<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 FEBRUARY 28, 1999
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 1-13436
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
Incorporation or Organization) No.)
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)
Securities registered pursuant to Section 12(b) of the Exchange Act: Common
Stock, $.001 par value; Class A Common Stock Purchase Warrants.
Securities registered pursuant to Section 12(g) of the Exchange Act: None.
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 April 9, 1999
1
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
FORM 10-Q
QUARTER ENDED FEBRUARY 28, 1999
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information
ITEM 1. FINANCIAL STATEMENTS - TELETOUCH COMMUNICATIONS,
INC. (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS AT
FEBRUARY 28, 1999 AND MAY 31, 1998 4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS -
THREE AND NINE MONTHS ENDED FEBRUARY 28, 1999 AND
FEBRUARY 28, 1998 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS -
NINE MONTHS ENDED FEBRUARY 28, 1999 AND
FEBRUARY 28, 1998 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
</TABLE>
2
<PAGE>
PART 1. FINANCIAL INFORMATION
3
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, except share data)
<TABLE>
<CAPTION>
February 28, 1999 May 31, 1998
-------------------------------------------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................................... $ 6,086 $ 4,567
Accounts receivable, net of allowance........................ 2,161 1,631
Inventory.................................................... 3,669 3,347
Deferred income tax assets................................... 44 44
Note receivable.............................................. 321 1,107
Prepaid expenses and other current assets.................... 766 494
------------------------ ---------------------
13,047 11,190
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $10,186 in 1999 and $9,134 in 1998........... 18,795 20,221
GOODWILL, INTANGIBLES AND OTHER ASSETS:
Goodwill..................................................... 24,786 24,786
Subscriber bases............................................. 28,225 28,225
FCC licenses................................................. 21,742 21,720
Non-compete agreements....................................... 700 700
Debt issue costs............................................. 4,100 4,124
Other........................................................ 48 50
Accumulated amortization..................................... (30,019) (23,822)
------------------------ ---------------------
49,582 55,783
------------------------ ---------------------
$ 81,424 $ 87,194
======================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses........................ $ 3,215 $ 4,765
Current portion of unearned sale/leaseback profit............ 405 405
Deferred revenue............................................ 1,585 1,177
------------------------ ---------------------
5,205 6,347
LONG-TERM LIABILITIES:
Long-term 75,300 74,487
debt.........................................................
Unearned sale/leaseback profit............................... 3,203 3,507
------------------------ ---------------------
78,503 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................................... 24,816 24,761
Accumulated deficit.......................................... (28,134) (22,942)
------------------------ ---------------------
(3,314) 1,823
------------------------ ---------------------
$ 81,424 $ 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 Nine Months Ended
February 28, February 28,
--------------------------------- ---------------------------------
1999 1998 1999 1998
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Service, rent, and maintenance revenue............. $ 10,953 $ 9,715 $ 31,630 $ 28,674
Product sales revenue.............................. 2,168 1,582 5,991 4,484
-------------- --------------- -------------- --------------
Total revenues.................................. 13,121 11,297 37,621 33,158
Net book value of products sold.................... (2,177) (1,801) (5,875) (4,787)
-------------- --------------- -------------- --------------
10,944 9,496 31,746 28,371
Costs and expenses:
Operating..................................... 2,986 2,834 8,843 8,155
Selling....................................... 1,627 1,089 4,103 3,119
General and administrative.................... 2,491 2,150 7,186 6,487
Depreciation and amortization................. 3,954 3,520 10,971 9,746
-------------- --------------- -------------- --------------
Total costs and expenses........................... 11,058 9,593 31,103 27,507
-------------- --------------- -------------- --------------
Operating income/(loss)............................ (114) (97) 643 864
Gain on sale of assets............................. 22 4,124 22 4,163
Interest expense, net.............................. (1,874) (2,169) (5,857) (6,525)
-------------- --------------- -------------- --------------
Income/(loss) before income taxes.................. (1,966) 1,858 (5,192) (1,498)
Income tax expense................................. -- 85 -- 85
-------------- --------------- -------------- --------------
Net income/(loss).................................. (1,966) 1,773 (5,192) (1,583)
Preferred stock dividends.......................... (811) (707) (2,379) (2,075)
-------------- --------------- -------------- --------------
Income/(loss) applicable to common stock........... (2,777) 1,066 (7,571) (3,658)
============== =============== ============== ==============
Basic Income/(loss) per share...................... $ (0.66) $ 0.25 $ (1.79) $ (0.86)
============== =============== ============== ==============
Diluted Income/(loss) per share.................... $ (0.66) $ 0.11 $ (1.79) $ (0.86)
============== =============== ============== ==============
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
5
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
February 28,
--------------------------------
1999 1998
-------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss................................................................. $ (5,192) $ (1,583)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization............................................ 10,971 9,746
Non cash interest expense................................................ 2,240 2,028
Gain on sale of assets................................................... (22) (4,163)
Amortization of unearned sale/leaseback profit........................... (304) (34)
Changes in operating assets and liabilities:
Accounts receivable, net................................................. (530) (84)
Inventories.............................................................. 969 170
Prepaid expenses and other assets........................................ 518 115
Accounts payable and accrued expenses.................................... (1,550) (805)
Deferred revenue......................................................... 408 399
------------- -------------
Net cash provided by operating activities 7,508 5,789
INVESTING ACTIVITIES:
Capital expenditures, including pagers................................... (5,093) (4,124)
Acquisitions, net of cash acquired....................................... -- (900)
Net proceeds from sale of assets......................................... 49 7,511
------------- -------------
Net cash provided by/(used for) investing activities (5,044) 2,487
FINANCING ACTIVITIES:
Payments on long-term debt............................................... (1,000) (7,500)
Debt issue costs......................................................... -- (531)
Net proceeds from preferred stock and common stock warrants.............. 55 3
------------- -------------
Net cash used for financing activities (945) (8,028)
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS..................................... 1,519 248
Cash and cash equivalents at beginning of period.............................. 4,567 3,371
------------- -------------
Cash and cash equivalents at end of period.................................... $ 6,086 $ 3,619
============= =============
</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
February 28, 1999 and 1998 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 February 28, 1999 and May 31, 1998 and the results of its
operations and cash flows for the periods ended February 28, 1999 and 1998. 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 February 28, 1998 have been reclassified to conform with the presentation
of the financial statements for the period ended February 28, 1999.
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/(loss) or
shareholders' equity. Comprehensive income/(loss) for the third quarter of
fiscal 1999 and 1998 and for the nine months ending February 28, 1999 and 1998
was the same as net income/(loss): $(1,966), $1,773, $(5,192) and $(1,583),
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 annual report on Form 10-K 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 - INTANGIBLES
Except for debt issue costs, the Company's intangible assets are recorded at
cost and are amortized, using the straight-line method, over the following
periods:
Goodwill 25 years
Subscriber bases 5 years
FCC licenses 25 years
Non-compete agreements 2-5 years
The Company defers costs incurred in obtaining debt and amortizes these costs
as additional interest expense over the term of the related debt using the
effective interest method. The carrying value of intangible assets is reviewed
if the facts and circumstances suggest that they may be permanently impaired.
If the review indicates that intangible assets will not be recoverable, as
determined by the undiscounted cash flow method, the asset will be reduced to
its estimated recoverable value.
NOTE C - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, MAY 31,
1999 1998
------------ -----------
(Unaudited)
<S> <C> <C>
Notes Payable.......................................... $60,000 $61,000
Junior Subordinated Notes, including accrued interest.. 15,300 13,487
------- -------
$75,300 $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
agreement (the "Credit Agreement") provides for loans in an amount not to exceed
$70 million, as opposed to the $95 million provided
8
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't.)
(Unaudited)
for in the original Credit Facility. As of February 28, 1999, $60 million of
the Credit Agreement is funded, and $10 million is available for future funding.
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 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 the principal be
repaid in escalating quarterly installments beginning in August 2000 and ending
in November 2005. In conjunction with the funding from the original Credit
Facility and the Credit Agreement, the Company entered into an interest rate
protection agreement that protects $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. Costs related to this agreement have been deferred and
included with debt issuance costs and are being amortized as additional interest
expense over the term of the agreement. The Credit Agreement also requires the
maintenance of specified financial and operating covenants and prohibits any
payments on the Junior Subordinated Notes and the payment of dividends.
NOTE D - 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 E - SHAREHOLDERS' EQUITY
On June 25, 1998, the Company effected a two-for-three reverse stock split of
its common shares distributable to shareholders of record as of May 11, 1998.
The Company's 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>
TELETOUCH COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't.)
(Unaudited)
NOTE F - EARNINGS PER SHARE
In periods in which a loss occurs, diluted earnings per share is the same as
basic earnings per share. The effect of outstanding stock options, warrants and
convertible preferred stock is anti-dilutive in periods which the Company has
incurred a loss. Therefore, the number of shares used in the calculation of
both basic and diluted earnings per share for the nine months ended February 28,
1999 and 1998, as well as for the three months ended February 28, 1999, is
4,235,611. The number of shares used in the calculation of basic and diluted
earnings per share for the three months ended February 28, 1998 is 4,235,611 and
9,599,425, respectively.
The following table sets forth the computation of basic and diluted earnings
per share for the three months ended February 28, 1998:
<TABLE>
<CAPTION>
<S> <C>
NUMERATOR:
Net income for basic and diluted
earnings per share $1,066,000
DENOMINATOR:
Denominator for basic earnings per
share-weighted average shares 4,235,611
Effect of dilutive securities:
Stock options 55,228
Warrants 2,849,005
Convertible preferred stock 2,459,581
----------
Dilutive potential common shares 5,363,814
Denominator for diluted earnings per
share-adjusted weighted average
shares and assumed conversions 9,599,425
Basic earnings per share $ 0.25
Diluted earnings per share $ 0.11
</TABLE>
NOTE G - SUBSEQUENT EVENT
On March 26, 1999, the Company signed an agreement with Prepaid Solutions,
Inc. ("PPS"), a Florida corporation that sells cellular telephones that utilize
prepaid cellular phone cards. The Company has loaned $750,000 to PPS which may
be converted into PPS common stock upon the completion of certain actions by PPS
and approval by the Company's Board of Directors. If the loans are not
converted to common stock, they are due and payable, unless renewed, within one
year.
10
<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, 1999 the Company had approximately
385,000 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 nine
months ending February 28, 1999 were approximately 35,300, a 10% 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 as the
Company continues to open new retail stores and to focus on other sales
channels.
The Company is also expanding its existing product lines. In December 1998,
the Company began offering 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 Smartpager, a service whereby individuals
can send an alphanumeric page to a subscriber without any special software or
equipment. The Company is closely monitoring new product offerings and the
expansion of existing products and services to ensure those products and
services are meeting its customers' needs.
11
<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 Nine Months ended
February 28, February 28,
-------------------------- --------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(in thousands, except pagers, ARPU and per share amounts)
<S> <C> <C> <C> <C>
Service, rent and maintenance revenue $ 10,953 $ 9,715 $ 31,630 $ 28,674
Product sales revenue 2,168 1,582 5,991 4,484
---------- ------------ ------------ -----------
Total revenues 13,121 11,297 37,621 33,158
Net book value of products sold (2,177) (1,801) (5,875) (4,787)
---------- ------------ ------------ -----------
$ 10,944 $ 9,496 $ 31,746 $ 28,371
Operating expenses $ 11,058 $ 9,593 $ 31,103 $ 27,507
Operating income $ (114) $ (97) $ 643 $ 864
Net income/(loss) before preferred stock dividends $ (1,966) $ 1,773 $ (5,192) $ (1,583)
Net income/(loss) after preferred stock dividends $ (2,777) $ 1,066 $ (7,571) $ (3,658)
Income/(loss) per share after preferred stock
dividends $ (0.66) $ 0.25 $ (1.79) $ (0.86)
EBITDA (1) $ 3,840 $ 3,423 $ 11,614 $ 10,610
Pagers in service at end of period 385,000 338,300 385,000 338,300
Average revenue per unit ("ARPU") $ 9.30 $ 9.31 $ 9.30 $ 9.31
</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. EBITDA for the three months and the nine months
ended February 28, 1999 and 1998 does not include gain on the sale of
assets.
Results of Operations for the nine months and three months ended February 28,
- -----------------------------------------------------------------------------
1999 and 1998
- -------------
Total Revenue: The total revenue of the Company increased to $37.6 and $13.1
-------------
million for the nine months and three months ended February 28, 1999 from $33.2
and $11.3 million for the nine months and three months ended February 28, 1998.
This increase is due primarily to the increase in the pagers in service
resulting from greater market penetration in the Company's
12
<PAGE>
existing markets and from the introduction of cellular products and services.
Pagers in service increased to approximately 385,000 at February 28, 1999 as
compared to 338,300 at February 28, 1998. The Company believes that internal
growth due to further penetration of its existing markets will continue and that
revenues from cellular products and services will also continue to increase.
The average revenue per unit ("ARPU") for the nine months ended February 28,
1999 was $9.30 as compared to $9.31 for the nine months ended February 28, 1998.
The decrease in ARPU is due to an increase in the percentage of the Company's
subscriber base represented by resellers as well as increased competition in the
Company's markets. Resellers are businesses that buy airtime at wholesale
prices from the Company and sell the service to end users. While the wholesale
price to the reseller is lower than the price the Company charges to its other
customers, the reseller bears the cost of acquiring, billing, collecting and
servicing its subscribers. At February 28, 1999 approximately 38% of the
Company's subscriber base is represented by resellers as opposed to
approximately 36% at February 28, 1998. Beginning with its March 1, 1999
billing, the Company implemented a slight price increase for its basic paging
service in several markets. This price increase will continue in stages during
the 4th quarter of fiscal 1999 until the increase is effective for all the
Company's markets. This increase should have a positive impact on the Company's
ARPU. However, as competitors continue to pursue the Company's customers in the
marketplace, the Company may experience a decline in future ARPU. In addition,
if the percentage of the Company's subscriber base represented by resellers
increases, ARPU will also decline. Nevertheless, the Company expects that the
growth of paging units in service and sales of new products and services 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 $20.1 million, 54% of
total revenue, for the first nine months of fiscal year 1999 as compared to
$17.8 million, 54% of total revenue, for the first nine months of fiscal year
1998; and $7.1 million, 54% of total revenue, for the three months ended
February 28, 1999 as compared to $6.1 million, 54% of total revenue, for the
three months ended February 28, 1998. Costs have increased due to increased
operating expenses associated with new retail store openings and tower lease
expenses related to the sale of previously-owned towers.
Depreciation and amortization: Depreciation and amortization expense
------------------------------
increased to $11.0 and $4.0 million for the nine months and three months ended
February 28, 1999, from $9.7 and $3.5 million for the nine months and three
months ended February 28, 1998. 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 $5.9 and $1.9 million for the
----------------
nine months and three months ended February 28, 1999 from $6.5 and $2.2 million
for the nine months and three months ended February 28, 1998. The decrease in
long-term debt under the Credit Agreement at February 28, 1999 versus the long-
term debt owed for most of fiscal 1998 combined with lower interest rates in
fiscal 1999 are the primary factors contributing to the lower interest costs.
These factors, however, are 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
13
<PAGE>
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.
EBITDA: EBITDA increased to $11.6 million, 31% of total revenue, for the
------
first nine months of fiscal year 1999 from $10.6 million, 32% of total revenue,
for the first nine months of fiscal year 1998; and $3.8 million, 29% of total
revenue, for the three months ended February 28, 1999 as compared to $3.4
million, 30% of total revenue, for the three months ended February 28, 1998.
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 service revenues, 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
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 February 28, 1999, $60 million of the Credit Agreement is
funded, and $10 million is available for future funding. 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 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 the principal be
repaid in escalating quarterly installments beginning in August 2000 and ending
in November 2005. In conjunction with the funding from the original Credit
Facility and the Credit Agreement, the Company entered into an interest rate
protection agreement that protects $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. Costs related to this agreement have been deferred and
included with debt issuance costs and are being amortized as additional interest
expense over the term of the agreement. The Credit Agreement also requires the
maintenance of specified financial and operating covenants and prohibits any
payments on the Junior Subordinated Notes and the payment of dividends.
The Company's paging operations require capital investment to procure pagers
and to acquire paging infrastructure equipment to support the Company's growth.
The Company's net capital expenditures amounted to $5.1 million and $4.1 million
for the first nine 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. However, these expenditures may not continue to increase at
the current rate as the
14
<PAGE>
Company focuses more of its efforts on selling, rather than leasing, pagers.
Capital 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.
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 vendors provide the Company with software
programs that 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.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to various legal proceedings arising in the ordinary
course of business. However, the Company believes that there is no proceeding,
either threatened or pending, against the Company that could result in a
material adverse effect on the results of operations or financial condition of
the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits,
--------
Exhibit Page
Number Title of Exhibit Number
- ------ ---------------- ------
27 Financial Data Schedule 18
(b) Reports on Form 8-K, None.
-------------------
16
<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 14, 1999
/s/ J. Richard Carlson
---------------------
J. Richard Carlson
President
Chief Operating Officer
Date: April 14, 1999
/s/J. Kernan Crotty
--------------------
J. Kernan Crotty
Executive Vice President
Chief Financial Officer
(Principal Accounting Officer)
17
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ACT 5 FDS
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