<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED 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
Part I Financial Statements
- ----------------------------
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...............................................12
Part II Other Information:
- --------------------------
Items 1-6 Other Information..........................................15
Signatures............................................................16
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
December 31, 1996 and September 30, 1997
<TABLE>
<CAPTION>
1996 1997
----------------- -----------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
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
----------------- -----------------
PROPERTY AND EQUIPMENT:
Furniture and equipment, net 90,571 77,950
----------------- -----------------
Total property and equipment 90,571 77,950
----------------- -----------------
OTHER ASSETS:
Security deposits 0 11,796
Prepaid cellular patent and rights, net 583,705 476,830
Purchased goodwill 0 2,789,968
Investment in marketable equity securities, net 4,812,660 1,631,180
----------------- -----------------
Total other assets 5,396,365 4,909,774
----------------- -----------------
Total assets $ 8,917,149 $ 6,297,042
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,072,052 $ 4,005,751
Accrued expenses and other current liabilities 1,318,274 618,535
Advances from stockholder 25,152 170,000
Reserve for contingent liability 1,749,563 1,100,000
Deferred revenue 1,667,388 897,854
Borrowings under line of credit 750,000 750,000
----------------- -----------------
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) (4,802,534)
Marketable equity securities valuation reserve (3,904,965) (2,503,820)
Retained earnings (deficit) (510,482) 22,241
----------------- -----------------
Total stockholders' equity (deficit) 869,579 (1,353,963)
----------------- -----------------
Total liabilities and stockholders' equity $ 8,917,149 $ 6,297,042
================= =================
</TABLE>
The accompanying notes are an integral part of these
financial statements.
4
<PAGE>
PICK Communications Corp.
Consolidated Statements of Operations
(UNAUDITED)
<TABLE>
<CAPTION>
3 months ended Sept. 30 9 months ended Sept. 30
------------------------------- -------------------------------
1996 1997 1996 1997
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue
Sales - prepaid telephone calling cards $ 315,631 $ 541,272 $ 1,490,624 $ 1,093,947
Sales - long distance services 3,125,424 1,754,431 3,680,648 6,496,645
-------------- --------------- -------------- --------------
Total sales 3,441,055 2,295,703 5,171,272 7,590,592
Provision for contingent costs 904,000 (649,563) 904,000 (649,563)
Other cost of sales 3,329,525 2,219,887 5,353,220 7,363,240
-------------- --------------- -------------- --------------
Total cost of sales 4,233,525 1,570,324 6,257,220 6,713,677
-------------- --------------- -------------- --------------
Gross profit (loss) (792,470) 725,379 (1,085,948) 876,915
-------------- --------------- -------------- --------------
Sales - prepaid cellular licenses 0 0 3,650,000 0
Operating expenses
Sales and marketing - related party 37,309 0 79,645 0
Sales and marketing - other 386,105 3,839 531,643 40,434
-------------- --------------- -------------- --------------
Total 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 35,625 139,007 106,875 210,171
Bad debt 303,243 13,089 389,921 78,766
-------------- --------------- -------------- --------------
Total operating expenses 1,093,988 632,594 2,353,901 1,695,211
-------------- --------------- -------------- --------------
Income (loss) from operations (1,886,458) 92,785 210,151 (818,296)
Interest (income) expense (127) 16,597 (782) 46,793
-------------- --------------- -------------- --------------
Income (loss) before taxes, minority interest in
subsidiary loss and other gains (losses) (1,886,331) 76,188 210,933 (865,089)
Gain on in-substance defeasance 53,080 0 53,080 0
Gain (loss) on sale of marketable equity
securities 0 0 4,784,000 (748,625)
-------------- --------------- -------------- --------------
Income (loss) before taxes and minority interest
in subsidiary loss (1,833,251) 76,188 5,048,013 (1,613,714)
Minority interest in subsidiary loss 17,787 2,056 36,932 338,437
Provision for deferred income tax (benefit) 0 0 1,808,000 (1,808,000)
-------------- --------------- -------------- --------------
Net income (loss) $(1,815,464) $ 78,244 $ 3,276,945 532,723
============== =============== ============== ==============
Net income (loss) per share $ (0.04) $ 0.00 $ 0.08 $ 0.01
============== =============== ============== ==============
Weighted average number of shares outstanding 42,775,559 36,013,717 42,829,377 37,261,393
============== =============== ============== ==============
</TABLE>
The accompanying notes are an integral part of the
financial statements.
5
<PAGE>
PICK Communications Corp.
Consolidated Statement of Stockholders' Equity
(UNAUDITED)
<TABLE>
<CAPTION>
Marketable
Additional Stock Securities Retained Total
Common Paid in Subscription Valuation Treasury Earnings Stockholders'
Stock Capital Receivable Reserve Stock (Deficit) Equity
------------- ----------- -------------- ------------ ------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1,
1997:
A) $ 87,395 $ 6,399,720 $ (600,000) $(3,904,965) $ (602,089) $(510,482) $ 869,579
Capital transactions:
B) (43,697) 43,697 0 0 0 0 0
C) (600) (599,400) 600,000 0 0 0 0
D) 0 0 0 0 (2,038,155) 0 (2,038,155)
E) 0 0 0 0 (11,978) 0 (11,978)
F) 0 0 0 3,570,762 (2,150,312) 0 1,420,450
G) 227 42,808 0 0 0 0 43,035
Other changes:
H) 0 0 0 (1,808,000) 0 0 (1,808,000)
I) 0 0 0 (361,617) 0 0 (361,617)
Net income 0 0 0 0 0 532,723 532,723
-------------- ----------- -------------- ------------ ------------- ---------- -------------
BALANCE, September 30,
1997:
$ 43,325 $ 5,886,825 $ 0 $(2,503,820) $ (4,802,534) 22,241 $(1,353,963)
============== =========== ============== ============ ============= ========== =============
</TABLE>
A) 43,697,516 shares issued and 43, 217,516 shares outstanding.
B) Reduction in par value from $0.002 to $0.001 per share.
C) Cancellation of 600,000 shares subscribed. 43,097,516 shares issued and
42,617,516 shares outstanding.
D) 750,000 shares the Company's common stock received in return for
$2,038,155 (book value) of prepaid advertising. 43,097,516 shares issued
and 41,867,516 shares outstanding.
E) Purchased 35,500 shares of the Company's common stock for $11,978.
43,097,516 shares issued and 41,832,016 shares outstanding.
F) Transactions involving the disposition of the common stock of Firenze Ltd.
and Ultimistics, Inc. See Note 4. 43,097,516 shares issued and
35,832,016 shares outstanding.
G) Shares issued as compensation to employees and others. 43,325,317 shares
issued and 36,059,817 shares outstanding.
H) Reversal of deferred income tax liability. See Note 2.
I) Adjustment to marketable securities valuation reserve related to
investment in the common stock of Jet Vacations, Inc.
The accompanying notes are an integral part of the
financial statements.
6
<PAGE>
PICK Communications Corp.
Consolidated Statements of Cash Flows
Nine months ended September 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1997
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,276,945 $ 532,723
Adjustments to reconcile net income (loss) to cash used in
operating activities:
Non-cash revenues - prepaid cellular license revenue (3,650,000) 0
Non-cash (gain) loss on sale of marketable equity securities (4,784,000) 748,625
Minority interest in consolidated subsidiary loss (36,932) (338,437)
Non-cash gain on in-substance defeasance (53,080) 0
Non-cash expenses - prepaid advertising 256,845 0
Depreciation and amortization 134,547 229,304
Bad debt expense 389,921 78,766
Stock issued for services 50,000 43,035
Reserve for contingent liabilities 904,000 (649,563)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (767,141) (396,775)
(Increase) decrease in prepaid telephone card inventory 79,803 15,182
(Increase) decrease in prepaid and other assets (117,439) (98,111)
Increase (decrease) in accounts payable 1,234,633 2,933,699
Increase (decrease) in accrued expenses and other current
liabilities 214,657 (699,739)
Increase (decrease) in deferred revenue 643,076 (769,534)
Increase (decrease) in deferred income taxes payable 1,808,000 (1,808,000)
----------------- -----------------
Net cash provided by (used in) operating activities (416,165) (178,825)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments 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
Acquisition of treasury stock for cash (44,500) (11,978)
Common stock of subsidiary issued for cash 527,612 0
Payments received on stock subscriptions receivable 325,000 0
Funds advanced by stockholder 50,000 170,000
Payments on stockholder advances (50,000) (25,152)
Payments on third-party debt (50,000) 0
----------------- -----------------
Net cash provided by (used in) financing activities 883,112 132,870
----------------- -----------------
Net increase (decrease) in cash 33,395 (52,467)
CASH, beginning of period 110,715 87,712
----------------- -----------------
CASH, end of period $ 144,110 $ 35,245
================= =================
</TABLE>
The accompanying notes are an integral part of the
financial statements.
7
<PAGE>
PICK Communications Corp.
Consolidated Statements of Cash Flows
Nine months ended September 30,
(UNAUDITED)
(Continued)
<TABLE>
<CAPTION>
1996 1997
----------------- -----------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<S> <C> <C>
Interest paid in cash $ 0 $ 46,793
================= ================
Stock issued for investment in marketable equity securities $ 2,075,000 $ 0
================= =================
Stock issued to acquire prepaid advertising $ 2,700,000 $ 0
================= =================
Stock issued for subscription receivable $ 125,000 $ 0
================= =================
In substance defeasance $ 425,000 $ 0
================= =================
Prepaid advertising and telephone cards exchanged for stock of the
Company $ 557,589 $ 0
================= =================
Prepaid advertising exchanged for stock of the Company and its
consolidated subsidiary $ 0 $ 2,458,155
================= =================
Marketable equity securities exchanged for stock of the Company and
its consolidated subsidiary $ 0 $ 5,642,313
================= =================
</TABLE>
The accompanying notes are an integral part of the
financial statements.
8
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(UNAUDITED)
(1) Summary of significant accounting principles. 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 periods 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.
Certain amounts in the accompanying financial statements have been
reclassified from the presentation in previously-issued financial
statements to conform with the presentation at September 30, 1997.
In the first quarter of 1997, in three separate transactions, the
Company transferred, to unrelated third parties, 2,800,000 shares of
restricted common stock of Ultimistics, Inc., which had a book value, to
the Company, of $5,600,000, and $420,000 of prepaid advertising. In
return, the Company received 1,000,000 shares of its common stock and
10,000,000 shares of the common stock of one of its subsidiaries. The
Company accounted for these transactions based upon its basis in the
Ultimistics shares, resulting in the Company's recording of goodwill in
the amount of $2,893,000 and treasury stock in the amount of $2,150,000.
If the Company had accounted for these transactions based upon either
(i) the market value of the Company's shares and the book value of the
subsidiary's shares at the dates of the transactions or (ii) the market
value of the Ultimistics shares at the dates of the transactions, the
Company would have recorded no goodwill and would have reflected an
additional, non-cash loss on disposition of securities of approximately
$4,900,000 in its statements of operations for the three months ended
March 31, 1997 and the nine months ended September 30, 1997.
(2) Income taxes. In the first quarter of 1997, the Company determined
it had no income tax liability; therefore, it reversed a
previously-provided deferred income tax liability of $1,808,000.
(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. 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, previously issued into escrow for IES. In
February 1997, the Company exchanged (with Firenze Ltd.) 5 million
shares of Firenze common stock for 5 million shares of the Company's
common stock and 6.25 million shares of PCT common stock. In February
1997, the Company exchanged (with New Century Media Inc.) 1 million
shares of Ultimistics Inc. common stock for 1 million shares of the
Company's common stock and 1 million shares of PCT common stock. In
March 1997, the Company exchanged (with Yakimoto Investment Ltd.) 1.5
million shares of Ultimistics Inc. common stock for 4 million shares of
PCT common stock. In March 1997, the Company exchanged (with an
unaffiliated third party) 300,000 shares of Ultimistics Inc. common
stock and the balance of the Company's prepaid advertising for 5 million
shares of PCT common stock. In March 1997, the Company repurchased
35,500 shares of its common stock in open market purchases at an average
price of $0.337 per share, or a total of $11,978. The cumulative total
of the Treasury stock acquisitions by the Company is $4.2 million.
9
<PAGE>
PICK Communications Corp.
Notes to Consolidated Financial Statements
(UNAUDITED)
(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 form 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. 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. The Company
believes that by completing this exchange it will eventually realize the
value in the underlying Ultimistics common stock, which, as a minority
shareholder of Ultimistics, might not have been possible.
At September 30, 1997, 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.). The 380,000 shares of Jet Vacations, which are restricted until
March, 1998, have a market value of $5,270,600 at September 30, 1997.
Because of the restrictions and the limited trading activity in the
shares of Jet Vacations, the Company valued these shares at 30% of the
market price, or $1,581,180. The difference between this and the
Company's basis of $4,085,000 is reflected in the valuation reserve of
$2,503,820.
(9) Statement of Financial Accounting Standards not yet evaluated. In
February, 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards ("SFAS") number 128
("Earnings per Share") and number 129 ("Disclosure of Information about
Capital Structure"). The Company will have to implement SFAS 128 and 129
in its financial statements for the year ended December 31, 1997. The
provisions of SFAS 128 change the presentation and calculation of
earnings per share. The Company has not evaluated the impact, if any,
of the provisions of SFAS 128 and 129.
(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.
10
<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 canceled 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>
(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 an operating loss of $818,296. 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 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. 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.
11
<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 risks 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.
There were no prepaid cellular license revenues during the nine months ended
September 30, 1997 compared to $ 3,650,000 in license revenues for the nine
months ended September 30, 1996. The cellular license revenues for 1996 were
non-cash transactions which resulted in the acquisition of restricted shares
of marketable securities.
The direct costs of international long distance and 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.
Amortization of $210,171 was attributable to the prepaid cellular telephone
technology license, which is being expensed over five years, and goodwill,
which is being amortized over seven years.
During the nine months ended September 30, 1996, the Company recognized
12
<PAGE>
non-cash gains from exchange of marketable securities of $4,784,000 and
provided for deferred tax liabilities in the amount of $1,808,000 related to
those transactions. In the first quarter of 1997, the Company reversed the
deferred tax liability, recognizing income of $1,808,000.
The Company reported net income of $532,723 for the nine months ended
September 30, 1997, compared with net income of $3,276,945 for the comparable
period in 1996, a decrease in net income of $2,744,222. Reported net income
for both periods is affected by significant non-cash transactions. 1997
reported net income benefits from the reversal of previously-provided reserves
for contingencies ($649,563) and deferred income taxes ($1,808,000) and is
burdened by non-cash losses from disposition of marketable securities
($418,625, $748,625 less the portion allocated to the minority interest of
$330,000). 1996 reported net income benefits from sales of prepaid cellular
licenses ($3,650,000) and gain on sale of marketable securities ($4,784,000)
and is burdened by provisions for reserves for contingencies ($904,000) and
deferred income taxes ($1,808,000). Absent the above non-cash transactions,
the Company would have reported a net loss of $1,506,215 for the nine months
ended September 30, 1997 and $2,445,055 for the nine months ended September
30, 1996, an improvement of $938,840.
As discussed in footnote 1 to the consolidated financial statements, the
Company has accounted for certain non-cash transactions consummated in the
first quarter of 1997 based upon the book value of the assets surrendered. If
the Company had accounted for these transactions based upon the fair value of
the assets surrendered, the Company would have reported an additional loss of
approximately $4,900,000 from sale of securities in the nine months ended
March 31, 1997.
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
such 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 of $649,563 of that provision in
1997. 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
13
<PAGE>
high write-offs and reserves provided in 1996.
Amortization expense has increased by $103,382 due to the amortization of
goodwill, which started in 1997.
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.
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. 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.
14
<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.
15
<PAGE>
Signatures:
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PICK Communications Corp.
Date: November 14, 1997 By: /s/ Diego Leiva
-------------------------------------
Diego Leiva
President and Chief Executive Officer
Date: November 14, 1997 By: /s/ Robert S. Bingham
-------------------------------------
Robert S. Bingham
Chief Financial Officer
(Principal Accounting Officer)
16
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<CIK> 0001006282
<NAME> PICK COMMUNICATIONS CORP.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 35,245
<SECURITIES> 0
<RECEIVABLES> 1,096,774
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<INVENTORY> 8,732
<CURRENT-ASSETS> 1,309,318
<PP&E> 127,538
<DEPRECIATION> (49,588)
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0
0
<COMMON> 43,325
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<INCOME-CONTINUING> 78,244
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