1
UNITED STATES
SECURITIES EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-23351
LET'S TALK CELLULAR & WIRELESS, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
FLORIDA 65-0292891
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
800 BRICKELL AVE., STE. 400
MIAMI, FL 33131 33131
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 358-8255
---------------------------
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(Former name, former address and fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the registrant's common stock was 8,749,762
as of June 12, 1998.
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LET'S TALK CELLULAR & WIRELESS, INC.
INDEX
PAGE
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of April 30, 1998 (Unaudited)
and July 31, 1997..................................................................... 4
Condensed Consolidated Statements of Operations for the Three Months Ended
April 30, 1998 and April 30, 1997 (Unaudited)......................................... 5
Condensed Consolidated Statements of Operations for the Six Months Ended
April 30, 1998 and April 30, 1997 (Unaudited)........................................ 6
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended April 30, 1998 and April 30, 1997 (Unaudited)................................... 7
Notes to Condensed Consolidated Financial Statement (Unaudited)....................... 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................ 10
PART II - OTHER INFORMATION...................................................................... 17
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), the Company is hereby
providing cautionary statements identifying important factors that could cause
the Company's actual results to differ materially from those projected in
forward-looking statements (as such term is defined in the Reform Act) of the
Company made by or on behalf of the Company herein or which are made orally,
whether in presentations, in response to questions or otherwise. Any statements
that express, or involve discussions as to expectations, beliefs, plans,
objectives, assumptions or future events or performance (often, but not always,
through the use of words or phrases such as "will result," "are expected to,"
"will continue," "is anticipated," "plans," "intends," "estimated," projection"
and "outlook") are not historical facts and may be forward-looking and,
accordingly, such statements involve estimates, assumptions, risks and
uncertainties which could cause actual results to differ materially from those
expressed in the forward-looking statements. Such risks include, among others,
the risks associated with rapid growth, competition, dependence on cellular and
PCS carriers, customer turnover, technological change and inventory
obsolescence.
The Company cautions that the risks described above could cause actual
results or outcomes to differ materially from those expressed in any
forward-looking statement of the Company made by or on behalf of the Company.
Any forward-looking statement speaks only as of the date on which such
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statement is made, and the Company undertakes no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrences of
unanticipated events. New factors emerge from time to time and it is not
possible for management to predict all of such factors. Further, management
cannot assess the effect of each such factor on the Company's business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statements.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LET'S TALK CELLULAR & WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 31, APRIL 30,
1997 1998
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 1,080,014 $ 367,427
Accounts receivable, net ................................................. 5,706,983 15,918,311
Inventories .............................................................. 5,712,420 14,570,270
Prepaid expenses ......................................................... 265,859 1,006,248
Income taxes receivable .................................................. 291,099 --
Other current assets ..................................................... 600,385 --
Deferred tax asset ....................................................... 475,245 475,245
----------- -----------
Total current assets ............................................. 14,132,005 32,397,501
Property and equipment, net ............................................... 5,296,743 10,988,090
Other assets, net .......................................................... 1,353,097 3,390,567
Intangible assets, net ..................................................... 13,755,696 36,867,381
----------- -----------
Total assets ..................................................... $34,537,541 $83,643,539
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ................................................... $ 6,583,542 $13,348,337
Bank lines of credit ..................................................... 1,023,285 3,600,000
Accrued expenses ......................................................... 3,120,493 5,272,457
Loans payable to shareholders and officers ............................... 258,100 --
Current portion of bank term loans and obligations under capital leases .. 732,195 1,552,460
Deferred revenues ........................................................ 693,038 1,072,585
Customer deposits ........................................................ 108,673 364,935
----------- -----------
Total current liabilities ........................................ 12,519,326 25,210,774
Bank term loans, less current portion ...................................... 12,350,000 20,000,000
Loans payable to shareholders and officers ................................. 2,000,000 2,000,000
Obligation under capital lease, less current portion ....................... 32,859 521,174
Other liabilities .......................................................... 72,808 1,002,069
Deferred tax liability ..................................................... 952,596 404,467
Commitments and contingencies
Shareholders' equity: ......................................................
Preferred stock, $.01 par value, 1,000,000 shares authorized, none
issued and outstanding .................................................. -- --
Common stock, $.01 par value, 50,000,000 shares authorized, 6,093,166 and
8,749,762 shares issued and outstanding, respectively ................... 60,932 87,498
Additional paid-in capital ................................................. 6,166,474 33,745,969
Retained earnings .......................................................... 382,546 671,588
----------- -----------
Total shareholders' equity ................................................. 6,609,952 34,505,055
----------- -----------
Total liabilities and shareholders' equity ................................. $34,537,541 $83,643,539
=========== ===========
See accompanying notes.
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LET'S TALK CELLULAR & WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED APRIL 30,
----------------------------
1997 1998
---------- -----------
Net revenues:
Retail sales ......................................................... $3,105,245 $11,421,499
Activation commissions ............................................... 2,562,182 11,320,666
Residual income ...................................................... 290,210 4,128,118
Wholesale sales ...................................................... -- 5,171,814
---------- -----------
Total net revenues ........................................... 5,957,637 32,042,097
Cost of sales .......................................................... 2,692,716 16,437,132
---------- -----------
Gross profit ........................................................... 3,264,921 15,604,965
Operating expenses:
Selling, general and administrative .................................. 3,412,701 13,091,756
Depreciation and amortization ........................................ 117,740 414,671
Amortization of intangible assets .................................... 60,000 478,394
---------- -----------
Total operating expenses ..................................... 3,590,441 13,984,821
---------- -----------
Income (loss) from operations .......................................... (325,520) 1,620,144
Interest expense, net .................................................. 47,923 307,833
---------- -----------
Income (loss) before provision for income taxes and extraordinary charge (373,443) 1,312,311
Provision (benefit) for income taxes ................................... (119,501) 563,383
---------- -----------
Income (loss) before extraordinary charge .............................. (253,942) 748,928
Extraordinary charge on debt retirement net of taxes ................... -- 240,226
---------- -----------
Net income (loss) ............................................. (253,942) 508,702
Accretion of Series A Preferred Stock to redemption value ..... 15,660 --
---------- -----------
Net income (loss) applicable to common shareholders ........... ($ 269,602) $ 508,702
========== ===========
Earnings per share:
Basic:
Income (loss) before extraordinary charge ..................... $ (0.13) $ .09
Extraordinary charge .......................................... -- (.03)
---------- -----------
Net income (loss) applicable to common shareholders ........... $ (0.13) $ .06
========== ===========
Diluted:
Income (loss) before extraordinary charge ..................... $ (0.13) $ .09
Extraordinary charge .......................................... -- $ (.03)
---------- -----------
Net income (loss) applicable to common shareholders ........... $ (0.13) $ .06
========== ===========
Weighted average shares outstanding:
Basic ......................................................... 2,137,850 8,576,728
========== ===========
Diluted ....................................................... 2,137,850 8,604,501
========== ===========
See accompanying notes.
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LET'S TALK CELLULAR & WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED APRIL 30,
----------------------------
1997 1998
----------- -----------
Net revenues:
Retail sales ................................................... $ 8,720,261 $27,882,650
Activation commissions ......................................... 8,287,135 28,804,420
Residual income ................................................ 929,638 8,966,889
Wholesale sales ................................................ -- 21,050,515
----------- -----------
Total net revenues ..................................... 17,937,034 86,704,474
Cost of sales .................................................... 8,039,235 49,673,915
----------- -----------
Gross profit ..................................................... 9,897,799 37,030,559
Operating expenses:
Selling, general and administrative ............................ 8,788,911 31,813,342
Depreciation and amortization .................................. 285,118 985,150
Amortization of intangible assets .............................. 160,000 1,438,938
----------- -----------
Total operating expenses ............................... 9,234,029 34,237,430
----------- -----------
Income from operations ........................................... 663,770 2,793,129
Interest expense, net ............................................ 128,604 1,052,799
----------- -----------
Income before provision for income taxes and extraodinary charge . 535,166 1,740,330
Provision for income taxes ....................................... 171,253 819,704
----------- -----------
Income before extraordinary charge ............................... 363,913 920,626
Extraordinary charge on debt retirement net of taxes ............. -- 631,584
----------- -----------
Net income .............................................. 363,913 289,042
Accretion of Series A Preferred Stock to redemption value 46,980 --
----------- -----------
Net income applicable to common shareholders ............ $ 316,933 $ 289,042
=========== ===========
Earnings per share:
Basic:
Income before extraordinary charge ...................... $ 0.15 $ 0.12
Extraordinary charge .................................... -- $ (0.08)
-----------
Net income applicable to common shareholders ............ $ 0.15 $ 0.04
=========== ===========
Diluted:
Income before extraordinary charge ...................... $ 0.07 $ 0.12
Extraordinary charge .................................... -- (0.08)
----------- -----------
Net income applicable to common shareholders ............ $ 0.07 $ 0.04
=========== ===========
Weighted average shares outstanding:
Basic .................................................. 2,137,850 7,381,246
=========== ===========
Diluted ................................................ 4,275,700 7,390,505
=========== ===========
See accompanying notes.
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LET'S TALK CELLULAR & WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED APRIL 30,
------------------------------
1997 1998
----------- ------------
OPERATING ACTIVITIES
Net income ............................................................. $ 316,933 $ 289,042
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization ....................................... 285,119 985,152
Amortization of intangible assets ................................... 150,000 1,438,938
Amortization of deferred financing costs ............................ 7,026 1,056,999
Provision for activation adjustments and cancellation losses ........ 30,000 191,158
Deferred income taxes ............................................... 298,030 (285,246)
Changes in operating assets and liabilities
Accounts receivable .............................................. (789,732) (6,483,362)
Inventories ...................................................... (2,297,872) (6,379,812)
Prepaid expenses ................................................. (412,415) (2,200,499)
Other assets ..................................................... (91,366) (180,092)
Income tax receivable ............................................ -- 291,099
Trade accounts payable ........................................... 935,718 (635,205)
Accrued expenses ................................................. 488,689 1,630,893
Income taxes payable ............................................. (89,675) 851,100
Customer deposits ................................................ (24,195) (507,259)
Deferred revenues ................................................ 147,971 (712,504)
Other liabilities ................................................ -- 565,038
----------- ------------
Net cash used in operating activities .................................. (1,045,769) (10,084,560)
INVESTING ACTIVITIES
Acquisition of Cellular Warehouse, net of cash acquired ................ -- (15,462,797)
Acquisition of Cellular Unlimited, net of cash acquired ................ -- (1,862,212)
Acquisition of Cellular USA, net of cash acquired ...................... -- (1,395,701)
Acquisition of Northpoint Cellular ..................................... (850,000) --
Purchases of property and equipment .................................... (1,975,264) (4,984,688)
Decrease in cash held in escrow ........................................ 2,009,194 --
----------- ------------
Net cash used in investing activities .................................. (816,070) (23,705,398)
FINANCING ACTIVITIES
Proceeds from sale of common stock, net of underwriting costs .......... -- 22,320,000
Proceeds from bank term loan ........................................... 600,000 21,500,000
Net (payments) proceeds on borrowings under bank lines of credit ....... 302,400 2,576,715
Payments on loans payable to shareholder and officers .................. -- (258,100)
Payments on bank term loan and capital leases .......................... (169,415) (13,061,244)
----------- ------------
Net cash provided by financing activities .............................. 732,985 33,077,371
----------- ------------
Net decrease in cash and cash equivalents .............................. (1,128,854) (712,587)
Cash and cash equivalents at beginning of period ....................... 1,357,172 1,080,014
----------- ------------
Cash and cash equivalents at end of period ............................. $ 228,318 $ 367,427
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest ................................................. $ 153,821 $ 870,495
=========== ============
Cash paid for income taxes ............................................. $ 89,675 $ 58,795
=========== ============
Common stock issued to acquire Cellular Warehouse ...................... $ 7,562,500
============
Net assets acquired in the acquisition of Cellular Warehouse ........... $ 5,374,787
============
Goodwill as a result of the stock issuance to acquire Cellular Warehouse $ 2,217,713
============
See accompanying notes.
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LET'S TALK CELLULAR & WIRELESS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
(UNAUDITED)
1-SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements
of Let's Talk Cellular & Wireless, Inc. and subsidiaries (the "Company") have
been prepared in accordance with the instructions to Form 10-Q and, therefore,
omit or condense certain footnotes and other information normally included in
financial statements prepared in accordance with generally accepted accounting
principles. The accounting policies followed for interim financial reporting are
the same as those disclosed in Note 2 of the Notes to Consolidated Financial
Statements included in the Company's audited financial statements for the fiscal
year ended July 31, 1997, which are included in the Registration Statement on
Form S-1 (Registration No 333-34595). In the opinion of management, all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of the financial information for the interim periods reported have
been made. Results of operations for the nine months ended April 30, 1998 are
not necessarily indicative of the results to be expected for the entire fiscal
year ending July 31, 1998.
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.
Fiscal year references are to the respective fiscal year ended July 31.
2-NET INCOME (LOSS) PER SHARE APPLICABLE TO COMMON SHAREHOLDERS
In 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share. Statement No. 128
replaced the previously reported primary and fully diluted earnings per share
with the basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share except that options,
warrants and convertible securities issued prior to an initial public offering
are considered in the calculation of diluted earnings per share prior to their
issuance only if nominal consideration was received by the Company. All earnings
per share amounts for all periods have been presented, and where necessary,
restated to conform to the Statement No. 128 requirements.
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The following table sets forth the computation of basic and diluted
earnings per share:
For the Three Months Ended For the Nine Months Ended
April 30, April 30,
--------------------------- --------------------------
1997 1998 1997 1998
---------- ---------- ---------- ----------
Numerator:
Net income (loss) applicable to common shareholders $ (269,602) $ 508,702 $ 316,933 $ 289,042
========== ========== ========== ==========
Denominator:
Denominator for basic earnings per
share - weighted average
shares ............................................ 2,137,850 8,576,728 2,137,850 7,381,246
Effect of dilutive securities:
Convertible Preferred Stock ....................... -- -- 2,137,850 --
Stock Options ..................................... -- 27,773 -- 9,259
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions .................... 2,137,850 8,604,501 4,275,700 7,390,505
========== ========== ========== ==========
Basic earnings (loss) per share
applicable to common
shareholders ...................................... $ (0.13) $ 0.06 $ 0.15 $ 0.04
========== ========== ========== ==========
Diluted earnings (loss) per share
applicable to common
shareholders ...................................... $ (0.13) $ 0.06 $ 0.07 $ 0.04
========== ========== ========== ==========
3-INITIAL PUBLIC OFFERING
On December 1, 1997, the Company completed an initial public offering
("IPO") of its common stock. Prior to the closing of the IPO, and after giving
effect to a stock split of 3.289 for 1 effected on October 20, 1997, the Company
had outstanding 6,093,166 shares of common stock, exclusive of 106,596 shares
issued immediately prior to the IPO upon exercise of warrants held by the bank
lender to the Company.
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In the IPO, 2,337,245 shares of common stock were sold, of which
2,000,000 shares were sold by the Company and 337,245 shares were sold by
selling shareholders. The Company's net proceeds from the IPO were used to repay
the then outstanding balance on bank term loans totalling $12.9 million, a
portion of the line of credit amounting to $4.9 million and shareholders loans
totalling $258,100, and fund the acquisitions of Cellular Unlimited Corp. and
Cellular USA, Inc. As a result of the repayment of the bank term loans during
the second quarter of fiscal 1998, the Company incurred an extraordinary charge
to earnings of approximately $391,000, net of taxes.
4-ACQUISITIONS
On December 1, 1997, the Company acquired substantially all of the
assets of Cellular Unlimited Corp. for a cash purchase price of $2,055,000 and
up to $225,000 in certain contingent payments in each of the six-month periods
ending July 31, 1998, January 31, 1999 and July 31, 1999.
On December 17, 1997, the Company acquired all of the outstanding
capital stock of Cellular USA, Inc. for a cash purchase price of $1,625,000 and
up to an aggregate of $175,000 in certain contingent payments in fiscal 1998 and
1999.
On February 22, 1998, the Company acquired substantially all of the
assets of Lazer Electronics Inc., and Best Electronics and Paging, Inc. for a
total cash purchase price of $190,000.
Additionally, on April 2, 1998, the Company acquired all of the
outstanding capital stock of Sosebee Enterprises, Inc. and Cellular Warehouse,
Inc. for a cash price of approximately $19.9 million and 550,000 shares of the
Company's common stock. This Acquisition was funded by the Company's new $35
million credit facility with Chase Manhattan Bank (see Liquidity and Capital
Resources).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is the largest independent specialty retailer of cellular
and wireless products, services and accessories in the United States, with 230
stores located in 21 states, the District of Columbia and Puerto Rico as of
April 30, 1998. The Company's stores, located predominantly in regional shopping
malls and power strip centers, seek to offer one-stop shopping for consumers to
purchase cellular, personal communication systems ("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 small 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.
Since its inception in 1989 through June 1996, the Company had limited
capital and opened 25 stores. Beginning in June 1996, the Company accelerated
its store expansion and during fiscal 1997, the Company added a net total of 68
stores, including five stores acquired from Peachtree Mobility in the Atlanta
metropolitan area, and 19 stores from Telephone Warehouse, Inc., one of the
largest AT&T cellular agents in the Southwest. During the nine months ended
April 30, 1998, the Company opened 53 stores, acquired 85 stores and closed 1
store.
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The Company presently plans to open a total of 65 to 75 new stores in
fiscal 1998 and 80 to 100 new stores in fiscal 1999. To prepare for this
expansion, 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. 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 or "PCS" carrier when a
customer initially subscribes for the carrier's service. The amount of
the activation commission paid by 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 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.
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 commissions, 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 commissions have become increasingly significant to the
Company's net revenues. In early 1997 the Company made a strategic decision to
accept increased activation commissions 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 commissions may account for an increased share of the Company's
future net revenues relative to residual income.
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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 commissions
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 operates three store formats in regional shopping malls and
power strip centers. 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 $34,000 and
$94,000, respectively. The initial inventory for a new store approximates
$32,000 for a kiosk and $47,000 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
mall-based store sales reach normal operating levels after three months of
operations. The Company's third store format is the "destination" store which is
located in a power strip center. These destination stores are normally larger
than the mall based stores and carry an average inventory of approximately
$33,000. The majority of the Company's destination stores were acquired in the
various acquisitions; consequently, the Company does not believe tracking their
start up costs would be meaningful.
The Company has completed a number of significant acquisitions in
fiscal 1997 and 1998 that have affected period to period comparisons. In June
1997, the Company more than doubled the amount of its assets and previous twelve
months' total net revenues by acquiring Telephone Warehouse. Effective March 1,
1998, the Company acquired Cellular Warehouse which had revenues of $38.4
million for the 12 months ended December 31, 1997. The accelerated amortization
applied to the value of the residual income acquired in connection with these
acquisitions is expected to have a significantly negative effect on net income
in fiscal 1998 and 1999.
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RESULTS OF OPERATIONS
Quarter Ended April 30, 1998 Compared to Quarter Ended April 30, 1997
Total net revenues increased $26.0 million, or 433.3%, to $32.0 million
in the third quarter of fiscal 1998 from $6.0 million in the third quarter of
fiscal 1997 due to increases in retail sales, activation commissions and
residual income, and to the acquisitions of Telephone Warehouse, Inc., and
National Cellular Incorporated (collectively, "Telephone Warehouse") on June 30,
1997, of Cellular USA and Cellular Unlimited effective November 1, 1997, and of
Cellular Warehouse effective March 1, 1998 and the resulting inclusion of the
acquired entities' operations in the Company's consolidated revenues for the
third quarter of fiscal 1998. Retail sales increased to $11.4 million from $3.1
million, activation commissions increased to $11.3 million from $2.6 million and
residual income increased $3.8 million to $4.1 million from $290,000. Comparable
store sales increased 10.7% and accounted for $600,000 or 2.3% of the increase
in total net revenues. Sales relating to 66 new stores opened, 102 stores
acquired since April 30, 1997, and the stores that were not yet open for 12 full
months accounted for $16.4 million or 63.1% of the increase in total net
revenues. The comparable stores sales growth was primarily attributable to
increased advertising, Company-sponsored airtime promotions and the growth of
cellular subscribers in the wireless industry overall. Wholesale sales increased
$5.2 million as a result of the acquisition of Telephone Warehouse. The increase
in residual income was primarily due to the inclusion of Telephone Warehouse's
and Cellular Warehouse's residual income ($3.5 million for the third quarter of
fiscal 1998).
Gross profit increased $12.3 million, or 372.7%, to $15.6 million in
the third quarter of fiscal 1998 from $3.3 million for the third quarter of
fiscal 1997. As a percentage of total net revenues, gross profit decreased to
48.7% from 54.8% primarily due to the inclusion of Telephone Warehouse's
wholesale operations, which have lower margins than the Company's retail sales.
Selling, general and administrative expenses increased $9.7 million, or
285.3%, to $13.1 million for the third quarter of fiscal 1998 from $3.4 million
in the third quarter of fiscal 1997 as a result of higher personnel, rent and
related costs associated with the net addition of 86 new stores and the
inclusion of the operations of Telephone Warehouse, Cellular USA, Cellular
Unlimited and Cellular Warehouse for the third quarter of fiscal 1998. As a
percentage of total net revenues, selling, general and administrative expenses
decreased to 40.9% during the third quarter of fiscal 1998 from 57.3% in the
third quarter of fiscal 1997.
Amortization of intangibles consisted of (i) $418,000 associated with
the amortization of goodwill and acquired residual income resulting from the
acquisitions of Telephone Warehouse, Cellular USA, Cellular Unlimited and
Cellular Warehouse and (ii) $60,000 associated with the thirty month noncompete
agreement entered into in August 1996 in connection with the acquisition of
Peachtree Mobility.
Income from operations increased $1.9 million, or 597.7%, to $1.6
million in the third quarter of fiscal 1998 from a loss of $326,000 in the third
quarter of fiscal 1997 and increased as a percentage of total net revenues to
5.1% from (5.5%).
Interest expense, net increased $260,000 to $308,000 in the third
quarter of fiscal 1998 from $48,000 in the third quarter of fiscal 1997
primarily due to increased bank borrowings used to finance the Company's
expansion.
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Income tax provision was $563,000 in the third quarter of fiscal 1998
as compared to a tax benefit of $120,000 in the third quarter of fiscal 1997
primarily as a result of a $1.7 million increase in income before provision for
income taxes and extraordinary charge.
Income (loss) before extraordinary charge increased $1.0 million to
$749,000 in the third quarter of fiscal 1998 from a loss of $254,000 in the
third quarter of fiscal 1997.
Extraordinary charge on debt retirement of $240,000, net of taxes
resulted from (i) a write-off of deferred financing costs in connection with
certain of the indebtedness repaid with the proceeds of the Company's new $35
million credit facility with Chase Manhattan Bank (see "Liquidity and Capital
Resources") and (ii) the acceleration of unamortized discount associated with
the warrants issued in connection with the repayment of such indebtedness.
Net income was $509,000 in the third quarter of fiscal 1998 compared to
a loss of $270,000 in the third quarter of fiscal 1997.
Nine Months Ended April 30, 1998 Compared to Nine Months Ended April 30, 1997
Total net revenues increased $68.8 million, or 384.4% to $86.7 million
in the nine months ended April 30, 1998 from $17.9 million in the nine months
ended April 30, 1997 due to increases in retail sales, activation commissions
and residual income, and to the acquisition of Telephone Warehouse, on June 30,
1997, of Cellular USA and Cellular Unlimited effective November 1, 1997 and of
Cellular Warehouse effective March 1, 1998 and the resulting inclusion of the
acquired entities' operations in the Company's consolidated revenues for 1998.
Retail sales increased to $27.9 million from $8.7 million, activation
commissions increased to $28.8 million from $8.3 million and residual income
increased $8.1 million to $9.0 million from $930,000. Comparable store sales
increased 13.4% and accounted for $2.3 million or 3.3% of the increase in total
net revenues. Sales relating to 66 new stores opened, 102 stores acquired since
April 30, 1997, and the stores that were not yet open for 12 full months
accounted for $37.2 million or 54.1% of the increase in total net revenues. The
comparable stores sales growth was primarily attributable to increased
advertising, Company-sponsored airtime promotions and the growth of cellular
subscribers in the wireless industry overall. Wholesale sales increased $21.1
million as a result of the acquisition of Telephone Warehouse on June 30, 1997.
The increase in residual income was primarily due to the inclusion of Telephone
Warehouse's and Cellular Warehouse's residual income ($7.7 million in the nine
months ended April 30, 1998).
Gross profit increased $27.1 million, or 273.7% to $37.0 million in the
nine month period ended April 30, 1998 from $9.9 million for the nine month
period ended April 30, 1997. As a percentage of total net revenues, gross profit
decreased to 42.7% from 55.3% primarily due to the inclusion of Telephone
Warehouse's wholesale operations, which have lower margins than the Company's
retail sales.
Selling, general and administrative expenses increased $23.0 million,
or 261.4%, to $31.8 million for the nine month period ended April 30, 1998 from
$8.8 million in the nine month period ended April 30, 1997 as a result of higher
personnel, rent and related costs associated with the net addition of 73 new
stores and the inclusion of the operations of Telephone Warehouse for the first
nine months of fiscal 1998 and of Cellular USA and Cellular Unlimited for the
second and third quarters of fiscal 1998 and of Cellular Warehouse for the
months of March and April of fiscal 1998. As a percentage of total net revenues,
selling, general and administrative expenses decreased to 36.7% during the nine
month period ended April 30, 1998 from 49.2% in the nine month period ended
April 30, 1997.
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Amortization of intangibles consisted of (i) $1.3 million associated
with the amortization of goodwill and acquired residual income resulting from
the acquisition of Telephone Warehouse on June 30, 1997, the acquisition of
Cellular USA and Cellular Unlimited on November 1, 1997, and the acquisition of
Cellular Warehouse on March 1, 1998, and (ii) $180,000 associated with the
thirty month noncompete agreement entered into in August 1996 in connection with
the acquisition of Peachtree Mobility.
Income from operations increased $2.1 million, or 320.6% to $2.8
million in the nine month period ended April 30, 1998 from $664,000 in the nine
month period ended April 30, 1997 and decreased as a percentage of total net
revenues to 3.2% from 3.7%.
Interest expense, net increased $924,000 to $1.1 million in the nine
month period ended April 30, 1998 from $129,000 in the nine month period ended
April 30, 1997 primarily due to increased bank borrowings used to finance the
Company's expansion.
Income tax provision was $820,000 in the nine month period ended April
30, 1998 as compared to $171,000 in the nine month period ended April 30, 1997
primarily as a result of a $1.2 million increase in income before provision for
income taxes and extraordinary charge.
Income before extraordinary charge increased $557,000 to $921,000 in
the nine month period ended April 30, 1998 from 364,000 in the nine month period
ended April 30, 1997.
Extraordinary charge on debt retirement of $632,000, net of taxes
resulted from (i) write-offs of deferred financing costs in connection with the
indebtedness repaid with the proceeds of the Company's initial public offering,
and the new $35 million credit facility with Chase Manhattan Bank and (ii) the
acceleration of unamortized discount associated with the warrants issued in
connection with the repayment of such indebtedness.
Net income was $289,000 in the nine month period ended April 30, 1998
compared to a net income of $317,000 in the nine month period ended April 30,
1997.
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 and cash
provided by operations.
Prior to the Company's IPO, the Company's credit facility was comprised
of a $9.0 million revolving loan and $12.8 million in term loans. The Company
used the proceeds of its IPO to repay all of the term loans and a portion of the
shareholders loans, a portion of the revolving loan, and fund the acquisitions
of Cellular USA and Cellular Unlimited. On April 2, 1998, the Company closed on
a new $35 million credit facility with Chase Manhattan Bank. The new credit
facility is comprised of $21.5 million in term loans, of which $19.9 million was
used to fund the acquisition of Cellular Warehouse, and a $13.5 million
revolver. On the closing date, the Company drew down $1.7 million on the
revolver to repay the balance of the old credit facility. The Company's existing
credit facility expires in April 2004 and is secured by substantially all of the
Company's assets. The revolving credit facility's availability is based on a
formula of eligible receivables and inventories, and as of June 10, 1998, the
Company has an additional $6.1 million available for borrowing. Advances under
the revolving credit line bear interest at variable percentages above the
commercial paper rate. The interest rate at April 30, 1998 was 9.58%.
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The Company anticipates that borrowings under existing facilities and cash
provided by operations will be sufficient to meet currently foreseeable
liquidity requirements.
The Company's working capital increased $5.6 million to $7.2
million at April 30, 1998 from $1.6 million at July 31, 1997. Accounts
receivable and inventory increased $19.1 million to $30.5 million at April
30, 1998 from $11.4 million at July 31, 1997. This increase was partially
offset by an increase in accounts payable of $6.7 million to $13.3 million at
April 30, 1998 from $6.6 million at July 31, 1997.
The Company's net cash used in operating activities increased to $10.1
million for the nine months ended April 30, 1998 compared to $1.0 million for
the nine months ended April 30, 1997. The increase in net cash used in operating
activities resulted primarily from an increase in inventories and accounts
receivable partially offset by an increase in current liabilities reflecting the
growth in the Company's operations.
The Company's net cash used in investing activities increased to $23.7
million for the nine months ended April 30, 1998 from $816,000 in the nine
months ended April 30, 1997. The increase in cash used in investing activities
was primarily attributable to capital expenditures for new stores and funding
the acquisitions of Cellular Unlimited Corp., Cellular USA, Inc. and Cellular
Warehouse.
The Company's net cash provided by financing activities increased to
$33.1 million in the nine months ended April 30, 1998 from $733,000 in the nine
months ended April 30, 1997 primarily as a result of the Company's IPO and its
new $35 million Credit Facility.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
See Note 3 to the Condensed Consolidated Financial Statements for a
discussion of the Company's Initial Public Offering effected on November 24,
1997.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits-
27.1 Financial Data Schedule
(b) The Company filed a form 8-K on April 2, 1998 in connection with
the acquisition of Sosebee Enterprises, Inc. and Cellular Warehouse, Inc.
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LET'S TALK CELLULAR & WIRELESS, INC.
June 12, 1998 By: /s/ Nicolas Molina
------------------------------
NICOLAS MOLINA
Chief Executive Officer
(principal executive officer)
June 12, 1998 By: /s/ Daniel Cammarata
------------------------------
DANIEL CAMMARATA
Chief Financial Officer
(principal accounting officer)
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