<PAGE>
UNITED STATES
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 Quarterly Period Ended November 30, 2000
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.
(Name of registrant in its charter)
DELAWARE 75-2556090
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
110 N. College, Suite 200, Tyler, Texas 75702 (903) 595-8889
(Address and telephone number of principal executive offices)
----------------------------------
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 - 4,882,992 shares outstanding as of November 30,
2000
1
<PAGE>
FORM 10-Q
QUARTER ENDED NOVEMBER 30, 2000
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements - Teletouch Communications, Inc. (Unaudited)
Condensed Consolidated Balance Sheets at
November 30, 2000 and May 31, 2000 4
Condensed Consolidated Statements of Operations -
Three and Six Months Ended November 30, 2000 and
November 30, 1999 5
Condensed Consolidated Statements of Cash Flows -
Six Months Ended November 30, 2000 and
November 30, 1999 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II. Other Information
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Signatures 17
</TABLE>
2
<PAGE>
Part I. Financial Information
3
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, except share data)
<TABLE>
<CAPTION>
November 30, 2000 May 31, 2000
--------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................................... $ 3,556 $ 6,828
Accounts receivable, net of allowance.............................................. 2,347 2,083
Inventory.......................................................................... 6,504 5,337
Deferred income tax assets......................................................... 56 56
Note receivable.................................................................... -- 515
Investment in securities........................................................... 150 --
Certificates of deposit, restricted as to use...................................... 100 750
Prepaid expenses and other current assets.......................................... 1,243 1,842
------------ --------------
13,956 17,411
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $14,300 in 2001 and $13,633 in 2000................................ 19,788 19,117
GOODWILL, INTANGIBLES, AND OTHER ASSETS:
Goodwill........................................................................... 24,892 24,892
Subscriber bases................................................................... 29,070 28,421
FCC licenses....................................................................... 22,210 22,036
Non-compete agreements............................................................. 715 705
Debt issue costs................................................................... 4,100 4,100
Other.............................................................................. 293 304
Accumulated amortization........................................................... (41,184) (39,293)
------------ --------------
40,096 41,165
------------ --------------
$ 73,840 $ 77,693
============ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses.............................................. $ 4,018 $ 4,796
Current portion of long-term debt.................................................. 146 6,608
Long-term debt reclassified as current............................................. 57,727 --
Current portion of unearned sale/leaseback profit.................................. 418 418
Deferred revenue................................................................... 1,638 1,593
------------ --------------
63,947 13,415
LONG-TERM LIABILITIES:
Long-term debt, net of current portion............................................. 20,101 71,927
Unearned sale/leaseback profit, net of current portion............................. 2,537 2,747
------------ --------------
22,638 74,674
COMMITMENTS AND CONTINGENCIES -- --
DEFERRED INCOME TAXES 969 1,042
SHAREHOLDERS' EQUITY (DEFICIT):
Series A cumulative convertible preferred stock, $.001 par value,
15,000 shares authorized, issued, and outstanding.................................. -- --
Series B convertible preferred stock, $.001 par value, 411,457 shares
authorized, 87,286 shares issued and outstanding................................... -- --
Common stock, $.001 par value, 25,000,000 shares authorized, 4,882,992
shares issued and outstanding 5 4
Treasury Stock, 15,200 shares (8) --
Additional paid-in capital......................................................... 26,362 24,863
Accumulated deficit................................................................ (39,941) (36,305)
Other comprehensive income......................................................... (132) --
------------ --------------
(13,714) (11,438)
------------ --------------
$ 73,840 $ 77,693
============ ==============
</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,
------------------------- -------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Service, rent, and maintenance revenue................ $ 11,205 $ 11,156 $ 22,248 $ 22,279
Product sales revenue................................. 3,070 2,579 6,064 4,886
---------- ---------- ---------- ----------
Total revenues..................................... 14,275 13,735 28,492 27,165
Net book value of products sold....................... (3,509) (2,497) (6,386) (4,618)
---------- ---------- ---------- ----------
10,766 11,238 22,106 22,547
Costs and expenses:
Operating........................................ 3,804 3,910 7,908 7,128
Selling.......................................... 2,263 2,164 4,654 3,885
General and administrative....................... 1,548 1,515 3,741 3,881
Depreciation and amortization.................... 2,526 3,647 4,992 7,293
---------- ---------- ---------- ----------
Total costs and expenses.............................. 10,141 11,236 21,295 22,187
---------- ---------- ---------- ----------
Operating income...................................... 625 2 811 360
Gain/(loss) on sale of assets......................... -- (116) 5 117
Interest expense, net................................. (2,229) (2,003) (4,451) (3,927)
---------- ---------- ---------- ----------
Net loss.............................................. (1,604) (2,117) (3,635) (3,450)
Preferred stock dividends............................. (1,056) (937) (2,077) (1,851)
---------- ---------- ---------- ----------
Loss applicable to common stock....................... (2,660) (3,054) (5,712) (5,301)
========== ========== ========== ==========
Loss per share........................................ $ (0.56) $ (0.72) $ (1.25) $ (1.25)
========== ========== ========== ==========
Weighted average shares outstanding................... 4,744,392 4,235,465 4,552,492 4,235,465
========== ========== ========== ==========
</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,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss......................................................... $ (3,635) $ (3,450)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization.................................... 4,992 7,293
Non cash interest expense........................................ 1,736 1,597
Provision for losses on accounts receivable...................... 911 702
Gain on sale of assets........................................... (5) (117)
Amortization of unearned sale/leaseback profit................... (210) (202)
Changes in operating assets and liabilities:
Accounts receivable, net......................................... (1,175) (1,192)
Inventories...................................................... (350) (1,532)
Prepaid expenses and other assets................................ 490 (24)
Accounts payable and accrued expenses............................ (777) (208)
Deferred revenue................................................ (70) 163
---------- -----------
Net cash provided by operating activities 1,907 3,030
INVESTING ACTIVITIES:
Capital expenditures, including pagers........................... (3,698) (4,286)
Redemption (Purchase) of certificates of deposit................. 650 (750)
Acquisitions, net of cash acquired............................... (99) --
Deferred costs associated with acquisitions...................... -- (15)
Net proceeds from sale of assets................................. 48 246
---------- -----------
Net cash used for investing activities (3,099) (4,805)
FINANCING ACTIVITIES:
Purchase of Treasure Stock....................................... (8) --
Payments on long-term debt....................................... (2,072) (250)
---------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS............................. (3,272) (2,025)
Cash and cash equivalents at beginning of period...................... 6,828 5,787
---------- -----------
Cash and cash equivalents at end of period............................ $ 3,556 $ 3,762
========== ==========
Supplemental disclosure of non cash activities:
----------------------------------------------
Issuance of common stock related to acquisition $ 1,500 --
</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 ("Teletouch" or the "Company") for
the periods ended November 30, 2000 and November 30, 1999 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, 2000. The balance sheet at May 31, 2000 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 and the results of its operations and cash
flows for the periods ended November 30, 2000 and November 30, 1999. 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.
Loss Per Share: Loss per share is computed using the weighted-average number of
common shares outstanding during the period.
Reclassification: Certain reclassifications have been made in the prior years'
financial statements to conform to the fiscal year 2001 presentation.
New Accounting Announcements: In June 1998, the Financial Accounting Standards
Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement establishes accounting and reporting guidelines for
derivatives and requires companies 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, 2000. Teletouch is currently analyzing the
implementation requirements and does not anticipate that the adoption of this
statement will have a material impact on its consolidated balance sheets,
statements of operations, or cash flows.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements". This SAB provides additional guidance on the accounting for
revenue recognition, including both broad conceptual discussions as well as
certain industry-specific guidance. The guidance is effective for the Company
in the fourth quarter of fiscal 2001. While Teletouch does not expect SAB No.
101 to have a material impact on its results of operations upon adoption, the
SEC is expected to issue further guidance regarding the implementation of SAB
No. 101 which could affect the Company's estimates of its expected impact.
7
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE B - INTANGIBLES
Except for debt issue costs, Teletouch'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 assets will be reduced to
their estimated recoverable value.
NOTE C - LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consists of the following (in thousands): November 30, May 31,
2000 2000
---- ----
<S> <C> <C>
Notes payable................................. $57,727 $59,750
Junior subordinated notes..................... 20,101 18,589
Other......................................... 146 196
------- -------
77,974 78,535
Less current portion............................ 146 6,608
Less portion reclassified as current debt....... 57,727 --
------- -------
$20,101 $71,927
======= =======
</TABLE>
Notes Payable: The Company's credit agreement with a group of lenders, led by
Chase Manhattan Bank (the "Credit Agreement") provides for loans in an amount
not to exceed $70 million. As of November 30, 2000, $57,727,000 of the Credit
Agreement was funded, and approximately $10 million is available for future
funding with the consent of the lending parties. Direct costs incurred in
connection with obtaining the Credit Agreement of approximately $4.1 million
have been deferred and are being amortized, using the effective interest rate
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 Teletouch and its subsidiaries.
Borrowings under the Credit Agreement require the principal be repaid in
escalating quarterly installments. The Company made its first installment in
September 2000, and these payments will end in November 2005.
8
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 Credit Agreement was amended as of
November 30, 2000, which allowed the Company to meet its financial covenant and
principal repayment terms. In addition, lenders under the facility have
indicated that they might be willing to amend the Credit Agreement further in
future periods. Teletouch's management believes it will be successful in
obtaining future amendments as needed. However, if such amendments are not
obtained, the Company would probably not be able to meet all of the terms of the
Credit Agreement in the near future. Because there can be no assurance that
these amendments will be provided and because of the accounting requirements set
forth in Emerging Issues Task Force Issue No. 86-30, "Classification of
Obligations When a Violation is Waived by the Creditor", Teletouch has
temporarily classified the amount outstanding under the Credit Agreement as a
current liability as of November 30, 2000.
As of November 30, 2000 the Company was in compliance with the terms of its
Junior Subordinated Note agreement. Based on the terms of the Junior
Subordinated Note agreement, if the lender declared the Company not in
compliance with the terms of the Credit Agreement, then by definition it would
be not in compliance with the terms of the Junior Subordinated Note agreement.
Management expects to be able to meet all the terms of the Credit Agreement and
Junior Subordinated Note agreement, or, if necessary, obtain future amendments
to enable the Company to remain in compliance.
NOTE D - STOCK OPTIONS
In December 1999, the Company reduced the exercise price of all outstanding
employee and director owned stock options to $0.87, which was equal to the
average of the closing price of the Company's common stock for the 20-trading
days prior to December 1, 1999. During the quarter ended August 31, 2000,
compensation expense of approximately $350,000 associated with these repriced
options was recognized due to the increase in market value of Teletouch's common
stock during the quarter. For the quarter ended November 30, 2000, the market
value of Teletouch's common stock decreased and in accordance with the recently
issued Financial Accounting Standards Board Interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation", compensation expense
associated with the repriced options that was recognized in previous periods was
reduced in the current quarter. Additional compensation expense may be recorded
in future periods based on fluctuations in the market value of the Company's
common stock.
NOTE E - NOTE RECEIVABLE
At May 31, 2000, the Company had a note receivable of $515,000 from a
supplier. In June 2000 the note was exchanged for 150,000 shares of common
stock of the supplier, which was recorded at fair market value on the date of
conversion and is restricted for six months after the exchange, and certain
other assets. There was no gain or loss associated with this transaction. The
150,000 shares of common stock received in the exchange are being accounted for
in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". As such, changes in market value of the stock are recorded
in other comprehensive income.
9
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE F - COMPREHENSIVE INCOME
Total comprehensive income for the three and six months ended November 30,
2000 and November 30, 1999 was a loss of $1,842,000 and $3,768,000 for fiscal
2001, and, $2,117,000 and $3,450,000 for fiscal 2000, respectively. The
difference between comprehensive income and net loss for periods ended November
30, 2000 was related to unrealized gains on marketable equity securities that
are classified as available for sale.
NOTE G - ACQUISITIONS
On September 1, 2000, Teletouch closed on an agreement to acquire
substantially all of the assets of Snider Communications Corporation ("Snider"),
a corporation headquartered in Little Rock, Arkansas, which provides statewide
wireless messaging coverage in Arkansas. As part of the purchase, Teletouch
acquired approximately 13,000 additional paging subscribers. The total
purchase price for Snider was approximately $1.7 million which consisted of
600,000 shares of Teletouch's common stock valued at $1.5 million and
approximately $.2 million in other cash expenditures related to closing. The
acquisition was accounted for using the purchase method of accounting and the
total purchase price was allocated as follows: $1,000,000 to property, plant
and equipment, $650,000 to subscriber bases, $150,000 to FCC liscenses, $10,000
to a non-compete agreement, $7,000 to inventory, and $115,000 to certain
liabilities. The results of operations of the acquisition, which are immaterial
to the consolidated operations, are included with that of the Company from the
date of closing.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 following discussion and analysis of the results of operations and
financial condition of the Company should be read in conjunction with the
condensed consolidated financial statements and notes thereto included elsewhere
in this report.
Teletouch is a leading provider of wireless telecommunications services,
primarily paging services, in non-major metropolitan areas and communities in
the southeast United States. As of November 30, 2000 the Company had
approximately 395,600 pagers in service which included pagers in service
acquired from Snider. 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. A high level of customer
attrition is common in the paging industry and Teletouch must be able to replace
terminating paging subscribers and attract additional wireless subscribers to
maintain operating margins. During recent months, customer attrition ("churn")
has increased resulting in a slight decline in the number of pagers in service.
Teletouch expects that net paging subscriber additions will continue to decline
slightly in future quarters as the demand for one-way paging continues to
decline. Teletouch is implementing customer retention programs and expanding
its existing product lines to minimize the impact of the level of customer
attrition. The sales and marketing expenses and other costs associated with
attracting new subscribers are substantial and there is no guarantee that our
future efforts in this area will improve subscriber growth and retention.
In December 1998, Teletouch launched its own brand of prepaid cellular
service and began offering PCS and traditional cellular service as an agent for
other cellular carriers. At November 30, 2000, the Company was offering some
type of cellular service in most of its markets. Teletouch also began offering
prepaid long distance cards as well as two-way paging services and Internet-
based messaging utilizing WebLink Wireless, Inc.'s nationwide network in the
last quarter of fiscal year 2000. The two-way paging and Internet-based
messaging services are offered to the Company's customers pursuant to a five
year agreement with WebLink Wireless, Inc. The Company monitors 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 Six Months Ended
November 30, November 30,
------------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
(in thousands, except pagers, ARPU and per share amounts)
Service, rent and maintenance revenue $ 11,205 $ 11,156 $ 22,248 $ 22,279
Product sales revenue 3,070 2,579 6,064 4,886
-------- -------- -------- --------
Total revenues 14,275 13,735 28,492 27,165
Net book value of products sold (3,509) (2,497) (6,386) (4,618)
-------- -------- -------- --------
$ 10,766 $ 11,238 $ 22,106 $ 22,547
Operating expenses $ 10,141 $ 11,236 $ 21,295 $ 22,187
Operating income $ 625 $ 2 $ 811 $ 360
Net loss before preferred stock dividends $ (1,604) $ (2,117) $ (3,635) $ (3,450)
Net loss $ (2,660) $ (3,054) $ (5,712) $ (5,301)
Loss per share after preferred stock dividends $ (0.59) $ (0.72) $ (1.21) $ (1.25)
EBITDA (1) $ 2,800 $ 3,649 $ 5,803 $ 7,653
Pagers in service at end of period 395,643 400,800 395,643 400,800
Average revenue per unit ("ARPU") $ 8.89 $ 8.98 $ 8.84 $ 9.03
</TABLE>
___________________________
(1) EBITDA represents earnings before interest, taxes, depreciation and
amortization (and certain non-recurring income and expenses). 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 its debt agreements. The
EBITDA shown above does not include gain/(loss) on the sale of assets or
compensation expense associated with repriced stock options.
Results of Operations for the six and three months ended November 30, 2000 and
------------------------------------------------------------------------------
1999
----
Total revenue: Teletouch's total revenue increased to $28.5 and $14.3
-------------
million for the six months and three months ended November 30, 2000 from $27.2
and $13.7 million for the six months and three months ended November 30, 1999.
This increase is due to increased cellular and two-way radio revenues, partially
offset by a decline in paging and messaging revenues. Pagers in service
decreased to approximately 395,600 at November 30, 2000 as compared to 400,800
at November 30, 1999, due to a continuing decline in the demand for one-way
paging service which was partially offset by the acquisition of approximately
13,000 paging subscribers from Snider on September 1, 2000.
12
<PAGE>
The negative impact on total revenue of the decrease in pagers in service
is compounded by a decrease in average revenue per unit ("ARPU"). The Company
was successful in increasing ARPU for the three months ended November 30, 2000
compared to the three months ended August 31, 2000 due to an increase in airtime
pricing and certain additional fees. However, ARPU for the six months ended
November 30, 2000 was $8.84 as compared to $9.03 for the six months ended
November 30, 1999. The decrease in ARPU is primarily 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 and a decline in demand for
paging services. Resellers are businesses that buy airtime at wholesale prices
from Teletouch and sell the service to end users. While the wholesale price to a
reseller is lower than the price the Company charges to its other customers, a
reseller bears the cost of acquiring, billing, collecting and servicing its
subscribers. At November 30, 2000 approximately 42% of the Company's subscriber
base was represented by resellers as opposed to 38% at November 30, 1999. As
competitors continue to pursue its customers in the marketplace, the percentage
of its subscriber base represented by resellers increases, and the paging
industry fully matures, ARPU is expected to continue to decline. Nevertheless,
Teletouch expects that the introduction of new products and services will
increase sufficiently to offset any decline in ARPU or paging subscribers and
not result in a decrease in total revenue.
Operating expenses, excluding depreciation and amortization: Operating
-----------------------------------------------------------
expenses, excluding depreciation and amortization, were $16.3 million, 57% of
total revenue, for the first six months of fiscal 2001 as compared to $14.9
million, 55% of total revenue, for the first six months of fiscal 2000; and $7.9
million, 55% of total revenue ($7.6 million, 53% of total revenue, including the
$350,000 compensation expense reduction associated with repriced stock options),
for the first quarter ended November 30, 2000 as compared to $7.6 million, 55%
of total revenue, for the quarter ended November 30, 1999. Costs have increased
primarily because of new retail store openings, particularly in the areas of
advertising and payroll costs.
Depreciation and amortization: Depreciation and amortization expense
-----------------------------
decreased to $5.0 and $2.5 million for the six months and three months ended
November 30, 2000, from $7.3 and $3.6 million for the six months and three
months ended November 30, 1999. The decrease is due to the expiration of
amortization on certain intangible assets that occurred in fiscal year 2000.
Interest expense: Net interest expense increased to $4.4 and $2.2 million
----------------
for the six months and three months ended November 30, 2000 from $3.9 and $2.0
million for the six months and three months ended November 30, 1999. Higher
interest rates on the Company's variable-rate debt obligations along with
increased interest costs associated with the Junior Subordinated Notes accounted
for the increase.
Income tax benefit: For fiscal year 2001, 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,
Teletouch's income tax 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 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.
13
<PAGE>
EBITDA: EBITDA decreased to $5.8 million, 20% of total revenue, for the
------
six months ended November 30, 2000 from $7.7 million, 28% of total revenue, for
the six months ended November 30, 1999. EBITDA decreased to $2.8 million
(excluding the $350,000 compensation expense reduction associated with the
repriced options), 20% of total revenue, for the three months ended November 30,
2000 from $3.6 million, 27% of total revenue, for the three months ended
November 30, 1999. The decrease in EBITDA in total and as a percentage of total
revenue is primarily due to lower margins achieved on product sales as a result
of promotional pricing on paging equipment and the continuing decline in ARPU.
The decrease in EBITDA is partially due to new retail openings, particularly in
the areas of advertising and payroll costs.
FINANCIAL CONDITION
The Company's credit agreement with a group of lenders, led by Chase
Manhattan Bank (the "Credit Agreement") provides for loans in an amount not to
exceed $70 million. As of November 30, 2000, $57,727,000 of the Credit Agreement
was funded, and approximately $10 million is available for future funding with
the consent of the lending parties. Direct costs incurred in connection with
obtaining the Credit Agreement of approximately $4.1 million have been deferred
and are being amortized, using the effective interest rate 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 Teletouch and its subsidiaries.
Borrowings under the Credit Agreement require the principal be repaid in
escalating quarterly installments. The Company made its first installment in
September 2000, and these payments will end in November 2005.
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 Credit Agreement was amended as of
November 30, 2000, which allowed the Company to meet its financial covenant and
principal repayment terms. In addition, lenders under the facility have
indicated that they might be willing to amend the Credit Agreement further in
future periods. Teletouch's management believes it will be successful in
obtaining future amendments as needed. However, if such amendments are not
obtained, the Company would probably not be able to meet all of the terms of the
Credit Agreement in the near future. Because there can be no assurance that
these amendments will be provided and because of the accounting requirements set
forth in Emerging Issues Task Force Issue No. 86-30, "Classification of
Obligations When a Violation is Waived by the Creditor", Teletouch has
temporarily classified the amount outstanding under the Credit Agreement as a
current liability as of November 30, 2000.
As of November 30, 2000 the Company was in compliance with the terms of its
Junior Subordinated Note agreement. Based on the terms of the Junior
Subordinated Note agreement, if the lender declared the Company not in
compliance with the terms of the Credit Agreement, then by definition it would
be not in compliance with the terms of the Junior Subordinated Note agreement.
Management expects to be able to meet all the terms of the Credit Agreement and
Junior Subordinated Note agreement, or, if necessary, obtain future amendments
to enable the Company to remain in compliance.
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Teletouch's operations require capital investment to purchase inventory for
lease to customers and to acquire paging infrastructure equipment to support the
Company's growth. Net capital expenditures, including pagers, amounted to $3.7
million and $4.3 million for the first six months of fiscal years 2001 and 2000,
respectively. Teletouch anticipates capital expenditures will decrease slightly
in fiscal 2001 as compared to fiscal 2000 as the Company slows its retail
expansion and continues to purchase lower cost pager inventory for lease to its
customers. Teletouch expects to pay for these expenditures with cash generated
from operations.
NEW ACCOUNTING ANNOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting guidelines for derivatives and requires
companies 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, 2000. Teletouch is currently analyzing the implementation
requirements and does not anticipate that the adoption of this statement will
have a material impact on its consolidated balance sheets, statements of
operations, or cash flows.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements". This SAB provides additional guidance on the accounting for
revenue recognition, including both broad conceptual discussions as well as
certain industry-specific guidance. The guidance is effective for the Company
in the fourth quarter of fiscal 2001. While Teletouch does not expect SAB No.
101 to have a material impact on its results of operations upon adoption, the
SEC is expected to issue further guidance regarding the implementation of SAB
No. 101 which could affect the Company's estimates of its expected impact.
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Part II. Other Information
Item 1. Legal Proceedings
Teletouch is party to various legal proceedings arising in the ordinary
course of business. The Company believes there is no proceeding, either
threatened or pending, against it that could result in a material adverse effect
on its results of operations or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its annual meeting of stockholders on November 9, 2000,
at which two proposals were considered and passed by the stockholders:
Proposal 1 was "To elect two Class III directors to serve for three years
and until their successors have been duly elected and shall qualify." The vote
to elect Charles C. Green III as a Class III director was 3,759,807 votes for,
2,716 withhold authority to vote, with 0 votes abstaining. The vote to elect
Thomas E. Van Pelt, Jr. as a Class III director was 3,759,807 votes for, 2,716
withhold authority to vote, with 0 votes abstaining.
Proposal 2 was "To ratify the selection of Ernst & Young LLP as the
Company's independent accountants." The vote on Proposal 2 was 3,760,057 votes
for, 2,466 votes against, with 0 votes abstaining.
Item 5. Other Information.
On September 1, 2000, Teletouch closed an agreement to acquire
substantially all of the assets of Snider Communications Corporation ("Snider"),
a corporation headquartered in Little Rock, Arkansas, which provides statewide
wireless messaging coverage in Arkansas. As part of the purchase, Teletouch
acquired approximately 13,000 additional paging subscribers. The total purchase
price for Snider was approximately $1.7 million which consisted of 600,000
shares of Teletouch's common stock valued at $1.5 million at June 5,2000, the
date of the final asset purchase agreement, and approximately $0.2 million in
other cash expenditures related to closing. As a part of the asset purchase
transaction, Teletouch agreed to register for resale the 600,000 shares issued
to Snider, pursuant to the Securities Act of 1933, as amended. Subsequent to the
asset purchase agreement, Snider, pursuant to a plan of liquidation, assigned
all of its right, title and interest in and to all of its assets, including the
600,000 Teletouch shares received as a result of the said asset purchase, to Ted
L. Snider, Jr. Ted L. Snider, Jr., the successor-in-interest to Snider, was also
the sole member of the Board of Directors of Snider and the sole beneficial
owner of Snider's outstanding capital stock at the time of the liquidation
transaction. Ted L. Snider, Jr. is the beneficial owner of the shares of
Teletouch common stock.. There were 4,298,192 shares of common stock issued and
outstanding prior to the issuance of the shares to Snider.
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SIGNATURES
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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 thereunto duly authorized.
TELETOUCH COMMUNICATIONS, INC.
---------------------------------
(Registrant)
Date: January 12, 2001
/s/J. Richard Carlson
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J. Richard Carlson
President
Chief Executive Officer
Chief Operating Officer
Date: January 12, 2001
/s/J. Kernan Crotty
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J. Kernan Crotty
Executive Vice President
Chief Financial Officer
(Principal Accounting Officer)
17
