1
UNITED STATES
SECURITIES EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-23351
LET'S TALK CELLULAR & WIRELESS, INC.
(Exact Name of Registrant as Specified in its Charter)
FLORIDA 65-0292891
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
800 BRICKELL AVE., STE. 400
MIAMI, FL 33131 33131
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 358-8255
-----------------------------
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(Former name, former address and fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the registrant's common stock is 8,749,762
as of June 14, 1999.
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LET'S TALK CELLULAR & WIRELESS, INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Page
----
Condensed Consolidated Balance Sheets as of April 30, 1999 (Unaudited)
and July 31, 1998................................................................................... 3
Condensed Consolidated Statements of Operations for the Three Months Ended
April 30, 1999 and April 30, 1998 (Unaudited)..................................................... 4
Condensed Consolidated Statements of Operations for the Nine Months Ended
April 30, 1999 and April 30, 1998 (Unaudited)..................................................... 5
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended April 30, 1999 and April 30, 1998 (Unaudited)................................................ 6
Notes to Condensed Consolidated Financial Statements (Unaudited)................................... 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................................... 9
PART II - OTHER INFORMATION..................................................................................... 15
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
APRIL 30, JULY 31,
1999 1998
----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 1,780,414 $ 1,697,397
Accounts receivable, net 18,572,100 15,954,275
Inventories 18,449,844 12,853,459
Prepaid expenses 647,004 429,869
Deferred tax asset 836,806 836,806
Net assets of discontinued wholesale operations -- 3,679,502
----------- -----------
Total current assets 40,286,168 35,451,308
Property and equipment, net 12,823,998 12,170,193
Other assets, net 1,140,658 1,020,524
Intangible assets, net 35,585,499 37,848,638
----------- -----------
Total assets $89,836,323 $86,490,663
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $15,915,587 $13,116,458
Bank lines of credit 8,636,818 9,099,072
Accrued expenses 5,976,640 6,628,207
Current portion of bank term loan and obligations under capital leases 3,126,148 1,947,361
Income taxes payable 44,301 273,255
Deferred revenues 907,677 855,729
Customer deposits 215,404 257,879
----------- -----------
Total current liabilities 34,822,575 32,177,961
Bank term loan, less current portion 17,000,000 19,250,000
Obligation under capital leases, less current portion 420,965 346,150
Other liabilities 584,916 372,395
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 2,779,722 116,012
----------- -----------
Total shareholders' equity 36,583,889 33,920,179
----------- -----------
Total liabilities and shareholders' equity $89,836,323 $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 APRIL 30,
----------------------------
1999 1998
----------- --------------
Net revenues:
Retail sales $12,579,955 $11,421,499
Activation commissions 15,780,698 11,320,666
Residual income 4,994,226 4,128,118
----------- -----------
Total net revenues 33,354,879 26,870,283
Cost of sales 14,288,357 11,479,748
----------- -----------
Gross profit 19,066,522 15,390,535
Operating expenses:
Selling, general and administrative 15,545,733 12,291,002
Depreciation and amortization 708,754 414,671
Amortization of intangible assets 588,654 478,394
----------- -----------
Total operating expenses 16,843,141 13,184,067
----------- -----------
Income from continuing operations 2,223,381 2,206,468
Interest expense, net 663,796 307,833
----------- -----------
Income from continuing operations before provision for
income taxes, discontinued operations and extraordinary charge 1,559,585 1,898,635
Provision for income taxes 623,834 797,913
----------- -----------
Income from continuing operations before discontinued
operations and extraordinary charge 935,751 1,100,722
Discontinued operations (Note 4):
Loss from operations of discontinued wholesale division
(net of taxes) 83,967 351,794
Loss on disposal of wholesale division (net of taxes) 27,203 --
----------- -----------
Net income before extraordinary item 824,581 748,928
Extraordinary charge on debt retirement (net of taxes) -- 240,226
----------- -----------
Net income $ 824,581 $ 508,702
=========== ===========
EARNINGS PER SHARE
Basic:
Income per share from continuing operations before
discontinued operations and extraordinary charge $ 0.10 $ 0.13
Loss per share from operations of discontinued wholesale
division 0.01 0.04
Loss per share on disposal of wholesale division -- --
Extraordinary charge per share -- 0.03
----------- -----------
Net income per share $ 0.09 $ 0.06
=========== ===========
Diluted:
Income per share from continuing operations before
discontinued operations and extraordinary charge $ 0.10 $ 0.13
Loss per share from operations of discontinued wholesale
division 0.01 0.04
Loss per share on disposal of wholesale division -- --
Extraordinary charge per share -- 0.03
----------- -----------
Net income per share $ 0.09 $ 0.06
=========== ===========
Weighted average shares outstanding:
Basic 8,749,762 8,576,728
=========== ===========
Diluted 8,749,762 8,604,501
=========== ===========
See accompanying notes.
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LET'S TALK CELLULAR & WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED APRIL 30,
-------------------------------
1999 1998
------------ -----------
Net revenues:
Retail sales $ 41,479,298 $27,882,650
Activation commissions 52,056,664 28,804,420
Residual income 13,910,534 8,966,889
------------ -----------
Total net revenues 107,446,496 65,653,959
Cost of sales 47,687,220 29,656,104
------------ -----------
Gross profit 59,759,276 35,997,855
Operating expenses:
Selling, general and administrative 48,549,973 29,571,880
Depreciation and amortization 1,976,533 985,150
Amortization of intangible 1,908,376 1,438,938
------------ -----------
Total operating expenses 52,434,882 31,995,968
------------ -----------
Income from continuing operations 7,324,394 4,001,887
Interest expense, 2,123,037 1,052,799
------------ -----------
Income from continuing operations before provision for income
taxes, discontinued operations and extraordinary charge 5,201,357 2,949,088
Provision for income taxes 2,119,064 1,303,207
------------ -----------
Income from continuing operations before discontinued operations
and extraordinary item 3,082,293 1,645,881
Discontinued operations (Note 4):
Loss from operations of discontinued wholesale division
(net of taxes) 391,380 725,255
Loss on disposal of wholesale division (net of taxes) 27,203 --
------------ -----------
Net income before extraordinary charge 2,663,710 920,626
Extraordinary charge on debt retirement (net of taxes) -- 631,584
------------ -----------
Net income $ 2,663,710 $ 289,042
============ ===========
EARNINGS PER SHARE
Basic:
Income per share from continuing operations before discontinued operations $ 0.35 $ 0.22
and extraordinary charge
Loss per share from operations of discontinued wholesale division 0.05 0.10
Loss per share on disposal of wholesale division -- --
Extraordinary charge per share -- 0.08
------------ -----------
Net income per share $ 0.30 $ 0.04
============ ===========
Diluted:
Income per share from continuing operations before discontinued operations $ 0.35 $ 0.22
and extraordinary charge
Loss per share from operations of discontinued wholesale division 0.05 0.10
Loss per share on disposal of wholesale division -- --
Extraordinary charge per share -- 0.08
------------ -----------
Net income per share $ 0.30 $ 0.04
============ ===========
Weighted average shares outstanding:
Basic 8,749,762 7,381,246
============ ===========
Diluted 8,749,762 7,390,505
============ ===========
See accompanying notes.
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LET'S TALK CELLULAR & WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED APRIL 30,
----------------------------------
1999 1998
----------- ------------
OPERATING ACTIVITIES
Net income $ 2,663,710 $ 289,042
----------- ------------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Loss from operations of discontinued wholesale division 391,379 725,255
Loss on disposal of wholesale division 27,203 --
Depreciation and amortization 1,976,533 985,152
Amortization of intangible assets 1,908,376 1,438,938
Amortization of deferred financing costs 94,958 1,056,999
Provision for activation adjustments and cancellation losses -- 191,158
Deferred income taxes -- (285,246)
Loss on disposal of property and equipment 38,212 --
Changes in operating assets and liabilities:
Accounts receivable (2,617,825) (6,483,362)
Inventories (5,596,385) (5,283,049)
Prepaid expenses (217,135) (2,200,499)
Other assets (215,092) (180,092)
Income tax receivable -- 291,099
Trade accounts payable 2,799,129 (635,205)
Accrued expenses (484,138) 1,630,893
Other liabilities 212,521 565,038
Income taxes payable 50,102 1,334,603
Customer deposits (42,475) (507,259)
Deferred revenues 51,948 (712,504)
----------- ------------
Net cash provided by (used in) continuing operations 1,041,021 (7,779,039)
Net cash provided by (used in) discontinued operations 1,619,637 (2,305,521)
----------- ------------
Total net cash provided by (used in) operations 2,660,658 (10,084,560)
INVESTING ACTIVITIES
Acquisition of Cellular Warehouse, net of cash acquired -- (15,462,797)
Acquisition of Cellular Unlimited, net of cash acquired -- (1,862,212)
Acquisition of Cellular USA, net of cash acquired -- (1,395,701)
Proceeds from sale of NCI 1,549,560 --
Purchases of property and equipment (2,428,733) (4,984,688)
----------- ------------
Net cash used in investing activities (879,173) (23,705,398)
FINANCING ACTIVITIES
Proceeds from sale of common stock, net of underwriting costs -- 22,320,000
Proceeds from bank term loans -- 21,500,000
Net proceeds on borrowings under bank lines of credit (462,254) 2,576,715
Payments on loans payable to shareholder and officers -- (258,100)
Payments on bank term loan and capital leases (1,236,214) (13,061,244)
----------- ------------
Net cash (used in) provided by financing activities (1,698,468) 33,077,371
----------- ------------
Net increase (decrease) in cash and cash equivalents 83,017 (712,587)
Cash and cash equivalents at beginning of period 1,697,397 1,080,014
----------- ------------
Cash and cash equivalents at end of period $ 1,780,414 $ 367,427
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 1,991,830 $ 870,495
=========== ============
Cash paid for income taxes $ 1,771,035 $ 58,795
=========== ============
Common stock issued to acquire Cellular Warehouse -- $ 7,562,500
============
Net assets acquired in the acquisition of Cellular Warehouse -- $ 5,374,787
============
Goodwill as a result of the stock issuance to acquire Cellular Warehouse -- $ 2,217,713
============
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
APRIL 30, 1999
(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 nine months ended April 30, 1999 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.
Certain amounts in the prior years financial statements have been reclassified
to conform to the current year's presentation for discontinued operations of the
wholesale division.
2-NET INCOME PER SHARE
Basic earnings per share is computed by dividing the Company's net income by the
weighted average number of shares outstanding during the period. Diluted
earnings per share is computed by dividing the Company's net income 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,
restated 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 (the "IPO"). 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 $20.0 million were used to repay the then outstanding balance on
bank term loans totaling approximately $12.9 million, a portion of the line of
credit amounting to approximately $4.9 million, 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
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extraordinary charge to earnings of approximately $391,000, net of income taxes
of approximately $261,000.
4-DISCONTINUED OPERATIONS
On March 9, 1999, the Company made a strategic decision to sell its wholesale
operations. This business has been accounted for as a discontinued operation and
the results of operations have been excluded from continuing operations in the
consolidated statements of operations from all periods presented.
On March 22, 1999, the Company completed the sale of substantially all of the
assets of National Cellular, Incorporated, "NCI", a wholly owned subsidiary,
together with all the goodwill associated with the business and the right to use
the names "NCI" and "National Cellular". The assets included the sale of the
inventory of wireless products, records and documents pertaining to its business
operations including customer and vendor files, and standard forms used in
connection with the operations of the business.
The purchase price of $1,550,000 was received in cash. In computing the loss on
the sale, the inventory sold had a carrying value of $1,408,000 on March 22,
1999. The unamortized portion of goodwill in the amount of $187,000 was charged
against the disposal and the result, net of an income tax benefit for $18,000
resulted in a loss of $27,000. The cash proceeds were used to paydown the
Company's revolving credit line.
Information relating to the discontinued wholesale operations are as follows:
Three Months Ended Nine Months Ended
------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ----------- -----------
Net revenues........................... $2,556,430 $5,171,814 $13,686,030 $21,050,515
Cost of sales.......................... 2,321,110 4,957,384 12,696,761 20,017,811
Gross profit........................... 235,320 214,430 989,269 1,032,704
Selling general and administrative..... 375,265 800,754 1,641,568 2,241,462
---------- ---------- ----------- -----------
Loss before income taxes............... 139,945 586,324 652,299 1,208,758
Less income tax benefit................ 55,978 234,530 260,920 483,503
---------- ---------- ----------- -----------
Net loss............................. $ 83,967 $ 351,794 $ 391,380 $ 725,255
========== ========== =========== ===========
The net assets of the discontinued operations were $0 as of April 30, 1999, and
$3,680,000 as of July 31, 1998.
5-CONTINGENCIES
The Company and one of its directors and officers and a former director and
officer are named as defendants in several class action lawsuits for alleged
violations of section 10(b) and 20(a) of the Securities and Exchange Act and SEC
Rule 10b-5 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 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 on the consolidated financial position, liquidity or
results of operations of the Company.
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6-SUBSEQUENT EVENTS
On June 7, 1999, the Company entered into an Agreement to Assign Accounts
Receivable, on a recourse basis, to H.I.G. Capital LLC (a Related Party). The
agreement provides that the Company can sell up to $2,000,000 of accounts
receivable at 98% of the invoice amount. The 98% of the invoice amount,
$1,960,000, was paid to the Company on June 7, 1999.
On June 7, 1999, the Company entered into an amendment of its Loan and
Security Agreement with the Chase Manhattan Bank which deferred the required
reduction period, whereby the Company is required to reduce all outstanding
advances under the revolving line of credit to not more than $9 million for the
period from March 1, 2000 through and including April 15, 2000. In addition, the
cap on eligible inventories used in computing the availability under the
revolving credit facility was temporarily increased on a scale beginning on
April 30, 1999 and ending on December 31, 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company is a leading specialty retailer of cellular and wireless products,
services and accessories in the United States, with 266 stores located in 23
states, the District of Columbia and Puerto Rico as of April 30, 1999. 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'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 30-35 new stores in Fiscal 1999,
as of the close of the third quarter, 26 new stores were opened. 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. Further, the
Company has continued to strengthen its senior executive team with the addition
of several new and well-seasoned executives in key areas, including Purchasing
and Distribution, Operations, Information Systems, and Human Resources as well
as strengthening 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 three 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.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.
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 $52.1
million and $28.8 million for the nine months ended April 30, 1999 and 1998,
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.
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
acquisitions is expected to have a significantly negative effect on net income
for the next two fiscal years.
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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 CONTINUING OPERATIONS
QUARTER ENDED APRIL 30, 1999 COMPARED TO QUARTER ENDED APRIL 30, 1998
TOTAL NET REVENUES increased $6.5 million, or 24.1% to $33.4 million in the
third quarter of fiscal 1999 from $26.9 million in the third quarter of fiscal
1998. The increase in revenues is due to the increases in the number of retail
locations , and to the acquisition of Sosebee Enterprises, Inc. and Cellular
Warehouse, Inc. (collectively "CWI") effective March 1, 1998 and the resulting
inclusion of a full three months of CWI's operations in the Company's
consolidated revenues for the third quarter of fiscal 1999. Retail sales
increased $1.2 million, or 10.1% to $12.6 million from $11.4 million, activation
commissions increased $4.5 million, or 39.4% to $15.8 million from $11.3 million
and residual income increased $.9 million, or 21% to $5.0 million from $4.1
million. Comparable store sales increased 348,000, or 1.7% to $20.8 million from
$20.4 million. The Company had 266 stores open at April 30, 1999 as compared to
230 at 31 April 30, 1998.
GROSS PROFIT increased $3.7 million, or 23.9% to $19.1 million in the third
quarter of fiscal 1999 from $15.4 million for the third quarter of fiscal 1998.
As a percentage of total net revenues, gross profit was 57.2% and 57.3% for
third quarter of fiscal 1999 and 1998, respectively.
SELLING, GENERAL AND ADMINISTRATIVE expenses increased $3.3 million, or 26.5% to
$15.5 million for the third quarter of fiscal 1999 from $12.3 million in the
third quarter of fiscal 1998. As a percentage of total net revenues, selling,
general and administrative expenses increased to 46.6% during the third quarter
of fiscal 1999 from 45.7% in the third quarter of fiscal 1998. The Company has
incurred additional expenses relating to the hiring of additional senior
personnel to support the operations of the Company as well as future growth.
AMORTIZATION OF INTANGIBLE ASSETS increased $111,000, or 23% to $589,000 in the
third quarter of fiscal 1999 from $478,000 in the third quarter of fiscal 1998.
The increase in amortization of intangible assets is a result of a full three
months of amortization relating to the acquisition of CWI for the third quarter
of Fiscal 1999. The CWI acquisition had an effective date of March 1, 1998.
INCOME FROM CONTINUING OPERATIONS increased $17,000, or .8% to $2.2 million in
the third quarter of fiscal 1999 from $2.2 million in the third quarter of
fiscal 1998 and decreased as a percentage of total net revenues to 6.7% from
8.2%.
INTEREST EXPENSE, NET increased $356,000, or 115.6% to $664,000 in the third
quarter of fiscal 1999 from $308,000 in the third quarter of fiscal 1998
primarily due to increased bank borrowings used to finance the Company's
expansion.
PROVISION FOR INCOME TAX was $624,000 in the third quarter of fiscal 1999 as
compared to $798,000 in the third quarter of fiscal 1998.
NET INCOME was $825,000 in the third quarter of fiscal 1999 compared to $509,000
in the third quarter of fiscal 1998.
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NINE MONTHS ENDED APRIL 30, 1999 COMPARED TO NINE MONTHS ENDED APRIL 30, 1998
TOTAL NET REVENUES increased $41.7 million, or 63.7% to $107.4 million in the
nine months ended April 30, 1999 from $65.7 million in the nine months ended
April 30, 1998. The increase in revenues is due to the increase in the number of
retail locations, and to the acquisitions of USA and Unlimited, effective
November 1, 1997, and of CWI effective March 1, 1998 and the resulting inclusion
of the acquired entities' operations in the Company's consolidated revenues for
the nine months ended April 30, 1999. Retail sales increased $13.6 million, or
48.8% to $41.5 million from $27.9 million, activation commissions increased
$23.3 million, or 80.7% to $52.1 million from $28.8 million and residual income
increased $4.9 million, or 55.1% to $13.9 million from $9.0 million. Comparable
store sales decreased $1.0 million, or 1.9% to $52.3 million from $53.4 million.
The increase in residual income was due to the inclusion of CWI's residual
income ($4.3 million for the nine months ended April 30, 1999) and the increase
in the number of activations resulting from the various acquisitions and the
Company's store expansion.
GROSS PROFIT increased $23.8 million, or 66% to $59.8 million in the nine months
ended April 30, 1999 from $36.0 million for the nine months ended April 30,
1998. As a percentage of total net revenues, gross profit increased to 55.6%
from 54.8%.
SELLING, GENERAL AND ADMINISTRATIVE expenses increased $18.9 million, or 64.2%
to $48.5 million for the nine months ended April 30, 1999 from $29.6 million in
the nine months ended April 30, 1998. As a percentage of total net revenues,
selling, general and administrative expenses increased to 45.2% during the nine
months ended April 30, 1999 from 45.0% in the nine months ended April 30,
1998. Included in the nine months ended April 30,1999 is a $450,000 charge in
connection with the settlement agreement with a former officer of the Company.
In addition, general and administrative expenses have increased due to the
expansion of the infrastructure.
AMORTIZATION OF INTANGIBLE ASSETS increased $469,000, or 32.6% to $1.9 million
in the nine months ended April 30, 1999 from $1.4 million in the nine months
ended April 30, 1998. The increase in amortization of intangible assets is a
result of a full year of amortization relating to the USA, Unlimited and CWI
acquisitions.
INCOME FROM CONTINUING OPERATIONS increased $3.3 million, or 83.0% to $7.3
million in the nine months ended April 30, 1999 from $4.0 million in the nine
months ended April 30, 1998 and increased as a percentage of total net revenues
to 6.8% from 6.1%.
INTEREST EXPENSE, NET increased $1.0 million, or 101.7% to $2.1 million in the
nine months ended April 30, 1999 from $1.1 million in the nine months ended
April 30, 1998 primarily due to increased bank borrowings used to finance the
Company's expansion.
PROVISION FOR INCOME TAX was $2.1 million in the nine months ended April 30,
1999 as compared to $1.3 million in the nine months ended April 30, 1998.
NET INCOME was $2.7 million in the nine months ended April 30, 1999 as compared
to $289,000 in the nine months ended April 30, 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 issuances and cash provided by
operations.
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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 April 30, 1999, the Company has an additional $2.0
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 8.01%
at April 30, 1999). This facility was used to finance the acquisition of CWI,
refinance existing bank debt and for working capital. The Credit Facility was
amended effective June 7, 1999 to defer the required reduction period, whereby
the Company is required to reduce all outstanding advances under the revolving
line of credit to not more than $9 million for the period from March 1, 2000
through and including April 15, 2000. In addition, the cap on eligible
inventories used in computing the availability under the revolving credit
facility was temporarily increased on a scale beginning on April 30, 1999 and
ending on December 31, 1999.
The Company's working capital increased $2.2 million to $5.5 million at April
30, 1999 from $3.3 million at July 31, 1998. Accounts receivable and inventory
increased $8.2 million to $37.0 million at April 30, 1999 from $28.8 million at
July 31, 1998. This increase was partially offset by an increase in accounts
payable of $2.8 million to $15.9 million at April 30, 1999 from $13.1 million at
July 31, 1998.
On June 7, 1999, in order to meet its liquidity needs, the Company entered into
an Agreement to Assign Accounts Receivable, on a recourse basis, to H.I.G.
Capital LLC (a Related Party). The agreement provides that the Company can sell
up to $2,000,000 of accounts receivable at 98% of the invoice amount. The 98% of
the invoice amount, $1,960,000, was paid to the Company on June 7, 1999. The
Company anticipates that borrowings under the Credit Facility will be sufficient
to meet currently foreseeable liquidity requirements.
The Company's net cash provided by continuing operating activities increased to
$1.0 million for the nine months ended April 30, 1999 compared to net cash used
in operating activities of ($7.8 million) for the nine months ended April 30,
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 provided by discontinued operations
increased to $1.0 million for the nine months ended April 30, 1999 compared
to net cash used in discontinued operations of ($2.3 million) for the nine
months ended April 30, 1998.
The Company's net cash used in investing activities decreased to $879,000 for
the nine months ended April 30, 1999 from $23.7 million in the nine months ended
April 30, 1998. The decrease in cash used in investing activities was primarily
attributable to a reduction of capital expenditures for new stores, and the
acquisition of Cellular Warehouse in the prior year.
The Company's net cash (used in) provided by financing activities decreased to
($1.7) million in the nine months ended April 30, 1999 from net cash provided by
financing activities of $33.1 million in the nine months ended April 30, 1998
primarily as a result of the Company's IPO.
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 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 modifications 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 complaint
financial software, pager billing system, and plans to complete the update of
its purchase order and point-of-sale systems by October 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 $100,000 in fiscal 1999.
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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 5 to the Condensed Consolidated Financial Statements for
the Quarter Ended April 30, 1999.
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-
10.18 Amendment No. 4 to the Loan and Security Agreement,
dated June 7, 1999, by and among the Company and
certain of its subsidiaries, certain lenders and The
Chase Manhattan Bank, as Agent.
10.19 Agreement to sell accounts receivable, entered into as
of June 7, 1999, by and among Let's Talk Cellular &
Wireless, Inc., a Florida corporation ("LTC"), H.I.G
Capital LLC ("HIG"), and The Chase Manhattan Bank as
agent for the Lenders ("Agent").
10.20 Assignment of Accounts Receivable, dated June 7, 1999,
between Let's Talk Cellular & Wireless, Inc., and
H.I.G. Capital LLC.
10.21 Asset Purchase Agreement, entered into effective as of
March 12, 1999, is by and between National Cellular,
Incorporated, a Texas corporation ("Seller"), and
National Cellular Investors, L.P., a Texas limited
partnership ("Buyer").
10.22 Letter Agreement dated March 20, 1999, amending the
Amended and Restated Employment Agreement between,
dated April 30, 1998 between the Company and Ronald
Koonsman.
27.1 Financial Data Schedule
(b) The Company filed a form 8-K on march 15, 1999, providing a
consolidated balance sheet as of February 28, 1999, at the
request of the Nasdaq National Market.
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LET'S TALK CELLULAR & WIRELESS, INC.
June 14, 1999 By: /s/ David H. Eisenberg
--------------------------
DAVID H. EISENBERG
Chief Executive Officer and Co-Chairman of
the Board
June 14, 199 9 By: /s/ Brett Beveridge
--------------------------
BRETT BEVERIDGE
President and Co-Chairman of the Board
June 14, 1999 By: /s/ Daniel Cammarata
-----------------------------
DANIEL CAMMARATA
Chief Financial Officer
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