<PAGE>
FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF HE 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
Page No.
PART I Financial Information
Item 1: Financial Statements 3
Consolidated Balance Sheets 4
Consolidated Statements of Operations 5
Consolidated Statements of Stockholders' Equity 6
Consolidated Statements of Cash Flows 7
Notes to the Consolidated Financial Statements 9
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
PART II Other Information:
Item 1 Legal Proceedings 20
Item 2 Changes in Securities 20
Item 3 Defaults Upon Senior Securities 20
Item 4 Submission of Matters to a Vote of Security Holders 20
Item 5 Other Information 20
Item 6 Exhibits and Reports on Form 8-K 20
SIGNATURES 21
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
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997 (*)
------------ ----------
ASSETS (Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash $ 87,712 $ 98,979
Accounts receivable, net 778,180 1,214,018
Prepaid telephone card inventory 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
----------- -----------
Furniture and equipment, net 90,571 84,368
----------- -----------
OTHER ASSETS:
Security deposits 0 28,694
Prepaid cellular patent and rights, net 583,705 498,836
Investment in marketable equity securities 4,812,660 1,532,000
----------- -----------
Total other assets 5,396,365 2,059,530
----------- -----------
Total assets $ 8,917,149 $ 3,536,924
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short term debt $ 750,000 $ 750,000
Accounts payable 1,072,052 3,026,929
Deferred revenue - prepaid calling cards 1,667,388 1,440,983
Reserve for contingent liability 1,749,563 1,749,563
Advances from stockholder 25,152 0
Accrued compensation due stockholders 43,698 56,349
Other current liabilities 1,274,576 869,901
----------- -----------
Total current liabilities 6,582,429 7,893,725
----------- -----------
Minority interest in consolidated subsidiary 1,465,141 110,921
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.002 par value at December 31, 1996, $0.001 par value at
June 30, 1997; authorized 75,000,000 shares; 43,697,516 issued and
43,217,516 outstanding at December 31, 1996; 43,097,516
issued and 35,832,016 outstanding at June 30, 1997 87,395 43,098
Additional paid in capital in excess of par 6,399,720 5,844,017
Stock subscription receivable (600,000) 0
Treasury stock (602,089) (3,072,222)
Unrealized gain (loss) on marketable equity securities (3,904,965) 1,349,000
Retained earnings (deficit) (510,482) (8,631,615)
----------- -----------
Total stockholders' equity (deficit) 869,579 (4,467,722)
----------- -----------
Total liabilities and stockholders' equity (deficit) $ 8,917,149 $ 3,536,924
=========== ===========
</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 June 30, Six Months Ended June 30,
1996 1997 (*) 1996 1997 (*)
------------ ------------ ------------ ------------
REVENUES:
<S> <C> <C> <C> <C>
Sales of long distance services $ 553,387 $ 2,591,695 $ 555,224 $ 4,742,214
Sales of prepaid calling cards 664,164 264,962 1,174,993 552,675
------------ ------------ ------------ ------------
Total revenues 1,217,551 2,856,657 1,730,217 5,294,889
COST OF SALES:
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
------------ ------------ ------------ ------------
OPERATING EXPENSES:
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 expense 81,485 39,385 86,678 65,677
------------ ------------ ------------ ------------
Total operating expenses 652,560 611,371 1,259,913 1,062,617
------------ ------------ ------------ ------------
(Loss) from operations (849,397) (481,158) (1,542,746) (911,081)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Net interest income (expense) 340 (16,252) (9,990) (30,196)
License fees 50,000 0 3,650,000 0
Net gains (losses) on marketable equity securities 0 0 4,784,000 (9,399,079)
------------ ------------ ------------ ------------
Total other income (expense) 50,340 (16,252) 8,424,010 (9,429,275)
------------ ------------ ------------ ------------
Income (loss) before minority interest in
subsidiary loss and income taxes (799,057) (497,410) 6,881,264 (10,340,356)
Minority interest in subsidiary loss 12,491 3,178 19,145 411,223
Benefit (provision) for income taxes 346,000 0 (1,808,000) 1,808,000
------------ ------------ ------------ ------------
Net income (loss) $ (440,566) $ (494,232) $ 5,092,409 $ (8,121,133)
============ ============ ============ ============
Net income (loss) per common share - basic $ (0.01) $ (0.01) $ 0.12 $ (0.21)
============ ============ ============ ============
Weighted average shares outstanding -basic 42,755,713 35,832,016 42,755,713 37,887,803
============ ============ ============ ============
</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
-------- ----------- ------------ ----------- -------------- ---------- -------------
Balance,
<S> <C> <C> <C> <C> <C> <C> <C>
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)
Valuation reserve (*) 0 0 0 0 5,253,965 0 5,253,965
Net (loss) (*) 0 0 0 0 0 (8,121,133) (8,121,133)
-------- ----------- -------- ----------- ----------- ------------ -----------
Balance,
June 30, 1997 (*) $ 43,098 $ 5,844,017 $ 0 $(3,072,222) $ 1,349,000 $ (8,631,615 $(4,467,722)
======== =========== ======== =========== =========== ============ ===========
</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.
(*) 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
Six Months Ended June 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1997(*)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 5,092,409 $(8,121,133)
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
Depreciation and amortization 87,832 83,880
Minority interest in subsidiary loss (6,654) (411,223)
Bad debt expense 86,678 65,677
Provision (benefit) for deferred income taxes 1,808,000 (1,808,000)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (527,635) (413,252)
Decrease (increase) in prepaid telephone card inventory 39,812 5,511
Decrease (increase) in other operating assets (121,017) (8,068)
Increase (decrease) in accounts payable 555,505 1,954,877
Increase (decrease) in deferred revenue 306,937 (226,405)
Increase (decrease) in customer deposits 250,000 (300,000)
Increase (decrease) in other operating liabilities 64,563 (166,033)
----------- -----------
Net cash provided by (used in) operating activities (797,570) 54,910
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (36,169) (6,513)
----------- -----------
Net cash (used in) investing activities (36,169) (6,513)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued for cash 250,000 0
Common stock issued for cash by subsidiary 602,000 0
Acquisition of treasury stock for cash 0 (11,978)
Payments received on stock subscriptions receivable 150,000 0
Payments on third-party debt (50,000) 0
Funds advanced by stockholder 50,000 0
Payments of stockholder advances 0 (25,152)
----------- -----------
Net cash provided by (used in) financing activities 1,002,000 (37,130)
----------- -----------
Net increase in cash 168,261 11,267
CASH, beginning of period 110,715 87,712
----------- -----------
CASH, end of period $ 278,976 $ 98,979
=========== ===========
</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)
Six Months Ended June 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1997(*)
---- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<S> <C> <C>
Interest paid during the period $ 0 $ 29,636
========== ==========
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 0 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
========== ==========
</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 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:
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.
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. Intercompany transactions have been eliminated.
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.
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, 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.
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.
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 $86,678 and $65,677 for the six
months ended June 30, 1996 and 1997 respectively.
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.
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
minimis.
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.
10
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(UNAUDITED)
(2) Restatement of Financial Information
The Company's financial statements at June 30, 1997 and for the six 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 3 and 7), as the Company
believed that it 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 in the first quarter
of 1997. The effect of the restatement as for the six months ended June 30, 1997
is as follows:
As previously As
Reported Restated
-------- --------
Net income (loss) $ 454,479 $ (8,121,133)
========= =============
Net income (loss) per share - basic $ 0.01 $ (0.21)
====== =======
Net income for the three months ended June 30, 1997 is the same as originally
reported.
(3) 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 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
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 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
11
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(UNAUDITED)
(3) Stockholders' Equity, Continued
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 individual's 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 was subsequently
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 above.
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, the Company reacquired 250,000 shares from IES, previously issued in
January 1996. In December 1996, the Company issued 400,000 shares to the
President of the Company in exchange for $100,000 of salary accrued but not yet
paid. In December 1996, the Company issued 55,000 shares to several non-officer
employees of the Company in recognition of the outstanding work performed by
these individuals on behalf of the Company. In February 1997, the Company agreed
to cancel 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 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 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 surrender of 2,800,000 shares of Ultimistics for the Company's and its
subsidiary's common stock.
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.
12
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(UNAUDITED)
(4) 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.
(5) Notes Payable
Short-term debt includes advances to PICK by the principal stockholder, which
were not collateralized. 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 200,000 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 7.
(6) 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 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.
(7) 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 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 exchange for 200,000
shares of Ultimistics common stock, valued at $480,000.
13
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(UNAUDITED)
(7) Investment in Marketable Equity Securities, Continued
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.
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 June 30, 1997, the
Company holds 380,000 shares of Jet Vacations. Because the shares 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
$1,482,000 at June 30, 1997. The Company is watching the market value of Jet
Vacations closely to determine future changes in valuation.
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 June 30, 1997.
(8) 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.
(9) 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.
(10) 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> <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>
14
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(UNAUDITED)
(10) Stock Option Plan, Continued
No options had been exercised at June 30, 1997.
(11) Working Capital Deficiency
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. As shown in the previously filed consolidated financial statements,
the Company incurred operating losses for the years ended December 31, 1994,
1995 and 1996. For the six months ended June 30, 1997, the Company recorded an
operating loss of $911,081. The Company has a working capital deficit of
$6,500,699 at June 30, 1997. 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 $43,643, which resulted in and
reflects an increase of cash of $11,267. 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 12), 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.
(12) 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 superseded all prior underwriting agreements and was terminated
without any funds being raised.
15
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations:
Restatement of Financial Information
The Company's Consolidated Financial Statements at June 30, 1997 and for the six
months then ended which are included in this Report have been restated from the
amounts previously reported. The Company initially did not report any losses on
the disposition of the marketable equity securities for transactions consummated
in the first quarter of 1997 (Notes 2, 3 and 7 to Consolidated Financial
Statements), as the Company believed that it 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.
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.
16
<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.
Other income (expense) changed from income of $8,424,010 in 1996 to a loss of
$9,429,275 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 and $4,784,000 in non-cash gains on disposition of marketable equity
securities, offset by $9,990 in net interest expense. The 1997 other expense
consists of $9,399,079 in non-cash losses on disposition of marketable equity
securities and $30,196 in interest expense.
A provision for federal income taxes made in 1996 was reversed due to the losses
incurred in the first quarter of 1997. See Note 1 to the Consolidated Financial
Statements in Item 1, above.
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.
17
<PAGE>
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.
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 $440,566 ($0.01 per
share) for the three months ended June 30, 1996 compared to a net loss of
$494,232 ($0.01 per share) 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 $54,910 primarily reflects positive cash flow arising from (i) an
increase in accounts payable of $1,954,877, (ii) $9,399,079 in non-cash losses
on disposition of marketable equity securities and (iii) depreciation and
amortization of $83,880, reduced by negative cash flow arising from (i) a net
loss of $8,121,133, (ii) an increase in accounts receivable of $413,252 and
(iii) non-cash income arising from the reversal of $1,808,000 in
previously-provided deferred income taxes.
Cash used for investing activities for the three months ended June 30, 1997 of
$6,513 reflects capital expenditures for fixed assets. The Company has no
material commitments for capital expenditures as of June 30, 1997.
18
<PAGE>
Cash used in financing activities for the six months ended June 30, 1997
amounted to $37,130, which was the retirement of advances from a stockholder and
the repurchase of common stock for treasury.
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.
19
<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 - 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
June 30, 1997.
Exhibits filed as part of this report are listed below:
27 Financial Data Schedule
20
<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 9, 1998 By: /s/ Diego Leiva
-----------------------------
Diego Leiva
President and Chief Executive Officer
Date: July 9, 1998 By: /s/ Robert S. Bingham
-----------------------------
Robert S. Bingham
Chief Financial Officer
(Principal Accounting Officer)
21
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0001006282
<NAME> PICK COMMUNICATIONS CORP.
<CURRENCY> U. S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 98,979
<SECURITIES> 0
<RECEIVABLES> 1,443,856
<ALLOWANCES> 229,838
<INVENTORY> 18,403
<CURRENT-ASSETS> 1,393,026
<PP&E> 127,541
<DEPRECIATION> 43,173
<TOTAL-ASSETS> 3,536,924
<CURRENT-LIABILITIES> 7,893,725
<BONDS> 0
0
0
<COMMON> 43,098
<OTHER-SE> (4,510,820)
<TOTAL-LIABILITY-AND-EQUITY> 3,536,924
<SALES> 2,856,657
<TOTAL-REVENUES> 2,856,657
<CGS> 2,726,444
<TOTAL-COSTS> 3,337,815
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,252
<INCOME-PRETAX> (494,232)
<INCOME-TAX> 0
<INCOME-CONTINUING> (494,232)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (494,232)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> 0
</TABLE>
