FORM 10-Q Amendment 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the period ended September 30, 1996
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 identification no.)
Incorporation or Organization)
155 Route 46, West, Third Floor
Wayne Interchange Plaza II
Wayne, NJ 07470
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (201) 812-7425
Indicate by check mark whether the registrant (1) has filed reports to be filed
by Section 13 or 15(d) of the securities Exchange Act of 1934 during the
preceding 12 months (or for shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes x No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 14, 1996
Common Stock, $.002 Par Value 43,242,516
(See Index to Sections of this Document on Page 2)
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PICK Communications Corp.
Table of Contents
Page No.
PART I Financial Information
Item 1: Financial Statements 3
Index to Financial Statements F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to the Consolidated Financial Statements F-6
Item 2: Management's Discussion and Analysis 13
PART II Other Information:
Item 1 Legal Proceedings 17
Item 2 Changes in Securities 17
Item 3 Defaults Upon Senior Securities 17
Item 4 Submission of Matters to a Vote of Security Holders 17
Item 5 Other Information 17
Item 6 Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
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PICK Communications Corp.
PART I Financial Information
Item 1 - Financial Statements:
Financial Information
Financial statements for the three and nine months ended September 30, 1996 and
September 30, 1995 are derived from the consolidation of the PICK Communications
Corp, (the "Company") Public Info/CommKiosk, Inc., ("PICK"), P.C.T. Prepaid
Telephone, Inc. ("PCT") and PICKNET, Inc. (PNI), in accordance with generally
accepted accounting principles. (See Notes to the Financial Statements for
accounting policies.)
On April 16, 1996, the Company established PICKNET, Inc., a wholly owned
subsidiary to serve as the operating company for the resale of international
long distance service. Service began for a third party customer in May, 1996.
The Consolidated Financial Statements of the Company are included in the
following pages labeled F-1 through F-9.
3
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PICK Communications Corp.
INDEX TO FINANCIAL STATEMENTS
Page
Consolidated Balance Sheets F-2
Consolidated Statements of Operation F-3
Consolidated Statement of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
F-1
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PICK Communications Corp.
Consolidated Balance Sheets
December 31, 1995 and September 30, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS ............................................................................. 1995 1996
CURRENT ASSETS .............................................................................. (Unaudited)
Cash .................................................................................... $ 110,715 144,110
Accounts receivable, net (note 1g) ...................................................... 824,463 1,211,655
Prepaid telephone card inventory (note 1d) .............................................. 167,091 87,288
Prepaid advertising ..................................................................... 0 2,458,156
Prepaid expenses and other current assets ............................................... 503,495 237,866
Total Current Assets ................................................................. 1,605,764 4,139,075
PROPERTY AND EQUIPMENT
Furniture and equipment, net (note 1e) .................................................. 114,135 148,093
Total Property and Equipment ............................................................ 114,135 148,093
OTHER ASSETS
Pre-paid cellular patent and rights, net ................................................ 712,500 605,625
Investment in marketable equity securities, net (note 6) ................................ 16,625 5,866,875
Total Other Assets ................................................................... 729,125 6,472,500
Total Assets ................................................................................ $ 2,449,024 10,759,668
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ........................................................................ $ 191,891 1,426,523
Direct cost telephone time accrual ...................................................... 1,084,201 755,795
Pre-paid telephone time liability ....................................................... 378,000 0
Accrued expenses and other current payables (note 1h) ................................... 145,448 656,512
Customer deposits ....................................................................... 0 410,000
Reserve to contingent liability ........................................................ 0 904,000
Deferred revenue ........................................................................ 805,383 1,448,458
Current income taxes payable (note 1j) .................................................. 0 0
Short-term portion of long-term debt .................................................... 75,000 0
Total Current Liabilities .......................................................... 2,679,923 5,601,288
LONG-TERM LIABILITIES
Deferred income tax liability (note 1j) ................................................. 0 0
Due to The Next Edge, Inc. (note 4) ..................................................... 400,000 0
Total Long-Term Liabilities .......................................................... 400,000 0
Total Liabilities .................................................................. 3,079,923 5,601,288
Minority interest in consolidated subsidiary ............................................ 215,508 1,705,681
STOCKHOLDERS' EQUITY
Common stock, $0.002 par; Authorized 50,000,000 shares; issued and
outstanding 40,542,516 at December 31, 1995 and 43,242,516 issued
and 42,762,516 outstanding at September 30, 1996 (note 2) ............................ 81,085 86,485
Additional paid in capital in excess of par (note 2) .................................... 2,018,780 6,288,380
Stock subscription receivable (note 2) .................................................. (800,000) (600,000)
Treasury stock (note 2) ................................................................. 0 (602,089)
Marketable equity securities valuation reserve (note 6) ................................. 0 (2,850,750)
Retained earnings (deficit) ............................................................. (2,146,272) 1,130,673
Total Stockholders' Equity .................................................................. (846,407) 3,452,699
Total Liabilities and Stockholders' Equity .................................................. $ 2,449,024 10,759,668
</TABLE>
The accompanying notes are an integral part of the financial statements
F-2
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PICK Communications Corp.
Consolidated Statements of Operations
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
3 months ended Sept. 30, 9 months ended Sept.30,
1995 1996 1995 1996
Revenue
Sales - debit cards to related parties (note 5) .......................$ 63,806 256,810 234,039 963,639
Sales - debit cards to others ......................................... 366,244 58,821 882,425 526,985
Sales - long distance services ........................................ 4,468 3,125,424 15,552 3,680,648
Total sales ....................................................... 434,518 3,441,055 1,132,016 5,171,272
Cost of sales - related parties (note 5) .............................. 67,063 30,150 521,523 135,357
Provision for contingent costs ........................................ 0 904,000 0 904,000
Other cost of sales ................................................... 189,474 3,299,375 426,709 5,217,863
Total cost of sales ................................................ 256,537 4,233,525 948,232 6,257,220
Gross profit(loss) ................................................. 177,981 (792,470) 183,784 (1,085,948)
Sales - prepaid cellular licenses ..................................... 0 0 0 3,650,000
Operating Expenses
Sales and marketing - related party (note 5) .......................... 24,600 37,309 28,000 79,645
Sales and marketing - other ........................................... 36,454 386,105 104,633 531,643
Total sales and marketing .......................................... 61,054 423,414 132,633 611,288
General and administrative ............................................. 256,393 320,616 506,965 1,218,145
Depreciation .......................................................... 6,072 11,090 18,216 27,672
Amortization ........................................................... 0 35,625 0 106,875
Bad debt ............................................................... 2,036 303,243 7,097 389,921
Total operating expenses ............................................ 325,555 1,093,988 664,911 2,353,901
Income(loss) from operations ........................................... (147,574) (1,886,458) (481,127) 210,151
Interest expense ....................................................... 13,286 (127) 31,039 (782)
Income(loss) before taxes, minority interest in
subsidiary loss and gain on sale of marketable
equity securities .................................................... (160,860) (1,886,331) (512,166) 210,933
Gain on in-substance defeasance ........................................ 0 53,080 0 53,080
Gain(loss) - sale of mkt equity securities ............................. 0 0 0 4,784,000
Income(loss) before taxes and minority interest
in subsidiary loss .................................................. (160,860) (1,833,251) (512,166) 5,048,013
Minority interest in subsidiary loss ................................... 0 17,787 0 36,932
Provision for def income tax(benefit)(note 1j) ......................... 0 0 0 1,808,000
Provision for curr income tax(benefit)(note 1j) ........................ 0 0 0 0
Net income(loss) ......................................................$ (160,860) (1,815,464) (512,166) 3,276,945
Primary net income(loss) per share ................................... $ -- (0.04) -- 0.08
Weighted average number of shares outstanding ......................... -- 42,775,559 -- 42,829,377
Fully diluted net income(loss) per share ..............................$ -- (0.04) -- 0.07
Weighted average number of shares outstanding ......................... -- 46,275,559 -- 46,329,377
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
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PICK Communications Corp.
Consolidated Statement of Stockholders' Equity
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Additional Stock Mkt Sec Retained Total
Common Paid in Subscrip Valuation Treasury Earnings/ Stockholders'
Stock Capital Receivable Reserve Stock (Deficit) Equity
BALANCE, January
1, 1996 $ 81,085 2,018,780 (800,000) 0 0 (2,146,272) (846,407)
Capital transactions:
A) 500 249,500 (125,000) 0 0 0 125,000
B) 2,300 2,697,700 0 0 0 0 2,700,000
C) 2,500 1,272,500 0 0 0 0 1,275,000
D) 0 0 0 0 (29,500) 0 (29,500)
E) 0 0 325,000 0 0 0 325,000
F) 0 0 0 0 (572,589) 0 (572,589)
G) 100 49,900 0 0 0 0 50,000
Marketable equity
securities valuation
reserve - net 0 0 0 (2,850,750) 0 0 (2,850,750)
Net income(loss) 0 0 0 0 0 3,276,945 3,276,945
BALANCE, September
30, 1996 $ 86,485 6,288,380 (600,000) (2,850,750) (602,089) 1,130,673 3,452,699
</TABLE>
A) January 1996; 250,000 shares of common stock; $125,000 in cash and $125,000
in stock subscription receivable. (note 2)
B) January 1996; 1,150,000 shares of common stock; $3 million in prepaid
advertising valued on the Company's books at $2,700,000. (note 2)
C) January 1996; 1,250,000 shares of common stock; 500,000 shares of Ultimistics
Inc. restricted common stock which had a bid price of $8.50 per share,
discounted 70%. (note 2)
D) March 1996; 230,000 shares of common stock; agreement to acquire as treasury
stock. (note 2)
E) Three quarters 1996; 0 shares of common stock; stock subscriptions received
in cash.
F) July 1996, exchanged prepaid advertising, prepaid telephone cards and $15,000
in cash for 250,000 shares of the Company's stock as treasury stock.
G) July 1996, converted $50,000 of legal services expenses into equity at the
rate of $1.00 per share
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
PICK Communications Corp.
Consolidated Statements of Cash Flows
9 months ended September 30,
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: ............................................................ 1995 1996
Net income(loss) ................................................................................. $ (512,166) 3,276,945
Adjustments to reconcile net loss to net cash used for operating activities:
Non-cash revenues - prepaid cellular license revenue ........................................... 0 (3,650,000)
Non-cash gain on sale of marketable equity securities .......................................... 0 (4,784,000)
Non-cash gain on in-substance defeasance ....................................................... 0 (53,080)
Non-cash expenses - prepaid advertising ........................................................ 0 256,845
Depreciation ................................................................................... 18,216 27,672
Amortization ................................................................................... 0 106,875
Bad debt expense ............................................................................... 22,125 389,921
Stock issued for services ...................................................................... 2,420 50,000
Provision for deferred income taxes ............................................................ 0 1,808,000
Reserve for contingent liabilities ............................................................. 0 904,000
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ..................................................... 5,835 (767,141)
(Increase) decrease in prepaid telephone card inventory ........................................ (41,328) 79,803
(Increase) decrease in prepaid and other assets ................................................ (36,234) (154,371)
Increase (decrease) in accounts payable ........................................................ 20,051 1,234,633
Increase (decrease) in direct cost telephone time accrual ...................................... (178,331) (328,408)
Increase (decrease) in deferred revenue ........................................................ 228,298 643,076
Increase (decrease) in prepaid telephone time liability ........................................ 0 (378,000)
Increase (decrease) in customer deposits ....................................................... 0 410,000
Increase (decrease) in accrued expenses (note 1h) .............................................. 37,677 511,065
Net cash (used) provided by operating activities ................................................. (433,437) (416,165)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in debt securities (note 4) .......................................................... 0 (371,920)
Purchase of fixed assets ......................................................................... (12,959) (61,632)
Net cash (used) provided by investing activities ................................................. (12,959) (433,552)
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued for cash ..................................................................... 493,114 125,000
Common stock issued for cash by subsidiary ....................................................... 0 527,612
Acquisition of treasury stock .................................................................... (44,500)
Payments received on stock subscriptions receivable .............................................. 0 325,000
Funds advanced by third-party .................................................................... 250,000 0
Payments on third-party debt ..................................................................... 0 (50,000)
Payments on stockholder advances ................................................................. (3,035) (50,000)
Funds advanced by stockholder .................................................................... 0 50,000
Net cash provided (used) by financing activities ................................................. 740,079 883,112
Net increase (decrease) in cash .................................................................. 293,683 33,395
CASH, beginning of period ........................................................................ 17,659 110,715
CASH, end of period .............................................................................. $ 311,342 144,110
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Stock issued for investment in marketable equity securities ................................. $ 10,000 2,075,000
Stock issued to acquire prepaid advertising ................................................. $ 0 2,700,000
Stock issued for subscription receivable .................................................... $ 82,500 125,000
Stock issued to retire note payable ......................................................... $ 250,000 0
Insubstance defeasance ...................................................................... $ 0 425,000
Prepaid advertising and telephone cards exchanged for treasury stock ........................ $ 0 557,589
</TABLE>
The accompanying notes are an integral part of the financial statements
F-5
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(UNAUDITED)
(1) Summary of Significant Accounting Principles
Organization PICK Communications Corp., (the Company) was incorporated in the
State of Utah on April 30, 1984, as S.T.V., Inc., changing its name to Adolphus
Companies, Inc., in February 1986, and then to Prime International Products,
Inc., in May 1988 and to PICK Communications Corp. in December 1995. In December
1987, the Company acquired American Italian Food Processing Co., Inc. in a stock
for stock exchange. All operations ceased in 1990. On September 12, 1995, the
Company acquired Public Info/Comm Kiosk, Inc. (PICK) in a stock for stock
exchange and conducts business from its headquarters in Wayne, NJ.
Public Info/Comm Kiosk, Inc. (PICK) was incorporated in the state of New Jersey
on August 6, 1992. It was inactive from incorporation until January 1993, when
the founder began the operations of the Company. PICK operated in 1993, as an
agent for the sale of long distance services. In August 1994, PICK began selling
its own brand of prepaid calling card. PICK's target market is primarily
Hispanics located in New York, New Jersey, South Florida and Texas. Pick
expanded into California in 1995.
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the dates of the statements of
financial condition and revenues and expenses for the years then ended. The
financial statements for the nine months ended September 30, 1995 and 1996
include all adjustments which in the opinion of management are necessary for
fair presentation. The following summarize the more significant accounting and
reporting policies and practices of the Company.
a) Basis of presentation The financial statements reflect the financial position
and results of operations of PICK, Inc., prior to the acquisition by the
Company, and on a consolidated basis subsequent to the acquisition. The
acquisition has been accounted for as a recapitalization by PICK, Inc.
b) Basis of consolidation The consolidated financial statements include the
accounts of the Company and its subsidiaries. Minority interest represents
minority shareholders' proportionate share of the equity and earnings(loss) of
PCT Prepaid Telephone, Inc. Intercompany transactions have been eliminated.
c) Revenue recognition For debit card sales, the Company recognizes revenue at
the time it provides the telephone services associated with its cards. It defers
revenues until then, based on customer patterns of usage, and recognizes the
cost of the carrier telephone traffic based on the minutes used, which are also
recognized in revenues. All other direct costs, (non-traffic costs representing
design royalty, printing, fulfillment, shipping, sales commissions, etc.), are
recognized as up-front costs when the initial sales are made to the
distributors. The Company anticipates that substantially all the telephone time
associated with the debit cards will be used by its customers. The Company does
not have a written returns policy, but considers sales returns on a case by case
basis.
d) Prepaid telephone card inventory Card inventory is composed of costs to
provide unactivated cards to the fulfillment company, which include printing and
freight, and is valued at the lower of cost or market. Inventory is relieved,
and charged to cost of sales, when activated cards are shipped from the
fulfillment company to the wholesale purchaser.
e) Fixed assets Fixed assets, principally telephone equipment, are stated at
cost. Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally 3, 5 and 7 years. Depreciation expense was
$18,216 and $27,672 for the nine months ended September 30, 1995 and 1996.
f) Concentration of credit risk Two customers accounted for approximately 10.0%
and 5.6% of net sales and approximately 28.8% and 22.6%of accounts receivable at
September 30, 1995. Three customers accounted
F-6
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PICK Communications Corp.
Notes to Consolidated Financial Statements
(1) Summary of significant accounting principles, continued
f) Concentration of credit risk, continued for approximately 33.6%, 25.6% and
13.5% of net sales and approximately 12.9%, 8.1% and 47.9% of accounts
receivable at Septrmber 30, 1996. The Company performs periodic credit
evaluations of its customers, but generally does not require collateral.
g) Accounts receivable The Company provides credit for open accounts in the
normal course of business. As of the dates of these statements, the Company has
established a reserve for doubtful accounts at a rate of approximately 25.9% of
outstanding accounts receivable or 8.2% of sales. The reserve amounts at
September 30, 1995 and 1996 were $22,125 and $422,599. Bad debt expense was
$7,097 and $389,921 for the nine months ended September 30, 1995 and 1996
respectively.
h) Accrued compensation Accrued compensation of $114,027 and $74,027 at
September 30, 1995 and 1996 is composed of compensation accrued, but not yet
paid to the President of the Company.
i) Valuation of intangibles Intangible assets are valued at cost and amortized
over their estimated remaining useful lives. The Company is amortizing the
prepaid cellular asset over the initial 60 month term of the contract.
Amortization expense was $0 and $106,875 for the nine months ended September 30,
1995 and 1996.
j) Income taxes Deferred income taxes are provided on elements of income that
are recognized for income tax purposes in periods different than such items are
recognized for financial accounting purposes. The Company had a deferred tax
liability of $0 and $0 and a current tax liability of $0 and $0 at September 30,
1995 and 1996. The deferred tax liability is composed of the tax effects
resulting from the exchange of the Foxwedge shares and Firenze shares it held
for shares of Ultimistics Inc. At the dates of these exchanges the Company
recorded gains for book purposes totaling $4,784,000 with deferred income tax
effects of $1,674,400 for federal and $430,600 for state. At September 30, 1996,
the current market value of all the shares of Ultimistics received during the
period, net of discount, would reflect a loss of $4,106,250, with deferred tax
asset effects of $1,674,400 for federal and $430,600 for state. At September 30,
1996, the Company has established a valuation allowance of its deferred tax
liability for this combined difference of $1,808,000, giving a net deferred tax
liability at September 30, 1996, of $0 federal and $0 state, for a total of $0.
The valuation allowance reduced the marketable equity securities valuation
reserve, as reflected in the Stockholders' Equity section of the consolidated
balance sheet at September 30, 1996. The current income tax liability is
adjusted by the benefit of net operating loss carryforwards totaling $2,110,496
at December 31, 1995. The tax benefit was comprised of approximately $717,600 in
federal tax benefit and $126,400 in state tax benefit at December 31, 1995. The
net current income tax liability is composed of $0 federal and $0 for state. Any
income tax benefits related to the differences between methods of depreciation
is de minimis.
k) Net income(loss) per share Primary income(loss) per share is computed by
dividing the net income(loss) by the weighted average number of common shares
outstanding during the period. Fully-diluted income(loss) per share is computed
by dividing the net income(loss) by the weighted average number of common shares
and common share equivalents, assuming the equivalents had been shares
outstanding, during the period.
(2) Stockholders' equity The Company has authorized 50,000,000 shares of $0.002
par value common stock.
On November 21, 1995, the Company issued 1,000,000 shares to an unrelated third
party in exchange for $200,000 cash and a note receivable for $800,000 to be
paid during 1996. Of this amount $600,000 has not yet been paid. Due to the
decline in the market price of the shares the Company is considering a
renegotiation of this transaction to issue more shares for the same subscription
amount on the unpaid balance as of September 30, 1996.
In June 1996, the Company settled a dispute with a former officer. This former
officer had the right to
F-7
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PICK Communications Corp.
Notes to Consolidated Financial Statements
(2) Stockholders' equity, continued exchange the individuals' 20,000 shares of
PICK, Inc. into 330,000 shares of the Company and also owned a warrant for 5,000
shares of PICK, Inc. with an exercise price of $5 per share, which the board of
directors has amended to a warrant for 82,500 shares of the Company with an
exercise price of $0.30 per share. These shares were part of the reorganization
discussed in note 2 above. The Company repurchased 230,000 of the 330,000 shares
and the warrant for $29,500 in cash. This settlement finalized the September
1995, recapitalization of the Company.
(3) Commitments The Company entered into a 63 month operating lease for the
Company's facilities in June 1996. This lease provides for three months free
rent and a renewal option for five additional years. Future minimum lease
payments under this operating lease in effect at September 30, 1996 are $8,620
per month, or $103,441 per year. Rent expense for the nine months ended
September 30, 1995 and 1996 was $8,884 and $16,015, respectively.
(4) In-substance defeasance In July 1996, the Company acquired US Treasury Notes
with a maturity amount of $425,000 with scheduled maturity dates which coincide
with the payment due dates on the remaining balance of the note payable to The
Next Edge, Inc. The Company placed these UST Notes in an irrevocable trust which
has as its trustee a New York City law firm. The trust is to collect the
maturity amounts of the UST Notes and remit the proper amount to The Next Edge
on the scheduled payment dates. The UST Notes were purchased for $371,920 in
cash. As the Company retains no legal interest in the trust this transaction has
been accounted for as an in-substance defeasance, whereby the Company recognized
a gain of $53,080 and removed the assets and corresponding liability from its
books and records.
(5) Related party transactions The Company purchased advertising services of
$28,000 and $79,645 in the nine month periods ended September 30, 1995 and 1996,
from an entity controlled by an individual who is a stockholder of the Company
and a member of the Board of Directors. This individual also received 150,000
shares of the Company's common stock for his and his staff's efforts to develop
and oversee the implementation of the advertising/marketing programs to be
instituted by the Company to use the $5,000,000 in prepaid advertising. The
Company purchased substantially all of its telephone network services in 1995,
from a vendor which also owns approximately 1% of the Company's common stock.
The Company had sales of $234,039 in 1995, to 2 stockholders and $963,639 in
1996, to 3 stockholders.
(6) Investment in marketable equity securities In June 1996, the Company entered
into a licensing agreement with the Internet Channel, Inc. whereby the Company
sold the commercialization rights for its prepaid cellular microchip for use in
acessing the Internet, (or World Wide Web). The Company received 500,000 shares
of Internet Channel, Inc. Rule 144 restricted common stock in exchange for this
license. The Company has valued this stock at $0.10 per share, for a total of
$50,000.
Although SFAS 115 does not apply to the investments held by the Company, as they
are all restricted by Rule 144 of the Securities Act of 1933, as amended, the
Company has decided to incorporate the disclosure requirements of SFAS 115. At
September 30, 1996, the Company holds 4,700,000 shares of Ultimistics with a
current market value of approximately $18,800,000 which when discounted 70%
equals $5,800,250. The Company has established a valuation reserve of $4,658,750
for this investment. The valuation reserve as reflected in the Stockholders'
Equity section of the consolidated balance sheet is net of the $1,808,000
deferred income tax effects, giving a net of $2,850,750. The Company believes
that the decline in market value of the Ultimistics stock is temporary in
nature. At September 30, 1996, there is no market for the shares of Internet
Channel, Inc.
(7) Working capital deficiency 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. As shown in the previously filed
consolidated
F-8
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PICK Communications Corp.
Notes to Consolidated Financial Statements
(7) Working capital deficiency, continued financial statements, the Company
incurred net losses for the years ended December 31, 1993, 1994 and 1995. For
the nine months ended September 30, 1996, the Company recorded $3,276,945 net
income. This profit was generated principally as a result of non-cash revenue
and gains. The Company has a working deficiency of $1,462,213 at September 30,
1996.
During the nine months ended Setember 30, 1996, the Company raised $883,112 net
in cash from financing activities. This amount plus its cash on hand at the
beginning of the period exceeded its cash flows used by operations and investing
activities by $144,110, which resulted in and reflects an increase of cash. At
September 30, 1996, the Company has one note receivable, accounted for as stock
subscriptions receivable, in the amount of $600,000, to be paid over the
remainder of 1996. The subscriber has declined to pay the subscription price due
to the decline in the market value of the shares (to $.40 from $2.00). The
Company is currently negotiating with this subscriber such that the Company may
issue additional stock to entice the subscriber to fulfill the obligation. The
Company's plans also include controlling its cash expenses, such that this
inflow of capital may continue to cover a cash shortfall over the next twelve
months.
Substantially all of the assets received relating to the profits generated
include common stock of Ultimistics Inc. The Company believes that it is in the
its best interest to hold this asset for the forseeable future, in the hope for
capital appreciation over the value recorded at September 30, 1996, and
increased liquidity over time.
In January 1996, the Company entered into agreements to exchange the prepaid
telephone time it owned and common stock of the Company for a total of
$5,000,000 of prepaid advertising. The Company entered into these transactions
because advertising expenditures are at the beginning of the Company's revenue
generating process. The Company believes it can generate a significant increase
in cash flow revenue, whether recognized or deferred, by increasing its
advertising presence in select target markets. The Company believes that to
increase its advertising without a concurrent cash expenditure, will be
beneficial to its cash flows from operations. The Company has utilized $256,845
of this advertising during the three months ended September 30, 1996.
The Company continues to negotiate for lower telephone time rates in conjunction
with higher usage volumes. The higher usage volumes are expected to occur when
the advertising/marketing programs now under development are instituted.
The Company is also seeking to raise additional funds, either through debt or
equity offerings, or a combination of both. Any funds raised would be employed
to further increase its prepaid telephone card business, and to develop its
prepaid cellular telephone business. There are no assurances that the Company
will be able to sucessfully raise additional funds in this manner.
The Company believes that these plans will enable it to continue as a going
concern. However, there can be no assurances that the Company will be able to
successfully implement such plans. If such plans are not sucessfully
implemented, the Company could be required to seek additional financing from
sources not currently anticipated.
F-9
<PAGE>
Item 2 - Management's Discussion and Analysis of Operations:
Results of Operations:
The Company generates revenues from the sale of telecommunications
services. This includes prepaid telephone debit cards to distributors for resale
outlets, international long distance to carriers and licenses for prepaid
cellular telephone to both domestic and international markets.
The Company's primary costs of sales are the cost of telephone services,
for both Debit Cards and for the resale of international long distance services.
In addition, the cost of sales includes the production of the Debit Cards, their
printing, fulfillment and distribution, and fixed costs associated with
international long distance switching and communications.
For Debit Card sales, the Company recognizes revenues at the time it
provides the telephone services associated with its cards. It defers revenues
until then, based on customer patterns of usage, and recognizes the cost of the
carrier telephone traffic based on the minutes used, which are also recognized
in revenues. Other direct costs (non-traffic costs representing design
royalties, printing, fulfillment, shipping, sales commissions, etc.) are
recognized as up-front costs as the initial sales are made to distributors. The
Company anticipates that substantially all of the telephone time associated with
the Debit Cards will be used by its customers. For the resale of international
long distance, the Company recognizes revenues as the traffic is used by its
customers. For the sale of prepaid cellular telephone licenses, the Company
recognizes revenues as the licenses are sold, based on the value received for
them. In this connection, the Company received substantially all of its
consideration for those licenses in the form of restricted Ultimistics, Inc.
("Ultimistics") common stock. The revenues were recognized based on discounted
values of the shares as of the dates of the transactions.
Nine Months Ended September 30, 1996 and September 30, 1995:
The Company sold territory licenses to market and distribute prepaid
cellular telephones for the majority of the world's area to Yakimoto Investment
Ltd. ("Yakimoto") for $3,600,000 and a $50,000 prepaid cellular license fee
pertaining to the use of that technology with The Internet Channel. This
significant profit will not recur; instead, the Company expects to develop the
cellular system and generate revenues from the sale of the prepaid cellular
telephones and the air time associated with their use over the next few years.
In addition, the Company generated $5,171,212 in revenues from the sale of
telecommunications services ($1,490,624 in Debit Card revenues and $3,680,648,
in long distance revenues) for the nine months ended September 30, 1996,
compared to total Debit Card revenues of $1,116,464 of Debit Cards and $15,552
of long distance sales for the nine months ended September 30, 1995. This
represents a total increase of $4,039,256 or 357%. This significant increase
reflects the introduction of the long distance business. Although revenues from
operations have increased, expenses have exceeded those revenues for the
non-prepaid cellular telecommunications segments of the Company's business,
resulting in a negative gross margin of $1,085,948 in the nine months ended
September 30, 1996, compared to a gross profit of $183,784 for the first nine
months ended September 30, 1995, an unfavorable variance of $1,269,732. The
Company continues to build the infrastructure necessary to support growth in
both Debit Cards and
13
<PAGE>
the resale of international long distance traffic segments of its business. The
loss results from the Company not yet achieving sufficient revenue volumes and
pricing increases in these businesses to off-set fixed costs necessary to build
capacity and produce operating profits. The long distance costs incurred, in the
third quarter reflect significant fixed costs related to establishing
communications and an additional switching source, and are included in the cost
of sales. In addition, the Company has provided for the cost of traffic which is
in a matter of dispute with its major carrier-AT&T. The Company believes it will
generally prevail in this dispute, but has provided an additional cost of
$904,000. If the Company does prevail in its dispute, up to $904,000 could be
realized as a reduction to cost, which will make the operating results more
favorable by an equal amount.
Sales and marketing expenses were $611,288 for the nine months ended
September 30, 1996, compared to $132,633 for the nine months ended September 30,
1995, reflecting an increase of $478,655 or 361%. This increase is primarily
attributable to the implementation of an advertising campaign in the third
quarter which used a significant amount of the Company's prepaid advertising
asset, and an increase in sales commissions as a result of increased sales.
General and administrative expenses were $1,218,145 for the nine months
ended September 30, 1996, compared to $506,965 for the nine months ended
September 30, 1995, reflecting an increase of $711,180 or 140%. This increase is
primarily attributable to salaries for additional personnel hired to support the
Company's growth and an increase in general office expenses attributable to the
increase in personnel.
Amortization of $106,875, was attributable to the pre-paid cellular
telephone technology license which is being expensed over five years.
Depreciation is based upon lives of 3, 5, 7 or 10 years, depending on the asset
classification.
The provision for bad debts was $389,921 for the nine months ended
September 30, 1996, compared to $7,097 for the nine months ended September 30,
1995. This increase of $382,824 is attributable to higher debit card sales
volumes and slow payments from customers which in turn, have experienced slow
payment from their small retail outlets. The collection problems are
attributable to the service capacity and operating limitations experienced by
the Company's switch, which adversely impacted its customers. The Company
believes it has provided for the substantial portion of its potential collection
problems with this increased provision for bad debts.
The provision for current income tax expense of $0 takes into account
amounts expected to be owed for estimated state and federal liabilities, based
on current earnings, off-set by the aggregate tax loss carry-forwards and the
current operating loss. The provision for deferred income taxes of $1,808,000
takes into account the non-taxable profit on the exchange of marketable
securities. The deferred tax liability will not have to be paid until the time
the securities are sold.
For the reasons listed above, the Company realized a net profit of
$3,276,945 (or $.08 per share) for the nine months ended September 30, 1996,
compared to a net loss of $512,166 for the nine months ended September 30, 1995,
an improvement of $3,789,111.
14
<PAGE>
Three Months Ended September 30, 1996 and September 30, 1995:
For the three months ended September 30, 1996, the Company generated debit
card revenues of $315,631 compared to $430,050 for the three months ended
September 30, 1995. This represents a decrease of $114,419 or 27%. This decrease
reflects switch capacity limitations which have resulted in product returns and
reductions in repeat sales of debit cards. The Company generated $3,125,424 in
revenues from the sale of international long distance services, substantially
all of which resulted from the start-up of PICKNET, Inc. for the three months
ended September 30, 1996, compared to $4,468 for the three months ended
September 30, 1995. This represents an increase of $3,120,956. Although total
revenues have increased, expenses have exceeded those revenues, resulting in a
negative gross margin of $792,470 in 1996, compared to a gross margin of
$177,981 in 1995, an unfavorable variance of $970,451 (or 545%). The Company
continues to build the infrastructure necessary to support growth in both Debit
Cards and the resale of international long distance traffic segments of its
business. The loss results from the Company not yet achieving sufficient revenue
volumes in these businesses to off-set fixed costs necessary to build capacity
and produce operating profits. The Company has provided for the cost of traffic
which is in a matter of dispute with its major carrier- AT&T. The Company
believes it will generally prevail in this dispute, but has provided an
additional cost of $904,000 if the Company does prevail in its dispute, up to
$904,000 could be realized as a reduction to cost, which will make the operating
results more favorable by an equal amount.
Selling and marketing expenses were $423,414 for the three months ended
September 30, 1996, compared to $61,054 for the three months ended September 30,
1995, reflecting an increase of $362,360 or 594%. This increase is primarily
attributable to the implementation of an advertising campaign in the third
quarter which used a significant amount of the Company's prepaid advertising
asset.
General and administrative expenses were $320,616 for the three months
ended September 30, 1996, compared to $256,393 for the three months ended
September 30, 1995, reflecting an increase of $64,223 or 25%. This increase is
primarily attributable to salaries for additional personnel hired to support the
Company's growth and an increase in general office expenses attributable to the
increase in personnel.
Amortization of $35,625 was attributable to the pre-paid cellular telephone
technology license which is being expensed over five years; no amortization
occurred in 1995. Depreciation is based upon lives of 3, 5, 7 or 10 years,
depending on the asset classification.
The provision for bad debts was $303,243 for the three months ended
September 30, 1996 compared to $2,036 for the three months ended September 30,
1995. This increase of $301,207 is attributable to higher debit card sales
volumes and slow payment of a customer which in turn has experienced slow
payment from its small retail outlets. The collection problems are attributable
to the service capacity and operating limitations experienced by the Company's
switch, which adversely impacted its customers. The Company believes it has
provided for the substantial portion of its potential collection problems with
this increased provision for bad debts.
15
<PAGE>
No provision for current or deferred income taxes took place. The deferred
tax liability will not have to be paid until the time the securities which give
rise to the liabilitiy are sold.
For the reasons listed above, the Company realized a net loss of $1,815,464
(or $0.04 per share) for the three months ended September 30, 1996 compared to a
net loss of $160,860 for the three months ended September 30, 1995, an increase
of $1,654,604.
Liquidity and Capital Resources:
The Company had working capital deficit of $1,462,213 as of September 30,
1996 compared to a deficit of $1,074,159 as of December 31, 1995. The working
capital ratio was .74:1 at September 30, 1996 compared to .60:1 at December 31,
1995.
Cash used in operating activities during the nine months ended September
30, 1996 of $416,165 primarily reflects net profit generated from operations of
$3,276,945, increases in deferred revenues of $643,076 and, depreciation and
amortization of $134,547. These sources were off-set by uses of $3,650,000 for
non-cash revenues relating to the sale of prepaid cellar licenses, $4,784,000
for the non-cash gain on the sale of marketable securities, and increased
accounts receivable of $767,141. The remaining increase of $783,775 reflects
general increases in working capital accounts which support higher levels of
activity. Net increases of current liabilities (accruals and deferred revenues),
which exceed increases in receivables and prepaid expenses, all of which are
necessary to support the increase in operating activities. Increases in accounts
receivable, card inventory, accounts payable and accrued expenses are the result
of increased volume. Accounts receivable are primarily generated from sales to
distributors which are obliged to pay for the cards within thirty days of
receipt. However, as stated above, the lack of consistency of the switching
equipment has caused the Company collection problems. The increase in deferred
revenues results from cards sold to distributors for which revenues have not yet
been recognized. The Company expects to recognize this revenue in future
periods, as customers use the Debit Cards, or as the cards expire.
Cash used for investing activities for the three months ended September 30,
1996 of $433,552 reflects the discounted pre-payment of debt of $371,920 and
capital expenditures of $61,632. The Company has no material commitments for
capital expenditures as of September 30, 1996.
Cash provided from financing activities for the nine months ended Septmber
30, 1996 amounted to $883,112, primarily reflecting the receipt of cash against
stock sales of $125,000 by the Company and $527,612 by a subsidiary, and stock
subscribed of $325,000, compared to a $740,079 for the nine months ended
September 30, 1995, which primarily reflects Common stock issued for $493,114
and funds advanced by a third party of $250,000, all relating to the
recapitalization on September 12, 1995.
As of September 30, 1996, the Company had cash and cash equivalents
amounting to $144,110, compared to $110,715 as of December 31, 1995.
The Company anticipates, based on its current plans and assumptions
relating to its operations,
16
<PAGE>
that its cash balances, together with projected cash flows from operations and
anticipated financing, will be sufficient to satisfy the Company's contemplated
cash requirements for the next 12 months. In the event that the Company's plans
change, its assumptions change or prove to be inaccurate, or cash flows
otherwise prove to be insufficient to fund operations, the Company may be
required to search for additional financing or curtail its proposed growth. The
Company currently has entered into a credit relationship with Banco Popular for
a $500,000 direct line of credit and a $250,000 line for letters of credit. No
other arrangements are in place with respect to any additional financing.
Part II - Other Information
Item 1 - Legal proceedings:
None to report
Item 2 - Changes in securities:
None to report
Item 3 - Defaults upon senior securities:
None to report
Item 4 - Submission of matters to a vote of security holders:
None to report
Item 5 - Other information:
None to report
Item 6 - Exhibits and reports on Form 8-K:
10. Major Contracts:
None to report.
17
<PAGE>
Signatures:
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PICK Communications Corp.
Date: November 14, 1996 By: /s/ Diego Leiva
Diego Leiva
President and Chief Executive Officer
Date: November 14, 1996 By: /s/ Karl R. Petersson
Karl R. Petersson
Vice President and Chief Financial Officer
(Principal Accounting Officer)
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF PICK COMMUNICATIONS CORP. FOR SEPTEMBER 30,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001006282
<NAME> PICK Communications Corp.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 144,110
<SECURITIES> 5,866,875
<RECEIVABLES> 1,601,576
<ALLOWANCES> 389,921
<INVENTORY> 87,288
<CURRENT-ASSETS> 4,139,075
<PP&E> 219,876
<DEPRECIATION> 71,783
<TOTAL-ASSETS> 10,759,668
<CURRENT-LIABILITIES> 5,601,288
<BONDS> 0
0
0
<COMMON> 86,485
<OTHER-SE> 3,366,214
<TOTAL-LIABILITY-AND-EQUITY> 10,759,668
<SALES> 5,171,272
<TOTAL-REVENUES> 13,658,352
<CGS> 6,257,220
<TOTAL-COSTS> 8,610,339
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 782
<INCOME-PRETAX> 5,084,945
<INCOME-TAX> 1,808,000
<INCOME-CONTINUING> 210,151
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<EXTRAORDINARY> 53,080
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