<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Period Ended November 30, 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 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 - 4,235,611 shares outstanding
as of January 8, 1999
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
FORM 10-Q
QUARTER ENDED November 30, 1998
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements - Teletouch Communications, Inc. (Unaudited)
Condensed Consolidated Balance Sheets at
November 30, 1998 and May 31, 1998 4
Condensed Consolidated Statements of Operations -
Three and Six Months Ended November 30, 1998 and
November 30, 1997 5
Condensed Consolidated Statements of Cash Flows -
Six Months Ended November 30, 1998 and
November 30, 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 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
2
<PAGE>
Part 1. Financial Information
3
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, except share data)
<TABLE>
<CAPTION>
November 30, May 31,
1998 1998
------------ ---------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................ $ 5,125 $ 4,567
Accounts receivable, net of allowance.................................... 1,788 1,631
Inventory............................................................... 4,106 3,347
Deferred income tax assets............................................... 44 44
Note receivable.......................................................... 363 1,107
Prepaid expenses and other current assets................................ 739 494
-------- --------
12,165 11,190
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation of $10,023 in 1999 and $9,134 in 1998........... 19,724 20,221
GOODWILL, INTANGIBLES AND OTHER ASSETS:
Goodwill................................................................. 24,786 24,786
Subscriber bases......................................................... 28,225 28,225
FCC licenses............................................................. 21,738 21,720
Non-compete agreements................................................... 700 700
Debt issue costs......................................................... 4,100 4,124
Other.................................................................... 68 50
Accumulated amortization................................................. (27,952) (23,822)
-------- --------
51,665 55,783
-------- --------
$ 83,554 $ 87,194
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses.................................... $ 3,992 $ 4,765
Current portion of unearned sale/leaseback profit........................ 405 405
Deferred revenue ........................................................ 1,493 1,177
-------- --------
5,890 6,347
LONG-TERM LIABILITIES:
Long-term debt .......................................................... 74,676 74,487
Unearned sale/leaseback profit........................................... 3,305 3,507
-------- --------
77,981 77,994
COMMITMENTS AND CONTINGENCIES .................................................. -- --
DEFERRED INCOME TAXES .......................................................... 1,030 1,030
STOCKHOLDERS' EQUITY:
Series A cumulative convertible preferred stock, $.001 par value,
15,000 shares authorized, issued, and outstanding...................... -- --
Series B convertible preferred stock, $.001 par value, 411,459
shares authorized, 87,287 shares issued and outstanding................ -- --
Common stock, $.001 par value, 25,000,000 shares authorized,
4,235,611 shares issued and outstanding ............................... 4 4
Additional paid-in capital............................................... 24,817 24,761
Accumulated deficit...................................................... (26,168) (22,942)
-------- --------
(1,347) 1,823
-------- --------
$ 83,554 $ 87,194
======== ========
</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,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Service, rent, and maintenance revenue .......... $ 10,447 $ 9,529 $ 20,677 $ 18,958
Product sales revenue ........................... 1,847 1,418 3,823 2,903
----------- ----------- ----------- -----------
Total revenues ............................... 12,294 10,947 24,500 21,861
Net book value of products sold ................. (1,826) (1,452) (3,698) (2,986)
----------- ----------- ----------- -----------
10,468 9,495 20,802 18,875
Costs and expenses:
Operating ................................. 2,929 2,588 5,857 5,321
Selling ................................... 1,246 1,079 2,476 2,031
General and administrative ................ 2,401 2,309 4,695 4,337
Depreciation and amortization ............. 3,688 3,113 7,017 6,226
----------- ----------- ----------- -----------
Total costs and expenses ........................ 10,264 9,089 20,045 17,915
----------- ----------- ----------- -----------
Operating income ................................ 204 406 757 960
Interest expense, net ........................... (1,948) (2,187) (3,983) (4,317)
----------- ----------- ----------- -----------
Loss before income taxes ........................ (1,744) (1,781) (3,226) (3,357)
Income tax expense .............................. -- -- -- --
----------- ----------- ----------- -----------
Net loss ........................................ (1,744) (1,781) (3,226) (3,357)
Preferred stock dividends ....................... (793) (692) (1,568) (1,368)
----------- ----------- ----------- -----------
Loss applicable to common stock ................. (2,537) (2,473) (4,794) (4,725)
=========== =========== =========== ===========
Loss per share .................................. $ (0.60) $ (0.58) $ (1.13) $ (1.12)
=========== =========== =========== ===========
Weighted Avg Shares Outstanding-Basic and
Diluted ....................................... 4,235,611 4,235,611 4,235,611 4,235,611
=========== =========== =========== ===========
</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,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Operating Activities:
Net loss ..................................... $(3,226) $(3,357)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization ................ 7,017 6,226
Non cash interest expense .................... 1,486 1,335
Gain on sale of assets ....................... -- (29)
Amortization of unearned sale/leaseback profit (202) --
Changes in operating assets and liabilities:
Accounts receivable, net ................... (157) (46)
Inventories ................................ (49) (244)
Prepaid expenses and other assets .......... 487 (49)
Accounts payable and accrued expenses ...... (773) (702)
Deferred revenue ........................... 316 178
------- -------
Net cash provided by operating activities ........... 4,899 3,312
Investing Activities:
Capital expenditures, including pagers ....... (3,400) (2,441)
Net proceeds from sale of assets ............. 4 101
------- -------
Net cash used for investing activities .............. (3,396) (2,340)
Financing Activities:
Payments on long-term debt ................... (1,000) (700)
Net proceeds from preferred and
common stock warrants ................... 55 3
------- -------
Net cash used for financing activities .............. (945) (697)
------- -------
Net increase in cash and cash equivalents ........... 558 275
Cash and cash equivalents at beginning of period .... 4,567 3,371
------- -------
Cash and cash equivalents at end of period .......... $ 5,125 $ 3,646
======= =======
</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, 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-K for
the year ended May 31, 1998. The balance sheet at May 31, 1998 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, 1998 and May 31, 1998 and the results of its
operations and cash flows for the periods ended November 30, 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.
Reclassification: Certain items in the financial statements for the period
ended November 30, 1997 have been reclassified to conform with the presentation
of the financial statements for the period ended November 30, 1998.
New Accounting Announcements: As of May 31, 1998, the Company adopted Statement
No. 130, "Reporting Comprehensive Income", which establishes new rules for
reporting and displaying comprehensive income (all changes in the equity of a
business enterprise during a period from non-owner transactions) and its
components (revenues, expenses, gains and losses). However, the adoption of
this Statement has had no impact on the Company's net income or shareholder's
equity. Comprehensive income for the second quarter of fiscal 1998 and 1997 and
for the six months ending November 30, 1998 and 1997 was the same as net income:
$(1,744), $(1,781), $(3,226) and $(3,357), respectively.
In June 1997, the Financial Accounting Standards Board (FASB) issued 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. This statement
will be adopted by the Company in its 10K for fiscal 1999. The adoption of this
statement will not impact the Company's results of operations, cash flows or
financial position.
7
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't.)
(Unaudited)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting guidelines for derivatives and requires an establishment to record all
derivatives as assets or liabilities on the balance sheet at fair value.
Additionally, this statement establishes accounting treatment for three types of
hedges: hedges of changes in the fair value of assets, liabilities or firm
commitments; hedges of the variable cash flows of forecasted transactions; and
hedges of foreign currency exposures of net investments in foreign operations.
Any derivative that qualifies as a hedge, depending upon the nature of that
hedge, will either be offset against the change in fair value of the hedged
assets, liabilities or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. SFAS No.
133 is effective for years beginning after June 15, 1999. The Company is
analyzing the implementation requirements and does not anticipate that the
adoption of this statement will have a material impact on the Company's
consolidated balance sheets or statements of operations or cash flows.
NOTE B - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
November 30, May 31,
1998 1998
------------- ------------
(Unaudited)
<S> <C> <C>
Notes Payable.......................................... $60,000 $61,000
Junior Subordinated Notes, including accrued interest.. 14,676 13,487
------- -------
$74,676 $74,487
======= =======
</TABLE>
In January, 1998, the Company amended its original agreement (the "Credit
Facility") with a group of lenders, led by Chase Manhattan Bank. The new
amended and restated credit agreement (the "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 November 30, 1998, $60
million of the Credit Agreement is funded, and $10 million is available for
future funding. In addition, the Company paid approximately $0.5 million in
amendment fees in order to complete the Credit Agreement. These fees have been
deferred and are being amortized, using the effective interest method, over the
term of the existing loans.
The 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%.
These rates vary depending on the leverage ratio of the Company. The Credit
Agreement is secured by substantially all of the assets of the Company and its
subsidiaries. Borrowings under the 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 Credit Agreement, the Company entered into interest
rate protection agreements which protect $47.5 million of the commitments
against future prime rate or LIBOR rate increases above 9.5% for the period
August 1998 through July 1999. In addition, the terms require the maintenance
of certain specified financial and operating covenants, provide for restrictions
on capital expenditures and
8
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't.)
(Unaudited)
future acquisitions, prohibit any payments on the Junior Subordinated Notes or
the payment of dividends.
NOTE C SALE-LEASEBACK TRANSACTION
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. Concurrent with the
sale, the Company leased back space on the towers sold for a period of ten years
for approximately $.6 million per year. The Company recognized a $4.1 million
gain related to the sale of the towers in fiscal 1998 and deferred the remaining
$4.0 million gain to be amortized into income on a straight-line basis over the
period of the lease.
NOTE D SHAREHOLDERS' EQUITY
In June, 1998, the Company announced a two-for-three reverse stock split of
its common shares distributable to shareholders of record on June 25, 1998, the
effective date of the reverse split. Teletouch shareholders received two shares
of stock and cash resulting from any fractional shares, in exchange for each
three previously outstanding shares. All outstanding shares and per share
amounts have been adjusted for all periods presented as a result of the two for
three reverse split.
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, 1998 the Company had approximately
366,900 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. While the industry is
maturing and recent growth has generally been sluggish, the Company realized net
additions of approximately 28,600 in fiscal 1998, a 9% increase over the
Company's subscriber base at the end of fiscal 1997. Net additions for the six
months ending November 30, 1998 were approximately 17,200, a 5% increase over
the Company's subscriber base at the end of fiscal 1998. While there can be no
assurance, the Company expects that net additions will continue to grow at or
above these rates as the Company continues to open new retail stores and to
focus on other sales channels.
The Company is also looking to expand its existing product lines. Beginning
December 1998, the Company will offer Sprint PCS cellular service in some
markets and prepaid cellular service in other markets. To enhance its primary
wireless services, the Company is also striving to expand its offering of other
value-added services such as voice mail and Smartpage, a service whereby
individuals can send an alphanumeric page to a subscriber without any special
software or equipment. The Company will closely monitor all additional product
offerings to ensure that those products are meeting its customers' needs and are
adding value to its stockholders.
10
<PAGE>
RESULTS OF OPERATIONS
The following table presents certain items from the Company's condensed
consolidated statements of operations and certain other information for the
periods indicated.
<TABLE>
<CAPTION>
Three Months ended Six Months ended
November 30, November 30,
------------------------- -------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(in thousands, except pagers, ARPU and per share amounts)
<S> <C> <C> <C> <C>
Service, rent and maintenance revenue $ 10,447 $ 9,529 $ 20,677 $ 18,958
Product sales revenue 1,847 1,418 3,823 2,903
-------- -------- -------- --------
Total revenues 12,294 10,947 24,500 21,861
Net book value of products sold (1,826) (1,452) (3,698) (2,986)
-------- -------- -------- --------
$ 10,468 $ 9,495 $ 20,802 $ 18,875
Operating expenses $ 10,264 $ 9,089 $ 20,045 $ 17,915
Operating income $204 $406 $757 $960
Net loss $ (1,744) $ (1,781) $ (3,226) $ (3,357)
Loss per share $ (0.60) $ (0.58) $ (1.13) $ (1.12)
EBITDA (1) $ 3,892 $ 3,519 $ 7,774 $ 7,186
Pagers in service at end of period 366,900 331,500 366,900 331,500
Average revenue per unit ("ARPU") $ 9.28 $ 9.25 $ 9.28 $ 9.25
</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.
Results of Operations for the six months and three months ended November 30,
- ----------------------------------------------------------------------------
1998 and 1997
- -------------
Total Revenue: The total revenue of the Company increased to $24.5 and $12.3
-------------
million for the six months and three months ended November 30, 1998 from $21.9
and $10.9 million for the six months and three months ended November 30, 1997.
This increase is due primarily to the increase in the pagers in service
resulting from greater market penetration in the Company's existing markets.
Pagers in service increased to approximately 366,900 at November 30, 1998 as
compared to 331,500 at November 30, 1997. The Company believes that internal
growth due to further penetration of its existing markets will continue.
11
<PAGE>
The impact on total revenue of the increase in pagers in service is slightly
magnified by the increase in average revenue per unit ("ARPU"). ARPU for the
six months ended November 30, 1998 was $9.28 as compared to $9.25 for the six
months ended November 30, 1997. This increase in ARPU is due primarily to a
higher percentage of sales through company-owned retail stores and direct sales
representatives. As of November 30, 1998 approximately 64% of the Company's
paging units are sold through company-owned retail stores and direct sales
representatives as opposed to approximately 63% at November 30, 1997. The
Company may experience a decline in future ARPU as competition continues to
pursue customers in its marketplace, which may result in new customers being
added at a lower ARPU than the Company's existing ARPU in that market. In
addition, if the percentage of units sold through company-owned retail stores
and direct sales representatives decreases, ARPU will decline. However, while
there can be no assurance, the Company expects that the growth in units in
service will increase sufficiently to offset any decline in ARPU and not result
in a decrease in total revenue.
Operating Expenses, excluding depreciation and amortization: Operating
-----------------------------------------------------------
expenses, excluding depreciation and amortization, were $13.0 million, 53% of
total revenue, for the first six months of fiscal year 1999 as compared to $11.7
million, 53% of total revenue for the first six months of fiscal year 1998; and
$6.6 million, 53% of total revenue for the three months ended November 30, 1998
as compared to $6.0 million, 55% of total revenue for the three months ended
November 30, 1997. The increased costs are primarily due to an increase in
operating expenses due to new retail store openings and tower lease expenses
incurred due to the sale of previously owned towers.
Depreciation and amortization: Depreciation and amortization expense
------------------------------
increased to $7.0 and $3.7 million for the six months and three months ended
November 30, 1998 from $6.2 and $3.1 million for the six months and three months
ended November 30, 1997. The increase is due primarily to the additional
depreciation recorded on returned leased pagers. The Company expects that this
expense will stabilize in the near term as the Company focuses more on selling,
rather than leasing pagers.
Interest Expense: Interest expense decreased to $4.0 and $1.9 million for the
----------------
six months and three months ended November 30, 1998 from $4.3 and $2.2 million
for the six months and three months ended November 30, 1997. This decrease is
due to the decreased debt owed by the Company at November 30, 1998 versus the
debt owed at November 30, 1997 and lower interest rates, partially offset by the
increased amortization of financing costs associated with the Credit Agreement.
Income tax benefit: For fiscal year 1999 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>
EBITDA: EBITDA increased to $7.8 million, 32% of total revenue, for the first
------
six months of fiscal year 1999 from $7.2 million, 33% of total revenue, for the
first six months of fiscal year 1998; and $3.9 million, 32% of total revenue for
the three months ended November 30, 1998 as compared to $3.5 million, 32% of
total revenue, for the three months ended November 30, 1997. The decrease in
EBITDA as a percentage of total revenue is due to the fact that operating costs
have increased at a faster pace than total revenue, primarily as a result of the
Company expanding its retail operations.
FINANCIAL CONDITION
In January, 1998, the Company amended its original agreement (the "Credit
Facility") with a group of lenders, led by Chase Manhattan Bank. The new
amended and restated credit agreement (the "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 November 30, 1998, $60
million of the Credit Agreement is funded, and $10 million is available for
future funding. In addition, the Company paid approximately $0.5 million in
amendment fees in order to complete the Credit Agreement. These fees have been
deferred and are being amortized, using the effective interest method, over the
term of the existing loans.
The 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%.
The rates vary depending on the leverage ratio of the Company. The Credit
Agreement is secured by substantially all of the assets of the Company and its
subsidiaries. Borrowings under the 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 Credit Agreement, the Company entered into interest
rate protection agreements which protect $47.5 million of the commitments
against future prime rate or LIBOR rate increases above 9.5% for the period
August 1998 through July 1999. 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 $3.4 million and $2.4 million
for the first six months of fiscal years 1999 and 1998, respectively. Management
anticipates capital expenditures for the Company to continue to increase as the
demand for 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 Agreement.
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. Concurrent with the
sale, the Company leased back space on the towers sold for a period of ten years
for approximately $.6 million per year. The Company recognized a $4.1 million
gain related to the sale of the towers in fiscal 1998 and deferred the remaining
$4.0 million gain to be amortized into income on a straight-line basis over the
period of the lease.
13
<PAGE>
IMPACT OF YEAR 2000
The Company has developed a Year 2000 compliance plan to address the issue of
software currently in use that may have time or date sensitivity that requires
correction. If not addressed, system failures or miscalculations could cause
disruptions of operations, including, among other things, a temporary inability
to process transactions, prepare invoices or engage in similar normal business
activities.
The Company has contacted its major vendors and received written confirmation
of compliance from them. These software programs cover the transmission of
paging signals, invoicing and retention of customer activity and the reporting
of the Company's financial and accounting transactions.
All of these programs are covered under existing maintenance agreements and no
significant costs have been incurred with respect to Year 2000 compliance
issues.
Although the Company has received assurances that it will be Year 2000
compliant and expects no significant issues or expenses with respect to Year
2000 compliance, the Company is continuing to review its product offering for
potential issues. In addition, the Company is in the process of developing Year
2000 contingency plans in the event of unforeseen issues.
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 4. Submission of Matters to a Vote of Security Holders
On November 11, 1998 the Company held its annual meeting of stockholders.
The matters considered at that meeting, and the results of the voting, were as
follows:
a) Re-election of Robert M. McMurrey, Clifford E. McFarland and Thomas E.
Gage as Class I directors (same vote for each individual):
For: 4,109,236 Withhold Authority: 5,695
b) Ratification of the selection of Ernst & Young LLP as the Company's
independent accountants:
For: 4,112,400 Against: 1,266 Abstain: 1,265
Item 5. Other Information
On November 11, 1998, subsequent to the annual meeting of shareholders,
the board of directors appointed J. Richard Carlson as a director to fill a
vacancy on the board. Mr. Carlson, the President and Chief Operating Officer of
the Company, serves as a Class II director.
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, None.
-------------------
15
<PAGE>
Signature
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
TELETOUCH COMMUNICATIONS, INC.
---------------------------------
(Registrant)
Date: January 13, 1999
/s/J. Richard Carlson
---------------------
J. Richard Carlson
President
Chief Operating Officer
Date: January 13, 1999
/s/J. Kernan Crotty
--------------------
J. Kernan Crotty
Executive Vice President
Chief Financial Officer
(Principal Accounting Officer)
16
<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-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 5,125
<SECURITIES> 0
<RECEIVABLES> 1,839
<ALLOWANCES> 51
<INVENTORY> 4,106
<CURRENT-ASSETS> 12,165
<PP&E> 29,747
<DEPRECIATION> 10,023
<TOTAL-ASSETS> 83,554
<CURRENT-LIABILITIES> 5,890
<BONDS> 74,676
0
0
<COMMON> 4
<OTHER-SE> (1,351)
<TOTAL-LIABILITY-AND-EQUITY> 83,554
<SALES> 24,500
<TOTAL-REVENUES> 24,500
<CGS> 3,698
<TOTAL-COSTS> 20,045
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,983
<INCOME-PRETAX> (3,226)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,226)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,226)
<EPS-PRIMARY> (1.13)
<EPS-DILUTED> (1.13)
</TABLE>
