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UNITED STATES
SECURITIES EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-23351
LET'S TALK CELLULAR & WIRELESS, INC.
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(Exact Name of Registrant as Specified in its Charter)
FLORIDA 65-0292891
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
800 BRICKELL AVE., STE. 400
MIAMI, FL 33131 33131
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 358-8255
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(Former name, former address and fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No []
The number of shares outstanding of the registrant's common stock is 8,749,762
(as of December 14, 1998).
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LET'S TALK CELLULAR & WIRELESS, INC.
INDEX
PAGE
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of October 31, 1998 (Unaudited)
and July 31, 1998.......................................................................... 3
Condensed Consolidated Statements of Operations for the Three Months Ended
October 31, 1998 and October 31, 1997 (Unaudited)......................................... 4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
October 31, 1998 and October 31, 1997 (Unaudited).......................................... 5
Notes to Condensed Consolidated Financial Statements (Unaudited)........................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................................. 7
PART II - OTHER INFORMATION............................................................................. 12
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 and
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, risks 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.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LET'S TALK CELLULAR & WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
OCTOBER 31, JULY 31,
1998 1998
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 1,151,639 $ 1,697,397
Accounts receivable, net 17,196,369 15,954,275
Inventories 20,120,282 16,532,961
Prepaid expenses 472,943 429,869
Deferred tax asset 836,806 836,806
------------ ------------
Total current assets 39,778,039 35,451,308
Property and equipment, net 12,886,078 12,170,193
Other assets, net 1,114,123 1,020,524
Intangible assets, net 37,166,114 37,848,638
------------ ------------
Total assets $ 90,944,354 $ 86,490,663
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 17,767,825 $ 13,116,458
Bank lines of credit 8,773,886 9,099,072
Accrued expenses 6,678,843 6,628,207
Current portion of bank term loans and obligations
under capital leases 2,742,831 1,947,361
Income taxes payable 95,505 273,255
Deferred revenues 1,364,671 855,729
Customer deposits 237,890 257,879
------------ ------------
Total current liabilities 37,661,451 32,177,961
Bank term loans, less current portion 18,500,000 19,250,000
Obligation under capital lease, less current portion 488,129 346,150
Other liabilities 198,465 372,395
Deferred tax liability 423,978 423,978
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 shares issued and
outstanding 87,498 87,498
Additional paid-in capital 33,716,669 33,716,669
Retained earnings (accumulated deficit) (131,836) 116,012
------------ ------------
Total common shareholders' equity 33,672,331 33,920,179
------------ ------------
Total liabilities and shareholders' equity $ 90,944,354 $ 86,490,663
============ ============
See accompanying notes.
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LET'S TALK CELLULAR & WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED OCTOBER 31,
------------------------------
1998 1997
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Net revenues:
Retail sales $ 12,264,618 $ 5,748,532
Activation commissions 14,089,902 5,650,684
Residual income 4,583,387 2,417,896
Wholesale sales 4,926,661 8,098,778
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Total net revenues 35,864,568 21,915,890
Cost of sales 18,491,407 13,819,040
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Gross profit 17,373,161 8,096,850
Operating expenses:
Selling, general and administrative 15,671,033 7,847,382
Depreciation and amortization 532,070 264,032
Amortization of intangible assets 682,524 616,726
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Total operating expenses 16,885,627 8,728,140
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Income (loss) from operations 487,534 (631,290)
Interest expense, net 735,381 498,713
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Loss before benefit for income taxes (247,847) (1,130,003)
Benefit for income taxes (60,617) (405,451)
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Net loss applicable to common shareholders $ (187,230) $ (724,552)
============ ============
EARNINGS PER SHARE
Basic and Diluted:
Net loss per share applicable to common shareholders $ (0.02) $ (0.12)
============ ============
Weighted average shares outstanding:
Basic and Diluted 8,749,762 6,093,168
============ ============
See accompanying notes.
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LET'S TALK CELLULAR & WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED OCTOBER 31,
------------------------------
1998 1997
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OPERATING ACTIVITIES
Net loss $ (247,847) $ (724,552)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 532,070 264,032
Amortization of intangible assets 682,524 616,726
Amortization of deferred financing costs 26,916 48,046
Provision for activation adjustments and cancellation losses -- 60,735
Deferred income taxes -- (577,098)
Changes in operating assets and liabilities:
Accounts receivable (1,242,094) (1,603,718)
Inventories (3,587,321) (1,735,527)
Prepaid expenses (43,074) (9,323)
Other assets (120,515) (943,699)
Income tax receivable -- 65,558
Trade accounts payable 4,651,367 1,822,351
Accrued expenses 50,636 831,748
Other liabilities (173,931) --
Income taxes payable (177,750) --
Customer deposits (19,989) (37,998)
Deferred revenues 508,942 2,311
----------- -----------
Net cash provided by (used in) operating activities 839,934 (1,920,408)
INVESTING ACTIVITIES
Purchases of property and equipment (1,008,139) (1,508,344)
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Net cash used in investing activities (1,008,139) (1,508,344)
FINANCING ACTIVITIES
Net borrowings under bank lines of credit (325,186) 2,866,766
Payments on bank term loan and capital leases (52,367) (139,125)
----------- -----------
Net cash (used in) provided by financing activities (377,553) 2,727,641
----------- -----------
Net decrease in cash and cash equivalents (545,758) (701,111)
Cash and cash equivalents at beginning of period 1,697,397 1,080,014
----------- -----------
Cash and cash equivalents at end of period $ 1,151,639 $ 378,903
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 564,939 $ 443,125
=========== ===========
Cash paid for income taxes $ 177,750 $ 85,693
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Acquisition of property and equipment under capital leases $ 239,816 --
===========
See accompanying notes.
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LET'S TALK CELLULAR & WIRELESS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998
(UNAUDITED)
1-SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements of Let's
Talk Cellular & Wireless, Inc. and subsidiaries (the "Company") have been
prepared in accordance with the instructions to Form 10-Q and, therefore, omit
or condense certain footnotes and other information normally included in
financial statements prepared in accordance with generally accepted accounting
principles. The accounting policies followed for interim financial reporting are
the same as those disclosed in Note 2 of the Notes to Consolidated Financial
Statements included in the Company's audited financial statements for the fiscal
year ended July 31, 1998 which are included in the Company's Annual Report on
Form 10-K for the year ended July 31, 1998. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of the financial information for the interim periods reported have
been made. Results of operations for the three months ended October 31, 1998 are
not necessarily indicative of the results to be expected for the entire fiscal
year ending July 31, 1999.
The Company's stores have historically experienced, and the Company expects its
stores to continue to experience, seasonal fluctuations in revenues with a
larger percentage of revenues typically being realized in the second fiscal
quarter during the holiday season. In addition, the Company's results during any
fiscal period can be significantly affected by the timing of store openings and
acquisitions and the integration of new and acquired stores into the Company's
operations.
Fiscal year references are to the respective fiscal year ended July 31.
2-NET LOSS PER SHARE APPLICABLE TO COMMON SHAREHOLDERS
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.
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard 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.
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.
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4-SUBSEQUENT EVENTS
In November 1998, the Company hired David Eisenberg as Co-Chairman of the Board
of Directors and Chief Executive Officer. The terms of his employment agreement
have not yet been finalized, however, the terms of an agreement are expected to
be finalized in the second quarter of fiscal 1999.
The Company and one of its directors and officers and a former director and
officer are named as defendants in two class action lawsuits for alleged
violations of section 10(b) and 20(a) of the Securities Exchange Act and SEC
Rule 10b-5, Bryan, et al. v. Molina et al., and Cortesi, et al. v. Let's Talk
Cellular & Wireless, Inc., et al., which are pending in the U.S. District Court
for the Southern District of Florida. The Plaintiffs maintain the Company and
the individual defendants committed a fraud on the securities market by
artificially inflating the price of the Company's stock. Plaintiffs propose a
class period of March 11, 1998 through July 2, 1998 and November 25, 1997
through July 2, 1998, respectively, and seek an unspecified amount of damages.
The Company will vigorously defend these claims.
The Company is a defendant in various other suits, claims and investigations
which arise in the normal course of business. In the opinion of management, the
ultimate disposition of the matters described in this paragraph, will not have a
material adverse effect of the consolidated financial position, liquidity or
results of operations of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is the largest independent specialty retailer of cellular and
wireless products, services and accessories in the United States, with 261
stores located in 23 states, the District of Columbia and Puerto Rico as of
October 31, 1998. The Company's stores, located predominantly in regional
shopping malls and power strip centers, seek to offer one-stop shopping for
consumers to purchase cellular, personal communication systems ("PCS"), paging,
internet, satellite, and other wireless products and services and related
accessories. The Company is also a wholesaler of cellular and wireless products
and accessories to more than 500 accounts, consisting primarily of distributors,
carriers and small independent retailers. The Company's business strategy is to
offer the most extensive assortment of wireless products and services at
everyday low prices supported by knowledgeable customer service, through
conveniently located and attractively designed stores.
The Company presently plans to open a total of 40-50 new stores in Fiscal 1999.
To handle the existing store base as well as expansion, management has been
building the infrastructure necessary to support a growing chain of stores. In
November 1998, the Company hired David Eisenberg as Co-Chairman of the Board of
Directors and Chief Executive Officer. Mr. Eisenberg brings over 40 years of
retail experience, most recently with Chief Auto Parts, to the Company. In
addition, the Company has continued to strengthen its field structure with the
addition of regional managers. As the Company continues to expand through new
store openings, it expects to leverage these investments and improve margins
through economies of scale.
The Company's revenues are generated principally from four sources:
(i) RETAIL SALES. The Company sells cellular and wireless products,
such as phones, pagers and related accessories in the Company's retail
outlets.
(ii) ACTIVATION 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.
(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
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airtime that the Company buys wholesale from paging carriers and then
resells to individuals and small businesses.
(iv) WHOLESALE SALES. The Company wholesales cellular and wireless
products and accessories to more than 500 accounts, consisting
primarily of distributors, carriers and small independent retailers.
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 $14.1
million and $5.7 million for the three months ended October 31, 1998 and 1997,
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 (the
"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 various acquisitions. 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 4-7 years) according to the anticipated timing
of acquired cash flows. Consequently, the accelerated amortization applied to
the value of the residual income acquired in connection with various
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acquisitions 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
QUARTER ENDED OCTOBER 31, 1998 COMPARED TO QUARTER ENDED OCTOBER 31, 1997
TOTAL NET REVENUES increased $13.9 million, or 63.6% to $35.9 million in the
first quarter of fiscal 1999 from $21.9 million in the first quarter of fiscal
1998. The increase in revenues is due to increases in retail sales, activation
commissions and residual income, and to the acquisitions of Cellular USA, Inc.
("USA") and Cellular Unlimited Corp. ("Unlimited") effective November 1, 1997,
and of Sosebee Enterprises, Inc. and Cellular Warehouse, Inc. (collectively,
"CWI") effective March 1, 1998 and the resulting inclusion of the acquired
entities' operations in the Company's consolidated revenues for the first
quarter of fiscal 1999. Retail sales increased $6.5 million, or 113.4% to $12.3
million from $5.7 million, activation commissions increased $8.4 million, or
149.3% to $14.1 million from $5.7 million and residual income increased $2.2
million, or 89.6% to $4.6 million from $2.4 million. Comparable store sales
decreased $210,000, or 1.9% to $11.0 million from $11.2 million. Sales relating
to 67 new stores opened, 85 stores acquired since October 31, 1997 and the 9
stores that were not yet open for 12 full months accounted for $15.2 million, or
109.1% of the increase in total net revenues. The comparable stores sales
decline was primarily attributable to two markets (26 of the 100 comparable
stores) which continued to have personnel issues at both the district and store
level. In addition, the Company received lower than anticipated commissions from
the cellular carriers as well as a decrease in the amount of carrier sponsored
promotions in these two markets verses the first quarter of fiscal year 1998.
The comparable store sales would have increased by 5.7% (in remaining 74
comparable stores) if the two markets described above were excluded from the
computation. Wholesale sales decreased $3.2 million, or 39.2% as a result of the
Company's shift in allocation of resources to the retail operations. The
increase in residual income was due to the inclusion of CWI's residual income
($2.0 million for the first quarter of fiscal 1999) and the increase in the
number of activations resulting from the various acquisitions and the Company's
store expansion. The Company had 261 stores open at October 31, 1998 as compared
to 111 at October 31, 1997.
GROSS PROFIT increased $9.3 million, or 114.6% to $17.4 million in the first
quarter of fiscal 1999 from $8.1 million for the first quarter of fiscal 1998.
As a percentage of total net revenues, gross profit increased to 48.4% from
36.9% primarily due to the wholesale operations making up a smaller percentage
of total revenue as compared to the first quarter of fiscal 1998. The Company's
wholesale operations have a significantly lower margin (6.3% for the first
quarter of fiscal 1999) than its retail operations.
SELLING, GENERAL AND ADMINISTRATIVE expenses increased $7.8 million, or 99.7% to
$15.7 million for the first quarter of fiscal 1999 from $7.8 million in the
first quarter of fiscal 1998 as a result of higher personnel, rent and related
costs associated with the net addition of 150 stores, either by internal growth
or acquisition from the first quarter of fiscal 1998. Included in the first
quarter of fiscal 1999 is a non-recurring pre-tax charge of $450,000 for
severance and related costs of a former Officer of the Company. 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 increased to 43.7% during the first
quarter of fiscal 1999 from 35.8% in the first quarter of fiscal 1998.
AMORTIZATION OF INTANGIBLES consisted of (i) approximately $623,000 associated
with the amortization of goodwill and acquired residual income resulting from
the acquisition of TWI on June 30, 1997, the acquisition of USA and Unlimited on
November 1, 1997, and the acquisition of CWI on March 1, 1998,
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and (ii) $60,000 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 in fiscal 1999
as a result of a full year of amortization relating to the USA, Unlimited and
CWI acquisitions.
INCOME FROM OPERATIONS increased $1.1 million, or 177.2% to $488,000 in the
first quarter of fiscal 1999 from a loss of $631,000 in the first quarter of
fiscal 1998 and increased as a percentage of total net revenues to 1.4% from
(2.9%).
INTEREST EXPENSE, NET increased $237,000, or 47.5% to $735,000 in the first
quarter of fiscal 1999 from $499,000 in the first quarter of fiscal 1998
primarily due to increased bank borrowings used to finance the Company's
expansion.
BENEFITS FOR INCOME TAX was $61,000 in the first quarter of fiscal 1999 as
compared to $405,000 in the first quarter of fiscal 1998.
NET LOSS was $187,000 in the first quarter of fiscal 1999 compared to $725,000
in the first quarter of fiscal 1998.
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.
The Company has 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 October 31, 1998, the Company has an additional $4.6
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 8.24%
at October 31, 1998). This facility was used to finance the acquisition of CWI,
refinance existing bank debt and for working capital. The Credit Facility was
amended effective July 31, 1998 to waive 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 million to $7 million
for the period beginning September 1, 1998 and ending on December 31, 1998. The
amendments 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 million 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 decreased $1.2 million to $2.1 million at October
31, 1998 from $3.3 million at July 31, 1998. Accounts receivable and inventory
increased $4.8 million to $37.3 million at October 31, 1998 from $32.5 million
at July 31, 1998. This increase was partially offset by an increase in accounts
payable of $4.7 million to $17.8 million at October 31, 1998 from $13.1 million
at July 31, 1998.
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The Company's net cash provided by operating activities increased to $840,000
for the first quarter of fiscal 1999 compared to net cash used in operating
activities of $1.9 million for the first quarter of fiscal 1998. The increase in
net cash provided by operating activities resulted primarily from an increase in
inventories and accounts receivable partially offset by an increase in current
liabilities reflecting the growth in the Company's operations.
The Company's net cash used in investing activities decreased to $1.0 million
for the first quarter of fiscal 1999 from $1.5 million in the first quarter of
fiscal 1998. The decrease in cash used in investing activities was primarily
attributable to a reduction of capital expenditures for new stores. The Company
opened 13 new stores in the first quarter of fiscal 1999.
The Company's net cash used in financing activities decreased to $378,000 in the
first quarter of fiscal 1999 from net cash provided by financing activities of
$2.7 million in the first quarter of fiscal 1998 primarily as a result of
reduced borrowings on the bank lines of credit.
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.
SEASONALITY
The Company's stores have historically experienced, and the Company expects its
stores to continue to experience, seasonal fluctuations in revenues with a
larger percentage of revenues typically being realized in the second fiscal
quarter during the holiday season. In addition, the Company's quarterly results
can be significantly affected by the timing of store openings and acquisitions
and the integration of new and acquired stores into the Company's operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 4 of the Notes to Condensed Consolidated Financial Statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits-
10.16 Settlement Agreement, dated October 9, 1998 by and between
the Company and Nick Molina.
27.1 Financial Data Schedule
(b) The Company did not file a form 8-K during the first quarter of
fiscal 1999.
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LET'S TALK CELLULAR & WIRELESS, INC.
December 14, 1998 By: /s/ Brett Beveridge
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BRETT BEVERIDGE
President and Co-Chairman of the Board
December 14, 1998 By: /s/ Dan Cammarata
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DAN CAMMARATA
Chief Financial Officer
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