<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED AUGUST 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO ___
COMMISSION FILE
NUMBER 0-24992
TELETOUCH COMMUNICATIONS, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2556090
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
110 NORTH COLLEGE, SUITE 200
TYLER, TEXAS 75702
(Address of principal executive offices, including zip code)
(903) 595-8800
(Issuer's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.001 par value - 6,353,416 shares outstanding
as of October 15, 1997
Transitional Small Business Disclosure Format : YES NO X
--- ---
1
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
FORM 10-QSB
QUARTER ENDED AUGUST 31, 1997
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - TELETOUCH COMMUNICATION, INC. (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS AT
AUGUST 31, 1997 AND MAY 31, 1997 4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS -
THREE MONTHS ENDED AUGUST 31, 1997 AND
AUGUST 31, 1996 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS -
THREE MONTHS ENDED AUGUST 31, 1997 AND
AUGUST 31, 1996 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 10
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
2
<PAGE>
PART 1. FINANCIAL INFORMATION
3
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
August 31, 1997 May 31, 1997
--------------------------------------------
ASSETS (Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents.................................... $ 3,454 $ 3,371
Accounts receivable, net of allowance........................ 1,608 1,571
Inventory.................................................... 2,419 2,450
Deferred income tax assets................................... 138 138
Prepaid expenses and other current assets.................... 474 384
-------------------- -----------------
8,093 7,914
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation of $8,403 in 1998 and $7,843 in
1997......................................................... 21,155 21,334
GOODWILL, INTANGIBLES AND OTHER ASSETS, net of
accumulated amortization of $17,614 in 1998 and $15,543 in
1997......................................................... 60,871 62,925
-------------------- -----------------
$ 90,119 $ 92,173
==================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses........................ $ 3,864 $ 4,360
Current portion of long-term debt............................ 7,204 5,710
Deferred revenue............................................. 994 792
-------------------- -----------------
12,062 10,862
LONG-TERM DEBT................................................... 72,433 74,114
COMMITMENTS AND CONTINGENCIES
DEFERRED INCOME TAXES............................................ 1,082 1,161
STOCKHOLDERS' EQUITY:
Series A cumulative preferred stock, $.001 par value......... -- --
Series B preferred stock, $.001 par value.................... -- --
Common stock, $.001 par value................................ 6 6
Additional paid-in capital................................... 24,759 24,756
Accumulated deficit.......................................... (20,223) (18,726)
-------------------- -----------------
4,542 6,036
-------------------- -----------------
$ 90,119 $ 92,173
==================== =================
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
4
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
August 31,
----------------------------------------------
1997 1996
--------------------- ---------------------
<S> <C> <C>
Pager sales and service revenue........................................ $ 10,247 $ 8,906
Other sales and service revenue........................................ 666 669
Cost of products sold.................................................. (1,534) (1,299)
--------------------- ---------------------
Net revenue.......................................................... 9,379 8,276
Costs and expenses:
Operating............................................................ 2,733 2,349
Selling.............................................................. 951 1,119
General and administrative........................................... 2,028 1,891
Depreciation and amortization........................................ 3,113 2,965
Merger termination charges........................................... -- 522
--------------------- ---------------------
Total costs and expenses............................................... 8,825 8,846
--------------------- ---------------------
Operating income (loss)................................................ 554 (570)
Interest expense, net.................................................. (2,130) (1,987)
--------------------- ---------------------
Loss before income taxes and extraordinary item........................ (1,576) (2,557)
Income tax expense..................................................... -- 23
--------------------- ---------------------
Loss before extraordinary item......................................... (1,576) (2,580)
Extraordinary item, early debt retirement,
net of income tax benefit of $179.................................... -- (3,389)
--------------------- ---------------------
Net loss............................................................... (1,576) (5,969)
Preferred stock dividends.............................................. (676) (596)
--------------------- ---------------------
Loss applicable to common stock........................................ $ (2,252) $ (6,565)
===================== =====================
Loss per share:
Loss before extraordinary item $(0.35) $(0.50)
Extraordinary item -- (0.53)
--------------------- ---------------------
Net loss per share $(0.35) $(1.03)
===================== =====================
Weighted Average Shares Outstanding.................................... 6,353,416 6,347,416
===================== =====================
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
5
<PAGE>
<TABLE>
<CAPTION>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
August 31,
------------------------------------------
1997 1996
------------------ -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.......................................................... $(1,497) $ (5,969)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Loss on early retirement of debt................................ -- 3,389
Depreciation and amortization................................... 3,113 2,965
Non cash interest expense....................................... 657 670
Loss (Gain) on sale of assets................................... (29) --
Deferred income taxes........................................... (79) 23
Changes in operating assets and liabilities:
Accounts receivable, net..................................... (37) (343)
Inventories.................................................. 152 (488)
Prepaid expenses and other assets............................ (106) (99)
Accounts payable and accrued expenses........................ (496) 326
Deferred revenue............................................. 202 193
------------------ ----------------
Net cash provided by operating activities 1,880 667
INVESTING ACTIVITIES:
Capital expenditures, including pagers.......................... (1,201) (572)
Acquisitions, net of cash acquired.............................. -- (10,626)
Deferred costs associated with acquisitions..................... -- 6
Net proceeds from sale of assets................................ 101 --
------------------ ----------------
Net cash used for investing activities (1,100) (11,192)
FINANCING ACTIVITIES:
Debt incurred in connection with acquisitions................... -- 10,626
Proceeds from new debt.......................................... -- 57,173
Payments on long-term debt...................................... (700) (52,700)
Debt issue costs................................................ -- (2,932)
Net proceeds from preferred stock and
common stock warrants........................................ 3 --
------------------ ----------------
Net cash provided by financing activities............................ (697) 12,167
------------------ ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................. 83 1,642
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..................... 3,371 1,021
------------------ ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................... $ 3,454 $ 2,663
================== ================
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
6
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
The unaudited condensed consolidated financial statements of Teletouch
Communications, Inc., and its subsidiaries (the "Company") for the periods ended
August 31, 1997 and 1996 have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis. Significant
accounting policies followed by the Company were disclosed in the notes to the
financial statements included in the Company's Annual Report on Form 10-KSB for
the year ended May 31, 1997. The balance sheet at May 31, 1997 has been derived
from the audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the Company's
management, the accompanying condensed consolidated financial statements contain
the material adjustments necessary to present fairly the financial position of
the Company at August 31, 1997 and May 31, 1997 and the results of its
operations and cash flows for the periods ended August 31, 1997 and 1996. All
such adjustments are of a normal recurring nature. Interim period results are
not necessarily indicative of the results to be achieved for the full year. The
financial statements for the periods ended August 31, 1997 and 1996 include the
results of operations for companies acquired by Teletouch from the effective
date of the acquisition, see Note B.
RECLASSIFICATION: Certain items in the financial statements for the period
ended August 31, 1996 have been reclassified to conform with the presentation of
the financial statements for the period ended August 31, 1997.
NEW ACCOUNTING PRONOUNCEMENTS: In February 1997 the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share"(SFAS No. 128), which the Company will be required to adopt
in fiscal 1998. The Company anticipates that adoption of SFAS No. 128 will have
no impact on its earnings per share calculation.
NOTE B - ACQUISITIONS
During 1997, the Company completed the acquisition of all of the stock of
Russell's Communication, Inc., d.b.a. LaPageCo ("LaPageCo") and AACS
Communications, Inc. ("AACS") for cash consideration of approximately $2.3
million and $1.9 million, respectively. In addition, the Company acquired
substantially all of the assets of Warren Communications, Inc. ("Warren"), for
cash consideration of approximately $5.1 million and Dave Fant Company, d.b.a.
Oklahoma Radio Systems ("ORS") for cash consideration of approximately $2.1
million and Cimarron Towers Inc. ("Cimarron") for cash consideration of
approximately $0.4 million. Additional consideration for Cimarron was
calculated at $1.4 million based on actual performance for the four month period
from September 1996 through December 1996. This additional consideration was
paid over a six month period which began in March 1997 and ended in August 1997.
The consideration paid for these acquisitions was obtained from the amounts
available under the Company's existing credit facility.
Each of these Fiscal Year 1997 acquisitions have been accounted for using the
purchase method of accounting. Of the total purchase price for these
acquisitions, for financial reporting purposes, the allocation was
approximately $0.8 million to property, plant and equipment, $0.2 million to
accounts receivable, $0.2 million to inventory and other assets, $4.8 to FCC
licenses, $4.2 million to subscriber bases, $0.4 million to non-compete
agreements, with the remaining amount allocated to goodwill.
The following unaudited pro forma summary financial information presents the
results of operations of the Company as if the Fiscal Year 1997 Acquisitions,
and related financing, had occurred at the beginning of the period. This
summary may not be indicative of what would have occurred had the Fiscal Year
1997 Acquisitions been made as of these dates or of results which may occur in
the future. The historical financial statements used to prepare the summary
reflect the Fiscal Year 1997 Acquisitions from the effective date of the
respective acquisition forward, using the purchase method of accounting, based
on the estimated fair values of assets purchased and liabilities assumed.
7
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
NOTE B - ACQUISITIONS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31, 1996
-------------------
(Unaudited)
<S> <C>
Net revenue...................................... $ 9,039
==========
Operating income (loss).......................... $ (493)
==========
Net loss before extraordinary item............... $ (2,691)
==========
Extraordinary item............................... $ (3,389)
==========
Net Loss......................................... $ (6,080)
==========
Loss per share applicable to common stock:....... $ (1.05)
==========
</TABLE>
NOTE C - GOODWILL, INTANGIBLES AND OTHER ASSETS
Goodwill, intangibles and other assets consist of the following :
<TABLE>
<CAPTION>
AUGUST 31, MAY 31,
1997 1997
----------- ---------
(Unaudited)
<S> <C> <C>
Goodwill............................................. $ 25,058 $ 25,059
Subscriber bases..................................... 28,225 28,225
FCC licenses......................................... 20,740 20,736
Deferred acquisition costs........................... - -
Non-compete agreements............................... 700 700
Debt issue costs..................................... 3,599 3,599
Other................................................ 163 149
-------- --------
78,485 78,468
Accumulated amortization.............................. (17,614) (15,543)
-------- --------
$ 60,871 $ 62,925
======== ========
</TABLE>
NOTE D - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
AUGUST 31, MAY 31,
1997 1997
----------- ---------
(Unaudited)
<S> <C> <C>
Notes Payable.......................................... $ 67,800 $ 67,800
Junior Subordinated Notes, including accrued interest.. 11,837 11,324
Other.................................................. - 700
-------- --------
$ 79,637 $ 79,824
======== ========
</TABLE>
8
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
NOTE D - LONG-TERM DEBT (CONTINUED)
The Company has an agreement with a group of lenders, led by Chase Manhattan
Bank, to provide new loans in an amount not to exceed $95 million (the "Credit
Facility"). As of August 31, 1997, $67.8 million of the Credit Facility had
been funded and $27.2 million is available for future funding. The Company
currently has $6.3 million of available funding under the Credit Facility. The
funding from the Credit Facility was used to repay the FINOVA Loan and to
provide the financing necessary to complete the fiscal Year 1997 Acquisitions
discussed in Note B and to provide additional working capital. As a result of
the repayment of the FINOVA Loan, the Company was required to pay a $1 million
prepayment penalty to FINOVA. The prepayment penalty of $1 million, and the
unamortized deferred loan costs associated with the FINOVA Loan of approximately
$2.6 million, were recorded as an extraordinary expense item in the first
quarter of fiscal year 1997. Direct costs incurred in connection with obtaining
the Credit Facility of approximately $3.1 million have been deferred and are
being amortized, using the effective interest rate method, over the term of the
loan.
The Credit Facility bears interest, at the Company's designation, at a
floating rate of either the prime rate plus 1% to 2% or LIBOR plus 2% to 3%
depending on the leverage ratio of the Company and is secured by substantially
all of the assets of the Company and its subsidiaries. Borrowings under the
Credit Facility require that the principal be repaid in escalating quarterly
installments beginning in February 1998 and ending in fiscal year 2004. In
conjunction with the funding from the Credit Facility, the Company entered into
interest rate protection agreements which protect $50 million, $60 million and
$47.5 million of the commitments against future prime rate or LIBOR rate
increases above 7.625%, 7.5% and 9.5% for periods August 1996 through July 1997,
August 1997 through July 1998 and August 1998 through July 1999, respectively.
At May 31,1997, the weighted average interest rate on the Credit Facility was
8.5%. In addition, the terms require the maintenance of certain specified
financial and operating covenants, provide for restrictions on capital
expenditures and future acquisitions, prohibit any payments on the Junior
Subordinated Notes discussed below or the payment of dividends.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
CERTAIN STATEMENTS CONTAINED HEREIN ARE NOT BASED ON HISTORICAL FACTS, BUT ARE
FORWARD-LOOKING STATEMENTS THAT ARE BASED UPON NUMEROUS ASSUMPTIONS ABOUT FUTURE
CONDITIONS THAT COULD PROVE NOT TO BE ACCURATE. ACTUAL EVENTS, TRANSACTIONS AND
RESULTS MAY MATERIALLY DIFFER FROM THE ANTICIPATED EVENTS, TRANSACTIONS OR
RESULTS DESCRIBED IN SUCH STATEMENTS. THE COMPANY'S ABILITY TO CONSUMMATE SUCH
TRANSACTIONS AND ACHIEVE SUCH EVENTS OR RESULTS IS SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO,
THE EXISTENCE OF DEMAND FOR AND ACCEPTANCE OF THE COMPANY'S PRODUCTS AND
SERVICES, REGULATORY APPROVALS AND DEVELOPMENTS, ECONOMIC CONDITIONS, THE IMPACT
OF COMPETITION AND PRICING, RESULTS OF FINANCING EFFORTS AND OTHER FACTORS
AFFECTING THE COMPANY'S BUSINESS THAT ARE BEYOND THE COMPANY'S CONTROL. THE
COMPANY UNDERTAKES NO OBLIGATION AND DOES NOT INTEND TO UPDATE, REVISE OR
OTHERWISE PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING
STATEMENTS THAT MAY BE MADE TO REFLECT FUTURE EVENTS OR CIRCUMSTANCES.
OVERVIEW
The Company is a leading provider of wireless messaging services, primarily
paging services, in non-major metropolitan areas and communities in the
southeast United States. As of August 31, 1997 the Company had approximately
328,300 pagers in service. The Company derives the majority of its revenues from
fixed periodic fees, not dependent on usage, charged to subscribers for paging
services. As long as a subscriber remains on service, operating results benefit
from the recurring payments of the fixed periodic fees without incurring
additional selling expenses or other fixed costs. Due to the growth from the
completion of the acquisitions discussed below, the Company's results of
operations for prior periods may not be indicative of future performance.
ACQUISITIONS
During 1997, the Company completed the acquisition of all of the stock of
Russell's Communication, Inc., d.b.a. LaPageCo ("LaPageCo") and AACS
Communications, Inc. ("AACS") for cash consideration of approximately $2.3
million and $1.9 million, respectively. In addition, the Company acquired
substantially all of the assets of Warren Communications, Inc. ("Warren"), for
cash consideration of approximately $5.1 million and Dave Fant Company, d.b.a.
Oklahoma Radio Systems ("ORS") for cash consideration of approximately $2.1
million and Cimarron Towers Inc. ("Cimarron") for cash consideration of
approximately $0.4 million. Additional consideration for Cimarron was
calculated at $1.4 million based on actual performance for the four month period
from September 1996 through December 1996. This additional consideration was
paid over a six month period which began in March 1997 and ended in August 1997.
The consideration paid for these acquisitions was obtained from the amounts
available under the Company's existing credit facility.
Each of these Fiscal Year 1997 acquisitions have been accounted for using the
purchase method of accounting. Of the total purchase price for these
acquisitions, for financial reporting purposes, the allocation was
approximately $0.8 million to property, plant and equipment, $0.2 million to
accounts receivable, $0.2 million to inventory and other assets, $4.8 to FCC
licenses, $4.2 million to subscriber bases, $0.4 million to non-compete
agreements, with the remaining amount allocated to goodwill.
10
<PAGE>
RESULTS OF OPERATIONS
The following table presents certain items from the Company's condensed
consolidated statements of operations, certain unaudited pro forma information,
and certain other information for the periods indicated. The pro forma
information presents results of the operations of the Company as if the Fiscal
Year 1997 Acquisitions and related financing, had occurred at the beginning of
each period presented.
<TABLE>
<CAPTION>
Pro forma
Three Months ended Three Months ended
August 31, August 31,
---------------------------- ----------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
(in thousands, except pagers, ARPU and per share amounts)
<S> <C> <C> <C> <C>
Net revenue $ 9,379 $ 8,276 $ 9,379 $ 9,039
Operating income(loss) $ 554 (570) $ 554 (493)
Loss before extraordinary item $ (1,576) $ (2,580) $ (1,576) $ (2,691)
Loss per share before extraordinary item $ (0.34) $ (0.50) $ (0.34) $ (0.52)
EBITDA (1)(2) $ 3,667 $ 2,917 $ 3,667 $ 3,286
Pagers in service at end of period 328,300 253,000 328,300 297,000
Average revenue per unit ("ARPU") $ 9.28 $ 13.47 $ 9.28 $ 10.99
</TABLE>
___________________________
(1) EBITDA represents earnings before interest, taxes, depreciation and
amortization and certain non-recurring charges. EBITDA is a standard measure
of financial performance in the paging industry. However, EBITDA is not a
measure defined in generally accepted accounting principles ("GAAP") and
should not be construed as an alternative to operating income or cash flows
from operating activities as determined in accordance with GAAP. EBITDA is,
however, one of the primary financial measures by which the Company's
covenants are calculated under the agreements governing the Company's
indebtedness.
(2) As discussed below, in July 1996 the Company and ProNet, Inc. mutually
agreed to terminate a previously announced agreement to merge the Company
with a subsidiary of ProNet. The actual and pro forma EBITDA for the three
months ended August 31, 1996 shown above excludes $522,000 of non-recurring
costs associated with these terminations.
Results of Operations for the three months ended August 31, 1997 and 1996
- -------------------------------------------------------------------------
Net Revenue: The historical net revenue of the Company has increased to $9.4
-----------
million in the first three months of fiscal year 1998 from $8.3 million in the
first three months of fiscal year 1997. This increase is due primarily to the
increase in the pagers in service resulting from the Fiscal Year 1997
Acquisitions as well as greater market penetration in the Company's existing
markets. Pagers in service increased to approximately 328,300 at August 31,
1997 as compared to 253,000 at August 31, 1996. The Fiscal Year 1997
Acquisitions represented approximately 48,000 of this increase. The Company
believes that internal growth due to further penetration of its' existing
markets will continue.
The impact on net revenue of the increase in pagers in service is partially
offset by the decline in average revenue per unit ("ARPU"). ARPU for the three
months ended August 31, 1997 was $9.28 as compared to $13.47 for the three
months ended August 31, 1996. This decline in ARPU is due to increased
competition in the Company's markets as well as an increase in the number of
paging units sold to paging resellers. Paging resellers are businesses that buy
airtime at wholesale prices from the Company and sell the service to
subscribers. While the wholesale price to the reseller is lower than the price
the Company charges directly to its customers, the reseller bears the cost of
acquiring, billing, collecting and servicing the subscribers. Prior to the
Fiscal Year 1997 Acquisitions, approximately 16% of the Company's paging units
were sold through resellers, as of August 31, 1997 approximately 37% of the
Company's paging units are sold through resellers. The Company expects to see
the ARPU continue to decline as the competition continues to pursue customers in
its marketplace, generally resulting in new customers being added at a lower
ARPU than the Company's existing ARPU in that market. In addition, the higher
percentage of units sold through resellers in the Fiscal Year 1997 Acquisitions
as compared to the percentage sold through resellers by the Company prior to
these acquisitions, will also result in an overall reduction of the ARPU.
However, while there can be no assurance, the Company expects that the growth in
units in service will
11
<PAGE>
increase sufficiently to offset this decline in ARPU and not result in a
decrease in net revenue.
Operating Expenses, excluding depreciation and amortization: Operating
-----------------------------------------------------------
expenses, excluding depreciation and amortization, were $5.7 million, 61% of net
revenue, in the first three months of fiscal year 1998 as compared to $5.9
million, 71% of net revenue in the first three months of fiscal year 1997. The
decreased costs are primarily due to the $0.5 million of non-recurring costs
included in the three months ended August 31, 1996, related to costs incurred in
connection with the terminated merger proposal with Pro Net and other terminated
acquisitions. This decrease is partially offset by an increase in operating
expenses due to the inclusion of operating results of the Fiscal Year 1997
Acquisitions for three full months in fiscal year 1998 as compared to one month
in fiscal year 1997. On a pro forma basis, assuming the Fiscal Year 1997
Acquisitions had occurred at the beginning of the period, these expenses
decreased to $5.7 million, 61% of pro forma net revenue, for the first three
months of fiscal year 1998 as compared to $6.3 million, 69% of pro forma net
revenue, in the first three months of fiscal year 1997 ($5.8 million and $64%
excluding the costs associated with the costs of terminated mergers and
acquisitions). The decreased pro forma costs are primarily due to the $0.5
million of non-recurring costs included in the three months ended August 31,
1996 related to the terminated Pro Net merger and other terminated acquisitions.
Many of these costs, including increased general and administrative salaries
and other costs, are incurred early in the growth process. Accordingly,
although the actual costs are expected to continue to increase, the Company
expects them to decrease as a percentage of net revenue as the company continues
to grow.
Depreciation and amortization: Depreciation and amortization expense
-----------------------------
increased to $3.1 million in the first three months of fiscal year 1998 from
$3.0 million in the first three months of fiscal years 1997. The increase is
due primarily to the increased amortization of intangible assets resulting the
Fiscal Year 1997 Acquisitions. The Company expects that this expense will
stabilize in the near term as the amortization related to the Dial Acquisition
and the Fiscal Year 1997 Acquisitions are included in the results of operations
for a full year in fiscal 1997 and 1998.
Interest Expense: Interest expense increased to $2.1 million in the first
----------------
three months of fiscal year 1998 from $2.0 million in the first three months of
fiscal year 1997. This increase is due to the increased debt incurred by the
Company in connection with the Fiscal Year 1997 Acquisitions as well as the
financing of the costs associated with obtaining the Credit Facility.
Income tax benefit: For fiscal year 1998 the Company estimates the effective
------------------
tax benefit rate will be 0%. A valuation allowance has been recorded against
deferred tax assets which are not likely to be realized. Specifically, the
Company's carryforwards expire at specific future dates and utilization of
certain carryforwards is limited to specific amounts each year. However, due to
the uncertain nature of their ultimate realization the Company has established a
significant valuation allowance against these carryforward benefits and will
recognize benefits only as reassessment demonstrates they are realizable.
Realization is entirely dependent upon future earnings in specific tax
jurisdictions. While the need for this valuation allowance is subject to
periodic review, if the allowance is reduced, the tax benefits of the
carryforwards will be recorded in future operations as a reduction of the
Company's income tax expense.
12
<PAGE>
Extraordinary Item: In July 1996, the Company repaid its outstanding notes
------------------
payable to FINOVA Capital Corporation ("FINOVA") with the proceeds of the Credit
Facility. As a result of this prepayment of the FINOVA Loan, the Company
incurred a prepayment penalty of $1.0 million. The prepayment penalty, and
unamortized deferred loan costs associated with the FINOVA Loan of approximately
$2.6 million, were recorded as an extraordinary item net of income tax benefit.
EBITDA: EBITDA increased to $3.7 million, 39% of net revenue, in the first
------
three months of fiscal year 1998 from $2.4 million, 29% of net revenue ($2.9
million, 35% of net revenue, excluding the $0.5 million of costs associated with
the terminated ProNet merger and other terminated acquisitions), in the first
three months of fiscal year 1997. On a pro forma basis, assuming the Fiscal Year
1997 Acquisitions occurred at the beginning of the period, EBITDA increased to
$3.7 million, 39% of pro forma net revenue, for the first three months of fiscal
year 1998 as compared to $2.8 million, 31% of pro forma net revenue ($3.3
million and 36% excluding the costs associated with the terminated ProNet merger
and other terminated acquisitions), in the first three months of fiscal year
1997. The increase in pro forma EBITDA is primarily due to the growth in pro
forma net revenue over the first three months of fiscal year 1997 and the $0.5
million of non-recurring costs included in the three months ended August 31,
1996 related to the terminated Pro Net merger and other terminated acquisitions.
FINANCIAL CONDITION
The Company has an agreement with a group of lenders, led by Chase Manhattan
Bank, to provide new loans in an amount not to exceed $95 million (the "Credit
Facility"). As of August 7, 1997, $67.8 million of the Credit Facility had been
funded and $27.2 million is available for future funding. The Company currently
has $6.3 million of available funding under the Credit Facility. The funding
from the Credit Facility was used to repay the FINOVA Loan and provide the
financing necessary to complete the Fiscal 1997 Acquisitions and to provide
additional working capital. As a result of the repayment of the FINOVA Loan,
the Company paid a $1 million prepayment penalty to FINOVA. The prepayment
penalty of $1 million and the unamortized deferred loan costs associated with
the FINOVA Loan of approximately $2.6 million was recorded as an extraordinary
expense item in the first quarter of fiscal year 1997. Direct costs incurred in
connection with obtaining the Credit Facility of approximately $3.1 million was
deferred and is being amortized, using the effective interest rate method, over
the term of the loan.
The Credit Facility bears interest, at the Company's designation, at a
floating rate of either the prime rate plus 1% to 2% or LIBOR plus 2% to 3%
depending on the leverage ratio of the Company and is secured by substantially
all of the assets of the Company and its subsidiaries. Borrowings under the
Credit Facility require that the principal be repaid in escalating quarterly
installments beginning in February 1998 and ending in fiscal year 2004. In
conjunction with the funding from the Credit Facility, the Company entered into
interest rate protection agreements which protect $50 million, $60 million and
$47.5 million of the commitments against future prime rate or LIBOR rate
increases above 7.625%, 7.5% and 9.5% for periods August 1996 through July 1997,
August 1997 through July 1998 and August 1998 through July 1999, respectively.
In addition, the terms require the maintenance of certain specified financial
and operating covenants, provide for restrictions on capital expenditures and
future acquisitions, prohibit any payments on the Junior Subordinated Notes
discussed below or the payment of dividends.
The Company's paging operations require capital investment to procure pagers
and to acquire paging infrastructure equipment to support the Company's growth.
The Company's net capital expenditures amounted to $1.2 million and $0.6 million
for the first three months of fiscal year 1998 and 1997, respectively.
Management anticipates capital expenditures for the Company to continue to
increase as the Company continues to improve its infrastructure. These
expenditures will be paid for with cash generated from operations and borrowings
under the unused portion of the Credit Facility.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to various legal proceedings arising in the ordinary
course of business. The Company believes that there is no proceeding, either
threatening or pending, against the Company that could result in a material
adverse effect on the results of operations or financial condition of the
Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits,
--------
Exhibit Page
Number Title of Exhibit Number
- ------ ---------------- ------
27 Financial Data Schedule
(b) Reports on Form 8-K, None.
-------------------
14
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
TELETOUCH COMMUNICATIONS, INC.
------------------------------
(Registrant)
Date: October 15, 1997 /s/ Robert M. McMurrey
-----------------------------------------
Robert M. McMurrey
Chairman
Chief Executive Officer
/s/ Thomas R. McLemore
-----------------------------------------
Thomas R. McLemore
Executive Vice President
Chief Financial Officer
(Principal Accounting Officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ART 5 FDS
FOR FIRST QUARTER 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> AUG-31-1997
<CASH> 3,454
<SECURITIES> 0
<RECEIVABLES> 1,956
<ALLOWANCES> 348
<INVENTORY> 2,419
<CURRENT-ASSETS> 8,093
<PP&E> 29,558
<DEPRECIATION> 8,403
<TOTAL-ASSETS> 90,119
<CURRENT-LIABILITIES> 12,062
<BONDS> 72,433
0
0
<COMMON> 6
<OTHER-SE> 4,536
<TOTAL-LIABILITY-AND-EQUITY> 90,119
<SALES> 10,913
<TOTAL-REVENUES> 10,913
<CGS> 1,534
<TOTAL-COSTS> 8,825
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,130
<INCOME-PRETAX> (1,576)
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<NET-INCOME> (1,576)
<EPS-PRIMARY> (0.35)
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