income in 1996 from gains on disposition of marketable equity
securities and a one-time license fee related to the Company's prepaid cellular
telephone technology.
The Company initially did not report any gains or losses on the disposition of
the marketable equity securities referred to above, as the Company believed that
it was not appropriate to recognize losses on the acquisition of its and its
subsidiary's common stock or on exchange of one investment in marketable equity
securities for another. The Company subsequently determined that it would have
been preferable to record these transactions based upon the fair value of the
assets exchanged, resulting in the recognition of approximately $9,500,000 in
losses. The Company is in the process of amending its quarterly reports on Form
10-Q for the quarters ended March 31, 1997, June 30, 1997 and September 30, 1997
to reflect this change.
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
- -----------------------------------------------------------------------
On a consolidated basis, the Company generated revenues of $5,869,682 and
$1,565,039 for the years ended December 31, 1996 and 1995, respectively. 1996
revenues consist of International Long Distance Services amounting to $4,444,342
and prepaid telephone calling card usage amounting to $1,425,340. The increase
in revenues of $4,304,643, or 275%, was primarily the result of the Company's
expansion into the International Long Distance Services business. The Company's
prepaid telephone calling card revenues were $ 1,425,340, compared to $1,565,039
in 1995. While the Company believes the market for prepaid telephone calling
cards continues to gain acceptance and growth, the Company held back on the
marketing of these cards in 1996 (due to switching facility shortcomings) until
pending upgrades were completed in late 1996.
The gross margin loss (excluding the $1,749,563 provision for contingency) of
$531,549, was 9.1% of net sales for the year ended December 31, 1996, compared
to a gross margin of $177,580 (or 11.3%) for the year ended December 31, 1995.
The gross margin loss in 1996 compared to 1995 is primarily attributable to the
start-up costs incurred relating to the international long distance services and
the continued low volumes associated with both prepaid telephone calling cards
and international long distance services. The vast proportion of the sales
activity (75.7%) in 1996 related to international long distance services
activity compared to 0% in 1995, while all of sales in 1995 related to prepaid
telephone calling card activity compared to 24.3% in 1996.
Total operating expenses were $2,952,646 and $1,203,625 for the years ended
December 31, 1996 and 1995, respectively, representing an increase of
$1,749,021, or 145.3%. Selling and marketing expenses for 1996 amounted to
$1,077,766 compared to $257,487 in 1995, an increase of $820,279, or 319%. These
expenses are primarily attributable to the expansion of total revenue activities
and the establishment of a distribution network to support the Company's planned
pre-paid products. As a result, marketing expenses were 18.4% of total revenues
for the year ended December 31, 1996, compared to 16.5% of revenues for the year
ended December 31, 1995.
General and administrative expenses of $1,473,376 for the year ended December
31, 1996 were higher than those of the prior year by $600,363, or 68.8%,
primarily associated with the establishment of a staff ($512,479), facility
($28,796) and office expense ($43,178) to support higher levels of operations.
Operating expenses include depreciation of $39,258 and $30,475 for the years
ending December 31, 1996 and 1995, respectively, as well as amortization expense
of $142,500 in 1996 relating to the prepaid cellular technology procured late in
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1995. No amortization was recorded in 1995. The interest expense represents an
accrual of interest relating to a bank loan in 1996; the 1995 interest expense
relates to a disputed vendor charge, which was subsequently settled in 1996 in
the Company's favor.
The Company realized a net operating loss of $5,233,758 in 1996, compared to a
net operating loss of $1,026,045 in 1995, an unfavorable change of $4,207,713.
In addition, the Company realized non-cash gains related to investments in
marketable equity securities in 1996 of $4,784,000 and non-cash license fees of
$3,650,000.
Liquidity and Capital Resources
The Company had negative cash flow from operations of $419,672 for 1997,
compared with negative cash flow from operations of $1,218,381 and $1,045,603
for 1996 and 1995, respectively. However, delinquent accounts payable at
December 31, 1997 are significantly greater than at the end of the prior two
periods. If the Company had the financial resources to satisfy its trade
liabilities as timely as in prior years, the cash flow from operations in 1997
would have been no better than a negative $1,500,000.
The Company has a working capital deficit of $7,405,608 at December 31, 1997 as
compared with a deficit of $3,152,216 at December 31, 1996. The Company's
accounts payable and other operating liabilities increased by $2,529,708 during
1997, which, along with a $250,000 short-term loan from an individual and an
increase in loans from the Company's principal stockholder from $25,152 to
$170,000 has been the source of capital to finance the Company's operating
losses during the period. In order to assure the Company's survival, it is
essential that the Company (i) restructure its operations so that operating
profits are generated and (ii) obtain additional capital.
In the fourth quarter of 1997, the Company signed a one-year agreement, with a
company located in the Middle East, for termination of long distance services to
approximately 60 countries in Africa, Asia and the Middle East, at rates that
are a significant improvement over rates paid by the Company in 1997. Management
believes that, once equipment is installed and tested, the Company will be able
to re-sell time at margins that are markedly improved over those historically
generated by the Company's operations. In the first quarter of 1998, the term of
this contract was extended to expire in the first quarter of 2003. Building the
capacity to handle this volume of telephone traffic will require the Company to
lease or buy, during the next twelve months, several million dollars of
telephone switching and signal compression equipment, fiber optic cable and
satellite ground stations, which will require the Company to obtain additional,
lease, debt and/or equity financing. While the Company believes it will be able
to obtain the necessary financing, there is no assurance that the Company will
be successful in obtaining such financing.
In 1997, the Company leased two central office telephone switches (with a value
of approximately $940,000) and related facilities, which will obligate the
Company to approximately $40,000 per month in additional facility and equipment
rent. The Company is currently negotiating terms to lease compression equipment,
fiber optic cable and additional central office switches. The Company has leased
access to one ground station and is investigating purchasing or leasing
additional access.
In the first quarter of 1998, the Company amended its existing agreement with
IDT. Under the terms of the amendment, the Company agreed to sell IDT up to
10,000,000 minutes per month of long distance traffic at favorable rates and IDT
agreed to lend the Company $2,000,000, consisting of $500,000 when the
12
<PAGE>
transaction was signed, $1,000,000 was funded in April, 1998 and the remaining
$500,000 is scheduled to be advanced in May, 1998. The loan bears interest at 9%
and matures in February, 1999.
In the first quarter of 1998, the Company signed a two-year agreement with a
distributor of prepaid telephone calling cards. Under the agreement, after a six
month "ramp-up" period, the distributor agreed to a monthly minimum purchase of
$5,000,000 face value of prepaid telephone calling cards from the Company, which
is expected to result in net revenues of approximately $3,000,000 per month to
the Company.
Because of the time required to build and test capacity, the Company does not
expect to realize any significant revenues or operating income from either of
the above contracts until late in the second quarter of 1998. Until that time,
Management anticipates that revenues will be lower than those for the comparable
periods in 1997 and the Company will continue to generate operating losses.
In April, 1998, the Company borrowed $1,000,000. The loan is unsecured, bears
interest at 10% and matures July 1, 1998. In consideration for advancing the
funds, the lenders received warrants to purchase 1,000,000 shares of the
Company's common stock at $0.35 per share, which are exercisable on or before
April 1, 2001.
The Company is also pursuing other sources of capital. While the Company
believes it will be successful in its efforts to raise sufficient capital and to
restructure its operations so that it may continue as a going concern, there can
be no assurance that the Company will be successful.
Impact of Year 2000
The Company believes that many of its suppliers and customers may have year 2000
issues ("Year 2000 Issues") which could affect the Company. Many older computer
software programs recognize only the last two digits of the year in any date
(e.g.: "98" for "1998"). These programs were designed and developed without
considering the impact of the upcoming change in century. If the software is not
reprogrammed or replaced, many computer applications could fail or create
erroneous results by or at the Year 2000. The Company will commence a program to
pursue compliance of resolving this issue with whom it electronically
interconnects. It is not possible, however, to quantify the overall cost of
resolving this issue for the Company's suppliers and customers. The Company has
been advised that its own software has been designed and developed with a
resolution of the Year 2000 Issue and, as such, the Company presently believes
that the cost of fixing the Year 2000 Issue will not have a material effect on
the Company's current financial position, liquidity or results of operations.
Item 8: Financial Statements and Supplementary Data
The Company's financial statements are included in a separate section of this
report, following Item 14.
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
13
<PAGE>
PART III
Item 10: Directors and Executive Officers of the Registrant
Set forth below are the names of all directors and executive officers of the
Company, along with certain information relating to the business experience of
each of the listed officers.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Diego Leiva 46 President, Chief Executive Officer and Chairman
Raymond M. Brennan 60 Vice President, Secretary, Director
Robert R. Sams 59 Director
Ricardo Maranon (1) 53 Director
Marilou C. Halvorsen (1) 33 Director
Hans d'Orville (2) 48 Director
Karen M. Quinn 50 Vice President of Operations and Corporate
Communications
Robert S. Bingham 49 Vice President and Chief Financial Officer
</TABLE>
- ----------------
(1) Member of audit and compensation committees.
(2) Appointed to the Board of Directors on April 23, 1998.
14
<PAGE>
Diego Leiva founded Public Info/Comm Kiosk, Inc., a New Jersey corporation,
which is currently a wholly-owned subsidiary of the Company, in August 1992, and
has served as PICK's Chairman of the Board, Chief Executive Officer and
President since that time. He has held the same positions with the Company since
its reorganization pursuant to the Reorganization Plan in September 1995. From
1989 through July 1992, Mr. Leiva served as Director of Sales for Apertus
Technologies, Inc., a computer telecommunications sales firm. Prior thereto, he
was Vice President of Marketing and Sales for Market Makers, Inc., Chief
Operating Officer of Silo, Inc., and President of Astroglow Lamps Company. See
"Certain Relationships and Related Transactions."
Raymond M. Brennan has served as Vice President and Secretary of PICK since May
1994 and Director since June 1994. He has held the same positions with the
Company since September 1995. From April 1990 to April 1994, Mr. Brennan served
as Executive Vice President and General Counsel of EOL, Inc., a full service
event production and marketing company. From January 1982 to March 1990, Mr.
Brennan served as Vice President of Business Affairs for Radio City Music Hall
Productions, Inc., where he administered both the Purchasing and Legal
Departments. See "Certain Relationships and Related Transactions."
Robert R. Sams has served as director of the Company since September 1995 and of
PICK since November 1994. He has been engaged in merchant banking, corporate
finance, acquisitions and financial advisory services since founding Saicol
Limited in 1983.
Ricardo Maranon has served as director of the Company since September 1995 and
of PICK since December 1994. He has served as President of the Florida-based
advertising agency Maranon & Associates Advertising since founding that company
in 1985.
Marilou C. Halvorsen has served as director of the Company since June of 1997.
She has been Executive Director of the New Jersey Amusement Association since
1995 and was recently named to the Board of Directors of the New Jersey Travel
Industry Association.
Hans d'Orville has served as a director since April 23, 1998. He holds both a
Masters and a Doctorate in Economics from the University of Konstanz in Germany.
Since 1975, he has served in various capacities in international organizations
and diplomacy. His most recent positions include Executive Coordinator of the
InterAction Council and Director of Information Technologies for Development
Programme at the United Nations Development Programme. He is a member of several
international committees and boards.
Karen M. Quinn has been Vice President of Operations and Corporate
Communications of the Company since September 1995. Ms. Quinn has also worked
for PICK since December 1992, having become its Vice President of Operations in
May 1994. Previously, Ms. Quinn was a Business Manager in the health care
industry for 22 years, and Vice-President of Operations at two computer sales
and service companies over a period of six years.
Robert S. Bingham has been Vice President and Chief Financial Officer of the
Company since September 17, 1997. He served as a director of Frankel & Topche
P.C., CPAs from February, 1995 through September, 1997; Vice President and Chief
Financial Officer of Smith Management Company (a privately-held investment
management company) from April, 1993 through April, 1994; Vice President Finance
of Prime Hospitality Corp. (a NYSE-listed hotel investment and management
company) from November, 1985 through April, 1993 and as an auditor and
consultant for Ernst & Young, LLP, Certified Public Accountants from July, 1976
though October, 1985.
Pursuant to Section 16 of the Exchange Act, the Company's Directors and
executive officers and beneficial owners of more than 10% of the Company's
common stock, par value $0.001 ("Common Stock") or warrants are required to file
certain reports, within specified time periods, indicating their holdings of and
transactions in the Common Stock and derivative securities. Based solely on a
review of such reports provided to the Company and written representations from
such persons regarding the necessity to file such reports, the Company is not
aware of any failures to file reports or report transactions in a timely manner
during the Company's fiscal year ended December 31, 1997, except that Ms.
Halvorsen and Mr. Bingham each filed one late Form 3.
Item 11: Executive Compensation
Directors currently receive no cash compensation for serving on the Board of
Directors or any Committee of the Board, other than reimbursement of travel
expenses incurred by them and their spouses in attending Board meetings held
outside the New York Metropolitan area. Two of the Directors are employees of
the Company. Each of the Directors has received restricted stock and stock
options from the Company. Entities affiliated with certain Directors have
received restricted stock and/or stock options and have entered into business
arrangements with the Company.
15
<PAGE>
The following table sets forth all compensation awarded to, earned by, or paid
to the Executive Officer named therein for all services rendered to the Company
during the three fiscal years ending December 31, 1997. No other Executive
Officer of the Company ("Named Executive Officer") received total compensation
in excess of $100,000 during any of the last three years:
Summary Compensation Table
Annual Compensation
-------------------
Securities
Name and Underlying
Positions Year Salary ($) Stock Options
- --------- ---- ---------- -------------
Diego Leiva 1997 $150,000 750,000 (2)
Chief Executive 1996 $150,000 500,000 (2)
Officer and 1995 $93,750(1)
Chairman of the
Board of Directors
(1) Mr. Leiva was entitled to compensation of $150,000 in 1995 and 1994. The
amounts not paid to Mr. Leiva, $56,250 for 1995 and $73,477 for 1994, or an
aggregate of $129,727 were paid in 1996 as follows: (i) on December 3, 1996,
the Company and Mr. Leiva agreed to an exchange of $100,000 of such accrued
salary for 400,000 shares of Common Stock of the Company at a purchase price
per share of $0.25, the closing asked price per share of such stock on that
date; (ii) the remaining balance of $29,727 in unpaid salary accrued to Mr.
Leiva was paid in cash to Mr. Leiva in 1996.
(2) Options to purchase 500,000 shares granted in 1996, at prices varying from
$0.875 to $0.9625 per share were cancelled and re-issued in 1997 at $0.19
per share.
The Company maintains a $250,000 term life insurance policy for Diego Leiva, for
which the Company paid $1,257 and $1,186 in 1997 and 1996, respectively.
Option Grants in Last Fiscal Year
The table below contains certain information concerning stock options granted to
the Named Executive Officer, named in the Summary Compensation Table, during the
year ended December 31, 1997:
<TABLE>
<CAPTION>
Potential Realizable Value at
Number of Percent of Total Assumed Annual Rates of Stock Price
Securities Options Appreciation for Option Term
Underlying Granted to Exercise ----------------------------
Options Employees in Price Expiration 5% 10%
Granted Fiscal year ($/Share) Date ($) ($)
------- ----------- --------- ---- --- ---
<S> <C> <C> <C> <C> <C> <C>
Diego Leiva 250,000 9.1% $0.30 June 2, 2000 $11,822 $24,825
131,578 4.8% 0.19 July 9, 2000 3,941 8,275
368,422 13.4% 0.19 July 9, 2000 11,034 23,170
</TABLE>
16
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Year End Option Values
The table below includes information regarding the value realized on option
exercises and the market value of unexercised options held by the Named
Executive Officer named in the Summary Compensation Table during the year ended
December 31, 1997:
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Shares Options Options
Acquired at FY-End(#) at FY-End ($)
on Exer- Value Exercisable/ Exercisable/
Name cise (#) Realized ($) Unexercisable Unerecisable
---- -------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Diego Leiva 0 0 750,000/0 45,000/0 (1)
</TABLE>
(1) As of December 31, 1997, the market value of the shares was $0.28 cents,
compared to the option exercise prices of $0.19 and $0.30.
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee was an officer or employee of the
Company or any of its subsidiaries during the prior year or was formerly an
officer of the Company or of any of its subsidiaries. None of the Executive
Officers of the Company has served on the Compensation Committee during the last
fiscal year of any other entity, any of whose officers served on the
Compensation Committee of the Company.
Employee Benefit Plans
Other than stock options, the Company does not currently have, nor during the
1997 fiscal year did it have, any other long-term incentive plans.
17
<PAGE>
Item 12: Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of May 15, 1998, the number of shares of the
Company's outstanding Common Stock beneficially owned by (i) each Director and
nominee for Director of the Company, (ii) each Executive Officer named under the
heading "Directors and Executive Officers" above, (iii) each beneficial owner of
more than 5% of the Company's Common Stock and (iv) all of the Company's
Executive Officers and Directors as a group:
<TABLE>
<CAPTION>
Name and Address Amount and Nature of
of Beneficial Owner Beneficial Ownership (1) Percentage (2)
- ------------------- ------------------------ --------------
<S> <C> <C> <C>
Diego Leiva (11) 13,288,609 (3)(4) 35.6%
Robert R. Sams 1,115,000 (5) 3.0%
Ricardo Maranon 1,276,000 (5)(6) 3.4%
Raymond M. Brennan (11) 1,411,500 (7)(8) 3.8%
Karen M. Quinn (11) 1,291,250 (8) 3.5%
Robert S. Bingham (11) 75,000 (9) 0.2%
Marilou C. Halvorsen 590,000 (10) 1.6%
Hans d'Orville 109,000 (12) 0.3%
Greg Manning
775 Passaic Avenue
West Caldwell, New Jersey 07006 4,112,289 (13) 11.3%
All executive officers and directors
as a group (8 persons) 19,156,359 46.0%
</TABLE>
(1) Unless otherwise noted, all shares are beneficially owned and the sole
voting and investment power is held by the person indicated.
(2) Based on 36,404,703 shares outstanding as of May 15, 1998. Each beneficial
owner's percentage ownership is determined by assuming that options or
warrants that are held by such person and which are convertible or
exercisable within sixty (60) days of such date pursuant to Rule 13d-3
under the Securities Exchange Act of 1934 (the "Exchange Act") have been
converted or exercised.
(3) Includes 4,290,000 shares beneficially owned by Mr. Leiva's wife.
(4) Includes incentive stock options to purchase up to 131,578 shares of the
Company's Common Stock at $.0.19 per share, 250,000 shares at $0.30 per
share and 150,000 shares at $0.41 per share and non-qualified stock options
to purchase up to 368,422 shares of the Company's Common Stock at $0.19 per
share pursuant to options under the Plan.
18
<PAGE>
(5) Includes non-qualified stock options to purchase up to 900,000 shares of
the Company's Common Stock, including 500,000 shares at $0.17 per share,
250,000 shares at $0.27 per share and 150,000 shares at $0.37 per share
pursuant to the Plan.
(6) Includes 37,250 shares of the Company's Common Stock beneficially owned by
Mr. Maranon's daughter.
(7) Includes 250,000 shares beneficially owned by Mr. Brennan's wife.
(8) Includes incentive stock options to purchase up to 191,176 shares at $0.17
per share, 250,000 shares at $.27 per share and 150,000 shares at $0.37 per
share and non-qualified stock options to purchase up to 308,824 shares at
$0.17 per share pursuant to the Plan.
(9) Includes non-qualified stock options to purchase up to 50,000 shares at
$0.37 per share. Excludes incentive stock options to purchase up to 250,000
shares at $0.25 per share vesting in September, 1998; incentive stock
options to purchase up to 200,000 shares and non-qualified stock options to
purchase up to 50,000 shares, all at $0.50 per share, vesting in September,
1999.
(10) Includes non-qualified stock options to purchase up to 250,000 shares at
$0.27 per share and 300,000 shares at $0.37 per share pursuant to the Plan.
(11) The address of this person is c/o the Company, 155 Route 46 West, 3rd
Floor, Wayne, New Jersey 07470.
(12) Includes non-qualified stock options to purchase up to 100,000 shares at
$0.99 per share.
(13) These shares are held by Greg Manning Auctions, Inc. A company of which
Greg Manning, a former director of the Company, is an officer and
stockholder.
Item 13: Certain Relationships and Related Transactions
On June 2, 1997, the Company granted 250,000 options to purchase shares of
Common Stock of the Company each to Diego Leiva, Raymond Brennan, Karen Quinn,
Robert Sams, Ricardo Maranon and Marilou Halvorsen, all exercisable at $0.27 per
share, except that Mr. Leiva's exercise price is $0.30 (10% over the market
value on June 2, 1997).
On July 9, 1997, the Company granted 500,000 options to purchase shares of
Common Stock of the Company each to Diego Leiva, Raymond Brennan, Karen Quinn,
Robert Sams and Ricardo Maranon, all exercisable at $0.17 per share, except that
Mr. Leiva's exercise price is $0.19 per share (10% over the market value on July
9, 1997).
On September 16, 1997, the Company granted Robert Bingham 250,000 options to
purchase shares of Common Stock of the Company exercisable at $0.25 per share
and 250,000 options exercisable at $0.50 per share.
19
<PAGE>
On February 20, 1998, the Company granted 150,000 options each to Diego Leiva,
Raymond Brennan, Karen Quinn, Robert Sams and Ricardo Maranon, all exercisable
at $0.37 per share, except that Mr. Leiva's exercise price is $0.41 per share
(10% over the market value on February 20, 1998).
On February 20, 1998, the Company granted 300,000 options to Marilou Halvorsen
exercisable at $0.37 per share and 50,000 options to Robert Bingham exercisable
at $0.37 per share.
On April 23, 1998, the Company granted 100,000 options to Hans d'Orville
exercisable at $0.99 per share.
20
<PAGE>
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports of Form 8-K.
(a) 1. Financial Statements Page
- ---------------------------- ----
Report of Certified Public Accountants F-1
Consolidated Balance Sheets at December 31, 1997 and 1996 F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995 F-3
Consolidated Statement of Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-7
(a) 3. Exhibits
- ----------------
3.1 Amended Articles of Incorporation (1)
3.2 By-Laws(2)
4.1 Form of Warrant Agreement between Registrant and certain holders of
warrants.
10.1 Distributor Agreement, dated February 11, 1988, between the Registrant
and Blackstone Calling Card, Inc. (the "Blackstone Agreement")
10.2 Amendment dated April 13, 1998 to the Blackstone Agreement
10.3 Amendment dated April 27, 1998 to the Blackstone Agreement
10.4 Reciprocal Telecommunications Agreement, dated December 4, 1997, between
Picknet, Inc. and Gulfsat Communications Company (the "Gulfsat
Agreement")
10.5 Amendment, dated March 7, 1998, to the Gulfsat Agreement
10.6 Promissory Note, dated April 2, 1998, between the Registrant and Wolfson
Equities
10.7 Letter Agreement, dated April 2, 1998, between the Registrant and
Wolfson Equities
10.8 Reciprocal Telecommunications Agreement, dated November 11, 1996 between
Picknet, Inc. and IDT Corporation (the "IDT Agreement")
10.9 Amendment, dated November 11, 1996, to the IDT Agreement
10.10 Promissory Note, dated February 12, 1998 between Picknet, Inc. and IDT
Corporation
10.11 Form of Lease Agreement between Telecommunications Finance Group and
PICK Communications, Corp.
21.1 Subsidiaries of the Registrant (1)
23.1 Consent of Independent Certified Public Accountants
27.1 Financial Data Schedule
- -------------
(1) Incorporated herein by reference from Exhibits to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996.
(2) Incorporated herein by reference from Exhibits to Registrant's Form 10.
21
<PAGE>
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, thereto duly authorized.
PICK COMMUNICATIONS CORP.
By: /s/ Diego Leiva
------------------
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant in the
capacities and on the dates stated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Diego Leiva President, CEO (Principal May 29, 1998
- ------------------------- Executive Officer and Chairman)
Diego Leiva
/s/ Robert S. Bingham
- -------------------------
Robert S. Bingham Vice President and Chief Financial May 29, 1998
Officer (Principal Financial Officer)
/s/ Raymond M. Brennan Vice President, Secretary and Director May 29, 1998
- -------------------------
Raymond M. Brennan
/s/ Karen M. Quinn Vice President of Operations and May 29, 1998
- ------------------------- Corporate Communications
Karen M. Quinn
/s/ Robert R. Sams Director May 29, 1998
- -------------------------
Robert R. Sams
/s/ Ricardo Maranon Director May 29, 1998
- -------------------------
Ricardo Maranon
/s/ Marilou C. Halvorsen Director May 29, 1998
- -------------------------
Marilou C. Halvorsen
</TABLE>
22
<PAGE>
Report of Certified Public Accountants
To: The Board of Directors
PICK Communications Corp.
Wayne, New Jersey
We have audited the accompanying consolidated balance sheets of PICK
Communications Corp. and its Subsidiaries (the "Company") as of December 31,
1997 and 1996 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1997,
1996 and 1995. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
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 consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 1997 and 1996 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of PICK
Communications Corp. and its Subsidiaries as of December 31, 1997 and 1996 and
the results of its operations and its cash flows for the years ended December
31, 1997, 1996 and 1995 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 14 to
the consolidated financial statements, the Company has experienced significant
losses, resulting in a deficit equity position. The Company's financial position
and operating results raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 14. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Durland & Company, CPAs, P.A.
Palm Beach, Florida
April 29, 1998
Page F-1
<PAGE>
PICK Communications Corp.
Consolidated Balance Sheets
December 31,
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 44,400 $ 87,712
Accounts receivable, net 451,818 778,180
Prepaid telephone card inventory 2,054 23,914
Prepaid advertising 0 2,458,155
Prepaid expenses and other current assets 123,762 82,252
----------- -----------
Total current assets 622,034 3,430,213
----------- -----------
FIXED ASSETS:
Furniture and equipment, net 1,000,083 90,571
----------- -----------
OTHER ASSETS:
Security deposits 24,396 0
Prepaid cellular patent and rights, net 0 583,705
Investment in marketable equity securities 171,000 4,812,660
----------- -----------
Total other assets 195,396 5,396,365
----------- -----------
Total assets $ 1,817,513 $ 8,917,149
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short term debt $1,000,000 $ 750,000
Current portion of capital leases 146,128 0
Accounts payable 4,480,815 1,072,052
Deferred revenue - prepaid calling cards 681,653 1,667,388
Reserve for contingent liability 1,100,000 1,749,563
Advances from stockholder 170,000 25,152
Accrued compensation due stockholders 53,525 43,698
Other current liabilities 395,521 1,274,576
----------- -----------
8,027,642 6,582,429
----------- -----------
Capital leases, less current portion 794,905 0
----------- -----------
Total liabilities 8,822,547 6,582,429
----------- -----------
Minority interest in consolidated subsidiary 88,080 1,465,141
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.002 par value at December 31, 1996, $0.001 par value at
December 31, 1997; authorized 75,000,000 shares; 43,697,516 issued and
43,217,516 outstanding at December 31, 1996; 43,325,317
issued and 36,059,817 outstanding at December 31, 1997 43,325 87,395
Additional paid in capital in excess of par 5,886,825 6,399,720
Warrants 21,242 0
Stock subscription receivable 0 (600,000)
Treasury stock (3,072,222) (602,089)
Unrealized gain (loss) on marketable equity securities 38,000 (3,904,965)
Retained earnings (deficit) (10,010,284) (510,482)
----------- -----------
Total stockholders' equity (deficit) (7,093,114) 869,579
----------- -----------
Total liabilities and stockholders' equity (deficit) $ 1,817,513 $ 8,917,149
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page F-2
<PAGE>
PICK Communications Corp.
Consolidated Statements of Operations
Years ended December 31,
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Sales of long distance services $ 7,669,243 $ 4,444,342 $ 0
Sales of prepaid calling cards 1,346,660 1,425,340 1,565,039
----------- ----------- -----------
Total revenues 9,015,903 5,869,682 1,565,039
----------- ----------- -----------
COST OF SALES:
Cost of sales 9,088,749 6,401,231 1,387,459
----------- ----------- -----------
Gross profit (loss) before adjustment to provision
for contingent costs (72,846) (531,549) 177,580
Adjustment to provision for contingent costs 649,563 (1,749,563) 0
----------- ----------- -----------
Gross profit (loss) 576,717 (2,281,112) 177,580
OPERATING EXPENSES:
Sales and marketing 39,960 1,077,766 257,487
General and administrative 1,796,869 1,473,376 873,013
Depreciation 38,031 39,258 30,475
Amortization 142,500 142,500 0
Bad debt expense 253,270 219,746 42,650
----------- ----------- -----------
Total operating expenses 2,270,630 2,952,646 1,203,625
----------- ----------- -----------
Loss from operations (1,693,913) (5,233,758) (1,026,045)
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (157,669) (19,802) (45,033)
Gain on in-substance defeasance 0 53,080 0
License fees 0 3,650,000 0
Gain (loss) on disposal of fixed assets 0 (50,271) 0
Write-off of intangible asset (441,205) 0 0
Net gains (losses) on marketable equity securities (9,449,079) 4,784,000 0
----------- ----------- -----------
Total other income (expense) (10,047,953) 8,417,007 (45,033)
----------- ----------- -----------
Income (loss) before minority interest in subsidiary
loss and income taxes (11,741,866) 3,183,249 (1,071,078)
Benefit (provision) for deferred income taxes 1,808,000 (1,808,000) 0
Minority interest in subsidiary loss 434,064 260,541 37
----------- ----------- -----------
Net income (loss) $(9,499,802) $ 1,635,790 $(1,071,041)
=========== =========== ===========
Net income (loss) per common share - basic $ (0.26) $ 0.04 $ (0.03)
======== ======= =======
Weighted average shares outstanding - basic 36,958,530 41,991,502 40,442,516
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page F-3
<PAGE>
PICK Communications Corp.
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Unrealized
Additional Stock Gain (Loss) on Total
Common Paid in Subscription Treasury Marketable Retained Stockholders'
Stock Capital Warrants Receivable Stock Securities (Deficit) Equity
----- ------- -------- ---------- ----- ---------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 1, 1995 $ 53,545 $ 0 $ 0 $ 0 $ 0 $ 0 $(1,075,231) $(1,021,686)
Transactions: A) (6,080) 238,980 0 0 0 0 0 232,900
B) 31,200 1,779,800 0 (800,000) 0 0 0 1,011,000
C) 2,420 0 0 0 0 0 0 2,420
Net (loss) 0 0 0 0 0 0 (1,071,041) (1,071,041)
-------- ---------- --------- --------- --------- --------- ---------- ----------
Balance,
December 31, 1995 81,085 2,018,780 0 (800,000) 0 0 (2,146,272) (846,407)
Transactions D) 5,300 4,219,700 0 (125,000) 0 0 0 4,100,000
E) 0 0 0 0 (602,089) 0 0 (602,089)
F) 1,010 161,240 0 0 0 0 0 162,250
G) 0 0 0 325,000 0 0 0 325,000
Valuation reserve 0 0 0 0 0 (3,904,965) 0 (3,904,965)
Net income 0 0 0 0 0 0 1,635,790 1,635,790
-------- ---------- --------- --------- --------- --------- ---------- ----------
Balance,
December 31, 1996 87,395 6,399,720 0 (600,000) (602,089) (3,904,965) (510,482) 869,579
Transactions H) (43,697) 43,697 0 0 0 0 0 0
I) (600) (599,400) 0 600,000 0 0 0 0
J) 0 0 0 0 (2,470,133) 0 0 (2,470,133)
K) 227 42,808 0 0 0 0 0 43,035
L) 0 0 21,242 0 0 0 0 21,242
Valuation reserve 0 0 0 0 0 3,942,965 0 3,942,965
Net (loss) 0 0 0 0 0 0 (9,499,802) (9,499,802)
-------- ---------- --------- --------- --------- --------- ---------- ----------
Balance,
December 31, 1997 $ 43,325 $ 5,886,825 $ 21,242 $ 0 $(3,072,222) $ 38,000 $(10,010,284) $(7,093,114)
======== =========== ========== ========= =========== ========== ============ ===========
</TABLE>
A) 16,665,000 shares of common stock exchanged for 100% of the issued and
outstanding common stock of Public Info/Comm Kiosk, Inc., accounted for as a
reorganization. Also reflects 8,277,516 shares of the Company outstanding at
the time of the reorganization. The Company had 24,942,516 shares outstanding
subsequent to this reorganization.
B) Sale of shares: 3,000,000 shares in return for 1,000,000 shares of Foxwedge,
Inc. valued at $6,000; 4,500,000 shares in return for $250,000 cash, (with an
individual who subsequently became a director of the Company); 500,000 shares
in return for cancellation of a $250,000 note payable; 1,500,000 shares in
return for $82,500 cash (with an officer/director of the Company); 100,000
shares in return for prepaid cellular patent pending and rights valued at
$212,500; 5,000,000 shares in return for 5,000,000 restricted shares of
Firenze, Ltd. valued at $10,000 and 1,000,000 shares in return for $200,000
cash and $800,000 in subscriptions receivable. Shares outstanding:
40,300,516.
C) Common stock issued for services, valued at $0.01 per share. Shares
outstanding: 40,542,516.
D) Sale of shares: 250,000 shares in return for $125,000 cash and $125,000 in
subscriptions receivable; 1,150,000 shares in return for prepaid advertising
valued at $2,700,000 and 1,250,000 shares in return for 500,000 shares of
Ultimistics, Inc. valued at $1,275,000. Shares outstanding: 43,192,516.
E) Reacquisition of shares: 230,000 shares for $29,500 cash and 250,000 shares
for $15,000 cash, prepaid calling cards and unused prepaid advertising.
Shares outstanding: 42,712,516.
F) Shares issued for services: 50,000 shares for $50,000 of legal services;
455,000 shares for $100,000 of salary due to an officer/stockholder and
$12,250 of other employee services. Shares outstanding: 43,217,516.
G) Collection of subscriptions receivable.
H) Reduction in par value for $0.002 to $0.001 per share.
I) Cancellation of 600,000 shares subscribed. Shares outstanding: 42,617,516.
J) Reacquisition of shares: 750,000 shares in return for unused prepaid
advertising with a book value of $2,038,155; 35,500 shares in return for
$11,978 cash and 6,000,000 in return for shares of Firenze, Ltd. and
Ultimistics, Inc. Shares outstanding: 35,832,016.
K) Shares issued to employees and others as compensation. Shares outstanding:
36,059,817.
L) Warrants for purchase of 250,000 shares of common stock at $0.50 per share,
exercisable for three years, issued for placement of short term debt.
The accompanying notes are an integral part of these financial statements.
Page F-4
<PAGE>
PICK Communications Corp.
Consolidated Statements of Cash Flows
Years ended December 31,
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (9,499,802) $ 1,635,790 $ (1,071,041)
Adjustments to reconcile net income (loss) to cash
used in operating activities:
Non-cash loss (gain) on marketable securities 9,449,079 (4,784,000) 0
Non-cash revenue - license fees 0 (3,650,000) 0
Non-cash gain on in-substance defeasance 0 (53,080) 0
Non-cash advertising expense 0 256,845 0
Stock and warrants issued for services 64,277 162,250 2,420
Depreciation and amortization 180,531 181,758 30,475
Write-off of intangible asset 441,205 0 0
Loss on abandonment of fixed assets 0 50,271 0
Minority interest in subsidiary loss (434,064) (260,541) 0
Bad debt expense 253,270 219,746 42,650
Adjustment to provision for contingent liabilities (649,563) 1,749,563 0
Provision (benefit) for deferred income taxes (1,808,000) 1,808,000 0
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 73,092 (163,490) (693,856)
Decrease (increase) in prepaid telephone card inventory 21,860 143,177 (119,193)
Decrease (increase) in other operating assets (65,906) 32,539 (503,495)
Increase (decrease) in accounts payable 3,408,763 880,161 (294,994)
Increase (decrease) in deferred revenue (985,735) 862,005 479,786
Increase (decrease) in other operating liabilities (868,679) (289,375) 1,081,645
----------- ----------- ----------
Net cash (used in) operating activities (419,672) (1,218,381) (1,045,603)
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in debt securities 0 (371,920) 0
Purchase of fixed assets (6,510) (65,966) (38,706)
----------- --------- ----------
Net cash (used in) investing activities (6,510) (437,886) (38,706)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued for cash 0 250,000 1,015,400
Common stock issued for cash by subsidiary 0 527,612 0
Acquisition of treasury stock for cash (11,978) (44,500) 0
Payments received on stock subscriptions receivable 0 200,000 0
Funds advanced on third-party debt 250,000 750,000 250,000
Payments on third-party debt 0 (75,000) (85,000)
Funds advanced by stockholder 170,000 75,152 0
Payments on stockholder advances (25,152) (50,000) (3,035)
----------- ----------- ----------
Net cash provided by financing activities 382,870 1,633,264 1,177,365
----------- ----------- ----------
Net increase (decrease) in cash (43,312) (23,003) 93,056
CASH, beginning of period 87,712 110,715 17,659
----------- ----------- ----------
CASH, end of period $ 44,400 $ 87,712 $ 110,715
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page F-5
<PAGE>
PICK Communications Corp.
Consolidated Statements of Cash Flows (Continued)
Years ended December 31,
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period $ 75,877 $ 8,271 $ 0
=========== =========== ==========
Non-cash financing activities:
Assets acquired under capital leases 941,033 0 0
=========== =========== ==========
Book value of marketable equity securities exchanged for
common stock of the Company and its subsidiary 6,390,625 0 0
=========== =========== ==========
Book value of marketable equity securities exchanged for
other marketable equity securities 4,085,000 0 0
=========== =========== ==========
Book value of prepaid advertising and telephone cards
exchanged for common stock of the Company
and its subsidiary 2,458,155 557,589 0
=========== =========== ==========
Stock issued for investment in marketable equity securities 0 1,275,000 16,000
=========== =========== ==========
Stock issued to retire note payable 0 0 250,000
=========== =========== ==========
Stock issued to acquire intangible assets 0 0 212,500
=========== =========== ==========
Stock issued for subscriptions receivable 0 125,000 882,500
=========== =========== ==========
Stock issued to acquire prepaid advertising 0 2,700,000 0
=========== =========== ==========
Insubstance defeasance 0 425,000 0
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page F-6
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Principles
Description of Business:
PICK Communications Corp. (the "Company") acts as a wholesaler of long distance
telephone services and sells, through distributors, prepaid telephone calling
cards. The Company is headquartered in Wayne, New Jersey and also leases
facilities and telephone switching equipment in Jersey City, New Jersey and
Miami, Florida.
Organization and Basis of Presentation
The Company was incorporated in the State of Utah in 1984 as S.T.V., Inc.,
changing its name to Adolphus Companies, Inc. in 1986, to Prime International
Products, Inc. in 1988 and to PICK Communications Corp. in 1995. The Company had
no operations between 1990 and September, 1995. On September 12, 1995, the
Company acquired Public Info/Comm Kiosk, Inc. ("PICK, Inc.") in a stock for
stock exchange. The accompanying consolidated financial statements reflect
operations of PICK, Inc. prior to September 12, 1995.
Certain amounts in the accompanying consolidated financial statements at
December 31, 1996 and 1995 and for the years then ended have been reclassified
from the presentation in previously-issued financial statements to conform with
the presentation at December 31, 1997.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
Minority interest represents the minority shareholders' proportionate share of
the equity and loss of PCT Prepaid Telephone, Inc. ("PCT"). Although the Company
owned less than 50% of PCT during 1996 and at December 31, 1996, the Company
maintained effective control of PCT and, in the first quarter of 1997, the
Company acquired an additional 33% of the outstanding shares of PCT, bringing
its ownership to 79%.
Use of Estimates
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the dates of the statements of
financial condition and revenues and expenses for the years then ended. Actual
results could differ from those estimates.
Revenue Recognition
Sales of long distance time are recognized at the time the service is provided,
as reported by the switch. The Company defers revenue related to prepaid calling
cards (which is recorded net of distributor discounts) and recognizes revenue as
the time is used.
Concentration of Credit Risk
In 1997, approximately 19% and 13% of revenues were from two customers; in 1996,
approximately 36% and 25% of revenues were from two customers and in 1995,
approximately 35% and 15% of revenues were from two customers. The Company
performs periodic credit evaluations of its customers, but generally does not
require collateral.
Page F-7
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Principles, Continued
Concentration of Credit Risk, Continued
Accounts receivable consist of the following at December 31, 1997 and 1996:
1997 1996
---- ----
Accounts receivable $ 778,315 $ 942,343
Reserve for bad debts 326,497 164,163
---------- ---------
Accounts receivable - net $ 451,818 $ 778,180
========= =========
Five customers comprise 35.6%, 19.8%, 16.4%, 13.1% and 10.2% of gross accounts
receivable at December 31, 1997. Two customers accounted for 29.5% and 13.1% of
gross accounts receivable at December 31, 1996. The Company also purchases
telecommunications services from many of its customers. Frequently, accounts
receivable are settled by set-off against liabilities with the same party.
Prepaid Telephone Card Inventory
Card inventory is composed of costs to produce cards, including printing and
freight, and is valued at the lower of cost or market. Inventory is relieved and
charged to cost of sales when cards are activated.
Fixed Assets
Fixed assets are stated at cost. Depreciation is computed using the straight
line method over the estimated useful lives of the assets (3, 5 or 7 years).
Intangible Asset
The Company's intangible assets (patent related to prepaid cellular technology)
are valued at cost and amortized over their estimated useful lives of five
years. The unamortized balance was written-off at December 31, 1997 (Note 4).
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") number 109 ("Accounting for Income Taxes").
Current and deferred income tax assets and liabilities are recognized in the
financial statements based upon events that have been recognized in the
financial statements and measured based upon the income tax laws enacted at the
time of the events. Valuation allowances are established to reduce income tax
assets to the amount estimated to be realized, based upon currently-available
evidence.
Net Loss Per Share
Net loss per share - basic is computed by dividing the net loss by the weighted
average number of common shares outstanding during the period. Net loss per
share - diluted is not presented because the inclusion of common share
equivalents would be anti-dilutive.
(2) Prepaid Advertising
In 1996, the Company acquired prepaid advertising valued at $2,700,000 in
exchange for 1,000,000 shares of its common stock. In return for the unused
portions of the advertising, 250,000 of those shares were returned to the
Company in 1996 and the remaining 750,000 shares in 1997.
Page F-8
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(3) Furniture and Equipment
Furniture and equipment consists of the following at December 31, 1997 and 1996:
1997 1996
---- ----
Office furniture and equipment - at cost $ 127,538 $ 121,028
Less accumulated depreciation (68,488) (30,457)
---------- ---------
Net 59,050 90,571
---------- ---------
Telephone switching equipment
acquired under capital leases 941,033 0
----------- ---------
Net furniture and equipment $ 1,000,083 $ 90,571
=========== =========
(4) Prepaid Cellular Telephone Technology
In October, 1995, the Company acquired the world-wide rights to market,
distribute, sell and manufacture a prepaid cellular telephone technology for
$712,500, $212,500 of which was paid by issuance of 100,000 shares of the
Company's stock. A United States patent was granted related to this technology
in the first quarter of 1998. Although the Company believes this technology may
prove to have value, the technology generated no revenues in 1997 and the
Company elected to write-off its remaining investment ($441,205) as of December
31, 1997.
(5) Investment in Marketable Equity Securities
During 1996, the Company acquired 4,700,000 restricted shares of the common
stock of Ultimistics, Inc. ("Ultimistics"): (i) 500,000 shares for 1,000,000
shares of the common stock of Foxwedge Inc. it owned, recording a gain of
$1,194,000, (ii) 2,000,000 shares for 5,000,000 shares of the common stock of
Firenze, Ltd. it owned, recording a gain of $3,590,000, (iii) 500,000 shares in
return for 1,250,000 shares of the Company's stock, (ivi) 1,500,000 shares in
return for two, five-year license agreements (Note 11) and (v) 200,000 shares
from the sale, by PCT, of its common stock (Note 7).
During the first quarter of 1997, the Company, in four separate transactions,
disposed of all of its shares of Ultimistics, along with $420,000 of prepaid
advertising, in return for (i) 1,000,000 shares of the Company's common stock,
(ii) 10,000,000 shares of PCT (Note 7), and (iii) 380,000 restricted shares of
the common stock of Fairbanks, Inc. (which subsequently changed its name to Jet
Vacations, Inc. "JETV"). The Company recorded losses of $9,399,079 on these
transactions.
At December 31, 1997, the Company owned 380,000 restricted shares the common
stock of JETV and 500,000 restricted shares of Internet Channel, Inc. The market
value per share of JETV was $1.50. Because the shares are restricted and there
is very limited trading activity in JETV stock, the Company believes the fair
value to be approximately 30% of the market price, or $171,000 at December 31,
1997. 200,000 of the JETV shares are pledged as security for the Company's bank
loan (Note 6) and 100,000 of the JETV shares are pledged to one of the Company's
vendors. In 1997, the Company wrote-off its investment in Internet Channel,
Inc., recognizing a loss of $50,000.
(6) Short Term Debt
Short term debt consists of $750,000 in outstanding loans from a bank as of
December 31, 1997 and 1996 and $250,000 borrowed from an individual as of
December 31, 1997.
The bank borrowing bears interest at the bank's prime rate plus 4%, matures on
May 31, 1998 and is secured by the Company's accounts receivable and 200,000
shares of the common stock of JETV owned by the Company.
Page F-9
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(6) Short Term Debt, Continued
The amount borrowed from an individual was repaid in April, 1998. As additional
compensation for lending the Company funds, the individual was granted warrants
(exercisable over three years) to purchase 250,000 shares of the Company's
common stock at $0.50 per share. In return for extending the maturity date of
the loan from March 9, 1998 to April 13, 1998, the individual was granted
warrants for an additional 125,000 shares on the same terms.
(7) Transactions Involving Stock in Subsidiary
During 1996, the Company's subsidiary, PCT, sold 19,250,000 of its shares of
common stock to several unrelated parties. The proceeds consisted of
approximately $525,000 in cash and 200,000 shares of the common stock of
Ultimistics, which was valued at $800,000.
During the first quarter of 1997, the Company, in four separate transactions,
acquired 16,250,000 shares of the common stock of PCT:
(i) 6,250,000 shares (along with 5,000,000 shares of the Company's
common stock) for 5,000,000 shares of the common stock of
Firenze.
(ii) 1,000,000 shares (along with 1,000,000 shares of the Company's
common stock) for 1,000,000 shares of the common stock of
Ultimistics.
(iii) 4,000,000 shares for 1,500,000 shares of Ultimistics.
(iv) 5,000,000 shares for $420,000 in prepaid advertising and 300,000
shares of Ultimistics.
In 1997, the Company recognized losses on disposition of marketable equity
securities of approximately $2,900,000 related to the acquisition of PCT shares.
(8) Commitments
The Company leases facilities and equipment under operating and capital leases.
The future minimum payments under such leases as of December 31, 1997 are as
follows:
Operating Capital
Leases Leases
------ ------
1998 $ 327,120 $ 251,188
1999 327,120 251,188
2000 240,720 251,188
2001 86,600 251,188
2002 0 251,188
--------- ----------
Total payments $ 981,560 1,255,940
========= ---------
Less amounts representing interest (314,907)
Current portion (146,128)
---------
Capital lease obligations, long-term portion $ 794,905
=========
Rental expense under operating leases was $106,586, $45,315 and $10,280 in 1997,
1996 and 1995, respectively.
Page F-10
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(9) Income Taxes
The deferred tax liability at December 31, 1996 of $1,808,000 is reflected as a
reduction of "Unrealized gain (loss) on marketable equity securities" in the
accompanying balance sheet.
The Company's deferred tax assets at December 31, 1997 and 1996 consist of the
following:
1997 1996
---- ----
Approximate tax benefit from net operating loss carryforwards:
Federal $1,800,000 $ 1,261,900
State 300,000 222,100
---------- -----------
2,100,000 1,484,000
Less valuation allowance (2,100,000) (1,484,000)
---------- ------------
Net deferred tax assets $ 0 $ 0
========== ============
The deferred tax assets are comprised of the tax benefit of net operating loss
carryforwards of approximately $5,500,000 and $3,700,000 at December 31, 1997
and 1996, respectively, which expire $1,000,000 in 2009, $1,100,000 in 2010,
$1,600,000 in 2011 and $1,800,000 in 2012.
(10) Related Party Transactions
The Company purchased advertising services of $123,837 and $10,541, in 1996 and
1995, respectively, from an entity controlled by an individual who is a
stockholder and director of the Company. In conjunction with the purchase of
prepaid advertising in 1996 (Note 2), the Company issued 150,000 shares of its
common stock to this same individual.
(11) License Agreements
In the first quarter of 1996, the Company entered into two, five-year license
agreements for distribution of its prepaid cellular telephone technology (Note
5) in specified overseas markets. The licensee paid initial, non-refundable
license fees valued at $3,600,000, and was to pay additional royalties on its
gross revenues from sales of the technology. The initial fees were paid by
transfer of 1,500,000 shares of the restricted common stock of Ultimistics to
the Company. In the first quarter of 1997, the Company cancelled the license
agreements for non-performance.
(12) Litigation and Reserve for Contingent Liability
The Company is, from time to time, party to litigation that arises in the
ordinary course of its business operations or otherwise. Except as described
below, the Company is not presently a party to any litigation that it believes
would have a material adverse effect on its business.
In February 1997, the Company commenced a mediation action against American
Telephone & Telegraph ("AT&T") seeking $10 million in damages for breach of
contract and fraudulent inducement and malicious conduct under a carrier
agreement (the "Carrier Agreement") entered into in February 1996. The Company
contracted with AT&T under the Carrier Agreement for inbound 800 service and
outbound domestic and international long distance service. The Company claims
that AT&T reneged on certain commitments to provide the Company with lower
international rates than the Company was invoiced by AT&T. AT&T has claimed that
the Company owes it in excess of $1,000,000. In 1996, the Company provided for a
non-cash reserve of $1,750,000, which was reduced to $1,100,000 in the third
quarter of 1997 and is a part of the Company's working capital deficiency. After
two mediation sessions, AT&T indicated that it intended to withdraw from the
mediation. Accordingly, on November 5, 1997, the Company filed for arbitration
proceedings against AT&T. There can be no assurance that the Company will be
able to prevail in this arbitration. Any adverse judgment or settlement could
have a material impact on the Company's financial condition.
Page F-11
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(12) Litigation and Reserve for Contingent Liability, Continued
In April, 1998, the Company settled (without submitting an answer), a lawsuit
which WorldCom Network Services, Inc. had filed in the Supreme Court, NY County
on January 7, 1998. Under the settlement, PICK agreed to pay outstanding
accounts payable owed to WorldCom of approximately $2.8 million, plus interest
at 18%, in monthly payments to be made between April 27, 1998 and December 28,
1998.
(13) Stock Option Plan
In February, 1996, the Company adopted a stock option plan for employees and
directors. The following summarizes activity under the plan:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996
--------------------------------------- --------------------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
------------- ---------------------- ------------ -----------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 3,500,000 $ 0.878 0 -
Options canceled (3,500,000) $ 0.878 0 -
Granted 4,500,000 $ 0.230 3,500,000 $ 0.878
---------- ---------
Outstanding at end of period 4,500,000 $ 0.230 3,500,000 $ 0.878
========== =========
</TABLE>
The Company applies Accounting Principles Board Opinion number 25, "Accounting
for Stock Issued to Employees," in accounting for stock-based compensation
plans. Accordingly, no compensation expense has been recognized in the
accompanying statements of operations for stock options granted to employees.
Had compensation been recorded, based upon the fair value (calculated under the
methodology in Statement on Financial Accounting Standards ("SFAS") number 123,
"Accounting for Stock-Based Compensation") at the grant date for awards under
the Company's stock option plan, the Company's income (loss) per share would
have been changed as shown below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income (loss), as reported $ (9,499,802) $ 1,635,790 $ (1,071,041)
Pro-forma compensation expense (638,878) (340,114) 0
------------- ----------- ------------
Pro-forma net income (loss) $ (10,138,680) $ 1,295,676 $ (1,071,041)
============= =========== ============
Income (loss) per share, as reported $ (0.26) $ 0.04 $ (0.03)
======= ======= =======
Pro-forma net income (loss) per share $ (0.27) $ 0.03 $ (0.03)
======= ======= =======
</TABLE>
The fair value of the options at the date of grant was estimated using the
Black-Scholes option pricing model with the following model assumptions: risk
free rate of return of 6% (1997) and 6.26% (1996); no dividend yield for all
years; expected life of three years and volatility of 134% (1997) and 68%
(1996).
(14) Going Concern Matters
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. As shown in the accompanying consolidated statements of operations,
the Company has incurred operating losses and negative cash flow from operations
in 1997, 1996 and 1995. In addition, the Company has a working capital
deficiency of $7,405,608 at December 31, 1997. Substantially all of the debts of
Page 12
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(14) Going Concern Matters, Continued
the Company mature or are subject to payment agreements calling for payment
before the end of 1998. Without the Company extending the payout terms,
negotiating additional long-term financing arrangements and additional equity,
or increasing revenues and/or decreasing expenses, these facts, among others,
may indicate that the Company will be unable to continue as a going concern for
a reasonable period of time. The financial statements do not include any
adjustments relating to the recoverability assets or the classification of
liabilities should the Company be unable to continue as a going concern.
As discussed in the following footnote, the Company has obtained additional
short-term financing during the first four months of 1998 and has contracts in
place that management believes will allow the Company to generate positive
operating income starting in the second or third quarter of 1998. The Company is
also negotiating with several potential investors to raise additional funds
through private placement of debt and/or equity. The Company believes that these
plans, if successfully implemented, will enable it to continue as a going
concern. However, there can be no assurance that the Company will be successful
in either generating positive operating income or raising additional funds in
the immediate future.
(15) Subsequent Events
In the first quarter of 1998, the Company amended its existing agreement with
IDT Corporation ("IDT"), one of its long distance customers. Under the terms of
the amendment, the Company agreed to sell IDT up to 10,000,000 minutes per month
of long distance traffic at favorable rates and IDT agreed to lend the Company
$2,000,000, $500,000 when the transaction was signed, $1,000,000 was funded in
April, 1998 and the remaining $500,000 is to be advanced in May, 1998. The loan
bears interest at 9% and matures in February, 1999. In addition, IDT receives a
warrant to purchase one share of the Company's common stock for each five
dollars loaned, at an exercise price equal to the closing price for the
Company's common stock at the date immediately prior to the date of the advance.
In connection with these advances, the Company has issued 100,000 warrants with
an exercise price of $0.24 per share and 200,000 warrants with an exercise price
of $1.00 per share and is obligated to issue 100,000 warrants when the final
advance is made.
In February, 1998, the Company entered into a two-year agreement with a major
distributor of prepaid telephone calling cards, Blackstone Calling Card, Inc.
("Blackstone" and the "Blackstone Agreement"). Under the terms of the Blackstone
Agreement, as amended, after a six month phase-in period commencing April 27,
1998, Blackstone will purchase a minimum face value of $5,000,000 per month from
the Company, which is expected to result in net revenues of approximately
$3,000,000 per month to the Company. The Blackstone Agreement is also subject to
termination by either party without cause at the end of year one, upon sixty
days prior notice or by Blackstone if the Company fails to maintain overall
network quality.
In April, 1998, the Company borrowed $1,000,000. The loan is unsecured, bears
interest at 10% and matures July 1, 1998. In consideration for advancing the
funds, the lenders received warrants to purchase 1,000,000 shares of the
Company's common stock at $0.35 per share, which are exercisable on or before
April 1, 2001. The placement agent for this loan received warrants to purchase
250,000 shares of the Company's common stock at $0.35 per share.
In April,1998, the Company entered into an agreement with WorldCom Network
Services, Inc., one of its vendors to pay approximately $2,800,000 in accounts
payable in monthly installments, plus interest at an annual rate of 18%, through
December, 1998.
(16) New Accounting Pronouncements
In June, 1997, the Financial Accounting Standards Board (the "FASB") issued SFAS
number 130, " Reporting Comprehensive Income," which establishes standards for
reporting comprehensive income in a financial statement that is displayed with
the same prominence as other financial statements. Comprehensive income, as
defined, includes all changes in equity during a period from non-owner sources.
Page F-13
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(16) New Accounting Pronouncements, Continued
Management is currently evaluating the financial statement and disclosure impact
of SFAS number 130. The disclosures prescribed by SFAS number 130 must be made
beginning with the quarter ended March 31, 1998.
In June, 1997, the FASB issued SFAS number 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes standards for
companies to report information about operating segments in annual financial
statements. Management is currently evaluating the financial statement and
disclosure impact of SFAS number 131. The disclosures prescribed by SFAS number
131 must be made beginning with the year ended December 31, 1998.
<PAGE>
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. SUCH SECURITIES MAY NOT BE SOLD, ASSIGNED, TRANSFERRED,
PLEDGED OR HYPOTHECATED UNLESS REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
Warrant to Purchase 100,000 Shares of Common Stock
WARRANT TO PURCHASE SHARES OF COMMON STOCK
OF
PICK COMMUNICATIONS CORP.
This is to certify that, FOR VALUE RECEIVED, IDT Corporation ("Holder")
having an office at 190 Main Street, Hackensack, NJ 07601, is entitled to
purchase, subject to the provisions of this Warrant, from PICK COMMUNICATIONS
CORP., a Nevada corporation (the "Company"), 100,000 fully paid, validly issued
and non-assessable shares of Common Stock (the "Common Stock"), par value $.001
per share, of the Company at any time or from time to time for one year from the
date hereof at the price of the Company's stock at the close of business on the
date hereof. To the extent that there is no public market for the Company's
shares at the day this or any subsequent warrant is issued, the exercise price
shall be the fair market value of the Company's stock, as reasonably determined
by the Company's Board of Directors, but not less than its book value
<PAGE>
on the such date. This Warrant is one of what is expected to be three identical
Warrants issuable pursuant to a loan transaction entered into on this date
between PICKNET, INC., a wholly-owned subsidiary of the Company, and the Holder.
A second Warrant shall be issued to the Holder at the Second Advance, as defined
hereafter, to purchase an additional 200,000 shares of Common Stock at any time
or from time to time during the one-year period from the day Holder makes the
second advance of $1,000,000 to PICKNET under its loan to PICKNET (the "Second
Advance"), at the price of the Company's stock at the close of business on the
day of the Second Advance. A third warrant shall be issued to the Holder at the
Third Advance, as defined hereafter, to purchase an additional 100,000 shares of
Common Stock at any time or from time to time during the one-year period from
the day Holder makes the third advance of $500,000 to PICKNET under its loan to
PICKNET (the "Third Advance") at the price of the Company's stock at the close
of business on the day of the Third Advance.
The number of shares of Common Stock to be received upon the exercise of
this Warrant and the price to be paid for each share of Common Stock may be
adjusted from time to time as hereinafter set forth. The shares of Common Stock
deliverable upon such exercise, and as adjusted from time to time, are
-2-
<PAGE>
hereinafter sometimes referred to as "Warrant Shares" and the exercise price of
a share of Common Stock in effect at any time and as adjusted from time to time
is hereinafter sometimes referred to as the "Exercise Price".
(a) EXERCISE OF WARRANT. This Warrant may be exercised by presentation
and surrender hereof to the Company at its principal office or to the Company's
warrant agent, if any has been so appointed, with the Purchase Form annexed
hereto duly executed and accompanied by payment of the Exercise Price, in cash
or by certified or bank cashier's check, for the number of Warrant Shares
specified in such form. As soon as practicable after each such exercise of the
Warrants, the Company shall issue or cause to be issued and delivered to the
Holder a certificate or certificates for the Warrant Shares issuable upon such
exercise, registered in the name of the Holder. The Warrant shall be deemed to
have been exercised immediately prior to the close of business on the date of
any such exercise, provided such exercise is in accordance with the provisions
set forth herein. If this Warrant should be exercised in part only, the Company
shall, upon surrender of this Warrant for cancellation, execute and deliver a
new Warrant evidencing the rights of the Holder thereof to purchase the balance
-3-
<PAGE>
of the Warrant Shares purchasable thereunder. Upon receipt by the Company of
this Warrant at its office in proper form for exercise, the Holder shall be
deemed to be the holder of record of the shares of Common Stock issuable upon
such exercise, notwithstanding that the stock transfer books of the Company
shall then be closed or that certificates representing such shares of Common
Stock shall not then be physically delivered to the Holder. Holder shall be
entitled to a cashless exercise of the warrant, in whole or in part.
(b) RESERVATION OF SHARES. The Company shall at all times reserve for
issuance and/or delivery upon exercise of this Warrant such number of shares of
its Common Stock as shall be required for issuance and delivery upon exercise of
the Warrants.
(c) FRACTIONAL SHARES. No fractional shares or script representing
fractional shares shall be issued upon the exercise of this Warrant. If more
than one Warrant shall be exercised at one time by the Holder, the number of
full shares which shall be issuable upon exercise thereof shall be computed on
the basis of the aggregate number of full shares issuable upon such exercise.
-4-
<PAGE>
No adjustment shall be made in respect of cash dividends on Warrant Shares
delivered upon exercise of any Warrant. With respect to any fraction of a share
called for upon exercise hereof, the Company shall pay to the Holder an amount
in cash equal to such fraction multiplied by the average closing bid and asked
prices of the Common Stock on the last available date for which quotations are
available immediately preceding the date of exercise of this Warrant, or if the
bid and asked prices are not so reported, then the current market value shall be
an amount, not less than the book value thereof as at the end of the most recent
fiscal year of the Company ending prior to the date of the exercise of the
Warrant, determined in such reasonable manner as may be prescribed by the
Board of Directors of the Company.
(d) EXCHANGE OR LOSS OF WARRANT. This Warrant is exchangeable, without
expense, at the option of the Holder, upon presentation and surrender hereof to
the Company for other Warrants of different denominations entitling the holder
thereof to purchase in the aggregate the same number of shares of Common Stock
purchasable hereunder. This Warrant may be divided or combined with other
Warrants which carry the same rights upon presentation hereof at the principal
office of the Company with a written notice specifying the denominations in
-5-
<PAGE>
which new Warrants are to be issued and signed by the Holder hereof. The term
"Warrant" as used herein includes any Warrants into which this Warrant may be
divided or exchanged. Upon receipt by the Company or its warrant agent, if any,
of evidence satisfactory to it of the loss, theft, destruction or mutilation of
this Warrant, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Warrant, if mutilated, the Company will execute and deliver a new Warrant of
like tenor and date.
(e) RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be
entitled to any rights of a stockholder in the Company, either at law or equity,
and the rights of the Holder are limited to those expressed in the Warrant and
are not enforceable against the Company except to the extent set forth herein
and in any warrant agreement entered into by and between the Company and a
warrant agent with respect to the Warrants. In the event the Company enters into
a warrant agreement with a warrant agent, the terms of the Warrant shall be
embodied in the warrant agreement; and the acceptance of this Warrant by the
Holder shall be deemed consent by the Holder for the Company to enter into any
such warrant agreement, upon such terms and conditions mutually agreeable
-6-
<PAGE>
between the Company and any such warrant agent, provided such warrant agreement
does not adversely affect any of the rights of the Holder, as set forth in this
Warrant.
(f) ANTI-DILUTION PROVISIONS. After each adjustment of the Exercise
Price pursuant to this Section (f), the number of shares of Common Stock
purchasable upon the exercise of the Warrant shall be the number of Warrant
Shares receivable upon exercise thereof prior to such adjustment multiplied by a
fraction the numerator of which shall be the original Exercise Price as defined
above and the denominator of which shall be such adjusted Exercise Price. The
Exercise Price shall be subject to adjustment as set forth below:
(i) In case the Company shall hereafter (A) pay a dividend or
make a distribution on its Common Stock in shares of its capital stock (whether
shares of Common Stock or of capital stock of any other class), (B) subdivide
its outstanding shares of Common Stock, or (C) combine its outstanding shares of
Common Stock into a smaller number of shares, the Exercise Price in effect
immediately prior to such action shall be adjusted so that the Holder of any
Warrant thereafter exercised shall be entitled to receive the number of shares
-7-
<PAGE>
of capital stock of the Company which the Holder would have owned immediately
following such action had such Warrant been exercised immediately prior thereto.
An adjustment made pursuant to this subsection shall become effective
immediately after the record date in the case of a dividend and shall become
effective immediately after the effective date in the case of a subdivision.
(ii) No adjustment in the Exercise Price shall be required to be
made unless such adjustment would require an increase or decrease of at least
$.10; provided, however, that any adjustments which by reason of this subsection
are not required to be made shall be carried forward and taken into account in
any subsequent adjustment. All calculations under this Section (f) shall be made
to the nearest cent or to the nearest one-one hundredth of a share, as the case
may be, but in no event shall the Company be obligated to issue fractional
shares upon the exercise of any Warrant.
(iii) No adjustment of the Exercise Price shall be made except on
the conditions set forth in this Section (f). Without limitation to the
foregoing, there shall be no adjustment pursuant to this Section (f) should the
-8-
<PAGE>
Company issue any capital stock for cash or other consideration on terms
approved by the Board of Directors.
(iv) In case of any change of outstanding shares of Common Stock
issuable upon exercise of the Warrants (other than a change in par value or from
par value to no par value or from no par value to par value or as a result of a
subdivision or combination), or in case of any consolidation or merger of the
Company with or into another corporation (other than a merger with a Subsidiary
in which merger the Company is the continuing corporation and which does not
result in any reclassification or change of the then outstanding shares of
Common Stock or other capital stock issuable upon exercise of the Warrants other
than a change in par value or from par value to no par value or from no par
value to par value) or in the case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as an
entirety, then, as a condition of such change, consolidation, merger, sale or
conveyance, the Company, or such successor or purchasing corporation, as the
case may be, shall make lawful and adequate provision whereby the Holder of the
Warrant shall have the right thereafter to receive on exercise of such Warrant
-9-
<PAGE>
the kind and amount of shares of stock and other securities and property
receivable upon such reclassification, change, consolidation, merger, sale or
conveyance by a holder of the number of shares of Common Stock issuable upon
exercise of such Warrant immediately prior to such change, consolidation,
merger, sale or conveyance. Such provisions shall include provision for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided elsewhere in this Section (f). The above provisions of this
Section (f) shall similarly apply to successive consolidations, mergers, sales
or conveyances.
(v) Before taking any action which would cause an adjustment
reducing the Exercise Price below the then par value of the shares of Common
Stock issuable upon exercise of the Warrants, the Company will take any
corporate action which may, in the opinion of its counsel, be necessary in order
that the Company may validly and legally issue fully paid and non-assessable
shares of the Company at such adjusted Exercise Price.
(g) PIGGYBACK REGISTRATION RIGHTS. If, at any time while any Warrant
Shares (as hereinafter defined) are outstanding, the Company shall file a
registration statement (other than on Form S-4, Form S-8, any other form that
-10-
<PAGE>
does not permit secondary sales or any successor form) with the Securities and
Exchange Commission (the "Commission"), the Company shall give all the then
holders of any Warrant Shares (the "Eligible Holders") at least 30 days prior
written notice of the filing of such registration statement. If requested by any
Eligible Holder in writing within 30 days after receipt of any such notice and
if the Warrant Shares are eligible for registration under the registration
statement in question, the Company shall, at the Company's sole expense (other
than the fees and disbursements of counsel for the Eligible Holders and the
underwriting discounts, if any, payable in respect of the Warrant Shares sold by
any Eligible Holder), register or qualify all or, at each Eligible Holder's
option, any portion of the Warrant Shares of any Eligible Holder who shall have
made such request, concurrently with the registration of such other Warrant
Shares, all to the extent requisite to permit the public offering and sale of
the Warrant Shares through the facilities of all appropriate securities
exchanges and the over-the-counter market, and will use its best efforts through
its officers, directors, auditors and counsel to cause such registration
statement to become effective as promptly as practicable.
Notwithstanding the foregoing, if the managing underwriter of any such
offering shall advise the Company in writing that, in its opinion, the
-11-
<PAGE>
distribution of all or a portion of the Warrant Shares requested to be included
in the registration concurrently with the securities being registered by the
Company would materially adversely affect the distribution of such securities by
the Company for its own account, then any Eligible Holder who shall have
requested registration of his or its Warrant Shares shall delay the offering and
sale of such Warrant Shares (or the portions thereof so designated by such
managing underwriter) for such period, not to exceed 90 days (the "Delay
Period"), as the managing underwriter shall request. As used herein, "Warrant
Shares" shall mean the shares issued or issuable upon exercise or conversion of
a Warrant to Purchase Shares of Common Stock of the Company (including any
warrants issued upon the exercise or transfer of any such warrants in whole or
in part) issued to the Eligible Holders, which, in each case, have not been
previously sold pursuant to a registration statement or Rule 144 promulgated
under the Act. In addition to the foregoing, at such time that the Company
becomes eligible to register the Warrant Shares on Form S-3, the Company shall
do so and maintain the effectiveness of such Registration Statement until such
time as the Warrant Shares have been sold or can be sold pursuant to Rule
144(k). Any such registration shall be entirely at the Holder's expense.
-12-
<PAGE>
(h) INVESTMENT REPRESENTATION. By accepting this Warrant, the Holder
acknowledges that it is being taken for his own account as principal, for
investment purposes only, and not with a view to, or for, resale, distribution
or fractionalization thereof, in whole or in part, and no other person has a
direct or indirect beneficial interest in such Warrant and such Warrant may only
be transferred, subject to compliance with the legend set forth on the first
page. Unless the shares issuable upon the exercise of this Warrant are
registered under the Securities Act of 1933, as amended (the "Act"), the Holder,
upon exercise of this Warrant will be required to provide the Company with an
investment letter and the certificates representing such shares will contain a
legend to the effect that the Holder may not transfer, sell, pledge or
hypothecate such shares unless the registration provisions of the Act have been
complied with and unless the Company has received an opinion of counsel that
such registration is not required.
(i) NOTICES. All notices and other communications which are required or
may be given under this Warrant shall be in writing and shall be deemed to have
been duly given when delivered in person or transmitted by telex or three (3)
days after being mailed, postage prepaid, in the case of the Company to Wayne
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<PAGE>
Interchange Plaza II, 155 Route 46 West, Wayne, NJ 07470, and in the case of the
Holder to the address set forth herein, or to such other address as such party
shall have specified by notice to the other party hereto. If notice is given by
registered or certified first class mail, postage prepaid, return receipt
requested, the return receipt shall be conclusive evidence of the notice having
been mailed on the date set forth.
(j) MISCELLANEOUS. This Agreement contains the entire Agreement and
supersedes all prior agreements and understandings, oral or written, between the
parties hereto with respect to the subject matter hereof. This Warrant may not
be changed orally, but only by an agreement in writing signed by the party
against whom any waiver, change, amendment, modification or discharge is sought,
provided however, that this Warrant may be amended or modified without the
consent of the Holder if such amendment or modification does not adversely
affect the rights of the Holder hereunder. This Agreement will not be assigned
by either party hereto and shall be interpreted under the laws of the State of
New Jersey without application to the principles of conflicts of laws.
-14-
<PAGE>
PICK COMMUNICATIONS CORP.
By: /s/ Robert Bingham
-----------------------------------
[SEAL] Robert Bingham
Vice-President - Finance
and Chief Financial Officer
Dated: February 12, 1998
Attest:
/s/ Raymond Brennan
- ---------------------------
Raymond Brennan
Secretary
-15-
<PAGE>
PURCHASE FORM
Dated ______________, 19__
The undersigned hereby irrevocably elects to exercise the within
Warrant to the extent of purchasing __________________ shares of Common Stock
and hereby makes payment of in payment of _______________ the actual exercise
price thereof.
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name ___________________________________________________________________________
(Please typewrite or print in block letters)
Address ________________________________________________________________________
Signature ______________________________________________________________________
-16-
<PAGE>
DISTRIBUTOR AGREEMENT
THIS DISTRIBUTOR AGREEMENT is made on this 11th day of February, 1998, by and
between PICK, INC., (hereinafter "PICK") a New Jersey Corporation, located at
Wayne Interchange Plaza 11, 155 Route 46 West, Third Floor, Wayne, NJ 07470, and
BLACKSTONE CALLING CARD, INC.
(hereinafter "DISTRIBUTOR"), located at 7900 N. W. 36th Street, Second Floor,
Miami, Florida 33166.
WHEREAS, PICK is engaged in the business of marketing telecommunications
services, long distance access lines, and other communications products; and
WHEREAS, DISTRIBUTOR is engaged in the business of distributing prepaid
telephone calling cards to an established network of retail outlets for the
purpose of resale to the general public; and
WHEREAS, PICK and DISTRIBUTOR desire to enter into a non-exclusive
distributorship whereby DISTRIBUTOR agrees to market specific prepaid telephone
calling cards;
NOW, THEREFORE, the parties, intending to be legally bound, agree as follows:
1. Subject to the terms and conditions of this Agreement, PICK grants to
DISTRIBUTOR and DISTRIBUTOR accepts a non-exclusive license to market the
specific prepaid telephone calling cards herein delineated to retail customers
as per Attachment A attached hereto. PICK agrees, however, that PICK will grant
DISTRIBUTOR "most favored nation's" pricing as compared with pricing to any
competitor of DISTRIBUTOR that is purchasing from PICK on the same terms and
conditions as set forth herein, including the same volume per month at the same
discount.
2. DISTRIBUTOR agrees that it will not publish or cause to be published, any
statement, or encourage or approve any advertising or practice, which might
mislead or deceive any third parties or might be detrimental to the good name,
service marks, trademarks, good will or reputation of PICK or PICK's products
and/or services. DISTRIBUTOR shall print at his own cost all prepaid telephone
calling cards, Point of Sale materials, advertising and promotional materials,
packaging, etc. Design and format of the specific prepaid telephone calling
cards and collateral materials must be provided by DISTRIBUTOR to PICK and
approved in writing by PICK prior to the undertaking of any printing or
production. Such approval, however, shall not
<PAGE>
DISTRIBUTOR AGREEMENT
PAGE 2
be unreasonably withheld or delayed. DISTRIBUTOR agrees that wording and network
provider logos to appear on the reverse side of the prepaid telephone calling
cards will be supplied entirely by PICK and will be printed as provided.
Further, DISTRIBUTOR agrees that the network provider named in the legend
stating that "Network services provided by PICK Communications Corp." will never
be duplicated on any product not supported by PICK.
3. Prices, Ordering, Activation and Payment Terms are detailed in Attachment B
which is attached hereto and is hereby made a part of this Agreement.
DISTRIBUTOR hereby agrees that it will initially distribute its prepaid
telephone cards only in the States where PICK is authorized to do business and
has filed tariffs. Such states are listed in Exhibit A attached hereto and made
a part hereof. If DISTRIBUTOR wishes to sell in any other states, DISTRIBUTOR
shall notify PICK and PICK shall seek to register in such state and file the
appropriate tariff at DISTRIBUTOR's sole cost and expense.
4. The relationship contemplated by this Agreement is one of independent
contractors pursuant to which PICK shall provide and DISTRIBUTOR shall market
specific prepaid telephone calling cards to various retailers; no other
relationship between the parties is intended to be created or is created herein.
5. The initial term of this Agreement shall commence on or before March 15, 1998
and shall continue for two (2) years and shall be automatically renewed for
additional consecutive contract periods of one (1) year each unless terminated.
Notwithstanding the foregoing, either PICK or DISTRIBUTOR shall have the right
to terminate this Agreement for any reason whatsoever at end of any year during
the Term hereof by giving the other party sixty (60) days prior written notice;
provided, however, that the conditions, representations, warranties and
indemnifications contained in this Agreement shall survive such termination.
6. DISTRIBUTOR and PICK hereby warrant and represent to each other that each
will hold in confidence such information as PICK or DISTRIBUTOR designates as
Confidential in writing to the other including, but not limited to, trade
secrets, competitively sensitive information such as customer lists, cost data,
commission schedules, etc., technical information and information of a
proprietary nature or not known generally by the public.
7. DISTRIBUTOR will protect, indemnify and hold harmless PICK and its directors,
officers and employees, from any and all liability, damage, loss or expense
(including reasonable attorney's fees) arising out of any act or omission of
DISTRIBUTOR or any of its agents or employees relating to any breach of its
obligations or any warranty or representation made to PICK in this Agreement.
Likewise, PICK will indemnify and hold harmless DISTRIBUTOR and its directors,
officers and employees, from any and all liability, damage, loss or expense
(including reasonable attorney's fees) arising out of any act or omission of
PICK relating to any breach of its obligations or any warranty or representation
made to DISTRIBUTOR in this Agreement.
8. PICK will use reasonable efforts under the circumstances to maintain overall
network quality. The quality of service provided hereunder shall be consistent
with other common carrier
<PAGE>
DISTRIBUTOR AGREEMENT
PAGE 3
industry standards, government regulations and sound business practices. If
DISTRIBUTOR is receiving legitimate complaints from its Retailers about PICK's
network quality it shall inform PICK thereof immediately in writing (via Fax)
giving the country in question as well as as many particulars as possible. PICK
shall have twenty (20) days to remedy the situation and, if PICK does not cure
the problem within the twenty (20) days, DISTRIBUTOR shall have the right to
cancel this Agreement. PICK MAKES NO OTHER WARRANTIES ABOUT THE SERVICE PROVIDED
HEREUNDER, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO, ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE.
9. A waiver by either party of any of the terms and conditions of this Agreement
in any instance shall not be deemed or construed to be a waiver of such term or
condition for the future, or of any subsequent breach thereof. If any provision
of this Agreement, as applied to either party or to any circumstance, shall be
either void or unenforceable, the same shall in no way affect any other
provision of this Agreement or the validity or enforceability of this Agreement.
10. All notices required to be given hereunder shall be deemed given when
delivered personally or sent by facsimile with a copy by registered mail or
overnight carrier (such as Federal Express), charges pre-paid, as follows:
PICK, INC. Blackstone Calling Card, Inc.
Wayne Interchange Plaza 11 7900 N. W. 36th Street, 2nd Floor
155 Route 46 West, Third Floor Miami, FL 33166
Wayne, NJ 07470 ATTN: Luis Arias, President
ATTN: Diego Leiva, President FAX: (305) 592-6691
FAX: (973) 812-4181
With a copy to: Brian Fink, Esq.
169 E. Flagler St., Suite 1700
Miami, FL 33131
FAX: (305) 371-8011
Notices shall include change of address and change of bank.
11. DISTRIBUTOR, without the written consent of PICK, shall not assign, transfer
or encumber any of its rights or obligations under this Agreement; providing,
however, that such consent shall not be unreasonably withheld or delayed if such
assignment, transfer or encumbrance is to a company wholly owned or controlled
by DISTRIBUTOR. Any attempt to assign, transfer or encumber any of Distributor's
rights or obligations hereunder, without the consent of PICK, shall be void and
of no effect.
12. Except as set forth in Paragraph 8 above and Paragraph 7 of Attachment B
hereto, this Agreement and the relationship of the parties may be terminated by
the non-defaulting party in accordance with applicable provision hereof and/or
the occurrence of any of the following events which shall constitute a default:
<PAGE>
DISTRIBUTOR AGREEMENT
PAGE 4
(A) Material breach of this Agreement after notice thereof and failure
of the breaching party to cure such breach: (1) within three (3) days of receipt
of such notice where such breach involves a failure to make payments when due
and (ii) within twenty (20) days of receipt of such notice for all other
breaches; and
(B) The adjudication of bankruptcy of either party under any Federal,
state or municipal bankruptcy or insolvency act, or the appointment of a
receiver or any act or action constituting a general assignment by a party of
its properties and interest for the benefit of creditors.
13. This Agreement shall be construed in accordance with the laws of the State
of New Jersey. This Agreement constitutes the entire understanding between the
parties and may not be changed or modified, nor may any of the terms hereof be
waived, except in writing signed by both parties.
IN WITNESS HEREOF, this Agreement has been duly executed by the parties as of
the date first above written.
DISTRIBUTOR:
PICK, INC. BLACKSTONE CALLING CARD, INC.
By: /s/ Raymond M. Brennan By: /s/ Luis Arias
----------------------- -----------------------------------
Raymond M. Brennan Luis Arias
Vice President President
65-0576903
----------
Federal Tax I.D. Number
<PAGE>
April 13, 1998
Mr. Luis Arias
President
Blackstone Calling Card, Inc.
7900 N.W. 36th St., Second floor
Miami, FL 33166
Dear Mr. Arias:
Reference is made to the Distributor Agreement between PICK, Inc. ("PICK") and
Blackstone Calling Card, Inc. ("Distributor") dated February 11, 1998.
Pursuant to Paragraph 13 of the referenced Agreement, PICK and Distributor
hereby agree to make the following changes in the Agreement:
A. Under Attachment B. in the Section entitled "Products and Ordering" in
Paragraph 1 change the words "ninety (90) day ramp-up period" to "one
hundred eighty (180) day ramp-up period commencing April 27, 1998:; and
in Paragraph 2 change the words "initial ramp-up period of ninety (90)
days" to "initial ramp-up period of one hundred eighty (180) days
commencing April 27, 1998".
B. Under Attachment B in the Section entitled "Activation" insert at the
beginning of Paragraph 2 "Activation shall commence no later than April
27, 1998".
C. Delete Exhibit B to the Agreement in its entirety and insert in lieu
thereof "Exhibit B Effective April 13, 1998" which is attached hereto
and hereby made a part of the Agreement and which contains Universal
Service Fees and Dial Around Compensation.
Except as set forth above, all the other terms and conditions of the Referenced
Distributor Agreement are hereby ratified and confirmed.
<PAGE>
If the foregoing has your approval, please sign in the space provided below and
return one (1) copy to my attention.
Sincerely,
PICK, INC.
By: /s/ Raymond M. Brennan
--------------------------------
Raymond M. Brennan
Vice President
ACCEPTED and AGREED:
BLACKSTONE CALLING CARD, INC.
By: /s/ Luis Arias
----------------------------------
Luis Arias, President
<PAGE>
PICK Communications Corp.
Wayne Interchange Plaza II
155 Route 46 West, Third Floor
Wayne, NJ 07470
Phone: 201 912 PICK (7425)
Fax: 201 812-4181
April 27, 1998
Mr. Luis Arias
Blackstone Calling Card, Inc.
Second Floor
7900 N. W. 36th Street
Miami, Florida 33166
Dear Mr. Arias:
Reference is made to the Distributor Agreement between PICK, Inc.
("PICK") and Blackstone Calling Card, Inc. ("Distributor") dated
February 11, 1998.
Pursuant to Paragraph 13 of the referenced Agreement, PICK and Distributor
hereby agree to make the following addition in the Agreement:
14. The parties hereby agree that any dispute between them shall be
resolved by binding arbitration conducted in Miami, Dade County,
Florida utilizing the American Arbitration Association. The proceeding
shall be governed by the Commercial Arbitration Rules of the American
Arbitration Association; provided, however, the parties stipulate and
agree that they will fully cooperate and take such actions as are
necessary to allow each party to conduct full discovery as provided for
by the Rules of Civil Procedure for the United States District Court,
including but not limited to Rules 26 through 37. Either party may
commence an action in a court of competent jurisdiction in Miami, Dade
County, Florida for the purpose of obtaining and enforcing the rights
to discovery as provided for in this Agreement.
<PAGE>
If the foregoing has your approval, please sign in the space provided below and
return one copy to my attention.
Sincerely,
PICK, INC.
By: /s/ Diego Lieva
---------------------------
Diego Lieva, President
Accepted and Agreed:
Blackstone Calling Card, Inc.
By: /s/ Luis Arias
------------------------------
Luis Arias, President
<PAGE>
RECIPROCAL TELECOMMUNICATIONS AGREEMENT
AGREEMENT made this 4th day of December, 1997 by and between GULFSAT
COMMUNICATIONS COMPANY (hereinafter "CUSTOMER"), P.O. Box 2400 Safat, Kuwait and
PICKNET, INC., located at 155 Route 46 West, Third Floor, Wayne, New Jersey
07470 (hereinafter "PICK").
WITNESSETH:
WHEREAS, PICK and Customer are in the business of providing telecommunications
services; and
WHEREAS, Customer desires to purchase telecommunications services from PICK and
PICK desires to purchase telecommunications services from Customer;
NOW THEREFORE, in consideration of the mutual promises and covenants contained
herein, and for other good and valuable consideration, the parties agree as
follows:
1. Services.
(A) PICK agrees to furnish to Customer, and Customer agrees to purchase from
PICK, the telecommunications services set forth in Exhibit A attached hereto.
(B) Customer agrees to furnish to PICK and PICK agrees to purchase from
Customer, the telecommunications services as set forth in Exhibit B attached
hereto.
(C) Interconnection between Customer and PICK, for purposes of performance
hereunder, shall occur as agreed between the parties.
(D) It is understood that all Services provided by the parties hereunder are
provided for resale by the other party to its end users, customers or
subscribers.
2. Terms. This Agreement shall commence on or before the 2nd day of January,
1998 (the "Commencement Date") and continue for a period of one (1) year. This
Agreement shall thereafter continue, on the same terms and conditions, on a
month-to-month basis unless either party notifies the other party in writing not
less than thirty (30) days prior to the termination date of its desire to
terminate this Agreement.
3. Rates.
PICK and Customer agree that each is granting the other most favorable price
per minute rates in the Exhibits attached to this Agreement as follows:
(A) During the term of this Agreement, PICK shall charge for the
telecommunications services, and Customer shall pay for such telecommunication
services, that amount as determined by using the appropriate rates set out in
Exhibit A.
<PAGE>
(B) During the term of this Agreement, Customer shall charge for the
telecommunication services, and PICK shall pay for such telecommunication
services, that amount as determined by using the appropriate rates set out in
Exhibit B.
(C) PICK and Customer shall have the right to modify the rates and conditions
set forth in Exhibits "A" and "B" at any time during this Agreement, but shall
give the other party at least seven (7) days prior notice. Both parties agree to
provide each other with initial traffic projections, by country, to the top ten
(10) countries they are interested in purchasing rates for from the other.
Thereafter each will provide such projections to the other on a quarterly basis.
Projections shall be given on the Forms attached as Exhibit 2A and 2B (to this
Agreement) respectively as appropriate.
(D) Billing shall include raw CDR (unrated) and completely rated summaries by
country showing number of calls, number of minutes and corresponding charges.
(E) All calls other than calls to Mexico, will be billed with a thirty second
minimum and thereafter in six-second increments rounded to the next highest
one-tenth of a minute per all record. Calls to Mexico are billed with a one
minute minimum and thereafter in one minute increments.
4. Charges and Payment Terms.
(A) PICK and Customer hereby acknowledge the charges for the provision of
Service will be billed as provided herein and that payment for such Service
shall be payable in U.S. dollars. For each weekly cycle during the term of this
Agreement, PICK and Customer will provide the other party with a faxed invoice
for Service provided. The invoice amounts billed and payable by PICK and
Customer during any weekly cycle shall be offset, and the party which has a
balance payable after such netting shall make payment to the other party on or
before the second (2nd) day of the following month. Late payments will be
assessed a late charge of 1.5% per month or the maximum amount permitted by law,
whichever is less. Payments shall be made by wire transfer or such other methods
as may be agreed by the parties.
(B) Should either PICK or Customer dispute any of the charges on the weekly
invoice, it shall notify the other party of the disputed charges not later than
thirty (30) days from the date of invoice. Said dispute shall set forth all
details concerning the disputed charges in writing. In the event of a dispute,
the entire invoice shall nevertheless be paid in accordance with the payment
terms set forth herein. After resolution of the disputed portion of the invoice,
the adjustments, if any, shall be immediately credited to the other party's
account.
(C) Each party hereby waives any deposit requirement from the other for
providing services under this Agreement.
5. Warranty. PICK and Customer will use reasonable efforts under the
circumstances to maintain overall network quality. The quality of Service
provided hereunder shall be consistent with
2
<PAGE>
other common carrier industry standards, government regulations and sound
business practices. PICK AND CUSTOMER MAKE NO OTHER WARRANTIES ABOUT THE SERVICE
PROVIDED HEREUNDER, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO, ANY
WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE.
6. Continuing Relationship and Termination. This Agreement and the relationship
of the parties may be terminated by the non-defaulting party in accordance with
applicable provision hereof and/or the occurrence of any of the following events
which shall constitute a default:
(A) Material breach of this Agreement after notice thereof and failure of the
breaching party to cure such breach: (i) within three (3) days of receipt of
such notice where such breach involves a failure to make payments when due and
(ii) within twenty (20) days of receipt of such notice for all other breaches;
(B) The adjudication of bankruptcy of either party under any Federal, state
or municipal bankruptcy or insolvency act, or the appointment of a receiver or
any act or action constituting a general assignment by a party of its properties
and interest for the benefit of creditors.
(C) The determination by any governmental entity having jurisdiction over the
Service provided under this Agreement that the relationship of the parties
and/or Services provided hereunder are contrary to then existing laws.
7. Taxes If Applicable. The parties acknowledge and understand that all charges
stated in attached Exhibits are computed exclusive of any applicable use,
excise, gross receipts, sales and privilege taxes, duties, fees or other similar
liabilities (other than general income or property taxes). Such Additional
Charges shall be paid by the party receiving services in addition to all other
charges provided for herein. All applicable taxes, duties, fees or other
liabilities shall be billed to the appropriate party by the other party unless
such party provides the other party with applicable tax exemption
documentation.. Each party is solely liable for and hereby indemnities and holds
the other party harmless from filing all applications, forms, reports, returns,
statements, and other documents and information with any payment of all taxes
and/or assessments to all local, county, state, federal, and other taxing
authorities having jurisdiction with respect to any and all charges to each
party's end users or customers for the services, including without limitation,
any governmental agency or authority in any foreign country.
8. Suspension of Services. In the event payment in full is not received from
either party when due, the other party shall have the right, after giving the
defaulting party two (2) days prior notice after the due date to suspend all or
any portion of the Service to the defaulting party until such time as such party
has paid in full all charges then due, including any late fees.
3
<PAGE>
9. Liability; General Indemnity.
(A) Limited Liability IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER
PARTY FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL LOSSES OR DAMAGES,
INCLUDING WITHOUT LIMITATION, LOSS OF REVENUE, LOSS OF CUSTOMERS OR CLIENTS,
LOSS OF GOODWILL OR LOSS OF PROFITS ARISING IN ANY MANNER FROM THIS AGREEMENT
AND THE PERFORMANCE OR NONPERFORMANCE OF OBLIGATIONS HEREUNDER.
THE LIABILITY OF PICK AND CUSTOMER WITH RESPECT TO THE INSTALLATION (INCLUDING
DELAYS THEREOF), PROVISION, TERMINATION, MAINTENANCE, REPAIR, INTERRUPTION, OR
RESTORATION OF ANY SERVICE OR FACILITIES OFFERED UNDER THIS AGREEMENT SHALL NOT
EXCEED AN AMOUNT EQUAL TO THE CHARGE APPLICABLE UNDER THIS AGREEMENT TO THE
PERIOD DURING WHICH SERVICES WERE AFFECTED. FOR THOSE SERVICES WITH MONTHLY
RECURRING CHARGES, THE LIABILITY OF EITHER PARTY IS LIMITED TO AN AMOUNT EQUAL
TO THE PROPORTIONATE MONTHLY RECURRING CHARGES FOR THE PERIOD DURING WHICH
SERVICE WAS AFFECTED.
(B) General Indemnity. In the event parties other then PICK and Customer
shall have use of the Service, then PICK and Customer agree to forever indemnify
and hold each other harmless from and against any and all claims, demands,
suits, actions, losses, damages, assessments or payments which may be asserted
by said parties arising out of or relating to any defect in the Service.
10. Force Majeure. If either party's performance of this Agreement or any
obligation hereunder is prevented, restricted or interfered with by causes
beyond its reasonable control including, but not limited to, acts of God, fire,
explosion, vandalism, cable cut, storm or other similar occurrence, any law,
order, regulation, direction, action or request of the United States government
or state or local governments, or of any department, agency, commission, court,
bureau, corporation or other instrumentality of any one or more said
governments, or of any civil or military authority, or by national emergency,
insurrection, riot, war, strike, lockout or work stoppage or other labor
difficulties, supplier failure, shortage, breach or delay, then such party shall
be excused from such performance on a day-to-day basis to the extent of such
restriction or interference. Such party shall notify the other and use
reasonable efforts under the circumstances to avoid or remove such causes of
nonperformance and shall proceed to perform with reasonable dispatch whenever
such causes are removed or cease. This provision shall not, however, relieve
either party from making any payment when due.
11. Notices. All notices pursuant to this Agreement shall be deemed given when
delivered personally or sent by registered mail or facsimile or overnight
carrier (such as Federal Express), charges prepaid, as follows:
4
<PAGE>
PICKNET, INC. GULFSAT COMMUNICATIONS COMPANY
155 Route 46 West, Third Floor P.O. Box 2400
Wayne, NJ 07470 Safat, Kuwait
FAX: (973) 812-4181 FAX: 965-240-2200
FAX: (973) 812-4181 Attn: Jaafar S. Najdi,
Att: Diego Leiva, President Executive Director
Notice of change of address shall also be governed by this Paragraph.
12. No-Waiver. No term or provision of this Agreement shall be deemed waived and
no breach or default shall be deemed excused unless such waiver or consent shall
be in writing and signed by the party claimed to have waived or consented. No
consent by any party to, or waiver of, a breach or default by the other, whether
express or implied, shall constitute a consent to, waiver of, or excuse for any
different or subsequent breach or default.
13. Partial Invalidity. If any term or provision of this Agreement shall be
found to be illegal or unenforceable, then notwithstanding such illegality or
unenforceability, this Agreement shall remain in full force and effect and such
terms or provision shall be deemed to be deleted.
14. Exclusive Remedies. Except as otherwise specifically provided for herein,
the remedies set forth in this Agreement comprise the exclusive remedies
available to either party at law or in equity.
15. Use of Service. PICK and Customer agree to provide the Service specified
hereunder upon condition that the Service shall not be used for any unlawful
purpose. The provision of Service will not create a partnership or joint venture
between the parties or result in a joint communication service offering to any
third party.
16. Choice of Law. This Agreement shall be construed in accordance with the laws
of the State of New Jersey. However, any controversy or claim arising out of the
parties, or breach which has not been cured, shall be settled by binding
arbitration in accordance with Commercial Arbitration Rules of the American
Arbitration Association and judgment upon the award of the Arbitrators may be
entered in any court having jurisdiction.
17. Proprietary Information.
(A) Confidential Information. The parties understand and agree that the terms
and conditions of this Agreement, and documents referred (including invoices to
Customer for Service provided hereunder) herein, communications between the
parties regarding this Agreement or the Service to be provided hereunder
(including price quotes to Customer or PICK for any Service proposed to be
provided or actually provided hereunder) and all information regarding the
customers of Customer or PICK, as well as such information relevant to any other
agreements between the parties (collectively "Confidential Information"), are
confidential as between Customer and PICK.
(B) Limited Disclosure. A party shall not disclose Confidential Information
unless subject
5
<PAGE>
to discovery or disclosure pursuant to legal process, or unless required by the
SEC since both parties are public corporations, or to any other party other than
the directors, officers, and employees of a party or agent's of a party
including their respective brokers, lenders, insurance carriers or prospective
purchasers of the party's business who have specifically agreed in writing to
nondisclosure of the terms and conditions hereof. Any disclosure hereof required
by legal process shall only be made after providing the non-disclosing party
with notice thereof in order to permit the non-disclosing party to seek an
appropriate protective order or exemption. Likewise, each party will give notice
of any disclosure to the SEC to the other party. Violation by a party or its
agents of the foregoing provision shall entitle the non-disclosing party, at its
option, to obtain injunctive relief without a showing of irreparable harm or
injury and without bond.
(C) Press Releases. The partied further agree that any press release,
advertisement or publication generated by a party regarding this Agreement, the
Service provided hereunder or in which a party desires to mention the name of
the other party's parent or affiliated company(ies), will be submitted to the
non-publishing party for its written approval prior to publication.
(D) Survival and Confidentiality. The provisions of this Paragraph will
be effective as of the date of this Agreement and remain in full force and
effect for a period equal to the longer of (i) five (5) years following the
effective date of this Agreement; or (ii) five (5) years following the
termination of all Service hereunder.
18. Successors and Assignment. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors or assigns,
provided, however, that neither party shall assign or transfer its rights or
obligations under this Agreement without the prior written consent of the other
party, which shall not unreasonably be withheld and further provided that any
assignment or transfer without such consent shall be void.
19. General.
(A) Survival of Terms. The terms and provisions contained in this Agreement
that by their sense and context are intended to survive the performance thereof
by the parties hereto shall so survive the completion of performance and
termination of this Agreement, including, without limitation, provision for
indemnification and the making of any and all payments due hereunder.
(B) Headings. Descriptive headings in this Agreement are for convenience only
and shall not affect the construction of this Agreement.
(C) Industry Terms. - Words having well-known technical or trade meanings
shall be so construed, and all listings of items shall not be taken to be
exclusive, but shall include other items, whether similar or dissimilar to those
listed, as the context reasonably requires.
(D) Rule of Construction. No rule of construction requiring interpretation
against the draftsman hereof shall apply in the interpretation of this
Agreement.
6
<PAGE>
20. Entire Agreement. This Agreement consists of all of the terms and conditions
contained herein; in executed Service Schedules that are identified herewith;
and in documents incorporated herein specifically by reference. This Agreement
constitutes the complete and exclusive statement of the understandings between
the parties and supersedes all proposals and prior agreements (oral or written)
between the parties relating to Service provided hereunder. No subsequent
agreement between the parties concerning the Service shall be effective or
binding unless it is made in writing and subscribed to by authorized
representatives of Customer and PICK.
ACCEPTED and AGREED:
PICKNET, INC. GULFSAT COMMUNICATIONS COMPANY
By: /s/ Diego Leiva By: /s/ Jaafar S. Najdi
------------------------- -----------------------------------
Diego Leiva, President Jaafar S. Najdi, Executive Director
7
<PAGE>
PICKNET, INC.
Wayne Interchange Plaza II
155 Route 46 West, 3rd Floor
Wayne, NJ 07470
Phone: (973) 812-7425
Fax: ( 973) 812-4181
March 7, 1998
Mr. Jaafar S. Najdi
Executive Director
Gulfsat Communications Company
P.O. Box 2400
Safat, Kuwait
Dear Mr. Najdl:
Reference in made to the Reciprocal Telecommunications Agreement between Gulfsat
Communications Company and PICKNET, Inc. dated December 4,1997.
Per Paragraph 20 of the Referenced Agreement, you and we hereby agree to the
following changes:
A. Delete Paragraph 2, in its entirety, and insert in lieu thereof the
following:
"2. Term. This Agreement shall commence on or before the lst day of
March, 1998 (the "Commencement Date") and continue for a period of five (5)
years. This Agreement shall thereafter continue, on the same terms and
conditions, on a year to year basis unless either party notifies the other
party, in writing, not less than one hundred and eighty (180) days prior to the
termination date of its desire to terminate this Agreement."
B. Under Paragraph 3 insert the following subparagraph:
"(F) Gulfsat Communications Company hereby agrees to offer its rates to
the Middle East, Africa and Asia on an exclusive basis in the U. S.
solely to PICKNET, Inc. for the Term of this Agreement. Accordingly, if
Gulfsat is contacted by any parties in the United States for rates to
the Middle East, Africa or Asia, Gulfsat shall refer all such inquiries
to PICKNET. If PICKNET is contacted from above territory, it will
discuss such inquiries with Gulfsat.
C. Under Paragraph 4 delete subparagraph (A), in its entirity, and insert in
lieu thereof the following:
"(A) PICK and Customer hereby acknowledge the charges for the provision
of Service will be billed on a monthly basis as provided herein and
that payment for such
<PAGE>
Service shall be payable in U. S. dollars. For each weekly cycle during
each month of the Term of this Agreement, PICK and Customer will
provide the other party with a faxed Invoice for Service provided. The
Invoice amounts billed and payable by PICK and Customer during any
Weekly cycle shall be offset, and the party which has a balance payable
after such netting at the end of each month shall make payment to the
other party on or before the thirtieth (30th) day of the following
month. Late payments will be assessed a late charge of 1.5% per month
or the maximum amount permitted by law, whichever is less. Payments
shall be made by wire transfer."
Also under Paragraph 4, in the Subparagraph (B), in the third line, add the word
"monthly" in front of the word "Invoice" at the end of the first sentence.
D. Under Paragraph 17 in subparagraph A, in the second line add the words "or
PICK" after the word "Customer".
Also, under Paragraph 17 in subparagraph D, in the third line after the word
"of" change "(l) five (5) years" to "(l) ten (10) years".
Except as set forth above, all the other terms and conditions of the Referenced
Agreement are hereby ratified and confirmed.
If the foregoing has your approval, please sign in the space provided below and
return one (1) signed copy to my attention.
PICKNET, INC.
By: /s/ Diego Leiva
------------------------------
Diego Leiva
President
ACCEPTED and AGREED:
GULFSAT COMMUNICATIONS COMPANY
By: /s/ GULFSAT COMMUNICATIONS COMPANY
-------------------------------------
<PAGE>
Note
$500,000 April 2, 1998
For value received, the undersigned, PICK COMMUNICATIONS CORP, a Nevada
corporation having an address at Wayne Interchange Plaza II, 155 Route 46 West,
Third Floor, Wayne, New Jersey 07470 (the "Borrower") hereby promises to pay to
the order of Wolfson Equities, One State Street, 29th Floor, New York, New York
10006 (the "Payee"), the principal sum of Five Hundred Thousand Dollars
($500,000), on the earlier of (i) July 1, 1998 and (ii) the date which is three
(3) business days following the date on which the Borrower and/or its
subsidiaries receives, in aggregate, financing in an amount of gross proceeds of
at least $5,000,000, together with all accrued interest through and including
the date of payment. Interest shall be payable at a rate per annum (computed for
actual days elapsed on the basis of a 365-day year) of ten percent (10%). The
Borrower may prepay this Note at any time prior to the due date hereof, in full,
without premium or penalty.
All indebtedness outstanding under this Note after maturity, including accrued
interest, shall bear interest (computed in the same manner as interest on this
Note prior to maturity at the rate of eighteen (18%) percent per annum, and such
interest shall be payable on demand.
Payments of both principal and interest on this Note are to be made at the
office of the Payee at One State Street, 29th Floor, New York, New York 10006 or
such other place as the holder hereof shall designate to the Borrower in
writing, in lawful money of the United States of America in immediately
available funds.
The borrower shall pay reasonable costs and expenses of collection, including,
without limitation, reasonable attorneys' fees and disbursements in the event
that any action, suit or proceeding is brought by the holder hereof to collect
this Note and either the holder obtains a judgment in its favor that is not
appealed from or is upheld on appeal, or such action, suit or proceeding is
settled with any sum due and owing to the holder as a result of such settlement.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO
ITS RULES PERTAINING TO CONFLICT OF LAWS.
THE BORROWER IRREVOCABLY CONSENTS THAT ANY LEGAL ACTION OR PROCEEDING AGAINST IT
UNDER, ARISING OUT OF OR IN ANY MANNER RELATING TO THIS NOTE MAY BE BROUGHT IN
ANY COURT OF THE STATE OF NEW YORK, COUNTY OF NEW YORK, OR IN THE UNITED STATES
DISTRICT COURT FOR THE STATE OF NEW YORK. THE BORROWER, BY THE EXECUTION AND
DELIVERY OF THIS NOTE, EXPRESSLY AND IRREVOCABLY ASSENTS AND SUBMITS TO THE
PERSONAL JURISDICTION OF SUCH COURT IN ANY SUCH ACTION OR PROCEEDING. BY ITS
ACCEPTANCE OF THIS NOTE BY THE HOLDER AND BY THE EXECUTION HEREOF BY THE
BORROWER, EACH AGREES THAT ANY AND ALL LEGAL ACTION RELATING TO THIS NOTE SHALL
BE BROUGHT, AND MAINTAINED, ONLY IN SUCH COURTS. THE BORROWER FURTHER
IRREVOCABLY CONSENTS TO THE SERVICE OF
1
<PAGE>
ANY COMPLAINT, SUMMONS, NOTICE OR OTHER PROCESS RELATING TO ANY SUCH ACTION OR
PROCEEDING BY DELIVERY THEREOF TO IT AT THE ADDRESS SET FORTH ABOVE OR SUCH
OTHER ADDRESS AS THE BORROWER SHALL HAVE THERETOFORE NOTIFIED THE HOLDER HEREOF
IN WRITING OR IN ANY OTHER MANNER PERMITTED BY LAW. IN THE EVENT SERVICE ON THE
BORROWER IS EFFECTED AS SET FORTH IN THE PRECEDING SENTENCE, THE BORROWER HEREBY
EXPRESSLY AND IRREVOCABLY WAIVES ANY CLAIM OR DEFENSE IN ANY SUCH ACTION OR
PROCEEDING BASED ON ANY ALLEGED LACK OF PERSONAL JURISDICTION, IMPROPER VENUE,
FORUM NON CONVENIENS, OR ANY SIMILAR BASIS. THE BORROWER SHALL NOT BE ENTITLED
IN ANY ACTION OR PROCEEDING TO ASSERT ANY DEFENSE GIVEN OR ALLOWED UNDER THE
LAWS OF ANY STATE OTHER THAN THE STATE OF NEW YORK UNLESS SUCH DEFENSE IS ALSO
GIVEN OR ALLOWED BY THE LAWS OF THE STATE OF NEW YORK.
PICK Communications, Corp.
By: /s/ Robert S. Bingham
-------------------------------------------
Robert S. Bingham
Vice President and Chief Financial Officer
2
<PAGE>
April 2, 1998
Wolfson Equities
One State Street, 29th Floor
New York, Now York 10006
("Bridge Lender")
Re: Bridge Loan to PICK Communications, Corp.
Dear Bridge Lender:
This letter agreement will confirm our understanding and agreement with respect
to the proposed bridge loan (the "Bridge Loan") in the principal amount of
$1,000,000 to be made by you and certain others (the "Lenders," or individually,
the "Lender") to the undersigned, PICK Communications, Corp., a Nevada
corporation (the "Borrower"), and is entered into in order to induce you to make
the Bridge Loan and in consideration therefor, as follows:
1. The Bridge Loan made by you will be evidenced by promissory notes of
the Company, dated the date hereof (the "Notes") payable to each
Lender, in the aggregate principal amount of $1,000,000 bearing
interest at 10% per annum, with principal and interest due and payable
in full on the earlier of (a) July 1, 1998 or (b) the date which is
three (3) business days following the receipt by the Company and/or its
subsidiaries of financing aggregating at least $5,000,000 (the
"Maturity Date").
2. The Bridge Loan will be disbursed in immediately available funds by
wire transfer to the following account:
Chase Manhattan Bank
57 Diamond Spring Road
Denville, NJ 07834
Routing # 021 000 021
For account of Picknet, Inc.
Account # 6002 004726
3. In consideration for the loan, the Company shall issue to the Bridge
Lenders an aggregate of warrants to purchase 1,000,000 shares of the
Company's common stock at a price of $0.35 per share for a period
terminating three years from the date hereof. The Company agrees to
provide piggyback registration rights for the shares underlying the
warrants and the warrants shall contain reasonable and standard
cashless exercise provisions.
4. In the event that the Company has not paid to the Bridge Lender all
principal and interest due and owing on or prior to the Maturity Date,
the Borrower shall be in default of the Note and:
a) The interest on all principal and accrued interest shall become
18%.
<PAGE>
b) The Borrower shall, at its option, have the right to convert the
Note (principal and accrued interest) into common stock of the
Borrower at a price which is equal to the sum of (a) $0.25 per
share and (b) 50% of the closing bid price for the Borrower's
common stock for that day immediately prior to the Lender's
notice of conversion. Such conversion option shall commence upon
the Borrower's default under the Note. This conversion option,
and any other rights of the Lender upon default, do not limit or
compromise the Bridge Lender's other remedies, including those
set forth in the other provisions of this Agreement, the Note or
the law.
(i) If following a default and the vesting of the Lender
conversion option, the Borrower makes payment in full
on its financial obligations under the Note, the
Lender may, within 30 days following receipt of such
payment, return all such funds to the Borrower and
exercise the conversion rights which accrued to the
Note upon such default.
(ii) The conversion of the Note shall be deemed to have
been made immediately prior to the close of business
on the date (each an "Exercise Date") of the
surrender to the Company for exercise of the Note.
Such conversion, evidenced in writing, shall be
executed by the Bridge Lender or his attorney duly
authorized in writing and shall be delivered to the
Company at its corporate offices located at Wayne
Interchange Plaza II, 155 Route 46 West, Third Floor,
Wayne, N.J. 07470 (the "Corporate Office"), or at any
such other office or agency as the Company may
designate.
(iii) The person entitled to receive the number of shares
deliverable on conversion shall be treated for all
purposes as the holder of such shares as of the close
of business on the Exercise Date. The Company shall
not be obliged to issue any fractional share interest
in shares issuable or deliverable on such conversion
and such fractional shares shall be of no value
whatsoever.
(iv) Within ten days after the conversion date, the
Company, at its own expense, shall cause to be issued
and delivered to the person or persons entitled to
receive the same, a certificate or certificates in
the name requested by the Bridge Lender for the
number of shares deliverable on such conversion. No
adjustment shall be made in respect of cash dividends
on shares delivered on such conversion. All shares of
Common Stock delivered upon such conversion shall be
validly issued, fully paid and non-assessable, and
shall be free of all taxes, liens and charges with
respect to the issuance thereof.
(v) The Borrower agrees to provide piggyback registration
rights for the shares received upon conversion.
(vi) The Borrower shall, at all times, reserve for
issuance and/or delivery upon conversion of the Notes
such number of shares of its Common Stock as shall
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<PAGE>
be required for issuance and delivery upon conversion
of the Notes (inclusive of accrued interest).
5. The Lenders shall have no obligation to make the Bridge Loan unless and
until the following conditions precedent have been satisfied in the
sole judgment of the Lenders:
a) The Notes and the Warrants shall have been executed and
delivered and all other legal matters related to the Bridge
Loan have been satisfied;
b) All legal matters relating to the Bridge Loan shall be
reasonably satisfactory to counsel to the Lenders.
6. The Company represents to the Lenders that this letter agreement (the
"Agreement"), the Notes and Warrant Certificates have been duly
executed by it, have been duly authorized by all necessary corporate
action on the part of the Company, constitute the valid and legally
binding obligation of the Company, enforceable in accordance with their
terms except as such enforceability may be limited by laws of
bankruptcy, fraudulent conveyance, creditors rights or principles of
equity, and are not inconsistent with the term of the Company's
certificate of incorporation or by-laws, and that the execution,
delivery and performance of the Agreement, the Notes and the Warrants
do not and will not breach or result in a default under any agreement
to which the Company is a party.
7. Representations and Warranties of the Lender. Each Lender represents
and warrants to the Company as follows:
a) The Lender has received, read and understands the materials
provided by the Company. Further, the Lender has had such
opportunity to ask questions of and to receive answers from
the Company, or an agent of the Company, concerning the terms
and conditions of the investment and the business and affairs
of the Company, and to verify such information as the Lender
considers necessary or advisable in order to form a decision
concerning an investment in the Company.
b) The Note being issued to such Lender is being acquired for
investment for the Lenders own account and not with the view
to, or for resale in connection with, any distribution or
public offering hereof. The Lender understands that none of
the securities of the Company have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), or
any state securities laws by reason of contemplated issuance
in transaction exempt from the registration requirements of
the Securities Act and applicable state securities laws and
that the reliance of the Company and others upon these
exemptions is predicated in part upon this representation by
the Lender. The Lender further understands that the Note may
not be transferred or resold without registration under the
Securities Act and any applicable state securities laws, or an
exemption from the requirements of the Securities Act and
applicable state securities laws.
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<PAGE>
c) The Lender's principal residence is located in the State of New
York.
d) The Lender is able to bear the loss of the entire investment of
the Note without any material adverse effect on the Lender's
financial position or prospects, and the Lender has such
knowledge and experience of financial and business matters to be
capable of evaluating the merits and risks of the investment to
be made pursuant to this Agreement.
e) This Agreement has been duly authorized by all necessary action
on the part of the Lender, has been duly executed and delivered
by the Lender and is a valid and binding agreement of the Lender.
This Agreement shall be governed by and construed in accordance with the law of
the State of New York, may not be amended, modified or waived except in writing,
signed by both parties hereto, shall be binding upon the Company and inure to
the benefit of the Lenders and its respective successors, assigns, heirs and
legal representatives.
Very truly yours,
PICK Communications, Corp
By: /s/ Robert S. Bingham
----------------------------------------
Robert S. Bingham
Vice President and Chief Financial Officer
Agreed and Accepted:
WOLFSON EQUITIES
BY: /s/ WOLFSON EQUITIES
--------------------------
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<PAGE>
RECIPROCAL TELECOMMUNICATIONS AGREEMENT
AGREEMENT made this 11th day of November, 1996 by and between IDT CORPORATION
(hereinafter "CUSTOMER"), located at 294 State Street, Hackensack, New Jersey
07601 and PICKNET, INC., located at 155 Route 46 West, Third Floor, Wayne, New
Jersey 07470 (hereinafter "PICK").
WITNESSETH:
WHEREAS, PICK and Customer are in the business of providing telecommunications
services; and
WHEREAS, Customer desires to purchase telecommunications services from PICK and
PICK desires to purchase telecommunications services from Customer;
NOW THEREFORE, in consideration of the mutual promises and covenants contained
herein, and for other good and valuable consideration, the parties agree as
follows:
1. Services.
--------
(A) PICK agrees to furnish to Customer, and Customer agrees to purchase
from PICK, the telecommunications services set forth in Exhibit A attached
hereto.
(B) Customer agrees to furnish to PICK and PICK agrees to purchase from
Customer, the telecomnunications services as set forth in Exhibit B attached
hereto.
(C) Interconnection between Customer and PICK, for purposes of
performance hereunder, shall occur as agreed between the parties.
(D) It is understood that all Services provided by the parties
hereunder are provided for resale by the other party to its end users, customers
or subscribers.
2. Terms. This Agreement shall commence on the 1st day of November, 1996 (the
"Commencement Date") and continue for a period of one (1) year. This Agreement
shall thereafter continue, on the same terms and conditions, on a month-to-month
basis unless either party notifies the other party in writing not less than
thirty (30) days prior to the termination date of its desire to terminate this
Agreement.
3. Rates.
-----
PICK and Customer agree that each is granting the other most favorable
price per minute rates in the Exhibits attached to this Agreement as follows:
<PAGE>
(A) During the term of this Agreement, PICK shall charge for the
telecommunications services, and Customer shall pay for such telecommunication
services, that amount as determined by using the appropriate rates set out in
Exhibit A.
(B) During the term of this Agreement, Customer shall charge for the
telecommunication services, and PICK shall pay for such telecommunication
services, that amount as determined by using the appropriate rates set out in
Exhibit B.
(C) PICK and Customer shall have the right to modify the rates and
conditions set forth in Exhibits "A" and "B" at any time during this Agreement,
but shall give the other party at least seven (7) days prior notice. Both
parties agree to provide each other with initial traffic projections, by
country, to the top ten (10) countries they are interested in purchasing rates
for from the other. Thereafter each will provide such projections to the other
on a quarterly basis. Projections shall be given on the Forms attached as
Exhibit 2A and 2B (to this Agreement) respectively as appropriate.
(D) Billing shall include raw CDR (unrated) and completely rated
summaries by country showing number of calls, number of minutes and
corresponding charges.
(E) All calls other than calls to Mexico, will be billed with a thirty
second minimum and thereafter in six-second increments rounded to the next
highest one-tenth of a minute per all record. Calls to Mexico are billed in one
minute increments.
4. Charges and Payment Terms.
-------------------------
(A) PICK and Customer hereby acknowledge the charges for the provision
of Service will be billed as provided herein and that payment for such Service
shall be payable in U.S. dollars. For each week during the term of this
Agreement, PICK and Customer will provide the other party with an invoice for
Service provided during the previous week. The invoice amounts due and payable
by PICK and Customer shall be offset, and the party which has a balance payable
after such netting shall make payment to the other party on or before the second
(2nd) day of the following week. Late payments will be assessed a late charge of
1.5% per month or the maximum amount permitted by law, whichever is less.
Payments shall be made by wire transfer or such other methods as may be agreed
by the parties.
(B) Should either PICK or Customer dispute any of the charges on the
weekly invoice, it shall notify the other party of the disputed charges not
later than sixty (60) days from the date of invoice. Said dispute shall set
forth all details concerning the disputed charges in writing. In the event of a
dispute, the entire invoice shall nevertheless be paid in accordance with the
payment terms set forth herein. After resolution of the disputed portion of the
invoice, the adjustments, if any, shall be immediately credited to the other
party's account.
(C) Each party hereby waives any deposit requirement from the other for
providing services under this Agreement.
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<PAGE>
5. Warranty. PICK and Customer will use reasonable efforts under the
circumstances to maintain overall network quality. The quality of Service
provided hereunder shall be consistent with other common carrier industry
standards, government regulations and sound business practices. PICK AND
CUSTOMER MAKE NO OTHER WARRANTIES ABOUT THE SERVICE PROVIDED HEREUNDER, EXPRESS
OR IMPLIED, INCLUDING BUT NOT LIMITED TO, ANY WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE OR USE.
6. Continuing Relationship and Termination. This Agreement and the relationship
of the parties may be terminated by the non-defaulting party in accordance with
applicable provision hereof and/or the occurrence of any of the following events
which shall constitute a default:
(A) Material breach of this Agreement after notice thereof and failure
of the breaching party to cure such breach: (i) within seven (7) days of receipt
of such notice where such breach involves a failure to make payments when due
and (ii) within thirty (30) days of receipt of such notice for all other
breaches;
(B) The adjudication of bankruptcy of either party under any Federal,
state or municipal bankruptcy or insolvency act, or the appointment of a
receiver or any act or action constituting a general assignment by a party of
its properties and interest for the benefit of creditors;
(C) The determination by any governmental entity having jurisdiction
over the Service provided under this Agreement that the relationship of the
parties and/or Services provided hereunder are contrary to then existing laws.
7. Taxes. The parties acknowledge and understand that all charges stated in
attached Exhibits are computed exclusive of any applicable use, excise, gross
receipts, sales and privilege taxes, duties, fees or other similar liabilities
(other than general income or property taxes). Such Additional Charges shall be
paid by the party receiving services in addition to all other charges provided
for herein. All applicable taxes, duties, fees or other liabilities shall be
billed to the appropriate party by the other party unless such party provides
the other party with applicable tax exemption documentation. Each party is
solely liable for and hereby indemnifies and holds the other party harmless from
filing all applications, forms, reports, returns, statements, and other
documents and information with any payment of all taxes and/or assessments to
all local, county, state, federal and other taxing authorities having
jurisdiction with respect to any and all charges to each party's end users or
customers for the services, including without limitation, any governmental
agency or authority in any foreign country.
8. Suspension of Services. In the event payment in full is not received from
either party when due, the other party shall have the right, after giving the
defaulting party seven (7) days prior notice after the due date to suspend all
or any portion of the Service to the defaulting party until such time as such
party has paid in full all charges then due, including any late fees.
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<PAGE>
9. Liability; General Indemnity.
----------------------------
(A) Limited Liability. IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE
OTHER PARTY FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL LOSSES OR
DAMAGES, INCLUDING WITHOUT LIMITATION, LOSS OF REVENUE, LOSS OF CUSTOMERS OR
CLIENTS, LOSS OF GOODWILL OR LOSS OF PROFITS ARISING IN ANY MANNER FROM THIS
AGREEMENT AND THE PERFORMANCE OR NON-PERFORMANCE OF OBLIGATIONS HEREUNDER.
THE LIABILITY OF PICK AND CUSTOMER WITH RESPECT TO THE INSTALLATION (INCLUDING
DELAYS THEREOF), PROVISION, TERMINATION, MAINTENANCE, REPAIR, INTERRUPTION, OR
RESTORATION OF ANY SERVICE OR FACILITIES OFFERED UNDER THIS AGREEMENT SHALL NOT
EXCEED AN AMOUNT EQUAL TO THE CHARGE APPLICABLE UNDER THIS AGREEMENT TO THE
PERIOD DURING WHICH SERVICES WERE AFFECTED. FOR THOSE SERVICES WITH MONTHLY
RECURRING CHARGES, THE LIABILITY OF EITHER PARTY IS LIMITED TO AN AMOUNT EQUAL
TO THE PROPORTIONATE MONTHLY RECURRING CHARGES FOR THE PERIOD DURING WHICH
SERVICE WAS AFFECTED.
(B) General Indemnity. In the event parties other then PICK and
Customer shall have use of the Service, then PICK and Customer agree to forever
indemnify and hold each other harmless from and against any and all claims,
demands, suits, actions, losses, damages assessments or payments which may be
asserted by said parties arising out of or relating to any defect in the
Service.
10. Force Majeure. If either party's performance of this Agreement or any
obligation hereunder is prevented, restricted or interfered with by causes
beyond its reasonable control including, but not limited to, acts of God, fire,
explosion, vandalism, cable cut, storm or other similar occurrence, any law,
order, regulation, direction, action or request of the United States government
or state or local governments, or of any department agency, commission, court,
bureau, corporation or other instrumentality of any one or more said
governments, or of any civil or military authority, or by national emergency,
insurrection, riot, war, strike, lockout or work stoppage or other labor
difficulties, supplier failure, shortage, breach or delay, then such party shall
be excused from such performance on a day-to-day basis to the extent of such
restriction or interference. Such party shall notify the other and use
reasonable efforts under the circumstances to avoid or remove such causes of
nonperformance and shall proceed to perform with reasonable dispatch whenever
such causes are removed or cease. This provision shall not, however, relieve
either party from making any payment when due.
11. Notices. All notices pursuant to this Agreement shall be deemed given when
delivered personally or sent by registered mail or facsimile or overnight
carrier (such as Federal Express), charges prepaid; as follows:
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<PAGE>
PICKNET, INC. IDT CORPORATION
155 Route 46 West, Third Floor 294 State Street
Wayne, NJ 07470 Hackensack, NJ 07601
FAX: (201) 812-4181 FAX: (201) 928-1057
Attn: Diego Leiva, President Attn: Jonathan S. Levy, Vice President
Notice of change of address shall also be governed by this Paragraph.
12. No-Waiver. No term or provision of this Agreement shall be deemed waived and
no breach or default shall be deemed excused unless such waiver or consent shall
be in writing and signed by the party claimed to have waived or consented. No
consent by any party to, or waiver of, a breach or default by the other, whether
express or implied, shall constitute a consent to, waiver of, or excuse for any
different or subsequent breach or default.
13. Partial Invalidity. If any term or provision of this Agreement shall be
found to be illegal or unenforceable, then notwithstanding such illegality or
unenforceability, this Agreement shall remain in full force and effect and such
term or provision shall be deemed to be deleted.
14. Exclusive Remedies. Except as otherwise specifically provided for herein,
the remedies set forth in this Agreement comprise the exclusive remedies
available to either party at law or in equity.
15. Use of Service. PICK and Customer agree to provide the Service specified
hereunder upon condition that the Service shall not be used for any unlawful
purpose. The provision of Service will not create a partnership or joint venture
between the parties or result in a joint communications service offering to any
third party.
16. Choice of Law. This Agreement shall be construed in accordance with the laws
of the State of New Jersey. Both parties agree that jurisdiction and venue for
any and all disputes under this agreement will be proper in the State of New
Jersey, County of Bergen.
17. Proprietary Information.
-----------------------
(A) Confidential Information. The parties understand and agree that the
terms and conditions of this Agreement, and documents referred (including
invoices to Customer for Service provided hereunder) herein, communications
between the parties regarding this Agreement or the Service to be provided
hereunder (including price quotes to Customer or PICK for any Service proposed
to be provided or actually provided hereunder) and all information regarding the
customers of Customer or PICK, as well as such information relevant to any other
agreements between the parties (collectively "Confidential Information"), are
confidential as between Customer and PICK.
(B) Limited Disclosure A party shall not disclose Confidential
Information unless subject to discovery or disclosure pursuant to legal process,
or unless required by the SEC since
5
<PAGE>
both parties are public corporations, or to any other party other than the
directors, officers, and employees of a party or agent's of a party including
their respective brokers, lenders, insurance carriers or prospective purchasers
of the party's business who have specifically agreed in writing to nondisclosure
of the terms and conditions hereof. Any disclosure hereof required by legal
process shall only be made after providing the non-disclosing party with notice
thereof in order to permit the non-disclosing party to seek an appropriate
protective order or exemption. Likewise, each party will give notice of any
disclosure to the SEC to the other party. Violation by a party or its agents of
the foregoing provision shall entitle the non-disclosing party, at its option,
to obtain injunctive relief without a showing of irreparable harm or injury and
without bond.
(C) Press Releases. The parties further agree that any press release,
advertisement or publication generated by a party regarding this Agreement, the
Service provided hereunder or in which a party desires to mention the name of
the other party's parent or affiliated company(ies), will be submitted to the
non-publishing party for its written approval prior to publication.
(D) Survival and Confidentiality. The provisions of this Paragraph will
be effective as of the date of this Agreement and remain in full force and
effect for a period equal to the longer of (i) five (5) years following the
effective date of this Agreement; or (ii) five (5) years following the
termination of all Service hereunder.
18. Successors and Assignment. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors or assigns,
provided, however, that neither party shall assign or transfer its rights or
obligations under this Agreement without the prior written consent of the other
party, which shall not unreasonably be withheld and further provided that any
assignment or transfer without such consent shall be void.
19. General
-------
(A) Survival of Terms. The terms and provisions contained in this
Agreement that by their sense and context are intended to survive the
performance thereof by the parties hereto shall so survive the completion of
performance and termination of this Agreement, including, without limitation,
provision for indemnification and the making of any and all payments due
hereunder.
(B) Headings. Descriptive headings in this Agreement are for
convenience only and shall not affect the construction of this Agreement.
(C) Industry Terms. Words having well-known technical or trade meanings
shall be so construed, and all listings of items shall not be taken to be
exclusive, but shall include other items, whether similar or dissimilar to those
listed, as the context reasonably requires.
(D) Rule of Construction. No rule of construction requiring
interpretation against the draftsman hereof shall apply in the interpretation of
this Agreement.
6
<PAGE>
20. Entire Agreement. This Agreement consists of all of the terms and
conditions contained herein; in executed Service Schedules that are identified
herewith; and in documents incorporated herein specifically by reference. This
Agreement constitutes the complete and exclusive statement of the understandings
between the parties and supersedes all proposals and prior agreements (oral or
written) between the parties relating to Service provided hereunder. No
subsequent agreement between the parties concerning the Service shall be
effective or binding unless it is made in writing and subscribed to by
authorized representatives of Customer and PICK.
ACCEPTED and AGREED:
PICKNET INC. IDT CORPORATION
By: /s/ Raymond M. Brennan By: /s/ Jonathan S. evy
------------------------ -----------------------
Raymond M. Brennan Jonathan S. Levy
Vice President Vice President
7
<PAGE>
AMENDMENT TO
RECIPROCAL TELECOMMUNICATIONS AGREEMENT
Reference is made to the Reciprocal Telecommunications Agreement
between, PICKNET Inc. ("PICK") with IDT Corporation ("Customer"), dated November
11, 1996.
1. Customer shall lend PICK up to a total of Two Million Dollars
($2,000,000), subject to the following advancement schedule and conditions
therein ("Loan") and PICK agrees to repay said Loan within one (1) year
following the first advance made hereunder. PICK's parent company, PICK
Communications Corp. ("PCC"), agrees to absolutely and unconditionally guarantee
repayment of any advancements made to PICK by Customer and shall co-sign any
Notes executed by PICK as required hereunder. Upon advancements by Customer,
Customer shall be issued warrants by PCC to purchase shares of PCC common stock,
pursuant to the following schedule. The terms and conditions of the Loan are as
set forth in the draft Note attached hereto. Prior to any advancement being made
by Customer, PICK shall execute an original Note in the full amount of such
advancement.
a. Initial Advance $500,000.00
(upon signing this Amendment)
Warrants Issued 100,000 shares
b. Second Advance $1,000,000.00
(upon PICKs demonstrated ability to provide
the SERVICES hereunder to Customer,
regardless of whether or not Customer is
able to receive such SERVICES)
Warrants issued 200,000 shares
c. Third Advance $500,000
(Thirty (30) days after Second Advance)
Warrants issued 100,000 shares
The aforementioned warrants shall be issued and effective as of each advance
date, are exercisable for a period of one (1) year from the date of issuance, at
the market closing price on the date of Issuance. Such warrants shall enjoy
piggy-back registration rights. In the event that PCC becomes S-3 eligible, the
warrants shall enjoy demand registration rights, however, such registration
shall be entirely at Customer's expense. Additionally, the warrants will be
adjusted proportionately for any stock splits or dividends. Any warrants issued
in connection with advancements made by Customer in connection with the Loan,
will be issued by PCC in the amount of one (1) share per $5 loaned.
In the event that PICK fails to provide the SERVICES as set forth hereunder,
Customer shall have no obligation to make the third advance to PICK.
2. This Amendment shall remain in effect for one (1) year or until the
above Loan made by
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<PAGE>
Customer in connection herewith is repaid in full, whichever is later. There
shall be no penalty for prepayment of the Loan.
3. PICK will provide Customer with international long distance
telecommunications services, which shall be provided pursuant to an agreement
between PICK and GULFSAT Communications Co. ("GULFSAT"), and which shall be
provided to countries listed therein, as available ("SERVICES").
PICK will provide the SERVICES to Customer pursuant to the following:
a. Up to 10,000,000 minutes per month, at ten percent (10%) above
PICKs Cost, which shall be equal to the rates set forth in the GULFSAT
Agreement, plus $0.04 per minute; and,
b. In excess of 10,000,000 minutes per month, at "most favored
nation's" pricing (as compared with pricing for PICK's other carrier customers).
Notwithstanding the foregoing, in no event shall Customer's traffic to
any country in any month exceed fifty percent (50%) of PICK's GULFSAT capacity
for such country.
4. In addition to the foregoing, from the date PICK is providing
service to Customer, exclusive of the GULFSAT Services, which is operational and
successfully completed both as originating traffic and terminating traffic,
Customer shall make available to PICK $500,000 worth of long distance traffic at
preferred rates. Of the amount of said traffic utilized during any one month,
fifty percent (50%) of the cost of such traffic shall be used to offset any
payments due to PICK for the abovementioned GULFSAT traffic during the month of
such traffic being utilized by PICK and the remaining fifty percent (50%) of the
cost of such traffic shall be used to offset any payments due to PICK for the
aforementioned GULFSAT traffic during the month following such traffic being
utilized by PICK.
5. All payments made under this Amendment shall be payable on a weekly
basis and shall be forwarded via wire transfer.
6. During the term of this Amendment and thereafter as long as PICK has
an Agreement with GULFSAT, Customer shall not circumvent PICK's contractual
relationship with GULFSAT.
7. All parties hereto represent, warrant and covenant that each is
authorized by its respective Board of Directors to enter into this Amendment and
related Agreement, that entering into this and related Agreements will not
violate any law, or other agreement, and that each is a duly incorporated legal
entity. PICK and PCC shall have the Board of Directors of both corporate
entities ratify the execution of all documents in connection with this
Agreement, within ten (10) days of the effective date of this Agreement. Failure
to do so will result in PICK and PCC's obligation to immediately return any
advances made hereunder.
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<PAGE>
8. Except as specifically set forth above in this Amendment, all of the
other terms and conditions of the referenced Agreement are hereby ratified and
confirmed.
The foregoing Amendment is hereby accepted and agreed to this 12th day of
February, 1998.
PICKNET, Inc. IDT Corporation
By: /s/ Diego Leiva By: /s/ Joshua Winkler
----------------------- ------------------------------
Diego Leiva Joshua Winkler
Title: President & CEO Title: Executive Vice President-Sales
PICK Communications Corp.
By: /s/ Diego Leiva
- -----------------------
Diego Leiva
Title: President & CEO
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<PAGE>
TERM PROMISSORY NOTE
$500,000 (the "Principal") Date: 2/12, 1998
FOR VALUE RECEIVED, PICKNET. Inc., 115 Route 46 West, Suite A2.
Mountain Lake, New Jersey 07046, a New Jersey Corporation ("Maker"), hereby
promises to pay to the order of IDT Corp., 294 State Street, Hackensack, New
Jersey 07601, a Delaware Corporation ("Payee"), at Payee's address listed above,
or at such other place as the holder hereof may designate in writing, the
Principal, plus interest, on the terms set forth herein. Payee may transfer this
Note to any person, who shall then be deemed to be Payee hereunder.
ARTICLE ONE
PAYMENT
1.2 Monthly payments of interest only at the rate of 0.75 percent per
month shall be due and payable on the 15th of each month, beginning one month
following the date above, and through and including February 9, 1999. The
Principal shall be due and repaid on February 9, 1999. In any event, all
outstanding principal and interest shall be repaid no later than February 9,
1999. Interest shall be computed on the basis of 30-day months and 360-day
years.
1.3 Payment of principal, interest and any other sum due hereunder
shall be made in lawful money of the United States of America, via wire
transfer. Wire transfer instructions are attached hereto as Schedule A. Prior to
any sale or other disposition of this Note, the payee shall endorse thereon the
amount of principal paid hereon.
ARTICLE TWO
REPRESENTATIONS AND WARRANTIES
The obligations, representations, warranties and covenants of Maker set
forth in amendment to the Reciprocal Telecommunications Agreement of even date
herewith (the "Agreement") are herewith incorporated herein as if set forth at
length and each shall be deemed to be independently material and to have been
relied upon by the Payee.
Payee's only obligation under the Note is the advancement of money
referenced above. Maker's obligation to repay any amounts advanced, with
interest, shall be absolute and unconditional. Payee's representations,
warranties or covenants as set forth in the Agreement specifically are not
incorporated herein and shall not constitute a defense to the payment of this
Note. Payee's failure to perform under the Agreement shall not constitute a
defense to the repayment of the Note.
<PAGE>
ARTICLE THREE
EVENTS OF DEFAULT
3.1 If any one or more of the following events (herein termed "Events
of Default") shall happen;
(a) any payment of principal or interest is not paid when due and
payable hereunder,
(b) Maker or any guarantor hereof shall:
(i) consent to the appointment of a receiver or trustee for all or
a substantial part of its or his property or to the filing of a
petition against it or him under the federal bankruptcy laws or any
other similar law or statute for the relief or aid of debtors of the
United States of America or any State thereof, as now or hereinafter in
effect (the "Bankruptcy Laws"),
(ii) have an order for relief entered against it or him under the
Bankruptcy Laws or otherwise be adjudicated a bankrupt or insolvent or
have any court of competent jurisdiction assume custody or control of
Maker or any guarantor or of the whole or any substantial part of the
property of Maker or any guarantor,
(iii) become insolvent or admit its or his inability, or become
unable, to pay its or his debts generally as they become due.
(iv) file a petition, or have an action, motion or other proceeding
under the Bankruptcy Laws brought against it for relief or for
reorganization or for the adoption of an arrangement under the
Bankruptcy Laws or an admission seeking the relief therein provided.
(v) make a general assignment for the benefit of its creditors;
(c) default in the due observance of any provision of this Note or any
guaranty executed in connection herewith and the same shall not be cured within
30 days of written notice from Payee; this requirement of prior written notice
of default shall not apply to a default in payment of principal or interest
under Section 3.1(a);
(d) Maker takes any action to terminate, liquidate or dissolve Maker;
(e) any material representation or warranty contained herein, or in any
agreement or instrument executed in connection herewith (including, without
limitation, the Agreement and any guaranty of the obligations of Maker arising
hereunder), or made in connection herewith shall not have been true and accurate
in all material respects when made; or
(f) any material adverse change occurs in the financial condition of
Maker or guarantor of Maker's obligations hereunder, or the death of any such
guarantor, then and in any such event, at
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<PAGE>
any time thereafter, if any Event of Default shall then be continuing, Payee may
by written notice to Maker declare the entire principal, accrued interest and
any other amounts owing under this Note to be immediately due and payable
(except that in case of an Event of Default under paragraphs (a) through (d)
above no such additional notice shall be required and such acceleration shall be
automatic upon the occurrence of such Event of Default), and in such case the
same shall be paid immediately in full. If any payment of principal or interest
is not paid by the end of 15 calendar days after the date when due and payable
hereunder, Maker shall promptly pay to Payee a late charge equal to 2% of the
amount of the overdue payment. Maker acknowledges that such charge is a
reasonable estimate of the additional cost to be incurred by payee on account of
a late payment. Interest shall accrue on all amounts past due, after expiration
of any applicable grace period provided for herein, whether or not an Event of
Default has occurred, at the rate per annum of the lesser of 18% or the highest
rate permitted by law until paid.
3.2 In case any one or more default hereunder or under any related
document shall happen and be continuing, Payee may proceed to protect and
enforce Payee's rights either by suit in equity or by action at law, or both,
whether for the specific performance of any covenant, condition, or agreement
contained in this Note or in aid of the exercise of any power granted in this
Note to enforce any other legal or equitable right of Payee. After an event of
Default, Maker shall pay to Payee immediately upon written demand therefor any
amounts reasonably expended or incurred by Payee in collecting any amount due
hereunder, including, without limitation, attorneys' fees and costs, whether or
not any legal action is instituted in connection therewith, including interest
on all such amounts from the date demanded until the date paid at the rate per
annum of the lesser of 18% or the highest rate permitted by law until paid.
ARTICLE FOUR
MISCELLANEOUS
4.1 This Note (a) may not be changed, waived, discharged or terminated
except by an instrument in writing signed by the Payee and (b) shall be binding
upon Maker, its successors and assigns, and shall inure to the benefit of and be
enforceable by Payee, its successors and assigns. No Promises or representations
have been made by Payee in connection herewith except as expressly set forth
herein. Maker hereby waives presentment, demand, protest, notice of dishonor and
all other notices and demands, except as expressly set forth herein.
4.2 This Note shall be paid in full without any offset or deduction for
any claim, counterclaim or defense of any kind whatsoever, the right to raise
any of which is waived by Maker, except as provided in Article 2 hereof. Maker
also hereby waives the right to trial by jury in any litigation related to this
Note.
4.3 This note shall be construed and governed in all respects by the
laws of the State of New Jersey applicable to contracts made and to be performed
therein.
4.4 If any provision of this Note is deemed to be invalid, illegal, or
unenforceable, the balance of this Note shall remain in full force and effect.
3
<PAGE>
4.5 Any notice or communication required or sent in connection with
this Note shall be effective when sent pursuant to the terms of the Agreement.
4.6 As a further inducement to the Payee to accept this Note, Maker
acknowledging that Payee is relying on the covenants in this paragraph,
covenants and agrees that: in any action or proceeding brought on, under or in
connection with or relating to this Note, any legal suit arising out of or in
connection with this Note may be instituted in the Superior Court of the State
of New Jersey, County of Bergen;
IN WITNESS WHEREOF, Maker executed this Note on the day and year first
above written.
PICKNET, INC.
By: /s/ Diego Leiva
------------------------------
Diego Leiva
Officer: President & CEO
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<PAGE>
LEASE AGREEMENT
This LEASE AGREEMENT, is effective on June 27, 1997 between
TELECOMMUNICATIONS FINANCE GROUP (hereinafter "Lessor"), and PICK COMMUNICATIONS
CORP., a Nevada corporation with its principal office located at 155 Route 46
W., 3rd floor, Wayne, NJ 07470, (hereinafter "Lessee").
1. Lease.
Lessor, subject to the conditions set forth in Section 25 hereof,
agrees to lease to Lessee and Lessee agrees to lease from Lessor hereunder,
those items of personal property (the "equipment") which are described on
Schedule I of Exhibit A hereto and amendments to Schedule 1. Lessee agrees to
execute and deliver to Lessor a certificate of delivery and acceptance in
substantively the form of Exhibit A hereto (a "Delivery Certificate")
immediately after Turnover of the equipment, and such execution shall constitute
Lessee's irrevocable acceptance of such items of equipment for all purposes of
this Lease. The Delivery Certificate shall constitute a part of this Lease to
the same extent as if the provisions thereof were set forth herein.
2. Definitions.
"Amortization Deductions" as defined in Section 11(b)(i) hereof.
"Appraisal Procedure" shall mean the following procedure for
determining the Fair Market Sale Value of any item of equipment. If
either Lessor or Lessee shall request by notice (the "Appraisal
Request") to the other that such value be determined by the Appraisal
Procedure, (i) Lessor and Lessee shall, within 15 days after the
Appraisal Request, appoint an independent appraiser mutually
satisfactory to them, or (ii) if the parties are unable to agree on a
mutually acceptable appraiser within such time, Lessor and Lessee shall
each appoint one independent appraiser (provided that if either party
hereto fails to notify the other party hereto of the identity of the
independent appraiser chosen by it within 30 days after the Appraisal
Request, the determination of such value shall be made by the
independent appraiser chosen by such other party), and (iii) if such
appraisers cannot agree on such value within 20 days after their
appointment and if one appraisal is not within 5% of the other
appraisal, Lessor and Lessee shall choose a third independent appraiser
mutually satisfactory to them (or, if they fail to agree upon a third
appraiser within 25 days after the appointment of the first two
appraisers, such third independent appraiser shall within 20 days
thereafter be appointed by the American Arbitration Association), and
such value shall be determined by such third independent appraiser
within 20 days after his appointment, after consultation with the other
two independent appraisers. If the first two appraisals are within 5%
of each other, than the average of the two appraisals shall be the Fair
Market Sale Value. The fees and expenses of all appraisers shall be
paid by Lessee.
"Business Day" shall mean a day other than a Saturday, Sunday or legal
holiday under the laws of the State of Florida.
"Code" shall mean the Internal Revenue Code of 1954, as amended, or any
comparable successor law.
"Commencement Date" as defined in Section 3 hereof.
"Default" shall mean any event or condition which after the giving of
notice or lapse of time or both would become an Event of Default.
"Delivery Certificate" as defined in Section 1 hereof.
"Equipment" as defined in Section 1 hereof.
"Event of Default" as defined in Section 18 hereof.
"Event of Loss" shall mean, with respect to any item of equipment, the
actual or constructive total loss of such item of equipment or the use
thereof, due to theft, destruction, damage beyond repair or rendition
thereof permanently unfit for normal use from any reason whatsoever, or
the condemnation, confiscation or seizure of, or requisition of title
to or use of, such item of equipment.
<PAGE>
"Fair Market Sale Value" shall, at any time with respect to any item of
equipment, be equal to the sale value of such item of equipment which
would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and
willing buyer-user (other than a lessee currently in possession or a
used equipment or scrap dealer). For purposes of Section 7(b) hereof
Fair Market Sale Value shall be determined by (i) an independent
appraiser (at Lessee's expense) selected by Lessor or (ii) by the
Appraisal Procedure if the Appraisal Request is made at least 90 days
(but not more than 360 days) prior to the termination or expiration of
the Lease Term, as the case may be, which determination shall be made
(a) without deduction for any costs or expenses of dismantling or
removal; and (b) on the assumption that such item of equipment is free
and clear of all Liens and is in the condition and repair in which it
is required to be returned pursuant to Section 7(a) hereof. For
purposes of Section 19(c) hereof Fair Market sale Value shall be
determined (at Lessee's expense) by an independent appraiser selected
by Lessor, on an "as-is, where-is" basis, without regard to the
provisions of clauses (a) and (b) above; provided that if Lessor shall
have sold any items of equipment pursuant to Section 19(b) hereof prior
to giving the notice referred to in Section 19(c) hereof, Fair Market
Sale Value of such item of equipment shall be the net proceeds of such
sale after deduction of all costs and expenses incurred by Lessor in
connection therewith; provided further, that if for any reason Lessor
is not able to obtain possession of any item of equipment pursuant to
Section 19(a) hereof, the Fair Market Sale Value of such item of
equipment shall be zero.
"Imposition" as defined in Section 11(a) hereof.
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<PAGE>
"Indemnitee" as defined in Section 17 hereof.
"Late Charge Rate" shall mean an interest rate per annum equal to the
higher of two percent (2%) over the Reference Rate or eighteen percent
(18%), but not to exceed the highest rate permitted by applicable law.
"Lease" and the terms "hereof", "herein", "hereto" and "hereunder",
when used in this Lease Agreement, shall mean and include this Lease
Agreement, Exhibits and the Delivery Certificate hereto as the same may
from time to time be amended, modified or supplemented.
"Lease Term" shall mean, with respect to any item of equipment, the
term of the lease of such item of equipment hereunder specified in
Section 3 hereof.
"Lessee" as defined in the introductory paragraph to this Lease.
"Lessor" as defined in the introductory paragraph of this Lease.
"Lessor's Value" shall mean, with respect to any item of equipment and
installation if applicable, the total amount set forth in Schedule 1 of
Exhibit A hereto.
"Lessor's Liens" shall mean (i) any mortgage, pledge, lien, security
interest, charge, encumbrance, financing statement, title retention or
any other right or claim of any person claiming through or under
Lessor, not based upon or relating to ownership of the equipment or the
lease thereof hereunder and (ii) any mortgage, pledge, lien, security
interest, charge, encumbrance, financing statement, title retention or
any other right or claim of Owner (other than Lessor) claiming through
or under Lessor in connection with the transactions described in
Section 21(b) hereof.
"Liens" shall mean any mortgage, pledge, lien, security interest,
charge, encumbrance, financing statement, title retention or any other
right or claim of any person, other than any Lessor's Lien.
"Loss Payment Date" shall mean with respect to any item of equipment
the date on which payment, as described in Section 16 (b) hereof, is
made to the Lessor by the Lessee as the result of an Event of Loss with
respect to such item. The Loss Payment Date shall be within ninety (90)
days of the said Event of Loss.
"Owner" shall mean the entity or person having ownership interest to
the equipment as contemplated by the provisions of Section 21(b) hereof
and may be a person other than Lessor.
"Owner's Economies" shall mean the after-tax yield and periodic
after-tax cash flow anticipated by Owner as of the date of this Lease,
in connection with the transactions contemplated by this Lease as
determined by Owner unless Lessor shall have transferred its interest
in the equipment to another person as contemplated by the provisions of
Section 21(b) hereof in which case "Owner's Economics" shall mean the
after-tax yield and periodic after-tax cash flow anticipated by such
person as of the date of the lease between such person and Lessor
contemplated by said provisions, in connection with the transactions
contemplated by such lease as determined by such person.
"Recovery Deductions" as defined in Section 11(b)(i) hereof.
"Reference Rate" shall mean the rate of interest publicly announced by
Citibank, NA. in New York, New York from time to time as its prime
rate.
The reference rate is not intended to be the lowest rate of interest
charged by Citibank, N.A. in connection with extensions of credit to
debtors. The Reference Rate shall be determined at the close of
business on the 15th day of each calendar month (if the 15th day is not
a Business Day, then on the first preceding Business Day) and shall
become effective as of the first day of the calendar month succeeding
such determination and shall continue in effect to, and including, the
last day of said calendar month.
<PAGE>
"Rent Payment Date" shall mean each date on which an installment of
rent is due and payable pursuant to Section 5(a) hereof.
"Stipulated Loss Value" shall mean, with respect to any item of
equipment, the amount determined by multiplying the Lessor's Value of
such item of equipment by the percentage set forth in Schedule A hereto
opposite the applicable Rent Payment Date; provided that for purposes
of Sections 16 (b) and 19 (e) hereof any determination of Stipulated
Loss Value as of a date occurring after the final Rent Payment Date
with respect to such item of equipment, shall be made as of such final
Rent Payment Date.
"Tax Benefits" shall mean the right to claim such deductions, credits,
and other benefits as are provided by the Code to an owner of property,
including the Recovery Deductions and Amortization Deductions.
"Turnover" shall mean that point in time when the equipment
installation personnel complete testing of the equipment, or when the
equipment is placed into service, whichever first occurs.
All accounting terms not specifically defined herein shall be construed
in accordance with generally accepted accounting principles.
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<PAGE>
3. Lease Term.
The term of the lease of the equipment hereunder shall commence on the
Commencement Date specified in the Delivery Certificate ("Commencement Date")
and, unless earlier terminated pursuant to the provisions hereof or at law or
equity shall continue for a term of sixty (60) months from such Commencement
Date. The Commencement Date specified in the Delivery Certificate shall be the
date on which Turnover Occurs at a site provided by Lessee in accordance with
the provisions of Section 4 hereof.
4. Installation.
Lessor shall arrange for installation of the equipment, the cost of
which installation shall be deemed to be part of Lessor's Value. Exhibit A
hereto shall indicate whether such cost is included or excluded from the monthly
rent payments due in accordance with Section 5(a) hereof. If excluded from such
monthly rent payments, Lessor shall separately invoice Lessee for such
installation upon completion thereof and Lessee shall pay such invoice within
thirty (30) days from the date thereof. Lessee shall be obligated to timely
provide a suitable site for the installation of the equipment in accordance with
the equipment manufacturer's practices attached hereto as Exhibit C. Lessee
shall be responsible for compliance with environmental requirements and central
office grounding procedures specified in Exhibit C hereto and for providing
adequate space, lighting heating, air-conditioning and A/C power at the
installation site. Unavailability of Lessee furnished facilities shall be cause
for adjustments to the installation price set forth in Schedule I of Exhibit A
hereto.
5. Rent: Unconditional Obligations.
(a) Lessee agrees to pay to Lessor, at the address specified in Section
24 hereof or at such other address as Lessor may specify, rent for the initial
equipment at a rate not to exceed $22.244 per $1,000 of the total Lessor's Value
of such items of equipment, as set forth in Schedule 1 of Exhibit A dated June
27, 1997, (plus applicable sales or use taxes) per month, in sixty (60)
consecutive monthly installments, with the first installment of rent being due
on the Commencement Date unless the Commencement Date is other than the first
day of a calendar month, in which event the first installment of rent shall be
due on the first day of the month following the Commencement Date, and
succeeding installments being due on the same date of each month thereafter. In
the event of any additions to the initially leased equipment, the rental rate on
any additional equipment will be the rate as shown on the Amendment to Schedule
1 of Exhibit A adding the equipment to the lease.
(b) Lessee shall also pay to Lessor, on demand, interest at the Late
Charge Rate on any installment of rent and on any other amount owing hereunder
which is not paid on its due date, for any period for which the same shall be
overdue. Each payment made under this Lease shall be applied first to the
payment of interest then owing and then to rent or other amounts owing
hereunder, interest shall be computed on the basis of a 360-day year and actual
days elapsed.
(c) This Lease is a net lease, and Lessee's obligation to pay all rent
and all other amounts payable hereunder is ABSOLUTE AND UNCONDITIONAL under any
and all circumstances and shall not be affected by any circumstances of any
character whatsoever, including, without limitation, (i) any set-off,
counterclaim, recoupment, defense, abatement or reduction or any right which
Lessee may have against Lessor, the manufacturer or supplier of any of the
equipment or anyone else for any reason whatsoever; (ii) any defect in the
title, condition, design, or operation of, or lack of fitness for use of, or any
damage to, or loss of all or any part of the equipment from any cause
whatsoever; (iii) the existence of any Liens with respect to the equipment; (iv)
the invalidity, unenforceability or disaffirmance of this Lease or any other
document related hereto; or (v) the prohibition of or interference with the use
or possession by Lessee of all or any part of the equipment, for any reason
whatsoever, including without limitation, by reason of (1) claims for patent,
trademark or copyright infringement; (2) present or future governmental laws,
rules or orders; (3) the insolvency, bankruptcy or reorganization of any person;
and (4) any other cause whether similar or dissimilar to the foregoing, any
present or future law to the contrary notwithstanding. Lessee hereby waives, to
the extent permitted by applicable law, any and all rights which it may now have
or which may at any time hereafter be conferred upon it, by statute or
otherwise, to terminate, cancel, quit or surrender the lease of any equipment.
If for any reason whatsoever this Lease or any Supplement, other than pursuant
to Section 16 (b) hereof, shall be terminated in whole or in full by operation
of law or otherwise, Lessee will nonetheless pay to Lessor an amount equal to
each installment of rent at the time such installment would have become due and
payable in accordance with the terms hereof. Each payment of rent or other
amount paid by Lessee hereunder shall be final and Lessee will not seek to
recover all or any part of such payment for Lessor for any reason whatsoever.
<PAGE>
6. WARRANTY DISCLAIMER; ASSIGNMENT OF WARRANTIES.
(a) LESSOR NEITHER MAKES NOR SHALL BE DEEMED TO HAVE MADE AND LESSEE
HEREBY EXPRESSLY WAIVES ANY WARRANTY OR REPRESENTATION EITHER EXPRESS OR IMPLIED
AS TO THE EQUIPMENT, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF
MERCHANTABILITY OR FITNESS OF THE EQUIPMENT FOR ANY PARTICULAR PURPOSE, FREEDOM
FROM INTERFERENCE OR INFRINGEMENT OR THE LIKE OR AS TO THE TITLE TO OR LESSOR'S
OR LESSEE'S INTEREST IN THE EQUIPMENT OR AS TO ANY OTHER MATTER RELATING TO THE
EQUIPMENT OR ANY PART THEREOF.
LESSEE CONFIRMS THAT IT HAS SELECTED THE EQUIPMENT AND EACH PART
THEREOF ON THE BASIS OF ITS OWN JUDGMENT AND EXPRESSLY DISCLAIMS RELIANCE UPON
ANY STATEMENTS, REPRESENTATIONS OR WARRANTIES MADE BY LESSOR.
LESSOR NEITHER MAKES NOR SHALL BE DEEMED TO HAVE MADE ANY
REPRESENTATION OR WARRANTY AS TO THE ACCOUNTING TREATMENT TO BE ACCORDED TO THE
TRANSACTIONS CONTEMPLATED BY THIS LEASE OR AS TO ANY TAX CONSEQUENCES AND/OR TAX
TREATMENT THEREOF.
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<PAGE>
(b) LESSOR HERE BY ASSIGNS TO LESSEE SUCH RIGHTS AS LESSOR MAY HAVE TO
EXTENT LESSOR MAY VALIDLY ASSIGN SUCH RIGHTS UNDER ALL MANUFACTURERS' AND
SUPPLIERS' WARRANTIES WITH RESPECT TO THE EQUIPMENT PROVIDED, HOWEVER, THAT THE
FOREGOING RIGHTS SHALL AUTOMATICALLY REVERT TO LESSOR UPON THE OCCURRENCE AND
DURING THE CONTINUANCE OF ANY EVENT OF DEFAULT THEREUNDER OR UPON THE RETURN OF
THE EQUIPMENT TO LESSOR. LESSEE AGREES TO SETTLE ALL CLAIMS WITH RESPECT TO THE
EQUIPMENT DIRECTLY WITH THE MANUFACTURERS OR SUPPLIERS THEREOF AND TO GIVE
LESSOR PROMPT NOTICE OF ANY SUCH SETTLEMENT AND THE DETAILS OF SUCH SETTLEMENT.
HOWEVER IN THE EVENT ANY WARRANTIES ARE NOT ASSIGNABLE THE LESSOR AGREES TO ACT
ON BEHALF OF THE LESSEE IN SETTLING CLAIMS ARISING UNDER THE WARRANTY WITH THE
MANUFACTURER OR SUPPLIER.
(c) IN NO EVENT SHALL LESSOR BE LIABLE FOR LOSS OF REVENUE OR PROFITS,
SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY NATURE OR FROM ANY
CAUSE EVEN IF LESSOR HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
7. Disposition of Equipment.
(a) Return.
Lessee shall, upon the expiration or earlier termination of the Lease
Term of each item of equipment, subject to paragraph (b) below, return such item
of equipment to lessor at such place within the continental United States of
America as Lessor shall designate in writing to Lessee. Until such item of
equipment is returned to Lessor pursuant to the provisions of this Section, all
of the provisions of this lease with respect thereto shall continue in full
force and effect. Lessee shall pay all the costs and expenses in connection with
or incidental to the return of the equipment including, without limitation, the
cost of removing, assembling, packing, insuring and transporting the equipment.
At the time of such return, the equipment shall be in the condition and repair
required to be maintained by Section 12 hereof and free and clear of all Liens.
(b) Purchase Option.
So long as no Default or Event of Default shall have occurred and be
continuing Lessee may, by written notice given to Lessor at least 120 days (but
not more than 360 days) prior to the expiration date of the lease Term of any
item of equipment (which notice shall be irrevocable), elect to purchase such
item of equipment on such expiration date for a cash purchase price equal to the
Fair Market Sale Value of such item of equipment determined as of such
expiration date, plus an amount equal to all taxes (other than income taxes on
any gain on such sale), costs and expenses (including legal fees and expenses)
incurred or paid by lessor in connection with such sale. Upon payment by Lessee
of such purchase price, and of all other amounts then due and payable by Lessee,
Lessor shall transfer title, if any, to such items of equipment except computer
software to Lessee on an "as-is, where-is" basis, without recourse and without
representation or warranty of any kind, express or implied, other than a
representation and warranty that such item of equipment is free and clear of any
Lessor's Liens.
8. Representation and Warranties.
In order to induce Lessor to enter into this Lease and to lease the
equipment to Lessee hereunder, Lessee represents and warrants that:
(a) Organization.
Lessee is duly organized, validly existing and in good standing under
the laws of the State of Nevada and is duly qualified to do business and is in
good standing in the State in which the equipment will be located.
(b) Power and Authority.
Lessee has full power, authority and legal right to execute, deliver
and perform this Lease, and the execution, delivery and performance hereof has
been duly authorized by Lessee's governing body or officer(s).
(c) Enforceability.
This Lease has been duly executed and delivered by Lessee and
constitutes a legal, valid and binding obligation of Lessee enforceable in
accordance with its terms.
(d) Consents and Permits.
The execution, delivery and performance of this lease does not require
any approval or consent of any trustee, shareholder, partner, sole proprietor,
or holders of any indebtedness or obligations of Lessee, and will not contravene
any law, regulation, judgment or decree applicable to Lessee, or the certificate
of partnership or incorporation or by-laws of lessee, or contravene the
provisions of, or constitute a default under, or result in the creation of any
Lien upon any property of lessee under any mortgage, instrument or other
agreement to which lessee is a party or by which Lessee or its assets may be
bound or affected; and no authorization, approval, license, filing or
registration with any court or governmental agency or instrumentality is
necessary in connection with the execution, delivery, performance, validity and
enforceability of this Lease,
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<PAGE>
(e) Financial Condition of the Lessee.
The financial statements and any other financial information of Lessee
heretofore furnished to Lessor are complete and correct and fairly present the
financial condition of Lessee and the results of its operations for the
respective periods covered thereby, there are no known contingent liabilities or
liabilities for taxes of Lessee which are not reflected in said financial
statements and since the date thereof, there has been no material adverse change
in such financial condition or operations.
(f) No Litigation.
There is no action, suit, investigation or proceeding by or before any
court, arbitrator, administrative agency or other governmental authority pending
or threatened against or affecting Lessee (A) which involves thc transactions
contemplated by this Lease or the equipment: or (B) which, if adversely
determined, could have a material adverse effect on the financial condition,
business or operations of Lessee.
(g) United States Source Income.
No items of equipment shall be used in a way that results in the
creation of an item of income to Lessor, the source of which for Federal Income
Tax purposes is without the United States.
9. Liens.
Lessee will not directly or indirectly create, incur, assume, suffer,
or permit to exist any Lien on or with respect to the equipment.
10. Insurance.
Lessee shall maintain at all times on the equipment, at its expense,
property damage, direct damage and liability insurance in such amounts, against
such risks in such form and with such insurers as shall be reasonably
satisfactory to Lessor and any other Owner; provided, that the amount of direct
damage insurance shall not on any date be less than the greater of the full
replacement value or the Stipulated Loss Value of the equipment as of such date.
Each insurance policy will, among other things, name Lessor and any other Owner
as an additional insured or as loss payee (as the case may be) as their
interests may appear, require that the insurer give Lessor and any such Owner at
least thirty (30) days prior written notice of any alteration in or cancellation
of the terms of such policy, and require that the interest of Lessor and any
such Owner continue to be insured regardless of any breach of or violation by
Lessee of any warranties, declarations or conditions contained in such insurance
policy, Lessee shall furnish to Lessor and such Owner a certificate or other
evidence satisfactory to Lessor that such insurance coverage is in effect
provided, however, that Lessor and such Owner shall be under no duty to
ascertain the existence or adequacy of such insurance.
11. Taxes.
(a) General Tax Provisions.
Lessee shall timely pay, and shall indemnify and hold Lessor harmless
from and against, all fees, taxes (whether sales, use, excise, personal property
or other taxes), imposts, duties, withholdings, assessments and other
governmental charges of whatever kind or character, however designated (together
with any penalties, fines or interest thereon), all of the foregoing being
herein collectively called "Impositions", which are at any time levied or
imposed against Lessor, Lessee, this Lease, the equipment or any part thereof by
any Federal, State, or Local Government or taxing authority in the United States
or by any foreign government or any subdivision or taxing authority thereof
upon, with respect to, as a result of or measured by (i) the equipment (or any
part thereof), or this Lease or the interests of the Lessor therein; or (ii) the
purchase, ownership, delivery, leasing, possession, maintenance, use, operation,
return, sale or other disposition of the equipment or any part thereof; or (iii)
the rentals, receipts or earnings payable under this Lease or otherwise arising
from the equipment or any part thereof; excluding, however, taxes based on or
measured by the net income of Lessor that are imposed by (1) the United States
of America, or (2) the State of Florida or any political subdivision of the
State of Florida, or (3) any other State of the United States of America or any
political subdivision of any such State in which Lessor is subject to
Impositions as the result (whether solely or in part) of business or
transactions unrelated to this Lease. In case any report or return is required
to be filed with respect to any obligation of Lessee under this Section or
arising out of this Section, Lessee will notify Lessor of such requirement and
make such report or return in such manner as shall be satisfactory to Lessor;
provided, that the payment of any use taxes shall be made in such manner as
specified by Lessor in writing to Lessee; or (iv) the provisions of this Section
shall survive the expiration or earlier termination of this Lease.
<PAGE>
(b) Special Tax Provisions.
(i) The Owner of the items of equipment, shall be entitled to
take into account in computing its Federal income tax liability, Current Tax
Rate and such deductions, credits, and other benefits as are provided by the
Code to an owner of property, including without limitation:
(A) Recovery deductions ("Recovery Deductions") under Section
168 (a) of the Code for each item of equipment in an amount determined,
commencing with the 1997 taxable year, by multiplying the Owner's Cost of such
item of equipment by the percentages applicable under Section 168 (b) of the
Code with respect to "(5)-year property" within the meaning of Section 168 (c)
(2) of the Code:
(B) Amortization of expenses ("Amortization Deductions") paid
or to be paid by Owner in connection with this lease at a rate no less rapid
than straight line over the Lease Term.
(ii) For the purposes of this Subsection 11 (b) only, the term
"Owner" shall include the "common parent" and all other corporations included in
the affiliated group, within the meaning of Section 1504 of the Code (or any
other successor section thereto), of which Owner is or becomes a member.
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<PAGE>
12. Compliance with Laws; Operation and Maintenance.
(a) Lessee will use the equipment in a careful and proper manner, will
comply with and conform to all governmental laws, rules and regulations relating
thereto, and will cause the equipment to be operated in accordance with the
manufacturer's or supplier's instructions or manuals.
(b) Lessee will, at its own expense, keep and maintain the equipment in
good repair, condition and working order and furnish all parts, replacements,
mechanisms, devices and servicing required therefor so that the value, condition
and operating efficiency therefor will at all times be maintained and preserved,
reasonable wear and tear excepted. Lessee will, at its own expense, perform all
required acts necessary to maintain any manufacturer's warranties and guarantees
respecting the equipment. All such repairs, parts, mechanisms, devices and
replacements shall immediately. without further act, become the property of
Lessor and part of the equipment.
(c) Lessee will not make or authorize any improvement, change, addition
or alteration to the equipment (i) if such improvement, change, addition or
alteration will impair the originally intended function or use of the equipment
or impair the value of the equipment as it existed immediately prior to such
improvement, change, addition or alteration; or (ii) if any parts installed in
or attached to or otherwise becoming a part of the equipment as a result of any
such improvement, change, addition or alteration shall not be readily removable
without damage to the equipment. Any part which is added to the equipment
without violating the provisions of the immediately preceding sentence and which
is not a replacement or substitution for any property which was a part of the
equipment, shall remain the property of Lessee and may be removed by Lessee at
any time prior to the expiration or earlier termination of the Lease Term. All
such parts shall be and remain free and clear of any Liens. Any such part which
is not so removed prior to the expiration or earlier termination of the Lease
Term shall, without further act, become the property of Lessor.
13. Inspection.
Upon prior notice, Lessor or its authorized representatives may at any
reasonable time or times inspect the equipment when it deems it necessary to
protect its interest therein.
14. Identification.
Lessee shall, at its expense, attach to each item of equipment a notice
satisfactory to Lessor disclosing Owner's ownership of such item of equipment.
15. Personal Property.
Lessee represents that the equipment shall be and at all times remain
separately identifiable personal property. Lessee shall, at its expense, take
such action (including the obtaining and recording of waivers) as may be
necessary to prevent any third party from acquiring any right to or interest in
the equipment by virtue of the equipment being deemed to be real property or a
part of real property or a part of other personal property. and if at any time
any person shall claim any such right or interest, Lessee shall, at its expense,
cause such claim to be waived in writing or otherwise eliminated to Lessor's
satisfaction within 30 days after such claim shall have first become known to
Lessee.
16. Loss or Damage.
(a) All risk of loss, theft, damage or destruction to the equipment or
any part thereof, however incurred or occasioned, shall be done by Lessee and,
unless such occurrence constitutes an Event of Loss pursuant to paragraph (b) of
this Section, Lessee shall promptly give Lessor written notice hereof and shall
promptly cause the affected part or parts of the equipment to be replaced or
restored to the condition and repair required to be maintained by Section 12
hereof.
(b) If an Event of Loss with respect to any item of equipment shall
occur Lessee shall promptly give Lessor written notice thereof, and Lessee shall
pay to Lessor as soon as it receives insurance proceeds with respect to said
Event of Loss but in any event no later than 90 days after the occurrence of
said Event of Loss an amount equal to the sum of (i) the Stipulated Loss Value
of such item of equipment computed as of the Rent Payment Date with respect to
such item of equipment on or immediately preceding the date of the occurrence of
such Event of Loss; and (ii) all rent and other amounts due and owing hereunder
for such item of equipment on or prior to the Loss Payment Date. Upon payment of
such amount to Lessor, the lease of such item of equipment hereunder shall
terminate, and Lessor will transfer within forty days to Lessee, Lessor's right,
title, if any, and interest in and to such item of equipment, on an "as-is,
where-is" basis, without recourse and without representation or warranty,
express or implied, other than a representation and warranty that such item of
equipment is free and clear of any Lessor's Liens.
<PAGE>
(c) Any payments received at any time by Lessor or Lessee from any
insurer with respect to loss or damage to the equipment shall be applied as
follows: (i) if such payments are received with respect to an Event of Loss they
shall be paid to Lessor, but to the extent received by Lessor, they shall reduce
or discharge, as the case may be, Lessee's obligation to pay the amounts due to
Lessor under Section 16 (b) hereof with respect to such Event of Loss; or (fl)
if such payments are received with respect to any loss of or damage to the
equipment other than an Event of Loss, such payments shall. unless a Default or
Event of Default shall have occurred and be continuing, be paid over to Lessee
to reimburse Lessee for its payment of the costs and expenses incurred by Lessee
in replacing or restoring pursuant to Section 16 (a) hereof the part or parts of
the equipment which suffered such loss or damage.
-6-
<PAGE>
17. General Indemnity.
Lessee assumes liability for, and shall indemnify, protect save and
keep harmless Lessor, the partners comprising Lessor, its and their directors,
officers, employees, agents, servants, successors and assigns (an "Indemnitee")
from and against any and all liabilities, obligations, losses, damages,
penalties, claims, actions, suits, costs and expenses including reasonable legal
expenses, of whatsoever kind and nature, imposed on, incurred by or asserted
against any Indemnitee, in any way relating to or arising out of this Lease or
the enforcement hereof, or the manufacture, purchase, acceptance, rejection,
ownership, possession, use, selection, delivery lease, operation, condition,
sale, return or other disposition of the equipment or any part thereof
(including without limitation, latent or other defects, whether or not
discoverable by Lessee or any other person, any claim in tort whether or not for
strict liability and any claim for patent, trademark, copyright or other
intellectual property infringement); provided, however, that Lessee shall not be
required to indemnify any Indemnitee for loss or liability arising from acts or
events which occur after the equipment has been returned to Lessor in accordance
with the Lease, or for loss or liability resulting solely from the willful
misconduct or gross negligence of such Indemnitee. The provisions of this
Section shall survive the expiration or earlier termination of this Lease.
18. Events of Default.
The following events shall each constitute an event of default (herein
called "Event of Default") under this Lease:
(i) Lessee shall fail to execute and deliver to Lessor (or Lessor's
agent) the "Delivery Certificate" within twenty-four (24) hours of Turnover of
the equipment to Lessee.
(ii) Lessee shall fail to commence lease payments on the first day of
the month following the Commencement Date, or such other initiation of lease
payments as specified in Section 5 of this Lease.
(iii) Lessee shall fail to make any payment of rent or other amount
owing hereunder or otherwise after notice has been given that payment is past
due; or
(iv) Lessee shall fail to maintain the insurance required by Section 10
hereof or to perform or observe any of the covenants contained in Sections 2l or
22 hereof; or
(v) Lessee shall fail to perform or observe any other covenant,
condition or agreement to be performed or observed by it with respect to this
Lease or any other agreement between Lessor and Lessee and such failure shall
continue unremedied for 30 days after the earlier of (a) the date on which
Lessee obtains, or should have obtained knowledge of such failure; or (b) the
date on which notice thereof shall be given by Lessor to Lessee; or
(vi) Any representation or warranty made by Lessee herein or in any
document, certificate or financial or other statement now or hereafter furnished
Lessor in connection with this lease shall prove at any time to have been
untrue, incomplete or misleading in any material respect as of the time when
made; or
(vii) The entry of a decree or order for relief by a court having
jurisdiction in respect of Lessee, adjudging Lessee a bankrupt or insolvent, or
approving as properly filed a petition seeking a reorganization, arrangement,
adjustment or composition of or in respect of Lessee in an involuntary
proceeding or case under the Federal bankruptcy laws, as now or hereafter
constituted, or any other applicable Federal or State bankruptcy, insolvency or
other similar law, or appointing a receiver, liquidator, assignee, custodian,
trustee or sequestrator (or similar official) of Lessee or of any substantial
part of its property, or ordering the winding-up or liquidation of its affairs,
and the continuance of any such decree or order unstayed and in effect for a
period of 30 days; or
(viii) The institution by Lessee of proceedings to be adjudicated a
bankrupt or insolvent, or the consent by it to the institution of bankruptcy or
insolvency proceedings against it, or the commencement by Lessee of a voluntary
proceeding or case under the Federal bankruptcy laws, as now or hereafter
constituted, or any other applicable Federal or state bankruptcy, insolvency or
other similar law, or the consent by it to the filing of any such petition or to
the appointment of or taking possession by a receiver, liquidator, assignee,
trustee, custodian or sequestrator (or other similar official) of Lessee or of
any substantial part of its property, or the making by it of any assignment for
the benefit of creditors or the admission by it of its inability to pay its
debts generally as they become due or its willingness to be adjudicated a
bankrupt or the failure of Lessee generally to pay its debts as they become due
or the taking of corporate action by Lessee in furtherance of any of the
foregoing.
<PAGE>
19. Remedies.
If an Event of Default specified in Subsection 18(vii) or (viii) above
shall occur, then, and in any such event, Lessor shall not be obligated to
purchase or lease any of the equipment and this Lease shall, without any
declaration or other action by Lessor, be in default. If an Event of Default,
other than an Event of Default specified in Subsection 18(vii) or (viii) above,
shall occur, Lessor may, at its option, declare this Lease to be in default. At
any time after this Lease is in default under the first sentence of this Section
19, Lessor has declared this Lease to be in default under the second sentence of
this Section 19, Lessor and/or its representative may do any one or more of the
following with respect to all of the equipment or any part thereof as Lessor in
its sole discretion shall elect, to the extent permitted by applicable law then
in effect:
(a) demand that Lessee, and Lessee shall at its expense upon such
demand, return the equipment promptly to Lessor at such place in the continental
United States of America as Lessor shall specify, or lessor and/or its agents,
at its option, may with or without entry upon the premises where the equipment
is located and disable the equipment, or make the equipment inoperable
permanently or temporarily in lessor's sole discretion, and/or take immediate
possession of the equipment and remove the same by summary proceedings or
otherwise, all without liability for or by reason of such entry or taking of
possession, whether for the restoration of damage to property caused by such
taking or for disabling or otherwise;
-7-
<PAGE>
(b) sell the equipment at public or private sale, with or without
notice, advertisement or publication, as Lessor may determine, or otherwise
dispose of, hold, use, operate, lease to others or keep idle the equipment as
Lessor in its sole discretion may determine, all free and clear of any rights of
Lessee and without any duty to account to Lessee with respect to such action or
inaction or for any proceeds with respect thereto;
(c) by written notice to Lessee specifying a payment date which shall
be not earlier than 20 days after the date of such notice, demand that Lessee
pay to Lessor, and Lessee shall pay to Lessor, on the payment date specified in
such notice, as liquidated damages for loss of a bargain and not as a penalty,
all accrued and unpaid rent for the equipment due on all Rent Payment Dates up
to and including the payment date specified in such notice plus an amount
(together with interest on such amount at the Late Charge Rate, from the payment
date specified in such notice to the date of actual payment) equal to the
excess, if any, of the Stipulated Loss Value of the equipment as of the payment
date specified in such notice over the Fair Market Sale Value of the equipment
as of such date,
(d) Lessor may exercise any other right or remedy which may be
available to it under applicable law or proceed by appropriate court action to
enforce the terms hereof or to recover damages for the breach hereof or to
rescind this Lease. Lessor is entitled to recover any amount that fully
compensates the Lessor for any damage to or loss of the Lessor's residual
interest in the equipment caused by the Lessee's default.
In the event any present value discounting is applied, the discount
rate used shall be the Federal Reserve Board Discount Rate.
In addition, Lessee shall be liable for any and all unpaid rent and
other amounts due hereunder before or during the exercise of any of the
foregoing remedies and for all reasonable legal fees and other costs and
expenses incurred by reason of the occurrence of any Event of Default or the
exercise of Lessor's remedies with respect thereto, including all reasonable
costs and expenses incurred in connection with the placing of the equipment in
the condition required by Section 12 hereof.
No remedy referred to in this Section 19 is intended to be exclusive,
but each shall be cumulative and in addition to any other remedy referred to
herein or otherwise available to Lessor at law or in equity; and the exercise or
beginning of exercise by Lessor of any one or more of such remedies shall not
preclude the simultaneous or later exercise by Lessor of any or all such other
remedies. No express or implied waiver by Lessor of an Event of Default shall in
any way be, or be construed to be, a waiver of any future or subsequent Event of
Default. To the extent permitted by applicable law, Lessee hereby waives any
rights now or hereafter conferred by statute or otherwise which may require
Lessor to sell or lease or otherwise use the equipment in mitigation of Lessor's
damages or losses or which may otherwise limit or modify any of lessor's rights
or remedies under this Lease.
20. Lessor's Right to Perform.
If Lessee fails to make any payment required to be made by it hereunder
or fails to perform or comply with any of its other agreements contained herein,
lessor may itself make such payment or perform or comply with such agreement,
and the amount of such payment and the amount of the reasonable expenses of
Lessor incurred in connection with such payment or the performance of or
compliance with such agreement, as the case may be, together with interest
thereon at the Late Charge Rate, shall be deemed to be additional rent, payable
by Lessee within 30 days of notice.
21. LOCATION; ASSIGNMENT OR SUBLEASE; TITLE TRANSFER.
(a) LESSEE WILL NOT REMOVE THE EQUIPMENT FROM THE LOCATION SPECIFIED IN
SCHEDULE 1 OF EXHIBIT A WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR, SUCH
CONSENT NOT TO BE UNREASONABLY WITHHELD, EXCEPT REMOVAL OUTSIDE THE CONTINENTAL
U.S. IS NOT PERMITTED. THE EQUIPMENT SHALL AT ALL TIMES BE IN THE SOLE
POSSESSION AND CONTROL OF LESSEE AND LESSEE WILL NOT, WITHOUT THE PRIOR WRITTEN
CONSENT OF LESSOR, ASSIGN THIS LEASE OR ANY INTEREST HEREIN OR SUBLEASE OR
OTHERWISE TRANSFER ITS INTEREST IN ANY OF THE EQUIPMENT, AND ANY ATTEMPTED
ASSIGNMENT, SUBLEASE OR OTHER TRANSFER BY LESSEE IN VIOLATION OF THESE
PROVISIONS SHALL BE VOID.
(b) LESSOR AND LESSEE ACKNOWLEDGE THAT LESSOR (i) MAY TRANSFER ITS
INTEREST IN THE EQUIPMENT AN OWNER OTHER THAN LESSOR. LESSOR MAY
CONTEMPORANEOUSLY THEREWITH LEASE THE EQUIPMENT BACK FROM SUCH OWNER AND(i) MAY
ASSIGN THIS LEASE LESSEE HEREBY CONSENTS TO EACH OF THE ABOVE-DESCRIBED
TRANSACTIONS. FURTHER LESSEE DOES HEREBY ACKNOWLEDGE (i) THAT ANY SUCH TRANSFER
AND/OR ASSIGNMENT BY LESSOR DOES NOT MATERIALLY CHANGE LESSEE'S DUTIES AND
OBLIGATIONS HEREUNDER, (ii) THAT SUCH TRANSFER AND/OR ASSIGNMENT DOES NOT
MATERIALLY INCREASE THE BURDENS OR RIGHTS IMPOSED ON THE LESSEE, AND (iii)THAT
THE ASSIGNMENT IS PERMITTED EVEN IF THE ASSlGNMENT COULD BE DEEMED TO MATERIALLY
AFFECT THE INTEREST OF THE LESSEE.
<PAGE>
22. Status Changes in Lessee.
Lessee will not without thirty (30) days prior written notice to
Lessor, (a) enter into arty transaction of merger or consolidation unless it is
the surviving corporation or after giving effect to such merger or consolidation
its net worth equals or exceeds that which existed prior to such merger or
consolidation; or (b) change the form of organization of its business; or (c)
change its name or its chief place of business. Lessee must obtain Lessor's
prior written concurrence before Lessee may undertake any actions to (a)
liquidate, dissolve or any such similar action of the Lessee's organization, or
(b) sell, transfer or otherwise dispose of all or any substantial part of
Lessee's assets.
-8-
<PAGE>
23. Further Assurances; Financial Information.
(a) Lessee will, at its expense, promptly and duly execute and deliver
to Lessor such further documents and assurances and take such further action as
Lessor may from time to time reasonably request in order to establish and
protect the rights, interests and remedies created or intended to be created in
favor of Lessor hereunder, including without limitation, the execution and
ruling of Uniform Commercial Code financing statements covering the equipment
and proceeds therefrom in the jurisdictions in which the equipment is located
from time to time. To the extent permitted by applicable law, Lessee hereby
authorizes Lessor to file any such financing statements without the signature of
Lessee.
(b) Lessee will qualify to do business and remain qualified in good
standing in each jurisdiction in which the equipment is from time to time
located.
(c) Lessee will furnish to Lessor as soon as available, but in any
event not later than 90 days after the end of each fiscal year of Lessee, a
consolidated balance sheet of Lessee as at the end of such fiscal year, and
consolidated statements of income and changes in financial position of Lessee
for such fiscal year all in reasonable detail, prepared in accordance with
generally accepted accounting principles applied on a basis consistently
maintained throughout the period involved. These reports will not be disclosed
to anyone other than the Lessor and/or the Owner as provided in Section 21(b).
24. Notices.
All notices, demands and other communications hereunder shall be in
writing, and shall be deemed to have been given or made when deposited in the
United States mail, first class postage prepaid, addressed as follows or to such
other address as any of the authorized representatives of the following entities
may from time to time designate in writing to the other listed below;
Lessor: TELECOMMUNICATIONS FINANCE GROUP
400 Rinehart Road
Lake Mary, Florida 32746
Lessee: PICK COMMUNICATIONS CORP.
155 Route 46 W., 3rd floor
Wayne, NJ 07470
25. Conditions Precedent:
(a) Lessor shall not be obligated to lease the items of equipment
described herein to Lessee hereunder unless;
(i) Such Uniform Commercial Code financing statements covering
equipment and proceeds therefrom and landlord and/or mortgagee waivers or
disclaimers and/or severance agreements with respect to the items of equipment
covered by this Lease as Lessor shall deem necessary or desirable in order to
perfect and protect its interests therein shall have been duly executed and
filed, at Lessee's expense, in such public offices as Lessor shall direct;
(ii) All representations and warranties of Lessee contained
herein or in any document or certificate furnished Lessor in connection herewith
shall be true and correct on and as of the date of this Lease with the same
force and effect as if made on and as of such date; no Event of Default or
Default shall be in existence on such date or shall occur as a result of the
lease by Lessee of the equipment specified in Schedule 1 of Exhibit A;
(iii) In the sole judgment of Lessor, there shall have been no
material adverse change in the financial condition or business of Lessee;
(iv) All proceedings to be taken in connection with the
transactions contemplated by this Lease, and all documents incidental thereto,
shall be satisfactory in form and substance to Lessor and its counsel;
(v) Lessor shall have received from Lessee, in form and
substance satisfactory to it, such other documents and information as lessor
shall reasonably request;
(vi) All legal matters in connection with the transactions
contemplated by this Lease shall be satisfactory to Lessor's counsel; and
(vii) No Change in Tax Law, which in the sole judgment of
Lessor would adversely affect Lessor's Economics, shall have occurred or shall
appear, in Lessor's good faith judgment. to be imminent.
26. Software License.
Reference is made to the form of Software Product License Agreement
attached hereto as Exhibit B (the "License Document'). Lessor has arranged for
the equipment manufacturer to grant Lessee a license to use the Software as
defined in the License Document in conjunction with the equipment leased
hereunder in accordance with the terms of the License Document. The original
license fee is contained in the lease rate. To avail itself of the license
grant, Lessee must execute the License Document, upon Commencement of the Lease.
"Buyer" and "Licensee" as used in the License Document are synonymous with
Lessee.
-9-
<PAGE>
27. LIMITATION OF LIABILITY.
LESSOR SHALL NOT BE LIABLE FOR LOST PROFITS OR REVENUE, SPECIAL,
INDIRECT, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES OF ANY NATURE OR FROM
ANY CAUSE WHETHER BASED IN CONTRACT OR TORT, INCLUDING NEGLIGENCE, OR OTHER
LEGAL THEORY EVEN IF LESSOR HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
LESSEE HEREBY AGREES THAT LESSOR WILL NOT BE LIABLE FOR ANY LOST PROFITS OR
REVENUE OR FOR ANY CLAIM OR DEMAND AGAINST LESSEE BY ANY OTHER PARTY.
28. Miscellaneous.
(a) Any provision of this Lease which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provisions in any
other jurisdiction. To the extent permitted by applicable law, Lessee hereby
waives any provision of law which renders any provision hereof prohibited or
unenforceable in any respect.
(b) No terms or provisions of this Lease may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which the enforcement of the change, waiver, discharge or
termination is sought. No delay or failure on the part of Lessor to exercise any
power or right hereunder shall operate as a waiver thereof, nor as an
acquiescence in any default, nor shall any single or partial exercise of any
power or right preclude any other or further exercise thereof, or the exercise
of any other power or right. After the occurrence of any Default or Event of
Default, the acceptance by Lessor of any payment of rent or other sum owed by
Lessee pursuant hereto shall not constitute a waiver by Lessor of such Default
or Event of Default, regardless of Lessor's knowledge or lack of knowledge
thereof at the time of acceptance of any such payment, and shall not constitute
a reinstatement of this Lease, if this Lease shall have been declared in default
by Lessor pursuant to Section 18 hereof or otherwise, unless Lessor shall have
agreed in writing to reinstate the lease and to waive the Default or Event of
Default.
In the event Lessee tenders payment to Lessor by check or draft containing a
qualified endorsement purporting to limit or modify Lessee's liability or
obligations under this Lease, such qualified endorsement shall be of no force
and effect even if Lessor processes the check or draft for payment.
(c) This Lease with exhibits contains the full, final and exclusive
statement of the agreement between Lessor and Lessee relating to the lease of
the equipment.
(d) This Lease shall constitute an agreement of an operating lease,
and nothing herein shall be construed as conveying to Lessee any right, title or
interest in the equipment except as Lessee only.
(e) This Lease and the covenants and agreements contained herein
shall be binding upon, and inure to the benefit of, Lessor and its successors
and assigns and Lessee and, to the extent permitted by Section 21 hereof, its
successors and assigns.
(f) The headings of the Sections are for convenience of reference
only, are not a part of this Lease and shall not be deemed to affect the meaning
or construction of any of the provisions hereof.
(g) This Lease may be executed by the parties hereto on any number of
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute but one and the
same instrument.
(h) This Lease is deemed made and entered into in the State of
Florida and shall be governed by and construed under and in accordance with the
laws of the State of Florida as if both parties were residents of Florida.
(i) Lessee hereby irrevocably consents and agrees that any legal
action, suit, or proceeding arising out of or in any way in connection with this
lease shall be instituted or brought in the courts of the State of Florida, or
the United States Courts for the District of Florida, and by execution and
delivery of this Lease, Lessee hereby irrevocably accepts and submits to, for
itself and in respect of its property, generally and unconditionally, the
non-exclusive jurisdiction of any such court, and to all proceedings in such
courts. Lessee irrevocably consents to service of any summons and/or legal
process by registered or certified United States mail, postage prepaid, to
Lessee at the address set forth in Section 24 hereof, such method of service to
constitute, in every respect, sufficient and effective service of process in any
legal action or proceeding. Nothing in this Lease shall affect the right to
service of process in any other manner permitted by law or limit the right of
Lessor to bring actions, suits or proceedings in the court of any other
jurisdiction. Lessee further agrees that final judgment against it in any such
legal action, suit or proceeding shall be conclusive and may be enforced in any
other jurisdiction, within or outside the United States of America, by suit on
the judgment, a certified or exemplified copy of which shall be conclusive
evidence of the fact and the amount of the liability.
-10-
<PAGE>
IN WITNESS WHEREOF, Lessor and Lessee have each caused this Lease to be duly
executed as of the day and year first above written and by its signature below
Lessee expressly acknowledges that this Lease may not be modified unless done so
in a writing signed by each of the parties hereto or their successors in
interest.
PICK COMMUNICATIONS CORP. (Lessee)
By: ______________________________
(Name & Title)
Date Signed: ________, ____
TELECOMMUNICATIONS FINANCE GROUP (Lessor)
By: ______________________________
Authorized Representative
Date Signed:________, ____
-11-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> DEC-31-1996
<PERIOD-END> DEC-31-1997
<CASH> 44,400
<SECURITIES> 0
<RECEIVABLES> 778,315
<ALLOWANCES> (326,497)
<INVENTORY> 2,054
<CURRENT-ASSETS> 622,034
<PP&E> 1,068,571
<DEPRECIATION> 68,488
<TOTAL-ASSETS> 1,817,513
<CURRENT-LIABILITIES> 8,027,642
<BONDS> 0
0
0
<COMMON> 43,325
<OTHER-SE> (7,136,439)
<TOTAL-LIABILITY-AND-EQUITY> 1,817,513
<SALES> 9,015,903
<TOTAL-REVENUES> 9,015,903
<CGS> 8,439,186
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,270,630
<LOSS-PROVISION> 9,890,284
<INTEREST-EXPENSE> 157,669
<INCOME-PRETAX> (11,741,953)
<INCOME-TAX> (1,808,000)
<INCOME-CONTINUING> (9,499,802)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,499,802)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> 0
</TABLE>
