<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 FEBRUARY 28, 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 - 6,347,416 shares outstanding as of April 9, 1996
Transitional Small Business Disclosure Format : YES NO X
__ __
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
FORM 10-QSB
QUARTER ENDED FEBRUARY 28, 1997
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - TELETOUCH COMMUNICATION, INC. (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS AT
FEBRUARY 28, 1997 AND MAY 31, 1996 4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS -
THREE AND NINE MONTHS ENDED FEBRUARY 28, 1997
AND FEBRUARY 29, 1996 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS -
NINE MONTHS ENDED FEBRUARY 28, 1997
AND FEBRUARY 29, 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 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
2
<PAGE>
PART 1. FINANCIAL INFORMATION
3
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, except share data)
<TABLE>
<CAPTION>
February 28, May 31,
1997 1996
----------- -------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 1,822 $ 1,021
Accounts receivable, net of allowance.................. 1,418 1,705
Inventory.............................................. 4,775 3,498
Deferred income tax assets............................. 124 124
Prepaid expenses and other current assets.............. 708 336
------- -------
8,847 6,684
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation............................... 20,833 20,198
GOODWILL, INTANGIBLES AND OTHER ASSETS,
net of accumulated amortization........................ 62,916 57,080
------- -------
$92,596 $83,962
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses.................. $ 5,273 $ 3,562
Current portion of long-term debt...................... 2,505 --
Deferred revenue....................................... 836 981
------- -------
6,109 4,543
LONG-TERM DEBT............................................ 77,617 60,115
COMMITMENTS AND CONTINGENCIES
DEFERRED INCOME TAXES..................................... 328 740
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............................. 24,756 24,865
Accumulated deficit.................................... (16,220) (6,307)
------- -------
8,542 18,564
------- -------
$92,596 $83,962
======= =======
</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 NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29,
1997 1996 1997 1996
------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Pager sales and service revenue... $ 9,843 $ 7,955 $ 28,232 $ 20,719
Other sales and service revenue... 673 650 1,996 1,965
Cost of products sold............. (1,285) (1,214) (3,736) (3,427)
---------- ---------- ---------- ----------
Net revenue..................... 9,231 7,391 26,492 19,257
Costs and expenses:
Operating....................... 2,189 1,706 6,292 4,239
Selling......................... 1,709 1,219 4,912 3,282
General and Administrative...... 2,178 1,936 6,261 4,970
Depreciation and amortization... 3,099 2,562 9,122 6,461
Merger termination charges...... -- -- 522 --
---------- ---------- ---------- ----------
Total costs and expenses.......... 9,175 7,423 27,109 18,952
---------- ---------- ---------- ----------
Operating income (loss)........... 56 (32) (617) 305
Interest expense, net............. (2,199) (1,844) (6,140) (4,707)
---------- ---------- ---------- ----------
Loss before income taxes.......... (2,143) (1,876) (6,757) (4,402)
Income tax benefit................ (131) (563) (412) (1,345)
---------- ---------- ---------- ----------
Loss before extraordinary item.... (2,012) (1,313) (6,345) (3,057)
Extraordinary item, early debt
retirement...................... -- -- (3,568) --
---------- ---------- ---------- ----------
Net loss.......................... (2,012) (1,313) (9,913) (3,057)
Preferred stock dividends......... (616) (525) (1,816) (1,225)
---------- ---------- ---------- ----------
Loss applicable to common stock.... $ (2,628) $ (1,838) $ (11,729) $ (4,282)
========== ========== ========== ==========
Loss per share:
Loss before extraordinary item $ (0.41) $ (0.31) $ (1.29) $ (0.76)
Extraordinary item -- -- $ (0.56) --
---------- ---------- ---------- ----------
Net loss $ (0.41) $ (0.31) $ (1.85) $ (0.76)
========== ========== ========== ==========
Weighted Average Shares
Outstanding..................... 6,347,416 5,986,676 6,347,416 5,603,536
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
February 28, February 29,
1997 1996
------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.............................................. $ (9,913) $ (3,057)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Loss on early retirement of debt...................... 3,568 --
Depreciation and amortization......................... 9,122 6,461
Non cash interest expense............................. 2,010 1,485
Deferred income taxes................................. (412) (1,466)
Changes in operating assets and liabilities:
Accounts receivable, net......................... 446 (377)
Inventories...................................... (1,955) (713)
Prepaid expenses and other assets................ (163) 330
Accounts payable and accrued expenses............ (94) 912
Deferred revenue................................. (209) 260
--------- ---------
Net cash provided by operating activities................ 2,400 3,835
INVESTING ACTIVITIES:
Capital expenditures, including pagers................ (2,565) (2,272)
Acquisitions, net of cash acquired.................... (10,660) (50,600)
Decrease in other assets.............................. 101 (19)
Deferred costs associated with acquisitions........... (422) --
--------- ---------
Net cash used for investing activities................... (13,546) (52,891)
FINANCING ACTIVITIES:
Debt incurred in connection with acquisitions......... 10,626 35,194
Proceeds from new debt................................ 57,173 --
Payments on long-term debt............................ (52,700) (184)
Payments to related parties........................... -- (7)
Debt issue costs...................................... (3,152) --
Net proceeds from preferred stock and
common stock warrants............................. -- 15,898
Proceeds from stock subscriptions receivable.......... -- 52
--------- ---------
Net cash provided by financing activities................ 11,947 50,953
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... 801 1,897
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......... 1,021 715
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............... $ 1,822 $ 2,612
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(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
February 28, 1997 and February 29, 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, 1996. The balance sheet at May 31, 1996
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 February 28, 1997 and May 31, 1996 and the
results of its operations and cash flows for the periods ended February 28, 1997
and February 29, 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
February 28, 1997 and February 29, 1996 include the results of operations for
companies acquired by Teletouch from the effective date of the acquisition, see
Note B.
IMPAIRMENT OF LONG-LIVED ASSETS: In March 1995, the FASB issued Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, which requires impairment losses to be recognized for
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows are not sufficient to recover the assets'
carrying amount. The Company has adopted Statement 121 in the first quarter of
fiscal year 1997 and has determined that no material impairment loss has
occurred.
NOTE B - ACQUISITIONS
During the first nine months of fiscal year 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, 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 $0.5 million. Additional
consideration for Cimarron was calculated at $1.4 million based on actual
performance during the four month period from September 1996 through December
1996. This additional consideration is payable over a six month period
beginning March 1997. The consideration paid for these acquisitions was
obtained from the amounts available under the Company's existing credit
facility.
Each of these acquisitions has been accounted for using the purchase method of
accounting. Of the total purchase price for these acquisitions, for financial
reporting purposes, the preliminary allocation was approximately $1.1 million to
property, plant and equipment, $0.2 million to accounts receivable, $0.3 million
to inventory and other assets, $5.2 million to FCC licenses, $3.6 million to
subscriber bases, $0.4 million to non-compete agreements, with the remaining
amount allocated to goodwill.
7
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
NOTE B - ACQUISITIONS (CONTINUED)
The following unaudited pro forma summary financial information presents the
results of operations of the Company as if the acquisitions, and related
financing, had occurred at the beginning of each period presented. This summary
may not be indicative of what would have occurred had the 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 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.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FEBRUARY 28 FEBRUARY 29
1997 1996
----------- ------------
(Unaudited)
<S> <C> <C>
Net revenue................................................ $ 27,260 $24,745
======= =======
Operating income (loss).................................... $ (467) $ 991
======= =======
Net loss before extraordinary item......................... $ (6,124) $(3,351)
======= =======
Extraordinary item......................................... $ (3,568) $(3,568)
======= =======
Net Loss................................................... $ (9,692) $(6,919)
======= =======
Loss per share:
Loss before extraordinary item.......................... $ (1.25) $ (0.88)
======= =======
Extraordinary item per share............................ $ (0.56) $ (0.64)
======= =======
Net Loss per share...................................... $ (1.81) $ (1.52)
======= =======
</TABLE>
NOTE C - GOODWILL, INTANGIBLES AND OTHER ASSETS
Goodwill, intangibles and other assets consist of the following :
<TABLE>
<CAPTION>
FEBRUARY 28, MAY 31,
1997 1996
------------- ---------
(Unaudited)
<S> <C> <C>
Goodwill.................................................... $23,529 $20,380
Subscriber bases............................................ 27,625 24,014
FCC licenses................................................ 20,798 15,600
Deferred acquisition costs.................................. - 998
Non-compete agreements...................................... 700 300
Debt issue costs............................................ 4,271 3,795
Other....................................................... 149 203
-------- -------
77,072 65,290
Accumulated amortization...................................... (14,156) (8,210)
-------- -------
$ 62,916 $57,080
======== =======
</TABLE>
8
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
NOTE D - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, MAY 31,
1997 1996
-------- -------
(Unaudited)
<S> <C> <C>
Notes Payable.......................................... $ 66,800 $50,700
Junior Subordinated Notes, including accrued interest.. 10,817 9,415
-------- -------
$ 77,617 $60,115
======== =======
</TABLE>
In July 1996, the Company entered into 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 February 28, 1997, $66.8 million of the
Credit Facility had been funded and $28.2 million is available for future
funding. The funding from the Credit Facility was used to repay notes payable
to FINOVA Capital Corporation (the "FINOVA Loan"), and to provide the financing
necessary to complete the acquisitions discussed in Note B. As a result of the
repayment of the FINOVA Loan, the Company was required to pay a $1 million
prepayment penalty to FINOVA Capital Corporation ("FINOVA"). The prepayment
penalty, and the unamortized deferred loan costs associated with the FINOVA Loan
of approximately $2.6 million, have been recorded as an extraordinary expense.
Direct costs incurred in connection with obtaining the Credit Facility of
approximately $3.0 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. The terms require
that the Company obtain an interest rate protection agreement to protect at
least 50% of the commitments against fluctuations in the three-month LIBOR rate
for a period of at least three years. The Company has agreements in place that
protects up to $50 million of borrowings against future LIBOR rate increases
above 7.625% through August 1997; up to $60 million of borrowings against future
LIBOR rate increases above 7.5% from August 1997 through August 1998; and up to
$47.5 million of borrowings against future LIBOR rate increases above 9.5% from
August 1998 through August 1999. In addition, the terms of the Credit Facility
require the maintenance of certain specified financial and operating covenants,
provide for restrictions on capital expenditures and future acquisitions, and
prohibit any payments of principal or interest on the Junior Subordinated Notes
or the payment of dividends.
NOTE E - INCOME TAXES
For fiscal year 1997 the Company estimates the effective tax benefit rate will
be 6.1% as compared to 31.3% for fiscal year 1996. The decrease is due to the
recording of a valuation allowance 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.
9
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
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.
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 February 28, 1997 the Company had approximately
308,144 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.
The following discussion and analysis of the financial condition and results of
operations of the Company should be read in conjunction with the condensed
consolidated financial statements and notes thereto included elsewhere in this
report.
ACQUISITIONS
In August 1995, the Company purchased substantially all of the non-cash assets
and assumed selected liabilities of Dial-A-Page, Inc. ("Dial") for a purchase
price of approximately $49.4 million (the "Dial Acquisition"). Of the total
purchase price, for financial reporting purposes, approximately $14.2 million
was allocated to property, plant and equipment, $0.5 million to accounts
receivable, $15.5 million to FCC licenses, $13.8 million to subscriber bases,
$0.1 million to non-compete agreements, $1.2 million to current liabilities, and
$0.1 million to other current assets, with the remaining amount allocated to
goodwill. To complete the Dial Acquisition, and to provide additional working
capital, the Company completed the private placement of $25 million of debt and
equity securities with Continental Illinois Venture Corporation ("CIVC") and
certain other parties both related and unrelated to CIVC (together with CIVC,
the "CIVC Investors"), and $35 million in additional senior financing from its
existing senior lender, FINOVA Capital Corporation (the "FINOVA Loan"). In July
1996, the FINOVA Loan was repaid with proceeds from the Credit Facility.
During the first nine months of fiscal year 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 $0.5 million. Additional
consideration for Cimarron was calculated at $1.4 million based on actual
performance during the four month period from September 1996 through December
1996. This additional consideration is payable over a six month period
beginning March 1997. The consideration paid for these acquisitions was
obtained from available capacity under the Company's existing credit facility.
Collectively, the acquisitions made during the first nine months of fiscal year
1997 are referred to as "the Fiscal Year 1997
10
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
Acquisitions".
Each of these acquisitions have been accounted for using the purchase method of
accounting. Of the total purchase price for these acquisitions, for financial
reporting purposes, the preliminary allocation was approximately $1.1 million to
property, plant and equipment, $0.2 million to accounts receivable, $0.3 million
to inventory and other assets, $5.2 million to FCC licenses, $3.6 million to
subscriber bases, $0.4 million to non-compete agreements, with the remaining
amount allocated to goodwill.
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 Dial
Acquisition and the Fiscal Year 1997 Acquisitions, and related financing, had
occurred at the beginning of each period presented.
<TABLE>
<CAPTION>
Pro forma
Nine Months ended Nine Months ended
February 28 February 29 February 28 February 29
1997 1996 1997 1996
-------------- ------------- ------------- -------------
(in thousands, except pagers, ARPU and per share amounts)
<S> <C> <C> <C> <C>
Net revenue $ 26,492 $ 19,257 $ 27,260 $ 24,745
Operating (loss) income $ (617) 305 (467) 991
Loss before extraordinary item $ (6,345) $ (3,057) $ (6,124) $ (3,351)
Loss per share before extraordinary item $ (1.29) $ (0.76) $ (1.25) $ (0.88)
EBITDA (1)(2) $ 9,027 $ 6,766 $ 9,448 $ 9,512
Pagers in service at end of period 308,000 180,000 308,000 233,000
Average revenue per unit ("ARPU") $ 10.63 $ 13.93 $ 9.78 $ 11.34
</TABLE>
(1) EBITDA represents earnings before interest, taxes, depreciation and
amortization. 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. In addition, the Company elected not to
complete certain other acquisitions that it had been pursuing. The actual
and pro forma EBITDA for the nine months ended February 28, 1997 shown above
excludes $522,000 of non-recurring costs associated with these terminations.
11
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
Results of Operations for the nine and three months ended February 28, 1997 and
February 29, 1996
Net Revenue: The historical net revenue of the Company has increased to $26.5
million and $9.2 million for the nine and three months ended February 28, 1997
from $19.3 million and $7.4 million for the nine and three months ended February
29, 1996. These increases are due primarily to the increase in the pagers in
service resulting from the completion of the Dial Acquisition in August 1995,
the Fiscal Year 1997 Acquisitions as well as greater market penetration in the
Company's existing markets. Pagers in service increased to approximately
308,000 at February 28, 1997 as compared to 180,000 at February 29, 1996. The
Fiscal Year 1997 Acquisitions represented approximately 97,000 of this increase.
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 nine
months ended February 28, 1997 was $10.63 as compared to $13.93 for the nine
months ended February 29, 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 February 28, 1997 approximately 38% 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 growth in
units in service will increase sufficiently to offset this decline in ARPU and
not result in a decrease in net revenue.
Expenses, excluding depreciation and amortization: Operating expenses, excluding
depreciation and amortization, were $18.0 million, 68% of net revenue, in the
first nine months of fiscal year 1997 as compared to $12.5 million, 65% of net
revenue in the first nine months of fiscal year 1996 and $6.1 million, 66% of
net revenue, in the three months ended February 28, 1997 as compared to $4.9
million, 66% of net revenue in the three months ended February 29, 1996. The
increased costs are primarily due to the inclusion of operating results of the
Dial Acquisition for nine full months in fiscal year 1997 as compared to only
four months in fiscal year 1996 and the inclusion of the Fiscal Year 1997
Acquisitions from their respective acquisition dates. In addition, $0.5 million
of non-recurring costs are included in general and administrative expenses for
the nine months ended February 28, 1997 related to costs incurred in connection
with a now terminated proposed merger with ProNet, Inc. ("ProNet") and certain
other proposed acquisitions that the Company will not be pursuing. Excluding
the impact of these non-recurring costs, operating expenses for the first nine
months of fiscal year 1997 were $17.5 million, 66% of net revenues. On a pro
forma basis, assuming the Fiscal Year 1997 Acquisitions and the Dial Acquisition
had occurred at the beginning of the respective periods, these expenses
increased to $18.3 million, 67% of pro forma net revenue, ($17.8 million and 65%
excluding the costs associated with the terminated ProNet merger and other
acquisitions) for the first nine months of fiscal year 1997 as compared to $15.2
million, 62% of pro forma net revenue, in the first nine months of fiscal year
1996.
The increase as a percentage of actual and pro forma net revenue is due to the
increased costs associated with a much larger, publicly traded, company; slower
than expected costs savings realized from the integration of the Fiscal Year
1997 Acquisitions; and an increase of approximately $0.4 million of bad debt
expense incurred during fiscal year 1997 as compared to fiscal year 1996. Many
of the costs associated with being a larger publicly traded company, including
increased general and administrative salaries and other costs, are incurred
early in the growth process. Accordingly, these costs are expected to decrease
as a percentage of net revenue as the company continues to grow. The slower
than expected cost savings as well as the increase in bad debt expense resulted
primarily from the diversion of senior management while it tried to complete the
now terminated merger agreement with ProNet. Since the termination of the
proposed merger, the Company has been focusing on
12
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
reducing costs and expects to see positive results during the second half of the
fiscal year.
Depreciation and amortization: Depreciation and amortization expense increased
to $9.1 million and $3.1 million for the nine and three months ended February
28, 1997 from $6.5 million and $2.6 million for the nine and three months ended
February 29, 1996. The increase is due primarily to the increased amortization
of intangible assets resulting from the Dial Acquisition and the Fiscal Year
1997 Acquisitions. The Company expects that this expense will continue to
increase 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.
Interest Expense: Interest expense increased to $6.1 million and $2.2 million
for the nine and three months ended February 28, 1997 from $4.7 million and $1.8
million for the nine and three months ended February 29, 1996. This increase is
due to the increased debt incurred by the Company in connection with the Fiscal
Year 1997 Acquisitions and the Dial Acquisition as well as the financing of the
costs associated with obtaining the Credit Facility. The Credit Facility terms
provide for lower interest rates than the FINOVA Loan; however, due to the
increased amount borrowed, the interest expense for fiscal year 1997 will be
greater than the amounts incurred in fiscal year 1996.
Income tax benefit: For fiscal year 1997 the Company estimates the effective
tax benefit rate will be 6.1% as compared to 31.3% for fiscal year 1996. The
decrease is due to the recording of a valuation allowance 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.
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. As discussed above, the
Company has recorded a significant valuation allowance against tax assets which
are not likely to be realized. Accordingly, the Company has not recognized any
tax benefit associated with this extraordinary item.
EBITDA: EBITDA increased to $8.5 million, 32% of net revenue ($9.0 million, 34%
of net revenue, excluding the $0.5 million of costs associated with the
terminated ProNet merger and other terminated acquisitions), in the first nine
months of fiscal year 1997 as compared to $6.8 million, 35% of net revenue in
the first nine months of fiscal year 1996 and $3.2 million, 34% of net revenue,
in the three months ended February 28, 1997 as compared to $2.5 million, 34% of
net revenue in the three months ended February 29, 1996. On a pro forma basis,
assuming the Fiscal Year 1997 Acquisitions and the Dial Acquisition had occurred
at the beginning of the respective periods, EBITDA decreased to $8.9 million,
33% of pro forma net revenue, ($9.4 million and 35% excluding the costs
associated with the terminated ProNet merger and other acquisitions) for the
first nine months of fiscal year 1997 as compared to $9.5 million, 38% of pro
forma net revenue, in the first six months of fiscal year 1996. The decrease in
pro forma EBITDA as a percentage of net revenue is due to the impact of the
increased costs discussed above. In addition, these margins are impacted by the
declining ARPU discussed above. The Company expects that this margin will
stabilize in the near term as the impact of declining ARPU is offset by
increased revenue from increasing numbers of pagers in service and lower
operating expenses as a percentage of net revenue.
FINANCIAL CONDITION
13
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
In July 1996, the Company entered into 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 February 28, 1997, $66.8 million of the
Credit Facility had been funded and $28.2 million is available for future
funding. The funding from the Credit Facility was used to repay notes payable
to FINOVA Capital Corporation (the "FINOVA Loan"), and to provide the financing
necessary to complete the acquisitions discussed in Note B. 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 and the unamortized
deferred loan costs associated with the FINOVA Loan of approximately $2.6
million have been recorded as an extraordinary expense. Direct costs incurred in
connection with obtaining the Credit Facility of approximately $3.0 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. The terms require
that the Company obtain an interest rate protection agreement to protect at
least 50% of the commitments against fluctuations in the three-month LIBOR rate
for a period of at least three years. The Company has agreements in place that
protects up to $50 million of borrowings against future LIBOR rate increases
above 7.625% through August 1997; up to $60 million of borrowings against future
LIBOR rate increases above 7.5% from August 1997 through August 1998; and up to
$47.5 million of borrowings against future LIBOR rate increases above 9.5% from
August 1998 through August 1999. In addition, the terms require the maintenance
of certain specified financial and operating covenants, provide for restrictions
on capital expenditures and future acquisitions, and prohibit any payments of
principal or interest on the Junior Subordinated Notes or the payment of
dividends. The Company believes that the availability under the Credit
Facility, and cash flow from operations, will be sufficient to fund working
capital needs for the next twelve months.
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 capital expenditures amounted to $2.6 million and $2.3 million for the
first nine months of fiscal year 1997 and 1996, 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.
14
<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
threatened 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Shareholders Meeting on November 12, 1996. Messrs.
G. David Higginbotham and Marcus D. Wedner were elected as Class II directors at
the meeting to serve for three years. The votes cast and withheld for each such
director was as follows:
G. David Higginbotham FOR: 5,360,246 WITHHELD: 3,000
Marcus D. Wedner FOR: 5,360,246 WITHHELD: 3,000
Messrs. Robert M. McMurrey, Clifford E. McFarland, Charles C. Green III and
Christopher J. Perry, none of whom are Class II directors, were not up for
election and their terms of office as Directors continued after the meeting.
The shareholders ratified the selection of Ernst & Young, LLP, as the Company's
independent public accountants for the 1997 fiscal year by a vote of 5,361,246
votes in favor, 2,000 votes against and no votes abstaining.
There were no Broker Non-Votes with respect to the above matters.
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.
15
<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: April 3, 1997 /s/ G. David Higginbotham
------------------------------------
G. David Higginbotham
President
Chief Operating Officer
/s/ Thomas R. McLemore
------------------------------------
Thomas R. McLemore
Vice President Finance
Interim Chief Financial Officer
(Principal Accounting Officer)
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ARTICLE 5
FDS FOR 3RD QUARTER FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> FEB-28-1997
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<RECEIVABLES> 1,731
<ALLOWANCES> 313
<INVENTORY> 4,775
<CURRENT-ASSETS> 8,847
<PP&E> 29,120
<DEPRECIATION> 8,287
<TOTAL-ASSETS> 92,596
<CURRENT-LIABILITIES> 8,614
<BONDS> 75,112
0
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<OTHER-SE> 8,536
<TOTAL-LIABILITY-AND-EQUITY> 92,596
<SALES> 30,228
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<INCOME-PRETAX> (6,757)
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