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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB/A
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED: MAY 31, 1997
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File No. 0-24992
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TELETOUCH COMMUNICATIONS, INC.
(Name of small business issuer in its charter)
DELAWARE 75-2556090
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
110 N. COLLEGE, SUITE 200, TYLER, TEXAS 75702 (903) 595-8800
(Address and telephone number of principal executive offices)
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Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock, $0.001 par value; Class A Common Stock Purchase Warrants.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past twelve 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
As of August 7, 1997, the aggregate market value of the voting stock held by
non-affiliates of the Registrant, based on the average of the closing bid and
asked prices on that date, was approximately $9,546,281.
As of August 7, 1997, the Registrant had outstanding 6,347,416 shares of Common
Stock, 15,000 shares of Series A Preferred Stock, and 130,930 shares of Series B
Preferred Stock.
Portions of the Registrant's Definitive Proxy Statement for the 1997 Annual
Meeting of Stockholders of the Registrant to be held on November 12, 1997, are
incorporated by reference into Part III.
Transitional Small Business Disclosure Format: Yes [ ] No [ X ]
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INDEX TO FORM 10-KSB
OF
TELETOUCH COMMUNICATIONS, INC.
PAGE NO.
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PART I
Item 1. Business 1
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Item 6. Management's Discussion and Analysis
Item 7. Financial Statements F-1
Item 8. Changes In and Disagreements with Accountants On Accounting
and Financial Disclosure
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners and Management
Item 12. Certain Relationships and Related Transactions
Item 13. Exhibits and Reports on Form 8-K
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STATEMENTS CONTAINED OR INCORPORATED BY REFERENCE IN THIS DOCUMENT
THAT ARE NOT BASED ON HISTORICAL FACT ARE "FORWARD-LOOKING STATEMENTS" WITHIN
THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD-
LOOKING STATEMENTS MAY BE IDENTIFIED BY USE OF FORWARD-LOOKING TERMINOLOGY SUCH
AS "MAY", "WILL", "EXPECT", "ESTIMATE", "ANTICIPATE", "CONTINUE", OR SIMILAR
TERMS, VARIATIONS OF THOSE TERMS OR THE NEGATIVE OF THOSE TERMS. FORWARD-
LOOKING STATEMENTS ARE BASED UPON NUMEROUS ASSUMPTIONS ABOUT FUTURE CONDITIONS
THAT COULD PROVE NOT TO BE ACCURATE. ACTUAL EVENTS, TRANSACTIONS AND RESULTS
MAY DIFFER MATERIALLY FROM THE ANTICIPATED EVENTS, TRANSACTIONS AND 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.
PART I
ITEM 1. BUSINESS
GENERAL
Teletouch Communications, Inc. (the "Company" or "Teletouch") was formed in
July 1994 and is headquartered in Tyler, Texas. Teletouch, or one of its
several predecessors, has operated paging, two-way mobile communications
services and telemessaging services in east Texas for over 30 years. Unless
otherwise indicated, references herein to the Company or Teletouch include
Teletouch-Texas and the Company's various predecessors.
The Company provides paging services in non-major metropolitan areas and
communities. Currently the Company provides services in Alabama, Arkansas,
Louisiana, Mississippi, Missouri, Oklahoma, Texas, Tennessee and Florida. The
Company has 39 sales offices in 9 states. Through intercarrier arrangements, the
Company provides additional nationwide and regional coverage.
The Company has experienced significant growth both internally and through
acquisitions. At May 31, 1997 the Company had approximately 321,100 pagers in
service as compared to approximately 195,500 and 68,500 at May 31, 1996 and
1995, respectively. For fiscal year 1997 the Company had net revenues of $35.8
million as compared to $27.0 million and $6.6 million in fiscal years 1996 and
1995, respectively.
The Company's strategy is to continue to expand within its existing
marketplaces as well as by acquiring additional regional paging companies that
serve adjacent markets, generally consisting of smaller metropolitan and non-
metropolitan markets. The Company also considers acquisitions of other paging
companies that also cover larger metropolitan markets provided that they service
markets that are strategically located near its existing markets. The Company
believes that the smaller metropolitan and non-metropolitan markets have been
relatively ignored by the larger companies in the paging industry and therefore
provide for greater growth potential for paging and related services. By
combining its business with other similar companies, the Company believes it can
achieve improved operating results of the combined businesses by consolidating
administrative functions, taking advantage of economies of scale and, sharing
common frequencies to offer customers paging coverage over a wider area on the
Company's own system. By reducing overhead costs, expanding sales, and focusing
on secondary markets, the Company believes that it can improve its pager service
operating margins while achieving continued pager unit and revenue growth.
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ACQUISITIONS
In December 1994, the Company acquired substantially all of the assets and
liabilities of Beepers Plus of Jackson Partnership and the stock of Beepers Plus
of Memphis, Inc., and Beepers Plus of Nashville (collectively "Beepers Plus")
for approximately $20.7 million. In addition, in December 1994, the Company
acquired substantially all of the non-cash assets and assumed certain
liabilities of Waco Communications, Inc. ("WACO") for approximately $2.9
million. 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"). These
acquisitions have been financed with the proceeds from the Company's Initial
Public Offering in December 1994, the private placement of $25 million of debt
and equity securities and the proceeds from additional senior debt. Together,
the Beepers Plus, Waco and Dial acquisitions added approximately 141,000
subscribers to the Company's subscriber base. For further discussion of these
acquisitions, see "Management's Discussion and Analysis - Acquisitions".
During the first nine months of fiscal 1997, the company completed the
acquisition of all 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 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 $0.4 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 is payable over a six month period which began 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 Acquisitions".
INDUSTRY BACKGROUND
The paging industry has been in existence since 1949 when the Federal
Communications Commission ("FCC") allocated a group of radio frequencies for use
in providing one-way and two-way mobile communications services. Throughout its
history, the paging industry has been characterized by consolidation,
substantial growth and technological change. Historically, the paging industry
has been highly fragmented, with a large number of small, local operators. The
industry grew slowly as the quality and reliability of equipment gradually
improved and consumers began to perceive the benefits of mobile communications.
Many of the firms that entered the paging business during the first two decades
of the industry did so as a complement to their existing telephone answering
service or two-way radio communications sales and service businesses. Further
improvements in equipment reliability and cost-effective technological
innovations helped to accelerate the use of paging services in the 1970s.
Some of the most significant developments in the industry occurred in the
1980s. The digital display pager was introduced, which quickly supplanted tone
and voice pagers as the most popular paging product. In 1982 the FCC allocated
additional frequencies, which expanded the capacity of the industry and allowed
new market entrants in markets where additional frequencies were previously
unavailable.
Although the growth rate of the paging industry is difficult to determine
precisely, management estimates that the number of pagers in service has grown
since 1990 at an annual rate of nearly 20% and will continue to grow at an
annual rate of approximately 15% for the next five years. Sources estimate that
at the end of 1996 there were approximately 42 million pagers in service in the
United States and that there will be at least 50 million units in service by
the year 2000. Factors generally considered contributing to this expected growth
include: (i) increased mobility of the general population; (ii) a continued
movement
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towards a service based economy; (iii) general increase in awareness of the
benefits of mobile communications; (iv) the relatively high costs of other
mobile communications services such as cellular telephone service; and (v)
technological advances in paging equipment and services
Three types of carriers have emerged in the paging industry: (i) large
national paging companies; (ii) regional carriers, including Teletouch, that
operate in regional markets such as several contiguous states in one geographic
region of the United States but can offer subscribers service outside of the
subscriber's home region through a national network of interconnections between
the subscriber's own provider, a national firm and other regional providers; and
(iii) small, single market operators.
PAGING OPERATIONS
Paging provides a one-way communications link to a paging service
subscriber within the paging service coverage area. Each subscriber is assigned
a distinct telephone number or personal identification number that a caller
dials to activate the subscriber's pager. When a telephone call for a
subscriber is received at the Company's computerized paging control terminals, a
radio signal is transmitted to the subscriber's pager which then causes the
pager to emit a voice signal, a tone or a vibration to alert the subscriber.
Depending upon the type of pager in use, the paging subscriber may respond
directly to the message from information displayed on the pager or by calling
his or her home, office or voice mail system to receive the message. The
advantage of paging over a conventional telephone service is that the pager's
reception is not restricted to a single location, and its advantage over a
cellular telephone is that a pager is smaller, has a longer battery life and,
most importantly, is substantially less expensive to use. Some cellular
subscribers use a pager in conjunction with their cellular telephone to screen
incoming calls and to lower the expense of their cellular telephone service.
The Company currently provides four basic types of paging services: tone-
only, numeric digital display, alphanumeric display (all of which can be used in
conjunction with the Company's voice mail services) and tone-plus-voice. In
each case, the subscriber carries a pocket-sized radio receiver, i.e., a pager,
that is preset to monitor a designated radio frequency. A subscriber's pager is
activated by radio signals emitted by the transmitters. In the case of a
numerical digital display pager, a caller transmits a message that may consist
of an area code and telephone number or other numerical information consisting
of up to 12 digits. Alphanumeric display service allows subscribers to receive
and store messages consisting of both numbers and letters. With tone-only
service, the subscriber's receiver, when activated, produces an audible "beep"
sound or vibration and with tone-plus-voice service, the pager emits a beeping
sound plus a brief voice message.
Digital display paging service, which was introduced around 1980, has in
recent years grown at a faster rate than tone-only or tone-plus-voice service.
Today the vast majority of the pagers in service are numeric display.
Alphanumeric display pagers, which were introduced in the mid-1980s, constitute
a small but increasing portion of the Company's subscriber base.
The Company offers paging subscribers voice mail messaging services. When
a subscriber uses voice mail in conjunction with paging service and a recorded
message is left by a caller, the paging subscriber is automatically notified
through a page alert. Voice mail employs a sophisticated computer technology
that enables the customer to receive digitally recorded voice messages 24 hours
a day wherever he or she is by accessing the voice mail system via any touch-
tone telephone. The Company's voice mail systems provide complete message
privacy, allow for personalized message greetings and enable voice messages to
be sent to a large group of people simultaneously.
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The paging industry has traditionally distributed its services through
direct marketing and sales activities. In recent years, additional channels of
distribution have evolved, including: (i) carrier-operated stores; (ii)
resellers, who purchase paging services on a wholesale basis from carriers and
resell those services on a retail basis to their own customers; (iii) agents who
solicit customers for carriers and are compensated on a commission basis; and
(iv) retail outlets that often sell a variety of merchandise, including pagers
and other telecommunications equipment. While most paging subscribers
traditionally have been business users, industry observers believe that pager
use among consumers has increased significantly in recent years. In addition,
paging subscribers have increasingly chosen to purchase rather than lease their
pagers. The Company expects that these trends will continue.
SOURCES OF SYSTEM EQUIPMENT AND PAGERS
The Company does not manufacture any of the pagers or related transmitting
and computerized paging terminal equipment used in the Company's paging
operations. The equipment used in the Company's paging operations, including
pagers, is available for purchase from multiple sources, and the Company
anticipates that pagers and paging equipment will continue to be available to
the Company in the foreseeable future, consistent with normal manufacturing and
delivery lead times. Because of the high degree of compatibility among
different models of transmitters, computers and other paging and voice mail
equipment manufactured by suppliers, the Company's paging networks are not
dependent upon any single source of such equipment. The Company continually
evaluates new developments in technology in connection with the design and
enhancement of its paging and voice mail systems and selection of products to be
offered to subscribers. The Company currently purchases the majority of its
pagers, from Motorola, its transmitters from two competing sources and its
paging terminals from Glenayre, a manufacturer of mobile communications
equipment.
THE COMPANY'S PRODUCTS AND MARKETS
The Company's products are wireless communications services, primarily
paging and telemessaging services, including voice mail and alphanumeric
transcription services. The Company is licensed by the FCC to transmit numeric,
alphanumeric, voice and tone-only messages to pagers it either sells or leases
to customers.
The Company's customers include various size companies with field sales and
service operations, individuals in occupations requiring substantial mobility
and the need to receive timely information, and a rapidly expanding base of
individual consumers who use pagers to stay in touch with friends and family.
Some of the Company's customers use pagers rather than home telephones as their
primary means of communication. These customers often respond to pages using
pay phones and the telephones of friends and family.
The Company's sales strategy is to concentrate on smaller business accounts
and individuals who value continuity, quality and personal service. In recent
years the Company has increasingly emphasized pager sales as compared to
rentals. Customers buying pagers and paying only for service (wireless message
transmission) tend to be less likely to leave the Company for a competitor
because doing so often requires that the frequency of the pager, as well as the
pager's telephone number, must be changed. The Company has the ability to offer
a high level of technical support and provides a full range of dependable
communications services with personal service.
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The Company markets its paging services in Texas under the Teletouch name,
Beepers Plus by Teletouch in the Tennessee markets of Memphis and Nashville and
Dial-A-Page by Teletouch in its other markets. In order to access the broadest
possible market, the Company utilizes multiple distribution channels including:
(i) Company operated sales offices, including malls and strip shopping centers,
that sell pagers to the consumer market; (ii) direct sales staff that
concentrate on business accounts; (iii) resellers, who purchase bulk paging
services from the Company and resell them to their own subscribers; and (iv) by
reselling other paging carriers' services when existing or potential customers
require paging service beyond the coverage of its own network.
COMPETITION
The Company experiences direct competition from one or more competitors in
all the locations in which it operates. Some of the Company's competitors have
greater financial resources than the Company. Competition for subscribers to
the Company's paging services is based primarily on the price and quality of
services offered and the geographic area covered. The Company believes that the
price and quality of its services and its geographic coverage areas within its
markets generally compare favorably with those of its competitors.
Although some of the competitors are small privately owned companies
serving only one market area, others are subsidiaries or divisions of larger
companies, such as telephone companies, that provide paging services in multiple
market areas. Among the Company's competitors are Arch Communications Group,
Inc., AT&T Wireless Messaging, Beepers Unlimited, Metrocall, Inc., Mobilemedia
Communications, Inc., Paging Network, Inc. and Air Touch, Inc.
Entities offering wireless two-way communications services, including
cellular, broadband personal communication service ("PCS") and specialized
mobile radio services ("SMR"), also compete to a certain extent with the
Company's paging services. Cellular and PCS service is generally more expensive
than paging services and, where price is a consideration and access to fixed
wire communications (such as ordinary telephones) is available, paging can
compete successfully with or be an adjunct to cellular and PCS systems. In
addition, future technological advances and associated regulatory changes in the
telecommunications industry could create new services or products competitive
with the paging services currently provided by the Company. Recent and proposed
regulatory changes by the FCC are aimed at encouraging such technological
developments and new services and promoting competition. There can be no
assurance that the Company would not be adversely affected by such technological
developments or regulatory changes.
REGULATION
The Company's paging operations are subject to regulation by the FCC under
the Communications Act of 1934, as amended (the "Communications Act"), and may
be conducted only under licenses to use frequencies granted by the FCC to the
Company. In addition to authorizing the use of radio frequencies, FCC
licenses set forth the technical parameters, such as maximum power and tower
height, under which the Company is permitted to use those frequencies.
The FCC has recently adopted rules generally revising the classification of
licenses. Traditionally, the FCC has classified licensees as either Radio
Common Carrier licenses ("RCC") or Private Carrier Paging ("PCP") licenses.
Pursuant to the FCC's rules, all licensees will be classified either as
Commercial Mobile Radio Service licenses ("CMRS") or Private Mobile Radio
Services licensees. Those carriers, like the Company and its competitors, who
make service available to the public on a for-profit basis through
interconnection with the public switched telephone network are classified as
CMRS licensees. The FCC has recently adopted new rules to license paging
channels in the exclusive UHF and VHF bands, as well as in the exclusive 929 and
931 MHz bands, on a geographic area basis. Geographic area licenses will be
awarded through auctions, which are expected to be held sometime in 1998.
Incumbent licensees, such as
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the Company, will retain their exclusivity under the FCC's rules. The Company
also operates paging systems utilizing shared, non-exclusive frequencies below
929 MHz. The FCC has indicated that these shared these shared frequencies will
not be subject to the upcoming auctions.
In addition, until recently, the RCC licenses held by the Company were
subject to rate and entry regulations in states that chose to impose tariff and
certification obligations whereas the PCP licenses were not subject to such
regulations. As a result of recent Congressional legislation, the state
regulatory differences between RCCs and PCPs have been eliminated.
The FCC radio licenses granted to the Company are for varying terms of up
to 10 years, and renewal applications must be approved by the FCC. In the past,
FCC renewal applications have been more or less routinely granted. Although
there can be no assurance that any future applications filed by the Company will
be approved or acted upon in a timely manner by the FCC, based on its experience
to date, the Company believes that such applications will continue to be
approved.
In the past, the Company regularly applied to the FCC for authority to use
additional frequencies and to add additional transmitter sites to expand
coverage on existing frequencies. Under current FCC guidelines, the Company can
expand its coverage and add additional sites only on frequencies formerly
classified as PCP frequencies below 929.000 MHz. All other paging frequencies
on which the Company holds licenses are frozen in a status quo condition pending
the final announcement and implementation of geographic area licensing auctions
anticipated in 1998. The Communications Act also requires prior FCC approval
for acquisitions by the Company of radio licenses held by other companies, as
well as transfers of controlling interests of any entities that hold radio
licenses. Although there can be no assurance that any such future applications
filed by the Company will be approved or acted upon in a timely manner by the
FCC, the Company knows of no reason to believe such applications would not be
approved or granted. The FCC has determined that all major modification and
expansion applications will be subject to competitive bidding ("auction")
procedures. Since these procedures are new to the paging industry, the Company
cannot predict their impact on its licensing practices.
The Communications Act requires the FCC to limit foreign ownership of
licenses. These foreign ownership restrictions limit the percentage of Company
stock that may be owned or voted, directly or indirectly, by aliens or their
representatives, a foreign government or its representatives, or a foreign
corporation. Similar statutory restrictions limit aliens and foreign
representatives from being officers and directors of entities that hold CMRS
licenses. However, these limitations will be modified when a new international
trade agreement goes into effect in 1998.
The FCC has authority to restrict the operation of licensed radio
facilities or to revoke or modify such licenses. The FCC may adopt changes to
its radio licensing rules at any time, subject to following certain
administrative procedures. The FCC may impose fines for violations of its
rules. Under certain circumstances, the Company's license applications may be
deemed "mutually exclusive" with those of other paging companies, in which case,
the FCC would select between the mutually exclusive applicants. The FCC has
previously used lottery procedures to select between mutually exclusive paging
applications; however, recently the FCC, in response to a Congressional mandate,
began awarding new CMRS paging licenses by the auction process.
The FCC could change its rules or policies in a manner that could have a
material adverse effect on the Company's business. Such actions could affect
the scope and manner of the Company's services, or could lead to increased
competition in the paging industry. For example, the FCC was ordered by
Congress to hold auctions to award licenses for new personal communications
services in 1994. These and other new mobile services could compete directly or
indirectly with the Company. In addition, from time to time, federal and state
legislators propose legislation that could affect the Company's business either
beneficially or adversely. The Company cannot predict the impact of such
legislative actions on its operations.
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The foregoing description of certain regulatory factors does not purport to
be a complete summary of all present and proposed legislation and regulations
pertaining to the Company's operations.
EMPLOYEES
As of August 7, 1997, the Company had approximately 307 total employees, of
which 254 were full-time. The majority of these individuals are marketing,
servicing and clerical employees. The Company considers its relationships with
its employees to be satisfactory and is not a party to any collective bargaining
agreement.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently owns 4 office buildings and twenty transmitter sites
and the transmitter broadcast towers on those sites. In addition, the Company
leases 46 additional locations in its market areas, including its executive
offices in Tyler, Texas. The Company leases transmitter sites on commercial
towers, buildings, and other fixed structures in approximately 303 locations.
The Company's leases are for various terms and provide for monthly rental
payments at various rates. The Company is obligated to make total lease
payments of approximately $1,046,000 under its office facility and tower site
leases for the fiscal year ended May 31, 1998, see Note G to the consolidated
financial statements.
The Company believes that its facilities are adequate for its current needs
and that it will be able to obtain additional space as needed at reasonable
cost.
ITEM 3. 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
During the quarter ended May 31, 1997, no matters were placed before the
stockholders of the Company for consideration.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to the Company's initial public offering in December 1994 there had
been no public market for the securities of the Company. As of December 21,
1994 the Company's securities were listed for quotation on The Nasdaq Small-Cap
Market ("Nasdaq") under the symbols: TELL and TELLW. As of December 21, 1994,
the Company's securities were listed for trading on the Boston Stock Exchange
("BSE") under the symbols TLL and TLLW. There can be no assurance that the
Company will be able to continue to satisfy the requirements for quotation on
Nasdaq or listing on BSE.
The following table sets forth, for the periods indicated, the reported
high and low transaction prices for the Common Stock and Class A Warrants for
the periods such securities were traded on Nasdaq. Such quotations reflect
inter-dealer prices, but do not include retail mark-ups, mark-downs, or
commissions and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Common Stock Class A Warrants
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High Low High Low
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<S> <C> <C> <C> <C>
Fiscal year 1996
1/st/ Quarter 4-3/4 3-1/4 1-3/32 11/32
2/nd/Quarter 4-1/16 2-7/8 13/16 1/2
3/rd/ Quarter 4 3-1/16 19/32 1/4
4/th/ Quarter 6 3-3/4 1-1/8 13/32
Fiscal Year 1997
1/st/ Quarter 5-3/8 2-5/8 1/2 5/16
2/nd/ Quarter 3-1/8 2-7/8 5/16 1/4
3/rd/ Quarter 3 1-3/4 3/8 5/16
4/th/ Quarter 2-1/4 1-5/8 1/2 1/4
- ---------------------
</TABLE>
As of August 7, 1997 there were 6,353,416 shares of common stock, 15,000
shares of Series A preferred stock, 130,930 shares of Series B preferred stock,
2,300,000 Class A Warrants, 3,991,260 shares of Common Stock Purchase Warrants,
and 486,259 shares of Series B Preferred Stock Purchase Warrants outstanding.
As of August 7, 1997, there were 38 holders of record of the Common Stock, in
excess of 300 beneficial holders, and 16 holders of record of the Class A
Warrants based upon information furnished by Continental Stock Transfer & Trust
Company, New York, New York, the transfer agent for the Common Stock and the
Class A Warrants. The number of holders of record does not reflect the number
of beneficial holders of the Company's Common Stock or Class A Warrants for whom
shares and warrants are held by banks, brokerage firms and others.
The Company has never paid and does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future. Dividends on the Series
A Preferred Stock accrue at 14% per annum. Such dividends may be paid in kind
by the issuance of additional securities. Cash payment of any dividends on the
Company's Common Stock or Preferred Stock, and the redemption of the Preferred
Stock, are prohibited so long as the Credit Facility is outstanding. See
"Management's Discussion and Analysis-Financial Condition."
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ITEM 6. 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 following discussion and analysis of the financial condition and
results of operations of the Company should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
report.
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 May 31, 1997 the Company had 321,100 pagers in
service. The Company derives the majority of its revenues from fixed periodic,
usually monthly, 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 fiscal 1997, the Company completed the acqisition of all 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 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 $0.4
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 is payable over a six
month period which began 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
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 accounting purposes, the allocation was approximately $0.8 million to
property, plant and equipment, $0.2 million to accounts receivable, $0.1 million
to inventory and other assets, $4.8 million to FCC Licenses, $4.2 million to
subscriber bases, $0.4 million to non-compete agreements, with the remaining
amount allocated to goodwill.
9
<PAGE>
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 license, $13.8 million to subscriber bases,
$0.1 million to non-compete, $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'
former senior lender, FINOVA Capital Corporation ("FINOVA"). The Company
incurred financing costs and professional fees incident to the Dial Acquisition,
and the related financings, of approximately $5.5 million. The CIVC Investors
purchased 15,000 shares, with an initial liquidation value of $15 million, of
the Series A 14% Cumulative Preferred Stock (the "Series A Preferred Stock") and
$10 million of 14% Junior Subordinated Notes ("the Subordinated Notes") due in
fiscal year 2003. Dividends on the Series A Preferred Stock accrue at the rate
of 14% per annum. Each share of Series A Preferred Stock will become
convertible into common stock based on a stated formula after August 3, 2003.
The CIVC Investors also received warrants, exercisable at a nominal price, to
purchase 5,065,951 shares of Teletouch common stock (the "Common Stock Purchase
Warrants") and 617,189 shares of Series B Preferred Stock (the "Series B
Preferred Stock Purchase Warrants"). Each share of Series B Preferred Stock
will become convertible into six shares of Common Stock after two years or
earlier upon the occurrence of an event of default as specified by the purchase
agreement. CIVC will have the right, after two years, to require that its
securities be registered for public sale.
In December 1994, the Company acquired substantially all of the assets and
liabilities of Beepers Plus of Jackson Partnership and the stock of Beepers Plus
of Memphis, Inc. and Beepers Plus of Nashville (collectively, "Beepers Plus")
for approximately $20.7 million. In addition, in December 1994, the Company
acquired substantially all of the non-cash assets and assumed certain
liabilities of Waco Communications, Inc. ("WACO") for approximately $2.9
million. The acquisitions of Beepers Plus and WACO were financed with the
proceeds from the Company's Initial Public Offering (see Note H to the
consolidated financial statements) and a $19 million loan from FINOVA.
10
<PAGE>
RESULTS OF OPERATIONS
The following table presents certain items from the Company's 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 acquisitions of Dial,
laPageCo, Warren, ORS, Cimarron and AACS (collectively, "the Completed
Acquisitions") and the related financing, had occurred at the beginning of each
period presented.
<TABLE>
<CAPTION>
Pro forma
Year ended May 31, Year ended May 31,
----------------------------- ----------------------------
1997 1996 1997 1996
--------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
(in thousands, except pagers, ARPU and per share amounts)
Net revenue $ 35,834 $ 27,046 $ 36,597 $ 33,450
Operating expenses 37,163 27,646 37,849 33,896
-------- -------- -------- --------
Operating Income (1,329) (600) (1,252) (446)
Interest expense, net (8,177) (6,421) (8,370) (8,200)
Other -- -- -- --
-------- -------- -------- --------
Loss before income taxes (9,506) (7,021) (9,622) (8,646)
Income tax benefit (476) (2,201) (481) (2,715)
-------- -------- -------- --------
Loss before extraordinary item (9,030) (4,820) $ (9,141) $ (5,931)
Extraordinary item (3,389) -- (3,389) (1,338)
-------- -------- -------- --------
Net loss $(12,419) $ (4,820) $(12,530) $ (7,269)
======== ======== ======== ========
Loss per share applicable to
common stock:
Loss before extraordinary item $ (1.81) $ (1.15) $ (1.83) $ (1.39)
Extraordinary item (0.53) -- (0.53) (0.23)
-------- -------- -------- --------
Net loss $ (2.34) $ (1.15) $ (2.36) $ (1.62)
======== ======== ======== ========
EBITDA (1)(2) $ 12,402 $ 9,337 $ 12,771 $ 12,026
======== ======== ======== ========
Pagers in service at end of period 321,100 195,500 321,100 195,500
======== ======== ======== ========
Average revenue per unit ("ARPU") $ 10.02 $ 13.56 $ 10.02 $ 13.57
======== ======== ======== ========
</TABLE>
- --------------------------
(1) EBITDA represents earnings before other income (expense), 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 shown above
excludes $527,000 and $627,000 of non-recurring costs associated with the
ProNet agreement for fiscal 1997 and 1996, respectively.
11
<PAGE>
Results of Operations for the fiscal years ended May 31, 1997, 1996 and 1995
- ----------------------------------------------------------------------------
Net Revenue: The historical net revenue of the Company has increased to
-----------
$35.8 million in fiscal year 1997 from $27.0 million and $6.6 million in fiscal
years 1996 and 1995, respectively. These increases are due primarily to the
increase in the pagers in service resulting from the Completed Acquisitions as
well as greater market penetration in the Company's existing markets. On a pro
forma basis, net revenue increased to $36.6 million in fiscal year 1997 from
$33.5 million in fiscal year 1996. Pagers in service increased to 321,100 at
May 31, 1997 as compared to 195,500 and 68,500 at May 31, 1996 and May 31, 1995,
respectively. Of these increases, the LaPageco, Oklahoma Radio Systems, Warren,
AACS and Cimarron acquisitions represented 97,000 additional pagers added. The
Dial Acquisition represented an additional 141,000 pagers added. 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 year
ended May 31, 1997 was $10.02 as compared to $13.56 and $14.35 for the years
ended May 31, 1996 and May 31, 1995, respectively. 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. Currently
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, and
as the units sold through resellers continues to increase. However, while there
can be no assurance, the Company expects that the growth in units in service
will increase sufficiently to offset this decline in ARPU.
Operating Expenses, excluding depreciation and amortization: Operating
-----------------------------------------------------------
expenses, excluding depreciation and amortization, were: $24.0 million, 67% of
net revenue, for fiscal year 1997; $18.3 million, 68% of net revenue, for fiscal
year 1996; and $4.9 million, 74% of net revenue, for fiscal year 1995. The
increased costs are primarily due to the inclusion of operating results of the
Completed Acquisitions from the dates of those acquisitions. In addition, $0.5
million of non-recurring costs are included in general and administrative
expenses for the year ended May 31, 1997 related to costs incurred in connection
with a now terminated proposed merger with ProNet, Inc. ("ProNet"). The
decrease as a percentage of net revenue is due to fixed costs being spread over
an increased customer base. On a pro forma basis, assuming the Completed
Acquisitions had occurred at the beginning of the respective fiscal year, these
expenses increased to $24.4 million, 67% of pro forma net revenue, ($23.9
million and 65% excluding the costs associated with the terminated ProNet
merger) in fiscal year 1997 as compared to $22.1 million, 66% of pro forma net
revenue, ($21.1 million and 64% excluding the costs associated with the
terminated ProNet merger) in fiscal year 1996. The increase as a percentage of
proforma net revenue is primarily due to the increased costs associated with a
much larger, publicly traded, company.
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 $13.2 million in fiscal year 1997 from $9.3 million and $1.8
million in fiscal years 1996 and 1995, respectively. The increase is due
primarily to the increased amortization of intangible assets resulting from the
Completed Acquisitions. The Company expects that this expense will continue to
increase in the near term as the amortization related to the AACS, Cimarron,
laPageco, ORS, and Warren acquisitions are included in the results of operations
for a full year.
12
<PAGE>
Interest Expense: Interest expense increased to $8.2 million in fiscal
----------------
year 1997 from $6.4 million and $1.6 million in fiscal years 1996 and 1995,
respectively. This increase is due to the increased debt incurred by the
Company in connection with the Completed Acquisitions. As discussed below,
during fiscal 1997, the Company entered into a new credit facility with a group
of lenders led by Chase Manhattan Bank, ("the Credit Facility"). The Credit
Facility terms provide for lower interest rates than the former senior notes
from FINOVA.
Income tax benefit: At May 31, 1997, the Company had a net operating loss
------------------
carryforward of approximately $15.6 million that will begin to expire in 2010.
For fiscal year 1997 the Company's effective tax benefit rate was 5.0% as
compared to 31.3% and 11.6% in fiscal year 1996 and 1995, respectively. The
primary differences between the statutory income tax benefit rate and the
effective rate in the Company's historical financial statements is non-
deductible amortization of intangibles related to the Completed Acquisitions,
the establishment of a valuation allowance and non-deductible interest expense
on a convertible note in fiscal 1995.
EBITDA: EBITDA increased to $11.9 million, 33% of net revenue, ($12.4
------
million, 35% of net revenue, excluding the $0.5 million of costs associated with
the terminated ProNet merger) in fiscal year 1997 from $8.7 million, 32% of net
revenue, ($9.3 million, 34% of net revenue, excluding the $0.6 million of costs
associated with the terminated ProNet merger) in fiscal year 1996 and $1.7
million, 26% of net revenue, in fiscal year 1995. On a pro forma basis, assuming
the Completed Acquisitions had occurred at the beginning of the respective
fiscal year, EBITDA was $12.3 million, 33% of pro forma net revenue, ($12.8
million and 35% excluding the costs associated with the terminated ProNet
merger) in fiscal year 1997 as compared to $11.4 million, 34% of net
revenue($12.0 million, 36% of pro forma net revenue, excluding the $0.6 million
of costs associated with the terminated ProNet merger), in fiscal year 1996.
The decrease in pro forma EBITDA as a percentage of net revenue is due to the
impact of the increased costs associated with running a larger, publicly traded,
company as 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 pagers in service and lower operating expenses
as a percentage of net revenue.
FINANCIAL CONDITION
As a consequence of the Completed Acquisitions, and related financing, most
of the Company's balance sheet items at May 31, 1997 have increased from their
respective levels at May 31, 1996. As of May 31, 1997 the Company's cash
balance was $3.4 million as compared to $1.0 million at May 31, 1996.
The primary sources of capital for the Company prior to the IPO in December
1994 were cash flow from operations and vendor financing. Subsequent to the
IPO, the Company has been able to raise financing from several sources as a
means to fund the Completed Acquisitions and working capital needs. In addition
to the financing proceeds, cash provided by operations increased to $6.9 million
in fiscal year 1997 from $3.3 million and $0.3 million in fiscal years 1996 and
1995, respectively. The increase in cash provided from operations is primarily
due to the cash flow provided from the Completed Acquisitions. The Company
expects that the cash flow provided from operations is sufficient to fund the
working capital needs. However, the Company will need to utilize funds
available from the Credit Facility to fund future acquisitions.
13
<PAGE>
In August 1995, in order 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 the CIVC Investors, and $35 million
in additional senior financing from its' former senior lender, FINOVA. The
Company incurred financing costs and professional fees incident to the Dial
Acquisition, and the related financings, of approximately $5.5 million. The
CIVC Investors purchased 15,000 shares, with an initial liquidation value of $15
million, of the Series A Preferred Stock and $10 million of the Subordinated
Notes due in fiscal year 2003. Dividends on the Series A Preferred Stock accrue
at the rate of 14% per annum. Each share of Series A Preferred Stock will
become convertible into common stock based on a stated formula after August 3,
2003. The CIVC Investors also received warrants, exercisable at a nominal
price, to purchase 5,065,951 shares of Teletouch common stock and 617,189 shares
of Series B Preferred Stock. Each share of Series B Preferred Stock will become
convertible into six shares of Common Stock after two years or earlier upon the
occurrence of an event of default as specified by the purchase agreement. CIVC
will have the right, after two years, to require that its securities be
registered for public sale.
During fiscal year 1996, the holders exercised an aggregate of 1,074,691
Common Stock Purchase Warrants and 130,930 Series B Preferred Stock Purchase
Warrants. The Series A Preferred Stock and the Series B Preferred Stock are
non-voting except as to the merger or consolidation with another entity or
entities, or the sale of substantially all of the assets of the Company. The
total number of shares of Common Stock outstanding after these issuances is
6,347,416. The total number of shares of Series B Preferred Stock outstanding
after the issuance is 130,930.
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 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 $5.8 million, $3.1
million and $0.6 million for fiscal 1997, 1996 and 1995, respectively. The
increase in fiscal year 1997 was primarily due to the upgrading of the
infrastructure of the Completed Acquisitions as well as increased need for
pagers to support the growth in pagers in service. Management anticipates
capital expenditures for the Company to continue to increase as the demand for
14
<PAGE>
pagers increases and 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.
In fiscal 1997, the Company entered into an agreement with GTE for the
purchase of certain FCC licenses totaling $1 million. The purchase is
anticipated to occur in fiscal year 1998.
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 calculations.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required by this item are included in this report
beginning on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on
accounting, financial disclosure or other matters which would require disclosure
herein.
15
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Information regarding directors, executive officers, promoters and control
persons, compliance with section 16(a) of the Exchange Act are incorporated by
reference from the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held November 12, 1997
ITEM 10. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by reference
from the Company's Proxy Statement for the Annual Meeting of Stockholders to be
held November 12, 1997
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding security ownership of certain beneficial owners and
management is incorporated by reference from the Company's Proxy Statement for
the Annual Meeting of Stockholders to be held November 12, 1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions is
incorporated by reference from the Company's Proxy Statement for the Annual
Meeting of Stockholders to be held November 12, 1997.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit Page
Number Title of Exhibit Number
- ------ ---------------- ------
10.1* Employment Agreement Dated July 25, 1997 between
Teletouch and J. Richard Carlson
11 Computation of loss per share
21 Subsidiaries
27 Financial Data Schedule
* Indicates a management contract or compensatory plan or arrangement
required to be filed herewith.
(b) Reports on Form 8-K
The company did not file a form 8-K during the fourth Quarter of Fiscal
1997.
16
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors................... F-2
Consolidated Balance Sheets...................... F-3
Consolidated Statements of Operations............ F-4
Consolidated Statements of Cash Flows............ F-5
Consolidated Statements of Shareholders' Equity.. F-6
Notes to Consolidated Financial Statements....... F-7
F - 1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Teletouch Communications, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheets of Teletouch
Communications, Inc. and subsidiaries as of May 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended May 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Teletouch
Communications, Inc. and its subsidiaries at May 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended May 31, 1997, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
August 7, 1997
F - 2
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, except share data)
<TABLE>
<CAPTION>
May 31,
--------------------
1997 1996
-------- --------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ............................................ $ 3,371 $ 1,021
Accounts receivable, net of allowance of $353 in 1997 and $310 in 1996 1,571 1,705
Inventory ............................................................ 2,450 3,498
Deferred income tax assets ........................................... 138 124
Prepaid expenses and other current assets ............................ 384 336
-------- --------
7,914 6,684
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation of $7,843 in 1997 and $5,258 in 1996 ........ 21,334 20,198
GOODWILL, INTANGIBLES AND OTHER ASSETS, net of
accumulated amortization of $15,543 in 1997 and $8,210 in 1996 ....... 62,925 57,080
-------- --------
$ 92,173 $ 83,962
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses ................................ $ 4,360 $ 3,562
Current portion of long-term debt .................................... 5,710 --
Deferred revenue ..................................................... 792 981
-------- --------
10,862 4,543
LONG-TERM DEBT 74,114 60,115
COMMITMENTS AND CONTINGENCIES
DEFERRED INCOME TAXES 1,161 740
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 .................................................. (18,726) (6,307)
-------- --------
6,036 18,564
======== ========
$ 92,173 $ 83,962
======== ========
</TABLE>
F-3
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year ended May 31,
--------------------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Pager sales and service revenue................. $ 38,683 $ 29,083 $ 6,608
Other sales and service revenue................. 2,706 2,642 2,066
Cost of products sold........................... (5,555) (4,679) (2,084)
------------- ------------- -------------
Net revenue..................................... 35,834 27,046 6,590
Costs and expenses:
Operating....................................... 12,587 9,388 2,294
Selling......................................... 3,896 3,178 972
General and administrative...................... 6,949 5,143 1,604
Depreciation and amortization................... 13,204 9,310 1,822
Merger termination charges...................... 527 627 --
------------- ------------- -------------
Total costs and expenses........................ 37,163 27,646 6,692
------------- ------------- -------------
Operating loss.................................. (1,329) (600) (102)
Interest expense, net........................... (8,177) (6,421) (1,626)
Gain on sale of answering service............... -- -- 103
------------- ------------- -------------
Loss before income taxes........................ (9,506) (7,021) (1,625)
Income tax benefit.............................. (476) (2,201) (188)
------------- ------------- -------------
Loss before extraordinary item.................. (9,030) (4,820) (1,437)
Extraordinary item, early debt retirement
net of income tax benefit of $179............... (3,389) -- --
------------- ------------- -------------
Net loss........................................ (12,419) (4,820) (1,437)
Preferred stock dividends....................... (2,470) (1,837) --
------------- ------------- -------------
Loss applicable to common stock................. $ (14,889) $ (6,657) $ (1,437)
============= ============= =============
Loss per share:
Loss before extraordinary item.................. $ (1.81) $ (1.15) $ (0.39)
Extraordinary item.............................. (0.53) -- --
------------- ------------- -------------
Net loss........................................ $ (2.34) $ (1.15) $ (0.39)
============= ============= =============
Weighted Average Shares Outstanding............. 6,347,416 5,790,522 3,686,704
============= ============= =============
</TABLE>
F - 4
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended May 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Operating Activities
Net loss ...................................... $(12,419) $ (4,820) $ (1,437)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Loss on early retirement of debt .............. 3,389 - -
Depreciation and amortization ................. 13,204 9,310 1,822
Non cash interest expense ..................... 2,557 1,999 614
Gain on sale of answering service ............. - - (103)
Deferred income taxes ......................... (476) (2,201) (210)
Changes in operating assets and liabilities:
Accounts receivable, net ................. 304 (328) (718)
Inventories .............................. 435 (1,759) (293)
Prepaid expenses and other assets ........ (32) (150) (342)
Accounts payable and accrued expenses .... 212 1,147 778
Deferred revenue ......................... (254) 105 148
-------- -------- --------
Net cash provided by operating activities .......... 6,920 3,303 259
Investing Activities:
Capital expenditures, including pagers ........ (5,836) (3,124) (569)
Acquisitions, net of cash acquired ............ (12,622) (51,801) (23,317)
Increase in other assets ...................... - - (96)
Deferred costs associated with acquisitions ... 251 (157) (689)
Payments received on long-term receivable ..... - - 33
Net proceeds from sale of assets .............. 10 - 103
-------- -------- --------
Net cash used for investing activities ............. (18,197) (55,082) (24,535)
Financing Activities:
Debt incurred in connection with acquisitions . 12,622 38,029 19,392
Proceeds from new debt ........................ 56,578 1,200 1,138
Payments on long-term debt .................... (52,400) (404) (1,841)
Payments from related parties ................. - - 236
Payments to related parties ................... - (7) (681)
Debt issue costs .............................. (3,064) (2,758) (702)
Other ......................................... (109) - -
Net proceeds from preferred stock and
common stock warrants .................... - 15,973 -
Proceeds from stock subscriptions receivable .. - 52 -
Net proceeds from public offering ............. - - 7,388
-------- -------- --------
Net cash provided by financing activities .......... 13,627 52,085 24,930
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,350 306 654
Cash and cash equivalents at beginning of period ... 1,021 715 61
-------- -------- --------
Cash and cash equivalents at end of period ......... $ 3,371 $ 1,021 $ 715
======== ======== ========
</TABLE>
F-5
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands Except Number of Shares)
<TABLE>
<CAPTION>
Preferred Stock
---------------------------------------------------
Series A Series B Common Stock Additional Accumulated Stock
---------------- ---------------- --------------------- Paid-In Earnings Subscription
Shares Amount Shares Amount Shares Amount Capital (Deficit) Receivable
-------- ------ -------- ------ --------- ------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1994 ....... -- -- -- -- 2,680,000 3 $ 718 $ (50) $ (52)
Net Loss .................. -- -- -- -- -- -- -- (1,437) --
Issuance of common stock in
Note conversion ......... -- -- -- -- 225,225 -- 51 -- --
Interest expense associated
with bridge financing and
convertible note ........ -- -- -- -- -- -- 503 -- --
Issuance of common stock
through public offering . -- -- -- -- 2,300,000 2 7,386 -- --
Issuance of common stock to
financial advisor ....... -- -- -- -- 20,000 -- 45 -- --
Issuance of common stock in
lieu of financing costs ... -- -- -- -- 47,500 -- 190 -- --
--------- ---- --------- ---- --------- --------- --------- --------- ---------
Balance at May 31, 1995 ....... -- -- -- -- 5,272,725 5 8,893 (1,487) (52)
Net Loss .................. -- -- -- -- -- -- -- (4,820) --
Payment of stock
subscription receivable ... -- -- -- -- -- -- -- -- 52
Issuance of Preferred Stock
and warrants in connection
with
Dial Acquisition, net ... 15,000 -- -- -- -- -- 15,961 -- --
Exercise of warrants ...... -- -- 130,930 -- 1,074,691 1 11 -- --
--------- ---- --------- ---- --------- --------- --------- --------- ---------
Balance at May 31, 1996 ....... 15,000 -- 130,930 -- 6,347,416 6 24,865 (6,307) --
Net Loss .................. -- -- -- -- -- -- -- (12,419) --
Other ..................... -- -- -- -- -- -- (109) -- --
Balance at May 31, 1997 ....... 15,000 $ -- 130,930 $ -- 6,347,416 $ 6 $ 24,756 $ (18,726) $ --
========= ==== ========= ==== ========= ========= ========= ========= =========
</TABLE>
F-6
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands except per share amount)
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of Teletouch Communications, Inc. and its wholly-owned subsidiaries
(together, "the Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS: Cash equivalents are recorded at cost, which approximates
market, and include investments in financial instruments having maturities of
three months or less at the time of purchase.
INVENTORIES: Inventories are carried at the lower of cost or market using the
first-in, first-out method and consist of pagers held for sale and spare parts
held for resale.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is recorded at
cost. Depreciation is computed using the straight-line method based on the
following estimated useful lives:
Pagers............................ 3 years
Paging infrastructure............. 5-20 years
Building and improvements......... 10-20 years
Other equipment................... 5-10 years
INTANGIBLE ASSETS: Goodwill is recorded at cost and amortized over 25 years
using the straight-line method. Except for debt issue costs, other intangibles
are recorded at cost and amortized over periods ranging from 5 to 25 years,
computed on the straight-line-method. The Company defers costs incurred in
obtaining debt and amortizes, as additional interest expense, these costs over
the term of the related debt using the effective interest method. It is the
Company's policy to account for intangible assets at the lower of amortized cost
or estimated fair value. On an ongoing basis, management reviews the valuation
and amortization of such assets with consideration toward recovery through
future operating results at the current rate of amortization.
REVENUE RECOGNITION: Revenue is recognized as services are provided or the
product is delivered to customers. Billings to customers for services in
advance of providing such services are deferred and recognized as revenue as
services are provided.
ADVERTISING COSTS: All advertising costs are expensed when paid. Advertising
costs were $0.8 million, $0.7 million and $0.2 million in fiscal 1997, 1996 and
1995, respectively.
F - 7
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(dollar amounts in thousands except per share amount)
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOSS PER SHARE: The computation of earnings (loss) per share is based upon the
weighted average number of common shares outstanding during the period plus the
dilutive effect of common shares contingently issuable, primarily from stock
options, exercise of warrants and convertible notes. Common stock equivalents
and other dilutive securities are excluded from the computation of weighted
average shares outstanding in periods when an operating loss is reported as the
effect is anti-dilutive.
SOURCES OF SUPPLY OF EQUIPMENT AND PAGERS: The Company does not manufacture
any of the transmitting, computer equipment or pagers used in providing its
paging services, but instead purchases such equipment and pagers from multiple
sources. The Company anticipates that such equipment and pagers will continue
to be available in the foreseeable future, subject to normal manufacturing and
delivery lead times. Because of the high degree of compatibility among
different models of transmitters, computers and other paging equipment
manufactured by multiple suppliers, the Company is able to design its systems
without depending upon any single source of equipment. The Company continuously
evaluates new developments in paging technology in connection with the design
and enhancement of its paging systems and the selection of products and services
to be offered to its subscribers.
CONCENTRATION OF CREDIT RISK: The Company provides paging services, primarily
in non-metropolitan areas and communities in the southeast United States, to
businesses and individual consumers in non-major metropolitan areas and
communities. The Company's diversified customer base does not result in any
significant concentration of credit risk. The Company performs periodic credit
evaluations of its customers to determine individual customer credit risks and
has the ability to terminate services for nonpayment. Credit losses have been
within management's expectations.
FINANCIAL INSTRUMENTS: With the exception of its Junior Subordinated Notes,
management believes that the carrying value of its financial instruments
approximates fair value. It is not practicable to estimate the fair value of
the Junior Subordinated Notes given their unique characteristics and the
complexity involved in estimating their fair value.
RECLASSIFICATION: Certain items in the 1996 and 1995 financial statements
have been reclassified to conform with the 1997 presentation.
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 calculations.
F - 8
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(dollar amounts in thousands except per share amount)
NOTE B - ACQUISITIONS
During fiscal 1997, the company completed the acquisition of all 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 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 $0.4
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 is payable over a six
month period which began March 1997. The consideration paid for these
acquisitions was obtained from available capacity under the Company's existing
credit facility. Collectively, the acquisitions made fiscal year 1997 are
referred to as "the Fiscal Year 1997 Acquisitions".
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 accounting purposes, the allocation was
approximately $0.8 million to property, plant and equipment, $0.2 million to
accounts receivable, $0.1 million to inventory and other assets, $4.8 million to
FCC Licenses, $4.2 million to subscriber bases, $0.4 million to non-compete
agreements, with the remaining amount allocated to goodwill.
In August 1995, the Company acquired substantially all of the non-cash assets
and assumed selected liabilities of Dial-A-Page, Inc. ("Dial") for a cash
purchase price of approximately $49.4 million (the "Dial Acquisition"). 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"), see Note E and Note H, and $35 million in additional senior
financing from its former senior lender, FINOVA Capital Corporation ("FINOVA"),
see Note E. The Company incurred financing costs and professional fees incident
to the Dial Acquisition, and the related financings, of approximately $5.5
million. Of the total purchase price, for financial reporting purposes,
approximately $14.2 million has been allocated to property, plant and equipment,
$0.5 million to accounts receivable, $15.5 million to FCC license, $13.8 million
to subscriber bases, $0.1 million to non-compete, $1.2 million to current
liabilities, and $0.1 million to other current assets, with the remaining amount
allocated to goodwill.
Each of the acquisitions was accounted for using the purchase method of
accounting and the results of their operations are included in the statements of
operations since the respective acquisition date.
F - 9
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(dollar amounts in thousands except per share amount)
NOTE B - ACQUISITIONS (CONTINUED)
The following unaudited pro forma summary financial information presents the
results of operations of the Company as if the Fiscal 1997 Acquisitions and the
Dial Acquisition 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 Fiscal Year 1997 Acquisitions and the Dial Acquisition 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 and the Dial Acquisition 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>
YEARS ENDED
MAY 31,
-------------------
(Unaudited)
1997 1996
-------- ---------
<S> <C> <C>
Net revenue.............. $ 36,597 $33,450
======== =======
Operating income (loss).. $ (1,252) $ (446)
======== =======
Net loss................. $(12,530) $(7,269)
======== =======
Loss per share applicable
to common stock......... $ (2.36) $ (1.62)
======== =======
</TABLE>
F - 10
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(dollar amounts in thousands except per share amount)
NOTE C - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
Land..................................... $ 254 $ 200
Leased Pagers............................ 7,503 6,091
Paging Infrastructure.................... 17,325 16,744
Buildings and improvements............... 619 522
Other equipment.......................... 3,476 1,899
------- -------
29,177 25,456
Accumulated depreciation................. (7,843) (5,258)
------- -------
$21,334 $20,198
======= =======
</TABLE>
Depreciation expense was $5.8 million, $3.6 million and $0.8 million in fiscal
1997, 1996 and 1995, respectively.
NOTE D - GOODWILL, INTANGIBLES AND OTHER ASSETS
Goodwill, intangibles and other assets consist of the following :
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Goodwill............................................... $ 25,059 $20,380
Subscriber bases....................................... 28,225 24,014
FCC licenses........................................... 20,736 15,600
Deferred acquisition costs............................. 998
Non-compete agreements................................. 700 300
Debt issue costs....................................... 3,599 3,795
Other.................................................. 149 203
-------- -------
78,468 65,290
Accumulated amortization............................... (15,543) (8,210)
-------- -------
$ 62,925 $57,080
======== =======
NOTE E - LONG-TERM DEBT
Long-term debt consists of the following :
1997 1996
-------- -------
Notes Payable.......................................... $ 67,800 $50,700
Junior Subordinated Notes.............................. 11,324 9,415
Other.................................................. 700 --
-------- -------
79,824 60,115
Less current portion................................... 5,710 --
-------- -------
74,114 60,115
======== =======
</TABLE>
F - 11
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(dollar amounts in thousands except per share amount)
NOTE E - LONG-TERM DEBT (CONTINUED)
NOTES PAYABLE: 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 May 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 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 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.
F - 12
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(dollar amounts in thousands except per share amount)
NOTE E - LONG-TERM DEBT (CONTINUED)
JUNIOR SUBORDINATED NOTES: In August 1995, in connection with the Dial
Acquisition, the Company borrowed $10 million of 14% Junior Subordinated Notes
("the Subordinated Notes") due in fiscal year 2003 from the CIVC Investors. The
Subordinated Notes were initially recorded, for financial reporting purposes, at
approximately $8 million. The terms of the Subordinated Notes require the
maintenance of certain specified financial and operating covenants and provide
for restrictions on capital expenditures and future acquisitions. The effective
interest rate on the subordinate notes during fiscal 1997 was 18.4%. Included
in the note balance is accrued interest of $2.9 million and $1.2 million at May
31, 1997 and May 31, 1996, respectively. Also see Note H below.
OTHER: As a consideration of the current year acquisition of Cimarron, the
Company entered into a note payable of $1.4 million(see Note B). This
consideration is payable over a six month period commencing March 1997. At May
31, 1997, $0.7 million of this note remain outstanding.
MATURITIES: Maturities of debt outstanding at May 31, 1997 are as follows:
1998 - $5.7 million; 1999 - $8.4 million; 2000 - $10.0 million; 2001 - $10.0
million; 2002 - $11.7 million; thereafter - $34.0 million.
INTEREST: Cash paid for interest, including interest to related parties,
during 1997, 1996 and 1995 was approximately $5.6 million, $4.2 million, and
$0.9 million, respectively.
NOTE F - INCOME TAXES
The liability method is used in accounting for income taxes. Under this
method, deferred income tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates that are expected to be
in effect when the differences reverse.
The Company made no cash payments for federal income taxes during the three
years ended May 31, 1997.
The Company has a net operating loss carryforward of approximately $15.6
million which is available to reduce future taxable income and will expire
beginning in 2010.
The decrease in the Company's effective tax benefit rate 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.
F - 13
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(dollar amounts in thousands except per share amount)
NOTE F - INCOME TAXES (CONTINUED)
Significant components of the Company's deferred income tax liabilities and
assets as of May 31, 1997 and 1996 follow:
<TABLE>
<CAPTION>
1997 1996
-------- ------
<S> <C> <C>
Deferred income tax liabilities
Depreciation and amortization methods.. $ 2,768 $2,228
Other.................................. 100 100
------- ------
Total deferred income tax liabilities..... 2,868 2,328
Deferred income tax assets:
Allowance for doubtful accounts........ 119 105
Inventory reserve...................... 19 19
Net operating loss carryforward........ 5,310 1,588
Valuation allowance.................... (3,603) --
------- ------
Total deferred income tax assets.......... 1,845 1,712
------- ------
Net deferred income tax liability......... $ 1,023 $ 616
======= ======
</TABLE>
A reconciliation from the federal statutory income tax rate to the effective
income tax rate for the years 1997, 1996, and 1995 follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Statutory income tax rate (benefit)..................... (34.0)% (34.0)% (34.0)%
Unbenefited net operating losses........................ 27.6 % -- --
Expenses not deductible for tax purposes, primarily
amortization of intangible assets and nondeductible
interest expense on convertible note (1995).......... 1.4 % 2.3 % 15.5 %
Other................................................... -- 0.4 % 6.9 %
----- ----- -----
Effective income tax rate (benefit)..................... (5.0)% (31.3)% (11.6)%
===== ===== =====
</TABLE>
F - 14
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(dollar amounts in thousands except per share amount)
NOTE G - COMMITTMENTS AND CONTINGENCIES
The Company leases buildings, transmission towers and equipment under
noncancelable operating leases. Rent expense was $2,104, $1,501, and $349 in
1997, 1996, and 1995, respectively. Future minimum rental commitments under
noncancelable leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998.................. $1,046
1999.................. 725
2000.................. 529
2001.................. 321
2002.................. 227
2003 and thereafter... 385
------
$3,233
======
</TABLE>
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.
NOTE H - STOCKHOLDERS' EQUITY
CAPITAL STRUCTURE: The Company's authorized capital structure allows for the
issuance of 25,000,000 shares of common stock with a $0.001 par value and
5,000,000 shares of preferred stock with a $0.001 par value.
INITIAL PUBLIC OFFERING: On December 29, 1994, the Company consummated the
initial public offering of its common stock and Redeemable Class A Common Stock
Purchase Warrants ("Class A Warrants" and together "the IPO"). In the IPO, the
Company issued 2,300,000 shares of common stock and 2,300,000 Class A Warrants
(including the securities sold under the underwriters' over-allotment option,
which closed in full on December 30, 1994), which were initially sold together
at an initial public offering price of $4.10. Each Class A Warrant carries the
right to purchase a share of common stock for $4.50 and may be redeemed by the
Company at $0.10 per warrant if the closing bid price of the common stock has
been at least $5.625 for 15 consecutive trading days. As of May 31, 1997, all
2,300,000 Class A Warrants remain outstanding. As part of the consideration to
the Underwriters for their services in connection with the public offering
described herein, the Company issued to the Underwriters, for nominal
consideration, the Underwriters' Warrants to purchase an aggregate of 200,000
shares of Common Stock at an exercise price of $5.60 per share and warrants to
purchase, at a price of $.10 per warrant, 200,000 warrants, each of which
entitles the holder to purchase one share of Common Stock on the same terms and
conditions as the Class A Warrants, except that the exercise price shall be
$6.30 per share. The Underwriters' Warrants are non-redeemable by the Company.
The Underwriters' Warrants are exercisable for a period of four years beginning
December 29, 1995. The Company received net proceeds of approximately $7.4
million from the IPO.
F - 15
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(dollar amounts in thousands except per share amount)
NOTE H - STOCKHOLDERS' EQUITY (CONTINUED)
In conjunction with the IPO, the Company converted $0.05 million of a note
payable to a related party, see Note J below, into 225,225 shares of Common
Stock on December 29, 1994.
DIAL ACQUISITION: In connection with the Dial Acquisition, see Note B,
the Company designated 15,000 shares of authorized preferred stock as "Series
A 14% Cumulative Preferred Stock" and 617,189 shares as "Series B Preferred
Stock". The CIVC Investors purchased 15,000 shares, with an initial
liquidation value of $15 million (19.3 million at May 31, 1997 and 16.8
million at May 31, 1996), of the Series A 14% Cumulative Preferred Stock (the
"Series A Preferred Stock") and the Subordinated Notes, see Note E. Dividends
on the Series A Preferred Stock accrue at the rate of 14% per annum. Each
share of Series A Preferred Stock as well as dividends in Arrears are
convertible after August 3, 2003 into common stock at the option of the Series
A Preferred Stockholder, based on a stated formula after. As of May 31, 1997,
the conversion of Series A Preferred Stock would result in an estimated
issuance of 4.3 million shares of common stock (5.5 million shares of common
stock if dividends in arrears are paid "in kind"). The CIVC Investors also
received warrants, exercisable at a nominal price, to purchase 5,065,951
shares of Teletouch common stock (the "Common Stock Purchase Warrants") and
617,189 shares of Series B Preferred Stock (the "Series B Preferred Stock
Purchase Warrants"). Each share of Series B Preferred Stock will become
convertible into six shares of Common Stock after two years or earlier upon
the occurrence of an event of default as specified by the purchase agreement.
CIVC will have the right, after two years, to require that its securities be
registered for public sale.
During fiscal year 1996, the holders exercised an aggregate of
1,074,691 Common Stock Purchase Warrants and 130,930 Series B Preferred Stock
Purchase Warrants. The Series A Preferred Stock and the Series B Preferred
Stock are non-voting except as to the merger or consolidation with another
entity or entities, or the sale of substantially all of the assets of the
Company.
As discussed in Note E, and the Credit Facility prohibits, the payment
of dividends on the Series A Preferred Stock. At May 31, 1997, approximately
$4.3 million of dividends were in arrears (or 1.2 million shares of common
stock if paid "in kind".)
OTHER: The Company entered into a consulting arrangement in January
1994. As a result of the agreement, approximately $0.5 million was charged to
expense in fiscal 1994. In addition, the arrangement provided for the issuance
of common stock (430,000 shares) at a subscription price of $0.12 per share
and a warrant to purchase common stock (400,000 shares) at $0.50 per share.
(the "Consultant Warrant") The Consultant Warrant expires in January 2004. The
estimated fair values in January 1994 assigned to the shares ($0.90 per share)
and shares underlying the Consultant Warrant ($0.90 per share) to be issued in
excess of the subscription or exercise price has been charged to expense with
a corresponding increase in common stock and additional paid-in capital of
$0.5 million. Additionally, a stock subscription receivable of $0.05 million
was recorded for the shares issued in July 1994 and such amount was paid in
full.
F - 16
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(dollar amounts in thousands except per share amount)
NOTE H - STOCKHOLDERS' EQUITY (CONTINUED)
The Company had a financial advisory agreement with its merger and acquisitions
financial advisor related to services provided in connection with the
acquisition of Waco Communications, Inc. and Beepers Plus (Memphis, Nashville
and Jackson). This agreement provided for the payment of approximately $0.1
million and the issuance of 20,000 shares of the Company's common stock relating
to the purchase of Waco Communications, Inc. A fee of approximately $0.2
million also was paid to the financial advisor upon the acquisition of Beepers
Plus. In addition, the financial advisor was paid a loan fee of 2%, or $0.4
million. Based upon the terms of the financial advisory agreement, $0.5 million
of the total amount payable to the financial advisor was paid at the closing of
the acquisitions and the remaining $0.2 million was paid under the terms of an
8% promissory note in May 1996.
COMMON STOCK RESERVED: Approximately 16.9 million shares of common stock are
reserved for future issuance at May 31, 1997, as follows:
<TABLE>
<CAPTION>
<S> <C>
Conversion of Series A Preferred Stock 5,516
Common Stock Purchase Warrants 3,991
Conversion of Series B Preferred Stock 3,703
Class A Warrants 2,300
Underwriters' Warrants 400
Consultant Warrant 400
1994 Stock Option and Stock Appreciation Rights Plan 400
Other option 175
------
16,885
======
</TABLE>
NOTE I - STOCK OPTIONS
The Company's 1994 Stock Option and Stock Appreciation Rights Plan (the "1994
Plan") was adopted in July 1994 by the Company, and provides for the granting of
incentive and non-incentive stock options and stock appreciation rights to
officers, directors, employees and consultants to purchase not more than an
aggregate of 400,000 shares of Common Stock. The Company's Board of Directors
administers the Plan and has authority to determine the optionees to whom awards
will be made, the terms of vesting and forfeiture, amount of the awards and
other terms. Under the terms of the Plan, the option price approved by the
Board of Directors shall not be less than the fair market value of the common
stock at date of grant.
F - 17
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(dollar amounts in thousands except per share amount)
<TABLE>
<CAPTION>
NOTE I - STOCK OPTIONS (CONTINUED)
Weighted
Stock option activity has been as follows: Average
Number of Exercise Price Exercise Price
Shares Per Share Per Share
----------- -------------- --------------
<S> <C> <C> <C>
Options outstanding at May 31, 1994............... -- --
Options granted to officers..................... 160,000 $ 3.00
Options granted to directors.................... 20,000 $ 4.50
------- -------------
Options outstanding at May 31, 1995............... 180,000 $3.00 - $4.50 $3.06
Options granted to officers..................... 120,000 $3.38 - $4.00 $3.57
Options granted to directors.................... 20,000 $ 3.50 $3.50
Options forfeited............................... (10,000) $ 3.00 $3.00
------- ------------- --------------
Options outstanding at May 31, 1996............... 310,000 $3.00 - $4.50 $3.35
Options granted to officers..................... 55,000 $1.63 - $3.00 $2.35
Options granted to others....................... 10,000 $1.78 - $1.90 $1.84
Options forfeited............................... (70,000) $3.00 - $3.75 $3.38
------- ------------- --------------
Options outstanding at May 31, 1997............... 305,000 $1.63 - $4.00 $3.12
======= ==============
Exercisable at May 31, 1997....................... 185,000 $3.02
======= ==============
Exercisable at May 31, 1996....................... 91,900 $3.00
======= ==============
Weighted-average fair value of options
granted during 1997........................... $ 1.20
=======
Weighted-average fair value of options
granted during 1996........................... $ 2.28
=======
Weighted-average remaining
contractual life.............................. 8.5 years
</TABLE>
Pro forma information regarding net income and earnings per share is required
by SFAS 123, and has been determined as if the Company had accounted for its
stock options under fair value method of that statement. The fair value for
these options was estimated at the date of grant using a binomial option pricing
model with the following weighted-average assumptions for 1997 and 1996,
respectively: risk-free interest rates of 6.5% and 6.1%; dividend yields of 0%
for both years; volatility factors of the expected market price of the Company's
common stock of .57 and a weighted-average expected life of the option of 5
years.
Binomial option valuation models are used in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions, including the expected stock price volatility. Because the
Company's stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the
F - 18
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(dollar amounts in thousands except per share amount)
NOTE I - STOCK OPTIONS (CONTINUED)
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock
options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense on a straight-line basis over the options' vesting
period. The pro forma effects on net income for 1997 and 1996 are not
representative of the pro forma effect on net income in future years because
they do not take into consideration pro forma compensation expense related to
grants made prior to 1995. The Company's pro forma information follows:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Pro forma net loss ($12,488) ($4,880)
======== =======
Pro forma loss per share ($2.36) ($1.15)
======== =======
</TABLE>
Under the terms of a contractual agreement, the Company has granted options to
acquire 75,000 shares of common stock, exercisable at a price of $6.00, to a
company that provided investor and public relations services. In addition,
options to acquire 100,000 shares of common stock, exercisable at a price of
$5.04, were granted to an officer of that company.
NOTE J - RELATED PARTY TRANSACTIONS
In conjunction with the IPO, the Company obtained $0.2 million in bridge
financing from a related party with an option to convert a portion of the note
into Common Stock. Based on the nature of bridge financing, the interest rates
of 8% and 4%, may not be reflective of the effective market rate of interest
when considering the conversion feature and terms. Accordingly, $0.5 million
was charged to interest expense during fiscal year 1995, which takes into
consideration the estimated fair value of the Company's common stock on the date
the notes were issued. $0.15 million of the bridge financing was repaid and
$0.05 million was converted into 225,225 shares of Common Stock on December 29,
1994.
NOTE K - RETIREMENT PLAN
Effective October 1995, the Company began sponsoring a defined contribution
retirement plan covering substantially all of its employees. Employees who have
completed one year of continuous service with the Company, or an acquired
company, and are at least 21 years of age are eligible to participate. Eligible
employees may contribute up to a maximum of 16% of their earnings. The Company
pays the administrative fees of the plan and may choose to contribute; however,
the Company is not obligated to make any contributions. No contributions were
made in fiscal year 1997 or 1996.
F - 19
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on August 25, 1997.
TELETOUCH COMMUNICATIONS, INC.
By: /s/ Robert M. McMurrey
------------------------------------
Robert M. McMurrey
Chairman and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant, in the capacities and on the
dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Robert M. McMurrey Chairman and Chief Executive August 25, 1997
- ------------------------- Officer
Robert M. McMurrey
/s/ J. Richard Carlson President, Chief Operating August 25, 1997
- ------------------------- Officer and Director
J. Richard Carlson
/s/ Thomas R. McLemore Executive Vice President, August 25, 1997
- ------------------------- Chief Financial Officer
Thomas R. McLemore
/s/ G. David Higginbotham Senior Vice President, August 25, 1997
- ------------------------- Technology/MIS,
G. David Higginbotham Director
Director August 25, 1997
- -------------------------
Charles C. Green III
/s/ Clifford E. McFarland Director August 25, 1997
- -------------------------
Clifford E. McFarland
/s/ Marcus D. Wedner Director August 25, 1997
- -------------------------
Marcus D. Wedner
/s/ Christopher J. Perry Director August 25, 1997
- -------------------------
Christopher J. Perry
<PAGE>
Exhibit 10.1
<PAGE>
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement"), dated as of July 25, 1997, between
Teletouch Communications, Inc., a Delaware corporation (together with its
subsidiaries, the "Company"), and J. Richard Carlson, an individual currently
resident in Virginia (the "Employee").
W I T N E S E T H:
WHEREAS, the Company desires to offer the Employee employment upon the
terms and conditions set forth herein an d the Employee desires to accept such
employment;
NOW THEREFORE in consideration of the mutual benefits to be derived from
this Agreement, the Company and the Employee hereby agree as follows:
Term of Employment; Office and Duties
- -------------------------------------
a) Beginning on August 4, 1997 (the "Employment Date") and for an
initial term of two years, the Company shall employ the Employee as a senior
executive of the Company with the title of President and Chief Operating
Officer, with the duties and responsibilities prescribed for such offices in the
Bylaws of the Company and such additional duties and responsibilities consistent
with such positions as may from time to time be assigned to the Employee by the
Board of Directors. Employee agrees to perform such duties and discharge such
responsibilities in accordance with the terms of this Agreement. This Agreement
shall be automatically renewed for an additional one-year term, unless notice to
the contrary is given by either party to the other party at least 90 day prior
to the end of the initial two-year term. After the first renewal term, on each
anniversary date of this Agreement (a "Renewal Date") the employment of the
Employee by the Company pursuant to this Agreement shall automatically be
renewed for an additional one-year term ending on the succeeding anniversary
date, unless notice to the contrary is given by either party to the other party
at least 90 days prior to such Renewal Date.
b) The Employee shall devote all of his working time to the business and
affairs of the Company other than during vacations of at most three weeks per
year and periods of illness or incapacity; provided, however, that nothing in
-------- -------
this Agreement shall preclude the Employee from devoting time required: (i) for
serving as a director of officer of any organization or entity not in the paging
business; (ii) delivering lectures or fulfilling speaking engagement; and (iii)
engaging in charitable and community activities; provided, however, that such
-------- -------
activities do not interfere with the performance of his duties hereunder.
2. Compensation and Benefits
-------------------------
For all services rendered by the Employee in any capacity during the period
of Employee's employment by the Company, including without limitation, services
as an executive officer or member of any committee of the Company or any
subsidiary, affiliate or division thereof, from and after the Effective Date the
Employee shall be compensated as follows:
<PAGE>
a) Base Salary. The Company shall pay the Employee a fixed salary ("Base
------------
Salary") at a rate of one hundred seventy-five thousand dollars ($175,000) per
year. The Board of Directors may periodically review the Employee's Base Salary
with a view to increasing such Base Salary if, in the judgement of the Board of
Directors, the earnings of the Company or the services of the Employee merit
such an increase. Base Salary will be payable in accordance with the customary
payroll practices of the Company.
b) Bonus.
------
(i) The Company shall pay the Employee bonuses in accordance with
the incentive bonus plan set forth on Annex A hereto. The initial bonus for the
Employee for fiscal 1998 shall be a maximum of $65,000. The bonus for
subsequent fiscal years will be subject to upward revision if, in the judgement
of the Board of Directors, the earnings of the Company or the services of the
Employee merit such an increase.
(ii) In addition to other amounts payable hereunder, Employee shall
receive from the Company a signing bonus of $15,000, payable on the Employment
Date.
c) Fringe Benefits.
----------------
(i) The Employee shall be entitled to participate in such disability,
health and life insurance and other fringe benefit plans or programs, including
a Section 401(k) retirement plan, of the Company established from time to time
by the Board of Directors, if any, to the extent that his position, tenure,
salary, age, health and other qualifications make him eligible to participate,
subject to the rules and regulations applicable thereto. Such additional
benefits shall include, but not be limited to, paid sick leave and individual
health insurance, all in accordance with the policies of the Company. Where
possible, all waiting and eligibility periods will be waived.
(ii) Employee shall be granted options (the "Employment Options") to
purchase 500,000 shares of the Company's Common Stock, par value $.001 per share
(the "Common Stock") as of the Employment Date, which shall be exercisable at a
price per share equal to the average of the closing price of the Common Stock
for the 20-trading days prior to the Employment Date. On the first anniversary
of the Employment Date, 100,000, or 20%, of the Employment Options shall vest
and become exercisable. Thereafter the Employment Options shall vest and become
exercisable on a daily basis, pro rata at the rate of 20% of all unvested
Employment Options for each of the four years following the one year anniversary
of the Employment Date ("Vesting Rate").
Vesting of Employment Options may be accelerated based on the operation
performance of the Company as follows:
A) A maximum of 50,000 Employment Options will vest immediately upon
achievement of either of the following targets: EBITDA of $20.0 million on
or before May 31, 1999; or $23.0 million on or before May 31, 2000; and
<PAGE>
B) A maximum of an additional 50,000 Employment Options will
vest immediately upon achievement of either of the following targets:
EBITDA of $21.0 million on or before May 31, 1999; or $25.0 million on or
before May 31, 2000.
For the purposes of this Section 2(c), vesting of Employment Options will
be accelerated upon completion of audited financial statements for the fiscal
years in question which report that the acceleration targets were achieved.
Upon any acceleration of vesting of Employment Options pursuant to this Section
2(c), the Vesting Rate shall be adjusted, to be an amount determined by
multiplying the number of as-then unvested Employment Options by a fraction, the
numerator of which is 1, and the denominator of which is the number of years
remaining from the time of such acceleration until the fifth anniversary of the
Employment Date.
(iii) In addition to the foregoing, on the third anniversary of
the Employment Date and provided that Employee is still in the employ
of the Company, Employee will receive an additional 250,000 options
(the "Outyear Options") to purchase Common Stock. The Outyear Options
shall have an exercise price per share equal to the average of the
closing price of the Common Stock for the 20 trading days prior to the
third anniversary of the Employment Date. The Outyear Options shall
vest on a daily basis, pro rata over a two year period beginning on
the date of their grant.
(iv) Common Stock issuable upon exercise of the Employment
Options and the Outyear Options shall be unregistered, restricted
stock. The vesting of all options granted pursuant to this Agreement
shall accelerate upon sale of substantially all of the assets of the
Company or the merger out of existence of the Company provided that
Employee is still in the employ of the Company.
(d) Withholding and Employment Tax. Payment of all compensation
------------------------------
hereunder shall be subject to customary withholding tax and other employment
taxes as may be required with respect to compensation paid by an
employer/corporation to an employee.
(e) Disability. The Company shall, to the extent such benefits can
----------
be obtained at a reasonable cost, provide the Employee with disability insurance
benefits at least as favorable to the Employee as those being provided by the
Company to other senior executives of the Company. In the event of the
Employee's Disability (as hereinafter defined), medical, health and dental
plans, at the Company's expense, to the extent such benefits can be obtained at
a reasonable cost, for the term of such Disability (as hereinafter defined) in
accordance with the terms of such plans.
(f) Death. The Company shall, to the extent such benefits can be
-----
obtained at a reasonable cost, provide the Employee with life insurance benefits
at least as favorable to the Employee as those being provided by the Company to
other senior executives of the Company. In the event of the Employee's death,
the Employee's family shall continue to be covered by all of the Company's
medical, health and dental plans, at the Company's expense, to the extent such
benefits can be obtained at a reasonable cost, for twenty-four (24) months
following the Employee's death in accordance with the terms of such plans.
(g) Vacation. Employee shall receive three (3) weeks of vacation
--------
annually, administered in accordance with the Company's existing vacation
policy. Unused vacation days may not be carried over into subsequent periods.
<PAGE>
(h) Stock Purchase. The Company and the Employee believe it is in
--------------
their respective best interest for Employee to have a vested equity holding in
the Company. Employee shall purchase $30,000 in market value of such Common
Stock in open market transactions in the two-year period following the
Employment Date, at least $15,000 of which shall be purchased within the first
twelve months from the Employment Date; provided however that at no time shall
he be required to make any such purchase if to do so would constitute a
violation of federal or state securities laws.
3. Business Expense.
----------------
The Company will reimburse all reasonable documented moving expenses
incurred in connection with Employee's relocation from Arlington, Virginia to
Tyler, Texas, including (i) temporary living expenses, (ii) documented moving
expenses that are deductible by Employee for federal income tax purposes, and
(iii) a sum computed by dividing A by B, where "A" is the dollar amount of
documented moving expenses of the Employee that are not deductible for federal
income tax purposes, and "B" is the amount computed by subtracting Employee's
marginal federal income tax rate from 1. The maximum amount payable to Employee
for all expenses referred to in the proceeding sentence shall be $35,000.
Moreover, the Company shall pay or reimburse all reasonable travel and
entertainment expenses incurred by the Employee in connection with the
performance of his duties under this Agreement, including reimbursement for
attending out-of-town meetings of the Board of Directors if requested to attend,
in accordance with such procedures as the Company may from time to time
establish for senior officers and as required to preserve any deductions for
federal income taxation purposes to which the Company may be entitled and
subject to the Company's normal requirements with respect to reporting and
documentation of such expenses.
4. Termination of Employment.
-------------------------
Notwithstanding any other provision of this Agreement, Employee's
employment with the Company may be terminated upon written notice to the other
party as follows:
(a) By the Company, in the event of the Employee's death or
Disability (as hereinafter defined) or for Cause (as hereinafter defined). For
purposes of this Agreement, "Cause" shall mean either: (i) the indictment of, or
the bringing of formal charges against, Employee by a governmental authority of
competent jurisdiction for charges involving criminal fraud or embezzlement;
(ii) the conviction of Employee of a crime involving an act or acts of
dishonesty, fraud or moral turpitude by the Employee, which act or acts
constitute a felony; (iii) Employee's continued failure to substantially perform
Employee's duties hereunder (after the elapse of a reasonable period to cure
such failure to perform if such failure is curable) following written notice
from the Board of Directors specifically setting forth such failure; (iv)
Employee having willfully caused the Company, without the approval of the Board
of Directors, to fail to abide by either a valid contract to which the Company
is a party or the Company's Bylaws; (v) Employee having committed acts or
omissions constituting gross negligence or willful misconduct with respect to
the Company; (iv) Employee having committed acts or omissions constituting a
breach of Employee's duty of loyalty or fiduciary duty to the Company or any act
of dishonesty or fraud with respect to the Company; (vii) Employee having
committed acts or omissions constituting a material breach of this Agreement
which are not cured in a reasonable time, which time shall be 30 days from
receipt of written notice from the Company of such material breach; or (viii)
failure by Employee to make those Common Stock purchases contemplated by Section
2(h) hereof. A
<PAGE>
determination that Cause exists as defined in clauses (iv), (v), (vi) or (vii)
(as to this Agreement) of the preceding sentence shall be made by at least a
majority of the members of the Board of Directors. For purposes of this
Agreement, "Disability" shall mean the inability of Employee, in the reasonable
judgment of a physician appointed by the Board of Directors, to perform his
duties of employment for the Company or any of its subsidiaries because of any
physical or mental disability or incapacity, where such disability shall exist
for an aggregate period of more than 120days in any 365-day period or for any
period of 90 consecutive days. The Company shall by written notice to the
Employee specify the event relied upon for termination pursuant to this
Section4(a), and Employee's employment hereunder shall be deemed terminated as
of the date of such notice. In the event of any termination under this
Subsection 4(a), the Company shall pay all amounts then due to the Employee
under Section 2(a) of this Agreement for any portion of the payroll period
worked but for which payment had not yet been made up to the date of
termination, and, if such termination was for Cause, the Company shall have no
further obligations to Employee under this Agreement, and any and all options
granted hereunder shall terminate according to their terms. In the event of a
termination due to Employee's Disability or death, the Company shall comply with
its obligations under Sections 2(e) and 2(f).
(b) By the Company, for any reason and in its sole and absolute
discretion, provided that in such event the Company shall, as liquidated damages
or severance pay, or both, continue to pay to Employee the Base Salary (at a
monthly rate equal to the rate in effect immediately prior to such termination)
for the 9-month period commencing on the date of termination (the "Termination
Payments"). For the avoidance of doubt, the intent of the foregoing is that the
Company shall pay to Employee ratably, over a 9-month period, 9/12 of the amount
of the Base Salary. In addition to Termination Payments, if (i) this Agreement
is terminated pursuant to this Section 4(b), and (ii) the Employee has been
employed by the Company for at least twelve months; then Employment Options to
purchase 50,000 shares of Common Stock shall be deemed to have vested on the day
prior to such termination date (in addition to any Employment Options which may
have otherwise vested prior to such termination date); provided, however, that
-------- -------
any and all unvested options granted hereunder shall immediately terminate and
that any and all vested options granted hereunder shall terminate according to
their terms in the event Employee is no longer employed by the Company.
(c) By the Employee for "Good Reason," (as the Employee shall
determine in good faith) which shall be deemed to exist: (i) if the Company's
Board of Directors fail to elect or reelect the Employee to, or removes the
Employee from, any of the offices referred to in Section 1(a): (ii) if the scope
of Employee's duties, responsibilities, authority or position is significantly
reduced (excluding, for this purpose, changes in responsibilities resulting from
the growth or shrinkage of the Company's business) (but not excluding changes
resulting from a sale of the Company, whether by merger, tender offer or
otherwise) provided that Employee shall act within 30 days of any such
diminution in the scope of his duties, responsibilities, authority or position;
or (iii) if the Company shall have continued to fail to comply with any material
provision of this Agreement after a 30-day period to cure (if such failure is
curable) following written notice to the Company of such non-compliance. In the
event of any termination under this Section 4(c), the Company shall, as
liquidated damages or severance pay, or both, pay the Termination Payments to
Employee for the 9-month period commencing on the date notice of such
termination is given to the Company. In addition to Termination Payments, if
(i) this Agreement is terminated pursuant to this Section 4(c), and (ii) the
Employee has been employed by the company for at least twelve months; then
Employment Options to purchase 50,000 shares of Common Stock shall be deemed to
have vested on the day prior to such termination date (in addition to any
Employment Options which may have vested prior to such termination date);
provided, however, that any and all unvested options granted hereunder shall
- -------- -------
immediately terminate and that any and all vested options granted hereunder
shall terminate according to their terms in the event Employee is no longer
employed by the Company.
<PAGE>
(d) Employee and the Company shall execute a mutual release of all
claims against the other party (excluding claims pursuant to this Agreement for
post-termination obligations of the parties) prior to commencing the payment of
Termination Payments.
(e) During any period in which Employee is obligated not to compete
with the Company pursuant to Section 5 hereof (unless Employee was terminated
for Cause), Employee and his family shall continue to be covered by the
Company's life, medical, health and dental plans. Such coverage shall be at the
Company's expense to the same extent as if Employee were still employed by the
company. In the event of a termination pursuant to Sections 4(b) or 4(c), the
Company shall provide to Employee, at the company's expense, outplacement
services of a nature customarily provided to a senior executive. Notwithstanding
the foregoing, the obligations of the company pursuant to this Section 4(e)
shall remain in effect no longer than nine months following Employee's
termination.
(f) Notwithstanding any other provision of this Agreement, the
Company shall have the right on one occasion to defer making Termination
Payments to Employee for a Maximum period of ninety (90) days (the "Deferral
Period") if the making of such payments will cause a default or event of default
under the Company's senior loan agreement. Prior to electing to defer
Termination Payments hereunder, the Company will make good faith efforts to
obtain a waiver of any such default or event of default from its senior lender.
5. Non-Competition.
---------------
During the period of Employee's employment hereunder, for one (1) year
after any termination of Employee's employment under Section 4(b) or 4(c) and
for three (3) years after any termination of Employee pursuant to Section 4(a)
hereof, the Employee shall not, within any state in which the Company or any
subsidiary of the Company is duly qualified to do business, or in any state in
which the Company is then providing services or marketing its services (or
engaged in active discussions to provide such services), or within a one hundred
(100) mile radius of any such state, directly or indirectly own any interest in,
manage, control, participate in, consult with, render services for, or in any
manner engage in any business competing with the businesses of the Company as
such businesses exist or are in development on the date of the termination of
the Employee's employment (unless the Board of Directors shall have authorized
such activity and the Company shall have consented thereto in writing).
Investments in less than five percent of the outstanding securities of any class
of a corporation subject to the reporting requirements of Section 13 or Section
15(d) of the Securities Exchange Act of 1934, as amended, shall not be
prohibited by this Section 5. At the option of Employee and so long as Employee
shall have executed the mutual release required under Section 4(d), Employee's
obligations under this Section 5 arising after the termination of Employee shall
be suspended during any period (except for a Deferral Period) in which the
Company fails to pay to him Termination Payments required to be paid to him
pursuant to this Agreement. The provisions of this Section 5 are subject to the
provisions of Section 14 of this agreement.
6. Inventions and Confidential Information.
---------------------------------------
The parties hereto recognize that a major need of the Company is to
preserve its specialized knowledge, trade secrets, and confidential information.
The strength and good will of the Company is derived from the specialized
knowledge, trade secrets, and confidential information generated from experience
with the activities undertaken by the Company and its subsidiaries. The
disclosure of this information and knowledge to competitors would be beneficial
to them and detrimental to the Company, as would the disclosure of
<PAGE>
information about the marketing practices, pricing practices, costs, profit
margins, design specifications, analytical techniques, and similar items of the
Company and its subsidiaries. The Employee acknowledges that the proprietary
information, observations and data obtained by him while employed by the Company
concerning the business or affairs of the Company are the property of the
Company. By reason of his being a senior executive of the Company, the Employee
has or will have access to, and has obtained or will obtain, specialized
knowledge, trade secrets and confidential information about the Company's
operations and the operations of its subsidiaries, which operations extend
throughout the United States. Therefore, subject to the provisions of Section 14
hereof, the Employee hereby agrees as follows, recognizing that the Company is
relying on these agreements in entering into this Agreement.
(i) During the period of Employee's employment with the Company and for
three (3) years thereafter, the Employee will not use, disclose to
others, or publish or otherwise make available to any other party any
inventions or any confidential business information about the affairs
of the Company, including but not limited to confidential information
concerning the Company's products, methods, engineering designs and
standards, analytical techniques, technical information, customer
information, employee information, and other confidential information
acquired by him in the course of his past or future services for the
Company. Employee agrees to hold as the Company's property all books,
papers, letters, formulas, memoranda, notes, plans, records, reports,
computer tapes, printouts, software and other documents, and all
copies thereof and therefrom, in any way relating to the Company's
business and affairs, whether made by him or otherwise coming into his
possession, and on termination of his employment, or on demand of the
Company, at any time, to deliver the same to the Company within
twenty-four (24) hours of such termination or demand.
(ii) During the period of Employee's employment with the Company and for
three (3) years thereafter, (a) the Employee will not directly or
indirectly through another entity induce or otherwise attempt to
influence any employee of the Company to leave the Company's employ
and (b) the Employee will not directly or indirectly hire or cause to
be hired or induce a third party to hire, any such employee (unless
the Board of Directors shall have authorized such employment and the
Company shall have consented thereto in writing) or in any way
interfere with the relationship between the Company and any employee
thereof and (c) induce or attempt to induce any customer, supplier,
licensee, licensor or other business relation of the Company to cease
doing business with the Company or in any way interfere with the
relationship between any such customer, supplier, licensee or business
relation of the Company.
7. Indemnification.
---------------
The Company will indemnify the Employee (and his legal representatives) to
the fullest extent permitted by the laws of the state in which the Company is
incorporated, as in effect at the time of the subject act or omission, or by the
Certificate of Incorporation and Bylaws of the Company, as in effect at such
time or on the date of this Agreement, whichever affords greater protection to
the Employee, and the Employee shall be entitled to the protection of any
insurance policies the Company may elect to maintain generally for the benefit
of its executive officers, against all judgments, damages, liabilities, costs,
charges and expenses whatsoever incurred or sustained by him or his legal
representative in connection with any action, suit or proceeding to which he (or
his legal representatives or other successors) may be made a party by reason of
his being or having
<PAGE>
been an officer of the Company or any of its subsidiaries except that the
Company shall have no obligation to indemnify Employee for liabilities resulting
from conduct of the Employee with respect to which a court of competent
jurisdiction has made a final determination that Employee committed gross
negligence or willful misconduct.
8. Litigation Expenses.
-------------------
In the event of any litigation or other proceeding between the Company and
the Employee with respect to the subject matter of this Agreement and the
enforcement of the rights hereunder and such litigation or proceeding results in
final judgment or order in favor of the Employee, which judgment or order is
substantially inconsistent with the positions asserted by the Company in such
litigation or proceeding, the Company in such event shall reimburse the Employee
for all of his reasonable costs and expenses relating to such litigation or
other proceeding, including, without limitation, his reasonable attorneys' fees
and expenses. In no event shall the Employee be required to reimburse the
Company for any of the costs and expenses relating to such litigation or other
proceeding.
9. Consolidation; Merger; Sale of Assets; Change of Control.
--------------------------------------------------------
Nothing in this Agreement shall preclude the Company from combining,
consolidating or merging with or into, transferring all or substantially all of
its assets to, or entering into a partnership or joint venture with, another
corporation or other entity, or effecting any other kind of corporate
combination, consolidation or merger, or to which such assets are transferred,
or such partnership or joint venture assumes this Agreement and all obligations
and undertakings of the Company hereunder. The mere occurrence of any such
transaction shall not, in and of itself, constitute an event falling within the
scope of Section 4(c). Upon such a consolidation, merger, transfer of assets or
formation of such partnership or joint venture, this Agreement shall inure to
the benefit of, be assumed by, and be binding upon such resulting or surviving
transferee corporation or such partnership or joint venture, and the term
"Company," as used in this Agreement, shall mean such corporation, partnership
or joint venture or other entity, and this Agreement shall continue in full
force and effect and shall entitle the Employee and his heirs, beneficiaries and
representatives to exactly the same compensation, benefits, perquisites,
payments and other rights as would have been their entitlement had such
combination, consolidation, merger, transfer of assets or formation of such
partnership or joint venture not occurred.
10. Survival of Obligations.
-----------------------
Sections 4, 5, 6, 7, 8, 9, 11, 12 and 14 shall survive the termination for
any reason of this Agreement (whether such termination is by the Company, by the
Employee, upon the expiration of the Agreement or otherwise).
11. Employee's Representations.
--------------------------
The Employee hereby represents and warrants to the Company that (i) the
execution, delivery and performance of this Agreement by the Employee do not and
shall not conflict with, breach, violate or cause a default under any contract,
agreement, instrument, order, judgment or decree to which the Employee is a
party or by which he is bound, (ii) the Employee is not a party to or bound by
any employment agreement, noncompete agreement or confidentiality agreement with
any other person or entity and (iii) upon the execution
<PAGE>
and delivery of this Agreement by the Company, this Agreement shall be the valid
and binding obligation of the Employee, enforceable in accordance with its
terms. The Employee hereby acknowledges and represents that he has consulted
with legal counsel regarding his rights and obligations under this Agreement and
that he fully understands the terms and conditions contained herein.
12. Company's Representations.
-------------------------
The Company hereby represents and warrants to the Employee that (i) the
execution, delivery and performance of this Agreement by the Company do not and
shall not conflict with, breach, violate or cause a default under any contract,
agreement, instrument, order, judgment or decree to which the Company is a party
or by which it is bound and (ii) upon the execution and delivery of this
Agreement by the Employee, this Agreement shall be the valid and binding
obligation of the Company, enforceable in accordance with its terms.
13. Enforcement.
-----------
Because the Employee's services are unique and because the Employee has
access to confidential information concerning the Company, the parties hereto
agree that money damages would not be an adequate remedy for any breach of this
Agreement. Therefore, in he event of a breach or threatened breach of this
Agreement, the Company may, in addition to other rights and remedies existing in
its favor, apply to any court of competent jurisdiction for specific performance
and/or injunctive or other relief in order to enforce, or prevent any violations
of, the provisions hereof (without posting a bond or other security).
14. Severability.
------------
In case any one or more of the provisions or part of a provision contained
in this Agreement shall for any reason be held to be invalid, illegal or
unenforceable in any respect in any jurisdiction, such invalidity, illegality or
unenforceability shall be deemed not to affect any other jurisdiction or any
other provision or part of a provision of this Agreement, nor shall such
invalidity, illegality or unenforceability affect the validity, legality or
enforceability of this Agreement or any provision or provisions hereof in any
other jurisdiction; and this Agreement shall be reformed and construed in such
jurisdiction as if such provision or part of a provision held to be invalid or
illegal or unenforceable had never been contained herein and such provision or
part reformed so that it would be valid, legal and enforceable in such
jurisdiction to the maximum extent possible. In furtherance and not in
limitation of the foregoing, the Company and the Employee each intend that the
covenants contained in Sections 5 and 6 shall be deemed to be a series of
separate covenants, one for each county of the State of Texas and one for each
and every other state, territory or jurisdiction of the United States and any
foreign country set forth therein. If, in any judicial proceeding, a court shall
refuse to enforce any of such separate covenants, then such unenforceable
covenants shall be deemed eliminated from the provisions hereof for the purpose
of such proceedings to the extent necessary to permit the remaining separate
covenants to be enforced in such proceedings. If, in any judicial proceeding, a
court shall refuse to enforce any one or more of such separate covenants because
the total time, scope or area thereof is deemed to be excessive or unreasonable,
then it is the intent of the parties hereto that such covenants, which would
otherwise be unenforceable due to such excessive or unreasonable period of time,
scope or area, be enforced for such lesser period of time, scope or area as
shall be deemed reasonable and not excessive by such court.
<PAGE>
15. Entire Agreement; Amendment.
---------------------------
This Agreement contains the entire agreement between the Company and the
Employee with respect to the subject matter hereof and thereof. This Agreement
may not be amended, waived, changed, modified or discharged except by an
instrument in writing executed by or on behalf of the party against whom
enforcement of any amendment, waiver, change, modification or discharge is
sought. No course of conduct or dealing shall be construed to modify, amend or
otherwise affect any of the provisions hereof.
16. Notices.
-------
All notices, requests, demands and other communications hereunder shall be
in writing and shall be deemed to have been duly given if physically delivered,
delivered by express mail or other expedited service or upon receipt if mailed,
postage prepaid, via registered mail, return receipt requested, addressed as
follows:
(a) To the Company: (b) To the Employee
Teletouch Communications, Inc. J. Richard Carlson
110 North College, Suite 200 2234 N. Burlington Street
Tyler, Texas 75702 Arlington, Virginia 22207
Attn: Chairman of the Board
with a copy to: with a copy to:
Continental Illinois Venture Corporation Daniel F. Markham, P.C.
231 South LaSalle Street 36 West 44/th/ Street, Suite 1111
Chicago, Illinois 60697 New York, New York 10036
Attn: Marcus D. Wedner Attn: Daniel F. Markham, Esquire
and to:
DeMartino, Finkelstein, Rosen & Virga
1818 N. Street, N.W., Suite 400
Washington, DC 20036
Attn: Ralph V. DeMartino, Esquire
and/or to such other persons and addresses as any party shall have specified in
writing to the other.
17. Assignability.
-------------
This Agreement shall not be assignable by either party and shall be binding
upon, and shall inure to the benefit of, the heirs, executors, administrators,
legal representatives, successors and assigns of the parties. In the event that
all or substantially all of the business of the Company is sold or transferred,
then this Agreement shall be binding on the transferee of the business of the
Company whether or not this Agreement is expressly assigned to the transferee.
<PAGE>
18. Governing Law.
-------------
This Agreement shall be governed by and construed under the laws of the
State of Texas.
19. Waiver and Further Agreement.
----------------------------
Any waiver of any breach of any terms or conditions of this Agreement shall
not operate as a waiver of any other breach of such terms or conditions or any
other term or condition, nor shall any failure to enforce any provision hereof
operate as a waiver of such provision or of any other provision hereof. Each of
the parties hereto agrees to execute all such further instruments and documents
and to take all such further action as the other party may reasonably require in
order to effectuate the terms and purposes of this Agreement.
20. Headings of No Effect.
---------------------
The paragraph headings contained in this Agreement are for reference
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first above written.
COMPANY:
TELETOUCH COMMUNICATIONS, INC.
By:
------------------------------
Robert M. McMurrey,
Chairman of the Board
EMPLOYEE:
-----------------------------------
J. Richard Carlson
<PAGE>
ANNEX A
- -------
BONUS PROVISIONS
----------------
Employee will be entitled to receive an annual bonus payable each year
subsequent to final audited statements, but in no case later than 150 days after
the end of the Company's fiscal year if the following targets are met (as shown
by the Company's audited financial statements) as follows:
<TABLE>
<CAPTION>
Target
--------------------------------------------------------------
OPERATING CASHFLOW/1/ PERSONAL OBJECTIVES
OBJECTIVES (80%) (20%)
Fiscal Year Ended ($52,000 target @ 100% ($13,000 upon 100%
May 31, achievement of target) achievement of target)
- ------------------- ----------------------------- -----------------------------
<S> <C> <C>
1998 $12.5 million operating cash To be mutually determined
flow, within the following by the Board of Directors and
limitations: at least $15.5 Employee within sixty days
million EBITDA and no more of the Employment Date
than $3.0 million capital
expenditures
1999 and To be mutually determined To be mutually determined
subsequent years by the Board of Directors and by the Board of Directors and
the Employee in the fourth Employee in the fourth
quarter of the preceding fiscal quarter of the preceding fiscal
year year
</TABLE>
The bonus payable will be adjusted as follows:
<TABLE>
<CAPTION>
% of Financial
Potential Portion of
% of Target Met/2/ Bonus Payable/2/
------------------------ --------------------
<S> <C>
less than 90% 0%
90% 40%
100% 100%
</TABLE>
__________________
/1/ Defined as EBITDA less capital expenditures.
/2/ At percentages in between two benchmarks, a proportionate part of the bonus
potential will be payable.
<PAGE>
Exhibit 11
<PAGE>
EXHIBIT 11 - COMPUTATION OF LOSS PER SHARE
<TABLE>
<CAPTION>
Year ended May 31,
-----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Total weighted average shares outstanding...... 6,347,416 5,790,522 3,686,704
Loss before extraordinary item................. $ (9,030,000) $(4,820,000) $(1,437,000)
Extraordinary item, net of income tax benefit.. $ (3,389,000) $ -- $ --
------------ ----------- -----------
Net loss....................................... $(12,419,000) $(4,820,000) $(1,437,000)
Preferred stock dividends...................... $ (2,470,000) $(1,837,000) $ --
------------ ----------- -----------
Loss applicable to common stock................ $(14,889,000) $(6,657,000) $(1,437,000)
============ =========== ===========
Loss per share:
Loss before extraordinary item................ $ (1.81) $ ( 1.15) $ (0.39)
Extraordinary item............................ $ (0.53) $ -- $ --
------------ ----------- -----------
Net loss...................................... $ (2.34) $ ( 1.15) $ (0.39)
============ =========== ===========
</TABLE>
Notes to computation of loss per share:
(1) Common stock equivalent shares issued one year prior to the offering and
assumed issued and outstanding for all periods presented under SAB 83 guidance
for fiscal years prior to the IPO. Prior to the IPO, the offering price of
$4.00 is used in the computation of the average market price. Dilution is
determined using the average market price. The common equivalent shares for
fiscal year 1996 and 1995 have an anti-dilutive effect on the loss per share and
have therefore been excluded from the calculation of loss per share.
<PAGE>
Exhibit 21
<PAGE>
EXHIBIT 21 - SUBSIDIARIES
The following is a list of all subsidiaries of the Company, all of which
are wholly owned:
<TABLE>
<CAPTION>
Jurisdiction Ownership
Name of Subsidiary of Incorporation Percentage
- ------------------ ---------------- ----------
<S> <C> <C>
Beepers Plus of Nashville, Inc. Tennessee 100%
Beepers Plus of Memphis, Inc. Tennessee 100%
Pager Airlines, Inc. Delaware 100%
Teletouch Licenses, Inc. Delaware 100%
laPageco, Inc. Louisiana 100%
AACS, Inc. Texas 100%
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ACT 5 FDS
FOR 4TH QTR 10K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> MAY-31-1997
<CASH> 3,371
<SECURITIES> 0
<RECEIVABLES> 1,924
<ALLOWANCES> 353
<INVENTORY> 2,450
<CURRENT-ASSETS> 7,914
<PP&E> 29,177
<DEPRECIATION> 7,843
<TOTAL-ASSETS> 92,173
<CURRENT-LIABILITIES> 10,862
<BONDS> 74,114
0
0
<COMMON> 6
<OTHER-SE> 6,030
<TOTAL-LIABILITY-AND-EQUITY> 92,173
<SALES> 41,389
<TOTAL-REVENUES> 41,389
<CGS> 5,555
<TOTAL-COSTS> 37,163
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,177
<INCOME-PRETAX> (9,506)
<INCOME-TAX> (476)
<INCOME-CONTINUING> (9,030)
<DISCONTINUED> 0
<EXTRAORDINARY> (3,389)
<CHANGES> 0
<NET-INCOME> (12,419)
<EPS-PRIMARY> (2.34)
<EPS-DILUTED> (2.34)
</TABLE>
