1
As filed with the Securities and Exchange Commission on September 9, 1997
Registration No. 333-34595
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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LET'S TALK CELLULAR & WIRELESS, INC.
(Exact name of registrant as specified in its charter)
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FLORIDA 5999,5065 650292891
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) identification no.)
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5200 N.W. 77TH COURT
MIAMI, FLORIDA 33166
(305) 477-8255
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
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NICOLAS MOLINA
BRETT BEVERIDGE
LET'S TALK CELLULAR & WIRELESS, INC.
5200 N.W. 77TH COURT
MIAMI, FLORIDA 33166
(305) 477-8255
(Name, address, including zip code, and telephone number,
including area code, of agents for service)
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WITH COPIES TO:
JORGE L. FREELAND, ESQ. MICHAEL L. FITZGERALD, ESQ.
GREENBERG TRAURIG HOFFMAN BROWN & WOOD LLP
LIPOFF ROSEN & QUENTEL, P.A. ONE WORLD TRADE CENTER
1221 BRICKELL AVENUE NEW YORK, NEW YORK 10048
MIAMI, FLORIDA 33131 (212) 839-5300
(305) 579-0500 TELECOPY (212) 839-5599
TELECOPY (305) 579-0717
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [X]
CALCULATION OF REGISTRATION FEE
==================================================================================================================
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1)(2) REGISTRATION FEE
==================================================================================================================
Common Stock, $.001 par value(1).......... $50,000,000 $15,152
==================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933.
(2) Includes shares of Common Stock which may be purchased by the
Underwriters pursuant to an over-allotment option.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
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SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED SEPTEMBER 9, 1997
PROSPECTUS
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SHARES
[LOGO]
COMMON STOCK
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Of the shares of Common Stock offered hereby shares are being
offered by Let's Talk Cellular & Wireless, Inc. (the "Company") and shares
are being offered by certain shareholders of the Company (the "Selling
Shareholders"). The Company will not receive any of the proceeds from the sale
of shares by the Selling Shareholders. See "Principal and Selling Shareholders."
Prior to the offering, there has been no public market for the Common
Stock. It is currently estimated that the initial public offering price will be
between $ and $ per share. See "Underwriting" for a discussion
of the factors to be considered in determining the initial public offering
price.
Application has been made for quotation of the Company's Common Stock
on The Nasdaq National Market System under the symbol "LTCW."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
====================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS
- --------------------------------------------------------------------------------------------------------------------
Per Share.................... $ $ $ $
====================================================================================================================
Total(3)..................... $ $ $ $
====================================================================================================================
(1) The Company and the Selling Shareholders have agreed to indemnify the
several Underwriters against certain liabilities, including certain
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at
$ .
(3) The Selling Shareholders have granted the Underwriters an option to
purchase up to an additional shares of Common Stock, exercisable within
30 days after the date hereof, solely to cover over-allotments, if any.
If such option is exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Selling Shareholders will be
$ , $ and $ , respectively. See "Underwriting."
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The shares of Common Stock are offered by the several Underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1997.
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MERRILL LYNCH & CO.
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The date of this Prospectus is , 1997.
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[PHOTOS/MAP OF U.S.]
Certain persons participating in the offering may engage in transactions that
stabilize, maintain or otherwise affect the price of the Common Stock. Such
transactions may include stabilizing, the purchase of Common Stock to cover
syndicate short positions and the imposition of penalty bids. For a description
of these activities, see "Underwriting."
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE
READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE
INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT
OPTION HAS NOT BEEN EXERCISED, AND GIVES EFFECT TO A STOCK SPLIT TO BE
EFFECTED IMMEDIATELY PRIOR TO THE OFFERING. FISCAL YEAR REFERENCES ARE TO THE
RESPECTIVE FISCAL YEAR ENDED JULY 31. REFERENCES TO PRO FORMA FINANCIAL
INFORMATION ARE TO THE INFORMATION SET FORTH HEREIN UNDER "UNAUDITED PRO FORMA
FINANCIAL DATA," GIVING EFFECT TO THE ACQUISITION BY THE COMPANY OF TELEPHONE
WAREHOUSE, INC. AND NATIONAL CELLULAR, INCORPORATED (COLLECTIVELY, "TELEPHONE
WAREHOUSE") AS IF SUCH ACQUISITION (THE "TELEPHONE WAREHOUSE ACQUISITION") TOOK
PLACE AS OF THE BEGINNING OF THE PERIODS PRESENTED. UNLESS OTHERWISE INDICATED,
CELLULAR AND PCS INDUSTRY STATISTICS ARE OBTAINED FROM THE CELLULAR
TELECOMMUNICATIONS INDUSTRY ASSOCIATION ("CTIA") AND PAUL KAGAN ASSOCIATES, INC.
AND PAGING INDUSTRY STATISTICS ARE OBTAINED FROM THE STRATEGIS GROUP.
THE COMPANY
Let's Talk Cellular & Wireless, Inc. (together with its subsidiaries,
the "Company") is the largest independent specialty retailer of cellular and
wireless products, services and accessories in the United States, with 93 stores
located in 12 states, the District of Columbia and Puerto Rico as of July 31,
1997. The Company's stores, located predominantly in regional shopping malls,
seek to offer one-stop shopping for consumers to purchase cellular, personal
communication system ("PCS"), paging, internet, satellite, and other wireless
products and services and related accessories. The Company is also a leading
wholesaler of cellular and wireless products and accessories to more than 1,000
accounts, consisting primarily of distributors, carriers and smaller independent
retailers.
The Company's business strategy is to offer the most extensive
assortment of wireless products and services at everyday low prices supported by
knowledgeable customer service, through conveniently located and attractively
designed stores. The Company believes that this strategy provides it with a
competitive advantage by combining the extensive product selection, competitive
prices and operating efficiencies typical of a "big box" retailer with the
superior customer service and upscale shopping experience characteristic of a
specialty retailer. The Company offers wireless products from well-known,
name-brand suppliers such as AT&T, Ericsson, Motorola, Nokia and Sony. The
Company's stores typically sell up to 40 different makes and models of cellular
and PCS phones and pagers and over 1,000 SKUs of wireless products and
accessories, such as batteries, home and car chargers, vehicle adapter kits and
cases. The Company supports its broad product offering with knowledgeable and
personalized customer service focused on educating the consumer and identifying
the most appropriate products and services for each consumer's individual needs.
The Company offers everyday low prices that are competitive with other retailers
and supports this policy with price guarantee, upgrade and trade-in programs.
The Company believes that its store level economics compare favorably
to other retailing sectors. The Company has developed both kiosk and in-line
mall stores, which average approximately 150 and 800 square feet in size,
respectively. In fiscal 1997, the comparable stores (stores owned and operated
by the Company for at least 12 full months) generated average annual sales of
approximately $500,000 (excluding two stores that generate substantially higher
sales than other stores). In fiscal 1997, per store capital expenditures and
initial inventory for new kiosks and in-line stores averaged approximately
$62,000 and $136,000, respectively. Although sales per square foot vary by
format, the Company's stores had average sales per square foot of approximately
$1,000 in fiscal 1997.
The Company's revenues are generated principally from four sources:
retail sales, activation commissions paid by cellular carriers, residual
payments and wholesale sales. Retail sales involve the sale of cellular, PCS and
wireless products, such as phones, pagers and related accessories in the
Company's retail outlets. Activation commissions are payments the Company
receives from the applicable cellular carrier when a customer initially
subscribes for the cellular carrier's services. The amount of the activation
commission paid by cellular carriers is based upon various service plans offered
by the carriers. Residual payments are monthly payments ("residual income") made
by certain cellular carriers and pager customers. Cellular residual payments are
based upon a percentage (usually 4-6%) of the customers' monthly service
charges. Pager residual payments are received for the pager airtime that the
Company buys wholesale from paging carriers and then resells to individuals and
small businesses. Wholesale sales involve the sale of wholesale cellular and
wireless products. Management believes the wholesale business,
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which was acquired as part of the Telephone Warehouse Acquisition, provides the
Company with greater purchasing power and additional distribution capabilities
that complement the Company's retail operations.
The Company earns a profit on the cellular and PCS phones it retails as
the purchase price and/or activation commission exceeds the cost of the products
sold. The Company has recently made a strategic decision to accept increased
activation commissions from carriers in certain markets, in lieu of monthly
residual payments, to optimize cash flow and to facilitate the Company's growth
strategy.
INDUSTRY DYNAMICS
The wireless communications industry has grown substantially in recent
years. Cellular telephone service has been one of the fastest growing markets
within the industry. Since the inception of the cellular phone industry in 1983,
the number of U.S. cellular subscribers has grown to approximately 44 million by
year end 1996, having grown at an annual compound rate of 41% during the
previous five years. It is estimated that as of December 1996, this subscriber
base reflected an average market penetration of only 16.6%, based on the U.S.
population. In 1996, PCS wireless services were introduced in selected regions
of the U.S., which resulted in approximately 300,000 subscribers by year end.
Paul Kagan Associates, Inc. projects that by the year 2000 the number of
cellular and PCS subscribers in the U.S. will reach approximately 89 million.
According to CTIA, approximately $24 billion was spent on cellular service in
1996.
The paging market has also grown significantly. The number of U.S.
pagers in service has grown to approximately 42 million by year end 1996, having
grown at an annual compound rate of approximately 29% during the previous five
years. It is estimated that as of December 1996, this subscriber base reflected
an average market penetration of only 16%, based on the U.S. population. The
Strategis Group projects that by the year 2000 the number of U.S. pagers in
service will reach over 60 million. The Company believes that the U.S. market
for wireless communications products and services will continue to expand due to
advances in system technology and equipment, the emergence of new wireless
technologies, such as PCS, lower equipment prices and service charges and
increased consumer acceptance.
The Company believes that a shift is occurring in the distribution of
cellular and wireless services, products and accessories in the United States.
For many years cellular and wireless products and services were distributed to
consumers directly through telemarketing, direct mail, direct sales forces and,
to a lesser extent, carrier-owned retail outlets. As wireless services and
products have become more affordable, the market has expanded significantly and
shifted to a broader consumer base, which purchases for, among other reasons,
convenience and security purposes. In order to better access such a broad
consumer base, management believes carriers will seek multiple points of retail
distribution including established independent specialty retailers such as the
Company, their own retail outlets and "big box" electronics retailers.
COMPETITIVE POSITIONING
The Company believes that it has certain competitive advantages over
other retailers in satisfying consumers' changing needs and preferences.
Compared to "big box" retailers, the Company believes that its stores are more
conveniently located in regional shopping malls and typically have more selling
space devoted to wireless products. In addition, the Company believes that
because it exclusively focuses on wireless products, it is able to provide more
specialized and faster customer service than "big box" retailers. With the
technological advancements and continuous introductions of new products and
service options in the wireless industry, consumers demand increasingly higher
levels of service and support, access to a more extensive product selection and
greater education regarding all wireless products, including cellular, PCS,
paging and internet products.
Compared to carrier-owned stores, the Company has the advantage of
typically being able to offer wireless services from multiple carriers in any
given area whereas carrier-owned stores almost always offer only their own
wireless service. As a result, the Company is able to offer a larger number of
service options, including PCS from up to five carriers as well as paging
services. Other advantages include the Company's expertise in retailing
communications products and services to consumers and its ability to serve as a
one-source retail distribution system for a wide variety of cellular and
wireless services.
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GROWTH STRATEGY
The Company believes that the combination of its broad product
offering, highly visible and convenient store locations, excellent customer
service and everyday low pricing strategy positions it well for future growth.
Key elements of the Company's growth strategy are outlined below:
* NEW STORE EXPANSION. The Company plans to open 65 to 75 new
stores in fiscal 1998 and 80 to 100 new stores in fiscal 1999,
in both new and existing markets, of which approximately 40%
are expected to be kiosks and 60% are expected to be in-line
stores. The Company believes that this expansion rate, which
is dependent upon a number of factors, is achievable given the
Company's existing infrastructure, the ease with which it can
replicate its store model and its successful opening of 45 new
stores in fiscal 1997. As of July 31, 1997, the Company had 7
store locations under construction and had signed leases or
reached an agreement in principle for an additional 16 store
locations. The Company's stores are located in only 55 of the
more than 1,000 regional malls in the continental U.S. The
Company intends to focus initially on the largest and fastest
growing wireless markets in the U.S., based on industry
statistics, by targeting additional mall locations and
supplementing its penetration in existing markets with power
strip locations. Management believes that the flexibility of
the Company's kiosk and in-line store formats permits the
Company to take advantage of the best available locations
across a broad range of market areas.
* PURSUE SELECTIVE ACQUISITIONS. The Company intends to continue
to increase the number of its stores through selective
acquisitions of other specialty retailers of cellular and
wireless products in addition to those stores opened by the
Company. The Company believes that the independent retail
market for cellular and wireless products is highly fragmented
and consists of numerous independent specialty retailers in
each major metropolitan area. Through selective acquisitions,
the Company seeks to obtain immediate access to desirable
markets and locations, qualified sales personnel and, in some
cases, an existing subscriber base. The Company believes it
can successfully apply its operating strategy and leverage its
existing infrastructure and financial controls with such
acquisitions. Recent acquisitions completed by the Company
include (i) Peachtree Mobility, one of AirTouch Cellular's
largest Atlanta agents, acquired in August 1996 and (ii)
Telephone Warehouse, one of the largest AT&T agents in the
southwestern U.S., acquired in June 1997. As part of the
Company's growth strategy, management regularly reviews
acquisition prospects that would augment or complement the
Company's existing operations.
* INCREASE COMPARABLE STORE SALES. The Company seeks to increase
comparable store sales by capitalizing on the changing
industry dynamics that are driving the growth in cellular and
wireless usage and pursuing repeat business from its existing
customers for new products, product upgrades and additional
accessories. As the Company's stores increase penetration into
new and existing markets, the Company expects to obtain
greater brand name recognition through broader advertising,
increased repeat and referral business and corporate sales.
* CAPITALIZE ON OPERATING LEVERAGE. The Company continues to
invest in an infrastructure, including a management team and
information systems, to manage a rapidly growing chain of
stores. As a result, the Company may experience reduced
operating margins in the near term. As the Company continues
to expand internally and through acquisitions, it expects to
leverage these investments and improve margins through
economies of scale. In addition, the Company believes its
acquisition of Telephone Warehouse will provide additional
purchasing power as the wholesale operations of Telephone
Warehouse have historically been able to source inventory at
lower prices because of volume discounts.
HISTORY
Let's Talk Cellular & Wireless was founded by the Company's Chief
Executive Officer, Nick Molina, and Chairman, Brett Beveridge. Originally the
founders sold cellular products and services at major public events until
opening their first store in 1989. During the first three years of operations
the Company opened three stores. By early 1995, the Company had grown to 14
stores primarily in the southeastern U.S. In June 1996, the Company, then
operating 25 stores (one of which subsequently closed), received growth capital
from HIG Investment Group, L.P. and its affiliates ("HIG") and accelerated its
store expansion.
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See "Certain Transactions." Since that time, the Company has opened 45 stores
and acquired 24 stores and now operates 93 stores with total net revenues of
$54.7 million on a pro forma basis for the nine months ended April 30, 1997.
RECENT ACQUISITIONS
TELEPHONE WAREHOUSE ACQUISITION. In June 1997, the Company acquired
Telephone Warehouse in exchange for 552,590 shares of the Company's Common Stock
and the assumption of $13.1 million of indebtedness. Telephone Warehouse is one
of the largest AT&T agents in the southwestern United States and operates 19
specialty cellular and wireless retail stores in Texas, Missouri and Kansas. It
also wholesales cellular and wireless products to over 1,000 regional and local
retailers, distributors and carriers. See "Certain Transactions." For the twelve
months ended December 31, 1996 and for the four months ended April 30, 1997,
Telephone Warehouse had total net revenues of approximately $49.6 million and
$14.5 million, respectively. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for additional information
regarding the historical results of operations of Telephone Warehouse.
The Company's principal purpose in acquiring Telephone Warehouse was to
obtain immediate access to desirable markets, such as Dallas, San Antonio and
Kansas City, and locations and to qualified sales personnel and an existing
subscriber base. The Company intends to apply its operating strategy to
Telephone Warehouse, leverage Telephone Warehouse's existing infrastructure and
grow Telephone Warehouse's retail operations. In addition, the Company has the
opportunity to leverage the expertise of and benefit from Telephone Warehouse's
significant pager business. Management believes that the wholesale business,
which was acquired as part of the Telephone Warehouse Acquisition, provides the
Company with greater purchasing power and additional distribution capabilities.
PEACHTREE MOBILITY. In August 1996, the Company acquired Peachtree
Mobility, one of AirTouch Cellular's largest Atlanta agents, which operates five
retail stores (the "Peachtree Acquisition"). Since the date of the acquisition,
the Company has changed the stores' names to "Let's Talk Cellular & Wireless,"
increased the stores' in-stock merchandise availability and integrated the
accounting, sales and administrative functions into the Company's corporate
offices. The Company has also added two additional stores and is constructing a
third for the Atlanta market.
The Company's executive offices are located at 5200 N.W. 77th Court,
Miami, Florida 33166, and its telephone number is (305) 477-8255.
THE OFFERING
Common Stock offered by the Company ..................................... shares
Common Stock offered by the Selling Shareholders......................... shares
Common Stock to be outstanding after the offering........................ shares(1)
Use of proceeds ....................................................... To repay the Company's outstanding bank indebtedness
and certain shareholder loans, and, with the
remaining net proceeds, to finance the Company's
expansion, including the opening of new stores and
possible acquisitions, and for other general
corporate purposes.
Proposed Nasdaq National Market symbol................................... "LTCW"
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(1) Does not include shares of Common Stock issuable upon the
exercise of outstanding stock options, at a weighted average exercise
price of $ per share.
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SUMMARY FINANCIAL DATA
The following table presents (i) summary historical consolidated
financial data of the Company as of the dates and for the periods indicated and
(ii) summary unaudited pro forma financial data of the Company as of the dates
and for the periods indicated giving effect to the events described in the
"Unaudited Pro Forma Financial Data" included elsewhere herein as though they
had occurred on the dates indicated therein. The summary unaudited pro forma
financial data are not necessarily indicative of operating results or the
financial condition that would have been achieved had these events been
consummated on the date indicated and should not be construed as representative
of future operating results or financial condition. The summary historical
consolidated and unaudited pro forma financial data should be read in
conjunction with the financial statements and related notes thereto of the
Company and Telephone Warehouse and with the "Unaudited Pro Forma Financial
Data" and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus.
FISCAL YEAR ENDED JULY 31, NINE MONTHS ENDED APRIL 30,
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PRO PRO
FORMA(1) FORMA(1)
1994 1995 1996 1996 1996 1997 1997
--------- -------- -------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
INCOME STATEMENT DATA:
Retail sales and
activation income ..... $ 4,033 $ 7,771 $ 12,518 $ 26,995 $ 9,175 $17,007 $27,451
Residual income ......... 228 533 1,075 8,780 753 930 7,539
Wholesale sales ......... -- -- -- 24,893 -- -- 19,669
--------- -------- -------- -------- -------- ------- -------
Total net revenues .... 4,261 8,304 13,593 60,668 9,928 17,937 54,659
Gross profit ............ 2,133 4,044 7,084 22,295 5,214 9,898 21,881
Selling, general and
administrative expenses 1,918 3,896 6,601 16,505 4,841 8,789 16,581
Income from operations
before amortization of
intangibles ........... 172 48 258 4,341 218 824 4,112
Income from operations .. 172 48 258 2,399 218 664 2,407
Income before provision
for income taxes ...... 159 8 105 2,326 100 535 2,374
Income tax provision .... 70 -- 39 1,037 33 230 946
--------- -------- -------- -------- -------- ------- -------
Net income .............. $ 89 $ 8 $ 66 $ 1,289 $ 67 $ 305 $ 1,428
========= ======== ======== ======== ======== ======= =======
Net income per share
applicable to Common
Shareholders .......... $ .11 $ .01 $ .07 $ .54(2) $ .08 $ .22 $ .61(2)
========= ======== ======== ======== ======== ======= =======
Weighted average shares
outstanding ........... 824 824 876 1,940(2) 824 1,355 1,940(2)
========= ======== ======== ======== ======== ======= =======
SELECTED OPERATING DATA:
Stores open at end of
period:(3)
Kiosk ................. 5 13 14 14 14 30 30
In-line ............... 3 9 11 31 12 31 50
--------- -------- -------- -------- -------- ------- -------
Total ................ 8 22 25 45 26 61 80
Percentage change in
comparable store ...... (2.2%) 10.5% 11.5% 4.9% 7.9%
sales(4)
Average comparable
store
sales (5) ............. $ 442,000 $450,000 $462,000 $305,000 $337,000
Number of activations
during period ......... 1,661 5,205 14,803 11,395 28,890
Total gross square feet
at end of period....... 2,447 7,006 9,529 9,529 33,231
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AS OF APRIL 30, 1997
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ACTUAL PRO FORMA(6)
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BALANCE SHEET DATA:
Working capital ................ $ 709 $17,225
Total assets ................... 9,397 43,205
Long-term debt ................. 712 2,026
Preferred stock ................ 2,947 --
Shareholders' equity ........... 1,018 32,552
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(1) In June 1997 the Company acquired Telephone Warehouse in exchange for
552,590 shares of Common Stock and the assumption of Telephone Warehouse's
outstanding indebtedness. The unaudited pro forma financial data set forth
herein reflect (i) the combined operations of the Company and Telephone
Warehouse and (ii) the sale of the shares of Common Stock offered by the
Company hereby and the application of the estimated net proceeds therefrom
as set forth in "Use of Proceeds," as if such transactions had taken place
as of the beginning of the periods presented. For information regarding the
pro forma adjustments made to the Company's historical financial data, see
"Unaudited Pro Forma Financial Data."
(2) Pro forma net income per share applicable to Common Shareholders is
based on pro forma net income (see note (1) above) less $242,000
representing the fair value of the Common Stock distributed to the
holder of the Company's Series A Preferred Stock in order to induce the
conversion of the Series A Preferred Stock to Common Stock. See
"Unaudited Pro Forma Financial Data."
(3) For the nine months ended April 30, 1997 on a pro forma basis, includes
19 stores acquired in June 1997 pursuant to the Telephone Warehouse
Acquisition.
(4) A store becomes comparable after it has been owned and operated by the
Company for at least 12 full months. Comparable store sales are
comprised of retail sales and activation income at the Company's retail
stores, but do not include residual income.
(5) Represents the average retail sales and activation income on a store by
store basis only for stores owned and operated by the Company for at
least 12 full months as of period end (excluding two stores that
generate substantially higher sales than other stores). Therefore,
period to period figures may not be comparable.
(6) Adjusted to give effect to (i) the Telephone Warehouse Acquisition and
related transactions, (ii) the sale of the shares of Common Stock offered
by the Company and the application of the estimated net proceeds
therefrom as set forth in "Use of Proceeds" as if such transactions had
occurred at April 30, 1997, and (iii) a non-recurring charge of
approximately $753,000, net of tax, related to the write-off of
deferred financing costs in connection with the repayment of bank
indebtedness with a portion of the proceeds of this offering. See
"Capitalization" and "Pro Forma Condensed Consolidated Balance Sheet."
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RISK FACTORS
PROSPECTIVE INVESTORS OF THE SHARES OF COMMON STOCK OFFERED HEREBY
SHOULD CAREFULLY CONSIDER ALL OF THE INFORMATION SET FORTH IN THIS PROSPECTUS
AND, IN PARTICULAR, SHOULD EVALUATE THE FOLLOWING RISKS IN CONNECTION WITH AN
INVESTMENT IN COMMON STOCK OFFERED HEREBY.
RISKS ASSOCIATED WITH RAPID GROWTH
The Company's total net revenues have grown significantly in the past
several years, with sales increasing from $3.3 million in fiscal 1993 to $54.7
million on a pro forma basis for the nine months ended April 30, 1997. In
connection with the recent Telephone Warehouse Acquisition, the Company more
than doubled the amount of its assets and previous twelve months' total net
revenues. The Company intends to continue to pursue an aggressive growth
strategy. The continued growth of the Company is dependent, in large part, upon
the Company's ability to construct and operate new stores on a timely and
profitable basis and upon the Company's ability to acquire and profitably
integrate the operations of new and acquired stores. The Company plans to open
approximately 65 to 75 new stores in fiscal 1998 and 80 to 100 new stores in
fiscal 1999. However, the rate of new store openings is subject to various
contingencies, many of which are beyond the Company's control. These
contingencies include, among others, the Company's ability to secure suitable
store sites on a timely basis and on satisfactory terms, the Company's ability
to hire, train and retain qualified personnel, the availability of adequate
capital resources and the successful integration of new stores into existing
operations. There can be no assurance that the Company's new stores will be
profitable or achieve sales and profitability comparable to the Company's
existing stores. In addition, the Company expects that, as a result of further
infrastructure investments it plans to make during fiscal 1998, principally in
order to integrate the operations of its new and acquired stores, it may
experience reduced operating margins in the near term.
The Company's growth will also depend on its ability to acquire
additional retailers, manage expansion, control costs of its operations and
consolidate acquisitions into existing operations. In connection with such
acquisitions, the Company will be required to review the operations of the
acquired company, including its management infrastructure and systems and
financial controls, and make operating adjustments or complete reorganizations
as appropriate. Unforeseen capital and operating expenses, or other difficulties
and delays frequently encountered in connection with the expansion and
integration of acquired operations, could have an adverse effect upon the
Company's financial results. Significant acquisitions, such as the Telephone
Warehouse Acquisition, require the integration of administrative, finance,
sales, purchasing and marketing organizations, as well as the coordination of
common sales and marketing efforts and the implementation of appropriate
operational, financial and management systems and controls. This will require
substantial attention from the Company's senior management team, who have
limited acquisition experience to date. The diversion of management attention
required by the acquisition and integration of acquired companies, as well as
any other difficulties that may be encountered in the transition and integration
process, could have an adverse effect on the results of operations of the
Company. There can be no assurance that the Company will identify suitable
acquisition candidates, that acquisitions will be consummated on acceptable
terms or that the Company will be able to successfully integrate the operations
of any acquired company. The Company's ability to continue to grow through the
acquisition of additional stores will also be dependent upon the availability of
suitable candidates, the Company's ability to attract and retain competent
management and the availability of capital to complete the acquisitions. See
"Business--Growth Strategy." The Company currently intends to finance
acquisitions through a combination of cash resources, borrowings and, in
appropriate circumstances, the issuance of equity and/or debt securities. The
acquisition of additional stores has in the past and is expected in the future
to have a significant effect on the Company's results of operations and
financial position and could cause substantial fluctuations in the Company's
quarterly and yearly operating results. The accelerated amortization applied to
the value of the residual income acquired in connection with the Telephone
Warehouse Acquisition is expected to have a significantly negative effect on net
income in the fourth quarter of fiscal 1997 and for the next two fiscal years.
Future acquisitions by the Company involving residual income could result in
significant charges to net income from accelerated amortization. See Note 2 to
the "Pro Forma Condensed Consolidated Statements of Income."
COMPETITION
The retail market for cellular and wireless products and service is
characterized by intense price competition and significant price erosion over
the life of a product. The Company competes with numerous well-
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established retailers, carriers, wholesale distributors and suppliers of
cellular and wireless products and equipment, including the Company's carriers
and suppliers, many of which possess greater financial, marketing and other
resources than the Company. Substantially all of these competitors market the
same or similar products directly to the Company's customers and most have the
financial resources to withstand substantial price competition and implement
extensive advertising and promotional programs. Certain carriers are principal
competitors of the Company and also provide the Company with significant revenue
(38% of total net revenue in fiscal 1996) from activation and residual payments.
Potential conflicts of interest could arise, therefore, between the Company and
its principal customers. In recent years, the price of products and subscription
rates for services that the Company and its competitors have been able to charge
their customers have decreased, primarily as a result of lower costs and greater
competition in the industry. The Company believes that significant price-based
competition will continue to exist in each of the Company's markets for the
foreseeable future. The cellular and wireless retail industry is highly
fragmented and characterized by low barriers to entry and frequent introduction
of new products. The Company's ability to continue to compete successfully will
be largely dependent on its ability to maintain its current carrier and supplier
relationships and to anticipate various competitive factors affecting the
industry, such as new or improved products, changes in technology and consumer
preferences, demographic trends, regional and local economic conditions and
discount pricing and promotion strategies by competitors. The Company expects
that there will be increasing competition in the acquisition of other cellular
and wireless retailers as industry participants become larger. There can be no
assurance that the Company will be able to maintain or increase its size
relative to its competitors or to maintain its historical profit margins in the
face of increased competition. See "Business - Competition."
DEPENDENCE ON CELLULAR AND PCS CARRIERS
Generally, a Company store operates pursuant to a carrier agreement
between one of the cellular and one or more of the PCS carriers operating in the
geographic area in which the store is located and the Company or its subsidiary
that owns the store. Payments from three of the Company's carriers constituted
approximately 45.0% of its total net revenues for the nine months ended April
30, 1997. The Company is therefore highly dependent on its relationship with its
carriers. Each cellular and PCS carrier is responsible for maintaining the
quality and consistency of its signal, the capacity of the system to add new
customers and the competitiveness of the retail prices it charges for service.
In addition, the carriers create national and regional advertising as well as
customer incentive programs. The Company has no ability to control its carriers'
funding for system maintenance, capacity increases, marketing or the prices it
charges for coverage below regulatory ceilings. Consequently, the Company's
ability to attract and retain cellular and PCS customers is dependent upon the
quality and pricing of services provided by the Company's carriers. In addition,
there are typically only two licensed cellular carriers and up to five licensed
PCS carriers in a geographic area. The wireless communications industry is
relatively new and dynamic. While the Company currently believes that carriers
have an incentive to achieve broad distribution of wireless phone services and
that the current program of activation and residual payments will continue as a
method of subsidizing the cost of such distribution, no assurance can be given
that such payment programs will continue or will continue at the current rate of
payments. For instance, the Company does not receive activation commissions or
residual payments in connection with its recent sales of PCS phones but instead
acquires PCS phones from carriers at a significantly reduced cost than that paid
by the PCS carrier. The Company, in turn, resells such phones at a profit that
may be less than the total profit it would earn in connection with the sale and
related activation and residual payments associated with a cellular phone. The
activation commissions the Company receives from its cellular and paging
carriers are negotiated at the time the carrier agreements are executed and
remain constant over the life of the contract, unless renegotiated. There can be
no assurance that the Company will be able to maintain the size of the
activation commissions and residual payments it receives from carriers upon the
expiration or renegotiation of existing carrier agreements or in connection with
entering into new agreements with its existing or new carriers. Two of the
Company's cellular carrier agreements contain non-competition provisions that
prevent the Company from selling wireless services (including cellular and PCS)
of a competing carrier during the term of the agreement and for one year
thereafter. In addition, most of the carrier agreements provide for the
carrier's termination of its residual payments to the Company in the event the
agreement is terminated by the Company without cause. Accordingly, the Company
has limited ability to change carriers in a geographic area in the event its
current carrier fails to provide cellular or PCS services at competitive prices
and terms. There can be no assurance that the Company's carriers will continue
to provide cellular and PCS services at competitive prices and terms or that the
Company will be able to change carriers without a significant loss of revenues.
In the event one or more of the Company's carriers experiences financial
difficulties or fails to maintain
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competitive prices and services the Company's results of operations and
financial condition could be adversely affected. See "Business -- Carrier
Agreements."
CUSTOMER TURNOVER
The Company's results of operations can be significantly affected by
customer cancellations of cellular phone service and pagers. In the event that a
customer cancels service within a stipulated period (generally 180 days) of
activation, the cellular carrier assesses a charge-back to the Company relating
to the applicable customer. The sales and marketing costs associated with
attracting new cellular and paging customers are substantial relative to the
costs of providing cellular and paging service to existing customers. Although
the Company accrues for estimated deactivation losses, there can be no assurance
that any increase in the Company's cellular or pager customer disconnection rate
would not adversely affect the Company's results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--General."
TECHNOLOGICAL CHANGE AND INVENTORY OBSOLESCENCE
The retail market for cellular and wireless communications products and
services is characterized by rapidly changing technology and evolving industry
standards, often resulting in short product life cycles, product obsolescence or
inventory price reductions. Future technological advances in the industry could
lead to the introduction of new products and services that compete with the
products and services offered by the Company or could lower the cost of
competitive products and services to the extent that the Company is required to
further reduce the price of its products and services. As the number of stores
the Company operates increases and as the Company enters into product wholesale
activities in connection with the Telephone Warehouse Acquisition, it will be
required to raise its inventory levels, thereby increasing its risk of loss from
inventory obsolescence or price reductions. Accordingly, the Company's success
is dependent upon its ability to anticipate technological changes in the
industry and to continually identify, obtain and successfully market new
products that satisfy evolving industry and consumer requirements. In the event
the Company is unable to obtain new products and services representing improved
technology, the Company's stores will be at a competitive disadvantage to
retailers offering technologically advanced products and services.
VARIABILITY OF RESULTS OF OPERATIONS
The Company's stores have historically experienced, and the Company
expects its stores to continue to experience, seasonal fluctuations in revenues,
with a larger percentage of revenues typically being realized in the second
fiscal quarter during the holiday season. In addition, the Company's results
during any fiscal period can be significantly affected by the timing of store
openings and acquisitions and the integration of new and acquired stores into
the Company's operations. Comparable store sales can also fluctuate
significantly from period to period as a result of a variety of factors,
including the timing of periodic promotions sponsored by carriers, the
introduction of new wireless equipment and the acquisition of large corporate
accounts.
EFFECT OF CONSUMER SPENDING
The success of the Company's operations depends to a significant extent
upon a number of factors relating to discretionary consumer spending, including
economic conditions affecting disposable consumer income (such as employment,
business conditions, taxation and interest rates) and the ability of mall anchor
tenants and other attractions to generate customer traffic in the vicinity of
the Company's stores. There can be no assurance that consumer spending will not
be affected by adverse economic conditions, thereby affecting the Company's
results of operations and financial condition.
POSSIBLE HEALTH RISKS ASSOCIATED WITH WIRELESS TELEPHONES
Lawsuits have been filed against suppliers and sellers of wireless
telephones alleging possible health risks, including brain cancer, associated
with electromagnetic fields emitted by portable hand-held wireless telephones.
To date, there has been only limited research in this area, and such research
has not been conclusive as to what effects, if any, exposure to electromagnetic
fields emitted by portable wireless telephones has on human cells. However, the
perception that health risks may exist could adversely affect the Company's
ability to market portable wireless telephone products. Inasmuch as most of the
Company's revenues are derived from sales of portable wireless telephones,
future studies confirming possible health risks associated with the use of such
products could
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have a material adverse effect on the wireless communications industry and the
Company. As a distributor of wireless telephones, the Company may be subject to
product liability and other lawsuits alleging health risks. The costs associated
with the defense of such lawsuits or a successful claim against the Company
could have a material adverse effect on the Company's results of operations and
financial condition.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is substantially dependent upon its senior
management team, in particular the Company's Chief Executive Officer and
Chairman, Messrs. Molina and Beveridge, respectively. The loss of the services
of one or more of these persons could have a material adverse effect on the
Company. The Company has entered into five year employment agreements with
Messrs. Molina and Beveridge that limit the ability of the executives to compete
with the Company after their departure. See "Management--Employment Agreements."
The Company's business will also be dependent upon its ability to attract and
retain additional qualified personnel. The loss of Mr. Molina, Mr. Beveridge or
other key personnel could have a material adverse effect on the Company's
results of operations and financial condition. See "Management."
CONTROLLING SHAREHOLDER
Upon completion of this offering, HIG will beneficially own
approximately % of the outstanding Common Stock (approximately % if the
Underwriters' over-allotment option is exercised in full). Accordingly, HIG will
have sufficient voting power to control all matters requiring shareholder
approval, including the election of directors and the approval of fundamental
corporate transactions. See "Principal and Selling Shareholders."
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER, BYLAW AND OTHER PROVISIONS
Certain provisions of the Company's Amended and Restated Articles of
Incorporation (the "Articles") and Amended and Restated Bylaws ("Bylaws") may be
deemed to have anti-takeover effects and may discourage, delay, defer or prevent
a change in control of the Company. Certain of these provisions (i) divide the
Company's Board of Directors into three classes, each of which will serve for
different three-year periods, (ii) provide that the shareholders may remove
directors from office only for cause and by a supermajority vote, (iii) provide
that special meetings of the shareholders may be called only by the Board of
Directors or upon the written demand of the holders of not less than fifty
percent of the votes entitled to be cast at a special meeting, (iv) establish
certain advance notice procedures for nomination of candidates for election as
directors and for shareholder proposals to be considered at annual shareholders'
meetings, and (v) authorize the issuance of 1,000,000 shares of "blank check"
preferred stock with such designation, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without shareholder approval, to issue preferred
stock with dividend, liquidation, conversion, voting or other rights that could
materially adversely affect the voting power or other rights of the holders of
the Company's Common Stock. In addition, certain provisions of the Florida
Business Corporation Act may be deemed to have certain anti-takeover effects.
Certain anti-takeover provisions of the Company's Articles concerning the
number, term and removal of directors may only be amended by a supermajority
vote of shareholders. See "Description of Capital Stock--Anti-takeover Effects
of Certain Provisions of the Company's Articles of Incorporation and Bylaws and
Other Provisions."
FORWARD-LOOKING INFORMATION
Certain statements and information in this Prospectus constitute
forward-looking statements within the meaning of the Federal Private Securities
Litigation Reform Act of 1995. Such forward-looking statements typically include
words or phrases such as "anticipate," "estimate," "project," "believe" and
words or phrases of similar import. Such statements are subject to certain
risks, uncertainties and assumptions, including, without limitation, those set
forth in this section. Should one or more of these risks or uncertainties
materialize, or should these underlying assumptions prove incorrect, actual
results may vary materially from those anticipated, estimated or projected.
DILUTION
Investors purchasing shares of Common Stock in this offering will
experience immediate and substantial dilution in net tangible book value of
$ per share. See "Dilution."
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding an
aggregate of shares of Common Stock. All of the shares sold in this offering
(plus an additional shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradeable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"), except for any shares purchased by an affiliate of the Company that will
be subject to the resale limitations of Rule 144 under the Securities Act. Upon
the expiration of lock-up agreements between each of the executive officers,
directors and existing shareholders and the Underwriters, 180 days after the
date of this Prospectus (or earlier upon the written consent of Merrill Lynch &
Co., Merrill Lynch Pierce Fenner & Smith, Inc. ("Merrill Lynch")), shares of
Common Stock outstanding prior to this offering may be sold in the public market
by affiliates of the Company, subject to the limitations and restrictions
contained in Rule 144 under the Securities Act. The remaining shares of
Common Stock will become eligible for sale subject to Rule 144 without further
restriction or registration under the Securities Act beginning in June 1998. In
addition, shares of Common Stock have been reserved for issuance under the
Company's 1997 Executive Incentive Compensation Plan (the "Incentive Plan").
Options to acquire an aggregate of of such shares have been granted to
certain key employees and directors of the Company, and upon completion of this
offering any shares of Common Stock issuable upon the exercise of such options
(subject to certain vesting terms and other limitations on exercise with respect
to such options) will be eligible for sale in the future pursuant to
registration on Form S-8. Sales of substantial amounts of Common Stock, or the
perception that substantial amounts of Common Stock are available for future
sale, could adversely affect the prevailing market price of the Common Stock.
Certain shareholders of the Company holding shares of Common Stock have the
right to require the Company to register their shares of Common Stock under the
Securities Act. All of the existing shareholders have the right to include
shares of Common Stock in registrations proposed to be effected by the Company.
Such shareholders have agreed not to exercise their registration rights prior to
180 days from the date of this Prospectus without the prior written consent of
Merrill Lynch. See "Shares Eligible for Future Sale," "Management--Executive
Incentive Compensation Plan," "Principal and Selling Shareholders" and
"Underwriting."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering there has been no public market for the Common
Stock and there can be no assurance that an active trading market will develop
or, if developed, that such market will be sustained following the offering or
that the market price of the Common Stock will not decline below the initial
public offering price. The initial public offering price of the Common Stock
will be determined by negotiations between the Company, the Selling Shareholders
and the representatives of the Underwriters based on the factors described under
"Underwriting." The trading price of the Common Stock could be subject to
fluctuations in response to variations in the Company's results of operations,
as well as developments that affect the industry, the overall economy and the
financial markets. Upon commencement of this offering, the Common Stock will be
quoted on the Nasdaq National Market, which stock market has experienced and is
likely to experience in the future significant price and volume fluctuations
which could adversely affect the market price of the Common Stock without regard
to the operating performance of the Company.
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USE OF PROCEEDS
The net proceeds from the sale of the shares of Common Stock
offered by the Company hereby (at an assumed initial public offering price of
$ per share and not including fees payable as described under "Certain
Transactions") are estimated to be approximately $26.7 million. The Company will
not receive any proceeds from the sale of Common Stock offered by the Selling
Shareholders. The Company intends to use approximately $14.4 million of the net
proceeds of the offering to repay its outstanding bank indebtedness and certain
shareholder loans and to apply the remaining net proceeds to finance the
Company's expansion, including the opening of new stores and possible
acquisitions, and for other general corporate purposes. Of the net proceeds to
the Company, (i) approximately $14.1 million will be used to repay the Company's
outstanding bank indebtedness incurred primarily to fund the Telephone Warehouse
Acquisition, and (ii) approximately $258,100 will be used to repay loans from
Messrs. Molina and Beveridge bearing interest at 8.0% and maturing upon the
closing of this offering. See "Certain Transactions." Bank loans to be repaid by
the Company consist of $13.1 million of term loans and $1.0 million of revolving
loans, bearing interest at 4.5% and 3.75%, respectively, over the commercial
paper rate, and in each case payable May 2004. The bank loans are secured by all
of the assets of the Company and a first priority lien on the Common Stock owned
by HIG. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" regarding the
Company's proposed new credit facilities. Pending the application of the
remaining net proceeds, the Company will invest such proceeds in money market
funds or other short-term, investment-grade, interest bearing securities.
DIVIDEND POLICY
The Company does not intend to pay cash dividends to holders of its
Common Stock for the foreseeable future. Instead, the Company intends to apply
earnings, if any, to finance its growth. Any future determination to pay cash
dividends will be at the discretion of the Board of Directors and will be
dependent upon the Company's financial condition, restrictions contained in
financing agreements, results of operations, capital requirements and such other
factors as the Board of Directors may consider relevant.
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CAPITALIZATION
The following table sets forth the current portion of long-term debt
and capitalization of the Company as of April 30, 1997 (i) on a historical basis
and (ii) on a pro forma basis, giving effect to the Telephone Warehouse
Acquisition and related transactions and reflecting the sale of the shares
of Common Stock offered by the Company hereby (at an assumed initial public
offering price of $ per share and after payment of the fees described under
"Certain Transactions") and the application of the net proceeds thereof as set
forth in "Use of Proceeds." The table should be read in conjunction with the
Consolidated Financial Statements and related notes and "Unaudited Pro Forma
Financial Data" appearing elsewhere in this Prospectus. See also "Use of
Proceeds" and "Management's Discussion and Analysis Financial Condition and
Results of Operations."
AS OF APRIL 30, 1997
----------------------
ACTUAL PRO FORMA(1)
------ ------------
(IN THOUSANDS)
Current portion of long-term debt and capital lease obligations .... $1,400 $ 11
====== ========
Long-term debt, less current maturities:
Term notes ..................................................... $ 428 $
8.0% subordinated note ......................................... -- 2,000
Indebtedness to shareholders ................................... 258 --
Capital lease obligations ...................................... 26 26
------ --------
Total long-term debt ........................................ 712 2,026
------ --------
Series A Preferred Stock, $30 par value; 150,000 shares
authorized; 100,000 shares issued and outstanding;
none issued and outstanding pro forma .......................... 2,947 --
Common shareholders' equity:
Common Stock, $.001 par value; 50,000,000 shares
authorized; shares issued and outstanding;
shares issued and outstanding pro forma(1)(2) ............... 1 2
Additional paid-in capital ..................................... 284 32,569
Retained earnings (deficit) .................................... 733 (19)
------ --------
Total common shareholders' equity .......................... 1,018 32,552
------ --------
Total capitalization ................................. $4,677 $ 34,578
====== ========
- ----------
(1) See "Pro Forma Condensed Consolidated Balance Sheet."
(2) Does not include shares of Common Stock issuable upon the exercise of
outstanding stock options, at a weighted average exercise price of
$ per share.
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DILUTION
At April 30, 1997, the Company had a net tangible book value of
$578,000, or $ per share of Common Stock. Net tangible book value per
share is determined by dividing the net tangible book value (tangible assets
less total liabilities) of the Company by the total number of shares of Common
Stock to be outstanding. Without taking into account any changes in net tangible
book value after April 30, 1997, other than to give effect to the Telephone
Warehouse Acquisition and to the issuance and sale of the shares of Common
Stock offered by the Company hereby (at an assumed initial public offering price
of $ per share, after deduction of the underwriting discount and estimated
offering expenses to be paid by the Company), the application of the net
proceeds to pay indebtedness as set forth in "Use of Proceeds" and the
non-recurring charges that will result from the repayment of indebtedness as
described in "Pro Forma Condensed Consolidated Balance Sheet," the pro forma net
tangible book value of the Company at April 30, 1997 would have been $18.8
million, or $ per share. This represents an immediate increase in net
tangible book value of $ per share to existing shareholders and an
immediate dilution of $ per share to new investors. The following table
illustrates this per share dilution:
Assumed initial public offering price per share ................................... $
Net tangible book value per share as of April 30, 1997 .........................
Increase in net tangible book value per share attributable to new investors ....
--------
Pro forma net tangible book value per share after the offering ....................
--------
Dilution per share to new investors ............................................... $
========
The following table summarizes, on a pro forma basis as of April 30,
1997, the difference between the number of shares of Common Stock purchased from
the Company, the aggregate consideration paid and the average price per share
paid by existing shareholders and new investors purchasing shares in this
offering:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------- ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------ -------- ------- --------- ---------
Existing shareholders(1)(2) % $ % $
New investors(1)...........
----- ----- ----- ------
Total ............ 100.0% $ 100.0%
===== ===== ===== ======
- ---------------
(1) Sales by the Selling Shareholders in this offering will reduce the
number of shares held by the existing shareholders to , or %
of the total number of shares of Common Stock to be outstanding after
this offering, and the number of shares to be purchased by new
investors will increase to , or % of the total shares of
Common Stock to be outstanding. If the Underwriters' over-allotment
option is exercised in full, the number of shares held by existing
shareholders will decrease to or % of the total number of shares of
Common Stock to be outstanding after this offering, and the number of
shares to be purchased by new investors will increase to , or %
of the total shares of Common Stock to be outstanding. See "Principal
and Selling Shareholders."
(2) Includes shares of Common Stock that will be issued immediately
prior to the sale of the Common Stock offered hereby, for a per share
price of $.0001, upon exercise of warrants that are held by the bank
lender to the Company. See "Certain Transactions" and "Principal and
Selling Shareholders."
The foregoing table assumes no exercise of outstanding stock options
after the date hereof. As of the date of this Prospectus, there were options
outstanding to purchase a total of shares of Common Stock, at a weighted
average exercise price of $ per share. See "Management--Executive
Incentive Compensation Plan" and Note 14 of Notes to Consolidated Financial
Statements.
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UNAUDITED PRO FORMA FINANCIAL DATA
The accompanying unaudited pro forma condensed consolidated statements
of income for the nine months ended April 30, 1997 and the year ended July 31,
1996, reflect the historical statements of income of the Company, adjusted to
reflect the effects of the Telephone Warehouse Acquisition and related
transactions, the sale of the Common Stock offered hereby and the application of
a portion of the net proceeds therefrom to the repayment of outstanding bank
indebtedness and certain shareholder notes as if such transactions had occurred
as of the beginning of the periods presented. The accompanying unaudited pro
forma condensed consolidated balance sheet of the Company consolidates the
historical balance sheets of the Company and Telephone Warehouse as if the
Telephone Warehouse Acquisition and related transactions, the sale of the Common
Stock offered hereby and the application of the net proceeds from this offering
had occurred on April 30, 1997. Share and per share amounts included herein do
not give effect to a stock split anticipated to be effected immediately
prior to this offering.
On June 27, 1997 (effective June 30, 1997), the Company purchased all
of the outstanding shares of common stock of Telephone Warehouse from Texas
Cellular Partners, L.P. ("TCP"), an affiliate of HIG, in exchange for 552,590
shares of the Company's Common Stock and assumption of $13.1 million of
indebtedness. The fair value of the shares issued, as determined by management,
was approximately $2.5 million. The fair value of net assets acquired, including
approximately $1.6 million (net of deferred tax liability of $942,000) allocated
to acquired residual income, was approximately $4.8 million. The purchase price
exceeded the fair value of the net assets acquired by approximately $10.8
million, which amount will be amortized on a straight line basis over 30 years.
The allocated cost of residual income is being amortized on an accelerated
basis, which amortization is expected to have a significant negative effect on
net income in the fourth quarter of fiscal 1997 and for the next two fiscal
years. See Note 2 to the Pro Forma Condensed Consolidated Statements of Income.
The acquisition will be accounted for using the purchase method of accounting.
In connection with the acquisition of Telephone Warehouse, the Company
refinanced its debt and issued warrants to NationsCredit Commercial Corporation,
the Company's bank lender ("NationsCredit"), to purchase a total of 32,410
shares of the Company's Common Stock at an exercise price of $.0001 per share.
In a previous transaction, on January 1, 1997, TCP had purchased from
the President and sole shareholder of Telephone Warehouse, Ronald Koonsman, all
of the outstanding stock of Telephone Warehouse for a purchase price of $15.1
million including acquisition costs of approximately $200,000.
Simultaneous with the acquisition of Telephone Warehouse, the Company
induced the holder of the Company's outstanding Series A Preferred Stock to
convert all outstanding shares of the Series A Preferred Stock to Common Stock
by increasing the conversion ratio of the Series A Preferred Stock from 5.32 to
1 to 6.5 to 1. As a result of such conversion, the holder of the Company's
outstanding Series A Preferred Stock surrendered certain rights to enforce
various restrictive covenants regarding the Company's operations. Upon such
conversion, the holder of the Series A Preferred Stock received 650,000 shares
of Common Stock (118,182 in addition to the original conversion ratio).
Management determined that the fair value of the 118,182 shares at the date of
issuance was approximately $242,000.
The unaudited pro forma consolidated financial data and accompanying
notes should be read in conjunction with the Consolidated Financial Statements
and the related notes of the Company and the Combined Financial Statements and
related notes of Telephone Warehouse, all of which are included elsewhere in
this Prospectus. The Company believes that the assumptions used in the following
statements provide a reasonable basis on which to present the pro forma
financial data. The purchase price allocation and the fair value of the shares
issued in connection with the Telephone Warehouse Acquisition and the conversion
of the Series A Preferred Stock into Common Stock are based on preliminary data
and may be subject to change. The unaudited pro forma financial data is provided
for informational purposes only and should not be construed to be indicative of
the Company's financial condition or results of operations had the transactions
and events above been consummated on the dates assumed and are not intended to
constitute projections with regards to the Company's financial condition as of
any future date or results of operations for any future period.
17
20
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
NINE MONTHS ENDED APRIL 30, 1997
(UNAUDITED)
The Telephone Pro Forma
Company Warehouse Adjustments Pro Forma
------------ ------------ ------------ -----------
Net revenues:
Retail sales and activation income $ 17,007,396 $ 10,443,722 $27,451,118
Residual income 929,638 6,609,551 7,539,189
Wholesale sales -- 19,668,748 19,668,748
------------ ------------ ------------ -----------
Total net revenues 17,937,034 36,722,021 -- 54,659,055
Cost of sales 8,039,363 24,738,886 32,778,249
------------ ------------ ------------ -----------
Gross profit 9,897,671 11,983,135 -- 21,880,806
Operating expenses:
Selling, general and administrative 8,788,905 7,863,826 $ (72,000)(1) 16,580,731
Former shareholder compensation
expense -- 920,000 (170,000)(1) 750,000
Depreciation and amortization 285,120 153,338 438,458
------------ ------------ ------------ -----------
Operating expenses before amortization
of intangibles 9,074,025 8,937,164 (242,000) 17,769,189
------------ ------------ ------------ -----------
Income from operations before
amortization of intangibles 823,646 3,045,971 242,000 4,111,617
Amortization of intangibles 160,000 773,356 771,168 (2) 1,704,524
------------ ------------ ------------ -----------
Income from operations 663,646 2,272,615 (529,168) 2,407,093
Interest expense, net (128,604) (459,803) (716,874)(3) (35,636)
1,269,645 (4)
Other income -- 2,784 2,784
------------ ------------ ------------ -----------
Income before provision for
income taxes 535,042 1,815,596 23,603 2,374,241
Income tax provision 230,241 488,999 226,434 (5) 945,674
------------ ------------ ------------ -----------
Net income 304,801 1,326,597 (202,831)(8) 1,428,567
Fair value of Common Stock distributed
to preferred shareholder to induce
conversion of Series A Preferred
Stock -- -- 242,000 (6) 242,000
------------ ------------ ------------ -----------
Net income applicable to common
shareholders $ 304,801 $ 1,326,597 $ (444,831)(8) 1,186,567
============ ============ ============ ===========
Net income applicable to common
shareholders per share $ 0.22 (7)(8) $ 0.61
============ ===========
Weighted average shares outstanding 1,355,442 (7) 1,940,442
============ ===========
18
21
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED JULY 31, 1996
(UNAUDITED)
The Telephone Pro Forma
Company Warehouse Adjustments Pro Forma
------------ ------------ ------------ ------------
Net revenues:
Retail sales and activation income $ 12,518,247 $ 14,476,886 $ 26,995,133
Residual income 1,075,035 7,705,343 8,780,378
Wholesale sales -- 24,893,187 24,893,187
------------ ------------ ------------ ------------
Total net revenues 13,593,282 47,075,416 -- 60,668,698
Cost of sales 6,509,282 31,864,814 38,374,096
------------ ------------ ------------ ------------
Gross profit 7,084,000 15,210,602 22,294,602
Operating expenses:
Selling, general and administrative 6,601,077 10,076,122 (172,000)(1) 16,505,199
Former shareholder compensation
expense -- 2,169,288 (1,169,288)(1) 1,000,000
Depreciation and amortization 225,159 223,077 448,236
------------ ------------ ------------ ------------
Operating expenses before amortization
of intangibles 6,826,236 12,468,487 (1,341,288) 17,953,435
------------ ------------ ------------ ------------
Income from operations before
amortization of intangibles 257,764 2,742,115 1,341,288 4,341,167
Amortization of intangibles -- -- 1,942,631 (2) 1,942,631
------------ ------------ ------------ ------------
Income from operations 257,764 2,742,115 (601,343) 2,398,536
Interest expense, net (152,827) (15,435) (1,646,489)(3) (76,987)
1,737,764 (4)
Other income 3,959 3,959
------------ ------------ ------------ ------------
Income before provision for
income taxes 104,937 2,730,639 (510,068) 2,325,508
Income tax provision 38,939 504,546 493,068 (5) 1,036,553
------------ ------------ ------------ ------------
Net income 65,998 2,226,093 (1,003,136)(8) 1,288,955
Fair value of common stock distributed to
preferred shareholder to induce
conversion of Series A Preferred Stock -- -- 242,000 (6) 242,000
------------ ------------ ------------ ------------
Net income applicable to common
shareholders $ 65,998 $ 2,226,093 $ (1,245,136)(8) $ 1,046,955
============ ============ ============ ============
Net income applicable to common
shareholders per share $ 0.07 (7)(8) $ 0.54
============ ============
Weighted average shares outstanding 876,077 1,940,442
============ (7) ============
19
22
Notes to Pro Forma Condensed Consolidated Financial Statements (unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - NINE MONTHS ENDED APRIL 30, 1997
AND YEAR ENDED JULY 31, 1996
(1) Reflects reduction of compensation expense to $1 million per year based
on a new employment agreement signed at the time of the Telephone
Warehouse Acquisition by Ronald Koonsman providing for the following:
(i) for the six month period beginning on July 1, 1997, a salary of
$50,000, (ii) for the 12 month period beginning on January 1, 1998, a
salary of $100,000 and (iii) a bonus of $950,000 payable on or before
December 31, 1997, provided that certain financial performance levels
are met for the twelve months ended December 31, 1997 ($170,000
reduction for the nine months ended April 30, 1997 and $1.2 million
reduction for the year ended July 31, 1996). Also reflects a new
employment agreement entered into at the time of the Telephone
Warehouse Acquisition with a Vice President of Telephone Warehouse that
provided for a reduction in compensation expense from 10% to 5% of
annual income before interest, taxes, depreciation and amortization and
management fees ($72,000 reduction for the nine months ended April 30,
1997 and $172,000 reduction for the year ended July 31, 1996).
(2) Reflects increase to amortization of intangible assets. Goodwill
totaling approximately $10.8 million is being amortized over 30 years
and the allocated cost of acquired residual income of approximately
$2.5 million is being amortized on an accelerated basis according to
the anticipated timing of acquired cash flows, resulting in incremental
amortization as follows:
Nine months
ended Year ended
April 30, 1997 July 31, 1996
-------------- -------------
Incremental amortization of goodwill $149,804 $ 359,530
Incremental amortization of acquired residual income 621,364 1,583,101
-------- ----------
Pro forma adjustments $771,168 $1,942,631
The amortization of the allocated cost of acquired residual income is expected
to be approximately as follows:
Amortization of
acquired
residual income
---------------
July 1 to July 30, 1997 $ 168,000
Fiscal 1998 1,507,000
Fiscal 1999 676,000
Fiscal 2000 189,000
Fiscal 2001 5,000
----------
$2,545,000
(3) Reflects incremental interest expense and incremental amortization of
deferred financing costs on assumed debt of Telephone Warehouse,
comprised of $11.1 million in bank indebtedness and $2 million in note
payable to former shareholder, and new borrowings to fund the Telephone
Warehouse Acquisition of $2 million as if such debt was outstanding as
of the beginning of the periods presented, as follows:
Nine months
ended Year ended
April 30, 1997 July 31, 1996
-------------- -------------
Incremental interest expense on assumed debt $585,761 $1,393,500
Incremental interest expense on new borrowings 43,534 67,497
Incremental amortization of deferred financing costs on assumed debt 47,782 132,429
Incremental amortization of deferred financing costs on new debt 39,797 53,063
-------- ----------
Pro forma adjustments $716,874 $1,646,489
20
23
Notes to Pro Forma Condensed Consolidated Financial Statements (unaudited)
(4) Reflects a reduction in interest expense assuming the repayment of bank
indebtedness of $13.5 million and certain shareholder notes of $258,100
with a portion of the proceeds from the offering.
(5) Reflects recognition of income tax expense associated with the
following:
Nine months
ended Year ended
April 30, 1997 July 31, 1996
-------------- -------------
Income tax provision as if all Telephone Warehouse entities were
C-Corporations as of the beginning of the periods presented $ 138,430 $ 505,790
Tax effect of the pro forma adjustments at statutory rates 317,908 573,025
Tax benefit associated with the amortization of the acquired residual
income (229,904) (585,747)
--------- ---------
Pro forma adjustments $ 226,434 $ 493,068
(6) Reflects management's estimate of the fair value of 118,182 shares of
Common Stock distributed to induce conversion of Series A Preferred
Stock into a total of 650,000 shares of Common Stock.
(7) Net income applicable to common shareholders per share is calculated by
deducting from net income the estimated fair value of Common Stock
issued to induce conversion of the Series A Preferred Stock and using
the weighted average number of shares of Common Stock outstanding
during the respective periods, assuming that the conversion of the
Series A Preferred Stock into 650,000 shares of Common Stock, the
issuance of 552,590 shares of Common Stock to purchase Telephone
Warehouse, the issuance of 32,410 warrants in connection with the
Company's debt refinancing, and the issuance of 55,442 stock options to
certain officers, had all occurred as of the beginning of the periods
presented, resulting in 1,940,442 weighted shares outstanding for the
periods presented.
(8) Does not include a non-recurring charge of approximately $753,000, net
of tax, relating to the write-off of deferred financing costs in
connection with the repayment of the bank indebtedness of $13.5 million
with a portion of the net proceeds of this offering.
21
24
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET APRIL 30, 1997
(UNAUDITED)
The Telephone Pro Forma
Company Warehouse Adjustments Pro Forma
---------- ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 228,318 $ 573,872 $ (112,676)(3) $ 13,550,681
12,861,167 (6)
Accounts receivable, net 1,397,527 2,483,069 3,880,596
Inventory 3,508,030 3,201,119 6,709,149
Prepaid expenses 38,279 287,702 325,981
Other current assets 115,231 -- 115,231
Deferred tax asset 76,675 353,176 66,993 (6) 496,844
---------- ------------ ------------ ------------
Total current assets 5,364,060 6,898,938 12,815,484 25,078,482
Property and equipment, net 3,514,670 694,015 4,208,685
Other assets, net 78,072 951,565 223,000 (1) 146,780
148,438 (5)
(1,254,295)(6)
Investment in Telephone Warehouse 2,530,862 (2) --
(2,530,862)(3)
Intangible assets, net 440,000 12,684,181 646,832 (3) 13,771,013
---------- ------------ ------------ ------------
Total assets $9,396,802 $ 21,228,699 $ 12,579,459 $ 43,204,960
---------- ------------ ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $1,777,208 2,755,370 $ 4,532,578
Bank lines of credit 1,129,400 -- (1,129,400)(1) --
Accrued expenses 1,073,701 1,304,836 2,378,537
Current portion of bank term loan
and obligations under capital
leases 270,907 500,000 (260,000)(1) 10,907
75,000 (1)
(575,000)(6)
Income taxes payable 277,152 157,573 (434,725)(6) --
Deferred revenues 85,797 716,237 802,034
Customer deposits 40,421 89,039 129,460
---------- ------------ ------------ ------------
Total current liabilities 4,654,586 5,523,055 (2,324,125) 7,853,516
Bank term loan, less current portion 428,333 10,700,000 (428,333)(1) --
1,925,000 (1)
(12,625,000)(6)
Loans from shareholders 258,100 -- (258,100)(6) --
Note payable to former shareholder -- 2,000,000 2,000,000
Line of credit 300,000 40,733 (1) --
(340,733)(6)
Obligations under capital leases, less
current portion 26,226 -- 26,226
Other liabilities 40,778 -- 40,778
Deferred tax liability 24,134 708,938 733,072
Redeemable, convertible preferred stock,
$30 par value, 150,000 shares
authorized, 100,000 shares issued and
outstanding, none issued
and outstanding, pro forma 2,946,915 -- (2,946,915)(4) --
Common shareholders' equity
Common stock, $.001 par value; 50,000,000
shares authorized; 650,000 shares
issued and outstanding, 1,852,590 shares
issued and outstanding, pro forma 650 20 553 (2) 1,853
(20)(3)
650 (4)
Additional paid-in capital 283,902 1,999,980 2,530,309 (2) 32,568,914
(1,999,980)(3)
2,946,265 (4)
148,438 (5)
26,660,000 (6)
Retained earnings (deficit) 733,178 (3,294) 3,294 (3) (19,399)
(752,577)(6)
---------- ------------ ------------ ------------
Total common shareholders' equity 1,017,730 1,996,706 29,536,932 32,551,368
---------- ------------ ------------ ------------
Total liabilities and common
shareholders' equity $9,396,802 $ 21,228,699 $ 12,579,459 $ 43,204,960
========== ============ ============ ============
22
25
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF APRIL 30, 1997
(1) Reflects the refinancing of debt in connection with the Telephone
Warehouse Acquisition resulting in increased borrowings of $2 million
which was used to repay $1.8 million of debt and to pay financing costs
of $223,000, as follows:
New debt:
NationsCredit term loan $ 2,000,000
NationsCredit line of credit 40,733
Debt repaid:
Bank term loan (688,333)
Bank line of credit (1,129,400)
Financing costs (223,000)
(2) Reflects the Company's issuance of 552,590 shares of Common Stock
valued by management at $2.5 million to acquire Telephone Warehouse.
(3) Reflects the elimination of the Company's investment in Telephone
Warehouse and a preliminary allocation of cost in excess of purchase
price over the fair value of the net assets acquired in connection with
the Telephone Warehouse Acquisition of approximately $10.8 million and
acquired residual income of approximately $1.6 million (net of deferred
tax liability of $942,000).
(4) Reflects the conversion of all outstanding shares of Series A Preferred
Stock into 650,000 shares of Common Stock.
(5) Reflects the fair value of warrants, as determined by management,
issued to purchase 32,410 shares of Common Stock in connection with the
Telephone Warehouse Acquisition, the conversion of Series A Preferred
Stock and refinancing of debt. Deferred interest expense of $148,438
was recorded at June 27, 1997, representing the estimated value of the
warrants, as determined by management, which is being recognized as
interest expense over the seven year term of the NationsCredit loans.
The warrants expire on December 31, 2006 and may be exercised at any
time.
(6) Reflects (i) the sale of Common Stock offered hereby and the
application of the estimated net proceeds of $26.7 million to the
repayment of bank indebtedness of $13.5 million and certain shareholder
notes of $258,100 resulting in an increase to cash of approximately
$12.9 million and (ii) the write-off of deferred financing costs of
approximately $753,000, net of tax, related to the repayment of the
bank indebtedness.
23
26
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below for income
statement and balance sheet data has been derived from the financial statements
of the Company contained elsewhere herein. The consolidated financial statements
as of and for the year ended July 31, 1996 have been audited by Ernst & Young
LLP, independent auditors. The consolidated financial statements as of and for
the years ended July 31, 1994 and 1995 have been audited by Deloitte & Touche,
LLP, independent auditors. The consolidated financial statements as of and for
the years ended July 31, 1992 and 1993 have been derived from unaudited
consolidated financial statements. The income statement data for the nine months
ended April 30, 1996 and 1997 and the balance sheet data as of April 30, 1997
have been derived from unaudited interim consolidated financial statements
contained elsewhere herein, which in the opinion of management, include all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of the information set forth therein. The data set forth below
should be read in conjunction with the financial statements and related notes,
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
NINE MONTHS ENDED
FISCAL YEAR ENDED JULY 31, APRIL 30,
------------------------------------------------------------------- ----------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- --------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
INCOME STATEMENT DATA:
Retail sales and
activation income ........ $ $ 3,205 $ 4,033 $ 7,771 $ 12,518 $ 9,175 $ 17,007
Residual income ............ 75 228 533 1,075 753 930
Wholesale sales ............ -- -- -- -- -- -- --
------- ------- --------- -------- -------- -------- --------
Total net revenues ....... 1,597(1) 3,280 4,261 8,304 13,593 9,928 17,937
Cost of sales .............. 870 1,596 2,128 4,260 6,509 4,714 8,039
------- ------- --------- -------- -------- -------- --------
Gross profit ............... 727 1,684 2,133 4,044 7,084 5,214 9,898
Selling, general and
administrative expenses .. 722 1,203 1,918 3,896 6,601 4,841 8,789
Depreciation and
amortization ............. -- -- 43 100 225 155 285
Amortization of intangibles -- -- -- -- -- -- 160
------- ------- --------- -------- -------- -------- --------
Income from operations ..... 5 481 172 48 258 218 664
Interest expense, net ...... 3 1 13 40 153 118 129
Other expense (income) ..... -- -- -- -- -- -- --
Income before provision
for income taxes ......... 2 480 159 8 105 100 535
Income tax provision ....... -- 194 70 -- 39 33 230
------- ------- --------- -------- -------- -------- --------
Net income ................. $ 2 $ 286 $ 89 $ 8 $ 66 $ 67 $ 305
======= ======= ========= ======== ======== ======== ========
Net income per share ....... $ -- $ .35 $ .11 $ .01 $ .07 $ .08 $ .22
======= ======= ========= ======== ======== ======== ========
Weighted average shares
outstanding .............. 824 824 824 824 876 824 1,355
======= ======= ========= ======== ======== ======== ========
SELECTED OPERATING DATA:
Stores open at end of
period:(2)
Kiosk .................... 2 3 5 13 14 14 30
In-Line .................. 1 1 3 9 11 12 31
------- ------- --------- -------- -------- -------- --------
Total ................... 3 4 8 22 25 26 61
Percentage change in
comparable store sales(3) (4) (4) (2.2%) 10.5% 11.5% 4.9% 7.9%
Average comparable store
sales(5) ................. (4) (4) $ 442,000 $450,000 $462,000 $305,000 $337,000
Number of activations
during period ............ (4) (4) 1,661 5,205 14,803 11,395 28,890
Total gross square
feet at end of
period .............. 677 821 2,447 7,006 9,529 9,529 33,231
24
27
AS OF JULY 31, AS OF APRIL 30,
----------------------------------------------- ---------------
1992 1993 1994 1995 1996 1997
------ ----- ---- ----- ----- ---------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital (deficiency) .... $ (68) $165 $144 $ (110) $ 779 $ 709
Total assets ..................... 187 561 947 3,324 6,646 9,397
Long-term debt ................... 3 -- 26 328 474 712
Preferred stock .................. -- -- -- -- 2,937 2,947
Shareholders' equity
(deficiency) ..................... (10) 276 362 621 693 1,018
- ---------------
(1) Information not available to differentiate retail sales and activation
income from residual income.
(2) Includes five stores acquired in August 1996, but does not include 19
stores acquired in June 1997 pursuant to the Telephone Warehouse
Acquisition.
(3) A store becomes comparable after it has been owned and operated by the
Company for at least 12 full months. Comparable store sales are
comprised of retail sales and activation income at the Company's retail
stores, but do not include residual income.
(4) Information not available.
(5) Represents the average retail sales and activation income on a store by
store basis only for stores owned and operated by the Company for at
least 12 full months as of period end (excluding two stores that
generate substantially higher sales than other stores). Therefore,
period to period figures may not be comparable.
25
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE RESULTS OF OPERATIONS AND FINANCIAL
CONDITION OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO INCLUDED
ELSEWHERE IN THIS PROSPECTUS.
GENERAL
The Company is the largest independent specialty retailer of cellular
and wireless products, services and accessories in the United States, with
stores located in 12 states, the District of Columbia and Puerto Rico. Since its
inception in 1989 through June 30, 1996, the Company opened 25 stores. During
that period, the Company had limited capital and opened stores with funds
derived primarily from cash generated from operations. In June 1996, the Company
issued $3.3 million of Series A Preferred Stock to HIG and accelerated its store
expansion. Since June 1996, the Company has added a net total of 68 stores,
including 5 stores acquired from Peachtree Mobility in the Atlanta metropolitan
area and 19 stores acquired from Telephone Warehouse.
The Company opened 45 stores in fiscal 1997 and presently plans to open
65 to 75 new stores in fiscal 1998 and 80 to 100 new stores in fiscal 1999. To
prepare for this expansion, during the past year management has been building
the infrastructure necessary to support a rapidly growing chain of stores. The
Company hired senior management, established a field structure of district
managers, developed employee training programs, enhanced its financial controls
and procedures and finalized standards of store design and visual presentation.
The Company plans to continue its infrastructure investments during fiscal 1998
and, as a result, may experience reduced operating margins in the near term. As
the Company continues to expand through new store openings and acquisitions, it
expects to leverage these investments and improve margins through economies of
scale.
The Company's revenues are generated principally from four sources:
(i) RETAIL SALES. The Company sells cellular and wireless
products, such as phones, pagers and related accessories in the
Company's retail outlets.
(ii) ACTIVATION INCOME. The Company receives an activation
commission from the applicable cellular carrier when a customer
initially subscribes for the cellular carrier's service. The amount of
the activation commission paid by cellular carriers is based upon
various service plans offered by the carriers and is recognized by the
Company at the time of sale. New subscription activation commissions
are fully refundable if the subscriber cancels its subscription prior
to completion of a minimum period of continuous active service
(generally 180 days). Customers generally sign a service agreement with
the Company that requires a customer deposit that is forfeited in the
event of early cancellation. The Company then applies the customer's
deposit to reduce or offset its resulting deactivation loss owed to the
carrier. The Company accrues for estimated deactivation losses, net of
cancellation fees, by creating a reserve against carrier accounts
receivable.
(iii) RESIDUAL INCOME. The Company receives monthly payments
made by certain cellular carriers and pager customers. Cellular
residual payments are based upon a percentage (usually 4-6%) of the
customers' monthly service charges and are recognized as income when
received. Pager residual payments are received on a monthly basis
directly from pager customers for the pager airtime that the Company
buys wholesale from paging carriers and then resells to individuals and
small businesses.
(iv) WHOLESALE SALES. The Company recently began to wholesale
cellular and wireless products when it acquired Telephone Warehouse in
June 1997. The wholesale business typically has higher volumes and
lower margins than the retail business, but provides the Company with
greater purchasing power and additional distribution capabilities.
26
29
Comparable stores sales include only stores owned and operated by the
Company for at least 12 full months and are comprised of retail sales and
activation income, as residual income is not allocated among stores.
Historically, retail sales have accounted for most of the Company's net
revenues. As sales of discounted and "free" cellular phones designed to attract
new subscribers have increased significantly, the number of activations has
increased and activation income has become increasingly significant to the
Company's net revenues. The Company has recently made a strategic decision to
accept increased activation income in connection with certain new carrier
agreements in lieu of monthly residual payments to optimize cash flow and to
facilitate the Company's growth strategy. As a result, management believes that
activation income may account for an increased share of the Company's future net
revenues relative to residual income.
To date, the cost of wireless products has gradually decreased over
time. With such lower costs, the Company typically has offered lower prices to
attract more subscribers, which has increased its total activation income and
contributed to gross profit improvements. Consequently, the Company believes
that as prices of wireless products decrease they become more affordable to
consumers, expanding the wireless communications market and creating an
opportunity to attract new subscribers and increase activation income.
The Company has developed two distinct mall-based store formats,
free-standing kiosks and traditional "in-line" stores. The average capital
expenditures for new kiosk and in-line locations approximate $30,000 and
$90,000, respectively. The initial inventory for a new store approximates
$32,000 for a kiosk and $46,000 for an in-line store. Management believes that
the flexibility of the Company's kiosk and in-line store formats permits the
Company to take advantage of the best available locations across a broad range
of market areas. Pre-opening costs for new stores such as travel and the hiring
and training of new employees are expensed as incurred and typically average
$3,000 per store. In fiscal 1997, comparable stores generated average annual
sales of approximately $500,000 (excluding two stores that generate
substantially higher sales than other stores). Generally, the Company's new
store sales reach normal operating levels after three months of operations.
In connection with the offering, the Company expects to incur a
write-off of deferred financing costs of approximately $753,000, net of tax, in
connection with the repayment of bank indebtedness with a portion of the
proceeds of this offering.
ACQUISITION OF TELEPHONE WAREHOUSE
In June 1997, the Company more than doubled the amount of its assets
and previous twelve months' total net revenues by acquiring Telephone Warehouse,
one of the largest AT&T cellular agents in the Southwest. Telephone Warehouse
operates 19 wireless specialty retail stores in Texas, Missouri and Kansas and
wholesales cellular and wireless products to over 1,000 regional and local
retailers, distributors and carriers. On a pro forma basis, the Company had
$60.7 million in total net revenues, $22.3 million in gross profit and $2.4
million in income from operations for the year ended July 31, 1996 and had $54.7
million in total net revenues, $21.9 million in gross profit and $2.4 million in
income from operations for the nine months ended April 30, 1997. See "Unaudited
Pro Forma Financial Data."
Telephone Warehouse had total net revenues of $49.6 million ($22.4
million of which were from retail sales, activation and residual income and the
remaining were from wholesale operations) and income from operations of $4.0
million for its fiscal year ended December 31, 1996.
The accelerated amortization applied to the value of the residual
income acquired in connection with the Telephone Warehouse Acquisition is
expected to have a significantly negative effect on net income in the fourth
quarter of fiscal 1997 and for the next two fiscal years. See Note 2 to the "Pro
Forma Condensed Consolidated Statements of Income."
Prior to its acquisition by the Company, Telephone Warehouse was
operated with different strategic and financial objectives. Former management
sought to maximize cash flow and shareholder distributions, rather than
27
30
reinvest earnings in new store growth. As a result, Telephone Warehouse's net
revenues and number of stores did not grow significantly in recent years.
The Company's principal purpose in acquiring Telephone Warehouse was to
obtain immediate access to desirable markets, such as Dallas, San Antonio and
Kansas City, and locations and to qualified sales personnel and an existing
subscriber base. The Company intends to apply its operating strategy to
Telephone Warehouse, leverage Telephone Warehouse's existing infrastructure and
grow Telephone Warehouse's retail operations. In addition, the Company has the
opportunity to leverage the expertise of and benefit from Telephone Warehouse's
significant pager business. Management believes that the wholesale business,
which was acquired as part of the Telephone Warehouse Acquisition, provides the
Company with greater purchasing power and additional distribution capabilities.
In connection with the acquisition, the Company issued 552,590 shares
of Common Stock and assumed $13.1 million of indebtedness. The Company recorded
intangibles of approximately $13.3 million, of which $10.8 million was allocated
to goodwill, to be amortized over a 30-year period, and $2.5 million was
allocated to acquired residual income, substantially all of which is to be
amortized through the year 2000 on an accelerated basis according to the
anticipated timing of acquired cash flows. The Company has accounted for the
Telephone Warehouse Acquisition using the purchase method of accounting and, as
a result, does not include in its financial statements the results of operations
of Telephone Warehouse prior to the date it was acquired by the Company.
RESULTS OF OPERATIONS
The following table summarizes for the periods presented certain
selected income statement data of the Company expressed as a percentage of total
net revenues:
FISCAL YEAR ENDED JULY 31, NINE MONTHS ENDED APRIL 30,
------------------------------ ---------------------------
1994 1995 1996 1996 1997
------ ------ ------ ----- -----
Total net revenues................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................ 49.9 51.3 47.9 47.5 44.8
------ ------ ------ ------ ------
Gross profit......................... 50.1 48.7 52.1 52.5 55.2
Selling, general and
administrative expenses........... 45.0 46.9 48.6 48.8 49.0
Depreciation and amortization........ 1.0 1.2 1.7 1.6 1.6
Amortization of intangibles.......... - - - - 0.9
Income from operations............... 4.0 0.6 1.9 2.2 3.7
Interest expense, net................ 0.3 0.5 1.1 1.2 0.7
Income tax provision................. 1.6 - 0.3 0.3 1.3
------ ------ ------ ------ ------
Net income........................... 2.1% 0.1% 0.5% 0.7% 1.7%
====== ====== ====== ====== ======
Number of stores at end of period.... 8 22 25 26 61
28
31
THE COMPANY
NINE MONTHS ENDED APRIL 30, 1997 COMPARED TO NINE MONTHS ENDED APRIL 30, 1996
TOTAL NET REVENUES increased $8.0 million, or 80.7%, to $17.9 million
for the nine months ended April 30, 1997 from $9.9 million for the nine months
ended April 30, 1996 due to increases in retail sales, activation income and
residual income. Retail sales and activation income increased 85.4% to $17.0
million from $9.2 million and residual income increased 23.5% to $930,000 from
$753,000. Comparable store sales increased 7.9% and accounted for $693,000 or
8.7% of the increase in total net revenues. Sales relating to 31 new stores
opened, five stores acquired since July 31, 1996 and the four stores that were
not yet open for 12 full months accounted for $7.3 million or 91.1% of the
increase in total net revenues. The comparable stores sales growth was primarily
attributable to increased advertising during the holiday season in the second
fiscal quarter and the growth of cellular subscribers in the wireless industry
overall. The increase in residual income was due to the increase in the number
of cellular activations (28,890 activations during the nine months ended April
30, 1997 as compared to 11,395 activations during the nine months ended April
30, 1996) and the addition of new pager subscribers resulting from the Peachtree
Acquisition. The Company had 61 stores open at April 30, 1997 as compared to 25
at July 31, 1996.
GROSS PROFIT increased $4.7 million, or 89.8%, to $9.9 million for the
nine months ended April 30, 1997 from $5.2 million for the nine months ended
April 30, 1996. As a percentage of total net revenues, gross profit increased to
55.2% from 52.5% primarily due to activation income increasing at a faster rate
than the cost of merchandise sold. Management expects that, following the
acquisition of Telephone Warehouse, gross profit as a percentage of total net
revenues will decrease since wholesale sales generally have lower margins than
retail sales.
SELLING, GENERAL AND ADMINISTRATIVE expenses increased $3.9 million, or
81.5%, to $8.8 million for the nine months ended April 30, 1997 from $4.8
million for the nine months ended April 30, 1996, primarily as a result of
higher personnel, rent and related costs associated with the opening of 31 new
stores and the acquisition of 5 Peachtree stores. Higher advertising costs were
incurred in connection with entering new markets and additional expenses related
to infrastructure investments were incurred to support this expansion.
Management believes that more advertising is required to support sales in new
markets than is required to support the same level of sales in existing markets
and, as a result, expects advertising to increase in future periods as the
Company expands into new markets with new store openings. A charge of $129,000
was recorded in April 1997 to cover the closing of one underperforming store and
the write-off of the related assets. As a percentage of total net revenues,
selling, general and administrative expenses increased to 49.0% during the nine
months ended April 30, 1997 from 48.8% during the nine months ended April 30,
1996.
AMORTIZATION OF INTANGIBLES consisted of $160,000 for the nine months
ended April 30, 1997 associated with the thirty month noncompete agreement
entered into in August 1996 in connection with the Peachtree Acquisition.
INCOME FROM OPERATIONS increased $446,000 to $663,000 for the nine
months ended April 30, 1997 from $217,000 for the nine months ended April 30,
1996 and increased as a percentage of total net revenues to 3.7% from 2.2%.
INTEREST EXPENSE, NET increased $11,000 to $129,000 for the nine months
ended April 30, 1997 from $118,000 for the nine months ended April 30, 1996
primarily due to increased bank borrowings. The increase in gross interest
expense was partially offset by interest income earned primarily on the cash
relating to HIG's preferred stock investment in the Company.
INCOME TAX PROVISION was $230,000 for the nine months ended April 30,
1997 as compared to $33,000 for the nine months ended April 30, 1996 primarily
as a result of a $435,000 increase in income before provision for income taxes.
In addition, the effective tax rate in 1997 was 43% as compared to 33% in 1996.
The higher effective tax rate in 1997 resulted primarily from adjustments made
to deferred tax balances related to depreciation.
29
32
NET INCOME increased to $305,000 for the nine months ended April 30,
1997 from $67,000 for the nine months ended April 30, 1996.
YEAR ENDED JULY 31, 1996 COMPARED TO YEAR ENDED JULY 31, 1995
TOTAL NET REVENUES increased $5.3 million, or 63.7%, to $13.6 million
in fiscal 1996 from $8.3 million in fiscal 1995. Retail sales and activation
income increased 61.1% to $12.5 million from $7.8 million, and residual income
increased 101.6% to $1.1 million from $533,000. Comparable store sales increased
11.5% and accounted for $855,000, or 16.2%, of the increase in total net
revenues. Net revenues from the three stores opened during fiscal 1996 and the
14 stores that were not yet open for 12 full months accounted for $4.4 million,
or 83.2%, of the increase in total net revenues. The comparable store sales
increase was primarily attributable to the introduction of a new model of
cellular phone to the market during the fourth quarter of fiscal 1996, increased
number of activations relating to corporate accounts, increased carrier
promotions conducted in certain of the Company's significant cellular markets
and the growth of cellular subscribers in the wireless industry overall. The
increase in residual income was due to the growth in the number of the Company's
cellular subscribers corresponding to the increase in cellular activations (to
14,803 in fiscal 1996 from 5,205 in fiscal 1995). The Company had 25 stores open
at July 31, 1996 as compared to 22 at July 31, 1995.
GROSS PROFIT increased $3.0 million, or 75.2%, to $7.0 million in
fiscal 1996 from $4.0 million in fiscal 1995. As a percentage of total net
revenues, gross profit increased to 52.1% in fiscal 1996 from 48.7% in fiscal
1995, primarily due to activation income increasing at a faster rate than the
cost of merchandise sold.
SELLING GENERAL AND ADMINISTRATIVE expense increased $2.7 million, or
69.4%, to $6.6 million in fiscal 1996 from $3.9 million in fiscal 1995 primarily
as a result of higher personnel, rent and related costs associated with the
opening of new stores. As a percentage of total net revenues, selling, general
and administrative expense increased to 48.6% in fiscal 1996 from 46.9% in
fiscal 1995. This increase resulted from higher expenses associated with new
stores with lower initial sales volumes compared to established stores and
increased general and administrative expenses related to adding field management
and increasing advertising to support expansion into new markets.
INCOME FROM OPERATIONS increased $210,000 to $258,000 in fiscal 1996
from $48,000 in fiscal 1995 and increased as a percentage of total net revenues
to 1.9% from 0.6%.
INTEREST EXPENSE, NET increased $113,000 to $153,000 in fiscal 1996
from $40,000 in fiscal 1995 primarily as a result of higher bank borrowings to
finance the increase in the Company's working capital requirements and
additional store openings.
INCOME TAX provision was $39,000 in fiscal 1996 as a result of $97,000
increase in income before provision for income taxes.
NET INCOME was $66,000 in fiscal 1996 from $8,000 in fiscal 1995.
YEAR ENDED JULY 31, 1995 COMPARED TO YEAR ENDED JULY 31, 1994
TOTAL NET REVENUES increased $4.0 million, or 94.9%, to $8.3 million in
fiscal 1995 from $4.3 million in fiscal 1994. Retail sales and activation income
increased 92.7% to $7.8 million in fiscal 1995 from $4.0 million in fiscal 1994
and residual income increased 133.5% to $533,000 in fiscal 1995 from $228,000 in
fiscal 1994. Comparable store sales increased 10.5% and accounted for $424,000,
or 10.5%, of total net revenues. Net revenues from the 14 stores opened during
fiscal 1995 and the four stores that were not yet open for 12 full months
accounted for $3.6 million, or 89.1%, of the increase in total net revenues. The
comparable store sales growth was primarily attributed to improved merchandise
assortments, higher focus on activations and retention of more qualified sales
associates through an improved store payroll structure. The increase in residual
income was due to the growth in the number of the Company's cellular subscribers
corresponding to the increase in cellular
30
33
activations (to 5,205 in fiscal 1995 from 1,661 in fiscal 1994). The Company had
22 stores open at July 31, 1995 as compared to 8 stores open at July 31, 1994.
GROSS PROFIT increased $1.9 million, or 89.5%, to $4.0 million in
fiscal 1995 from $2.1 million in 1994. As a percentage of total net revenues,
gross profit decreased to 48.7% in fiscal 1995 from 50.1% in fiscal 1994,
primarily due to the introduction of discounts on the retail price of phones.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE increased $2.0 million, or
103.1%, to $3.9 million in fiscal 1995 from $1.9 million in fiscal 1994
primarily due to increases in payroll, rent and other costs associated with the
opening of 14 stores in fiscal 1995. Higher payroll costs were incurred due to
modifications to the store payroll structure designed to attract and retain
quality sales associates. As a percentage of total net revenues, selling general
and administrative expense increased to 46.9% in fiscal 1995 from 45.0% in
fiscal 1994. This increase resulted from higher expenses associated with new
stores with lower initial sales volume compared to established stores.
INCOME FROM OPERATIONS decreased $124,000 to $48,000 in fiscal 1995
from $172,000 in fiscal 1994 and decreased as a percentage of total net revenues
to 0.6% from 4.0%.
INTEREST EXPENSE, NET increased $27,000 to $40,000 in fiscal 1995 from
$13,000 in fiscal 1994 primarily as a result of higher bank borrowings.
NET INCOME was $8,000 in fiscal 1995 compared to $90,000 in fiscal
1994.
TELEPHONE WAREHOUSE
FOUR MONTHS ENDED APRIL 30, 1997 COMPARED TO FOUR MONTHS ENDED APRIL 30, 1996
TOTAL NET REVENUES decreased $565,000, or 3.8%, to $14.5 million for
the four months ended April 30, 1997 from $15.0 million for the four months
ended April 30, 1996. Retail sales and activation income decreased 4.3% to $4.2
million and wholesale sales decreased 8.5% to $7.4 million. These decreases were
partially offset by an increase in residual income of 11.5% to $2.9 million from
$2.6 million. Comparable store sales, based on retail sales and activation
income, were flat. The decrease in retail sales, activation income and wholesale
sales was primarily due to the diversion of management's attention during the
period preceding the acquisition of Telephone Warehouse. In addition, Telephone
Warehouse closed two stores during the four months ended April 30, 1997. The
decrease in wholesale sales resulted from high levels of Ericsson digital phone
sales during the four months ended April 30, 1996. Due to lower cost sourcing,
special discounted prices on the Ericsson phones were offered during the four
months ended April 30, 1996, which were not repeated in the comparable period in
1997. The increase in residual income is primarily attributable to the increase
in the number of pager activations.
GROSS PROFIT decreased $284,000, or 5.5%, to $4.9 million during the
four months ended April 30, 1997 from $5.2 million during the four months ended
April 30, 1996. As a percentage of total net revenues, gross profit decreased to
33.8% in the four months ended April 30, 1997 from 34.4% in the four months
ended April 30, 1996 primarily due to increased promotions offering free
accessories to promote cellular activations in the retail stores. In addition,
the four month period ended April 30, 1996 had higher wholesale margins due to
lower cost sourcing associated with the high levels of Ericsson digital phone
sales, and such higher wholesale margins were not repeated in the comparable
period in 1997.
SELLING, GENERAL AND ADMINISTRATIVE expenses remained constant at $3.2
million for the four months ended April 30, 1997 and, as a percentage of total
net revenues, increased to 22.3% from 21.6% for the comparable period in 1996
due to the decrease in total net revenues.
31
34
AMORTIZATION OF INTANGIBLES consisted of $773,000 for the four months
ended April 30, 1997 associated with the amortization of goodwill and acquired
residual income resulting from the acquisition of Telephone Warehouse by TCP, an
affiliate of HIG.
INCOME FROM OPERATIONS decreased $805,000 to $495,000 for the four
months ended April 30, 1997 from $1.3 million for the four months ended April
30, 1996 and decreased as a percentage of total net revenues to 3.4% from 8.6%.
INTEREST EXPENSE, NET was $437,000 for the four months ended April 30,
1997 compared to a net interest income of $26,000 for the four months ended
April 30, 1996, primarily due to the indebtedness incurred in connection with
the acquisition of Telephone Warehouse.
NET INCOME. As a result of the foregoing, Telephone Warehouse incurred
a net loss of $3,000 during the four months ended April 30, 1997 compared to a
net income of $1,102,000 during the four months ended April 30, 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
TOTAL NET REVENUES increased $4.8 million, or 10.7%, to $49.6 million
in 1996 from $44.8 million in 1995. Wholesale sales increased $7.0 million, or
34.4%, to $27.3 million in 1996 from $20.3 million in 1995 primarily due to high
levels of Ericsson digital phones sales. Due to lower cost sourcing, special
discounted prices on Ericsson digital phones were offered during the first half
of the year. Residual income increased $1.1 million, or 14.6%, to $8.3 million
in 1996 from $7.3 million in 1995 due to an increase in cellular and pager
subscribers. Retail sales and activation income decreased $3.2 million, or
18.8%, to $14.0 million in 1996 from $17.3 million in 1995 due to a decline in
carrier promotions, which resulted in fewer activations and equipment sales. In
addition, the Company increased promotions of free pagers, which resulted in a
corresponding decline in retail product sales.
GROSS PROFIT increased $1.8 million, or 12.4%, to $16.2 million in 1996
from $14.4 million in 1995. Gross profit as a percentage of total net revenues
increased to 32.7% in 1996 from 32.3% in 1995 primarily due to an increase in
residual income and higher wholesale margins associated with the Ericsson
digital phone sales.
SELLING, GENERAL AND ADMINISTRATIVE expense increased $178,000, or
1.7%, to $10.4 million in 1996 from $10.2 million in 1995. As a percentage of
total net revenues, selling, general and administrative expense decreased to
20.9% in 1996 from 22.7% in 1995 because sales increased more rapidly than
selling, general and administrative expense.
INCOME FROM OPERATIONS increased $2.1 million to $4.0 million in 1996
from $1.9 million in 1995 and increased as a percentage of total net revenues to
8.1% from 4.1%.
INTEREST INCOME, NET increased $19,000 to $30,000 in 1996 from $11,000
in 1995.
NET INCOME increased to $3.4 million in 1996 from $1.7 million in 1995
for the above reasons and due to the decrease in former shareholder compensation
expense of $529,000.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
TOTAL NET REVENUES increased $2.4 million, or 5.5%, to $44.8 million in
1995 from $42.4 million in 1994. Wholesale sales increased 8.0% to $20.3 million
in 1995 from $18.8 million in 1994 primarily due to the addition of sales
personnel in the wholesale operations. Residual income increased 30.2% to $7.3
million in 1995 from $5.6 million in 1994 due to the increase in cellular and
pager subscribers. Retail sales and activation income decreased 4.7% to $17.3
million in 1995 from $18.1 million in 1994, due to increased product
discounting.
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35
GROSS PROFIT increased $2.3 million, or 19.1%, to $14.4 million in 1995
from $12.1 million in 1994. Gross profit as a percentage of total net revenues
increased to 32.2% in 1995 from 28.6% in 1994 primarily due to a decrease in the
cost of wireless products.
SELLING GENERAL AND ADMINISTRATIVE expense increased $1.4 million, or
15.8%, to $10.2 million in 1995 from $8.8 million in 1994 primarily due to
increases in payroll, rent, advertising resulting from the opening of new
stores. As a percentage of total net revenues, selling, general and
administrative expense increased to 22.7% in 1995 from 20.7% in 1994. This
increase resulted from higher expenses associated with new stores with lower
initial sales volumes compared to established stores.
INCOME FROM OPERATIONS increased by $1.9 million to $1.9 million in
1995 from a loss from operations of $85,000 in 1994 and increased as a
percentage of total net revenues to 4.1% from a loss of 0.2%
INTEREST INCOME, NET decreased $9,000 to $11,000 in 1995 from $20,000
in 1994.
NET INCOME increased to $1.7 million from a loss of $86,000 in 1994 for
the above reasons and due to a decrease in former shareholder compensation
expense of $1.1 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements have been primarily to support its
increased inventory requirements and build-out costs for new store expansion and
to fund acquisitions. The Company has historically financed its liquidity needs
through a combination of bank borrowings, capital contributions, loans from
shareholders and cash provided by operations. Telephone Warehouse's liquidity
requirements have been primarily to finance its working capital requirements.
Telephone Warehouse has historically financed its liquidity needs primarily
through loans from its former shareholder.
The Company's working capital decreased $69,356 to $709,474 at April
30, 1997 from $778,830 at July 31, 1996. The Company's cash requirements during
the nine months ended April 30, 1997 were affected by the need for increased
working capital to fund the Company's growth. Accounts receivable and inventory
increased $3.1 million, or 168.0% to $4.9 million at April 30, 1997 from $1.8
million at July 31, 1996. This increase was partially offset by an increase in
accounts payable of $935,718, or 111.2% to $1.8 million at April 30, 1997 from
$841,490 at July 31, 1996.
The Company's net cash used in operating activities increased to
$630,829 for the nine months ended April 30, 1997 from $116,663 for the nine
months ended April 30, 1996. The decrease in net cash provided by operating
activities resulted primarily from an increase in inventories and accounts
receivable partially offset by an increase in current liabilities and net income
reflecting the growth in the Company's operations. During fiscal 1996, net cash
provided by operating activities was $252,184 primarily attributable to net
income before a non-cash charge of $225,159 for depreciation and amortization.
Telephone Warehouse's net cash provided by operating activities
decreased to $893,613 for the four months ended April 30, 1997 from $985,023 for
the four months ended April 30, 1996. The decrease in cash provided for the four
months ended April 30, 1997 as compared to the comparable period in 1996 is
primarily due to lower net earnings before a non-cash charge of $773,356 for
amortization of intangibles in connection with the Telephone Warehouse
Acquisition. During fiscal 1996, net cash provided by operating activities was
$4.0 million primarily due to net income of $3.4 million.
The Company's net cash used in investing activities increased to $1.2
million for the nine months ended April 30, 1997 from $476,959 for the nine
months ended April 30, 1996. The increase in cash used by investing activities
was primarily attributable to capital expenditures of $2.4 million and the
Company's acquisition of Northpoint Cellular (more commonly known as Peachtree
Mobility) for $850,000, partially offset by the release of $2.0 million of
escrowed cash relating to HIG's preferred stock investment in the Company. Net
cash used in
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36
investing activities in fiscal 1996 was $2.5 million which primarily consisted
of $594,185 in capital expenditures and $2.0 million in escrowed cash from HIG,
both of which were used principally to fund new store openings.
Telephone Warehouse's net cash used in investing activities increased
to $11.8 million for the four months ended April 30, 1997 from $2,359 for the
four months ended April 30, 1996 due to TCP's acquisition of Telephone Warehouse
effective January 1, 1997. See Note 1 to the Combined Financial Statements of
Telephone Warehouse.
The Company's net cash provided by financing activities increased to
$696,404 for the nine months ended April 30, 1997 from $527,414 for the nine
months ended April 30, 1996 primarily due to increased borrowings. During fiscal
1996, net cash provided by financing activities was $3.4 million, primarily
reflecting $2.9 million of proceeds from the Company's sale of Series A
Preferred Stock to HIG in June 1996.
Telephone Warehouse's net cash provided by financing activities
increased to $11.5 million for the four months ended April 30, 1997 as compared
to net cash used by financing activities of $1.3 million for the four months
ended April 30, 1996. The increase in net cash used by financing activities is
due to increased borrowings relating to TCP's acquisition of Telephone
Warehouse. See Note 1 to the Combined Financial Statements of Telephone
Warehouse. During fiscal 1996, net cash used in financing activities was $4.8
million reflecting a dividend distribution taken by its former shareholder.
At April 30, 1997, the Company's capital expenditure commitments
through fiscal 1998 were approximately $3.9 million and relate primarily to new
store openings, enhancements to the Company's management information system and,
to a lesser extent, renovation of existing stores. The average capital
expenditures for new kiosk and in-line locations approximate $30,000 and
$90,000, respectively. Initial inventory for a new store approximates $32,000
for a kiosk and $46,000 for an in-line store. Start-up costs for new stores such
as travel and the hiring and training of new employees are expensed as incurred
and typically average $3,000 per store. No assurance can be given that the
amount of capital expenditures anticipated to be made by the Company during
fiscal 1998 will, in fact, be made. The timing and amount of capital
expenditures is dependent upon a variety of factors, including the availability
of suitable sites for the construction of new stores, the size of the store and
the extent of build-out required at the selected site.
The Company's existing credit facility provides for borrowings of up to
$22.1 million, of which $14.1 million was outstanding as of July 31, 1997. The
credit facility, which expires in January 2004, is secured by substantially all
of the Company's assets, including the capital stock of Telephone Warehouse
owned by the Company, and by the capital stock of the Company owned by HIG. The
credit facility is comprised of a $9.0 million revolving loan and an aggregate
of $13.1 million in term loans. The revolving credit facility's availability is
based on a formula of eligible receivables and inventories, and at July 31, 1997
the Company had an additional $6.0 million available for borrowing. Advances
under the revolving credit line bear interest at 3.75% above the commercial
paper rate. The term loans are payable in increasing quarterly payments over
seven years and bear interest at 4.5% over the commercial paper rate.
The Company intends to use a portion of the net proceeds of this
offering to repay all amounts outstanding under its existing bank term loans and
credit facility. The Company expects that it will thereupon terminate its
existing credit facility and secure other credit facilities with a commercial
bank. The Company anticipates that net proceeds from the offering of Common
Stock, cash provided by operations and borrowings under credit facilities, will
be sufficient to meet currently foreseeable liquidity requirements.
SEASONALITY
The Company's stores have historically experienced, and the Company
expects its stores to continue to experience, seasonal fluctuations in revenues
with a larger percentage of revenues typically being realized in the second
fiscal quarter during the holiday season. In addition, the Company's quarterly
results can be significantly affected by the timing of store openings and
acquisitions and the integration of new and acquired stores into the Company's
operations, as well as other factors.
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37
BUSINESS
GENERAL
The Company is the largest independent specialty retailer of cellular
and wireless products, services and accessories in the United States, with 93
stores located in 12 states, the District of Columbia and Puerto Rico as of July
31, 1997. The Company's stores, located predominantly in regional shopping
malls, seek to offer one-stop shopping for consumers to purchase cellular, PCS,
paging, internet, satellite, and other wireless products and services and
related accessories. The Company is also a leading wholesaler of cellular and
wireless products and accessories to more than 1,000 accounts, consisting
primarily of distributors, carriers and smaller independent retailers.
The Company's business strategy is to offer the most extensive
assortment of wireless products and services at everyday low prices supported by
knowledgeable customer service, through conveniently located and attractively
designed stores. The Company believes that this strategy provides it with a
competitive advantage by combining the extensive product selection, competitive
prices and operating efficiencies typical of a "big box" retailer with the
superior customer service and upscale shopping experience characteristic of a
specialty retailer. The Company offers wireless products from well-known,
name-brand suppliers such as AT&T, Ericsson, Motorola, Nokia and Sony. The
Company's stores typically sell up to 40 different makes and models of cellular
and PCS phones and pagers and over 1,000 SKUs of wireless products and
accessories, such as batteries, home and car chargers, vehicle adapter kits and
cases. The Company supports its broad product offering with knowledgeable and
personalized customer service focused on educating the consumer and identifying
the most appropriate products and services for each consumer's individual needs.
The Company offers everyday low prices that are competitive with other retailers
and supports this policy with price guarantee, upgrade and trade-in programs.
INDUSTRY DYNAMICS
The wireless communications industry provides voice and data
communications services through cellular telephone, personal communications
services, satellite, enhanced specialized mobile radio and paging services.
Advances in system technology and equipment, combined with lower equipment
prices and service charges, have increased consumer acceptance and have caused
significant increases in worldwide demand for wireless communications products
and services.
CELLULAR/PCS MARKET
Cellular telephone service has been one of the fastest growing markets
within the industry. Since the inception of the cellular phone industry in 1983,
the number of U.S. cellular subscribers has grown to approximately 44 million by
year end 1996, having grown at an annual compound rate of 41% during the
previous five years. It is estimated that as of December 1996, this subscriber
base reflected an average market penetration of only 16.6%, based on the U.S.
population. In 1996, PCS wireless services were introduced in selected regions
of the U.S., which resulted in approximately 300,000 subscribers by year end.
Paul Kagan Associates, Inc. projects that by the year 2000 the number of
cellular and PCS subscribers in the U.S. will reach approximately 89 million.
According to CTIA, approximately $24 billion was spent on cellular service in
1996.
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38
The following table sets forth certain information with respect to the
cellular telephone market for the last five years:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------- 1992-96
1992 1993 1994 1995 1996 CAGR(1)
---- ---- ---- ---- ---- -------
Cellular subscribers
(millions) 11.0 16.0 24.1 33.8 44.0 41.4%
% GROWTH 46.0% 45.1% 50.8% 40.0% 30.4% --
Cellular penetration 4.3% 6.2% 9.1% 12.9% 16.6% --
Cellular service revenue
($billions) $ 7.8 $10.9 $14.2 $19.1 $23.6 31.8%
% GROWTH 37.0% 39.2% 30.6% 34.0% 23.9% --
- ---------------
(1) Compound annual growth rate measured from 1992 through 1996.
In recent years the number of systems and services has expanded within
the cellular industry. Until 1993, cellular systems in the U.S. were based upon
analog radio frequency technology. Primarily in response to the growth in the
number of cellular subscribers, many cellular carriers are upgrading their
existing cellular systems from analog to digital radio frequency technology to
increase capacity. Digital technology offers advantages over analog systems for
consumers, such as better quality, improved call security, lower service charges
and the ability to provide data transmission services. The Company believes it
will benefit from the increased availability of digital systems as demand
increases for cellular service and new cellular products. In 1996, PCS wireless
services were introduced as an alternative to cellular technology. PCS utilizes
digital technology similar to digital cellular service, but operates on
different transmission frequencies. As a result, PCS telephones offer many of
the same benefits as digital cellular telephones but currently have more limited
coverage areas and service plans.
The Company believes that it will benefit from the increase in the
number of wireless service providers. Prior to 1995, the Federal Communications
Commission (the "FCC") allowed two carriers to provide cellular service to each
metropolitan service area. In 1995 and 1996, the FCC completed auctions of major
area PCS licenses. As a result, up to five PCS carriers have been granted
licenses to operate in each metropolitan service area, increasing the total
number of potential PCS and cellular carriers to as many as seven per market.
The Company sells PCS in most of its markets where PCS service is available. The
Company believes that an increase in the number of wireless service providers
will increase competition among carriers. Such competition could result in
increased demand for wireless communications products, lower prices, increased
advertising and improved service quality. As such competition increases between
cellular and PCS carriers, management believes that agents with multiple points
of distribution, such as the Company, will become more important to the growth
of carrier sales.
PAGING MARKET
The paging market has also grown significantly in recent years. The
number of U.S. pagers in service has grown to approximately 42 million by year
end 1996, having grown at an annual compound rate of approximately 29% during
the previous five years. It is estimated that as of December 1996, this
subscriber base reflected an average market penetration of only 16%, based on
the U.S. population. The Strategis Group projects that by the year 2000, the
number of U.S. pagers in service will reach over 60 million.
The Company believes that the growth in the paging industry has been
and will continue to be driven by higher speed services, new features and growth
in the wireless communications industry. Paging continues to be a lower-cost,
wireless alternative to cellular and PCS service. In addition, paging is also
complementary to cellular, offering users the ability to screen incoming calls
and to minimize usage-based charges.
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The following table sets forth certain information with respect to the
paging market for the last five years:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------- CAGR(1)
1992 1993 1994 1995 1996 1992-96
---- ---- ---- ---- ---- -------
Pagers in service 15.3 19.3 26.3 34.5 42.3 28.9%
(millions)
% GROWTH 29.7 26.1 36.3 31.2 22.6 --
Paging penetration 6% 8% 10% 13% 16% --
- ---------------
(1) Compound annual growth rate measured from 1992 through 1996.
EMERGING WIRELESS TECHNOLOGIES
The Company anticipates that the emergence of new wireless
communications technologies and services such as enhanced specialized mobile
radio ("ESMR") and satellite communications systems, will increase the variety
of wireless services and expand the potential retail market for wireless
products. The Company intends to sell other products and services incorporating
new technologies as they become available. The Company believes that certain of
its existing carriers will be participants in developing new communications
technologies and its current suppliers will be suppliers of products
incorporating these new technologies. The Company anticipates that its
relationships with these carriers and suppliers will enable the Company to take
advantage of opportunities to sell new products and services. Management also
believes that carriers of advanced technologies will have a financial incentive
to utilize the Company's retail distribution capabilities to increase consumer
acceptance and use of their new systems.
DISTRIBUTION CHANNELS
The Company believes that a shift is occurring in the distribution of
cellular and wireless services, products and accessories in the United States.
For many years cellular and wireless products and services were distributed to
consumers directly through telemarketing, direct mail, direct sales forces and,
to a lesser extent, retail outlets. As wireless services and products have
become more affordable, the market has expanded significantly and shifted to a
broader consumer base, which purchases for, among other reasons, convenience and
security purposes. In order to better access such a broad consumer base,
management believes carriers will seek multiple points of retail distribution
including established independent specialty retailers such as the Company, their
own retail outlets and "big box" electronics retailers.
OPERATING STRATEGY
The Company's operating strategy is to enhance its position as the
largest independent specialty retailer of cellular and wireless products and
services in the United States by emphasizing the following competitive
strengths:
* PRIME STORE LOCATIONS. The Company seeks to locate its retail
stores in prime locations in regional shopping malls or other
high traffic locations in selected geographic markets having
desirable demographic statistics. Management believes that the
Company's market presence, established relationships with
national mall developers, attractive store design and
relatively high average sales volume per square foot give the
Company a competitive advantage in securing desirable mall
locations on attractive terms. The Company utilizes either
kiosk or in-line store formats to have greater flexibility to
place stores in the best available locations.
* STRONG STORE-LEVEL ECONOMICS. The Company believes that its
store level economics compare favorably to other retailing
sectors. The Company has developed both kiosk and in-line mall
stores, which average approximately 150 and 800 square feet in
size, respectively. In fiscal 1997, comparable stores (stores
owned and operated by the Company for at least 12 full months)
generated
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average annual sales of approximately $500,000 (excluding two
stores that generate substantially higher sales than other
stores) and, although sales per square foot vary by format,
overall the Company's stores had average sales per square foot
of approximately $1,000. In fiscal 1997, per store capital
expenditures and initial inventory for new kiosks and in-line
stores averaged approximately $62,000 and $136,000,
respectively.
* ATTRACTIVE STORE DESIGN. Let's Talk Cellular & Wireless stores
are designed to create a warm and inviting atmosphere that
emphasizes the Company's distinctive, upscale image and
encourages impulse purchases. The typical store utilizes a
combination of light wood, glass and bright colors to attract
walk-in traffic and encourage browsing. Merchandise is
displayed in large glass cases with prominent signage
containing simple explanations of product and service features
and benefits, as well as pricing and subscription information.
The Company believes its attractive store design, merchandise
presentations and signage are a significant factor in
establishing, differentiating and reinforcing the "Let's Talk
Cellular & Wireless" brand.
* EXTENSIVE MERCHANDISE SELECTION. The Company seeks to offer
the most extensive selection of cellular and wireless
products, services and accessories in the industry from
leading suppliers such as Motorola, Nokia, Ericsson, Sony and
AT&T for cellular phones, Ericsson and Sony for PCS phones and
Motorola, NEC, Panasonic and Sony for numeric, alpha numeric
and two-way pagers. A typical store offers up to 40 different
makes and models of cellular and PCS phones and pagers and
over 1,000 SKUs of other wireless products and accessories,
such as batteries, home and car chargers, vehicle adapter kits
and cases. The Company believes that its stores offer a
significantly greater breadth of products than the typical
carrier-owned store. The Company attempts to emphasize
in-stock availability of products that reflect the latest
technology and industry trends. As an independent retailer,
the Company has the advantage of being able to objectively
select from among the available carriers and suppliers in
choosing services and products to offer its customers. The
Company believes it provides individuals and small businesses
with one-stop shopping for all of their wireless
communications needs.
* EXCEPTIONAL CUSTOMER SERVICE. The Company believes that
providing high quality, knowledgeable and personalized
customer service differentiates the Company from its
competitors. The Company has implemented extensive employee
training programs on an ongoing basis designed to ensure that
its sales associates are thoroughly familiar with the latest
technical and functional elements of its products and services
as they are introduced. With the technological advancements
and introductions of new products and service options in the
wireless industry, customers are more likely to require the
advice of increasingly qualified salespeople to assist in
product and service selections. Management believes that its
emphasis on training and customer service distinguishes the
Company within the industry and is an important part of its
business strategy. The Company emphasizes a consultative
selling process, in which sales personnel inquire about the
needs and desires of each customer, in an attempt to recommend
the most appropriate products and services.
* COMPETITIVE EVERYDAY LOW PRICING. The Company maintains
everyday low prices that are competitive with prices charged
by other retailers within each local market. The Company
supports this policy with a lowest-price guarantee, 7-day
return policy and 30-day satisfaction guarantee to provide
customer assurance and satisfaction. In addition, customers
are eligible to receive 100% credit for their product
purchases if they upgrade within 12 months of the original
purchase.
* SOPHISTICATED FINANCIAL CONTROLS. Each Let's Talk Cellular &
Wireless store is equipped with a modern point-of-sale
computer terminal. The point-of-sale terminals are linked to a
central computer at the Miami headquarters, allowing the
Company's finance staff to continuously monitor sales and
inventory levels. The system is capable of generating
financial statements at the store level, providing management
with key operating and financial data in a timely manner,
thereby allowing the Company to respond quickly to changes in
consumer preferences and emerging industry trends. The Company
anticipates spending approximately $650,000 during fiscal 1998
in connection with the
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upgrading of its entire corporate MIS system, which will allow
the Company to efficiently monitor up to 300 retail locations.
This new system is expected to be fully tested and on-line by
April 1998.
* WHOLESALE STRATEGY. Management believes the wholesale business
provides the Company greater purchasing power and additional
distribution capabilities which complement the Company's
retail operations. The Company intends to continue to expand
its wholesale business by aggressively seeking to obtain more
accounts with distributors, carriers and independent
retailers. In addition, the Company intends to utilize its
Miami distribution facility to support its wholesale
operations and offer faster delivery and lower-cost shipping
to its east coast accounts. The Company also intends to
purchase substantially all of its cellular and wireless
product inventory through its wholesale operations and, as a
result of the increased volume of wholesale purchases, obtain
such products at lower cost.
GROWTH STRATEGY
Since opening its first store in 1989, the Company has grown through
internal expansion and acquisitions, and now operates 93 stores. The following
table shows the development of the Company's stores during the past five years.
FISCAL YEAR ENDED JULY 31,
-----------------------------------------------------
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
Open at beginning of year....................... 2 3 4 8 22 25
Opened during year.............................. 1 1 4 14 5 45
Acquired during year............................ - - - - - 24
Closed during year.............................. - - - - 2 1
----- ----- ----- ------ ----- -----
Open at end of year............................. 3 4 8 22 25 93
===== ===== ===== ====== ===== =====
Weighted average open during year............ 2.1 3.7 6.3 14.5 25.5 69.8
* NEW STORE EXPANSION. The Company plans to open 65 to 75 new stores in
fiscal 1998 and 80 to 100 stores in fiscal 1999 in both new and
existing markets, of which approximately 40% are expected to be kiosks
and 60% are expected to be in-lines. The Company believes that this
expansion rate, which is dependent on a number of factors, is
achievable given the Company's existing infrastructure, the ease with
which it can replicate the Company's store model and its successful
opening of 45 new stores in fiscal 1997. As of July 31, 1997, the
Company had 7 store locations under construction and has signed leases
or reached an agreement in principle for an additional 16 store
locations. The Company's store expansion strategy is to target
initially the largest and fastest growing wireless markets in the U.S.,
based on industry statistics. Management believes that the flexibility
of the Company's kiosk and in-line store formats permits the Company to
take advantage of the best available locations across a broad range of
market areas. Within each selected market, the Company intends to open
a cluster of 5-15 stores in order to achieve scale economies and to
obtain greater marketing benefits. Specific components of the Company's
store expansion program include the following:
TARGET ADDITIONAL MALL LOCATIONS. The Company intends to
continue opening both kiosks and in-line stores in shopping
malls where it can obtain desirable locations with high
traffic flow. Currently, the Company owns stores in only 55 of
the more than 1,000 regional malls located in the continental
U.S., many of which are managed by companies with which the
Company has established strong relationships. The Company
believes that the combination of its market presence,
established relationships with national mall developers,
attractive store design and high average sales volume per
square foot give the Company a competitive advantage in
securing desirable mall locations on attractive terms. The
Company's kiosk and in-line mall stores average approximately
150 and 800 square feet, respectively.
PENETRATE POWER STRIP LOCATIONS IN EXISTING MARKETS. The
Company intends to open power-strip locations to further
penetrate existing markets and supplement its geographic
expansion in selected
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markets. Power strips are generally anchored by one or more
large retailers, and typically contain a variety of smaller
specialty stores. The Company's power-strip stores typically
range in size from 2,000 to 4,000 square feet.
* PURSUE SELECTIVE ACQUISITIONS. The Company intends to continue to
increase the number of its stores through selective acquisitions of
other specialty retailers of cellular and wireless products in addition
to those stores opened by the Company. The Company believes that the
independent retail market for cellular and wireless products is highly
fragmented and consists of numerous independent specialty retailers in
each major metropolitan area. Through selective acquisitions, the
Company seeks to obtain immediate access to desirable markets and
locations, qualified sales personnel and, in some cases, an existing
subscriber base. The Company believes it can successfully apply its
operating strategy and leverage its existing infrastructure and
financial controls with such acquisitions. Potential acquisition
candidates include other independent wireless retailers that the
Company believes have excellent market demographics and management. In
assessing acquisition candidates, the Company reviews numerous factors,
including purchase price, store locations, number of potential
customers, market penetration and growth, availability of capital and
local competition. The Company believes that, following the offering,
it will have a competitive advantage over non-public specialty
retailers in making acquisitions as a result of its improved access to
the capital markets and its ability to use its common stock as
acquisition currency.
Management has had successful experiences in acquiring other specialty
retailers of cellular and wireless products. In August 1996, the
Company acquired Peachtree Mobility, an Atlanta based retailer with
five stores. Since the acquisition, the Company has changed the stores'
names to "Let's Talk Cellular & Wireless," increased the number of
product offerings in the stores, improved in-stock availability,
integrated the accounting and sales and administrative functions into
the Company's corporate offices. The Company has also added two
additional stores and is constructing a third for the Atlanta market.
In June 1997, the Company acquired 19 stores located in Texas, Kansas
and Missouri through the Telephone Warehouse Acquisition. The Company
reviews acquisitions on a continuing basis as opportunities arise,
however, there can be no assurance that any of the Company's expansion
plans will be consummated or prove successful.
* INCREASE COMPARABLE STORE SALES. The Company seeks to increase
comparable store sales by capitalizing on the changing industry
dynamics that are driving the growth in cellular and wireless usage,
and pursuing repeat business from its existing customers for new
products, product upgrades and additional accessories. As the Company's
stores increase penetration into new and existing markets, the Company
expects to obtain greater brand name recognition through broader
advertising, increased repeat and referral business and corporate
sales.
* CAPITALIZE ON OPERATING LEVERAGE. The Company continues to invest in an
infrastructure, including a management team and information systems, to
manage a rapidly growing chain of stores. As a result, the Company may
experience reduced operating margins in the near term. As the Company
continues to expand internally and through acquisitions, it expects to
leverage these investments and improve margins through economies of
scale. For example, Telephone Warehouse has historically been able to
acquire inventory at lower prices than the Company. The Company
recently has combined its purchasing department with that of Telephone
Warehouse and expects to attain further cost reductions based on
greater volume purchases and other economies of scale as the Company
grows.
PRODUCTS AND SERVICES
The Company offers an extensive selection of cellular and wireless
communications products and services as described below:
* CELLULAR PHONES, SERVICES AND ACCESSORIES. The Company offers
up to 25 different makes and models of cellular phones, with
an emphasis on having in-stock availability of phones that
reflect the latest technology and industry trends. The Company
displays the phones by four price categories and rates them
for excellence in quality, design and performance. With such
prominent displays of
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43
product information, the Company believes that it encourages
browsing, better educates customers and increases impulse
purchases. The Company offers cellular telephone service from
leading carriers such as Airtouch Cellular, AT&T, Bell
Atlantic/Nynex, BellSouth, Cellular One and L.A. Cellular and
markets all of their various service plans and available
options, such as night and weekend programs and call waiting.
In addition, the Company offers pre-paid cellular service,
when available from the carrier, to customers who would not
otherwise financially qualify for cellular service. Let's Talk
Cellular & Wireless stores also display a wide assortment of
cellular phone hardware and accessories such as batteries,
home and car chargers, vehicle adapter kits, cases and starter
kits from leading name-brand suppliers.
* PCS PHONES, SERVICES AND ACCESSORIES. The Company offers up to
5 different makes and models of PCS phones in its markets
where PCS service is available. PCS telephones operate in a
manner similar to cellular telephones, but utilize different
transmission frequencies. Differences exist in the service
features available, the service coverage areas, and the
service plan pricing options and structure. The Company offers
PCS service from leading PCS carriers such as PCS Sprint,
Omnipoint, PrimeCo and PCS phones from Ericsson and Sony. The
Company also rates PCS phones to help customers differentiate
quality, design and performance and offers a complete line of
PCS accessories from various suppliers.
* PAGERS, SERVICES AND ACCESSORIES. The Company offers up to 10
different makes and models of wireless pagers, including
numeric (standard pagers that can only display numbers),
alphanumeric (pagers that can display numbers and/or text) and
2-way (alphanumeric pagers that give users the ability to
respond to messages with the touch of a button) from leading
name-brand suppliers including Motorola, NEC, Panasonic and
Sony. The Company offers paging services from leading national
carriers such as CTI, McCaw, Metrocall, PageMart, PageNet, and
offers local, regional or nationwide paging coverage. The
Company also offers additional services such as voice mail and
custom greeting as well as a broad selection of pager hardware
and accessories to complement its sales of pagers and pager
services.
* OTHER PRODUCTS. The Company's stores seek to continuously
offer the latest in wireless products and services as they
become available for consumer use. The Company merchandises
internet products such as Mindspring, WebTV and WebPhones and
intends to offer other internet products and services that
become available in the future. The Company intends to sell
Sprint long distance services and prepaid calling cards for
long distance telephone service. The Company offers the Carcop
hand-held automobile security system which utilizes global
positioning system ("GPS") technology to identify the location
of automobiles. Additionally, the Company intends to offer
other after-market automobile navigation devices which utilize
GPS technology when such devices become more widely used and
affordable in price. The Company sells several electronic
products and services to business customers, such as an
automated electronic phone answering service and call routing
system that utilizes voice recognition technology to route
calls. Additionally, the Company sells hand-held voice
organizers that utilize voice recognition technology,
digitally store names, calendars, address books and messages,
and transfer data between laptop computers and other portable
electronic devices. The Company intends to carry satellite
phones and other devices that take advantage of new wireless
technologies as they become available in the future. The
Company carries Personal Digital Assistants ("PDA"),
electronic devices that contain the functions and capabilities
of a palm top computer, a cellular phone, a beeper, an
internet browser and an e-mail retriever and are capable of
sending and receiving facsimile transmissions. The Company's
strategy is to provide one-stop shopping for its customers and
to maintain its reputation as a retailer of the latest
technological advances in the communications industry.
Management believes that the flexibility of its merchandising
positions the Company as an attractive distribution network
for new products and services.
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TYPICAL RETAIL TRANSACTIONS
CELLULAR. In a typical cellular retail transaction, a customer
subscribes for service with one carrier and receives a phone for free or at a
substantial discount to its retail value. The Company's cost for the "free"
phone, approximately $100-$140, is more than offset by an activation commission
paid by the carrier, and by volume bonuses and coop advertising payments. In
some cases, the carrier pays the Company 4-6% of the customer's on-going monthly
service bills as residual payments for as long as the subscription remains in
effect. The Company seeks to supplement its sales with wireless accessories,
such as batteries, chargers and carrying cases, which generate an average gross
margin of approximately 65% for the Company.
PCS. In a typical PCS retail transaction, the customer buys the phone
from the Company at a price in excess of the Company's cost and subscribes for
service with a selected PCS carrier. The Company does not receive activation
commissions or residual payments in connection with its recent sales of PCS
phones but instead acquires PCS phones from carriers at a significantly reduced
cost than that paid by the PCS carrier. The Company, in turn, resells such
phones at a profit
PAGING. In a typical paging retail transaction, the customer buys a
pager and 12 months of service at one low price. Alternatively, a customer can
purchase a pager at full retail price and subscribe for three months of service.
In each case, the customer's initial payment exceeds the cost of the pager.
STORE DESIGN
The Company believes its attractive store design, merchandise
presentations and signage are a significant factor in establishing,
differentiating and reinforcing the Let's Talk Cellular & Wireless brand. The
Company seeks to create an inviting and enjoyable shopping environment that
emphasizes the Company's distinctive, upscale image, attracts walk-in traffic
and encourages impulse purchases. The typical Let's Talk Cellular & Wireless
store utilizes a combination of light wood, glass and bright colors to attract
walk-in traffic. Kiosks are typically oval or rectangular in shape, with glass
merchandise display cases forming the outside perimeter. The Company pays
careful attention to detail in the layout of each of its stores, particularly
lighting, colors, choice of material and placement of display cases. Each store
features merchandise displays and other materials that are designed to provide
easy customer access and information to encourage browsing. The Company seeks to
present customers with simple explanations of product and service features and
benefits, as well as pricing and sign-up information.
To facilitate the opening of multiple stores, the Company utilizes two
basic designs for kiosk and three basic designs for in-line stores. The designs
incorporate modular fixtures and can be easily adjusted to reflect different
sized and shaped locations, permitting faster and more cost effective
construction. The Company believes that a number of its key store design
elements can be used in a wide variety of retail settings.
SALES AND MARKETING
The Company's marketing strategy is to attract new customers, create
name awareness and promote repeat business through its use of local radio,
direct mail and print media as well as in-store promotional programs and special
price and product offerings. The Company seeks to place its stores in highly
visible locations where its distinctive store design will attract the attention
of prospective customers. The Company believes that its stores benefit from
increased traffic flow created by the advertising, marketing and promotional
efforts of the mall itself as well as other mall tenants. The Company clusters
stores in target markets in order to provide it with a sufficient base to
undertake management, marketing and advertising efforts.
The Company's marketing programs are supplemented by carriers and
suppliers in the form of cooperative advertising allowances, market development
funds, and new store allowances. For the nine months ended April 30, 1997, the
Company received an aggregate of $1.2 million of such funds. Cooperative
advertising allowances are provided for store advertising that features their
services or products. Market development funds
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are additional funds provided for marketing and advertising in new markets. New
store allowances are funds provided to offset the costs of developing new
stores.
CUSTOMER SERVICE
With the technological advancements and introductions of new products
and service options in the wireless industry, customers are more likely to
require the advice of increasingly qualified salespeople to assist in product
and service selections. Management believes that its emphasis on training and
customer service distinguishes the Company within the industry and is an
important part of its business strategy. The Company seeks to maximize customer
satisfaction as well as repeat and referral business by providing high quality,
knowledgeable and personalized customer service. The Company has implemented
extensive employee training programs on an ongoing basis designed to ensure that
its sales associates are thoroughly familiar with the latest technical and
functional elements of its products and services as they are introduced. Each
sales professional receives two weeks of classroom training and two additional
weeks of in-store training prior to his permanent assignment. New products and
services are introduced to the Company's sales staff by supplier and carrier
representatives prior to the public. The Company emphasizes a consultative
selling process in which sales personnel inquire about the needs and desires of
each customer, in an attempt to recommend the most appropriate products and
services. The Company's sales representatives' compensation is comprised of a
base salary and a sales commission on product sales. In addition to in-store
promotions, the Company's sales force generate repeat and referral business by
contacting existing and prospective customers via telephone. The Company offers
everyday low prices that are competitive with other retailers and supports this
policy with a lowest-price guarantee, a 7-day return policy and a 30-day
satisfaction guarantee to provide customer assurance and satisfaction. In
addition, customers are eligible to receive 100% credit for their product
purchases if they upgrade within 12 months of the original purchase.
CARRIER AGREEMENTS
Generally, the Company's stores offers cellular and PCS telephone
services and paging service pursuant to carrier agreements between one or more
of the carriers operating in the geographic area where the store is located and
the Company. There are only two licensed cellular carriers in a geographic
market. In each market the Company has an exclusive agreement with one such
cellular carrier. Two of Telephone Warehouse's carrier agreements covering the
Texas markets have provisions prohibiting the Company from offering competing
cellular or PCS telephone service during the term of the agreements and for a
period of one year after termination. The Company's cellular carrier agreements
range in duration from one to five years. In most of the Company's cellular
carrier agreements, the Company receives activation commissions and monthly
residual fees based on the number of subscribers enlisted and the volume of
their usage. The Company can receive bonus commissions when the volume of
activations exceeds certain levels. There are up to five PCS carriers in a
geographic market, depending on the size of the market, and therefore, the
Company's PCS carrier agreements are nonexclusive. The Company typically offers
multiple PCS services to its customers, although in several geographic markets
the Company is precluded from selling PCS services due to restrictions in the
relevant cellular carriers agreements. The Company's PCS carrier agreements are
typically for a term of one year. Management believes that in most instances,
the cancellation or non-renewal of any of its carrier agreements would not have
a material adverse effect on the Company's financial condition or results of
operations, as it believes that a canceled agreement could likely be replaced
with an agreement with one of the carrier's competitors. However, in certain
markets where the Company receives substantial residual payments from the
carrier, the cancellation or non-renewal could have a significant effect on the
Company's financial condition and results of operations. The Company is also a
reseller of paging services, buying blocks of paging time from paging carriers
at a substantial discount and reselling paging services to its customers. The
Company's paging carrier agreements range in duration from one to 10 years.
Paging customers are charged a monthly fee for local service and additional fees
for service in other markets. The Company offers cellular and paging coverage
throughout the continental United States and PCS coverage in the five U.S.
markets where it is available to the Company's stores. Set forth below is a list
of the Company's cellular, PCS and paging carriers, the geographic territory
where the services are sold and the expiration dates of their agreements:
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TYPE OF
CARRIER SERVICE GEOGRAPHIC AREA EXPIRES
- -------------------- -------- -------------------------------------------------- ----------------
Airtouch Cellular Cellular Atlanta December 1998
AT&T Wireless Cellular Dallas/Fort Worth December 2001
AT&T Wireless Cellular Denver(1) September 2001
AT&T Wireless Cellular New York City metropolitan area December 1998
AT&T Wireless Cellular San Antonio December 2001
Bell Atlantic/NyNex Cellular District of Columbia, Maryland, Philadelphia,
New Jersey February 1998
BellSouth Mobility Cellular South and Central Florida(2) March 1998
Cellular One Cellular Puerto Rico January 1998
Cellular One Cellular Kansas City December 1999
L.A. Cellular Cellular Los Angeles January 1998
Cellular One Paging Puerto Rico May 31, 2002
CTI Paging Nationwide December 1997
McCaw Paging San Antonio March 1998
Metrocall Paging Dallas/Fort Worth August 2004
PageMart Paging Nationwide October 1997
PageNet Paging Texas, Louisiana, Oklahoma, Arkansas, Kansas,
Missouri February 2006
Omnipoint PCS New York City metropolitan area (3)
PrimeCo PCS South Florida, Tampa, Orlando October 2001
Sprint PCS Nationwide April 1998
- ---------------
(1) In September 1996, the Company entered into a Kiosk Staffing Agreement
with AT&T Wireless. Pursuant to the agreement the Company provides
personnel and management expertise to operate AT&T Wireless kiosks and
in-line stores in the greater Denver metropolitan area through
September 2001 in exchange for receiving commissions and fees for
services and products sold at such stores. The Company currently
operates 3 such AT&T Wireless stores. The agreement provides
incremental operating income with no requirements for capital
expenditures.
(2) The Company currently offers BellSouth Mobility cellular service in
South and Central Florida, although its carrier agreement with Bell
South Mobility permits the Company to offer such services wherever
BellSouth Mobility offers cellular service, which is currently
throughout the Southeastern United States.
(3) Pursuant to a non-binding memorandum of understanding.
SUPPLIERS
The Company purchases its inventory from a variety of sources, such as
suppliers, carriers and other large wholesale distributors. The Company
purchases all of its inventory through a centralized purchasing department that
tracks the inventory needs of each of its stores. The Company deals with its
suppliers on an order-by-order basis and seeks to find the lowest price with
quantity discounts. The purchasing department negotiates payment terms, vendor
financing of inventory and merchandise discounts with suppliers. The Company
currently purchases inventory from over 40 suppliers. Because cellular and
wireless products can be sourced from numerous suppliers, the Company does not
believe it is dependent on any particular source of supply for its inventory
needs.
Historically, Telephone Warehouse has purchased inventory at lower
prices than the Company because of its large volume discounts, which are
primarily associated with its wholesale business. The wholesale business
maintains competitive pricing by purchasing products from multiple sources such
as suppliers, carriers and large distributors, often on a "spot" basis to take
advantage of discounts. Management believes that the acquisition of Telephone
Warehouse, combined with continued new store expansion and an improved capital
structure resulting
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from the offering, will give the Company increased purchasing capabilities and
enable the Company to qualify for better quantity discounts.
SITE SELECTION
The Company's strategy for opening stores is to seek prime locations in
regional shopping malls or other high traffic locations in selected geographic
markets having attractive demographic statistics. Markets for new stores are
selected on the basis of factors such as attractive demographics, household
income levels, growth potential and real estate availability. Within a specific
market, management carefully selects each site by evaluating store location,
visibility, accessibility and walk-by traffic volume, among other factors.
Management believes that the Company's market presence, established
relationships with national mall developers, attractive store design and high
average sales volume per square foot give the Company a competitive advantage in
securing desirable mall locations on attractive terms. The Company utilizes
either kiosk or in-line store formats to have greater flexibility to place
stores in the best available locations.
WHOLESALE OPERATIONS
The Company wholesales cellular phones and accessories to over 1,000
accounts, consisting primarily of distributors, carriers and smaller independent
retailers. The Company seeks to provide superior customer service as compared to
larger distributors in the industry by locating "hard to find" items, responding
quickly to customer inquiries and credit decisions, quickly turning around
repairs and providing same day shipping service. The wholesale business
maintains competitive pricing by purchasing products from multiple sources such
as suppliers, carriers and large distributors, often on a "spot" basis to take
advantage of discounts. The Company believes its wholesale business serves a
niche market in which customers are willing to pay higher prices for better
customer service. Management plans to continue to grow the wholesale business
because it believes the business will continue to complement the Company's
retail operations by providing economies of scale for purchasing and
distributing products and enabling the Company to purchase its cellular and
wireless product inventory through its wholesale operations at lower cost.
MANAGEMENT INFORMATION SYSTEMS
Each Company store is equipped with a modern computer terminal. The
point-of-sale terminals are linked to a central computer at the Miami
headquarters, allowing the Company's finance staff to continuously monitor sales
and inventory levels. The Company's MIS system provides sales, cost, gross
margin and commission information from store point-of-sale terminals that are
polled nightly. Customer, product and control information is also updated
nightly. The MIS system is also linked to the accounting system for general
ledger and accounts payable functions. The MIS system is capable of generating
financial statements at the store level and providing management with key
operating and financial data in a timely manner, thereby allowing the Company to
respond quickly to changes in customer preferences and emerging industry trends.
The Company is in the process of upgrading its corporate MIS system, which will
allow the Company to monitor up to 300 retail locations. This new system is
expected to be fully tested and on-line by April 1998.
COMPETITION
The Company is the largest independent specialty retailer of cellular
and wireless products and services. However, the industry is characterized by
intense competition, is highly fragmented and is composed of national chains of
"big box" electronic and consumer goods retailers, carrier-owned retail stores,
and regional and local chains of other specialty cellular retailers, among
others. Certain of the Company's competitors have significantly greater
resources than the Company. Competition is based in part on local market
conditions and varies from one location or geographic area to another. The
Company believes that the primary elements of competition in the industry are
price, breadth of product, in-stock availability of products and services that
meet the latest industry trends, level of customer service and convenience of
store location. The Company believes it competes favorably with national and
regional retailers. See "Business - Competitive Strengths" and "Risk Factors -
Competition."
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PROPERTIES
The Company currently leases all of its existing store locations other
than the AT&T Wireless stores in Denver and one store owned by Telephone
Warehouse. The Company expects that its policy of leasing rather than owning
will continue as it expands. The Company's leases generally provide for initial
lease terms ranging from three to five years for kiosks and up to 10 years for
in-line and power strip stores. Rent is generally computed as a percentage of
the store's gross sales in excess of a fixed minimum base rent plus a portion of
the mall common area maintenance expenses, taxes, insurance and electrical
service for the premises and mall common areas. Lease rental payments are also
subject to annual increases for taxes, common area maintenance and insurance.
As current leases expire, the Company believes that it will generally
be able either to obtain lease renewals if desired for present store locations,
or to obtain leases for equivalent or better locations in the same general area.
Certain of the Company's store leases contain provisions requiring the
landlord's written consent for, or permitting the landlord to terminate the
lease upon, a change in control of the ownership of the lessee. The foregoing
provisions may be applicable in certain cases as a result of the Telephone
Warehouse Acquisition (see "Certain Transactions -- the Telephone Warehouse
Acquisition"). Based primarily on the absence of lease terminations following
the Telephone Warehouse Acquisition, the Company's historic ability to secure
leases for suitable locations and the significant number of Company stores,
management believes that such provisions will not have a material adverse effect
on the business or financial position of the Company.
In addition to its stores, the Company currently leases an
approximately 9,220 square foot building in Miami, Florida, for its corporate
headquarters and distribution facility. Management believes that the portion of
such building used for its corporate headquarters is not adequate for the
Company's anticipated growth and has entered into a new lease for approximately
11,000 square feet of office space in Miami, Florida, for its corporate
headquarters, which management believes will be adequate for the Company's
anticipated growth. The Company also owns an approximately 4,600 square foot
building in Irving, Texas, which it uses as a retail store.
EMPLOYEES
As of July 31, 1997, the Company had approximately 470 employees, of
whom approximately 354 are involved in retail operations, 14 are involved in
wholesale operations and 102 are corporate office personnel. None of the
Company's employees is covered by a collective bargaining agreement and
management believes that the Company's relations with its employees are good.
SERVICEMARKS
The Company has filed an application to register the name "Let's Talk
Cellular & Wireless" and the Company's logo as a servicemark in the United
States Patent and Trademark Office. The Company is actively engaged in a program
to consolidate its store operations under the "Let's Talk Cellular & Wireless"
tradename and achieve a consistent and distinctive store appearance. As of July
31, 1997, 76% of the Company's 93 stores were operated under the "Let's Talk
Cellular & Wireless" tradename. In the Texas, Kansas and Missouri markets, the
Company conducts its retail operations under the name Telephone Warehouse,
pending an orderly transition to the "Let's Talk Cellular & Wireless" tradename.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings other than routine
litigation incidental to its business, none of which is material.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers, directors and key employees of the Company are
as follows:
NAME AGE POSITION
- -------------------- --- -----------------------------------------
Nicolas Molina 29 Chief Executive Officer and Director
Brett Beveridge 32 President and Chairman of the Board
Anne Gozlan 35 Chief Financial Officer
Ronald Koonsman 54 President-Telephone Warehouse
Anthony Tamer 39 Director
Sami Mnaymneh 36 Director
John Bolduc 33 Director
Douglas Berman 31 Director
Allan Sorensen 59 Director
KEY EMPLOYEES
Richard Berglund 50 Vice President-Sales
Fernando Perez 37 Director of Information Systems
Chris Howard 31 Director of Construction and Design
Nelson Roberts 43 Vice President and General Manager - Telephone
Warehouse, Inc.
Michael Starcher 30 Vice President and General Manager - National
Cellular Incorporated
Sheril Miller 41 Director of Real Estate
Lazarus Rothstein 39 General Counsel and Secretary
NICOLAS MOLINA is a co-founder of the Company and serves as Chief
Executive Officer and a director of the Company. Since the inception of the
Company in 1989, Mr. Molina has been a director and an executive officer of the
Company and has been primarily responsible for the Company's finance,
administration and expansion, including real estate site selection, leasing and
construction of the Company's retail operations, human resources, MIS and other
general corporate matters. Prior to the formation of the Company, Mr. Molina was
a corporate account executive for McCaw Communications.
BRETT BEVERIDGE is a co-founder of the Company and serves as Chairman
of the Board of Directors and President of the Company. Since the inception of
the Company in 1989, Mr. Beveridge has been a director and an executive officer
of the Company and has been primarily responsible for the Company's retail
operations, marketing, merchandising, distribution, carrier and vendor
relationships and other general operational matters. Prior to the formation of
the Company, Mr. Beveridge was a Divisional Sales Manager for Bally
Corporation's health club division in Miami, Florida from 1984 to 1988.
ANNE GOZLAN has served as Chief Financial Officer of the Company since
May 1995. From 1992 to 1995, Ms. Gozlan served as controller of Perfumania,
Inc., a publicly traded specialty retailer of perfumes and related products.
Prior to joining Perfumania, Ms. Gozlan was an audit manager at Price
Waterhouse, where she was employed from 1984 to 1992.
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RONALD KOONSMAN was the founder and has served as President and Chief
Executive Officer of Telephone Warehouse and its affiliates since January 1984.
Mr. Koonsman has over 27 years of experience in the telecommunications industry,
having been employed by Southwestern Bell and AT&T in a variety of management
positions from 1970 to 1983.
ANTHONY TAMER has been a Managing Director of HIG Capital Management,
Inc., an affiliate of HIG Investment Group, L.P. since 1993. Mr. Tamer was
previously a Partner at Bain & Company ("Bain") from 1986 to 1993. Mr. Tamer
attended Harvard Business School where he was awarded a Master in Business
Administration degree. He also holds a Master degree in Electrical Engineering
from Stanford University, and a Bachelor degree in Electrical Engineering from
Rutgers University.
SAMI MNAYMNEH has been a Managing Director of HIG Capital Management,
Inc., an affiliate of HIG Investment Group, L.P. since 1993. Mr. Mnaymneh was
previously a Managing Director at The Blackstone Group from 1990 to 1993 and
prior to such time was a Vice President in the Mergers and Acquisitions Group at
Morgan Stanley & Co. Mr. Mnaymneh attended Columbia University in New York,
where he was elected to Phi Beta Kappa. He subsequently attended Harvard
Business School and Harvard Law School where he was awarded a Master in Business
Administration degree and a Juris Doctor degree, respectively, with honors.
JOHN BOLDUC has been a Managing Director of HIG Capital Management,
Inc., an affiliate of HIG Investment Group, L.P. since 1993. Prior to joining
HIG, Mr. Bolduc was with Bain from 1990 to 1993. Mr. Bolduc has a Master in
Business Administration from the Darden Graduate School of Business at the
University of Virginia and a Bachelor of Science degree in Computer Engineering
from Lehigh University.
DOUGLAS BERMAN has been a Vice President of HIG Capital Management,
Inc., an affiliate of HIG Investment Group, L.P., since 1996. Prior to joining
HIG Capital Management, Mr. Berman was with Bain from 1992 to 1996. Mr. Berman
is a graduate of the Wharton School of the University of Pennsylvania, where he
received a Master in Business Administration. He also holds a B.A. in Economics
from the University of Virginia, where he was elected to Phi Beta Kappa.
ALLAN SORENSEN has served as Vice Chairman of the Board and a Director
of the Company since 1994. Mr. Sorensen is also Chairman of the Board of Interim
Services, Inc., a New York Stock Exchange company, where he has served on the
Board of Directors since 1967. He has also served as Temporary Chairman of The
Appletree Companies since August 1996 and Director since February 1996. He was a
member of the Board of Directors of H&R Block, Inc. from 1979 until September
1993 when Interim Services was spun off in an initial public offering. He is the
past five-term Chairman of the Board and a director of the Home Health Services
and Staffing Association (HHSSA). He is a past president and member of the Board
of Directors of the National Association of Temporary & Staffing Services
(NATSS) and recipient of their 1992 Leadership Award.
RICHARD BERGLUND has served as Vice President - Sales of the Company
since October 1996. From 1992 to 1996, Mr. Berglund served as Director of Stores
at Herman's World of Sporting Good's, Inc.
FERNANDO PEREZ has served as the Director of Information Systems for
the Company since August 1996. Prior to such time, Mr. Perez was employed by
Sunglass Hut International, Inc., where he served as Manager of Systems and
Programming for over 5 years. Before joining Sunglass Hut, he served as the
Manager of Operations for Savin Florida, a retailer of office products, from
1988 to 1991 after serving as its Manager of Information Systems from 1984 to
1987.
CHRIS HOWARD has served as the Company's Director of Construction and
Design since July 1996. From 1992 to 1996, Mr. Howard served as a Director of
Construction for Spec's Music Co. Prior to joining Spec's Music Co., Mr. Howard
served as a senior project manager for Scherer Construction & Engineering from
1989 to 1992.
NELSON ROBERTS has served as Vice President and General Manager of
Telephone Warehouse, Inc. since January 1992. Mr. Roberts has over 27 years of
retail experience in the consumer electronics industry, including
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12 years in sales and marketing in the wireless communications industry. Mr.
Roberts served as the president of a Dallas-based chain of mobile electronics
retail stores from 1981 to 1992.
MICHAEL STARCHER has served as Vice President and General Manager of
National Cellular, Incorporated since May 1993. From March 1992 until such time,
Mr. Starcher served as Controller of Telephone Warehouse, Inc. Mr. Starcher was
employed by Fisk & Robinson P.L.C., a public accounting firm from 1990 to such
time. Mr. Starcher is a graduate of Texas A&M University, where he received a
Bachelor of Arts degree in Accounting and Finance.
SHERIL MILLER has served as Director of Real Estate of the Company
since August 1997. From July 1994 until such time, Ms. Miller was employed by
Land Associates, a leasing, marketing and real estate development firm, as a
leasing executive. From February 1993, Ms. Miller was employed by General
Growth, a real estate development firm, and prior to such time was employed for
eight years by Kravco, a real estate development firm.
LAZARUS ROTHSTEIN has served as General Counsel and Secretary of the
Company since May 1997. Prior to joining the Company, Mr. Rothstein engaged in
the private practice of law for 13 years, primarily in the areas of real estate,
securities and business transactions and commercial litigation.
The Company's Board of Directors intends to appoint at least one
additional director who is not affiliated with the Company within 90 days of the
consummation of this offering. This additional director has not yet been
identified.
The Company also intends to establish an Audit Committee and a
Compensation Committee in connection with the appointment of such additional
directors. The Compensation Committee will be responsible for setting and
administering policies that govern annual compensation for the Company's
executive officers and administering the Company's Incentive Plan. See
"-Executive Incentive Compensation Plan." The duties and responsibilities of the
Audit Committee will include (i) recommending to the full Board the appointment
of the Company's auditors and any termination for engagement, (ii) reviewing the
plan and scope of audits, (iii) reviewing the Company's significant accounting
policies and internal controls, (iv) administering the Company's compliance
programs, (v) having general responsibility for all related auditing matters and
(vi) approving all material transactions with affiliates.
The Company's Articles provide that the Board of Directors be divided
into three classes, with regular three year staggered terms and initial terms of
one, two and three years for each of the classes of directors. Accordingly,
Messrs. Bolduc, Berman and Sorensen will hold office until the annual meeting of
shareholders to be held in 1998. Messrs. Mnaymneh and Tamer and one of the
contemplated independent directors will hold office until the 1999 annual
meeting and Messrs. Molina and Beveridge and another contemplated independent
director will hold office until the 2000 annual meeting.
DIRECTOR COMPENSATION
The Company does not currently intend to pay any fees to directors. The
Company will reimburse all directors for out-of-pocket expenses incurred in
connection with the rendering of services as a director.
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EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company,
for services rendered during the past year to the Company's Chief Executive
Officer and certain other officers whose total 1997 salary and bonus exceeded
$100,000 (the "Named Officers").
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------------------- -------------
SECURITIES
NAME AND FISCAL OTHER ANNUAL UNDERLYING
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS
- --------------------------- ------ -------- ------- ------------ -------------
($) ($) ($) (#)
Nicolas Molina 1997 $198,000 $25,000 $33,960(2) (3)
Chief Executive Officer
Brett Beveridge 1997 $198,000 $25,000 34,800(2) (3)
President and Chairman
of the Board
Anne Gozlan 1997 $100,000 -- -- $40,000(4)
Chief Financial Officer
- ----------------
(1) The column for "All other Compensation" has been omitted because there
is no compensation required to be reported in such column.
(2) Represents the value of perquisites and other personal benefits,
including premium payments and related expense for life insurance,
disability insurance and group health insurance totaling $19,927 and
$20,199 for Messrs. Molina and Beveridge, respectively.
(3) See "Option Grants Table" below for additional information about these
options.
(4) Represents a stock bonus consisting of an aggregate of 13,000 shares of
Common Stock, 6,500 shares of which vested in May 1997 and 6,500 shares
of which vested in June 1997.
OPTION GRANTS, EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth information with respect to grants of
options to purchase shares of Common Stock during the fiscal year ended July 31,
1997 to the Named Officers. The amounts shown as potential realizable values on
the options are based on assumed annualized rates of appreciation in the price
of the Common Stock of 0%, 5% and 10% over the term of the options, as set forth
in rules of the Securities and Exchange Commission. Actual gains, if any, on
stock option exercises are dependent on future performance of the Common Stock.
There can be no assurance that the potential realizable values reflected in this
table will be achieved.
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STOCK OPTION GRANTS IN THE FISCAL YEAR ENDED JULY 31, 1997
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM (1)
----------------------------------------------------------------- --------------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED EXERCISE OR
UNDERLYING OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION
NAME GRANTED (#) IN FISCAL YEAR ($/SHARE) DATE 0%($) 5%($) 10%($)
- ------------------ ------------------- ---------------- ----------- ----------- ------- ------ -------
Nicolas Molina.... 50% 7/27/07
Brett Beveridge... 50% 7/27/07
- --------------
(1) The Company determined that the Common Stock had a fair market value of
$ on the date of grant.
The following table sets forth information concerning the value of
unexercised options as of July 31, 1997 held by the Company's Named Officers. No
options were exercised during fiscal 1997.
YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
NAME OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END
- ------------------------------------- -------------------------- ----------------------------
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
-------------------------- ----------------------------
Nicolas Molina......................
Brett Beveridge.....................
- ---------------
(1) The Company determined that the Common Stock had a fair market value of
$ per share on July 31, 1997.
EXECUTIVE INCENTIVE COMPENSATION PLAN
The Company has adopted a 1997 Executive Incentive Compensation Plan
(the "Incentive Plan") which is designed to assist the Company in attracting,
motivating, retaining and rewarding high-quality executives and other employees,
officers, directors and independent contractors (collectively, the
"Participants") by enabling the Participants to acquire or increase a
proprietary interest in the Company, as well as providing the Participants with
annual and long-term performance incentives to expend their maximum efforts in
the creation of shareholder value. Pursuant to the terms of the Incentive Plan
the Company may grant Participants stock options, stock appreciation rights,
restricted stock, deferred stock, other stock-related awards and performance or
annual incentive awards that may be settled in cash, stock or other property
(collectively, the "Awards"). A committee comprised of at least two non-employee
directors (the "Committee"), or in the absence thereof the Board of Directors,
will administer and interpret the Incentive Plan and is authorized to grant
Awards thereunder to all eligible Participants.
Under the Incentive Plan, the total number of shares of Common Stock
that may be subject to the granting of Awards during the term of the Incentive
Plan shall be equal to shares, plus the number of shares with respect
to Awards previously granted under the Incentive Plan that terminate without
being exercised and the
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number of shares of Common Stock that are surrendered in payment of any Awards
or any tax withholding requirements. The following is a description of the
Awards that may be granted under the Incentive Plan:
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS - The Committee is
authorized to grant stock options, including both incentive and
non-qualified stock options, and stock appreciation rights ("SAR")
entitling a Participant to receive the amount by which the fair market
value of a share of Common Stock on the date of exercise exceeds the
grant price of the SAR. The exercise price per share subject to an
option and the grant price of an SAR are determined by the Committee,
but must not be less than the fair market value of a share of Common
Stock on the date of grant. Each option is exercisable after the period
or periods specified in the related option agreement, but no option may
be exercisable after the expiration of ten years from the date of
grant. Options granted to an individual who owns (or is deemed to own)
at least 10% of the total combined voting power of all classes of stock
of the Company must have an exercise price of at least 110% of the fair
market value of the Common Stock on the date of grant and a term of no
more than five years. Options may be exercised by payment of the
exercise price in cash, shares of Common Stock, outstanding Awards or
other property having a fair market value equal to the exercise price,
as the Committee may determine from time to time.
RESTRICTED AND DEFERRED STOCK - The Committee is authorized to grant
restricted stock and deferred stock. Restricted stock is a grant of
shares of Common Stock which may not be sold or disposed of, and which
may be forfeited in the event of termination of employment, prior to
the end of a restricted period specified by the Committee. A
Participant granted restricted stock generally has all the rights of a
shareholder of the Company, unless otherwise determined by the
Committee. An Award of deferred stock confers upon the Participant the
right to receive shares of Common Stock at the end of a specified
deferral period, subject to possible forfeiture of the Award in the
event of termination of employment prior to the end of a specified
restricted period. Prior to the issuance of shares of Common Stock, an
Award of deferred stock carries no voting or dividend rights.
BONUS STOCK AND AWARDS IN LIEU OF CASH OBLIGATIONS - The Committee is
authorized to grant shares of Common Stock as a bonus, free of
restrictions, or to grant shares of Common Stock or other Awards in
lieu of cash under the Incentive Plan, subject to such terms as the
Committee may specify.
OTHER STOCK-BASED AWARDS - The Committee is authorized to grant Awards
that are denominated or payable in, valued by reference to, or
otherwise based on or related to, shares of Common Stock. Such Awards
might include convertible or exchangeable debt securities, other rights
convertible or exchangeable into shares of Common Stock, purchase
rights for shares of Common Stock, Awards with value and payment
contingent upon performance by the Company or any other factors
designated by the Committee, and Awards valued by reference to the book
value of shares of Common Stock or the value of securities of or the
performance of specified subsidiaries or business units. The Committee
determines the terms and conditions of such Awards.
The right of a Participant to exercise or receive a grant or settlement
of an Award, and the timing thereof, may be subject to such performance
conditions (including subjective individual goals) as may be specified by the
Committee. In addition, the Incentive Plan authorizes specific annual incentive
Awards, which represent a conditional right to receive cash, shares of Common
Stock or other Awards upon achievement of certain preestablished performance
goals and subjective individual goals during a specified fiscal year.
Awards may be settled in the form of cash, shares of Common Stock,
other Awards or other property at the discretion of the Committee. The Committee
may condition any payment relating to an Award on the withholding of taxes and
may provide that a portion of any shares of Common Stock or other property to be
distributed will be withheld (or previously acquired shares of Common Stock or
other property surrendered by the Participant) to satisfy withholding and other
tax obligations. Awards granted under the Incentive Plan generally
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may not be pledged or otherwise encumbered and are not transferable except by
will or by the laws of descent and distribution, or to a designated beneficiary
upon the Participant's death, except that the Committee may, in its discretion,
permit transfers for estate planning or other purposes subject to any applicable
restrictions.
The Company had no Awards outstanding prior to fiscal 1997.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In June 1996, the Company's Board of Directors established a
Compensation Committee, consisting of Messrs. Tamer and Molina, to set executive
compensation levels. All compensation decisions affecting Mr. Molina were
approved by the Company's directors, exclusive of Mr. Molina. Upon consummation
of this offering, the Compensation Committee will consist of Mr. Sorensen.
EMPLOYMENT AGREEMENTS
Effective June 27, 1997, the Company amended and restated employment
agreements with each of Messrs. Molina and Beveridge. Mr. Molina's agreement
provides for his employment as the Chief Executive Officer of the Company, and
Mr. Beveridge's agreement provides for his employment as the President of the
Company. Both agreements provide for five year terms with base salaries of
$210,000 per year, to be increased annually by the greater of the annual
increase in the consumer price index or 5%, as well as annual bonuses of not
less than $50,000, subject to the achievement of reasonable performance targets
set by the Board. Upon termination of their employment by the Company for
reasons other than death, disability or cause, the executive shall be entitled
to receive the greater of (i) his salary and bonus for the remainder of the
employment period or (ii) two years' salary and bonus, except that these amounts
shall be reduced by any amounts of earned income the executive may be receiving
from any new employer.
In May 1995, the Company entered into an employment agreement with Ms.
Gozlan, which was subsequently amended in June 1996. The agreement provides for
a three-year term with a base salary of $100,000 to be increased annually by the
greater of the annual increase in the consumer price index or 5%. Upon
termination of her employment by the Company for reasons other than death,
disability or cause, Ms. Gozlan shall be entitled to receive her salary for the
following 12 months. In August 1997, the term of Ms. Gozlan's employment
agreement was extended through December 1998.
In June 1997, Telephone Warehouse amended and restated its employment
agreement with Mr. Koonsman, its former owner in connection with the Telephone
Warehouse Acquisition. The agreement provides for a two-year term expiring in
December 1998 and compensation in the form of (i) a $50,000 salary through
December 1997, (ii) a $100,000 salary from January 1998 through December 1998
and (iii) a $950,000 bonus paid in December 1997 provided that Telephone
Warehouse's earnings exceed certain targets. Upon termination of his employment
by the Company for reasons other than death, cause or resignation, Mr. Koonsman
shall be entitled to receive all payments of his compensation. See "Certain
Transactions."
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CERTAIN TRANSACTIONS
GENERAL
The Company from time to time has entered into transactions with
certain of its officers, directors and principal shareholders and entities in
which such parties have an interest. The Company believes that each such
transaction has been on terms no less favorable to the Company than could be
obtained in a transaction with an independent third party.
SERIES A PREFERRED STOCK
In June 1996 the Company issued 100,000 shares of Series A Preferred
Stock to HIG Fund V, Inc., a subsidiary of HIG ("Fund V"), in exchange for an
aggregate of $3.3 million pursuant to the Series A Preferred Stock Purchase
Agreement, dated June 25, 1996, among the Company, Messrs. Molina and Beveridge
and Fund V (the "Purchase Agreement"). HIG and Messrs. Tamer, Mnaymneh, Bolduc
and Berman own shares in Fund V.
Simultaneously with the Telephone Warehouse Acquisition, the Company
induced Fund V to convert the Series A Preferred Stock to Common Stock by
increasing the conversion ratio of the Series A Preferred Stock from 5.32 to 1
to 6.5 to 1. As a result of such conversion, Fund V surrendered certain rights
to enforce restrictive covenants regarding the Company's operations. Upon such
conversion, the Company issued to Fund V 650,000 shares of Common Stock, of
which 118,182 were in addition to the original conversion feature. In connection
with such conversion, Fund V agreed to terminate the provisions of the Purchase
Agreement other than provisions relating to registration rights pertaining to
shares issued in connection with such conversion.
TELEPHONE WAREHOUSE ACQUISITION
TCP, a subsidiary of HIG, acquired all of the outstanding capital stock
of Telephone Warehouse, Inc. and National Cellular, Incorporated from Mr. Ronald
Koonsman on December 31, 1996 for $15.1 million, consisting primarily of $12.9
million in cash and a $2.0 million 8% subordinated note (the "Seller Note"). The
acquisition was financed by $13.1 million in senior indebtedness provided by
NationsCredit, a limited partner of TCP, and the Seller Note. In addition, Mr.
Koonsman's employment agreement provided that he would receive an additional
$1.0 million in 1997 and up to $2.0 million in 1998 upon the two companies
reaching certain financial performance targets. The Seller Note was secured by a
second priority lien on TCP's stock in Telephone Warehouse, Inc. and National
Cellular, Incorporated and was guaranteed by the two companies. HIG,
NationsCredit and Messrs. Tamer, Mnaymneh, Bolduc and Berman own beneficial
interests in TCP.
In June 1997 the Company issued 552,590 shares of common stock to TCP
in exchange for all of the outstanding capital stock of Telephone Warehouse,
Inc. and National Cellular, Incorporated and assumed all of TCP's indebtedness,
approximately $13.1 million at such date. Mr. Koonsman's employment agreement
was amended to provide as follows: (i) for the six month period beginning on
July 1, 1997, a salary of $50,000, (ii) for the 12 month period beginning on
January 1, 1998, a salary of $100,000 and (iii) a bonus of $950,000 payable on
or before December 31, 1997, provided that Telephone Warehouse, Inc. and
National Cellular, Incorporated reach certain financial targets for the 12
months ended December 31, 1997. The Seller Note was modified to increase the
principal amount by up to $1,585,000 (subject to Telephone Warehouse, Inc. and
National Cellular, Incorporated reaching certain financial performance targets,
whether or not Mr. Koonsman is employed by the Company), to add the Company as a
guarantor, to add a second lien on Fund V's stock in the Company as additional
collateral for the loan and to provide for the release of the pledge of TCP's
and Fund V's stock in the Company upon the Company's initial public offering.
In connection with the Telephone Warehouse Acquisition, the Company
refinanced its debt and issued stock purchase warrants to NationsCredit. Such
warrants permit NationsCredit to purchase an aggregate of 32,410 shares of
Common Stock at an exercise price of $.0001 per share. NationsCredit will
exercise such warrants in full prior to this offering and sell the 32,410
underlying shares to the Underwriters as part of this offering. See "Principal
and Selling Shareholders." A portion of the proceeds of this offering will be
used to repay all of the Company's indebtedness to NationsCredit, thereby
releasing the guarantees and collateral for the loans.
Pursuant to Ms. Gozlan's employment agreement with the Company, 6,500
shares of the Common Stock granted to her vested in May 1997, and 6,500 shares
vested upon the consummation of the Telephone Warehouse Acquisition.
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Concurrently with the Telephone Warehouse Acquisition, the Company
issued stock options to purchase 27,721 shares of Common Stock, with an exercise
price of $65.92 per share, to each of Nicolas Molina and Brett Beveridge. See
"Management - Option Grants, Exercises and Fiscal Year-end Values."
MANAGEMENT
During fiscal 1995 Messrs. Molina and Beveridge together loaned the
Company an aggregate of $258,100 to fund the opening of new stores and for other
working capital purposes. These loans bear interest at 8.0% per annum, are
unsecured and mature upon the earlier of June 1, 1998 or the consummation of the
offering. The Company intends to repay these loans from the proceeds of the
offering. During fiscal 1997 the Company paid Messrs. Molina and Beveridge
approximately $18,100 in interest on the loans.
HIG Capital Management, Inc., an affiliate of HIG, provided to the
Company certain (i) investment banking services in connection with this
offering, for an aggregate fee of $240,000, and (ii) management and consulting
services from July 1997 through the date hereof, for a fee of $29,200 per month.
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information concerning the beneficial
ownership of the Common Stock immediately prior to this offering and as adjusted
to reflect the sale of the shares offered by this Prospectus by (i) each of the
Company's executive officers and directors, (ii) each person who is the
beneficial owner of more than 5% of the Common Stock and (iii) all executive
officers and directors as a group.
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING(2) NUMBER OF SHARES AFTER THE OFFERING(2)
-------------------------- TO BE SOLD --------------------------
NAME AND ADDRESS(1) NUMBER PERCENTAGE IN THE OFFERING NUMBER PERCENTAGE
- ------------------- ----------- ---------- ---------------- -------- ----------
HIG Investment Group, L.P.(3)..... % (4) %
Nicolas Molina(5).................
Brett Beveridge(5)................
NationsCredit Commercial
Corporation(6)................
Anne Gozlan(7)....................
Ronald Koonsman...................
Anthony Tamer(8).................. (4)
Sami Mnaymneh(8).................. (4)
John Bolduc.......................
Douglas Berman....................
Allan Sorensen.................... (4)
All directors and executive
officers of the Company as
a group (9 persons)(9)........ (4)
- ----------
* Less than 1%
(1) Unless otherwise indicated, the address of each of the beneficial
owners is c/o the Company, 5200 N.W. 77th Court, Miami, Florida 33166.
(2) Based on shares outstanding at August , 1997 and as
adjusted after the offering. Pursuant to the rules of the Commission,
certain shares which a person has the right to acquire within 60 days
of the date hereof pursuant to the exercise of stock options are deemed
to be outstanding for the purpose of computing the percentage ownership
of such person but are not deemed outstanding for the purpose of
computing the percentage ownership of any other person.
(3) Includes shares held of record by Fund V and shares held
of record by TCP. Mr. Tamer and Mr. Mnaymneh are directors of the
Company, Managing Directors of HIG Capital Management, Inc., directors
of Fund V and TCP, and are controlling shareholders of the general
partner of HIG Investment Group, L.P. Messrs. Tamer and Mnaymneh may,
by virtue of their relationship with Fund V, TCP and HIG Investment
Group, L.P., be deemed to beneficially own the securities held by Fund
V, TCP and HIG Investment Group, L.P., and to share voting and
investment power with respect to such securities. Messrs. Tamer and
Mnaymneh both disclaim beneficial ownership of the securities, except
to the extent of their respective investment interests in Fund V, TCP
and HIG Investment Group, L.P. The address of Fund V, TCP and HIG
Investment Group, L.P. and Messrs. Tamer and Mnaymneh is c/o HIG
Capital Management, Inc., 1001 South Bayshore Drive, Suite 2708, Miami,
Florida 33131. Mr. Tamer and Mr. Mnaymneh each disclaim beneficial
ownership of the securities.
(4) Does not reflect the possible sale of shares upon exercise of the
Underwriters' over-allotment option. See "Underwriting."
(5) Includes (i) shares directly owned, and (ii) shares
subject to presently exercisable options.
(6) Includes shares issuable upon the exercise of outstanding warrants
issued to NationsCredit as the Company's lender. Does not include
shares owned of record by TCP, of which NationsCredit is a
limited partner. The address of NationsCredit is One Canterbury Green,
Stamford, CT 06912. See "Certain Transactions."
(7) Includes shares directly owned.
(8) Reflects shares held of record by Fund V and TCP. See footnote (3).
(9) Includes shares subject to presently exercisable options held by
each of Messrs. Molina and Beveridge. Excludes shares owned of
record by HIG Investment Group, L.P.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of (i) 50,000,000
shares of Common Stock, par value $.001 per share, shares of which are
outstanding and (ii) shares of preferred stock, par value $ per share,
none of which are outstanding. The following summary description of the capital
stock of the Company is qualified in its entirety by reference to the Amended
and Restated Articles of Incorporation and Amended and Restated Bylaws of the
Company, copies of which are filed as exhibits to the Registration Statement of
which this Prospectus is a part. See "Additional Information."
COMMON STOCK
Subject to the rights of the holders of any preferred stock which may
be outstanding, each holder of Common Stock on the applicable record date is
entitled to receive such dividends as may be declared by the Board of Directors
out of funds legally available therefor, and, in the event of liquidation, to
share pro rata in any distribution of the Company's assets after payment or
providing for the payment of liabilities and the liquidation preference of any
outstanding preferred stock. Each holder of Common Stock is entitled to one vote
for each share held of record on the applicable record date on all matters
presented to a vote of shareholders, including the election of directors.
Holders of Common Stock have no cumulative voting rights or preemptive rights to
purchase or subscribe for any stock or other securities and there are no
conversion rights or redemption or sinking fund provisions with respect to such
stock. All outstanding shares of Common Stock are, and the shares of Common
Stock offered hereby will be when issued, fully paid and nonassessable.
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, New York, New York.
PREFERRED STOCK
The Company's Board of Directors may, without further action by the
Company's shareholders, from time to time, direct the issuance of shares of
preferred stock in series and may, at the time of issuance, determine the
rights, preferences and limitations of each series. Satisfaction of any dividend
preferences of outstanding shares of preferred stock would reduce the amount of
funds available for the payment of dividends on shares of Common Stock. Holders
of shares of preferred stock may be entitled to receive a preference payment in
the event of any liquidation, dissolution or winding-up of the Company before
any payment is made to the holders of shares of Common Stock. Under certain
circumstances, the issuance of shares of preferred stock may render more
difficult or tend to discourage a merger, tender offer or proxy contest, the
assumption of control by a holder of a large block of the Company's securities
or the removal of incumbent management. The Board of Directors of the Company,
without shareholder approval, may issue shares of preferred stock with voting
and conversion rights which would adversely affect the holders of shares of
Common Stock. Upon consummation of the offering, there will be no shares of
preferred stock outstanding, and the Company has no present intention to issue
any shares of preferred stock.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY'S
ARTICLES OF INCORPORATION AND BYLAWS AND OTHER PROVISIONS
Certain provisions of the Articles and Bylaws of the Company and
Florida law summarized in the following paragraphs may be deemed to have an
anti-takeover effect and may delay, defer or prevent a tender offer or takeover
attempt that a shareholder might consider in its best interest, including those
attempts that might result in a premium over the market price for the shares
held by shareholders.
CLASSIFIED BOARD OF DIRECTORS. The Articles provide for the Board of
Directors to be divided into three classes of directors serving staggered
three-year terms. As a result, approximately one-third of the Board of Directors
will be elected each year. The Articles also provide that shareholders may
remove a director upon the affirmative vote of two-thirds of all votes entitled
to be cast for the election of directors. This provision, when coupled with the
provision of the Bylaws authorizing only the Board of Directors to fill vacant
directorships, will
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preclude a shareholder from removing incumbent directors without cause and
simultaneously gaining control of the Board of Directors by filling the
vacancies created by such removal with its own nominees. The Company's Articles
provide that the provisions described in this paragraph may only be amended by
an affirmative vote of two-thirds of all votes entitled to be cast for the
election of directors.
SPECIAL MEETING OF SHAREHOLDERS. The Articles provide that special
meetings of shareholders of the Company may be called only by the Board of
Directors, the Company's Chairman of the Board of Directors or the holders of
not less than 50% of all votes entitled to be cast on any issue proposed to be
considered at such special meeting. This provision will make it more difficult
for shareholders to take actions opposed by the Board of Directors.
ADVANCE NOTICE FOR SHAREHOLDER PROPOSALS AND DIRECTOR NOMINATIONS. The
Articles provide that shareholders seeking to bring business before an annual
meeting of shareholders, or to nominate candidates for election as directors at
an annual or special meeting of shareholders, must provide timely notice thereof
in writing. To be timely with respect to an annual meeting, a shareholder's
notice must be delivered to or mailed and received at the principal executive
offices of the Company not less than 120 days nor more than 180 days prior to
the first anniversary of the date of the Company's notice of annual meeting
provided with respect to the previous year's meeting. The Articles also specify
certain requirements for a shareholder's notice to be in proper written form.
These provisions may preclude shareholders from bringing matters before or from
making nominations for directors at an annual or special meeting.
AUTHORIZED BUT UNISSUED SHARES. Subject to the applicable requirements
of the Nasdaq National Market, the authorized but unissued shares of Common
Stock and preferred stock are available for future issuance without shareholder
approval. These additional shares may be utilized for a variety of corporate
purposes, including future public offerings to raise additional capital,
corporate acquisitions and employee benefit plans. The existence of authorized
but unissued and unreserved Common Stock and preferred stock may enable the
Board of Directors to issue shares to persons friendly to current management
which could render more difficult or discourage an attempt to obtain control of
the Company by means of a proxy contest, tender offer, merger or otherwise, and
thereby protect the continuity of the Company's management.
CERTAIN FLORIDA LEGISLATION. The State of Florida has enacted
legislation that may deter or frustrate takeovers of Florida corporations. The
Florida Control Share Act generally provides that shares acquired in excess of
certain specified thresholds will not possess any voting rights unless such
voting rights are approved by a majority of a corporation's disinterested
shareholders. The Florida Affiliated Transactions Act generally requires
supermajority approval by disinterested shareholders of certain specified
transactions between a public corporation and holders of more than 10% of the
outstanding voting shares of the corporation (or their affiliates). Florida law
and the Company's Articles also authorize the Company to indemnify the Company's
directors, officers, employees and agents under certain circumstances and
presently limit the personal liability of corporate directors for monetary
damages, except where the directors (i) breach their fiduciary duties and (ii)
such breach constitutes or includes certain violations of criminal law, a
transaction from which the directors derived an improper personal benefit,
certain unlawful distributions or certain other reckless, wanton or willful acts
or misconduct. The Company may also indemnify any person who was or is a party
to any proceeding by reason of the fact that he is or was a director, officer,
employee or agent of such corporation (or is or was serving at the request of
such corporation in such a position for another entity) against liability to be
in the best interests of such corporation and, with respect to criminal
proceedings, had no reasonable cause to believe his conduct was unlawful.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this offering, the Company will have shares
of Common Stock issued and outstanding. Of the Common Stock outstanding upon
completion of this offering, the shares of Common Stock sold in this
offering ( if the Underwriters' over-allotment option is exercised in
full) will be freely tradable by the holders thereof without restriction or
further registration under the Securities Act except for any shares held by
"affiliates" of the Company, as that term is defined under the Securities Act
and the regulations promulgated thereunder (an "affiliate"), or persons who have
been affiliates within the preceding three months. Upon the expiration of
lock-up agreements between each of the executive officers, directors and
existing shareholders and the Underwriters, 180 days after the date of this
Prospectus (or earlier upon the written consent of Merrill Lynch),
shares of Common Stock outstanding prior to this offering may be sold in the
public market by affiliates of the Company, subject to the limitations and
restrictions contained in Rule 144 under the Securities Act. Holders of the
remaining shares of Common Stock will not be able to sell their shares in
reliance on Rule 144 under the Securities Act prior to 1998.
In general, under Rule 144 as currently in effect, a holder (or holders
whose shares are aggregated) of "restricted securities," including persons who
may be deemed affiliated with the Company, whose shares meet a one-year holding
period requirement are entitled to sell, within any three-month period, a number
of these shares that does not exceed the greater of 1% of the then outstanding
shares of Common Stock (approximately shares immediately after this
offering) or the average weekly reported trading volume in the Common Stock
during the four calendar weeks preceding the date on which notice of the sale is
given, provided certain manner of sale and notice requirements and requirements
as to the availability of current public information about the Company are
satisfied. Under Rule 144(k), a holder of "restricted securities" who is deemed
not to have been an affiliate of the Company during the three months preceding a
sale by him, and whose shares meet a two-year holding period requirement, is
entitled to sell those shares, without regard to these restrictions and
requirements. In addition, affiliates of the Company must comply with the
restrictions and requirements of Rule 144, other than the one-year holding
period requirement, in order to sell shares of Common Stock which are not
"restricted securities" (such as shares acquired by affiliates in the offering).
The Company has reserved an aggregate of shares of Common
Stock for issuance under the Incentive Plan. See "Management--Executive
Incentive Compensation Plan." After the offering, the Company may file a
registration statement under the Securities Act to register the Common Stock to
be issued under this plan. After the effective date of such registration
statement, shares issued under the Incentive Plan will be freely tradable
without restriction or further registration under the Securities Act, unless
acquired by affiliates of the Company.
Prior to this offering, there has been no trading market for the Common
Stock. No prediction can be made as to the effect, if any, that future sales of
shares pursuant to Rule 144 or otherwise will have on the market price
prevailing from time to time. Sales of substantial amounts of the Common Stock
in the public market following this offering or the perception that such sales
might occur could adversely affect the then prevailing market price. The
Company's existing shareholders have agreed that they will not sell or otherwise
transfer any shares of Common Stock to the public for 180 days after this
offering. See "Underwriting."
REGISTRATION RIGHTS
Following the closing of this offering, the existing shareholders of
the Company will be entitled, subject to the lock-up agreements, to require the
Company to register under the Securities Act a total of approximately shares of
outstanding Common Stock (the "Registrable Shares") in the event the Company
proposes to register any of its securities, either for its own account or for
the account of a security holder, subject to certain limitations on the number
of shares to be included in the registration by the underwriter of such
offering. Pursuant to agreements entered into between the Company and each of
Fund V, Mr. Molina, Mr. Beveridge, Mr. Sorensen and Ms. Gozlan, under certain
circumstances and subject to certain limitations, each such shareholder may
require the Company to file a registration statement under the Securities Act
with respect to its, his or her , , and shares of
Common Stock, respectively, and the Company must use all commercially reasonable
efforts to effect such registration.
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UNDERWRITING
Subject to the terms and conditions set forth in the Purchase Agreement
(the "Purchase Agreement"), the Company and the Selling Shareholders have agreed
to sell to each of the underwriters named below (the "Underwriters") and each of
the Underwriters, for whom Merrill Lynch is acting as representative (the
"Representative"), severally has agreed to purchase, the number of shares of
Common Stock set forth opposite its name below:
NUMBER OF
UNDERWRITER SHARES
----------- -----------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.........................
Total...............................
===========
The Representative has advised the Company and the Selling Shareholders
that the Underwriters propose to offer the Common Stock to the public initially
at the public offering price set forth on the cover page of this Prospectus and
to certain dealers at such price less a concession not in excess of $ per
share and that the Underwriters may allow, and such dealers may reallow,
discounts not in excess of $ per share to certain other dealers. After the
initial public offering, the offering price, concession and discount may be
changed.
NationsCredit has informed the Company that it intends to exercise its
warrants to purchase shares of Common Stock in full prior to this offering and
sell the aggregate of such underlying shares to the Underwriters. See "Principal
and Selling Shareholders."
The Selling Shareholders (other than NationsCredit) have granted an
option to the Underwriters, exercisable for 30 days after the date of this
Prospectus, to purchase up to an aggregate of additional shares of
Common Stock at the initial public offering price set forth on the cover page of
this Prospectus, less the underwriting discount. The Underwriters may exercise
this option only to cover over-allotments, if any, made on the sale of the
Common Stock offered hereby. To the extent that the Underwriters exercise this
option, each Underwriter will be obligated, subject to certain conditions, to
purchase a number of additional shares of Common Stock proportionate to such
Underwriter's initial amount reflected in the foregoing table.
At the request of the Company, the Underwriters have reserved for sale,
at the initial public offering price, up to shares to be sold and offered
hereby by the Company to certain employees of the Company and other persons. The
number of shares of Common Stock available for sale to the general public will
be reduced to the extent such persons purchase such reserved shares. Any
reserved shares which are not orally confirmed for purchase within one day of
the pricing of the offering will be offered by the Underwriters to the general
public on the same terms as the other shares offered hereby. Certain individuals
purchasing reserved shares may be required to agree not to sell, offer or
otherwise dispose of any shares of Common Stock for a period of three months
after the date of this Prospectus.
The Company, its executive officers, directors and all existing
shareholders have agreed, subject to certain exceptions, not to directly or
indirectly (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of or otherwise dispose of or transfer any shares
of Common Stock or securities convertible into or exchangeable or exercisable
for Common Stock, whether now owned or thereafter acquired by the person
executing the agreement or with respect to which the person executing the
agreement thereafter acquires the power of disposition, or file a registration
statement under the Securities Act with respect to the foregoing or (ii) enter
into any swap or other agreement that transfers, in whole or in part, the
economic consequence of ownership of the Common Stock whether any such
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swap or transaction is to be settled by delivery of Common Stock or other
securities, in cash or otherwise, without the prior written consent of Merrill
Lynch for a period of 180 days after the date of this Prospectus. See "Shares
Eligible for Future Sale."
Prior to the offering, there has been no public market for the Common
Stock of the Company. The initial public offering price has been determined
through negotiations among the Company, the Selling Shareholders and the
Representative. The factors considered in determining the initial public
offering price, in addition to prevailing market conditions, are price-earnings
ratios of publicly traded companies that the Representative believes to be
comparable to the Company, certain financial information of the Company, the
history of, and the prospects for, the Company and the industry in which it
competes, and the Company's past and present operations, the prospects for, and
timing of, future revenues of the Company, the present state of the Company's
development, and the above factors in relation to market values and various
valuation measures of other companies engaged in activities similar to those of
the Company. There can be no assurance that an active trading market will
develop for the Common Stock or that the Common Stock will trade at or above the
initial public offering price. The initial public offering price set forth on
the cover page of this Prospectus should not be considered an indication of the
actual value of the Common Stock. Such price is subject to change as a result of
market conditions and other factors. Application has been made for quotation of
the Common Stock on the Nasdaq National Market under the symbol "LTCW."
The Underwriters do not intend to confirm sales of the Common Stock
offered hereby to any accounts over which they exercise discretionary authority.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including certain liabilities under
the Securities Act or to contribute to payments Underwriters may be required to
make in respect thereof.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Common Stock. As an
exception in these rules, the Representative is permitted to engage in certain
transactions that stabilize the price of the Common Stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the offering, (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus) the Representative may
reduce that short position by purchasing Common Stock in the open market. The
Representative may also elect to reduce any short position by exercising all or
part of the over-allotment option described above.
The Representative may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the Representative
purchases shares of Common Stock in the open market to reduce the Underwriters'
short position or to stabilize the price of the Common Stock, it may reclaim
the amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect that
the transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representative will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
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LEGAL MATTERS
The legality of the shares of Common Stock offered hereby will be
passed upon for the Company by Greenberg Traurig Hoffman Lipoff Rosen & Quentel,
P.A., Miami, Florida. Certain legal matters will be passed upon for the
Underwriters by Brown & Wood LLP, New York, New York.
EXPERTS
The consolidated financial statements of the Company at July 31, 1996
and for the year then ended and the combined financial statements of Telephone
Warehouse at December 31, 1995 and 1996, and for each of the three years in the
period ended December 31, 1996 appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, and the
consolidated financial statements of the Company at July 31, 1995 and for each
of the two years in the period ended July 31, 1995, have been audited by
Deloitte & Touche LLP, independent auditors, as set forth in their respective
reports thereon appearing elsewhere herein, and are included in reliance upon
such reports given upon the authority of such firms as experts in accounting and
auditing.
The Company's Board of Directors appointed Ernst & Young LLP as the
independent accountants for the Company in July 1996 to replace Deloitte &
Touche LLP, who were the independent accountants from July 1994 until such time.
During the period of Deloitte & Touche LLP's retention by the Company, there
were no disagreements between Deloitte & Touche LLP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Deloitte
& Touche LLP, would have caused them to make reference to the disagreement in
any of their reports on the Company's financial statements. In addition, the
reports of Deloitte & Touche LLP on the financial statements of the Company at
and for the years ended July 31, 1994 and 1995 contained no adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty, the
scope of the audit performed or accounting principles. During the two years
ended July 31, 1995, there have been no reportable events described in Item
304(a)(1)(v) of Regulation S-K promulgated by the Commission. The Company has
requested Deloitte & Touche LLP furnish it with a letter addressed to the
Commission stating whether or not it agrees with the above statements. A copy of
such letter has been filed as an exhibit to the registration statement of which
this Prospectus forms a part. The Company engaged Ernst & Young LLP as its new
independent accountants as of July 12, 1996 to perform audit services commencing
with the year ended July 31, 1996. During the year ended July 31, 1995, the
Company has not consulted Ernst & Young LLP on items which (i) were or should
have been subject to Statement on Accounting Standards No. 50 or (ii) concerned
the subject matter of a disagreement or reportable event (as described in Item
304(a)(1)(iv) of Regulation S-K).
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, exhibits and schedules thereto, the "Registration Statement") under
the Securities Act of 1933, as amended (the "Act"), with respect to the Common
Stock offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement. For further information with respect to
the Company and the Common Stock offered hereby, reference is hereby made to
such Registration Statement. Statements contained in this Prospectus as to the
contents of any contract or other document are not necessarily complete and, in
each instance, reference is made to the copy of such contract or document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference. Copies of the Registration Statement may be
obtained from the Commission's principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of the fees prescribed by the Commission,
or may be examined without charge at the offices of the Commission. The
Commission also maintains a World Wide Web site on Internet at
http://www.sec.gov that contains reports, proxy and information statements and
other information filed electronically with the Commission. Information
concerning the Company will also be available for inspection at the offices of
the Nasdaq National Market, Reports Section, 1735 K Street, N.W., Washington,
D.C. 20006.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements which have been certified by its
independent public accountants, and quarterly reports containing unaudited
summary financial information for each of the first three quarters of each
fiscal year.
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Index to Financial Statements
Let's Talk Cellular & Wireless, Inc. and Subsidiaries:
Report of Independent Certified Public Accountants..................... F-2
Report of Independent Certified Public Accountants..................... F-3
Consolidated Balance Sheets............................................ F-4
Consolidated Statements of Income...................................... F-6
Consolidated Statements of Changes in Redeemable,
Convertible Preferred Stock and Common Shareholders' Equity......... F-7
Consolidated Statements of Cash Flows.................................. F-8
Notes to Consolidated Financial Statements............................. F-10
Telephone Warehouse:
Report of Independent Auditors......................................... F-26
Combined Balance Sheets ............................................... F-27
Combined Statements of Operations...................................... F-29
Combined Statements of Changes in Shareholders' Equity................. F-30
Combined Statements of Cash Flows...................................... F-32
Notes to Combined Financial Statements................................. F-34
F-1
66
Report of Independent Certified Public Accountants
Board of Directors and Shareholders
Let's Talk Cellular & Wireless, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Let's Talk
Cellular & Wireless, Inc. and subsidiaries as of July 31, 1996, and the related
consolidated statements of income, changes in redeemable, convertible preferred
stock and common shareholders' equity, and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1996 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Let's Talk
Cellular & Wireless, Inc. and subsidiaries at July 31, 1996, and the results of
its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the accompanying
consolidated financial statements as of July 31, 1996 and for the year then
ended have been restated for a change in the method of recording preopening
expenses.
/s/ ERNST & YOUNG LLP
Miami, Florida
September 26, 1996
F-2
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Report of Independent Certified Public Accountants
Board of Directors and Shareholders
Let's Talk Cellular & Wireless, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Let's Talk
Cellular & Wireless, Inc. (formerly Let's Talk Cellular of America, Inc.) and
subsidiaries as of July 31, 1995, and the related consolidated statements of
income, shareholders' equity and cash flows for the two years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Let's Talk Cellular & Wireless,
Inc. and subsidiaries at July 31, 1995, and the results of its operations and
its cash flows for the two years then ended in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the financial statements, the accompanying
consolidated financial statements as of July 31, 1995 and for the year then
ended have been restated for a change in the method of recording preopening
expenses.
/s/ DELOITTE & TOUCHE LLP
Miami, Florida
October 31, 1995, except for the seventh
paragraph of Note 2 as to which the date
is September 26, 1996.
F-3
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Let's Talk Cellular & Wireless, Inc. and Subsidiaries
Consolidated Balance Sheets
JULY 31 APRIL 30
-------------------------- ----------
1995 1996 1997
-------------------------- ----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 241,820 $1,357,172 $ 228,318
Accounts receivable, net 510,643 620,521 1,397,527
Inventory 1,191,352 1,210,159 3,508,030
Prepaid expenses 170,454 31,224 38,279
Other current assets 128,251 42,511 115,231
Deferred tax asset (Note 9) -- 17,174 76,675
---------- ---------- ----------
Total current assets 2,242,520 3,278,761 5,364,060
Cash held in escrow (Note 10) -- 2,009,194 --
Property and equipment, net (Note 3) 1,058,430 1,324,852 3,514,670
Other assets, net 23,062 32,780 78,072
Intangible assets, net (Note 12) -- -- 440,000
---------- ---------- ----------
Total assets $3,324,012 $6,645,587 $9,396,802
========== ========== ==========
(CONTINUED ON THE FOLLOWING PAGE)
F-4
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Let's Talk Cellular & Wireless, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
JULY 31 APRIL 30
-------------------------- -----------
1995 1996 1997
---------- ---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED)
Current liabilities:
Trade accounts payable $1,231,606 $ 841,490 $1,777,208
Bank lines of credit (Note 4) 462,493 827,000 1,129,400
Accrued expenses 365,845 512,486 1,073,701
Current portion of loans from shareholders 100,000 -- --
Current portion of bank term loans and obligations under
capital leases (Notes 4 and 6) 47,880 115,236 270,907
Income taxes payable (Note 9) -- 59,217 277,152
Deferred revenues 97,903 79,886 85,797
Customer deposits 46,878 64,616 40,421
---------- ---------- ----------
Total current liabilities 2,352,605 2,499,931 4,654,586
Bank term loans, less current portion (Note 4) -- 190,000 428,333
Loans from shareholders, less current
portion (Note 5) 258,997 258,100 258,100
Obligations under capital leases, less
current portion (Note 6) 69,071 26,226 26,226
Other liabilities 2,711 35,565 40,778
Deferred tax liability (Note 9) 19,999 5,572 24,134
Commitments and contingencies (Note 7)
Redeemable, convertible preferred stock,
$30 par value, 150,000 shares authorized,
100,000 issued and outstanding (Note 10) -- 2,937,360 2,946,915
Common shareholders' equity (Note 11):
Common stock, $.001 par value, 50,000,000 shares
authorized, 650,000 shares issued and outstanding
650 650 650
Additional paid-in capital 257,600 263,806 283,902
Retained earnings 362,379 428,377 733,178
---------- ---------- ----------
Total common shareholders' equity 620,629 692,833 1,017,730
---------- ---------- ----------
Total liabilities and shareholders' equity $3,324,012 $6,645,587 $9,396,802
========== ========== ==========
SEE ACCOMPANYING NOTES.
F-5
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Let's Talk Cellular & Wireless, Inc. and Subsidiaries
Consolidated Statements of Income
NINE MONTHS ENDED
YEAR ENDED JULY 31 APRIL 30
----------------------------------------------- -----------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
Net revenues:
Retail sales and activation income $ 4,032,861 $ 7,770,308 $ 12,518,247 $ 9,175,457 $ 17,007,396
Residual income 228,341 533,273 1,075,035 752,871 929,638
------------ ------------ ------------ ------------ ------------
Total net revenues 4,261,202 8,303,581 13,593,282 9,928,328 17,937,034
Cost of sales 2,127,718 4,259,814 6,509,282 4,714,601 8,039,363
------------ ------------ ------------ ------------ ------------
Gross profit 2,133,484 4,043,767 7,084,000 5,213,727 9,897,671
Operating expenses:
Selling, general and administrative 1,918,038 3,896,453 6,601,077 4,841,389 8,788,905
Depreciation and amortization 43,082 99,732 225,159 155,034 285,120
Amortization of intangible assets -- -- -- -- 160,000
------------ ------------ ------------ ------------ ------------
Total operating expenses 1,961,120 3,996,185 6,826,236 4,996,423 9,234,025
------------ ------------ ------------ ------------ ------------
Income from operations 172,364 47,582 257,764 217,304 663,646
Interest expense, net (12,690) (39,898) (152,827) (117,737) (128,604)
------------ ------------ ------------ ------------ ------------
Income before provision (benefit)
for income taxes 159,674 7,684 104,937 99,567 535,042
Provision (benefit) for income taxes 70,045 (455) 38,939 33,060 230,241
============ ============ ============ ============ ============
Net income $ 89,629 $ 8,139 $ 65,998 $ 66,507 $ 304,801
============ ============ ============ ============ ============
Net income per share $ .11 $ .01 $ .07 $ .08 $ .22
============ ============ ============ ============ ============
Weighted average shares outstanding 823,624 823,624 876,077 823,624 1,355,442
============ ============ ============ ============ ============
SEE ACCOMPANYING NOTES.
F-6
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Let's Talk Cellular & Wireless, Inc. and Subsidiaries
Consolidated Statements of Changes in Redeemable,
Convertible Preferred Stock and Common Shareholders' Equity
REDEEMABLE CONVERTIBLE COMMON SHAREHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK
----------------------------------------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
------- ----------- --------- --------- -------- ---------
Balance at July 31, 1993 -- $ -- 650,000 $ 650 $ 7,600 $264,611
Net income -- -- -- -- -- 89,629
------- ----------- --------- --------- -------- ---------
Balance at July 31, 1994 -- -- 650,000 650 7,600 354,240
Capital contributions -- -- -- -- 250,000 --
Net income -- -- -- -- -- 8,139
------- ----------- --------- --------- -------- ---------
Balance at July 31, 1995 -- -- 650,000 650 257,600 362,379
Issuance of redeemable convertible
preferred stock for cash 100,000 3,295,000 -- -- -- --
Issuance costs associated with
redeemable convertible
preferred stock -- (358,702) -- -- -- --
Accretion of preferred stock to
redemption value -- 1,062 -- -- (1,062) --
Issuance of stock under stock
bonus plan -- -- -- -- 7,268 --
Net income -- -- -- -- -- 65,998
------- ----------- --------- --------- -------- ---------
Balance at July 31, 1996 100,000 2,937,360 650,000 650 263,806 428,377
Accretion of preferred stock to
redemption value (Unaudited) -- 9,555 -- -- (9,555) --
Issuance of stock under stock
bonus plan (Unaudited) -- -- -- -- 29,651 --
Net income (Unaudited) -- -- -- -- -- 304,801
------- ----------- --------- --------- -------- ---------
Balance at April 30, 1997
(Unaudited) 100,000 $ 2,946,915 650,000 $ 650 $283,902 $ 733,178
======= =========== ========= ========= ======== =========
SEE ACCOMPANYING NOTES.
F-7
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Let's Talk Cellular & Wireless, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
NINE MONTHS ENDED
YEAR ENDED JULY 31 APRIL 30
------------------------------------------- --------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
OPERATING ACTIVITIES
Net income $ 89,629 $ 8,139 $ 65,998 $ 66,507 $ 304,801
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 43,082 99,732 225,159 155,034 285,120
Amortization of intangible assets -- -- -- -- 160,000
Provision for activation adjustments and
cancellation losses -- -- 65,638 -- 65,969
Deferred income taxes -- 19,999 (31,601) (15,141) (40,939)
Loss on disposal of property and equipment -- -- 50,476 22,065 128,685
Issuance of stock under stock bonus plan -- -- 7,268 -- 29,651
Changes in operating assets and liabilities:
Accounts receivable (96,918) (387,717) (175,516) (199,109) (842,975)
Inventory (149,387) (719,560) (18,807) (6,335) (2,297,871)
Prepaid expenses (21,986) (133,886) 139,230 125,208 (7,055)
Other current assets (1,942) (120,748) 85,740 93,284 (72,720)
Other assets (12,399) (10,663) (9,718) (14,728) (45,292)
Trade accounts payable 193,682 1,014,614 (390,116) (402,658) 935,718
Accrued expenses (57,246) 216,619 146,641 (81,165) 561,215
Other liabilities -- 2,711 32,854 33,941 5,213
Income taxes payable -- -- 59,217 58,137 217,935
Customer deposits 30,169 4,659 17,738 41,144 (24,195)
Deferred revenues -- 97,903 (18,017) 7,153 5,911
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities 16,684 91,802 252,184 (116,663) (630,829)
INVESTING ACTIVITIES
Acquisition of Northpoint Cellular -- -- -- -- (850,000)
Proceeds from disposals of property and
equipment -- -- 73,680 63,750 --
Purchases of property and equipment (181,976) (809,182) (594,185) (540,709) (2,353,623)
Increase in cash held in escrow -- -- (2,009,194) -- 2,009,194
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities (181,976) (809,182) (2,529,699) (476,959) (1,194,429)
(CONTINUED ON THE FOLLOWING PAGE)
F-8
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Let's Talk Cellular & Wireless, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
NINE MONTHS ENDED
YEAR ENDED JULY 31 APRIL 30
------------------------------------------ --------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
FINANCING ACTIVITIES
Borrowings under bank lines of credit $ 147,785 $ 312,493 $ 364,507 $ 403,307 $ 302,400
Increase (decrease) in loans from shareholders -- 332,792 (100,897) (100,897) --
Proceeds from capital contributions -- 250,000 -- -- --
Proceeds from bank term loan -- -- 300,000 300,000 600,000
Payments on bank term loan and capital leases -- -- (107,041) (74,996) (205,996)
Proceeds from sale of preferred stock, net of
issuance costs -- -- 2,936,298 -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by financing activities 147,785 895,285 3,392,867 527,414 696,404
----------- ----------- ----------- ----------- -----------
Net (decrease) increase in cash and
cash equivalents (17,507) 177,905 1,115,352 (66,208) (1,128,854)
Cash and cash equivalents at
beginning of period 81,422 63,915 241,820 241,820 1,357,172
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 63,915 $ 241,820 $ 1,357,172 $ 175,612 $ 228,318
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 11,432 $ 31,269 $ 152,358 $ 110,235 $ 154,656
=========== =========== =========== =========== ===========
Cash paid for income taxes $ 209,615 $ 9,812 $ -- $ 30,941 $ 87,700
=========== =========== =========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Acquisition of property and equipment under
capital leases $ -- $ 135,683 $ 21,552 $ 14,703 $ --
=========== =========== =========== =========== ===========
SEE ACCOMPANYING NOTES.
F-9
74
Let's Talk Cellular & Wireless, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 1996
(Information pertaining to the nine months ended
April 30, 1996 and 1997 is unaudited)
1. NATURE OF OPERATIONS
Let's Talk Cellular & Wireless, Inc. and its wholly-owned subsidiaries
(collectively, the Company) ( known as Let's Talk Cellular of America, Inc.
prior to June 27, 1997) is an independent specialty retailer of cellular and
wireless products, services and accessories. As of July 31, 1995 and 1996 and
April 30, 1997, the Company operated 22 and 25 and 61 stores, respectively,
located throughout the United States and Puerto Rico.
The Company's stores have historically experienced, and the Company expects its
stores to continue to experience, seasonal fluctuations in revenues with a
larger percentage of revenues typically being realized in the second fiscal
quarter during the holiday season. In addition, the Company's results during any
fiscal period can be significantly affected by the timing of store openings and
acquisitions and the integration of new and acquired stores into the Company's
operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Let's Talk
Cellular and Wireless, Inc. and its wholly-owned subsidiaries LTC Kiosk
Management Corporation and Let's Talk Cellular of Bayside, Inc. All intercompany
balances and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
ACCOUNTS RECEIVABLE
Substantially all of the Company's accounts receivable are due from carriers of
wireless communication services. Collateral is not required and terms are
generally between 30 and 60 days. Accounts receivable are net of allowances of
$-0-, $65,638 and $131,607 as of July 31, 1995 and 1996 and April 30, 1997,
respectively, which are primarily reserves for deactivations.
F-10
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Let's Talk Cellular & Wireless, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories, consisting of cellular and wireless products and related
accessories, are valued at the lower of cost, based on the average cost method,
or market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the shorter of their useful life or
the remainder of the noncancelable lease period (including renewal options) (see
Note 3).
INTANGIBLE ASSETS
The noncompete arrangement entered into in connection with the Northpoint
Cellular, Inc. acquisition (see Note 12) is amortized over the life of the
arrangement, which is thirty months.
PREOPENING EXPENSES
Effective August 1, 1996, the Company changed its method of accounting for
preopening expenses from capitalizing these costs and amortizing them over 18
months to expensing them as incurred. The Company believes this new method is
preferable because it is more consistent with industry standards. This change
has been applied retroactively and the financial statements of prior periods
have been restated in accordance with provisions of Accounting Principles Board
Opinion No. 20, ACCOUNTING CHANGES. As a result of the change, previously
reported net income for the year ended July 31, 1996 increased approximately
$14,000 ($.02 per share) and decreased by approximately $36,000 ($.04 per share)
for the year ended July 31, 1995.
F-11
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Let's Talk Cellular & Wireless, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
In fiscal 1997, the Company will adopt the provisions of Statement of Financial
Accounting Standards (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS. SFAS No. 121 requires impairment losses to be recorded on long-lived
assets when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. Based on current circumstances, the Company does not believe the effect
upon adoption of SFAS No. 121 will be material.
REVENUE RECOGNITION
Product Sales
Revenue from retail product sales is recorded upon customer purchase.
Activation Income
The Company receives activation income from cellular carriers for each new
cellular phone subscription sold by the Company. Revenue from such commissions
is recorded upon customer subscription. New subscription activation commissions
are fully refundable if the subscriber cancels service within a certain minimum
period of continuous active service (generally 180 days). Customers generally
sign a service agreement that requires a customer deposit which is forfeited in
case of early cancellation. The allowance for doubtful accounts includes an
amount for estimated cancellation losses, net of deposit forfeitures.
Residual Income
The Company generally receives monthly residual income from the cellular service
providers based on a percentage of actual phone usage by subscribers. Revenue
from residual income is generally recorded as the cellular service is provided.
Revenue from prepaid pager service is deferred and recognized over the period
service is provided, usually three to twelve months. Revenue from monthly
installment pager service contracts is recorded as received.
F-12
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Let's Talk Cellular & Wireless, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING
The Company expenses advertising costs as incurred. Advertising expense which is
included in selling, general and administrative is recorded net of cooperative
advertising payments received. Net advertising expense amounted to $27,932,
$130,277 and $77,168 for the years ended July 31, 1994, 1995 and 1996,
respectively and $16,219 and $268,806 for the nine months ended April 30, 1996
and 1997, respectively. These amounts are net of $18,995, $181,550 and $654,687
of cooperative advertising payments received for the years ended July 31, 1994,
1995 and 1996, respectively, and $507,232 and $1,170,739 for the nine months
ended April 30, 1996 and 1997, respectively.
INCOME TAXES
Deferred income tax assets and liabilities are determined based upon differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates that will be in effect when the differences
are expected to reverse.
NET INCOME PER SHARE
Net income per share is calculated using the weighted average number of common
and common equivalent shares outstanding during the respective periods. Common
equivalent shares consist of common stock that would be issued upon conversion
of the redeemable, convertible preferred stock (described in Note 10). Common
shares and common equivalent shares issued at prices below the Company estimated
public offering price during the 12 months immediately preceding the date of the
initial filing of the registration statement are anticipated to be included in
the calculation of common shares, using the treasury stock method, as if they
were outstanding for all periods presented. As such, 118,182 shares of common
stock issued to induce conversion of the redeemable convertible preferred stock
(see Note 14) and 55,442 shares of common stock issuable upon the exercise of
stock options (see Note 14) are included in the calculation of the weighted
average number of common and common equivalent shares. For the year ended July
31, 1996 and for the nine month period ended April 30, 1997, accretion to
redemption value of the redeemable convertible preferred stock of $1,062 and
$9,555, respectively, has been deducted from net income for purposes of
calculating net income per share.
F-13
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Let's Talk Cellular & Wireless, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTERIM FINANCIAL DATA
In the opinion of the management of the Company, the accompanying unaudited
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position of the
Company as of April 30, 1997, the results of operations and cash flows for the
nine months ended April 30, 1996 and 1997 and the changes in redeemable,
convertible preferred stock and common shareholders' equity for the nine months
ended April 30, 1997.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued a new
accounting pronouncement, SFAS No. 128, EARNINGS PER SHARE, which will change
the current method of computing earnings per share. The new standard requires
presentation of "basic earnings per share" and "diluted earnings per share"
amounts, as defined. SFAS No. 128 will be effective for the Company's quarter
ending April 30, 1998, and upon adoption, all prior-period earnings per share
presented shall be restated to conform with the provisions of the new
pronouncement. Application earlier than the Company's quarter ending January 31,
1998 is not permitted. The restated basic and diluted earnings or loss per share
to be reported upon adoption of SFAS No. 128 will not differ from amounts
reported under the existing accounting rules for all periods reported by the
Company through July 31, 1997.
F-14
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Let's Talk Cellular & Wireless, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
USEFUL LIVES JULY 31 APRIL 30
(YEARS) 1995 1996 1997
------------- ----------- ----------- --------------
Computer equipment 5 $ 287,755 $ 239,185 $ 587,277
Furniture and equipment 7 363,848 716,724 1,210,889
Office equipment 5 29,660 33,216 61,392
Leasehold improvements 7-10 517,891 734,012 2,247,486
Construction in progress 53,520 3,850 60,223
----------- ----------- --------------
1,252,674 1,726,987 4,167,267
Less accumulated depreciation
and amortization (194,244) (402,135) (652,597)
=========== =========== ==============
$ 1,058,430 $ 1,324,852 $ 3,514,670
=========== =========== ==============
Office equipment under capital leases totaled $135,683 , $157,235 and $ 143,070
at July 31, 1995 and 1996, and April 30, 1997, respectively. Accumulated
amortization for assets under capital leases was $13,397, $44,121, and $ 54,671
at July 31, 1995 and 1996 and April 30, 1997, respectively.
4. BANK LINES OF CREDIT AND BANK TERM LOAN
Through September 5, 1995, the Company had a bank line of credit secured by
substantially all of the Company's assets, personally guaranteed by the
Company's shareholders and bearing interest at the bank's prime rate plus 1.5%
(8.75% at July 31, 1995). This line of credit was repaid in full on September 5,
1995.
On September 5, 1995, the Company entered into a new line of credit and a term
loan agreement with a bank. Under the line of credit, the Company can borrow up
to $1,300,000 (as amended on December 4, 1995) based on a formula of eligible
receivables and inventories. Advances under the line of credit are payable on
demand and bear interest at 2% above the bank's prime rate (10.25% at July 31,
1996). The line of credit is secured by a pledge of substantially all of the
Company's assets and is personally guaranteed by the Company's majority
shareholders. The line of credit was repaid on June 27, 1997 in connection with
the Company's acquisition of Telephone Warehouse (see Note 14).
F-15
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Let's Talk Cellular & Wireless, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. BANK LINES OF CREDIT AND BANK TERM LOAN (CONTINUED)
Under the bank term loan, the Company borrowed $300,000. The term loan is
payable in 35 monthly principal installments of $5,000 with the remaining
principal balance due in September 1998, and bears interest at 2.5% above the
bank's prime rate (10.75% at July 31, 1996). The term loan is secured by a
pledge of substantially all of the Company's assets and is personally guaranteed
by the Company's majority shareholders. The bank term loan was repaid on June
27, 1997 in connection with the Company's acquisition of Telephone Warehouse
(see Note 14).
The Company's line of credit and bank term loan agreement contains certain
restrictive covenants which, among other things, restricts the payment of
dividends, restricts additional indebtedness and obligations, limits capital
expenditures, and requires maintenance of certain financial ratios.
Maturities of the bank term loan as of April 30, 1997, are as follows:
1998 $ 260,000
1999 395,000
2000 33,333
----------
Total $ 688,333
==========
On August 27, 1996, the Company entered into a $600,000 term loan agreement with
a bank. The term loan is payable in 36 monthly principal installments of $16,667
commencing on October 1, 1996 and bears interest at 1.5% above the bank's prime
rate. The term loan is secured by a pledge of substantially all of the Company's
assets and is personally guaranteed by the Company's majority shareholders. This
term loan was repaid on June 27, 1997 in connection with the Company's
acquisition of Telephone Warehouse (see Note 14).
F-16
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Let's Talk Cellular & Wireless, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. LOANS FROM SHAREHOLDERS
Loans from shareholders consist of the following:
JULY 31 APRIL 30
1995 1996 1997
--------- --------- ---------
Note payable to shareholder, unsecured,
bearing interest at 16%, repaid in
September 1995 $ 100,000 $ -- $ --
Notes payable to shareholders, unsecured,
bearing interest at 8%, payable on
October 1, 2001 (see Note 14) 258,997 258,100 258,100
--------- --------- ---------
358,997 258,100 258,100
Less current portion (100,000) -- --
--------- --------- ---------
Long-term portion $ 258,997 $ 258,100 $ 258,100
========= ========= =========
6. CAPITAL LEASE OBLIGATIONS
The Company leases certain office equipment under capital leases. These lease
obligations are payable in monthly installments. During 1996, total payments
under such leases aggregated $57,041. The future minimum lease payments at July
31, 1997 relating to these capital leases are as follows:
Year ending July 31, 1997:
1997 $ 67,466
1998 34,122
1999 4,960
---------
Total payments remaining under capital leases 106,548
Less amount representing interest at 13% (25,086)
---------
Present value of capital lease obligations 81,462
Less current portion (55,236)
---------
Capital lease obligations, net of current portion $ 26,226
=========
F-17
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Let's Talk Cellular & Wireless, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. CAPITAL LEASE OBLIGATIONS (CONTINUED)
The present value of capital lease obligations at April 30, 1997 amounted to
$37,133, of which $10,907 represents the current portion of the capital lease
obligations.
7. COMMITMENTS AND CONTINGENCIES
The Company leases retail, offices and warehouse space and certain equipment
under operating leases which expire at various dates through 2007 with options
to renew certain of such leases for additional periods. The lease agreements
covering retail space provide for minimum rentals and/or rentals based on a
percentage of sales.
Future minimum payments under operating leases at July 31, 1996 are
approximately as follows:
1997 $1,354,546
1998 1,184,565
1999 960,348
2000 685,207
2001 236,618
Thereafter 27,600
----------
Total $4,448,884
==========
Total rent expense for the years ended July 31, 1994, 1995 and 1996 and the nine
month periods ended April 30, 1996 and April 30, 1997 was approximately
$330,000, $874,500, $1,566,600, $1,174,154 and $1,961,220, respectively, of
which approximately $18,000, $21,100, $10,600, $10,590 and $25,000,
respectively, was paid for rentals based on a percentage of sales.
The Company is the defendant in certain legal proceedings that have arisen in
the ordinary course of business. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material adverse
effect on the Company's results of operations or financial position.
F-18
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Let's Talk Cellular & Wireless, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable, amounts
due under the lines of credit, trade accounts payable and accrued expenses
approximate fair value because of their short duration to maturity. The carrying
amounts of the bank term loans approximates fair value because the interest rate
is tied to a quoted variable index. The carrying value of the loans from
shareholders approximate fair value because the interest rate approximates the
Applicable Federal Rate (AFR).
9. INCOME TAXES
The components of the provision (benefit) for income taxes are as follows:
NINE MONTHS ENDED
YEARS ENDED JULY 31 APRIL 30
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
Current $ 70,045 $ (20,454) $ 70,540 $ 48,201 $ 271,180
Deferred -- 19,999 (31,601) (15,141) (40,939)
--------- --------- --------- --------- ---------
Total $ 70,045 $ (455) $ 38,939 $ 33,060 $ 230,241
========= ========= ========= ========= =========
The differences between the federal statutory income tax rate and the effective
income tax rate are summarized below:
NINE MONTHS ENDED
YEAR ENDED JULY 31 APRIL 30,
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
Tax at federal statutory rate $ 54,289 $ 2,613 $ 35,679 $ 33,853 $ 181,914
State income taxes, net of
federal benefit 5,796 279 3,809 3,614 19,422
Permanent differences 16 3,950 6,023 5,307 6,046
Other 9,944 (7,297) (6,572) (9,714) 22,859
--------- --------- --------- --------- ---------
$ 70,045 $ (455) $ 38,939 $ 33,060 $ 230,241
========= ========= ========= ========= =========
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Let's Talk Cellular & Wireless, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES (CONTINUED)
Significant components of the Company's net deferred income taxes are as
follows:
JULY 31 APRIL 30
1995 1996 1997
-------- -------- --------
Deferred tax assets:
Allowances $ -- $ 5,885 $ 49,524
Miscellaneous accruals -- 11,289 15,993
Stock compensation -- -- 11,158
-------- -------- --------
Total current deferred tax asset -- 17,174 76,675
Deferred tax liabilities:
Depreciation (19,999) (5,572) (17,862)
Other -- -- (6,272)
-------- -------- --------
Total deferred tax liabilities (19,999) (5,572) (24,134)
-------- -------- --------
Net deferred tax (liability) asset $(19,999) $ 11,602 $ 52,541
======== ======== ========
10. CASH IN ESCROW AND REDEEMABLE, CONVERTIBLE PREFERRED STOCK
On June 25, 1996, the Company entered into a Series A Preferred Stock Purchase
Agreement (the Agreement) with a third party investor (HIG Fund V) and issued
100,000 shares of the Company's Series A Preferred Stock (the Preferred Stock),
par value $30 per share at a price of $32.95 per share for an aggregate purchase
price of $3,295,000 of which $1,000,000, net of $358,702 in certain issuance
costs, was paid at closing. The balance of $2,000,000 was released from escrow
to the Company in September and December of 1996.
Under the escrow agreement, the release of funds occurred upon management
providing certain representations, including: (a) that the Company has
substantially used all of the previous amounts funded as set forth in the
Agreement, which provided in general that funds were to be used for capital
expenditures and not to repay shareholder notes or to pay down the Company's
line of credit to less than a specified amount; and (b) that there had been no
material adverse change (as defined by management) in the Company's condition or
prospects.
F-20
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Let's Talk Cellular & Wireless, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. CASH IN ESCROW AND REDEEMABLE PREFERRED STOCK (CONTINUED)
Each holder of the Preferred Stock shall be entitled to vote on all matters and
shall be entitled to that number of votes equal to the largest number of whole
shares of Common Stock into which such holders shares of Preferred Stock could
be converted. Any share of Preferred Stock may, at the option of the holder, be
converted at any time into 3.5 shares of Common Stock, subject to certain
adjustments to prevent dilution. The conversion rate increases to 5.32 shares of
Common Stock if certain performance thresholds are not met, as defined in the
agreement. As of April 30, 1997, such thresholds were not met. The Preferred
Stock is redeemable at $30 per share at the option of the Investor, on the
earlier of June 25, 2001, or upon the occurrence of certain events as set forth
in the Agreement.
In connection with the issuance of the Preferred Stock and until the Company's
first Qualified Public Offering, as defined, the Company agreed with the
preferred stockholders to comply with certain restrictive covenants, including
covenants concerning limitations on: investments, distributions, dealings with
affiliates, mergers, the issuance of options, rights or warrants, indebtedness,
compensation, and consulting agreements and capital expenditures. The Company
requested the conversion of the Preferred Stock prior to the lapse of the
Investor's option to convert, as described above and, in connection with such
conversion, the conversion rate was amended and the Preferred Stockholder rights
were terminated (see Note 14).
Holders of Preferred Stock have priority over holders of common stock or any
other series of capital stock in the event of liquidation, dissolution, or
winding up of the Company.
11. COMMON STOCK
On June 25, 1996, the Company amended and restated its Articles of Incorporation
such that the par value of the Common Stock was decreased to $0.001 per share
and the number of authorized shares of common stock was increased to 50,000,000
shares. The 1995 financial statements have been restated to reflect the change
in par value and the newly authorized shares.
During 1996 and 1997, the Company issued 6,500 shares of the Company's Common
Stock under a stock bonus plan and recognized $7,268 and $29,651 in compensation
expense associated with such issuance for the year ended July 31, 1996 and the
nine months ended April 30, 1997. The Common Stock issued under the stock bonus
plan can be redeemed by the Company at book value, upon termination of
employment.
F-21
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Let's Talk Cellular & Wireless, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. COMMON STOCK (CONTINUED)
Common Stock reserved for issuance at April 30, 1997 was 531,818 shares.
12. ACQUISITION OF NORTHPOINT CELLULAR, INC.
On August 31, 1996, the Company entered into an asset purchase agreement with a
third party (Northpoint Cellular, Inc., a company also known as Peachtree
Mobility) to purchase the assets of five stores located in the Georgia area for
a total purchase price of $850,000. The assets purchased amounted to $250,000
and consisted mostly of leasehold improvements. In conjunction with the
purchase, Northpoint Cellular, Inc. entered into a noncompete arrangement for
aggregate consideration of $600,000 which was paid on August 31, 1996. The
noncompete arrangement expires February, 1999.
13. SIGNIFICANT CUSTOMERS
One customer accounted for, 11%, and 23%, of the Company's net revenues for the
years ended July 31, 1995 and 1996 and 21% and 16% for the nine months ended
April 30, 1996 and 1997, respectively. Accounts receivable from this customer
accounted for 30%, 51% and 18% of the total net accounts receivable at July 31,
1995, 1996 and April 30, 1997, respectively.
A second customer accounted for 13% of net revenues for the nine months ended
April 30, 1997 and 12% of the net accounts receivable at April 30, 1997.
A third customer accounted for 11% of net revenues for the year ended July 31,
1996 and 11% and 16% for the nine months ended April 30, 1996 and 1997,
respectively. This customer accounted for 25% and 27% of the net accounts
receivable at July 31, 1996 and April 30, 1997, respectively.
14. EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
On June 5, 1997, the Company's line of credit facility was increased to
$2,300,000.
On June 27, 1997 (effective June 30, 1997), the Company purchased 100% of the
outstanding shares of common stock of National Cellular, Inc., and Telephone
Warehouse, Inc. (collectively Telephone Warehouse), from Texas Cellular
Partners, L.P. (TCP), an affiliate of HIG Fund V, in
F-22
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Let's Talk Cellular & Wireless, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF CERTIFIED
PUBLIC ACCOUNTANTS (CONTINUED)
exchange for 552,590 shares of the Company's common stock and assumption of
approximately $13,100,00 million of indebtedness. The fair value of the shares
issued to TCP were determined by management to be approximately $2,530,000. The
fair value of net assets acquired, including approximately $2,545,000 allocated
to acquired residual income was approximately $4,844,000. A deferred tax
liability of $942,000 was provided related to the acquired residual income.
The purchase price exceeded the fair value of the net assets acquired by
approximately $10,786,000. The acquisition will be accounted for as a purchase,
and accordingly, the Company's financial statements will include the net assets
and results of operations of Telephone Warehouse beginning July 1, 1997. The
purchase price allocation is based on preliminary data. In a previous
transaction, on January 1, 1997, TCP had purchased from the president and sole
shareholder of Telephone Warehouse (the Former Shareholder), all of the
outstanding stock of Telephone Warehouse for a purchase price of approximately
$15,100,000, including acquisition costs of approximately $200,000.
In connection with the acquisition, the Company assumed an employment agreement
with the former shareholder of Telephone Warehouse (the Former Shareholder)
providing for the following: (i) for the six month period beginning on July 1,
1997, a salary of $50,000, (ii) for the 12 month period beginning on January 1,
1998, a salary of $100,000 and (iii) a bonus of $950,000 payable on or before
December 31, 1997, provided that certain financial performance levels are met
for the twelve months ended December 31, 1997.
Payments to be made beginning July 1, 1997 through December 31, 1997 under the
employment agreement totaling $1,000,000, will be treated as compensation
expense for such period. In addition, a note payable to the Former Shareholder
included in assumed indebtedness of $13,100,000, provides for additional
payments to be made in March 1999 for up to $1,585,000 contingent upon the
results of Telephone Warehouse for the year ended December 31,1998, whether or
not the Former Shareholder remains employed by the Company.
As a condition precedent to the Telephone Warehouse acquisition (see above), on
June 27, 1997, the Company issued 650,000 shares of Common Stock to HIG Fund V
in exchange for the conversion of all the outstanding Preferred Stock. Of the
650,000 shares issued, 118,182 were in addition to the original conversion
feature of the Preferred Stock in order to induce HIG Fund V to convert the
Preferred stock and in exchange for relief from the limitations placed on the
F-23
88
Let's Talk Cellular & Wireless, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF CERTIFIED PUBLIC
ACCOUNTANTS (CONTINUED)
Company by the HIG Fund V, as described in Note 10. Management determined that
the fair value of the 118,182 shares at the date of issuance was approximately
$242,000.
On June 27, 1997, in connection with the purchase of Telephone Warehouse from
TCP, the Company assumed the debt of Telephone Warehouse, which was owed to
Nations Credit Commercial Corporation (NCCC), a limited partner of TCP, and
simultaneously refinanced the Company's debt with NCCC. The Company's new credit
facility provides for borrowings of up to $22.1 million of which $14.1 million
was outstanding as of July 31, 1997. Such credit facility is secured by
substantially all of the Company's assets and is comprised of a $9 million
revolving credit facility and an aggregate of $13.1 million in term loans. The
revolving credit facility's availability is based on a formula of eligible
receivables and inventories with sublimits of $4 million to the Company and $5
million to Telephone Warehouse. The $4 million and $5 million sublimits bear
interest at 3.75% above the commercial paper rate. The term loans are payable
quarterly over seven years and bear interest at 4.5% over the commercial paper
rate.
On June 27, 1997, the Company borrowed $2 million on the term loans and $1
million on the revolving credit facility. The proceeds were used to repay the
Company's existing debt at that time and pay loan origination fees and related
expenses of $223,000.
In connection with the Company's debt refinancing, the Company issued stock
purchase warrants to NCCC to purchase a total of 32,410 shares of the Company's
common stock at an exercise price of $.0001 per share. Deferred interest expense
of $148,438 was recorded at June 27, 1997, representing the estimated value of
the warrants, which is being recognized as interest expense over the term of the
credit facilities of 7 years. The warrants expire on December 31, 2006.
On June 27, 1997, the Company entered into amended and restated employment
agreement with two of its officers to provide for five year terms with base
salaries subject to annual increases and annual bonuses subject to achievement
of defined performance targets.
F-24
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Let's Talk Cellular & Wireless, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF CERTIFIED PUBLIC
ACCOUNTANTS (CONTINUED)
On June 27, 1997, the Company entered into amended and restated promissory notes
(Amended Shareholder Notes) with two of its shareholders in the amount of
$258,100. The Amended Shareholder Notes call for the principal to be payable in
full on the earlier to occur of (a) a Qualified Public Offering, as defined, or
(b) June 1, 1998. All accrued and unpaid interest under the Amended Shareholder
Notes is due and payable monthly and bear interest at 8%.
Also, On June 27, 1997, the Company issued stock options to purchase 55,442
shares of Common Stock, with an exercise price of $65.92 per share, to two
officers of the Company.
F-25
90
Report of Independent Auditors
Board of Directors and Shareholder
National Cellular, Inc.
Telephone Warehouse, Inc.
Telephone Warehouse-San Antonio, Inc.
Telephone Warehouse-KC, Inc.
We have audited the accompanying combined balance sheets of National Cellular,
Inc., Telephone Warehouse, Inc., Telephone Warehouse-San Antonio, Inc. and
Telephone Warehouse-KC, Inc. (collectively referred to as Telephone Warehouse or
Predecessor) as of December 31, 1995 and 1996, and the related combined
statements of operations, changes in shareholder's equity, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of National
Cellular, Inc., Telephone Warehouse, Inc., Telephone Warehouse-San Antonio, Inc.
and Telephone Warehouse-KC, Inc. at December 31, 1995 and 1996, and the combined
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Dallas, Texas
July 25, 1997
F-26
91
Telephone Warehouse
Combined Balance Sheets
DECEMBER 31
---------------------------- | APRIL 30
1995 1996 | 1997
----------- ----------- | -----------
(PREDECESSOR) | (UNAUDITED)
|
ASSETS |
Current assets: |
Cash and cash equivalents $ 2,114,591 $ 1,265,919 | $ 573,872
Accounts receivable, net 4,803,664 4,390,030 | 2,483,069
Inventory, net 2,070,164 3,267,965 | 3,201,119
Prepaid expenses 110,395 90,834 | 287,702
Deferred tax asset (Note 9) 118,318 119,479 | 353,176
----------- ----------- | -----------
Total current assets 9,217,132 9,134,227 | 6,898,938
|
Property and equipment, net (Note 3) 877,843 757,184 | 694,015
Other assets, net 86,302 80,169 | 951,565
Intangible assets, net (Note 4) -- -- | 12,684,181
|
|
|
|
|
|
|
|
|
----------- ----------- | -----------
Total assets $10,181,277 $ 9,971,580 | $21,228,699
=========== =========== | ===========
(CONTINUED ON FOLLOWING PAGE)
F-27
92
Telephone Warehouse
Combined Balance Sheets (continued)
DECEMBER 31 | APRIL 30
------------------------------ | 1997
1995 1996 | (UNAUDITED)
------------ ------------ | ------------
(PREDECESSOR) |
|
LIABILITIES AND SHAREHOLDER'S EQUITY |
Current liabilities: |
Trade accounts payable $ 3,494,156 $ 4,658,232 | $ 2,755,370
Accrued expenses 1,125,892 834,376 | 1,304,836
Current portion of term note (Note 5) -- -- | 500,000
Income taxes payable 32,259 434,953 | 157,573
Deferred revenues 631,672 562,788 | 716,237
Customer deposits 100,849 96,679 | 89,039
------------ ------------ | ------------
Total current liabilities 5,384,828 6,587,028 | 5,523,055
|
Deferred tax liability (Note 9) 2,272 2,272 | 708,938
Loans from former shareholder (Note 5) 1,065,000 1,065,000 | --
Bank line of credit (Note 5) -- -- | 300,000
Note payable to former shareholder (Note 5) -- -- | 2,000,000
Term note, less current portion (Note 5) -- -- | 10,700,000
Commitments and contingencies (Note 7) |
|
Shareholder's equity: |
National Cellular, Inc.: |
Common stock $1 par value, 10,000,000 shares |
authorized; 20,000 shares issued and outstanding at |
December 31, 1995 and 1996 and $0.01 par value, 3,000 |
shares authorized; 1,000 shares issued and |
outstanding at April 30, 1997 20,000 20,000 | 10
Additional paid in capital -- -- | 999,990
Telephone Warehouse, Inc.: |
Common stock no par value, 1,000,000 shares |
authorized; 2,000 shares issued and outstanding at |
December 31, 1995 and 1996 and $0.01 par value, 3,000 |
shares authorized; 1,000 shares issued and |
outstanding at April 30, 1997 -- -- | 10
Additional paid in capital 1,000 1,000 | 999,990
Telephone Warehouse-San Antonio, Inc.: |
Common stock no par value, 1,000,000 shares authorized; |
1,000 shares issued and outstanding at December 31, 1995 |
and 1996 -- -- | --
Additional paid in capital 1,000 1,000 | --
Telephone Warehouse-KC, Inc.: |
Common stock $1 par value, 1,000,000 shares authorized; |
1,000 shares issued and outstanding at December 31, 1995 |
and 1996 -- -- | --
Additional paid in capital 1,000 1,000 | --
Retained earnings (accumulated deficit) 3,706,177 2,294,280 | (3,294)
------------ ------------ | ------------
Total shareholder's equity 3,729,177 2,317,280 | 1,996,706
------------ ------------ | ------------
Total liabilities and shareholder's equity $ 10,181,277 $ 9,971,580 | $ 21,228,699
============ ============ | ============
SEE ACCOMPANYING NOTES.
F-28
93
Telephone Warehouse
Combined Statements of Operations
FOUR MONTHS ENDED APRIL 30
YEAR ENDED DECEMBER 31 ------------------------------
------------------------------------------------- 1996 | 1997
1994 1995 1996 (UNAUDITED) | (UNAUDITED)
------------ ------------ ------------ ------------ | ------------
(PREDECESSOR) |
|
Net revenues: |
Retail sales and activation income $ 18,103,704 $ 17,261,537 $ 14,023,500 $ 4,339,690 | $ 4,153,753
Residual income 5,586,406 7,275,971 8,337,688 2,643,661 | 2,947,009
Wholesale sales 18,768,104 20,273,747 27,253,550 8,055,859 | 7,373,530
------------ ------------ ------------ ------------ | ------------
Total net revenues 42,458,214 44,811,255 49,614,738 15,039,210 | 14,474,292
|
Cost of sales 30,321,312 30,360,447 33,368,653 9,868,826 | 9,587,580
------------ ------------ ------------ ------------ | ------------
Gross profit 12,136,902 14,450,808 16,246,085 5,170,384 | 4,886,712
|
Operating expenses: |
Selling, general and |
administrative 8,802,304 10,193,631 10,371,732 3,251,874 | 3,234,527
Former shareholder |
compensation expense 3,256,000 2,169,000 1,640,000 553,075 | 320,000
Depreciation and amortization 164,026 231,966 225,109 65,934 | 64,163
Amortization of intangible assets -- -- -- -- | 773,356
------------ ------------ ------------ ------------ | ------------
Total operating expenses 12,222,330 12,594,597 12,236,841 3,870,883 | 4,392,046
------------ ------------ ------------ ------------ | ------------
Income (loss) from operations (85,428) 1,856,211 4,009,244 1,299,501 | 494,666
Other income (expense): |
Interest income (expense), net 19,651 10,754 29,542 26,004 | (436,758)
Other 12,928 12,203 2,639 55 | --
------------ ------------ ------------ ------------ | ------------
Total other income (expense) 32,579 22,957 32,181 26,059 | (436,758)
------------ ------------ ------------ ------------ | ------------
Income (loss) before provision for |
income taxes (52,849) 1,879,168 4,041,425 1,325,560 | 57,908
Provision for income taxes 33,042 174,702 678,322 223,370 | 61,202
------------ ------------ ------------ ------------ | ------------
Net (loss) income $ (85,891) $ 1,704,466 $ 3,363,103 $ 1,102,190 | $ (3,294)
============ ============ ============ ============ | ============
|
Unaudited pro forma information |
|
Historical (loss) income before |
provision for income taxes $ (52,849) $ 1,879,168 $ 4,041,425 $ 1,325,560 |
Pro forma provision (benefit) for |
income taxes (7,368) 712,240 1,462,710 491,306 |
------------ ------------ ------------ ------------ |
Pro forma net (loss) income $ (45,481) $ 1,166,928 $ 2,578,715 $ 834,254 |
============ ============ ============ ============ |
SEE ACCOMPANYING NOTES.
F-29
94
Telephone Warehouse
Combined Statements of Changes in Shareholder's Equity
NATIONAL CELLULAR INC. TELEPHONE WAREHOUSE, INC.
------------------------------------ -------------------------------------
ADDITIONAL ADDITIONAL
COMMON PAID-IN COMMON PAID-IN
SHARES STOCK CAPITAL SHARES STOCK CAPITAL
------- --------- ---------- ------ --------- ----------
Predecessor:
Balance at December 31, 1993 20,000 $ 20,000 $ -- 2,000 $ -- $ 1,000
Formation of Telephone Warehouse-San
Antonio, Inc. on February 19, 1994 -- -- -- -- -- --
Net income -- -- -- -- -- --
------- --------- --------- ----- --------- ---------
Balance at December 31, 1994 20,000 20,000 -- 2,000 -- 1,000
Formation of Telephone Warehouse-KC,
Inc. on January 19, 1995 -- -- -- -- -- --
Net income -- -- -- -- -- --
Dividends -- -- -- -- -- --
------- --------- --------- ----- --------- ---------
Balance at December 31, 1995 20,000 20,000 -- 2,000 -- 1,000
Net income -- -- -- -- -- --
Dividends -- -- -- -- -- --
------- --------- --------- ----- --------- ---------
Balance at December 31, 1996 20,000 20,000 -- 2,000 -- 1,000
Successor:
Capital contribution by TCP 1,000 10 999,990 1,000 10 999,990
Acquisition of National Cellular, Inc.,
Telephone Warehouse, Inc., Telephone
Warehouse-KC, Inc., and Telephone
Warehouse-San Antonio, Inc. by TCP and
amendments to par value, and the number
of authorized, issued and outstanding (20,000) (20,000) (2,000) -- (1,000)
shares (Unaudited)
Net loss (Unaudited) -- -- -- -- -- --
------- --------- --------- ----- --------- ---------
Balance at April 30, 1997 (Unaudited) 1,000 $ 10 $ 999,990 1,000 $ 10 $ 999,990
======= ========= ========= ===== ========= =========
(CONTINUED ON FOLLOWING PAGE)
F-30
95
Telephone Warehouse
Combined Statements of Changes in Shareholder's Equity (continued)
TELEPHONE WAREHOUSE - TELEPHONE WAREHOUSE
SAN ANTONIO, INC. KC, INC. RETAINED
ADDITIONAL ADDITIONAL EARNINGS TOTAL
COMMON PAID-IN COMMON PAID-IN (ACCUMULATED SHAREHOLDER'S
SHARES STOCK CAPITAL SHARES STOCK CAPITAL DEFICIT) EQUITY
------- ------- ---------- ------ ------- ------- ------------ -----------
Predecessor:
Balance at December 31, 1993 $ -- $ -- $ -- -- $ -- $ -- $ 3,987,602 $ 4,008,602
Formation of Telephone Warehouse-San
Antonio, Inc. on February 19, 1994 1,000 -- 1,000 -- -- -- -- 1,000
Net income -- -- -- -- -- -- (85,891) (85,891)
------- ------- -------- ------ ------- ------- ----------- -----------
Balance at December 31, 1994 1,000 -- 1,000 -- -- -- 3,901,711 3,923,711
Formation of Telephone Warehouse-KC,
Inc. on January 19, 1995 -- -- -- 1,000 -- 1,000 -- 1,000
Net income -- -- -- -- -- -- 1,704,466 1,704,466
Dividends -- -- -- -- -- -- (1,900,000) (1,900,000)
------- ------- -------- ------ ------- ------- ----------- -----------
Balance at December 31, 1995 1,000 -- 1,000 1,000 -- 1,000 3,706,177 3,729,177
Net income -- -- -- -- -- -- 3,363,103 3,363,103
Dividends -- -- -- -- -- -- (4,775,000) (4,775,000)
------- ------- -------- ------ ------- ------- ----------- -----------
Balance at December 31, 1996 1,000 -- 1,000 1,000 -- 1,000 2,294,280 2,317,280
Successor:
Capital contribution by TCP -- -- -- -- -- -- -- 2,000,000
Acquisition of National Cellular, Inc.,
Telephone Warehouse, Inc., Telephone
Warehouse-KC, Inc., and Telephone
Warehouse-San Antonio, Inc. by TCP and
amendments to par value, and the number
of authorized, issued and outstanding (1,000) -- (1,000) (1,000) -- (1,000) (2,294,280) (2,317,280)
shares (Unaudited)
Net loss (Unaudited) -- -- -- -- (3,294) (3,294)
------- ------- -------- ------ ------- ------- ------------ -----------
Balance at April 30, 1997 (Unaudited) -- $ -- $ -- -- $ -- $ -- $ (3,294) $ 1,996,706
======= ======= ======== ====== ======= ======= =========== ===========
F-31
SEE ACCOMPANYING NOTES
96
Telephone Warehouse
Combined Statements of Cash Flows
FOUR MONTHS ENDED APRIL 30
YEAR ENDED DECEMBER 31 -------------------------------
-------------------------------------------------- 1996 | 1997
1994 1995 1996 (UNAUDITED) | (UNAUDITED)
------------ ------------ ------------ ----------- | ------------
(PREDECESSOR) |
|
OPERATING ACTIVITIES |
Net (loss) income $ (85,891) $ 1,704,466 $ 3,363,103 $ 1,102,190 | $ (3,294)
Adjustments to reconcile net (loss) |
income to net cash (used in) |
provided by operating activities: |
Depreciation and amortization 164,026 231,966 225,109 65,934 | 64,163
Amortization of intangibles -- -- -- -- | 773,356
Amortization of deferred |
financing costs -- -- -- -- | 51,539
Bad debt expense 142,688 57,650 30,281 15,550 | 12,050
Deferred income taxes (22,892) 5,412 (1,161) (53,569) | (208,925)
Changes in operating assets |
and liabilities: |
Accounts receivable (1,720,296) 427,238 383,353 1,663,804 | 1,894,911
Inventory (1,292,344) 376,685 (1,197,801) (187,907) | 66,846
Prepaid expenses and other |
assets (54,849) (62,019) 25,694 (2,797) | (193,060)
Trade accounts payable 1,451,571 429,303 1,164,076 (1,864,336) | (1,902,862)
Accrued expenses and |
customer deposits 674,631 43,799 (295,686) (25,469) | 462,820
Income taxes payable 37,130 (19,267) 402,694 150,589 | (277,380)
Deferred revenues 118,792 113,120 (68,884) 121,034 | 153,449
------------ ------------ ------------ ------------ | ------------
Net cash (used in) provided by |
operating activities (587,434) 3,308,353 4,030,778 985,023 | 893,613
|
INVESTING ACTIVITIES |
Acquisition of business, net of |
cash acquired -- -- -- -- | (11,827,004)
Proceeds from disposals of property |
and equipment 14,489 22,987 20,099 13,100 | 20,912
Purchases of property and equipment (265,496) (390,806) (124,549) (15,459) | (21,906)
------------ ------------ ------------ ------------ | ------------
Net cash used in investing |
activities (251,007) (367,819) (104,450) (2,359) | (11,827,998)
(CONTINUED ON FOLLOWING PAGE).
F-32
97
Telephone Warehouse
Combined Statements of Cash Flows (continued)
FOUR MONTHS ENDED APRIL 30
YEAR ENDED DECEMBER 31 -------------------------------
-------------------------------------------------- 1996 | 1997
1994 1995 1996 (UNAUDITED) | (UNAUDITED)
------------ ------------ ------------ ------------ | ------------
(PREDECESSOR) |
|
FINANCING ACTIVITIES |
Increase in loans from former |
shareholder 275,000 790,000 -- -- | --
Borrowings on bank term loan -- -- -- -- | 11,200,000
Proceeds from bank line of credit -- -- -- -- | 2,200,000
Payment on loans from former |
shareholder -- -- -- -- | (1,065,000)
Payment on bank line of credit -- -- -- -- | (1,900,000)
Debt acquisition costs | (926,743)
Capital contributions 1,000 1,000 -- -- | 2,000,000
Dividends -- (1,900,000) (4,775,000) (1,275,000) | --
------------ ------------ ------------ ------------ | ------------
Net cash provided by (used in) |
financing activities 276,000 (1,109,000) (4,775,000) (1,275,000) | 11,508,257
------------ ------------ ------------ ------------ | ------------
|
Net (decrease) increase in cash |
and cash equivalents (562,441) 1,831,534 (848,672) (292,336) | 573,872
Cash and cash equivalents at |
beginning of period 845,498 283,057 2,114,591 2,114,591 | --
------------ ------------ ------------ ------------ | ------------
Cash and cash equivalents at end |
of period $ 283,057 $ 2,114,591 $ 1,265,919 $ 1,822,255 | $ 573,872
============ ============ ============ ============ | ============
SUPPLEMENTAL DISCLOSURES OF |
CASH FLOW INFORMATION |
Cash paid for interest $ -- $ 20,750 $ 68,300 $ 30,300 | $ 340,330
============ ============ ============ ============ | ============
Cash paid for income taxes $ 31,627 $ 109,333 $ 460,127 $ 29,083 | $ 435,000
============ ============ ============ ============ | ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH |
FINANCING ACTIVITY |
Issuance of note payable to Former |
Shareholder $ -- $ -- $ -- $ -- | $ 2,000,000
============ ============ ============ ============ | ============
SEE ACCOMPANYING NOTES.
F-33
98
Telephone Warehouse
Notes to Combined Financial Statements
December 31, 1996
(Information pertaining to the four months
ended April 30, 1996 and 1997 is unaudited)
1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS
BASIS OF PRESENTATION
The accompanying combined financial statements as of December 31, 1996 and for
each of the three years then ended are the combined financial statements of
Telephone Warehouse (or Predecessor) which was comprised of four entities:
National Cellular, Inc. (NCI), Telephone Warehouse, Inc., Telephone
Warehouse-San Antonio, Inc. and Telephone Warehouse-KC, Inc. Each such entity
was owned 100% by a sole shareholder (the Former Shareholder). All transactions
among the combined companies have been eliminated.
Effective January 1, 1997, Texas Cellular Partners, L.P. (TCP) acquired all of
the capital stock of Telephone Warehouse from the Former Shareholder for
approximately $12,896,000 of cash and a subordinated promissory note of
$2,000,000. At the time of such acquisition, Telephone Warehouse entered into a
two year employment agreement with the Former Shareholder that provided for
payment of up to $3,000,000 upon Telephone Warehouse reaching certain financial
performance levels in 1997 and 1998. TCP, in connection with the acquisition:
(i) merged Telephone Warehouse - San Antonio, Inc. and Telephone Warehouse-KC,
Inc. with and into Telephone Warehouse, Inc. (ii) amended the par value, and the
number of authorized, issued and outstanding shares of NCI and Telephone
Warehouse, Inc., and (iii) contributed $1,000,000 to NCI. and $1,000,000 to
Telephone Warehouse, Inc.
The accompanying combined financial statements as of April 30,1997 and for the
four months then ended are the combined financial statements of Telephone
Warehouse (or Successor). In connection with the acquisition described above and
effective as of January 1 1997, Telephone Warehouse is comprised of two
entities: NCI and Telephone Warehouse, Inc. All transactions between the
combined companies have been eliminated.
The purchase price exceeded the fair value of tangible net assets acquired by
approximately $13,458,000 of such amount $2,672,000 was allocated to the
estimated fair value of acquired residual income at December 31, 1996 and
$10,786,000 was allocated to the costs in excess of identifiable assets
(goodwill). A deferred tax liability of $989,000 was provided related to the
acquired residual income. The fair value of assets acquired, not including
intangibles, was approximately $10,278,000 (including $307,000 of deferred taxes
not recorded at Telephone Warehouse due to its Subchapter S status) and the fair
value of liabilities assumed, including the
F-34
99
Telephone Warehouse
Notes to Combined Financial Statements (continued)
(Information pertaining to the four months
ended April 30, 1996 and 1997 is unaudited)
1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS (CONTINUED)
deferred tax liability of $989,000 described above, totaled approximately
$8,643,000. The purchase price allocation is based on preliminary data.
In accordance with pushdown basis of accounting in financial statements of
subsidiaries, this purchase transaction has been reflected in the combined
financial statements of the Company as of January 1, 1997.
In connection with the acquisition and the repayment of amounts due to the
former shareholder, the Company obtained $12.7 million and $2.0 million of bank
debt and seller financing, respectively (see Note 5). In connection with the
acquisition, the Company incurred $927,000 and $197,000 related to deferred
financing costs and acquisition costs, respectively.
NATURE OF OPERATIONS
Telephone Warehouse (the Company) is an independent specialty retailer and
wholesale distributor of cellular and wireless products and services. As of
December 31, 1995 and 1996 and April 30, 1997, the Company's retail business
operated 19, 20 and 18 stores, respectively, located in Dallas and San Antonio,
Texas and Kansas City, Kansas and Missouri. The Company's wholesale business
distributes wireless communications products to numerous retail and wholesale
outlets throughout the United States from its warehouse located in Arlington,
Texas.
The Company's stores have historically experienced, and the Company expects its
stores to continue to experience, seasonal fluctuations in revenues with a
larger percentage of revenues typically being realized in the fourth quarter
during the holiday season. In addition, the Company's results during any fiscal
period can be significantly affected by the timing of store openings and
acquisitions and the integration of new and acquired stores into the Company's
operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
F-35
100
Telephone Warehouse
Notes to Combined Financial Statements (continued)
(Information pertaining to the four months
ended April 30, 1996 and 1997 is unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTS RECEIVABLE
The Company's retail accounts receivable are due primarily from carriers of
wireless communications services. Wholesale accounts receivable are primarily
due from distributors and small retailers. Credit is extended to wholesale
customers based on the evaluation of the customers financial condition.
Collateral is not required and terms are generally between 30 and 60 days.
Accounts receivable are net of allowances of approximately $625,000, $572,000
and $472,000 as of December 31, 1995, 1996 and April 30, 1997, of which
$139,000, $123,000 and $133,000 relates to the Company's wholesale operations,
respectively. The remaining balances are comprised primarily of reserves for
early cellular deactivations.
INVENTORIES
Inventories, consisting of cellular and wireless products and related
accessories, are valued at the lower of cost or market, cost being determined by
the average cost method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the shorter of their useful life or
the remainder of the noncancelable lease period (see Note 3).
OTHER ASSETS
At April 30, 1997, unamortized deferred financing costs totaling $875,000 are
included in other assets and are being amortized on the interest method over the
terms of the related debt, which is seven years.
INTANGIBLE ASSETS
Intangible assets includes cost in excess of identifiable assets acquired
(goodwill) and cost allocable to the estimated fair value of acquired residual
income.
The Company reviews the carrying value of intangible assets on an ongoing basis.
When factors indicate that an intangible assets may be impaired, the Company
uses an estimate of the
F-36
101
Telephone Warehouse
Notes to Combined Financial Statements (continued)
(Information pertaining to the four months
ended April 30, 1996 and 1997 is unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
undiscounted future cash flows over the remaining life of the asset in measuring
whether the intangible asset is recoverable. If such an analysis indicates that
impairment has in fact occurred, the book value of the intangible asset is
written down to its estimated fair value. Goodwill is being amortized over 30
years and acquired residual income is being amortized on an accelerated basis
based on the timing of acquired cash flows through the year 2000.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
During 1996, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS. SFAS No. 121 which requires impairment losses to be recorded on
long-lived assets when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the assets'
carrying amount. The adoption of SFAS No. 121 had no effect on the Company's
combined financial statements.
REVENUE RECOGNITION
Product Sales
Revenue from retail product sales is recorded upon customer purchase. Revenue
from wholesale product sales is recognized upon shipment of goods.
Activation Income
The Company receives activation income from cellular service providers for each
new cellular phone subscription sold by the Company. Revenue from such
activations is recorded upon customer subscription. New subscription activation
commissions are fully refundable if the subscriber cancels service within a
certain minimum period of continuous active service (generally 180 days).
Customers generally sign a service agreement that requires a customer deposit
which is forfeited in case of early cancellation. The allowance for doubtful
accounts includes an amount for estimated cancellation losses, net of deposit
forfeitures.
F-37
102
Telephone Warehouse
Notes to Combined Financial Statements (continued)
(Information pertaining to the four months
ended April 30, 1996 and 1997 is unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Residual Income
The Company generally receives monthly residual income from the cellular service
providers based on a percentage of actual phone usage by subscribers. Revenue
from residual income is generally recorded as the cellular service is provided.
Revenue from prepaid pager service ($2,790,402, $3,924,746, $4,859,113,
$1,520,339, $1,841,281 for the years ended December 31, 1994, 1995, 1996 and the
four months ended April 30, 1996 and 1997, respectively) is deferred and
recognized over the period service is provided, usually three to twelve months.
Revenue from monthly installment pager service contracts is recorded as
received.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising expense which is
included in selling, general and administrative is recorded net of cooperative
advertising payments received. Net advertising expense amounted to approximately
$846,000, $977,000, $933,000, $162,000 and $209,000 for the years ended December
31, 1994, 1995, 1996 and the four months ended April 30, 1996 and 1997,
respectively. These amounts are net of approximately $1,874,000, $1,842,000,
$1,364,000, $346,000 and $311,000 of cooperative advertising payments received
for the years ended December 31, 1994, 1995, 1996 and the four months ended
April 30, 1996 and 1997, respectively.
INCOME TAXES
NCI, a C corporation for all periods presented, adopted the provisions of
Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES
(SFAS 109) in its separate financial statements. Under SFAS 109, deferred tax
assets and liabilities are recognized based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
Prior to January 1, 1997, the Former Shareholder elected S Corporation treatment
for Telephone Warehouse, Inc., Telephone Warehouse-San Antonio, Inc. and
Telephone Warehouse-KC, Inc. As a result, the net income for those entities is
reflected in the Former Shareholder's personal tax return. Therefore, no
provision or credit for federal income tax amounts for those entities has been
included in these combined financial statements for the three year period ended
F-38
103
Telephone Warehouse
Notes to Combined Financial Statements (continued)
(Information pertaining to the four months
ended April 30, 1996 and 1997 is unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
December 31, 1996. Concurrent with the acquisition of the Company by TCP on
January 1, 1997, such three entities were merged into Telephone Warehouse, Inc.
which became a C Corporation. Subsequent to January 1, 1997, Telephone
Warehouse, Inc. began accounting for income taxes under SFAS 109.
PRO FORMA STATEMENTS OF INCOME INFORMATION
Pro forma net income reflects adjustments for income taxes which would have been
recorded if Telephone Warehouse, Inc., Telephone Warehouse-San Antonio, Inc. and
Telephone Warehouse-KC, Inc. had been C-corporations for the three years ended
December 31, 1996.
INTERIM FINANCIAL DATA
In the opinion of the management of the Company, the accompanying unaudited
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position of the
Company as of April 30, 1997, the results of operations and cash flows for the
four months ended April 30, 1996 and 1997 and the changes in shareholder's
equity for the four months ended April 30, 1997.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
F-39
104
Telephone Warehouse
Notes to Combined Financial Statements (continued)
(INFORMATION PERTAINING TO THE FOUR MONTHS
ENDED APRIL 30, 1996 AND 1997 IS UNAUDITED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
USEFUL LIVES DECEMBER 31 APRIL 30
(YEARS) 1995 1996 1997
--------------- ------------ ----------- -----------
Computer equipment 5 $ 47,634 $ 78,600 $ 90,796
Furniture, vehicles and
equipment 5 - 7 623,690 575,909 554,997
Office equipment 7 18,535 18,535 18,535
Building 30 324,000 324,000 324,000
Leasehold improvements 2 - 6 603,981 676,074 685,784
------------ ----------- -----------
1,617,840 1,673,118 1,674,112
Less accumulated depreciation and
amortization (739,997) (915,934) (980,097)
============ =========== ===========
$ 877,843 $ 757,184 $ 694,015
============ =========== ===========
4. INTANGIBLE ASSETS
Intangible assets consist of the following at April 30, 1997:
Goodwill $10,785,888
Acquired residual income 2,671,649
-----------
13,457,537
Accumulated amortization (773,356)
-----------
$12,684,181
===========
5. REVOLVING LINE OF CREDIT, LOANS FROM FORMER SHAREHOLDER AND TERM NOTE
The Company had a $2 million revolving line of credit with a bank for which the
maximum borrowings were limited to the sum of (a) 80% of the outstanding
eligible accounts receivable and (b) the lesser of (i) 50% of the eligible
inventory (as defined in the loan agreement) or (ii) $750,000, less any amounts
advanced to the Company. Interest was due and payable quarterly
F-40
105
Telephone Warehouse
Notes to Combined Financial Statements (continued)
(INFORMATION PERTAINING TO THE FOUR MONTHS
ENDED APRIL 30, 1996 AND 1997 IS UNAUDITED)
5. REVOLVING LINE OF CREDIT, LOANS FROM FORMER SHAREHOLDER AND TERM NOTE
(CONTINUED)
based on the bank's prime rate. The line was secured by accounts receivable,
contract rights, inventory and general intangibles of the Company. At December
31, 1995 and 1996, no amounts were outstanding under the line. This revolving
line of credit was terminated on January 1, 1997.
Amounts due to the Former Shareholder at December 31, 1995 and 1996 totaled
$1,065,000. The interest rates on amounts due the Former Shareholder varied
between 7% and 9.5% with maturities between March 1999 and October 2000.
Interest was paid annually and the notes were unsecured. These loans and accrued
interest amounting to $1,103,577 were repaid on January 1, 1997 in connection
with the acquisition of the Company by TCP (see Note 11).
In connection with the January 1, 1997 acquisition, the Company entered into a
$11.2 million term note (Term Note) with NationsCredit Commercial Corporation
(NCCC), a limited partner of TCP. The Term Note requires quarterly principal
payments beginning in May 1997 and continuing through February 2004. The Company
may also be required to make additional incremental principal payments beginning
in January 1998 if the Company's cash flow exceeds certain levels agreed to in
the Term Note. Interest is payable monthly at the 30 day commercial paper rate
plus 4.5% (10.2% at April 30, 1997). The Term Note is collateralized by
substantially all of the assets of the Company.
Additionally, the Company entered into a $5 million credit facility (Line of
Credit) with NCCC. The Line of Credit requires monthly interest payments at an
interest rate based on the 30 day commercial paper rate plus 3.75% on all
outstanding amounts, and monthly commitment fees of 0.25% on any unused amounts.
The Line of Credit expires on January 1, 2004 with any borrowings outstanding
payable on that date. The Line of Credit is collateralized by substantially all
of the assets of the Company. The Company borrowed $1,500,000 in conjunction
with the January 1, 1997 acquisition of the Company by TCP. As of April 30,
1997, $300,000 is outstanding under the Line of Credit and based upon the
borrowing base, as defined, the available borrowings are $2,456,000.
The Term Note and Line of Credit agreement contain certain restrictive covenants
that, among other things, restrict the payment of dividends, restrict additional
indebtedness and obligations, limits capital expenditures, and require
maintenance of certain financial ratios.
F-41
106
Telephone Warehouse
Notes to Combined Financial Statements (continued)
(INFORMATION PERTAINING TO THE FOUR MONTHS
ENDED APRIL 30, 1996 AND 1997 IS UNAUDITED)
5. REVOLVING LINE OF CREDIT, LOANS FROM FORMER SHAREHOLDER AND TERM NOTE
(CONTINUED)
The Company incurred deferred financing costs totaling approximately $927,000
(see Note 6) in association with obtaining the Term Note and Line of Credit.
A $2 million subordinated term note due to the Former Shareholder (Seller Note)
was issued to the Former Shareholder in connection with the January 1, 1997
acquisition of the Company by TCP. Interest is payable quarterly at an interest
rate of 8%. The Seller Note is due on March 15, 2002. The Seller Note is
subordinated to borrowings under the Term Note and the Line of Credit (see Note
11).
Maturities of the outstanding borrowings at April 30, 1997, are as follows:
Twelve months ending April 30:
1998 $ 500,000
1999 1,000,000
2000 1,500,000
2001 2,200,000
2002 2,500,000
Thereafter 5,800,000
=============
Total $13,500,000
=============
6. RELATED PARTY TRANSACTIONS
The Former Shareholder (an officer of the Company) received compensation of
$3,256,000, $2,169,000, $1,640,000, and $553,000 for the years ended December
31, 1994, 1995, 1996 and the four months ended April 30, 1996, respectively.
Dividends paid to the Former Shareholder were $1,900,000, $4,775,000 and
$1,275,000 for the years ended December 31, 1995, 1996 and the four months ended
April 30, 1996, respectively. No compensation or dividends were paid to the
Former Shareholder during the four months ended April 30, 1997. Accrued expenses
at April 30, 1997 includes $320,000 related to estimated amounts due under the
employment agreement. No dividends were paid to the Former Shareholder for the
year ended December 31, 1994.
F-42
107
Telephone Warehouse
Notes to Combined Financial Statements (continued)
(INFORMATION PERTAINING TO THE FOUR MONTHS
ENDED APRIL 30, 1996 AND 1997 IS UNAUDITED)
6. RELATED PARTY TRANSACTIONS (CONTINUED)
On January 1, 1997, the Company entered into a management agreement with HIG
Capital Management, Inc., an affiliate of the general partner of TCP, requiring
a $20,800 monthly payment in exchange for consulting services to be rendered.
Included in selling, general and administrative expenses is $83,200 in fees paid
in connection with this agreement for the period ended April 30, 1997. HIG
Capital Management Inc. was paid $500,000 for acquisition and financing services
rendered in connection with the acquisition of the Company by TCP and the
attainment of the Term Note and Line of Credit described in Note 5.
The Company has entered into various debt agreements with NCCC (see Note 5).
Total debt outstanding at April 30, 1997 to NCCC was $11,500,000. Interest
payments to NCCC for the period ended April 30, 1997 amounted to approximately
$392,000 and $4,000 of unused line of credit fee. Deferred financing costs
include $243,000 paid to NCCC for services rendered in connection with the
attainment of the Term Note and Line of Credit described in Note 5.
The Company issued the Seller Note (see Note 5) to the Former Shareholder (an
officer of the Company). Interest payments for the period ended April 30, 1997
amounted to approximately $53,000 (see Note 11).
7. COMMITMENTS AND CONTINGENCIES
The Company leases retail, offices and warehouse space and certain equipment
under operating leases which expire at various dates through 2000 with options
to renew certain of such leases for additional periods. Certain of the Company's
leases include rent escalation provisions over the life of the lease.
Future minimum payments under operating leases at December 31, 1996 are
approximately as follows:
1997 $ 645,421
1998 384,588
1999 160,516
2000 22,960
----------
Total $1,213,485
==========
F-43
108
Telephone Warehouse
Notes to Combined Financial Statements (continued)
(INFORMATION PERTAINING TO THE FOUR MONTHS
ENDED APRIL 30, 1996 AND 1997 IS UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Total rent expense for the years ended December 31, 1994, 1995, 1996 and the
four months ended April 30, 1996 and 1997 was approximately $536,000, $796,000,
$964,000, $314,000 and $323,000, respectively.
The Company is the defendant in certain legal proceedings that have arisen in
the ordinary course of business. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material adverse
effect on the Company's results of operations or financial position.
8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable, trade
accounts payable and accrued expenses approximate fair value because of their
short duration to maturity. The carrying amounts of the bank line of credit and
term note approximate fair value because the interest rate is tied to a quoted
variable index.
9. INCOME TAXES
Historical
The historical income tax information for the period prior to January 1, 1997
reflects disclosures for NCI only.
The components of the provision for income taxes are as follows:
FOUR MONTHS ENDED
YEARS ENDED DECEMBER 31 APRIL 30
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
Current $ 56,000 $ 170,000 $ 679,000 $ 277,000 $ 270,000
Deferred (23,000) 5,000 (1,000) (54,000) (209,000)
--------- --------- --------- --------- ---------
Total $ 33,000 $ 175,000 $ 678,000 $ 223,000 $ 61,000
========= ========= ========= ========= =========
F-44
109
Telephone Warehouse
Notes to Combined Financial Statements (continued)
(INFORMATION PERTAINING TO THE FOUR MONTHS
ENDED APRIL 30, 1996 AND 1997 IS UNAUDITED)
9. INCOME TAXES (CONTINUED)
The difference between the federal statutory income tax rate and the effective
income tax rate are summarized below:
FOUR MONTHS ENDED
YEARS ENDED DECEMBER 31 APRIL 30
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
Tax at federal statutory rate $ (18,000) $ 639,000 $ 1,374,000 $ 451,000 $ 19,000
State income taxes, net
of federal benefit 11,000 73,000 89,000 40,000 1,000
Amortization of goodwill -- -- -- -- 41,000
Income earned in non-tax
paying entities 40,000 (537,000) (785,000) (268,000) --
----------- ----------- ----------- ----------- -----------
Total $ 33,000 $ 175,000 $ 678,000 $ 223,000 $ 61,000
=========== =========== =========== =========== ===========
Significant components of the Company's net deferred income taxes are as
follows:
DECEMBER 31 APRIL 30
1995 1996 1997
--------- --------- ---------
Deferred tax assets:
Depreciation $ -- $ -- $ 24,000
Allowance for doubtful accounts 49,000 53,000 161,000
Inventory 50,000 56,000 90,000
Deferred revenue -- -- 17,000
Deferred rent -- -- 12,000
Other 19,000 10,000 87,000
--------- --------- ---------
Total deferred tax asset 118,000 119,000 391,000
Deferred tax liabilities:
Depreciation (2,000) (2,000) --
Amortization of residual income -- -- (747,000)
--------- --------- ---------
Total deferred tax liabilities (2,000) (2,000) (747,000)
--------- --------- ---------
Net deferred tax asset (liability) $ 116,000 $ 117,000 $(356,000)
========= ========= =========
F-45
110
Telephone Warehouse
Notes to Combined Financial Statements (continued)
(INFORMATION PERTAINING TO THE FOUR MONTHS
ENDED APRIL 30, 1996 AND 1997 IS UNAUDITED)
9. INCOME TAXES (CONTINUED)
Pro Forma
The pro forma provision for income taxes for the three years ended December 31,
1996 reflects income tax expense as if Telephone Warehouse, Inc., Telephone
Warehouse-San Antonio, Inc. and Telephone Warehouse-KC, Inc. had been taxed as C
corporations.
The components of the pro forma provision for income taxes is as follows:
YEARS ENDED DECEMBER FOUR MONTHS ENDED
1994 1995 1996 APRIL 30, 1996
---------- ---------- ---------- -----------------
Current $ 129,000 $ 816,000 $1,393,000 $ 526,000
Deferred (136,000) (104,000) 70,000 (35,000)
---------- ---------- ---------- ----------
Total $ (7,000) $ 712,000 $1,463,000 $ 491,000
========== ========== ========== ==========
The differences between the federal statutory income tax rate and the pro forma
effective income tax rate are summarized below:
YEARS ENDED DECEMBER 31 FOUR MONTHS ENDED
1994 1995 1996 APRIL 30, 1996
---------- ---------- ---------- -----------------
Tax at federal statutory rate $ (18,000) $ 639,000 $1,374,000 $ 451,000
State income taxes, net of federal
benefit 11,000 73,000 89,000 40,000
---------- ---------- ---------- ----------
Total $ (7,000) $ 712,000 $1,463,000 $ 491,000
========== ========== ========== ==========
10. SIGNIFICANT CUSTOMERS
During the year ended December 31, 1994, 1995, 1996 and the four months ended
April 30, 1996 and 1997, the Company recognized activation income and residual
income from two cellular service providers of approximately $12,304,000,
$12,574,000, $10,797,000, $3,056,000 and $2,996,000, respectively. At December
31, 1995, 1996 and April 30, 1997, accounts receivable included approximately
$2,627,000, $1,627,000 and $838,000, respectively, due from these two cellular
service providers.
F-46
111
Telephone Warehouse
Notes to Combined Financial Statements (continued)
(INFORMATION PERTAINING TO THE FOUR MONTHS
ENDED APRIL 30, 1996 AND 1997 IS UNAUDITED)
11. SUBSEQUENT EVENTS
On June 27, 1997 (effective June 30, 1997), TCP sold 100% of the outstanding
shares of NCI and Telephone Warehouse, Inc. to Let's Talk Cellular & Wireless,
Inc. (LTC), an entity partially owned by an affiliate of the general partners of
TCP.
On June 27, 1997, in connection with the sale of the Company , TCP and the
Former Shareholder negotiated certain amendments to the terms of the Seller Note
and the Former Shareholder's employment agreement to provide for the following:
(i) for the six month period beginning on July 1, 1997, a salary of $50,000,
(ii) for the 12 month period beginning on January 1, 1998, a salary of $100,000
and (iii) a bonus of $950,000 payable on or before December 31, 1997, provided
that certain financial performance levels are met for the twelve months ended
December 31, 1997. Accrued expenses at April 30, 1997 includes $320,000 related
to estimated amounts due under the employment agreement. The Seller Note of $2.0
million was renegotiated to provide for additional payments to be made in March
1999 for up to $1.585 million contingent upon the results of the Company for the
year ended December 31, 1998, whether or not the Former Shareholder remains
employed by the Company.
Based on the terms of the amended employment agreement and the $2 million Seller
Note, any bonus paid to the Former Shareholder during the year ended December
31, 1997 will be treated as compensation, any amounts paid in 1998 (in excess of
the original $2 million Seller Note), will be accounted for as additional
purchase price related to the acquisition by TCP.
F-47
112
================================================================================
DEALER, SALESPERSON OR ANY OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING SHAREHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
----------
TABLE OF CONTENTS
PAGE
Prospectus Summary.................................. 3
Risk Factors........................................ 9
Use of Proceeds..................................... 14
Dividend Policy..................................... 14
Capitalization...................................... 15
Dilution............................................ 16
Unaudited Pro Forma Financial Data.................. 17
Selected Consolidated Financial Data................ 24
Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 26
Business............................................ 35
Management.......................................... 47
Certain Transactions................................ 54
Principal and Selling Shareholders.................. 56
Description of Capital Stock........................ 57
Shares Eligible for Future Sale..................... 59
Underwriting........................................ 60
Legal Matters....................................... 62
Experts............................................. 62
Additional Information.............................. 62
Index to Financial Statements....................... F-1
----------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
================================================================================
================================================================================
SHARES
[LOGO]
COMMON STOCK
---------------
PROSPECTUS
---------------
MERRILL LYNCH & CO.
, 1997
================================================================================
113
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Registrant estimates that expenses payable by the Registrant in
connection with the offering described in this registration statement (other
than underwriting discounts and commissions) will be as follows:
Securities and Exchange Commission registration fee .... $ 15,152
NASD filing fee ........................................ 5,500
Nasdaq National Market listing fee .....................
Printing and engraving expenses ........................ *
Accounting fees and expenses ........................... *
Legal fees and expenses ................................ *
Fees and expenses (including legal fees) for
qualifications under state securities laws ........... 10,000
Registrar and Transfer Agent's fees and expenses ....... *
Miscellaneous .......................................... *
--------
Total ............................................ $ 30,652
========
- ---------------
* To be provided by amendment.
All amounts except the Securities and Exchange Commission registration fee, the
NASD filing fee and the Nasdaq listing fee are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant has authority under the Florida Business Corporation Act
to indemnify its directors and officers to the extent provided in such statute.
The Registrant's Articles of Incorporation provide that the Registrant shall
indemnify its executive officers and directors to the fullest extent permitted
by law either now or hereafter. The Registrant is also entering into an
agreement with each of its directors and certain of its officers wherein it is
agreeing to indemnify each of them to the fullest extent permitted by law. In
general, Florida law permits a Florida corporation to indemnify its directors,
officers, employees and agents, and persons serving at the corporation's request
in such capacities for another enterprise against liabilities arising from
conduct that such persons reasonably believed to be in, or not opposed to, the
best interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful.
The provisions of the Florida Business Corporation Act that authorize
indemnification do not eliminate the duty of care of a director and, in
appropriate circumstances, equitable remedies such as injunctive or other forms
of nonmonetary relief will remain available under Florida law. In addition, each
director will continue to be subject to liability for (a) violations of the
criminal law, unless the director had reasonable cause to believe his conduct
was lawful or had no reasonable cause to believe his conduct was unlawful, (b)
deriving an improper personal benefit from a transaction, (c) voting for or
assenting to an unlawful distribution, and (d) willful misconduct or a conscious
disregard for the best interests of the Registrant in a proceeding by or in the
right of the Registrant to procure a judgment in its favor or in a proceeding by
or in the right of a shareholder. The statute does not affect a director's
responsibilities under any other law, such as the Federal securities laws or
state or Federal environmental laws.
II-1
114
At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought from the Registrant, nor is the Registrant aware of any threatened
litigation that may result in claims for indemnification from the Registrant by
any officer or director.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
All numbers of shares set forth in this Item 15 do not reflect the
anticipated stock split described below.
In October 1994, the Registrant issued to Allan Sorensen, an aggregate
of 65,000 shares of Common Stock. The aggregate consideration paid for such
securities was $250,000. Such securities were issued pursuant to the exemption
set forth in Section 4(2) of the Securities Act.
In June 1996, the Registrant issued to its current shareholders for no
additional consideration 650,000 shares of Common Stock in connection with a
650-for-one forward stock split. Such shares were issued pursuant to the
exemption set forth in Section 3(a)(9) of the Securities Act.
In June 1996, the Registrant issued to Fund V an aggregate of 100,000
shares of Series A Preferred Stock. The aggregate consideration paid for such
securities was $3.3 million. See "Certain Transactions - Series A Preferred
Stock." Such securities were issued pursuant to the exemption set forth in
Section 4(2) of the Securities Act.
In June 1997, the Registrant issued to Fund V, the current holder of
Series A Preferred Stock, for no additional cash consideration, an aggregate of
650,000 shares of Common Stock in connection with the conversion of the Series A
Preferred Stock. See "Certain Transactions - Series A Preferred Stock." Such
shares were issued pursuant to the exemption set forth in Section 3(a)(9) of the
Securities Act.
In June 1997, the Registrant issued to TCP an aggregate of 552,590
shares of Common Stock in exchange for all of the outstanding capital stock of
Telephone Warehouse, Inc. and National Cellular, Incorporated and the assumption
of all of the indebtedness of TCP, in connection with the Telephone Warehouse
Acquisition. See "Certain Transactions - Telephone Warehouse Acquisition." Such
shares were issued pursuant to the exemption set forth in Section 4(2) of the
Securities Act.
In June 1997, the Registrant issued to NationsCredit warrants to
purchase an aggregate of 32,410 shares of Common Stock in connection with the
Telephone Warehouse Acquisition. See "Certain Transactions - Telephone Warehouse
Acquisition." Such warrants were issued pursuant to the exemption set forth in
Section 4(2) of the Securities Act.
Immediately prior to this offering, the Company will issue to
NationsCredit for nominal consideration an aggregate of 32,410 shares of Common
Stock upon exercise of outstanding warrants. See "Certain Transactions -
Telephone Warehouse Acquisition." Such shares will be issued pursuant to the
exemption set forth in Section 4(2) of the Securities Act.
Immediately prior to this offering, the Registrant expects to issue to
its current shareholders for no additional consideration shares of
Common Stock in connection with a for-one forward stock split. Such
shares will be issued pursuant to the exemption set forth in Section 3(a)(9) of
the Securities Act.
II-2
115
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
EXHIBIT DESCRIPTION
------- -----------
1.1 Proposed form of Underwriting Agreement **
3.1 Registrant's form of Amended and Restated Articles of Incorporation **
3.2 Registrant's form of Amended and Restated Bylaws **
4.1 Registrant's form of Common Stock Certificate *
5.1 Opinion of Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A. as to the validity of the Common Stock
being registered *
10.1 Registrant's 1997 Executive Incentive Compensation Plan **
10.2 Form of Indemnification Agreement between the Registrant and each of its directors and certain executive
officers **
10.3 Shareholders Agreement, dated as of June 27, 1997, by and among the Registrant, Nicolas Molina, Brett
Beveridge, Allan Sorensen, HIG Fund V, Inc. and Texas Cellular Partners, L.P.**
10.4 Registration Rights Agreement, dated as of June 27, 1997, by and among the Registrant, Nicolas Molina,
Brett Beveridge and Allan Sorensen.**
10.5 Amended and Restated Renewal Promissory Note of the Registrant to Nicolas Molina in the principal amount
of $129,050, accruing interest at the rate of 8.0% per annum and due and payable upon the consummation of
this offering.**
10.6 Amended and Restated Renewal Promissory Note of the Registrant to Brett Beveridge in the principal amount
of $129,050, accruing interest at the rate of 8.0% per annum and due and payable upon the consummation of
this offering**
10.7 The Registrant's Stock Option Agreement for Nicolas Molina, dated as of June 27, 1997, by and between the
Registrant and Nicolas Molina.**
10.8 The Registrant's Stock Option Agreement for Brett Beveridge, dated as of June 27, 1997, by and between the
Registrant and Brett Beveridge.**
10.9 Amended and Restated Employment Agreement, dated as of June 27, 1997, by and between the Registrant and
Nicolas Molina.**
10.10 Amended and Restated Employment Agreement, dated as of June 27, 1997, by and between the Registrant and
Brett Beveridge.**
10.11 Employment Agreement, dated as of May 22, 1995, by and between the Registrant and Anne Gozlan, as amended
to date.**
10.12 Amended and Restated Employment Agreement, dated as of June 27, 1997, by and between the Registrant and
Ronald Koonsman.**
10.13 Intercompany Note of the Registrant to Texas Cellular Partners, L.P. in the principal amount of up to
$3,585,000, accruing interest at the rate of 8.0% per annum and maturing on the second anniversary of this
offering.**
10.14 Warrantholders Rights Agreement, dated as of June 27, 1997, among the Registrant, HIG Fund V, Inc. and
NationsCredit Commercial Corporation and the related Warrant to purchase 32,410 shares of Common Stock of
the Registrant.**
10.15 Credit Agreement, dated as of December 31, 1996 and amended as of June 27, 1997, by and among the
Registrant, NationsCredit Commercial Corporation, the Lenders referred to therein, Texas Cellular Partners,
L.P., Telephone Warehouse, Inc. and National Cellular, Incorporated.**
10.16 Amended and Restated Consulting Agreement, dated as of August 18, 1997, among the Registrant, Telephone
Warehouse, Inc. and HIG Capital Management, Inc.**
10.17 Series A Preferred Stock Purchase Agreement, dated as of July 25, 1996, by and among the Registrant, HIG
Fund V, Inc., Nicolas Molina and Brett Beveridge, as amended by (i) that Conversion Agreement, dated as of
June 27, 1997, by and among the Registrant, HIG Fund V, Inc. and Texas Cellular Partners, L.P. and (ii)
that Side Letter, dated
II-3
116
April 11, 1997, from HIG Capital Management, Inc. to Nicolas Molina and Brett Beveridge
relating to indebtedness and capital expenditure limits.**
10.18 Stock Purchase Agreement, dated as of October 5, 1994, by and between the Registrant and Allan Sorensen,
as amended.**
10.19 Amended and Restated Agreement and Plan of Merger, dated as of June 27, 1997, by and among the Registrant,
Merger Sub 1, Inc., Merger Sub 2, Inc.,
Telephone Warehouse, Inc. National Cellular, Incorporated and Texas Cellular Partners, L.P.**
10.20 Asset Purchase Agreement, dated as of August 31, 1996, by and among the Registrant, North Point Cellular,
Inc., Michael Weinstock and Marc Greene.**
10.21+ Dealer Agreement, dated December 20, 1996, by and between Telephone Warehouse, Inc. and Metroplex
Telephone Company d/b/a AT&T Wireless Services.***
10.22+ Dealer Agreement, dated December 20, 1996, by and between Telephone Warehouse - San Antonio, Inc. and
AT&T Wireless Services of San Antonio, Inc. d/b/a AT&T Wireless Services.***
11.1 Statement regarding computation of per share earnings**
16.1 Deloitte & Touche LLP letter**
21.1 Subsidiaries of the Registrant**
23.1 Consent of Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A. (to be included in its opinion to be
filed as Exhibit 5.1) *
23.2 Consent of Ernst & Young LLP***
23.3 Consent of Ernst & Young LLP***
23.4 Consent of Deloitte & Touche LLP***
24.1 Reference is made to the signature pages of this Registration Statement for the Power of Attorney contained
therein
27.1 Financial Data Schedule**
27.2 Financial Data Schedule**
- ----------
* To be filed by amendment.
** Previously filed.
*** Filed herewith.
+ Certain provisions of this exhibit are subject to a request for
confidential treatment filed with the Securities and Exchange
Commission.
(b) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts......... S-1
All other schedules for which provision is made in the applicable
accounting regulations of the Commission are not required under the related
instructions or are not applicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registration of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being
II-4
117
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) The undersigned registrant hereby undertakes that:
(i) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of a registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part
of the registration statement as of the time it was declared effective.
(ii) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-5
118
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Miami,
State of Florida, on September 9, 1997.
LET'S TALK CELLULAR & WIRELESS, INC.
By: /s/ Nicolas Molina
---------------------------------------
Nicolas Molina, Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Nicolas Molina
- -------------------------------- Chief Executive Officer and Director September 9, 1997
Nicolas Molina (principal executive officer)
Anne Gozlan*
- -------------------------------- Chief Financial Officer September 9, 1997
Anne Gozlan (principal accounting officer)
Brett Beveridge*
- -------------------------------- President and Chairman of the Board September 9, 1997
Brett Beveridge
Anthony Tamer*
- -------------------------------- Director September 9, 1997
Anthony Tamer
Douglas Berman*
- -------------------------------- Director September 9, 1997
Douglas Berman
Sami Mnaymneh*
- -------------------------------- Director September 9, 1997
Sami Mnaymneh
John Bolduc*
- -------------------------------- Director September 9, 1997
John Bolduc
Allan Sorensen*
- -------------------------------- Director September 9, 1997
Allan Sorensen
*By /s/ Nicolas Molina
----------------------------
Nicolas Molina
Attorney-in-Fact
II-6
119
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Let's Talk Cellular & Wireless, Inc.
We have audited the financial statements of Let's Talk Cellular & Wireless, Inc.
as of July 31, 1996, and for the year then ended, and have issued our report
thereon dated September 26, 1996 (included elsewhere in this Registration
Statement). Our audit also included the financial statement schedule listed in
item 16(b) of this Registration Statement. This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Miami, Florida
September 26, 1996
S-1
120
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
LET'S TALK CELLULAR & WIRELESS, INC.
JULY 31, 1996
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
OF YEAR EXPENSES DEDUCTIONS YEAR
---------- -------- ---------- ----------
Year ended July 31, 1996
Deducted from asset accounts:
Allowances ..................... $ -- $65,638 $ -- $ 65,638
======= ======= ========= ========
Nine months ended April 30, 1997
Deducted from asset accounts:
Allowances (Unaudited) ......... $65,638 $65,969 $ -- $131,607
======= ======= ========= ========
Note: At July 31, 1995 and 1994 and for the years then ended, there
were no allowance deductions from asset accounts.
S-2
121
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
1.1 Proposed form of Underwriting Agreement **
3.1 Registrant's form of Amended and Restated Articles of Incorporation **
3.2 Registrant's form of Amended and Restated Bylaws **
4.1 Registrant's form of Common Stock Certificate *
5.1 Opinion of Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A. as to the validity of the Common Stock
being registered *
10.1 Registrant's 1997 Executive Incentive Compensation Plan **
10.2 Form of Indemnification Agreement between the Registrant and each of its directors and certain executive
officers **
10.3 Shareholders Agreement, dated as of June 27, 1997, by and among the Registrant, Nicolas Molina, Brett
Beveridge, Allan Sorensen, HIG Fund V, Inc. and Texas Cellular Partners, L.P.**
10.4 Registration Rights Agreement, dated as of June 27, 1997, by and among the Registrant, Nicolas Molina,
Brett Beveridge and Allan Sorensen.**
10.5 Amended and Restated Renewal Promissory Note of the Registrant to Nicolas Molina in the principal
amount of $129,050, accruing interest at the rate of 8.0% per annum and due and payable upon the
consummation of this offering.**
10.6 Amended and Restated Renewal Promissory Note of the Registrant to Brett Beveridge in the principal
amount of $129,050, accruing interest at the rate of 8.0% per annum and due and payable upon the
consummation of this offering**
10.7 The Registrant's Stock Option Agreement for Nicolas Molina, dated as of June 27, 1997, by and between the
Registrant and Nicolas Molina.**
10.8 The Registrant's Stock Option Agreement for Brett Beveridge, dated as of June 27, 1997, by and between the
Registrant and Brett Beveridge.**
10.9 Amended and Restated Employment Agreement, dated as of June 27, 1997, by and between the Registrant and
Nicolas Molina.**
10.10 Amended and Restated Employment Agreement, dated as of June 27, 1997, by and between the Registrant and
Brett Beveridge.**
10.11 Employment Agreement, dated as of May 22, 1995, by and between the Registrant and Anne Gozlan, as amended
to date.**
10.12 Amended and Restated Employment Agreement, dated as of June 27, 1997, by and between the Registrant and
Ronald Koonsman.**
10.13 Intercompany Note of the Registrant to Texas Cellular Partners, L.P. in the principal amount of up to
$3,585,000, accruing interest at the rate of 8.0% per annum and maturing on the second anniversary of this
offering.**
10.14 Warrantholders Rights Agreement, dated as of June 27, 1997, among the Registrant, HIG Fund V, Inc. and
NationsCredit Commercial Corporation and the related Warrant to purchase 32,410 shares of Common Stock of
the Registrant.**
10.15 Credit Agreement, dated as of December 31, 1996 and amended as of June 27, 1997, by and among the
Registrant, NationsCredit Commercial Corporation, the Lenders referred to therein, Texas Cellular Partners,
L.P., Telephone Warehouse, Inc. and National Cellular, Incorporated.**
10.16 Amended and Restated Consulting Agreement, dated as of August 18, 1997, among the Registrant,
Telephone Warehouse, Inc. and HIG Capital Management, Inc.**
10.17 Series A Preferred Stock Purchase Agreement, dated as of July 25, 1996, by and among the Registrant,
HIG Fund V, Inc., Nicolas Molina and Brett Beveridge, as amended by (i) that Conversion Agreement,
dated as of June 27, 1997, by and among the Registrant, HIG Fund V, Inc. and Texas Cellular Partners,
L.P. and (ii) that Side Letter, dated April 11, 1997, from HIG Capital Management, Inc. to Nicolas Molina
and Brett Beveridge relating to indebtedness and capital expenditure limits.**
122
10.18 Stock Purchase Agreement, dated as of October 5, 1994, by and between the Registrant and Allan Sorensen,
as amended.**
10.19 Amended and Restated Agreement and Plan of Merger, dated as of June 27, 1997, by and among the Registrant,
Merger Sub 1, Inc., Merger Sub 2, Inc.,
Telephone Warehouse, Inc. National Cellular, Incorporated and Texas Cellular Partners, L.P.**
10.20 Asset Purchase Agreement, dated as of August 31, 1996, by and among the Registrant, North Point
Cellular, Inc., Michael Weinstock and Marc Greene.**
10.21+ Dealer Agreement, dated December 20, 1996, by and between Telephone Warehouse, Inc. and Metroplex
Telephone Company d/b/a AT&T Wireless Services.***
10.22+ Dealer Agreement, dated December 20, 1996, by and between Telephone Warehouse - San Antonio, Inc. and
AT&T Wireless Services of San Antonio, Inc d/b/a AT&T Wireless Services.***
11.1 Statement regarding computation of per share earnings**
16.1 Deloitte & Touche LLP letter**
21.1 Subsidiaries of the Registrant**
23.1 Consent of Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A. (to be included in its opinion to be
filed as Exhibit 5.1) *
23.2 Consent of Ernst & Young LLP***
23.3 Consent of Ernst & Young LLP***
23.4 Consent of Deloitte & Touche LLP***
24.1 Reference is made to the signature pages of this Registration Statement for the Power of Attorney
contained therein
27.1 Financial Data Schedule**
27.2 Financial Data Schedule**
- ----------
* To be filed by amendment.
** Previously filed.
*** Filed herewith.
+ Certain provisions of this exhibit are subject to a request for
confidential treatment filed with the Securities and Exchange
Commission.