<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 JUNE 30, 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)
Registrant's Telephone number, including area code: (973) 812-7425
Indicate by check mark whether the registrant (1) has filed reports 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 August 7, 1998
Common Stock, $.001 Par Value 36,497,767
(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.
Index to Form 10-Q
------------------
Page Number
-----------
PART I Financial Information
Item 1: Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to the Consolidated Financial Statements 8
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
PART II Other Information:
Item 1 Legal Proceedings 18
Item 2 Changes in Securities 18
Item 3 Defaults Upon Senior Securities 19
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 5 Other Information 19
Item 6 Exhibits and Reports on Form 8-K 19
SIGNATURES 20
2
<PAGE>
Part I - Financial Information
- ------------------------------
Item 1 - Financial Statements
PICK Communications Corp.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
---- ----
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 44,400 $ 278,748
Accounts receivable, net 451,818 442,251
Prepaid telephone card inventory 2,054 0
Prepaid expenses and other current assets 123,762 189,609
----------- -----------
Total current assets 622,034 910,608
----------- -----------
Furniture and equipment, net 1,000,083 1,483,888
----------- -----------
OTHER ASSETS:
Security deposits 24,396 28,346
Investment in marketable equity securities 171,000 99,750
----------- -----------
Total other assets 195,396 128,096
----------- -----------
Total assets $ 1,817,513 $ 2,522,592
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short term debt $ 1,000,000 $ 3,575,000
Current portion of capital leases 146,128 255,931
Accounts payable 4,480,815 3,811,417
Deferred revenue - prepaid calling cards 681,653 1,239,062
Reserve for contingent liability 1,100,000 1,100,000
Advances from stockholder 170,000 0
Accrued compensation due stockholders 53,525 0
Customer deposits and prepayments 6,496 181,496
Other current liabilities 389,025 642,913
----------- -----------
Total current liabilities 8,027,642 10,805,819
----------- -----------
Capital leases, less current portion 794,905 1,182,609
----------- -----------
Total liabilities 8,822,547 11,988,428
----------- -----------
Minority interest in consolidated subsidiary 88,080 87,166
----------- -----------
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; 43,692,426
issued and 36,426,926 outstanding at June 30, 1998 43,325 43,692
Additional paid in capital in excess of par 5,886,825 6,019,268
Warrants to purchase common stock 21,242 276,621
Treasury stock (3,072,222) (3,072,222)
Unrealized gain (loss) on marketable equity securities 38,000 (33,250)
Retained earnings (deficit) (10,010,284) (12,787,111)
----------- -----------
Total stockholders' equity (deficit) (7,093,114) (9,553,002)
----------- -----------
Total liabilities and stockholders' equity (deficit) $ 1,817,513 $ 2,522,592
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
PICK Communications Corp.
Consolidated Statements of Operations
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Sales of long distance services $ 2,591,695 $ 634,286 $ 4,742,214 $ 963,018
Sales of prepaid calling cards 264,962 1,135,736 552,675 1,313,495
----------- ----------- ----------- -----------
Total revenues 2,856,657 1,770,022 5,294,889 2,276,513
COST OF SALES:
Cost of sales 2,726,444 2,320,676 5,143,353 3,148,694
----------- ----------- ----------- -----------
Gross profit (loss) 130,213 (550,654) 151,536 (872,181)
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Sales and marketing 35,041 0 36,595 0
General and administrative 494,938 589,850 876,465 1,104,914
Depreciation 6,418 7,472 12,716 13,977
Amortization 35,589 71,851 71,164 123,372
Bad debt expense 39,385 0 65,677 2,072
----------- ----------- ----------- -----------
Total operating expenses 611,371 669,173 1,062,617 1,244,335
----------- ----------- ----------- -----------
(Loss) from operations (481,158) (1,219,827) (911,081) (2,116,516)
----------- ----------- ----------- -----------
OTHER (EXPENSE):
Net interest (expense) (16,252) (428,061) (30,196) (541,595)
Amortization of debt placement expenses 0 (118,750) 0 (118,750)
Net (losses) on marketable equity securities 0 0 (9,399,079) 0
----------- ----------- ----------- -----------
Total other (expense) (16,252) (546,811) (9,429,275) (660,345)
----------- ----------- ----------- -----------
(Loss) before minority interest in
subsidiary loss and income taxes (497,410) (1,766,638) (10,340,356) (2,776,861)
Minority interest in subsidiary loss 3,178 457 411,223 914
Benefit (provision) for income taxes 0 (880) 1,808,000 (880)
----------- ----------- ----------- -----------
Net (loss) $ (494,232) $ (1,767,061) $(8,121,133) $(2,776,827)
=========== ============ ============ ============
Net (loss) per common share - basic $(0.01) $(0.05) $(0.21) $(0.08)
====== ====== ====== ======
Weighted average shares outstanding - basic 35,832,016 36,403,908 37,887,803 36,339,570
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<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) 367,109 367 132,443 0 0 0 0 132,810
B) 0 0 0 255,379 0 0 0 255,379
C) 0 0 0 0 0 (71,250) 0 (71,250)
Net (loss) 0 0 0 0 0 0 (2,776,827) (2,776,827)
---------- -------- ----------- --------- ----------- ---------- ------------ ----------
Balance,
June 30, 1998 36,426,926 $ 43,692 $ 6,019,268 $ 276,621 $(3,072,222) $ (33,250) $(12,787,111) $(9,553,002)
========== ======== =========== ========= =========== ========== ============ ===========
</TABLE>
A) Shares issued to employees and others as compensation.
B) Warrants for purchase of (i) 250,000 shares of common stock at $0.50 per
share, exercisable for three years, (ii) 100,000 shares of common stock
at $0.24 per share exercisable for one year, (iii) 200,000 shares of
common stock at $1.00 per share exercisable for one year (iv) 1,250,000
shares of common stock at $0.35 per share exercisable for three years and
(v) 100,000 shares at $0.56 per share exercisable for one year.
C) Adjustment to unrealized gain (loss) on marketable equity securities.
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
PICK Communications Corp.
Consolidated Statements of Cash Flows
Six Months Ended June 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (8,121,133) $ (2,776,827)
Adjustments to reconcile net (loss) to cash provided by
(used in) operating activities:
Non-cash loss on marketable securities 9,399,079 0
Common stock issued for services 0 132,810
Warrants to purchase common stock issued to lenders 0 211,629
Depreciation and amortization 83,880 256,099
Minority interest in subsidiary loss (411,223) (914)
Bad debt expense 65,677 2,072
(Benefit) for deferred income taxes (1,808,000) 0
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (413,252) 7,495
Decrease (increase) in prepaid telephone card inventory 5,511 2,054
Decrease (increase) in other operating assets (8,068) (69,797)
Increase (decrease) in accounts payable 1,954,877 (669,398)
Increase (decrease) in deferred revenue (226,405) 557,409
Increase (decrease) in customer deposits (300,000) 175,000
Increase (decrease) in other operating liabilities (166,033) 200,364
------------- ------------
Net cash provided by (used in) operating activities 54,910 (1,972,004)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (6,513) (30,127)
------------- ------------
Net cash (used in) investing activities (6,513) (30,127)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition of treasury stock for cash (11,978) 0
Principal paid on capital leases 0 (93,521)
Funds advanced on third-party debt, net of cash placement costs 0 2,925,000
Payments on third-party debt 0 (425,000)
Funds advanced by stockholder 0 15,000
Payments of stockholder advances (25,152) (185,000)
------------- ------------
Net cash provided by (used in) financing activities (37,130) 2,236,479
------------- ------------
Net increase in cash 11,267 234,348
CASH, beginning of period 87,712 44,400
------------- ------------
CASH, end of period $ 98,979 $ 278,748
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
PICK Communications Corp.
Consolidated Statements of Cash Flows (Continued)
Six Months Ended June 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period $ 29,636 $ 325,246
=========== ============
Non-cash financing activities:
Assets acquired under capital leases 0 591,026
============ ============
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
============ ============
Prepaid advertising 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, Public Info/Comm Kiosk, Inc.
("PICK"), PICKNET Inc. ("PICKNET"), and P.C.T. Prepaid Telephone, Inc.
("PCT"). All significant intercompany balances and transactions have been
eliminated.
Minority interest represents the minority shareholders' proportionate share of
the equity and loss of 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 that 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.
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.
Concentration of Credit Risk
In 1998, approximately 43% and 16% of revenues were from two customers; in
1997, approximately 25% and 14% 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.
8
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(UNAUDITED)
(1) Summary of Significant Accounting Principles, Continued
Concentration of Credit Risk, Continued
Accounts receivable consist of the following:
December 31, June 30,
1997 1998
---- ----
Accounts receivable $ 778,315 $ 670,321
Reserve for bad debts 326,497 228,070
--------- ---------
Accounts receivable - net $ 451,818 $ 442,251
========= =========
Four customers comprised approximately 25%, 24%, 19%, and 16% of gross
accounts receivable, respectively, at June 30, 1998. Five customers comprised
approximately 36%, 20%, 16%, 13% and 10% of gross accounts receivable,
respectively, at December 31, 1997. At June 30, 1998, the Company has a
reserve for bad debts equal to 34% 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.
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).
Telephone equipment acquired under capital leases is amortized over five
years, using the straight line method.
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.
Accounts Payable
Accounts payable at June 30, 1998 includes $2,170,544 payable to WorldCom
Network Services, Inc., which is payable in monthly installments of between
$350,000 and $385,544, plus interest at 18% per annum, through December of
1998.
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.
9
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(UNAUDITED)
(2) Furniture and Equipment
Furniture and equipment consists of the following:
December 31, June 30,
1997 1998
---- ----
Furniture and equipment - at cost $ 127,538 $ 157,665
Less accumulated depreciation (68,488) (82,465)
--------- ---------
Net 59,050 75,200
--------- ---------
Telephone switching equipment
acquired under capital leases 941,033 1,532,059
Less accumulated amortization 0 (123,372)
--------- ---------
Net 941,033 1,408,687
--------- ---------
Net furniture and equipment $1,000,083 $1,483,887
========== ==========
(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. and then, Precom
Tech Inc. ("PTI")). The Company recorded losses of $9,399,079 on these
transactions.
At June 30, 1998, the Company owned 380,000 restricted shares of the common
stock of PTI. PTI common stock is traded on the over-the-counter market and
reported on the OTC Bulletin Board. The market value per share of PTI was
$0.875 at June 30, 1998, as reflected on the OTC Bulletin Board. Because the
shares are restricted and there is very limited trading activity in PTI stock,
the Company believes the fair value to be approximately 30% of the market
price, or $99,750 at June 30, 1998. 200,000 of the PTI shares were pledged as
security for the Company's bank loan (Note 4) and 100,000 of the PTI shares
are pledged to one of the Company's vendors.
(4) Short Term Debt
Short-term debt consists of the following:
December 31, June 30,
1997 1998
---- ----
Borrowings from bank $ 750,000 $ 575,000
Short-term loans 250,000 1,000,000
Loan from customer/supplier 0 2,000,000
---------- ----------
$1,000,000 $3,575,000
========== ==========
The bank borrowing was repaid on July 29, 1998 from a portion of the proceeds
of the borrowing discussed in Note 12.
The $250,000 short-term loan outstanding at December 31, 1997 was repaid in
April 1998 from the borrowing discussed in the following paragraph. As
additional compensation for lending the Company funds, the individual was
initially granted warrants (exercisable over three years) to purchase 250,000
10
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(UNAUDITED)
(4) Short Term Debt, Continued
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 April 1998, the Company borrowed $1,000,000 from unaffiliated investors.
The loan was unsecured, bore interest at 10% and matured 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. This borrowing was repaid on July 31, 1998
from a portion of the proceeds of the borrowing discussed in Note 12. Because
the borrowing was repaid after maturity date, the interest rate was increased,
effective July 1, 1998, to 18% and the lenders have the option, exercisable
through August 28, 1998, to return the principal and interest paid to the
Company in exchange for shares of the Company's common stock at a cost of the
lesser of $0.25 per share or 50% of the closing bid price on the date prior to
conversion.
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. Of this amount, $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 dates of grant.
(5) Commitments
The Company leases facilities and equipment under operating and capital
leases. The future minimum payments under such leases as of June 30, 1998 are
as follows:
Operating Capital
Leases Leases
--------- -------
1998 (six months) $ 163,560 $ 207,392
1999 327,120 414,783
2000 240,720 414,783
2001 86,600 414,783
2002 0 414,783
--------- ---------
Total payments $ 818,000 1,866,524
=========
Less amounts representing interest (427,984)
Current portion (255,931)
---------
Capital lease obligations, long-term portion $1,182,609
==========
Rental expense under operating leases was $182,136 and $51,720 for the six
months ended June 30, 1998
11
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(UNAUDITED)
(5) Commitments, Continued
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.
(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.
12
<PAGE>
(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 Six Months Ended
December 31, 1997 June 30, 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 cancelled (3,500,000) $ 0.878 0 -
Options granted 4,500,000 $ 0.230 1,200,000 $ 0.427
--------- ---------
Outstanding at end of period 4,500,000 $ 0.230 5,700,000 $ 0.271
========= =========
</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 six months ended June 30, 1998, total other
comprehensive income was a loss of $71,250.
(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 six months ended June 30, 1998 as well as the years
ended December 31, 1997, 1996 and 1995. In addition, the Company has a working
capital deficiency of $9,895,211 at June 30, 1998. As discussed in the
following footnote, the Company has entered into significant equipment
purchase and software license commitments and has obtained additional
short-term financing during the third quarter of 1998 (which matures in the
fourth quarter of 1998). 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.
13
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(UNAUDITED)
(11) Going Concern Matters
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 July and August 1998, the Company borrowed $5,313,750 of privately-placed
short-term debt. The related notes bear interest at 10%, are secured by
substantially all assets of the Company and mature in 120 days from date of
issuance. In addition, each note purchaser is entitled to a warrant to
purchase one share of the Company's common stock for each dollar loaned. The
warrants are exercisable for five years at an exercise price of $0.50 per
share. The Company is also obligated to issue 748,416 shares of its common
stock and 1,347,149 warrants to purchase shares of its common stock at $0.50
per share to entities assisting in the placement of the debt. See Part II,
Item 2 - Changes in Securities.
Subsequent to June 30, 1998, the Company committed to purchase approximately
$1,600,000 worth of telecommunications and computer equipment, payments for
which will be due prior to September 31, 1998. The Company also committed to
license certain computer software, which will obligate the Company to minimum
payments of $2,600,000, of which $465,000 is due in the third quarter and
$385,000 in the fourth quarter.
(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.
14
<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.
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. The Company began to recognize revenue from
sales to Blackstone in the second quarter of 1998.
In late 1997, the Company entered into a reciprocal telecommunications
agreement for international traffic termination in Africa, the Middle East and
Asia, via satellite, with Gulfsat Communications Company ("Gulfsat" and the
"Gulfsat Contract"), a communications company located in the Middle East. In
March 1998, the term of the contract was extended to February 28, 2003. Under
the contract, the Company is entitled to terminate up to 70,000,000 minutes
per month in telecommunications services into the above regions, at rates that
are significantly lower than those currently available to the Company or its
competitors.
The Company began to send traffic to one country in the second quarter and
anticipates adding additional capacity starting late in the third quarter of
1998. To utilize this capacity, the Company and/or Gulfsat must purchase and
install telephone switching and compression equipment at several locations in
the United States, the United Kingdom and the destination countries. Until
this capacity can be more fully employed, the Company anticipates that long
distance revenues will lag behind revenues reported in the prior year.
15
<PAGE>
Six Months Ended June 30, 1998 Compared with June 30, 1997
The Company significantly curtailed is operations during the first half of
1998, while it installed and tested two Siemens Digital Central Office
Switches. These switches replace switching services previously purchased from
third party vendors. Consequently, total revenues amounted to $2,276,513 for
the six months ended June 30, 1998, compared to $5,294,889 for the six months
ended June 30, 1997, a decrease of $3,018,376, or 57%. For the six months
ended June 30, 1998, the Company generated international long distance revenue
of $963,018, compared with $4,742,214 for the six months ended June 30, 1997,
a decrease of $3,779,196 (80%). Prepaid telephone calling card revenues were
$1,313,495 for the six months ended June 30, 1998, compared to $552,675 for
the six months ended June 30, 1997. This represents an increase of $760,820 or
138% and is attributable to sales to Blackstone.
The direct costs of international long distance and prepaid telephone calling
card services amounted to $3,148,694 for the six months ended June 30, 1998
compared to $5,143,353 for the six months ended June 30, 1997, a decrease of
$1,994,659 or 39%. The Company's gross profit declined from $151,536 (2.9%) to
a loss of $872,181 (38%) 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 $1,104,914 for the six months ended
June 30, 1998, compared to $876,465 for the six months ended June 30, 1997,
reflecting an increase of $228,449 or 26%. This increase is primarily
attributable to costs associated with additions to staff.
The Company's net loss improved from $8,121,133 to $2,776,827 primarily
because 1997 was burdened by $9,399,079 in non-cash, non-operating losses on
disposition of marketable equity securities, offset by a $1,205,435 increase
in operating losses and a $630,149 increase in net interest expense and
amortization of debt placement fees.
The Company's $1,972,004 negative cash flow from operations was financed by
proceeds from short-term borrowings.
Three Months Ended June 30, 1998 Compared with June 30, 1997
Total revenues amounted to $1,770,022 for the three months ended June 30,
1998, compared to $2,856,657 for the three months ended June 30, 1997, a
decrease of $1,086,635, or 38%. For the three months ended June 30, 1998, the
Company generated international long distance revenue of $634,286, compared
with $2,591,695 for the three months ended June 30, 1997, a decrease of
$1,957,409 (76%). Prepaid telephone calling card revenues were $1,135,736 for
the three months ended June 30, 1998, compared to $264,962 for the three
months ended June 30, 1997. This represents an increase of $870,774 or 329%
and is attributable to sales to Blackstone.
16
<PAGE>
The direct costs of international long distance and prepaid telephone calling
card services amounted to $2,320,676 for the three months ended June 30, 1998
compared to $2,726,444 for the three months ended June 30, 1997, a decrease of
$405,768 or 15%. The Company's gross profit declined from $130,213 (4.6%) to a
loss of $550,654 (31%) 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 $589,850 for the three months ended
June 30, 1998, compared to $494,938 for the three months ended June 30, 1997,
reflecting an increase of $94,912 or 19%. This increase is primarily
attributable to costs associated with additions to staff.
The Company's net loss increased from $494,232 to $1,767,061 primarily due to
the $680,867 decline in gross profit discussed above and an increase of
$530,559 in interest expense and amortization of debt placement expenses.
Liquidity and Capital Resources:
The Company had a working capital deficit of $9,895,211 as of June 30, 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. In addition, the
Company has committed to purchase approximately $1,600,000 worth of
telecommunications and computer equipment, payments for which will be due
prior to September 31, 1998. The Company also committed to license certain
computer software, which will obligate the Company to minimum payments of
$2,600,000, of which $465,000 is due in the third quarter and $385,000 in the
fourth quarter
The Company repaid $1,575,000 in short-term debt during July of 1998,
consisting of $575,000 in bank borrowings and $1,000,000 borrowed in April 1998
from unaffiliated investors. (See Note 4 of Notes to Consolidated Financial
Statements.) The short-term debt was repaid from a portion of the proceeds of
a $5,313,750 short-term debt financing. This replacement, short-term debt
financing matures in the fourth quarter of 1998.
The Company generated negative cash flow from operations of $1,972,004 in the
six months ended June 30, 1998, which was financed with the proceeds of
short-term borrowings.
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.
17
<PAGE>
Part II - Other Information
- ----------------------------
Item 1 - Legal Proceedings:
During the quarter ended June 30, 1998, there were no material changes in the
Company's previously reported legal proceeding commenced against American
Telephone & Telegraph Company.
Item 2 - Changes in Securities:
On July 13, 1998, the Company commenced a private placement offering (the
"Offering") of a minimum of 20 and a maximum of 40 Units (as hereafter
defined) and an over-allotment option of up to 20 Units. The units (the
"Units") each consisted of a $100,000 10% senior secured note (the "Notes")
and warrants (the "Warrants") to purchase 100,000 shares of the Company's
Common Stock.
Commonwealth Associates acted as Placement Agent in the sale of the Units
offered and received upon consummation of the Offering: (i) a placement fee
equal to 7% of the gross proceeds of the Units sold in the Offering; and (ii)
a structuring fee equal to 2% of the gross proceeds of the Units sold in the
Offering. The Placement Agent is entitled to receive from the Company (i) that
number of shares of Common Stock equal to 5% of the gross proceeds of the
Offering divided by the closing bid price of the Company's Common Stock on
July 29, 1998 (the "Closing Bid"); (ii) warrants to purchase at an exercise
price of $.50 per share that number of shares of Common Stock equal to 10% of
the gross proceeds of the Offering divided by the Closing Bid (the "Agent's
Warrants") and (iii) reimbursement of legal fees. The Company agreed to
indemnify the Placement Agent and certain other persons against certain
liabilities, including certain liabilities arising under the Securities Act of
1933, as amended (the "Securities Act").
In addition, Liberty Capital, Ltd., a co-financial advisor to the Company with
respect to the Offering ("Liberty"), is entitled to receive from the Company
under its agreement with the Company: (i) 2% of the offering price of the
Units; (ii) Common Stock equal to 5% of the gross proceeds of the Offering
divided by the Closing Bid and (iii) warrants to purchase at an exercise price
of $.50 per share that number of shares of Common Stock equal to 8% of the
gross proceeds of the Offering divided by the Closing Bid.
On July 29, 1998, July 31, 1998 and August 6, 1998, the Company sold 22.91,
13.9025 and 16.325 Units, respectively, for cash, or an aggregate of
$5,313,750 in gross proceeds. The Units were offered and sold only to
"accredited investors" as such term is defined in Regulation D promulgated
under the Securities Act and was offered and sold only to prospective
investors who: (i) represented, among other things, that they were acquiring
Units for their own account, for investment only and not with a view toward
the resale or distribution thereof that they were aware that the Units had not
been registered under the Securities Act and that their transfer rights are
restricted by the Securities Act, applicable securities laws and the absence
of a market for the Units and (ii) represented that they
18
<PAGE>
were accredited investors. Therefore, the Offering was exempt from
registration pursuant to Section 4(6) of the Securities Act and Rule 506 of
Regulation D promulgated thereunder.
The principal amount of the Notes, together with accrued interest, is due and
payable on the earlier of (i) completion by the Company of an equity financing
resulting in gross proceeds of $5,000,000 or more or (ii) November 26, 1998
(the "Maturity Date"). The Maturity Date set forth in (ii) may be extended for
up to 60 days (the "Extension Period") solely at the Company's option (the
"Extension Option"). In the event the Company defaults in the payment of the
Notes, and such default continues uncured for five (5) business days, holders
of the Notes will have the option to convert the principal amount, together
with accrued interest, into shares of the Company's Common Stock at a
conversion price per share equal to the lower of (i) 50% of the closing bid
price of the Common Stock on the date of the Event of Default or (ii) $.25.
Each Warrant is exercisable for a period of five years commencing on July 29,
1998 for one share of Common Stock at an exercise price equal to $.50 per
share. In the event the Company exercises the Extension Option, the exercise
price of the Warrants shall be reset to the lower of the Closing Bid on the
original Maturity Date or $.50. In the event the Company does not repay the
Notes by the end of the Extension Period, the Company will file a Registration
Statement with the Securities and Exchange Commission within 90 days of the
end of the Extension Period (e.g., April 25, 1999) registering the shares of
Common Stock underlying the Warrants. In the event the Company fails to file
such registration statement on a timely basis, the Exercise Price of this
Warrant shall be adjusted downward 10% per month until such registration
statement is filed. The Warrants will be protected against dilution upon the
occurrence of certain events, including, but not limited to, sales of shares
of Common Stock for less than fair market value or the exercise price.
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:
No reports on Form 8-K have been filed during the quarter ended June
30, 1998.
Exhibits filed as part of this report are listed below:
27 Financial Data Schedule
19
<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: August 12, 1998 By: /s/ Diego Leiva
----------------
Diego Leiva
President and Chief Executive Officer
Date: August 12, 1998 By: /s/ Robert S. Bingham
----------------------
Robert S. Bingham
Vice President and Chief Financial Officer
(Principal Accounting Officer)
20
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<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
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