Page 103 of 128 Pages
Exhibit 7
PICK COMMUNICATIONS CORP.
SUBSCRIPTION AGREEMENT (the "Subscription Agreement" or the "Agreement")
made as of this __ day of March, 1999, between PICK Communications Corp., a
Nevada corporation with offices at 000 Xxxxx 00 Xxxx, Xxxxx Xxxxxxxxxxx Xxxxx
XX, Xxxxx Xxxxx, Xxxxx, Xxx Xxxxxx 00000 (the "Company") and the undersigned
(the "Subscriber").
WHEREAS, the Company is a party to an agreement dated March 3, 1999 with
Commonwealth Associates L.P. ("Commonwealth") and Xxxxx Xxxxx (the "Purchase
Agreement") pursuant to which Commonwealth and/or Permitted Designees (as
defined in the Purchase Agreement) are entitled to purchase shares of Series B
Convertible Preferred Stock (the "Shares") of the Company for a purchase price
of $1.00 per share (subject to adjustment); and
WHEREAS, the Subscriber represents that the Subscriber is either
Commonwealth, an officer, employee or affiliate of Commonwealth, or a Permitted
Designee; and
WHEREAS, the Company and the Subscriber wish to set forth additional terms
and conditions relating to the Subscriber's purchase of the Shares.
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants hereinafter set forth, the parties hereto do hereby agree as follows:
I. SUBSCRIPTION FOR SHARES AND REPRESENTATIONS BY AND COVENANTS OF
SUBSCRIBER
1.1 The Company is currently taking all required steps to effect a change
in its authorized capital stock, by either a reverse split and/or an increase in
the authorized shares, to provide sufficient authorized shares for all its
currently outstanding shares on a fully diluted basis, as well as the Shares
covered by the Purchase Agreement and any other required issuances. The Company
has obtained the approval its shareholders and its Board of Directors and is in
the process of complying with Securities and Exchange Commission (the "SEC" or
the "Commission") requests to effect the proposed change. In any event, Xxxxx
Xxxxx has also agreed to escrow seven million of his shares for the benefit of
Commonwealth and/or the Permitted Designees until the number of authorized
shares is amended if Commonwealth and/or the Permitted Designees and/or the
Holders (as defined in the Purchase Agreement) are unable to obtain common stock
upon conversion of their Preferred Stock and/or Notes (as defined in the
Purchase Agreement).
1.2 The Subscriber represents and warrants that the Subscriber is an
"accredited investor" as such term in defined in Rule 501 of Regulation D
promulgated under the United States Securities Act of 1933, as amended (the
"Act") and is able to bear the economic risk of an investment in the Shares.
1.3 The Subscriber acknowledges that the Subscriber has prior investment
experience, including investment in non-listed and non-registered securities, or
the Subscriber has employed the
Page 104 of 128 Pages
services of an investment advisor, attorney or accountant to read all of the
documents furnished or made available by the Company and to evaluate the merits
and risks of such an investment.
1.4 The Subscriber represents that the Shares are being purchased for
investment and not for distribution or resale to others. The Subscriber agrees
not to sell or otherwise transfer the Shares unless they are registered under
the Act or unless an exemption from such registration is available.
1.5 The Subscriber understands that Rule 144 (the "Rule") promulgated
under the Act requires, among other conditions, a one year holding period prior
to the resale (in limited amounts) of securities acquired in a non-public
offering without having to satisfy the registration requirements under the Act.
The Subscriber understands that the Company makes no representation or warranty
regarding its fulfillment in the future of any reporting requirements under the
Securities Exchange Act of 1934, as amended, or its dissemination to the public
of any current financial or other information concerning the Company, as is
required by the Rule as one of the conditions of its availability. The
Subscriber understands and hereby acknowledges that the Company is under no
obligation to register the Shares under the Act, with the exception of certain
registration rights relating to the shares of Common Stock issuable upon
conversion of the Shares (the "Underlying Shares") set forth in the Purchase
Agreement and Article IV herein. The Subscriber consents that the Company may,
if it desires, permit the transfer of the Shares out of the Subscriber's name
only when the request for transfer is accompanied by an opinion of counsel
reasonably satisfactory to the Company that neither the sale nor the proposed
transfer results in a violation of the Act or any applicable state "blue sky"
laws (collectively " Securities Laws"). The Subscriber agrees to hold the
Company and its directors, officers and controlling persons and their respective
heirs, representatives, successors and assigns harmless and to indemnify them
against all liabilities, costs and expenses incurred by them as a result any
sale or distribution by the undersigned Subscriber in violation of any
Securities Laws
1.6 The Subscriber consents to the placement of a legend on any
certificate or other document evidencing the Shares stating that they have not
been registered under the Act and setting forth or referring to the restrictions
on transferability and sale thereof.
1.7 The Subscriber hereby represents that the address of Subscriber
furnished by him at the end of this Subscription Agreement is the undersigned's
principal residence if he is an individual or its principal business address if
it is a corporation or other entity.
1.8 The Subscriber acknowledges that if he is a Registered Representative
of an NASD member firm, he must give such firm the notice required by the NASD's
Rules of Fair Practice, receipt of which must be acknowledged by such firm on
the signature page hereof.
1.9 The Subscriber acknowledges that at such time, if ever, as the
Underlying Shares are registered, sales of the Underlying Shares will be subject
to state securities laws, including those of states which may require any
securities sold therein to be sold through a registered broker-dealer or in
reliance upon an exemption from registration.
1.10 If the undersigned Subscriber is a partnership, corporation, trust or
other entity, such partnership, corporation, trust or other entity further
represents and warrants that: (i) it was not formed for the purpose of investing
in the Company; (ii) it is authorized and otherwise duly qualified
Page 105 of 128 Pages
to purchase and hold the Shares; and (iii) that this Subscription Agreement has
been duly and validly authorized, executed and delivered constitutes the legal,
binding and enforceable obligation of the undersigned.
II. RISK FACTORS
An investment in the Shares involves a high degree of risk. This
Subscription Agreement contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of the
Company's management as well as assumptions made by and information currently
available to the Company's management. When used in this Subscription Agreement,
the words "anticipate", "believe", "estimate", "expect" and similar expressions,
as they relate to the Company or the Company's management, are intended to
identify forward-looking statements. Such statements reflect the current view of
the Company with respect to future events and are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated or expected. The Company does not intend to update these
forward-looking statements.
Significant and Continuing Losses
The Company has experienced significant operating losses since it
commenced full operations in 1994. The Company incurred net losses of
approximately $1,251,000, $1,071,000 and $9,500,000 for the years ended December
31, 1994, 1995, and 1997 and $8,067,000 for the nine-month period ended
September 30, 1998. Although the Company had net income of $1,636,000 in 1996,
this resulted from non-cash, non-operating income, which was offset in 1997 by
non-cash non-operating losses.
The Company significantly curtailed its operations during the first half
of 1998, while it installed and tested two new switches which should allow the
Company to better control its operations. Consequently total revenues amounted
to approximately $6,239,000 for the nine month period ended September 30, 1998,
compared to $7,591,000 for the comparable period last year. While the new
switches are fully operational, there can be no assurance that the Company will
be able to return in the foreseeable future to the level of sales it had at the
end of 1997. The Company will continue to have a high level of operating
expenses and will be required to make significant up-front expenditures in
connection with its proposed expansion and development of new products
(including, but not limited to, salaries of executive, marketing and other
personnel). The Company expects to incur additional losses until such time as it
is able to generate sufficient revenues to finance its operations and the costs
of expansion. There can be no assurance that the Company will be able to
generate such revenues and operate profitably.
Immediate Need for the Proceeds of the Offering and Additional Financing
The Company is without cash on hand to meet its current obligations. The
Company will not be able to sustain its operations without funding such as the
sale of the Shares. The Company has an immediate need for the proceeds of the
sale of the Shares in order to pay outstanding past-due payables, meet its
immediate payroll obligations and finance its current business operations.
Page 106 of 128 Pages
As of February 17, 1999, the Company had approximately $20 million of
short term indebtedness, including, approximately $8 million of trade payables,
$2 million of a short-term loan which was extended buy may become due and
payable immediately and $9.9 million of 18% senior secured notes (the "Notes"),
plus accrued interest, currently due on March 31, 1999.
At September 30, 1998, the Company had a working capital deficit of
$13,977,767 and a stockholders' deficit of $11,796,854. During 1998, the Company
obtained interim financing, loans and advances in the aggregate amount of
approximately $12,900,000.
The proceeds of the sale of the Shares will be sufficient to enable the
Company to continue operations on an extremely limited basis only. The Company
needs substantial financing to repay the Notes and for additional working
capital. In the event that the Company is unable to obtain such additional
financing, the Noteholders can declare a default and cause the Company to
curtail its operations, sell assets, and/or be forced to seek protection under
the Federal bankruptcy laws. In such an event, the owners of the Shares hereby
can lose their entire investment in the Company.
Exclusive of the $1,000,000 purchase price of the Shares, the Company has
no firm arrangements with respect to additional financing, and it is not
anticipated that existing stockholders will provide any portion of the Company's
future financing requirements. While the Company has had discussions with
potential sources of financing, there can be no assurance that additional
financing, will be available to the Company on commercially reasonable or
acceptable terms, if at all. The failure to secure necessary financing would be
expected to have a material adverse impact on the Company as set forth above.
Qualified Financial Statements Based on Obtaining Financing and Attaining
Successful Operations.
The Company has incurred operating losses and negative cash flow from
operations in 1997, 1996 and 1995 as stated in the Financial Statements and had
a working capital deficiency of $7,406,000 at December 31, 1997. These operating
losses and negative cash flow have continued in 1998 and 1999. In addition,
substantially all of the debts of the Company are short term. The Company's
Former Accountants issued a qualified report on the Company's financial
statements as at and for the year ended December 31, 1997. The report states
that 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. See "Report of Certified Public Accountants" and "Note l4 of Notes to
Financial Statements" contained in the Company's Annual Report on Form 10-K.
Restated Financial Statements
The Company's financial statements as of March 31, 1997 were restated in
June 1998. The Company initially did not report any gains or losses on the
disposition of marketable equity securities for transactions consummated in the
first quarter of 1997, 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 the exchange of one investment in marketable equity securities for a similar
investment. While the
Page 107 of 128 Pages
Company believed its initial reporting was correct when made, 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 $9,400,000 in non-cash, non-operating losses. The
effect of the restatement for the quarter ended March 31, 1997, was to reduce
net income of $948,711 to a net loss of $7,626,903. These transactions do not
have a cash or operating effect on the Company's results of operations, and, to
date, have not adversely affected the price of the Company's Common Stock.
Dependence on Limited Number of Clients
The Company's prepaid telephone calling card business largely depends upon
its relationship with Blackstone Calling Card, Inc. ("Blackstone"). Under the
terms of the Company's agreement with Blackstone (the "Blackstone Agreement"),
Blackstone had agreed to purchase, after a six month phase-in period ending
October 27, 1998, a minimum face value of $5,000,000 per month from the Company,
which was expected to result in net revenues of approximately $3,000,000 per
month to the Company. It is anticipated that the Blackstone Agreement will have
to be amended to lower the purchase minimum amount and the corresponding revenue
to the Company due to the fact that the Company has not received sufficient
capacity from Gulfsat Communications Company ("Gulfsat") to terminate
Blackstone's requirements. Gulfsat has increased the availability of minutes to
the Company, however, not enough to satisfy Blackstone's requirements.
The termination of business by Blackstone could have a material adverse
effect on the Company. The Blackstone Agreement is subject to termination by
either party without cause at the end of year one or upon 60 days' prior notice
by Blackstone if the Company fails to maintain overall network quality.
In 1997, approximately 19% and 13% of the Company's revenues were from two
customers, Trescom and DC Communications Corp. During the first nine months of
1998, approximately 65% of the Company's revenues were from Blackstone.
Limited Operating History
The Company was organized in April 1984 and had no operations when it
acquired control of Public Info/Comm Kiosk, Inc. ("Kiosk") in September 1995, in
a reverse merger. The Company has a limited operating history upon which an
evaluation of the Company's future performance and prospects can be made. The
Company's prospects must be considered in light of the risks, expenses, delays,
problems and difficulties frequently encountered in the establishment of a new
business in the telecommunications industry, which is an evolving industry
characterized by intense competition.
Competition
The Company faces intense competition in the marketing and sale of its
prepaid telephone calling card products and long distance services. The
Company's telephone debit cards and long distance services compete for consumer
recognition with other prepaid phone cards, credit calling cards and long
distance telephone services which have achieved significant international,
national and regional consumer loyalty. Many of these products and services are
marketed by companies which are well-established, have reputations for success
in the development and sale of products and
Page 108 of 128 Pages
services and have significantly greater financial, marketing, distribution,
personnel and other resources than the Company, thereby permitting such
companies to implement extensive advertising and promotional campaigns, both
general and in response to efforts by additional competitors to enter into new
markets and introduce new products and services. Certain of these competitors,
including AT&T, MCI, Sprint and the "Baby Bells," such as Xxxx Atlantic and Xxxx
South, dominate the telecommunications industry and have the financial resources
to enable them to withstand substantial price competition, which is expected to
increase significantly. These and other large telephone companies, as well as
retailers, such as Southland Corp., have entered into the telephone debit card
segment of the industry. In addition, because the prepaid phone card segment of
the industry has no substantial barriers to entry, competition from smaller
competitors in the Company's target markets is also expected to continue to
increase significantly.
The telecommunications industry is characterized by frequent introduction
of new products and services, and is subject to changing consumer preferences
and industry trends, which may adversely affect the Company's ability to plan
for future design, development and marketing of its products and services. The
markets for telecommunications products and services are also characterized by
rapidly changing technology and evolving industry standards, often resulting in
product obsolescence or short product life cycles. The proliferation of new
telecommunications technologies, including personal communication services,
cellular telephone products and services and telephone debit cards employing
alternative technologies, may reduce demand for telephone debit cards generally.
The Internet services business is highly competitive and there are few
significant barriers to entry. Currently, the Company competes with a number of
national and local Internet service providers ("ISPs"). In addition, a number of
multinational corporations, including giant communications carriers such as
AT&T, MCI, Sprint and some of the regional Xxxx operating companies, are
offering, or have announced plans to offer, Internet access or on-line services.
The Company also faces significant competition from Internet access
consolidators such as Verio, Inc. and from on-line service firms such as America
Online ("AOL"), CompuServe, and Prodigy. The Company believes that new
competitors which may include computer software and services, telephone, media,
publishing, cable television and other companies, are likely to enter the
on-line services market.
Many of the Company's Internet service competitors possess financial
resources significantly greater than those of the Company and, accordingly,
could initiate and support prolonged price competition to gain market share. If
significant price competition were to develop, the Company might be forced to
lower its prices, which has occurred in the last year, possibly for a protracted
period, which would have a material adverse effect on its financial condition
and results of operations and could threaten its economic viability. In
addition, the Company believes that the Internet service and on-line service
businesses will further consolidate in the future, which could result in
increased price and other competition in the industry and consequently adversely
impact the Company.
The Company believes that the primary competitive factors among Internet
access providers are price, customer support, technical expertise, local
presence in a market, ease of use, variety of value-added services and
reliability. The Company believes it will be able to compete favorably in these
areas. The Company's success in the high-speed direct market will depend heavily
upon its ability to provide high quality Internet connectivity and value-added
Internet services targeted in
Page 109 of 128 Pages
select target markets. Other factors that will affect the Company's success in
these markets include the Company's continued ability to attract additional
experienced marketing, sales and management talent, and the expansion of
support, training and field service capabilities.
The Company is not presently aware of any competitor offering the same
prepaid cellular telephone technology. Although the Company has a patent on such
product, larger, more established entities with greater financial and personnel
resources than those of the Company have entered into direct competition with
the Company offering competing non-infringing products. Accordingly, there can
be no assurance that the Company will be able to market the product or compete
effectively.
The Company believes that it competes on the basis of price and service.
The Company's success will depend on the Company's ability to anticipate and
respond to rapid changes in consumer preferences and the introduction of new
products, as well as its ability to retain its favorable gross margins. There
can be no assurance that the Company will be able to compete successfully in its
markets.
Uncertainty of Market Acceptance
Achieving market acceptance for the Company's products and services
requires substantial marketing efforts and the expenditure of significant funds
to create both awareness and demand by large corporations, advertisers and
marketers, retailers and consumers. The Company's success depends, in large
part, on its ability to attract large corporations to advertise and promote
their products and services using the Company's telephone debit cards, as well
as the level of acceptance and usage by consumers. Because demand by large
corporations, advertisers and marketers, retailers and consumers may be
interrelated, any lack or lessening of demand by any one of these consuming
entities could adversely affect overall market acceptance of the Company's
products and services. There can be no assurance that substantial markets will
develop for prepaid cellular phones or any new products, nor can there be any
assurance that the Company will be able to meet its current marketing objectives
or succeed in positioning itself as a key player in the telecommunications
industry.
Risks Associated with Marketing Strategy and Rapid Expansion
The Company grew from approximately $1.6 million of net sales in 1995 to
$9.0 million of net sales in 1997 (prior to the decrease in sales during 1998
discussed elsewhere herein). This has placed demands on the management,
employees, operations and physical resources of the organization. Although the
Company intends to continue to pursue a strategy of growth and will seek to
expand its distribution capabilities to achieve greater penetration in new and
emerging telecommunications markets, unless the Company is able to repay its
short-term indebtedness it will be without the required funds to do so, and has
limited experience in effecting expansion. Implementation of the Company's
proposed expansion will depend on, among other things, the Company's ability to
establish additional distribution arrangements targeting several market
segments, and hire and retain skilled management, financial, marketing, and
other personnel.
The Company's marketing strategy and plans are subject to change as a
result of a number of factors, including, but not limited to, progress or delays
in the Company's marketing efforts, changes in market conditions (including the
emergence of significant supplementary markets), the nature of
Page 110 of 128 Pages
possible distribution arrangements which may become available to it in the
future and competitive factors. The Company may also seek to expand its
operations through the possible acquisition of companies in businesses which the
Company believes are complementary with its business. However, there can be no
assurance that the Company will be able to implement successfully its business
strategy or otherwise expand its operations, or that the Company will ultimately
effect any acquisition or integrate successfully into its operations any
acquired business.
In order to manage any future growth, the Company will be required to
continue to improve its operating systems, attract and retain skilled management
and technical personnel and successfully manage growth (including monitoring
operations, controlling costs and maintaining effective quality, and service
controls). If the Company is unable to effectively manage its growth, the
Company's business, operating results and financial conditions could be
adversely affected.
Dependence on Satellites and Third-Party Long Distance Carriers; Possible
Service Interruptions and Equipment Failures
The Company is currently dependent on a limited number of satellites and
domestic and international long distance carriers to provide access to long
distance telephone service on a cost effective basis. The Company has entered
into interconnect agreements or arrangements with satellites and long distance
carriers, pursuant to which the Company leases phone lines and transmission
facilities necessary to transmit consumer calls. Although the Company believes
that it currently has sufficient access to transmission facilities, satellites
and long distance networks on favorable terms and believes that its
relationships with such third parties are satisfactory, any increase in the
rates charged by such third parties would materially adversely affect the
Company's operating margins. Failure to obtain continuing access to such
facilities, satellites and networks would also have a material adverse effect on
the Company, including possibly requiring the Company to significantly curtail
or cease its operations.
In addition, the Company's operations require that its switching
facilities and its satellites and carriers' long distance networks operate on a
continuous basis. It is not atypical for these facilities to experience service
interruptions and equipment failures which could last for a significant period
of time. It is possible that the Company's switching facilities and its
satellites and carriers' long-distance networks may, from time to time,
experience service interruptions or equipment failures. Such interruptions
occurred during the fourth quarter of 1996, when it lost access to its AT&T
switching facilities during a period when it did not have access to an
alternative carrier, and in the first quarter of 1998 when the Company was in
the process of bringing its own leased switches on line. In addition to having a
material adverse effect on the Company's results of operations such
interruptions adversely affect consumer confidence, as well as the Company's
reputation.
Government Regulations
Long distance telecommunication services are subject to regulation by the
Federal Communications Commission (the "FCC") and by state regulatory
authorities. Among other things, these regulatory authorities impose regulations
governing the rates, terms and conditions for interstate and intrastate
telecommunication services. The federal law governing regulation of interstate
telecommunications are the Communications Acts of 1934 and 1996 (the
"Communications Acts"), which applies to all "common carriers," including AT&T,
MCI and Sprint, as well as entities, such
Page 111 of 128 Pages
as the Company, which resell the transmission services provided through the
facilities of other common carriers. In general, under the Communications Acts,
common carriers are required to charge reasonable rates and are prohibited from
engaging in unreasonable practices in the provision of their services. Common
carriers are also prohibited from engaging in unreasonable discrimination in
their rates, charges and practices.
The Communications Acts require each common carrier to file tariffs with
the FCC. A tariff is a list of services offered, the terms under which the
services are offered, and the rates, or range of rates, charged for services.
Upon filing a tariff, the service provider is required to provide the services
at the rates and under the terms and conditions specified in the tariff. Failure
to file a tariff could result in fines and penalties. The Company believes it
has filed all required tariffs with the FCC.
In addition to federal regulation, resellers of long distance services may
be subject to regulation by the various state regulatory authorities. The scope
of such regulation varies from state to state, with certain states requiring the
filing and regulatory approval of various certifications and state tariffs. As
the Company expands the geographic scope of its long distance operations, it
intends to obtain operating authority as may be required to provide long
distance service.
The Company believes that it is in substantial compliance with all
material laws, rules and regulations governing its operations and has obtained
or is in the process of obtaining all licenses, tariffs and approvals necessary
for the conduct of its business. In the future, legislation enacted by Congress,
court decisions relating to the telecommunications industry, or regulatory
actions taken by the FCC or the states in which the Company operates could
adversely impact the Company's business. Changes in existing laws and
regulations, particularly relaxation of existing regulations resulting in
significantly increased price competition, may have a significant impact on the
Company's activities and on the Company's operating results. Adoption of new
statutes and regulations and the Company's expansion into new geographic markets
could require the Company to alter its methods of operations, at costs which
could be substantial, or otherwise limit the types of services offered by the
Company. There can be no assurance that the Company will be able to comply with
additional applicable laws, regulations and licensing requirements.
Future Dependence on the Internet; Developing Market
The Company's ability to derive revenues by providing online commerce and
Internet services will depend, in part, upon a developed and robust industry and
the infrastructure for providing Internet access and carrying Internet traffic.
There can be no assurance that the necessary infrastructure, such as a reliable
network backbone, or complementary products, such as high speed modems, will be
developed or that the Internet will become a viable commercial marketplace in
those segments targeted by the Company. Critical issues concerning the
commercial use of the Internet, including security, reliability, cost, ease of
use and access, and quality of service, remain unresolved and may impact the
growth of Internet use. In the event that the necessary infrastructure or
complementary products are not developed or the Internet does not become a
viable commercial marketplace, the future business, operating results and
financial condition of the Company could be adversely affected if the Company
were to expend significant proceeds for the development of Internet services.
Page 112 of 128 Pages
Dependence on Key Personnel
The development of new telecommunications products and services or
improvements of the Company's existing products is dependent to a significant
degree on the efforts of the Company's Chief Executive Officer, Xxxxx Xxxxx, as
well as certain other officers of the Company. The loss of Xx. Xxxxx'x services
for any reason would be expected to have a material adverse effect on the
Company. In addition, the Company has obtained a $1 million key-man life
insurance policy on Xx. Xxxxx'x life. The Company's future success is also
dependent on, among other factors, the successful recruitment and retention of
key personnel. Competition for skilled and technical talent is intense. There
can be no assurance that the Company will be successful in attracting and
retaining such personnel. Any failure by the Company to retain existing key
employees or to hire new employees when necessary could have a potential adverse
effect upon the Company's business, financial condition and results of
operations.
Possible Inability to Recognize Deferred Revenue
The sale of long distance telephone service through prepaid phone cards
may be subject to "escheat" laws in various states. These laws generally provide
that payments or deposits received in advance or in anticipation of the
provision of utility (including telephone) services that remain unclaimed for a
specific period of time after the termination of such services are deemed
"abandoned property" and must be remitted to the state. Although the Company is
not aware of any case in which such laws have been applied to the sale of
prepaid phone cards, and does not believe that such laws are applicable, in the
event that such laws are deemed applicable, the Company may be unable to
recognize the portion of its deferred revenue remaining upon the expiration of
phone cards with unused calling time. In such event, the Company may be required
to deliver such amounts to certain states in accordance with these laws, which
could have a material adverse effect on the Company.
Control by Management
Xxxxx Xxxxx, the Company's Chief Executive Officer, his affiliates and
other officers and directors of the Company currently own beneficially
approximately 50% of the Company's shares of Common Stock giving effect to all
currently exercisable options and warrants but not the conversion of the Notes
or the Shares. Therefore, these stockholders may have the ability to elect all
of the Company's Directors and to control the outcome of all other issues
submitted to the Company's stockholders.
Difficulty of Trading and Obtaining Quotations for Common Stock
The Company's Common Stock is currently traded in the over-the-counter
market in the so-called "pink sheets," and is quoted on the National Association
of Securities Dealers, Inc.'s Electronic Bulletin Board under the symbol "PICK."
As a result of trading in the over-the-counter market, an investor would likely
find it more difficult to dispose of, or to obtain quotations as to the price of
the Common Stock.
Page 113 of 128 Pages
Xxxxx Stock Regulation
The trading of the Company's Common Stock is currently subject to Rule
15g-9 promulgated under the Exchange Act for non-Nasdaq and non-exchange listed
securities. Under such rule, brokers-dealers who recommend such securities to
persons other than established customers and accredited investors must make a
special written suitability determination for the purchaser and receive the
purchaser's written agreement to a transaction prior to sale. Securities are
exempt from this rule if the market price is at least $5.00 per share.
The SEC has adopted regulations that generally define a "xxxxx stock" to
be an equity security that has a market price of less than $5.00 per share or an
exercise price of less than $5.00 per share subject to certain exceptions. Such
exceptions include equity securities listed on Nasdaq and equity securities
issued by an issuer that has (i) net tangible assets of at least $2,000,000, if
such issuer has been in continuous operation for more than three years, or (ii)
net tangible assets of at least $5,000,000, if such issuer has been in
continuous operation for less than three years, or (iii) average revenue of at
least $6,000,000 for the preceding three years. Unless an exception is
available, the regulations require the delivery, prior to any transaction
involving a xxxxx stock, of a risk disclosure schedule explaining the xxxxx
stock market and the risks associated therewith.
The Company's Common Stock is currently a xxxxx stock as defined in the
Exchange Act and as such, the market liquidity for the Common Stock is limited
to the ability of broker-dealers to sell Common Stock in compliance with the
above-mentioned disclosure requirements .
Restrictions on Transferability
Neither the Shares nor the Underlying Shares have been registered under
the Act or under any state securities laws and they cannot be sold, transferred,
pledged, assigned, hypothecated or otherwise disposed of without registration
under the Act and such laws unless, in the opinion of counsel satisfactory to
the Company, any such sale, transfer, assignment, pledge or hypothecation will
not violate the registration requirements under the Act or state securities
laws. While the Company expects this to occur by the beginning of April 1999,
there can be no assurance the Company will obtain such approval. The Rule will
not be available for any public sale of the Common Stock unless the requirements
thereunder are satisfied, including, but not limited to, the one-year holding
period, which commences from the date of purchase of the Shares and that the
Company is current in its filings with the SEC. The Company did not timely file
its Form 10-K for December 31, 1997 or its Form 10-Q for March 31, 1998,
although its Form 10-Q for June 30, 1998 and September 30, 1998 were filed on a
timely basis. In the event that the Company has not filed a report required to
be filed, an investor hereunder may not be able to sell his Shares under Rule
144 until the time when such report is filed.
The Company has agreed to file a registration statement registering the
Common Stock offered hereby and that issuable upon exercise of the Warrants
within 30 days from the filing with the Commission of the Company's Form 10-K
for the fiscal year ended December 31, 1998, unless a private placement is still
taking place which must be concluded prior to filing a registration statement
with the SEC. There can be no assurance that the Company will file such
registration statement on a timely basis or that any such registration statement
will be declared effective.
Page 114 of 128 Pages
Shares Eligible For Future Sale
Of the shares of the Company's Common Stock outstanding, approximately
21,169,711 are "restricted securities," as that term is defined in the
Securities Act, and may be sold in compliance with the provisions of the Rule.
III. REPRESENTATIONS BY THE COMPANY
The Company represents and warrants to the Subscriber that:
(a) The Company is a corporation duly organized, existing and in
good standing under the laws of the State of Nevada and has the corporate power
to conduct the business which it conducts and proposes to conduct and is
qualified to do business in New Jersey.
(b) The execution, delivery and performance of this Subscription
Agreement by the Company has been duly approved by the Board of Directors of the
Company and the Company will file an Information Statement with the SEC and a
Designation (as defined in the Purchase Agreement) by March 12, 1999 and,
thereafter, will use its best efforts to effect such changes outlined in the
Information Statement.
(c) The Shares have been duly and validly authorized and when issued
and paid for in accordance with the terms hereof, will be duly and validly
issued and fully paid and non assessable.
(d) Except as set forth in Section 1.1 above, the Company will at
all times have authorized and reserved a sufficient number of shares of Common
Stock to provide for conversion of the Shares.
(e) The Company has obtained, or is in the process of obtaining, all
licenses, permits and other governmental authorizations necessary to the conduct
of its business; such licenses, permits and other governmental authorizations
obtained are in full force and effect; and the Company is in all material
respects complying therewith.
(f) The Company knows of no pending or threatened legal or
governmental proceedings to which the Company is a party which could materially
adversely affect the business, property, financial condition or operations of
the Company.
(g) The Company is not in violation of or default under, nor will
the execution and delivery of this Subscription Agreement, the issuance of the
Shares, and the incurrence of the obligations herein and therein set forth and
the consummation of the transactions herein or therein contemplated, result in a
violation of, or constitute a default under, the Company's articles of
incorporation or by-laws, any material obligations, agreement, covenant or
condition contained in any bond, debenture, note or other evidence of
indebtedness or in any material contract, indenture, mortgage, loan agreement,
lease, joint venture or other agreement or instrument to which the Company is a
party or by which it or any of its properties may be bound or any material
order, rule, regulation, writ, injunction, or decree of any government,
governmental instrumentality or court, domestic or foreign.
Page 115 of 128 Pages
(h) The financial information contained in the Subscription
Agreement presents fairly the financial condition of the Company as of the dates
and for the periods indicated.
IV. REGISTRATION RIGHTS
4.1 The Company hereby agrees with the holders of the Shares, the
Underlying Shares or their transferees (collectively, the "Holders") that no
later than one month following the Closing, unless a private placement is still
taking place which must be concluded prior to filing a registration statement
with the SEC covering the resale of the Underlying Shares on Form S-1 or such
other form as the Company desires, pursuant to the Act, and the Company will use
its best efforts to cause such registration to become effective as promptly as
practicable thereafter.
The obligation of the Company under this Section 5.1 shall be limited to
one registration statement.
4.2 Registration Procedures. The Company will after the Closing Date:
(a) prepare and file with the SEC a registration statement with
respect to such securities, and use its best efforts to cause such registration
statement to become and remain effective until the Underlying Shares are freely
saleable without the volume limitations of Rule 144;
(b) prepare and file with the SEC such amendments to such
registration statement and supplements to the prospectus contained therein as
may be necessary to keep such registration statement effective until the
Underlying Shares are freely salable without the volume limitation of Rule 144;
(c) furnish to the Holders participating in such registration and to
the underwriters of the securities being registered such reasonable number of
copies of the registration statement, preliminary prospectus, final prospectus
and such other documents as such underwriters may reasonably request in order to
facilitate the public offering of such securities;
(d) use its best efforts to register or qualify the securities
covered by such registration statement under such state securities or blue sky
laws of such jurisdictions as the Holders may reasonably request in writing
within 45 days following the original filing of such registration statement,
except that the Company shall not for any purpose be required to execute a
general consent to service of process or to qualify to do business as a foreign
corporation in any jurisdiction wherein it is not so qualified;
(e) notify the Holders, promptly after it shall receive notice
thereof, of the time when such registration statement has become effective or a
supplement to any prospectus forming a part of such registration statement has
been filed;
(f) notify the Holders promptly of any request by the SEC for the
amending or supplementing of such registration statement or prospectus or for
additional information;
(g) prepare and file with the SEC, promptly upon the request of any
Holders, any amendments or supplements to such registration statement or
prospectus which, in the opinion of
Page 116 of 128 Pages
counsel for such Holders (and concurred in by counsel for the Company), is
required under the Act or the rules and regulations thereunder in connection
with the distribution of Common Stock by such Holders;
(h) prepare and promptly file with the SEC and promptly notify such
Holders of the filing of such amendment or supplement to such registration
statement or prospectus as may be necessary to correct any statements or
omissions if, at the time when a prospectus relating to such securities is
required to be delivered under the Act, any event shall have occurred as the
result of which any such prospectus or any other prospectus as then in effect
would include an untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of the
circumstances in which they were made, not misleading; and
(i) advise the Holders, promptly after it shall receive notice or
obtain knowledge thereof, of the issuance of any stop order by the SEC
suspending the effectiveness of such registration statement or the initiation or
threatening of any proceeding for that purpose and promptly use its best efforts
to prevent the issuance of any stop order or to obtain its withdrawal if such
stop order should be issued.
4.3 Expenses.
(a) With respect to the registration required pursuant to Section
4.1 hereof, all fees, costs and expenses of and incidental to such registration,
inclusion and public offering (as specified in paragraph (b) below) in
connection therewith shall be borne by the Company, provided, however, that the
Holders shall bear their pro rata share of the underwriting discount and
commissions and transfer taxes.
(b) The fees, costs and expenses of registration to be borne by the
Company as provided in paragraph (a) above shall include, without limitation,
all registration, filing, and NASD fees, printing expenses, fees and
disbursements of counsel and accountants for the Company, and all legal fees and
disbursements and other expenses of complying with state securities or blue sky
laws of any jurisdictions in which the securities to be offered are to be
registered and qualified (except as provided in 4.3(a) above). Fees and
disbursements of counsel and accountants for the Holders and any other expenses
incurred by the Holders not expressly included above shall be borne by the
Holders.
4.4 Indemnification.
(a) The Company will indemnify and hold harmless each Holder of
Securities which are included in a registration statement pursuant to the
provisions of Section 4.1 hereof, its directors and officers, and any
underwriter (as defined in the Act) for such Holder and each person, if any, who
controls such Holder or such underwriter within the meaning of the Act, from and
against, and will reimburse such Holder and each such underwriter and
controlling person with respect to, any and all loss, damage, liability, cost
and expense to which such Holder or any such underwriter or controlling person
may become subject under the Act or otherwise, insofar as such losses, damages,
liabilities, costs or expenses are caused by any untrue statement or alleged
untrue statement of any material fact contained in such registration statement,
any prospectus contained
Page 117 of 128 Pages
therein or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading; provided, however,
that the Company will not be liable in any such case to the extent that any such
loss, damage, liability, cost or expenses arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission so
made in conformity with information furnished by such Holder, such underwriter
or such controlling person in writing specifically for use in the preparation
thereof.
(b) Each Holder of Securities included in a registration pursuant to
the provisions of Section 4.1 hereof will indemnify and hold harmless the
Company, its directors and officers, any controlling person and any underwriter
from and against, and will reimburse the Company, its directors and officers,
any controlling person and any underwriter with respect to, any and all loss,
damage, liability, cost or expense to which the Company or any controlling
person and/or any underwriter may become subject under the Act or otherwise,
insofar as such losses, damages, liabilities, costs or expenses are caused by
any untrue statement or alleged untrue statement of any material fact contained
in such registration statement, any prospectus contained therein or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was so made in reliance upon and in
strict conformity with written information furnished by or on behalf of such
Holder specifically for use in the preparation thereof.
(c) Promptly after receipt by an indemnified party pursuant to the
provisions of paragraph (a) or (b) of this Section 4.4 of notice of the
commencement of any action involving the subject matter of the foregoing
indemnity provisions such indemnified party will, if a claim thereof is to be
made against the indemnifying party pursuant to the provisions of said paragraph
(a) or (b), promptly notify the indemnifying party of the commencement thereof;
but the omission to so notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than
hereunder. In case such action is brought against any indemnified party and it
notifies the indemnifying party of the commencement thereof, the indemnifying
party shall have the right to participate in, and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party,
provided, however, if counsel for the indemnifying party concludes that a single
counsel cannot under applicable legal and ethical considerations, represent both
the indemnifying party and the indemnified party, the indemnified party or
parties have the right to select separate counsel to participate in the defense
of such action on behalf of such indemnified party or parties. After notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party pursuant to the provisions of said paragraph (a) or (b) for
any legal or other expense subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable costs of
investigation, unless (i) the indemnified party shall have employed counsel in
accordance with the provisions of the preceding sentence, (ii) the indemnifying
party shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after the notice of the
commencement of the action or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party.
Page 118 of 128 Pages
V. MISCELLANEOUS
5.1 Any notice or other communication given hereunder shall be deemed
sufficient if in writing and sent by registered or certified mail, return
receipt requested, addressed to the Company, at its registered office, Wayne
Xxxxxxxxxxx Xxxxx XX, Xxxxx Xxxxx, Xxxxx, Xxx Xxxxxx 00000, Attention: Chief
Executive Officer and to the Subscriber at his address indicated on the last
page of this Subscription Agreement. Notices shall be deemed to have been given
on the date of mailing, except notices of change of address, which shall be
deemed to have been given when received.
5.2 This Subscription Agreement shall not be changed, modified or amended
except by a writing signed by the parties to be charged, and this Subscription
Agreement may not be discharged except by performance in accordance with its
terms or by a writing signed by the party to be charged.
5.3 This Subscription Agreement shall be binding upon and inure to the
benefit of the parties hereto and to their respective heirs, legal
representatives, successors and assigns. This Subscription Agreement sets forth
the entire agreement and understanding between the parties as to the subject
matter thereof and merges and supersedes all prior discussions, agreements and
understandings of any and every nature among them.
5.4 Notwithstanding the place where this Subscription Agreement may be
executed by any of the parties hereto, the parties expressly agree that all the
terms and provisions hereof shall be construed in accordance with and governed
by the laws of the State of New York. The parties hereby agree that any dispute
which may arise between them arising out of or in connection with this
Subscription Agreement shall be adjudicated before a court located in New York
City and they hereby submit to the exclusive jurisdiction of the courts of the
State of New York located in New York, New York and of the federal courts in the
Southern District of New York with respect to any action or legal proceeding
commenced by any party, and irrevocably waive any objection they now or
hereafter may have respecting the venue of any such action or proceeding brought
in such a court or respecting the fact that such court is an inconvenient forum,
relating to or arising out of this Subscription Agreement or any acts or
omissions relating to the sale of the securities hereunder, and consent to the
service of process in any such action or legal proceeding by means of registered
or certified mail, return receipt requested, in care of the address set forth
below or such other address as the undersigned shall furnish in writing to the
other.
5.5 This Subscription Agreement may be executed in counterparts.
5.6 The holding of any provision of this Subscription Agreement to be
invalid or unenforceable by a court of competent jurisdiction shall not affect
any other provision of this Subscription Agreement, which shall remain in full
force and effect.
5.7 It is agreed that a waiver by either party of a breach of any
provision of this Subscription Agreement shall not operate, or be construed, as
a waiver of any subsequent breach by that same party.
5.8 The parties agree to execute and deliver all such further documents,
agreements and instruments and take such other and further action as may be
necessary or appropriate to carry out the purposes and intent of this
Subscription Agreement.
Page 119 of 128 Pages
5.9 The Company agrees not to disclose the names, addresses or any other
information about the Subscribers, except as required by law, provided, that the
Company may use information relating to the Subscriber in any registration
statement under the Act with respect to the Securities.
IN WITNESS WHEREOF, the parties have executed this Subscription
Agreement as of the day and year first written above.
------------------------------ ---------------------------------
Signature of Subscriber Signature of Co-Subscriber
------------------------------ ---------------------------------
Name of Subscriber Name of Co-Subscriber
[please print]
------------------------------ ---------------------------------
Address of Subscriber Address of Co-Subscriber
------------------------------ ---------------------------------
Social Security or Taxpayer Social Security or Taxpayer
Identification Number of Subscriber Identification Number of
Co-Subscriber
------------------------------
Number of Shares of Preferred Stock
Subscribed For
*If Subscriber is a Registered Representative
with an NASD member firm, have the following
acknowledgment signed by the appropriate party:
The undersigned NASD member firm
acknowledges receipt of the notice
required by Rule 3050 of the NASD Subscription Accepted:
Conduct Rules.
PICK COMMUNICATIONS CORP.
------------------------------
Name of NASD Member Firm By:
-----------------------------
Name:
Title:
By
---------------------------
Authorized Officer
