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UNITED STATES
SECURITIES EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended January 31, 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.
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(Exact Name of Registrant as Specified in its Charter)
FLORIDA 65-0292891
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification 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 March 15, 1999).
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LET'S TALK CELLULAR & WIRELESS, INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Condensed Consolidated Balance Sheets as of January 31, 1999 (Unaudited)
and July 31, 1998.................................................................................... 3
Condensed Consolidated Statements of Operations for the Three Months Ended
January 31, 1999 and January 31, 1998 (Unaudited)................................................... 4
Condensed Consolidated Statements of Operations for the Six Months Ended
January 31, 1999 and January 31, 1998 (Unaudited)................................................... 5
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended January 31, 1999 and January 31, 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............................................................................................ 8
PART II - OTHER INFORMATION....................................................................................... 16
</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"), 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
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1999 1998
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(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,047,923 $ 1,697,397
Accounts receivable, net 24,440,420 15,954,275
Inventories 20,039,779 16,532,961
Prepaid expenses 588,643 429,869
Deferred tax asset 836,806 836,806
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Total current assets 47,953,571 35,451,308
Property and equipment, net 12,949,896 12,170,193
Other assets, net 1,079,483 1,020,524
Intangible assets, net 36,528,916 37,848,638
----------- -----------
Total assets $98,511,866 $86,490,663
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $19,544,887 $13,116,458
Bank lines of credit 9,232,382 9,099,072
Accrued expenses 9,161,849 6,628,207
Current portion of bank term loan and obligations under capital leases 2,747,818 1,947,361
Income taxes payable 1,314,227 273,255
Deferred revenues 1,408,234 855,729
Customer deposits 222,231 257,879
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Total current liabilities 43,631,628 32,177,961
Bank term loan, less current portion 17,750,000 19,250,000
Obligation under capital leases, less current portion 453,755 346,150
Other liabilities 493,197 372,395
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 1,955,141 116,012
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Total shareholders' equity 35,759,308 33,920,179
----------- -----------
Total liabilities and shareholders' equity $98,511,866 $86,490,663
=========== ===========
</TABLE>
See accompanying notes.
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LET'S TALK CELLULAR & WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JANUARY 31,
1999 1998
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<S> <C> <C>
Net revenues:
Retail sales $ 16,634,725 $ 10,712,619
Activation commissions 22,186,064 11,833,070
Residual income 4,332,921 2,420,875
Wholesale sales 6,202,939 7,779,923
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Total net revenues 49,356,649 32,746,487
Cost of sales 25,283,107 19,417,743
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Gross profit 24,073,542 13,328,744
Operating expenses:
Selling, general and administrative 18,599,508 10,874,204
Depreciation and amortization 735,709 306,447
Amortization of intangible assets 637,198 343,818
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Total operating expenses 19,972,415 11,524,469
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Income from operations 4,101,127 1,804,275
Interest expense, net 723,861 246,253
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Income before provision for income taxes and extraordinary charge 3,377,266 1,558,022
Provision for income taxes 1,350,907 661,772
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Income before extraordinary charge 2,026,359 896,250
Extraordinary charge on debt retirement (net of taxes) -- 391,358
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Net income applicable to common shareholders $ 2,026,359 $ 504,892
============ ============
EARNINGS PER SHARE
Basic and Diluted:
Income per share applicable to common shareholders $ 0.23 $ 0.12
Extraordinary charge -- (0.05)
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Net income applicable to common shareholders $ 0.23 $ 0.7
============ ============
Weighted average shares outstanding:
Basic and Diluted 8,749,762 7,512,829
============ ============
</TABLE>
See accompanying notes.
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LET'S TALK CELLULAR & WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JANUARY 31,
1999 1998
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<S> <C> <C>
Net revenues:
Retail sales $ 28,899,343 $ 16,461,151
Activation commissions 36,275,966 17,483,754
Residual income 8,916,308 4,838,771
Wholesale sales 11,129,600 15,878,701
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Total net revenues 85,221,217 54,662,377
Cost of sales 43,774,514 33,236,783
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Gross profit 41,446,703 21,425,594
Operating expenses:
Selling, general and administrative 34,270,541 18,721,586
Depreciation and amortization 1,267,779 570,479
Amortization of intangible assets 1,319,722 960,544
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Total operating expenses 36,858,042 20,252,609
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Income from operations 4,588,661 1,172,985
Interest expense, net 1,459,241 744,966
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Income before provision for income taxes and extraordinary charge 3,129,420 428,019
Provision for income taxes 1,290,291 256,321
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Income before extraordinary charge 1,839,129 171,698
Extraordinary charge on debt retirement (net of taxes) -- 391,358
------------ ------------
Net income (loss) applicable to common shareholders $ 1,839,129 $ (219,660)
============ ============
EARNINGS PER SHARE
Basic and Diluted:
Income per share applicable to common shareholders $ 0.21 $ 0.03
Extraordinary charge -- (0.06)
------------ ------------
Net income (loss) applicable to common shareholders $ 0.21 $ (0.03)
============ ============
Weighted average shares outstanding:
Basic and Diluted 8,749,762 6,802,997
============ ============
</TABLE>
See accompanying notes.
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LET'S TALK CELLULAR & WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JANUARY 31,
1999 1998
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<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,839,129 $ (219,660)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,267,779 570,481
Amortization of intangible assets 1,319,722 960,544
Amortization of deferred financing costs 60,866 729,392
Provision for activation adjustments and cancellation losses 464,275 141,158
Deferred income taxes -- (230,845)
Changes in operating assets and liabilities:
Accounts receivable (8,950,420) (4,695,205)
Inventories (3,506,818) (6,530,075)
Prepaid expenses (158,774) (2,369,425)
Other assets (119,825) 40,666
Income tax receivable -- 291,099
Trade accounts payable 6,428,429 3,764,969
Accrued expenses 2,533,642 1,421,071
Other liabilities 120,802 --
Income taxes payable 1,040,972 (151,770)
Customer deposits (35,648) (37,693)
Deferred revenues 552,505 35,610
------------ ------------
Net cash provided by (used in) operating activities 2,856,636 (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)
Purchases of property and equipment (1,807,666) (2,951,129)
------------ ------------
Net cash used in investing activities (1,807,666) (6,209,042)
FINANCING ACTIVITIES
Proceeds from sale of common stock, net of underwriting costs -- 22,320,000
Net proceeds on borrowings under bank lines of credit 133,310 2,976,715
Payments on loans payable to shareholder and officers -- (258,100)
Payments on bank term loans and capital leases (831,754) (13,082,244)
------------ ------------
Net cash (used in) provided by financing activities (698,444) 11,956,371
------------- ------------
Net increase (decrease) in cash and cash equivalents 350,526 (532,354)
Cash and cash equivalents at beginning of period 1,697,397 1,080,014
------------ ------------
Cash and cash equivalents at end of period $ 2,047,923 $ 547,660
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 1,307,408 $ 757,995
============ ============
Cash paid for income taxes $ 177,750 $ 58,795
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Acquisition of property and equipment under capital leases $ 239,816 --
============
</TABLE>
See accompanying notes.
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LET'S TALK CELLULAR & WIRELESS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 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 six months ended January 31, 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.
2-NET INCOME (LOSS) PER SHARE APPLICABLE TO COMMON SHAREHOLDERS
Basic earnings per share is computed by dividing the Company's net income (loss)
by the weighted average number of shares outstanding during the period. Diluted
earnings per share is computed by dividing the Company's net income (loss) by
the weighted average number of shares outstanding and the dilutive impact of
common stock equivalents. The dilutive impact of common stock equivalents is
determined by applying the treasury stock method.
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 128 ("SFAS No.128"), Earnings per Share. All earnings
per share amounts for all periods have been presented, and where necessary,
related to conform to the SFAS No.128 requirements.
3-INITIAL PUBLIC OFFERING
On December 1, 1997, the Company completed an initial public offering of its
common stock (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
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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 extraordinary charge to earnings of approximately $391,000, net of income
taxes of approximately $261,000.
4-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.
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 268
stores located in 23 states, the District of Columbia and Puerto Rico as of
January 31, 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 is also a wholesaler of cellular and wireless products
and accessories to more than 500 accounts, consisting primarily of distributors,
carriers and small independent retailers. The Company's business strategy is to
offer the most extensive assortment of wireless products and services at
everyday low prices supported by knowledgeable customer service, through
conveniently located and attractively designed stores.
The Company presently plans to open a total of 30-40 new stores in Fiscal 1999.
To handle the existing store base as well as expansion, management has been
building the infrastructure necessary to support a growing chain of stores. In
November 1998, the Company hired David Eisenberg as Co-Chairman of the Board of
Directors and Chief Executive Officer. Mr. Eisenberg brings over 40 years of
retail experience, most recently with Chief Auto Parts, to the Company. 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
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expand through new store openings, it expects to leverage these investments and
improve margins through economies of scale.
The Company's revenues are generated principally from four sources:
(i) RETAIL SALES. The Company sells cellular and wireless products, such
as phones, pagers and related accessories in the Company's retail outlets.
(ii) ACTIVATION COMMISSIONS. The Company receives an activation commission
from the applicable cellular carrier when a customer initially subscribes
for the cellular carrier's service. The amount of the activation
commission paid by cellular carriers is based upon various service plans
offered by the carriers and is recognized by the Company at the time of
sale. New subscription activation commissions are fully refundable if the
subscriber cancels its subscription prior to completion of a minimum
period of continuous active service (generally 180 days). Customers
generally sign a service agreement with the Company that requires a
customer deposit that is forfeited in the event of early cancellation. The
Company then applies the customer's deposit to reduce or offset its
resulting deactivation loss owed to the carrier. The Company accrues for
estimated deactivation losses, net of cancellation fees, by creating a
reserve against carrier accounts receivable. The reserve is reflective of
the historical cancellation experience.
(iii) RESIDUAL INCOME. The Company receives monthly payments made by
certain cellular carriers and pager customers. Cellular residual payments
are based upon a percentage (usually 3-6%) of the customers' monthly
service charges and are recognized as income when received. Pager residual
payments are received on a monthly basis directly from pager customers for
the pager airtime that the Company buys wholesale from paging carriers and
then resells to individuals and small businesses.
(iv) WHOLESALE SALES. The Company wholesales cellular and wireless
products and accessories to more than 500 accounts, consisting primarily
of distributors, carriers and small independent retailers. The wholesale
business typically has higher volumes and lower margins than the retail
business, but provides the Company with greater purchasing power and
additional distribution capabilities.
Comparable store 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 $36.3
million and $17.5 million for the six months ended January 31, 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
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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.
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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.
In most cases acquired companies were operated with different strategic and
financial objectives. Former management sought to maximize cash flow and
shareholder distributions, rather than reinvest earnings in new store growth. As
a result, certain of the acquired companies' net revenues and number of stores
did not grow significantly in recent years.
RESULTS OF OPERATIONS
QUARTER ENDED JANUARY 31, 1999 COMPARED TO QUARTER ENDED JANUARY 31, 1998
TOTAL NET REVENUES increased $16.6 million, or 50.7% to $49.4 million in the
second quarter of fiscal 1999 from $32.7 million in the second quarter of fiscal
1998. The increase in revenues is due to increases in retail sales, activation
commissions and residual income, and to the acquisition of Sosebee Enterprises,
Inc. and Cellular Warehouse, Inc. (collectively "CWI") effective March 1, 1998
and the resulting inclusion of CWI's operations in the Company's consolidated
revenues for the second quarter of fiscal 1999. Retail sales increased $5.9
million, or 55.3% to $16.6 million from $10.7 million, activation commissions
increased $10.4 million, or 87.5% to $22.2 million from $11.8 million and
residual income increased $1.9 million, or 79.0% to $4.3 million from $2.4
million. Comparable store sales decreased $1.2 million, or 5.4% to $20.5 million
from $21.7 million. Sales relating to the 74 stores not yet opened for 12 months
and the 57 stores acquired since January 31, 1998 accounted for $17.8 million,
or 107.2% of the increase in total net revenues. The comparable stores sales
decline was primarily attributable to two markets (21 of the 137 comparable
stores) which continued to be impacted by operational problems, which have been
identified and corrected, and a very aggressive prior year carrier promotion.
The comparable store levels would have increased by 2.5% (in the remaining 116
comparable stores) if the two markets were excluded. Wholesale sales decreased
$1.6 million, or 20.3% as a result of the Company's shift in allocation of
resources to the retail operations. The increase in residual income was due to
the inclusion of CWI's residual income ($1.8 million for the second quarter of
fiscal 1999) and the increase in the number of activations resulting from the
Company's store expansion. The Company had 268 stores open at January 31, 1999
as compared to 144 at January 31, 1998.
GROSS PROFIT increased $10.7 million, or 80.6% to $24.1 million in the second
quarter of fiscal 1999 from $13.3 million in the second quarter of fiscal 1998.
As a percentage of total net revenues, gross profit increased to 48.8% from
40.7% primarily due to the wholesale operations making up a smaller percentage
of total revenue as compared to the second quarter of fiscal 1998. The Company's
wholesale operations have a significantly lower margin (7.2% for the second
quarter of fiscal 1999) than its retail operations.
SELLING, GENERAL AND ADMINISTRATIVE expenses increased $7.7 million, or 71.0% to
$18.6 million in the second quarter of fiscal 1999 from $10.9 million in the
second quarter of fiscal 1998 as a result of higher personnel, rent and related
costs associated with the net addition of 124 stores, either by internal growth
or acquisition from the second quarter of fiscal 1998. The Company has incurred
additional expenses relating
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to infrastructure investments to support the expansion program. As a percentage
of total net revenues, selling, general and administrative expenses increased to
37.7% in the second quarter of fiscal 1999 from 33.2% in the second quarter of
fiscal 1998.
AMORTIZATION OF INTANGIBLES increased $293,000, or 85.3% to $637,000 in the
second quarter of fiscal 1999 from $344,000 in the second quarter of fiscal
1998. The increase in amortization of intangibles is a result of a full three
months of amortization relating to the acquisition of CWI on March 1, 1998.
INCOME FROM OPERATIONS increased $2.3 million, or 127.3% to $4.1 million in the
second quarter of fiscal 1999 from $1.8 million in the second quarter of fiscal
1998 and increased as a percentage of total net revenues to 8.3% from 5.5%.
INTEREST EXPENSE, NET increased $478,000, or 194.0% to $724,000 in the second
quarter of fiscal 1999 from $246,000 in the second quarter of fiscal 1998
primarily due to increased bank borrowings used to finance the Company's
expansion.
PROVISION FOR INCOME TAX was $1.4 million in the second quarter of fiscal 1999
as compared to $662,000 in the second quarter of fiscal 1998.
NET INCOME was $2.0 million in the second quarter of fiscal 1999 compared to
$505,000 in the second quarter of fiscal 1998.
SIX MONTHS ENDED JANUARY 31, 1999 COMPARED TO SIX MONTHS ENDED JANUARY 31, 1998
TOTAL NET REVENUES increased $30.6 million, or 55.9% to $85.2 million in the six
months ended January 31, 1999 from $54.7 million in the six months ended January
31, 1998. The increase in revenues is due to increases in retail sales,
activation commissions and residual income, and to the acquisitions of Cellular
USA, Inc. ("USA") and Cellular Unlimited Corp. ("Unlimited"), effective November
1, 1997, and of CWI effective March 1, 1998 and the resulting inclusion of the
acquired entities' operations in the Company's consolidated revenues for the six
months ended January 31, 1999. Retail sales increased $12.4 million, or 75.6% to
$28.9 million from $16.5 million, activation commissions increased $18.8
million, or 107.5% to $36.3 million from $17.5 million and residual income
increased $4.1 million, or 84.3% to $8.9 million from $4.8 million. Comparable
store sales decreased $1.4 million, or 4.2% to $31.5 million from $32.9 million.
Sales relating to the 74 stores not yet opened for 12 months and the 57 stores
acquired since January 31, 1998 accounted for $32.0 million, or 104.6% of the
increase in total net revenues. Wholesale sales decreased $4.7 million, or 29.9%
as a result of the Company's shift in allocation of resources to the retail
operations. The increase in residual income was due to the inclusion of CWI's
residual income ($3.8 million for the six months ended January 31, 1999) and the
increase in the number of activations resulting from the various acquisitions
and the Company's store expansion.
GROSS PROFIT increased $20.0 million, or 93.4% to $41.4 million in the six
months ended January 31, 1999 from $21.4 million in the six months ended
January 31, 1998. As a percentage of total net revenues, gross profit increased
to 48.6% from 39.2% primarily due to the wholesale operations making up a
smaller percentage of total revenue as compared to the six months ended January
31, 1998. The Company's
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<PAGE> 13
wholesale operations have a significantly lower margin (6.8% for the six months
ended January 31, 1999) than its retail operations.
SELLING, GENERAL AND ADMINISTRATIVE expenses increased $15.5 million, or 83.1%
to $34.3 million in the six months ended January 31, 1999 from $18.7 million in
the six months ended January 31, 1998 as a result of higher personnel, rent and
related costs associated with the net addition of 124 stores, either by internal
growth or acquisition from the six months ended January 31, 1998. The Company
has incurred additional expenses relating to infrastructure investments to
support the expansion program. As a percentage of total net revenues, selling,
general and administrative expenses increased to 40.2% in the six months ended
January 31, 1999 from 34.2% in the six months ended January 31, 1998. Included
in the six months ended January 31, 1999 is a $450,000 charge in connection with
the settlement agreement with a former officer of the Company.
AMORTIZATION OF INTANGIBLES increased $359,000, or 37.4% to $1.3 million in the
six months ended January 31, 1999 from $961,000 in the six months ended January
31, 1998. The increase in amortization of intangibles is a result of a full six
months of amortization relating to the USA, Unlimited and CWI acquisitions.
INCOME FROM OPERATIONS increased $3.4 million, or 291.2% to $4.6 million in the
six months ended January 31, 1999 from $1.2 million in the six months ended
January 31, 1998 and increased as a percentage of total net revenues to 5.4%
from 2.1%.
INTEREST EXPENSE, NET increased $714,000, or 95.9% to $1.5 million in the six
months ended January 31, 1999 from $745,000 in the six months ended January 31,
1998 primarily due to increased bank borrowings used to finance the Company's
expansion.
PROVISION FOR INCOME TAX was $1.3 million in the six months ended January 31,
1999 as compared to $256,000 in the six months ended January 31, 1998.
NET INCOME (LOSS) was $1.8 million in the six months ended January 31, 1999
compared to a net loss of ($220,000) in the six months ended January 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements have been primarily to fund acquisitions,
support its increased inventory requirements and build-out costs for new store
expansion. The Company has financed its liquidity needs through a combination of
borrowings, capital contributions, stock issuance and cash provided by
operations.
The Company has a Loan and Security Agreement with The Chase Manhattan Bank,
establishing a revolving credit facility for up to $13.5 million and a term loan
of $21.5 million (the "Credit Facility"). The Credit Facility expires in January
2004 and is secured by substantially all of the Company's assets. The revolving
credit facility's availability is based on a formula of eligible receivables and
inventories, and as of January 31, 1999, the Company has an additional $4.3
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 8.12%
at January 31, 1999). This facility was used to finance the acquisition of CWI,
refinance existing bank debt and for working capital.
-13-
<PAGE> 14
The Credit Facility was amended effective January 31, 1999 to waive a certain
financial covenant for the quarter ended January 31, 1999. The amendment also
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 June 1, 1999 through and including July 15,
1999. The Company anticipates that borrowings under the Credit Facility will be
sufficient to meet currently foreseeable liquidity requirements.
The Company's working capital increased $1.0 million to $4.3 million at January
31, 1999 from $3.3 million at July 31, 1998. Accounts receivable and inventory
increased $12.0 million to $44.5 million at January 31, 1999 from $32.5 million
at July 31, 1998. This increase was partially offset by an increase in accounts
payable of $6.4 million to $19.5 million at January 31, 1999 from $13.1 million
at July 31, 1998.
The Company's net cash provided by (used in) operating activities increased to
$2.9 million for the six months ended January 31, 1999 compared to net cash used
in operating activities of ($6.3 million) for the six months ended January 31,
1998. The increase in net cash provided by operating activities resulted
primarily from net income of $1.8 million in the six months ended January 31,
1999 compared to a net loss of ($220,000) in the six months ended January 31,
1998 and an increase in current liabilities offset by an increase in inventories
and accounts receivables reflecting the growth in the Company's operations.
The Company's net cash used in investing activities decreased to $1.8 million in
the six months ended January 31, 1999 from $6.2 million in the six months ended
January 31, 1998. The decrease in cash used in investing activities was
primarily attributable to the Unlimited and USA acquisitions as well as a
reduction of capital expenditures for new stores.
The Company's net cash (used in) provided by financing activities decreased to
($698,000) in the six months ended January 31, 1999 from net cash provided by
financing activities of $12.0 million in the six months ended January 31, 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 and plans to complete the update of its purchase order and
point-of-sale systems by September 1999. In addition, the Company has
committed to purchase a Year 2000 compliant pager billing system which is
scheduled to be installed in the second calendar quarter of 1999. All of the
software and computer systems used by the Company are commercially available and
therefore, the Company believes that the cost of becoming Year 2000 compliant
will not be material and is not expected to exceed $250,000 in fiscal 1999.
The Year 2000 issue creates risk for the Company for unforeseen problems in its
own computer systems and from third parties on which the Company relies.
Accordingly, the Company is requesting assurances from all software vendors from
which it has purchased or from which it may purchase software that the software
sold to the Company will correctly process all date information at all times. In
addition, the Company is querying its customers and suppliers as to their
progress in identifying and addressing problems that their computer systems will
face in correctly processing date information as the year 2000 approaches and is
reached. However, there are no assurances that the Company will identify all
date-
-14-
<PAGE> 15
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.
-15-
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 4 to the Condensed Consolidated Financial Statements for the
Quarter Ended January 31, 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
The following items were submitted to a vote of the shareholders of
the Company at its annual meeting held on January 13, 1999:
(i) the election of directors to the staggered Board provided for in
the Articles as follows: Allan Sorenson, John P. Bolduc and
Douglas F. Berman to serve as Class I directors, to hold office
until the 2001 annual shareholders meeting; and
(ii) the amendment of the Company's 1997 Executive Incentive
Compensation Plan to increase the number of shares available for
grant by 1,000,000 shares to a total of 1,310,000 shares.
The results of the vote of the shareholders are as follows:
For Against Result
--- ------- ------
Item (i) 6,948,003 25,948 Approved
Item (ii) 6,824,388 135,633 Approved
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits-
10.17 Amendment No. 3 to the Loan and Security Agreement, dated
February 26, 1999, by and among the Company and certain of
its subsidiaries, certain lenders and The Chase Manhattan
Bank, as Agent.
27.1 Financial Data Schedule
(b) The Company did not file a form 8-K during the second quarter of
fiscal 1999.
-16-
<PAGE> 17
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 15, 1999 By: /s/ David Eisenberg
------------------------------------------
DAVID EISENBERG
Chief Executive Officer and Co-Chairman of
the Board
March 15, 1999 By: /s/ Brett Beveridge
------------------------------------------
BRETT BEVERIDGE
President and Co-Chairman of the Board
March 15, 1999 By: /s/ Dan Cammarata
------------------------------------------
DAN CAMMARATA
Chief Financial Officer
-17-
<PAGE> 1
EXHIBIT 10.17
WAIVER AND AMENDMENT NO. 3
TO
LOAN AND SECURITY AGREEMENT
THIS WAIVER AND AMENDMENT NO. 3 ("Amendment") is entered into as
of February 26, 1999, by and among Let's Talk Cellular & Wireless, Inc., a
corporation organized under the laws of the State of Florida ("LTC"), Telephone
Warehouse, Inc., a corporation organized under the laws of the State of Delaware
("TWI"), Cellular Warehouse Inc., a corporation organized under the laws of the
State of Georgia ("CWI"), Cellular USA, a corporation organized under the laws
of the State of Nevada ("USA"), Sosebee Enterprises, Inc., a corporation
organized under the laws of the State of Georgia ("SEI") and National Cellular
Incorporated, a corporation organized under the laws of the State of Texas
("NCI") ("LTC, TWI, CWI, USA, SEI and NCI, each a "Borrower" and jointly and
severally, the "Borrowers"), the undersigned financial institutions (each, a
"Lender" and collectively, the "Lenders") and The Chase Manhattan Bank, a
corporation organized under the laws of the State of New York ("Chase") as agent
for Lenders (Chase in such capacity, the "Agent").
BACKGROUND
----------
Borrowers, Agent and Lenders are parties to a Loan and Security
Agreement dated as of April 2, 1998 (as amended, restated, supplemented or
otherwise modified from time to time, the "Loan Agreement"), pursuant to which
Agent and Lenders provide Borrowers with certain financial accommodations.
Borrowers have requested that Agent and Lenders waive certain financial
covenant defaults that have occurred and amend certain provisions of the Loan
Agreement and Agent and Lenders are willing to do so on the terms and conditions
hereafter set forth.
NOW, THEREFORE, in consideration of any loan or advance or grant of
credit heretofore or hereafter made to or for the account of Borrowers by Agent
and Lenders, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. DEFINITIONS. All capitalized terms not otherwise defined herein
shall have the meanings given to them in the Loan Agreement.
2. WAIVER. Subject to satisfaction of the conditions precedent set
forth in Section 5 below, Agent and Lenders hereby waives the Event of Default
which has occurred as a result of Borrowers' non-compliance with Section 7.21(i)
of the Loan Agreement to the extent the Leverage Ratio at the end of the fiscal
quarter ended January 31, 1999 with respect to the immediately preceding four
fiscal quarter period was no more than 2.56 to 1.00, but, in each case, only to
the extent the non-compliance with such Sections occurred prior to such periods.
<PAGE> 2
3. AMENDMENTS TO LOAN AGREEMENT. Subject to satisfaction of the
conditions precedent set forth in Section 4 below, the Loan Agreement is hereby
amended as follows:
(a) The following defined terms are added to Section 1.2 of the
Loan Agreement in their appropriate alphabetical order:
"AMENDMENT NO. 3" shall mean Amendment No. 3 to this Agreement
dated as of February 26, 1999.
"AMENDMENT NO. 3 EFFECTIVE DATE" shall mean the date on which all
of the conditions precedent contained in Section 5 of the Amendment
No. 3 shall have been satisfied.
(b) Section 2.2(h) of the Loan Agreement is amended in its entirety
to provide as follows:
"2.2(h) REDUCTION PERIOD. Borrowers shall reduce all outstanding
Revolving Advances to not more than $9,000,000 and not permit
outstanding Revolving Advances to be more than $9,000,000 for the
period of June 1, 1999 through and including July 15, 1999."
4. FIELD EXAM; CONSULTANTS.
(i) Notwithstanding the proviso in Section 3.4 of the Loan
Agreement, Borrowers agree to pay Agent for all field examination expenses in
accordance with Section 3.4 of the Loan Agreement for a field exam to be
scheduled by Agent following the Amendment No. 3 Effective Date. The obligation
of Borrowers to pay for such field examination expenses shall be in addition to
Borrowers' obligation to pay for field examination expenses pursuant to the
proviso of Section 3.4 of the Loan Agreement.
(ii) Borrowers agree to pay Agent for all costs incurred by
Agent in arranging for a consultant to meet with the management of Borrowers
and all costs of the consultant in assessing Borrowers' future financial plans.
5. CONDITIONS OF EFFECTIVENESS. This Amendment shall become effective
upon satisfaction of the following conditions precedent: Agent shall have
received (i) four (4) copies of this Amendment executed by each Borrower and
each Lender, (ii) a non-refundable waiver and amendment fee in the amount of
$60,000 and all legal fees and (iii) such other certificates, instruments,
documents, agreements and opinions of counsel as may be required by Agent,
Lenders or their counsel, each of which shall be in form and substance
satisfactory to Agent, Lenders and their counsel.
6. REPRESENTATIONS AND WARRANTIES. Borrowers hereby represent and
warrant as follows:
2
<PAGE> 3
(a) This Amendment and the Loan Agreement, as amended hereby,
constitute legal, valid and binding obligations of Borrowers and are
enforceable against Borrowers in accordance with their respective terms.
(b) Upon the effectiveness of this Amendment, Borrowers hereby
reaffirm all covenants, representations and warranties made in the Loan
Agreement to the extent the same are not amended hereby and agree that all such
covenants, representations and warranties shall be deemed to have been remade
as of the effective date of this Amendment.
(c) No Event of Default or Default has occurred and is continuing
or would exist after giving effect to this Amendment.
(d) Borrowers have no defense, counterclaim or offset with respect
to the Loan Agreement.
7. EFFECT ON THE LOAN AGREEMENT.
(a) Upon the effectiveness of this Amendment, each reference in the
Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of
like import shall mean and be a reference to the Loan Agreement as amended
hereby.
(b) Except as specifically amended herein, the Loan Agreement, and
all other documents, instruments and agreements executed and/or delivered in
connection therewith, shall remain in full force and effect, and are hereby
ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment
shall not, except as expressly provided in Section 2, operate as a waiver of
any right, power or remedy of Lender, nor constitute a waiver of any provision
of the Loan Agreement, or any other documents, instruments or agreements
executed and/or delivered under or in connection therewith.
8. GOVERNING LAW. This Amendment shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns
and shall be governed by and construed in accordance with the laws of the State
of New York.
9. HEADINGS. Section headings in this Amendment are included herein
for convenience of reference only and shall not constitute a part of this
Amendment for any other purpose.
10. COUNTERPARTS. This Amendment may be executed by the parties hereto
in one or more counterparts, each of which shall be deemed an original and all
of which when taken together shall constitute one and the same agreement.
3
<PAGE> 4
IN WITNESS WHEREOF, this Amendment has been duly executed as of the
day and year first written above.
LET'S TALK CELLULAR & WIRELESS, INC.
By: /s/ Daniel Cammarata
------------------------------------
Name: Daniel Cammarata
Title: CFO
TELEPHONE WAREHOUSE, INC.
By: /s/ Daniel Cammarata
------------------------------------
Name: Daniel Cammarata
Title: CFO
CELLULAR WAREHOUSE, INC.
By: /s/ Daniel Cammarata
------------------------------------
Name: Daniel Cammarata
Title: CFO
NATIONAL CELLULAR INCORPORATED
By: /s/ Daniel Cammarata
------------------------------------
Name: Daniel Cammarata
Title: CFO
CELLULAR USA
By: /s/ Daniel Cammarata
------------------------------------
Name: Daniel Cammarata
Title: CFO
4
<PAGE> 5
SOSEBEE ENTERPRISES, INC.
By: /s/ Daniel Cammarata
------------------------------------
Name: Daniel Cammarata
Title: CFO
THE CHASE MANHATTAN BANK, as Agent and a
Lender
By: /s/ Paula M. Carr
------------------------------------
Name: Paula M. Carr
Title: Vice President
Commitment Percentage: 25%
BANK OF AMERICA, FSB, Lender
By:
------------------------------------
Name:
Title:
Commitment Percentage: 25%
IBJ WHITEHALL BANK & TRUST COMPANY,
Lender
By: /s/ Patricia G. McCormack
------------------------------------
Name: Patricia G. McCormack
Title: Director
Commitment Percentage: 25%
MERRILL LYNCH BUSINESS FINANCIAL
SERVICES, Lender
By: /s/ Hugh E. Johnson
------------------------------------
Name: Hugh E. Johnson
Title: Vice President
Commitment Percentage: 25%
5
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 2,047,923
<SECURITIES> 0
<RECEIVABLES> 25,440,420
<ALLOWANCES> 1,000,000
<INVENTORY> 20,039,779
<CURRENT-ASSETS> 47,953,571
<PP&E> 17,205,165
<DEPRECIATION> 4,255,269
<TOTAL-ASSETS> 98,511,866
<CURRENT-LIABILITIES> 43,631,628
<BONDS> 0
0
0
<COMMON> 87,498
<OTHER-SE> 35,671,810
<TOTAL-LIABILITY-AND-EQUITY> 98,511,866
<SALES> 85,221,217
<TOTAL-REVENUES> 85,221,217
<CGS> 43,774,514
<TOTAL-COSTS> 34,270,541
<OTHER-EXPENSES> 2,587,501
<LOSS-PROVISION> 464,275
<INTEREST-EXPENSE> 1,459,241
<INCOME-PRETAX> 3,129,420
<INCOME-TAX> 1,290,291
<INCOME-CONTINUING> 1,839,129
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,839,129
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
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