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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO _____ . _____
COMMISSION FILE NO. 0-23351
LET'S TALK CELLULAR & WIRELESS, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 650292891
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
800 BRICKELL AVENUE, SUITE 400, MIAMI, FLORIDA 33131
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (305) 358-8255
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK (PAR VALUE $.001 PER SHARE)
(TITLE OF CLASS)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of
the Company as of October 30, 1998 was approximately $10,682,322 based on the
$3.125 closing sale price for the Common Stock on the NASDAQ National Market
System on such date. For purposes of this computation, all executive officers
and directors of the Company have been deemed to be affiliates. Such
determination should not be deemed to be an admission that such directors and
officers are, in fact, affiliates of the Registrant.
The number of shares of Common Stock of the Registrant outstanding as
of October 30, 1998 was 8,749,762.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the registrant's definitive proxy statement pursuant to
Regulation 14A of the Securities Exchange Act of 1934 in connection with the
1999 annual meeting of shareholders of the registrant are incorporated by
reference into Part III of this Report.
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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"), Let's Talk
Cellular & Wireless, Inc. (together with its subsidiaries, 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 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 accordingly, such statements involve estimates, assumptions and
uncertainties which could cause actual results to differ materially from those
expressed in the forward-looking statements. Such uncertainties include, among
others, the following factors: risks associated with rapid growth, the
Company's ability to successfully compete, dependence on carriers,
technological change and inventory obsolescence, dependence on key personnel
and other risk factors that may emerge from time to time. It is not possible
for management to predict all of such factors or to 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.
PART I
ITEM 1. BUSINESS
GENERAL
Let's Talk Cellular & Wireless, Inc., (together with its subsidiaries,
the "Company") is the largest independent specialty retailer of cellular and
wireless products, services and accessories in the United States, with 248
stores located in 22 states, the District of Columbia and Puerto Rico as of
July 31, 1998. The Company's stores seek to offer one-stop shopping for
consumers to purchase cellular, personal communication system ("PCS"), paging,
Internet, satellite, and other wireless products and services and related
accessories. The Company also wholesales cellular and wireless products and
accessories to more than 500 accounts, consisting primarily of distributors,
carriers and smaller independent retailers.
The Company's business strategy is to offer the most extensive
assortment of wireless products and services at everyday low prices supported
by knowledgeable customer service, through conveniently located and
attractively designed stores. The Company believes that this strategy provides
it with a competitive advantage by combining the extensive product selection,
competitive prices and operating efficiencies typical of a "big box" retailer
with the superior customer service and upscale shopping experience
characteristic of a specialty retailer. The Company offers wireless products
from well-known, name-brand suppliers such as AT&T, Ericsson, Motorola, Nokia
and Sony. The Company's stores typically sell up to 30 different makes and
models of cellular and PCS phones and pagers and over 1,000 stock keeping units
("SKUs") of wireless products and accessories, such as batteries, home and car
chargers, vehicle adapter kits and cases. The Company supports its broad
product offering with knowledgeable and personalized customer service focused
on educating the consumer and identifying the most appropriate products and
services for each consumer's individual needs. The Company offers everyday low
prices that are competitive with other retailers and supports this policy with
price guarantee, upgrade and trade-in programs.
The Company's revenues are generated principally from four sources:
retail sales, activation income, residual payments and wholesale sales. Retail
sales involve the sale of cellular, PCS and wireless products, such as phones,
pagers and related accessories in the Company's retail outlets. Activation
income consists of payments the Company receives from the applicable wireless
carrier when a customer initially subscribes for the carrier's services. The
amount of the activation commission paid by carriers is based upon various
service plans offered by
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the carriers. Residual payments are monthly payments ("residual income") made
by certain carriers and pager customers. Cellular residual payments are based
upon a percentage (usually 3-6%) of the customers' monthly service charges.
Pager residual payments are received for the pager airtime that the Company
buys wholesale from paging carriers and then resells to individuals and small
businesses. Wholesale sales involve the sale of wholesale cellular and wireless
products.
Since opening its first store in 1989, the Company has grown through
internal expansion and acquisitions. During fiscal 1998, the Company opened 72
new stores and acquired 85 stores; the Company plans to open 30 to 50 new
stores in fiscal 1999.
RECENT ACQUISITIONS
The Company has continued to increase the number of its stores through
selective acquisitions of other specialty retailers of cellular and wireless
products. During fiscal 1998, the Company acquired 85 stores in 9 states,
thereby gaining immediate access to desirable markets and locations, qualified
sales personnel and, in some cases, an existing subscriber base. The Company
intends to change the names of all of the acquired stores to "Let's Talk
Cellular & Wireless," increase in-stock merchandise availability and integrate
the accounting, sales and administrative functions into the Company's corporate
offices. The following are brief descriptions of the Company's significant
acquisitions.
CELLULAR WAREHOUSE ACQUISITION. Effective March 1, 1998, the Company
completed the acquisition of all the outstanding capital stock of Sosebee
Enterprises, Inc. and Cellular Warehouse, Inc. (collectively, "Cellular
Warehouse") thereby acquiring one of BellSouth's largest agents in the
southeast. Cellular Warehouse operates 57 retail stores in 6 states. For the
twelve months ended December 31, 1997, Cellular Warehouse had total net
revenues of $38.4 million. The purchase price consisted of $20.0 million in
cash and 550,000 shares of the Company's common stock, par value to $.01 per
share (the "Common Stock").
CELLULAR UNLIMITED ACQUISITION. In December 1997, the Company acquired
substantially all of the assets of Cellular Unlimited, one of Cellular One's
largest agents in upstate New York, which operates 15 retail stores. For the
twelve months ended July 31, 1997, Cellular Unlimited had total net revenues of
approximately $6.4 million. The purchase price was $2.2 million 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 for an aggregate amount of
$675,000.
CELLULAR USA ACQUISITION. In December 1997, the Company acquired all
of the outstanding capital stock of Cellular USA, one of AT&T's largest agents
in Las Vegas, which operates six retail stores. For the twelve months ended
July 31, 1997, Cellular USA had total net revenues of approximately $3.0
million. The purchase price was $1.7 million and certain contingent payments of
up to an aggregate of $175,000 in 1998 and 1999.
TELEPHONE WAREHOUSE ACQUISITION. In June 1997, the Company acquired
Telephone Warehouse in exchange for 1,817,468 shares of the Company's Common
Stock and the assumption of $13.1 million of indebtedness. Telephone Warehouse
was one of the largest AT&T agents in the southwestern United States and
operates 25 specialty cellular and wireless retail stores in Texas, Missouri
and Kansas. It also wholesales cellular and wireless products to over 500
regional and local retailers, distributors and carriers.
PEACHTREE MOBILITY. In August 1996, the Company acquired Peachtree
Mobility, one of Air-Touch Cellular's largest Atlanta agents, which operated
five retail stores for $850,000 in cash.
INDUSTRY OVERVIEW
The wireless communications industry has grown substantially in recent
years. Cellular telephone service has been one of the fastest growing markets
within the industry. Since the inception of the cellular phone industry
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in 1983, the number of U.S. cellular subscribers has grown to approximately 55
million by year end of 1997, having grown at an annual compound rate of 41%
during the previous five years. It is estimated that as of December 1997 this
subscriber base reflected an average market penetration of only 20.4%, based
on the U.S. population. In 1996, PCS wireless services were introduced in
selected regions of the U.S., which resulted in approximately 300,000
subscribers by year end. Paul Kagan Associates, Inc. projects that by the year
2000 the number of cellular and PCS subscribers in the U.S. will reach
approximately 89 million.
The industry has seen a shift in the distribution of cellular and
wireless services, products and accessories in the United States. For many
years cellular and wireless products and services were distributed to consumers
directly through telemarketing, direct mail, direct sales forces and, to a
lesser extent, carrier-owned retail outlets. As wireless services and products
have become more affordable, the market has expanded significantly and shifted
to a broader consumer base, which purchases for, among other reasons,
convenience and security purposes.
TYPICAL RETAIL TRANSACTIONS
CELLULAR. In a typical cellular retail transaction, a customer
subscribes for service with one carrier and receives a phone for free or at a
substantial discount to its retail value. The Company's cost for the "free"
phone, approximately $100-$140, is more than offset by an activation commission
paid by the carrier, and by volume bonuses and co-op advertising payments. In
some cases, the carrier pays the Company 3-6% of the customer's ongoing monthly
service bills as residual payments for as long as the subscription remains in
effect. The Company seeks to supplement its sales with wireless accessories,
such as batteries, chargers and carrying cases, which generate a high average
gross margin for the Company.
PCS. In a typical PCS retail transaction, the customer buys the phone
from the Company at a price in excess of the Company's cost and subscribes for
service with a selected PCS carrier. The Company does not typically receive
activation commissions or residual payments in connection with its recent sales
of PCS phones but instead acquires PCS phones from carriers at a significantly
reduced cost than that paid by the PCS carrier. The Company, in turn, resells
such phones at a profit.
PAGING. In a typical paging retail transaction, the customer buys a
pager and three months of service at one low price. Alternatively, a customer
can simply purchase a pager at full retail price. In each case, the customer's
initial payment exceeds the cost of the pager.
SALES AND MARKETING
The Company's marketing strategy is to attract new customers, create
name awareness and promote repeat business through its use of local radio,
direct mail, television and print media as well as in-store promotional
programs and special price and product offerings. The Company seeks to place
its stores in highly visible locations where its distinctive store design will
attract the attention of prospective customers. The Company believes that its
mall based stores benefit from increased traffic flow created by the
advertising, marketing and promotional efforts of the mall itself as well as
other mall tenants. The Company clusters stores in target markets in order to
provide it with a sufficient base to leverage management, marketing and
advertising efforts.
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The Company's marketing programs are supplemented by carriers and
suppliers in the form of cooperative advertising allowances, market development
funds, and new store allowances. For fiscal 1998, the Company received an
aggregate of $5.5 million of such funds. Cooperative advertising allowances are
provided for store advertising that features their services or products. Market
development funds are additional funds provided for marketing and advertising
in new markets. New store allowances are funds provided to offset the costs of
developing new stores.
CARRIER AGREEMENTS
Generally, the Company's stores offer cellular and PCS telephone
services and paging service pursuant to carrier agreements between one or more
of the carriers operating in the geographic area where the store is located and
the Company. There are only two licensed cellular carriers in a geographic
market. In each market the Company has an exclusive agreement with one such
cellular carrier. The Company's cellular carrier agreements range in duration
from one to five years. In some of the Company's cellular carrier agreements,
the Company receives activation commissions and monthly residual fees based on
the number of subscribers enlisted and the volume of their usage. The Company
can receive bonus commissions when the volume of activations exceeds certain
levels. There are up to five PCS carriers in a geographic market, depending on
the size of the market, and therefore, the Company's PCS carrier agreements are
nonexclusive. The Company typically offers multiple PCS services to its
customers. The Company's PCS carrier agreements are typically for a term of one
year. In fiscal 1998, 1997 and 1996 sales to the following carriers represented
more than 10% of the Company's net revenues: (i) BellSouth Mobility represented
16%, 12% and 23%, respectively; (ii) AirTouch Cellular represented 8%, 12% and
0%, respectively; and (iii) Bell Atlantic/NyNex represented 6%, 13% and 11%,
respectively. Management believes that in most instances, the cancellation or
non-renewal of any of its carrier agreements would not have a material adverse
effect on the Company's financial condition or results of operations, as it
believes that a canceled agreement could likely be replaced with an agreement
with one of the carrier's competitors. However, in certain markets where the
Company receives substantial residual payments from the carrier, the
cancellation or non-renewal could have a significant effect on the Company's
financial condition and results of operations. The Company is also a reseller of
paging services, buying blocks of paging time from paging carriers at a
substantial discount and reselling paging services to its customers. The
Company's paging carrier agreements range in duration from one to 10 years.
Paging customers are charged a monthly fee for local service and additional fees
for service in other markets.
SUPPLIERS
The Company purchases its inventory from a variety of sources, such as
suppliers, carriers and other large wholesale distributors. The Company
purchases all of its inventory through a centralized purchasing department that
tracks the inventory needs of each of its stores. The Company deals with its
suppliers on an order-by-order basis and seeks to find the lowest price with
quantity discounts. The purchasing department negotiates payment terms, vendor
financing of inventory and merchandise discounts with suppliers. The Company
currently purchases inventory from approximately 30 suppliers. Because cellular
and wireless products can be sourced from numerous suppliers, the Company does
not believe it is dependent on any particular source of supply for its
inventory needs.
The acquisition of Telephone Warehouse has enabled the Company to
purchase inventory at lower prices using volume discounts associated with the
wholesale business. The wholesale business maintains competitive pricing by
purchasing products from multiple sources such as suppliers, carriers and large
distributors, often on a "spot" basis to take advantage of discounts. The
wholesale business combined with continued new store expansion has given the
Company increased purchasing capabilities and has enabled the Company to
qualify for better quantity discounts.
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SITE SELECTION
The Company's strategy for opening stores is to seek prime locations
in regional shopping malls, power strip centers or other high traffic locations
in selected geographic markets having attractive demographic statistics.
Markets for new stores are selected on the basis of factors such as attractive
demographics, household income levels, growth potential and real estate
availability. Within a specific market, management carefully selects each site
by evaluating store location, visibility, accessibility and walk-by traffic
volume, among other factors. Management believes that the Company's market
presence, established relationships with national developers, attractive store
design and high average sales volume per square foot give the Company a
competitive advantage in securing desirable locations on attractive terms.
STORE COMPOSITION
The Company currently has store locations in 13 of the top 20 wireless
markets in the United States. The Company believes that there are continued
expansion opportunities in existing markets as well as new markets. Since
opening its first store in 1989, the Company has grown through internal
expansion and acquisitions, and operated 248 stores as of July 31, 1998. The
following table shows the development of the Company's stores during the past
five years:
Fiscal Year Ended July 31,
--------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Open at beginning of year.................... 93 25 22 8 4
Opened during year........................... 72 45 5 14 4
Acquired during year......................... 85 24 -- -- --
Closed during year........................... 2 1 2 -- --
---- ---- ---- ---- ----
Open at end of year.......................... 248 93 25 22 8
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
Company believes that the flexibility of its kiosk and in-line store formats
permit the Company to take advantage of the best available locations across a
broad range of market areas. The Company's third store format is the
"destination" store which is located in a power strip center.
WHOLESALE OPERATIONS
The Company wholesales cellular phones and accessories to over 500
accounts, consisting primarily of distributors, carriers and smaller
independent retailers. The Company seeks to provide superior customer service
as compared to larger distributors in the industry by locating "hard to find"
items, responding quickly to customer inquiries and credit decisions, quickly
turning around repairs and providing same day shipping service. The wholesale
business maintains competitive pricing by purchasing products from multiple
sources such as suppliers, carriers and large distributors, often on a "spot"
basis to take advantage of discounts. The Company believes its wholesale
business serves a niche market in which customers are willing to pay higher
prices for better customer service. Management plans to continue to grow the
wholesale business because it believes the business will continue to complement
the Company's retail operations by providing economies of scale for purchasing
and distributing products and enabling the Company to purchase its cellular and
wireless product inventory through its wholesale operations at lower cost.
MANAGEMENT INFORMATION SYSTEMS
The Company believes that a high level of technology and automation
are essential to its business and therefore has invested considerable resources
in computer hardware and systems applications. These systems integrate all
major aspects of the Company's business including monitoring of sales,
inventory and financial
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reporting. The majority of the Company's stores are equipped with point-of-sale
terminals which are linked to the central computer at the Miami headquarters.
These point of sale terminals are polled nightly and provide sales, cost, gross
margin and commission information from each location. The Company is in the
process of upgrading its point of sale system, whereby all company stores will
be operating on the same system which will be linked with the Company's
accounting systems. This point-of-sale system will accommodate the Company's
future growth plans. The Company has completed its analysis of its management
information systems with respect to year 2000 issues. The conversion process is
expected to be completed by mid-calendar year 1999 and is not expected to have
a material effect on the Company's consolidated financial position, results of
operations or cash flows.
COMPETITION
The Company is the largest independent specialty retailer of cellular
and wireless products and services. However, the industry is characterized by
intense competition, is highly fragmented and is composed of national chains of
"big box" electronic and consumer goods retailers, carrier-owned retail stores,
and regional and local chains of other specialty cellular retailers, among
others. Certain of the Company's competitors have significantly greater
resources than the Company. Competition is based in part on local market
conditions and varies from one location or geographic area to another. The
Company believes that the primary elements of competition in the industry are
price, breadth of product, in-stock availability of products and services that
meet the latest industry trends, level of customer service and convenience of
store location. The Company believes it competes favorably with national and
regional retailers.
EMPLOYEES
As of July 31, 1998, the Company had approximately 989 employees, of
whom approximately 816 are involved in retail operations, 9 are involved in
wholesale operations and 164 are corporate office personnel. None of the
Company's employees are covered by a collective bargaining agreement and
management believes that the Company's relations with its employees are good.
SERVICEMARKS
The Company has filed an application to register the name "Let's Talk
Cellular & Wireless" and the Company's logo as a servicemark in the United
States Patent and Trademark Office. The Company is actively engaged in a
program to consolidate its store operations under the "Let's Talk Cellular &
Wireless" tradename and achieve a consistent and distinctive store appearance.
REGULATION
Compliance by the Company with federal, state and local laws and
regulations, including, without limitation, environmental protection laws, has
not had, and is not expected to have, a material effect on capital
expenditures, earnings or the competitive position of the Company.
The Company's principal executive offices are located at 800 Brickell
Avenue, Suite 400, Miami, Florida 33131, and its telephone number is (305)
358-8255.
ITEM 2. PROPERTIES
PROPERTIES
The Company currently leases all of its existing store locations other
than one store in Texas. The Company expects that its policy of leasing rather
than owning will continue as it expands. The Company's leases
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generally provide for initial lease terms ranging from three to five years for
kiosks and up to 10 years for in-line and power strip stores. Rent is generally
computed as a percentage of the store's gross sales in excess of a fixed
minimum base rent plus a portion of the mall common area maintenance expenses,
taxes, insurance and electrical service for the premises and mall common areas.
Lease rental payments are also subject to annual increases for taxes, common
area maintenance and insurance. As current leases expire, the Company believes
that it will generally be able either to obtain lease renewals if desired for
present store locations, or to obtain leases for equivalent or better locations
in the same general area.
In addition to its stores, the Company currently leases approximately
36,000, 9,220 and 6,000 square feet buildings in Grand Prairie, Texas, Miami,
Florida and Dunwoody, Georgia, respectively, for its distribution facilities.
The Company leases approximately 11,000 square feet of office space in Miami,
Florida, for its corporate headquarters, which management believes will be
adequate for the Company's anticipated growth. The Company also owns an
approximately 4,600 square foot building in Irving, Texas, which it uses as a
retail store.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in litigation arising in the
ordinary course of business, none of which is expected to have a material
adverse effect on the Company's consolidated financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
quarter ended July 31, 1998.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock commenced trading on the Nasdaq National
Market under the symbol "LTCW" on November 24, 1997. The following table sets
forth, for the periods indicated, the high and low sale prices of shares of the
Common Stock as reported on the Nasdaq National Market.
HIGH LOW
---- ---
FISCAL 1998:
Second Fiscal Quarter (November 24 to January 31).............. $12 1/4 $ 8 1/8
Third Fiscal Quarter........................................... $24 $ 10 3/4
Fourth Fiscal Quarter.......................................... $19 1/2 $ 4 3/16
FISCAL 1999:
First Fiscal Quarter........................................... $ 4 3/4 $ 1 7/8
On October 30, 1998, the last reported sale price for the Company's
Common Stock on the Nasdaq National Market was $3.125 per share, with a high of
$3.25 per share and a low of $2.9375 per share. As of October 30, 1998, the
Company had 36 stockholders of record (including brokerage firms and other
nominees).
The Company has not paid dividends to holders of its Common Stock
during fiscal 1997 and fiscal 1998 and does not intend to pay cash dividends to
holders of its Common Stock for the foreseeable future. Instead, the Company
intends to apply earnings, if any, to finance its growth. Any future
determination to pay cash dividends will be at the discretion of the Board of
Directors and will be dependent upon the Company's financial condition,
restrictions contained in financing agreements, results of operations, capital
requirements and such other factors as the Board of Directors may consider
relevant.
On April 2, 1998, the Company issued 550,000 shares of the Company's
Common Stock in connection with the acquisition of Cellular Warehouse which
was effective March 1, 1998.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below has been
derived from the consolidated financial statements of the Company.
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FISCAL YEAR ENDED JULY 31,
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1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
STATEMENT OF OPERATIONS
DATA:
Net revenues:
Retail sales ................... 41,155 $ 13,230 $ 8,152 $ 6,120 $ 3,572
Activation commissions ......... 41,847 12,575 4,366 1,651 461
Residual income ................ 13,267 1,948 1,075 533 228
Wholesale sales ................ 26,218 2,309 -- -- --
---------- ---------- ---------- ---------- ----------
Total net revenues ........... 122,487 30,062 13,593 8,304 4,261
Cost of sales ..................... 68,411 14,823 6,509 4,260 2,128
---------- ---------- ---------- ---------- ----------
Gross profit ...................... 54,076 15,239 7,084 4,044 2,133
Selling, general and
administrative expenses ........ 47,242 14,073 6,601 3,896 1,918
Depreciation and amortization ..... 1,797 451 225 100 43
Amortization of intangibles ....... 2,359 418 -- -- --
---------- ---------- ---------- ---------- ----------
Income from operations ............ 2,678 297 258 48 172
Interest expense, net ............. (1,769) (340) (153) (40) (13)
---------- ---------- ---------- ---------- ----------
Income (loss) before
provision for income taxes ..... 909 (43) 105 8 159
Income tax provision .............. 544 3 39 -- 70
---------- ---------- ---------- ---------- ----------
Income (loss) before
extraordinary charge ........... 365 $ (46) $ 66 $ 8 $ 89
Extraordinary charge on debt
retirement (net of taxes) ...... 632 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss) ................. $ (267) $ (46) $ 66 $ 8 $ 89
========== ========== ========== ========== ==========
Net income (loss) applicable
to common shareholders ......... $ (267) $ (366) $ 66 $ 8 $ 89
========== ========== ========== ========== ==========
Net income (loss) per share
applicable to
common shareholders(1)(2)(3) ... $ (.03) $ (.07) $ .01 $ -- $ .01
========== ========== ========== ========== ==========
Weighted average shares
outstanding (basic) ............ 7,726,187 6,199,762 6,199,762 6,199,762 6,199,762
========== ========== ========== ========== ==========
Weighted average shares
outstanding (diluted) .......... 7,753,960 6,199,762 6,199,762 6,199,762 6,199,762
========== ========== ========== ========== ==========
SELECTED OPERATING DATA:
EBITDA(4) ......................... $ 6,834 $ 1,203 $ 492 $ 148 $ 215
========== ========== ========== ========== ==========
Net cash provided by
(used in) operating activities . $ (8,629) $ (472) $ 252 $ 92 $ 17
========== ========== ========== ========== ==========
Net cash used in investing
activities ..................... $ (26,104) $ (1,666) $ (2,530) $ (809) $ (182)
========== ========== ========== ========== ==========
Net cash provided by
financing activities ........... $ 35,351 $ 1,860 $ 3,393 $ 895 $ 148
========== ========== ========== ========== ==========
Stores open at end of period:
Kiosk .......................... 74 35 14 13 5
In-Line ........................ 91 39 11 9 3
Destination .................... 83 19 -- -- --
---------- ---------- ---------- ---------- ----------
Total ........................ 248 93 25 22 8
Percentage change in comparable
store sales (5) ................ 5.1% 5.4% 11.5% 10.5% (2.2)%
Average comparable
store sales (6) ................ $ 513,000 $ 500,000 $ 462,000 $ 450,000 $ 442,000
Total gross square feet
at end of period ............... 233,624 96,093 9,529 7,006 2,447
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AS OF JULY 31,
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1998 1997 1996 1995 1994
-------- -------- ------- ------ ----
(IN THOUSANDS)
BALANCE SHEET DATA
Working capital (deficiency). $ 3,273 $ 1,613 $ 779 ($110) $144
Total assets................. 86,491 34,538 6,646 3,324 947
Long-term debt............... 19,596 14,383 474 328 26
Preferred stock.............. -- -- 2,937 -- --
Shareholders' equity......... 33,920 6,610 693 621 362
(1) The fair value of the Common Stock distributed to the holder of the
Company's Series A Preferred Stock in order to induce the conversion of
the Series A Preferred Stock to Common Stock of $320,000 is deducted from
net loss for purposes of calculating net loss per share applicable to
common shareholders for fiscal 1997.
(2) Accretion to redemption value of the Series A Preferred Stock of $62,640,
has been deducted from net income (loss) for purposes of calculating net
income (loss) per share applicable to common shareholders for fiscal
1997.
(3) This represents both basic and diluted earnings per share.
(4) EBITDA is defined as net income (loss) before extraordinary charge plus
(i) provision for income taxes, (ii) gross interest expense and (iii)
depreciation and amortization. EBITDA is presented not as an alternative
measure of operating results or cash flow from operations (as determined
in accordance with generally accepted accounting principles ("GAAP")), but
because it is a widely accepted supplemental financial measure, and
management believes it provides relevant and useful information. The
Company's calculation of EBITDA may not be comparable to similarly titled
measures reported by other companies since all companies do not calculate
this non-GAAP measure in the same fashion. The Company's EBITDA
calculation is not intended to represent cash provided by (used in)
operating activities, since it does not include interest and taxes and
changes in operating assets and liabilities, nor is it intended to
represent the net increase in cash, since it does not include cash
provided by (used in) investing and financing activities. As such, EBITDA
does not address cash used to support increased inventory requirements
and build-out costs for new store expansion and to fund acquisitions. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" for further discussion of significant trends and cash
requirements not captured by EBITDA.
(5) A store becomes comparable after it has been owned and operated by the
Company for at least 12 full months. Comparable store sales are comprised
of retail sales and activation income at the Company's retail stores, but
do not include residual income.
(6) Represents the average retail sales and activation income on a store by
store basis only for stores owned and operated by the Company for at
least 12 full months as of period end. Therefore, period to period
figures may not be comparable.
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 248
stores located in 22 states, the District of Columbia and Puerto Rico as of
July 31, 1998. During fiscal 1998 the Company acquired 85 and built 72 stores.
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 COMMISSIONS. The Company receives an
activation commission from the applicable cellular carrier when a
customer initially subscribes for the cellular carrier's service. The
amount of the activation commission paid by cellular carriers is based
upon various service plans offered by the carriers and is recognized
by the Company at the time of sale. New subscription activation
commissions are fully refundable if the subscriber cancels its
subscription prior to completion of a minimum period of continuous
active service (generally 180 days). Customers generally sign a
service agreement with the Company that requires a customer deposit
that is forfeited in the event of early cancellation. The Company then
applies the customer's deposit to reduce or offset its resulting
deactivation loss owed to the carrier. The Company accrues for
estimated deactivation losses, net of cancellation fees, by creating a
reserve against carrier accounts receivable. The reserve is reflective
of the historical cancellation experience.
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(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 3-6%) 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. Activation commissions for the Company were
$41.8 million, $12.6 million and $4.4 million in fiscal 1998, 1997 and 1996,
respectively. In fiscal 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.
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
commissions.
On December 1, 1997, the Company completed an initial public offering
("IPO") of its Common Stock. On October 20, 1997, the Company effected a 3.289
for 1 stock split and immediately prior to the IPO, the Company issued 106,696
shares of its Common Stock upon exercise of warrants held by the Company's bank
lender. 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 totaling $12.9 million, a
portion of the line of credit amounting to $4.9 million and shareholder loans
totaling $258,100 and to fund the acquisitions of Cellular Unlimited Corp. and
Cellular USA, Inc. See Note (3) - of the notes to the Company's consolidated
financial statements referenced in Part II item 8 of this Form 10-K for further
details of the IPO. In connection with the repayment of debt, the Company
incurred a write-off of deferred financing costs of approximately $391,000, net
of tax, in connection with the repayment of bank indebtedness as a result of
the IPO and bank refinancing.
The Company acquired 85 stores in connection with corporate
acquisitions during fiscal year 1998. Acquisitions have a significant effect on
the Company's results of operations and financial position and cause
substantial fluctuations in the Company's quarterly and yearly operating
results. The Company has accounted for all of its acquisitions using the
purchase method of accounting and, as a result, does not include in its
financial statements the results of operations of the acquired company prior to
the date it was acquired by the Company. Any goodwill of an acquisition is
amortized over a 30-year period while the portion of the purchase price
allocated to residual income is amortized on an accelerated basis (typically
four to seven years) according to the anticipated timing of acquired cash
flows. Consequently, the accelerated amortization applied to the value of the
residual
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income acquired in connection with the Telephone Warehouse acquisition and the
Cellular Warehouse acquisition is expected to have a significantly negative
effect on net income for the next two fiscal years.
In most cases acquired companies were operated with different
strategic and financial objectives. Former management sought to maximize cash
flow and shareholder distributions, rather than reinvest earnings in new store
growth. As a result, certain of the acquired companies' net revenues and number
of stores did not grow significantly in recent years.
RESULTS OF OPERATIONS
The following table summarizes for the periods presented certain
selected income statement data of the Company expressed as a percentage of
total net revenues:
FISCAL YEAR
ENDED JULY 31,
------------------------------
1998 1997 1996
----- ----- -----
Total net revenues............................... 100.0% 100.0% 100.0%
Cost of sales.................................... 55.9 49.3 47.9
----- ----- -----
Gross profit..................................... 44.1 50.7 52.1
Selling, general and administrative expenses..... 38.6 46.8 48.6
Depreciation and amortization.................... 1.5 1.5 1.7
Amortization of intangibles...................... 1.9 1.4 --
----- ----- -----
Income from operations........................... 2.2 1.0 1.8
Interest expense, net............................ 1.4 1.1 1.1
Income tax provision............................. 0.4 -- 0.3
----- ----- -----
Income (loss) before extraordinary charge........ 0.3 (0.1) 0.4
Extraordinary charge on debt retirement
(net of tax).................................. 0.5 -- --
----- ----- -----
Net income (loss)................................ (0.2)% (0.1)% 0.4%
===== ===== =====
Number of stores at end of period................ 248 93 25
YEAR ENDED JULY 31, 1998 COMPARED TO YEAR ENDED JULY 31, 1997
TOTAL NET REVENUES increased $92.4 million, or 307.4%, to $122.5
million in fiscal 1998 from $30.1 million in fiscal 1997. The increase in
revenues is due to increases in retail sales, activation commissions and
residual income, and to the acquisitions 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 the
applicable period in fiscal 1998. Retail sales increased 211.1% to $41.2
million from $13.2 million, activation commissions increased 232.8% to $41.8
million from $12.6 million and residual income increased $11.3 million or
581.0% to $13.3 million from $1.9 million. Comparable store sales increased
5.1% and accounted for $1.3 million, or 1.4% of the increase in total net
revenues. Sales relating to 72 new stores opened, 85 stores acquired since July
31, 1997 and the 61 stores that were not yet open for 12 full months accounted
for $55.9 million, or 60.5%, 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 to
$26.2 million from $2.3 million as a result of the Telephone Warehouse
acquisition on June 30, 1997. Residual income increased to $13.3 million in
1998 from $1.9 million in 1997. The increase in residual income is due to the
inclusion of 12 months of Telephone Warehouse residual income in 1998 as
compared to 1 month in 1997, the inclusion of five months of Cellular Warehouse
residual income and the
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additional cellular subscribers due to the increase in the number of
activations resulting from the various acquisitions and the Company's store
expansion. The Company had 248 stores open at July 31, 1998 as compared to 93
at July 31, 1997.
GROSS PROFIT increased $38.9 million, or 254.8% to $54.1 million in
fiscal 1998 from $15.2 million in fiscal 1997. As a percentage of total net
revenues, gross profit decreased to 44.1% from 50.7% primarily due to the
inclusion of Telephone Warehouse's wholesale operations in the Company's
operations for a full fiscal year. The Company's wholesale operations have a
significantly lower margin (4.8% for fiscal 1998) than its retail operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased $33.2 million,
or 235.7%, to $47.2 million for fiscal 1998 from $14.1 in fiscal 1997. The
increase was primarily a result of higher personnel, rent and related costs
associated with the opening of 72 stores and the inclusion of the operations of
the various acquisitions for the applicable period during the year. The Company
has continued to enter new markets which has resulted in higher advertising
costs. In addition, the Company has incurred additional expenses relating to
infrastructure investments to support the expansion program. As a percentage of
total net revenues, selling, general and administrative expenses decreased to
38.6% during fiscal 1998 from 46.8% in fiscal 1997.
AMORTIZATION OF INTANGIBLES consisted of (i) $2.1 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) $240,000 associated with the
thirty month noncompete agreement entered into in August 1996 in connection
with the acquisition of Peachtree Mobility. The Company expects the
amortization of intangibles to increase next fiscal year as a result of a full
year of amortization relating to the Cellular USA, Cellular Unlimited and
Cellular Warehouse acquisitions.
INCOME FROM OPERATIONS increased $2.4 million, or 801.3% to $2.7
million for the year ended July 31, 1998 from $297,000 for fiscal 1997 and
increased as a percentage of total net revenues to 2.2% from 1.0%.
INTEREST EXPENSE, NET increased $1.4 million to $1.8 million for the
year ended July 31, 1998 from $340,000 for the year ended July 31, 1997
primarily due to increased bank borrowings used to finance the Company's
expansion.
INCOME TAX PROVISION was $544,000 for the year ended July 31, 1998 as
compared to $3,000 for the year ended July 31, 1997 primarily as a result of a
$900,000 increase in income before provision for income taxes and extraordinary
charge and the non-deductibility of the amortization of goodwill resulting from
the Telephone Warehouse acquisition.
INCOME BEFORE EXTRAORDINARY CHARGE increased $411,000 to $365,000 in
the year ended July 31, 1998 from $(46,000) in the year ended July 31, 1997.
EXTRAORDINARY CHARGE ON DEBT RETIREMENT of $632,000, 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 initial
public stock offering, (ii) the acceleration of unamortized discount associated
with the warrants issued in connection with the repayment of such indebtedness
and (iii) the write off of additional deferred financing costs as a result of
the refinancing of the Company's debt.
NET LOSS was $267,000 in the year ended July 31, 1998 compared to a
net loss of $366,000 in the year ended July 31, 1997.
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YEAR ENDED JULY 31, 1997 COMPARED TO YEAR ENDED JULY 31, 1996
TOTAL NET REVENUES increased $16.5 million, or 121.2%, to $30.1
million in fiscal 1997 from $13.6 million in fiscal 1996 due to increases in
retail sales, activation commissions and residual income, and to the
acquisition of Telephone Warehouse on June 30, 1997 and the resulting inclusion
of Telephone Warehouse's operations in the Company's consolidated revenues for
the month of July 1997. Retail sales increased 62.3% to $13.2 million from $8.2
million, activation commissions increased 188.0% to $12.6 million from $4.4
million and residual income increased $873,000, or 81.2%, to $1.9 from $1.1
million. Comparable store sales increased 5.4% and accounted for $634,000, or
3.8%, of the increase in total net revenues. Sales relating to 45 new stores
opened, 24 stores acquired since July 31, 1996 and the four stores that were
not yet open for 12 full months accounted for $12.6 million, or 76.3%, of the
increase in total net revenues. The comparable stores sales growth was
primarily attributable to increased advertising during the holiday season in
the second fiscal quarter and the growth of cellular subscriptions in the
wireless communication industry overall. Wholesale sales increased to $2.3
million as a result of the acquisition of Telephone Warehouse on June 30, 1997.
The increase in residual income was due to the inclusion of Telephone
Warehouse's residual income ($720,000 for the month of July 1997), the increase
in the number of cellular activations (43,360 in fiscal 1997 as compared to
14,803 in fiscal 1996) and the addition of cellular subscribers resulting from
the Peachtree Acquisition and the Company's store expansion. The Company had 93
stores open at July 31, 1997 as compared to 25 at July 31, 1996.
GROSS PROFIT increased $8.1 million, or 115.1%, to $15.2 million in
fiscal 1997 from $7.1 million in fiscal 1996. As a percentage of total net
revenues, gross profit decreased to 50.7%, from 52.1%, 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 $7.5 million,
or 113.2%, to $14.1 million in fiscal 1997 from $6.6 million in fiscal 1996,
primarily as a result of higher personnel, rent and related costs associated
with the opening of 45 stores, the acquisition of five Peachtree Mobility
stores and the inclusion of Telephone Warehouse's operations for the month of
July 1997. Higher advertising costs were incurred in connection with entering
new markets and additional expenses related to infrastructure investments were
incurred to support this expansion. A charge of $264,000 was recorded in fiscal
1997 in connection with the write-off of assets associated with underperforming
stores and one store closing. As a percentage of total net revenues, selling,
general and administrative expenses decreased to 46.8% during fiscal 1997 from
48.6% in fiscal 1996.
AMORTIZATION OF INTANGIBLES consisted of (i) $220,000 associated with
the thirty month noncompete agreement entered into in August 1996 in connection
with the Peachtree Acquisition, and (ii) $198,000 associated with the
amortization of goodwill and acquired residual income resulting from the
acquisition of Telephone Warehouse on June 30, 1997.
INCOME FROM OPERATIONS increased $39,000 to $297,000 in fiscal 1997
from $258,000 in fiscal 1996 and decreased as a percentage of total net
revenues to 1.0% from 1.9%.
INTEREST EXPENSE, NET increased $187,000 to $340,000 in fiscal 1997
from $153,000 in fiscal 1996 primarily due to increased bank borrowings.
INCOME TAX PROVISION was $3,000 in fiscal 1997 as compared to $39,000
in fiscal 1996 primarily as a result of a $148,000 decrease in income before
provision for income taxes.
NET LOSS was $46,000 in fiscal 1997 compared to net income of $66,000
in fiscal 1996.
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS was $366,000 in fiscal 1997
as compared to $66,000 of income in fiscal 1996 primarily due to the fair value
of the Common Stock, $320,000, distributed to the preferred
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shareholder to induce conversion of the Series A Preferred Stock. This amount
is reflected as a deduction from net loss.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements have been primarily to fund
acquisitions, support its increased inventory requirements and build-out costs
for new store expansion. The Company has financed its liquidity needs through a
combination of borrowings, capital contributions, stock issuance 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 the shareholders
loans, and a portion of the revolving loan, and to fund the acquisitions of
Cellular USA and Cellular Unlimited. In connection with the Cellular Warehouse
Acquisition, the Company entered into a Loan and Security Agreement with The
Chase Manhattan Bank, establishing a revolving credit facility for up to $13.5
million and a term loan of $21.5 million (the "Credit Facility"). The Credit
Facility expires in January 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 July 31, 1998, the
Company has an additional $2.4 million available for borrowing. Advances under
the revolving credit line bear interest at prime plus .75% and/or LIBOR plus
2.5% (a weighted average of 8.39% at July 31, 1998). This facility was used to
finance the acquisition of Cellular Warehouse, refinance existing bank debt, and
for working capital. The Credit Facility was amended effective July 31, 1998 to
waive certain events of default with certain financial covenants and amend
certain financial covenants for the year ended July 31, 1998 and subsequent
periods. The amendments to the Credit Facility also increased the maximum
eligible inventory used in determining availability under the revolving line of
credit from $6,000,000 to $7,000,000 for the period beginning September 1, 1998
and ending on December 31, 1998. The amendment also provided for a reduction
period, whereby the Company is required to reduce all outstanding advances under
the revolving line of credit to not more than $8,000,000 for the period from
February 15, 1999 through and including April 15, 1999. The Company anticipates
that borrowings under the Credit Facility will be sufficient to meet currently
foreseeable liquidity requirements.
The Company's working capital increased $1.7 million to $3.3 million
at July 31, 1998 from $1.6 million at July 31, 1997. Accounts receivable and
inventory increased $21.1 million to $32.5 million at July 31, 1998 from $11.4
million at July 31, 1997. This increase was partially offset by an increase in
accounts payable of $6.5 million to $13.1 million at July 31, 1998 from $6.6
million at July 31, 1997.
The Company's net cash used in operating activities increased to $8.6
million for fiscal 1998 compared to $472,000 for fiscal 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 $26.1
million for the year ended July 31, 1998 from $1.7 million in the year ended
July 31, 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
$35.4 million in the year ended July 31, 1998 from $1.9 million in the year
ended July 31, 1997 primarily as a result of the Company's IPO and the proceeds
from the Credit Facility.
At July 31, 1998, the Company's commitments for capital expenditures
totaled $1.0 million and related primarily to capital costs for new store
construction and existing store renovations. Management believes that net cash
provided by operations together with borrowing availability under the Company's
Credit Facility will be sufficient to fund estimated capital expenditures
associated with the Company's planned opening of approximately 30 to 50
locations in fiscal 1999, and other working capital requirements through at
least fiscal 1999.
In October 1998, one of the Company's officers resigned from the
Company. As a result, the Company will recognize a pre-tax charge of $450,000
in the first quarter of fiscal 1999 for the officer's severance package.
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
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affected by the timing of store openings and acquisitions and the integration
of new and acquired stores into the Company's operations.
YEAR 2000
The Company has conducted a review of its computer systems to identify
the systems that could be affected by the "Year 2000" issue and has developed
an implementation plan to resolve the issue. The Year 2000 issue is the result
of the computer programs being written using two digits rather than four to
define the applicable year. Any of the Company's computer programs that have
time/date-sensitive software and hardware may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a major system
failure or miscalculation. The Company presently believes that, with
modification to existing software and hardware and the purchase of new
software, the Year 2000 issue will not pose significant operations problems for
the Company's systems as so modified and converted. The Company has already
installed Year 2000 compliant financial software and plans to complete the
update of its purchase order system by December 31, 1998. In addition, the
Company has committed to purchase a Year 2000 compliant pager billing system
which is scheduled to be installed in the first calendar quarter of 1999. All
of the software and computer systems used by the Company are commercially
available and therefore, the Company believes that the cost of becoming Year
2000 compliant will not be material and is not expected to exceed $250,000 in
fiscal 1999.
The Year 2000 issue creates risk for the Company for unforeseen
problems in its own computer systems and from third parties on which the
Company relies. Accordingly, the Company is requesting assurances from all
software vendors from which it has purchased or from which it may purchase
software that the software sold to the Company will correctly process all date
information at all times. In addition, the Company is querying its customers
and suppliers as to their progress in identifying and addressing problems that
their computer systems will face in correctly processing date information as
the year 2000 approaches and is reached. However, there are no assurances that
the Company will identify all date-handling problems in its business systems or
that the Company will be able to successfully remedy Year 2000 compliance
issues that are discovered. To the extent that the Company is unable to resolve
its Year 2000 issues prior to January 1, 2000, operating results could be
adversely affected. In addition, the Company could be adversely affected if
other entities (e.g., vendors or customers) not affiliated with the Company do
not appropriately address their own year 2000 compliance issues in advance of
their occurrence.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("SFAS
No. 131"). SFAS No. 131 establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 is effective for financial
statements for fiscal years beginning after December 15, 1997. The Company is in
the process of evaluating the disclosure requirements. The adoption of SFAS No.
131 will have no impact on the Company's consolidated statement of operations,
financial condition or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During fiscal year 1998, the Company was not a party to any derivative
contracts, hedging or other market risk transactions.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and supplementary data required by this Item 8
are set forth at the pages indicated in Item 14(a) below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required by this Item 10 will be contained in the
Company's definitive proxy materials to be filed with the Securities and
Exchange Commission on or prior to November 28, 1998 and is incorporated in this
Annual Report on Form 10-K by this reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 will be contained in the
Company's definitive proxy materials to be filed with the Securities and
Exchange Commission on or prior to November 28, 1998 and is incorporated in this
Annual Report on Form 10-K by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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The information required by this Item 12 will be contained in the
Company's definitive proxy materials to be filed with the Securities and
Exchange Commission on or prior to November 28, 1998 and is incorporated in this
Annual Report on Form 10-K by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 will be contained in the
Company's definitive proxy materials to be filed with the Securities and
Exchange Commission on or prior to November 28, 1998 and is incorporated in this
Annual Report on Form 10-K by this reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS:
Reference is made to the index set forth on page F-2 of this
Annual Report on Form 10-K.
2. FINANCIAL STATEMENT SCHEDULE:
The following consolidated financial statement schedule of
the Company is included on page S-1:
Schedule II - Valuation and qualifying accounts
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and
Exchange Commission are not required under the related
instructions, or are inapplicable, or have been shown in the
consolidated financial statements or notes thereto, and
therefore have been omitted from this section.
3. EXHIBITS:
EXHIBIT
NO. DESCRIPTION
3.1 Registrant's Amended and Restated Articles of
Incorporation (filed as Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (No. 333-34595)
(the "Form S-1))*.
3.2 Registrant's Amended and Restated Bylaws (filed as
Exhibit 3.2 to the Form S-1)*.
4.1 Specimen Common Stock Certificate (filed as Exhibit
4.1 to the Form S-1)*.
10.1 Registrant's 1997 Executive Incentive Compensation
Plan (filed as Exhibit 10.1 to the Form S-1)*.
10.2 Form of Indemnification Agreement between the
Registrant and each of its directors and certain
executive officers (filed as Exhibit 10.1 to the
Form S-1)*.
10.3 Registration Rights Agreement, dated as of June 27,
1997, by and among the Registrant, Nicolas Molina,
Brett Beveridge and Allan Sorensen (filed as Exhibit
10.4 to the Form S-1)*.
10.4 Loan and Security Agreement dated April 2, 1998 by
and among Let's Talk Cellular & Wireless, Inc. and
certain of its subsidiaries, certain Lenders and The
Chase Manhattan Bank, as Agent (filed as Exhibit
10.1 to the Company's Current Report on Form 8-K
dated April 12, 1998 (the "April 1998 8-K"))*.
10.5+ Authorized Agency Agreement between BellSouth
Cellular National Marketing, Inc. and Let's Talk
Cellular & Wireless, Inc., effective April 1, 1998
(filed as Exhibit 10.2 to the April 1998 8-K).*
10.6 Stock Option Agreement for Nicolas Molina, dated as
of June 27, 1997, by and between the Registrant and
Nicolas Molina (filed as Exhibit 10.7 to the Form
S-1).*
10.7 Stock Option Agreement for Brett Beveridge, dated as
of June 27, 1997, by and between the Registrant and
Brett Beveridge (filed as Exhibit 10.8 to the Form
S-1).*
10.8 Amended and Restated Employment Agreement, dated as
of June 27, 1997, by and between the Registrant and
Brett Beveridge (filed as Exhibit 10.10 to the Form
S-1).*
10.9 Amended and Restated Employment Agreement, dated as
of June 27, 1997, by and between the Registrant and
Ronald Koonsman (filed as Exhibit 10.12 to the Form
S-1).*
10.10+ Dealer Agreement, dated December 20, 1996, by and
between Telephone Warehouse, Inc. and Metroplex
Telephone Company d/b/a AT&T Wireless Services
(filed as Exhibit 10.21 to the Form S-1).*
10.11+ Dealer Agreement, dated December 20, 1996, by
and between Telephone Warehouse--San Antonio, Inc.
and AT&T Wireless Services of San Antonio, Inc.
d/b/a AT&T Wireless Services (filed as Exhibit 10.22
to the Form S-1).*
10.12 Employment Agreement, dated July 7, 1998 by and
between the Company and Dan Cammarata.
10.13 Amendment No. 1 to the Loan and Security Agreement,
dated September 25, 1998, by and among the Company
and certain of its subsidiaries, certain lenders and
The Chase Manhattan Bank, as Agent.
20
21
10.14 Amendment No. 2 to the Loan and Security Agreement,
dated October 30, 1998, by and among the Company and
certain of its subsidiaries, certain lenders and The
Chase Manhattan Bank, as Agent.
10.15 Amendment to the Amended and Restated Employment
Agreement, dated April 30, 1998 between the Company
and Ronald Koonsman.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule
- ------------------------------
* Incorporated by reference.
+ Certain provisions of this exhibit are subject to a request for
confidential treatment filed with the Securities and Exchange
Commission.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
21
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Miami, State of Florida, on November 12, 1998.
LET'S TALK CELLULAR & WIRELESS
By: /s/ Dan Cammarata
--------------------------------------
Dan Cammarata, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Douglas Berman Director November 12, 1998
- ---------------------------
Douglas Berman
/s/ Brett Beveridge President and Chairman of the Board November 12, 1998
- ---------------------------
Brett Beveridge
/s/ John Bolduc Director November 12, 1998
- ---------------------------
John Bolduc
/s/ Dan Cammarata Chief Financial Officer November 12, 1998
- --------------------------- (principal accounting officer)
Dan Cammarata
/s/ Jonathan Kislak Director November 12, 1998
- ---------------------------
Jonathan Kislak
/s/ Sami Mnaymneh Director November 12, 1998
- ---------------------------
Sami Mnaymneh
/s/ Allan Sorensen Director November 12, 1998
- ---------------------------
Allan Sorensen
/s/ Anthony Tamer Director November 12, 1998
- ---------------------------
Anthony Tamer
23
CONSOLIDATED FINANCIAL STATEMENTS
LET'S TALK CELLULAR & WIRELESS, INC.
AND SUBSIDIARIES
YEARS ENDED JULY 31, 1998, 1997 AND 1996
WITH REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
F-1
24
LET'S TALK CELLULAR & WIRELESS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1998, 1997 AND 1996
CONTENTS
Report of Independent Certified Public Accountants...........................F-3
Audited Financial Statements:
Consolidated Balance Sheets..................................................F-4
Consolidated Statements of Operations........................................F-5
Consolidated Statements of Changes in Redeemable Convertible Preferred
Stock and Common Shareholders' Equity......................................F-6
Consolidated Statements of Cash Flows........................................F-7
Notes to Consolidated Financial Statements...................................F-8
F-2
25
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Let's Talk Cellular & Wireless, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Let's
Talk Cellular & Wireless, Inc. and subsidiaries as of July 31, 1998 and 1997,
and the related consolidated statements of operations, changes in redeemable,
convertible preferred stock and common shareholders' equity, and cash flows for
each of the three years in the period ended July 31, 1998. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Let's Talk Cellular & Wireless, Inc. and subsidiaries at July 31, 1998 and 1997,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended July 31, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
Miami, Florida
October 9, 1998, except for the
third paragraph of Note 7, as to
which the date is October 30, 1998
F-3
26
LET'S TALK CELLULAR AND WIRELESS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31,
---------------------------
1998 1997
---------------------------
ASSETS
Current Assets:
Cash and cash equivalents $1,697,397 $1,080,014
Accounts receivable, net 15,954,275 5,706,983
Inventories 16,532,961 5,712,420
Prepaid expenses 429,869 265,859
Income taxes receivable -- 291,099
Other current assets -- 600,385
Deferred tax asset 836,806 475,245
---------------------------
Total current assets 35,451,308 14,132,005
Property and equipment, net 12,170,193 5,296,743
Other assets, net 1,020,524 1,353,097
Intangible assets, net 37,848,638 13,755,696
---------------------------
Total assets $ 86,490,663 $ 34,537,541
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 13,116,458 $6,583,542
Bank lines of credit 9,099,072 1,023,285
Accrued expenses 6,628,207 3,120,493
Loans payable to shareholders and officers -- 258,100
Current portion of bank term loans and
obligations under capital leases 1,947,361 732,195
Income taxes payable 273,255 --
Deferred revenues 855,729 693,038
Customer deposits 257,879 108,673
---------------------------
Total current liabilities 32,177,961 12,519,326
Bank term loans, less current portion 19,250,000 12,350,000
Loans payable to shareholders and officers -- 2,000,000
Obligations under capital leases, less current portion 346,150 32,859
Other liabilities 372,395 72,808
Deferred tax liability 423,978 952,596
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, 8,749,762 and
6,093,166 shares issued and outstanding at
July 31, 1998 and 1997, respectively 87,498 60,932
Additional paid-in-capital 33,716,669 6,166,474
Retained earnings 116,012 382,546
---------------------------
Total common shareholders' equity 33,920,179 6,609,952
---------------------------
Total liabilities and shareholders' equity $ 86,490,663 $ 34,537,541
===========================
See accompanying notes.
F-4
27
LET'S TALK CELLULAR AND WIRELESS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JULY 31,
-------------------------------------------
1998 1997 1996
-------------------------------------------
Net revenues:
Retail sales $41,155,097 $ 13,230,085 $8,151,904
Activation commissions 41,846,386 12,574,633 4,366,343
Residual income 13,267,259 1,948,169 1,075,035
Wholesale sales 26,217,929 2,309,082 --
-------------------------------------------
Total net revenues 122,486,671 30,061,969 13,593,282
Cost of revenues 68,410,621 14,822,617 6,509,282
-------------------------------------------
Gross profit 54,076,050 15,239,352 7,084,000
Operating expenses:
Selling, general and administrative 47,242,454 14,073,392 6,601,077
Depreciation and amortization 1,796,783 451,108 225,159
Amortization of intangible assets 2,358,896 417,739 --
-------------------------------------------
Total operating expenses 51,398,133 14,942,239 6,826,236
-------------------------------------------
Income from operations 2,677,917 297,113 257,764
Interest expense, net 1,768,469 340,102 152,827
-------------------------------------------
Income (loss) before provision for income taxes and
extraordinary charge 909,448 (42,989) 104,937
Provision for income taxes 544,398 2,842 38,939
-------------------------------------------
Income (loss) before extraordinary charge 365,050 (45,831) 65,998
Extraordinary charge on debt retirement, net of taxes 631,584 -- --
-------------------------------------------
Net (loss) income (266,534) (45,831) 65,998
Fair value of Common Stock distributed to preferred
shareholder to induce conversion of
Series A Preferred Stock -- (320,000) --
-------------------------------------------
Net (loss) income applicable to common shareholders $ (266,534) $ (365,831) $ 65,998
===========================================
EARNINGS PER SHARE
Basic and Diluted:
Income before extraordinary charge $ 0.05 $ (0.07) $ 0.01
Extraordinary charge (0.08) -- --
-------------------------------------------
Net (loss) income applicable to common shareholders $ (0.03) $ (0.07) $ 0.01
===========================================
Weighted average shares outstanding:
Basic 7,726,187 6,199,762 6,199,762
===========================================
Diluted 7,753,960 6,199,762 6,199,762
===========================================
See accompanying notes.
F-5
28
LET'S TALK CELLULAR AND WIRELESS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND COMMON SHAREHOLDERS' EQUITY
COMMON SHAREHOLDERS' EQUITY
-------------------------------------------------------
REDEEMABLE CONVERTIBLE
PREFERRED STOCK COMMON STOCK
------------------------- -------------------------
ADDITIONAL
PAID-IN RETAINED
SHARES AMOUNT SHARES (1) AMOUNT (1) CAPITAL EARNINGS(1)
------------------------- -------------------------------------------------------
Balance at July 31, 1995 -- $ -- 2,137,848 $ 21,379 $ 236,871 $ 362,379
Issuance of Series A
Preferred Stock for cash 100,000 3,295,000 -- -- -- --
Issuance costs associated
with Series A Preferred Stock -- (358,702) -- -- -- --
Accretion of Series A Preferred
Stock to redemption value -- 1,062 -- -- (1,062) --
Issuance of stock under stock
bonus plan -- -- -- -- 7,268 --
Net Income -- -- -- -- -- 65,998
-------------------------------------------------------------------------------------
Balance at July 31, 1996 100,000 2,937,360 2,137,848 21,379 243,077 428,377
Accretion of Series A Preferred
Stock to redemption value -- 62,640 -- -- (62,640) --
Issuance of stock under stock
bonus plan -- -- -- -- 29,651 --
Redemption of Series A
Preferred Stock in exchange
for common stock (100,000) (3,000,000) 2,137,850 21,379 2,978,621 --
Issuance of common stock
to purchase Telephone Warehouse -- -- 1,817,468 18,174 2,811,826 --
Warrants issued in connection
with debt refinancing -- -- -- -- 165,939 --
Net loss -- -- -- -- -- (45,831)
-------------------------------------------------------------------------------------
Balance at July 31, 1997 -- -- 6,093,166 60,932 6,166,474 382,546
Proceeds from initial public offering,
net of issuance costs of
approximately $2,306,000 -- -- 2,106,596 21,066 19,993,195 --
Issuance of common stock
in connection with the acquisition
of Cellular Warehouse -- -- 550,000 5,500 7,557,000 --
Net loss -- -- -- -- -- (266,534)
-------------------------------------------------------------------------------------
Balance at July 31, 1998 -- $ -- 8,749,762 $ 87,498 $33,716,669 $ 116,012
=====================================================================================
- --------------------
(1) Number of shares and related amounts have been restated to reflect a 3.289
for 1 stock split entered on October 20, 1997
See accompanying notes.
F-6
29
LET'S TALK CELLULAR AND WIRELESS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JULY 31,
------------------------------------------------
1998 1997 1996
------------------------------------------------
OPERATING ACTIVITIES
Net (loss) Income $ (266,534) $ (45,831) $ 65,998
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,796,783 451,108 225,159
Amortization of intangible assets 2,358,896 417,739 -
Amortization of deferred financing costs 88,074 40,998 -
Provision for activation adjustments and
cancellation losses (31,678) 151,041 65,638
Deferred income taxes (556,351) (137,739) (31,601)
Loss on disposal of property and equipment -- 128,184 50,476
Loss on impairment of leasehold improvements -- 135,167 --
Issuance of stock under bonus plan -- 29,651 7,268
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable (7,211,693) (1,945,325) (175,516)
Inventories (8,342,504) (2,389,231) (18,807)
Prepaid expenses (181,956) (58,233) 139,230
Other current assets 600,385 (357,874) 85,740
Income tax receivable 291,099 (291,099) -
Other assets (137,491) (267,408) (9,718)
Trade accounts payable 1,182,605 2,886,454 (390,116)
Accrued expenses 870,471 791,505 146,641
Other liabilities 299,587 37,243 32,854
Income tax payable 694,311 (63,348) 59,217
Customer deposits (730,430) (27,528) 17,738
Deferred revenues 15,640 42,758 (18,017)
Extraordinary charge due to the write-off
of deferred financing costs 631,584 -- --
------------------------------------------------
Net cash (used in) provided by operating activities (8,629,202) (471,768) 252,184
INVESTING ACTIVITIES
Acquisition of Cellular Warehouse, net of
cash acquired of approximately $4,466,000 (15,556,886) -- --
Acquisition of Cellular Unlimited, net of
cash acquired of approximately $211,000 (1,974,558) -- --
Acquisition of Cellular USA, net of cash acquired of
approximately $255,000 (1,476,829) -- --
Acquisition of Lazer (197,044) -- --
Acquisition of Northpoint Cellular -- (850,000) --
Cash acquired in connection with the acquisition of
Telephone Warehouse -- 823,846 --
Proceeds from disposals of property and equipment -- -- 73,680
Purchases of property and equipment (6,899,026) (3,648,761) (594,185)
Decrease (increase) in cash held in escrow -- 2,009,194 (2,009,194)
------------------------------------------------
Net cash used in investing activities (26,104,343) (1,665,721) (2,529,699)
FINANCING ACTIVITIES
Proceeds from sale of common stock, net of
issuance costs 22,320,000 -- --
Net borrowings under bank lines of credit 8,075,787 196,286 364,507
Decrease in loans from shareholders (2,258,100) -- (100,897)
Proceeds from bank term loan 21,500,000 2,600,000 300,000
Payments on bank term loan and capital leases (13,640,771) (935,955) (107,041)
Deferred financing costs (645,988) -- --
Payments from sale of preferred stock, net of
issuance costs -- -- 2,936,298
------------------------------------------------
Net cash provided by financing activities 35,350,928 1,860,331 3,392,867
------------------------------------------------
Net increase (decrease) in cash and cash equivalents 617,383 (277,158) 1,115,352
Cash and cash equivalents at beginning of year 1,080,014 1,357,172 241,820
================================================
Cash and cash equivalents at end of year $ 1,697,397 $ 1,080,014 $ 1,357,172
================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 1,599,808 $ 373,079 $ 152,358
================================================
Cash paid for income taxes $ 58,795 $ 502,700 --
================================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Common Stock issued to acquire Cellular Warehouse $ 7,562,500 -- --
================================================
Goodwill as a result of the stock issuance to
acquire Cellular Warehouse $ 1,909,137 -- --
================================================
Net assets acquired in the acquisition of Cellular
Warehouse $ 5,653,363 -- --
================================================
Acquisition of property and equipment under
capital leases $ 458,876 $ 36,412 $ 21,552
================================================
Common stock issued to acquire Telephone
Warehouse -- $ 2,830,000 --
================================================
Common stock issued to convert Redeemable
Preferred Stock -- $ 3,000,000 --
================================================
Warrants issued in connection with debt refinancing -- $ 165,939 --
================================================
See accompanying notes.
F-7
30
LET'S TALK CELLULAR & WIRELESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JULY 31, 1998
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Let's Talk Cellular & Wireless, Inc. and its wholly-owned subsidiaries (the
"Company") (known as Let's Talk Cellular of America, Inc. prior to June 27,
1997) is the largest independent specialty retailer and wholesale distributor
of cellular and wireless products, services and accessories in the United
States. As of July 31, 1998, 1997, and 1996, the Company operated 248, 93 and
25 stores, respectively, located throughout the United States, the District of
Columbia and Puerto Rico.
The Company's stores have historically experienced, and the Company expects its
stores to continue to experience, seasonal fluctuations in revenues with a
larger percentage of revenues typically being realized in the second fiscal
quarter during the holiday season. In addition, the Company's results during
any fiscal period can be significantly affected by the timing of store openings
and acquisitions and the integration of new and acquired stores into the
Company's operations.
Effective March 1, 1998, the Company acquired all of the outstanding capital
stock of Sosebee Enterprises, Inc. and Cellular Warehouse, Inc. (collectively,
"CWI") for a cash price of approximately $20,023,000, including acquisition
costs of approximately $978,000, and 550,000 shares of the Company's common
stock (see Note 4).
On December 1, 1997, the Company completed an initial public offering of its
common stock (the "IPO"). 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 (see Note 3).
On June 27, 1997 (effective June 30, 1997), the Company purchased 100% of the
outstanding shares of common stock of National Cellular, Incorporated, and
Telephone Warehouse, Inc. (collectively, "TWI"), from Texas Cellular Partners,
L.P. ("TCP"), an affiliate of HIG Fund V, Inc. ("HIG"). The Series A Preferred
Stock of the Company, owned by HIG, was converted into Common Stock
simultaneously with this acquisition (see Note 13).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of Let's Talk Cellular and Wireless, Inc. and its wholly-owned
subsidiaries LTC Kiosk Management Corporation, Let's Talk Cellular of Bayside,
Inc., Telephone Warehouse, Inc., National Cellular, Incorporated, Cellular USA,
Sosebee Enterprises, Inc. and Cellular Warehouse, Inc. All intercompany balances
and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid investments
with a maturity of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE - A substantial portion of the Company's accounts
receivable are due from carriers of wireless communication services. Wholesale
accounts receivable are primarily due from distributors and small retailers.
Credit is extended to wholesale customers based on the evaluation of the
customer's
F-8
31
financial condition. Collateral is not required and terms are generally between
30 and 60 days. Accounts receivable are net of allowances of approximately
$655,000 and $687,000 as of July 31, 1998 and 1997, respectively (of which
approximately $110,000 and $133,000 relate to the Company's wholesale
operations, respectively), which are primarily reserves for deactivations. The
reserve for deactivations is calculated based on a historical percentage of
deactivations.
INVENTORIES - Inventories, consisting of cellular and wireless products and
related accessories, are valued at the lower of cost, based on the average-cost
method, or market.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost. Depreciation
is computed using the straight-line method over the estimated useful lives of
the related assets. Leasehold improvements are amortized over the shorter of
their useful life or the remainder of the non-cancelable lease period
(including renewal options) (see Note 5).
OTHER ASSETS - At July 31, 1998 and 1997, other assets include unamortized
deferred financing costs totaling approximately $610,000, and $1,005,000, net
of accumulated amortization of approximately $36,000 and $16,000, respectively.
Deferred financing costs are being amortized on the interest method over the
terms of the related debt, which is six years.
INTANGIBLE ASSETS - Intangible assets include costs in excess of identifiable
assets acquired (goodwill), costs allocable to the estimated fair value of
acquired residual income and costs allocable to the estimated fair value of the
non-compete arrangement entered into in connection with the Northpoint
Cellular, Inc. acquisition (see Note 6). When factors indicate that an
intangible asset may be impaired, the Company uses an estimate of the
undiscounted future cash flows over the remaining life of the asset in
measuring whether the intangible asset is recoverable. If such an analysis
indicates that an impairment has in fact occurred, the book value of the
intangible asset is written down to its estimated fair value. Goodwill is being
amortized over 30 years, acquired residual income is being amortized on an
accelerated basis based on the timing of acquired cash flows through the year
2004 and the non-compete arrangement is being amortized over the life of the
arrangement, which is thirty months.
PRE-OPENING EXPENSES - The Company expenses store pre-opening costs as
incurred.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS - In fiscal 1997, the
Company adopted the provisions of Statement of Financial Accounting Standards
("SFAS") No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS. SFAS No.
121 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 did not have a material impact on the results of
operations of the Company for the years ended July 31, 1998 and 1997.
REVENUE RECOGNITION - Product Sales: Revenue from retail product sales is
recorded upon customer purchase. Revenue from wholesale product sale is
recognized upon shipment of goods.
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 requires
a customer deposit which is forfeited in case of early cancellation. At July 31,
1998 and 1997, the Company's allowance for accounts receivable includes an
amount for estimated cancellation losses, net of deposit forfeitures, which is
reflective of the historical cancellation experience.
Residual Income: The Company generally receives monthly residual income from
the cellular service providers based on a percentage of actual phone usage by
subscribers. Revenue from residual income is recorded as the cellular service
is provided. Revenue from prepaid pager service is deferred and
F-9
32
recognized over the period service is provided, usually three months. Revenue
from monthly installment pager service contracts is recorded as received.
ADVERTISING - The Company expenses advertising costs as incurred. Advertising
expense which is included in selling, general and administrative is recorded
net of cooperative advertising payments received. Net advertising expense
amounted to approximately $2,359,000, $591,000 and $77,000 for the years ended
July 31, 1998, 1997 and 1996, respectively. These amounts are net of
approximately $5,480,000, $1,805,000 and $655,000 of cooperative advertising
payments received, respectively.
INCOME TAXES - Deferred income tax assets and liabilities are determined based
upon differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates that will be in effect
when the differences are expected to reverse.
ACCOUNTING FOR STOCK-BASED COMPENSATION - SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, defines a fair value method of accounting for
issuance of stock options and other equity instruments. Under the fair value
method, compensation cost is measured at the grant date based on the fair value
of the award and is recognized over the service period, which is usually the
vesting period. Pursuant to SFAS No. 123, companies are encouraged, but are not
required, to adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board Opinion ("APB") No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, but are required to disclose in a
note to the consolidated financial statements pro forma net income and per
share amounts as if the Company had applied the new method of accounting.
The Company applies APB No. 25 and related Interpretations in accounting for
its employee stock-based transactions and has complied with the disclosure
requirements of SFAS No. 123.
EARNINGS PER SHARE - Basic earnings per share is computed by dividing the
Company's net income (loss) by the weighted average number of shares
outstanding during the period.
Diluted earnings per share is computed by dividing the Company's net income
(loss) by the weighted average number of shares outstanding and the dilutive
impact of common stock equivalents. The dilutive impact of common stock
equivalents is determined by applying the treasury stock method.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS - In June 1997, the Financial Accounting
Standards Board issued SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE
AND RELATED INFORMATION ("SFAS No.131"). SFAS No. 131 establishes standards for
the way that public enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No.131 is
effective for financial statements for fiscal years beginning after December
15, 1997. The Company is in the process of evaluating the disclosure
requirements. The adoption of SFAS No.131 will have no impact on the Company's
consolidated statement of operations, financial condition or cash flows.
RECLASSIFICATIONS - Certain amounts in the prior year's consolidated financial
statements and related notes have been reclassified to conform to the current
year's presentation.
F-10
33
3. INITIAL PUBLIC OFFERING
On December 1, 1997, the Company completed an initial public offering of its
common stock. 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 of approximately
$20,014,000 were used to repay the then outstanding balance on bank term loans
totaling approximately $12,900,000, a portion of the line of credit amounting
to approximately $4,900,000, shareholders' loans totaling approximately
$258,000, and fund various acquisitions. 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 income
taxes of approximately $261,000 (see Note 7).
4. ACQUISITIONS
On June 27, 1997 (effective June 30, 1997), the Company purchased TWI in
exchange for 1,817,468 shares of the Company's common stock and assumption of
approximately $13,075,000 of indebtedness. The fair value of the shares issued
to TCP were determined by management to be approximately $2,830,000. The fair
value of net assets acquired, including approximately $1,773,000 allocated to
acquired residual income was approximately $4,368,000. A deferred tax liability
of $679,000 was provided related to the acquired residual income. The purchase
price exceeded the fair value of the net assets acquired by approximately
$11,557,000.
In connection with the acquisition, the Company assumed a note payable to the
former shareholder of TWI (the "Former Shareholder") of $2,000,000, included in
assumed indebtedness of $13,075,000. The note was due and payable on March 15,
2002, however, was prepaid by the Company in May 1998.
On December 1, 1997, the Company acquired substantially all of the assets of
Cellular Unlimited Corp. for a cash purchase price of approximately $2,186,000,
including acquisition costs of approximately $112,000, 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, for an aggregate amount of $675,000.
No contingent payments were earned for the year ended July 31, 1998.
On December 17, 1997, the Company acquired substantially all of the outstanding
capital stock of Cellular USA, Inc. for a cash purchase price of approximately
$1,732,000, including acquisition costs of approximately $81,000, and up to an
aggregate of $175,000 in certain contingent payments in fiscal 1998 and 1999.
No contingent payments were earned for the year ended July 31, 1998.
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 $197,000.
Additionally, effective March 1, 1998, the Company acquired all of the
outstanding capital stock of CWI for a cash price of approximately $20,023,000,
including acquisition costs of approximately $978,000, and 550,000 shares of
the Company's common stock. This acquisition was funded by the Company's new
$35,000,000 credit facility with a lender (see Note 7). The fair value of the
shares issued to the two shareholders of CWI were determined by management,
based on quoted market price, to be approximately $7,563,000. The fair value of
net assets acquired, including approximately $2,544,000 allocated to acquired
residual income, was approximately $8,250,000. The purchase price exceeded the
fair value of the net assets acquired by approximately $19,335,000.
The following table summarizes, on an unaudited pro forma basis, the results of
operations for the years ended July 31, 1998 and 1997 as though the acquisition
of CWI and TWI had occurred as of the beginning of the respective periods:
F-11
34
YEAR ENDED JULY 31,
------------------------------------
1998 1997
------------- -------------
Net revenues $ 144,343,000 $ 108,225,000
Income before extraordinary charge 2,528,000 3,942,000
Net income 1,896,000 3,942,000
Earnings per share (Basic and Diluted):
Income before extraordinary charge $ 0.29 $ 0.44
Extraordinary charge (0.07) --
------------- -------------
Net income $ 0.22 $ 0.44
============= =============
All acquisitions were accounted for as purchases and, accordingly, the
accompanying consolidated financial statements include the results of their
operations from the acquisition dates.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
JULY 31,
USEFUL --------------------------------------------
LIVES 1998 1997
----------------- --------------------------------------------
Leasehold improvements 2-10 $ 8,002,839 $ 3,174,432
Furniture, vehicles and equipment 5-7 3,709,939 1,647,002
Computer equipment and software 5 2,099,528 778,628
Capitalized equipment 5 590,699 179,482
Building 30 321,636 254,998
Office equipment 5-7 285,402 78,032
Construction in progress 147,640 2,750
--------------------------------------------
15,157,683 6,115,324
Less accumulated depreciation
and amortization (2,987,490) (818,581)
============================================
$ 12,170,193 $ 5,296,743
============================================
Computer equipment under capital leases totaled approximately $591,000 and
$179,000 at July 31, 1998 and 1997, respectively. Accumulated amortization for
assets under capital leases was approximately $137,000 and $70,000 at July 31,
1998 and 1997, respectively.
During 1998, 1997, and 1996, the Company recorded a loss on impairment of
leasehold improvements of approximately $0, $135,000, and $0, respectively.
Additionally, the Company wrote-off approximately $0, $128,000 and $51,000 of
property and equipment related to store closings for the years ended July 31,
1998, 1997 and 1996, respectively.
F-12
35
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
JULY 31,
-----------------------------------------------
1998 1997
-----------------------------------------------
Goodwill $ 33,358,668 $ 11,028,312
Acquired residual income 5,631,797 2,545,123
Acquisition costs 1,035,723 --
Non-compete agreement 600,000 600,000
-----------------------------------------------
40,626,188 14,173,435
Less accumulated amortization (2,777,550) (417,739)
===============================================
$ 37,848,638 $ 13,755,696
===============================================
In conjunction with the purchase of Northpoint Cellular, Inc. on August 31,
1996, Northpoint Cellular, Inc. entered into a non-compete agreement for
aggregate consideration of $600,000 which was paid on August 31, 1996. The
non-compete agreement is being amortized on a straight-line basis over the life
of the agreement which is 3 years.
7. BANK LINES OF CREDIT AND BANK TERM LOAN
On June 27, 1997, in connection with the purchase of TWI from TCP, the Company
assumed the debt of TWI owed to Nations Credit Commercial Corporation ("NCCC"),
a limited partner of TCP, which consisted of the then outstanding balance of
$13,075,000 under a term loan agreement, and simultaneously refinanced the
Company's debt with NCCC (collectively, the "NCCC Debt"). In connection with
the IPO, the Company paid down a portion of the NCCC Debt. On April 2, 1998, in
connection with the purchase of CWI, the Company entered into a financing
arrangement with Chase Manhattan Bank (the "Credit Facility"). The Credit
Facility provides for borrowings of up to $13,500,000 under a revolving line of
credit (approximately $9,100,000 is outstanding at July 31, 1998) and a
$21,500,000 term loan. The proceeds from the term loan and a portion of the
line of credit borrowings was used to repay the remaining NCCC Debt and finance
the CWI acquisition. As a result of the repayment of the remaining NCCC Debt
during the third quarter of fiscal 1998, the Company incurred an extraordinary
charge to earnings of approximately $240,000, net of income taxes of
approximately $160,000. The Credit Facility is secured by substantially all of
the Company's assets, and availability under the revolving line of credit is
based on a formula of eligible accounts receivable and inventories. At July 31,
1998, approximately $2,400,000 was available under the revolving line of credit
based on eligible collateral at that date. The weighted average interest rate
was 9.7% and 10.25% at July 31, 1998 and 1997, respectively. On September 25,
1998, the Credit Facility was amended to revise certain financial covenants and
increase the maximum eligible inventory used in determining availability under
the revolving line of credit from $6,000,000 to $7,000,000 for the period
beginning September 1, 1998 and ending on December 31, 1998. The amendment also
provided for a reduction period, whereby the Company is required to reduce all
outstanding advances under the revolving line of credit to not more than
$8,000,000 for the period from February 15, 1999 through and including April 15,
1999.
The Credit Facility contains certain restrictive covenants that, among other
things, restrict the payment of dividends, restrict additional indebtedness and
obligations, limit capital expenditures and require maintenance of certain
financial ratios, including minimum EBITDA (as defined), leverage ratio,
interest coverage ratio and fixed charge coverage ratio.
At July 31, 1998, the Company was not in compliance with certain financial
covenants of the Credit Facility. On October 30, 1998, the Company obtained a
waiver and second amendment to the Credit Facility, whereby events of default
were waived and certain financial covenants were amended for the year ended July
31, 1998 and subsequent periods.
F-13
36
Amounts outstanding under bank term loans are as follows:
JULY 31,
--------------------------------------------
1998 1997
--------------------------------------------
NCCC term loan of $13,075,000 payable in quarterly principal payments over 7
years through May 2004 bearing interest at 4.5% over the commercial
paper rate (10.157% at July 31, 1997), secured by
substantially all of the Company's assets (a) $ -- $ 13,050,000
Bank term loan of $21,500,000 payable in quarterly
principal payments over 6 years through March 2004
bearing interest at prime and/or LIBOR plus .75% and 2.5% (8.388% at
July 31, 1998), respectively, secured by substantially all of the
Company's assets 21,125,000
--------------------------------------------
21,125,000 13,050,000
Less current portion (1,875,000) (700,000)
--------------------------------------------
Long-term portion $ 19,250,000 $ 12,350,000
============================================
- ---------------------
(a) In connection with the Company's debt refinancing, the Company issued
stock purchase warrants, expiring on December 31, 2006, to NCCC to
purchase a total of 106,596 shares of the Company's common stock at an
exercise price of $.00003 per share. Deferred interest expense of
approximately $166,000 was recorded at June 27, 1997 representing the
estimated value of the warrants. Unamortized deferred financing charges
of approximately $632,000, net of income taxes of approximately $421,000,
was included in the extraordinary charge described above.
Maturities of the Credit Facility as of July 31, 1998 are as follows:
YEAR ENDED
JULY 31,
- --------------
1999 $ 1,875,000
2000 3,250,000
2001 4,000,000
2002 4,250,000
2003 5,000,000
Thereafter 2,750,000
-----------
Total $21,125,000
============
8. LOANS PAYABLE TO SHAREHOLDERS AND OFFICERS
Loans payable to shareholders and officers are as follows:
JULY 31, 1997
-------------
Loans payable to shareholders $ 258,100
8% subordinated note payable to officer
(Former Shareholder) 2,000,000
-------------
2,258,100
Less current portion (258,100)
-------------
Long-term portion $ 2,000,000
=============
As of July 31, 1997, loans from shareholders, amounting to approximately
$258,000, consisted of unsecured notes payable to two shareholders bearing
interest at 8%, due monthly, and payable on October 2001. These loans were paid
in full by the Company during fiscal 1998.
F-14
37
In connection with the acquisition of TWI, the Company assumed a $2 million
subordinated term note due to the Former Shareholder of TWI. This note was paid
in full by the Company in association with the acquisition of CWI and the
execution of the Credit Facility (see Note 7).
9. CAPITAL LEASE OBLIGATIONS
The Company leases certain computer and office equipment under capital leases.
These lease obligations are payable in monthly installments. During 1998 and
1997, total payments under such leases aggregated approximately $129,000 and
$53,000. The future minimum lease payments at July 31, 1998 relating to these
capital leases are as follows:
YEAR ENDED
JULY 31,
- --------------
1999 $ 113,148
2000 113,148
2001 113,148
2002 113,148
2003 56,574
-----------
Total payments remaining under capital leases 509,166
Less amounts representing interest (90,655)
-----------
Present value of capital lease obligations 418,511
Less current portion (72,361)
-----------
Capital lease obligations, net of current portion $ 346,150
===========
10. COMMITMENTS AND CONTINGENCIES
The Company leases retail, office and warehouse space and certain equipment
under operating leases which expire at various dates through 2008 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
percentage of sales.
Future minimum payments under operating leases at July 31, 1998 are as follows:
YEAR ENDED
JULY 31,
- --------------
1999 $ 8,364,836
2000 7,223,356
2001 5,821,932
2002 4,664,219
2003 3,305,759
Thereafter 8,359,115
-----------
Total $37,739,217
===========
Total rent expense for the years ended July 31, 1998, 1997, and 1996 was
approximately $8,580,000, $2,985,000 and $1,567,000, respectively, of which
approximately $70,000, $8,000 and $11,000, respectively, was paid for rentals
based on a percentage of sales.
F-15
38
The Company is the defendant in certain legal proceedings that have arisen in
the ordinary course of business. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material adverse
effect on the Company's results of operations or financial position.
11. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable, amounts
due under the lines of credit, trade accounts payable and accrued expenses
approximate fair value because of their short duration to maturity. The
carrying amounts of the bank term loans approximates fair value because the
interest rate is tied to a quoted variable index. The carrying value of the
loans from shareholders approximate fair value because the interest rate
approximates the Applicable Federal Rate (AFR).
12. INCOME TAXES
The components of the provision (benefit) for income taxes are as follows:
JULY 31,
-----------------------------------------------
1998 1997 1996
-----------------------------------------------
Attributable to income
before extraordinary
charge:
Current $1,100,749 $ 140,581 $ 70,540
Deferred (556,351) (137,739) (31,601)
-----------------------------------------------
$ 544,398 $ 2,842 $ 38,939
Attributable to
extraordinary charge (421,056) -- --
-----------------------------------------------
$ 123,342 $ 2,842 $ 38,939
===============================================
The following table reconciles the U.S. Federal income tax rate to the Company's
effective tax rate attributable to income before extraordinary charge:
JULY 31,
---------------------------------------------
1998 1997 1996
---------------------------------------------
Tax at U.S. statutory rate 34.00% (34.00%) 34.00%
Increase (decrease) in rate resulting from:
State taxes, net of federal benefit 3.63 0.64 3.63
Statutory rate applied to
non-deductible amortization of the
excess of cash over net assets
acquired 19.89 39.97 5.74
Other items 2.30 -- (6.26)
---------------------------------------------
Effective tax rate 59.82% 6.61% 37.11%
=============================================
F-16
39
Significant components of the Company's deferred tax assets and liabilities are
as follows:
JULY 31,
-------------------------------------------------
1998 1997
-------------------------------------------------
Deferred tax assets:
Allowances $ 150,587 $ 216,591
Amortization of residuals 144,339 --
Amortization of covenant not to compete 142,994 --
Deferred rent 125,436 --
Inventory 89,431 88,654
Accrued compensation 81,657 --
Accrued vacation -- 79,328
Impairment to long-lived assets 50,863 50,863
Bad debt 41,523 --
Other 9,976 39,809
-------------------------------------------------
Total deferred tax assets 836,806 475,245
-------------------------------------------------
Deferred tax liabilities
Residuals (282,477) (903,663)
Goodwill (115,068) --
Depreciation (18,117) (48,933)
Other (8,316) --
-------------------------------------------------
Total deferred tax liabilities (423,978) (952,596)
-------------------------------------------------
Net deferred tax assets (liabilities) $ 412,828 $ (477,351)
=================================================
The Company paid income taxes of approximately $59,000, $503,000 and $0 for the
fiscal years ended July 31, 1998, 1997 and 1996, respectively.
13. CASH HELD IN ESCROW AND REDEEMABLE CONVERTIBLE PREFERRED STOCK
On June 25, 1996, the Company entered into a Series A Preferred Stock Purchase
Agreement (the "Agreement") with HIG and issued 100,000 shares of the Company's
Series A Redeemable Convertible Preferred Stock (the "Series A Preferred
Stock"), par value $30 per share at a price of $32.95 per share for an
aggregate purchase price of $3,295,000 of which $1,000,000, net of
approximately $359,000 in certain issuance costs, was paid at closing. The
balance of $2,000,000 was released from escrow to the Company in September and
December of 1996.
Under the escrow agreement, the release of funds occurred upon management
providing certain representations including: (a) that the Company had
substantially used all of the previous amounts funded as set forth in the
Agreement, which provided in general that funds were to be used for capital
expenditures and not to repay shareholder notes or to pay down the Company's
line of credit to less than a specified amount and (b) that there had been no
material adverse change (as defined by management) in the Company's condition
or prospects.
Each holder of the Series A Preferred Stock was entitled to vote on all matters
and was entitled to that number of votes equal to the largest number of whole
shares of Common Stock into which such holder's shares of Series A Preferred
Stock could be converted. Any share of Series A Preferred Stock was, at the
option of the holder, to be converted at any time into 11.51 shares of Common
Stock, subject to certain adjustments to prevent dilution. As of June 27, 1997,
thresholds were not met, as defined in the Agreement.
F-17
40
In connection with the original issuance of the Series A Preferred Stock and
until the Company's first Qualified Public Offering, as defined, the Company
agreed with the preferred stockholders to comply with certain restrictive
covenants, including covenants concerning limitations on investments,
distributions, dealings with affiliates, mergers, the issuance of options,
rights or warrants, indebtedness, compensation, and consulting agreements and
capital expenditures. As a condition precedent to the acquisition of TWI, on
June 27, 1997, the Company issued 2,137,850 shares of Common Stock to HIG in
exchange for the conversion of all the outstanding Series A Preferred Stock. Of
the 2,137,850 shares issued, 388,701 shares were issued in addition to the
original conversion feature of the Series A Preferred Stock and in order to
induce HIG to convert the Series A Preferred Stock and in exchange for relief
from the limitations placed on the Company by HIG, Management determined that
the fair value of the 388,701 shares at the date of issuance was approximately
$320,000.
14. PREFERRED AND COMMON STOCK
On September 16, 1997, the Company amended and restated its Articles of
Incorporation such that the par value of the Common Stock was increased to $.01
per share and the number of shares of authorized capital stock was increased to
51,000,000 shares, consisting of 50,000,000 shares of common stock and
1,000,000 shares of preferred stock par value $.01 per share ("Preferred
Stock").
During 1996 the Company issued an aggregate of 64,135 shares of Common Stock
under a stock bonus agreement, as amended, and recognized approximately $30,000
and $7,000 in compensation expense in 1997 and 1996, respectively, associated
with the vesting provisions of the agreement, which provided for all of the
shares to be fully vested as of June 27, 1997, due to a change in control of
the Company. Upon termination of the employee, the Company may, at its option
and in its sole discretion, redeem all or a portion of these shares, at a price
equal to the higher of a per share value based on earnings or book value. This
redemption provision expired as a result of the IPO.
On June 27, 1997, the Company issued stock options to purchase 182,348 shares
of Common Stock, with an exercise price of $20.04 per share, to two officers of
the Company. These options vested immediately.
In August 1997, the Company established the 1997 Executive Incentive
Compensation Plan (the "Incentive Plan"). Pursuant to the terms of the
Incentive Plan the Company may grant participants stock options, stock
appreciation rights, restricted stock, deferred stock, other stock-related
awards and performance or annual incentive awards that may be settled in cash,
stock or other property (collectively, the "Awards"). Under the Incentive Plan,
the total number of shares of Common Stock that may be subject to the granting
of Awards during the term of the Incentive Plan shall be equal to 310,000
shares, plus the number of shares with respect to Awards previously granted
under the Incentive Plan that terminate without being exercised and the number
of shares of Common Stock that are surrendered in the payment of any Awards.
The Company granted, in accordance with the provisions of the Incentive Plan,
stock options to purchase an aggregate of 264,608 shares of Common Stock to
certain key employees and directors of the Company immediately prior to the
IPO. Such stock options have an exercise price equal to the initial public
offering price and vest over a three year period.
Changes under these plans for 1998, 1997, and 1996 were as follows:
JULY 31, 1998 JULY 31, 1997 JULY 31, 1996
------------------------------ --------------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------------------------------------------------------------------------------------------
Outstanding at beginning
of year 182,348 $ 20.04 -- -- -- --
Granted 332,474 12.31 182,348 $ 20.04 -- --
Exercised -- -- -- -- -- --
Forfeited (47,529) 12.00 -- -- -- --
---------------------------------------------------------------------------------------------
Outstanding at end of year 467,293 $ 15.36 182,348 $ 20.04 -- --
=============================================================================================
Options exercisable at
year-end 192,348 $ 19.91 182,348 $ 20.04 -- --
=============================================================================================
F-18
41
The following table summarizes information about fixed stock options
outstanding at July 31, 1998 (see Note 18):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ---------------------------------------------
WEIGHTED
AVERAGE WEIGHTED
NUMBER REMAINING NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISABLE EXERCISE
PRICES AT JULY 31, 1998 LIFE AT JULY 31, 1998 PRICE
- ------------------------------------------------------------------------------- ---------------------------------------------
$ 12.00 226,945 9.32 -- --
13.00 40,000 9.64 -- --
13.06 8,000 9.55 -- --
17.50 10,000 9.67 10,000 $ 17.50
20.04 182,348 8.91 182,348 20.04
As required by SFAS No. 123, pro forma information regarding net income and
earnings per share has been determined as if the Company had accounted for its
employee stock options under the fair value provision of that statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model.
The following weighted average assumptions were used:
JULY 31,
------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------
Expected life 10 10 --
Interest rate 6.00% 6.00% --
Volatility (1) 1.277 -- --
Dividend yield -- -- --
- --------------------
(1) Zero volatility factor for fiscal 1997 and 1996, as there was no history
for the Company's stock during fiscal 1997 and 1996.
The weighted average per share fair values of options granted under the
Company's stock option plans during 1998 and 1997 were $11.47 and $9.04,
respectively. Had the fair value of the grants under these plans been recognized
as compensation expense over the vesting period of the Awards, compensation cost
would have been increased by approximately $707,000 (approximately $441,000
after tax, $0.06 per basic and diluted share) and $0 in 1998 and 1997,
respectively.
The Black-Scholes options valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those traded options, and because changes in the subjective
input assumptions can materially affect the fair value
F-19
42
estimate, the existing models, in management's opinion, do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
In 1997, the Financial Accounting Standards Board issued SFAS No. 128 ("SFAS No.
128"), Earnings per Share. All earnings per share amounts for all periods have
been presented, and where necessary, related to conform to the SFAS No. 128
requirements.
The following table reconciles the numerator (earnings) and denominator
(shares) of the basic and diluted earnings per share computations for earnings
before extraordinary charge:
YEAR ENDED JULY 31,
-------------------------------------------------------
1998 1997 1996
-------------------------------------------------------
Numerator:
Net (loss) income applicable to common shareholders $(266,534) $(365,831) $ 65,998
=======================================================
Denominator:
Denominator for basic earnings per share - weighted
average shares 7,726,187 6,199,762 6,199,762
Effect of dilutive securities:
Stock options 27,773 - -
-------------------------------------------------------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversions 7,753,960 6,199,762 6,199,762
=======================================================
Basic (loss) earnings per share applicable to common
shareholders $ (0.03) $ (0.07) $ 0.01
=======================================================
Diluted (loss) earnings per share applicable to
common shareholders $ (0.03) $ (0.07) $ 0.01
=======================================================
15. RELATED PARTY TRANSACTIONS
On June 27, 1997, the Company entered into a consulting agreement with HIG
Capital Management, Inc. an affiliate of the general partner of TCP, to provide
management, consulting and financial services. The agreement, as amended and
restated on October 8, 1997, requires that the Company pay $350,000 per year,
payable in monthly installments. This agreement expired effective December 1,
1997 as a result of the completion of the Company's IPO. For the year ended
July 31, 1998 and 1997, the Company paid approximately $117,000 and $29,000,
respectively, under this agreement.
In accordance with this consulting agreement, the Company paid HIG Capital
Management Inc. an investment banking fee of $840,000 as a result of the
completion of the IPO.
16. SIGNIFICANT CUSTOMERS
One customer accounted for 16%, 12% and 23% of the Company's net revenues for
the years ended July 31, 1998, 1997 and 1996, respectively. This customer
accounted for 8% and 6% of the total net accounts receivable at July 31, 1998
and 1997, respectively.
F-20
43
A second customer accounted for 8%, 12% and 0% of net revenues for the years
ended July 31, 1998, 1997 and 1996, respectively. This customer accounted for 4%
and 7% of the net accounts receivable at July 31, 1998 and 1997, respectively.
A third customer accounted for 6%, 13% and 11% of net revenues for the years
ended July 31, 1998, 1997 and 1996, respectively. This customer accounted for 4%
and 8% of the net accounts receivable at July 31, 1998 and 1997, respectively.
17. EMPLOYEE BENEFIT PLAN
In August 1996, the Company adopted a defined contribution plan (401k 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 did not make any contributions during the years ended
July 31, 1998, 1997 and 1996.
18. SUBSEQUENT EVENTS
On October 9, 1998, one of the Company's officers resigned from employment with
the Company. As a result, a charge of $450,000 in the first quarter of fiscal
1999 will be recognized for the officer's severance package.
On September 14, 1998, the Board of Directors approved the Company to revalue
all of its stock options, except for those options held by members of the Board
of Directors, to reduce the exercise price to $7.00 per share.
F-21
44
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
LET'S TALK CELLULAR & WIRELESS, INC.
JULY 31, 1997
BALANCE AT
BEGINNING CHARGED TO CHARGED TO BALANCE AT
DESCRIPTION OF COSTS AND OTHER END OF
YEAR EXPENSES ACCOUNTS(1) DEDUCTIONS YEAR
-------- --------- ----------- ---------- --------
Year ended July 31, 1996
Deducted from asset accounts:
Allowances ............................................ $ -- $ 65,638 $ -- $ -- $ 65,638
======== ======== ======== ======== ========
Year ended July 31, 1997
Deducted from asset accounts:
Allowances ............................................ $ 65,638 $151,041 $525,125 $ 55,000 $686,804
Inventory ............................................. -- 20,000 188,594 -- 208,594
-------- -------- -------- -------- --------
$ 65,638 $171,041 $713,719 $ 55,000 $895,398
======== ======== ======== ======== ========
Year ended July 31, 1998
Deducted from asset accounts:
Allowances ............................................ $686,804 $ 64,438 $412,832 $508,948 $655,126
Inventory ............................................. 208,594 79,059 -- -- 287,653
-------- -------- -------- -------- --------
$895,398 $143,497 $412,832 $508,948 $942,779
======== ======== ======== ======== ========
(1) Acquired in connection with the Telephone Warehouse and Cellular Warehouse
acquisitions in 1997 and 1998, respectively.
S-1