<PAGE>
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 JUNE 30, 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 jurisdiction of (I.R.S. employer
Incorporation or Organization) identification no.)
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: (973) 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 August 18, 1997
Common Stock, $.001 Par Value 35,983,346
(See Index to Sections of this Document on Page 2)
<PAGE>
PICK Communications Corp.
Index to Form 10Q
<TABLE>
<S> <C>
Part I Financial Statements
Item 1: Financial Statements ................................................................. 3
Consolidated Balance Sheets
as of December 30, 1996 and June 30, 1997.................................. 4
Consolidated Statements of Operations - Three months and six months
Ended June 30, 1996 and June 30, 1997........................................ 5
Consolidated Statements of Stockholders' Equity - six months
as of June 30, 1996 and June 30, 1997 ....................................... 6
Statements of Cash Flows - Three months and six months
Ended June 30, 1996 and June 30, 1997 ....................................... 7
Notes to the Financial Statements..................................................... 8
thru
14
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................................ 15
thru
18
Part II Other Information:
Items 1&2 Other Information.......................................................... 19
Signatures ........................................................................... 20
</TABLE>
2
<PAGE>
Part I - Financial Information
Item 1 - Financial Statements:
Financial Information
Financial statements for the three and six months ended June 30, 1997
and June 30, 1996 are derived from the consolidation of PICK Communications
Corp., (the "Company") Public Info/CommKiosk, Inc. ("PICK"), PICKNET Inc.
("PICKNET"), and P.C.T. Prepaid Telephone, Inc. ("PCT").
3
<PAGE>
PICK Communications Corp.
Consolidated Balance Sheets
December 31, 1996 and June 30, 1997
<TABLE>
<CAPTION>
ASSETS 1996 1997
---- ----
CURRENT ASSETS (Unaudited)
<S> <C> <C>
Cash $ 87,712 98,979
Accounts receivable, net (note 1g) 778,180 1,214,018
Prepaid telephone card inventory (note 1d) 23,914 18,403
Prepaid advertising 2,458,155 0
Prepaid expenses and other current assets 82,252 61,626
Total Current Assets 3,430,213 1,393,026
----------- -----------
PROPERTY AND EQUIPMENT
Furniture and equipment, net (note 1e) 90,571 84,368
----------- -----------
Total Property and Equipment 90,571 84,368
----------- -----------
OTHER ASSETS
Security deposits 0 28,694
Pre-paid cellular patent and rights, net (note 8) 583,705 498,836
Purchased goodwill 0 2,893,300
Investment in marketable equity securities, net (note 6) 4,812,660 1,992,797
----------- -----------
Total Other Assets 5,396,365 5,413,627
----------- -----------
Total Assets $ 8,917,149 6,891,021
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable (note 5) $ 1,072,052 3,026,929
Direct cost telephone time accrual (note 5) 316,215 322,972
Pre-paid telephone time liability 0 149,685
Accrued expenses and other current payables 658,361 453,593
Customer deposits 300,000 0
Advances from stockholders (note 4) 25,152 0
Accrued compensation 43,698 0
Reserve for contingent liability 1,749,563 1,749,563
Deferred revenue 1,667,388 1,440,983
Current income taxes payable (note 1i) 0 0
Line of credit (note 4) 750,000 750,000
----------- -----------
Total Current Liabilities 6,582,429 7,893,725
----------- -----------
Minority interest in consolidated subsidiary 1,465,141 110,921
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, no par; Authorized 75,000,000 shares; issued and outstanding
43,217,516 at December 31, 1996 and 35,983,346 at June 30, 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 (notes 2) (602,089) (4,802,534)
Marketable equity securities valuation reserve (note 6) (3,904,965) (2,142,203)
Retained earnings (deficit) (510,482) (56,003)
----------- -----------
Total Stockholders' Equity 869,579 (1,113,625)
----------- -----------
Total Liabilities and Stockholders' Equity $ 8,917,149 6,891,021
=========== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
PICK Communications Corp.
Consolidated Statements of Operations
(UNAUDITED)
<TABLE>
<CAPTION>
3 months ended June 30, 6 months ended June 30,
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue
Sales - debit cards to others $ 436,117 264,962 485,898 545,169
Sales - debit cards to related parties 228,0470 0 689,095 7,506
Sales - long distance services 553,387 2,591,695 555,224 4,742,214
------------ ------------ ------------ ------------
Total sales 1,217,551 2,856,657 1,730,217 5,294,889
Cost of sales - related parties (note 5) 36,517 3,967 105,207 22,372
Other cost of sales 1,377,871 2,722,477 1,907,843 5,120,981
------------ ------------ ------------ ------------
Total cost of sales 1,414,388 2,726,444 2,013,050 5,143,353
------------ ------------ ------------ ------------
Gross profit (loss) (196,837) 130,213 (282,833) 151,536
Sales - prepaid cellular licenses 50,000 0 3,650,000 0
Operating Expenses
Sales and marketing - related party 42,336 0 42,336 0
Sales and marketing - other 89,155 35,041 145,538 36,595
------------ ------------ ------------ ------------
Total sales and marketing 131,491 35,041 187,874 36,595
General and administrative 395,403 494,938 897,529 876,465
Depreciation 8,556 6,418 16,582 12,716
Amortization 35,625 35,589 71,250 71,164
Bad debt 81,485 39,385 86,678 65,677
------------ ------------ ------------ ------------
Total operating expenses 652,560 611,371 1,259,913 1,062,617
------------ ------------ ------------ ------------
Income (loss) from operations (799,397) (481,158) 2,107,254 (911,081)
Interest expense (340) 16,252 9,990 30,196
------------ ------------ ------------ ------------
Income (loss) before taxes, minority interest in
subsidiary loss and gain on sale of marketable
equity securities (799,057) (497,410) 2,097,264 (941,277)
Gain (loss) on sale of mkt equity security (note 6) 0 0 4,784,000 (748,625)
------------ ------------ ------------ ------------
Income (loss) before taxes and minority interest
in subsidiary loss (799,057) (497,410) 6,881,264 (1,689,902)
Minority interest in subsidiary loss 12,491 3,178 9,145 336,381
Provision for def income tax (benefit)(note 1i) 0 0 1,808,000 1,808,000
Provision for curr income tax (benefit) (note 1i) (346,000) 0 0 0
------------ ------------ ------------ ------------
Net income (loss) $ (440,656) (494,232) 5,092,409 454,479
============ ============ ============ ============
Primary net income (loss) per share $ (0.01) (0.01) .12 0.01
============ ============ ============ ============
Weighted average number of shares outstanding 42,755,713 35,983,346 42,755,713 35,983,346
============ ============ ============ ============
Fully diluted net income (loss) per share $ -- (0.01) .11 0.01
============ ============ ============ ============
Weighted average number of shares outstanding 45,755,713 40,983,346 45,294,165 40,983,346
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
Pick Communications Corp.
Consolidated Statement of Stockholders' Equity
(UNAUDITED)
<TABLE>
<CAPTION>
Additional Stock Mkt Sec Retained Total
Common Paid in Subscrip Valuation Treasury Earnings/ Stockholders'
Stock Capital Receivable Reserve Stock (Deficit) Equity
<S> <C> <C> <C> <C> <C> <C> <C>
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) 849,181 849,181
H) (11,978) (11,978)
I) 56,612 56,612
Marketable equity
securities valuation
reserve - net 0 0 0 0 0 0 0
Net income (loss) 0 0 0 0 0 454,479 454,479
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, June
30, 1997 $ 43,098 5,844,017 0 (2,142,203) (4,802,534) (56,003) (1,113,625)
========== ========== ========== ========== ========== ========== ==========
</TABLE>
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 if 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 1,000,000 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 Ultimistics,
Inc. exchanged for 1,000,000 shares. 43,097,516 shares of common stock
issued and 35,867,516 outstanding.
G) February 1997; exchanged 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.
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
PICK Communications Corp.
Consolidated Statements of Cash Flows
6 months ended June 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) $ (351,306) 454,479
Adjustments to reconcile net loss to net cash used for operating activities:
Non-cash revenues - prepaid cellular license revenue (3,650,000) 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) (336,381)
Depreciation 16,582 12,716
Amortization 71,250 71,164
Bad debt expense 86,678 (8,332)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (527,635) (413,252)
(Increase) decrease in prepaid telephone card inventory 39,812 5,511
(Increase) decrease in prepaid and other assets (121,017) 20,626
Increase (decrease) in accounts payable (note 5) 555,505 1,954,877
Increase (decrease) in direct cost telephone time accrual (note 5) (103,106) 6,757
Increase (decrease) in deferred revenue 306,937 (226,405)
Increase (decrease) in prepaid telephone time liability (378,000) 149,685
Increase (decrease) in customer 250,000 (300,000)
Increase (decrease) in deferred income taxes payable 1,808,000 (1,808,000)
Increase (decrease) in accrued expenses (note 1h) 539,015 (248,466)
----------- -----------
Net cash (used) provided by operating activities (797,570) 83,604
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Common stock repurchased for cash 0 (11,978)
Purchase of fixed assets (36,169) (6,513)
Security deposits 0 (28,694)
----------- -----------
Net cash (used) provided by investing activities (36,169) (47,185)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued for cash 250,000 0
Common stock issued for cash by subsidiary 602,000 0
Payments received on stock subscriptions receivable 150,000 0
Payments on stockholder advances 0 (25,152)
Payments on third-party debt (50,000) 0
Funds advanced by stockholder 50,000 0
----------- -----------
Net cash provided (used) by financing activities 1,002,000 (25,152)
----------- -----------
Net increase (decrease) in cash 168,261 11,267
CASH, beginning of period 110,715 87,712
----------- -----------
CASH, end of period $ 278,976 98,979
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid in cash
Noncash financing activities: $ 0 29,636
=========== ======
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 six
months ended June 30, 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 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.
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 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.
8
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
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 $16,582 and $12,716 for the six months ended
June 30, 1996 and 1997.
f) Concentration of credit risk Three customers accounted for
approximately 22.4%, 20.1%, and 10.9% of net sales and approximately
6.4%, 17.4%, and 61.2% of accounts receivable at June 30, 1996. Two
customers accounted for approximately 24.7% and 13.6% of net sales and
approximately 30.7% and 13.1% of accounts receivable at June 30, 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 dates of these statements, the
Company has established a reserve for doubtful accounts at a rate of
approximately 15.9% of outstanding accounts receivable or 4.3% of
sales. The reserve amounts at June 30, 1996 and 1997 were $119,356 and
$229,838. Bad debt expense was $36,678 and $65,677 for the six months
ended June 30, 1996 and 1997 respectively.
h) 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 $71,250 and $71,164 for the six
months ended June 30, 1996 and 1997.
i) 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
June 30, 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 minimis.
j) 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 75,000,000 shares of
$0.001 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.
9
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(2) Stockholders' equity, continued PICK has 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, 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 $212,500. 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 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.
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. The original
agreement calls for the Company to use this advertising within two
years, however the Company has received oral approval for a three year
extension. 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. 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 June 1996, the Company settled a dispute with a former officer. This
former officer had the right to 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.
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
10
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(2) Stockholders' equity, continued 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.
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 in June 1996. Future minimum lease payments under
this operating lease in effect at June 30, 1997 are $8,620 per month,
or $103,441 per year. Rent expense for the six months ended June 30,
1996 and 1997 was $7,710 and $51,720, respectively.
(4) Notes payable Short-term debt was made up entirely of advances to PICK
by the principal stockholder, which were not collaterallized. These
advances carried no interest nor a stated maturity. The advances
totaled $25,152 and $0 in 1996 and 1997. PICK repaid $ 25,152 in 1997.
In November 1996, the Company received a $ 750,000 line of credit form
Banco Popular, which the Company had drawn down completely. this line
of credit is payable September 30, 1997 and carries an interest rate of
prime rate plus 2%. This line of credit is collateralized with shares
of Jet Vacations, Inc. common stock that the Company owns and accounts
receivable. These Jet Vacations 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 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
$3,967 in services from three minor stockholders in the second quarter
of 1997.
11
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(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 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.
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<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 June and July 1997,
the Company granted the following options to directors and officers of
the Company:
<TABLE>
<CAPTION>
Name & Relationship Incentive options / exercise price Non-Qualifying Options / exercise price
------------------- ---------------------------------- ---------------------------------------
<S> <C> <C>
D. Leiva, CEO, Chairman 131,578 / $0.19 368,422/$0.19
250,000 / $0.30
R. Brennan, VP & Director 191,176 / $0.17 308,824/$0.17
250.000 / $0.27
K. Quinn, VP 191,176 / $0.17 308,824/$0.17
250,000 / $.027
R. Sams, Director 0 / 0 500,000/$0.17
250,000/$0.27
R. Maranon, Director 0 / 0 500,000/$0.17
250,000/$0.27
M. Halvorsen, Director 0 / 0 250,000/$0.27
</TABLE>
No options had been exercised at June 30, 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) 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 losses for the years ended December 31, 1994, 1995 and
1996. For the six months ended June 30, 1997, the Company recorded
$490,605 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
$6,500,699 at June 30, 1997.
13
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(10) Working capital deficiency, continued During the six months ended June
30, 1997, 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 foreseeable future, in the hope for capital
appreciation over the value recorded at June 30, 1997, and increased
liquidity over time.
The Company spent the six months 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 13), 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 successfully implemented, the Company could be required to seek
additional financing from sources not currently anticipated.
(11) Subsequent Event: July 18, 1997, the Company signed a best efforts
underwriting agreement with Kaufman Bros. LP to raise $ 5 million in
equity and or debt. The contract calls for compensation of 8% of gross
proceeds and warrants to purchase 10% of the number of shares of common
stock equivalents sold at closing. This is exercisable over a 5 year
period at 110% of the conversion price of the common stock. This
supersedes all prior underwriting agreements.
14
<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 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 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 licenses
during the quarter. upon making these license sales, the Company's policy is to
recognize substantially all of the consideration received for these licenses at
the time it is received.
Six Months Ended June 30, 1997 and June 30, 1996
Total revenues excluding licenses, amounted to $ 5,294,889 for the six months
ended June 30, 1997 compared to $ 1,730,217 for the six months ended June 30,
1996. This represents an increase of $ 3,564,672 or 206% for the six months
ended June 30, 1997, the Company generated international long distance revenue
of $ 4,742,214 compared to $ 555,224 for six months ending June 30, 1996; the
international long distance business began in May of 1996. Debit Card revenues
were $ 552,675 for the six months ended June 30, 1997, compared to $1,174,993
for the six months ended June 30, 1996. This represents a decrease of $ 622,318
or 53%. This decrease reflects market changes which have resulted in product
returns and reductions in repeat sales of debit cards. There were no prepaid
cellular license revenues during the six months ended June 30, 1997 compared to
$ 3,650,000 in license revenues for the six months ended June 30, 1996. The
cellular license revenues for 1996 were non-cash transactions which resulted in
the acquisition of restricted shares of marketable securities.
15
<PAGE>
The direct costs of international long distance and debit card services amounted
to $ 5,143,353 for the six months ending June 30, 1997 compared to $ 2,013,050
for the six months ending June 30, 1996. As a result, the gross margin was 2.9%
of revenues for the six months ended June 30, 1997, compared to a negative gross
margin of 16.3% of revenues for the six months ended June 30, 1996 an
improvement of 19.2 percentage points.
Amortization of $71,164 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. Net interest expense of $30,196 is due to the fully utilized
line of credit of $750,000 with Banco Popular.
There is no provision for current income tax expense which 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.
For the reasons listed above, the Company realized a net profit of
$454,479 (or $.01 per share) for the six months ended June 30, 1997 compared to
a net profit of $5,092,409 for the six months ended June 30 of the prior year.
This change is due to the lack of license sales or gains on securities during
this time period.
16
<PAGE>
Three Months Ended June 30, 1996 and June 30, 1997:
For the three months ended June 30, 1996, the Company generated debit
card revenues of $664,164 compared to $264,962 for the three months ended June
30, 1997. This represents an decrease of $399,202 or 60.1%. In addition, the
Company generated $2,591,695 in revenues from the sale of long distance
services, for the three months ended June 30, 1997, compared to $553,387 for the
three months ended June 30, 1996. This represents an increase of $2,038,308.
Although revenues for both lines of business have increased, expenses have
exceeded those revenues, resulting in a negative gross margin of $196,837 in
1996, compared to a positive gross margin of $130,213 in 1997, a favorable
variance of $327,050. 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 change in results indicates
the Company is beginning to achieve sufficient revenue volumes to produce
operating profits, although there can be no assurance the Company will achieve
profitability.
Selling and marketing expenses were $131,491 for the three months ended
June 30, 1996, compared to $35,041 for the three months ended June 30, 1997,
reflecting a decrease of $96,450. This decrease is primarily attributable to a
decrease of costs incurred to promote the Company's products, including
advertising, promotions, attendance at trade shows, and production of marketing
materials.
General and administrative expenses were $395,403 for the three months
ended June 30, 1996, compared to $494,938 for the three months ended June 30,
1997, reflecting an increase of $99,535. 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 for the three months ended June 30, 1996 as
compared to $35,589 for the three months ended June 30, 1997 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.
17
<PAGE>
The provision for bad debts was $81,485 for the three months ended June
30, 1996 compared to $39,385 for the three months ended June 30, 1997. This
decrease of $42,100 is attributable to lower debit card sales volumes.
For the reasons listed above, the Company realized a loss of $440,656
(or $.01 per share) for the three months ended June 30, 1996 compared to a net
loss of $494,232 for the three months ended June 30, 1997.
Liquidity and Capital Resources:
The Company had working capital deficit of $6,500,699 as of June 30,
1997 compared to $3,152,216 as of December 31, 1996. The working capital ratio
was .18:1 at June 30, 1997 compared to .52:1 at December 31, 1996.
Cash generated from operating activities during the six months ended
June 30, 1997 of $83,604 primarily reflect net profit of $454,479 and
depreciation and amortization of $83,880, an increase in accounts receivable and
accounts payable of $2,368,129 and offset by the reversal of deferred income
taxes of $1,808,000. The remaining decrease of $22,046 reflects normal changes
in current assets over current 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. 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 June 30,
1997 of $47,185 reflects capital expenditures for fixed assets and the
repurchase of common stock for treasury. The Company has no material commitments
for capital expenditures as of June 30, 1997.
Cash provided from financing activities for the six months ended June
30, 1997 amounted to $25,152, which was the retirement of advances from a
stockholder.
As of June 30, 1997, the Company had cash and cash equivalents
amounting to $98,979, compared to $87,712 as of December 31, 1996.
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, 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 no arrangements in place with respect to additional
financing.
18
<PAGE>
Part II - Other Information
Item 1 - Legal Proceedings:
During the six months ended June 30, 1997, there were no material
changes in the Company's legal proceeding commenced against American Telephone &
Telegraph Company. On July 29, 1997, a mediation session was held at the
American Arbitration Association offices in Somerset, New Jersey. The mediation
has been continued and the next scheduled session is September 22, 1997.
Item 2 - 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: August 18, 1997 By: /s/ Diego Leiva
-------------------------------------
Diego Leiva
President and Chief Executive Officer
Date: August 18, 1997 By: /s/ Bruce J. Staloff
------------------------------------
Bruce J. Staloff
Acting Chief Financial Officer
(Principal Accounting Officer)
20
