<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED FEBRUARY 28, 1998
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 February 27,
1998
Transitional Small Business Disclosure Format: YES NO X
--- ---
Page 1
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
FORM 10-QSB
QUARTER ENDED FEBRUARY 28, 1998
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - TELETOUCH COMMUNICATIONS, INC. (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS AT
FEBRUARY 28, 1998 AND MAY 31, 1997 4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS -
THREE AND NINE MONTHS ENDED FEBRUARY 28, 1998 AND
FEBRUARY 28, 1997 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS -
NINE MONTHS ENDED FEBRUARY 28, 1998 AND
FEBRUARY 28, 1997 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 10
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
Page 2
<PAGE>
PART 1. FINANCIAL INFORMATION
Page 3
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
February 28, 1998 May 31, 1997
----------------- -----------------
ASSETS (Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents........................................ $ 3,619 $ 3,371
Accounts receivable, net of allowance............................ 1,655 1,571
Inventory........................................................ 2,837 2,450
Deferred income tax assets ...................................... 138 138
Prepaid expenses and other current assets........................ 1,598 384
----------------- -----------------
9,847 7,914
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation of $8,792 in 1998 and $7,843 in 1997.... 20,350 21,334
GOODWILL, INTANGIBLES AND OTHER ASSETS, net of
accumulated amortization of $21,754 in 1998 and $15,543 in 1997.. 58,099 62,925
----------------- -----------------
$ 88,296 $ 92,173
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses............................ $ 3,555 $ 4,360
Current portion of long-term debt................................ -- 5,710
Current portion of deferred profit on sale/leaseback............. 401 --
Deferred revenue................................................. 1,191 792
----------------- -----------------
5,147 10,862
LONG-TERM LIABILITIES:
Long-term debt................................................ 73,920 74,114
Deferred profit on sale/leaseback............................. 3,611 --
----------------- -----------------
76,531 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.............................................. (20,308) (18,726)
----------------- -----------------
4,457 6,036
----------------- -----------------
$ 88,296 $ 92,173
================= =================
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
Page 4
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 28, February 28,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Pager sales and service revenue.............................. $ 10,720 $ 9,843 $ 31,153 $ 28,232
Other sales and service revenue.............................. 577 673 2,005 1,996
Cost of products sold........................................ (1,801) (1,285) (4,787) (3,736)
------------ ------------ ------------ ------------
Net revenue.............................................. 9,496 9,231 28,371 26,492
Costs and expenses:
Operating................................................ 2,834 2,613 8,155 7,510
Selling.................................................. 1,089 1,215 3,119 3,493
General and administrative............................... 2,150 2,248 6,487 6,462
Depreciation and amortization............................ 3,520 3,099 9,746 9,122
Merger termination charges............................... -- -- -- 522
------------ ------------ ------------ ------------
Total costs and expenses..................................... 9,593 9,175 27,507 27,109
------------ ------------ ------------ ------------
Operating income/(loss)...................................... (97) 56 864 (617)
Gain on sale of assets 4,124 -- 4,163 --
Interest expense, net........................................ (2,169) (2,199) (6,525) (6,140)
------------ ------------ ------------ ------------
Income/(loss) before income taxes and extraordinary item..... 1,858 (2,143) (1,498) (6,757)
Income tax expense/(benefit)................................. 85 (131) 85 (233)
------------ ------------ ------------ ------------
Income/(loss) before extraordinary item...................... 1,773 (2,012) (1,583) (6,524)
Extraordinary loss, early debt retirement,
net of income tax benefit................................ -- -- -- (3,389)
------------ ------------ ------------ ------------
Net income/(loss)............................................ 1,773 (2,012) (1,583) (9,913)
Preferred stock dividends.................................... (707) (616) (2,075) (1,816)
------------ ------------ ------------ ------------
Income/(loss) applicable to common stock..................... $ 1,066 $ (2,628) $ (3,658) $ (11,729)
============ ============ ============ ============
Basic earnings/(loss) per share:
Income/(loss) before extraordinary item.................. $0.17 $(0.41) $(0.58) $(1.32)
Extraordinary item....................................... -- -- -- (0.53)
------------ ------------ ------------ ------------
$0.17 $(0.41) $(0.58) $(1.85)
============ ============ ============ ============
Diluted earnings/(loss) per share
Income/(loss) before extraordinary item.................. $0.07 $(0.41) $(0.58) $(1.32)
Extraordinary item....................................... -- -- -- (0.53)
------------ ------------ ------------ ------------
$0.07 $(0.41) $(0.58) $(1.85)
============ ============ ============ ============
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
Page 5
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
February 28,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss............................................... $ (1,583) $ (9,913)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Loss on early retirement of debt....................... -- 3,389
Depreciation and amortization.......................... 9,746 9,122
Non cash interest expense.............................. 2,028 2,010
Loss (Gain) on sale of assets.......................... (4,163) --
Deferred income taxes.................................. -- (233)
Changes in operating assets and liabilities:
Accounts receivable, net........................... (84) 446
Inventories........................................ 170 (230)
Prepaid expenses and other assets.................. (1,206) (163)
Accounts payable and accrued expenses.............. (805) (94)
Deferred revenue................................... 399 (209)
----------- -----------
Net cash provided by operating activities 4,502 4,125
INVESTING ACTIVITIES:
Capital expenditures, including pagers................. (4,124) (4,290)
Acquisitions, net of cash acquired..................... (900) (10,660)
Decrease in other assets............................... -- 101
Deferred costs associated with acquisitions............ -- (422)
Net proceeds from sale of assets....................... 4,785 --
----------- -----------
Net cash used for investing activities (239) (15,271)
FINANCING ACTIVITIES:
Debt incurred in connection with acquisitions.......... -- 10,626
Proceeds from new debt................................. -- 57,173
Deferred profit on sale/leaseback...................... 4,013
Payments on long-term debt............................. (7,500) (52,700)
Debt issue costs....................................... (531) (3,152)
Net proceeds from preferred stock and
common stock warrants............................... 3 --
----------- -----------
Net cash provided by (used for) financing activities..... (4,015) 11,947
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... 248 801
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......... 3,371 1,021
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............... $ 3,619 $ 1,822
=========== ===========
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
Page 6
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
The unaudited condensed consolidated financial statements of Teletouch
Communications, Inc., and its subsidiaries (the "Company") for the periods ended
February 28, 1998 and 1997 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 February 28, 1998 and May 31,
1997 and the results of its operations and cash flows for the periods ended
February 28, 1998 and 1997. All such adjustments are of a normal recurring
nature. Interim period results are not necessarily indicative of the results to
be achieved for the full year. The financial statements for the periods ended
February 28, 1998 and 1997 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 February 28, 1997 have been reclassified to conform with the presentation
of the financial statements for the period ended February 28, 1998.
NEW ACCOUNTING ANNOUNCEMENTS: In June 1997, the Financial Accounting Standards
Board (FASB) issued Statement No. 130, "Reporting Comprehensive Income, " which
establishes standards for reporting and displaying comprehensive income and its
components (revenues, expenses, gains and losses) as part of a full set of
financial statements, and Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information." Statement No. 131 establishes standards
for reporting information about a company's operating segments and related
disclosures about its products, services, geographic areas of operations and
major customers. Both statements will be adopted by the Company in fiscal 1999.
The adoption of these statements will not impact the Company's results of
operations, cash flows or financial position.
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.
See Accompanying Notes to Condensed Consolidated Financial Statements
Page 7
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)
NOTE B - ACQUISITIONS (CONTINUED.)
The following unaudited pro forma summary financial information presents the
results of operations of the Company as if the 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.
NINE MONTHS ENDED
FEBRUARY 28, 1997
--------------------
(Unaudited)
Net revenue.................................... $ 27,255
=========
Operating income (loss)........................ (540)
=========
Net loss before extraordinary item............. (6,635)
=========
Extraordinary item............................. (3,389)
=========
Net Loss....................................... $(10,024)
=========
Loss per share applicable to common stock:..... $ (1.87)
=========
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.
NOTE C - GOODWILL, INTANGIBLES AND OTHER ASSETS
Goodwill, intangibles and other assets consist of the following :
FEBRUARY 28, MAY 31,
1998 1997
-------- --------
(Unaudited)
Goodwill......................................... $ 25,034 $ 25,059
Subscriber bases................................. 28,225 28,225
FCC licenses..................................... 21,715 20,736
Non-compete agreements........................... 700 700
Debt issue costs................................. 4,130 3,599
Other............................................ 49 149
-------- --------
79,853 78,468
Accumulated amortization.......................... (21,754) (15,543)
-------- --------
$ 58,099 $ 62,925
======== ========
NOTE D - LONG-TERM DEBT
Long-term debt consists of the following:
FEBRUARY 28, MAY 31,
1998 1997
-------- --------
(Unaudited)
Notes Payable................................ $ 61,000 $ 67,800
Junior Subordinated Notes, including
accrued interest........................... 12,920 11,324
Other........................................ -- 700
-------- --------
$ 73,920 $ 79,824
======== ========
See Accompanying Notes to Condensed Consolidated Financial Statements
Page 8
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)
NOTE D - LONG-TERM DEBT (CONTINUED)
In January, 1998, the Company renegotiated its original agreement (the
"Credit Facility") with a group of lenders, led by Chase Manhattan Bank, as a
result of the sale of substantially all of the Company's towers to Pinnacle
Towers, Inc., as discussed in Note E. The new Agreement (the "Amended and
Restated Credit Agreement") provides for loans in an amount not to exceed $70
million, as opposed to the $95 million provided for in the original Credit
Facility. As of February 28, 1998, $61 million of the Amended and Restated
Credit Agreement had been funded, and $9 million is available for future
funding. In addition, the Company paid approximately $0.5 million in amendment
fees in order to complete the amended agreement. These fees have been deferred
and are being amortized, using the effective interest method, over the term of
the existing loans.
The funding from the original 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 original Credit Facility of approximately $3.6 million have been
deferred and are being amortized, using the effective interest rate method, over
the term of the existing loans.
The Amended and Restated Credit Agreement 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 Amended and Restated Credit Agreement require that the principal be
repaid in escalating quarterly installments beginning in August 2000 and ending
in fiscal year 2006. In conjunction with the funding from the original Credit
Facility and the Amended and Restated Credit Agreement, 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 original 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
On January 28, 1998, the Company sold substantially all of its
communications towers for approximately $8.7 million. The proceeds from the
sale were used to reduce the outstanding debt under the Credit Facility. The
Company will lease back space on the towers sold for a period of ten years for
approximately $.6 million per year.
NOTE F - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
THREE MONTHS ENDED
FEBRUARY 28, 1998
------------------
Numerator:
Net income for basic and diluted
earnings per share $1,066,000.00
Denominator:
Denominator for basic earnings per
share-weighted average shares 6,353,416
Effect of dilutive securities:
Stock options 82,842
Warrants 4,273,508
Convertible preferred stock 3,689,372
------------------
Dilutive potential common shares 8,045,722
Denominator for diluted earnings per
share-adjusted weighted average
shares and assumed conversions 14,399,138
Basic earnings per share $ 0.17
Diluted earnings per share $ 0.07
The effect of the outstanding stock options, warrants and convertible preferred
stock is anti-dilutive in periods which the Company has incurred a loss. The
weighted average shares outstanding for the three months ended February 28, 1997
was 6,347,416. The weighted average shares outstanding for the nine months ended
February 28, 1998 and February 28, 1997 was $6,353,416 and $6,347,416,
respectively.
See Accompanying Notes to Condensed Consolidated Financial Statements
Page 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 February 28, 1998 the Company had approximately
338,300 pagers in service. The Company derives the majority of its revenues from
fixed periodic fees, not dependent on usage, charged to subscribers for paging
services. As long as a subscriber remains on service, operating results benefit
from the recurring payments of the fixed periodic fees without incurring
additional selling expenses or other fixed costs. Due to the growth from the
completion of the acquisitions discussed below, the Company's results of
operations for prior periods may not be indicative of future performance.
ACQUISITIONS
During 1997, the Company completed the acquisition of all of the stock of
Russell's Communication, Inc., d.b.a. LaPageCo ("LaPageCo") and AACS
Communications, Inc. ("AACS") for cash consideration of approximately $2.3
million and $1.9 million, respectively. In addition, the Company acquired
substantially all of the assets of Warren Communications, Inc. ("Warren"), for
cash consideration of approximately $5.1 million and Dave Fant Company, d.b.a.
Oklahoma Radio Systems ("ORS") for cash consideration of approximately $2.1
million and Cimarron Towers Inc. ("Cimarron") for cash consideration of
approximately $0.4 million. Additional consideration for Cimarron was
calculated at $1.4 million based on actual performance for the four-month period
from September 1996 through December 1996. This additional consideration was
paid over a six-month period which began in March 1997 and ended in August 1997.
The consideration paid for these acquisitions was obtained from the amounts
available under the Company's existing credit facility.
Each of these Fiscal Year 1997 acquisitions have been accounted for using
the purchase method of accounting. Of the total purchase price for these
acquisitions, for financial reporting purposes, the allocation was
approximately $0.8 million to property, plant and equipment, $0.2 million to
accounts receivable, $0.2 million to inventory and other assets, $4.8 million to
FCC licenses, $4.2 million to subscriber bases, $0.4 million to non-compete
agreements, with the remaining amount allocated to goodwill.
See Accompanying Notes to Condensed Consolidated Financial Statements
Page 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
Nine Months ended Nine Months ended
February 28, February 28,
----------------- -----------------
1998 1997 1997
---- ---- ----
(in thousands, except pagers, ARPU and per share amounts)
<S> <C> <C> <C>
Net revenue $ 28,371 $ 26,492 $ 27,255
Operating income(loss) $ 864 $. (617) $ (540)
Income (loss) before extraordinary item $ (1,498) $..(6,524) $ (6,635)
Loss per share before extraordinary item $ (0.58) $ (1.32) $ (1.33)
EBITDA (1)(2) $ 10,610 $ 9,027 $ 9,396
Pagers in service at end of period 338,300 308,000 308,000
Average revenue per unit ("ARPU") $ 9.31 $ 9.69 $ 9.77
</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 nine
months ended February 28, 1997 shown above excludes $522,000 of non-
recurring costs associated with these terminations. EBITDA for the nine
months ended February 28, 1998 excludes the gain on sale of assets.
Results of Operations for the three months and nine months ended February 28,
- -----------------------------------------------------------------------------
1998 and 1997
- -------------
Net Revenue: The historical net revenue of the Company has increased to
-----------
$28.4 and $9.5 million for the nine and three months ended February 28, 1998
from $26.5 and $9.2 million for the nine and three months ended February 28,
1997. 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 338,300 at February 28, 1998 as compared to 308,000 at February
28, 1997. The Company believes that internal growth due to further penetration
of its existing markets will continue.
See Accompanying Notes to Condensed Consolidated Financial Statements
Page 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 nine
months ended February 28, 1998 was $9.31 as compared to $9.69 for the nine
months ended February 28, 1997. This decline in ARPU is due to increased
competition in the Company's markets as well as an increase in the number of
paging units sold to paging resellers. Paging resellers are businesses that buy
airtime at wholesale prices from the Company and sell the service to
subscribers. While the wholesale price to the reseller is lower than the price
the Company charges directly to its customers, the reseller bears the cost of
acquiring, billing, collecting and servicing the subscribers. Prior to the
Fiscal Year 1997 Acquisitions, approximately 16% of the Company's paging units
were sold through resellers, as of February 28, 1998 approximately 36% 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 after 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 $17.8 million, 63% of
net revenue, for the first nine months of fiscal year 1998 as compared to $18.0
million, 68% of net revenue in the first nine months of fiscal year 1997; and
$6.1 million, 64% of net revenue for the three months ended February 28, 1998 as
compared to $6.1 million, 66% of net revenue for the three months ended February
28, 1997. 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 nine full months in fiscal year 1998 as
compared to seven 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 $17.8 million, 63% of pro forma net revenue,
for the first nine months of fiscal year 1998 as compared to $18.4 million, 67%
of pro forma net revenue, in the first nine months of fiscal year 1997 ($17.9
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 $9.7 and $3.5 million for the nine and three months ended February
28, 1998 from $9.1 and $3.1 million for the first nine and three months ended
February 28, 1997. 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 $6.5 and $2.2 million for
----------------
the nine and three months ended February 28, 1998 from $6.1 and $2.2 million for
the nine and three months ended February 28, 1997. This increase is due to the
increased debt incurred by the Company in connection with the Fiscal Year 1997
Acquisitions as well as the amortization of financing costs associated with
obtaining the original Credit Facility and the Amended and Restated Credit
Agreement, offset by the reduction in interest expense due to the reduction of
debt with proceeds from the sale of assets.
See Accompanying Notes to Condensed Consolidated Financial Statements
Page 12
<PAGE>
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.
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 $10.6 million, 37% of net revenue, for the
------
first nine months of fiscal year 1998 from $8.5 million, 32% of net revenue
($9.0 million, 34% of net revenue, excluding the $0.5 million of costs
associated with the terminated ProNet merger and other terminated acquisitions),
in the first nine months of fiscal year 1997; and $3.4 million, 36% of net
revenue for the three months ended February 28, 1998 as compared to $3.2
million, 34% of net revenue for the three months ended February 28, 1997. On a
pro forma basis, assuming the Fiscal Year 1997 Acquisitions occurred at the
beginning of the period, EBITDA increased to $10.6 million, 37% of pro forma net
revenue, for the first nine months of fiscal year 1998 as compared to $8.9
million, 33% of pro forma net revenue ($9.4 million and 34% excluding the costs
associated with the terminated ProNet merger and other terminated acquisitions),
in the first nine 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 nine
months of fiscal year 1998 and the $0.5 million of non-recurring costs included
in the nine months ended February 28, 1997 related to the terminated Pro Net
merger and other terminated acquisitions.
FINANCIAL CONDITION
In January, 1998, the Company renegotiated its original agreement (the
"Credit Facility") with a group of lenders, led by Chase Manhattan Bank, as a
result of the sale of substantially all of the Company's towers to Pinnacle
Towers, Inc., as discussed in Note E. The new Agreement (the "Amended and
Restated Credit Agreement") provides for loans in an amount not to exceed $70
million, as opposed to the $95 million provided for in the original Credit
Facility. As of February 28, 1998, $61 million of the Amended and Restated
Credit Agreement had been funded, and $9 million is available for future
funding. In addition, the Company paid approximately $0.5 million in amendment
fees in order to complete the amended agreement. These fees have been deferred
and are being amortized, using the effective interest method, over the term of
the existing loans.
The funding from the original Credit Facility was used to repay the FINOVA
Loan and provide the financing necessary to complete the Fiscal Year 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 original Credit
Facility of approximately $3.6 million were deferred and are being amortized,
using the effective interest rate method, over the term of the existing loans.
The Amended Restated Credit Agreement 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 Amended and Restated Credit Agreement require that the principal be
repaid in escalating quarterly installments beginning in August 2000 and ending
in fiscal year 2006. In conjunction with the funding from the original Credit
Facility and the Amended and Restated Credit Agreement, 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
See Accompanying Notes to Condensed Consolidated Financial Statements
Page 13
<PAGE>
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 $4.1 million and $4.3
million for the first nine months of fiscal years 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 Amended and Restated Credit Agreement.
IMPACT OF YEAR 2000
Three of the Company's primary software programs, written and supported by
outside vendors, use two digits rather than four to define the applicable year.
As a result, those programs have time-sensitive software that recognize a date
using "00" as the year 1900 rather than the year 2000. If not corrected, this
could cause a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company has identified the software and vendors involved and has been
furnished with written information on the new software versions that will be
Year 2000 compliant and the estimated dates, prior to the year 2000, when they
will be available. These new versions of software are covered under existing
maintenance agreements, therefore the Company expects no significant costs
associated with compliance.
See Accompanying Notes to Condensed Consolidated Financial Statements
Page 14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to various legal proceedings arising in the ordinary
course of business. The Company believes that there is no proceeding,
either 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 17
(b) Reports on Form 8-K,
-------------------
The Company filed a Current Report on
Form 8-K (File No. 0-24992), dated
January 27, 1998. Such Form 8-K
disclosed the sale of certain assets
(communication towers).
See Accompanying Notes to Condensed Consolidated Financial Statements
Page 15
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
TELETOUCH COMMUNICATIONS, INC.
--------------------------------
(Registrant)
Date: April 8, 1998
/s/J. Richard Carlson
---------------------
J. Richard Carlson
President
Chief Operating Officer
Date: April 8, 1998
/s/Thomas R. McLemore
----------------------
Thomas R. McLemore
Executive Vice President
Chief Financial Officer
(Principal Accounting Officer)
See Accompanying Notes to Condensed Consolidated Financial Statements
Page 16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Act 5 FDS
for 3rd quarter 10Q and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 3,619
<SECURITIES> 0
<RECEIVABLES> 1,755
<ALLOWANCES> 60
<INVENTORY> 2,837
<CURRENT-ASSETS> 9,847
<PP&E> 29,142
<DEPRECIATION> 8,792
<TOTAL-ASSETS> 88,296
<CURRENT-LIABILITIES> 5,147
<BONDS> 73,920
0
0
<COMMON> 6
<OTHER-SE> 4,451
<TOTAL-LIABILITY-AND-EQUITY> 88,296
<SALES> 33,158
<TOTAL-REVENUES> 33,158
<CGS> 4,787
<TOTAL-COSTS> 27,507
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,525
<INCOME-PRETAX> (1,498)
<INCOME-TAX> 85
<INCOME-CONTINUING> (1,583)
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<NET-INCOME> (1,583)
<EPS-PRIMARY> (0.58)
<EPS-DILUTED> (0.58)
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