<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number is 0-27604
PICK COMMUNICATIONS CORP.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Nevada 75-2107261
(State or other jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or jurisdiction)
155 Route 46 West, Wayne, New Jersey 07470
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 812-7425
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock. $0.001 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
The aggregate market value of the 18,985,662 shares of voting stock held by
non-affiliates of the Registrant as of April 14, 1999 was $35,598,116 (assuming
solely for purposes of this calculation that all directors, officers and greater
than 5% stockholders of the Registrant are "affiliates").
The number of shares outstanding of the Registrant's Common Stock, par value
$0.001 per share, as of April 14, 1999, was 43,367,335.
Documents incorporated by reference: None.
<PAGE>
PART I
This Report includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding expected future
revenues and expenses. Forward-looking statements relate to plans and
expectations of the Company and are subject to risks and uncertainties including
the timely development and acceptance of new products in constantly evolving
telecommunications and Internet industries, the impact of competitive products
and pricing, government regulations and other risks detailed from time to time
in the Company's SEC reports.
Item 1: Business
GENERAL DEVELOPMENT OF THE BUSINESS
PICK Communications Corp. ("PICK" or the "Company") was incorporated in April
1984 under the laws of the State of Utah as S.T.V., Inc. In February 1986, the
Company changed its name to Adolphus Companies, Inc. and to Prime International
Products Inc. ("Prime") in May 1988. Prime ceased operations in late 1990. In
July 1995, Prime changed its state of organization from Utah to Nevada. On
September l2, 1995, Prime executed a Stock Purchase Agreement to exchange
16,500,000 shares of Prime's Common Stock for all of the common stock and
warrants of Public Info/Comm. Kiosk, Inc. ("Kiosk"), which made Kiosk a
subsidiary of Prime. Kiosk was incorporated under the laws of New Jersey in
August. 1992. Prime changed its name to PICK Communications Corp. in December
1995. Unless otherwise indicated, all references to "the Company" or "PICK"
hereinafter include the business and operations of Kiosk prior to the September
12, 1995 transaction and the combined companies thereafter. The transaction was
a reverse acquisition accounted for as a re-organization of Kiosk.
PICK is an interlink facilities based telecommunications service provider
targeting newly deregulated and regulated emerging international markets,
through five wholly-owned subsidiaries -- PICK US Inc., which markets and
distributes prepaid telephone calling cards nationally; PICK Net Inc. and PICK
Net UK PLC, both of which provide international long distance services to other
carriers and resellers, PICK Sat Inc., created with the assistance of Microsoft
and Philips, which recently commenced providing satellite delivered, high speed
broadband Internet access; and PICK Online.Com Inc., recently formed to be an
aggregator and delivery provider of audio and video streaming content
(broadcasts) using multicasting technology to the "Edge of the Internet." In
addition, the Company owns 79% of P.C.T. Prepaid Telephone, Inc., which has
rights to market and distribute a patented, prepaid cellular telephone system in
the United States and Canada.
The Company's business strategy is to be a diversified telecommunications
carrier delivering an integrated package of advanced services, through satellite
communications and through broadband delivery on the Internet of high-speed
voice, data and video services. The Company's initial focus has been to expand
its facilities-based network and augment its capacity to terminate international
traffic throughout the Middle East, Africa and Asia. This expansion is expected
to be facilitated by several reciprocal agreements that the Company has entered
into for delivery of communications
-2-
<PAGE>
services into these regions. The current footprint for PICK Sat is North and
South America with plans for expansion into Asia. The Company is currently
attempting to secure financing for its PICK Sat and PICK Online.Com Inc.
subsidiaries which recently commenced providing services and need to be
capitalized in order to implement their respective business plans. The Company
does not currently plan to expand its prepaid telephone calling card business
and is exploring various alternatives, including the possible sale of such
business.
The Company increased its sales from approximately $23,000 in 1993, to $0.5
million in 1994, $1.6 million in 1995, $5.9 million in 1996, $9.0 million in
1997 and $9.8 million in 1998. The increases in sales, however, corresponded
with net losses for the Company of approximately $1.3 million, $1.1 million,
$9.5 million and $17.1 million for the years ended December 31, 1994, 1995,
1997, and 1998. The Company had a net profit of $1.6 million in 1996. The
Company significantly curtailed its operations during 1998, while it installed
and tested the two Siemens Telecom Networks Digital Central Office switches. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Between July 29 and September 8, 1998, the Company sold an aggregate of 99 Units
in a bridge loan (the "July Bridge Loan") for gross proceeds of $9,900,000. A
portion of the net proceeds of the July Bridge Loan was used to repay a
$1,000,000 unsecured bridge loan incurred in April 1998 and a $575,000 bank loan
which bore interest at 8% above the bank's prime rate. Upon repayment of the
Bank Loan, the Bank released its security interest and a security interest on
the Company's assets was filed on behalf of the investors in the July Bridge
Loan. In November 1998, the interest rate of the July Bridge Loan was increased
retroactively to 18% and the maturity date of the promissory notes evidencing
the loan (the "Notes") was extended to April 27, 1999.
In excess of 90% in interest of the Noteholders have consented to a
restructuring (the "Restructuring") to amend their Notes (the "Amended Note"),
for which the Company has agreed for a two-year period to allow each consenting
Noteholder to (a) exchange one share of Common Stock for each warrant issued in
connection with the original issuance of the Notes, and (b) either receive one
share of Common Stock for every one dollar principal amount of Notes amended, or
alternatively elect to have the conversion price of the Amended Note reset to
$.50 per share. Commonwealth, as agent for the Notes will be paid 10% of the
shares issued to Noteholders in the restructuring up to a maximum of 2 million
shares, plus 500,000 warrants exercisable at $1.375 per share, and the exercise
price of warrants previously issued to Commonwealth was reduced to $.10 per
share.
The maturity date of the Amended Notes will be April 27, 2002. Each Amended Note
shall be convertible at any time at the option of the holder thereof into shares
of Common Stock at $1.00 per share, subject to adjustment under certain
circumstance at the first anniversary date of the
-3-
<PAGE>
Restructuring. In addition, the Company shall have the option to extend the
maturity date for one additional year, in which event the Conversion Price shall
be subject to adjustment.
The Amended Notes shall be automatically converted into shares of Common Stock
in the event that the closing bid price for the Common Stock has exceeded $1.50
per share for 20 consecutive trading days. Commonwealth shall be entitled to
designate one nominee to the Board and the Noteholders shall have the right to
nominate one person to a reconstructed Board consisting of a majority of
independent directors. The Company has agreed to register the Common Stock
issued to the Noteholders in exchange for the Warrants initially issued to them
immediately following the filing of this Report and register all other shares
disclosed above including those issued upon conversion of the Amended Notes,
within six months of the completion of the Restructuring.
International Long Distance Services
The international long distance telecommunications market has experienced
significant growth in recent years. During 1996, according to the Federal
Communications Commission (the "FCC"), the United States originated
international long distance telecommunications market grew at a rate of 20.7%
from $15.9 billion to $19.2 billion for that year. The factors driving this
growth include: (1) deregulation of the telecommunications industry by the FCC
in the United States; (2) new United States regulations regarding international
settlement rates and direct agreements; (3) deregulation and privatization of
the telecommunications industry in developing countries; (4) improvement of
telecommunications infrastructure in the United States and abroad; (5) worldwide
increases in voice and other data communications equipment; and (6)
globalization of commerce.
Major providers such as American Telephone & Telegraph Company ("AT&T"), MCI/
WorldCom, Inc. ("MCI") and Sprint Communications Company ("Sprint") have raised
the threshold for wholesalers seeking to participate in the international long
distance market by linking favorable rates to long-term contracts, coupled with
substantial commitment levels and substantial deposits. Only resellers able to
meet these requirements have the opportunity to aggregate traffic from smaller
resellers and negotiate even more favorable rates. Management believes that PICK
is in a position to exploit its established presence in this market.
PICK Net Inc. and PICK Net UK PLC (collectively, "PICK Net") are two separate
subsidiaries both providing international long distance services to other
carriers and resellers. Each of these companies is a facilities based, switched
carrier, with wholesale digital licenses. To gain rapid market entry without
investment in major capital expenditures or a technical staff, PICK initially
elected to contract for services with an experienced switch service provider. In
1997 and 1998 PICK leased and installed two Siemens Telecom Networks Digital
Central Office switches in Jersey City, New Jersey and Miami, Florida as
international gateways, and anticipates implementing additional "collection
point" international gateway switches which should enhance the Company's ability
to aggregate long distance calls for its network. PICK has also signed a
contract for satellite communications and is seeking to secure several providers
for earth station facilities and transatlantic, as well as domestic, fiber optic
cable systems. PICK established a technical staff to
-4-
<PAGE>
bring this segment of its business under direct Company control rather than
relying on third party providers.
PICK Net has organized and developed dedicated networks combining transatlantic
fiber and internationally based transponder facilities with digital satellite
delivery into the Gulf, Central and East Asian and North and Central African
regions in association (see agreement below) with Gulfsat Communications Company
("Gulfsat"), a Kuwait based satellite telecommunications firm primarily engaged
in providing VSAT (Very Small Aperture Terminal) solutions world wide. Gulfsat
has teamed with PICK to transform itself from a closed network corporate
communications provider, to a satellite based, international long distance
voice, data, and multimedia services provider.
PICK Net in conjunction with Gulfsat delivers international telecommunications
traffic originating from the United States into the deregulating countries
currently served by and contracted with Gulfsat. The Companies will continue to
collectively deploy and implement a dedicated and exclusive network in full
digital ATM protocol which will provide for the termination of voice, data, and
fax traffic originating in the United States and Europe into emerging
international markets.
PICK Net has agreed, together with Gulfsat, to deploy and implement switches
internationally, and for PICK Net to deploy switches in the United States. This
joint deployment strategy calls for the opening of approximately three new
countries each month until all 50 countries currently contracted with Gulfsat
are on-line. Three countries are on-line and fully operational as of April 12,
1999. To access the Gulfsat satellite connections, the Company has access to
earth stations in Nova Scotia and the U.K. and is working to secure access to
other international earth stations.
In late 1997, the Company entered into a reciprocal telecommunications agreement
(the "Gulfsat Contract") for international traffic termination in Africa, the
Middle East and Asia, via satellite, with Gulfsat, which agreement, as amended
in March 1998, terminates on February 28, 2003. Under the agreement, the Company
is entitled to terminate up to approximately 70 million minutes per month in
telecommunications services from the United States and Europe into the above
regions, at the most favorable price per minute rates charged by Gulfsat.
Management believes, based on its knowledge of the industry, that these rates
are lower than those currently available to its competitors. However, in the
second half of 1998, the Company became aware of newer, state-of-the-art
technology that would facilitate the transmission of not only voice traffic but
also data and Internet traffic. In order to capitalize on this technology and
maximize the benefit the Company could derive from the Gulfsat Contract, it
became necessary to defer installation. The Company first had to investigate the
companies offering the appropriate asynchronous transmission mode (ATM)
equipment and then, in concert with Gulfsat, select a strategic vendor in this
global effort. The Company and Gulfsat then had to purchase and install the
appropriate telephone switching and compression equipment for the Jersey City,
New Jersey, hub, the United Kingdom and the first of the several destination
countries. To begin installation, the Company required a portion of the proceeds
from the short-term debt financing obtained in the third quarter of 1998 to
purchase this equipment in late 1998. During 1998, the Company was only able to
terminate traffic into one country in the Middle East via Gulfsat and was unable
to satisfy the requirements of its existing customers.
-5-
<PAGE>
The Company is currently sending traffic into three countries and anticipates
adding subsequent countries in fairly rapid succession. The Company has
purchased the necessary equipment for the installation in half-a-dozen
additional countries, but will require additional funding for further
installations.
On July 20, 1998, the Company signed an agreement (the "Nortel Agreement") with
Northern Telecom Inc. ("Nortel") pursuant to which the Company may purchase
Nortel equipment. The equipment purchased and to be purchased from Nortel is
expected to significantly increase the capacity of the Company's network and is
enabling the Company to transition from a traditional, voice-only network to a
network which supports multimedia services and the Internet protocol. The Nortel
Agreement requires that Nortel and Gulfsat, as a network partner of Nortel,
refer to the Company purchasers of Nortel switches who intend to connect to the
Gulfsat system to connect through the Company's switch network. The Nortel
Agreement provides PICK with a premier ATM switch for its network and prevents
its partner, Gulfsat, from using its PICK network dedicated switches with any
other carriers. As of April 1, 1999, the Company has installed Nortel equipment
in Jersey City, New Jersey and London, England, and Gulfsat has purchased
equipment for installation in eight countries. The Company requires additional
financing to purchase additional equipment needed to increase the Company's
ability to capitalize on the Gulfsat agreement.
In September 1998, PICK Net UK PLC commenced operations in London to work in
tandem with PICK Net, Inc. to grow PICK's international network infrastructure.
PICK Net UK PLC has been granted an International Simple Voice Reseller Standard
License from the United Kingdom to operate as a reseller of international
telephony traffic. PICK Net UK PLC also provides uplink capabilities to numerous
satellites terminating in Africa, Asia, Europe and the Middle East.
In late 1996, the Company entered into a reciprocal telecommunications agreement
with IDT Corporation ("IDT"), one of the Company's customers/carriers. Under the
agreement, IDT agreed to purchase certain telecommunication services from the
Company, and the Company agreed to purchase certain telecommunications services
from IDT for one year, renewable with the consent of both parties. In February
1998, the Company amended its agreement with IDT to provide IDT with a preferred
purchasing arrangement for 16 months from February 1998. Pursuant to the
amendment, IDT agreed to lend the Company $2,000,000 in working capital
financing for one year. In return, the Company agreed to allow IDT to purchase
telecommunications services to specified countries (up to a maximum of 10
million minutes per month) at a preferred rate per minute and additional
capacity available at the same rate charged to the Company's other customers.
IDT loaned the Company $500,000 on February 3, 1998, $1,000,000 on April 24,
1998 and $500,000 on June 10, 1998. The loan bears interest at 9% per annum and
matured on February 9, 1999.
In April 1999, the Company and IDT reached an agreement in principle to execute
a new six month note in the principal amount of $2,060,000, at 12% interest per
annum. A payment of $500,000 is due by May 31, 1999, half of which shall be
applied to the Note and the other half to accounts receivable from the Company
to IDT. Thereafter, PICK agreed to pay IDT $50,000 per month towards payment of
the Note; grant to IDT 200,000 shares of PICK Common Stock, and extend the term
of 400,000 outstanding warrants for an additional three years.
Primarily because of the attractive rates the Company can offer its customers to
Africa, the Middle East and Asia, many first and second tier carriers have
expressed interest in purchasing international long distance services from the
Company. The Company has signed agreements to sell telecommunications services
to several of these carriers and based on its knowledge of the industry
-6-
<PAGE>
believes it can sign agreements with other carriers contingent upon the Company
being able to increase capacity from Gulfsat.
High Speed Broadband Internet Services
PICK Sat provides satellite-based, high-speed broadband, Internet access and
interactive multimedia services to end user service providers. This company is a
fully developed and tested wide band data transmission wireless carrier which
was created in association with Microsoft Corporation ("Microsoft") and Philips
Digital Video Systems Company ("Philips"), as described below. PICK Sat became
commercially operational in March 1999 and provides data distribution, Internet
carrying services, and multimedia WEG 2 DVB compliant transmission via satellite
at 8MB down stream. PICK Sat is operating out of temporary facilities in Miami,
Florida and will be headquartered in a 10,000 sq. ft. facility in Miami, FL at
Kroger Park, where an advanced Network Operating Center (NOC) is currently under
construction. This facility will provide ample room for expansion and
anticipated customer transmission requirements. Additionally, a satellite
broadcast dish farm will be constructed next to the building, and is expected to
be completed by Summer of 1999. In September 1998, Mario J. Pino was appointed
as President of this new subsidiary. Mr. Pino was former General Manager of
ZakSat General Trading Company W.L.L., a corporation formed under the laws of
Kuwait to deliver global direct television, cable television and broadband
interactive services, which was a similar, but closed content provider and
delivery system. The Company is negotiating for satellite transmission with New
Sky Satellite and Sat Mex, although there can be no assurance it will be
successful in its efforts.
PICK Sat offers customers three different types of service: data delivery
services, broadcast services and interactive services. Data delivery services
allow for the simultaneous distribution of multimedia files, video, data streams
and real-time feeds to single users or groups of users. Broadcast delivery
services allow for the delivery of Internet, E-mail, Digital IP Television and
Digital IP Radio. The interactive services will provide the scalability to
allocate significant levels of bandwidth to deliver high speed interactive
services such as digital interactive television, radio and Internet.
The PICK Sat system provides real time multicast digital video streaming via
satellite and has accomplished its intended near term goal of true wide band
broadcast satellite distribution ability. As such, the Company has entered into
a preliminary agreement with its first client for this service. This client is
an owner and distributor of Latin American / Spanish and Portuguese drama
programming which will be transmitted via this open architecture broadcast
methodology to cable networks and cable services providers in North, Central and
South America and Spain. Additionally, PICK has identified business models which
include push technology hosting, secured corporate and data transmission
networks, high speed bandwidth sales and international real time transmission of
data, video, and live feed content. The Company has targeted as potential
initial clients, Internet Service Providers (ISP's), cable service providers,
media content providers, and high traffic E-Commerce internet / Web site
companies and information services providers.
-7-
<PAGE>
Demand for these services continues to grow as cost effective and multimedia
programming are required by margin conscious distributors and media content
companies. Additionally, this system is designed as an open architecture
non-proprietary system which allows PICK Sat to act as a carrier for content
owners, ISP's, voice traffic providers, data providers and video providers.
These are fully digitized transmissions, and PICK Sat can increase the bandwidth
of service providers by eight times using its ATM compression technologies. For
example, this technology allows a 30 channel cable operator to become a 240
channel cable operator and effectively compete with DirectTV with only marginal
new infrastructure purchases.
In June 1998, PICK Sat entered into agreements for hardware with Philips and
software with Microsoft for the above-described broadband interactive service.
Pursuant to the Company's strategic agreement with Philips, the Company obtained
the right to use the Philips Clevercast(TM) end-to-end data broadcasting system
and the Philips PC-DVB Digital Receiver Cards designed to be installed into all
modern multimedia PCs and to be integrated into PC software via the Windows 95,
98 and NT features. This will allow PC desktop users to receive satellite
transmissions of digital data, television audio, high speed Internet, E-commerce
and other multimedia applications. Microsoft provided software solutions to
support PICK Sat's services. This is expected to be among the first satellite
interactive platforms that will use the complete range of Microsoft's server
software solutions. The Company's Commitment to Cooperate with Microsoft
provides for Microsoft to license certain equipment and provide technical
support, consulting services, know-how and training to the Company for three
years in exchange for a license fee with an initial platform license fee and
monthly fees based on usage. Microsoft may terminate the commitment to cooperate
if the Company does not have a certain amount of subscribers after two years of
commercial operation.
PICK Online.Com Inc.
PICK Online.Com was recently formed to be an aggregator and delivery provider of
audio and video streaming content (broadcasts) to the "Edge of the Internet".
PICK Sat will provide the satellite-based platform for PICK Online.Com to be
able to assemble and broadcast live streams of audio and video from broadcast
radio and TV stations from anywhere in the world.
The Company's initial goal will be to offer radio and later TV stations, the
ability to reach an audience as IP Multicasting was intended to, but in a more
effective and economical way. Multicasting is a method of disseminating an audio
or video Internet media stream that is normally made available from a source to
a single end user and instead making it available to an unlimited number of end
users.
Through the use of the PICK Sat platform, PICK Online.Com intends to present a
common sense solution to bringing audio and video streaming to ISPs and
broadband networks such as Cable Modem and Asynchronous Digital Service Line
(ADSL) service providers. Later goals are to further utilize the PICK Sat
platform to provide Internet access and other IP services direct to office and
to home.
-8-
<PAGE>
Microsoft has been a critical resource in the development of the PICK Sat
platform and PICK Online.Com. Contributions have included migration of Microsoft
Windows NT Server, Microsoft Commercial Internet Server (MCIS) and the Windows
Media Technology onto the PICK Sat platform.
PICK Online.Com will have the ability to deliver IP data directly to ISPs, LANs,
Broadband networks and any other IP end user "node" at the Edge of the Internet.
PICK Online.Com will be the portal for end users to access multicast radio and
TV streaming content. The service will use Microsoft Media Server to encode
signals and multicast them efficiently to Internet Edge points.
End users will be able to listen to or watch a stream via their ISP or Broadband
provided through their Microsoft browser never knowing that the stream is
multicast and delivered via satellite.
Terrestrial technology using increasing quantities of the Internet backbone has
been available for some time, but has only been implemented in a relatively
small number of locations. To work properly, terrestrial multicasting requires
Internet-wide implementation which is both costly and time consuming. PICK
Online.Com "leapfrogs" the Internet infrastructure and delivers streaming
content directly to the Edge of the Internet. This not only gets the streams
there with higher quality, but also without using any of the provider's
expensive and limited backbone bandwidth.
Prepaid Telephone Calling Cards
PICK US Inc. is a pre-paid services company currently providing domestic and
international pre-paid calling card services through its dedicated pre-paid
network switching facility. For consumers who do not have access to long
distance and international telephone services through a home telephone or credit
card because of an inability to access credit, prepaid telephone calling cards
represent a convenient and cost-effective way to obtain such access. This is
because prepaid telephone cards enable an individual to purchase prepaid
telephone service with cash and then use the card by entering a PIN number that
is provided. In addition, students, military personnel, foreign and domestic
vacationers and business travelers, immigrants and visitors to the United States
are also strong markets for prepaid telephone calling cards. Many businesses
with mobile workforces now use prepaid telephone calling cards in order to
allocate and budget expenditures on a monthly basis. Additionally, since calling
cards are used extensively throughout the world, they are widely recognized and
accepted.
PICK US Inc. believes its niche is the sale of pre-paid international services
to the immigrant United States population as this population segment typically
falls below traditional credit benchmarks and at the same time requires the
ability to make international calls. PICK provides a prepaid platform, including
a voice response unit, inbound 800 service, data base and customer service,
through a contract with a third-party provider (Innovative Telecom Corp.) and
supplies all domestic and international call termination through its own
switches.
PICK entered the prepaid telephone calling card business in 1993 utilizing its
own branded cards. In February 1998, the Company entered into an agreement with
Blackstone Calling Card, Inc.
-9-
<PAGE>
("Blackstone"), a major marketer and distributor of prepaid telephone calling
cards (the "Blackstone Agreement") expiring in April 2000. Under the terms of
the Blackstone Agreement, as amended, after a six month phase-in period ending
October 27, 1998, Blackstone was to purchase prepaid telephone calling cards
with a minimum retail 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. These calls originate in the United States and are directed for
termination primarily to parts of Africa and Asia. The Blackstone Agreement is
subject to termination by either party without cause at the end of year one upon
60 days' prior notice, or by Blackstone if the Company fails to maintain overall
network quality. The parties are negotiating to extend the term of the contract
an additional two years. 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, as described above, to terminate the traffic
per month needed to satisfy Blackstone and other customers and this
significantly impacts Blackstone's purchases.
Prepaid Cellular Technology
In October 1995, the Company entered into an agreement with The Phone Store,
Inc. ("TPST") pursuant to which the Company obtained a 50% ownership interest in
a patent for prepaid cellular technology which utilizes an internal
programmable, tamper-proof chip that allows the phone to operate for a prepaid
amount of time, then switches off the power to the phone when the prepaid time
is depleted. In October 1995, the Company also obtained an exclusive license to
make and market this product on a worldwide basis. This license has an initial
term of five years and options for additional multiple five year periods. The
agreement requires the Company to pay TPSI a total of $500,000, payable at a
rate of $25,000 per quarter for a period of five years, beginning January 1,
1996. In 1996, the Company purchased treasury securities, which were used, in
substance, to fund this obligation. The Company was also required to issue a
total of 100,000 shares of its common stock to TPSI in increments of 20,000
shares each year for five years beginning on January 1, 1996; these shares have
been issued and placed in an escrow account to be issued to TPSI on applicable
due dates. The Company has not marketed this technology to date, however, it may
introduce this product on a limited basis if funds are available.
Customers, Sales and Marketing
The Company did not perform any meaningful sales or marketing efforts of its own
during 1998 because (a) Blackstone and others market the Company's prepaid
telephone calling card products, and (b) the Company has commitments for most of
its capacity for international long distance carrier services and needs
additional funding prior to being able to expand its customer base. The Company
commenced marketing efforts, however, in March 1999, concerning PICK Sat and
PICK Online.Com
PICK Sat is marketing to companies that transmit large amounts of data
(including video) to multiple locations, including television broadcasters and
programmers, corporations and other institutions, and to Internet Service
Providers ("ISPs") and cable television companies with existing subscriber
-10-
<PAGE>
bases for the delivery of "customer specific content" to such customer's end
users. PICK Sat believes that this strategy will enable it to market to a
broader base of clients and gain subscribers without the high costs of direct
sales, while retaining its primary focus, service delivery. As such, a necessary
client base will include content providers whose products can be bundled for
distribution through PICK Sat's ISP and cable television clients or directly to
offices and homes. This approach enables PICK Sat to negotiate with clients on a
global basis. For example, European content providers wishing to deliver content
to South and Central America, can do so through PICK Sat's contracts with South
and Central American ISPs and cable television companies. Both clients benefit
since the content provider broadens its base of distribution and the cable
company enhances the quality and volume of end user choices. In addition, PICK
Sat will market to corporations looking to broadcast presentations and training
courses to their locations worldwide. PICK Online.Com intends to market its
service first to radio stations already hosted on the Internet. There will
initially be no charge for them to participate. For ISPs, an Initial number of
reception cards and dishes will be given away with no charge for service until a
predetermined number of radio stations becomes available.
Media-rich banner advertising opportunities on the Internet will exist for both
PICK Online.Com and its affiliate broadcasters and IP service providers. Banners
for local ads will alternate with national ads at both the PICK Online.Com home
page, as well as www.pickradio.com radio station page.
Banner space on the PICK Online.Com home page will be allocated for local area
ISP sales while radio station (destination) banners will be allocated for radio
station ad sales. Advertising space will be made available on consignment with a
share of the revenue going to PICK Online.Com The Company will sell banner space
on both pages and charge for creation and insertion of banners.
Once there is an established network of Internet Edge providers, PICK Online.Com
will be able to offer one-to-many closed circuit broadcasts of audio and video
for teleconferencing distant education, pay-per-view events or other multicast
applications.
In addition to aggregating radio stations and later TV stations for broadcasting
through its Web site portal, PICK Online.Com seeks to partner with other
important content providers to have them see the benefit of making their content
available on PICK Online.Com Microsoft has recognized the potential of PICK
Online.Com as a link to its new Internet Explorer 5.0 browser. Microsoft Windows
Media Server and Player are integral parts of PICK Online.Com services.
PICK's primary customers for its international long distance carrier services
are carriers and resellers such as ComTech International, IDT Corporation, World
Access Telecommunications Group, Inc. and Teleglobe USA Inc. Carrier customers
require little on-going maintenance, and the carrier segment of the business
shares certain costs with the prepaid telephone calling card segment. In 1998,
approximately 72% and 10% of the Company's revenues were from two customers,
Blackstone and IDT Corporation. In 1997, approximately 19% and 13% of the
Company's revenues were derived from two customers, Trescom and DC
Communications Corp. and in 1996, 36% & 25% were from two customers.
-11-
<PAGE>
Competition
The international long distance services business is highly competitive and is
characterized by rapidly changing per minute rates, particularly to key
international cities and countries. The Company's future success depends upon
its ability to compete with other carriers, providing high quality service at
competitive prices. PICK's competitors in the sale of international long
distance services include AT&T, MCI/Worldcom and Sprint, as well as British
Telecom and other first tier carriers in deregulated European countries.
However, AT&T, MCI/Worldcom and Sprint are regulated carriers. This means they
were the originally deployed long distance carriers permitted to terminate
traffic where government controlled Post Telephone and Telegraph (PTT's)
administrations existed. As such their rates were and still are significantly
higher than those available to the new, deregulated carriers.
Additionally, second tier carriers (such as PICK Net) are direct competitors as
well. They include Pacific Gateway, IDT Corp, Primus Telecommunications, and
Star Telecommunications. These competitors are well capitalized and address much
larger markets than PICK. Service to the customer is more crucial to the success
of a telecommunications company than acquiring market share. Therefore,
partnering with competitors to increase traffic capacity and prevent
international busy signals is crucial. To prevent busy signals and better serve
its customers, PICK has signed many telephone traffic agreements with first and
second tier international and domestic long distance carriers. Each
telecommunications company and partner targets a specific market / country and
leverages its other reciprocal long distance carrier partners for its
non-targeted regions.
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 ISPs. In addition, a number of multinational corporations,
including giant communications carriers such as AT&T, MCI/Worldcom, Sprint and
some of the regional Bell 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.
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 adversely impact the
Company. In the last year, a number of on-line services have lowered their
monthly service fees, which may cause the Company to lower its monthly fees in
order to compete.
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 Internet market will depend heavily upon its
ability to provide high quality Internet connectivity and value-added Internet
services targeted in select markets. Other factors that will affect the
Company's success in these markets include the
-12-
<PAGE>
Company's continued ability to attract additional experienced marketing, sales
and management talent, and the expansion of support, training and field service
capabilities.
PICK Online.Com is expected to be well received by radio and TV stations who
want to reach large Internet audiences and by IP service providers who are
experiencing backbone bandwidth limitation and are not able to deliver good
quality streaming due to increased usage by their subscribers to streaming media
services. PICK is not aware of any other company today that can offer streaming
services to any ISPs and, in turn, to end users in the same manner as PICK
Online.Com The only company that has been successful in providing streaming
services is broadcast.com. This operator has well over 300 radio and TV streams
available through its Web site and uses terrestrial IP multicasting over the
Internet. However, broadcast.com multicasts to only a limited number of member
ISPs and through private land line connections. Part of broadcast.com's strength
has been in using its private terrestrial infrastructure to sell other
specialized high margin services such as teleconferencing, pay-per view and
other types of Web events. Another strength is the signing of hundreds of
exclusive content agreements with broadcasters, sports teams and a number of
music and audio CDs.
PICK Online.Com's major strength is its ability to send its multicast signal to
an unlimited number of ISPs almost immediately and at a low cost. There are
hundreds of radio and TV stations that are not on broadcast.com or even on the
Internet at all. More streams to more Edge of the Internet sites and the ability
to roll out quickly are all factors in how the Company will compete against
broadcast.com. As the Company gains content and as it expands it presence at the
Edge of the Internet, it is expected to become a more effective competitor to
broadcast.com.
The competition in the marketing and sale of prepaid telephone calling cards is
intense at the retail level. Some telephone calling cards are marketed by
companies which are well-established and have significantly greater financial,
marketing, distribution, and personnel resources than the Company. These large
companies already have name recognition and can implement extensive advertising
and promotional campaigns. Other cards are sold by more transient companies that
only survive for a short time. Many of these small companies advertise low
calling prices offset by hidden charges. The Company does not currently plan to
expand its prepaid telephone calling card business and is exploring various
alternatives, including the possible sale of such business.
Many of the Company's 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,
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.
-13-
<PAGE>
Patents and Trademarks
The Company and TPSI are joint owners of a patent on the technology for a
microprocessor-controlled prepaid cellular telephone system. The Company has
obtained or applied for trademark registrations for the name PICK and of each of
its subsidiaries and has obtained trademark registrations for the names
"Communicard by PICK(R)", "LOVE CALL(R)", "COMMUNICASH(R)", and "las Americas
(R)."
Government Regulation
Long distance telecommunication services are subject to regulation by 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 apply to all "common carriers,"
including AT&T, MCI/Worldcom and Sprint, as well as entities, such 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 is also subject to regulations administered by the Occupational
Safety and Health Administration, various state agencies and county and local
authorities acting in cooperation with federal and state authorities. The
extensive regulatory framework imposes significant compliance burdens and risks
on the Company. Governmental authorities have the power to enforce compliance
with these regulations and to obtain injunctions or impose civil and criminal
fines in the case of violations.
-14-
<PAGE>
Employees
As of April 5, 1999, the Company employed a total of 36 full-time employees and
also employed independent contractors for various purposes. The employees are
not represented by a labor union, and the Company believes that its employee
relations are excellent.
Item 2: Properties
The Company leases office space at Wayne Interchange Plaza II, 155 Route 46
West, Third Floor, Wayne, New Jersey 07470, under a lease that expires on
September 30, 2001, with a monthly rental of $8,000. In addition, the Company,
leases space where its digital central office telephone switching equipment is
located in Jersey City, New Jersey (which expires September 1, 2000) and Miami,
Florida (which expires July 1, 2000). PICK Sat has signed a lease for its new
facilities at 5255 N.W. 87th Avenue, Miami, FL 33166. The lease is for
approximately 10,300 square feet and expires on October 31, 2003. The rent is as
follows: $6,441 per month from November 1, 1998 to November 30, 1998; $12,883
per month from December 1, 1998 to October 31, 1999; $13,269 per month from
November 1, 1999 to October 31, 2000; $13,667 per month from November 1, 2000 to
October 31, 2001; $14,077 per month from November 1, 2001 to October 31, 2002;
and $14,500 per month from November 1, 2002 to October 31, 2003.
Item 3: Legal Proceedings
Other than the following lawsuits, the Company is not a party to any material
legal proceedings. In February 1997, the Company commenced a mediation action
against 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 and is included in other
current liabilities in the Company's consolidated financial statements. 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 and reduced its claim to $5 milllion. The trial began
on April 19, 1999 and ended on April 22, 1999. 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.
On or about March 15, 1999, Worldcom Network Services, Inc., d/b/a Wiltel,
commenced a lawsuit against the Company in the United States District Court,
Southern District of New York demanding a judgment in the amount of $1,177,734
and interest at 18% per annum plus costs and expenses. The plaintiff alleges
that the Company failed to pay for telecommunications services provided. On
April 15, 1999, the Company and Worldcom agreed to a Settlement Agreement. Under
the terms of the
-15-
<PAGE>
Settlement Agreement, the Company agreed to pay Worldcom $1,256,622 by June 30,
1999, in exchange for a full and complete settlement of Worldcom's lawsuit
against the Company. The Company is entitled to deduct $580 per day interest
charge for each day in advance of June 30, 1999 on which the Company makes
payment to Worldcom.
Item 4: Submission of Matters to a Vote of Security Holders
On November 4, 1998, the Company held an annual meeting of shareholders to
consider and vote upon (i) a proposal to elect Diego Leiva, Robert R. Sams,
Ricardo Maranon, Marilou C. Halvorsen and Hans d'Orville as directors and (ii)
to ratify the appointment of Goldstein Golub Kessler LLP as the Company's
auditors. The number of votes cast for and against each of the foregoing
proposals and the number of abstentions are set forth below.
(i) Proposals to elect Directors:
Withhold
For Authority
--- ---------
Diego Leiva 30,423,309 11,650
Robert R. Sams 30,423,309 11,650
Ricardo Maranon 30,423,309 11,650
Marilou C. Halvorsen 30,423,309 11,650
Hans d'Orville 30,423,309 11,650
(ii) To ratify the appointment of Goldstein Golub Kessler LLP as the Company's
auditors:
For Against Abstain
--- ------- -------
30,147,879 5,300 281,780
On December 14, 1998 and March 24, 1999, the Company distributed Information
Statements to the Company's shareholders informing them of amendments of the
Company's Articles of Incorporation to increase the number of shares of
authorized Common Stock first from 75,000,000 to 100,000,000 shares in January
1999 and then from 100,000,000 to 400,000,000 shares in April 1999.
-16-
<PAGE>
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock has been traded in the over-the-counter market and
reported on the OTC Bulletin Board under the symbol "PICK" since September 1996.
The Company's common stock had been traded in the over-the-counter market and
reported on the OTC Bulletin Board under the symbol "PRMF" from August 17, 1995
through September 23, 1996. The following table sets forth the high and low bid
prices of the Company's common stock as reported on the over-the-counter market
for the periods indicated. The prices represent inter-dealer quotations, without
retail mark-up, mark down or commission, and may not represent actual
transactions.
Bid Prices
----------
Period High Low
------ ---- ---
Calendar Year 1997
------------------
First quarter $0.78 $ 0.16
Second quarter 0.33 0.12
Third quarter 0.27 0.05
Fourth quarter 0.51 0.15
Calendar Year 1998
------------------
First quarter 0.51 0.19
Second quarter 1.05 0.41
Third quarter 0.88 0.42
Fourth quarter 0.93 0.39
Calendar Year 1999
------------------
First quarter 1.52 0.36
As of April 5, 1999, there were 452 shareholders of record of the Company's
common stock. The Company reasonably believes that there are in excess of 1,000
beneficial owners of its common stock.
The Company has never paid any cash dividends on its common stock and has no
intention of doing so at this time. The Company intends to retain all its
earnings for use in the business.
Item 6: Selected Financial Data
The following selected, financial data should be read in conjunction with the
Consolidated Financial Statements and "Management's Discussion and Analysis of
Financial Condition and Results of
-17-
<PAGE>
Operations" appearing elsewhere in this Report. The selected financial
information for and as of the years ended December 31, 1997, 1996, 1995 and 1994
are derived from the Consolidated Financial Statements of the Company, which
financial statements have been audited by Durland & Company, CPAs, P.A.,
independent certified public accountants. The selected financial information for
and as of the year ended December 31, 1998 have been audited by Goldstein Golub
Kessler LLP. The Consolidated Balance Sheets as of December 31, 1998 and 1997
and the Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996 and the accountants' reports thereon are included elsewhere
in this Report.
Statement of Operations Data:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales $ 9,822,903 $ 9,015,903 $ 5,869,682 $ 1,565,039 $ 529,913
Cost and expenses 20,758,095 10,709,816 11,103,440 2,591,084 1,780,493
------------- ------------ ----------- ----------- ------------
Income (loss) before
other income (Expense) (10,935,192) (1,693,913) (5,233,758) (1,026,045) (1,250,580)
------------- ------------ ----------- ----------- ------------
Other - net (6,130,179) (10,047,953) 8,417,007 (44,996) --
------------- ------------ ----------- ----------- ------------
Income (loss) before minority
interest and income taxes (17,065,371) (11,741,866) 3,183,249 (1,071,041) (1,250,580)
Minority interest and
income taxes 2,062 2,242,064 (1,547,459) -- --
------------- ------------ ------------ ------------ ------------
Net income (loss) $ (17,063,309) $ (9,499,802) $ 1,635,790 $ (1,071,041) $ (1,250,580)
============= ============ ============ ============ ============
Net income (loss) $(0.46) $(0.26) $0.04 ($0.03) --
per common share - basic ======= ======= ===== ====== ============
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital (deficiency) $(14,677,342) ($7,405,608) (3,152,216) $(1,074,159) $(1,127,590)
============ =========== =========== =========== ===========
Long-term liabilities 10,815,216 794,905 -- 400,000 --
============ =========== =========== =========== ===========
Stockholders' equity (deficiency) (20,351,879) (7,093,114) 869,579 (846,407) (1,021,686)
============ =========== ============ =========== ===========
</TABLE>
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following should be read in conjunction with the Consolidated Financial
Statements included elsewhere in this Report.
-18-
<PAGE>
Results of Operations
The Company generates revenues from the sale of telecommunication services. This
includes international long distance service to carriers and resellers, and
revenues derived from prepaid telephone calling cards to distributors for resale
to retail outlets. In 1999, the Company, through its wholly owned subsidiary
PICK Sat Inc. ("PICK Sat") commenced development of a system to multicast the
delivery of Internet Protocol multi-media content via satellite. Also in 1999,
the Company formed PICK Online.Com Inc. to provide broadband Internet content to
users, including radio streaming using the PICK Sat platform
(www.pickradio.com). PICK Sat and PICK Online.Com are in the development stage
and have not generated any revenue.
The Company's costs of sales primarily consist of 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 its customers use the traffic. For prepaid telephone calling cards 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. For PICK Sat business, the Company will charge its
customers for the cost of service including set-up, equipment, band width on the
satellite and a portion of the facilities cost. In addition, monthly service
fees are charged both for the up link of broadband content and for the down link
to individual receivers.
Gulfsat Contract
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 and Gulfsat agreed
that its rates to Africa, the Middle East and Asia would be offered in the
United States exclusively through the Company. Under the contract, the Company
is entitled to terminate up to approximately 70 million minutes per month in
telecommunications services into the above regions. Management believes, based
upon its knowledge of the industry, that costs per minute to terminate traffic
through Gulfsat are lower than those currently available to the Company's
competitors.
In the second half of 1998, however, the Company became aware of newer,
state-of-the art technology that would facilitate the transmission of not only
voice traffic but also data and Internet traffic. In order to capitalize on this
technology and maximize the benefit the Company could derive from the Gulfsat
Contract, it became necessary to defer equipment installation. The Company first
had to investigate the companies offering the appropriate asynchronous
transmission mode (ATM) equipment and then, in concert with Gulfsat, select a
strategic vendor in this global effort. Then the Company and Gulfsat had to
purchase and install the appropriate telephone switching and compression
equipment for the Jersey City, New Jersey, hub, the United Kingdom and the first
of several destination countries. To begin installation, the Company required a
portion of the proceeds
-19-
<PAGE>
from the short-term debt financing obtained in the third quarter of 1998 to
purchase this equipment in late 1998. The Company is currently sending traffic
into three countries and anticipates adding subsequent countries in fairly rapid
succession. The Company has purchased the necessary equipment for the
installation in half-a-dozen additional countries, but will require additional
funding for further installations.
Blackstone Contract
Early in 1998, the Company entered into a two-year contract with Blackstone
Calling Card, Inc. ("Blackstone"), a major marketer and distributor of prepaid
telephone calling cards (the "Blackstone Agreement"). Under terms of the
Blackstone Agreement, as amended, after a six-month phase-in period ending
October 27, 1998, Blackstone was to purchase prepaid telephone cards with a
minimum retail face value of $5.0 million per month from the Company, which was
expected to result in net revenues of approximately $3.0 million per month to
the Company.
As described previously, the Company has not been able to terminate as much
traffic from Blackstone and others pursuant to the terms of the Gulfsat
Agreement as it anticipated. Accordingly, the Company has not been able to
service the minimum traffic called for in the Blackstone Agreement and
Blackstone has been delivering less traffic than originally anticipated. This
has significantly reduced the volume of Blackstone's purchases and, because the
Company has had to purchase time from other carriers (at higher prices than the
Company anticipated paying to Gulfsat) to satisfy the traffic generated by the
users of Blackstone's calling cards, the Company has negative gross profit under
the contract.
Multicasting, Broadband Satellite Internet Services
- ---------------------------------------------------
About mid-year 1998, through its wholly owned subsidiary - PICK Sat Inc. - the
Company began development of a multicast, satellite-delivered, broadband, high
speed Internet and multi-media platform. Customers began beta sites using this
platform for delivery of data and multi-media in March 1999. In April 1999, the
Company formed PICK Online.Com Inc. to provide broadband Internet content to
users, including radio streaming using the PICK Sat platform
(www.pickradio.com). PICK Sat and PICK Online.Com are both in the development
stage and to date have not generated any revenue.
Year Ended December 31, 1998 as Compared with Year Ended December 31, 1997
- --------------------------------------------------------------------------
Total revenues amounted to $9,822,903 for the twelve months ended December 31,
1998 ("1998") compared to $9,015,903 for the twelve months ended December 31,
1997 ("1997"). The Company significantly curtailed its operations during the
first half of 1998, while it installed and tested two leased Siemens Digital
Central Office Switches. Consequently, the Company decided to curtail its
marketing efforts for the sale of international long distance services until the
switches were installed and enough countries were hooked into the Gulfsat
network to give the Company the capability to
-20-
<PAGE>
deliver competitively priced traffic through Gulfsat. For 1998, the Company
generated international long distance revenue of $1,978,441, compared with
$7,669,243 for 1997, a decrease of $5,690,802 or 74%. Prepaid telephone calling
card revenues were $7,844,462 for 1998, compared to $1,346,660 for 1997. This
represents an increase of $6,497,802, or 483%. This increase reflects beginning
of the Blackstone Agreement, even at lower than anticipated levels.
The cost of telephone time purchased increased from $8,326,318 to $13,322,978,
an increase of $4,996,660. These costs increased by 60%, even though revenues
declined by 74%, primarily due to the costs of long distance arising from the
usage of prepaid telephone calling cards sold through Blackstone. Other cost of
sales increased from $762,431 to $3,069,566 primarily due to the fixed costs
associated with the Company's newly developed network and processing costs
arising from the increased prepaid telephone calling card activity. 1997 cost of
sales benefitted from the reversal of $649,563, representing a portion of a
previous provision for contingent costs.
Selling, general and administrative expenses were $3,880,100 for 1998, compared
to $1,836,829 for 1997, reflecting an increase of $2,043,271, or 111%. This
increase is primarily due to increases in staffing.
The Company's loss before other income (expense) rose from $1,693,913 for 1997
to $10,935,192 for 1998 primarily due to the increases in cost of sales and
general and administrative expenses discussed above.
Interest and debt placement expenses increased significantly from the prior year
due to the substantial increase in the amount of short-term debt placed in 1998.
Year Ended December 31, 1997 as Compared with Year Ended December 31, 1996
- --------------------------------------------------------------------------
Total revenues amounted to $9,015,903 for the twelve months ended December 31,
1997 ("1997") compared to $5,869,682 for the twelve months ended December 31,
1996 ("1996"). This represents an increase of $3,146,221, or 54%. For 1997, the
Company generated international long distance revenue of $7,669,243 compared to
$4,444,342 for 1996; the international long distance business began in May of
1996. Prepaid telephone calling card revenues were $1,346,660 for 1997, compared
to $1,425,340 for 1996. This represents a decrease of $78,680, or 5.5%. This
decrease reflects reductions in the Company's advertising and market changes
which have resulted in product returns and reductions in repeat sales of calling
cards.
The direct costs of international long distance and calling card services
amounted to $9,088,749 (which excludes a $649,563 credit arising from reversal
of a portion of the previously-provided contingency reserve related to billing
disputes with AT&T - see Note 12 of Notes to the Consolidated Financial
Statements) for 1997 compared to $6,401,231 (which excludes a $1,749,563
provision for contingent costs provided related to billing disputes with AT&T)
for 1996. As a result, the gross margin was negative 0.8% of revenues for 1997,
compared to a negative gross margin of 9.1% in 1996. Including the adjustments
to the contingency reserve, gross margin would be 6.4% for 1997 and negative
38.9% for 1996.
-21-
<PAGE>
The decrease in selling and marketing expenses were a direct result of a
reduction in product advertising, largely due to market changes. The general and
administrative costs increased primarily due to a need for increased outside
professional assistance. In addition, there was a modest increase in personnel
cost. Bad debt expense increased primarily because of the bankruptcy of one of
the Company's international long distance customers.
The Company's loss from operations improved from $5,233,758 for 1996 to
$1,693,913 for 1997. The primary reasons for this improvement are (i)
improvement in gross margin (other than changes to the contingency reserve) of
approximately $460,000, (ii) changes in amounts charged to the contingency
reserve of approximately $2,400,000 and (iii) reductions in advertising expenses
of approximately $1,040,000, offset by increases in general and administrative
expenses (primarily rent, salaries and professional fees) of approximately
$350,000. Absent changes in charges to the contingency reserve, the Company's
operating loss would have improved by approximately $1,140,000.
The Company recognized approximately $9,900,000 in non-cash, non-operating
losses in 1997 from losses from disposition of marketable equity securities and
a write-off of the Company's investment in prepaid cellular telephone
technology. The Company recognized approximately $8,400,000 in non-cash,
non-operating income in 1996 from gains on disposition of marketable equity
securities and a one-time license fee related to the Company's prepaid cellular
telephone technology.
The Company initially did not report any gains or losses on the disposition of
the marketable equity securities referred to above, as the Company believed that
it was not appropriate to recognize losses on the acquisition of its and its
subsidiary's common stock or on exchange of one investment in marketable equity
securities for another. The Company subsequently determined that it would have
been preferable to record these transactions based upon the fair value of the
assets exchanged, resulting in the recognition of approximately $9,500,000 in
losses.
Liquidity and Capital Resources
In order to assure the Company's survival and continuation as a going concern,
it is essential that the Company (i) develop its operations so that operating
profits are generated and (ii) obtain additional capital.
The Company is pursuing several sources of capital. In addition to potential
funds from investors and from corporate strategic partners, the Company may
receive funding from the exercise of outstanding options and warrants on the
Company's stock. 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.
The Company's 1998 operating loss before other income (expense) of $10,935,192
(and net loss of $17,063,309) generated negative cash flow from operations of
$5,073,495 for 1998, compared with negative cash flow from operations of
$419,672 and $1,218,381 for 1997 and 1996, respectively.
Due to the losses discussed above, the Company's working capital deficiency
increased from $7,405,608 at December 31, 1997 to $14,677,342 at December 31,
1998 (an increase in the working capital deficiency of $7,271,734. Included in
the working capital deficiency as of December 31, 1998 is approximately
$11,900,000 of short-term debt. This includes $9.9 million principal amount
which matured on April 27, 1999, more than 90% of which is being converted into
three-year notes. It also includes $2 million which the parties have agreed in
principle to extend for six months. The Company's net worth changed from a
negative $7,093,114 at December 31, 1997 to a negative $20,351,879 at December
31, 1998 (an increase in negative net worth of $13,258,765).
-22-
<PAGE>
Current assets increased by $942,425 from December 31, 1997 to 1998, primarily
due to increases in cash, accounts receivable, and prepaid expenses and other
current assets. Current liabilities increased by $8,214,159. This increase is
largely due to net increases in short-term borrowing. The proceeds of the
short-term borrowings were used to fund (i) approximately $1,200,000 in
placement costs, (ii) $2,185,000 in debt repayments, (iii) $1,725,000 in capital
expenditures, (iv) a $2,200,000 increase in cash and (v) the operating losses
discussed above.
Substantially all of the liabilities of the Company mature or are subject to
payment agreements calling for payment before the end of the first-half of 1999.
In addition, the Company has committed approximately $690,000 to license
computer software, payments for which will be due in 1999.
The Company significantly increased it capital spending in property and
equipment to $3,817,153 in 1998 from $6,510 in 1997. These expenditures were to
support the development of the Company's international long distance telephone
and high speed broadband Internet service businesses.
During March 1999, the Company authorized the issuance of Series B and Series D
convertible preferred stock totaling 2,500,000 shares. The Series B Convertible
Preferred Stock has a liquidation preference of $1.00 per share and is
convertible into 20,000,000 shares of the Company's common stock. As of April
27, 1999, the Company had sold $1,871,000 of Series B Convertible Preferred
Stock convertible into 18,710,000 shares of Common Stock. The Series D
Convertible Preferred Stock has a stated par value of $0.001 per share and is
convertible into 11,905,000 shares of the Company's common stock. As of April
27, 1999, the Company had sold $1,500,000 of Series D Convertible Preferred
Stock convertible into 3,571,429 shares of Common Stock.
-23-
<PAGE>
Impact of Year 2000
Many older computer software programs recognize only the last two digits of the
year in any date (e.g.: "98" for "1998"). These programs were designed and
developed without considering the impact of the upcoming change in century. If
the software is not reprogrammed or replaced, many computer applications could
fail or create erroneous results by or at the Year 2000. The Year 2000 ("Y2K")
issue refers to possible events resulting directly or indirectly from the
inability of digital computer equipment or software to accurately and without
interruption handle dates both before and after January 1, 2000.
The Company has reviewed its software and current operating systems and believes
that they are Y2K compliant. The Company primarily utilizes operating systems
obtained from Microsoft, which the Company believes, based on information
provided by Microsoft, are Y2K compliant. The Company believes that none of its
equipment is date sensitive or otherwise uses imbedded computer chips.
Accordingly, the Company does not believe that imbedded chip technology will
present any Y2K issues The Company is, however, checking its equipment to verify
this as part of its overall Y2K program. The Company expects that the costs of
achieving internal Y2K compliance will not have a material adverse impact on
results of operations, liquidity or capital resources.
The risk to the Company resulting from the failure of suppliers, customers and
other third parties to attain Y2K readiness is the same as other companies in
its industry or other business enterprises generally. The Company has initiated
a program of formally contacting its suppliers and customers to identify any
potential disruption due to Y2K. The Company expects to resolve any significant
Y2K issues before the occurrence of any business disruptions, although the
Company has limited or no control over the actions of its suppliers and
customers.
-24-
<PAGE>
The Company expects to identify and adequately prepare for all significant
internal Y2K issues that could adversely affect its business operations. The
Company does not expect the cost of resolving such issues will have a material
impact on its financial position, results of operations or liquidity. The
Company does not believe that it is possible, with complete certainty, to
identify all potential Y2K issues that may affect the Company, its suppliers and
it customers. While the Company believes that its overall efforts are adequate
to address the Y2K issues, there can by no guarantee that all internal systems
as well as those of third parties on which the Company relies, will converted on
a timely basis. These unknown or unresolved Y2K issues may have a materially
adverse affect on the Company's business, financial condition, cash flows and
operations.
Item 8: Financial Statements and Supplementary, Data
The Company's financial statements are included in a separate section of this
Report, following Item 14.
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Effective September 17, 1998, Goldstein Golub Kessler LLP were engaged as the
Company's independent accountants for the 1998 fiscal year. The change in the
independent accountants had been approved by the Company's Board of Directors.
Upon the engagement of Goldstein Golub Kessler LLP, the Company dismissed
Durland & Company, CPAs, P.A., its independent accountant for the years ended
December 31, 1996 and 1997. The Company has no disagreements with its current
and former accountants on accounting and financial disclosures.
-25-
<PAGE>
PART III
Item 10: Directors and Executive Officers of the Registrant
The following table sets forth the names, ages and positions with the Company as
of the date of this Report of all of the executive officers of the Company and
its principal subsidiaries and directors of the Company. Also set forth below is
information as to the principal occupation and background for each named person
in the table.
Name Age Position
---- --- --------
Diego Leiva 48 Chairman of the Board and Director
Thomas M. Malone 43 Chief Executive Officer and Director
James H. Season 55 Vice President and Chief Financial Officer
Niles D. Ring 65 Vice President of Human Resources
Mario Pino 36 President of PICK Sat Inc.
Karen M. Quinn 51 President of PICK US INC.
Robert R. Sams (1) 60 Director
Ricardo Maranon (2) 54 Director
John Tydeman (1) 51 Director
Alberto M. Delgado (2) 52 Director
- ----------------------------------------------------
(1) Member of audit committee.
(2) Member of compensation committee.
Diego Leiva founded Public Info/Comm Kiosk, Inc. ("Kiosk"), a New Jersey
corporation, which is currently a wholly-owned subsidiary of the Company, in
August 1992, and has served as the Company's Chairman of the Board, a Director
and President since that time and as Chief Executive Officer until April 1999.
From 1989 through July 1992, Mr. Leiva served as Director of Sales for Apertus
Technologies, Inc., a computer telecommunications sales firm.
Thomas M. Malone, Chief Executive Officer and a director joined the Company as
an officer on April 1, 1999 and as a director on April 26, 1999. Prior thereto,
from 1988, he was employed by Cable and Wireless Inc., last holding the position
of President of the Internet, Web-hosting and Messaging division. He was
responsible for integrating, managing and directing the engineering, operations,
Web hosting and customer care groups for the Internet
-26-
<PAGE>
business that were acquired for $1.7 billion from MCI when the latter company
was acquired by Worldcom. Mr. Malone joined Cable and Wireless in 1988 and held
several positions, including Senior Vice President and General Manger, from 1990
to 1998, and Assistant Vice President of Business Development from 1988 to 1990.
Prior thereto, from 1984 to 1988, he was employed by Sprint International, last
holding the position of Director of Marketing, Product Management and Alliances
and from 1979 to 1983, Mr. Malone was employed by CompuServe, Inc., last holding
the position of District Sales Management, Houston, Texas.
James H. Season, Vice President and Chief Financial Officer, joined the Company
in April 1999. Prior thereto, Mr. Season was a founder, Chief Financial Officer,
Treasurer and Director of Hungarian Broadcasting Corp. from August 1996 to
January 1999. From January 1990 to August 1996 he was Managing Director of RHL
Management Group, Inc., an investment banking and financial consulting firm.
From 1982 to 1986, Mr. Season was Managing Director of Chase Manhattan
Investment Bank. Mr. Season serves on the Board of Directors of Hungarian
Telephone and Cable Corp. and Hungarian Broadcasting Corp.
Niles D. Ring, Vice President/Human Resources, joined the Company in September
1998, having been Human Resources specialist with Bristol-Myers Squibb, and
founding Director of Bristol-Myers Career Center, Evansville, Indiana since
1992.
Mario Pino, President of PICK Sat Inc. since October 1998. Prior thereto, Mr.
Pino was a division manager of Zaid Al Kazemi Trading from 1995 to 1998. From
1993 to 1995, he was general manager of American Cable Trading.
Karen M. Quinn, President of PICK US Inc. since January 1999. She had been Vice
President of Operations and Corporate Communications of the Company from
September 1995. Ms. Quinn has also worked for Kiosk since December 1992, having
become its Vice President of Operations in May 1994. Previously, Ms. Quinn was a
Business Manager in the health care industry for 22 years, and Vice-President of
Operations at two computer sales and service companies over a period of six
years.
Robert R. Sams has served as director of the Company since September 1995 and of
Kiosk since November 1994. He has been engaged in merchant banking, corporate
finance, acquisitions and financial advisory services since founding Saicol
Limited in 1983.
Ricardo Maranon has served as director of the Company since September 1995 and
of Kiosk since December 1994. He has served as President of the Florida-based
advertising agency Maranon & Associates Advertising since founding that company
in 1985.
John Tydeman has served as a director of the Company since November 1998. He has
been a strategic advisor since 1985 to a number of pay television and satellite
ventures worldwide. His expertise is in the commercial design, restructuring and
implementation of such ventures. His positions with these entities include: SES,
operator of ASTRA satellite system; Dolphin Group, a privately held Middle East
multi-business enterprise; CEO of ATL (News Corporation and Zee
-27-
<PAGE>
Telefilm Joint Venture); CEO Showtime (Kipco/Viacom JV) and advisor to Kipco;
advisor to Zaksat; advisor to TVNZ; Advisor to Shinawatra Group; advisor to
Regional Television Operators (Australia); advisor to Jamison, a merchant
banking organization; advisor to Optus, Australia telco. Dr. Tydeman holds a PhD
in systems engineering and serves on the Board of Directors of Nostrad
Telecommunications, Asia Today Limited and Asia Television Limited and as
advisor to the Dolphin Group.
Alberto M. Delgado has served as a director of the Company since November 1998.
Dr. Delgado is the Pastor of Alpha & Omega Church, Miami, Florida which he
established in September 1981. In 1995, Dr. Delgado received his Doctoral Degree
in Theology from Logos Bible College and Graduate School, Jacksonville, Florida.
He is a member of the National Religious Broadcasters and Chairman of the
Christian Brotherhood Foundation.
Pursuant to Section 16 of the Exchange Act, the Company's Directors and
executive officers and beneficial owners of more than 10% of the Company's
common stock, par value $0.001 ("Common Stock") or warrants are required to file
certain reports, within specified time periods, indicating their holdings of and
transactions in the Common Stock and derivative securities. Based solely on a
review of such reports provided to the Company and written representations from
such persons regarding the necessity to file such reports, the Company is not
aware of any failures to file reports or report transactions in a timely manner
during the Company's fiscal year ended December 31, 1998, other than one late
Form 4 filing by both Robert R. Sams and Ricardo Maranon.
Item 11: Executive Compensation
Summary Compensation Table
The following table sets forth all compensation awarded to, earned by,
or paid to the executive officer named therein for all services rendered to the
Company during the three fiscal years ending December 31, 1998. No other
executive officer of the Company received total compensation in excess of
$100,000 during any of the last three years:
Annual Compensation
<TABLE>
<CAPTION>
Shares
Name and Underlying
Positions Year Salary($) Bonus $ Stock Options
- --------- ---- --------- ------- -------------
<S> <C> <C> <C> <C>
Diego Leiva, President 1998 $162,500(1) $15,201 2,750,000
Chief Executive 1997 150,000 __ 750,000(1)
Officer and 1996 150,000 __ __(1)
Chairman of the
Board of Directors
</TABLE>
-28-
<PAGE>
<TABLE>
<CAPTION>
Shares
Name and Underlying
Positions Year Salary ($) Bonus $ Stock Options
- --------- ---- ---------- ------- -------------
<S> <C> <C> <C>
Robert Bingham, 1998 $111,500 -- 50,000(2)
Vice President and 1997 34,417 -- 500,000(3)
Chief Financial Officer 1996 -- -- --
Raymond Brennan, 1998 $138,340 -- 250,000(4)
Vice President and 1997 88,419 -- 750,000(5)
Secretary 1996 85,365 -- --
Karen M. Quinn 1998 $100,179 -- 300,000(6)
President PICK US Inc. 1997 85,164 -- 750,000(5)
1996 85,153 -- --
</TABLE>
- -----------------------
(1) Includes options to purchase 500,000 shares granted in 1996, at prices
varying from $0.875 to $0.9625 per share were canceled and re-issued in
1997 at $0.19 per share and 250,000 options granted in 1997 at $0.30 per
share.
(2) Exercisable at $0.37 per share.
(3) Includes options to purchase 250,000 shares at $0.25 per share and options
to purchase 250,000 shares at $0.50 per share.
(4) Includes options to purchase 150,000 shares at $0.37 per share and options
to purchase 100,000 shares at $0.55 per share.
(5) Includes options to purchase 250,000 shares at $0.27 per share and options
to purchase 500,000 shares at $0.17 per share.
(6) Includes options to purchase 150,000 shares at $0.37 per share and options
to purchase 150,000 shares at $0.55 per share.
The Company maintained a $250,000 term life insurance policy for Diego
Leiva for his benefit, for which the Company paid $1,377, $1,257 and $1,186 in
1998, 1997 and 1996, respectively. In addition, the Company maintains a
$1,000,000 key man life insurance policy for Mr. Leiva.
Effective April 1, 1999, Thomas M. Malone and James H. Season became
Chief Executive Officer and Vice President and Chief Financial Officer,
respectively, of the Company. Mr. Malone will be paid $250,000 per annum and
will receive a $100,000 signing bonus. Mr. Season will be paid $125,000 per
annum and will receive a $15,000 signing bonus. Both Mr.
-29-
<PAGE>
Malone and Mr. Season are expected to sign employment agreements with the
Company and receive further benefits including a monthly car allowance and stock
options.
Employment Agreement
In September 1998, the Company entered into a five-year employment
agreement with Diego Leiva, as President and Chief Executive Officer, which
commenced on January 1, 1999 (the "Commencement Date"). The Agreement is
automatically renewable for additional one-year periods unless terminated on 90
days' prior written notice. Mr. Leiva will be paid $300,000 per annum beginning
on the Commencement Date, increasing by $50,000 increments on January 1, in each
of the four following years and by $75,000 per year in each year after the fifth
anniversary date if the Agreement is automatically extended. The agreement
provided that Mr. Leiva would continue to receive his then current base salary
until the Company's Senior Secured Notes are repaid. Mr. Leiva is entitled to a
monthly car allowance of $1,600 per month for automobiles in Florida and New
Jersey and shall also be reimbursed for reasonable living expenses in the
location which is not his principal residence. Mr. Leiva's agreement precludes
him from soliciting employees of the Company or interfering with PICK's
relationships with other employees for 18 months after termination of
employment. Mr. Leiva is also prohibited from competing with the Company during
the period following termination of employment for which PICK is liable to pay
him his base salary are for one year, whichever is longer.
In April 1999, Mr. Leiva's employment agreement was amended to provide
he would continue solely as Chairman of the Board and a Director. Mr. Leiva
agreed to vote his shares of Common Stock in favor of Management's nominees,
provided he is a nominee for the Board.
Directors Compensation
Directors currently receive no cash compensation for serving on the
Board of Directors or any Committee of the Board, other than reimbursement of
travel expenses incurred by them and their spouses in attending Board meetings
held outside the New York Metropolitan area. One of the directors is an employee
of the Company. Each of the Directors has received stock options from the
Company.
Option Grants in Last Fiscal Year
The table below contains certain information concerning stock options
granted to the Named Executive Officers, named in the Summary Compensation
Table, during the year ended December 31, 1998:
-30-
<PAGE>
<TABLE>
<CAPTION>
Number of Percent of Total Potential Realizable Value at
Securities Options Assumed Annual Rates of Stock Price
Underlying Granted to Exercise Appreciation for Option Term
Options Employees in Price Expiration 5% 10%
Name Granted Fiscal year ($/Share) Date ($) ($)
- ---- ------- ----------- --------- ---------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Diego Leiva 2,500,000 60% $.55 11/2/03 $343,750 $687,500
150,000 3.6% .41 2/19/01 $9,225 $18,450
100,000 2.4% .61 11/4/01 $9,150 $18,300
Robert Bingham 50,000 1.2% $.37 (1) (1) (1)
Raymond Brennan 150,000 3.6% $.37 2/19/01 $8,325 $16,650
100,000 2.4% .55 11/4/01 $8,250 $16,500
Karen M. Quinn 150,000 3.6% $.37 2/19/01 $8,325 $16,650
150,000 3.6% .55 11/4/01 $12,375 $24,750
</TABLE>
- --------------
(1) Forfeited following Mr. Bingham's resignation on February 10, 1999.
Option Grants in 1999
In March 1999, the Company granted an aggregate of 11,505,000 options
to employees and consultants, all exercisable at $0.50 per share and vesting
over a three-year period, except Mr. Malone's option vesting over a four-year
period. Included were the following grants to officers and/or directors: Thomas
Malone, Chief Executive Officer (5,000,000 shares); Mario Pino, President of
PICK Sat (2,500,000 shares); James H. Season, Chief Financial Officer (500,000
shares); Niles Ring, Vice President (500,000 shares); and Karen Quinn, President
of PICK US Inc. (150,000 shares).
Aggregated Option Exercises in Last Fiscal Year and Year End Option Values
The table below includes information regarding the value realized on
option exercises and the market value of unexercised options held by the Named
Executive Officers named in the Summary Compensation Table during the year ended
December 31, 1998:
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised In-the-Money
Shares Options Options
Acquired at FY-End(#) at FY-End (S)
on Value Exercisable/ Exercisable/
Name Exercise (#) Realized($) Unexercisable Unexercisable(1)
---- ------------ ----------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Diego Leiva 250,000 $95,000 1,225,000/2,025,000 $345,750/$321,750
Robert Bingham 0 0 300,000/250,000 $120,500/$45,000
Raymond Brennan 250,000 $102,500 750,000/0 $307,000/0
Karen M. Quinn 250,000 $102,500 800,000/0 $321,000/0
</TABLE>
- -------------------------------
(1) As of December 31, 1998, the market value of the shares was $0.68.
-31-
<PAGE>
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee was an officer or employee of the
Company or any of its subsidiaries during the prior year or was formerly an
officer of the Company or of any of its subsidiaries. None of the Executive
Officers of the Company has served on the Compensation Committee during the last
fiscal year of any other entity, any of whose officers served on the
Compensation Committee of the Company.
Employee Benefit Plans
Other than stock options, the Company does not currently have, nor during the
1998 fiscal year did it have, any other long-term incentive plans.
Item 12: Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of April 14, 1999, the number of shares of
the Company's outstanding Common Stock beneficially owned by (i) each director
of the Company, (ii) each Named Executive Officer named above, (iii) each
beneficial owner of more than 5% of the Company's Common Stock and (iv) all of
the Company's executive officers and directors as a group:
Name and Address Amount and Nature of
of Beneficial Owner (1) Beneficial Ownership (2) Percentage (3)
- ----------------------- ------------------------ --------------
Diego Leiva 13,798,247(4)(5) 30.9%
Robert R. Sams 2,633,674(6) 5.2%
Ricardo Maranon 1,504,674(7) 3.4%
Alberto M. Delgado 3,212,500(8)(9) 6.9%
John Tydeman 692,500(8)(10) 1.6%
-32-
<PAGE>
<TABLE>
<CAPTION>
Name and Address Amount and Nature of
of Beneficial Owner (1) Beneficial Ownership (2) Percentage (3)
- ----------------------- ------------------------ --------------
<S> <C>
Robert Bingham 25,0000 .1%
Raymond Brennan 1,430,174(11) 3.2%
Karen M. Quinn 1,359,924(12) 3.1%
All executive officers and
directors as a group
(11 persons) 24,631,693(13) 44.9%
</TABLE>
- --------------------------------
(1) The address of all officers and directors is c/o the Company, 155 Route 46
West, 3rd Floor, Wayne, New Jersey 07470.
(2) Unless otherwise noted, all shares are beneficially owned and the sole
voting and investment power is held by the person indicated.
(3) Based on 43,367,355 shares outstanding as of April 14, 1999. Each
beneficial owner's percentage ownership is determined by assuming that
options or warrants that are held by such person and which are convertible
or exercisable within sixty (60) days of such date pursuant to Rule l3d-3
under the Exchange Act have been converted or exercised.
(4) Includes 4,290,000 shares beneficially owned by Mr. Leiva's wife.
(5) Includes an aggregate of 1,250,000 stock options consisting of incentive
stock options to purchase up to l31,578 shares of the Company's Common
Stock at $0.19 per share, 150,000 shares at $0.41 per share, 63,000 shares
at $0.61 per share, non-qualified stock options to purchase up to 368,422
shares of the Company's Common Stock at $0.19 per share, 37,000 shares at
$.061 per share under the Plan; and non-qualified stock options to
purchase 500,000 shares at $0.55 per share outside of the Plan, but
excludes non-qualified stock options to purchase 2,000,000 shares at $0.55
per share.
(6) Includes non-qualified stock options to purchase up to 750,000 shares of
the Company's Common Stock, including 500,000 shares at $0.17 per share,
150,000 shares at $0.37 per share and 100,000 shares at $0.55 per share
pursuant to the Plan. Excludes 96,000 shares owned by Vulcan Petroleum of
which Mr. Sams is a director and minority shareholder. Includes 1,600,000
shares of Common Stock issuable upon conversion of 160,000 shares of
Series B Convertible Preferred Stock, but excludes 500,000 shares of
Common Stock issuable upon exercise of non-qualified stock options which
vest on March 3, 2000. See Item 13. "Certain Relationships and Related
Transactions."
(7) Includes non-qualified stock options to purchase up to 750,000 shares of
the Company's Common Stock, including 500,000 shares at $0.17 per share,
150,000 shares at $0.37 per share and 100,000 shares at $0.55 per share
pursuant to the Plan. Includes 37,250 shares
-33-
<PAGE>
of the Company's Common Stock beneficially owned by Mr. Maranon's
daughter. Includes 210,000 shares of Common Stock issuable upon conversion
of 21,000 shares of Series B Convertible Preferred Stock, but excludes
500,000 shares of Common Stock issuable upon exercise of non-qualified
stock options which vest on March 3, 2000. See Item 13. "Certain
Relationships and Related Transactions."
(8) Includes non-qualified stock options to purchase up to 62,500 shares at
$0.55 per share. Excludes nonqualified stock options to purchase up to
187,500 shares at $0.55 per share, vesting on November 2, 1999, and
500,000 shares of Common Stock issuable upon exercise of non-qualified
stock options which vest on March 3, 2000.
(9) Includes 3,l50,000 shares of Common Stock issuable upon conversion of
315,000 shares of Series B Preferred Stock. See Item l3. "Certain
Relationships and Related Transactions."
(10) Includes 600,000 shares of Common Stock issuable upon conversion of
$60,000 shares of Series B Preferred Stock. See Item l3. "Certain
Relationships and Related Transactions."
(11) Includes 340,000 shares beneficially owned by Mr. Brennan's wife. Also
includes an aggregate of 750,000 options, including incentive stock
options to purchase up to 191,176 shares at $0.17 per share, 150,000
shares at $0.37 per share, 80,000 shares at $0.55 per share, non-qualified
stock options to purchase up to 308,824 shares at $0.17 per share and
20,000 shares at $0.55 per share pursuant to the Plan.
(12) Includes an aggregate of 800,000 options, including incentive stock
options to purchase 191,176 shares at $0.17 per share, 150,000 shares at
$0.37 per share, 80,000 shares at $0.55 per share and non-qualified stock
options to purchase up to 308,824 shares at $0.17 per share and 70,000
shares at $0.55 per share pursuant to the Plan. Excludes non-qualified
stock options to purchase up to 150,000 shares at $0.50 per share, vesting
as follows: 30,000 on September 1, 1999; 45,000 on September 1, 2000;
45,000 on September 1, 2001; and 30,000 on September 1, 2002.
(13) Includes non-qualified stock options and incentive stock options to
purchase up to 4,362,500 shares by the parties named above and shares of
Preferred Stock to purchase up to 5,560,000 shares of Common Stock at the
prices per share stated in footnotes (5-12), also includes options to
purchase an aggregate of 1,075,000 shares held by current executive
officers not listed in the table, Thomas M. Malone, James H. Season, Mario
Pino and Niles D. Ring, which are currently exercisable, plus 500,000
shares of Common Stock issuable upon conversion of Series B Preferred
Stock granted to Thoms M. Malone, but excludes options to purchase an
aggregate of 7,725,000 shares which are not currently exercisable.
-34-
<PAGE>
Item 13: Certain Relationships and Related Transactions
See "Item 11 - Executive Compensation" for terms and conditions of employment
agreements entered into between the Company and Diego Leiva and options granted
to the Company's Executive Officers and Directors.
On March 3, 1999, the Company, Diego Leiva ("Leiva"), the Company's Chairman of
the Board, and Commonwealth Associates L.P. ("Commonwealth") the placement agent
for the holders of the Company's outstanding 18% senior secured notes, entered
into an Agreement by which Commonwealth and its designees, including J.P. Turner
& Company, L.L.C. ("Turner") and management of the Company, would purchase up to
$2,000,000 of preferred stock of the Company (the "Series B Preferred Stock") at
a purchase price of $1.00 per share. On March 12, 1999, the Company filed a
Certificate of Designation, as later amended, relating to the Series B Preferred
Stock (the "Series B Certificate") with the Secretary of State for the State of
Nevada. The Series B Certificate authorized 2,000,000 shares of Series B
Preferred Stock convertible by the holders thereof into the Company's Common
Stock at $.10 per share. In addition, the Series B Preferred Stock has a
liquidation preference of $1.00 per share. As of April 22, 1999, the Company had
received cash (and as part of Mr. Malone's signing bonus) for 1,871,000 shares
of Series B Preferred Stock from Commonwealth, Turner and officers and directors
of the Company convertible into 18,710,00 shares of Common Stock. The following
officers and/or directors have purchased the respective amounts of Series B
Preferred Stock:
Robert R. Sams $160,000
Alberto M. Delgado 315,000
Ricardo Maranon 21,000
John Tydeman 60,000
Thomas M. Malone 50,000
--------
Total $606,000
On March 3, 1999, the Board of Directors granted to each of the Company's four
independent directors, Robert Sams, Ricardo Maranon, Alberto M. Delgado and John
Tydeman, with each abstaining as to themselves, options to purchase 500,000
shares of Common Stock at $.51 per share in consideration of their substantial
efforts in assisting the Company in obtaining financing and for other valuable
consideration rendered to the Company. These options shall be fully vested on
March 3, 2000.
-35-
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Independent Auditor's Report F-2
Independent Auditor's Report F-3
Consolidated Financial Statements:
Balance Sheet F-4
Statement of Operations F-5
Statement of Stockholders' Deficiency F-6 - F-7
Statement of Cash Flows F-8 - F-9
Notes to Financial Statements F-10 - F-21
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
PICK Communications Corp.
We have audited the accompanying consolidated balance sheet of PICK
Communications Corp. and Subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, stockholders' deficiency, and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PICK Communications
Corp. and Subsidiaries as of December 31, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 16 to
the consolidated financial statements, the Company has incurred substantial
recurring losses from operations, has a net capital deficiency and has a working
capital deficiency that raise substantial doubt about its ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 16. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
March 5, 1999, except for portions of
Notes 13 and 17 as to which the
date is March 26, 1999 and Notes 6 and 16
as to which the date is April 28, 1999
F-2
<PAGE>
Report of Certified Public Accountants
To: The Board of Directors
PICK Communications Corp.
Wayne, New Jersey
We have audited the accompanying consolidated balance sheets of PICK
Communications Corp. and its Subsidiaries (the "Company") as of December 31,
1997 and the related consolidated statements of operations, stockholders' equity
and cash flows for the years ended December 31, 1997 and 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 1997 and 1996 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of PICK
Communications Corp. and its Subsidiaries as of December 31, 1997 and the
results of its operations and its cash flows for the years ended December 31,
1997 and 1996, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 14 to
the consolidated financial statements, the Company has experienced significant
losses, resulting in a deficit equity position. The Company's financial position
and operating results raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 14. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Durland & Company, CPAs, P.A.
Palm Beach, Florida
April 29, 1998
F-3
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 248,551 $ 44,400
Accounts receivable, less allowance for doubtful accounts of
$351,838 and $326,497, respectively 740,886 451,818
Prepaid expenses and other current assets 575,022 125,816
- ----------------------------------------------------------------------------------------------------------------------
Total current assets 1,564,459 622,034
- ----------------------------------------------------------------------------------------------------------------------
Property and Equipment - at cost, net of accumulated depreciation
and amortization of $428,199 and $68,488, respectively 5,048,551 1,000,083
- ----------------------------------------------------------------------------------------------------------------------
Other Assets:
Security deposits 178,146 24,396
Investment in marketable equity securities - 171,000
Deferred income tax asset, net of valuation allowance of $11,000,000
and 4,800,000 respectively - -
- ----------------------------------------------------------------------------------------------------------------------
Total other assets 178,146 195,396
- ----------------------------------------------------------------------------------------------------------------------
Total Assets $ 6,791,156 $ 1,817,513
======================================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Current portion of debt $ 2,127,500 $ 1,000,000
Current portion of capital leases 271,676 146,128
Accounts payable and accrued expenses 7,690,978 4,876,336
Deferred revenue - prepaid calling cards 2,183,806 681,653
Other current liabilities 3,967,841 1,323,525
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 16,241,801 8,027,642
Capital Leases, less current portion 1,042,716 794,905
Short term debt expected to be refinanced, less current portion 9,772,500 -
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 27,057,017 8,822,547
- ----------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Minority Interest in Consolidated Subsidiary 86,018 88,080
- ----------------------------------------------------------------------------------------------------------------------
Stockholders' Deficiency:
Common stock - $.001 par value; authorized 100,000,000 shares at December 31,
1998 and 75,000,000 shares at December 31, 1997; 38,201,881 issued and
38,166,381 outstanding at December 31, 1998;
43,325,317 issued and 36,059,817 outstanding at December 31, 1997 38,202 43,325
Additional paid-in capital 4,008,029 5,886,825
Options and warrants 2,687,461 21,242
Treasury stock, at cost, 35,500 and 7,265,500 shares at
December 31, 1998 and 1997, respectively (11,978) (3,072,222)
Accumulated other comprehensive income - 38,000
Accumulated deficit (27,073,593) (10,010,284)
- ----------------------------------------------------------------------------------------------------------------------
Stockholders' deficiency (20,351,879) (7,093,114)
- ----------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Deficiency $ 6,791,156 $ 1,817,513
======================================================================================================================
</TABLE>
The accompanying notes and independent auditor's report should
be read in conjunction with the consolidated financial statements
F-4
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales of long-distance services $ 1,978,441 $ 7,669,243 $ 4,444,342
Sales of prepaid calling cards 7,844,462 1,346,660 1,425,340
- ----------------------------------------------------------------------------------------------------------------------
Net sales 9,822,903 9,015,903 5,869,682
- ----------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales:
Cost of telephone time purchased 13,322,978 8,326,318 5,308,626
Other cost of sales 3,069,566 762,431 1,092,605
Adjustment to provision for contingent costs - (649,563) 1,749,563
- ----------------------------------------------------------------------------------------------------------------------
Total cost of sales 16,392,544 8,439,186 8,150,794
Selling, general and administrative 3,880,100 1,836,829 2,551,142
Depreciation and amortization 359,711 180,531 181,758
Bad debt expense 125,740 253,270 219,746
- ----------------------------------------------------------------------------------------------------------------------
Total costs and expenses 20,758,095 10,709,816 11,103,440
- ----------------------------------------------------------------------------------------------------------------------
Loss before other income (expense) (10,935,192) (1,693,913) (5,233,758)
- ----------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest expense (3,191,869) (157,669) (19,802)
Debt placement expenses (2,805,310) - -
Gain on in-substance defeasance - - 53,080
License fees - - 3,650,000
Loss on disposal of fixed assets - - (50,271)
Write-off of intangible asset - (441,205) -
Net gains (losses) on marketable equity securities (133,000) (9,449,079) 4,784,000
- ----------------------------------------------------------------------------------------------------------------------
Total other income (expense) (6,130,179) (10,047,953) 8,417,007
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interest in subsidiary
loss and income taxes (17,065,371) (11,741,866) 3,183,249
Benefit (provision) for income taxes - 1,808,000 (1,808,000)
Minority interest in subsidiary loss 2,062 434,064 260,541
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $(17,063,309) $ (9,499,802) $ 1,635,790
======================================================================================================================
Net income (loss) per common share - basic $ (.46) $ (.26) $ .04
======================================================================================================================
Weighted average shares outstanding - basic 36,923,564 36,958,530 41,991,502
======================================================================================================================
</TABLE>
The accompanying notes and independent auditor's report should
be read in conjunction with the consolidated financial statements
F-5
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock
----------------------- Additional Options
Number Paid-in and Stock Treasury
of Shares Amount Capital Warrants Subscription Stock
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 40,542,516 $81,085 $2,018,780 - $(800,000) -
Issuance of common stock for cash
and reduction of receivable 250,000 500 249,500 - (125,000) -
Issuance of common stock
for prepaid advertising 1,150,000 2,300 2,697,700 - - -
Issuance of common stock for
500,000 shares of Ultimistics, Inc. 1,250,000 2,500 1,272,500 - - -
Reacquisition of shares for cash (230,000) - - - - $ (29,500)
Reacquisition of shares for cash,
prepaid calling cards and unused
advertising (250,000) - - - - (572,589)
Issuance of common stock for
compensation and services 505,000 1,010 161,240 - - -
Collections of subscription
receivable - - - - 325,000 -
Accumulated other comprehensive
income (loss) - - - - - -
Net income - - - - - -
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 43,217,516 87,395 6,399,720 - (600,000) (602,089)
Reduction of $0.002 to $0.001
par value - (43,697) 43,697 - - -
Cancellation of 600,000 shares
subscribed (600,000) (600) (599,400) - 600,000 -
Reacquisition of shares for cash (35,500) - - - - (11,978)
Reacquisition of shares for
unused prepaid advertising, with
a book value of $2,038,155 (750,000) - - - - (2,038,155)
<CAPTION>
Accumulated Total
Other Stockholders'
Comprehensive Accumulated Equity
Income (Loss) Deficit (Deficiency)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1995 - $(2,146,272) $ (846,407)
Issuance of common stock for cash
and reduction of receivable - - 125,000
Issuance of common stock
for prepaid advertising - - 2,700,000
Issuance of common stock for
500,000 shares of Ultimistics, Inc. - - 1,275,000
Reacquisition of shares for cash - - (29,500)
Reacquisition of shares for cash,
prepaid calling cards and unused
advertising - - (572,589)
Issuance of common stock for
compensation and services - - 162,250
Collections of subscription
receivable - - 325,000
Accumulated other comprehensive
income (loss) $(3,904,965) - (3,904,965)
Net income - 1,635,790 1,635,790
- ------------------------------------------------------------------------------------
Balance at December 31, 1996 (3,904,965) (510,482) 869,579
Reduction of $0.002 to $0.001
par value - - -
Cancellation of 600,000 shares
subscribed - - -
Reacquisition of shares for cash - - (11,978)
Reacquisition of shares for
unused prepaid advertising, with
a book value of $2,038,155 - - (2,038,155)
(continued)
</TABLE>
The accompanying notes and independent auditor's report should
be read in conjunction with the consolidated financial statements
F-6
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock
----------------------- Additional Options
Number Paid-in and Stock Treasury
of Shares Amount Capital Warrants Subscription Stock
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Reacquisition of shares for
Firenze, Ltd. and Ultimistics, Inc. (6,000,000) - - - - $ (420,000)
Issuance of common stock for
services 227,000 $ 227 $ 42,808 - - -
Issuance of warrants in connection
with short-term debt - - - $ 21,242 - -
Accumulated other comprehensive
income (loss) - - - - - -
Net loss - - - - - -
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 36,059,016 43,325 5,886,825 21,242 - (3,072,222)
Issuance of common stock for
compensation 662,997 663 296,363 - - -
Issuance of common stock in
connection with private placement 1,394,368 1,394 864,405 - - -
Issuance of common stock upon - - -
exercise of warrants by director 50,000 50 13,450 - - -
Issuance of warrants in connection
with short-term debt - - - 2,359,940 - -
Issuance of options for compensation - - - 306,279 - -
Cancellation of 7,230,000
shares of treasury stock - (7,230) (3,053,014) - - 3,060,244
Accumulated other comprehensive
income (loss) - - - - - -
Net loss - - - - - -
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 38,166,381 $38,202 $ 4,008,029 $2,687,461 $-0- $ (11,978)
================================================================================================================================
<CAPTION>
Accumulated Total
Other Stockholders'
Comprehensive Accumulated Equity
Income (Loss) Deficit (Deficiency)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reacquisition of shares for
Firenze, Ltd. and Ultimistics, Inc. - - $ (420,000)
Issuance of common stock for
services - - 43,035
Issuance of warrants in connection
with short-term debt - - 21,242
Accumulated other comprehensive
income (loss) $3,942,965 - 3,942,965
Net loss - $ (9,499,802) (9,499,802)
- --------------------------------------------------------------------------------------
Balance at December 31, 1997 38,000 (10,010,284) (7,093,114)
Issuance of common stock for
compensation - - 297,026
Issuance of common stock in
connection with private placement - - 865,799
Issuance of common stock upon - -
exercise of warrants by director - - 13,500
Issuance of warrants in connection
with short-term debt - - 2,359,940
Issuance of options for compensation - - 306,279
Cancellation of 7,230,000
shares of treasury stock - - -
Accumulated other comprehensive
income (loss) (38,000) - (38,000)
Net loss - (17,063,309) (17,063,309)
- --------------------------------------------------------------------------------------
Balance at December 31, 1998 $ -0- $(27,073,593) $(20,351,879)
======================================================================================
</TABLE>
The accompanying notes and independent auditor's report should be read in
conjunction with the consolidated financial statements
F-7
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(17,063,309) $(9,499,802) $ 1,635,790
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Loss (gain) on marketable securities 133,000 9,449,079 (4,784,000)
Revenue from license fees - - (3,650,000)
Gain on in-substance defeasance - - (53,080)
Advertising expense - - 256,845
Stock, options and warrants issued for compensation
or services 603,305 64,277 162,250
Amortization of debt discounts and placement expenses 4,656,773 - -
Depreciation and amortization 359,711 180,531 181,758
Write-off of intangible asset - 441,205 -
Loss on abandonment of property and equipment - - 50,271
Minority interest in subsidiary loss (2,062) (434,064) (260,541)
Bad debt expense 125,740 253,270 219,746
Adjustment to provision for contingent liabilities - (649,563) 1,749,563
Provision (benefit) for deferred income taxes - (1,808,000) 1,808,000
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (414,808) 73,092 (163,490)
Decrease (increase) in other operating assets (602,956) (44,046) 175,716
Increase in accounts payable and accrued expenses 2,814,642 3,408,763 880,161
Increase (decrease) in deferred revenue 1,502,153 (985,735) 862,005
Increase (decrease) in other operating liabilities 2,814,316 (868,679) (289,375)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (5,073,495) (419,672) (1,218,381)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment in debt securities - - (371,920)
Purchase of property and equipment (3,817,153) (6,510) (65,966)
- ----------------------------------------------------------------------------------------------------------------------
Cash used in investing activities (3,817,153) (6,510) (437,886)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Common stock issued for cash 13,500 - 250,000
Common stock issued for cash by subsidiary - - 527,612
Acquisition of treasury stock for cash - (11,978) (44,500)
Proceeds from stock subscriptions receivable - - 200,000
Principal paid on capital leases (217,667) - -
Proceeds from third-party debt 11,468,966 250,000 750,000
Payments on third-party debt (2,000,000) - (75,000)
Funds advanced by stockholder 15,000 170,000 75,152
Payments on stockholder advances (185,000) (25,152) (50,000)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 9,094,799 382,870 1,633,264
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 204,151 (43,312) (23,003)
Cash at beginning of year 44,400 87,712 110,715
======================================================================================================================
Cash at end of year $ 248,551 $ 44,400 $ 87,712
======================================================================================================================
(continued)
</TABLE>
The accompanying notes and independent auditor's report should be read in
conjunction with the consolidated financial statements
F-8
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $1,167,716 $ 75,877 $ 8,271
==================================================================================================================
Supplemental schedule of noncash investing and
financing activities:
Assets acquired under capital leases $ 591,026 $ 941,033 -
==================================================================================================================
Discount on short-term debt $1,312,934 - -
==================================================================================================================
Book value of marketable equity securities exchanged
for common stock of the Company and its subsidiary - $6,390,625 -
==================================================================================================================
Book value of marketable equity securities exchanged
for other marketable equity securities - $4,085,000 -
==================================================================================================================
Book value of prepaid advertising and telephone cards
exchanged for common stock of the Company and
its subsidiary - $2,458,155 $ 557,589
==================================================================================================================
Stock issued for investment in marketable equity securities - - $1,275,000
==================================================================================================================
Stock issued for suscriptions receivable - - $ 125,000
==================================================================================================================
Stock issued to acquire prepaid advertising - - $2,700,000
==================================================================================================================
In-substance defeasance - - $ 425,000
==================================================================================================================
</TABLE>
The accompanying notes and independent auditor's report should be read in
conjunction with the consolidated financial statements
F-9
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. PRINCIPAL PICK Communications Corp. and Subsidiaries acts as a
BUSINESS wholesaler of long-distance telephone services and sells
ACTIVITY AND prepaid telephone calling cards through distributors. Also,
SUMMARY OF the Company intends to provide satellite-based Internet
SIGNIFICANT access and interactive multimedia services to end user
ACCOUNTING service providers. The Company is headquartered in Wayne, New
POLICIES: Jersey, and also leases facilities and telephone switching
equipment in Jersey City, New Jersey, and Miami, Florida.
The accompanying consolidated financial statements include
the accounts of the Company and its wholly-owned
subsidiaries: PICK US Inc. f/k/a PICK Inc. ("PICK US"); PICK
Net Inc. ("PICK Net"); PICK Net UK PLC; PICK Sat Inc. and
P.C.T. Prepaid Telephone, Inc. ("PCT"), a majority-owned
subsidiary (collectively, the "Company"). All significant
intercompany balances and transactions have been eliminated.
Subsequent to year-end, the Company formed a new subsidiary,
PICK Online.Com Inc., a media content aggregator using a
satellite-based multicast delivery system for Internet
Service Providers and Broadband Networks.
Minority interest represents the minority shareholders'
proportionate share of the equity and loss of PCT.
For comparability, certain 1997 and 1996 amounts have been
reclassified, where appropriate, to conform to the
consolidated financial statement presentation used in 1998.
The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. In
preparing the consolidated 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 consolidated balance sheet and revenue and expenses for
the periods then ended. Actual results could differ from
those estimates.
Sales of long-distance time are recognized at the time that
service is provided, as reported by the electronic switching
devices. The Company defers revenue related to prepaid
calling cards (which is recorded net of distributor
discounts) and recognizes revenue as the card is used.
Basic net loss per share is computed by dividing the net loss
by the weighted-average number of common shares outstanding
during the year. Diluted net loss per share is not presented
because the inclusion of common share equivalents would be
antidilutive.
The Company does not believe that any recently issued but not
yet effective accounting standards will have a material
effect on the Company's consolidated financial position,
results of operations or cash flows.
In 1998, approximately 72% and 10% of revenue were from two
customers; in 1997, approximately 19% and 13% of revenue were
from two customers; and in 1996, approximately 36% and 25% of
revenue 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.
F-10
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Two customers comprised approximately 65% and 11%
of gross accounts receivable, respectively, at
December 31, 1998. Five customers comprised
approximately 35%, 20%, 16%, 13% and 10% of gross
accounts receivable, respectively, at December 31,
1997. The Company also purchases
telecommunications services from many of its
customers. Frequently, accounts receivable are
settled by set-offs against liabilities with the
same party.
Depreciation of property and equipment is provided
for by the straight-line method over the estimated
useful lives of the related assets.
The Company's intangible assets (patent and
related rights for prepaid cellular technology)
were valued at cost and amortized over their
estimated useful lives of five years. Since, among
other factors, this technology generated no
revenue during 1997, the Company elected to write
off the unamortized balance at December 31, 1997.
The Company accounts for income taxes in
accordance with Statement of Financial Accounting
Standards ("SFAS") No. 109, Accounting for Income
Taxes. The Company recorded a deferred tax asset
for the tax effect of net operating loss
carryforwards and temporary differences. In
recognition of the uncertainty regarding the
ultimate amount of income tax benefits to be
derived, the Company has recorded a full valuation
allowance.
2. PREPAID Prepaid expense and other current assets consist
EXPENSES AND of the following:
OTHER CURRENT
ASSETS:
<TABLE>
<CAPTION>
December 31, 1998 1997
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computer equipment for resale $100,624 $ 2,054
Prepaid expenses 99,722 27,699
Advances and other current assets 225,020 -
Deposits 149,656 96,063
----------------------------------------------------------------------------------------
$575,022 $125,816
========================================================================================
</TABLE>
F-11
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
3. PROPERTY AND Property and equipment, at cost, consists of the
EQUIPMENT: following:
<TABLE>
<CAPTION>
Estimated
December 31, 1998 1997 Useful Life
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Property, equipment and software $1,186,464 $ 127,538 3 and 5 years
Telephone switching equipment 1,532,059 941,033 5 years
Asset development/installation
in process 2,758,227 -
----------------------------------------------------------------------------------------
5,476,750 1,068,571
Less accumulated depreciation and
amortization 428,199 68,488
----------------------------------------------------------------------------------------
$5,048,551 $1,000,083
========================================================================================
</TABLE>
Telephone switching equipment was acquired under
capital leases costing $1,252,271 and $941,033 at
December 31, 1998 and 1997, respectively, net of
accumulated depreciation of approximately $280,000
at December 31, 1998.
Asset development/installation in process consists
of (i) hardware and software costs related to the
Company's high-speed Internet business, which is
under development, and (ii) costs of
telecommunication equipment being installed.
Depreciation will commence when the development
and/or installation is complete and the assets are
fully operational.
4. PREPAID In October 1995, the Company acquired the
CELLULAR worldwide rights to market, distribute, sell and
TELEPHONE manufacture a prepaid cellular telephone
TECHNOLOGY technology for $712,500, of which $212,500 was
AND WRITE-OFF paid by the issuance of 100,000 shares of the
OF INTANGIBLE Company's stock. Although the Company believes
ASSET: this technology may prove to have value, the
technology generated no revenue in 1997 and the
Company elected to write off its remaining
investment ($441,205) as of December 31, 1997.
5. INVESTMENT IN In 1996, the Company acquired 4,700,000 restricted
MARKETABLE shares of the common stock of Ultimistics, Inc.
EQUITY ("Ultimistics"). During the first quarter of 1997,
SECURITIES: 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.). The Company recorded losses of
$9,399,079 on these transactions. During 1998, the
balance of $133,000 was written off.
F-12
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
6. SHORT-TERM DEBT Debt consists of the following:
EXPECTED TO BE
REFINANCED:
<TABLE>
<CAPTION>
December 31, 1998 1997
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Borrowings from bank - $ 750,000(a)
Loan from customer/supplier $ 2,000,000(c) -
Private placement debt 9,900,000(d) 250,000(b)
-----------------------------------------------------------------------------------------------
$11,900,000 1,000,000
Less current portion of debt 2,127,500 1,000,000
-----------------------------------------------------------------------------------------------
Short-term debt expected to be refinanced, less current portion $ 9,772,500 $ -
===============================================================================================
</TABLE>
(a) The bank borrowing was repaid on July
29,1998 from a portion of the proceeds of
the borrowing discussed below (d).
(b) 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 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.
Management estimates the value of these
additional warrants reflected in interest
expense in 1998 at $5,750.
(c) In February 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. Concurrently, 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. Management
estimates the value of these warrants
reflected in interest expense in 1998 at
$30,879. The loan bears interest at 9% per
annum and matured on February 9, 1999. In
April 1999 the Company and IDT agreed in
principal to a new note (the "New Note") due
in six months with a principal amount of
$2,060,000 at 12% interest per annum. The
Company is required to make a payment of
$500,000 on May 31, 1999, half of which
shall be applied to the New Note and the
balance against accounts receivable due to
IDT. Thereafter, the Company has agreed to
pay IDT $50,000 per month against the New
Note. In connection with the New Note, the
Company has granted additional shares of
common stock and warrants as defined in the
agreement.
<PAGE>
In April 1998, the Company borrowed
$1,000,000 from unaffiliated investors. The
loan was unsecured, bore interest at 10% per
annum 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
$175,000 value assigned to these warrants is
reflected in interest expense. 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.
The $43,750 value assigned to these warrants
is included in debt placement expenses. This
borrowing was repaid on July 31, 1998 from a
portion of the proceeds of the borrowing
discussed below. Because the borrowing was
repaid after the maturity date, the interest
rate was increased, effective July 1, 1998,
to 18% and the lenders and the placement
agent were granted warrants to purchase
1,250,000 shares of the Company's common
stock, exercisable through August 14, 2001,
at $0.25 per share. Management estimates the
value of these warrants reflected in
interest and debt placement expense at
$326,900 and $81,725, respectively.
F-13
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(d) Between July 29, 1998 and September 8, 1998,
the Company, through Commonwealth Associates
("Commonwealth") placed $9,900,000 (face
amount) of 10%, 120-day Senior Secured Notes
(the "Original Notes") and 9,900,000
warrants to purchase shares of the Company's
common stock at $0.50 per share for five
years (the "Placement"). The Notes are
secured by all of the assets of PICK
Communications Corp. The Company allocated
$8,587,066 of the gross sale proceeds to the
debt and $1,312,934 to the warrants. The
$1,312,934 discount was amortized as
interest expense over the original 120-day
life of the Notes. In November and December
1998, the Company exercised its right to
extend the maturity date of the Notes for 60
days. Under the terms of the Notes, the
interest rate of the Notes was increased to
18% per annum, retroactive to the issuance
of the Notes. In January, February and March
1999, the holders of the Notes agreed to
extend the maturity of the Notes until April
27, 1999. In return for the extensions, the
Company agreed to issue 500,000 shares of
its common stock and warrants to purchase
2,475,000 shares of the Company's common
stock for five years at $0.50 per share to
the holders of the Notes. On April 27, 1999,
the holders of the Original Notes, who
control in excess of 90% of the principal
which was due on April 27, 1999, consented
to restructure their Original Notes (the
"Restructured Notes") and extend the maturity
date until April 27, 2002. In return, the
Company has agreed, for a two year period,
to allow each of the holders of the
Restructured Notes certain rights regarding
the purchase or exchange of the Company's
common stock or warrants as deferred in the
agreement.
For the Placement of the Original Notes, the
Company paid Commonwealth and Liberty Capital (the
Company's co-financial advisor) $1,099,000 in
cash, issued 1,394,368 shares of common stock
(valued at $865,799) and warrants to purchase
2,509,859 shares of common stock at $0.50 per
share for five years (valued at $383,002). The
costs related to the Placement were being deferred
and amortized as debt placement expenses over the
term of the debt. At December 31, 1998, all debt
placement expenses were amortized and included in
the consolidated statement of operations.
7. ACCOUNTS Accounts payable and accrued expenses consist of
PAYABLE AND the following.
ACCRUED
EXPENSES:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
December 31, 1998 1997
----------------------------------------------------------------------------------------
Accounts payable - operating $5,530,511 $4,480,815
Accrued expenses - operating 510,467 395,521
Accrued expenses - for equipment 1,650,000 -
----------------------------------------------------------------------------------------
$7,690,978 $4,876,336
========================================================================================
</TABLE>
Accounts payable at December 31, 1998 include
$1,120,544 payable to WorldCom Network Services,
Inc., which was payable in monthly installments of
between $350,000 and $385,544, plus interest at
18% per annum, through December 1998. The Company
is in the process of renegotiating payment terms
(see Note 13).
F-14
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
8. OTHER CURRENT Other current liabilities consist of the following:
LIABILITIES:
<TABLE>
<CAPTION>
December 31, 1998 1997
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reserve for contingent liability $1,100,000 $1,100,000
Advance from customer 1,000,000 -
Provision for loss on deferred revenue -
prepaid calling cards 1,580,000 -
Customer deposits 287,841 -
Advances from stockholder - 170,000
Accrued compensation due to stockholders - 53,525
----------------------------------------------------------------------------------------
$3,967,841 $1,323,525
========================================================================================
</TABLE>
9. CAPITAL LEASE The Company leases telephone switching equipment
OBLIGATIONS: under capital leases which expire during 2002. The
leases require monthly payments of principal and
interest imputed at 12% per annum.
Future minimum lease payments under capital leases
are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C> <C>
1999 $ 414,783
2000 414,783
2001 414,783
2002 414,783
----------------------------------------------------------------------------------------
1,659,132
Less amount representing interest 344,740
----------------------------------------------------------------------------------------
1,314,392
Less current portion 271,676
----------------------------------------------------------------------------------------
Capital leases, less current portion $1,042,716
========================================================================================
</TABLE>
10. COMMITMENTS: The Company leases facilities under noncancelable
operating leases expiring from July 2000 through
October 2003. The future minimum payments due
under such leases as of December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------------
<S> <C> <C>
1999 $ 482,483
2000 400,744
2001 251,425
2002 169,769
2003 144,994
----------------------------------------------------------------------------------------
Total payments $1,449,415
========================================================================================
</TABLE>
F-15
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Rental expense under operating leases was
$356,718, $106,586 and $45,315 for the years ended
December 31, 1998, 1997 and 1996, respectively.
The Company has the right to renew its operating
leases for terms of between three and five years.
At December 1998, the Company has outstanding
commitments for the purchase of telecommunications
and computer equipment and for the license of
computer software of approximately $690,000.
In September 1998, the Company entered into an
employment agreement with a key executive. This
agreement commenced January 1, 1999. The agreement
provides for annual base salaries of $300,000,
$350,000, $400,000, $450,000 and $500,000 for the
next five years. In addition, the agreement
provides for additional compensation, as defined
in the agreement.
11. INCOME TAXES: The Company's deferred tax assets at December 31,
1998 consist of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
Federal $ 9,300,000
State 1,700,000
----------------------------------------------------------------------------------------
11,000,000
Less valuation allowance (11,000,000)
----------------------------------------------------------------------------------------
Net deferred tax assets $ - 0 -
========================================================================================
</TABLE>
The deferred tax assets are comprised of the tax
benefit of net operating loss carryforwards and
capital loss carryforwards of approximately
$20,000,000 and $8,300,000, respectively, at
December 31, 1998. These losses are available to
offset future taxable income through the years
2018 and 2003, respectively.
12. CONTRACT WITH In February 1998, the Company entered into a
BLACKSTONE two-year agreement with Blackstone Calling Card,
CALLING CARD, Inc. ("Blackstone" and the "Blackstone
INC.: Agreement"), a major distributor of prepaid
telephone calling cards. Under the terms of the
Blackstone Agreement, as amended, after a
six-month phase-in period commencing April 27,
1998, Blackstone would purchase prepaid calling
cards with a minimum retail value of $5,000,000
per month from the Company, which was expected to
result in net revenue of approximately $3,000,000
per month to the Company. While Blackstone's
purchases from the Company had increased
significantly during the first nine months of the
contract, it is anticipated that the Blackstone
Agreement will have to be amended to raise the per
minute rates charged to users of the prepaid
telephone calling cards sold through Blackstone
and lower the purchase minimum amount and the
corresponding revenue to the Company. The
Blackstone Agreement is also subject to
termination by either party without cause at the
end of any year upon 60 days' prior notice, or by
Blackstone if the Company fails to maintain
overall network quality.
Other current liabilities includes a provision of
$1,580,000 for anticipated losses from providing
future service on prepaid telephone calling cards
sold prior to December 31, 1998.
F-16
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
13. LITIGATION AND The Company is, from time to time, party to
RESERVE FOR litigation that arises in the ordinary course of
CONTINGENT its business operations. Except as described
LIABILITY: 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 $10,000,000 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 noncash reserve of
$1,750,000, which was reduced to $1,100,000 in the
third quarter of 1997. The reserve is included in
other current liabilities in the accompanying
consolidated financial statements. After two
mediation sessions, AT&T indicated that it
intended to withdraw from the mediation. On
November 5, 1997, the Company filed for
arbitration proceedings against AT&T and reduced
its claim to $5,000,000. The trial began on April
19, 1999 and ended on April 22, 1999. There can be
no assurance that the Company will be able to
prevail in this arbitration. Any adverse judgement
or settlement could have a material impact on the
Company's financial condition.
During March of 1999, Worldcom Network Services,
Inc., d/b/a Wiltel, (Worldcom) commenced a lawsuit
against the Company in the United States District
Court, Southern District of New York demanding a
judgment in the amount of $1,256,622 which
includes interest of 18% per annum plus costs and
expenses. The plaintiff had previously sued the
Company for failure to pay for telecommunications
services provided and the parties reached
agreement on a settlement. However, the Company
has not made the required payments. On April 15,
1999 the Company and Worldcom agreed to a 90-day
extension of monies due at an interest rate of 16%
per annum payable by June 30, 1999. Accounts
payable and accrued expenses includes a liability
of $1,137,352 for this settlement at December 31,
1998.
F-17
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
14. STOCK OPTIONS:
In February 1996, the Company adopted an incentive
stock option plan for employees, directors,
independent contractors and consultants of the
Company which provides for the grant of stock
options and stock appreciation rights. Options may
be granted at prices not less than fair market
value of the Company's common stock at the date of
grant and may not be exercised more than 10 years
after the date granted. Unless otherwise provided,
options vest at a rate of 20% a year commencing
with the date of grant. Pursuant to this plan an
aggregate of 7,500,000 shares of common stock have
been reserved for issuance. Of the total number of
shares of common stock as of December 31, 1998,
3,955,000 shares of common stock relate to options
issued outside of the incentive stock option plan.
Transactions related to stock options are as
follows:
<TABLE>
<CAPTION>
Number of Weighted-average
Shares Price per share
----------------------------------------------------------------------------------------
<S> <C> <C>
Granted during 1996 3,500,000 $ 0.88
----------------------------------------------------------------------------------------
Balance at December 31, 1996 3,500,000 0.88
Granted 4,500,000 0.23
Expired/canceled (3,500,000) (0.88)
----------------------------------------------------------------------------------------
Balance at December 31, 1997 4,500,000 0.23
Granted 6,800,000 0.52
Exercised (50,000) (0.27)
----------------------------------------------------------------------------------------
Balance at December 31, 1998 11,250,000 $ 0.41
========================================================================================
</TABLE>
The weighted-average fair value per share of
options granted during the years ended December
31, 1998, 1997 and 1996 amounted to $0.13, $0.64
and $0.10, respectively.
Approximately $306,000 is reflected in selling,
general and administrative expenses for the year
ended December 31, 1998 relating to options
granted to nonemployees.
The Company has elected, in accordance with the
provisions of SFAS No. 123, "Accounting for Stock
Based Compensation" to apply the current
accounting rules under Accounting Principles Board
Opinion No. 25 and related interpretations in
accounting for its stock options and, accordingly,
has presented the disclosure-only information as
required by SFAS No. 123. If the Company had
elected to recognize compensation cost based on
the fair value of the options granted at the grant
date as prescribed by SFAS No. 123, the Company's
net income (loss) and net income (loss) per common
share for the years ended December 31, 1998, 1997
and 1996 would approximate the pro forma amounts
indicated in the table below:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) - as reported $(17,063,309) $ (9,499,802) $1,635,790
Net income (loss) - pro forma $(17,253,914) $(10,138,680) $1,295,676
Diluted net income (loss) per
common share - as reported $(0.46) $(0.26) $0.04
Diluted net income (loss) per
common share - pro forma $(0.47) $(0.27) $0.03
----------------------------------------------------------------------------------------
</TABLE>
The fair value of each option grant is estimated
on the date of grant using the Black-Scholes
option-pricing model with the following
weighted-average assumptions used for the years
ended December 31, 1998, 1997 and 1996,
F-18
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
respectively; expected volatility of 18%, 134% and
68%, respectively; risk-free interest rates of
6.01%, 6.00% and 6.26%, respectively; no
annualized dividends paid with respect to a share
of common stock at the date of grant, and options
have expected lives of between two and five years.
The following table summarizes information about
fixed stock options outstanding at December 31,
1998:
<TABLE>
<CAPTION>
Options Options
Outstanding Exercisable
------------------------------------------------------------------------------------------
Weighted-
Number Average Weighted- Number Weighted-
Outstanding at Remaining Average Exercisable at Average
December 31, Contractual Exercise December 31, Exercise
Range of Exercise Prices 1998 Life (Years) Price 1998 Price
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 - $0.17-$0.27 3,950,000 0.6 $0.21 3,950,000 $0.21
2 - $0.30-$0.41 1,350,000 1.8 $0.36 1,350,000 $0.37
3 - $0.50-$0.55 5,750,000 4.2 $0.54 2,703,750 $0.54
4 - $0.61-$0.99 200,000 3.8 $0.80 200,000 $0.80
------------------------------------------------------------------------------------------
Total 11,250,000 2.6 $0.41 8,203,750 $0.54
==========================================================================================
</TABLE>
15. COMPREHENSIVE Comprehensive income, as defined in SFAS No. 130,
INCOME(LOSS): "Reporting Comprehensive Income", includes all
changes in equity during a period from nonowner
sources. An example of items included in
comprehensive income that are excluded from net
income are unrealized gains or losses on
marketable equity securities. For the years ended
December 31, 1998, and 1997, changes in
accumulated other comprehensive income (loss) were
($38,000) and $3,942,965, respectively and
relates to unrealized gains or losses on
marketable equity securities.
16. GOING CONCERN The accompanying consolidated financial statements
MATTERS: 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 substantial recurring losses
from operations, has a net capital deficiency
in the amount of $20,351,879 and has a working
capital deficiency of $14,677,342 that raise
substantial doubt about its ability to continue as
a going concern. In addition, the Company had
negative cash flow from operations in the years
ended December 31, 1998, 1997 and 1996.
Significant short-term obligations exist including
the payment of a settlement with Wiltel in the
amount of $1,256,622 payable by June 30, 1999 (See
Note 13); an agreement with IDT which requires a
payment of $500,000 by May 31, 1999 (See Note
(6c)) and normal cash flows from operations.
Without the Company's ability to extend the
pay-out terms of the aforementioned liabilities or
obtain additional long-term financing, as well as
increasing revenue and/or decreasing expenses, the
F-19
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Company will be unable to continue as a going
concern. 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.
The Company is 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.
17. SUBSEQUENT During March 1999, the Company authorized the
EVENTS: issuance of Series B and Series D Convertible
Preferred Stock totaling 2,500,000 shares of
convertible preferred stock. The Series B
Convertible Preferred Stock has a stated par value
of $.001 per share and is convertible into
20,000,000 shares of the Company's common stock.
The Series D Convertible Preferred Stock has a
stated par value of $.001 per share and is
convertible into 11,905,000 shares of the
Company's common stock.
During early 1999, the Company formed a 100% -
owned subsidiary, PICK Online.Com, Inc. to provide
audio and video broadcasting from radio and
television stations to be sent over the Internet.
This company is in its development stage and
management anticipates operations to commence
during 1999.
On March 3, 1999, the Board of Directors granted
each of the four independent directors three year
options to purchase 500,000 shares of common stock
at $0.51 per share. These options shall be fully
vested on March 3, 2000.
The Company intends to increase its authorized
shares of common stock from 100,000,000 to
400,000,000.
F-20
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
18. ALLOWANCE FOR Information relating to the allowance for doubtful
DOUBTFUL accounts is as follows at December 31,:
ACCOUNTS:
<TABLE>
<CAPTION>
Balance at
Beginning Charged to Balance at
of Year Expense Deductions End of Year
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996 $ 42,650 $219,746 $ 98,233 $164,163
========================================================================================
1997 $164,163 $253,270 $ 90,936 $326,497
========================================================================================
1998 $326,497 $125,740 $100,399 $351,838
========================================================================================
</TABLE>
F-21
<PAGE>
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports of Form 8-K.
(a) 1. Financial Statements Page
- ---------------------------- ----
Reports of Certified Public Accountants F-1
Consolidated Balance Sheets at December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996 F-4
Consolidated Statement of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-8
-36-
<PAGE>
(a) 3. Exhibits
- ---------------
3.1 Amended Articles of Incorporation (1)
3.2. By-Laws(2)
4.1 Form of Warrant Agreement between Registrant and certain holders of
warrants (3)
4.2 Form of Note issued by the Registrant to the Noteholders in the July
Bridge Loan
4.3 Form of Note issued by the Registrant to the Noteholders in the July
Bridge Loan, as amended
4.4 Form of Warrant issued by the Registrant to the Noteholders in the July
Bridge Loan
4.5 Form of Warrant issued by the Registrant to the Noteholders in the July
Bridge Loan as amended
10.1 Distributor Agreement, dated February 11, 1988, between the Registrant and
Blackstone Calling Card. Inc. (the "Blackstone Agreement") (3)
10.2 Amendment dated April 13, 1998 to the Blackstone Agreement (3)
10.3 Amendment dated April 27, 1998 to the Blackstone Agreement (3)
10.4 Reciprocal Telecommunications Agreement, dated December 4, 1997, between
Pick Net, Inc, and Gulfsat Communications Company (the "Gulfsat
Agreement") (3)
10.5 Amendment, dated March 7, 1998, to the Gulfsat Agreement (3)
10.6 Promissory Note, dated April 2, 1998, between the Registrant and Wolfson
Equities (3)
10.7 Letter Agreement, dated April 2, 1998, between the Registrant and Wolfson
Equities (3)
10.8 Reciprocal Telecommunications Agreement, dated November 11, 1996 between
Pick Net, Inc. and IDT Corporation (the "IDT Agreement") (3)
10.9 Amendment, dated November 11, 1996, to the IDT Agreement (3)
10.10 Promissory Note, dated February 12, 1998 between Pick Net, Inc. and IDT
Corporation (3)
10.11 Form of Lease Agreement between Telecommunications Finance Group and PICK
Communications, Corp. (3)
10.12 Employment Agreement, dated September 28, 1998 between Diego Leiva and the
Registrant.
21.1 Subsidiaries of the Registrant (1)
27.1 Financial Data Schedule
- -------------------
(1) Incorporated herein by reference from Exhibits to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996.
(2) Incorporated herein by reference from Exhibits to Registrant's Form 10.
(3) Incorporated herein by reference from Exhibits to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on September 16, 1998
reporting an event under Item 4.
-37-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section l3 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.
PICK COMMUNICATIONS CORP.
Dated: April April 29, 1999 By /s/ Diego Leiva
-----------------------------------
Diego Leiva, President and
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant in the
capacities and on the dates stated:
Signature Title Date
/s/ Diego Leiva
- -----------------------
Diego Leiva President and Chairman of the Board April 29, 1999
/s/ Thomas M. Malone Chief Executive Officer (Principal April 29, 1999
- ----------------------- Executive Officer) and Director
Thomas M. Malone
/s/ James H. Season Vice President and Chief Financial April 29, 1999
- ----------------------- Officer (Principal Financial Officer)
James H. Season
/s/ Robert R. Sams
- ---------------------- Director April 29, 1999
Robert R. Sams
/s/ Ricardo Maranon
- ---------------------- Director April 29, 1999
Ricardo Maranon
/s/ John Tydeman
- ---------------------- Director April 29, 1999
John Tydeman
/s/ Alberto M. Delgado
- ---------------------- Director April 29, 1999
Alberto M. Delgado
-38-
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT made as of the 28th day of September,1998, by and between
PICK COMMUNICATIONS CORP. (hereinafter referred to as "PICK" or "Employer"), a
corporation having its principal office at 155 Route 46 West, Wayne, New Jersey
07470, and DIEGO LEIVA (hereinafter "Employee"), an Individual residing in
Wayne, New Jersey.
WITNESSETH: WHEREAS, Employee is currently employed by PICK as the President and
Chief Executive Officer; and
WHEREAS, Employee is a founder of PICK and has been, and continues to
be, a driving force behind the continued success of PICK; and
WHEREAS, PICK is desirous of continuing to employ Employee in such
capacity, all upon the terms and subject to the conditions hereinafter provided.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto, intending to be legally bound, agree as
follows:
1. EMPLOYMENT: PICK agrees to employ Employee, and Employee agrees to
be employed by PICK, upon the terms and subject to the conditions of this
Agreement.
2. TERM: The term of employment of Employee by PICK under this
Agreement will commence January 1, 1999 (the "Commencement Date") and end on the
fifth anniversary of the Commencement Date; provided, however, that on the fifth
anniversary of the Commencement Date and each anniversary thereafter, this
Agreement shall automatically be extended for an additional period of one year,
unless either party gives at least ninety (90) days written hereinafter
provided;
3. DUTIES: BEST EFFORTS: Employee shall serve PICK as PICK's Chief
Executive Officer and President, and as Chief Executive Officer, a Director
and/or such other senior management level position(s) of wholly-owned
subsidiaries of PICK as the Board of Directors of PICK (the "Board") may from
time to time and in its reasonable discretion appoint Employee. Employee shall
perform and discharge well and faithfully the duties of Chief Executive Officer
and President of PICK and such duties in wholly-owned subsidiaries of PICK as
ordinarily are required in the positions thereof in which Employee is serving.
During the term of this Agreement, Employee shall devote all of his beat efforts
to advance the best interests of PICK and shall not engage in any other full-
time business activity or in any other business activity (other than as a
passive Investor in any industry, including without limitation, the
telecommunications Industry), whether or not such business activity is pursued
for gain, profit or other pecuniary advantage, unless such business activity is
consented to in advance by PICK's Board. In addition, if elected to do so by
PICK's Board of Directors, Employee shall serve as a Director and Chairman of
the Board of PICK.
<PAGE>
4. COMPENSATION AND BENEFITS:
a. PICK shall pay to Employee a base salary (the "Base
Salary"), payable in accordance with PICK's ordinary payroll practices as in
effect from time to time during this Agreement, as follows:
i. During the first year following the Commencement
Date: $300,000 per annum;
ii. During the second year following the
Commencement Date: $350,00 per annum;
iii. During the third year following the Commencement
Date: $400,000 per annum;
iv. During the fourth year following the Commencement
Date: $450,000 per annum;
v. During the fifth year following the Commencement
Date: $500,000 per annum;
vi. Should the term of this Agreement be amended
automatically thereafter, the Base Salary in each
succeeding year shall increase by $75,000 per annum
(e.g., in the sixth year, Base Salary by $575,000; in
the seventh year, Base Salary - $ 650,000).
Employee's Base Salary will not include any bonus paid to Employee in the
Board's sole discretion from time to time. Notwithstanding the foregoing,
Employee shall continue to receive his current Base Salary until such time as
PICK's ten (10%) percent Senior Notes are repaid and the foregoing increase in
Base Salary shall not go into effect until such Notes are repaid.
b. Motor Vehicle Allowance. During the term of this Agreement,
it is anticipated that Employee shall be required to maintain offices and motor
vehicles in two geographic locations, New Jersey and Florida. Therefore,
Employee shall receive a monthly car allowance in the amount of $1,600 per month
($800 per vehicle), which amount includes the payment of automobile insurance.
c. Living Expense Allowance. If Employee is required by PICK'S
business to maintain offices in more than one geographic location (e.g., New
Jersey and Florida), PICK will reimburse Employee for all reasonable living
expenses (including hotel, apartment or house rental, utilities and related
expenses) for the location which is not Employee's principal place of residence.
2
<PAGE>
d. Participation in Benefit Plans. Employee will be placed on
PICK's then existing policy of health insurance. PICK will pay the entire cost
of Employee's premium if Employee wishes to add any other dependent family
member, PICK will pay the premium for each additional dependent family member.
PICK reserves the right at its sole and absolute discretion, to change coverages
or providers at any time. Employee will be entitled to participate in any other
benefit plan PICK may offer its executives and key employees from time to time,
including, but not limited to, pension plan, profit sharing plan, and disability
plan.
e. Out-of-Pocket Expenses. PICK shall promptly pay for all
reasonable expenses incurred by Employee in the performance of his duties
hereunder, including, without limitation, those incurred in connection with
business related travel or entertainment, or, if such expenses are paid directly
by Employee, shall promptly reimburse Employee for such expenses, provided that
Employee properly account therefor in accordance with PICK's policy. Such
expenses shall include, but are not limited to, maintenance, repair, fuel and
other costs of operation of the motor vehicles which are the subject of the
Motor Vehicle Allowance set forth above.
f. Vacation. Employee shall be entitled to such paid vacation
days in each calendar year as determined by PICK from time to time, but not less
than thirty (30) days in any calendar year, prorated in any calendar year during
which Employee is employed hereunder for less than an entire year in accordance
with the number of days in such year during which he is so employed. Employee
shall also be entitled to all paid holidays given by PICK to its executives and
key management employees. Such vacation and holiday allowance shall otherwise be
subject to the policies and practices of PICK.
g. Stock Options. Employee shall be granted stock options
pursuant to the 1996 Stock Option Plan (the "Plan") of PICK Communications Corp.
and/or outside of the Plan, all pursuant to separate option agreements. The
parties acknowledge that PICK may, in its discretion, grant additional stock
options to Employee in the future. Any such transactions shall be governed by
one or more separate agreements based on PICK's policies and practices at said
time. Nothing contained in this Agreement shall in any way affect the stock
options Employee has already received from PICK and any previous provisions
relating to said stock options shall remain in full force and effect.
5. TERMINATION:
a. Termination for Cause. PICK shall have the right to
terminate Employee's employment at any time for Cause. For purposes of this
Agreement, "for Cause" or "Cause" shall mean any one or more of the following:
i. A good faith determination by PICK's Board of
Directors, that Employee has committed a substantial
and material breach of any covenant, term or
condition contained in this Agreement; provided,
3
<PAGE>
however, that the Board of PICK shall give Employee
not less than ten (10) days written notice of such
breach, and that Employee shall have the opportunity
to cure same (if said breach is susceptible of cure)
within three business days after the giving of such
notice;
ii. Conviction of Employee of a felony or a crime
involving moral turpitude;
iii. Commission by Employee of any act that exposes
PICK or any officer of PICK to any felonious criminal
liability for such act of Employee; and
iv. A good faith determination by PICK's Board of
Directors that Employee has been grossly negligent or
has engaged in intentional misconduct in the
performance of Employee's duties, and that Employee's
gross negligence or intentional misconduct has
resulted in a substantial business detriment to PICK;
provided, however, that the Board of PICK shall give
Employee not less than ten (10) days written notice
of its intent to terminate Employee for Cause, and
that Employee shall have the opportunity to cure same
(if said breach is susceptible of cure) within three
business days after the giving of such notice.
b. Termination on Disability of Employee. If, at any time, any
disability or incapacity of Employee to perform his duties properly should
continue for a consecutive period of one hundred eighty (180) days, PICK, at its
sole and exclusive option, may terminate this Agreement whereupon PICK shall be
released from all further obligations under this Agreement, except for PICK's
obligations under Section 6(C) of this Agreement. PICK's Board shall not
determine that Employee is so disabled or incapacitated unless Employee has
first been examined by an independent Board-certified physician specializing in
the pertinent medical field, and said physician advises the Board in writing
that Employee is so incapacitated or disabled that he cannot perform his duties
under this Agreement with any necessary reasonable accommodation.
c. Other Events Causing Termination. In addition to the
previous stated causes for termination, the employment of the Employee shall
terminate on the occurrence of any one or more of the following events:
i. The death of Employee;
ii. The Board of PICK determines to terminate this
Agreement without Cause (as defined above); and
4
<PAGE>
iii. The termination of this Agreement by reason of
its expiration and non-renewal.
6. COMPENSATION UPON TERMINATION:
a. For Cause. In the event Employee is terminated for Cause,
PICK shall pay Employee his Base Salary and continue his then existing benefits
through the date of termination and a period of three months thereafter and
Employee's entitlement to any other compensation or benefits shall be in
accordance with PICK's plans, policies and practices as in effect from time to
time.
b. Employee's Death. In the event of the termination of
Employee's employment due to Employee's death, PICK shall: (1) pay to Employee's
estate his Base Salary plus accrued benefits through the date of his death and
for a period of three (3) years thereafter, and (2) for the period of three (3)
years following his death provide continuation coverage to the members of
Employee's family under all Benefits Plans then in effect as set forth in
Section 4(D) of this Agreement and/or such other major medical and other health,
accident, life or other disability plans and programs PICK provided to Employee,
in which such family members participated immediately prior to his death. It is
agreed that PICK must maintain life insurance insuring Employee's life in a
minimum amount of $1 million, and that the proceeds of said life insurance shall
be devoted to PICK's obligations to Employee's estate under this paragraph of
the Agreement.
c. Employee's Disability. In the event of the termination of
Employee's employment due to Employee's disability or incapacity as set forth in
Section 5(B) of this Agreement, PICK shall pay to Employee his Base Salary
through the date of his termination. In addition, for a period of three (3)
years following the date of termination, PICK shall: (1) continue to pay
Employee the Base Salary in effect at the time of such termination less the
amount, if any, then payable to Employee under any disability benefits insurance
or plan purchased or paid for by PICK, and (2) provide Employee (and dependent
members of Employee's family receiving coverage as of the date of termination of
employment) continuation coverage under all Benefits Plans then in effect as set
forth in Section 4(B) of this Agreement and/or such other major medical and
other health, accident, life or other disability plans and programs PICK
provided to Employee, to the extent that such benefits, or comparable benefits,
continue to be made available to active employees of PICK. It is understood that
PICK intends to purchase and maintain disability insurance on Employee, and that
the proceeds of said disability insurance shall be devoted to PICK's obligations
to Employee under this paragraph of the Agreement.
d. For Any Reason Other than Cause, Death or Disability. In
the event Employee is terminated for any reason other than Cause, death or
disability, for the remaining term under this Agreement or for a period of three
(3) years following any such termination, whichever period is longer, PICK
shall: (1) continue to pay Employee the Base Salary in effect
5
<PAGE>
at the time of such termination, and (2) provide Employee (and dependent members
of Employee's family receiving coverage as of the date of termination of
employment) continuation coverage under all Benefits Plans then in effect as set
forth in Section 4(B) of this Agreement and/or such other major medical and
other health, accident, life or other disability plans and programs PICK
provided to Employee, to the extent that such benefits, or comparable benefits,
continue to be made available to active employees of PICK. The continuation of
Base Salary provided for in clause (1) of the preceding sentence shall not be
reduced by any compensation or other income that Employee may earn from
subsequent employment or otherwise.
e. Continuation of Benefits. The continuation coverage under
any benefits set forth under this Agreement and/or such other major medical and
other health, accident, life or other disability plans and programs PICK
provided to Employee (and for dependent members of Employee's family), for the
periods provided in Sections 6(B), 6(C) and 6(D) shall be provided: (1) at the
expense of PICK and (2) in satisfaction of PICK's obligation of any federal or
state law with respect to the period of time such benefits are continued
hereunder. Notwithstanding anything to the contrary contained herein, PICK's
obligation to provide such continuation coverage shall cease immediately upon
the date any covered individual becomes eligible for similar benefits under the
plans or policies of another employer.
f. Other Employment. Nothing contained herein shall prevent
Employee from obtaining other employment in the event he is terminated by PICK,
except as set forth in Section 8. provided Employee does not breach the
covenants contained in this Agreement. In the event Employee does obtain other
employment he shall still be entitled to any unpaid portion of his Base Salary
for the periods set forth in Section 6.
7. CONFIDENTIAL INFORMATION AND TRANSFER OF PATENT RIGHTS:
a. During the course of his employment by PICK, Employee has,
may have or will become aware of certain confidential business information of
PICK and/or its wholly-owned subsidiaries (hereinafter, for the purposes of this
Section 7 of the Agreement, PICK and its wholly-owned subsidiaries are referred
to as the "Company"). As used in this Agreement, the term "confidential business
information" means: (1) various patents, inventions and trade secrets
(including, but not limited to, formulas, designs, devices, patterns, secret
inventions, assembly devices and techniques, patents and their applications,
processes and complications of information, records and specifications that are
owned, developed and/or regularly used by the Company (including software
licensed to the Company) in the operation of its business; (2) the Company's
accounts, customer and supplier lists and locations, commission structure and
financial data as may exist from time to time, which are acknowledged to be
confidential, unique, valuable and special assets of the Company; and, (3)
proprietary information relating to the business or financial condition of the
Company.
b. Employee agrees that during his employment by the Company
and thereafter, he will not disclose to anyone, directly or indirectly, any
confidential business
6
<PAGE>
information of the Company (including software licensed to the Company), or use
any such confidential business information of the Company, other then in the
course of Employee's employment by PICK. All files, equipment, records,
documents, drawings, specifications, equipment, computer programs and date
relating to the business of the Company, whether prepared by Employee or
otherwise coming into Employee's possession in the course of his employment, are
and shall remain the exclusive property of the Company. Employee further agrees
that, upon the cessation of his employment by the Company for any reason
whatsoever, Employee will not take with him or retain, without prior written
authorization of the Company, any documents, data, lists, books, files, devices,
or other documents or copies of such items or information of any kind belonging
to or licensed to the Company and that constitute confidential business
information of the Company.
c. All ideas, inventions, improvements, technical information,
designs, drawings, trademarks, trade names, service marks and suggestions,
whether patented or patentable or unpatentable (collectively, the "Inventions
and Marks") in the Company's products, manufacturing or assembly techniques,
conceived by Employee, alone or with others, during the term of Employee's
employment by the Company, that are within the scope of the Company's business
operations or that relate to any Company work or projects, are the exclusive
property of the Company. Employee shall, without any additional compensation
therefor, disclose to Company within seven (7) business days any and all
Inventions and Marks, which Employee may conceive, develop or acquire during the
term of this Agreement or at any time thereafter, together with all patent
applications, letters patents, trademark, trade name and service mark
applications or registrations, copyrights and reissues thereof (collectively,
the "Registrations") that may at any time be granted for or upon any such
Inventions and Marks, and which relate to the products manufactured by Employee
for Company. Employee will execute all documents necessary to vest full title to
such Inventions and Marks and Registrations in Company. Additionally, if Company
intends to file foreign or domestic patent, trademark and/or copyright
applications for such Inventions and Marks, Employee will procure the execution
of all oaths, declarations, and other documents necessary to enable Company to
file such patent, trademark or copyright applications and to vest full title
therein to Company.
8. POST-EMPLOYMENT PROHIBITIONS:
a. Anti-Employee Raiding Provision. Any attempt on the part of
Employee to induce others to leave PICK's employ after the cessation of
Employee's employment by PICK, or any effort by Employee to interfere with
PICK's relationship with other employees, would be harmful and damaging to PICK.
Employee expressly agrees that during the term of his employment by PICK and for
a period of eighteen (18) months thereafter, he will not in any way, directly or
indirectly: (1) induce or attempt to induce any employee to quit employment with
PICK; (2) interfere with or disrupt PICK's relationship with other employees; or
(3) solicit, entice, take away or employ any person employed with PICK.
7
<PAGE>
b. Post-Employment Restriction. During the period of time
following the cessation of employment during which PICK is liable to pay
Employee continued Base Salary under Section 6 of this Agreement or for a period
of one (1) year following the cessation of employment, whichever is longer,
absent the prior approval of PICK's Board, Employee shall not directly or
indirectly, within the United States of America enter into or engage generally
in direct competition with the Company in the areas of business of the
telecommunications industry in which PICK and/or its wholly-owned subsidiaries
are then engaged, either as an individual on his own or as a partner or joint
venturer, or as an employee or agent for any person, entity or corporation, or
as an officer, director, or shareholder or otherwise; provided, however, that
nothing contained in this Section 8(B) shall be deemed to prohibit the Employee
from acquiring or holding, solely for investment, publicly traded securities of
any corporation some of the activities of which are competitive with the
business of PICK so long as such securities do not, in the aggregate, constitute
five (5%) percent or more of the outstanding voting securities of such
corporation. This covenant on the part of Employee shall be construed as an
agreement independent of any other provision of this Agreement and shall survive
the expiration of this Agreement, its termination or non-renewal. The existence
of any claim or cause of action of Employee against PICK, whether predicated on
this Agreement or otherwise, shall not constitute a defense to the enforcement
by PICK of the provisions of this subparagraph of this Agreement.
9. LEGAL DAMAGES FOR BREACH OF AGREEMENT INADEQUATE: Notwithstanding
anything to the contrary contained in this Agreement, PICK and Employee agree
that in the event of any breach of the provisions of Sections 7 or 8 of this
Agreement, the remedies at law for such breach would be inadequate. The parties
agree that in addition to any other remedies provided by this Agreement or
available at low, in equity, or by statute, the non-breaching party may apply
to any court of competent jurisdiction and be entitled to an injunction by such
court to prevent a breach or further breach of Sections 7 or 8 of this Agreement
on the part of the breaching party, and the provisions of Section 14 of this
Agreement shall apply to any such action.
10. INDEMNIFICATION: Subject to the provisions of PICK's Certificate of
Incorporation and Bylaws, each as amended from time to time, PICK shall
indemnify Employee to the fullest extent permitted by law for all amounts
(including without limitation, judgments, fines, settlement payments, expenses
and reasonable attorneys' fees) incurred or paid by Employee in connection with
any action, suit, investigation or proceeding arising out of or relating to the
performance by Employee of services for, or the acting by Employee as an officer
or employee of PICK, or any other person or enterprise at PICK's request;
provided, however, that PICK shall not be required to indemnify Employee against
any liability resulting from conduct which is willful, intentional or grossly
negligent, PICK shall use its best efforts to obtain and maintain in full force
and effect during the Agreement directors' and officers' liability insurance
policies providing full and adequate protection to Employee for his capacities,
provided the Board of Directors shall have no obligation to purchase such
insurance if, in its opinion, coverage is available only on unreasonable terms.
8
<PAGE>
11. RELEASE: Employee irrevocably and unconditionally releases and
forever discharges, gives up and waives any and all claims and rights he had,
has or may have against PICK existing at any time up to and including the date
of this Agreement. Employee is not waiving any rights arising after the date of
this Agreement. This release shall also apply to any of PICK and each of its
wholly-owned subsidiaries and its and their directors, officers, agents,
employees and representatives and against all who succeed to each of their
rights and responsibilities. This shall at least include successors, heirs,
executors of its and their estates, directors, officers, employees, agents and
representatives. For the remainder of this Section 11 of the Agreement, "PICK"
shall include all of the individuals and entities mentioned above.
This release applies to any and all claims or rights of which Employee
is not aware up to the date of Employee's execution of this Agreement and to any
and all claims not specifically mentioned in this release. Specifically,
Employee releases PICK from all actions, suits, charges, claims, debts,
contracts, charges, complaints, liabilities, obligations, promises, agreements,
controversies, claims for relief, damages, costs and attorneys' fees, up to the
date of Employee's execution of this Agreement, which Employee had, has or which
he or his heirs, executors and administrators may have as a result of his
employment with PICK for the purposes of this release, "employment" shall
include, but not be limited to, back pay, front pay, other wages or compensation
and any alleged violation of any federal, state, or local statutes, ordinances,
constitutions, regulations, or common laws. THE FOREGOING SPECIFICALLY INCLUDES
ANY CLAIMS OR ACTIONS UNDER THE UNITED STATES AND NEW JERSEY CONSTITUTIONS,
TITLE VII OF THE CIVIL RIGHTS ACT OF 1964 142 U.S.C. Sections 2000e et seq.), 42
U.S.C. SECTION 1981, THE AMERICANS WITH DISABILITIES ACT, (42 U.S.C. Section
12101, et seq.), THE NEW JERSEY CONSCIENTIOUS EMPLOYEE PROTECTION ACT (N.J.S.A.
34:19-1 et seq.), THE NEW JERSEY LAW AGAINST DISCRIMINATION (N.J.S.A. 10:5-1 et
seq.), THE AGE DISCRIMINATION IN EMPLOYMENT ACT (29 U.S.C. Sections 621 et
seq.), AND ALL REGULATIONS PROMULGATED UNDER ANY OF THESE LAWS. ALSO INCLUDED
ARE ANY CLAIMS OR ACTIONS FOR BREACH OF CONTRACT, WRONGFUL DISCHARGE,
CONSTRUCTIVE DISCHARGE, INFLICTION OF EMOTIONAL DISTRESS, TORTIOUS INTERFERENCE
WITH ECONOMIC ADVANTAGE, ANY FEDERAL OR STATE EXECUTIVE ORDER AND ANY EXPRESS OR
IMPLIED EMPLOYMENT CONTRACT BETWEEN EMPLOYEE AND PICK.
12. ARBITRATION
a. Avoidance of Litigation. The parties desire to avoid
litigation concerning all disputes or controversies arising under their
employment relationship and this Agreement and the costs, time, and
inconvenience incident to such litigation.
b. Submission to Arbitration. All claims, demands, disputes,
differences, controversies, and misunderstandings arising under, out of, in
connection with, or in relation to, this Agreement and the parties' employment
relationship, except for the covenants contained in
9
<PAGE>
Sections 7 and 8 above, shall be submitted to, and shall be determined by,
binding arbitration in accordance with the provisions of the New Jersey
Arbitration Act, which proceeding shall otherwise be governed by the Arbitration
Rules pertaining to employment of the American Arbitration Association then in
effect, and judgment may be entered on the award of the arbitrator in any court
having jurisdiction. The provisions of this paragraph shall specifically include
claims made under the United States and New Jersey Constitutions, Title VII of
the Civil Rights Act of 1964 (42 U.S.C. Sections 2000e et seq.), 42 U.S.C.
Section 1981, the Americans with Disabilities Act (42 U.S.C. Section 12101, et
seq.), the New Jersey Conscientious Employee Protection Act (N.J.S.A. 34:19-1 et
seq.), the New Jersey Law Against Discrimination (N.J.S.A. 10:5-1 et seq.), the
Age Discrimination in Employment Act (29 U.S.C. Sections 621 et seq.), and all
regulations promulgated under any of these laws.
c. Exclusive Remedy. With respect to any dispute or
controversy that is made subject to arbitration under the terms of this
Agreement, no suit at law or in equity based on such dispute or controversy
shall be instituted by either party, except to enforce the award of the
arbitrators.
13. SUCCESSORS: BINDING AGREEMENT. In the event of a future disposition
by PICK whether direct or indirect, by sale of assets or stock, merger,
consolidation or otherwise) of all or substantially all of its business and/or
assets, PICK will require any successor, by agreement in form and substance
satisfactory to Employee, to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that PICK would be required
to perform if no such disposition had taken place.
This Agreement and all rights of Employee hereunder shall inure to the
benefit of, and be enforceable by, Employee's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. Unless otherwise provided herein, any amounts payable hereunder after
Employee's death shall be paid in accordance with the terms of this Agreement to
Employee's estate.
14. GENERAL PROVISIONS:
a. Notices. All notices to be given under this Agreement shall
be in writing and shall be given by either party to the other either by personal
delivery or by mail, registered or certified, postage prepaid with return
receipt requested. Mailed notices shall be addressed to the parties at the
addresses appearing in the introductory paragraph of this Agreement, but each
party may adopt a new address by written notice in accordance with this
paragraph. Employee shall mail by first class mail a duplicate copy of any
notice sent to PICK to PICK's counsel, Steven Gerber, Esq., Gerber & Samson, 155
Willowbrook Boulevard, Wayne, NJ 07470. Notices delivered personally shall be
deemed communicated as of actual receipt; mailed notices shall be deemed
communicated as of three (3) days after mailing.
10
<PAGE>
b. Entire Agreement. This Agreement supersedes any and all
other agreements, either oral or in writing, between the parties with respect to
the employment of Employee by PICK, and this Agreement contains all of the
covenants and agreements between the parties with respect to the employment.
c. Waive. Failure on PICK's part to exercise any rights or
privileges granted to it or to insist upon the full performance of all
obligations assumed by Employee, shall not be construed as waiving any such
rights, privileges, obligations, or duties, or as creating any custom contrary
the requirements of this Agreement.
d. Law Governing Agreement. This Agreement shall be construed,
and governed in accordance with the laws of the State of New Jersey applicable
to contracts entered into and wholly performed in New Jersey, and shall be
enforced in any location Employee may be residing. In addition, by executing
this Agreement, PICK and Employee both submit to the personal jurisdiction of
the Courts of the State of New Jersey and of the United States District Court
for the District of New Jersey, and venue in said courts, for purposes of any
action arising under this Agreement, except as otherwise provided herein.
e. Construction. The language in this Agreement will be
construed neutrally without any regard as to the party who drafted the
Agreement. Each party acknowledges that they were provided ample time to review
this Agreement with an attorney of their choice before executing this Agreement.
f. Attorney's Fees and Costs. If any action at law or in
equity is necessary to enforce or interpret the terms of this Agreement, the
prevailing party in such an action shall be entitled to reasonable attorney's
fees, costs, and necessary disbursements from the other party, in addition to
any other relief that may he proper.
g. Savings Clause. If any provision of this Agreement is held
by a court of competent jurisdiction to be legally invalid or unenforceable for
any reason, the remaining provisions shall not be impaired or affected in any
way, and shall remain in full effect as if this Agreement had been executed
without the invalid provision.
11
<PAGE>
In witness whereof, the parties have executed this Agreement on the
dates set forth below,
PICK COMMUNICATIONS CORP.
By:
----------------------------------
Name: Niles D. Ring
Title: Corporate Vice President, Human
Resources & Corporate Organization
Dated:
Witnessed by:
- ------------------------
------------------------------------
DIEGO LEIVA, Employee
Dated:
Witnessed by:
- ------------------------
12
