<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED NOVEMBER 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO ___
COMMISSION FILE
NUMBER 0-24992
TELETOUCH COMMUNICATIONS, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2556090
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
110 NORTH COLLEGE, SUITE 200
TYLER, TEXAS 75702
(Address of principal executive offices, including zip code)
(903) 595-8800
(Issuer's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.001 par value - 6,353,416 shares outstanding as of January 12,
1998
Transitional Small Business Disclosure Format : YES NO X
--- ---
1
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
FORM 10-QSB
QUARTER ENDED NOVEMBER 30, 1997
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - TELETOUCH COMMUNICATION, INC. (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS AT
NOVEMBER 30, 1997 AND MAY 31, 1997 4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS -
THREE AND SIX MONTHS ENDED NOVEMBER 30, 1997 AND
NOVEMBER 30, 1996 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS -
SIX MONTHS ENDED NOVEMBER 30, 1997 AND
NOVEMBER 30, 1996 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 10
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
2
<PAGE>
PART 1. FINANCIAL INFORMATION
3
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
November 30, 1997 May 31, 1997
------------------------ -----------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.......................................... $ 3,646 $ 3,371
Accounts receivable, net of allowance.............................. 1,617 1,571
Inventory.......................................................... 3,064 2,450
Deferred income tax assets......................................... 138 138
Prepaid expenses and other current assets.......................... 418 384
----------- -----------
8,883 7,914
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation of $9,144 in 1998 and $7,843 in 1997...... 20,961 21,334
GOODWILL, INTANGIBLES AND OTHER ASSETS, net of
accumulated amortization of $19,684 in 1998 and $15,543 in 1997.... 58,799 62,925
----------- -----------
$ 88,643 $ 92,173
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses.............................. $ 3,658 $ 4,360
Current portion of long-term debt.................................. 9,323 5,710
Deferred revenue................................................... 970 792
----------- -----------
13,951 10,862
LONG-TERM DEBT......................................................... 70,848 74,114
COMMITMENTS AND CONTINGENCIES -- --
DEFERRED INCOME TAXES.................................................. 1,161 1,161
STOCKHOLDERS' EQUITY:
Series A cumulative preferred stock, $.001 par value............... -- --
Series B preferred stock, $.001 par value.......................... -- --
Common stock, $.001 par value...................................... 6 6
Additional paid-in capital......................................... 24,759 24,756
Accumulated deficit................................................ (22,082) (18,726)
----------- -----------
2,683 6,036
----------- -----------
$ 88,643 $ 92,173
=========== ===========
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
4
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
------------------------------------ -----------------------------------
1997 1996 1997 1996
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Pager sales and service revenue.................... $ 10,185 $ 9,483 $ 20,433 $ 18,389
Other sales and service revenue.................... 762 654 1,428 1,323
Cost of products sold.............................. (1,452) (1,152) (2,986) (2,451)
---------------- --------------- ---------------- ----------------
Net revenue...................................... 9,495 8,985 18,875 17,261
Costs and expenses:
Operating........................................ 2,588 2,548 5,321 4,897
Selling.......................................... 1,079 1,159 2,031 2,278
General and administrative....................... 2,309 2,323 4,337 4,214
Depreciation and amortization.................... 3,113 3,058 6,226 6,023
Merger termination charges....................... -- -- -- 522
---------------- --------------- ---------------- ----------------
Total costs and expenses........................... 9,089 9,088 17,915 17,934
---------------- --------------- ---------------- ----------------
Operating income (loss)............................ 406 (103) 960 (673)
Interest expense, net.............................. (2,187) (1,954) (4,317) (3,941)
---------------- --------------- ---------------- ----------------
Loss before income taxes and extraordinary item.... (1,781) (2,057) (3,357) (4,614)
Income tax benefit................................. -- (125) -- (102)
---------------- --------------- ---------------- ----------------
Loss before extraordinary item..................... (1,781) (1,932) (3,357) (4,512)
Extraordinary item, early debt retirement
net of income tax benefit of $179........... -- -- -- (3,389)
---------------- --------------- ---------------- ----------------
Net loss........................................... (1,781) (1,932) (3,357) (7,901)
Preferred stock dividends.......................... (692) (604) (1,368) (1,200)
---------------- --------------- ---------------- ----------------
Loss applicable to common stock.................... $ (2,473) $ (2,536) $ (4,725) $ (9,101)
================ =============== ================ ================
Loss per share:
Loss before extraordinary item................... $ (0.39) $ (0.40) $ (0.74) $ (0.90)
Extraordinary item............................... -- -- -- (0.53)
---------------- --------------- ---------------- ----------------
Net loss......................................... $ (0.39) $ (0.40) $ (0.74) $ (1.43)
================ =============== ================ ================
Weighted Average Shares Outstanding................ 6,353,416 6,347,416 6,353,416 6,347,416
================ =============== ================ ================
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
November 30,
------------------------------------------
1997 1996
------------------ ------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss..................................................... $ (3,357) $ (7,901)
Adjustments to reconcile net loss to net cash
Provided by operating activities:
Loss on early retirement of debt............................. -- 3,389
Depreciation and amortization................................ 6,226 6,023
Non cash interest expense.................................... 1,335 1,263
Loss (Gain) on sale of assets................................ (29) --
Deferred income taxes........................................ -- (102)
Changes in operating assets and liabilities:
Accounts receivable, net................................. (46) 499
Inventories.............................................. (244) (1,597)
Prepaid expenses and other assets........................ (49) (126)
Accounts payable and accrued expenses.................... (702) 1,184
Deferred revenue......................................... 178 (370)
------------------ ------------------
Net cash provided by operating activities 3,312 2,262
INVESTING ACTIVITIES:
Capital expenditures, including pagers....................... (2,441) (2,604)
Acquisitions, net of cash acquired........................... -- (10,629)
Deferred costs associated with acquisitions.................. -- (85)
Net proceeds from sale of assets............................. 101 --
------------------ ------------------
Net cash used for investing activities........................... (2,340) (13,318)
FINANCING ACTIVITIES:
Debt incurred in connection with acquisitions................ -- 10,626
Proceeds from new debt....................................... -- 57,173
Payments on long-term debt................................... (700) (52,700)
Debt issue costs............................................. -- (3,043)
Net proceeds from common stock warrants...................... 3 --
------------------ ------------------
Net cash provided by (used in) financing activities............... (697) 12,056
------------------ ------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS......................... 275 1,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................. 3,371 1,021
------------------ ------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................ $ 3,646 $ 2,021
================== ==================
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
6
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
The unaudited condensed consolidated financial statements of Teletouch
Communications, Inc., and its subsidiaries (the "Company") for the periods ended
November 30, 1997 and 1996 have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis. Significant
accounting policies followed by the Company were disclosed in the notes to the
financial statements included in the Company's Annual Report on Form 10-KSB for
the year ended May 31, 1997 ("Fiscal Year 1997"). The balance sheet at May 31,
1997 has been derived from the audited financial statements at that date but
does not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of the Company's management, the accompanying condensed consolidated
financial statements contain the material adjustments necessary to present
fairly the financial position of the Company at November 30, 1997 and May 31,
1997 and the results of its operations and cash flows for the periods ended
November 30, 1997 and 1996. All such adjustments are of a normal recurring
nature. Interim period results are not necessarily indicative of the results to
be achieved for the full year. The financial statements for the periods ended
November 30, 1997 and 1996 include the results of operations for companies
acquired by Teletouch from the effective date of the acquisition, see Note B.
RECLASSIFICATION: Certain items in the financial statements for the period
ended November 30, 1996 have been reclassified to conform with the presentation
of the financial statements for the period ended November 30, 1997.
NEW ACCOUNTING PRONOUNCEMENTS: In February 1997 the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share"(SFAS No. 128), which the Company will be required to adopt
in fiscal 1998. The Company anticipates that adoption of SFAS No. 128 will have
no impact on its earnings per share calculation.
NOTE B - ACQUISITIONS
During Fiscal Year 1997, the Company completed the acquisition of all of the
stock of Russell's Communication, Inc., d.b.a. LaPageCo ("LaPageCo") and AACS
Communications, Inc. ("AACS") for cash consideration of approximately $2.3
million and $1.9 million, respectively. In addition, the Company acquired
substantially all of the assets of Warren Communications, Inc. ("Warren"), for
cash consideration of approximately $5.1 million and Dave Fant Company, d.b.a.
Oklahoma Radio Systems ("ORS") for cash consideration of approximately $2.1
million and Cimarron Towers Inc. ("Cimarron") for cash consideration of
approximately $0.4 million. Additional consideration for Cimarron was
calculated at $1.4 million based on actual performance for the four month period
from September 1996 through December 1996. This additional consideration was
paid over a six month period which began in March 1997 and ended in August 1997.
The consideration paid for these acquisitions was obtained from the amounts
available under the Company's existing credit facility.
Each of these Fiscal Year 1997 acquisitions have been accounted for using the
purchase method of accounting. Of the total purchase price for these
acquisitions, for financial reporting purposes, the allocation was
approximately $0.8 million to property, plant and equipment, $0.2 million to
accounts receivable, $0.2 million to inventory and other assets, $4.8 million to
FCC licenses, $4.2 million to subscriber bases, $0.4 million to non-compete
agreements, with the remaining amount allocated to goodwill.
The following unaudited pro forma summary financial information presents the
results of operations of the Company as if the Fiscal Year 1997 Acquisitions,
and related financing, had occurred at the beginning of the period. This
summary may not be indicative of what would have occurred had the Fiscal Year
1997 Acquisitions been made as of these dates or of results which may occur in
the future. The historical financial statements used to prepare the summary
reflect the Fiscal Year 1997 Acquisitions from the effective date of the
respective acquisition forward, using the purchase method of accounting, based
on the estimated fair values of assets purchased and liabilities assumed.
7
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)
NOTE B - ACQUISITIONS (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30, 1996
----------------------
(Unaudited)
<S> <C>
Net revenue..................................... $ 18,096
=========
Operating income (loss)......................... (596)
=========
Net loss before extraordinary item.............. (4,623)
=========
Extraordinary item.............................. (3,389)
=========
Net Loss........................................ $ (8,012)
=========
Loss per share applicable to common stock:...... $ (1.45)
=========
</TABLE>
NOTE C - GOODWILL, INTANGIBLES AND OTHER ASSETS
Goodwill, intangibles and other assets consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30, MAY 31,
1997 1997
------------- ---------
(Unaudited)
<S> <C> <C>
Goodwill............................................. $ 25,059 $ 25,059
Subscriber bases..................................... 28,225 28,225
FCC licenses......................................... 20,751 20,736
Non-compete agreements............................... 700 700
Debt issue costs..................................... 3,599 3,599
Other................................................ 149 149
-------- --------
78,483 78,468
Accumulated amortization.............................. (19,684) (15,543)
-------- --------
$58,799 $ 62,925
======== ========
</TABLE>
NOTE D - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
NOVEMBER 30, MAY 31,
1997 1997
----------- --------
(Unaudited)
<S> <C> <C>
Notes Payable.......................................... $ 67,800 $ 67,800
Junior Subordinated Notes, including accrued interest.. 12,371 11,324
Other.................................................. -- 700
-------- --------
$ 80,171 $ 79,824
======== ========
</TABLE>
8
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)
NOTE D - LONG-TERM DEBT (CONTINUED)
The Company has an agreement with a group of lenders, led by Chase Manhattan
Bank, to provide loans in an amount not to exceed $95 million (the "Credit
Facility"). As of November 30, 1997, $67.8 million of the Credit Facility had
been funded and $27.2 million is available for future funding. The Company
currently has $6.3 million of available funding under the Credit Facility. The
funding from the Credit Facility was used to repay the FINOVA Loan and to
provide the financing necessary to complete the fiscal Year 1997 Acquisitions
discussed in Note B and to provide additional working capital. As a result of
the repayment of the FINOVA Loan, the Company was required to pay a $1 million
prepayment penalty to FINOVA. The prepayment penalty of $1 million, and the
unamortized deferred loan costs associated with the FINOVA Loan of approximately
$2.6 million, were recorded as an extraordinary expense item in the first
quarter of fiscal year 1997. Direct costs incurred in connection with obtaining
the Credit Facility of approximately $3.1 million have been deferred and are
being amortized, using the effective interest rate method, over the term of the
loan.
The Credit Facility bears interest, at the Company's designation, at a
floating rate of either the prime rate plus 1% to 2% or LIBOR plus 2% to 3%
depending on the leverage ratio of the Company and is secured by substantially
all of the assets of the Company and its subsidiaries. Borrowings under the
Credit Facility require that the principal be repaid in escalating quarterly
installments beginning in February 1998 and ending in fiscal year 2004. In
conjunction with the funding from the Credit Facility, the Company entered into
interest rate protection agreements which protect $50 million, $60 million and
$47.5 million of the commitments against future prime rate or LIBOR rate
increases above 7.625%, 7.5% and 9.5% for periods August 1996 through July 1997,
August 1997 through July 1998 and August 1998 through July 1999, respectively.
At May 31,1997, the weighted average interest rate on the Credit Facility was
8.5%. In addition, the terms require the maintenance of certain specified
financial and operating covenants, provide for restrictions on capital
expenditures and future acquisitions, prohibit any payments on the Junior
Subordinated Notes or the payment of dividends.
NOTE E - SUBSEQUENT EVENTS
On January 2, 1998, the Company entered into an agreement to sell all of
its communications towers for approximately $8.6 million. The proceeds from the
sale will be used to reduce the outstanding debt under the Credit Facility.
Contingent upon the closing of the sale, the Company will lease back space on
the towers sold for a period of ten years for approximately $.6 million per
year.
On December 31, 1997, the Company concluded its purchase of certain FCC
licenses from GTE with the payment of $.9 million. An initial payment of $.1
million was made in Fiscal Year 1997.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
CERTAIN STATEMENTS CONTAINED HEREIN ARE NOT BASED ON HISTORICAL FACTS, BUT ARE
FORWARD-LOOKING STATEMENTS THAT ARE BASED UPON NUMEROUS ASSUMPTIONS ABOUT FUTURE
CONDITIONS THAT COULD PROVE NOT TO BE ACCURATE. ACTUAL EVENTS, TRANSACTIONS AND
RESULTS MAY MATERIALLY DIFFER FROM THE ANTICIPATED EVENTS, TRANSACTIONS OR
RESULTS DESCRIBED IN SUCH STATEMENTS. THE COMPANY'S ABILITY TO CONSUMMATE SUCH
TRANSACTIONS AND ACHIEVE SUCH EVENTS OR RESULTS IS SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO,
THE EXISTENCE OF DEMAND FOR AND ACCEPTANCE OF THE COMPANY'S PRODUCTS AND
SERVICES, REGULATORY APPROVALS AND DEVELOPMENTS, ECONOMIC CONDITIONS, THE IMPACT
OF COMPETITION AND PRICING, RESULTS OF FINANCING EFFORTS AND OTHER FACTORS
AFFECTING THE COMPANY'S BUSINESS THAT ARE BEYOND THE COMPANY'S CONTROL. THE
COMPANY UNDERTAKES NO OBLIGATION AND DOES NOT INTEND TO UPDATE, REVISE OR
OTHERWISE PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING
STATEMENTS THAT MAY BE MADE TO REFLECT FUTURE EVENTS OR CIRCUMSTANCES.
OVERVIEW
The Company is a leading provider of wireless messaging services, primarily
paging services, in non-major metropolitan areas and communities in the
southeast United States. As of November 30, 1997 the Company had approximately
331,500 pagers in service. The Company derives the majority of its revenues from
fixed periodic fees, not dependent on usage, charged to subscribers for paging
services. As long as a subscriber remains on service, operating results benefit
from the recurring payments of the fixed periodic fees without incurring
additional selling expenses or other fixed costs. Due to the growth from the
completion of the acquisitions discussed below, the Company's results of
operations for prior periods may not be indicative of future performance.
ACQUISITIONS
During 1997, the Company completed the acquisition of all of the stock of
Russell's Communication, Inc., d.b.a. LaPageCo ("LaPageCo") and AACS
Communications, Inc. ("AACS") for cash consideration of approximately $2.3
million and $1.9 million, respectively. In addition, the Company acquired
substantially all of the assets of Warren Communications, Inc. ("Warren"), for
cash consideration of approximately $5.1 million and Dave Fant Company, d.b.a.
Oklahoma Radio Systems ("ORS") for cash consideration of approximately $2.1
million and Cimarron Towers Inc. ("Cimarron") for cash consideration of
approximately $0.4 million. Additional consideration for Cimarron was
calculated at $1.4 million based on actual performance for the four month period
from September 1996 through December 1996. This additional consideration was
paid over a six month period which began in March 1997 and ended in August 1997.
The consideration paid for these acquisitions was obtained from the amounts
available under the Company's existing credit facility.
Each of these Fiscal Year 1997 acquisitions have been accounted for using the
purchase method of accounting. Of the total purchase price for these
acquisitions, for financial reporting purposes, the allocation was
approximately $0.8 million to property, plant and equipment, $0.2 million to
accounts receivable, $0.2 million to inventory and other assets, $4.8 million to
FCC licenses, $4.2 million to subscriber bases, $0.4 million to non-compete
agreements, with the remaining amount allocated to goodwill.
10
<PAGE>
RESULTS OF OPERATIONS
The following table presents certain items from the Company's condensed
consolidated statements of operations, certain unaudited pro forma information,
and certain other information for the periods indicated. The pro forma
information presents results of the operations of the Company as if the Fiscal
Year 1997 Acquisitions and related financing, had occurred at the beginning of
Fiscal 1997.
<TABLE>
<CAPTION>
Pro forma
Six Months ended Six Months ended
November 30, November 30,
------------------------------ ------------------------
1997 1996 1996
-------------- -------------- --------------------
(in thousands, except pagers, ARPU and per share amounts)
<S> <C> <C> <C> <C>
Net revenue $ 18,875 $ 17,261 $ 18,096
Operating income(loss) $ 960 (673) (596)
Loss before extraordinary item $ (3,357) $ (4,512) $ (4,623)
Loss per share before extraordinary item $ (0.74) $ (0.90) $ (0.92)
EBITDA (1)(2) $ 7,186 $ 5,872 $ 6,241
Pagers in service at end of period 331,500 303,700 303,700
Average revenue per unit ("ARPU") $ 9.25 $ 9.65 $ 9.80
</TABLE>
___________________________
(1) EBITDA represents earnings before interest, taxes, depreciation and
amortization and certain non-recurring charges. EBITDA is a standard
measure of financial performance in the paging industry. However, EBITDA is
not a measure defined in generally accepted accounting principles ("GAAP")
and should not be construed as an alternative to operating income or cash
flows from operating activities as determined in accordance with GAAP.
EBITDA is, however, one of the primary financial measures by which the
Company's covenants are calculated under the agreements governing the
Company's indebtedness.
(2) As discussed below, in July 1996 the Company and ProNet, Inc. mutually
agreed to terminate a previously announced agreement to merge the Company
with a subsidiary of ProNet. The actual and pro forma EBITDA for the six
months ended November 30, 1996 shown above excludes $522,000 of non-
recurring costs associated with these terminations.
Results of Operations for the three months and six months ended November 30,
- ----------------------------------------------------------------------------
1997 and 1996
- -------------
Net Revenue: The historical net revenue of the Company has increased to $18.9
-----------
and $9.5 million for the six and three months ended November 30, 1997 from $17.3
and $9.1 million for the six and three months ended November 30, 1996. These
increases are due primarily to the increase in the pagers in service resulting
from the Fiscal Year 1997 Acquisitions as well as greater market penetration in
the Company's existing markets. Pagers in service increased to approximately
331,500 at November 30, 1997 as compared to 303,700 at November 30, 1996. The
Company believes that internal growth due to further penetration of its existing
markets will continue.
11
<PAGE>
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 six
months ended November 30, 1997 was $9.44 as compared to $9.65 for the six months
ended November 30, 1996. This decline in ARPU is due to increased competition in
the Company's markets as well as an increase in the number of paging units sold
to paging resellers. Paging resellers are businesses that buy airtime at
wholesale prices from the Company and sell the service to subscribers. While
the wholesale price to the reseller is lower than the price the Company charges
directly to its customers, the reseller bears the cost of acquiring, billing,
collecting and servicing the subscribers. Prior to the Fiscal Year 1997
Acquisitions, approximately 16% of the Company's paging units were sold through
resellers, as of November 30, 1997 approximately 37% of the Company's paging
units are sold through resellers. The Company expects to see the ARPU continue
to decline as the competition continues to pursue customers in its marketplace,
generally resulting in new customers being added at a lower ARPU than the
Company's existing ARPU in that market. In addition, the higher percentage of
units sold through resellers in the Fiscal Year 1997 Acquisitions as compared to
the percentage sold through resellers by the Company prior to these
acquisitions, will also result in an overall reduction of the ARPU. However,
while there can be no assurance, the Company expects that the growth in units in
service will increase sufficiently to offset this decline in ARPU and not result
in a decrease in net revenue.
Operating Expenses, excluding Depreciation and Amortization: Operating
-----------------------------------------------------------
expenses, excluding depreciation and amortization, were $11.7 million, 62% of
net revenue, for the first six months of fiscal year 1998 as compared to $12.0
million, 69% of net revenue in the first six months of fiscal year 1997; and
$6.0 million, 63% of net revenue for the three months ended November 30, 1997 as
compared to $6.1 million, 67% of net revenue for the three months ended November
30, 1996. The decreased costs are primarily due to the $0.5 million of non-
recurring costs included in the first quarter of fiscal year 1997, related to
costs incurred in connection with the terminated merger proposal with Pro Net
and other terminated acquisitions. This decrease is partially offset by an
increase in operating expenses due to the inclusion of operating results of the
Fiscal Year 1997 Acquisitions for six full months in fiscal year 1998 as
compared to four months in fiscal year 1997. On a pro forma basis, assuming the
Fiscal Year 1997 Acquisitions had occurred at the beginning of the period, these
expenses remained the same at $11.7 million, 62% of pro forma net revenue, for
the first six months of fiscal year 1998 as compared to $12.4 million, 68% of
pro forma net revenue, in the first six months of fiscal year 1997 ($11.9
million and $66% excluding the costs associated with the costs of terminated
mergers and acquisitions). The decreased pro forma costs are primarily due to
the $0.5 million of non-recurring costs included in the first quarter of fiscal
year 1997 related to the terminated Pro Net merger and other terminated
acquisitions.
Many of these costs, including increased general and administrative salaries
and other costs, are incurred early in the growth process. Accordingly,
although the actual costs are expected to continue to increase, the Company
expects them to decrease as a percentage of net revenue as the company continues
to grow.
Depreciation and Amortization: Depreciation and amortization expense
-----------------------------
increased to $6.2 and $3.1 million for the six and three months ended November
30, 1997 from $6.0 and $3.1 million for the first six and three months ended
November 30, 1996. The increase is due primarily to the increased amortization
of intangible assets resulting from the Fiscal Year 1997 Acquisitions. The
Company expects that this expense will stabilize in the near term as the
amortization related to Fiscal Year 1997 Acquisitions is included in the results
of operations for a full year.
Interest Expense: Interest expense increased to $4.3 and $2.2 million for
----------------
the six and three months ended November 30, 1997 from $3.9 and $2.0 million for
the six and three months ended November 30, 1996. This increase is due to the
increased debt incurred by the Company in connection with the Fiscal Year 1997
Acquisitions as well as the financing of the costs associated with obtaining the
Credit Facility.
Income Tax Benefit: For fiscal year 1998 the Company estimates the effective
------------------
tax benefit rate will be 0%. A valuation allowance has been recorded against
deferred tax assets which are not likely to be realized. Specifically, the
Company's carryforwards expire at specific future dates and utilization of
certain carryforwards is limited to specific amounts each year. However, due to
the uncertain nature of their ultimate realization the Company has established a
significant valuation allowance against these carryforward benefits and will
recognize benefits only as reassessment demonstrates they are realizable.
Realization is entirely dependent upon future earnings in specific tax
jurisdictions. While the need for this valuation allowance is subject to
periodic review, if the allowance is reduced, the tax benefits of the
carryforwards will be recorded in future operations as a reduction of the
Company's income tax expense.
12
<PAGE>
Extraordinary Item: In July 1996, the Company repaid its outstanding notes
------------------
payable to FINOVA Capital Corporation ("FINOVA") with the proceeds of the Credit
Facility. As a result of this prepayment of the FINOVA Loan, the Company
incurred a prepayment penalty of $1.0 million. The prepayment penalty, and
unamortized deferred loan costs associated with the FINOVA Loan of approximately
$2.6 million, were recorded as an extraordinary item net of income tax benefit.
EBITDA: EBITDA increased to $7.2 million, 38% of net revenue, for the first
------
six months of fiscal year 1998 from $5.4 million, 31% of net revenue ($5.9
million, 34% of net revenue, excluding the $0.5 million of costs associated with
the terminated ProNet merger and other terminated acquisitions), in the first
six months of fiscal year 1997; and $3.5 million, 37% of net revenue for the
three months ended November 30, 1997 as compared to $3.0 million, 33% of net
revenue for the three months ended November 30, 1996. On a pro forma basis,
assuming the Fiscal Year 1997 Acquisitions occurred at the beginning of the
period, EBITDA remained the same at $7.2 million, 38% of pro forma net revenue,
for the first six months of fiscal year 1998 as compared to $5.7 million, 32% of
pro forma net revenue ($6.2 million and 35% excluding the costs associated with
the terminated ProNet merger and other terminated acquisitions), in the first
six months of fiscal year 1997. The increase in pro forma EBITDA is primarily
due to the growth in pro forma net revenue over the first six months of fiscal
year 1998 and the $0.5 million of non-recurring costs included in the six months
ended November 30, 1996 related to the terminated Pro Net merger and other
terminated acquisitions.
FINANCIAL CONDITION
The Company has an agreement with a group of lenders, led by Chase Manhattan
Bank, to provide new loans in an amount not to exceed $95 million (the "Credit
Facility"). As of January 12, 1998, $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 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 were
deferred and are being amortized, using the effective interest rate method, over
the term of the loan.
The Credit Facility bears interest, at the Company's designation, at a
floating rate of either the prime rate plus 1% to 2% or LIBOR plus 2% to 3%
depending on the leverage ratio of the Company and is secured by substantially
all of the assets of the Company and its subsidiaries. Borrowings under the
Credit Facility require that the principal be repaid in escalating quarterly
installments beginning in February 1998 and ending in fiscal year 2004. In
conjunction with the funding from the Credit Facility, the Company entered into
interest rate protection agreements which protect $50 million, $60 million and
$47.5 million of the commitments against future prime rate or LIBOR rate
increases above 7.625%, 7.5% and 9.5% for periods August 1996 through July 1997,
August 1997 through July 1998 and August 1998 through July 1999, respectively.
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 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 $2.4 million and $2.6 million
for the first six months of fiscal year 1998 and 1997, respectively. Management
anticipates capital expenditures for the Company to increase as the Company
continues to improve its infrastructure. These expenditures will be paid for
with cash generated from operations and borrowings under the unused portion of
the Credit Facility.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to various legal proceedings arising in the ordinary
course of business. The Company believes that there is no proceeding, either
threatening or pending, against the Company that could result in a material
adverse effect on the results of operations or financial condition of the
Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits,
--------
Exhibit Page
Number Title of Exhibit Number
- ------ ---------------- ------
27 Financial Data Schedule
(b) Reports on Form 8-K, None.
-------------------
14
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
TELETOUCH COMMUNICATIONS, INC.
----------------------------------
(Registrant)
Date: January 14, 1998
/s/J. Richard Carlson
----------------------------------
J. Richard Carlson
President
Chief Operating Officer
Date: January 14, 1998
/s/Thomas R. McLemore
----------------------------------
Thomas R. McLemore
Executive Vice President
Chief Financial Officer
(Principal Accounting Officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Act 5 FDS
for 2nd quarter 10Q and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> NOV-30-1997
<CASH> 3,646
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<RECEIVABLES> 1,917
<ALLOWANCES> 300
<INVENTORY> 3,064
<CURRENT-ASSETS> 8,883
<PP&E> 30,105
<DEPRECIATION> 9,144
<TOTAL-ASSETS> 88,643
<CURRENT-LIABILITIES> 13,951
<BONDS> 70,848
0
0
<COMMON> 6
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<TOTAL-LIABILITY-AND-EQUITY> 88,643
<SALES> 21,861
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<CGS> 2,986
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<INTEREST-EXPENSE> 4,317
<INCOME-PRETAX> (3,357)
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<EPS-PRIMARY> (0.74)
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