<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-27604
PICK Communications Corp.
(Exact name of the registrant as specified in its charter)
NEVADA 75-2107261
(State or other jurisdiction of (I.R.S. employer
Incorporation or Organization) identification no.)
155 Route 46, West, Third Floor
Wayne Interchange Plaza II
Wayne, NJ 07470
(Address of principal executive offices) (Zip code)
Registrant's Telephone number, including area code: (973) 812-7425
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 for 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. Yes x No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at June 12, 1998
Common Stock, $.001 Par Value 36,426,926
(See Index to Sections of this Document on Page 2)
<PAGE>
PICK Communications Corp.
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.
Table of Contents
Page Number
-----------
PART 1 Financial Information:
Item 1: Financial Statements 3
Consolidated Balance Sheets 4
Consolidated Statements of Operations 5
Consolidated Statements of Stockholders' Equity 6
Consolidated Statements of Cash Flows 7
Notes to the Consolidated Financial Statements 8
Item 2: Management's Discussion and Analysis of Financial 14
Condition and Results of Operations
PART II Other Information:
Item 1: Legal Proceedings 17
Item 2: Changes in Securities 17
Item 3: Defaults upon Senior Securities 17
Item 4: Submission of Matters to a Vote of Security Holders 17
Item 5: Other Information 17
Item 6: Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
<PAGE>
PART I Financial Information
Item 1 - Financial Statements:
Financial Information
The consolidated financial statements for the three months ended March 31,
1998 and March 31, 1997 are derived from the consolidation of the PICK
Communications Corp, (the "Company" or "PCC") Public Info/Comm Kiosk, Inc.,
("PICK"), P.C.T. Prepaid Telephone, Inc. ("PCT") and PICKNET, Inc. (PICKNET).
3
<PAGE>
PICK Communications Corp.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, March 31, 1998
1997 (Unaudited)
---- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 44,400 $ 43,596
Accounts receivable, net 451,818 268,209
Prepaid telephone card inventory 2,054 0
Prepaid expenses and other current assets 123,762 111,869
------------- -------------
Total current assets 622,034 423,674
------------- -------------
FIXED ASSETS:
Furniture and equipment, net 1,000,083 1,075,792
------------- -------------
OTHER ASSETS:
Security deposits 24,396 24,396
Investment in marketable equity securities 171,000 171,000
------------- -------------
Total other assets 195,396 195,396
------------- -------------
Total assets $ 1,817,513 $ 1,694,862
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short term debt $1,000,000 $ 1,475,000
Current portion of capital leases 146,128 172,340
Accounts payable 4,480,815 4,410,794
Deferred revenue - prepaid calling cards 681,653 566,617
Reserve for contingent liability 1,100,000 1,100,000
Advances from stockholder 170,000 170,000
Accrued compensation due stockholder/employees 53,525 53,525
Customer deposits and prepayments 6,496 281,496
Other current liabilities 389,025 500,656
------------- -------------
8,027,642 8,730,428
------------- -------------
Capital leases, less current portion 794,905 860,102
------------- -------------
Total liabilities 8,822,547 9,590,530
------------- -------------
Minority interest in consolidated subsidiary 88,080 87,623
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.001 par value; authorized 75,000,000 shares; 43,325,317
issued and 36,059,817 outstanding at December 31, 1997; 43,634,317
issued and 36,368,817 outstanding at March 31, 1998 43,325 43,634
Additional paid in capital in excess of par 5,886,825 5,989,326
Warrants 21,242 38,021
Treasury stock (3,072,222) (3,072,222)
Unrealized gain (loss) on marketable equity securities 38,000 38,000
Retained earnings (deficit) (10,010,284) (11,020,050)
------------- -------------
Total stockholders' equity (deficit) (7,093,114) (7,983,291)
------------- -------------
Total liabilities and stockholders' equity (deficit) $ 1,817,513 $ 1,694,862
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
PICK Communications Corp.
Consolidated Statements of Operations
Three Months Ended March 31,
(Unaudited)
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
REVENUES:
Sales of long distance services $ 2,150,519 $ 328,732
Sales of prepaid calling cards 287,713 177,759
------------ ------------
Total revenues 2,438,232 506,491
------------ ------------
COST OF SALES:
Cost of sales 2,416,909 828,018
------------ ------------
Gross profit (loss) 21,323 (321,527)
------------ ------------
OPERATING EXPENSES:
Sales and marketing 1,554 0
General and administrative 381,527 515,064
Depreciation 6,298 6,505
Amortization 35,575 51,521
Bad debt expense 26,292 2,072
------------ ------------
Total operating expenses 451,246 575,162
------------ ------------
Loss from operations (429,923) (896,689)
------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (13,944) (113,534)
Net gains (losses) on marketable equity securities (9,399,079) 0
------------ ------------
Total other income (expense) (9,413,023) (113,534)
------------ ------------
(Loss) before minority interest in subsidiary
loss and income taxes (9,842,946) (1,010,223)
Benefit for deferred income taxes 1,808,000 0
Minority interest in subsidiary loss 408,043 457
------------ ------------
Net income (loss) $ (7,626,903) $ (1,009,766)
============ ============
Net income (loss) per common share - basic $ (0.19) $ (0.03)
======== =======
Weighted average shares outstanding - basic 39,884,372 36,274,517
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
PICK Communications Corp.
Consolidated Statements of Stockholders' Equity
(UNAUDITED)
<TABLE>
<CAPTION>
Unrealized
Number Additional Gain (Loss) on Total
of Shares Common Paid in Treasury Marketable Retained Stockholders'
Outstanding Stock Capital Warrants Stock Securities (Deficit) (Deficit)
----------- ----- ------- -------- ----- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1997 36,059,817 $43,325 $5,886,825 $21,242 $(3,072,222) $38,000 $(10,010,284) (7,093,114)
Transactions A) 309,000 309 102,501 0 0 0 0 102,810
B) 0 0 0 16,779 0 0 0 16,779
Net (loss) 0 0 0 0 0 0 (1,009,766) (1,009,766)
---------- ------- ---------- ------- ----------- ------- ------------- ----------
Balance,
March 31, 1998 36,368,817 $43,634 $5,989,326 $38,021 $(3,072,222) $38,000 $(11,020,050) $(7,983,291)
========== ======= ========== ======= =========== ======= ============ ===========
</TABLE>
A) Shares issued to employees and others as compensation.
B) Warrants for purchase of (i) 125,000 shares of common stock at $0.50 per
share, exercisable for three years, and (ii) 100,000 shares of common
stock at $0.24 per share exercisable for one year, issued for placement
of short term debt.
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
PICK Communications Corp.
Consolidated Statements of Cash Flows
Three Months Ended March 31,
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (7,626,903) $ (1,009,766)
Adjustments to reconcile net (loss) to cash provided by
(used in) operating activities:
Non-cash loss on marketable securities 9,399,079 0
Stock and warrants issued for services 0 119,589
Depreciation and amortization 41,873 58,026
Minority interest in subsidiary loss (408,043) (457)
Bad debt expense 26,292 2,072
(Benefit) for deferred income taxes (1,808,000) 0
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (679,548) 181,537
Decrease (increase) in prepaid telephone card inventory 10,046 2,054
Decrease (increase) in other operating assets 7,875 11,893
Increase (decrease) in accounts payable 1,124,038 (70,021)
Increase (decrease) in deferred revenue (218,981) (115,036)
Increase (decrease) in other operating liabilities 198,471 386,631
------------ ------------
Net cash provided by (used in) operating activities 66,199 (433,478)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets 0 (4,137)
------------ ------------
Net cash (used in) investing activities 0 (4,137)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition of treasury stock for cash (11,978) 0
Principle paid on capital leases 0 (38,189)
Funds advanced on third-party debt 0 500,000
Payments on third-party debt 0 (25,000)
Payments on stockholder advances (25,152) 0
------------ ------------
Net cash provided by (used in) financing activities (37,130) 436,811
------------ ------------
Net increase (decrease) in cash 29,069 (804)
CASH, beginning of period 87,712 44,400
------------ ------------
CASH, end of period $ 116,781 $ 43,596
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period $ 6,095 $ 55,372
============ ===========
Non-cash financing activities:
Assets acquired under capital leases 0 129,598
============ ===========
Book value of marketable equity securities exchanged for
common stock of the Company and its subsidiary 6,390,625 0
============ ===========
Book value of marketable equity securities exchanged for
other marketable equity securities 4,085,000 0
============ ===========
Book value of prepaid advertising and telephone cards
exchanged for common stock of the Company
and its subsidiary 2,458,155 0
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(Unaudited)
(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.
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").
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 card is used.
Concentration of Credit Risk
In 1998, approximately 50% and 20% of revenues were from two customers; in
1997, approximately 65% and 12% of revenues were from two customers. The
Company performs periodic credit evaluations of its customers, and may, under
certain circumstances, require deposits or prepayments where deemed
appropriate.
Accounts receivable consist of the following:
December 31, March 31,
1997 1998
---- ----
Accounts receivable $ 778,315 $ 597,158
Reserve for bad debts 326,497 328,949
--------- ---------
Accounts receivable - net $ 451,818 $ 268,209
========= =========
Five customers comprised 29.8%, 20.7%, 17.8%, 16.7 and 11.9% of gross accounts
receivable, respectively, at March 31, 1998. Five customers comprised 35.6%,
19.8%, 16.4%, 13.1% and 10.2% of gross accounts receivable, respectively, at
December 31, 1997. At March 31, 1998, the Company has a reserve for bad debts
equal to 55% of the gross accounts receivable. 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.
8
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(Unaudited)
(1) Summary of Significant Accounting Principles, Continued
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 Assets
The Company's intangible assets (patent and related rights for prepaid
cellular technology) are valued at cost and amortized over their estimated
useful lives of five years. Since, among other factors, this technology
generated no revenues during 1997, the Company elected to write-off the
unamortized balance at December 31, 1997.
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) Furniture and Equipment
Furniture and equipment consists of the following:
December 31, March 31,
1997 1998
---- ----
Office furniture and equipment - at cost $ 127,538 $ 131,675
Less accumulated depreciation (68,488) (74,993)
---------- ----------
Net 59,050 56,682
---------- ----------
Telephone switching equipment
acquired under capital leases 941,033 1,070,631
Less accumulated amortization 0 (51,521)
---------- ----------
Net 941,033 1,019,110
---------- ----------
Net furniture and equipment $1,000,083 $1,075,792
========== ==========
9
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(Unaudited)
(3) Investment in Marketable Equity Securities
In 1996, the Company acquired 4,700,000 restricted shares of the common stock
of Ultimistics, Inc. ("Ultimistics"). 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), 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 March 31, 1998, the Company owned 380,000 restricted shares of the common
stock of JETV. JETV common stock is traded on the over-the-counter market and
reported on the OTC Bulletin Board. The market value per share of JETV was
$1.50 at March 31, 1998, as reflected on the OTC Bulletin Board. 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 March 31, 1998. 200,000 of the JETV shares are
pledged as security for the Company's bank loan (Note 4) and 100,000 of the
JETV shares are pledged to one of the Company's vendors.
(4) Short Term Debt
Short term debt consists of the following:
December 31, March 31,
1997 1998
---- ----
Borrowings from bank $ 750,000 $ 725,000
Short-term loan from individual 250,000 250,000
Loan from customer 0 500,000
----------- -----------
$ 1,000,000 $ 1,475,000
=========== ===========
The bank borrowing matured on May 31, 1998 and bore interest at the bank's
prime rate plus 4%. The current balance of the loan is $575,000 and the
Company is negotiating an extension of the maturity until August 31, 1998.
While the Company believes it will be successful in this negotiation, there is
no assurance that the bank will agree to the extension, or that the Company
will have the ability to satisfy its liability to the bank, should the bank
insist on immediate payment. The loan is secured by the Company's accounts
receivable and 200,000 shares of the common stock of JETV owned by the
Company.
The $250,000 borrowed from an individual was repaid in April, 1998 from the
proceeds from the borrowing discussed in the first paragraph of Note 11. As
additional compensation for lending the Company funds, the individual was
initially 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.
In February of 1998, the Company amended its existing telecommunications
agreement with IDT Corporation ("IDT"), one of its long distance
vendors/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, through
June 9, 1999, at favorable rates and IDT agreed to lend the Company
$2,000,000. $500,000 was funded when the transaction was signed, $1,000,000
was funded in April, 1998 and the remaining $500,000 was advanced in June,
1998. The loan bears interest at 9% and matures in February, 1999. In
addition, IDT received 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. The Company has issued 100,000 warrants with an exercise price
of $0.24 per share, 200,000 warrants with an exercise price of $1.00 per share
and 100,000 warrants with an exercise price of $0.56 per share. The warrants
are exercisable for a period of one year from the respective date of grant.
10
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(Unaudited)
(5) Commitments
The Company leases facilities and equipment under operating and capital
leases. The future minimum payments under such leases as of March 31, 1998 are
as follows:
Operating Capital
Leases Leases
------ ------
1998 (nine months) $ 245,340 $ 214,465
1999 327,120 286,211
2000 240,720 286,211
2001 86,600 286,211
2002 0 286,211
--------- ----------
Total payments $ 899,780 1,359,309
=========
Less amounts representing interest (326,867)
Current portion (172,340)
---------
Capital lease obligations, long-term portion $ 860,102
=========
Rental expense under operating leases was $88,749 and $25,860 for the three
months ended March 31, 1998 and 1997, respectively. The Company has the right
to renew its operating leases for terms of between three and five years.
(6) Income Taxes
The Company's deferred tax assets at December 31, 1997 consist of the
following:
Approximate tax benefit from net operating loss carryforwards:
Federal $1,800,000
State 300,000
----------
2,100,000
Less valuation allowance (2,100,000)
----------
Net deferred tax assets $ 0
==========
The deferred tax assets are comprised of the tax benefit of net operating loss
carryforwards of approximately $5,500,000 at December 31, 1997, which expires
$1,000,000 in 2009, $1,100,000 in 2010, $1,600,000 in 2011 and $1,800,000 in
2012. Utilization of the net operating loss carryforwards may be limited in
the event of a change in control of the Company.
(7) Contract with Blackstone Calling Card, Inc.
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 February 1998, $250,000 was prepaid under
this contract and was applied to purchases made by Blackstone in April and May
of 1998.
11
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(Unaudited)
(8) 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.
(9) 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 Quarter Ended
December 31, 1997 March 31, 1998
------------------------------------- --------------------------------------
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 4,500,000 $ 0.230
Options canceled (3,500,000) $ 0.878 0 -
Granted 4,500,000 $ 0.230 1,100,000 $ .0375
---------- ---------
Outstanding at end of period 4,500,000 $ 0.230 5,600,000 $ 0.259
========== =========
</TABLE>
The options granted in 1996 were cancelled and most were re-issued at lower
exercise prices in 1997.
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.
(10) Comprehensive Income
Comprehensive income, as defined in Statement of Financial Accounting
Standards number 130, "Reporting Comprehensive Income" ("SFAS 130"), includes
all changes in equity during a period from non-owner sources. Examples of
items included in comprehensive income that are excluded from net income are
unrealized gains or losses on marketable equity securities or foreign currency
translation adjustments. For the three months ended March 31, 1998, total
other comprehensive income was $0.
12
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(Unaudited)
(11) 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. The Company has incurred operating losses and negative cash flow
from operations in the quarter ended March 31, 1998 and well as the years
ended December 31, 1997, 1996 and 1995. In addition, the Company has a working
capital deficiency of $8,306,754 at March 31, 1998, which includes a $575,000
loan from the Company's bank which matured on May 31, 1998 (Note 4).
Substantially all of the debts of the Company mature or are subject to payment
agreements calling for payment before the end of 1998. Without the Company
extending the pay-out terms of the aforementioned liabilities or obtaining
additional long-term financing, as well as increasing revenues and/or
decreasing expenses, the Company may 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 of 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 April, 1998 (which matures on July 1, 1998) and
has contracts in place that management believes will allow the Company to
generate positive operating income starting in the 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 in amounts sufficient to
allow it to continue as a going concern.
(12) Subsequent Events
In April 1998, the Company borrowed $1,000,000 from unaffiliated investors.
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 $75,000 and 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.
(13) New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (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.
In March 1998, the FASB issued SFAS number 132, "Employers' Disclosures about
Pensions and Other Post Retirement Benefits." The Company does not currently
provide pension or other post retirement benefits. Consequently, this
statement does not currently apply to the Company.
13
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations:
Results of Operations:
The Company generates revenues from the sale of telecommunications services.
This includes international long distance service to carriers and resellers,
and revenues derived from the sale of prepaid telephone calling cards to
distributors for resale to retail outlets.
The Company's primary costs of sales are the cost of telephone services, for
both the resale of international long distance services and for prepaid
telephone calling cards.
For the resale of international long distance, the Company recognizes revenues
as the traffic is used by its customers. For prepaid telephone calling card
sales, the Company recognizes revenues at the time it provides the telephone
services associated with its cards and recognizes the cost of the carrier
telephone traffic based on the minutes used in the same periods that the
Company recognizes revenues.
Three Months Ended March 31, 1998 Compared with March 31, 1997
The Company significantly curtailed is operations during the first quarter of
1998, while it installed and tested two Siemens Digital Central Office
Switches, which will allow the Company to better control its operations. These
switches replace switching services previously purchased from others.
Consequently, total revenues amounted to $506,491 for the three months ended
March 31, 1998, compared to $2,438,232 for the three months ended March 31,
1997, a decrease of $1,931,741, or 79%. For the three months ended March 31,
1998, the Company generated international long distance revenue of $328,732,
compared with $2,150,519 for the three months ended March 31, 1997, a decrease
of $1,821,787 (85%). Prepaid telephone calling card revenues were $177,759 for
the three months ended March 31, 1998, compared to $287,713 for the three
months ended March 31, 1997. This represents a decrease of $109,954 or 38%.
The direct costs of international long distance and prepaid telephone calling
card services amounted to $828,018 for the three months ended March 31, 1998
compared to $2,416,909 for the three months ended March 31, 1997, a decrease
of $1,588,891 or 66%. The Company's gross profit declined from $21,323 (0.9%)
to a loss of $321,527 (63%) because of a combination of higher fixed costs of
sales associated with the newly-installed switches and significantly lower
revenues to absorb those higher fixed costs.
General and administrative expenses were $515,064 for the three months ended
March 31, 1998, compared to $381,527 for the three months ended March 31,
1997, reflecting an increase of $133,537 or 35%. This increase is primarily
attributable to additions to staff and increases in employee compensation.
14
<PAGE>
Liquidity and Capital Resources:
The Company had a working capital deficit of $8,306,754 as of March 31, 1998
compared to a working capital deficit of $7,405,608 as of December 31, 1997.
Substantially all of the debts of the Company mature or are subject to payment
agreements calling for payment before the end of 1998.
The Company's bank borrowing matured on May 31, 1998. The current balance of
the loan is $575,000 and the Company is negotiating an extension of the
maturity until August 31, 1998. While the Company believes it will be
successful in this negotiation, there is no assurance that the bank will agree
to the extension, or that the Company will have the ability to satisfy its
liability to the bank, should the bank insist on immediate payment.
The Company generated negative cash flow from operations of $433,478 in the
three months ended March 31, 1998. Cash flow from operations during this
period benefited from a $250,000 prepayment from Blackstone Calling Card, Inc.
("Blackstone"), as referred to below. The negative cash flow from operations
was funded by $500,000 borrowed from one of the Company's vendors/customers,
IDT Corporation ("IDT"). (See the following paragraph and Note 4 of Notes to
Consolidated Financial Statements.)
In February of 1998, the Company amended its existing telecommunications
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, through June 9, 1999, and IDT agreed to lend the Company
$2,000,000. $500,000 was funded when the transaction was signed, $1,000,000
was funded in April, 1998 and the remaining $500,000 was advanced in June,
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
Blackstone. 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. 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. The $250,000
prepayment, referred to above, was applied to purchases made by Blackstone in
April and May of 1998.
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 the third 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 from unaffiliated investors.
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.
15
<PAGE>
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.
16
<PAGE>
Part II - Other Information
Item 1 - Legal proceedings:
During the quarter ended March 31, 1998, there were no material changes in the
Company's legal proceedings commenced against American Telephone & Telegraph
Company.
Item 2 - Changes in securities:
None to report
Item 3 - Defaults upon senior securities:
None to report
Item 4 - Submission of matters to a vote of security holders: None to
report.
Item 5 - Other information:
None to report
Item 6 - Exhibits and reports on Form 8-K: None to report.
17
<PAGE>
Signatures:
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PICK Communications Corp.
Date: June 17, 1998 By: /s/ Diego Leiva
------------------------------------------------
Diego Leiva
President and Chief Executive Officer
Date: June 17, 1998 By: /s/ Robert S. Bingham
------------------------------------------------
Robert S. Bingham
Vice President and Chief Financial Officer
(Principal Accounting Officer)
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