<PAGE> 1
3/13/98
11:30 AM
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 JANUARY 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.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
FLORIDA 65-0292891
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
800 BRICKELL AVE., STE. 400
MIAMI, FL 33131 33131
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 358-8255
-----------------------------
- --------------------------------------------------------------------------------
(Former name, former address and fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the registrant's common stock was 8,199,762
as of March 15, 1998.
<PAGE> 2
LET'S TALK CELLULAR & WIRELESS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets as of January 31, 1998 (Unaudited)
and July 31, 1997...................................................................... 4
Condensed Consolidated Statements of Operations for the Three Months Ended
January 31, 1998 and January 31, 1997 (Unaudited)...................................... 5
Condensed Consolidated Statements of Operations for the Six Months Ended
January 31, 1998 and January 31, 1997 (Unaudited)...................................... 6
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
January 31, 1998 and January 31, 1997 (Unaudited)...................................... 7
Notes to Condensed Consolidated Financial Statement (Unaudited)........................ 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 10
PART II - OTHER INFORMATION.................................................................... 17
</TABLE>
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), the Company is hereby
providing cautionary statements identifying important factors that could cause
the Company's actual results to differ materially from those projected in
forward-looking statements (as such term is defined in the Reform Act) of the
Company made by or on behalf of the Company herein or which are made orally,
whether in presentations, in response to questions or otherwise. Any statements
that express, or involve discussions as to expectations, beliefs, plans,
objectives, assumptions or future events or performance (often, but not always,
through the use of words or phrases such as "will result," "are expected to,"
"will continue," "is anticipated," "plans," "intends," "estimated," projection"
and "outlook") are not historical facts and may be forward-looking and,
accordingly, such statements involve estimates, assumptions, risks and
uncertainties which could cause actual results to differ materially from those
expressed in the forward-looking statements. Such risks include, among others,
the risks associated with rapid growth, competition, dependence on cellular and
PCS carriers, customer turnover, technological change and inventory
obsolescence.
The Company cautions that the risks described above could cause actual
results or outcomes to differ materially from those expressed in any
forward-looking statement of the Company made by or on behalf of the Company.
Any forward-looking statement speaks only as of the date on which such
-2-
<PAGE> 3
statement is made, and the Company undertakes no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrences of
unanticipated events. New factors emerge from time to time and it is not
possible for management to predict all of such factors. Further, management
cannot assess the effect of each such factor on the Company's business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statements.
-3-
<PAGE> 4
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LET'S TALK CELLULAR & WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1997 1998
-------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................... $ 1,080,014 $ 547,660
Accounts receivable, net ..................................................... 5,706,983 11,505,897
Inventories .................................................................. 5,712,420 12,715,150
Prepaid expenses ............................................................. 265,859 815,930
Income taxes receivable ...................................................... 291,099 --
Other current assets ......................................................... 600,385 --
Deferred tax asset ........................................................... 475,245 475,245
----------- -----------
Total current assets ................................................. 14,132,005 26,059,882
Property and equipment, net .................................................... 5,296,743 8,136,855
Other assets, net .............................................................. 1,353,097 2,205,809
Intangible assets, net ......................................................... 13,755,696 13,844,945
----------- -----------
Total assets ......................................................... $34,537,541 $50,247,491
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ....................................................... $ 6,583,542 $11,339,567
Bank lines of credit ......................................................... 1,023,285 4,000,000
Accrued expenses ............................................................. 3,120,493 4,488,331
Loans payable to shareholders and officers ................................... 258,100 --
Current portion of bank term loans and obligations under capital leases ...... 732,195 83,926
Deferred revenues ............................................................ 693,038 875,699
Customer deposits ............................................................ 108,673 70,980
----------- -----------
Total current liabilities ............................................ 12,519,326 20,858,503
Bank term loans, less current portion .......................................... 12,350,000 49,037
Loans payable to shareholders and officers ..................................... 2,000,000 2,000,000
Obligation under capital lease, less current portion ........................... 32,859 10,199
Other liabilities .............................................................. 72,808 437,031
Deferred tax liability ......................................................... 952,596 458,868
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued
and outstanding............................................................. -- --
Common stock, $.01 par value, 50,000,000 shares authorized, 6,093,166 and
8,199,762 shares issued and outstanding, respectively ....................... 60,932 81,998
Additional paid-in capital ..................................................... 6,166,474 26,188,969
Retained earnings .............................................................. 382,546 162,886
----------- -----------
Total shareholders' equity ..................................................... 6,609,952 26,433,853
----------- -----------
Total liabilities and shareholders' equity ..................................... $34,537,541 $50,247,491
=========== ===========
</TABLE>
-4-
<PAGE> 5
LET'S TALK CELLULAR & WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JANUARY 31,
------------------------------
1997 1998
------------ ------------
<S> <C> <C>
Net revenues:
Retail sales ................................................... $ 3,517,057 $ 10,712,619
Activation commissions ......................................... 4,182,617 11,833,070
Residual income ................................................ 316,076 2,420,875
Wholesale sales ................................................ -- 7,779,923
------------ ------------
Total net revenues ..................................... 8,015,750 32,746,487
Cost of sales .................................................... 3,606,076 19,417,743
------------ ------------
Gross profit ..................................................... 4,409,674 13,328,744
Operating expenses:
Selling, general and administrative ............................ 3,287,967 10,874,204
Depreciation and amortization .................................. 97,659 306,447
Amortization of intangible assets .............................. 60,000 343,818
------------ ------------
Total operating expenses ............................... 3,445,626 11,524,469
------------ ------------
Income from operations ........................................... 964,048 1,804,275
Interest expense, net ............................................ 42,124 246,253
------------ ------------
Income before provision for income taxes and extraordinary charge 921,924 1,558,022
Provision for income taxes ....................................... 295,014 661,772
------------ ------------
Income before extraordinary charge ............................... 626,910 896,250
Extraordinary charge on debt retirement (net of taxes) ........... -- 391,358
------------ ------------
Net income .............................................. 626,910 504,892
Accretion of Series A Preferred Stock to redemption value 15,660 --
------------ ------------
Net income applicable to common shareholders ............ $ 611,250 $ 504,892
============ ============
Earnings per share:
Basic:
- ------
Income before extraordinary charge ...................... $ 0.29 $ 0.12
Extraordinary charge .................................... -- (0.05)
------------ ------------
Net income applicable to common shareholders ........... $ 0.29 $ 0.07
============ ============
Diluted:
- --------
Income before extraordinary charge ...................... $ 0.14 $ 0.12
Extraordinary charge .................................... -- (0.05)
------------ ------------
Net income applicable to common shareholders ............ $ 0.14 $ 0.07
============ ============
Weighted average shares outstanding:
Basic ................................................... 2,137,850 7,512,829
============ ============
Diluted ................................................. 4,275,000 7,512,829
============ ============
</TABLE>
See accompanying notes.
-5-
<PAGE> 6
LET'S TALK CELLULAR & WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JANUARY 31,
------------------------------
1997 1998
------------ ------------
<S> <C> <C>
Net revenues:
Retail sales ................................................... $ 5,615,016 $ 16,461,151
Activation commissions ......................................... 5,724,953 17,483,754
Residual income ................................................ 639,428 4,838,771
Wholesale sales ................................................ -- 15,878,701
------------ ------------
Total net revenues ..................................... 11,979,397 54,662,377
Cost of sales .................................................... 5,346,519 33,236,783
------------ ------------
Gross profit ..................................................... 6,632,878 21,425,594
Operating expenses:
Selling, general and administrative ............................ 5,376,210 18,721,586
Depreciation and amortization .................................. 167,378 570,479
Amortization of intangible assets .............................. 100,000 960,544
------------ ------------
Total operating expenses ............................... 5,643,588 20,252,609
------------ ------------
Income from operations ........................................... 989,290 1,172,985
Interest expense, net ............................................ 80,681 744,966
------------ ------------
Income before provision for income taxes and extraordinary charge. 908,609 428,019
Provision for income taxes ....................................... 290,754 256,321
------------ ------------
Income before extraordinary charge ............................... 617,855 171,698
Extraordinary charge on debt retirement (net of taxes) ........... -- 391,358
------------ ------------
Net income (loss) ....................................... 617,855 (219,660)
Accretion of Series A Preferred Stock to redemption value 31,320 --
------------ ------------
Net income (loss) applicable to common shareholders ..... $ 586,535 $ (219,660)
============ ============
Earnings (loss) per share:
Basic:
- ------
Income before extraordinary charge ...................... $ 0.27 $ 0.03
Extraordinary charge .................................... -- (0.06)
------------ ------------
Net income (loss) applicable to common shareholders ..... $ 0.27 $ (0.03)
============ ============
Diluted:
- --------
Income before extraordinary charge ...................... $ 0.14 $ 0.03
Extraordinary charge .................................... -- (0.06)
------------ ------------
Net income (loss) applicable to common shareholders ..... $ 0.14 $ (0.03)
============ ============
Weighted average shares outstanding:
Basic ................................................... 2,137,850 6,802,997
============ ============
Diluted ................................................. 4,275,700 6,802,997
============ ============
</TABLE>
See accompanying notes.
-6-
<PAGE> 7
LET'S TALK CELLULAR & WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JANUARY 31,
----------------------------
1997 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) .............................................. $ 617,855 $ (219,660)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization ............................... 167,378 570,481
Amortization of intangible assets ........................... 100,000 960,544
Amortization of deferred financing costs .................... 4,684 729,392
Provision for activation adjustments and cancellation losses 25,000 141,158
Deferred income taxes ....................................... 298,030 (230,845)
Changes in operating assets and liabilities
Accounts receivable ...................................... (888,061) (4,695,205)
Inventories .............................................. (2,190,598) (6,530,075)
Prepaid expenses ......................................... 35,799 (2,369,425)
Other assets ............................................. (103,078) 40,666
Income tax receivable .................................... -- 291,099
Trade accounts payable ................................... 1,041,055 3,764,969
Accrued expenses ......................................... 334,536 1,421,071
Income taxes payable ..................................... (51,906) (151,770)
Customer deposits ........................................ (25,864) (37,693)
Deferred revenues ........................................ 12,599 35,610
------------ ------------
Net cash used in operating activities .......................... (622,571) (6,279,683)
INVESTING ACTIVITIES
Acquisition of Cellular Unlimited, net of cash acquired ........ -- (1,862,212)
Acquisition of Cellular USA, net of cash acquired .............. -- (1,395,701)
Acquisition of Northpoint Cellular ............................. (850,000) --
Purchases of property and equipment ............................ (1,325,230) (2,951,129)
Decrease in cash held in escrow ................................ 2,009,194 --
------------ ------------
Net cash used in investing activities .......................... (166,036) (6,209,042)
FINANCING ACTIVITIES
Proceeds from sale of common stock, net of underwriting costs .. -- 22,320,000
Proceeds from bank term loan ................................... 600,000 --
Net (payments) proceeds on borrowings under bank lines of credit (27,000) 2,976,715
Payments on loans payable to shareholder and officers .......... -- (258,100)
Payments on bank term loan and capital leases .................. (125,086) (13,082,244)
------------ ------------
Net cash provided by financing activities ...................... 447,914 11,956,371
------------ ------------
Net decrease in cash and cash equivalents ...................... (340,693) (532,354)
Cash and cash equivalents at beginning of period ............... 1,357,172 1,080,014
------------ ------------
Cash and cash equivalents at end of period ..................... $ 1,016,479 $ 547,660
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest ......................................... $ 102,547 $ 757,995
============ ============
Cash paid for income taxes ..................................... $ 89,675 $ 58,795
============ ============
</TABLE>
See accompanying notes.
-7-
<PAGE> 8
LET'S TALK CELLULAR & WIRELESS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 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, 1997, which are included in the Registration Statement on
Form S-1 (Registration No 333-34595). In the opinion of management, all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of the financial information for the interim periods reported have
been made. Results of operations for the six months ended January 31, 1998 are
not necessarily indicative of the results to be expected for the entire fiscal
year ending July 31, 1998.
The Company's stores have historically experienced, and the Company
expects its stores to continue to experience, seasonal fluctuations in revenues
with a larger percentage of revenues typically being realized in the second
fiscal quarter during the holiday season. In addition, the Company's results
during any fiscal period can be significantly affected by the timing of store
openings and acquisitions and the integration of new and acquired stores into
the Company's operations.
Fiscal year references are to the respective fiscal year ended July 31.
2-NET INCOME (LOSS) PER SHARE APPLICABLE TO COMMON SHAREHOLDERS
In 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share. Statement No. 128
replaced the previously reported primary and fully diluted earnings per share
with the basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share except that options,
warrants and convertible securities issued prior to an initial public offering
are considered in the calculation of diluted earnings per share prior to their
issuance only if nominal consideration was received by the Company. All earnings
per share amounts for all periods have been presented, and where necessary,
restated to conform to the Statement No. 128 requirements.
-8-
<PAGE> 9
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
January 31, January 31,
----------------------------- --------------------------------
1997 1998 1997 1998
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) applicable to
common shareholders.................. $ 611,250 $ 504,892 $ 586,535 ($219,660)
Denominator:
Denominator for basic
earnings per share - weighted average
shares .............................. 2,137,850 7,512,829 2,137,850 6,802,997
Effect of dilutive securities:
Preferred stock convertible to
common stock......................... 2,137,850 -- 2,137,850 --
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed
conversions.......................... 4,275,700 7,512,829 4,275,700 6,802,997
=========== =========== =========== =============
Basic earnings (loss) per share
applicable to common
shareholders ........................ $ 0.29 $ 0.07 $ 0.27 $ (0.03)
=========== =========== =========== =============
Diluted earnings (loss) per share
applicable to common
shareholders ........................ $ 0.14 $ 0.07 $ 0.14 $ (0.03)
=========== =========== =========== =============
</TABLE>
3-INITIAL PUBLIC OFFERING
On December 1, 1997, the Company completed an initial public offering
("IPO") of its common stock. Prior to the closing of the IPO, and after giving
effect to a stock split of 3.289 for 1 effected on October 20, 1997, the Company
had outstanding 6,093,166 shares of common stock, exclusive of 106,596 shares
issued immediately prior to the IPO upon exercise of warrants held by the bank
lender to the Company.
-9-
<PAGE> 10
In the IPO, 2,337,245 shares of common stock were sold, of which
2,000,000 shares were sold by the Company and 337,245 shares were sold by
selling shareholders. The Company's net proceeds from the IPO were used to repay
the then outstanding balance on bank term loans totalling $12.9 million, a
portion of the line of credit amounting to $4.9 million and shareholders loans
totalling $258,100, and fund the acquisitions of Cellular Unlimited Corp. and
Cellular USA, Inc. As a result of the repayment of the bank term loans during
the second quarter of fiscal 1998, the Company incurred an extraordinary charge
to earnings of approximately $391,000, net of taxes.
4-ACQUISITIONS
On December 1, 1997, the Company acquired substantially all of the
assets of Cellular Unlimited Corp. for a cash purchase price of $2,055,000 and
up to $225,000 in certain contingent payments in each of the six-month periods
ending July 31, 1998, January 31, 1999 and July 31, 1999.
Additionally, on December 17, 1997, the Company acquired all of the
outstanding capital stock of Cellular USA, Inc. for a cash purchase price of
$1,625,000 and up to an aggregate of $175,000 in certain contingent payments in
1998 and 1999.
5-SUBSEQUENT EVENTS
Effective February 1, 1998, the Company entered into a binding
agreement for the acquisition of all of the outstanding capital stock of
Cellular Warehouse of Atlanta, Georgia, in exchange for 900,000 shares of the
Company's common stock and $20 million in cash. The acquisition, which is
subject to customary regulatory approval, is expected to be completed in late
March. Cellular Warehouse, established in 1991, owns and operates 57 retail
stores in Florida, Georgia, North Carolina, South Carolina, Alabama and
Tennessee; the retail stores are located in strip and power strip shopping
centers. For the twelve months ended December 31, 1997 Cellular Warehouse had
revenues of approximately $37.8 million.
On February 22, 1998, the Company acquired substantially all of the
assets of Lazer Electronics Inc., and Best Electronics and Paging, Inc. for a
total cash purchase price of $190,000. Lazer owns and operates 8 retail stores
in Texas, Georgia and Florida, which are primarily located in regional malls.
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 144
stores located in 14 states, the District of Columbia and Puerto Rico as of
January 31, 1998. The Company's stores, located predominantly in regional
shopping malls, seek to offer one-stop shopping for consumers to purchase
cellular, personal communication systems ("PCS"), paging, internet, satellite,
and other wireless products and services and related accessories. The Company is
also a leading wholesaler of cellular and wireless products and accessories to
more than 1,000 accounts, consisting primarily of distributors, carriers and
small independent retailers. The Company's business strategy is to offer the
most extensive assortment of wireless products and services at everyday low
prices supported by knowledgeable customer service, through conveniently located
and attractively designed stores.
-10-
<PAGE> 11
Since its inception in 1989 through June 1996, the Company had limited
capital and opened 25 stores. In June 1996, the Company issued $3.3 million of
Series A Preferred Stock (which has been converted into common stock) and
accelerated its store expansion. During fiscal 1997, the Company added a net
total of 68 stores, including five stores acquired from Peachtree Mobility in
the Atlanta metropolitan area, and 19 stores from Telephone Warehouse, Inc., one
of the largest AT&T cellular agents in the Southwest. During the six months
ended January 31, 1998, the Company opened 31 stores and acquired 20 stores.
The Company presently plans to open a total of 65 to 75 new stores in
fiscal 1998 and 80 to 100 new stores in fiscal 1999. To prepare for this
expansion, during the past year management has been building the infrastructure
necessary to support a rapidly growing chain of stores. The Company hired senior
management, established a field structure of district managers, developed
employee training programs, enhanced its financial controls and procedures and
finalized standards of store design and visual presentation. As the Company
continues to expand through new store openings and acquisitions, it expects to
leverage these investments and improve margins through economies of scale.
The Company's revenues are generated principally from four sources:
(i) RETAIL SALES. The Company sells cellular and wireless
products, such as phones, pagers and related accessories in the
Company's retail outlets.
(i) ACTIVATION INCOME. 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.
(iii) RESIDUAL INCOME. The Company receives monthly payments
made by certain cellular carriers and pager customers. Cellular
residual payments are based upon a percentage (usually 4-6%) of the
customers' monthly service charges and are recognized as income when
received. Pager residual payments are received on a monthly basis
directly from pager customers for the pager airtime that the Company
buys wholesale from paging carriers and then resells to individuals and
small businesses.
(iv) WHOLESALE SALES. The Company began to wholesale cellular
and wireless products when it acquired Telephone Warehouse in June
1997. The wholesale business typically has higher volumes and lower
margins than the retail business, but provides the Company with greater
purchasing power and additional distribution capabilities.
Comparable stores sales include only stores owned and operated by the
Company for at least 12 full months and are comprised of retail sales and
activation commissions, as residual income is not allocated among stores.
-11-
<PAGE> 12
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. The Company has recently 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 income.
The Company has developed two distinct mall-based store formats,
free-standing kiosks and traditional "in-line" stores. The average capital
expenditures for new kiosk and in-line locations approximate $34,000 and
$94,000, respectively. The initial inventory for a new store approximates
$32,000 for a kiosk and $47,000 for an in-line store. Management believes that
the flexibility of the Company's kiosk and in-line store formats permits the
Company to take advantage of the best available locations across a broad range
of market areas. Pre-opening costs for new stores such as travel and the hiring
and training of new employees are expensed as incurred and typically average
$3,000 per store. In fiscal 1997, comparable stores generated average annual
sales of approximately $500,000 (excluding two stores that generate
substantially higher sales than other stores). Generally, the Company's new
store sales reach normal operating levels after three months of operations.
In June 1997, the Company more than doubled the amount of its assets
and previous twelve months' total net revenues by acquiring Telephone Warehouse.
The accelerated amortization applied to the value of the residual income
acquired in connection with the Telephone Warehouse Acquisition is expected to
have a significantly negative effect on net income in fiscal 1998 and 1999.
Effective February 1, 1998, the Company entered into a binding
agreement for the acquisition of all of the outstanding stock of Cellular
Warehouse of Atlanta, Georgia, in exchange for 900,000 shares of the Company's
common stock and $20 million in cash. The acquisition, which is subject to
customary regulatory approval, is expected to be completed in late March.
Cellular Warehouse, established in 1991, owns and operates 57 retail stores in
Florida, Georgia, North Carolina, South Carolina, Alabama and Tennessee; the
retail stores are located in strip and power strip shopping centers. For the
twelve months ended December 31, 1997 Cellular Warehouse had revenues of
approximately $37.8 million. (For a discussion of the financing of the
acquisition of Cellular Warehouse, see "Liquidity and Capital Resources").
Additionally, on February 22, 1998, the Company acquired substantially
all of the assets of Lazer Electronics, Inc. and Best Electronics and Paging,
Inc. (collectively "Lazer") for a total cash purchase price of $190,000. Lazer
owns and operates 8 retail stores in Texas, Georgia and Florida, which are
primarily located in regional malls.
In connection with the IPO and the repayment of bank indebtedness, the
Company incurred an extraordinary charge to earnings of approximately $391,000,
net of tax.
-12-
<PAGE> 13
RESULTS OF OPERATIONS
QUARTER ENDED JANUARY 31, 1998 COMPARED TO QUARTER ENDED JANUARY 31, 1997
TOTAL NET REVENUES increased $24.7 million, or 308.7%, to $32.7 million
in the second quarter of fiscal 1998 from $8.0 million in the second quarter of
fiscal 1997 due to increases in retail sales, activation commissions and
residual income, and to the acquisition of Telephone Warehouse, Inc., and
National Cellular Incorporated ("Telephone Warehouse") on June 30, 1997, and of
Cellular USA and Cellular Unlimited effective November 1, 1998 and the resulting
inclusion of the acquired entities' operations in the Company's consolidated
revenues for the second quarter of fiscal 1998. Retail sales increased to $10.7
million from $3.5 million, activation commissions increased to $11.8 million
from $4.2 million and residual income increased $2.1 million to $2.4 million
from $320,000. Comparable store sales increased 11.3% and accounted for $878,000
or 3.5% of the increase in total net revenues. Sales relating to 53 new stores
opened, 39 stores acquired since January 31, 1997, and the stores that were not
yet open for 12 full months accounted for $14.0 million or 56.7% 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 $7.8 million as a result of the acquisition of Telephone
Warehouse. The increase in residual income was primarily due to the inclusion of
Telephone Warehouse's residual income ($2.1 million for the second quarter of
fiscal 1998), the increase in the number of cellular activations (approximately
40,000 in second quarter of fiscal 1998 as compared to approximately 15,000 for
the second quarter of fiscal 1997), and the Company's store expansion program.
GROSS PROFIT increased $8.9 million, or 202.3%, to $13.3 million in the
second quarter of fiscal 1998 from $4.4 million for the second quarter of fiscal
1997. As a percentage of total net revenues, gross profit decreased to 40.7%
from 55.0% 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 $7.6 million, or
230.3%, to $10.9 million for the second quarter of fiscal 1998 from $3.3 million
in the second quarter of fiscal 1997 as a result of higher personnel, rent and
related costs associated with the net addition of 53 new stores and the
inclusion of the operations of Telephone Warehouse, Cellular USA and Cellular
Unlimited for the second quarter of fiscal 1998. As a percentage of total net
revenues, selling, general and administrative expenses decreased to 33.2% during
the second quarter of fiscal 1998 from 41.0% in the second quarter of fiscal
1997.
AMORTIZATION OF INTANGIBLES consisted of (i) $284,000 associated with
the amortization of goodwill and acquired residual income resulting from the
acquisition of Telephone Warehouse on June 30, 1997 and the acquisition of
Cellular USA and Cellular Unlimited on November 1, 1997, and (ii) $60,000
associated with the thirty month noncompete agreement entered into in August
1996 in connection with the acquisition of Peachtree Mobility.
INCOME FROM OPERATIONS increased $800,000, or 83.0%, to $1.8 million in
the second quarter of fiscal 1998 from $964,000 in the second quarter of fiscal
1997 and decreased as a percentage of total net revenues to 5.5% from 12.0%.
-13-
<PAGE> 14
INTEREST EXPENSE, NET increased $204,000 to $246,000 in the second
quarter of fiscal 1998 from $42,000 in the second quarter of fiscal 1997
primarily due to increased bank borrowings used to finance the Company's
expansion.
INCOME TAX PROVISION was $662,000 in the second quarter of fiscal 1998
as compared to $295,000 in the second quarter of fiscal 1997 primarily as a
result of a $636,000 increase in income before provision for income taxes and
extraordinary charge.
INCOME BEFORE EXTRAORDINARY CHARGE increased $269,000 to $896,000 in
the second quarter of fiscal 1998 from $627,000 in the second quarter of fiscal
1997.
EXTRAORDINARY CHARGE ON DEBT RETIREMENT of $391,000, 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 offering, and (ii) the acceleration of unamortized discount associated
with the warrants issued in connection with the repayment of such indebtedness.
NET INCOME was $505,000 in the second quarter of fiscal 1998 compared
to $627,000 in the second quarter of fiscal 1997.
SIX MONTHS ENDED JANUARY 31, 1998 COMPARED TO SIX MONTHS ENDED JANUARY 31, 1997
TOTAL NET REVENUES increased $42.7 million, or 355.8% to $54.7 million
in the six months ended January 31, 1998 from $12.0 million in the six months
ended January 31, 1997 due to increases in retail sales, activation commissions
and residual income, and to the acquisition of Telephone Warehouse, Inc., and
National Cellular Incorporated ("Telephone Warehouse") on June 30, 1997 and of
Cellular USA and Cellular Unlimited effective November 1, 1998 and the resulting
inclusion of the acquired entities' operations in the Company's consolidated
revenues for 1998. Retail sales increased to $16.5 million from $5.6 million,
activation commissions increased to $17.5 million from $5.7 million and residual
income increased $4.2 million to $4.8 million from $639,000. Comparable store
sales increased 11.1% and accounted for $1.3 million or 3.0% of the increase in
total net revenues. Sales relating to 53 new stores opened, 39 stores acquired
since January 31, 1997, and the stores that were not yet open for 12 full months
accounted for $21.3 million or 50.0% 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 $15.9
million as a result of the acquisition of Telephone Warehouse on June 30, 1997.
The increase in residual income was primarily due to the inclusion of Telephone
Warehouse's residual income ($4.2 million in the six months ended January 31,
1998), the increase in the number of cellular activations (approximately 61,000
in the six months ended January 31, 1998 as compared to approximately 20,000 in
the six months ended January 31, 1997), and the Company's store expansion
program.
GROSS PROFIT increased $14.8 million, or 224.2% to $21.4 million in the
six month period ended January 31, 1998 from $6.6 million for the six month
period ended January 31, 1997. As a percentage of total net revenues, gross
profit decreased to 39.2% from 55.4% 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 $13.3 million,
or 246.3%, to $18.7 million for the six month period ended January 31, 1998 from
$5.4 million in the six month period ended January 31, 1997 as a result of
higher personnel, rent and related costs associated with the net addition of
-14-
<PAGE> 15
53 new stores and the inclusion of the operations of Telephone Warehouse for the
first six months of fiscal 1998 and of Cellular USA and Cellular Unlimited for
the second quarter of fiscal 1998. As a percentage of total net revenues,
selling, general and administrative expenses decreased to 34.2% during the six
month period ended January 31, 1998 from 44.9% in the six month period ended
January 31, 1997.
AMORTIZATION OF INTANGIBLES consisted of (i) $841,000 associated with
the amortization of goodwill and acquired residual income resulting from the
acquisition of Telephone Warehouse on June 30, 1997 and the acquisition of
Cellular USA and Cellular Unlimited on November 1, 1997, and (ii) $120,000
associated with the thirty month noncompete agreement entered into in August
1996 in connection with the acquisition of Peachtree Mobility.
INCOME FROM OPERATIONS increased $200,000, or 20.2% to $1.2 million in
the six month period ended January 31, 1998 from $989,000 in the six month
period ended January 31, 1997 and decreased as a percentage of total net
revenues to 2.1% from 8.2%.
INTEREST EXPENSE, NET increased $664,000 to $745,000 in the six month
period ended January 31, 1998 from $81,000 in the six month period ended January
31, 1997 primarily due to increased bank borrowings used to finance the
Company's expansion.
INCOME TAX PROVISION was $256,000 in the six month period ended January
31, 1998 as compared to $291,000 in the six month period ended January 31, 1997
primarily as a result of a $480,000 decrease in income before provision for
income taxes and extraordinary charge.
INCOME BEFORE EXTRAORDINARY CHARGE decreased $446,000 to $172,000 in
the six month period ended January 31, 1998 from $618,000 in the six month
period ended January 31, 1997.
EXTRAORDINARY CHARGE ON DEBT RETIREMENT of $391,000, 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 offering, and (ii) the acceleration of unamortized discount associated
with the warrants issued in connection with the repayment of such indebtedness.
NET LOSS was $220,000 in the six month period ended January 31, 1998
compared to a net income of $618,000 in the six month period ended January 31,
1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements have been primarily to support its
increased inventory requirements and build-out costs for new store expansion and
to fund acquisitions. The Company has historically financed its liquidity needs
through a combination of bank borrowings, capital contributions, loans from
shareholders and cash provided by operations.
Prior to the Company's IPO, the Company's credit facility was comprised
of a $9.0 million revolving loan and $12.8 million in term loans. The Company
used the proceeds of its IPO to repay all of the term loans and a portion of
shareholders loans, a portion of the revolving loan, and fund the acquisitions
of Cellular USA and Cellular Unlimited. The Company's existing 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 March 13, 1998, the Company has
an additional $3 million available for borrowing. Advances under the revolving
credit line bear interest at 3.75% above the commercial paper rate. In
connection with the pending acquisition of Cellular
-15-
<PAGE> 16
Warehouse, the Company has obtained a commitment letter for a $35 million credit
facility with Chase Manhattan Bank. This facility will be used to finance the
transaction and transaction related expenses, refinance existing bank debt, and
provide for future working capital needs. The Company anticipates that
borrowings under existing or future credit facilities will be sufficient to meet
currently foreseeable liquidity requirements.
The Company's working capital increased $3.6 million to $5.2 million at
January 31, 1998 from $1.6 million at July 31, 1997. Accounts receivable and
inventory increased $12.8 million to $24.2 million at January 31, 1998 from
$11.4 million at July 31, 1997. This increase was partially offset by an
increase in accounts payable of $4.7 million to $11.3 million at January 31,
1998 from $6.6 million at July 31, 1997.
The Company's net cash used in operating activities increased to $6.3
million for the six months ended January 31, 1998 compared to $623,000 for the
six months ended January 31, 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 $6.2
million for the six months ended January 31, 1998 from $166,000 in the six
months ended January 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. and Cellular USA, Inc.
The Company's net cash provided by financing activities increased to
$12.0 million in the six months ended January 31, 1998 from $448,000 in the six
months ended January 31, 1997 primarily as a result of the Company's IPO.
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.
-16-
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
See Note 3 to the Condensed Consolidated Financial Statements for a
discussion of the Company's Initial Public Offering effected on November 24,
1997.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits-
27.1 Financial Data Schedule
(b) The Company did not file a form 8-K during the second quarter of
fiscal 1998.
-17-
<PAGE> 18
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.
March 13, 1998 By: /s/ Nicolas Molina
-------------------------------
NICOLAS MOLINA
Chief Executive Officer
(principal executive officer)
March 13, 1998 By: /s/ Anne Gozlan
-------------------------------
ANNE GOZLAN
Chief Financial Officer
(principal accounting officer)
-18-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 547,660
<SECURITIES> 0
<RECEIVABLES> 11,597,097
<ALLOWANCES> 91,200
<INVENTORY> 12,715,150
<CURRENT-ASSETS> 26,059,882
<PP&E> 9,528,281
<DEPRECIATION> 1,391,426
<TOTAL-ASSETS> 50,247,491
<CURRENT-LIABILITIES> 20,858,503
<BONDS> 0
0
0
<COMMON> 81,998
<OTHER-SE> 26,351,855
<TOTAL-LIABILITY-AND-EQUITY> 50,247,491
<SALES> 54,662,377
<TOTAL-REVENUES> 54,662,377
<CGS> 33,236,783
<TOTAL-COSTS> 20,997,575
<OTHER-EXPENSES> 20,111,451
<LOSS-PROVISION> 141,158
<INTEREST-EXPENSE> 744,966
<INCOME-PRETAX> 428,019
<INCOME-TAX> 256,321
<INCOME-CONTINUING> 171,698
<DISCONTINUED> 0
<EXTRAORDINARY> 391,358
<CHANGES> 0
<NET-INCOME> (219,660)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
