<PAGE>
FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED SEPTEMBER 30, 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 October 31, 1997
Common Stock, $.001 Par Value 36,059,817
(See Index to Sections of this Document on Page 2)
<PAGE>
PICK Communications Corp.
Index to Form 10Q
<TABLE>
<CAPTION>
Part I Financial Statements
<S> <C>
Item 1: Financial Statements................................................................ 3
Consolidated Balance Sheets
at December 31, 1996 and September 30, 1997...................................... 4
Consolidated Statements of Operations - Three months and nine months
ended September 30, 1996 and September 30, 1997.................................. 5
Consolidated Statement of Stockholders' Equity - Nine months
ended September 30, 1997 ........................................................ 6
Consolidated Statements of Cash Flows - Nine months
ended September 30, 1996 and September 30, 1997.................................. 7
Notes to Consolidated Financial Statements......................................... 9
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................ 16
Part II Other Information:
Items 1-6 Other Information......................................................... 19
Signatures ......................................................................... 20
</TABLE>
2
<PAGE>
Part I - Financial Information
Item 1 - Financial Statements:
The financial statements for the three and nine months ended September 30, 1997
and 1996 are derived from the consolidation of the 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
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997 (*)
------------ -------------
ASSETS (Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash $ 87,712 $ 35,245
Accounts receivable, net 778,180 1,096,774
Prepaid telephone card inventory 23,914 8,732
Prepaid advertising 2,458,155 0
Prepaid expenses and other current assets 82,252 168,567
------------- ------------
Total current assets 3,430,213 1,309,318
----------- -----------
Furniture and equipment, net 90,571 77,950
------------- -------------
OTHER ASSETS:
Security deposits 0 11,796
Prepaid cellular patent and rights, net 583,705 476,830
Investment in marketable equity securities 4,812,660 1,631,180
------------ -----------
Total other assets 5,396,365 2,119,806
------------ -----------
Total assets $ 8,917,149 $ 3,507,074
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short term debt $ 750,000 $ 750,000
Accounts payable 1,072,052 4,005,751
Deferred revenue - prepaid calling cards 1,667,388 897,854
Reserve for contingent liability 1,749,563 1,100,000
Advances from stockholder 25,152 170,000
Accrued compensation due stockholders 43,698 56,349
Other current liabilities 1,274,576 562,186
---------- -----------
Total current liabilities 6,582,429 7,542,140
---------- ----------
Minority interest in consolidated subsidiary 1,465,141 108,865
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.002 par value at December 31, 1996, $0.001 par value at
September 30, 1997; authorized 75,000,000 shares; 43,697,516 issued and
43,217,516 outstanding at December 31, 1996; 43,325,317
issued and 36,059,817 outstanding at September 30, 1997 87,395 43,325
Additional paid in capital in excess of par 6,399,720 5,886,825
Stock subscription receivable (600,000) 0
Treasury stock (602,089) (3,072,222)
Unrealized gain (loss) on marketable equity securities (3,904,965) 1,448,180
Retained earnings (deficit) (510,482) (8,450,039)
-------------- ------------
Total stockholders' equity (deficit) 869,579 (4,143,931)
-------------- -------------
Total liabilities and stockholders' equity (deficit) $ 8,917,149 $ 3,507,074
============ ===========
</TABLE>
(*) Amounts have been restated for certain items as more fully described
in Note 2 - Restatement of Financial Information.
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
PICK Communications Corp.
Consolidated Statements of Operations
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ---------------------------
1996 1997 (*) 1996 1997 (*)
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Sales of long distance services $ 3,125,424 $ 1,754,431 $ 3,680,648 $ 6,496,645
Sales of prepaid calling cards 315,631 541,272 1,490,624 1,093,947
------------ ----------- ----------- -----------
Total revenues 3,441,055 2,295,703 5,171,272 7,590,592
COST OF SALES:
Cost of sales 3,329,525 2,219,887 5,353,220 7,363,240
------------ ----------- ----------- -----------
Gross profit (loss) before adjustment to
provision for contingent costs 111,530 75,816 (181,948) 227,352
Adjustment to provision for contingent costs (904,000) 649,563 (904,000) 649,563
------------ ----------- ----------- -----------
Gross profit (loss) (792,470) 725,379 (1,085,948) 876,915
------------ ----------- ----------- -----------
OPERATING EXPENSES:
Sales and marketing 423,414 3,839 611,288 40,434
General and administrative 320,616 470,242 1,218,145 1,346,707
Depreciation 11,090 6,417 27,672 19,133
Amortization 35,625 35,711 106,875 106,875
Bad debt expense 303,243 13,089 389,921 78,766
------------ ----------- ----------- -----------
Total operating expenses 1,093,988 529,298 2,353,901 1,591,915
------------ ----------- ----------- -----------
(Loss) from operations (1,886,458) 196,081 (3,439,849) (715,000)
------------ ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Net interest income (expense) 127 (16,597) 782 (46,793)
License fees 0 0 3,650,000 0
Gain on in-substance defeasance 53,080 0 53,080 0
Net gains (losses) on marketable equity securities 0 0 4,784,000 (9,399,079)
------------ ----------- ----------- -----------
Total other income (expense) 53,207 (16,597) 8,487,862 (9,445,872)
------------ ----------- ----------- -----------
Income (loss) before minority interest in
subsidiary loss and income taxes (1,833,251) 179,484 5,048,013 (10,160,872)
Minority interest in subsidiary loss 17,787 2,092 36,932 413,315
Benefit (provision) for income taxes 0 0 (1,808,000) 1,808,000
------------ ----------- ----------- -----------
Net income (loss) $ (1,815,464) $ 181,576 $ 3,276,945 $(7,939,557)
============ =========== =========== ===========
Net income (loss) per common share - basic $ (0.04) $ 0.01 $ 0.08 $ (0.21)
============ =========== =========== ===========
Weighted average shares outstanding -basic 42,755,559 36,013,717 42,829,377 37,261,393
============ =========== =========== ===========
</TABLE>
(*) Amounts have been restated for certain items as more fully described
in Note 2 - Restatement of Financial Information.
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
PICK Communications Corp.
Consolidated Statements of Stockholders' Equity
(UNAUDITED)
<TABLE>
<CAPTION>
Unrealized
Additional Stock Gain (Loss) on Total
Common Paid in Subscription Treasury Marketable Retained Stockholders'
Stock Capital Receivable Stock Securities (Deficit) Equity
------ ---------- ------------ ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1996 87,395 6,399,720 (600,000) (602,089) (3,904,965) (510,482) 869,579
Transactions A) (43,697) 43,697 0 0 0 0 0
B) (600) (599,400) 600,000 0 0 0 0
C) (*) 0 0 0 (2,470,133) 0 0 (2,470,133)
D) 227 42,808 0 0 0 0 43,035
Valuation reserve (*) 0 0 0 0 5,353,145 0 5,353,145
Net (loss) (*) 0 0 0 0 0 (7,939,557) (7,939,557)
----------- ----------- --------- ----------- ----------- ------------ -----------
Balance, Sept. 30, 1997 (*) $ 43,325 $ 5,886,825 $ 0 $(3,072,222) $ 1,448,180 $ (8,450,039) $(4,143,931)
=========== =========== ========= =========== =========== ============ ===========
</TABLE>
A) Reduction in par value from $0.002 to $0.001 per share.
B) Cancellation of 600,000 shares subscribed. Shares outstanding: 42,617,516.
C) Reacquisition of shares: 750,000 shares in return for unused prepaid
advertising with a book value of $2,038,155; 35,500 shares in return for
$11,978 cash and 6,000,000 shares in return for shares of Firenze, Ltd.
and Ultimistics, Inc. Shares outstanding: 35,832,016.
D) Stock issued for services to employees and others. Shares outstanding:
36,059,817.
(*) Amounts have been restated for certain items as more fully described
in Note 2 - Restatement of Financial Information.
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
PICK Communications Corp.
Consolidated Statements of Cash Flows
Nine Months Ended September 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1997(*)
---- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 3,276,945 $ (7,939,557)
Adjustments to reconcile net income (loss) to cash provided by
(used in) operating activities:
Non-cash loss (gain) on marketable securities (4,784,000) 9,399,079
Non-cash income - license fees (3,650,000) 0
Non-cash gain on in-substance defeasance (53,080) 0
Depreciation and amortization 134,547 126,008
Minority interest in subsidiary loss (36,932) (413,315)
Bad debt expense 389,921 78,766
Stock issued for services 50,000 43,035
Non-cash expenses - prepaid advertising 256,845 0
Adjustment to reserve for contingent liability 904,000 (649,563)
Provision (benefit) for deferred income taxes 1,808,000 (1,808,000)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (767,141) (396,775)
Decrease (increase) in prepaid telephone card inventory 79,803 15,182
Decrease (increase) in other operating assets (117,439) (98,111)
Increase (decrease) in accounts payable 1,234,633 2,933,699
Increase (decrease) in deferred revenue 643,076 (769,534)
Increase (decrease) in other operating liabilities 214,657 (699,739)
-------------- -----------
Net cash provided by (used in) operating activities (416,165) (178,825)
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in debt securities (371,920) 0
Purchase of fixed assets (61,632) (6,512)
------------- -------------
Net cash (used in) investing activities (433,552) (6,512)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued for cash 125,000 0
Common stock issued for cash by subsidiary 527,612 0
Acquisition of treasury stock for cash (44,500) (11,978)
Payments received on stock subscriptions receivable 325,000 0
Payments on third-party debt (50,000) 0
Funds advanced by stockholder 50,000 170,000
Payments of stockholder advances (50,000) (25,152)
------------- ------------
Net cash provided by (used in) financing activities 883,112 132,870
------------ -----------
Net increase in cash 33,395 (52,467)
CASH, beginning of period 110,715 87,712
------------- ------------
CASH, end of period $ 144,110 $ 35,245
============= ==========
</TABLE>
(*) Amounts have been restated for certain items as more fully described
in Note 2 - Restatement of Financial Information.
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
PICK Communications Corp.
Consolidated Statements of Cash Flows (Continued)
Nine Months Ended September 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1997(*)
---- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<S> <C> <C>
Interest paid during the period $ 0 $ 46,793
========== ==========
Non-cash financing activities:
Book value of marketable equity securities exchanged for
common stock of the Company and its subsidiary 0 6,390,625
========== ==========
Book value of marketable equity securities exchanged for other
marketable equity securities 0 4,085,000
========== ==========
Prepaid advertising exchanged for common stock of
the Company and its subsidiary 557,589 2,458,155
========== ==========
Stock issued for investment in marketable equity securities 2,075,000 0
========== ==========
Stock issued for subscriptions receivable 125,000 0
========== ==========
Stock issued to acquire prepaid advertising 2,700,000 0
========== ==========
In-substance defeasance 425,000 0
========== ==========
</TABLE>
(*) Amounts have been restated for certain items as more fully described
in Note 2 - Restatement of Financial Information.
The accompanying notes are an integral part of these financial statements.
8
<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 and nine months ended September 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:
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.
License fees reported in the first and second quarters of 1996 have been
reclassified from operating revenues to other income in the accompanying
statements of operations.
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. In addition, intercompany transactions have been eliminated.
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.
9
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(UNAUDITED)
(1) Summary of Significant Accounting Principles, Continued
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.
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 $27,672 and $19,133 for the nine months
ended September 30, 1996 and 1997, respectively.
Accounts Receivable
The Company provides credit for open accounts in the normal course of business.
As of the September 30, 1997, the Company has established a reserve for doubtful
accounts at a rate of approximately 18.1% of outstanding accounts receivable.
The reserve amounts at September 30, 1997 was $242,927. Bad debt expense was
$389,921 and $78,766 for the nine months ended September 30, 1996 and 1997
respectively.
Accrued Compensation
Accrued compensation of $56,349 at September 30, 1997 is composed of
compensation accrued, but not yet paid to various officers.
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
$106,875 and $106,875 for the nine months ended September 30, 1996 and 1997.
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, on August 1, 1994. The Company had a deferred tax liability
of $1,808,000 at December 31, 1996. In the first quarter of 1997, the Company
determined that it had 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.
Net Income (Loss) per Share
Net loss per share - basic is computed by dividing the net loss by the weighted
average number of common shares outstanding during the period. Net loss per
share - diluted is not presented because the inclusion of common share
equivalents would be anti-dilutive.
(2) Restatement of Financial Information
The Company's financial statements as of September 30, 1997 and for the nine
months then ended have been restated. The Company initially did not report any
gains or losses on the disposition of the marketable equity securities for
transactions consummated in the first quarter of 1997 (Notes 4 and 8), as the
Company believed that it
10
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(UNAUDITED)
(2) Restatement of Financial Information, Continued
was not appropriate to recognize losses on the acquisition of its and its
subsidiary's common stock or on the exchange of one investment in marketable
equity securities for a similar investment. The Company subsequently determined
that it would have been preferable to record these transactions based upon the
fair value of the assets exchanged, resulting in the recognition of
approximately $9,400,000 in non-cash, non-operating losses. The effect of the
restatement as of September 30, 1997 and for the three and nine months then
ended is as follows:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, 1997 September 30, 1997
--------------------------------- ------------------------------------
As previously As As Previously As
Reported Restated Reported Restated
------------- -------- ------------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ 78,244 $ 181,576 $ 532,723 $ (7,939,557)
========= ========== ========== =============
Net income (loss) per share - basic $ 0.00 $ 0.01 $ 0.01 $ (0.21)
========= ========== ========== =============
</TABLE>
(3) Concentration of credit risk
Three customers accounted for approximately 33.6%, 25.6%, and 13.5% of net sales
for the nine months ended September 30, 1996 and approximately 12.9%, 8.1%, and
47.9% of accounts receivable at September 30, 1996. Two customers accounted for
approximately 22.7% and 14.2% of net sales for the nine months ended September
30, 1997; three customers accounted for approximately 16.9%, 16.2% and 15.0% of
the accounts receivable at September 30, 1997. The Company performs periodic
credit evaluations of its customers, but generally does not require collateral.
(4) 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.
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, 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, (Note 1).
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 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.
11
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(UNAUDITED)
(4) Stockholders' Equity, Continued
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 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 was subsequently amended to a warrant for
82,500 shares of the Company with an exercise price of $0.30 per share. The
dispute was resolved by the Company repurchasing 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, in return for a portion of the prepaid advertising previously
acquired from IES, the Company reacquired 250,000 shares from IES. 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 600,000 shares of
the Company's common stock held in trust for a minority stockholder in return
for forgiving the balance of the subscription receivable due to the Company. 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 750,000 shares of its common stock issued into escrow
for IES. In February 1997, the Company transferred to Firenze Ltd. 5 million
shares of Firenze common stock in exchange for for 5 million shares of the
Company's common stock and 6.25 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.
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. After restatement (Note
2), the Company recognized approximately $5,450,000 in losses in transactions
involving the exchange of 2,800,000 shares of Ultimistics for the Company's and
its subsidiary's common stock.
12
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(UNAUDITED)
(4) Stockholders' Equity, Continued
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.
(5) Commitments
The Company entered into a 63 month operating lease for the Company's facilities
in June 1996. This lease provides for three months free rent and a renewal
option for five additional years. Future minimum lease payments under this
operating lease are $8,620 per month, or $103,441 per year. Rent expense for the
nine months ended September 30, 1996 and 1997 was $16,015 and $77,580,
respectively.
The Company has entered into two, three-year space leases commencing October 1,
1997 and two, five-year equipment leases commencing when the equipment has been
installed and tested. Rent under the two space leases is $18,600 per month
($223,200 per year and $669,600 in total). Rent under the two equipment leases
is $20,640 per month ($247,675 per year and $1,238,379 in total).
(6) Notes Payable
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 December 31, 1997, carries an interest rate of prime rate plus 2% and is
secured by accounts receivable and 200,000 shares of Jet Vacations, Inc. common
stock.
(7) Related Party Transactions
The Company purchased $79,645 advertising services during the nine months ended
September 30, 1996 from an entity controlled by an individual who is a
stockholder and a member of the Board of Directors.
(8) Investment in Marketable Equity Securities
The Company exchanged 1,000,000 shares of common stock of Foxwedge, Inc. it
acquired in 1995 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 market value of the Ultimistics stock at the time of the
transactions was $12,000,000, 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
13
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(UNAUDITED)
(8) Investment in Marketable Equity Securities
exchange for 200,000 shares of Ultimistics common stock, valued at $480,000.
Simultaneously with the transaction referred to in the previous sentence, PCT
issued an additional 10,000,000 shares of its common stock to the Company.
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. (independent of the shares acquired as part of this exchange), and has
entered into a letter of intent to acquire an existing operating US based
company. Pursuant to the restatement (Note 2), the Company recorded a loss of
approximately $3,950,000 on this transaction.
Because the shares of Jet Vacations are restricted and there is very limited
trading activity in Jet Vacations stock, the Company believes the fair value to
be approximately 30% of the market price, or $1,581,180 at September 30, 1997.
The Company is watching the market value of Jet Vacations closely to determine
future changes in valuation.
As a result of the transactions discussed herein and in Note 4, 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 September 30, 1997.
(9) 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 129. The financial
statements have been restated to conform with SFAS 128.
(10) 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.
(11) Reserve for Contingent Liability.
In February, 1996, the Company entered into a long-term contract with American
Telephone & Telegraph Company ("AT&T") to purchase long distance time at
favorable rates. Based upon the rate schedule provided to the Company during the
negotiations, the Company began selling bulk time at prices slightly above its
expected cost. AT&T actually invoiced the time at a rate significantly higher
than the schedule provided. The Company provided a contingency reserve of
$904,000 in the third quarter of 1996 and an additional $845,563 in the fourth
quarter of 1996. In the course of further discussions concerning the dispute,
AT&T has indicated that, in its opinion, the balance due is slightly less than
$1,100,000. Based upon this, in the third quarter of 1997, the Company has
reduced the reserve to $1,100,000 and credited cost of sales for this $649,563
reduction in the reserve.
14
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(UNAUDITED)
(12) Stock Option Plan.
In February, 1996, the Company adopted a stock option plan for employees and
directors. The following summarizes activity under the plan:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1997
-------------------------------------- --------------------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
------------- --------------------- ------------ -----------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 0 -- 3,500,000 $ 0.878
Options cancelled 0 -- (3,500,000) $ 0.878
Granted 3,500,000 $ 0.878 4,500,000 $ 0.230
--------- ----------
Outstanding at end of period 3,500,000 $ 0.878 4,500,000 $ 0.230
========= ==========
</TABLE>
Of the options cancelled during 1997, options for 3,000,000 shares were reissued
at lower exercise prices.
(13) 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 operating losses in each of the years ended December 31,
1994, 1995 and 1996. For the nine months ended September 30, 1997, the Company
recorded a loss from operations of $715,000. At September 30, 1997, the Company
has a working capital deficit of $6,232,822 and negative tangible net worth
(total stockholders' equity less the net book value of intangible assets) of
$4,620,761.
The Company believes that profitability from the sale of telephone time can best
be achieved by having sufficient capacity to properly serve existing customer
requirements and by attracting more customers. This, in turn, will enable the
Company to purchase increasing numbers of telephone minutes, resulting in more
favorable purchase pricing. Upgraded technical performance of the telephone
switches which process the Company's traffic should also encourage increased
traffic volume and customer satisfaction. To that end, the Company has leased
two Siemens Stromberg-Carlson central office telephone switches which, at
October 31, 1997, were being installed in Miami and Jersey City.
In addition, utilizing these central office switches will permit the Company to
pursue direct-connect international agreements for long distance termination,
which has the potential to improve PICK's pricing structure dramatically in
these areas.
These changes also allow the Company to structure the calling costs on PICK's
prepaid telephone calling cards sold at retail in a manner which should result
in increased retail sales. Overall, the Company believes it will be able to
generate operating income in the future.
The Company has signed a best efforts private placement agreement with Kaufman
Bros., L.P. to raise $5 million in equity or debt. In December 1997, this
agreement was terminated without any funds being raised. The Company is also
pursuing other sources of capital. While the Company believes it will be
successful in its efforts to raise sufficient capital and to restructure its
operations so that it may continue as a going concern, there can be no assurance
that the Company will be successful.
15
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations:
This report includes forward-looking statements that involve risks and
uncertainties, including the timely development and acceptance of new products
in a constantly evolving telecommunications industry, the impact of competitive
products and pricing, government regulations and the other risk factors detailed
from time to time in the Company's SEC reports.
Results of Operations:
The Company generates revenues from the sale of international long distance
service to carriers and resellers, and from the sale of prepaid telephone
calling cards to retail outlets. This latter revenue is deferred when the cards
are sold and is recognized when the telephone service is actually provided.
Nine Months Ended September 30, 1997 Compared with September 30, 1996
Total revenues excluding cellular license revenues, amounted to $7,590,592 for
the nine months ended September 30, 1997 compared to $5,171,272 for the nine
months ended September 30, 1996. This represents an increase of $2,419,320 or
47%. For the nine months ended September 30, 1997, the Company generated
international long distance revenue of $6,496,645 compared to $3,680,648 for
nine months ending September 30, 1996; the international long distance business
began in May of 1996. Prepaid telephone calling card revenues were $1,093,947
for the nine months ended September 30, 1997, compared to $1,490,624 for the
nine months ended September 30, 1996. This represents a decrease of $396,677 or
27%. This decrease reflects market changes which have resulted in product
returns and reductions in repeat sales of calling cards.
The direct costs of international long distance and calling card services
amounted to $6,713,677 (which is net of a $649,563 credit arising from reversal
of a portion of the previously-provided contingency reserve related to billing
disputes with AT&T - see Note 11, Notes to Consolidated Financial Statements)
for the nine months ending September 30, 1997 compared to $6,257,220 (including
a $904,000 provision for contingent costs provided related to billing disputes
with AT&T) for the nine months ending September 30, 1996. As a result, the gross
margin was 11.6% of revenues for the nine months ended September 30, 1997,
compared to a negative gross margin of 21.0%. Absent the adjustments to the
contingency reserve, gross margin would be 3.0% for the nine months ended
September 30, 1997 and negative 3.5% for the comparable period in 1996.
The decrease in selling and marketing expenses were a direct result of a
reduction of product advertising, largely due to market changes. The general and
administrative costs increased primarily due to a need for increased outside
professional assistance. In addition, there was a modest increase in personnel
cost. Bad debt expense has declined significantly due to unusually high
write-offs and reserves provided in 1996.
16
<PAGE>
Operating loss improved from a loss of $3,439,849 for the nine months ended
September 30, 1996 to a loss of $715,000 for the comparable period in 1997. The
improvement was primarily due to improved gross profit (before provisions for
contingent costs) of $409,300, changes in amounts charged to the provision for
contingent costs of $1,553,563, reductions in sales and marketing expenses of
$570,854 and reductions in bad debt expense of $311,155.
Other income (expense) changed from income of $8,487,862 in 1996 to a loss of
$9,445,872 in 1997. The 1996 income consists of $3,650,000 in non-cash,
non-recurring license fees related to the Company's prepaid cellular telephone
technology, $4,784,000 in non-cash gains on disposition of marketable equity
securities, a gain on in-substance defeasance of debt of $53,080 and $782 in net
interest income. The 1997 other expense consists of $9,399,079 in non-cash
losses on disposition of marketable equity securities realized in the first
quarter of 1997 and $46,793 in interest expense.
Three Months Ended September 30, 1997 Compared with September 30, 1996:
Sales of long distance services declined by $1,370,993 (44%) compared with the
comparable quarter in 1996. During the third quarter of 1996, the Company was
utilizing AT&T for a majority of its international traffic based upon a belief
that it was obtaining very favorable rates. These rates allowed the Company to
attract significant volume, with August, 1996 being the highest volume month the
Company has had. AT&T severed the relationship in late 1996. Consequently,
during the comparable period in 1997, the Company has not had the benefit of
what it had believed to be favorable rates. As a result, volume declined because
the rates the Company has been able to offer its customers have not been as
competitive. Revenues from prepaid telephone calling cards increased by $225,641
(71%) compared with the comparable period in 1996 due to a combination of high
usage of cards sold in prior periods and recognition of revenue related to the
unused time on cards which expired during the third quarter of 1997.
Gross profit shows an improvement of $1,517,849. This improvement is almost
entirely due to the inclusion in cost of sales of a provision for contingent
costs of $904,000 in 1996 and a reversal, in 1997, of a $649,563 portion of the
$1,749,563 provided in the third and fourth quarters of 1996. Absent the
provision and reversal, gross profit would have been $75,816 (3.3% of sales) in
1997 and $111,530 (3.2% of sales) in 1996.
The decrease in selling and marketing expenses were a direct result of a
reduction of product advertising, largely due to market changes. The general and
administrative costs increased primarily due to a need for increased outside
professional assistance. In addition, there was a modest increase in personnel
cost. Bad debt expense has declined significantly due to unusually high
write-offs and reserves provided in 1996.
Liquidity and Capital Resources:
The Company has a working capital deficit of $6,232,822 at September 30, 1997 as
compared with a deficit of $3,152,216 at December 31, 1996. Accounts payable and
accrued liabilities have increased by $2,233,960 since December 31, 1996, which,
along with an increase in loans from the Company's principal stockholder from
$25,152 to $170,000, has been the source of capital to finance the Company's
operating losses during the period. In order to assure the Company's survival,
it is essential that the Company (i) restructure its operations so that
operating profits are generated and (ii) obtain additional capital.
17
<PAGE>
The Company has leased two central office telephone switches and related
facilities. Although this will obligate the Company to approximately $40,000 per
month in additional facilities and equipment rent, the Company believes that the
increased capacity from the new switches will allow the Company to generate
operating income in the future. The Company believes that profitability from the
sale of telephone time can best be achieved by having sufficient capacity to
properly facilitate existing customer requirements and by attracting more
customers. This, in turn, will enable the Company to purchase increasing numbers
of telephone minutes, resulting in more favorable purchase pricing. Upgraded
technical performance of the telephone switches which process the Company's
traffic should also encourage increased traffic volume and customer
satisfaction. To that end, the Company has leased two Siemens Stromberg-Carlson
central office telephone switches which are currently being installed in Miami
and Jersey City. In addition, utilizing these central office switches will
permit the Company to pursue direct-connect international agreements for long
distance termination, which has the potential to improve PICK's pricing
structure dramatically in these areas.
These changes also allow the Company to structure the calling costs on PICK's
prepaid telephone calling cards sold at retail in a manner which should result
in increased retail sales. Overall, the Company believes it will be able to
generate operating income in the future.
The Company has signed a best efforts private placement agreement with Kaufman
Bros., L.P. to raise $5 million in equity or debt. In December 1997, this
agreement was terminated without any funds being raised. The Company is also
pursuing other sources of capital. While the Company believes it will be
successful in its efforts to raise sufficient capital and to restructure its
operations so that it may continue as a going concern, there can be no assurance
that the Company will be successful.
18
<PAGE>
Part II - Other Information
Item 1 - Legal Proceedings:
During the nine months ended September 30, 1997, there were no material changes
in the Company's legal proceeding commenced against American Telephone &
Telegraph Company ("AT&T"). In November, 1997, AT&T indicated that it intends to
withdraw from the mediation. Accordingly, on November 5, 1997, the Company filed
an arbitration proceeding against AT&T.
Item 2 - Changes in Securities:
None to report
Item 3 - Defaults upon Senior Securities:
None to report
Item 4 - Submission of Matters to a Vote of Security Holders:
None to report
Item 5 - Other Information:
None to report
Item 6 - Exhibits and Reports on Form 8-K:
No reports on form 8-K have been filed during the quarter ended
September 30, 1997.
Exhibits filed as part of this report are listed below:
27 Financial Data Schedule
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: July 16, 1998 By: /s/ Diego Leiva
----------------------------------
Diego Leiva
President and Chief Executive Officer
Date: July 16, 1998 By: /s/ Robert S. Bingham
----------------------------------
Robert S. Bingham
Chief Financial Officer
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-1-1997
<PERIOD-END> SEP-30-1997
<CASH> 35,245
<SECURITIES> 0
<RECEIVABLES> 1,339,701
<ALLOWANCES> 242,202
<INVENTORY> 8,732
<CURRENT-ASSETS> 1,309,318
<PP&E> 127,541
<DEPRECIATION> 49,591
<TOTAL-ASSETS> 3,507,074
<CURRENT-LIABILITIES> 7,542,140
<BONDS> 0
0
0
<COMMON> 43,325
<OTHER-SE> 4,187,256
<TOTAL-LIABILITY-AND-EQUITY> 3,507,074
<SALES> 2,295,703
<TOTAL-REVENUES> 2,295,703
<CGS> 1,570,324
<TOTAL-COSTS> 2,099,622
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,597
<INCOME-PRETAX> 181,576
<INCOME-TAX> 0
<INCOME-CONTINUING> 181,576
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 181,576
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.00
</TABLE>
