SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED JUNE 30, 2000 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-27604 PICK Communications Corp. (Exact name of the registrant as specified in its charter) NEVADA 75-2107261 (State or other jurisdiction of (I.R.S. employer Incorporation or Organization) identification no.) 8401 NW 53rd Terrace, Suite 119, Miami, FL 33166 (Address of principal executive offices) (Zip Code) Registrant's Telephone number, including area code: (305) 717-1500 Indicate by check mark whether the registrant (1) has filed reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ As of September 30, 2000, the Registrant had 10,642,969 shares of Common Stock, $.01 par value, outstanding. 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 ability to implement its new business plan and strategy and launch its PICK Sat services, the Company's need for additional funding, the repayment of substantial short-term indebtedness, contingent liabilities of the Company on its discontinued operations, significant and continuing losses, dependence on a limited number of customers, dependence on the Internet, the timely development and acceptance of new products in a constantly evolving Internet 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

~~Index to Form 10-Q~~ Page Number PART I Financial Information Item 1. Financial Statements Consolidated Balance Sheet as at ~~March~~June 3130, 2000 (Unaudited) and December 31, 1999.......................................................................... 3 Consolidated Statement of Operations for the three-month ~~period~~and six-month periods ended ~~March~~June 3130, 2000 and 1999 (Unaudited)........................................... 4 Consolidated Statement of Stockholders' Deficiency for the ~~three~~six-month period ended ~~March~~June 3130, 2000 (Unaudited)................................... 5 Consolidated Statement of Cash Flows for the ~~three~~six-month periods ended ~~March~~June 3130, 2000 and 1999 (Unaudited)................................. 6 Notes to Consolidated Financial Statements (Unaudited).................................. 7-15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 16-2220 Part II. Other Information......................................................................... 2321 Item 1. Legal Proceedings......................................................................... 2321 Item 2. Changes in Securities..................................................................... 2321 Item 6. Exhibits and Reports on Form 8-K.......................................................... 2321 Signatures................................................................................ 2422

PICK COMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET

~~March~~June 3130, 2000 December 31, 1999 -------------- -------------------------------------------------------------------------------------------------------------------- (Unaudited) ASSETS Current Assets: Cash $ 164,198 Prepaid expenses and other current assets ~~$ 149~~30,~~283~~915 $ 176,455 Current assets from discontinued operations ~~119~~36,~~926~~279 325,220 ------------- --------------------------------------------------------------------------------------------------------------------- Total current assets ~~269~~231,~~209~~392 501,675 ------------- --------------------------------------------------------------------------------------------------------------------- Property and Equipment - at cost, net of accumulated depreciation of $~~263~~310,~~010~~643 and $214,527, respectively 4,~~469~~592,~~830~~709 4,434,970 ------------- --------------------------------------------------------------------------------------------------------------------- Other Assets: Security deposits ~~244~~300,~~613~~857 261,796 Deferred income tax asset, net of valuation allowance of $3132,~~151~~092,000 and $30,509,000, respectively -- -- Long-term assets from discontinued operations 2,~~131~~064,~~858~~510 2,068,394 ------------- --------------------------------------------------------------------------------------------------------------------- Total other assets 2,~~376~~365,~~471~~367 2,330,190 ------------- --------------------------------------------------------------------------------------------------------------------- Total Assets $ 7,~~115~~189,~~510~~468 $ 7,266,835 ============= ===================================================================================================================== LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current Liabilities: Cash overdraft $ ~~42,458~~- $ 20,193 Current portion of debt 1,~~623~~447,~~458~~430 888,000 Accounts payable and accrued expenses 910,~~008~~268,~~145~~803 8,540,607 Current liabilities from discontinued operations 11,~~890~~839,~~985~~139 10,965,614 ------------- --------------------------------------------------------------------------------------------------------------------- Total current liabilities 2223,~~565~~555,~~046~~372 20,414,414 Debt, less current portion 9,880,000 9,880,000 Long-term Liabilities from Discontinued Operations -- 736,586 ------------- --------------------------------------------------------------------------------------------------------------------- Total liabilities 3233,~~445~~435,~~046~~372 31,031,000 ------------- --------------------------------------------------------------------------------------------------------------------- Commitments and Contingencies Minority Interest in Consolidated ~~Subsidiary~~Subsidiaries 841,~~276~~263,617 84,276 ------------- --------------------------------------------------------------------------------------------------------------------- Stockholders' Deficiency: Preferred stock - $.001 par value; authorized 10,000,000 shares; 2,000,000 shares designated as Series B convertible preferred stock, aggregate liquidation value - $1,871,000, issued 1,871,000 shares:; ~~505~~395,000 shares and 930,000 shares outstanding, respectively ~~505~~395,000 930,000 500,000 shares designated as Series D convertible preferred stock, aggregate liquidation value - $4,660,000, issued 500,000 shares:; ~~190~~184,~~500~~000 shares and 260,500 shares outstanding, respectively 1,~~905~~840,000 2,605,000 Common stock - $.01 par value; authorized 40,000,000 shares, respectively; issued 910,~~931~~519,~~616~~419 and 8,919,881 shares, respectively 99105,~~352~~229 89,234 Additional paid-in capital 8081,~~861~~230,~~110~~233 79,746,228 Options and warrants 2,720,071 2,720,071 Subscription receivable (340,000) (340,000) Treasury stock, at cost, 3,550 shares (11,978) (11,978) Accumulated Other Comprehensive Income 1,482 1,482 Accumulated deficit (~~111~~113,~~153~~449,~~849~~558) (109,588,478) ------------- --------------------------------------------------------------------------------------------------------------------- Stockholders' deficiency (2527,~~413~~509,~~812~~521) (23,848,441) ------------- --------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Deficiency $ 7,~~115~~189,~~510~~468 $ 7,266,835 ============= =====================================================================================================================

See Notes to Consolidated Financial Statements -3- PICK COMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE THREE MONTHS ENDED ~~MARCH~~JUNE 3130, 2000 1999 ----------- --------------------- Costs and expenses: Selling, general and administrative $ ~~875~~1,~~022~~454,582 $ ~~977~~972,~~208~~608 Depreciation and amortization 4847,~~483~~633 1427,~~574~~736 ----------- ----------- ~~Operating loss 923,504 991,782~~ ----------- ~~-----------~~Operating loss 1,502,216 1,000,344 Other expense: Interest expense ~~570~~734,~~932~~800 ~~479~~150,~~423~~604 Settlement of ~~expenses~~third ~~(293,977)~~party debts -- -~~----------~~ ----------- ~~Total other expense 276,955 479,423~~ ----------- ----------- Total other expense 734,800 150,604 Loss from continuing operations before minority interest in ~~subsidiary~~ loss, ~~and~~of ~~discontinued operations 1,200,460 1,471,205~~ ----------- --------------------- ~~Loss~~consolidated ~~from~~subsidiaries ~~continuing~~and discontinued operations 12,~~200~~237,~~460~~015 1,~~471~~150,~~205~~948 ----------- --------------------- ~~Loss~~Minority ~~from~~interest ~~discontinued~~in ~~operations~~loss ~~364,911~~of 1consolidated subsidiaries (25,~~845,039~~954) - ---------- ---------------------- ~~Net~~Loss ~~loss~~from continuing operations 2,211,061 1,~~565~~150,~~371~~948 3Discontinued operations: Loss from discontinued operations 84,~~316~~648 2,~~244~~015,551 Loss on disposal of discontinued operations and related costs - 47,108,711 ---------- ---------------------- Total loss from discontinued operations 84,648 49,124,262 Net loss 2,295,709 50,275,210 Beneficial conversion feature of preferred stock -- 321,~~570~~600,000 ----------- --------------------- Net loss applicable to common stock 12,~~565~~295,~~371~~709 671,~~886~~875,~~244~~210 =========== ===================== Loss from continuing operations and beneficial conversion feature of preferred stock per common share - basic and diluted 0.1321 14.2194 =========== ===================== Loss from discontinued operations per common share - basic and diluted 0.0401 010.4467 =========== ===================== Net loss applicable to common ~~stock per~~ share - basic and diluted 0.1622 115.6562 =========== ===================== Weighted-average shares outstanding - basic and diluted 9$ 10,~~552~~402,~~727~~726 $ 4,~~161~~602,~~023~~698 =========== =====================

(RESTUBBED TABLE)

~~Series~~FOR BTHE ~~Series~~SIX DMONTHS ~~Preferred~~ENDED ~~Stock~~JUNE ~~Preferred~~30, ~~Stock~~2000 ~~Common~~1999 ~~Stock~~ ---------------------- ------ Costs and expenses: Selling, general and administrative $2,329,604 $ 1,445,676 Depreciation and amortization 96,116 42,310 ------------------ ----------~~---------~~ ~~Shares~~Operating ~~Amount~~loss ~~Shares~~2,425,720 ~~Amount~~1,487,986 ~~Shares~~Other ~~Amount~~expense: ~~---------~~Interest expense 1,305,732 630,027 Settlement of third party debts (293,977) -~~--------~~ --------- ----------- --------- ~~-------~~Total ~~Balance~~other atexpense ~~December 31~~1, ~~1999 930~~011,~~000~~755 ~~$ 930~~630,~~000~~027 ~~260,500~~Loss $from ~~2,605,000~~continuing ~~8,919,881~~operations ~~$89,234~~before ~~Issuance~~minority ofinterest ~~common stock~~ in ~~connection~~loss ~~with~~of ~~old debt~~ -- -- -- -- ~~50,000 500 Conversion of common stock from preferred stock (425,000) (425,000) (70,000) (700,000) 775,000 7,750 Issuance of common stock upon exercise of warrants~~ -- -- -- -- ~~186,735 1,867 Net loss~~ -- -- -- -- -- -- consolidated subsidiaries and discontinued operations 3,437,475 2,118,013 --------- --------- ---------- Minority interest in loss of consolidated subsidiaries (25,954) - ---------- --------- --------- ~~Balance~~Loss atfrom ~~March~~continuing ~~31,~~operations ~~2000 505~~3,~~000 $ 505~~411,~~000~~521 ~~190~~2,~~500 $ 1~~118,~~905,000~~013 ~~9,931,616~~Discontinued ~~$99,352~~operations: ~~=========~~Loss ~~=========~~from ~~=========~~discontinued ~~===========~~operations ~~=========~~449,559 ~~=======~~4,364,730 ~~Accumulated~~Loss ~~Additional~~on ~~Options~~disposal ~~Other~~of ~~Paid-in~~discontinued operations and ~~Stock~~related ~~Treasury~~costs ~~Comprehensive~~- ~~Capital~~47,108,711 ~~Warrants Subscriptions Stock Income~~ ------------ ------------ ----~~---------~~ ~~------------~~Total ~~------------~~loss ~~Balance~~from atdiscontinued ~~December~~operations 31449,559 ~~1999 $ 79~~51,~~746~~473,~~228~~441 $Net 2loss 3,~~720~~861,~~071~~080 ~~$ (340~~53,~~000) $ (11~~591,~~978)~~454 $Beneficial ~~1,482~~conversion ~~Issuance~~feature of ~~common stock in connection with old debt (500) -- -- -- -- Conversion of common stock from~~ preferred stock 125,~~117~~170,~~250~~000 -- -- -- -- ~~Issuance of common stock upon exercise of warrants Net loss (1,867)~~ -- -- -- -- ------------ ~~------------~~Net ~~------------~~loss ~~------------~~applicable ~~------------~~to ~~Balance~~common atstock ~~March 31~~3, ~~2000 $ 80,~~861,~~110~~080 ~~$ 2~~78,~~720~~761,~~071~~454 ~~$ (340,000) $ (11,978) $ 1,482~~ ============ ============ ==== Loss from continuing operations and beneficial conversion feature of preferred stock per common share - basic and diluted 0.34 6.37 ======== ============ ========~~====~~ ~~Accumulated~~Loss ~~Shareholders'~~from ~~Deficit~~discontinued ~~Deficiency~~operations ~~-------------~~per ~~------------- Balance at December 31, 1999 $(109,588,478) $ (23,848,441) Issuance of~~ common ~~stock~~share ~~in connection with old debt~~ -- --basic ~~Conversion~~and ofdiluted ~~common~~0.05 ~~stock~~12.02 ~~from~~============================ ~~preferred~~Net ~~stock~~loss --applicable --to ~~Issuance of~~ common ~~stock~~share ~~upon exercise of warrants~~ -- --basic ~~Net~~and ~~loss~~diluted ~~(1,565,371)~~0.39 ~~(1,565,371)~~18.39 ~~-------------~~============================ Weighted-~~------------~~average ~~Balance~~shares atoutstanding ~~March~~- ~~31,~~basic ~~2000~~and diluted $~~(111~~9,~~153~~977,~~849)~~728 $ ~~(25~~4,~~413~~281,~~812)~~860 ============= ===============

See Notes to Consolidated Financial Statements -4- PICK COMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY (UNAUDITED)

~~For~~Series ~~the~~B ~~Three~~Preferred ~~months~~Stock ~~ended~~Series ~~March~~D ~~31,~~Preferred ~~2000~~Stock ~~1999~~ ------------------------------------ ----------- ----------- Cash flows from operating activities: Net loss (1,565,371) (3,316,244) Adjustments to reconcile net loss to net cash used in operating activities: Stock, options and warrants issued for compensation or services --- ~~232,761~~Shares ~~Amortization~~Amount ofShares ~~debt~~Amount ~~discount and debt placement expenses~~ -- ~~32,026 Depreciation and amortization 48,483 108,773 Bad debt expense~~ -- ~~35,528 Changes in operating assets and liabilities: Decrease in prepaid expenses and other current assets 27,172~~ -- ~~Increase in accounts receivable~~ -- ~~(17,784) Decrease in other assets~~ -- ~~102,990 Decrease in current assets from discontinued operations 205,294~~ -- ~~Decrease in security deposits 17,183~~ -- ~~Increase in long~~-~~term assets from discontinued operations (63,464)~~ -- ~~Increase in accounts payable and accrued expenses 467,538 3,721,209 Decrease in deferred revenues~~ -- ~~(781,407) Decrease in other current liabilities~~ -- ~~(810,000) Increase in current liabilities from discontinued operations 925,371~~ -- ~~Decrease in long~~-~~term liabilities from discontinued operations (736,586)~~ -- ----------- ----------- ~~Net cash used in operating activities (674,380) (692,148)~~ ----------- ----------- ----------- ----------- ~~Cash flows used in investing activity~~ - ~~purchase of property and equipment (83,343) (414,002)~~ ----------- ------------------------- ~~Cash~~Balance ~~flows~~at ~~from~~December ~~financing~~31, ~~activities:~~1999 ~~Funds~~$930,000 ~~advanced~~$930,000 on$260,500 ~~third-party debt~~$2,605,000 ~~net~~Issuance of ~~cash~~common ~~placement~~stock ~~costs~~for ~~735,458~~services - - ~~Proceeds~~- ~~from~~- ~~issuance~~Issuance of ~~Series~~common Bstock ~~preferred~~in ~~stock~~connection of old debt - - ~~965,000~~- ~~Payment~~- Conversion of common stock from preferred stock ~~issuance~~(535,000) ~~cost~~(535,000) --(76,500) (64765,~~908~~000) ~~Increase~~Issuance inof ~~cash~~common ~~overdraft~~stock ~~22,265~~upon exercise of options and warrants Net loss - - - - --------- ----------- ~~Net cash provided by financing activities 757,723 900,092~~ ----------- ----------- ~~Net decrease in cash~~ -- ~~(206,058) Cash at beginning of period~~ -- ~~248,551~~ ----------- ------~~-----~~ ~~Cash~~Balance at ~~end~~June of30, ~~period~~2000 $395,000 --$395,000 $184,000 42$1,~~493~~840,000 =========== =========== ~~Supplemental disclosure of cash flow information: Cash paid during the period for interest from: Continuing operations $ -- $ -- Discontinued operations -- 67,824~~ =========== =========== ~~Supplemental schedule of noncash investing and financing activities: Deferred interest from issuance of stock and options $ -- $ 750,163~~ =========== ========~~===~~

(RESTUBBED TABLE)

~~March~~Common ~~31,~~Stock ~~December~~Additional ~~31,~~Options ~~Estimated 2000 1999 Useful Life~~ --------------------------- Paid-in and Shares Amount Capital Warrants -------------------------------------------------------------- ~~(Unaudited) Property, equipment and software $ 630,653 $ 567,543 3 and 5 years Asset development/ installation~~-in-~~process 4,102,187 4,081,954~~ ------------------------------------------------------------~~------------------------------~~ 4Balance at December 31,~~732~~ 1999 $ 8,~~840~~919,881 4$ 89,~~649~~234 $79,~~497~~746,228 ~~Less~~$2,720,071 ~~accumulated~~Issuance ~~depreciation~~of common stock for services 200,000 2,000 198,000 Issuance of common stock in connection of old debt 50,000 500 (500) Conversion of common stock from preferred stock 917,500 9,175 1,290,825 Issuance of common stock upon exercise of options and ~~amortization~~warrants ~~263~~432,~~010~~038 ~~214~~4,~~527~~320 (4,320) Net loss - - - - -----------------------------------------------------------~~---------------------------~~ Balance at June 30, 2000 $410,~~469~~519,~~830~~419 $4105,~~434~~229 $81,~~970~~230,233 $2,720,071 ===========================================================~~===============================~~

(RESTUBBED TABLE)

(RESTUBBED TABLE)

See Notes to Consolidated Financial Statements -5- PICK COMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) Six months ended June 30, 2000 1999 --------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net loss (3,861,080) (53,591,454) Adjustments to reconcile net loss to net cash used in operating activities: Stock, options and warrants issued for compensation or services 200,000 4,722,339 Loss on disposal of discontinued operations and related costs -- 41,636,097 Depreciation and amortization 96,116 42,310 Minority interest in loss of consolidated subsidiaries (25,954) Bad debt expense 64,099 Changes in operating assets and liabilities: Increase (decrease) in prepaid expenses and other current assets 21,990 (82,730) Decrease in current assets from discontinued operations 288,941 950,140 Increase in security deposits (39,061) (88,204) (Increase) decrease in long-term assets from discontinued operations 3,884 (53,931) Increase in accounts payable and accrued expenses 1,728,196 1,124,558 Increase in current liabilities from discontinued operations 873,525 622,146 Decrease in long-term liabilities from discontinued operations (736,586) -- --------------------------------------------------------------------------------------------------------------- Net cash used in operating activities (1,385,930) (4,718,729) --------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- Cash flows used in investing activity - purchase of property and equipment (194,404) (1,213,408) --------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Funds advanced on third-party debt, net of cash placement costs 559,430 -- Proceeds from subsidiary's new investor 1,205,295 -- Proceeds from issuance of Series B preferred stock 1,821,000 Proceeds from issuance of Series D preferred stock 4,660,000 Proceeds from stock subscription 5,000 Payment of preferred stock issuance cost (85,000) Payment on third-party debt (20,000) Decrease in cash overdraft (20,193) --------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 1,744,532 6,381,000 --------------------------------------------------------------------------------------------------------------- Net increase in cash 164,198 448,863 Cash at beginning of period -- 17,052 --------------------------------------------------------------------------------------------------------------- Cash at end of period $ 164,198 $ 465,915 =============================================================================================================== Supplemental disclosure of cash flow information: Cash paid during the period for interest from: Continuning operations $ 38,417 $ -- =============================================================================================================== Discontinued operations $ -- $ 76,912 ===============================================================================================================

See Notes to Consolidated Financial Statements -6- 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 (collectively, the "Company") 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 and leases facilities in Miami, Florida. The accompanying consolidated financial statements include the accounts of PICK Communications Corp. and its majority owned subsidiaries, PICK Sat Inc. ("PICK Sat") and P.C.T. Prepaid Telephone Inc. ("PCT"), its wholly owned subsidiary, PICK Online.Com Inc. ("POL"), and the discontinued operations of PICK US Inc. f/k/a PICK Inc. ("PICK US"), PICK Net Inc. ("PICK Net") and PICK Net UK PLC ("PICK Net UK"). All significant intercompany balances and transactions have been eliminated. The Company has discontinued the operations of its telecommunication and prepaid calling card business consisting of PICK US, PICK Net and PICK Net UK (see Note 7). Minority interest represents the minority stockholders' proportionate share of the equity and loss of PICK Sat and PCT. Revenue from PICK Sat will be derived from monthly fees charged based upon the type of usage and bandwidth contracted for, while sales from POL will be derived from subscribers ratably over the contract period. For the six-months ended June 30, 2000, both PICK Sat and POL had no revenue and no customers. Revenue from the discontinued operations are recognized at the time that the service is provided, for long-distance time, as reported by the electronic switching devices, and for prepaid calling cards as the card is used. For comparability, certain 1999 amounts have been reclassified, where appropriate, to conform to the financial statement presentation used in 2000. Effective July 23, 1999, the Company's board of directors authorized a 1-for-10 reverse split of its common stock. All share and per-share amounts in these consolidated financial statements have been restated to give effect to this reverse stock split. 2. PREPAID EXPENSES AND OTHER CURRENT ASSETS: Prepaid expenses and other current assets consist of the following: June 30, December 31, 2000 1999 -------------------------------------------------------------------------------- (Unaudited) Sundry receivable $ 8,836 $ 3,100 Computer equipment for resale 15,669 58,159 Prepaid expenses 6,410 61,851 Advances and other current assets -- 53,345 -------------------------------------------------------------------------------- $30,915 $176,455 ================================================================================ -7- PICK COMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -------------------------------------------------------------------------------- 3. PROPERTY AND EQUIPMENT: Property and equipment, at cost, consists of the following:

Asset development/installation-in-process consists of hardware and software costs related to the Company's high-speed internet business, which is under development. Depreciation will commence when the development and/or installation is complete and the assets are fully operational. 4. DEBT: Debt consists of the following: June 30, December 31, 2000 1999 -------------------------------------------------------------------------------- (Unaudited) Private placement debt (a) $ 9,880,000 $ 9,880,000 Note payable (b) -- 476,000 Revolver loan (c) 1,447,430 412,000 -------------------------------------------------------------------------------- 11,327,430 10,768,000 Less current portion of debt 1,447,430 888,000 -------------------------------------------------------------------------------- Debt, less current portion $ 9,880,000 $ 9,880,000 ================================================================================ (a) 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 990,000 shares of the Company's common stock at $5.00 per share for five years (the "Placement"). The Original Notes are secured by all the assets of PICK Communications Corp. The Company allocated -8- PICK COMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -------------------------------------------------------------------------------- $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 Original Notes. In November and December 1998, the Company exercised its rights to extend the maturity date of the Original Notes for 60 days. Under the terms of the Original Notes, the interest rate of the Original Notes was increased to 18% per annum, retroactive to the issuance of the Original Notes. In January, February and March 1999, the holders of the Original Notes agreed to extend the maturity of the Original Notes until April 27, 1999. In return for the extensions, the Company agreed to issue 50,012 shares of its common stock (valued at $265,063 and included in loss from discontinued operations in the accompanying consolidated statement of operations) and warrants (valued at $485,100 and included in loss from discontinued operations in the accompanying consolidated statement of operations) to purchase 245,750 shares of the Company's common stock for five years at $5.00 per share to the holders of the Original Notes. 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 139,437 shares of common stock (valued at $865,799) and warrants to purchase 250,986 shares of common stock at $5.00 per share (valued at $383,002) for five years. The costs related to the Placement were being deferred and amortized as debt placement expenses over the term of the debt. 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 extend the maturity date until April 27, 2002. Additionally, the Company has the option to extend the maturity date for one year. Under the terms of the restructuring, the Restructured Notes were initially convertible into shares of common stock at a fixed price of $10.00 rather than fair market value (valued at $7,077,600), as defined in the terms of restructuring. The Restructured Notes automatically convert to common stock if the closing bid price exceeds $15.00 per share, as defined. In January 2000, as a result of anti-dilution provision of the Restructured Notes the conversion rate was reduced to $5.00 per share. In consideration for the restructuring, the consenting noteholders received the following: (i) the right for a two-year period to exchange the existing warrants for an aggregate of 988,000 shares of the Company's common stock for no consideration (valued at $15,604,800); (ii) the right to receive from the Company an aggregate of 988,000 new shares of the Company's common stock for no consideration (valued at $16,907,600). During 1999, the 1,976,000 shares referred to in (i) and (ii) above were issued to the consenting noteholders. In consideration for the restructuring of the Original Notes, the Company issued to Commonwealth 200,000 shares of common stock (valued at $3,440,000 and included in loss on disposal of discontinued operations in the accompanying statement of operations), plus warrants to purchase 50,000 of the Company's common stock at $13.75 per share (valued at $239,477 and included in loss on disposal of discontinued operations in the accompanying statement of operations), subject to adjustment. Additionally, warrants previously issued to Commonwealth will be exercisable at $1.00 per share (valued at $2,046,097 and included in additional paid-in capital in the accompanying consolidated balance sheet). -9- PICK COMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -------------------------------------------------------------------------------- Due to the restructuring of the $9,900,000 short-term notes, the Company recorded an increase in stockholders' deficiency of $41,636,097 during 1999. All deferred interest and placement charges were written off and included in the loss on disposal of discontinued operations during 1999. (b) PICK Sat obtained a promissory note from Atlantic Tele-Network Inc. ("ATN") aggregating $476,000, which loan bears interest at prime plus 2%. This promissory note was entered into in connection with PICK Sat options as described in the PICK Sat option agreement dated September 13, 1999. ATN chose not to exercise this option and the promissory note became due and payable on February 4, 2000 and has not been paid. On January 4, 2000, in consideration of the then pending completion of the sale of the Company's PICK Net subsidiaries (see Note 7), as well as the termination of the PICK Sat option, ATN received five-year warrants to purchase 1,000,000 shares of PICK common stock exercisable at $2.00 per share. This promissory note was assumed by PICK Net's buyer on the date of the sale of PICK Net, January 18, 2000. During the second quarter ended June 30, 2000, PICK Sat removed the full loan balance plus accrued interest from its books and recorded the amount on PICK Net's books. (c) On November 3, 1999, PICK Sat entered into a 120-day revolver for $500,000 (the "Revolver") from Tri-Links Investment Trust ("Tri-Links"). At December 31, 1999, PICK Sat borrowed $412,000 under the Revolver which bears interest at 13% per annum, increasing to 15% per annum upon default and payment of which is guaranteed by PICK. Tri-Links was granted a security interest in substantially all of PICK Sat's assets which was initially subordinated to ATN and then made pari passu and equal in priority as of April 2000. The Revolver came due on March 3, 2000 and was extended until May 3, 2000. In addition, on January 26, 2000, Tri-Links, PICK, PICK Sat and Group Technology for Scientific Equipment and Supplies and Salah Khalid Al Fulaij ("Fulaij") entered into an Amendment Agreement which was amended again in March 2000, whereby the commitment under the Revolver was increased. The loan payable balance plus accrued at June 30, 2000 amounted to $1,447,430. As of August 30, 2000, the parties agreed in principle to a Third Amendment and Extension Agreement under which repayment of $1,150,000 principal amount was extended to April 1, 2001 and $100,000 will be converted into equity of PICK Sat by Fulaij. The interest rate was reduced from 13% to 10% per annum. Repayment of the loan will be made on a monthly basis until repaid in full on April 1, 2001. Until the loans are repaid, PICK and PICK Sat agreed to certain negative covenants including the payment of dividends to PICK cannot exceed $200,000 in the aggregate; not greater than l5% of PICK Sat's projected debt may be paid or incurred; and the companies cannot enter into certain mergers or sales of assets. The lenders were granted the right to elect either two members of PICK Sat's Board of Directors or two observers to the Board. Subject to a proposed recapitalization of PICK Sat, the lenders were granted warrants to purchase an aggregate of approximately 15,000 shares of PICK Sat's common stock at the lesser of $5.00 per share or 50% of the price paid by new investors at the time of PICK Sat's initial public offering on or before March 1, 2001. 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES: Accounts payable and accrued expenses consist of the following: June 30, December 31, 2000 1999 -------------------------------------------------------------------------------- (Unaudited) Accounts payable - operating $ 1,611,164 $2,323,613 Accrued expenses - operating 4,628,675 2,188,030 Accrued expenses - for equipment 1,066,000 1,066,000 Accrued expenses - settlement reserves 2,962,964 2,962,964 (see Note 8) -------------------------------------------------------------------------------- 10,268,803 $8,540,607 ================================================================================ -10- PICK COMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -------------------------------------------------------------------------------- 6. PREFERRED STOCK: 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 1,821,000 shares were issued at $1.00 per share, convertible into 1,821,000 shares of the Company's common stock at the rate of $1.00 per share. An additional 50,000 shares were issued (valued at $50,000) for professional services provided to the Company. There was a placement cost of $85,000 related to the issuance of Series B and the amount was paid in full during 1999. Through June 30, 2000, an aggregate of 1,476,000 shares of Series B convertible preferred stock have been converted into 1,476,000 shares of common stock. 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 was initially convertible into 1,190,500 shares of the Company's common stock at the rate of $4.20 per share. As of December 31, 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 $459,750 of preferred stock placement costs. This $459,750 placement costs has been recorded in the additional paid in capital account. In addition, the Company issued an aggregate of 700,000 common stock purchase warrants in connection with the sale of Series D convertible preferred stock. Each warrant, as adjusted, is exercisable at $6.30 per share of common stock for a two-year period for an aggregate of 70,000 shares. On July 15, 1999, the Company sold 34,000 shares of Series D convertible preferred stock for $340,000 to Diego Leiva, chairman of the board. The purchase is evidenced by a recourse promissory note secured by a pledge of the securities. Mr. Leiva has agreed to return all of such Series D Preferred Stock and Warrants to the Company, which will cancel his promissory note. In January 2000, the conversion rate was adjusted so that the preferred stock converts into common stock at $2.00 per share. Through June 30, 2000, an aggregate of $3,160,000 of the principal amount of Series D convertible preferred stock had been converted into 952,738 shares of common stock. At the time of issuance, the Series B and Series D were convertible at prices below the market value of the underlying common stock. The beneficial conversion feature represented by the intrinsic value is calculated as the difference between the conversion price and the market price of the underlying common stock multiplied by the number of shares to be issued from the conversion. The beneficial conversion feature is recognized as a return to the preferred stockholders. At December 31, 1999, the beneficial conversion feature amounted to $6,361,000 and $18,809,000 for the Series B and Series D, respectively. -11- PICK COMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -------------------------------------------------------------------------------- 7. DISCONTINUED OPERATIONS: On June 23, 1999, the Company formalized its plan to discontinue its telecommunications and prepaid calling card business consisting of PICK US, PICK Net and PICK Net UK PLC (collectively "PICK Net"). Accordingly, the telecommunications and prepaid calling card business are accounted for as discontinued operations in the accompanying consolidated financial statements. The Company contracted to sell PICK Net and PICK Net UK PLC on September 13, 1999 and discontinued the operations of PICK US. On January 18, 2000, PICK completed the sale of all of the stock of PICK Net for nominal value, and had approximately $10,700,000 of PICK Net's liabilities assumed, which, as a result of the default of the buyer (see below), the assumed liabilities continues to remain outstanding on the Company's financial statements. The buyer provided advances to PICK Net during 1999 to continue its operations. The Company issued 100,000 shares of common stock (valued at $1,000,000) of the old debt for repayment. Subsequent to the closing of the sale of PICK Net, the buyer defaulted on its payment obligation. The Company has demanded compliance by the buyer or it will pursue all legal remedies against the buyer. Operating results of discontinued telecommunications and prepaid calling card business are as follows: Six-month period ended June 30, 2000 1999 -------------------------------------------------------------------------------- (Unaudited) (Unaudited) Sales of long-distance services $ 168,598 $ 3,164,030 Sales of prepaid calling cards -- 2,215,485 -------------------------------------------------------------------------------- Net sales 168,598 5,379,515 -------------------------------------------------------------------------------- Cost of sales 328,864 6,835,866 Selling, general and administrative 82,650 896,372 Depreciation and amortization 18,587 200,496 Bad debt expense 64,099 128,298 -------------------------------------------------------------------------------- Total costs and expenses 494,200 8,061,032 -------------------------------------------------------------------------------- Loss before amortization of debt placement expenses and interest expense (325,602) (2,681,517) Amortization of debt placement expenses and interest expense 123,957 1,683,213 -------------------------------------------------------------------------------- Loss from discontinued operations $(449,559) $ (4,364,730) ================================================================================ (continued) Assets and liabilities of discontinued telecommunications and prepaid calling card business are as follows: June 30, December 31, 2000 1999 -------------------------------------------------------------------------------- (Unaudited) Cash $ -- $ 18,117 Accounts Receivable, less allowance for doubtful accounts of $231,091 and $482,735, respectively -- 228,885 Prepaid Expenses and Other Current Assets 36,279 78,218 -------------------------------------------------------------------------------- Current Assets from Discontinued Operations 36,279 325,220 -------------------------------------------------------------------------------- Property and Equipment - at cost, net of accumulated depreciation and amortization of $723,810 and $771,301, respectively 2,013,456 2,032,044 Security Deposits 51,054 36,350 -------------------------------------------------------------------------------- Long-term Assets from Discontinued Operations 2,064,510 2,068,394 ------------------------------------------------------------------------------- -12- PICK COMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -------------------------------------------------------------------------------- June 30, December 31, 2000 1999 -------------------------------------------------------------------------------- (Unaudited) Current Liabilities: Current portion of debt (a)(b)(c) $ 4,626,986 $ 3,814,244 Current portion of other debt 1,018,578 306,130 Accounts payable and accrued expenses 6,163,952 6,815,620 Deferred revenue - prepaid calling cards 29,620 29,620 -------------------------------------------------------------------------------- Current Liabilities from Discontinued Operations 11,839,136 10,965,614 -------------------------------------------------------------------------------- Long-term Liabilities from Discontinued Operations - less current portion -- 736,586 -------------------------------------------------------------------------------- Net Liabilities of Discontinued Operations $ 9,738,347 $ 9,308,586 ================================================================================ (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 issued 100,000 warrants with an exercise price of $2.40 per share to purchase 10,000 shares of common stock, 200,000 warrants with an exercise price of $10.00 per share to purchase 20,000 shares of common stock and 100,000 warrants with an exercise price of $5.60 per share to purchase 10,000 shares of common stock. 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 renegotiated its loan into a new six-month promissory note (the "Note"), in the amount of $2,000,000 plus $60,000 accrued interest at 12% per annum. Pursuant to an agreement, dated November 12, 1999, the Company extended the Note for an additional six months in the principal amount of $2,000,000 plus accrued interest. The Company has agreed to issue to IDT 40,000 shares of PICK's common stock in exchange for IDT's warrants to purchase 40,000 shares of PICK's common stock, which shall be canceled upon such delivery, plus a restructuring fee of 50,000 shares of PICK common stock. The Company also agreed to pay $250,000 upon the earlier to occur of 30 days from the date of -13- PICK COMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -------------------------------------------------------------------------------- execution of the agreement or the completion of additional financing for at least $5,000,000 for PICK and shall make 6 monthly principal payments of $25,000 each on the last business day of each month following the issue date of this Note, beginning on November 15, 1999. In the event PICK elects to exercise its option to extend the maturity date of the Note from 6 months to 3 years, it shall deliver to IDT $375,000, payable in immediately available funds or, at the option of PICK, 37,500 shares of PICK's common stock. Thereafter, PICK agrees to pay IDT $25,000 per month for 12 months, including the 6 monthly payments described above beginning on November 15, 1999. Interest is payable monthly at 9% per annum. This Note will automatically convert into common stock at $10.00 per share if the average price of the Company's common stock exceeds $15.00 per share for at least 20 consecutive days during which time the daily trading volume is at least 20,000 shares. All shares of common stock issued or issuable to IDT were included in a registration statement declared effective on November 12, 1999. PICK has been unable to make any required cash payments to IDT under the Note. (b) As of June 30, 2000, PICK Net has received from an affiliate of the buyer of PICK Net approximately $283,000. (c) PICK Net has promissory notes with ATN in the aggregate amount of $2,119,424 (including $476,000 principal amount plus accrued interest assumed for PICK Sat's balance by PICK Net's buyer on the date of sale, January 18, 2000) at June 30, 2000, which bear interest at prime plus 2% (11.5% at June 30, 2000). These promissory notes were entered into in connection with the sales of PICK Net as described in the stock purchase agreement dated September 13, 1999. The promissory notes became due and payable on February 4, 2000 and have not been paid (see Note 4). 8. LITIGATION SETTLEMENTS AND RESERVE FOR CONTINGENT LIABILITY: The Company is involved in various claims and legal actions arising from the ordinary course of business. Management is of the opinion that ultimate outcome of these matters would not have a material adverse impact on the financial position of the Company or the results of its operations, except as described below. 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 claimed 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 claimed that the Company owed 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 and is a part of the Company's working capital deficiency. The reserve is included in accounts payable and accrued expenses 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. In October 1999, the arbitrator found that AT&T was entitled to a net award of $1,376,447 plus 9% interest per annum since January 31, 1997. The buyer of PICK Net has assumed $95,000 of this settlement as defined in the purchase agreement (see Note 7). However, the Company remains liable for the balance of the -14- PICK COMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -------------------------------------------------------------------------------- judgment and is without the funds to satisfy it. Unless it is able to negotiate payment over an extended period of time this amount could force the Company into curtailing its operations or seeking protection under the bankruptcy laws. AT&T has converted the arbitration award into a judgment which it is attempting to enforce. During March 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 $1,177,734 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 (the "Settlement Agreement"). Under the terms of the Settlement Agreement, the Company agreed to pay Worldcom $1,256,622 (the "Settlement Payment") in exchange for a full and complete settlement of Worldcom's lawsuit against the Company. The Company agreed to pay the Settlement Payment with interest at 16% per annum on or before January 16, 2000 and for Worldcom to discontinue, without prejudice, the legal proceedings until such date, although the Company extended the forbearance through January 16, 2001. The Company paid Worldcom a 100,000 share restructuring fee during 1999. In July 1999, L.D. Exchange.com, Inc., a vendor of PICK Net, Inc., commenced arbitration proceedings against PICK Net before the American Arbitration Association (AAA) in San Diego, California, alleging breach of contract. These proceedings involve the alleged nonpayment of between $250,000 and $500,000 by PICK Net and not the Company. The Company notified the AAA that the matter did not involve the ompany. By letter dated August l4, 2000, the Company was advised that the arbitration had been withdrawn. On March 27, 2000, Telecom Management Resources, Inc. (as successor to International Career Information, Inc.), a vendor of PICK Net, commenced a lawsuit against the Company and PICK Net in the Superior Court of New Jersey, Law Division, Hudson County. The complaint involved the alleged non-payment of $58,220 under a Facilities Management Service Agreement and $50,400 for additional payments under an acceleration provision plus interest. The Company answered and denied the charges and raised affirmative defenses including the fact that the liability was assigned to PICK Net with the consent of the plaintiff and then PICK Net was sold. The parties have reached an agreement in principle which had been properly recorded for as for June 30, 2000 to settle the lawsuit; however no agreement has been signed to date. 9. 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 approximately $27,510,000 and has a working capital deficiency of approximately $23,324,000 at June 30, 2000 that raise substantial doubt about its ability to continue as a going concern. In addition, the Company had negative cash flow from operations for the six-month periods ended June 30, 2000 and 1999, and for the years ended December 31, 1999, 1998 and 1997. Significant short-term obligations exist including the payments of the settlements with Worldcom and AT&T in the amounts of $1,256,622 and $1,376,447, respectively (see Note 8) plus accrued interest. Additionally, payment of loans to various creditors plus accrued interest at June 30, 2000 cannot be met through cash flows from operations. Without the Company's ability to extend the payout terms of the aforementioned liabilities or obtain additional long-term financing, as well as increasing revenue and/or decreasing expenses, the Company will be unable to continue as a going concern. The consolidated 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. Furthermore, the Company is in need of immediate financing for working capital. If the Company is able to obtain adequate funding it expects that its operations on a going-forward basis will be primarily through its PICK Sat subsidiary, which has only recently commenced operations and has not generated any revenue to date. Furthermore, PICK Sat has covenanted with its secured lenders to limit the dividends it can pay to the Company. The Company has had discussions with several of its largest unsecured creditors, including, but not limited to, AT&T and IDT. The Company is attempting to reach an approved out of court "standby agreement" with all of its creditors. If the standby agreement is acceptable to the Company's creditors, then as long as the Company complies with its terms, the Company's creditors will not exercise their legal rights and remedies. If the proposed settlement with creditors is successful, the Company have no direct obligation to any of its unsecured creditors because their claims will be satisfied from the future earnings of PICK Sat and/or other affiliates. There can be no assurance that the Company's effort's to resolve the claims of its unsecured creditors will be successful. Should the Company be unable to obtain interim financing in the near term and/or reach an agreement with its unsecured creditors, the Company will be forced to cut back or suspend operations and/or seek protection under the bankruptcy laws. 10. OTHER MATTERS: In April 2000, a group of investors from Europe and the Middle East committed an aggregate of $10,000,000 to PICK Sat (the "PICK Sat Financing"), to occur over a 12-month period. The investors will acquire 20% ownership of PICK Sat and will be issued equity on the basis of 1% for every $500,000 invested. As of June 30, 2000, $1,205,295 had been invested in PICK Sat. The initial $500,000 was made as a convertible loan on a pari passu basis with the ATN indebtedness described in Note 4. Subsequent to June 30, 2000, additional investments were made totalling approximately $3,400,000. -15- 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 On June 23, 1999, the Company's Board of Directors voted to sell or discontinue the telecommunications portion of its business in order to focus on the Internet services portion of its business conducted through its PICKSat, Inc. ("PICK Sat") and PICK Online.Com, Inc. ("PICK Online") subsidiaries. Accordingly, the financial statements reflect the discontinuance of the Company's PICK US, Inc. ("PICK US"), PICK Net Inc. ("PICK Net") and PICK Net UK PLC subsidiaries. The closing of the sale of the PICK Net subsidiaries occurred on January 18, 2000. See "Costs and Expenses" below. In 1999, the Company, through its wholly owned subsidiary, PICK Sat commenced development of a system to multicast the delivery of Internet Protocol multi-media content via satellite. Also in March 1999, the Company formed PICK Online to provide broadband Internet content to users. PICK Sat and PICK Online are in the development stage and have not generated any revenues to date. For PICK Sat business, the Company will charge its customers monthly recurring fees based on type of usage and bandwidth contracted for and may charge an additional amount per reception location. The discontinued subsidiaries generated revenues from the sale of telecommunication services. These included international long distance service to carriers and resellers, and revenues derived from prepaid telephone calling cards to distributors for resale to retail outlets. The Company's costs of sales for the discontinued operations 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 recognized revenues as its customers used the traffic. For prepaid telephone calling cards sales, the Company recognized revenues at the time it provided the telephone services associated with its cards and recognized the cost of the carrier telephone traffic based on the minutes used in the same periods that the Company recognized revenues. -16- Six Months Ended June 30, 2000 Compared with June 30, 1999 Revenues: The Company's continuing operations, PICK Sat, have recently commenced commercial operations and as such have had no revenues for the six months ended June 30, 2000. Costs and Expenses: Selling, general and administrative expenses increased to $2,330,000 for the six months ended June 30, 2000, from $1,446,000 for the six months ended June 30, 1999, reflecting an increase of $884,000 or 61%. This increase is primarily due to the fact that the PICK Sat is working towards commercialization of its new product line. The Company generated significantly increased expenses for salaries, outside consultants, accounting, marketing, trade shows, legal, international travel and public relations in developing its business. The Company also had increased expenses for preparation of public filings and the negotiation of debt arrangements which were handled primarily by non-employees. Loss from Operations: The Company's loss from continuing operations increased from $2,118,000 for the six months ended June 30, 1999 to $3,412,000 for the six months ended June 30, 2000, primarily due to the increases in aggregate salaries, outside consultants, selling, general and administrative costs. PICK Sat is still developing its products and offerings and is moving closer to the commercial deployment phase. The Company was without adequate funds during the six months ended June 30, 2000 to commercialize its PICK Sat operations, prior to the PICK Sat Financing and therefore was operating at a reduced level. In addition, the loss from continuing operations during the six months ended June 30, 2000 was reduced by $293,977 due to a settlement of an old outstanding accounts payable balance. Discontinued Operations On June 23, 1999, the Company formalized its plan to discontinue its telecommunications and prepaid calling card business consisting of PICK US, PICK Net and PICK Net UK PLC (collectively "PICK Net"). Accordingly, the telecommunications and prepaid calling card business are accounted for as discontinued operations in the accompanying consolidated financial statements. On September 13, 1999, the Company agreed to sell its PICK Net operations to Lebow Investments Ltd., a recently formed corporation ("Lebow"). Lebow agreed to be financially responsible for the PICK Net operations which received funding to continue operations commencing in September 1999 through the closing of this transaction. On January 18, 2000, the Company completed the sale of all of the stock of PICK Net for nominal value, and had up to approximately $10 million of PICK Net's liabilities assumed. Simultaneously with the closing, Gulfsat Communications Company, a Kuwaiti company ("Gulfsat"), purchased all of the common stock of Lebow. Gulfsat was a principal vendor of services to the PICK Net companies which was owed approximately $1,555,000 as of October 31, 1999, primarily under a reciprocal telecommunications agreement and payment of which amount had been assumed by Lebow. In February 2000, Gulfsat defaulted under its agreements and discontinued operating PICK Net. The Company has made demand on Lebow and Gulfsat to satisfy its obligations, or it will pursue all legal remedies, but is attempting to negotiate a settlement. In any event, however, in addition to the direct obligations of the Company described hereinafter, the Company retains substantial contingent liabilities on its discontinued operations if those liabilities are not paid and has retained all such liabilities on its financial statements. (See Note 7 of Notes to Consolidated Financial Statements for operating results of the discontinued operations). -17- Loss from discontinued operations decreased from $51,473,000 for the six months ended June 30, 1999 to $450,000 for the six months ended June 30, 2000. The Company only operated its subsidiaries for 18 days during the six months ended June 30, 2000 before selling the operations, although it had certain ongoing obligations in view of its contingent liabilities which necessitated certain payments. For the six months ended June 30, 2000, the Company generated international long distance revenue of $168,598, compared with $3,164,000 for the six months ended June 30, 1999. The Company had no prepaid telephone calling card revenues for the six months ended June 30, 2000, compared to $2,215,000 for the six months ended June 30, 1999. The cost of sales decreased from $6,835,866 for the six months ended June 30, 1999 to $328,864 for the six months ended June 30, 2000, as operations were wound down. Material Changes in Financial Condition from December 31, 1999 to June 30, 2000: Due to the losses discussed above, the Company's working capital deficit increased from $19,912,739 as of December 31, 1999, to $23,323,980 as of June 30, 2000, an increase in the working capital deficit of $3,411,241, and the stockholders' deficiency increased from $23,848,441 at December 31, 1999 to $27,509,521 at June 30, 2000, an increase in stockholders' deficiency of $3,661,080. Current assets decreased by $270,283 primarily due to a decrease in current assets from discontinued operations at June 30, 2000. Current liabilities increased by $3,140,958. This increase is largely due to increases in the current portion of debt, in accounts payable and accrued expenses and current liabilities from discontinued operations. However, a substantial portion of current liabilities from discontinued operations were assumed by Lebow and Gulfsat on January 18, 2000, but in February 2000, they defaulted under their agreements. A significant portion of the liabilities of the Company mature or are subject to payment agreements calling for payment before the end of 2000. The Company has had discussions with several of its largest unsecured creditors, including, but not limited to, AT&T and IDT. The Company is attempting to reach an approved out of court "standby agreement" with all of its creditors. If the standby agreement is acceptable to the Company's creditors, then as long as the Company complies with its terms, the Company's creditors will not exercise their legal rights and remedies. If the proposed settlement with creditors is successful, the Company have no direct obligation to any of its unsecured creditors because their claims will be satisfied from the future earnings of PICK Sat and/or other affiliates. There can be no assurance that the Company's effort's to resolve the claims of its unsecured creditors will be successful. -18- The Company is in need of immediate financing for working capital. In April 2000, a group of investors from Europe and the Middle East committed an aggregate of $10 million to PICK Sat (the "PICK Sat Financing"), to occur over a 12-month period. The investors will acquire 20% ownership of PICK Sat and will be issued equity on the basis of 1% for every $500,000 invested. As of June 30, 2000 and October 1, 2000, $1,205,295, and approximately $4.6 million, respectively, has been invested in PICKSat. The initial $500,000 was made as a convertible loan on a pari passu basis with the Atlantic Tele-Network Inc. ("ATN") indebtedness described below. In September, 1999 PICK entered into an option agreement with Atlantic Tele-Network, Inc. ("ATN") to sell them up to 19.9% of the common stock of PICK Sat for $8 million, with an option to acquire an additional 31.1% for an additional $15 million payable in 500,000 shares of ATN common stock or $15 million in cash or ATN common stock, whichever produces the higher value at the time of exercise of the option was exercised in full. PICK Sat obtained interim loans in the principal amount of $476,000 from ATN for the Company and PICK Sat's operating expenses. ATN chose not to exercise the option. In addition, under a credit facility, as of June 30, 2000, one of PICK's former subsidiaries, PICK Net USA, had debt, amounting to $2,119,424 plus accrued interest, which includes the $476,000 principal amount plus accrued interest assumed from PICK Sat's balance by PICK Net's buyer on the date of sale, January 18, 2000. In accordance with the terms of the above loans from ATN, the $476,000 borrowed by PICK Sat and the $1,589,664 borrowed by PICK Net USA, all become due and payable on February 4, 2000 and has not been paid. On January 4, 2000, in consideration with the completion of the sale of the Company's PICK Net subsidiaries to Lebow and Gulfsat, as well as the termination of the PICK Sat option, ATN received five-year warrants to purchase 1 million shares of PICK Common Stock exercisable at $2.00 per share. On November 3, 1999, PICK Sat obtained a 120 day revolver for $500,000 (the "Revolver") from Tri-Links Investment Trust ("Tri-Links"). PICK Sat borrowed the entire $500,000 under the Revolver which bears interest at 13% per annum, increasing to l5% per annum upon default and payment of which is guaranteed by PICK. Tri-Links was granted a security interest in substantially all of PICK Sat's assets which was initially subordinated to ATN and then made pari passu and equal in priority. The Revolver came due on March 3, 2000 and was extended until May 3, 2000. In addition, on January 26, 2000, Tri-Links, PICK, PICK Sat and Group Technology for Scientific Equipment and Supplies and Salah Khalid Al Fulaij ("Fulaij") entered into an Amendment Agreement which was amended again in March and April 2000, whereby the commitment under the Revolver was increased. The loan payable balance at June 30, 2000 amounted to $1,447,430. As of August 30, 2000, the parties agreed in principle to a Third Amendment and Extension Agreement under which repayment of $1,150,000 principal amount was extended to April 1, 2001 and $100,000 will be converted into equity of PICK Sat by Fulaij. The interest rate was reduced from 13% to 10% per annum. Repayment of the loan will be made on a monthly basis until repaid in full on April 1, 2001. Until the loans are repaid, PICK and PICK Sat agreed to certain negative covenants including the payment of dividends to PICK cannot exceed $200,000 in the aggregate; not greater than l5% of PICK Sat's projected debt may be paid or incurred; and the companies cannot enter into certain mergers or sales of assets. The lenders were granted the right to elect either two members of PICK Sat's Board of Directors or two observers to the Board. Subject to a proposed recapitalization of PICK Sat, the lenders were granted warrants to purchase an aggregate of 15,000 shares of PICK Sat's common stock at the lesser of $5.00 per share or 50% of the price paid by new investors at the time of PICK Sat's initial public offering on or before March 1, 2001. 19 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 1,871,000 shares were issued, convertible into 1,871,000 shares of the Company's common stock at the rate of $1.00 per share. As of June 30, 2000, 1,476,000 shares of Series B convertible preferred stock had been converted into common stock. 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 was initially convertible into 1,190,500 shares of the Company's common stock at the rate of $4.20 per share. As of December 31, 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 $459,750 of preferred stock placement costs. In addition, the Company issued an aggregate of 700,000 common stock purchase warrants in connection with the sale of Series D convertible preferred stock. Each Warrant is exercisable at $6.30 per share of common stock for a two-year period. On July 15, 1999, the Company sold 34,000 shares of Series D convertible preferred stock for $340,000 to Diego Leiva, chairman of the board. The purchase is evidenced by a recourse promissory note secured by a pledge of the securities. Mr. Leiva has agreed to return the 34,000 shares of Series D Preferred Stock and accompanying warrants to the Company for cancellation. In January 2000, the conversion rate was adjusted so that the preferred stock converts into common stock at $2.00 per share. As of June 30, 2000, $3,160,000 principal amount of Series D Convertible Preferred Stock had been converted into 952,738 shares of common stock. The remaining $1,500,000 principal amount (exclusive of Mr. Leiva's $340,000 of preferred stock) of Series D Convertible Preferred Stock, is convertible into 750,000 shares of Common Stock, subject to adjustment. At December 31, 1999, we also recorded a beneficial dividend of $25,170,000 associated with the issuance of preferred stock. This charge did not use any cash of the Company. Material Changes in Cash Flows Cash increased during the six months ended June 30, 2000, by $164,198. This increase is attributable to a decrease in net cash used in operating activities of $1,385,930 and investing activities of $194,404. This is offset by increases in cash provided by financing activities of $1,744,532. Cash Flows from Operating Activities Operating activities used $1,385,930 in cash for the six months ended June 30 2000, compared with a use of $4,718,729 for the six months ended June 30, 1999. Cash flows from operating activities consists primarily of a net loss of $3,861,080 for the six months ended June 30, 2000, compared with a net loss of $53,591,454 for the six months ended June 30, 1999. Net cash flow from operating activities also reflected a $736,586 decrease in long-term liabilities for discontinued operations and a $873,525 increase in current liabilities from discontinued operations, whereas there were no discontinued operations during the six months ended June 30, 1999. Cash Flows from Investing Activities The Company's capital expenditures of $194,404 for the six months ended June 30, 2000 decreased from the six months ended June 30, 1999 of $1,213,408. This decrease is attributable primarily to the Company's development of the satellite-based Internet access, interactive multimedia structures for its PICK Sat subsidiary during 1999. Cash Flows from Financing Activities During the six months ended June 30, 2000, the Company had net cash provided by financing activities of approximately $1,744,500, as compared to $6,381,000 for the six months ended June 30, 1999. The proceeds are primarily from the issuance of PICK Sat's equity and funds advanced on third-party debt during the six months ended June 30, 2000 for $1,205,295 and $559,430, respectively. The proceeds were primarily from the issuance of the Series B and Series D preferred stock and funds advanced on third-party debt during the six months ended June 30, 1999. Year 2000 Compliance There have been no material changes since the Company's disclosure in its Annual Report on Form 10-K for December 31, 1999. The Company identified and prepared for all significant internal Y2K issues that could adversely affect its business operations. The cost of resolving such issues did not have a material impact on the Company's financial position, results of operations or liquidity. 20 Part II Other Information Item 1 - Legal Proceedings: During the quarter ended June 30, 2000, there were no material changes in the Company's previously reported legal proceeding in its Annual Report on Form 10-K for December 31, 1999, except as follows: The Company was advised by the American Arbitration Association on August 14, 2000, that the arbitration proceedings brought by L.D. Exchange.com, Inc., a vendor of PICK Net, Inc. had been withdrawn. In September 2000 the Company agreed to settle the lawsuit brought by Telecom Management Resources, Inc., a vendor of PICK Net, against the Company and PICK Net in the Superior Court of New Jersey, Law Division, Hudson County, however, no agreement has been executed. 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, 1999. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27.1 Selected Financial Data. (b) Reports on Form 8-K. None. 21 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. PICK COMMUNICATIONS CORP. Dated: October 13, 2000 By: /s/ Helge Bornmann ------------------- Helge Bornmann, Chairman of the Board and Chief Executive Officer (Principal Executive Officer and Principal Financial Officer) 22

Filing Compare · PICK COMMUNICATIONS CORP