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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED: MAY 31, 2001
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[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
Commission File No. 1-13436
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TELETOUCH COMMUNICATIONS, INC.
(Name of registrant in its charter)
Delaware 75-2556090
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
110 N. College, Suite 200, Tyler, Texas 75702 (903) 595-8800
(Address and telephone number of principal executive offices)
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Securities registered pursuant to Section 12(b) of the Exchange Act: Common
Stock, $0.001 par value, listed on the American Stock Exchange.
Securities registered pursuant to Section 12(g) of the Exchange Act: None.
Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of July 26, 2001, the aggregate market value of the voting stock held by
non-affiliates of the registrant, based on the closing price on that date, was
approximately $894,868. As of July 26, 2001, the registrant had outstanding
4,926,210 shares of Common Stock, 15,000 shares of Series A Preferred Stock, and
86,025 shares of Series B Preferred Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the 2001 Annual Meeting of
Shareholders of the registrant to be held on November 8, 2001 are incorporated
by reference into Part III.
INDEX TO FORM 10-K
of
TELETOUCH COMMUNICATIONS, INC.
PAGE NO.
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PART I .............................................................................................. 1
Item 1. Business................................................................................... 1
Item 2. Description of Property.................................................................... 7
Item 3. Legal Proceedings.......................................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders........................................ 8
PART II .............................................................................................. 8
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters...................... 8
Item 6. Selected Financial Data.................................................................... 9
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition ..... 10
Item 7a. Quantitative and Qualitative Disclosures about Market Risk................................. 14
Item 8. Financial Statement and Supplementary Data................................................. 14
Item 9. Changes In and Disagreements with Accountants On Accounting and Financial Disclosure ...... 14
PART III .............................................................................................. 14
Item 10. Directors and Executive Officers of the Registrant......................................... 14
Item 11. Executive Compensation..................................................................... 14
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 15
Item 13. Certain Relationships and Related Transactions............................................. 15
PART IV .............................................................................................. 15
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................... 15
Statements contained or incorporated by reference in this document that are
not based on historical fact are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements may be identified by use of forward-looking terminology such as
"may", "will", "expect", "estimate", "anticipate", "continue", or similar terms,
variations of those terms or the negative of those terms. Forward-looking
statements are based upon numerous assumptions about future conditions that
could prove not to be accurate. Actual events, transactions and results may
differ materially from the anticipated events, transactions and 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.
PART I
Item 1. Business
General
Teletouch Communications, Inc. ("Teletouch" or the "Company") was
incorporated under the laws of the State of Delaware in July 1994 and is
headquartered in Tyler, Texas. Teletouch, or one of its several predecessors,
has operated two-way mobile communications services and telemessaging services
in East Texas for over 30 years. References to Teletouch or the Company as used
throughout this document means Teletouch Communications, Inc. or Teletouch
Communications, Inc. and its subsidiaries, as the context requires.
Teletouch provides telecommunications services in non-major metropolitan
areas and communities. Currently the Company provides services in Alabama,
Arkansas, Louisiana, Mississippi, Missouri, Oklahoma, Texas, Tennessee and
Florida. The Company has 61 sales offices in those states. Through inter-carrier
arrangements, Teletouch also provides nationwide and expanded regional coverage.
Teletouch has experienced a substantial decline in the paging business over
the last year which is partially offset by the growth in other communications
services offered. At May 31, 2001 the Company had approximately 354,700 pagers
in service as compared to approximately 411,700 and 394,200 at May 31, 2000 and
1999, respectively. For fiscal year 2001 the Company had total revenues of $56.3
million as compared to $56.6 million and $51.1 million in fiscal years 2000 and
1999, respectively.
Teletouch's primary focus has been on pursuing a recapitalization of its
debt and certain equity securities. The Company is currently unable to comply
with the terms of its Credit Agreement which could allow the lender to terminate
the commitment and declare the borrowings totaling $57.3 million due and
payable. Further, due to the inability to comply with the terms of the Credit
Agreement the lenders of the Junior Subordinated Notes could declare these
borrowings of $23.3 million to be due and payable. These events would result in
the Company's inability to meet the repayment obligations, causing the Company
to seek protection from creditors. The Company's management believes it will be
successful in recapitalizing its debt and certain equity securities and
continues to follow its overall business strategy of minimizing the level of
customer attrition while continuing to add new products within all of its
distribution channels to minimize the impact of the loss in recurring revenues
from its paging subscribers. While the Company continues to have discussions
with the lenders, no assurances can be given that the Company will be able to
negotiate satisfactory terms. The Company's management believes that it will be
successful in recapitalizing its debt and certain equity securities which will
help generate sufficient future cash flows to meet the Company's capital needs.
If the Company is successful in recapitalizing its debt and certain equity
securities, it would consider acquisitions of paging companies that cover larger
metropolitan areas provided that those companies also service markets that are
strategically located near the Company's existing markets. Teletouch believes
its current markets continue to offer significant growth potential for other
wireless services. During the next two years, the Company intends to focus most
of its
efforts on developing its existing sales offices and broadening its range of
products sold. By reducing overhead costs and focusing on customer service, the
Company believes that it can minimize the impact on operating margins while it
develops additional products and services with recurring revenue streams to
replace the losses from paging service revenue. Additionally, if the opportunity
to acquire other regional paging companies arises, the Company believes it can
achieve better operating results than those achieved by the businesses
separately by consolidating administrative functions, taking advantage of
economies of scale, and sharing common frequencies to offer existing customers a
wider area of paging coverage.
Paging Industry Background
In 1949 the Federal Communications Commission ("FCC") allocated a group of
radio frequencies for use in providing one-way and two-way mobile communications
services, effectively creating the paging industry. Since 1949, the paging
industry has been characterized by consolidation, substantial growth, and
technological change. In the early years, the paging industry was highly
fragmented, with a large number of small, local operators. Many of the firms
that entered the paging business during the first two decades of the industry
did so as a complement to their existing telephone answering service or two-way
radio communications sales and service businesses. The industry grew slowly as
the quality and reliability of equipment gradually improved and consumers began
to perceive the benefits of mobile communications. Further improvements in
equipment reliability and cost-effective technological innovations accelerated
the use of paging services in the 1970s.
Some of the paging industry's most significant technological developments
occurred in the 1980s. The digital display (numeric) pager was introduced and
quickly replaced tone and voice pagers as the most popular paging product. In
1982, the FCC allocated additional frequencies which expanded coverage areas and
introduced competition into the market. More significant technological
developments occurred in the 1990s, including the advent of two-way paging
capabilities that do not require the use of traditional or cellular telephones
to return a page and cellular telephones that incorporate paging capability.
Although the one-way paging industry's growth rate is difficult to
determine precisely, sources estimate that pagers in service grew at an annual
rate of between 20% and 30% for much of the early 1990s. At the end of 1996,
approximately 42 million pagers were in service in the United States and
approximately 6 million net new subscribers were added during 1997, resulting in
a growth rate of a much lower 14%. Since 1997 growth rates have declined and are
currently flat to slightly negative. Growth rates in the one-way paging industry
are expected to decline further as the number of pagers in service continues to
decline. Factors contributing to the paging industry's negative growth include:
(i) expanding coverage of other mobile communications networks; (ii) an
increased consumer demand for products capable of two-way mobile communications;
(iii) the rapidly declining costs of other mobile communications services such
as cellular telephone service; and (iv) technological advances in cellular
equipment and services.
Three types of carriers have emerged in the paging industry: (i) large,
national paging companies; (ii) regional carriers, including Teletouch, that
operate in regional markets in the U.S. that can also offer service outside of
their home regions through a network of interconnections between their own
systems, a national firm, and/or other regional providers; and (iii) small,
single market operators.
The Company's Products and Markets
Paging Operations
Teletouch's paging network provides a one-way communications link to its
subscribers within a specified coverage area. Each subscriber is assigned a
distinct telephone number or personal identification number that a caller dials
to activate the subscriber's pager. When one of the Company's paging terminals
receives a telephone call for a subscriber, a radio signal is transmitted to the
subscriber's pager that then causes the pager to emit a tone, a vibration, or a
voice signal to alert the subscriber. Depending on the type
2
of pager used, the subscriber may respond directly to the caller using
information displayed on the pager or by calling a designated location or voice
mail system to retrieve the message. The advantage of paging over conventional
telephone service is that a pager's reception is not restricted to a single
location. The advantage over cellular telephones is that pagers are smaller,
have a longer battery life, and are substantially less expensive to use. Pagers
may also be used in areas where cellular telephone use is prohibited, such as
hospitals, due to interference with sensitive monitoring equipment. Some
cellular subscribers use a pager along with their cellular telephone to screen
incoming calls and to lower the expense of their cellular telephone service.
Teletouch currently provides four basic types of paging services: numeric,
alphanumeric, tone-only, and tone-plus-voice. Subscribers carry a pocket-sized
radio receiver (a pager) that is preset to monitor a designated radio frequency
and is activated by radio signals emitted from a transmitter when a call is
received. Numeric pagers display a caller's message that may consist of an area
code and telephone number or up to 12 digits of other numeric information.
Alphanumeric pagers allow subscribers to receive and store messages consisting
of both numbers and letters. With tone-only service, the subscriber's pager
produces an audible "beep" or vibration when activated, and tone-plus-voice
service causes a subscriber's pager to beep and then play a brief voice message.
Subscribers may be paged using traditional or cellular telephones, computer
software, alpha entry devices, or over the Internet from the Company's web page.
Teletouch is licensed by the FCC to transmit numeric, alphanumeric, tone, and
voice messages to pagers it either sells or leases to customers.
Numeric and alphanumeric paging services have almost completely replaced
Teletouch's tone-only or tone-plus-voice services. Today over half of the
Company's pagers in service are numeric pagers. Alphanumeric pagers, which were
introduced in the mid-1980s, constitute a smaller but increasing percentage of
the Company's subscriber base.
In March 2000, Teletouch signed a five-year agreement to market two-way
paging services through WebLink Wireless, Inc.'s nationwide network. This
agreement provides the Company with a broad suite of advanced messaging
services, such as Internet-based messaging and the transmission of two-way
wireless data to market to its customers.
Teletouch also offers its paging subscribers voice mail messaging and
Smartpager(R) services. When a subscriber uses voice mail in conjunction with
paging service and a caller leaves the subscriber a recorded message, the
subscriber is automatically paged. Voice mail employs sophisticated computer
technology that allows a subscriber to retrieve digitally recorded voice
messages 24 hours a day from any location by accessing the voice mail system
using a touch-tone telephone. The Company's voice mail systems provide complete
message privacy, allow for personalized message greetings, and enable voice
messages to be sent to a large group of people simultaneously.
Teletouch's Smartpager(R) service allows individuals to send an
alphanumeric page to a subscriber without any special software or equipment.
Subscribers are assigned a toll free number to give to friends, family, and
associates who can then call and leave messages with a Teletouch operator.
Operators, available 24 hours a day, immediately transmit these messages to
subscribers.
Paging companies traditionally distributed their services through direct
marketing and sales activities. In recent years additional distribution channels
evolved including: (i) carrier-operated stores; (ii) resellers, who purchase
paging services on a wholesale basis from carriers and resell those services on
a retail basis to their own customers; (iii) agents who solicit customers for
carriers and are compensated on a commission basis; and (iv) retail outlets that
often sell a variety of merchandise, including pagers and other
telecommunications equipment. Historically, most paging subscribers were
business users. However, pager use among retail consumers has increased
significantly in recent years. Increasingly, paging subscribers choose to
purchase rather than lease their pagers as equipment costs have decline. The
Company expects such trends to continue.
3
Teletouch's paging customers include various-sized companies with field
sales and service operations, individuals in occupations requiring substantial
mobility and the need to receive timely information, and a rapidly expanding
base of individual consumers who use pagers to stay in touch with friends and
family. Some of the Company's customers even use pagers rather than home
telephones as their primary means of communication. These customers respond to
pages using pay phones or the telephones of friends and family. Teletouch is not
dependent upon any single or small group of customers for a material part of its
overall business.
Teletouch's sales strategy is to concentrate on business accounts and on
individuals who value continuity, quality, and personal service. Historically,
the Company leased pagers to a large percent of its business accounts. As the
price of pagers declined, the Company has increasingly emphasized pager sales
over rentals. Teletouch offers its subscribers a high level of technical support
and provides a full range of dependable communications devices and services.
The Company now markets all its products and services under the Teletouch
name. In order to access the broadest possible market, the Company uses multiple
paging distribution channels. These channels include (i) Company-operated sales
offices, including mall and other shopping center locations, that sell pagers to
the consumer market; (ii) a direct sales staff that concentrates on business
accounts; (iii) resellers, who purchase pagers and paging services in bulk and
resell them to their own subscribers; and (iv) the resale of other paging
carriers' services when customers require coverage outside Teletouch coverage
areas.
Cellular Operations
In December 1998, Teletouch launched its own brand of prepaid cellular
telephone service, utilizing the resale of telecommunication service which it
buys at wholesale prices. The company also offers PCS cellular service as an
agent for other PCS carriers, including AT&T Wireless Services Inc., Cingular
Wireless, Verizon Communications Inc., Sprint Corporation and Voicestream
Wireless Corporation in all of its markets. In May 2001, the Company decided to
discontinue sales of its own brand of prepaid cellular service and transition
all customers to alternative celluar service under one of the Company's existing
agent agreements by January 2002. At year-end the Company continued to offer its
prepaid cellular service in 37 of its stores and PCS service in all of its sales
offices. In April 2000, Teletouch became an agent for Leap Wireless
International Inc. ("Cricket Communications"), a company that provides unlimited
local wireless service for a flat monthly fee. Cricket currently offers its
service in several major metropolitan areas in Tennessee, Arkansas and Oklahoma
and plans to offer the service in other markets in which Teletouch has retail
locations.
To complement its cellular products and services, Teletouch began offering
prepaid long distance cards in April 2000. The Company offers its cellular
products and services through all its sales channels. As with pagers, Teletouch
focuses on selling rather than leasing its cellular products.
Two-Way Radio Operations
Since 1963, Teletouch has been an authorized Motorola two-way radio dealer
in the East Texas area. The Company has locations in both Tyler and Longview and
services most of the law enforcement and public safety agencies as well as other
industries in a ten-county area. Teletouch is currently a member of Motorola's
Pinnacle Club, a group of 700 preferred Motorola dealers.
On March 29, 2000, Teletouch acquired Eastex Communications, Inc., a
privately held company headquartered in Nacogdoches, Texas. Eastex is also an
authorized Motorola two-way radio dealer and provides two-way radio services in
Nacogdoches, Lufkin, Livingston, and Huntsville, Texas.
4
The acquisition of Eastex will allow Teletouch to launch 450 MHz Logic
Trunked Radio ("LTR") Passport-enabled service, a "Nextel-type" radio service,
in eastern Texas. Shortly before acquiring Eastex, Teletouch launched this
service in its Tyler and Longview markets.
LTR radio service is licensed for the 450 MHz spectrum and includes voice,
data, and voice mail capabilities. The LTR Passport-enabled service includes
"follow-me-roaming" features that are similar to the automatic handoff of radio
signals characteristic of cellular radio systems. The market for LTR radio
service includes customers desiring an upgrade in features and extended roaming
compared with traditional two-way radio service. LTR radio service is also a
cost-efficient communications alternative to cellular telephones since LTR
service is based on a fixed monthly fee per-radio versus per-minute cellular
charges.
Financial Information about Industry Segments
Teletouch operates in the wireless telecommunications industry, providing
paging and messaging, cellular, and two-way radio services to a diversified
customer base. Teletouch's cellular and two-way radio operations represent less
than 10% individually and in the aggregate of operating income and assets of the
Company. Cellular and two-way radio operations represent approximately 18% in
the aggregate of the Company's revenue. Cellular and two-way revenues for fiscal
2001 were $6.6 million and $3.7 million, respectively. The Company had no
foreign operations.
Sources of System Equipment and Inventory
Teletouch does not manufacture its paging network equipment, including but
not limited to antennas, transmitters, and paging terminals, nor does it
manufacture any of the pagers, cellular telephones, or two-way radios it sells
or leases. This equipment is available for purchase from multiple sources, and
the Company anticipates that such equipment will continue to be available in the
foreseeable future, consistent with normal manufacturing and delivery lead
times. Because of the high degree of compatibility among different models of
transmitters, computers and other paging and voice mail equipment manufactured
by its suppliers, Teletouch's paging network is not dependent upon any single
source of such equipment. The Company currently purchases pagers and
transmitters from several competing sources. Until this year, the Company
purchased its paging terminals from Glenayre Technologies Inc., a leading
manufacturer of mobile communications equipment. During the year, Glenayre
announced that it would discontinue manufacturing paging terminals but would
continue to provide technical support for the foreseeable future. Teletouch does
not anticipate that the decision by Glenayre will impact its operations as such
terminal equipment is readily available in the used market. Cellular telephones
and two-way radios are available from several sources.
Teletouch continually evaluates potential products to offer in its sales
offices since those offices primarily target the consumer market, and consumers
have consistently requested other telecommunication products in addition to
paging, voice mail, and cellular services. Services such as internet access,
local telephone service, printing services and security services are currently
being investigated. Teletouch plans to continue introducing new products and
services to its customers as viable ones are identified.
Competition
Competition for subscribers is based primarily on the price and quality of
services offered and the geographic area covered. Teletouch has one or more
direct competitors in all its markets, some of which have greater financial
resources than Teletouch. The Company believes, however, that the price and
quality of its services and its geographic coverage areas within its markets
compare favorably with those of its competitors.
Although some competitors are small, privately owned companies serving only
one market area, others are subsidiaries or divisions of larger companies, such
as telephone companies, which provide paging
5
and other telecommunications services in multiple market areas. Among the
Company's competitors are Arch Wireless Inc, Metrocall Inc., and Cingular
Wireless.
Companies offering wireless two-way communications services, including 800
MHz cellular service, 1900 MHz wireless personal communications service ("PCS"),
and specialized mobile radio services ("SMR"), continues to compete with
Teletouch's paging services. Cellular and PCS services are generally more
expensive than paging services. Where price is a consideration or access to
fixed wire communications (such as ordinary telephones) is available, paging can
compete successfully with or be an adjunct to cellular and PCS systems. However,
the price of cellular and PCS services continue to decline and are quickly
approaching the higher end pricing on some paging services. Therefore, the
Company has aggressively partnered with cellular and PCS providers and continues
to work to develop services that will sustain the Company in this competitive
environment. Future technological advances and associated regulatory changes in
the industry could also result in new products and services that would either
put Teletouch at a competitive advantage or disadvantage with other companies.
If the pricing on cellular and PCS services continues to decline, the viability
of the paging industry in general and of the Company in particular could be
adversely affected.
Patents and Trademarks
In fiscal year 1999, Teletouch registered the trademark for its
Smartpager(R) service, a service that allows individuals to send an alphanumeric
page to a subscriber without any special software or equipment. The Company
considers this registered trademark to be beneficial and will consider
registering trademarks or service marks for future services it may provide.
Regulation
The FCC regulates Teletouch's paging operations under the Communications
Act of 1934, as amended (the "Communications Act"), by granting the Company
licenses to use radio frequencies. These licenses also set forth the technical
parameters, such as location, maximum power, and antenna height, under which the
Company is permitted to use those frequencies.
In 1996, the FCC implemented rules that revised the classification of most
private-carrier paging licensees. Traditionally, the FCC has classified licenses
as either Radio Common Carrier licenses ("RCC") or Private Carrier Paging
("PCP") licenses. Now all licenses are classified either as Commercial Mobile
Radio Service ("CMRS") or Private Mobile Radio Service ("PMRS"). Carriers like
Teletouch and its competitors, who make service available to the public on a
for-profit basis through interconnections with the public switched telephone
network, are classified as CMRS licensees. Until recently, Teletouch's RCC
licenses were subject to rate and entry regulations in states that chose to
impose tariff and certification obligations, whereas PCP licenses were not
subject to such regulations. As a result of Congressional legislation, the state
regulatory differences between RCCs and PCPs have been eliminated.
The FCC also adopted rules that license paging channels in the UHF and VHF
bands, as well as in the 929 and 931 MHz bands, on a geographic area basis.
These geographic area licenses are awarded through public auctions. The 929 and
931 MHz bands were auctioned in February 2000. The Company acquired 32 licenses
in the 931 MHz band in these auctions. Incumbent licensees, such as Teletouch,
will retain their exclusivity under the FCC's new rules. The Company also
operates paging systems utilizing shared, non-exclusive frequencies below 929
MHz.
The FCC grants radio licenses for varying terms of up to 10 years, and the
FCC must approve renewal applications. In the past, FCC renewal applications
have been more or less routinely granted. Although there can be no assurance the
FCC will approve or act upon Teletouch's future applications in a timely manner,
the Company believes that such applications will continue to be approved with
minimal difficulties.
6
Teletouch regularly applies to the FCC for authority to use additional
frequencies and to add additional transmitter sites to expand coverage on
existing frequencies. Under current FCC guidelines, the Company can expand its
coverage and add additional sites only on frequencies formerly classified as PCP
frequencies below 929 MHz. All other paging frequencies below 929 MHz on which
Teletouch holds licenses are frozen in a status quo condition pending the final
announcement and implementation of geographic area licensing auctions. The
Communications Act also requires prior FCC approval for the Company's
acquisitions of radio licenses held by other companies, as well as transfers of
controlling interests of any entities that hold radio licenses. Although there
can be no assurance the FCC will approve or act upon Teletouch's future
applications in a timely manner, the Company knows of no reason why such
applications would not be approved or granted. The FCC has also determined that
all major modification and expansion applications will be subject to competitive
bidding ("auction") procedures. Teletouch cannot predict the impact of these
procedures on its licensing practices.
The Communications Act requires the FCC to limit foreign ownership of
licenses. These foreign ownership restrictions limit the percentage of company
stock that may be owned or voted, directly or indirectly, by aliens or their
representatives, a foreign government or its representatives, or a foreign
corporation. The FCC also has the authority to restrict the operation of
licensed radio facilities or to revoke or modify such licenses. The FCC may
adopt changes to its radio licensing rules at any time, subject to following
certain administrative procedures. The FCC may also impose fines for violations
of its rules. Under certain circumstances, Teletouch's license applications may
be deemed "mutually exclusive" with those of other paging companies, in which
case the FCC would select between the mutually exclusive applicants. The FCC has
previously used lottery procedures to select between mutually exclusive paging
applications; however, in response to a Congressional mandate, the FCC adopted
rules to grant mutually exclusive CMRS paging applications through the auction
process.
The FCC could change its rules or policies in a manner that could have a
material adverse effect on the Company's business by limiting the scope and
manner of Teletouch's services or by increasing competition in the paging
industry. Beginning in 1994, the FCC was ordered by Congress to hold auctions to
award licenses for new personal communications services. These PCS and other new
mobile services could enable other service providers to compete directly or
indirectly with the Company. In addition, from time to time, federal and state
legislators propose and enact legislation that could affect the Company's
business either beneficially or adversely. Teletouch cannot predict the impact
of such legislative actions on its operations.
The foregoing description of certain regulatory factors does not purport to
be a complete summary of all the present and proposed legislation and
regulations pertaining to the Company's operations.
Employees
At May 31, 2001, Teletouch employed 402 people, of which 313 were employed
full-time and 89 were employed on a part-time or temporary basis. Most of these
employees performed sales, operations support, and clerical roles. The Company
considers its relationships with its employees to be satisfactory and is not a
party to any collective bargaining agreement.
Item 2. Description of Property
Teletouch owns an office building and one transmitter site, along with the
broadcast tower on that site. In addition, the Company currently leases 88
retail and office locations in its market areas, including its executive offices
in Tyler, Texas. Teletouch also leases transmitter sites on commercial towers,
buildings, and other fixed structures in approximately 388 locations. The
Company's leases are for various terms and provide for monthly rental payments
at various rates. Teletouch is obligated to make total lease payments of
7
approximately $3.0 million under its office facility and tower site leases for
fiscal year 2002. See Note H in the Notes to Consolidated Financial Statements.
The Company believes that its facilities are adequate for its current needs
and that it will be able to obtain additional space as needed at reasonable
cost.
Item 3. 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 will 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
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 2001.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
On April 6, 1998, Teletouch's securities began trading on the American
Stock Exchange ("AMEX") under the symbol TLL and ceased trading on The Nasdaq
Small Cap Market(TM) ("NASDAQ"). Also on April 6, 1998, the Company terminated
its Boston Stock Exchange listing.
The following table lists, for the periods indicated, the reported high and
low transaction prices for Teletouch Common Stock. Such prices reflect inter-
dealer prices, but do not include retail mark-ups, markdowns, or commissions and
may not necessarily represent actual transactions. All share prices have been
adjusted to give effect to the two-for-three reverse stock split effected June
25, 1998.
Common Stock
------------
High Low
---- ---
Fiscal Year 2000
----------------
1/st/ Quarter 1-9/16 13/16
2/nd/ Quarter 1-1/8 3/8
3/rd/ Quarter 8-7/16 5/8
4/th/ Quarter 7-15/16 1-5/8
Fiscal Year 2001
----------------
1/st/ Quarter 3-15/16 1-5/8
2/nd/ Quarter 3 1
3/rd/ Quarter 1.25 .50
4/th/ Quarter .98 .31
_________________
As of July 26, 2001, 4,926,210 shares of common stock, 15,000 shares of
Series A preferred stock, 86,025 shares of Series B preferred stock, 2,660,840
Common Stock Purchase Warrants, and 324,171 Series B Preferred Stock Purchase
Warrants were issued and outstanding. Also as of July 26, 2000, there were 43
holders of record of the Company's Common Stock based upon information furnished
by Continental Stock Transfer & Trust Company, New York, New York, the Company's
transfer agent. The number of holders of record does not reflect the number of
beneficial holders, estimated to be in excess of 800, of Teletouch's Common
Stock for whom shares and warrants are held by banks, brokerage firms, and other
entities.
8
Teletouch has never paid and does not anticipate paying any cash dividends
on its Common Stock in the foreseeable future. Dividends on the Series A
Preferred Stock accrue at 14% per annum compounded quarterly and may be paid in
kind by issuing additional securities. Cash dividends on the Company's Common
Stock or Preferred Stock, and the redemption of the Preferred Stock, are
prohibited so long as the Credit Agreement (discussed in footnotes B and F in
the Notes to the Consolidated Financial Statements) is in effect.
Item 6. Selected Financial Data
The following table represents certain items from the Company's
consolidated statements of operations and certain other information for the
periods indicated.
(In Thousands, except Per Share Data, Pagers in Service and ARPU)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Service, rent, and maintenance revenue ... $ 42,929 $ 45,164 $ 42,792 $ 38,831 $ 35,478
Product sales revenue .................... 13,366 11,427 8,346 6,328 5,911
--------- --------- --------- --------- ---------
Total revenues ........................ 56,295 56,591 51,138 45,159 41,389
Net book value of products sold .......... (13,405) (11,211) (8,000) (6,634) (6,506)
--------- --------- --------- --------- ---------
$ 42,890 $ 45,380 $ 43,138 $ 38,525 $ 34,883
Operating expenses (5) ................... 79,337 43,650 42,678 38,329 36,212
--------- --------- --------- --------- ---------
Operating income ......................... (36,447) 1,730 460 196 (1,329)
Interest expense, net .................... (8,775) (7,908) (7,823) (8,535) (8,177)
Loss on investments ...................... (356) -- -- -- --
--------- --------- --------- --------- ----------
Gain (loss) on disposal of assets ........ (237) 155 23 4,171 --
--------- --------- --------- --------- ----------
Loss before income taxes ................. (45,815) (6,023) (7,340) (4,168) (9,506)
Income tax expense/(benefit) ............. -- -- -- 48 (476)
--------- --------- --------- --------- ---------
Loss before extraordinary item ........... (45,815) (6,023) (7,340) (4,216) (9,030)
Extraordinary item ....................... -- -- -- -- (3,389)
--------- --------- --------- --------- ---------
Net loss before preferred stock dividends $ (45,815) $ (6,023) $ (7,340) $ (4,216) $ (12,419)
========= ========= ========= ========= =========
Loss per share applicable to common stock:
- -----------------------------------------
Loss before extraordinary item ........... $ (10.65) $ (2.29) $ (2.52) $ (1.66) $ (2.72)
Extraordinary item ....................... -- -- -- -- (0.80)
--------- --------- --------- --------- ---------
Net loss ................................. $ (10.65) $ (2.29) $ (2.52) $ (1.66) $ (3.52)
========= ========= ========= ========= =========
EBITDA (1)(2)(3)(4) ...................... $ 11,292 $ 14,827 $ 15,508 $ 14,316 $ 12,402
========= ========= ========= ========= =========
Pagers in service at end of period ....... 354,700 411,700 394,200 349,700 321,100
========= ========= ========= ========= =========
Average revenue per unit ("ARPU") ........ $ 8.78 $ 8.98 $ 9.25 $ 9.33 $ 10.02
========= ========= ========= ========= =========
Total assets (5) ......................... $ 31,445 $ 77,693 $ 81,256 $ 87,194 $ 92,173
========= ========= ========= ========= =========
Long-term debt, net of current
portion (6) ............................. $ -- $ 71,927 $ 75,944 $ 74,487 $ 79,824
========= ========= ========= ========= =========
____________________
(1) EBITDA represents earnings before interest, taxes, depreciation, and
amortization (and certain non-recurring income and expenses, such as the
gain on sale of assets). 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
compliance with contractual covenants is calculated under its debt
agreements.
(2) In January 2001, Teletouch restructured certain retail operations and
product lines. In May 2001 Teletouch decided to discontinue its own branded
prepaid cellular product line. These actions resulted in non-recurring
costs
9
that have been included in operating expenses and net book value of
products sold. The EBITDA shown above for fiscal 2001 excludes $959,000 of
non-recurring costs associated with these activities, consisting primarily
of severance expenses, lease payments for unoccupied space and impairment
of cellular phone inventory. Additionally, the EBITDA shown above for
fiscal 2001 excludes $356,000 of losses on stock held for investment and
$255,000 on impairment of certain fixed assets related to Teletouch's
prepaid cellular product line. EBITDA shown above also excludes the
impairment charges of $36,589,000 recorded in the three month period ended
May 31, 2001.
(3) In May 1999, Teletouch restructured certain administrative activities,
resulting in non-recurring costs that have been included in operating
expenses. The EBITDA shown above for fiscal 1999 excludes the $275,000 of
non-recurring costs associated with the restructure, consisting primarily
of personnel severance and rent on leases for unoccupied space.
(4) In May 1998, Teletouch and Premier Paging, Inc. ("Premier") reached a
settlement with regard to the termination of the proposed acquisition of
Premier. The EBITDA shown above for fiscal 1998 excludes $837,000 of
non-recurring costs associated with this settlement.
(5) Includes the impairment charges recorded in the three month period ended
May 31, 2001.
(6) $66,935,000 of long-term debt has been classified as a current liability.
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
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.
The following discussion and analysis of the results of operations and
financial condition of the Company should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
report.
Overview
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 May 31, 2001, the Company had approximately
354,700 pagers in service. The Company derives the majority of its revenues from
fixed, periodic fees, not dependent on usage, charged to subscribers for paging
services. As long as a subscriber remains on service, operating results benefit
from the recurring payments of the fixed, periodic fees without incurring
additional selling expenses or other fixed costs. Due to growth resulting from
the completion of acquisitions in previous years, Teletouch's results of
operations for prior periods may not be indicative of future performance.
Acquisitions and Disposals
On September 1, 2000, Teletouch acquired 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 $0.2
10
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 licenses, $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.
On March 31, 2000, Teletouch acquired substantially all the assets of
EASTEX Communications, Inc. for consideration of approximately $485,000. An
initial payment of approximately $277,000 was paid in cash, and the remaining
consideration will be paid in equal monthly installments over the next two
years. The acquisition was accounted for using the purchase method of
accounting, and the total purchase price was allocated as follows: $40,000 to
property, plant, and equipment; $20,000 to inventory; $181,000 to FCC licenses;
$151,000 to subscriber bases; $5,000 to a non-compete agreement; and the
remaining $88,000 to goodwill. The results of operations of the acquisition,
which are immaterial to consolidated operations, are included with that of the
Company from the date of closing.
Results of Operations for the fiscal years ended May 31, 2001, 2000, and 1999
Total revenue: Teletouch's total revenue decreased to $56.3 million in
-------------
fiscal year 2001 from $56.6 million in fiscal year 2000 and increased from $51.1
million in fiscal year 1999, respectively. The fiscal year 2001 total revenue
decrease from fiscal 2000 was due to a loss of approximately $4.6 million
revenues from pager sales and paging services due to a continuing decline in
demand for one-way paging service. This decrease in revenues was partially
offset by an increase in two-way revenues of $1.5 million due in part to the
acquisition of Eastex Communications in April 2000 and to an increase in
cellular revenues of $3.0 million due to internal growth. The fiscal year 2000
increase over fiscal 1999 was a combination of approximately $3.6 million in
additional revenues from cellular products and an increase in pager service
revenue resulting from internal growth. Pagers in service declined to 354,700 at
May 31, 2001 as compared to 411,700 and 394,200 at May 31, 2000 and 1999,
respectively.
The negative impact on total revenue of the decrease in pagers in service
is compounded by the decline in average revenue per unit ("ARPU"). ARPU for the
year ended May 31, 2001 was $8.78 as compared to $8.98 and $9.25 for the years
ended May 31, 2000 and May 31, 1999, respectively. The decrease in ARPU is
primarily due to increased competition in the Company's markets and to a lesser
extent to an increase in the percentage of the Company's subscriber base
represented by resellers. 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 May 31, 2001 approximately 42% of the Company's
subscriber base was represented by resellers as opposed to 41% at May 31, 2000
and 39% at May 31, 1999. As competitors continue to pursue Teletouch's customers
in the marketplace, as the percentage of its subscriber base represented by
resellers increases, and as the paging industry fully matures, ARPU is expected
to continue to decline. Teletouch expects that the introduction of new products
and services will only partially offset any decline in ARPU or paging
subscribers and will result in a decrease in total revenue during the next year.
Operating expenses, excluding depreciation and amortization: Operating
-----------------------------------------------------------
expenses, excluding depreciation and amortization, were $32.5 million, or 58% of
total revenue (excluding the impairment charges of $36.6 million) for fiscal
year 2001 as compared to $30.6 million, or 54% of total revenue and $27.9
million, or 55% of total revenue for the fiscal years 2000 and 1999,
respectively. Costs increased in fiscal 2001 over fiscal 2000 due to new retail
store openings, particularly in the areas of payroll, rent, and advertising
expenses and due to non-recurring charges of $0.5 million associated with retail
store closings. Costs increased in fiscal 2000 over fiscal 1999 primarily
because of new retail store openings, particularly in the areas of payroll,
rent, and advertising expenses. Additionally, due to the restructure of certain
administrative collection functions in May 1999 and due to the increase in the
churn rate for the Company's retail customers, bad debt losses for fiscal
11
2000 were $1.4 million as compared to $0.8 million for fiscal 1999. Operating
costs as a percentage of total revenue have either increased or remained flat
while the Company's paging subscriber base continues to decline. The Company
expects operating expenses to decline during the next year as unprofitable
products and /or locations are eliminated, however, it cannot be certain that
operating costs will decline in proportion to revenue.
Depreciation and amortization: Depreciation and amortization expense
-----------------------------
decreased to $10.2 million in fiscal year 2001 from $13.1 million and $14.8
million in fiscal years 2000 and 1999, respectively. The decrease in
depreciation and amortization expense in fiscal 2001 was due primarily to the
expiration of amortization on certain acquired intangible assets late in fiscal
2000 resulting in a $3.4 million decrease in amortization expense partially
offset by an increase in deprecation expense related to fixed assets used
opening new retail stores in fiscal 2000 and 2001. A decrease in amortization
expense in fiscal 2000 of approximately $0.9 million due to the expiration of
amortization on certain acquired intangible assets and a decrease in additional
depreciation recorded on returned lease pagers of approximately $1.0 million,
partially offset by an increase in depreciation on other assets of $0.2 million,
accounted for the decrease from fiscal 1999.
Interest expense: Net interest expense increased to $8.8 million in fiscal
----------------
year 2001 from $7.9 million in fiscal 2000, which decreased from $7.8 million in
fiscal 1999. Interest expense increased in fiscal 2001 over fiscal 2000
primarily due to increases in the variable interest rates on the Credit
Agreement as well as increased compound interest associated with the Junior
Subordinated Notes (discussed below under "Financial Condition"). A component of
the interest rate on the Credit Agreement is determined by the Company's
leverage ratio at each fiscal quarter. During fiscal 2001, the Company operated
at a leverage ratio that resulted in a variable interest rate higher than in
fiscal 2000. This increase in interest expense was offset slightly by principal
payments on the Credit Agreement totaling $2.4 million in fiscal 2001. Interest
expense increased in fiscal 2000 over fiscal 1999 primarily due to an increase
in interest charges associated with the Junior Subordinated Notes, partially
offset by a decrease in the amortization of debt issue costs.
Income tax benefit: At May 31, 2001, Teletouch had a net operating loss
------------------
carryforward of approximately $29.5 million that will begin to expire in fiscal
2012. For fiscal year 2002, the Company estimates that no tax benefit will be
recorded. A valuation allowance has been recorded against deferred tax assets
that are not likely to be realized. Specifically, the Company's carry forwards
expire at specific future dates, and utilization of certain carry forwards is
limited to specific amounts each year. However, due to the uncertain nature of
their ultimate realization, Teletouch has established a valuation allowance
against these carry forward 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 benefit of the carry forwards will be recorded in future operations as a
reduction of the Company's income tax expense.
EBITDA: EBITDA decreased to $11.3 million, or 20% of total revenue ($9.7
------
million, or 17% of total revenue, including the $0.4 million loss on investment
and $1.2 million in other costs associated with the restructuring activities) as
compared to $14.8 million, or 26% of total revenue in fiscal year 2000 and
compared to $15.5 million, or 30% of total revenue ($15.2 million, or 30% of
total revenue, including the $0.3 million of costs associated with the
restructuring) in fiscal year 1999. The decrease in fiscal 2001 EBITDA as a
percentage of total revenue is due primarily to losses in paging service revenue
of approximately $2.5 million due a continued decline in ARPU and number of
pagers in service. Contributing to the decline in EBITDA during fiscal 2001 were
lower than anticipated revenues from new retail stores opened in fiscal 2000 and
fiscal 2001 for which the operations expenses are basically fixed. The decrease
in fiscal 2000 EBITDA as a percentage of total revenue from fiscal 1999 is
primarily due to new retail store openings and increased bad debt losses, as
previously discussed.
Financial Condition
Teletouch's cash balance was $4.0 million at May 31, 2001 as compared to
$6.8 million at May 31, 2000. Cash provided by operating activities decreased to
$5.6 million in fiscal year 2001 from $9.4 million and
12
$10.5 million in fiscal year 2000 and fiscal year 1999, respectively. The
Company expects that cash flow provided from operations will be sufficient to
fund its working capital needs in the near term, provided that the Company is
successful in reorganizing its debt obligations, which is discussed in greater
detail below. In the absence of such a reorganization and additional financing,
the Company may be forced to terminate its operations.
Teletouch's operations require capital investment to purchase pagers for
lease to customers and to acquire paging infrastructure equipment to support the
Company's existing subscribers. Net capital expenditures, including pagers,
amounted to $6.5 million, $7.8 million and $7.6 million for fiscal 2001, 2000,
and 1999, respectively. The decrease in fiscal 2001 from fiscal 2000 was due to
less capital spending on opening new retail stores as well as the Company's
ability to continue to purchase lower cost pagers to lease to customers. The
increases in fiscal 2000 over fiscal 1999 was due primarily to capital
investments in new retail stores, leased pagers, and the addition of new
transmitter sites. Teletouch anticipates capital expenditures will decline in
fiscal 2002 as the Company plans to only replace necessary equipment to maintain
the paging infrastructure while continuing to purchase an adequate supply of
pagers to lease to customers. Teletouch will pay for these expenditures with
cash generated from operations.
The Company's Credit Agreement provides for loans in an amount not to
exceed $70 million. As of May 31, 2001, $57.3 million of the Credit Agreement
was funded. 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 equal to either the prime rate plus 1% to 2% or to 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 through November 2005. For fiscal
2001, the weighted-average interest rate on the Credit Agreement was 8.8%.
The Credit Agreement also requires the maintenance of certain financial and
operating covenants, and prohibits any payments on the Junior Subordinated Notes
and the payment of dividends. These covenants were amended as of the end of each
of the first three quarters of the fiscal year, which allowed the Company to
meet its financial covenant and principal repayment terms. As of August 24,
2001, the Company has been unable to negotiate new terms under the Credit
Agreement, which would allow the Company to remain in compliance with its terms
as of May 31, 2001, and for subsequent periods. Failure to comply with the terms
of the agreement results in an Event of Default under the Credit Agreement which
in turn allows the lender to terminate the commitment and to declare the
borrowings totaling $57.3 million to be due and payable. The Company is in
default of its payment obligations under the Credit Agreement as well as under
various financial covenants. The Lenders have refused to waive the Events of
Default, and are in the process of assessing their alternatives. In any event,
no additional borrowings will be available to the Company under the Credit
Agreement.
The terms of the Subordinated Notes require the maintenance of certain
financial and operating covenants and restrict future acquisitions. 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 discussed
above, then by definition it would not be in compliance with the terms of the
Junior Subordinated Note Agreement resulting in an additional $22.3 million
becoming due and payable.
The Company is pursuing a recapitalization of its debt and certain equity
securities. Although the Company's management believes it will successfully
recapitalize the Company in a timely fashion, there can be no assurance that
payment under the Credit Agreement and Junior Subordinated Notes will not be
declared due and payable which would likely result in the Company's inability to
meet the repayment obligations, causing the Company to seek protection from
creditors.
13
If the Company is able to obtain the required financing to remain in
business, future operating results depend on successful implementation of our
strategy to develop customer retention programs and expand 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.
New Accounting Pronouncements
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 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.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
The risk inherent in Teletouch's market risk sensitive instruments, such as
the Credit Agreement is the potential loss arising from adverse changes in
interest rates. The Company's earnings are affected by changes in interest rates
due to the impact those changes have on its variable-rate debt obligations,
which represented approximately 71% of its total long-term obligations as of May
31, 2001. If interest rates average one percent more in fiscal 2002 than they
did during fiscal 2001, the Company's interest expense would increase by
approximately $0.6 million. The impact of an increase in interest rates was
determined based on the impact of the hypothetical change in interest rates on
the Company's variable-rate long-term obligations as of May 31, 2001. The
preceding sensitivity analysis does not, however, consider the effects that such
changes in interest rates may have on overall economic activity, nor does it
consider additional actions the Company may take to mitigate its exposure to
such changes. Actual results may differ from the above analysis.
Item 8. Financial Statements and Supplementary Data
The financial statements required by this item are included in this report
beginning on page F-1.
Item 9. Changes In and Disagreements with Accountants On Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Teletouch incorporates by reference information regarding directors and
executive officers from the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held November 8, 2001.
Item 11. Executive Compensation
14
Teletouch incorporates by reference information regarding executive
compensation from the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held November 8, 2001.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Teletouch incorporates by reference information regarding security
ownership of certain beneficial owners and management from the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held November 8, 2001.
Item 13. Certain Relationships and Related Transactions
Teletouch incorporates by reference information regarding certain
relationships and related transactions from the Company's Proxy Statement for
the Annual Meeting of Shareholders to be held November 8, 2001.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements.
Consolidated Balance Sheets as of May 31, 2001 and 2000
Consolidated Statements of Operations for Each of the Three Years in
the Period Ended May 31, 2001
Consolidated Statements of Cash Flows for Each of the Three Years in
the Period Ended May 31, 2001
Consolidated Statements of Shareholders' Equity (Deficit) for Each of
the Three Years in the Period Ended May 31, 2001
Notes to Consolidated Financial Statements
Report of Independent Auditors
(a) (2) Financial Statement Schedules.
Schedule II - Valuation and Qualifying Accounts and Reserves
Schedules, other than those referred to above, have been omitted
because they are not required or are not applicable or because the
information required to be set forth therein either is not material or
is in included in the financial statements or notes thereto.
(a) (3) Exhibits.
Exhibit
Number Title of Exhibit
------- ----------------
21 Subsidiaries
(b) Reports on Form 8-K
Teletouch filed no reports on Form 8-K during the fourth quarter of
Fiscal 2001.
15
Index to Consolidated Financial Statements
Report of Independent Auditors.................................................. F-2
Consolidated Balance Sheets..................................................... F-3
Consolidated Statements of Operations........................................... F-4
Consolidated Statements of Cash Flows........................................... F-5
Consolidated Statements of Shareholders' Equity (Deficit)....................... F-6
Notes to Consolidated Financial Statements...................................... F-7
F-1
Report of Ernst & Young LLP, Independent Auditors
We have audited the accompanying consolidated balance sheets of Teletouch
Communications, Inc. and subsidiaries as of May 31, 2001 and 2000, and the
related consolidated statements of operations, shareholders' equity (deficit),
and cash flows for each of the three years in the period ended May 31, 2001. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Teletouch
Communications, Inc. and subsidiaries at May 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended May 31, 2001, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
As discussed in Note B to the consolidated financial statements, the Company's
failure to comply with certain terms of the Credit Agreement results in Events
of Default, as defined, which allows the lender to terminate the Credit
Agreement and declare the borrowings to be due and payable. The Events of
Default also allow the lenders of the Junior Subordinated Notes to declare these
borrowings to be due and payable. These factors raise substantial doubt about
the Company's ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of these
uncertainties.
/s/ Ernst & Young LLP
Dallas, Texas
August 22, 2001
F-2
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
May 31, 2001 May 31, 2000
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................................. $ 3,999 $ 6,828
Accounts receivable, net of allowance of $238 in 2001 and $213 in 2000 2,351 2,262
Inventory .............................................................. 4,552 5,337
Deferred income tax assets ............................................. 56 56
Note receivable ........................................................ -- 515
Certificates of deposit, restricted as to use .......................... 101 750
Prepaid expenses and other current assets .............................. 532 1,663
-------- --------
11,591 17,411
PROPERTY, PLANT AND EQUIPMENT, net of
Accumulated depreciation of $16,591 in 2001 and $13,633 in 2000 ........ 18,484 19,117
GOODWILL, INTANGIBLES, AND OTHER ASSETS:
Goodwill ............................................................... -- 24,892
Subscriber bases ....................................................... -- 28,421
FCC licenses ........................................................... -- 22,036
Non-compete agreements ................................................. -- 705
Debt issue costs ....................................................... 4,100 4,100
Other .................................................................. -- 304
Accumulated amortization ............................................... (2,730) (39,293)
-------- --------
1,370 41,165
-------- --------
$ 31,445 $ 77,693
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses .................................. $ 3,029 $ 4,796
Current portion of long-term debt ...................................... 12,196 6,608
Long-term debt classified as current ................................... 66,935 --
Current portion of unearned sale/leaseback profit ...................... 418 418
Deferred revenue ....................................................... 1,312 1,593
-------- --------
83,890 13,415
LONG-TERM LIABILITIES:
Long term debt, net of current portion ................................. -- 71,927
Unearned sale/leaseback profit, net of current portion ................. 2,327 2,747
-------- --------
2,327 74,674
COMMITMENTS AND CONTINGENCIES ................................................... -- --
DEFERRED INCOME TAXES ........................................................... 1,042 1,042
SHAREHOLDERS' EQUITY (DEFICIT):
Series A cumulative convertible preferred stock, $.001 par value, 15,000
shares authorized, issued, and outstanding in 2001 and 2000 ......... -- --
Series B convertible preferred stock, $.001 par value, 411,457 shares
authorized, 86,025 and 87,286 shares issued and outstanding in 2001
and 2000, respectively .............................................. -- --
Common stock, $.001 par value, 25,000,000 shares authorized, 4,926,210
shares issued in 2001 and 4,298,192 issued and outstanding in
2000 ................................................................ 5 4
Treasury Stock, 49,400 shares .......................................... (62) --
Additional paid-in capital ............................................. 26,363 24,863
Accumulated deficit .................................................... (82,120) (36,305)
-------- --------
(55,814) (11,438)
-------- --------
$ 31,445 $ 77,693
======== ========
See Accompanying Notes to Financial Statements
F-3
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except shares and per share amounts)
Year ended May 31,
--------------------------------------------
2001 2000 1999
----------- ------------ ------------
Service, rent, and maintenance revenue .............. $ 42,929 $ 45,164 $ 42,792
Product sales revenue ............................... 13,366 11,427 8,346
----------- ----------- -----------
Total revenues .................................. 56,295 56,591 51,138
Net book value of products sold ..................... (13,405) (11,211) (8,000)
----------- ----------- -----------
42,890 45,380 43,138
Costs and expenses:
Operating ..................................... 15,881 14,636 13,370
Selling ....................................... 8,961 8,281 5,657
General and administrative .................... 7,710 7,636 8,878
Depreciation and amortization ................. 10,196 13,097 14,773
Impairment charges ............................ 36,589 -- --
----------- ----------- -----------
Total costs and expenses ............................ 79,337 43,650 42,678
----------- ----------- -----------
Operating income .................................... (36,447) 1,730 460
Gain (loss) on disposal of assets ................... (237) 155 23
Loss on investments ................................. (356) -- --
Interest expense, net................................ (8,775) (7,908) (7,823)
----------- ----------- -----------
Net loss............................................. (45,815) (6,023) (7,340)
Preferred stock dividends ........................... (4,302) (3,718) (3,325)
----------- ----------- -----------
Loss applicable to common stockholders .............. $ (50,117) $ (9,741) $ (10,665)
=========== =========== ===========
Loss per share - basic and diluted $ (10.65) $ (2.29) $ (2.52)
=========== =========== ===========
Weighted Average Shares Outstanding-Basic and Diluted 4,706,393 4,256,359 4,235,527
=========== =========== ===========
See Accompanying Notes to Financial Statements
F-4
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended May 31,
------------------------------------
2001 2000 1999
---------- --------- ---------
Operating Activities:
Net loss ......................................................... $(45,815) $ (6,023) $ (7,340)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization .................................... 10,196 13,097 14,773
Impairment charges ............................................... 36,589 -- --
Non-cash consulting expense ...................................... -- -- 55
Non cash interest expense ........................................ 3,600 3,123 3,032
Provision for inventory impairment ............................... 474 -- --
Provision for losses on accounts receivable ...................... 1,647 1,443 779
(Gain) loss on disposal of assets ................................ 237 (155) (23)
Amortization of unearned sale/leaseback profit.................... (420) (418) (405)
Loss on investments .............................................. 356 -- --
Changes in operating assets and liabilities:
Accounts receivable, net ..................................... (1,735) (1,738) (936)
Inventories .................................................. 1,555 735 417
Prepaid expenses and other assets ............................ 1,131 (857) (95)
Accounts payable and accrued expenses ........................ (1,766) 86 (54)
Deferred revenue ............................................. (397) 79 337
-------- -------- --------
Net cash provided by operating activities .............................. 5,652 9,372 10,540
Investing Activities:
Capital expenditures, including pagers ........................... (6,479) (7,836) (7,642)
Acquisitions, net of cash acquired ............................... (239) (547) --
Deferred costs associated with acquisitions ...................... 46 (170) (2)
Redemption of certificates of deposit ............................ 649 725 --
Purchase of certificates of deposit .............................. -- (750) (725)
--------- -------- --------
Net proceeds from sale of assets ................................. 132 254 49
--------- -------- --------
Net cash used for investing activities ................................. (5,891) (8,324) (8,320)
Financing Activities:
Debt incurred in connection with acquisitions..................... -- 208 --
Purchase of treasury stock ....................................... (62) -- --
Payments on long-term debt ....................................... (2,528) (262) (1,000)
Net proceeds from exercise of
common stock warrants ........................................ -- 47 --
--------- -------- --------
Net cash used for financing activities ................................. (2,590) (7) (1,000)
--------- -------- --------
Net increase (decrease) in cash and cash equivalents.................... (2,829) 1,041 1,220
Cash and cash equivalents at beginning of period ....................... 6,828 5,787 4,567
--------- -------- --------
Cash and cash equivalents at end of period ............................. $ 3,999 $ 6,828 $ 5,787
========= ======== ========
See Accompanying Notes to Financial Statements
F-5
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands Except Number of Shares)
Preferred Stock Additional
---------------
Series A Series B Common Stock Paid-In
-------- -------- ------------
Shares Amount Shares Amount Shares Amount Capital
------ ------ ------ ------ ------ ------ -------
Balance at May 31, 1998 ......... 15,000 $ -- 87,287 $ -- 4,235,611 $ 4 $ 24,761
Net loss .................... -- -- -- -- -- -- --
Other ....................... -- -- (1) -- (84) -- 55
------ ----- ------ ---- --------- ------- --------
Balance at May 31, 1999 ......... 15,000 $ -- 87,286 $ -- 4,235,527 $ 4 $ 24,816
Net loss .................... -- -- -- -- -- -- --
Exercise of warrants ........ -- -- -- -- 62,665 -- 47
------ ----- ------ ---- --------- ------- --------
Balance at May 31, 2000 ......... 15,000 $ -- 87,286 $ -- 4,298,192 $ 4 $ 24,863
Net loss .................... -- -- -- -- -- -- --
Acquisition of business ..... -- -- -- 600,000 1 1,500
Conversion of preferred stock -- -- 1,261 11,352 -- --
Exercise of warrants ........ -- -- -- -- 16,666 -- --
Purchase of Treasury Stock .. -- -- -- -- -- -- --
------ ----- ------ ---- --------- ------- --------
Balance at May 31, 2001 ......... 15,000 $ -- 86,025 $ -- 4,926,210 $ 5 $ 26,363
====== ===== ====== ==== ========= ======= ========
Accumulated
Treasury Stock Earnings
--------------
Shares Amount (Deficit)
------- ------ ---------
Balance at May 31, 1998 ......... -- $ -- $ (22,942)
Net loss .................... -- -- (7,340)
Other ....................... -- --
------ ------ ---------
Balance at May 31, 1999 ......... -- $ -- $ (30,282)
Net loss .................... -- -- (6,023)
Exercise of warrants ........ -- --
------ ------ ---------
Balance at May 31, 2000 ......... -- $ -- $ (36,305)
Net loss .................... -- -- (45,815)
Acquisition of business ..... -- -- --
Conversion of preferred stock -- -- --
Exercise of warrants ........ -- -- --
Purchase of Treasury Stock .. 49,400 (62) --
------ ------ ---------
Balance at May 31, 2001 ......... 49,400 $ (62) $ (82,120)
====== ====== =========
See Accompanying Notes to Financial Statements
F-6
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Organization: Teletouch operates in the wireless telecommunications
industry, providing paging and messaging, cellular, and two-way radio services
to a diversified customer base. The Company provides services in non-major
metropolitan areas and communities including Alabama, Arkansas, Louisiana,
Mississippi, Missouri, Oklahoma, Texas, Tennessee and Florida. The Company has
61 sales offices in those states. Through inter-carrier arrangements, Teletouch
also provides nationwide and expanded regional coverage. The Company had no
foreign operations.
Principles of Consolidation: The consolidated financial statements include
the accounts of Teletouch Communications, Inc. and its wholly-owned subsidiaries
(together, "Teletouch" or "the Company"). All significant intercompany accounts
and transactions have been eliminated in consolidation.
Use of Estimates: Preparing financial statements in conformity with
generally accepted accounting principles ("GAAP") requires management to make
estimates and assumptions. Those assumptions affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash Equivalents: Cash equivalents are recorded at cost, which approximates
market, and include investments in financial instruments with maturities of
three months or less at the time of purchase.
Inventories: Inventories are carried at the lower of cost or market using
the first-in, first-out method. The Company's inventories consist of pagers,
cellular telephones, prepaid cellular and long distance phone cards, two-way
radios, accessories, and spare parts held for sale.
Property, Plant and Equipment: Property, plant and equipment is recorded at
cost. Depreciation is computed using the straight-line method based on the
following estimated useful lives:
Pagers............................... 3 years
Paging infrastructure................ 5-15 years
Building and improvements............ 10-20 years
Other equipment...................... 5-10 years
Leasehold improvements............... Shorter of estimated useful
life or term of lease
Intangible Assets: 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 the intangible assets will not be recoverable, as
determined by the undiscounted cash flow method, the asset will be reduced to
its estimated recoverable value.
F-7
Impairment of Long-lived Assets: The carrying amount of long-lived assets
including goodwill is reviewed if facts and circumstances suggest that they may
be impaired. If the review indicates that long-lived assets will not be
recoverable, as determined by the undiscounted cash flow method, the asset will
be reduced to its estimated recoverable value through a charge to operations.
As discussed in footnotes B and F, the Company's Credit Agreement requires,
among other things, the maintenance of certain financial and operating covenants
and prohibits any payments on the Junior Subordinated Notes and the payment of
dividends. These covenants were amended as of the end of each of the first three
quarters of the fiscal year, which enabled the Company to meet its financial
covenant and principal repayment terms. As of May 31, 2001, the Company has been
unable to negotiate new terms under the Credit Agreement which would enable the
Company to remain in compliance therewith and thereunder as of May 31, 2001, and
for subsequent periods. The resulting inability to comply with the terms of the
Credit Agreement resulted in the occurrence of an Event of Default under the
Credit Agreement which permits the lender to declare the borrowings to be due
and payable. The Company has not been successful in its efforts to recapitalize
the Company. During the fourth quarter, because of the continued default under
the Credit Agreement, the continued decline in cash flow and the on-going
financial and operating difficulties faced by companies in the wireless
telecommunications services industry, the Company determined that the remaining
net book value of its long-lived assets were substantially impaired and the
recovery of such amounts through future operations or disposition was unlikely.
Accordingly, management estimated the future undiscounted cash flows and
determined the goodwill and FCC licenses were significantly impaired and
therefore recorded a charge equal to remaining net book value of these assets of
$ 36.6 million.
Revenue Recognition: Revenue is recognized as services are provided or the
product is delivered to customers. Billings for services in advance are deferred
and recognized as revenue as services are provided. During the fourth quarter of
fiscal 2001, the Company adopted Staff Accounting Bulletin (SAB) Number 101,
"Revenue Recognition in Financial Statements". The adoption did not have a
material impact on the Company's results of operations.
Advertising Costs: All costs related to advertising activities begun during
the fiscal year are expensed when incurred. Advertising costs were $2.0 million,
$1.8 million, and $1.2 million in fiscal 2001, 2000, and 1999, respectively.
Loss Per Share: Loss per share is computed using the weighted-average
number of common shares outstanding during the period. Potentially dilutive
securities have not been considered in the computation because the effect would
be antidilutive.
Sources of System Equipment and Inventory: Teletouch does not manufacture
its paging network equipment, including but not limited to antennas,
transmitters, and paging terminals, nor does it manufacture any of the pagers,
cellular telephones, or two-way radios it sells or leases. This equipment is
available for purchase from multiple sources, and the Company anticipates that
such equipment will continue to be available in the foreseeable future,
consistent with normal manufacturing and delivery lead times. Because of the
high degree of compatibility among different models of transmitters, computers
and other paging and voice mail equipment manufactured by its suppliers,
Teletouch's paging network is not dependent upon any single source of such
equipment. The Company currently purchases pagers and transmitters from several
competing sources. Until this year, the Company purchased its paging terminals
from Glenayre, a leading manufacturer of mobile communications equipment. During
the year, Glenayre announced that they will discontinue manufacturing paging
terminals but would continue to provide technical support for the foreseeable
future. Teletouch does not anticipate that the decision by Glenayre will impact
its operations as such terminal equipment is readily available in the used
market. Cellular telephones and two-way radios are available from several
sources.
Concentration of Credit Risk: Teletouch provides paging and other wireless
telecommunications services to a diversified customer base of businesses and
individual consumers, primarily in non-metropolitan areas and communities in the
southeast United States. As a result, no significant concentration of credit
risk exists. The Company performs periodic
F-8
credit evaluations of its customers to determine individual customer credit
risks and promptly terminates services for nonpayment. Credit losses have been
within management's expectations.
Financial Instruments: With the exception of its Junior Subordinated Notes,
management believes that the carrying value of its financial instruments
approximates fair value. It is not practicable to estimate the fair value of the
Junior Subordinated Notes given their unique characteristics and the complexity
involved in estimating their fair value.
Reclassification: Certain reclassifications have been made in the fiscal
2000 and 1999 financial statements to conform to the fiscal year 2001
presentation.
New Accounting Pronouncements: 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 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.
NOTE B - BASIS OF PRESENTATION
The consolidated financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As discussed in footnote F, the
Company's Credit Agreement requires, among other things, the maintenance of
certain financial and operating covenants and prohibits any payments on the
Junior Subordinated Notes and the payment of dividends. These covenants were
amended by the lenders and the Company as of the end of each of the first three
quarters of the fiscal year, which allowed the Company to meet its financial
covenant and principal repayment terms. However, as of May 31, 2001, the Company
has been unable to amend or negotiate new terms under the Credit Agreement,
which would enable the Company to remain in compliance therewith and thereunder
as of May 31, 2001, and for subsequent periods. The resulting inability to
comply with the terms of the Credit Agreement resulted in the occurrence of an
Event of Default under the Credit Agreement which permits the lender to
terminate the commitment and to declare the borrowings totaling $57.3 million to
be due and payable. Also, 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 not be in compliance with
the terms of the Junior Subordinated Note Agreement resulting in an additional
$22.3 million becoming due and payable. While the Company continues to have
discussions with the lenders, no assurances can be given that the Company will
be able to successfully negotiate satisfactory terms. The default under the
Credit Agreement and Junior Subordinated Notes, the continued decline in cash
flow from operations, and the on-going operating difficulties faced by companies
in the wireless telecommunications services industry indicate that the Company
may be unable to continue as a going concern.
At May 31, 2001, the Company had 4,876,810 shares of common stock
outstanding. On an "if-converted" basis, the Company would have approximately
54.1 million shares of common stock outstanding assuming the conversion and
exercise of all outstanding Series A Preferred Stock, including dividends in
arrears payable in kind, Series B Preferred Stock, Common Stock Purchase
Warrants, and all other warrants and options to purchase common stock.
The Company is pursuing a recapitalization of its debt and certain equity
securities. Although the Company's management believes it will successfully
recapitalize the Company in a timely fashion, there can be no assurance that
F-9
payment under the Credit Agreement and Junior Subordinated Notes will not be
declared due and payable which would likely result in the Company's inability to
meet the repayment obligations, causing the Company to seek protection from
creditors.
If the Company is able to obtain the required financing to avoid seeking
protection from creditors, future operating results depend on successful
implementation of our strategy to develop customer retention programs and expand
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 or
provide sufficient revenue for us to continue to meet our operating and
financial obligations.
NOTE C - ACQUISITIONS
On September 1, 2000, Teletouch acquired 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 $0.2 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 licenses, $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 not material to the consolidated operations, are included
with that of the Company from the date of closing.
On March 31, 2000, Teletouch acquired substantially all the assets of
EASTEX Communications, Inc. for consideration of approximately $485,000. An
initial payment of approximately $277,000 was paid in cash, and the remaining
consideration will be paid in equal monthly installments over the next two
years. The acquisition was accounted for using the purchase method of
accounting, and the total purchase price was allocated as follows: $40,000 to
property, plant, and equipment; $20,000 to inventory; $181,000 to FCC licenses;
$151,000 to subscriber bases; $5,000 to a non-compete agreement; and the
remaining amount to goodwill. The results of operations of the acquisition,
which are not material to consolidated operations, are included with that of the
Company from the date of closing.
NOTE D - CERTIFICATES OF DEPOSIT
As of May 31, 2001 and 2000, Teletouch had deposited $101,000 and $725,000
into one-year certificates of deposits with banks to support letters of credit
issued to cellular service and paging equipment providers.
F-10
NOTE E - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
2001 2000
----- ----
Land............................................... $ -- $ 46
Leased pagers...................................... 5,900 6,949
Paging infrastructure.............................. 19,757 18,293
Buildings and improvements......................... 2,185 1,631
Other equipment.................................... 7,233 5,831
--------- ---------
35,075 32,750
Accumulated depreciation........................... (16,591) (13,633)
--------- ---------
$ 18,484 $ 19,117
========= =========
Depreciation expense was $6.8 million, $6.4 million and $7.1 million in
fiscal 2001, 2000, and 1999, respectively.
NOTE F - LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
2001 2000
---- ----
Notes payable.................................. $ 57,322 $59,750
Junior subordinated notes...................... 21,713 18,589
Other.......................................... 96 196
--------- ---------
79,131 78,535
Less current portion........................... 12,196 --
Less long-term debt classified as current...... 66,935 6,608
--------- ---------
$ -- $71,927
========= =========
Notes Payable: The Company's Credit Agreement provides for loans in an
amount not to exceed $70 million. As of May 31, 2001, $57.3 million of the
Credit Agreement was funded. 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 either the prime rate plus 1% to 2% or at 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 through November 2005. For fiscal
2001, the weighted-average interest rate on the Credit Agreement was 8.8%.
The Credit Agreement also requires the maintenance of certain financial and
operating covenants (see Note B), and prohibits any payments on the Junior
Subordinated Notes and the payment of dividends. These covenants were amended as
of the end of each of the first three quarters of the fiscal year, which allowed
the Company to meet its financial covenant and principal repayment terms. As of
May 31, 2001, the Company has been unable to negotiate new terms under the
Credit Agreement, which would allow the Company to remain in compliance with its
terms as of May 31, 2001, and for subsequent periods. Failure to comply with the
terms of the agreement results in an Event of Default under the Credit Agreement
which in turn allows the lender to terminate the commitment and to declare the
borrowings totaling $57.3 million to be due and payable. The Company is in
default of its payment obligations under the Credit Agreement as well as under
various financial covenants. The Lenders have refused to waive the Events of
Default, and are in the process of assessing their alternatives. In any event,
no additional borrowings will be available to the Company under the Credit
Agreement.
F-11
Junior Subordinated Notes: In August 1995, in connection with the
acquisition of Dial-A-Page, Inc., Teletouch borrowed $10 million from
Continental Illinois Venture Corporation ("CIVC") and certain other parties both
related and unrelated to CIVC (together with CIVC, the "CIVC Investors") in
exchange for which Teletouch issued 14% Junior Subordinated Notes to the CIVC
Investors. The Subordinated Notes are ("the Subordinated Notes") due in August
2003. The Subordinated Notes were initially recorded, for financial reporting
purposes, at approximately $8 million. The effective interest rate on the
Subordinated Notes during fiscal 2001 was 16.0%. Included in the Subordinated
Note balance was accrued interest of $12.3 million and $9.4 million at May 31,
2001 and May 31, 2000, respectively. See Note I below.
The terms of the Subordinated Notes require the maintenance of certain
financial and operating covenants and restrict future acquisitions. Pursuant to
the Junior Subordinated Note Agreement, if the lender declared the Company not
in compliance with the terms of the Credit Agreement, then the Company would not
be in compliance with the terms of the Junior Subordinated Note Agreement. The
resulting inability to comply with the terms of the Junior Subordinated Note
Agreement would cause an additional $22.3 million to become due and payable;
therefore, Teletouch has classified the amount outstanding under the
Subordinated Notes as a current liability as of May 31, 2001.
The Company is pursuing a recapitalization of its debt and certain equity
securities. Although the Company's management believes it will successfully
recapitalize the Company in a timely fashion, there can be no assurance that
payment under the Credit Agreement and Junior Subordinated Notes will not be
declared due and payable which would likely result in the Company's inability to
meet the repayment obligations, causing the Company to seek protection from
creditors (see Note B).
Maturities: Scheduled maturities of debt outstanding at May 31, 2001 are as
follows(see Note B): 2002 - $12.2 million; 2003 - $9.5 million; 2004 - $27.3
million; 2005 - $3.5 million; 2006 - $27.5 million.
Interest: Cash paid for interest during 2001, 2000, and 1999 was
approximately $5.4 million, $4.7 million, and $5.3 million, respectively.
NOTE G - INCOME TAXES
Teletouch uses the liability method to account for income taxes. Under this
method, deferred income tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates that are expected to be
in effect when the differences reverse.
The Company made no cash payments for federal income taxes in fiscal 2001,
2000 and 1999. Teletouch currently has a net operating loss carry forward of
approximately $29.5 million that is available to reduce future taxable income
and will expire beginning in fiscal 2012.
The Company's carry forwards expire at specific future dates and
utilization of certain carry forwards 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 carry forward 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 carry
forwards will be recorded in future statements of operations as a reduction of
the Company's income tax expense.
F-12
Significant components of Teletouch's deferred income tax liabilities and
assets as of May 31, 2001 and 2000 follow (in thousands):
2001 2000
---- ----
Deferred income tax liabilities:
Depreciation methods................................... $ 2,192 $ 2,119
Other.................................................. 100 100
--------- --------
Total deferred income tax liabilities..................... $ 2,292 $ 2,219
Deferred income tax assets:
Intangible assets...................................... 11,396 2,401
Allowance for doubtful accounts........................ 88 55
Unrecognized gain...................................... 933 1,089
Alternative minimum tax credit carry forward........... 85 85
Net operating loss carry forward....................... 10,030 6,591
Valuation allowance.................................... (21,226) (8,988)
--------- -------
Total deferred income tax assets.......................... 1,306 1,233
--------- --------
Net deferred income tax liability......................... $ 986 $ 986
========= ========
A reconciliation from the federal statutory income tax rate to the effective
income tax rate for the fiscal years 2001, 2000, and 1999 follows:
2000 1999 1998
---- ---- ----
Statutory income tax rate (benefit).......................... (34.0)% (34.0)% (34.0)%
Change in valuation allowance................................ 26.9% 30.7% 30.9%
Expenses not deductible for tax purposes, primarily
Amortization of intangible assets......................... 7.2% 3.3% 2.7%
Other........................................................ (0.1)% -- 0.4%
------ ------- ------
Effective income tax rate.................................... -- -- --
====== ======= ======
NOTE H - COMMITMENTS AND CONTINGENCIES
Teletouch leases buildings, transmission towers, and equipment under
non-cancelable operating leases. These leases contain various renewal terms and
restrictions as to use of the property, and some leases have built-in escalation
clauses. Rent expense (in thousands) was $3,855, $3,234, and $2,850 in fiscal
2001, 2000, and 1999, respectively. Future minimum rental commitments under
non-cancelable leases are as follows (in thousands):
2002........................... $ 3,046
2003........................... 2,363
2004........................... 1,789
2005........................... 1,208
2006........................... 796
2007 and thereafter............ 1,659
-------
$10,861
=======
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 will result in a material adverse effect
on its results of operations or financial condition.
NOTE I - SHAREHOLDERS' EQUITY
F-13
Capital Structure: Teletouch's authorized capital structure allows for the
issuance of 25,000,000 shares of common stock with a $0.001 par value and
5,000,000 shares of preferred stock with a $0.001 par value.
In connection with its initial public offering, Teletouch issued to certain
consultants the Consultant Warrants to purchase 266,666 shares of common stock
at an exercise price of $0.75 per share. The Consultant Warrants, unless
exercised, expire in January 2004.
In connection with the acquisition of Dial-A-Page, Inc. (see Note G),
Teletouch designated 15,000 shares of authorized preferred stock as "Series A
14% Cumulative Preferred Stock" (the "Series A Preferred Stock") and 411,457
shares as "Series B Preferred Stock". The CIVC Investors purchased the 15,000
shares, with an initial liquidation value of $15 million ($33.5 million at May
31, 2001), of the Series A Preferred Stock as well as the Subordinated Notes
(see Note F). Dividends on the Series A Preferred Stock accrue at the rate of
14% per annum and compound on a quarterly basis. Each share of Series A
Preferred Stock, as well as dividends in arrears, are convertible after August
3, 2003 into common stock, at the option of the Series A Preferred Shareholder,
based on a stated formula. As of May 31, 2001, the conversion of Series A
Preferred Stock would result in an estimated issuance of 2.9 million shares of
common stock (6.4 million shares of common stock if dividends in arrears are
paid "in kind") using the conversion price stated in the agreement. However, the
agreement states that the conversion price will in no event be more than the
market price of the Company's common stock. Based on the closing market price of
the Company's stock on May 31, 2001, the conversion of Series A Preferred Stock
would result in an estimated issuance of 18.8 million shares of common stock
(41.8 million shares of common stock if dividends in arrears are paid "in
kind").
The CIVC Investors also received warrants, exercisable at a nominal price,
to purchase 3,377,301 shares of Teletouch common stock (the "Common Stock
Purchase Warrants") and 411,457 shares of Series B Preferred Stock (the "Series
B Preferred Stock Purchase Warrants"). Each share of Series B Preferred Stock is
convertible into nine shares of Common Stock. CIVC has the right to require that
its securities be registered for public sale two years after the conversion into
common stock.
As of May 31, 2001, holders have exercised an aggregate of 716,461 Common
Stock Purchase Warrants and 87,286 Series B Preferred Stock Purchase Warrants.
The Series 662,662 $0.87 - $6.00 $1.98 A Preferred Stock and the Series B
Preferred Stock are non-voting except as to the merger or consolidation with
another entity or entities, or the sale of substantially all of the assets of
the Company.
As discussed in Note F, the Credit Agreement prohibits the payment of
dividends on the Series A Preferred Stock. At May 31, 2001, approximately $18.5
million of dividends ($1,231.00 per share) were in arrears (or 3.5 million
shares of common stock if paid "in kind" using the conversion price stated in
the agreement and 23.1 million shares of common stock if paid "in kind" using
the closing market price of the Company's common stock on May 31, 2001, as
previously discussed). Dividends earned per share in fiscal years 2001, 2000,
and 1999 were $286.81, $247.92 and $221.66, respectively.
Common stock reserved: The following represents the shares of common stock
to be issued on an "if-converted" basis at May 31, 2001, (in thousands):
Conversion of Series A Preferred Stock 41,831
Common Stock Purchase Warrants 2,661
Conversion of Series B Preferred Stock 3,692
Consultant Warrants 200
1994 Stock Option and Stock Appreciation Rights Plan 1,000
Other options 117
------
49,501
======
*using the conversion price as of May 31, 2001 and including dividends payable
in common stock
F-14
NOTE J - STOCK OPTIONS
Teletouch's 1994 Stock Option and Stock Appreciation Rights Plan (the "1994
Plan") was adopted in July 1994 and provides for the granting of incentive and
non-incentive stock options and stock appreciation rights to officers,
directors, employees and consultants to purchase not more than an aggregate of
1,000,000 shares of Common Stock. The Compensation Committee of the Board of
Directors administers the Plan and has authority to determine the optionees to
whom awards will be made, the terms of vesting and forfeiture, the amount of the
awards, and other terms. Under the terms of the Plan, the option price approved
by the Board of Directors shall not be less than the fair market value of the
common stock at date of grant. Exercise prices in the following table have been
adjusted to give effect to the repricing that took effect in December 1999
(discussed below).
Weighted
Stock option activity has been as follows: Average
Number of Exercise Price Exercise Price
Shares Per Share Per Share
--------- -------------- --------------
Options outstanding at May 31, 1998.............................. 662,662 $0.87 - $6.00 $1.98
Options granted to officers and management................... 50,000 $0.87 $0.87
Options granted to directors................................. 3,996 $0.87 $0.87
Options forfeited............................................ (16,666) $2.44 $2.44
-------- -------------- --------------
Options outstanding at May 31, 1999.............................. 663,992 $0.87 - $6.00 $1.88
-------- -------------- --------------
Options granted to officers and management................... 105,000 $0.69 - $1.88 $1.22
Options granted to directors................................. 2,664 $0.81 $0.81
Options forfeited............................................ (156,664) $3.56 - $6.00 $4.42
-------- -------------- --------------
Options outstanding at May 31, 2000.............................. 614,992 $0.69 - $3.38 $1.12
-------- -------------- --------------
Options granted to officers and management................... 167,667 $2.26 $2.26
Options forfeited............................................ (65,000) $0.69 - $1.88 $1.43
-------- -------------- --------------
Options outstanding at May 31, 2001.............................. 717,659 $0.69 - $3.38 $1.36
-------- -------------- --------------
Exercisable at May 31, 2001...................................... 443,392 $1.37
-------- --------------
Exercisable at May 31, 2000...................................... 277,677 $1.30
-------- --------------
Exercisable at May 31, 1999...................................... 298,978 $2.73
-------- --------------
Weighted-average fair value of options
granted during 2001.................................... $ 1.51
------
Weighted-average fair value of options
granted during 2000.................................... $ 0.62
------
Weighted-average fair value of options
granted during 1999.................................... $ 1.81
------
Weighted-average remaining
contractual life....................................... 7.0 years
Pro forma information regarding net loss and loss per share is required
by SFAS 123, and has been determined as if Teletouch had accounted for its stock
options under the fair value method of that statement. The fair value for these
options was estimated at the date of grant using a binomial option pricing model
with the following weighted-average assumptions for 2001, 2000, and 1999,
respectively: risk-free interest rates of 5.50%, 6.50%, and 5.75%;
F-15
dividend yields of 0% for all years; volatility factors of the expected market
price of the Company's common stock of 1.33 in 2001, .70 in 2000, and .63 in
1999, and a weighted-average expected life of the option of 2 to 5 years.
Binomial option valuation models are used in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective
assumptions, including the expected stock price volatility. Because Teletouch's
stock options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense on a straight-line basis over the options'
vesting period. The pro forma effects on net income for fiscal 2001, 2000, and
1999 are not representative of the pro forma effect on net income in future
years because they do not take into consideration pro forma compensation expense
related to grants made prior to 1995. The Company's pro forma information
follows (in thousands, except per share information):
2001 2000 1999
-------- -------- --------
Pro forma net loss applicable to common stockholders $(50,293) $(9,895) $(10,798)
Pro forma loss per share $ (10.69) $ (2.32) $ (2.55)
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. Compensation expense associated with
these repriced options will be measured and recognized in accordance with the
recently issued Financial Accounting Standards Board Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation". No
compensation expense was recorded for these options during fiscal years 2001 and
2000.
Under the terms of a contractual agreement, Teletouch granted options
to acquire 50,000 shares of common stock, exercisable at a price of $9.00, to a
company that provided investor and public relations services. In addition,
options to acquire 66,666 shares of common stock, exercisable at a price of
$7.56, were granted to an officer of that company.
NOTE K - RETIREMENT PLAN
Effective October 1995, Teletouch began sponsoring a defined
contribution retirement plan covering substantially all of its employees.
Employees who are at least 21 years of age are eligible to participate. Eligible
employees may contribute up to a maximum of 16% of their earnings. The Company
pays the administrative fees of the plan and began matching 75% of the first 6%
of employees' contributions in October 1998. Contributions of approximately
$265,000, $220,000 and $120,000 were made in fiscal years 2001, 2000, and 1999,
respectively.
NOTE L - 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 restricted
common stock of the supplier and software. There was no gain or loss associated
with this transaction. Due to the decline in the market value of the common
stock, which was considered other than temporary, and the impairment of the
software, during the fourth quarter of fiscal 2001, the Company recorded a
charge of approximately $468,000 to write off the common stock and the remaining
net book value of the software.
F-16
NOTE M - SELECTED QUARTERLY FINANCIAL DATA
Summarized quarterly financial data for the years ended May 31, 2001
and 2000 are set forth below (in thousands except per share amounts):
Three Months Ended
---------------------------------------------------
Fiscal 2001 August 31, November 30, February 28, May 31,
-----------
2000 2000 2001 2001
----------- ------------ ------------ ----------
Service, rent, and maintenance revenue $ 11,223 $ 11,205 $ 10,636 $ 9,865
Product sales revenue 2,994 3,070 4,037 3,265
-------- -------- -------- --------
Total Revenues 14,217 14,275 14,673 13,130
Net book value of products sold (2,877) (3,509) (3,707) (3,313)
-------- -------- -------- --------
11,340 10,766 10,966 9,817
Operating income (loss) (1) 186 625 (318) (36,940)
Net loss (1) (2,031) (1,604) (2,568) (39,612)
Loss per share - basic and diluted (1) (0.71) (0.56) (0.74) (8.11)
Three Months Ended
---------------------------------------------------
Fiscal 2000 August 31, November 30, February 28, May 31,
-----------
1999 1999 2000 2000
----------- ------------ ------------ ----------
Service, rent, and maintenance revenue $ 11,123 $ 11,156 $ 11,383 $ 11,502
Product sales revenue 2,307 2,579 3,011 3,530
-------- -------- -------- --------
Total Revenues 13,430 13,735 14,394 15,032
Net book value of products sold (2,121) (2,497) (2,893) (3,700)
-------- -------- -------- --------
11,309 11,238 11,501 11,332
Operating income (loss) 358 2 771 599
Net loss (1,333) (2,117) (1,295) (1,278)
Loss per share - basic and diluted (0.53) (0.72) (0.53) (0.52)
(1) Includes the impairment charges recorded in the three month period ended May
31, 2001. See Note B.
F-17
SCHEDULE II
TELETOUCH COMMUNICATIONS, INC.
Valuation and Qualifying Accounts and Reserves
(in thousands)
Year Ended
Allowance for Doubtful Accounts May 31, May 31, May 31,
1999 2000 2001
Balance at beginning of year $ 167 $ 167 $ 213
Additions charged to income 779 1393 1,647
Balances written off, net of recoveries (779) (1,347) (1,622)
------- --------- -------
Balance at end of year $ 167 $ 213 $ 238
======= ========= =======
F-18
SIGNATURES
In accordance with Section 13 or 15(d) 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, on August 29, 2001.
TELETOUCH COMMUNICATIONS, INC.
By: /s/ Robert M. McMurrey
-------------------------------
Robert M. McMurrey
Chairman
In accordance with the Securities Exchange Act of 1934, this report has
been signed by the following persons on behalf of the Registrant, in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Robert M. McMurrey Chairman, August 29, 2001
- -----------------------------------
Robert M. McMurrey Chief Executive Officer
/s/ J. Kernan Crotty President, August 29, 2001
- -----------------------------------
J. Kernan Crotty Chief Financial Officer
Director August 29, 2001
- -----------------------------------
Charles C. Green III
/s/ Clifford E. McFarland Director August 29, 2001
- -----------------------------------
Clifford E. McFarland