FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the period ended March 31, 1997
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 jurisdictiction 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 May 15, 1997
Common Stock, $.001 Par Value 35,867,016
(See Index to Sections of this Document on Page 2)
<PAGE>
PICK Communications Corp.
Table of Contents
Page No.
PART I Financial Information
Item 1: Financial Statements 3
Consolidated Balance Sheets 4
Consolidated Statements of Operations 5
Consolidated Statements of Stockholders' Equity 6
Consolidated Statements of Cash Flows 7
Notes to the Consolidated Financial Statements 8
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
PART II Other Information:
Item 1 Legal Proceedings 17
Item 2 Changes in Securities 18
Item 3 Defaults Upon Senior Securities 18
Item 4 Submission of Matters to a Vote of Security Holders 18
Item 5 Other Information 19
Item 6 Exhibits and Reports on Form 8-K 19
SIGNATURES 20
2
<PAGE>
PICK Communications Corp.
PART I Financial Information
Item 1 - Financial Statements:
Financial Information
Financial consolidated financial statements for the three months ended March 31,
1997 and March 31, 1996 are derived from the consolidation of the PICK
Communications Corp, (the "Company" or "PCC") Public Info/Comm Kiosk, Inc.,
("PICK"), P.C.T. Prepaid Telephone, Inc. ("PCT") and PICKNET, Inc. (PICKNET).
They are included in the following pages labeled F-1 through F-12.
3
<PAGE>
<TABLE>
<CAPTION>
PICK Communications Corp.
Consolidated Balance Sheets
December 31, 1996 and March 31, 1997
<S> <C> <C>
ASSETS ............................................... 1996 1997
----------- -----------
CURRENT ASSETS ................................................................. (Unaudited)
Cash ....................................................................... $ 87,712 116,781
Accounts receivable, net (note 1g) ......................................... 778,180 1,442,037
Prepaid telephone card inventory (note 1d) ................................. 23,914 13,868
Prepaid advertising ........................................................ 2,458,155 0
Prepaid expenses and other current assets .................................. 82,252 74,377
----------- -----------
Total Current Assets .................................................... 3,430,213 1,647,063
----------- -----------
PROPERTY AND EQUIPMENT
Furniture and equipment, net (note 1e) ..................................... 90,571 87,924
----------- -----------
Total Property and Equipment ............................................ 90,571 87,924
----------- -----------
OTHER ASSETS
Pre-paid cellular patent and rights, net ................................... 583,705 534,425
Purchased goodwill (note 1i) ............................................... 0 2,893,302
Investment in marketable equity securities, net (note 6) ................... 4,812,660 1,992,797
----------- -----------
Total Other Assets ...................................................... 5,396,365 5,420,524
----------- -----------
Total Assets ................................................................... $ 8,917,149 7,155,511
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable (note 5) .................................................. $ 1,072,052 2,196,090
Direct cost telephone time accrual (note 5) ................................ 316,215 623,380
Accrued expenses and other current payables (note 1h) ...................... 702,059 461,348
Customer deposits .......................................................... 300,000 432,017
Reserve for contingent liabilities ......................................... 1,749,563 1,749,563
Advances from stockholders (note 4) ........................................ 25,152 0
Deferred revenue ........................................................... 1,667,388 1,448,407
Line of credit (note 4) .................................................... 750,000 750,000
----------- -----------
Total Current Liabilities ............................................... 6,582,429 7,660,805
----------- -----------
LONG-TERM LIABILITIES
Deferred income tax liability (note 1j) .................................... 0 0
----------- -----------
Total Long-Term Liabilities ............................................. 0 0
----------- -----------
Total Liabilities .............................................................. 6,582,429 7,660,805
----------- -----------
Minority interest in consolidated subsidiary ................................... 1,465,141 114,099
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, $.002 par; Authorized 75,000,000 shares; 43,697,516 issued and
43,217,516 outstanding at December 31, 1996 and $.001 par; 43,097,516
issued and 35,832,016 outstanding at March 31, 1997 (note 2) ............ 87,395 43,098
Additional paid in capital in excess of par (note 2) ....................... 6,399,720 5,844,017
Stock subscription receivable (note 2) ..................................... (600,000) 0
Treasury stock (note 2) .................................................... (602,089) (4,802,534)
Marketable equity securities valuation reserve (note 6) .................... (3,904,965) (2,142,203)
Retained earnings (deficit) ................................................ (510,482) 438,229
----------- -----------
Total Stockholders' Equity ..................................................... 869,579 (619,393)
----------- -----------
Total Liabilities and Stockholders' Equity ..................................... $ 8,917,149 7,155,511
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
PICK Communications Corp.
Consolidated Statements of Operations
3 months ended March 31,
(UNAUDITED)
<S> <C> <C>
1996 1997
------------ ------------
Revenue
Sales - debit cards to related parties (note 5) ................................ $ 49,781 7,506
Sales - debit cards to others .................................................. 461,048 280,207
Sales - long distance services ................................................. 1,837 2,150,519
------------ ------------
Total sales ................................................................ 512,666 2,438,232
Cost of sales - related parties (note 5) ....................................... 68,690 18,405
Other cost of sales ............................................................ 529,972 2,398,504
------------ ------------
Total cost of sales ......................................................... 598,662 2,416,909
------------ ------------
Gross profit(loss) .......................................................... (85,996) 21,323
Sales - prepaid cellular licenses .............................................. 3,600,000 0
Operating Expenses
Sales and marketing - related party (note 5) ................................... 0 0
Sales and marketing - other .................................................... 56,383 1,554
------------ ------------
Total sales and marketing ................................................... 56,383 1,554
General and administrative ..................................................... 502,126 381,527
Depreciation ................................................................... 8,026 6,298
Amortization ................................................................... 35,625 35,575
Bad debt ....................................................................... 5,193 26,292
------------ ------------
Total operating expenses .................................................... 607,353 451,246
------------ ------------
Income(loss) from operations ................................................... 2,906,651 (429,923)
Interest expense ............................................................... 10,330 13,944
------------ ------------
Income(loss) before taxes, minority interest in subsidiary loss and gain on sale
of marketable equity securities ........................................... 2,896,321 (443,867)
Gain(loss) on sale of marketable equity securities (notes 6) ................... 4,784,000 (748,625)
------------ ------------
Income(loss) before taxes and minority interest in subsidiary loss ............. 7,680,321 (1,192,492)
Minority interest in subsidiary loss ........................................... 6,654 333,203
Provision for income taxes(benefit) - deferred (note 1j) ....................... 1,808,000 (1,808,000)
Provision for income taxes(benefit) - current (note 1j) ........................ 346,000 0
------------ ------------
Net income(loss) ............................................................... $ 5,532,975 948,711
============ ============
Primary net income(loss) per share ............................................. $ 0.13 0.02
============ ============
Weighted average number of shares outstanding .................................. 42,755,713 39,884,372
============ ============
Fully diluted net income(loss) per share ....................................... $ 0.12 0.02
============ ============
Weighted average number of shares outstanding .................................. 45,294,165 43,384,372
============ ============
</TABLE>
The accompanying notes are an integral part of the
financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
PICK Communications Corp.
Consolidated Statement of Stockholders' Equity
<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, 1997 A) $ 87,395 6,399,720 (600,000) (3,904,965) (602,089) (510,482) 869,579
Capital transactions:
B) .. (43,697) 43,697 0 0 0 0 0
C) .. (600) (599,400) 600,000 0 0 0 0
D) .. 0 0 0 0 (2,038,155) 0 (2,038,155)
E) .. 0 0 0 0 (313) 0 (313)
F) .. 0 0 0 856,969 (2,149,999) 0 (1,293,030)
G) .. 0 0 0 849,181 0 0 849,181
H) .. 0 0 0 0 (11,978) 0 (11,978)
I) .. 0 0 0 56,612 0 0 56,612
Marketable equity
securities valuation
reserve - net ....... 0 0 0 0 0 0 0
Net income(loss) ...... 0 0 0 0 0 948,711 948,711
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, March
31, 1997
(Unaudited) ........... $ 43,098 5,844,017 0 (2,142,203) (4,802,534) 438,229 (619,393)
=========== =========== =========== =========== =========== =========== ===========
<FN>
A) 43,697,516 shares of common stock issued and 43,217,516 outstanding.
B) January 1997; reduction in par value from $.002 to $.001 per share.
C) February 1997; (600,000) shares of common stock; cancellation of shares subscribed. 43,097,516 shares of common
stock issued and 42,617,516 outstanding.
D) February 1997; (750,000) shares of common stock; $2,550,000 face amount, $2,038,155 book value of prepaid
advertising exchanged for 750,000 shares. 43,097,516 shares of common stock issued and 41,867,516 outstanding.
E) February 1997; (5,000,000) shares of common stock; shares of Firenze, Ltd. exchanged for 5,000,000 shares.
43,097,516 shares of common stock issued and 36,867,516 outstanding.
F) February 1997; (1,000,000) shares of common stock; shares of Ultimisics, Inc. exchanged for 1,000,000 shares.
43,097,516 shares of common stock issued and 35,867,516 outstanding.
G) February 1997; exchange 1,500,000 shares of Ultimistics, Inc. for 4,000,000 shares of PCT Prepaid Telephone, Inc.,
a consolidated subsidiary.
H) February 1997; (35,500) shares of common stock; $11,978 in cash exchanged for 35,500 shares. 43,097,516 shares
of common stock issued and 35,832,016 outstanding.
I) March 1997: exchange 300,000 shares of Ultimistics, Inc. and $420,000 book value of prepaid advertising for
5,000,000 shares of PCT Prepaid Telephone, Inc., a consolidated subsidiary.
</FN>
</TABLE>
The accompanying notes are an integral part of the
financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
PICK Communications Corp.
Consolidated Statements of Cash Flows
3 months ended March 31,
(UNAUDITED)
<S> <C> <C>
1996 1997
------------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) $ 5,532,975 948,711
Adjustments to reconcile net loss to net cash used for operating activities:
Non-cash revenues - prepaid cellular license revenue (3,600,000) 0
Non-cash gain on sale of marketable equity securities (4,784,000) 0
Non-cash loss on consolidated subsidiary sale of marketable equity securities 0 748,625
Minority interest in consolidated subsidiary (loss) income (6,654) (333,203)
Compensation expense accrued for treasury stock purchase 29,500 0
Depreciation 8,026 6,298
Amortization 35,625 35,575
Bad debt expense 5,193 26,292
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (184,571) (679,548)
(Increase) decrease in prepaid telephone card inventory (15,774) 10,046
(Increase) decrease in prepaid and other assets (38,417) 7,875
Increase (decrease) in accounts payable (note 5) 434,084 1,124,038
Increase (decrease) in direct cost telephone time accrual (note 5) (430,522) 307,165
Increase (decrease) in deferred revenue 72,245 (218,981)
Increase (decrease) in prepaid telephone time liability (105,000) 0
Increase (decrease) in current income taxes payable 346,000 0
Increase (decrease) in customer deposits 0 132,017
Increase (decrease) in deferred income taxes payable 1,808,000 (1,808,000)
Increase (decrease) in accrued expenses (note 1h) 378,519 (240,711)
------------- -------------
Net cash (used) provided by operating activities (514,771) 66,199
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Common stock repurchased for cash 0 (11,978)
Purchase of fixed assets (3,105) 0
---------------- -------------
Net cash (used) provided by investing activities (3,105) (11,978)
---------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued for cash 125,000 0
Common stock issued for cash by subsidiary 135,000 0
Payments received on stock subscriptions receivable 150,000 0
Payments on stockholder advances 0 (25,152)
Payments on third-party debt (25,000) 0
Funds advanced by stockholder 50,000 0
---------------- -------------
Net cash provided (used) by financing activities 435,000 (25,152)
--------------- ---------------
Net increase (decrease) in cash (82,876) 29,069
---------------- --------------
CASH, beginning of period 110,715 87,712
--------------- --------------
CASH, end of period $ 27,839 116,781
================ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid in cash $ 0 6,095
================= ==============
Noncash financing activities:
Stock issued for investment in marketable equity securities $ 2,075,000 0
============== ===============
Stock issued to acquire prepaid advertising $ 2,700,000 0
============== =================
Stock issued for subscription receivable $ 125,000 0
=============== =================
</TABLE>
The accompanying notes are an integral part of the
financial statements.
7
<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.
PICK was incorporated in the state of New Jersey on August 6, 1992. It
was inactive until January 1993, when the founder began funding the
operations. PICK operated in 1993, as an agent for the sale of long
distance services. In 1994 the founder investigated the prepaid
telephone card industry and discovered a potential niche market. 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, California and Texas.
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
three months ended March 31, 1996 and 1997 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 of 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 cards sales, the Company recognizes
revenues at the time it provides the telephone services associated with
its cards. It defers revenue until then, based on customer patterns of
usage, and recognizes the cost of the carrier telephone traffic based
on minutes used, which are also recognized in revenue. All other direct
costs, (non-traffic costs representing design royalties, printing,
fulfillment, sales commissions, etc.), are recognized as upfront costs
when 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. The Company does
not have a written returns policy, but consider sales returns on a case
by case basis.
For bulk long distance time sales, the Company recognizes revenue and
the related expenses at the time the service is provided as reported by
the switch.
d) Prepaid telephone card inventory Card inventory is composed of costs to
provide unactivated cards to the fullfillment 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 fullfillment company to the wholesale
purchaser.
e) Fixed assets Fixed assets 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 $8,026 and
$6,298 for the three months ended March 31, 1996 and 1997,
respectively.
8
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(1) Summary of significant accounting principles, continued
f) Concentration of credit risk Three customers accounted for
approximately 65%, 11.5% and 2.8% of net sales and approximately 69.1%,
0% and 7.5% of accounts receivable at March 31, 1996. Four customers
accounted for approximately 22.8%, 21.7%, 19.5% and 5.3% of net sales
and approximately 29.1%, 24.2%, 5.4% and 0% of accounts receivable at
March 31, 1997. 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 date of these statements, the
Company has established a reserve for doubtful accounts at a rate of
approximately 11.7% of outstanding accounts receivable or 7.8% of
sales. The reserve amounts at March 31, 1996 and 1997 were $37,871 and
$190,454. Bad debt expense was $5,193 and $26,292 for the three months
ended March 31, 1996 and 1997 respectively.
h) Accrued compensation Accrued compensation of $145,448 at March 31, 1996
is composed of compensation accrued, but not yet paid to the President
of the Company. Accrued compensation of $56,349 at March 31, 1997 is
composed of compensation accrued, but not yet paid to various officers.
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 $35,625 and $35,575 for the
three months ended March 31, 1996 and 1997. The Company has not begun
to amortize the purchased goodwill related to the various acquisitions
of PCT Prepaid Telephone, Inc. common stock. The Company expects to
amortize the goodwill over seven years beginning in the second quarter
of 1997.
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. Statement
of Financial Accounting number 109 (SFAS 109) requires companies to
take into account changes in tax rates when valuing the deferred income
tax amounts carried on their Balance Sheets (the "Liability Method").
The Company adopted SFAS 109 effective with the conversion from Sub-S
status, August 1, 1994. The Company had a deferred tax liability of
$1,808,000 and $0 and a current tax liability of $346,000 and $0 at
March 31, 1996 and 1997. In the first quarter of 1997, the Company
determined that it has no income tax liability, therefore it reversed
the $1,808,000 previously provided for as deferred income tax
liability. Any income tax benefits related to the differences between
methods of depreciation is de minimus.
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. In August 1995, the Company had 277,516
shares outstanding. In August 1995, the Company completed a Regulation
D Rule 504 private offering in which the Company issued 8,000,000
shares in exchange for $232,650 in cash, net of offering expenses of
$7,350.
PICK had authorized 1,000,000 shares of no par common stock. In January
1993, PICK issued 100,000 shares in exchange for $1,000. At the end of
1993, the President of PICK contributed his compensation to PICK, by
way of waiving the compensation accrued. During 1994, the President had
loaned $161,000 to PICK, which he exchanged for 623,000 shares of
common stock. In August 1994, PICK issued 20,000 shares to a then
unrelated third-party in exchange for a telephone switch and the
tariffs required to operate the switch, valued at $100,000. From
January through July 1995, PICK issued shares to various parties for
services provided,
9
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(2) Stockholders' equity, continued valued at $0.01 per share, for a total
value of $2,420. These shares were valued at this level because at the
time of issuance, there was no assurance that PICK would be able to
stay in business and it had negative book value. In June 1995, PICK
sold 25,000 shares to an independent consultant for $250 in cash.
On September 12, 1995, the Company completed the acquisition of PICK,
(see note 1a). Pursuant to the agreement to effect this transaction,
the Company issued 3,000,000 shares in exchange for 1,000,000 shares of
Foxwedge, Inc., 4,500,000 shares in exchange for $250,000 in cash with
a formerly unrelated party, which subsequently became related through a
common director, 500,000 shares in exchange for an outstanding note
payable of $250,000, 1,500,000 shares in exchange for an $82,500
subscription receivable and 16,665,000 shares in exchange for 100% of
the issued and outstanding shares of PICK. In October 1995, the Company
issued 100,000 shares in partial exchange for co-ownership of the
prepaid cellular patent and exclusive commercialization rights, valued
at $425,000. In October 1995, the Company issued 5,000,000 shares in
exchange for 5,000,000 shares of Firenze, Ltd. common stock, valued at
$10,000. On November 21, 1995, the Company issued to an unrelated third
party 1,000,000 shares in exchange for $200,000 cash and a note
receivable for $800,000 to be paid during 1996.
In January 1996, the Company entered into an agreement to sell 250,000
shares of its common stock to an unrelated third party for $250,000 in
cash. Also in January 1996, the Company entered into an agreement with
International Executive Services, (IES), a barter exchange company, to
exchange 1,000,000 shares to IES and 150,000 shares to Richard Maranon,
a director of the Company, of the Company's common stock for $3,000,000
of prepaid advertising. The Company has recorded these shares at
$2,700,000, or $2.35 per share. The advertising to be provided is to be
composed of print, television, radio and outdoor media. In January
1996, the Company exchanged 1,250,000 shares of its common stock for
500,000 shares of Ultimistics Inc. common stock with an unrelated third
party individual who desired to diversify his/her portfolio. The
Company recorded this transaction at $1,275,000, which was a 70%
discount from the then current market value of $4,250,000 for the
Ultimistics stock.
In January 1996, the Company issued stock options to seven officers and
directors of the Company. Each of these options was for 500,000 shares,
for a total of 3,500,000 shares, at an exercise price of $2.75 per
share and expire on January 25, 1999. The exercise price was 10% above
the market price of the shares on the date of the grant. The Company
has reserved an additional 1,500,000 shares for potential future use in
granting options for valued employees.
In June 1996, the Company settled a dispute with a former officer. This
former officer had the right to exchange 20,000 shares of PICK, Inc.
into 330,000 shares of the Company and owned a warrant for 5,000 shares
of PICK, Inc. with an exercise price of $5 per share, which the board
of directors had amended to a warrant for 82,500 shares of the Company
with an exercise price of $0.30 per share. 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.
In July 1996, the Company issued 50,000 shares to Snow Becker Krauss,
P.C., the Company's legal counsel in lieu of cash payment for prior
services rendered. In July 1996, the Company reacquired 250,000 shares
from IES, previously issued in January 1996. In December 1996, the
Company issued 400,000 shares to the President of the Company in
exchange for $100,000 of salary accrued but not yet paid. In December
1996, the Company issued 55,000 shares to several non-officer employees
of the Company in recognition of the outstanding work performed by
these individuals on behalf of the Company.
In February 1997, the Company agreed to cancel the remaining 600,000
shares of the Company's common stock held in trust for the minority
stockholder and the balance remaining of the subscription receivable.
10
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(2) Stockholders' equity, continued
The Company and the stockholder were unable to renegotiate the stock
subscription.
In February 1997, the Company exchanged $2,550,000 face amount of the
prepaid advertising with IES for the remaining 750,000 shares of its
common stock issued into escrow for IES. In February 1997, the Company
exchanged to Firenze Ltd. 5 million shares of Firenze common stock for
5 million shares of the Company's common stock and 6.25 million shares
of PCT common stock. In February 1997, the Company exchanged with New
Century Media Inc. 1 million shares of Ultimistics Inc. common stock
for 1 million shares of the Company's common stock and 1 million shares
of PCT common stock. In March 1997, the Company exchanged with Yakimoto
Investment Ltd. 1.5 million shares of Ultimistics Inc. common stock for
4 million shares of PCT common stock. In March 1997, the Company
exchanged with an unaffiliated third party 300,000 shares of
Ultimistics Inc. common stock and the balance of the Company's prepaid
advertising for 5 million shares of PCT common stock. In March 1997,
the Company repurchased 35,500 shares of its common stock in open
market purchases at an average price of $0.337 per share, or a total of
$11,978. The cumulative total of the Treasury stock acquisitions by the
Company is $4.2 million.
At the January 1997, annual stockholders meeting four amendments to
the Company's Articles of Incorporation were approved. 1) The total
number of authorized shares of common stock was increased from
50 million to 75 million. 2) The common stock par value per share was
decreased from $0.002 to $0.001 per share. 3) The prohibition on
cumulative voting of the common stock was eliminated. 4) The Company
is now authorized to issue up to 10 million shares of no par "blank
check" preferred stock.
(3) Commitments The Company entered into a 63 month operating lease for the
Company's facilities beginning in July 1996. Future minimum lease
payments under this operating lease in effect at March 31, 1997 are
$8,620 per month, or $103,441 per year. Rent expense for the three
months ended March 31, 1996 and 1997 was $3,855 and $25,860,
respectively.
(4) Notes payable Short-term debt had been made up entirely of advances to
PICK by the principal stockholder, which were not collateralized. These
advances carried no interest nor a stated maturity. The advances
totalled $25,152 and $0 in 1996 and 1997. PICK repaid $25,152 in 1997.
In 1995, the Company acquired co-ownership of the prepaid cellular
patent and exclusive commercialization rights for stock and a $500,000
note payable to The Next Edge, Inc., which was assigned by TNE to The
Phone Store, Inc. (TPSI). This note is to be paid at a rate of $25,000
per quarter for five years. The Company made the January 1, 1996,
payment in December 1995. This note was not collateralized nor did it
carry interest. In July 1996, the Company acquired US Treasury Notes
with a maturity amount of $425,000 with scheduled maturity dates that
coincide with the scheduled payment due dates on the then remaining
balance of the note payable to TPSI. The Company placed these UST Notes
in an irrevocable trust that has as its trustee a Miami law firm. The
trust is to collect the maturity amounts of the UST Notes and remit the
correct amount to TPSI on such scheduled payment dates. The UST Notes
were acquired 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 asset and liability from its books and records.
In November 1996, the Company received a $750,000 line of credit from
Banco Popular, which the Company had drawn down completely. This line
of credit is payable on demand and carries an interest rate of prime
rate plus 2%. This line of credit is collateralized with 1 million
shares of Ultimistics, Inc. common stock that the Company owns and
accounts receivable. These Ultimistics shares are part of the exchange
into Fairbanks shares discussed in note 6.
(5) Related party transactions The Company purchased no advertising
services in 1996 and 1997, from an entity controlled by an individual
who is a stockholder and a member of the Board of Directors. This
individual also
11
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(5) Related party transactions, continued 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 prepaid advertising. The Company
purchased $18,405 in services from three minor stockholders in the
first quarter of 1997 and owed $8,892 to them at March 31, 1997
(6) Investment in marketable equity securities The Company exchanged
1,000,000 shares of common stock of Foxwedge, Inc. it held for 500,000
shares of Ultimistics Inc. common stock with a stockholder of
Ultimistics in January 1996. The Company recorded a $1,194,000 gain as
a result of this transaction. The market value of the Ultimistics stock
received was $4,000,000 at the date of the transaction, which the
Company discounted by 70% to $1,200,000, based on the size of the
Company's holdings of Ultimistics and the restrictions on resale. In
January 1996, the Company entered into two transactions with Yakimoto
Ltd. whereby the Company sold the prepaid cellular marketing rights for
South America to Yakimoto for 1,000,000 shares of Ultimistics stock,
and the rights to Asia, Australia, Africa and most of Europe to
Yakimoto for 500,000 shares of Ultimistics. The current market value of
the Ultimistics stock at the time of the transactions was $12,000,000
total, which the Company discounted by 70% to $3,600,000, based on the
size of the Company's holdings of Ultimistics and the restrictions on
resale. The Company recorded licensing revenue for these transactions.
In March 1996, the Company exchanged 5,000,000 shares of common stock
of Firenze, Ltd. it held for 2,000,000 shares of Ultimistics Inc.
common stock with a stockholder of Ultimistics. The Company recorded a
$3,590,000 gain as a result of this transaction. The market value of
the Ultimistics stock received was $12,000,000 at the date of the
transaction, which the Company discounted by 70% to $3,600,000, based
on the size of the Company's holdings of Ultimistics and the
restrictions on resale. In January 1996, P.C.T. Prepaid Telephone, Inc.
(PCT), a consolidated subsidiary of the Company, entered into an
agreement with unrelated individuals to issue 10,000,000 shares of PCT
common stock to the individuals and 10,000,000 shares to the Company in
exchange for 200,000 shares of Ultimistics common stock, valued at
$480,000.
In March 1997, the Company exchanged with Fairbanks, Inc. 1.9 million
shares of Ultimistics common stock for 380,000 shares of Fairbanks
common stock. Fairbanks has acquired over 75% of the issued and
outstanding common stock of Ultimistics Inc., and has entered into a
letter of intent to acquire an existing operating US based company. The
Company believes that by completing this exchange it will eventually
realize the value in the underlying Ultimistics common stock, which as
a minority shareholder might not have been possible.
As a result of the transactions discussed herein and in Note 2 on page
F-9, the Company's investment in marketable equity securities consists
of 500,000 shares of Internet Channel, Inc. valued at $50,000 and
380,000 shares of Jet Vacations, Inc., (f/k/a/ Fairbanks, Inc.), at
March 31, 1997.
Although Statement of Financial Accounting Standards number 115 (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 March 31, 1997, the Company holds 380,000 shares of Jet
Vacations with a current market value of $4,560,000. The Company
recorded these shares at the original book value of the Ultimistics
shares given up, $4,085,000 less the valuation reserve of $2,142,203
for this investment, for a net value of $1,942,797. The Company is
watching the market value of Jet Vacations closely to determine future
changes in valuation.
(7) Statement of Financial Accounting Standards not yet evaluated In
February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings
per Share," and 129, "Disclosure of Information about Capital
Structure." The Company will have to implement SFAS 128 and 129 by the
fiscal year ending December 31, 1997. The provisions of SFAS 128 change
the presentation and computation of earnings per share. The Company has
not yet had sufficient time to evaluate the impact, if any, of the
provisions of SFAS 128 and 129.
12
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(8) Revocation of prepaid cellular marketing rights In February 1997, the
Company revoked all the prepaid cellular marketing licenses previously
granted to Firenze Ltd. and Yakimoto Investments Ltd.
(9) Stock option plan In February 1996, the Company adopted the "1996 Stock
Option Plan." This plan allows the Company to grant options to acquire
up to 5 million shares of the Company's common stock by employees,
directors, independent contractors and consultants of the Company. The
options so granted can be Qualified Incentive Stock Options (ISOs),
Non-Qualified Stock Options (NQSOs), Stock Appreciation Rights (SARs)
or combinations of the three types of options. In September 1996, the
Company granted the following options to directors and officers of the
Company:
<TABLE>
<S> <C> <C>
Name & Relationship Incentive options / exercise price Non-Qualifing Options / exercise price
---------------------------- ---------------------------------- --------------------------------------
D. Leiva, CEO, Chairman 103,896 / $0.963 396,104 / $0.875
R. Brennan, VP & Director 114,285 / $0.875 385,715 / $0.875
K. Quinn, VP 114,285 / $0.875 385,715 / $0.875
K. Petersson, VP 114,285 / $0.875 385,715 / $0.875
R. Sams, Director 0 / 0 500,000 / $0.875
R. Maranon, Director 0 / 0 500,000 / $0.875
G. Manning, Director 0 / 0 500,000 / $0.875
</TABLE>
No options had been exercised at March 31, 1997. SFAS No. 123 requires
that companies that continue to account for stock options under APB No.
25 disclose pro forma net income and earnings per share as if Statement
123 had been applied. Net income as reported is $948,711 and would have
been $608,597. Primary and fully diluted earnings per share are $0.02
per share and $0.02 per share and would have been $0.02 per share and
$0.01 per share.
The fair value of the option grant was estimated using the
Black-Scholes option pricing model with the following model assumptions
for 1997: risk free rate of 6.26%; no dividend yield for all years;
expected life of three years and volatility of 68.16%.
(10) Best efforts underwriting In January 1997, the Company signed a best
efforts underwriting agreement with Interbank Capital of New York City
to raise up to $10 million for the Company, either in equity or debt.
This contract calls for compensation of: 1) for the first $2 million
raised: 200,000 shares of the Company's common stock, $200,000 in cash,
and rights/warrants for 10% of the stock issued, at an exercise price
equal to that of the offering; 2) for the second $8 million: a cash fee
equal to 10% of the amount raised and a non-accountable fee of 3% of
the amount raised and warrants equal to 10% of the stock issued to
effect the investment.
Also in January 1997, the Company signed a best efforts underwriting
agreement with Unity Funding America Corp. Of Englishtown, NJ to raise
an amount in excess of $15 million for the Company, either in equity or
debt. This contract calls for compensation of: 5% of the first $5
million; 4% of the second $5 million; 3% of the third $5 million and 2%
of any amount raised in excess of $15 million.
(11) 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 financial statements, the Company
incurred net operating losses for the years ended December 31, 1994,
1995 and 1996. For the three months ended March 31, 1997, the Company
recorded $948,711 net income. This profit was generated principally as
a result of non-cash reversal of previously provided for deferred
income tax expense and loss on sale of marketable equity securities by
a consolidated subsidiary. The Company has a working capital deficit of
$6,013,742 at March 31, 1997.
13
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(13) Working capital deficiency, continued During the three months ended
March 31, 1996, the Company generated positive cash flow from
operations, which was reduced by investing activities and financing
activities by $37,130, which resulted in and reflects an increase of
cash of $29,069. 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.
The Company believes that it is in its best interest to hold the Jet
Vacations stock for the forseeable future, in the hope for capital
appreciation over the value recorded at March 31, 1997, and increased
liquidity over time.
The Company spent the first quarter of 1997 utilizing some of its
previous investments in prepaid advertising and marketable equity
securities to acquire approximately 17.1% of its issued and outstanding
shares, as well as an additional 30% of the issued and outstanding
shares of PCT Prepaid Telephone, Inc. The Company believes that these
transactions will make its offering, (see note 10), more acceptable to
potential investors.
The Company also has negotiated 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 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.
14
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations:
Results of Operations:
The Company generates revenues from the sale of telecommunications services.
This includes international long distance service to carriers and resellers, and
revenues derived from the sale of prepaid telephone debit cards to distributors
for resale to retail outlets.
The Company's primary costs of sales are the cost of telephone services, for
both the resale of international long distance services and for Debit Cards. 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 service switching and communications.
For the resale of international long distance, the Company recognizes revenues
as the traffic is used by its customers. 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 in the same periods that recognizes 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. The Company did not sell any prepaid cellular telephone
licences during the quarter. Upon making these license sales, the Company's
policy is to recognize substantially all of the consideration received for those
licenses at the time it is received.
Three Months Ended March 31, 1997 Compared with March 31, 1996:
Total revenues, excluding licenses, amounted to $2,438,232 for the three months
ended March 31, 1997 compared to $512,666 for the three months ended March 31,
1996. This represents an increase of $1,925,566 or 376%. For the three months
ended March 31, 1997, the Company generated international long distance revenue
was $2,150,519. There were no such revenues in the first quarter of 1996; the
international long distance business began in May of 1996. Debit Card revenues
were $287,713 for the three months ended March 31, 1997, compared to $510,829
for the three months ended March 31, 1996. This represents a decrease of
$223,116 or 44%. This decrease reflects switch capacity limitations which have
resulted in product returns and reductions in repeat sales of debit cards. There
were no prepaid cellular license revenues during the three months ended March
31, 1997 compared to $3,600,000 in license revenues for the three months ended
March 31, 1996. The cellular license revenues for 1996 were non-cash
transactions which resulted in the acquisition of restricted shares of
marketable securities.
The direct costs of international long distance and debit card services amounted
to $2,416,909 for the three months ending March 31, 1997 compared to $598,662
for the three months ending March
15
<PAGE>
31, 1996, an increase of $1,818,247 or 304%. As a result, the gross margin was
$21,323 (1% of revenues) for the three months ended March 31, 1997, compared to
a negative gross margin of $85,996 (17% of revenues), an improvement of $107,319
or 125%.
The Company continues to build the infrastructure necessary to support growth in
both the resale of international long distance traffic and debit cards services.
Selling and marketing expenses were $1,554 for the three months ended March 31,
1997, compared to $56,383 for the three months ended March 31, 1996, reflecting
a decrease of $54,829 or 97%. This decrease is primarily attributable to a
planned cut back in the marketing campaign in the first
quarter, while the Company is building its infrastructure.
General and administrative expenses were $381,527 for the three months ended
March 31, 1997, compared to $502,126 for the three months ended March 31,
1996, reflecting a decrease of $120,599 or 24%. This decrease is
primarily attributable to reductions in employee compensation of $114,862,
which was 55% lower, and lower expenses of $5,737 across all other
administrative expense categories.
Amortization of $35,575 for the three months ended March 31, 1997 was
attributable to the pre-paid cellular telephone technology license which is
being expensed over five years compared to a similar amount amortized for the
three month period ended March 31, 1996. Depreciation of $6,298 for the three
months ended March 31, 1997 and $8,026 for the three months ended March 31, 1996
is based upon lives of 3, 5, 7 or 10 years, depending on the asset
classification. The decrease in depreciation is due to the $100,000 reduction to
the asset base that was written off in 1996.
The provision for bad debts was $26,292 for the three months
ended March 31, 1997, compared to $5,193 for the three months
ended March 31, 1996. This increase of $21,099 is in place to
provide for slow paying retail customers. Collection problems are attributable
to the service capacity and operating limitations experienced by the Company's
switch, which have 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.
A provision for federal income taxes made in 1996 was reversed after the Company
had received advice that the net result of the marketable securities acquisition
transactions giving rise to the 1996 provision and the tax losses generated
by exchanging those securities for the Company's common stock (as treasury
stock) and for an additional 33% ownership in PCT will result in no cumulative
tax liability. See Note 1j to the financial statements in Item 1, above.
For the reasons listed above, the Company realized a net profit of $948,711 (or
$0.02 per share on a primary basis and $0.02 per share on a fully diluted basis)
for the three months ended March 31, 1997, compared to a net profit of
$5,532,975 (or $0.13 per share on a primary basis and $0.12 per
share on a fully diluted basis) for the three months ended March 31, 1996.
16
<PAGE>
Liquidity and Capital Resources:
The Company had working capital deficit of $6,013,742 as of March 31, 1997
compared to a working capital deficit of $3,152,216 as of December 31,
1996. The working capital ratio was .22:1 at March 31, 1997 compared
to .52:1 at December 31, 1996. The Company has generated retained earnings of
$438,229, since inception. During the three months ended March 31, 1997, the
Company generated a positive cash flow of $29,069, increasing from $87,712 to
$116,781.
Operating activities for the three months ended March 31, 1997 generated $66,199
in positive cash flow, primarily composed of net income ($948,711), an increase
in accounts payable ($1,124,038) and the non-cash loss on the sale of
marketable equity securities by a subsidiary ($748,625), off-set by a
decrease in deferred income taxes ($1,808,000), an increase in accounts
receivable ($679,548) and the minority interest in the loss of a
consolidated subsidiary ($333,203). All other categories of cash flows
generated a positive cash flow of $65,576.
Investing activities for the three months ended March 31, 1997 required $11,978,
representing the repurchase by the Company of its own stock in the open market.
Financing activities for the three months ended March 31, 1997
required $25,152, representing the repayment of cash advances made to the
Company by a stockholder.
The Company has entered into a credit relationship with Banco Popular for a
$750,000 direct line of credit, all of which was drawn down as of March 31,
1997. The Company has entered into contracts with two investment bankers to
raise up to $10,000,000 on a best efforts basis. No other arrangements are in
place with respect to any additional financing. The Company anticipates, based
on its current plans and assumptions relating to its operations, 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.
Part II - Other Information
Item 1 - Legal proceedings:
During the quarter ended March 31, 1997, there were
no material changes in the Company's legal proceedings commenced
against American Telephone & Telegraph Company.
Item 2 - Changes in securities:
17
<PAGE>
On January 21, 1997, at an Annual Meeting of Stockholders, the Company was
authorized to issue up to 10,000,000 shares of blank check preferred stock. To
date, no such shares have been
issued.
In addition, the Company amended the Articles of Incorporation to increase the
number of authorized shares of common stock to 75,000,000, to change the par
value of common stock to $.001 from $.002, and eliminate the prohibition on
cumulative voting of the common stock.
Item 3 - Defaults upon senior securities:
None to report
Item 4 - Submission of matters to a vote of security holders:
(A) On January 21, 1997, an Annual Meeting of Stockholders was held at the
offices of PICK Communications Corp., 155 Route 46 West, Wayne, NJ.
(B) The meeting placed in nomination, the names of the existing slate of
Directors of the Company for re-election until the next annual meeting of
stockholders and until their successors have been
duly elected and qualified:
Diego Leiva, Chairman
Raymond M. Brennan, Secretary
Robert R. Sams, Director
Ricardo Maranon, Director
Greg Manning, Director
(Mr. Manning resigned from the Board of Directors
on March 10, 1997.)
All directors received affirmative votes and were re-elected.
(C) Description of Items Voted Upon:
Proposals Brought to a Vote For Against Withheld
Election of All Directors 33,072,728 373,750 470,000
Ratification of 1996 Stock Option Plan 28,590,620 129,247 1,997,084
Amendment of the Articles of Incorporation to Increase the Number of authorized
shares of common stock to 75,000,000, to change the par value of common stock to
$.001 from $.002, and to eliminate the prohibition on
18
<PAGE>
cumulative voting of the common stock. 28,006,729 655,638 1,997,084
Authorize up to 10,000,000 shares of
blank check preferred stock. 31,592,426 373,750 1,860,834
Amend the By-Laws to reduce the
minimum number of Directors required
to serve on committees of the Board
of Directors from three to two. 31,615,194 373,750 1,860,834
Ratify the selection of Durland & Company
CPA's, P.A. as auditors of the Company
for 1996 33,006,028 373,750 470,000
Item 5 - Other information:
None to report
Item 6 - Exhibits and reports on Form 8-K:
None to report.
19
<PAGE>
Signatures:
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PICK Communications Corp.
Date: May 20, 1997 By: /s/ Diego Leiva
------------------
Diego Leiva
President and Chief Executive Officer
Date: May 20, 1997 By: /s/ Karl R. Petersson
------------------------
Karl R. Petersson
Vice President and Chief Financial Officer
(Principal Accounting Officer)
20
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 116,781
<SECURITIES> 1,992,797
<RECEIVABLES> 1,632,491
<ALLOWANCES> (190,454)
<INVENTORY> 13,868
<CURRENT-ASSETS> 1,647,063
<PP&E> 94,222
<DEPRECIATION> 6,298
<TOTAL-ASSETS> 7,155,511
<CURRENT-LIABILITIES> 7,660,805
<BONDS> 0
0
0
<COMMON> 43,098
<OTHER-SE> (662,491)
<TOTAL-LIABILITY-AND-EQUITY> 7,155,511
<SALES> 2,438,232
<TOTAL-REVENUES> 2,438,232
<CGS> 2,416,909
<TOTAL-COSTS> 451,246
<OTHER-EXPENSES> (415,422)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,944
<INCOME-PRETAX> (859,289)
<INCOME-TAX> 1,808,000
<INCOME-CONTINUING> 948,711
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 948,711
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
