1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report June 12, 1998
Amending Form 8-K filed on April 17, 1998
LET'S TALK CELLULAR & WIRELESS, INC.
(Exact name of registrant as specified in charter)
FLORIDA 0-23351 65-0292891
- --------------------------------------------------------------------------------
State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation
800 Brickell Avenue, Suite 400, Miami, Florida 33131
- --------------------------------------------------------------------------------
(Address of principal offices) (Zip Code)
Registrant's telephone number including area code (305) 358-8255
(Former name or former address, if changed since last report) Not applicable
--------------
2
This current report on Form 8-K/A amends the Registrant's current report on
Form 8-K filed on April 17, 1998.
Item 2. ACQUISITION OF ASSETS.
On April 2, 1998, Let's Talk Cellular & Wireless, Inc., a Florida
corporation (the "Registrant"), completed the acquisition of all of the
outstanding capital stock (the "Shares") of Sosebee Enterprises, Inc., a Georgia
corporation doing business as "Cellular Warehouse," and Cellular Warehouse,
Inc., a Georgia corporation (together, the "Companies"). The Shares were
purchased by the Registrant from Messrs. Richard J. Sosebee and Frederick L.
Hill, III (the "Selling Shareholders"), each of whom owned half of the
outstanding common stock of each Company. The Selling Shareholders received as
consideration from the Registrant an aggregate of (i) approximately Nineteen
Million Nine Hundred Thousand Dollars ($19.9 million) in cash, including
acquisition costs of approximately $884,000 and (ii) Five Hundred and Fifty
Thousand (550,000) shares of common stock of the Registrant. The cash portion of
the consideration paid by the Registrant was financed through a Loan and
Security Agreement, dated April 2, 1998, by and among the Registrant and certain
of its subsidiaries, certain Lenders and The Chase Manhattan Bank, as Agent. The
consideration was negotiated at arms-length by the Registrant and the Selling
Shareholders. The Companies are independent specialty retailers of cellular and
wireless products, services and accessories. The Registrant intends to operate
the Companies in substantially the same manner as they operated prior to the
Registrant's acquisition of the Shares.
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Business Acquired.
The following statements of Sosebee Enterprises, Inc. d/b/a
Cellular Warehouse, Inc. are filed herewith on the pages
subsequent hereto:
Report of Independent Certified Public Accountants;
Balance Sheets at December 31, 1996 and December 31,
1997;
Statements of Income for the Years ended December 31,
1995, December 31, 1996 and December 31, 1997;
Statement of Shareholders' Equity for the Years ended
December 31, 1995, December 31, 1996 and December 31,
1997
Statement of Cash Flows for the Years ended
December 31, 1995, December 31, 1996 and December 31,
1997
Notes to Financial Statements for the Years ended
December 31, 1995, 1996 and 1997
(b) Pro Forma Financial Information. The following pro forma financial
information (unaudited) filed herewith on the pages subsequent
hereto gives effect to the acquisition of Sosebee Enterprises, Inc.
and Cellular Warehouse, Inc. on April 1, 1998:
Pro Forma Condensed Consolidated Statements of Income
for the nine months ended April 30, 1998 and the year
ended July 31, 1997 and Notes thereto.
Exbibits:
2.1 Second Amended and Restated Stock Purchase Agreement by and between Let's
Talk Cellular & Wireless, Inc. and certain Selling Shareholders relating to
the acquisition of Sosebee Enterprises, Inc. d/b/a Cellular Warehouse and
Cellular Warehouse, Inc. dated as of March 1, 1998
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SIGNATURES
-----------
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
Let's Talk Cellular & Wireless, Inc.
(Registrant)
Date: June 12, 1998 By: /s/ Daniel Cammarata
-------------------------------
Daniel Cammarata
Chief Financial Officer
Page 3 of 29 Pages
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Financial Statements
Sosebee Enterprises, Inc. d/b/a
Cellular Warehouse, Inc.
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
WITH REPORT OF INDEPENDENT AUDITORS
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Sosebee Enterprises, Inc. d/b/a
Cellular Warehouse, Inc.
Financial Statements
Years ended December 31, 1995, 1996 and 1997
CONTENTS
Report of Independent Auditors..........................................................................1
Audited Financial Statements
Balance Sheets..........................................................................................2
Statements of Income....................................................................................3
Statements of Shareholders' Equity......................................................................4
Statements of Cash Flows................................................................................5
Notes to Financial Statements...........................................................................6
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ERNST & YOUNG LLP * Suite 2800 * Phone: 404 874 8300
600 Peachtree Street
Atlanta, Georgia 30308-2215
Report of Independent Auditors
Board of Directors and Shareholders
Sosebee Enterprises, Inc.
d/b/a Cellular Warehouse, Inc.
We have audited the accompanying balance sheets of Sosebee Enterprises, Inc.
d/b/a Cellular Warehouse, Inc. (the Company) as of December 31, 1996 and 1997,
and the related statements of income, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. 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 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 financial statements referred to above present fairly, in
all material respects, the financial position of Sosebee Enterprises, Inc. d/b/a
Cellular Warehouse, Inc. at December 31, 1996 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
May 8, 1998
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Sosebee Enterprises, Inc. d/b/a
Cellular Warehouse, Inc.
Balance Sheets
DECEMBER 31
1996 1997
--------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,619,860 $ 2,623,735
Accounts receivable, net 7,103,342 4,598,424
Inventories 2,607,373 2,154,900
Prepaid expenses 136,696 158,198
Other current assets 163,013 134,794
--------------------------------------------
Total current assets 12,630,284 9,670,051
Property and equipment, net 770,304 832,226
Intangible assets, net 962,835 964,238
--------------------------------------------
Total assets $14,363,423 $11,466,515
============================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 2,966,523 $ 2,258,447
Accrued expenses 1,542,578 1,238,706
Deferred revenues 256,271 386,532
Customer deposits and rebates 1,058,435 756,962
--------------------------------------------
Total current liabilities 5,823,807 4,640,647
Long-term deferred revenues 402,830 558,334
Shareholders' equity:
Common stock, $1.00 par value, 100,000 shares authorized,
1,000 shares issued and outstanding 1,000 1,000
Additional paid-in capital 29,000 29,000
Retained earnings 8,106,786 6,237,534
--------------------------------------------
Total shareholders' equity 8,136,786 6,267,534
--------------------------------------------
Total liabilities and shareholders' equity $14,363,423 $11,466,515
============================================
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Sosebee Enterprises, Inc. d/b/a
Cellular Warehouse, Inc.
Statements of Income
YEAR ENDED DECEMBER 31
1995 1996 1997
-------------------------------------------------------------
Net revenues:
Activation commissions $ 9,354,051 $21,474,658 $20,676,080
Residual income 2,203,949 4,074,014 6,711,300
Product sales and other 3,011,560 7,079,682 11,043,430
-------------------------------------------------------------
Total net revenues 14,569,560 32,628,354 38,430,810
Cost of sales 7,004,966 14,413,008 15,597,981
-------------------------------------------------------------
Gross profit 7,564,594 18,215,346 22,832,829
Operating expenses:
Selling, general and administrative 5,265,495 11,545,809 14,503,176
Depreciation and amortization 34,685 114,044 210,746
Amortization of intangible assets -- 225,165 318,597
-------------------------------------------------------------
Total operating expenses 5,300,180 11,885,018 15,032,519
-------------------------------------------------------------
Net income $ 2,264,414 $ 6,330,328 $ 7,800,310
=============================================================
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Sosebee Enterprises, Inc. d/b/a
Cellular Warehouse, Inc.
Statements of Shareholders' Equity
COMMON STOCK ADDITIONAL TOTAL
----------------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------------------------------------------------------------------------
Balance at January 1, 1995 1,000 $1,000 $29,000 $ 1,088,530 $ 1,118,530
Dividends paid -- -- -- (243,563) (243,563)
Net income -- -- -- 2,264,414 2,264,414
--------------------------------------------------------------------------
Balance at December 31, 1995 1,000 1,000 29,000 3,109,381 3,139,381
Dividends paid -- -- -- (1,332,923) (1,332,923)
Net income -- -- -- 6,330,328 6,330,328
--------------------------------------------------------------------------
Balance at December 31, 1996 1,000 1,000 29,000 8,106,786 8,136,786
Dividends paid -- -- -- (9,669,562) (9,669,562)
Net income -- -- -- 7,800,310 7,800,310
--------------------------------------------------------------------------
Balance at December 31, 1997 1,000 $1,000 $29,000 $ 6,237,534 $ 6,267,534
==========================================================================
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Sosebee Enterprises, Inc. d/b/a
Cellular Warehouse, Inc.
Statements of Cash Flows
YEAR ENDED DECEMBER 31
1995 1996 1997
----------------------------------------------------
OPERATING ACTIVITIES
Net income $ 2,264,414 $ 6,330,328 $ 7,800,310
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 34,685 114,044 210,746
Amortization of intangible assets -- 225,165 318,597
Changes in operating assets and liabilities:
Accounts receivable (1,849,108) (3,603,499) 2,504,918
Inventories 59,421 (1,410,890) 452,473
Prepaid expenses (5,935) (86,933) (21,502)
Other current assets (20,867) (106,661) 28,219
Trade accounts payable 752,921 1,440,864 (708,076)
Accrued expenses (199,971) 1,010,119 (303,872)
Deferred revenues 69,190 589,911 285,765
Customer deposits and rebates 475,778 466,914 (301,473)
----------------------------------------------------
Net cash provided by operating activities 1,580,528 4,969,362 10,266,105
INVESTING ACTIVITIES
Purchases of property and equipment (86,840) (723,036) (272,668)
Acquisitions of customer bases -- (1,188,000) (320,000)
----------------------------------------------------
Net cash used in investing activities (86,840) (1,911,036) (592,668)
FINANCING ACTIVITIES
Decrease in loans from shareholders (727,002) -- --
Dividends paid (243,563) (1,332,923) (9,669,562)
----------------------------------------------------
Net cash used in financing activities (970,565) (1,332,923) (9,669,562)
----------------------------------------------------
Net increase in cash and cash equivalents 523,123 1,725,403 3,875
Cash and cash equivalents at beginning of period 371,334 894,457 2,619,860
----------------------------------------------------
Cash and cash equivalents at end of period $ 894,457 $ 2,619,860 $ 2,623,735
====================================================
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Sosebee Enterprises, Inc. d/b/a
Cellular Warehouse, Inc.
Notes to Financial Statements
Years ended December 31, 1995, 1996 and 1997
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Sosebee Enterprises, Inc. d/b/a Cellular Warehouse, Inc. (the Company) is an
independent specialty retailer and wholesale distributor of cellular and
wireless products, services and accessories.
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. As of December 31, 1995, 1996 and 1997, the Company
operated 20, 53 and 57 stores, respectively, located throughout the southeastern
United States.
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.
ACCOUNTS RECEIVABLE
A substantial portion of the Company's accounts receivable are due from carriers
of wireless communication services. Accounts receivable are net of allowances of
$191,000 and $235,000 as of December 31, 1996 and 1997, respectively, which are
primarily reserves for deactivations. The reserve for deactivations is
calculated based on a historical percentage of deactivations over a rolling five
month period.
INVENTORIES
Inventories, consisting of cellular and wireless products and related
accessories, are valued at the lower of cost, based on the first-in, first-out
method, or market.
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Sosebee Enterprises, Inc. d/b/a
Cellular Warehouse, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
STORE OPENING COSTS
The Company expenses store preopening costs as incurred. In connection with the
opening of stores, the Company receives incentives in the form of build-out
allowances from the certain cellular carriers. These incentives are recorded as
deferred revenue and recognized over the Company's estimate of its customers'
activation periods (seven years). At December 31, 1996 and 1997, the Company had
deferred revenues of $477,600 and $674,928, respectively, relating to these
openings.
CUSTOMER DEPOSITS AND REBATES
Substantially all customer deposits represent payments made to the Company by
individual customers relating to the activation of cellular phones. These
amounts are in addition to deposits that the customer may be required to make
directly with the carrier for monthly service. In the event that a customer
terminates a cellular airtime contract within six months of activation, the
deposit is forfeited to the Company. The Company is not liable for customers'
unpaid monthly service bills.
Certain customers are entitled to rebates from the Company based on the length
of continuous usage. The Company records a liability for the rebates at the time
of issuance. This liability is reduced as amounts are paid or the rebates
expire.
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Sosebee Enterprises, Inc. d/b/a
Cellular Warehouse, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
ACTIVATION COMMISSIONS
The Company receives activation commissions 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 may require a deposit, which is forfeited in case
of early cancellation. The allowance for accounts receivable includes an amount
for estimated cancellation losses, net of deposit forfeitures.
RESIDUAL INCOME
The Company receives monthly residual income from the cellular service providers
based on a percentage of actual phone usage by its subscribers. Revenue from
residual income is generally recorded as the cellular service is provided.
PRODUCT SALES AND OTHER
Revenue from retail product sales is recorded upon customer purchase. Revenue
from wholesale product sale is recognized upon shipment of goods. 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 earned. Approximately $12,000, $354,000 and
$772,000 of revenue from prepaid pager service was recognized in the years ended
December 31, 1995, 1996 and 1997, respectively.
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Sosebee Enterprises, Inc. d/b/a
Cellular Warehouse, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF 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
approximately $494,000, $594,000 and $959,000 for the years ended December 31,
1995, 1996 and 1997, respectively.
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", 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
financial statements.
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.
INCOME TAXES
The Company has elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code. Under those provisions, the Company does not pay federal
or state corporate income taxes. Instead, the stockholders are liable for
individual federal and state income taxes on their respective shares of the
Company's taxable income.
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Sosebee Enterprises, Inc. d/b/a
Cellular Warehouse, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES (CONTINUED)
The pro forma provision for federal and state income taxes for the years ended
December 31, 1995, 1996 and 1997 would be approximately $900,000, $2,600,000 and
$2,900,000, respectively and would have recorded deferred tax assets of
approximately $50,000 and $230,000 December 31, 1995 and 1996, respectively, and
a deferred tax liability of approximately $350,000 at December 31, 1997. The pro
forma provision reflects amounts that would have been recorded had the Company's
income been taxed for state and federal purposes as if it were a C Corporation
and accounted for taxes in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes."
3. ACQUISITIONS OF CUSTOMER BASES
During 1996, the Company acquired the customer residual income rights and
certain inventories and fixed assets of Dekalb Cellular, Inc., Car Phone Center,
Inc., and American Radio Corp. and certain assets and the customer residual
income rights of Commonwealth Distributors, Inc., East Coast Group, Inc. and
Cellular Trading Corp. (each a cellular phone retailer) for a total of
approximately $1.8 million in cash. These acquisitions gave rise to an
intangible asset (acquired customer base) of $1.2 million relating to the value
of rights to the residual income.
In 1997, the customer residual income rights of Southeast Telecom, Inc. (a
cellular phone retailer) was acquired for $320,000.
All of the acquisitions are accounted for as purchases, and, accordingly, the
residual income attributable to each entity is included in the income statement
from the effective dates of purchase. The intangible assets relating to these
acquisitions are being amortized over 7 years, the estimated contract period.
The accumulated amortization was approximately $225,000 and $544,000 at December
31, 1996 and 1997, respectively.
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Sosebee Enterprises, Inc. d/b/a
Cellular Warehouse, Inc.
Notes to Financial Statements (continued)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
USEFUL DECEMBER 31
LIVES 1996 1997
--------------------------------------------------------
Signs 5 $ 4,624 $ 4,624
Vehicles and equipment 5 218,107 218,107
Furniture and fixtures 7 101,848 101,848
Leasehold improvements 5-7 634,072 906,740
---------------------------------------
958,651 1,231,319
Less accumulated depreciation and
amortization (188,347) (399,093)
---------------------------------------
$ 770,304 $ 832,226
=======================================
5. COMMITMENTS AND CONTINGENCIES
The Company leases retail, office and warehouse space and certain equipment
under operating leases which expire at various dates through 2002 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 December 31, 1997 are
approximately as follows:
Years ending December 31:
1998 $1,343,700
1999 921,700
2000 482,600
2001 236,100
Thereafter 71,800
-----------------------
Total $3,055,900
=======================
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Sosebee Enterprises, Inc. d/b/a
Cellular Warehouse, Inc.
Notes to Financial Statements (continued)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Total rent expense for the years ended December 31, 1995, 1996 and 1997 was
approximately, $438,500, $1,101,000 and $1,557,000, respectively.
6. RELATED PARTY TRANSACTIONS
The Company paid $6,000 per month for rent of a building during the year ended
December 31, 1997 and $5,000 per month during the year ended December 31, 1996
to a shareholder of the Company. Also, a shareholder of the Company is a
shareholder in the bank with which the Company currently maintains its operating
accounts.
7. SIGNIFICANT CUSTOMERS
Two customers accounted for 100% of the Company's activation commissions and
residual income for the years ended December 31, 1995, 1996 and 1997. Accounts
receivable from these customers accounted for 97% and 99% of the total net
accounts receivable at December 31, 1996 and 1997, respectively.
8. EMPLOYEE BENEFIT PLAN
In January 1995, the Company adopted a defined contribution plan (401(k) Plan)
for all eligible employees based on years of service. The basis for determining
contributions is a percentage of the employees' compensation not to exceed 15%.
Contributions made by the Company are at the discretion of the Board of
Directors. The Company made contributions of $23,717 and $24,869 during the
years ended December 31, 1996 and 1997, respectively, and did not make any
contributions during the year ended December 31, 1995.
9. 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.
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Sosebee Enterprises, Inc. d/b/a
Cellular Warehouse, Inc.
Notes to Financial Statements (continued)
10. SUBSEQUENT EVENT
On April 2, 1998, the shareholders of the Company sold the stock of the Company
to Let's Talk Cellular & Wireless, Inc. (LTCW). In the transaction, LTCW issued
550,000 shares of common stock and paid approximately $17.5 million in cash in
exchange for all of the outstanding stock of Cellular Warehouse. The transaction
represents an equity value of approximately $28 million, based on LTCW's April
2, 1998 closing stock price of $19.00 per share.
11. YEAR 2000 (UNAUDITED)
The Company recognizes the need to ensure its operations will not be adversely
impacted by year 2000 software failures. The Company intends to take the actions
necessary to ensure that systems and applications will recognize and process
information in the year 2000 and beyond. While efforts are underway and no
estimate of the cost of this effort has been determined, management currently
does not expect the cost of year 2000 compliance to be material to its
consolidated financial statements.
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LET'S TALK CELLULAR & WIRELESS, INC.
PRO FORMA FINANCIAL DATA (unaudited)
The following unaudited pro forma condensed consolidated statements of income
for the nine months ended April 30, 1998 and the year ended July 31, 1997,
reflect the historical statements of income of the Company, adjusted to reflect
the effects of the Cellular Warehouse Acquisition and related transactions, the
Telephone Warehouse Acquisition and related transactions, the sale of Common
Stock completed in an initial public offering and the application of a portion
of the net proceeds therefrom to the repayment of outstanding bank indebtedness
and certain shareholder notes and as if such transactions had occurred as of the
beginning of the periods presented. Share and per share amounts give effect to a
3.289-for-one stock split effected on October 20, 1997.
On April 2, 1998 (effective March 1, 1998), the Company purchased all of the
outstanding shares of Common Stock of Cellular Warehouse, in exchange for $19.9
million in cash, including acquisition costs of approximately $884,000, and
550,000 shares of the Company's Common Stock. The value of the 550,000 shares
was approximately $7.6 million, based on the Company's March 1, 1998 closing
stock price of $13.75 per share. The fair value of net assets acquired,
including approximately $3.6 million allocated to acquired residual income, was
approximately $7.1 million. The purchase price exceeded the fair value of the
net assets acquired by approximately $20.4 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. The acquisition was accounted
for using the purchase method of accounting. In connection with the Cellular
Warehouse Acquisition, the Company entered into a term loan with a bank totaling
$21.5 million bearing interest at a variable percentage above the commercial
paper rate.
On June 27, 1997 (effective June 30, 1997), the Company purchased 100% of the
outstanding shares of common stock of Telephone Warehouse from Texas Cellular
Partners, L.P. (TCP), an affiliate of HIG Fund V, Inc. (an affiliate of the
controlling shareholder of the Company), in exchange for 1,817,468 shares of the
Company's Common Stock and assumption of $13.1 million of indebtedness. The fair
value of the shares issued was approximately $2.8 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
$4.9 million. The purchase price exceeded the fair value of the net assets
acquired by approximately $11.0 million, which amount is being amortized on a
straight line basis over 30 years. The allocated cost of residual income is
being amortized on an accelerated basis. The acquisition was 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 106,596 shares of the Company's Common Stock at an
exercise price of $.00003 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 17.5 to 1 to 21.38 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 2,137,850 shares of Common
Stock (388,701 shares in addition to the original conversion ratio). The fair
value of the 388,701 shares at the date of issuance was determined to be
approximately $320,000.
20
The accompanying unaudited pro forma condensed consolidated statements of income
for the nine months ended April 30, 1998 and the year ended July 31, 1997,
reflect the historical statements of income of the Company, adjusted to reflect
the effects of the Cellular Warehouse Acquisition, the Telephone Warehouse
Acquisition, the conversion of Preferred Stock into Common Stock and as if such
transactions had occurred on August 1, 1996.
The unaudited pro forma consolidated financial data and accompanying notes
should be read in conjunction with the Financial Statements and related notes of
Sosebee Enterprises, Inc. d/b/a Cellular Warehouse, Inc. which are included
herein, the Financial Statements and the related notes of the Company and the
Combined Financial Statements and related notes of Telephone Warehouse which are
included in the Company's Registration Statement on Form S-1 filed on November
24, 1997. 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 is based on preliminary data. 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.
21
Pro Forma Condensed Consolidated Statement of Income
For the nine months ended April 30, 1998
(Unaudited)
Cellular
Warehouse
Seven months
The ended Pro Forma
Company April 30, 1998 Adjustments Pro Forma
---------------- --------------------- ----------------- --------------
Net revenues:
Retail sales $ 27,882,650 $ 5,507,711 $ -- $ 33,390,361
Activation commissions 28,804,420 13,004,318 41,808,738
Residual income 8,966,889 3,343,967 12,310,856
Wholesale sales 21,050,515 -- 21,050,515
------------- ------------- ------------ ------------
Total net revenues 86,704,474 21,855,996 -- 108,560,470
Cost of sales 49,673,915 8,039,546 57,713,461
------------- ------------- ------------ ------------
Gross profit 37,030,559 13,816,450 -- 50,847,009
Operating expenses:
Selling, general and administrative 31,813,342 8,457,058 40,270,400
Depreciation and amortization 985,150 40,949 1,026,099
Amortization of intangibles 1,438,938 -- 809,560 (1) 2,248,498
------------- ------------- ------------ ------------
Total operating expenses 34,237,430 8,498,007 809,560 43,544,997
------------- ------------- ------------ -----------
Income from operations 2,793,129 5,318,443 (809,560) 7,302,012
Interest expense, net (1,052,799) -- (1,114,942)(2) (2,167,741)
Other -- 10,001 10,001
------------- ------------- ------------ ------------
Income before provision for income taxes 1,740,330 5,328,444 (1,924,502) 5,144,272
Income tax provision 819,704 -- 1,240,213 (3) 2,059,917
------------- ------------- ------------ ------------
Income before extraordinary charge 920,626 5,328,444 (3,164,715) 3,084,355
Extraordinary charge on debt retirement, net of taxes 631,584 -- -- 631,584
------------- ------------- ------------ ------------
Net income $ 289,042 $ 5,328,444 $(3,164,715) $ 2,452,771
============= ============= ============ ============
Basic and Diluted:
Income before extraordinary charge $ 0.12 $ 0.35
Extraordinary charge (0.08) (0.07)
------------- ------------
Net income per share $ 0.04 $ 0.28 (4)
============= ============
Weighted average shares outstanding:
Basic 7,381,246 8,749,762 (4)
============= ============
Diluted 7,390,505 8,759,021
============= ============
22
Pro Forma Condensed Consolidated Statement of Income
Year ended July 31, 1997
(Unaudited)
Telephone
Warehouse
Eleven Months
The Cellular Ended Pro Forma
Company Warehouse June 30, 1997 Adjustments Pro Forma
---------------- ------------- ----------------- ------------- -------------
Net revenues:
Retail sales $ 13,230,085 $ 8,522,600 $ 6,008,790 $ -- $ 27,761,475
Activation commissions 12,574,633 20,122,806 6,618,948 39,316,387
Residual income 1,948,169 5,174,436 8,186,855 15,309,460
Wholesale sales 2,309,082 -- 23,529,042 25,838,124
------------- ------------ ------------- ------------ ------------
Total net revenues 30,061,969 33,819,842 44,343,635 -- 108,225,446
Cost of sales 14,822,617 14,400,590 29,589,564 58,812,771
------------- ------------ ------------- ------------ ------------
Gross profit 15,239,352 19,419,252 14,754,071 -- 49,412,675
Operating expenses:
Selling, general and
administrative 13,993,392 13,017,756 9,588,511 (35,000)(1) 36,564,659
Former shareholder compensation
expense 80,000 -- 1,080,000 (1,060,000)(1) 100,000
Depreciation and amortization 451,108 77,233 189,004 717,345
Amortization of intangibles 417,739 -- 1,120,997 637,642 (2) 3,799,349
1,622,971 (3)
------------- ------------ ------------- ------------ ------------
Total operating expenses 14,942,239 13,094,989 11,978,512 1,165,613 41,181,353
------------- ------------ ------------- ------------ ------------
Income from operations 297,113 6,324,263 2,775,559 (1,165,613) 8,231,322
Interest expense, net (340,102) -- (714,997) (846,477)(4) (1,820,708)
(1,711,158)(5)
1,792,026 (6)
Other -- -- 7,598 7,598
------------- ------------ ------------- ------------ ------------
Income (loss) before provision for
income taxes (42,989) 6,324,263 2,068,160 (1,931,222) 6,418,212
Income tax provision 2,842 680,402 1,792,640 (7) 2,475,884
------------- ------------ ------------- ------------ ------------
Net income (loss) (45,831) 6,324,263 1,387,758 (3,723,862) 3,942,328
Fair value of Common Stock
distributed to preferred shareholder
to induce conversion of Series A
Preferred Stock (320,000) -- 320,000 (8) --
------------- ------------ ------------- ------------ ------------
Net income (loss) applicable to common
shareholders $ (365,831) $ 6,324,263 $ 1,387,758 $(3,403,862) $ 3,942,328
============= ============ ============= ============ ============
Basic and Diluted:
Net income (loss) applicable to common
shareholders per share $ (0.07) $ 0.44 (9)
============= ============
Basic and Diluted:
Weighted average shares outstanding $ 6,199,762 $ 8,749,762 (9)
============= ============
23
Notes to Pro Forma Condensed Consolidated Financial Statements (unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - NINE MONTHS ENDED APRIL 30, 1998
(1) Reflects increase to amortization of intangible assets for the Cellular
Warehouse Acquisition. Goodwill totaling approximately $20.4 million is
being amortized over 30 years and the allocated cost of acquired residual
income of approximately $3.6 million is being amortized on an accelerated
basis according to the anticipated timing of acquired cash flows,
resulting in incremental amortization as follows:
Incremental amortization of goodwill $ 409,600
Incremental amortization of acquired residual income 399,960
-------------
Pro forma adjustment $ 809,560
(2) Reflects incremental interest expense and incremental amortization of
deferred financing costs on new borrowings to fund the Cellular Warehouse
Acquisition of $21.5 million as if such debt was outstanding as of the
beginning of the period presented, as follows:
Incremental interest expense on new borrowings $ 1,049,170
Incremental amortization of deferred financing
costs on new debt 65,772
-------------
Pro forma adjustment $ 1,114,942
(3) Reflects recognition of income tax expense associated with the following:
Income tax provision as if Cellular Warehouse were a
C-Corporation as of August 1, 1996 $ 1,971,524
Tax effect of pro forma adjustments at statutory rates (731,311)
-------------
Pro forma adjustment $ 1,240,213
(4) Net income per share is calculated by using the weighted average number of
shares of Common Stock outstanding during the period, assuming the
conversion of the Series A Preferred Stock into 2,137,850 shares of Common
Stock, the issuance of the 1,817,468 shares of Common Stock to purchase
Telephone Warehouse, the issuance of 106,596 warrants in connection with the
Company's debt refinancing, the issuance of 550,000 shares of Common Stock
to purchase Cellular Warehouse and the issuance of 2,000,000 shares of
Common Stock in connection with the offering had all occurred as of August
1, 1997, resulting in 8,749,762 weighted average shares outstanding.
24
Notes to Pro Forma Condensed Consolidated Financial Statements (unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - YEAR ENDED JULY 31, 1997
(1) Reflects reduction of compensation expense to $100,000 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 and (ii) for
the 12 month period beginning on January 1, 1998, a salary of $100,000. The
agreement also provided for a non-recurring bonus of $950,000 that was paid
prior to December 31, 1997. As a non-recurring charge, such bonus is not
included herein. Also reflects a new employment arrangement entered into at
the time of the Telephone Warehouse Acquisition with the 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.
(2) Reflects increase to amortization of intangible assets for the Telephone
Warehouse Acquisition. Goodwill totaling approximately $11.0 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:
Incremental amortization of goodwill $163,791
Incremental amortization of acquired residual income 473,851
-------------
Pro forma adjustment $637,642
The amortization of the allocated cost of acquired residual income
subsequent to July 31, 1997 is expected to be approximately as follows:
Fiscal 1998 $1,507,000
Fiscal 1999 676,000
Fiscal 2000 189,000
Fiscal 2001 5,000
-------------
$2,377,000
25
Notes to Pro Forma Condensed Consolidated Financial Statements (unaudited)
(3) Reflects increase to amortization of intangible assets for the Cellular
Warehouse Acquisition. Goodwill totaling approximately $20.4 million is
being amortized over 30 years and the allocated cost of acquired residual
income of approximately $3.6 million is being amortized on an accelerated
basis according to the anticipated timing of acquired cash flows, resulting
in amortization as follows:
Amortization of goodwill $679,467
Amortization of acquired residual income 943,504
----------------
Pro forma adjustment $1,622,971
The amortization of the allocated cost of acquired residual income
subsequent to July 31, 1997 is expected to be approximately as follows:
Fiscal 1998 $740,000
Fiscal 1999 581,000
Fiscal 2000 456,000
Fiscal 2001 358,000
Fiscal 2002 281,000
Fiscal 2003 220,000
---------------
$2,636,000
(4) 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 period presented, as follows:
Incremental interest expense on assumed debt $583,706
Incremental interest expense on new borrowings 51,125
Incremental amortization of deferred financing
costs on assumed debt 137,590
Incremental amortization of deferred financing
costs on new debt 74,056
------------
Pro forma adjustment $846,477
26
Notes to Pro Forma Condensed Consolidated Financial Statements (unaudited)
(5) Reflects interest expense and amortization of deferred financing costs on
new borrowings to fund the Cellular Warehouse Acquisition of $21.5 million
as if such debt was outstanding as of the beginning of the period
presented, as follows:
Interest expense on new borrowings $1,612,500
Amortization of deferred financing
costs on assumed debt 98,658
---------------
Pro forma adjustment $1,711,158
(6) Reflects a reduction in interest expense assuming the repayment of bank
indebtedness of $14.1 million and certain shareholder notes of $258,100
with a portion of the proceeds from the offering.
(7) Reflects recognition of income tax expense associated with the following:
Income tax provision as if Cellular Warehouse
were a C-Corporation as of August 1, 1996 $2,339,977
Income tax provision as if all Telephone Warehouse
entities were a C-Corporations as of August 1, 1996 145,420
Tax effect of pro forma adjustments at statutory rates (517,432)
Tax benefit associated with the incremental amortization
of the acquired residual income (175,325)
---------------
Pro forma adjustment $1,792,640
(8) Reflects the reversal of a non-recurring distribution resulting from the
issuance of 388,701 shares of Common Stock distributed to induce the
conversion of the Series A Preferred Stock into a total of 2,137,850 shares
of Common Stock. The conversion of the Series A Preferred Stock was a
condition precedent to the Telephone Warehouse Acquisition.
27
Notes to Pro Forma Condensed Consolidated Financial Statements (unaudited)
(9) Net income per share applicable to common shareholders is calculated by
using the weighted average number of shares of Common Stock outstanding
during the period, assuming the conversion of the Series A Preferred Stock
into 2,137,850 shares of Common Stock, the issuance of the 1,817,468
shares of Common Stock to purchase Telephone Warehouse, the issuance of
106,596 warrants in connection with the Company's debt refinancing, the
issuance of 550,000 shares of Common Stock to purchase Cellular Warehouse
and the issuance of 2,000,000 shares of Common Stock in connection with
the offering had all occurred as of August 1, 1996 resulting in, 8,749,762
weighted average shares outstanding. Accretion to redemption value of the
Series A Preferred Stock of $62,640, has been deducted from net income for
purposes of calculating net income per share applicable to common
shareholders.