<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the quarterly period ended March 31, 1999
-----------------
OR
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the transition period from ______________ to_________________
Commission file number 0-27604
---------------
PICK COMMUNICATIONS CORP.
-------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Nevada 75-2107261
--------------------------------- -------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
155 Route 46 West, Wayne Interchange Plaza II, Wayne, NJ 07470
--------------------------------------------------------------
(Address of Principal Executive Offices)(Zip Code)
(973) 812-7425
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Not Applicable
---------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the registrant: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
past 90 days. Yes X No
As of June 30, 1999, the Registrant had 44,162,792 shares of Common
Stock, $.001 par value, outstanding.
<PAGE>
PICK Communications Corp.
This Report includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding expected future
revenues and expenses. Forward-looking statements relate to plans and
expectations of the Company and are subject to risks and uncertainties,
including the Company's immediate need for additional funding, the repayment of
substantial short-term indebtedness, significant and continuing losses,
dependence on a limited number of customers, dependence on and obligations to
third-party carriers, dependence on the Internet, the timely development and
acceptance of new products in a constantly evolving telecommunications industry,
the impact of competitive products and pricing, government regulations and other
risks detailed from time to time in the Company's SEC reports.
Index to Form 10-Q
Page Number
PART I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as at March 31, 1999 and
December 31, 1998
Consolidated Statements of Operations for the three
months ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 6. Exhibits and Reports on Form 8-K
Signatures
-2-
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
March 31, December 31,
1999 1998
- ----------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 42,493 $ 248,551
Accounts receivable, less allowance for doubtful accounts of
$387,366 and $351,838, respectively 723,142 740,886
Prepaid expenses and other current assets 452,056 575,022
Deferred interest 175,617 -
- ----------------------------------------------------------------------------------------------------------------------
Total current assets 1,393,308 1,564,459
- ----------------------------------------------------------------------------------------------------------------------
Property and Equipment - at cost, net of accumulated depreciation
and amortization of $536,972 and $428,199, respectively 5,353,780 5,048,551
- ----------------------------------------------------------------------------------------------------------------------
Other Assets:
Security deposits 198,146 178,146
Investment in marketable equity securities - -
Deferred interest, less current portion 542,520 -
Deferred income tax asset, net of valuation allowance of $11,000,000 - -
- ----------------------------------------------------------------------------------------------------------------------
Total other assets 740,666 178,146
- ----------------------------------------------------------------------------------------------------------------------
Total Assets $ 7,487,754 $ 6,791,156
======================================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Current portion of debt $ 2,020,000 $ 2,127,500
Current portion of capital leases 206,768 271,676
Accounts payable and accrued expenses 11,412,187 7,690,978
Deferred revenue - prepaid calling cards 1,402,399 2,183,806
Other current liabilities 3,157,841 3,967,841
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 18,199,195 16,241,801
Capital Leases, less current portion 1,042,716 1,042,716
Debt, less current portion 9,880,000 9,772,500
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 29,121,911 27,057,017
- ----------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies Minority Interest in Consolidated Subsidiary 86,018 86,018
- ----------------------------------------------------------------------------------------------------------------------
Stockholders' Deficiency:
Preferred stock - $.001 par value; authorized 10,000,000 shares at March 31,
1999; 2,000,000 shares designated as Series B Convertible Preferred Stock,
aggregate liquidation value - $1,050,000, issued and
outstanding 1,050,000 shares 1,050,000 -
Common stock - $.001 par value; authorized 400,000,000 and
100,000,000 shares, respectively; issued and outstanding 42,062,475
and 38,201,881 shares, respectively 42,062 38,202
Additional paid-in capital 8,693,875 4,008,029
Options and warrants 2,470,679 2,687,461
Stock subscription (5,000) -
Treasury stock, at cost, 35,500 shares (11,978) (11,978)
Accumulated deficit (33,959,813) (27,073,593)
- ----------------------------------------------------------------------------------------------------------------------
Stockholders' deficiency (21,720,175) (20,351,879)
- ----------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Deficiency $ 7,487,754 $ 6,791,156
======================================================================================================================
</TABLE>
-3-
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Three-month period ended March 31, 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sales of long-distance services $ 1,212,997 $ 328,732
Sales of prepaid calling cards 2,782,571 177,759
- ----------------------------------------------------------------------------------------------------------------------
Net sales 3,995,568 506,491
- ----------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales:
Cost of telephone time purchased 4,321,626 539,446
Other 891,698 288,572
- ----------------------------------------------------------------------------------------------------------------------
Total cost of sales 5,213,324 828,018
Selling, general and administrative 1,322,785 515,064
Depreciation and amortization 108,771 58,026
Bad debt expense 35,528 2,072
- ----------------------------------------------------------------------------------------------------------------------
Total costs and expenses 6,680,408 1,403,180
- ----------------------------------------------------------------------------------------------------------------------
Loss before interest expense (2,684,840) (896,689)
Interest expense 631,404 113,534
- ----------------------------------------------------------------------------------------------------------------------
Loss before minority interest in subsidiary loss (3,316,244) (1,010,223)
Minority interest in subsidiary loss - 457
- ----------------------------------------------------------------------------------------------------------------------
Net loss (3,316,244) $ (1,009,766)
======================================================================================================================
Beneficial conversion feature of preferred stock (3,570,000) -
- ----------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock $ (6,886,244) -
======================================================================================================================
Net loss per common share - basic $ (.17) $ (.03)
======================================================================================================================
Weighted-average shares outstanding - basic 41,610,229 36,274,517
======================================================================================================================
</TABLE>
-4-
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Three-month Three-month
period ended period ended
March 31, March 31,
1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,316,244) $(1,009,766)
Adjustments to reconcile net loss to net cash used in
operating activities:
Stock, options and warrants issued for compensation or services 232,761 119,589
Amortization of debt discounts and placement expenses 32,026 -
Depreciation and amortization 108,773 58,026
Minority interest in subsidiary loss - (457)
Bad debt expense 35,528 2,072
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (17,784) 181,537
Decrease in other operating assets 102,990 13,947
Increase (decrease) in accounts payable and accrued expenses 3,721,209 (70,021)
Decrease in deferred revenue (781,407) (115,036)
(Decrease) increase in other current liabilities (810,000) 386,631
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (692,148) (433,478)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows used in investing activity - purchase of property and equipment (414,002) (4,137)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Preferred stock issued for cash,
net of issuance cost of $85,000 965,000 -
Principal paid on capital leases (64,908) (38,189)
Proceeds from third-party debt - 500,000
Payments on third-party debt - (25,000)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 900,092 436,811
- ----------------------------------------------------------------------------------------------------------------------
Net decrease in cash (206,058) (804)
Cash at beginning of period 248,551 44,400
======================================================================================================================
Cash at end of period $ 42,493 $ 43,596
======================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 67,824 $ 55,372
======================================================================================================================
Supplemental schedule of noncash investing and financing activities:
Deferred interest from issuance of stock and options $ 750,163 -
======================================================================================================================
Assets acquired under capital leases - $ 129,598
======================================================================================================================
</TABLE>
-5-
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Principal Business Activity and Summary of Significant Accounting
Policies:
PICK Communications Corp. and Subsidiaries acts as a wholesaler of
long-distance telephone services and sells prepaid telephone calling
cards through distributors. Also, the Company intends to provide
satellite-based Internet access and interactive multimedia services to
end user service providers. In March 1999, 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. The Company is headquartered in
Wayne, New 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. ("PICK Sat"), PICK Online.Com Inc. ("POL") and P.C.T.
Prepaid Telephone Inc. ("PCT"), a majority-owned subsidiary
(collectively the "Company"). All significant intercompany balances and
transactions have been eliminated.
Minority interest represents the minority shareholders' proportionate
share of the equity and loss of PCT.
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 period.
Diluted net loss per share is not presented because the inclusion of
common share equivalents would be anti-dilutive.
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 operation or cash
flows.
In the three months ended March 31, 1999, approximately 62% and 23% of
revenues were from two customers; in the three months ended March 31,
1998, approximately 50% and 20% of revenues were from two customers.
The Company performs periodic credit
-6-
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
evaluations of its customers, and may, under certain circumstances,
require deposits or prepayments where deemed appropriate.
Two customers comprised approximately 23% and 16% of gross accounts
receivable, respectively, at March 31, 1999. Two customers comprised
approximately 65% and 11% of gross accounts receivable, respectively,
at December 31, 1998. 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 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 Expenses and Other Current Assets:
Prepaid expenses and other current assets consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Computer equipment for resale $ 97,409 $100,624
Prepaid expenses 191,432 99,722
Advances and other current assets 132,195 225,020
Deposits 31,020 149,656
-------- --------
$452,056 $575,022
======== ========
</TABLE>
-7-
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3) Property and Equipment:
Property and equipment, at cost, consist of the following:
<TABLE>
<CAPTION>
March 31, December 31, Estimated
1999 1998 Useful Life
---- ---- -----------
<S> <C> <C> <C>
Property, equipment and software $1,403,387 $1,186,464 3 and 5 years
Telephone switching equipment 1,649,340 1,532,059 5 years
Asset development/installation in process 2,838,025 2,758,227
---------- ----------
5,890,752 5,476,750
Less accumulated depreciation
and amortization 536,972 428,199
---------- ----------
$5,353,780 $5,048,551
========== ==========
</TABLE>
Telephone switching equipment was acquired under capital leases costing
$1,175,627 and $1,252,271 at March 31, 1999 and December 31, 1998,
respectively, net of accumulated depreciation of approximately $356,000
and $280,000 at March 31, 1999 and December 31, 1998, respectively.
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) Investment in Marketable Equity Securities:
In 1996, the Company acquired 4,700,000 restricted shares of the common
stock of Ultimistics, Inc. ("Ultimistics"). During the first quarter of
1997, the Company, in four separate transactions, disposed of all of
its shares of Ultimistics, along with $420,000 of prepaid advertising,
in return for (i) 1,000,000 shares of the Company's common stock, (ii)
10,000,000 shares of PCT, and (iii) 380,000 restricted shares of the
common stock of Fairbanks, Inc. (which subsequently changed its name to
Jet Vacations, Inc. and then Precom Tech Inc. The Company recorded
losses of $9,399,079 on these transactions. During 1998, the balance of
$133,000 was written off.
-8-
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(5) Debt:
Debt consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
<S> <C> <C> <C>
Loan from customer/supplier (a) $ 2,000,000 $ 2,000,000
Private placement debt (b) 9,900,000 9,900,000
----------- -----------
11,900,000 11,900,000
Less current portion of debt 2,020,000 2,127,500
----------- -----------
Debt, less current portion $ 9,880,000 $ 9,772,500
=========== ===========
</TABLE>
(a) 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 the interest expense for the three months ended
March 31, 1998 at $6,158. The loan bears interest at 9% per
annum and matured on February 9, 1999. The Company is
currently negotiating with IDT to extend the terms of
repayment.
(b) 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 the
assets of PICK Communications Corp. The Company allocated
$8,587,066 of the gross sales 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 rights 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 500,119 shares of its
common stock (valued at $265,063) and warrants (valued at
$485,100) 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 99% of the principal which was due on
April 27, 1999, consented to restructure their Original Notes
(the "Restructured Notes") and
-9-
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
extend the maturity date until April 27, 2002. Under the terms
of the restructuring, the New Notes are convertible to shares
of Common Stock at $1.00 or less per share, as defined in the
terms of restructuring. The notes automatically convert to
common stock if the closing bid price exceeds $1.50 per share,
as defined. Interest expense is deferred and amortized over
the restructured term of the note.
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 $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.
In consideration for executing the restructuring, the 9,880,000 warrant
previously issued to consenting note holders will be exchanged for
common stock at no cost to the note holder. Additionally, the Company
will issue to the consenting noteholders 9,880,000 shares of stock.
In consideration of the restructuring of the notes, the Company issued
to Commonwealth 2,000,000 shares of common stock plus warrants to
purchase 500,000 of the Company's common stock at $1.375 per share.
Additionally, warrants previously issued to Commonwealth will be
exercisable at $.10 per share. The costs related to the restructuring
will be deferred and amortized as debt placement expenses over the
restructured term of the note.
(6) Accounts Payable and Accrued Expenses:
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Accounts payable - operating $ 8,703,100 $5,530,511
Accrued expenses - operating 1,059,087 510,467
Accrued expenses - for equipment 1,650,000 1,650,000
----------- ----------
$11,412,187 $7,690,978
=========== ==========
</TABLE>
Accounts payable at March 31, 1999 and 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 12).
-10-
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(7) Other Current Liabilities:
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Reserve for contingent liability $1,100,000 $1,100,000
Advance from customer 1,000,000 1,000,000
Accrued loss on deferred revenue -
prepaid calling cards 770,000 1,580,000
Customer deposits 287,841 287,841
---------- ----------
$3,157,841 $3,967,841
========== ==========
</TABLE>
(8) Capital Lease Obligations:
The Company leases telephone switching equipment 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>
<S> <C> <C>
For the Three Months Ended March 31, 1999 $ 311,087
Year ending December 31, 2000 414,783
2001 414,783
2002 414,783
----------
1,555,436
Less amount representing interest 305,952
----------
1,249,484
Less current portion 206,768
----------
Capital leases, less current portion $1,042,716
==========
</TABLE>
-11-
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(9) Commitments:
The Company leases facilities under non-cancellable operating leases
expiring from July 2000 through October 2003. The future minimum
payments due under such leases are as follows:
<TABLE>
<CAPTION>
Operating
Leases
------
<S> <C>
For the Three Months Ended March 31, 1999 $ 361,862
December 31, 2000 400,744
2001 251,425
2002 169,769
2003 144,994
----------
Total payments $1,328,794
==========
</TABLE>
Rental expense under operating leases was $88,750 and $81,890 for the
three months ended March 31, 1999 and 1998, respectively. The Company
has the right to renew its operating leases for terms of between three
and five years.
At March 31, 1999, the Company had 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. The agreement
provides for additional compensation, as defined in the agreement. In
April of 1999, the Agreement was amended to provide the key executive
continue solely as chairman of the Board.
(10) Income Taxes:
The Company's deferred tax assets at March 31, 1999 consist of the
following:
Federal $ 9,300,000
State 1,700,000
------------
11,000,000
Less valuation allowance (11,000,000)
------------
Net deferred tax assets $ -0-
============
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 March 31,
1999. These losses are available to offset future taxable income
through the years 2018 and 2003, respectively.
-12-
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(11) Contract with Blackstone Calling Card, Inc.:
In February, 1998, the Company entered into a two-year agreement with
Blackstone Calling Card, Inc ("Blackstone" and 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 revenues of approximately $3,000,000 per
month to the Company. The Blackstone Agreement is 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. The parties are seeking a termination
of the Blackstone Agreement.
Other current liabilities include a provision of $770,000 and
$1,580,000 for anticipated losses from providing future services on
prepaid telephone calling cards sold prior to March 31, 1999 and
December 31, 1998, respectively.
(12) Litigation and Reserve for Contingent Liability:
The Company is, from time to time, party to litigation that arises in
the ordinary course of its business operations or otherwise. Except as
described below, the Company is not presently a party to any litigation
that it believes would have a material adverse effect on its business.
In February 1997, the Company commenced a mediation action against
American Telephone & Telegraph ("AT&T") seeking $10,000,000 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 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. 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. Accordingly, 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 judgment or
settlement could have a material impact on the Company's financial
condition.
During March 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,
-13-
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
demanding a judgment in the amount of $1,256,622 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 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. The Company is seeking an extension of time to make payment
to Worldcom. Accounts payable and accrued expenses include a liability
of $1,187,813 and $1,137,352 for this settlement at March 31, 1999 and
December 31, 1998, respectively.
(13) Going Concern Matters:
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which
contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has incurred
substantial recurring losses from operations, has a net capital
deficiency in the amount of $21,720,175 and has a working capital
deficiency of $16,805,887 at March 31, 1999, 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 three months
ended March 31, 1999 and 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 12); The Company is under negotiation with IDT to extend
their $2,000,000 loan. (See Note 5(a)) 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 revenues and/or decreasing expenses,
the 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 classifications 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.
-14-
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(14) Other Matters and Subsequent Events:
In March 1999, the Board of Directors authorized the issuance of
2,000,000 shares of Series B 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
at the rate of $.10 per share. As of March 31, 1999, the Company had
sold an aggregate of 1,050,000 shares of Series B Convertible Preferred
Stock for $1,050,000. Subsequent to March 31, 1999, the Company sold an
additional 821,000 shares of Series B Convertible Preferred Stock for
$821,000.
In April 1999, the Board of Directors authorized the issuance of
500,000 shares of Series D Convertible Preferred 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, at the rate of $.42 per share. As of June 23, 1999, the Company
had sold an aggregate of 466,000 shares of Series D Convertible
Preferred Stock for $4,660,000, prior to the payment of $324,500 of
sales commissions. In addition, the Company issued an aggregate of
632,000 Common Stock Purchase Warrants in connection with the sale of
Series D Convertible Preferred Stock. Each Warrant is exercisable at
$.63 per share of Common Stock for a two-year period.
On March 3, 1999, the Board of Directors granted each of the then four
independent directors 3-year options to purchase 500,000 shares of
common stock at $.51 per share. Those options shall be fully vested on
March 3, 2000.
On February 26, 1999, the Board of Directors of the Company authorized
an increase of the Company's authorized shares of common stock from
100,000,000 to 400,000,000 shares which was effective on April 13,
1999.
-15-
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Item 2 - 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.
Material Changes in 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 revenues to date.
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.
Three Months Ended March 31, 1999 Compared with March 31, 1998
Revenues:
Total revenues amounted to approximately $3,996,000 for the three months ended
March 31, 1999, compared to approximately $506,000 for the three months ended
March 31, 1998, an increase of $3,490,000. The Company significantly curtailed
its operations during the first half of 1998, while it installed and tested two,
leased Siemens Digital Central Office Switches. These switches replaced
switching services previously purchased from third party vendors. Consequently,
the Company decided to curtail its marketing efforts for the sale of
international long distance services until it completed this installation and
until it had the capability to deliver traffic through Gulfsat. Therefore, for
the three months ended March 31, 1999, the Company generated international long
distance revenue of approximately $1,213,000, compared with approximately
$329,000 for the three months ended March 31, 1998. Prepaid telephone calling
card revenues were approximately $2,783,000 for the three
-16-
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
months ended March 31, 1999, compared to approximately $178,000 for the three
months ended March 31, 1998. This latter increase is attributable to sales to
Blackstone Calling Card, Inc. ("Blackstone") under the Company's agreement with
Blackstone, a major marketer and distributor of prepaid telephone calling cards.
Costs and Expenses:
The cost of telephone time purchased increased from approximately $539,000 to
approximately $4,322,000. Due to Gulfsat's inability to provide countries as
originally anticipated, these costs increased by a greater amount than the sales
generated by the Company due primarily to the Company's inability to obtain
preferential rates from the common carriers. Other cost of sales increased from
approximately $289,000 to $892,000. The total increase resulted primarily from
the processing costs arising from the increased prepaid telephone calling card
activity sold through Blackstone and long-distance services.
Selling, general and administrative expenses were approximately $1,323,000 for
the three months ended March 31, 1999, compared to $515,000 for the three months
ended March 31, 1998, reflecting an increase of $808,000 or 157%. Approximately
$313,000 of this increase is due to start-up and development expenses of the
Company's newly formed PICK Sat subsidiary. The residual increase is primarily
due to other additions to staff and the amount of debt placement expenses
aggregating approximately $250,000.
Loss from Operations:
The Company's loss from operations increased from $897,000 to $2,685,000
primarily due to the increases in cost of sales and general and administrative
expenses discussed above.
Other:
Interest expense increased significantly from the prior year due to the
substantial increase in the amount of short-term debt placed in the current year
and additional interest costs attributable to the various loan extensions.
Material Changes in Financial Condition from December 31, 1998 to March 31,
1999:
Due to the losses discussed above, the Company's working capital deficit
increased from approximately $14,677,000 as of December 31, 1998, to $16,806,000
as of March 31, 1999 (an increase in the working capital deficit of $2,129,000)
and the stockholders' deficiency changed from a negative $20,352,000 at December
31, 1998 to $21,720,000 at March 31, 1999 (an increase in negative net worth of
$1,368,000).
Current assets decreased by $171,000 primarily due to a decrease in prepaid
expenses and other current assets at March 31, 1999. Current liabilities
increased by $1,957,000. This increase is
-17-
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
largely due to net increases in accounts payable and accrued expenses as a
result of funding of continued losses, greater sales volume, offset, in part, by
a decrease in deferred revenue for pre-paid calling cards and a decrease in
other current liabilities of $1,591,000.
Approximately $18,200,000 of the liabilities of the Company mature or are
subject to payment agreements calling for payment before the end of 1999.
Management is in the process of negotiating with the largest trade creditors to
restructure a substantial portion of this short-term debt. The Company is
attempting to reach agreements to make a down payment immediately and convert
the balance of the Company's obligation into long-term indebtedness and/or
equity securities of the Company, but there can be no assurance that agreements
will be executed.
The Company is pursuing sources of capital in order to repay short-term
indebtedness and to commence operations of its new businesses. 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 is investigating various alternatives which include the termination,
divestiture or reorganization of the operations of PICK US, Inc. and PICK Net
Inc. and PICK Net UK PLC.
The Company has terminated marketing and distribution of prepaid telephone
calling cards, through PICK US, Inc. We are seeking to terminate, divest or
reorganize the operations of PICK Net Inc. and PICK Net UK PLC, both of which
provide international long distance services to other carriers and resellers. We
have signed a non-binding letter of intent to sell the assets of these three
subsidiaries for nominal value and have a majority of their liabilities assumed,
but there can be no assurance a definitive agreement will be reached.
Furthermore, the Company is in need of immediate financing for working capital.
If the Company is able to obtain adequate funding it expects that the Company's
operations on a going forward basis will be primarily through its PICK Sat
subsidiary which is a developing company and has not generated any revenues to
date. However, in the event that we are unable to obtain interim financing by
mid-July 1999, we will be forced to cutback or suspend operations and /or seek
protection under the bankruptcy laws. Although the Company is in discussions
with several sources of financing, there can be no assurance we will obtain such
financing, or if available, will be on commercially reasonable terms.
-18-
<PAGE>
Material Changes in Cash Flows
Cash decreased during the three months ended March 31, 1999, by approximately
$206,000. This decline is attributable to an increase in cash used in operating
activities of approximately $692,000 and investing activities of $414,000. This
is offset by increases in cash provided by financing activities of approximately
$900,000.
Cash Flows from Operating Activities
Operating activities used approximately $692,000 in cash for the three months
ended March 31, 1999, compared with a use of approximately $433,000 for the
three months ended March 31, 1998. The increased loss in operations of
approximately $3,316,000 resulted from the Company's sales in the prepaid
calling card business under the Blackstone agreement and sales of long distance
services. This loss was offset principally by an increase in accounts payable
and accrued expenses.
Cash Flows from Investing Activities
The Company's capital expenditures of approximately $414,000 for the three
months ended March 31, 1999 increased over the three months ended March 31, 1998
of $4,137. This increase is attributable primarily to the Company's continued
development of the satellite-based Internet access, interactive multimedia
structures for its PICK Sat subsidiary.
Cash Flows from Financing Activities
During the three months ended March 31, 1999, the Company had net cash provided
by financing of approximately $900,000, as compared to approximately $437,000 in
the three months ended March 31, 1998. The proceeds are from the issuance of
preferred stock for the current period and incurring debt in the prior period .
-19-
<PAGE>
PICK COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Impact of Year 2000:
There have been no material changes since the Company's disclosure in its Annual
Report on Form 10-K for December 31, 1998.
Part II - Other Information
Item 1 - Legal Proceedings:
During the quarter ended March 31, 1999, there were no material changes in the
Company's previously reported legal proceeding in its Annual Report on Form 10-K
for December 31, 1998.
Item 2 - Changes in Securities:
There have been no material changes since the Company's disclosure in
the Annual Report on Form 10-K from December 31, 1998, except as described
hereafter.
On April 14, 1999, the Company authorized the issuance of 500,000
shares of Series D Convertible Preferred Stock. The Series D Cumulative
Preferred Stock has a stated par value of $.001 per share, a liquidation
preference of $10.00 per share and is convertible into Common Stock at a rate of
$.42 per share. As of June 28, 1999, the Company had sold $4,660,000 of Series D
Convertible Preferred Stock convertible into 11,095,238 shares of Common Stock.
In connection with the sale of Series D Convertible Preferred Stock, the Company
has paid an aggregate of $324,500 of sales commissions and has issued an
aggregate of 632,000 two-year warrants to purchase an equal number of shares of
Common Stock at $.63 share.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Selected Financial Data.
(b) Reports on Form 8-K.
None
-20-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: July 2, 1999 PICK COMMUNICATIONS CORP.
By: /s/ Diego Leiva
-----------------------------------
Diego Leiva
(Principal Executive Officer)
Chairman of the Board
By: /s/ Henry Ewen
-----------------------------------
Henry Ewen
(Acting Principal Financial Officer)
-21-
<PAGE>
Exhibit Index
Exhibit Description
- ------- -----------
27.1 Selected Financial Data
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> DEC-31-1998
<PERIOD-END> MAR-31-1999
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<RECEIVABLES> 1,110,508
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