Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-K
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FISCAL YEAR ENDED: MAY 31, 1998
------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File No. 0-24992
---------------------------
TELETOUCH COMMUNICATIONS, INC.
(Name of issuer in its charter)
DELAWARE 75-2556090
(State or other jurisdiction (I.R.S. 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)
----------------------------------
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock, $0.001 par value; Class A Common Stock Purchase Warrants.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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 August 25, 1998, the aggregate market value of the voting stock held by
non-affiliates of the Registrant, based on the average of the closing bid and
asked prices on that date, was approximately $5,781,375.
As of August 21, 1998, the Registrant had outstanding 4,235,611 shares of Common
Stock, 15,000 shares of Series A Preferred Stock, and 87,287 shares of Series B
Preferred Stock.
Portions of the Registrant's Definitive Proxy Statement for the 1998 Annual
Meeting of Shareholders of the Registrant to be held on November 11, 1998, are
incorporated by reference into Part III.
INDEX TO FORM 10-K
OF
TELETOUCH COMMUNICATIONS, INC.
PAGE NO.
--------
PART I
Item 1. Business 1
Item 2. Description of Property 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for Common Equity and Related Shareholders Matters 8
Item 6. Management's Discussion and Analysis 9
Item 7. Selected Financial Data 14
Item 8. Financial Statements 15
Item 9. Changes In and Disagreements with Accountants On
Accounting and Financial Disclosure 15
PART III
Item 10. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act 16
Item 11. Executive Compensation 16
Item 12. Security Ownership of Certain Beneficial Owners
and Management 16
Item 13. Certain Relationships and Related Transactions 16
PART IV
Item 14. Exhibits and Reports on Form 8-K 16
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. (the "Company" or "Teletouch") was formed in
July 1994 and is headquartered in Tyler, Texas. Teletouch, or one of its
several predecessors, has operated paging, two-way mobile communications
services and telemessaging services in East Texas for over 30 years. Unless
otherwise indicated, references herein to the Company or Teletouch include
Teletouch-Texas and the Company's various predecessors.
The Company provides paging 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 42 sales offices in 9 states. Through intercarrier arrangements, the
Company provides additional nationwide and regional coverage.
The Company has experienced significant growth both internally and through
acquisitions. At May 31, 1998 the Company had approximately 349,700 pagers in
service as compared to approximately 321,100 and 195,500 at May 31, 1997 and
1996, respectively. For fiscal year 1998 the Company had total revenues of $45.2
million as compared to $41.4 million and $31.7 million in fiscal years 1997 and
1996, respectively.
The Company's strategy is to continue to expand within its existing
marketplaces as well as by acquiring additional regional paging companies that
serve adjacent markets, generally consisting of smaller metropolitan and non-
metropolitan markets. The Company also considers acquisitions of other paging
companies that also cover larger metropolitan markets provided that they service
markets that are strategically located near its existing markets. The Company
believes that the smaller metropolitan and non-metropolitan markets have been
relatively ignored by the larger companies in the paging industry and therefore
provide for greater growth potential for paging and related services. By
combining its business with other similar companies, the Company believes it can
achieve improved operating results of the combined businesses by consolidating
administrative functions, taking advantage of economies of scale and, sharing
common frequencies to offer customers paging coverage over a wider area on the
Company's own system. By reducing overhead costs, expanding sales, and focusing
on secondary markets, the Company believes that it can improve its pager service
operating margins while achieving continued pager unit and revenue growth.
1
ACQUISITIONS
In August, 1995 the Company purchased substantially all of the non-cash assets
and assumed selected liabilities of Dial-A-Page, Inc. ("Dial") for a purchase
price of approximately $49.4 million (the "Dial Acquisition"). The acquisition
has been financed with the proceeds from the Company's private placement of $25
million of debt and equity securities and the proceeds from additional senior
debt. The Dial acquisition added approximately 89,000 subscribers to the
Company's subscriber base. For further discussion of this acquisition, see
"Management's Discussion and Analysis - Acquisitions and Disposals".
During the first nine months of fiscal 1997, the Company completed the
acquisition of all the stock of Russell's Communication, Inc., d.b.a. laPageco
("laPageco") and AACS Communications, Inc. ("AACS") for cash consideration of
approximately $2.3 million and $1.9 million, respectively. In addition, the
Company acquired substantially all the assets of Warren Communications, Inc.
("Warren") for cash consideration of approximately $5.1 million, Dave Fant
Company, d.b.a. Oklahoma Radio Systems ("ORS") for cash consideration of
approximately $2.1 million and Cimarron Towers Inc. ("Cimarron") for cash
consideration of approximately $0.4 million. Additional consideration for
Cimarron was calculated at $1.4 million based on actual performance for the
four-month period from September 1996 through December 1996. This additional
consideration was payable over a six month period which began March 1997. The
consideration paid for these acquisitions was obtained from available capacity
under the Company's existing credit facility. Collectively, the acquisitions
made during the first nine months of fiscal year 1997 are referred to as "the
Fiscal Year 1997 Acquisitions".
On December 31, 1997, the Company concluded its purchase of certain FCC
licenses from GTE for consideration of $0.9 million. An initial payment of $0.1
million was made in fiscal year 1997.
INDUSTRY BACKGROUND
The paging industry has been in existence since 1949 when the Federal
Communications Commission ("FCC") allocated a group of radio frequencies for use
in providing one-way and two-way mobile communications services. Throughout its
history, the paging industry has been characterized by consolidation,
substantial growth and technological change. Historically, the paging industry
has been highly fragmented, with a large number of small, local operators. The
industry grew slowly as the quality and reliability of equipment gradually
improved and consumers began to perceive the benefits of mobile communications.
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. Further
improvements in equipment reliability and cost-effective technological
innovations helped to accelerate the use of paging services in the 1970s.
Some of the most significant developments in the industry occurred in the
1980s. The digital display pager was introduced, which quickly supplanted tone
and voice pagers as the most popular paging product. In 1982 the FCC allocated
additional frequencies, which expanded the capacity of the industry and allowed
new market entrants in markets where additional frequencies were previously
unavailable.
Although the growth rate of the paging industry is difficult to determine
precisely, management estimates that the number of pagers in service has grown
since 1990 at an annual rate of nearly 20% and will continue to grow at an
annual rate of approximately 15% for the next five years. Sources estimate that
at the end of 1996 there were approximately 42 million pagers in service in the
United States and that there will be at least 50 million units in service by the
year 2000. Factors generally considered contributing to this expected growth
include: (i) increased mobility of the general population; (ii) a continued
movement towards a service based economy; (iii) general increase in awareness of
the benefits of mobile communications; (iv) the relatively high costs of other
mobile communications services such as cellular telephone service; and (v)
technological advances in paging equipment and services.
2
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 such as several contiguous states in one geographic
region of the United States but can offer subscribers service outside of the
subscriber's home region through a national network of interconnections between
the subscriber's own provider, a national firm and other regional providers; and
(iii) small, single market operators.
PAGING OPERATIONS
Paging provides a one-way communications link to a paging service subscriber
within the paging service 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 a telephone call for a subscriber is
received at the Company's computerized paging control terminals, a radio signal
is transmitted to the subscriber's pager which then causes the pager to emit a
voice signal, a tone or a vibration to alert the subscriber. Depending upon the
type of pager in use, the paging subscriber may respond directly to the message
from information displayed on the pager or by calling his or her home, office or
voice mail system to receive the message. The advantage of paging over a
conventional telephone service is that the pager's reception is not restricted
to a single location, and its advantage over a cellular telephone is that a
pager is smaller, has a longer battery life and, most importantly, is
substantially less expensive to use. Some cellular subscribers use a pager in
conjunction with their cellular telephone to screen incoming calls and to lower
the expense of their cellular telephone service.
The Company currently provides four basic types of paging services: tone-
only, numeric digital display, alphanumeric display (all of which can be used in
conjunction with the Company's voice mail services) and tone-plus-voice. In
each case, the subscriber carries a pocket-sized radio receiver, i.e., a pager,
that is preset to monitor a designated radio frequency. A subscriber's pager is
activated by radio signals emitted by the transmitters. In the case of a
numerical digital display pager, a caller transmits a message that may consist
of an area code and telephone number or other numerical information consisting
of up to 12 digits. Alphanumeric display service allows subscribers to receive
and store messages consisting of both numbers and letters. With tone-only
service, the subscriber's receiver, when activated, produces an audible "beep"
sound or vibration and with tone-plus-voice service, the pager emits a beeping
sound plus a brief voice message.
Digital display paging service, which was introduced around 1980, has in
recent years grown at a faster rate than tone-only or tone-plus-voice service.
Today the vast majority of the pagers in service are numeric display.
Alphanumeric display pagers, which were introduced in the mid-1980s, constitute
a small but increasing portion of the Company's subscriber base.
The Company offers paging subscribers voice mail messaging services. When a
subscriber uses voice mail in conjunction with paging service and a recorded
message is left by a caller, the paging subscriber is automatically notified
through a page alert. Voice mail employs a sophisticated computer technology
that enables the customer to receive digitally recorded voice messages 24 hours
a day wherever he or she is by accessing the voice mail system via any 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.
The paging industry has traditionally distributed its services through direct
marketing and sales activities. In recent years, additional channels of
distribution have 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. While most paging subscribers
traditionally have been business users, industry observers believe that pager
use among consumers has increased significantly in recent years. In addition,
paging subscribers have increasingly chosen to purchase rather
3
than lease their pagers. The Company expects that these trends will continue.
SOURCES OF SYSTEM EQUIPMENT AND PAGERS
The Company does not manufacture any of the pagers or related transmitting and
computerized paging terminal equipment used in the Company's paging operations.
The equipment used in the Company's paging operations, including pagers, is
available for purchase from multiple sources, and the Company anticipates that
pagers and paging equipment will continue to be available to the Company 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 suppliers, the Company's paging networks are not dependent upon any single
source of such equipment. The Company continually evaluates new developments in
technology in connection with the design and enhancement of its paging and voice
mail systems and selection of products to be offered to subscribers. The
Company currently purchases the majority of its pagers from Motorola, its
transmitters from two competing sources, and its paging terminals from Glenayre,
a manufacturer of mobile communications equipment.
THE COMPANY'S PRODUCTS AND MARKETS
The Company's products are wireless communications services, primarily paging
and telemessaging services, including voice mail and alphanumeric transcription
services. The Company recently launched Internet access service in selected
markets. The Company is licensed by the FCC to transmit numeric, alphanumeric,
voice and tone-only messages to pagers it either sells or leases to customers.
The Company's customers include various size 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 use pagers rather than home telephones as their
primary means of communication. These customers often respond to pages using
pay phones and the telephones of friends and family.
The Company's sales strategy is to concentrate on smaller business accounts
and individuals who value continuity, quality and personal service. In recent
years, the Company has increasingly emphasized pager sales as compared to
rentals. Customers buying pagers and paying only for service (wireless message
transmission) tend to be less likely to leave the Company for a competitor
because doing so often requires that the frequency of the pager, as well as the
pager's telephone number, must be changed. The Company has the ability to offer
a high level of technical support and provides a full range of dependable
communications services with personal service.
The Company markets its paging services in Texas under the Teletouch name,
Beepers Plus by Teletouch in the Tennessee markets of Memphis and Nashville and
Dial-A-Page by Teletouch in its other markets. In order to access the broadest
possible market, the Company utilizes multiple distribution channels including:
(i) Company-operated sales offices, including malls and strip shopping centers,
that sell pagers to the consumer market; (ii) direct sales staff that
concentrate on business accounts; (iii) resellers, who purchase bulk paging
services from the Company and resell them to their own subscribers; and (iv) by
reselling other paging carriers' services when existing or potential customers
require paging service beyond the coverage of its own network.
The Company plans on expanding the product offerings in its sales offices. As
mentioned, those offices primarily target the consumer market. Consumers have
demonstrated other telecommunication needs in addition to paging and voice mail,
including cellular and PCS services, Internet services, long distance and local
phone services. The Company plans on introducing a broader array of new services
to its customers in fiscal year 1999. In conjunction with these plans, the
Company will open new retail outlets and move a
4
select number of retail outlets to higher traffic locations.
In addition, the Company is expanding its targeting of resellers and agents.
The objective is to increase the number of outlets that market the Company's
products and services.
COMPETITION
The Company experiences direct competition from one or more competitors in all
the locations in which it operates. Some of the Company's competitors have
greater financial resources than the Company. Competition for subscribers to
the Company's paging services is based primarily on the price and quality of
services offered and the geographic area covered. The Company believes that the
price and quality of its services and its geographic coverage areas within its
markets generally compare favorably with those of its competitors.
Although some of the competitors are small, privately owned companies serving
only one market area, others are subsidiaries or divisions of larger companies,
such as telephone companies, that provide paging services in multiple market
areas. Among the Company's competitors are Arch Communications Group, Inc.,
Beepers Unlimited, Metrocall, Inc., Mobilemedia Communications, Inc., Paging
Network, Inc. and Air Touch, Inc.
Entities offering wireless two-way communications services, including
cellular, broadband personal communication service ("PCS") and specialized
mobile radio services ("SMR"), also compete to a certain extent with the
Company's paging services. Cellular and PCS service is generally more expensive
than paging services and, where price is a consideration and 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. In
addition, future technological advances and associated regulatory changes in the
telecommunications industry could create new services or products competitive
with the paging services currently provided by the Company. Recent and proposed
regulatory changes by the FCC are aimed at encouraging such technological
developments and new services and promoting competition. There can be no
assurance that the Company would not be adversely affected by such technological
developments or regulatory changes.
REGULATION
The Company's paging operations are subject to regulation by the FCC under the
Communications Act of 1934, as amended (the "Communications Act"), and may be
conducted only under licenses to use frequencies granted by the FCC to the
Company. In addition to authorizing the use of radio frequencies, FCC licenses
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 put into effect rules which 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. Pursuant to the FCC's current rules, all licenses are
classified either as Commercial Mobile Radio Service ("CMRS") or Private Mobile
Radio Services ("PMRS"). Those carriers, like the Company and its competitors,
who make service available to the public on a for-profit basis through
interconnection with the public switched telephone network are classified as
CMRS licensees. The FCC has also adopted rules to license paging channels in the
exclusive UHF and VHF bands, as well as in the exclusive 929 and 931 MHz bands,
on a geographic area basis. Geographic area licenses will be awarded through
auctions. Most recently, the FCC has indicated that the 929 and 931 MHz bands
will be auctioned in the third quarter of 1998 and the lower bands in 1999. As
of this date, the FCC has not scheduled either auction. Incumbent licensees,
such as the Company, will retain their exclusivity under the FCC's rules. The
Company also operates paging systems utilizing shared, non-exclusive frequencies
below 929 MHz. The FCC has indicated that these shared frequencies will not be
subject to the upcoming auctions.
5
In addition, until recently, the RCC licenses held by the Company were subject
to rate and entry regulations in states that chose to impose tariff and
certification obligations whereas the PCP licenses were not subject to such
regulations. As a result of recent Congressional legislation, the state
regulatory differences between RCCs and PCPs have been eliminated.
The FCC radio licenses granted to the Company are for varying terms of up to
10 years, and renewal applications must be approved by the FCC. In the past,
FCC renewal applications have been more or less routinely granted. Although
there can be no assurance that any future applications filed by the Company will
be approved or acted upon in a timely manner by the FCC, based on its experience
to date, the Company believes that such applications will continue to be
approved.
In the past, the Company regularly applied 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 929.000 MHz. All other paging frequencies on
which the Company 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 acquisitions by the
Company 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 that any such future applications filed by the Company will
be approved or acted upon in a timely manner by the FCC, the Company knows of no
reason to believe such applications would not be approved or granted. The FCC
has determined that all major modification and expansion applications will be
subject to competitive bidding ("auction") procedures. Since these procedures
are new to the paging industry, the Company cannot predict their impact 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 has 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 impose fines for violations of its rules. Under certain
circumstances, the Company'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. Such actions could affect
the scope and manner of the Company's services, or could lead to increased
competition in the paging industry. For example, the FCC was ordered by
Congress to hold auctions to award licenses for new personal communications
services in 1994. These and other new mobile services could compete directly or
indirectly with the Company. In addition, from time to time, federal and state
legislators propose legislation that could affect the Company's business either
beneficially or adversely. The Company 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-present and proposed legislation and regulations
pertaining to the Company's operations.
6
EMPLOYEES
As of August 6, 1998, the Company had approximately 362 total employees, of
which 324 were full-time. The majority of these individuals are marketing,
servicing and clerical employees. 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
The Company currently owns 3 office buildings and 1 transmitter site and the
transmitter broadcast tower on that site. In addition, the Company leases 47
additional locations in its market areas, including its executive offices in
Tyler, Texas. The Company leases transmitter sites on commercial towers,
buildings, and other fixed structures in approximately 303 locations. The
Company's leases are for various terms and provide for monthly rental payments
at various rates. The Company is obligated to make total lease payments of
approximately $1,683,000 under its office facility and tower site leases for
fiscal year 1999. See Note F to the 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
The Company is party to various legal proceedings arising in the ordinary
course of business. The Company believes that there is no proceeding, either
threatened or pending, against the Company that could result in a material
adverse effect on the results of operations or financial condition of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Effective April 1, 1998 the holders of a majority of common stock took action
by written consent to approve a two for three reverse split of the common stock.
3,301,387 shares of common stock (pre-split), representing approximately 52% of
the then outstanding common stock consented to such action.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Prior to the Company's initial public offering in December 1994 there had been
no public market for the securities of the Company. As of December 21, 1994 the
Company's securities were listed for quotation on The NASDAQ Small-Cap Market
("NASDAQ"). As of December 21, 1994, the Company's securities were listed for
trading on the Boston Stock Exchange ("BSE"). Effective the commencement of
trading on April 6, 1998, the Company's securities began trading on the American
Stock Exchange ("AMEX") and ceased trading on NASDAQ. Effective April 6, 1998,
the Company terminated its BSE listing. The Company's securities trade on the
AMEX under the symbols TLL and TLLW.
The following table sets forth, for the periods indicated, the reported high
and low transaction prices for the Common Stock and Class A Warrants for the
periods such securities were traded on NASDAQ or the AMEX as noted above. Such
prices reflect inter-dealer prices, but do not include retail mark-ups,
markdowns, or commissions and may not necessarily represent actual transactions.
7
Common Stock Class A Warrants
------------ ----------------
High Low High Low
---- --- ---- ---
Fiscal Year 1997
1st Quarter 8-7/16 3-15/16 3/4 15/32
2nd Quarter 4-11/16 4-5/16 5/32 3/8
3rd Quarter 4-1/2 2-5/8 9/16 15/32
4th Quarter 3-3/8 2-7/16 3/4 3/8
Fiscal Year 1998
1st Quarter 3-3/4 2-5/8 9/32 3/16
2nd Quarter 3-3/4 2-5/8 21/64 3/16
3rd Quarter 3-3/4 2-1/4 9/32 3/16
4th Quarter 4-11/16 3-3/8 3/4 3/16
All share prices give effect to the two for three reverse split which took
effect June 26, 1998.
- ---------------------
As of August 21, 1998 there were 4,235,611 shares of common stock, 15,000
shares of Series A preferred stock, 87,287 shares of Series B preferred stock,
1,533,333 Class A Warrants, 2,660,840 shares of Common Stock Purchase Warrants,
and 324,173 shares of Series B Preferred Stock Purchase Warrants outstanding. As
of August 21, 1998, there were 43 holders of record of the Common Stock, in
excess of 800 beneficial holders, and 17 holders of record of the Class A
Warrants based upon information furnished by Continental Stock Transfer & Trust
Company, New York, New York, the transfer agent for the Common Stock and the
Class A Warrants. The number of holders of record does not reflect the number of
beneficial holders of the Company's Common Stock or Class A Warrants for whom
shares and warrants are held by banks, brokerage firms and others.
The Company 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. Such dividends may be paid in kind by
the issuance of additional securities. Cash payment of any dividends on the
Company's Common Stock or Preferred Stock, and the redemption of the Preferred
Stock, are prohibited so long as the Amended and Restated Credit Agreement is
outstanding. See "Management's Discussion and Analysis-Financial Condition."
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
CERTAIN STATEMENTS CONTAINED HEREIN ARE NOT BASED ON HISTORICAL FACTS, BUT ARE
FORWARD-LOOKING STATEMENTS THAT ARE BASED UPON NUMEROUS ASSUMPTIONS ABOUT FUTURE
CONDITIONS THAT COULD PROVE NOT TO BE ACCURATE. ACTUAL EVENTS, TRANSACTIONS AND
RESULTS MAY MATERIALLY DIFFER FROM THE ANTICIPATED EVENTS, TRANSACTIONS OR
RESULTS DESCRIBED IN SUCH STATEMENTS. THE COMPANY'S ABILITY TO CONSUMMATE SUCH
TRANSACTIONS AND ACHIEVE SUCH EVENTS OR RESULTS IS SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO,
THE EXISTENCE OF DEMAND FOR AND ACCEPTANCE OF THE COMPANY'S PRODUCTS AND
SERVICES, REGULATORY APPROVALS AND DEVELOPMENTS, ECONOMIC CONDITIONS, THE IMPACT
OF COMPETITION AND PRICING, RESULTS OF FINANCING EFFORTS AND OTHER FACTORS
AFFECTING THE COMPANY'S BUSINESS THAT ARE BEYOND THE COMPANY'S CONTROL. THE
COMPANY UNDERTAKES NO OBLIGATION AND DOES NOT INTEND TO UPDATE, REVISE OR
OTHERWISE PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING
STATEMENTS THAT MAY BE MADE TO REFLECT FUTURE EVENTS OR CIRCUMSTANCES.
The following discussion and analysis of the financial condition and results
of operations of the Company should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this report.
8
OVERVIEW
The Company is a leading provider of wireless messaging services, primarily
paging services, in non-major metropolitan areas and communities in the
southeast United States. As of May 31, 1998 the Company had approximately
349,700 pagers in service. The Company derives the majority of its revenues from
fixed periodic, usually monthly, fees, not dependent on usage, charged to
subscribers for paging services. As long as a subscriber remains on service,
operating results benefit from the recurring payments of the fixed periodic fees
without incurring additional selling expenses or other fixed costs. Due to the
growth from the completion of the acquisitions discussed below, the Company's
results of operations for prior periods may not be indicative of future
performance.
ACQUISITIONS AND DISPOSALS
During fiscal 1997, the Company completed the acquisition of all the stock of
Russell's Communication, Inc., d.b.a. laPageco ("laPageco") and AACS
Communications, Inc. ("AACS") for cash consideration of approximately $2.3
million and $1.9 million, respectively. In addition, the Company acquired
substantially all the assets of Warren Communications, Inc. ("Warren") for cash
consideration of approximately $5.1 million, Dave Fant Company, d.b.a. Oklahoma
Radio Systems ("ORS") for cash consideration of approximately $2.1 million and
Cimarron Towers Inc. ("Cimarron") for cash consideration of approximately $0.4
million. Additional consideration for Cimarron was calculated at $1.4 million
based on actual performance for the four-month period from September 1996
through December 1996. This additional consideration was payable over a six
month period which began March 1997. The consideration paid for these
acquisitions was obtained from available capacity under the Company's existing
credit facility. Collectively, the acquisitions made during the first nine
months of fiscal year 1997 are referred to as "the Fiscal Year 1997
Acquisitions". The pro forma effects of these acquisitions to the Company's
operations were not significant.
Each of these acquisitions was accounted for using the purchase method of
accounting. Of the total purchase price for these acquisitions, for financial
accounting purposes, the allocation was approximately $0.8 million to property,
plant and equipment, $0.2 million to accounts receivable, $0.1 million to
inventory and other assets, $4.8 million to FCC Licenses, $4.2 million to
subscriber bases, $0.4 million to non-compete agreements, with the remaining
amount allocated to goodwill.
In August 1995, the Company purchased substantially all of the non-cash assets
and assumed selected liabilities of Dial-A-Page, Inc. ("Dial") for a purchase
price of approximately $49.4 million (the "Dial Acquisition"). Of the total
purchase price, for financial reporting purposes, approximately $14.2 million
was allocated to property, plant and equipment, $0.5 million to accounts
receivable, $15.5 million to FCC license, $13.8 million to subscriber bases,
$0.1 million to non-compete, $1.2 million to current liabilities, and $0.1
million to other current assets, with the remaining amount allocated to
goodwill.
To complete the Dial Acquisition, and to provide additional working capital,
the Company completed the private placement of $25 million of debt and equity
securities with Continental Illinois Venture Corporation ("CIVC") and certain
other parties both related and unrelated to CIVC (together with CIVC, the "CIVC
Investors"), and $35 million in additional senior financing from its former
senior lender, FINOVA Capital Corporation ("FINOVA"). The Company incurred
financing costs and professional fees incident to the Dial Acquisition, and the
related financings, of approximately $5.5 million. The CIVC Investors purchased
15,000 shares, with an initial liquidation value of $15 million, of the Series A
14% Cumulative Preferred Stock (the "Series A Preferred Stock") and $10 million
of 14% Junior Subordinated Notes ("the Subordinated Notes") due in fiscal year
2003. Dividends on the Series A Preferred Stock accrue at the rate of 14% per
annum. Each share of Series A Preferred Stock will become convertible into
common stock based on a stated formula after August 3, 2003. 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
411,459 shares of Series B Preferred Stock (the "Series B
9
Preferred Stock Purchase Warrants"). Each share of Series B Preferred Stock will
become convertible into six shares of Common Stock after two years or earlier
upon the occurrence of an event of default as specified by the purchase
agreement. CIVC will have the right, after two years, to require that its
securities be registered for public sale.
On January 28, 1998, the Company sold substantially all of its communications
towers for approximately $8.7 million. The proceeds from the sale were used to
reduce the outstanding debt under the Credit Facility. Concurrent with the
sale, the Company leased back space on the towers sold for a period of ten years
for approximately $.6 million per year. The Company recognized a $4.1 million
gain related to the sale of the towers in fiscal 1998 and deferred the remaining
$4.0 million gain over the period of the lease.
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED MAY 31, 1998, 1997 AND 1996
Total Revenue: The historical total revenue of the Company increased to
-------------
$45.2 million in fiscal year 1998 from $41.4 million and $31.7 million in fiscal
years 1997 and 1996, respectively. These increases were due primarily to the
increase in the pagers in service resulting from the acquisitions completed in
fiscal 1997 as well as greater market penetration in the Company's existing
markets. Pagers in service increased to 349,700 at May 31, 1998 as compared to
321,000 and 195,500 at May 31, 1997 and May 31, 1996, respectively. Of these
increases, the laPageco, Oklahoma Radio Systems, Warren, AACS and Cimarron
acquisitions represented 97,000 additional pagers added during fiscal year 1997.
The Dial Acquisition represented an additional 89,000 pagers added in fiscal
year 1996.
The impact on net revenue of the increase in pagers in service is partially
offset by the decline in average revenue per unit ("ARPU"). ARPU for the year
ended May 31, 1998 was $9.33 as compared to $10.02 and $13.56 for the years
ended May 31, 1997 and May 31, 1996, respectively. This decline in ARPU is due
to increased competition in the Company's markets as well as an increase in the
number of paging units sold to paging resellers. Paging resellers are businesses
that buy airtime at wholesale prices from the Company and sell the service to
subscribers. While the wholesale price to the reseller is lower than the price
the Company charges directly to its customers, the reseller bears the cost of
acquiring, billing, collecting and servicing the subscribers. Currently
approximately 36% of the Company's paging units are sold through resellers.
Prior to the fiscal year 1997 acquisitions, approximately 16% of the Company's
paging units were sold through resellers. The Company expects to see the ARPU
continue to decline as the competition continues to pursue customers in its
marketplace, generally resulting in new customers being added at a lower ARPU
than the Company's existing ARPU in that market, and as the units sold through
resellers continues to increase. However, while there can be no assurance, the
Company expects that the growth in units in service will increase sufficiently
to offset this decline in ARPU.
Operating expenses, excluding depreciation and amortization: Operating
-----------------------------------------------------------
expenses, excluding depreciation and amortization, were: $25.0 million, 55% of
total revenue, for fiscal year 1998; $23.0 million, 56% of total revenue, for
fiscal year 1997; and $17.9 million, 56% of total revenue, for fiscal year 1996.
The increased costs are primarily due to the inclusion of operating results of
the Completed Acquisitions for an entire year in fiscal year 1998. In addition,
$0.8 million of non-recurring costs are included in general and administrative
expenses for the year ended May 31, 1998 related to costs incurred in connection
with the settlement of a lawsuit due to a terminated acquisition. Non-recurring
costs were $0.5 million and $0.6 million in fiscal years 1997 and 1996,
respectively. The decrease as a percentage of total revenue is due to fixed
costs being spread over an increased customer base.
Many of these costs, including increased general and administrative salaries
and other costs, are incurred early in the growth process. Accordingly,
although the actual costs are expected to continue to increase, the Company
expects them to decrease as a percentage of total revenue as the Company
continues to grow.
10
Depreciation and amortization: Depreciation and amortization expense
-----------------------------
increased to $13.3 million in fiscal year 1998 from $13.2 million and $9.3
million in fiscal years 1997 and 1996, respectively. The increase is due
primarily to the increased amortization of intangible assets resulting from the
Completed Acquisitions which have been included in the results of operations for
a full year, and to the acquisition of additional tangible assets.
Interest Expense: Interest expense increased to $8.5 million in fiscal year
----------------
1998 from $8.2 million and $6.4 million in fiscal years 1997 and 1996,
respectively. This increase is due to the increased debt incurred by the
Company in connection with the fiscal year 1997 Acquisitions as well as the
amortization of financing costs associated with obtaining the original Credit
Facility and the Amended and Restated Credit Agreement, offset by the reduction
in interest expense due to the reduction of debt with proceeds from the sale of
assets.
Income tax benefit: At May 31, 1998, the Company had a net operating loss
------------------
carryforward of approximately $13.1 million that will begin to expire in 2011.
For fiscal year 1999 the Company estimates that no tax benefit will be recorded.
A valuation allowance has been recorded against deferred tax assets which are
not likely to be realized. Specifically, the Company carryforwards expire at
specific future dates and utilization of certain carryforwards is limited to
specific amounts each year. However, due to the uncertain nature of their
ultimate realization, the Company has established a significant valuation
allowance against these carryforward benefits and will recognize benefits only
as reassessment demonstrates they are realizable. Realization is entirely
dependent upon future earnings in specific tax jurisdictions. While the need for
this valuation allowance is subject to periodic review, if the allowance is
reduced, the tax benefit of the carryforwards will be recorded in future
operations as a reduction of the Company's income tax expense.
EBITDA: EBITDA increased to $13.5 million, 30% of total revenue, ($14.3
------
million, 32% of total revenue, excluding the $0.8 million of costs associated
with a terminated acquisition) in fiscal year 1998 from $11.9 million, 29% of
total revenue, ($12.4 million, 30% of total revenue, excluding the $0.5 million
of costs associated with the terminated ProNet merger) in fiscal year 1997 and
$8.7 million, 27% of total revenue, in fiscal year 1996. The increase in EBITDA
as a percentage of total revenue is due primarily to the increase in the pagers
in service resulting from the completed Acquisitions, as well as greater market
penetration in the Company's existing markets.
FINANCIAL CONDITION
As a consequence of the improved results of operations and the funds provided
by the sale of assets, partially offset by the repayment of debt, the Company's
cash balance was $4.6 million at May 31, 1998, as compared to $3.4 million at
May 31, 1997.
The primary sources of capital for the Company prior to the IPO in December
1994 were cash flow from operations and vendor financing. Subsequent to the
IPO, the Company has been able to raise financing from several sources as a
means to fund the Completed Acquisitions and working capital needs. In addition
to the financing proceeds, cash provided by operations increased to $8.4 million
in fiscal year 1998 from $6.9 million and $3.3 million in fiscal years 1997 and
1996, respectively. The increase in cash provided from operations is primarily
due to the improved results of operations and the resulting increases in total
revenue and EBITDA. The Company expects that the cash flow provided from
operations is sufficient to fund the working capital needs. However, the
Company will need to utilize funds available from the Amended and Restated
Credit Agreement to fund future acquisitions, if any.
On January 28, 1998, the Company sold substantially all of its communications
towers for approximately $8.7 million. The proceeds from the sale were used to
reduce the outstanding debt under the Credit Facility. Concurrent with the sale,
the Company leased back space on the towers sold for a period of ten years for
approximately $.6 million per year. The Company recognized a $4.1 million gain
related to
11
the sale of the towers in fiscal 1998 and deferred the remaining $4.0 million
gain to be amortized into income on a straight-line basis over the period of the
lease.
During fiscal year 1996, the holders exercised an aggregate of 716,461 Common
Stock Purchase Warrants and 130,930 Series B Preferred Stock Purchase Warrants.
The Series 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. The total number of
shares of Common Stock outstanding after these issuances is 4,235,611. The
total number of shares of Series B Preferred Stock outstanding after the
issuance is 130,930.
The Company's paging operations require capital investment to procure pagers
and to acquire paging infrastructure equipment to support the Company's growth.
The Company's net capital expenditures amounted to $5.8 million, $5.8 million
and $3.1 million for fiscal 1998, 1997 and 1996, respectively. The increase in
fiscal year 1997 was primarily due to the upgrading of the infrastructure of the
Completed Acquisitions as well as increased need for pagers to support the
growth in pagers in service. Management anticipates capital expenditures for the
Company to continue to increase as the demand for pagers increases and the
Company continues to improve its infrastructure. These expenditures will be
paid for with cash generated from operations and borrowings under the unused
portion of the Amended and Restated Credit Agreement.
In January, 1998, the Company amended its original agreement (the "Credit
Facility") with a group of lenders, led by Chase Manhattan Bank, as a result of
the sale of substantially all of the Company's towers to Pinnacle Towers, Inc.,
as discussed in Note D. The new Agreement (the "Amended and Restated Credit
Agreement") provides for loans in an amount not to exceed $70 million, as
opposed to the $95 million provided for in the original Credit Facility. As of
May 31, 1998, $61 million of the Amended and Restated Credit Agreement had been
funded, and $9 million is available for future funding. In addition, the
Company paid approximately $0.5 million in amendment fees in order to complete
the amended agreement. These fees have been deferred and are being amortized,
using the effective interest method, over the term of the existing loans.
The funding from the original Credit Facility was used to repay the FINOVA
Loan and to provide the financing necessary to complete the Fiscal Year 1997
Acquisitions discussed in Note B and to provide additional working capital. As
a result of the repayment of the FINOVA Loan, the Company was required to pay a
$1 million prepayment penalty to FINOVA. The prepayment penalty of $1 million,
and the unamortized deferred loan costs associated with the FINOVA Loan of
approximately $2.6 million, were recorded as an extraordinary expense item in
the first quarter of fiscal year 1997. Direct costs incurred in connection with
obtaining the original Credit Facility of approximately $3.6 million have been
deferred and are being amortized, using the effective interest rate method, over
the term of the existing loans.
The Amended and Restated Credit Agreement bears interest, at the Company's
designation, at a floating rate of either the prime rate plus 1% to 2% or LIBOR
plus 2% to 3% depending on the leverage ratio of the Company and is secured by
substantially all of the assets of the Company and its subsidiaries. Borrowings
under the Amended and Restated Credit Agreement require that the principal be
repaid in escalating quarterly installments beginning in August 2000 and ending
in fiscal year 2006. In conjunction with the funding from the original Credit
Facility and the Amended and Restated Credit Agreement, the Company entered into
interest rate protection agreements which protect $50 million, $60 million and
$47.5 million of the commitments against future prime rate or LIBOR rate
increases above 7.625%, 7.5% and 9.5% for periods August 1996 through July 1997,
August 1997 through July 1998 and August 1998 through July 1999, respectively.
At May 31, 1998, the weighted average interest rate on the original Credit
Facility was 8.2%. In addition, the terms require the maintenance of certain
specified financial and operating covenants, provide for restrictions on capital
expenditures and future acquisitions, prohibit any payments on the Junior
Subordinated Notes or the payment of dividends.
12
NEW ACCOUNTING ANNOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
No. 130, "Reporting Comprehensive Income, " which establishes standards for
reporting and displaying comprehensive income and its components (revenues,
expenses, gains and losses) as part of a full set of financial statements, and
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information." Statement No. 131 establishes standards for reporting information
about a company's operating segments and related disclosures about its products,
services, geographic areas of operations and major customers. Both statements
will be adopted by the Company in fiscal 1999. The adoption of these statements
will not impact the Company's results of operations, cash flows or financial
position.
IMPACT OF YEAR 2000
The company has developed a Year 2000 compliance plan to address the issue of
software currently in use that may have time or date sensitivity that require
correction. If not addressed, system failures or miscalculations could cause
disruptions of operations, including, among other things, a temporary inability
to process transactions, prepare invoices or engage in similar normal business
activities.
The Company has contacted its major vendors and received written confirmation
of compliance from them. These software programs involved cover the
transmission of paging signals, invoicing and retention of customer activity and
the reporting of the Company's financial and accounting transactions.
All of these programs are covered under existing maintenance agreements and no
significant costs have been incurred with respect to Year 2000 compliance
issues.
The Company is actively reviewing its product offering for compliance issues
and expects no significant issues or expense with respect to Year 2000
compliance.
ITEM 7. SELECTED FINANCIAL DATA
The following table presents certain items from the Company's consolidated
statements of operations and certain other information for the periods
indicated.
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Service, rent and maintenance revenue............ $ 38,831 $ 35,478 $ 26,854 $ 7,338 $ 2,763
Product sales revenue............................ 6,328 5,911 4,871 1,336 502
-------- -------- -------- -------- --------
Total revenue.................................. 45,159 41,389 31,725 8,674 3,265
Net book value of products sold.................. 6,634 6,506 5,165 2,084 766
-------- -------- -------- -------- --------
38,525 34,883 26,560 6,590 2,499
Operating expenses............................... 38,329 36,212 27,160 6,692 2,199
-------- -------- -------- -------- --------
Operating income................................. 196 (1,329) (600) (102) 300
Interest expense, net............................ (8,535) (8,177) (6,421) (1,626) (143)
Other............................................ -- -- -- -- (495)
Gain on sale of assets........................... 4,171 -- -- 103 --
-------- -------- -------- -------- --------
Loss before income taxes......................... (4,168) (9,506) (7,021) (1,625) (338)
Income tax expense/(benefit)..................... 48 (476) (2,201) (188) (53)
-------- -------- -------- -------- --------
Loss before extraordinary item................... (4,216) (9,030) (4,820) (1,437) (285)
Extraordinary item............................... -- (3,389) -- -- --
-------- -------- -------- -------- --------
Net loss........................................ $ (4,216) $(12,419) $ (4,820) $ (1,437) $ (285)
======== ======== ======== ======== ========
Loss per share applicable to common stock.......
Loss before extraordinary item.................. $ (1.66) $ (2.72) $ (1.72) $ (0.58) $ (0.13)
Extraordinary item.............................. -- (0.80) -- -- --
-------- -------- -------- -------- --------
Net loss........................................ $ (1.66) $ (3.52) $ (1.72) $ (0.58) $ (0.13)
======== ======== ======== ======== ========
13
EBITDA (1)(2)(3) $ 14,316 $ 12,402 $ 9,337 $ 1,720 $ 608
======== ======== ======== ======== ========
Pagers in service at end of period.............. 349,700 321,100 195,500 68,500 8,286
======== ======== ======== ======== ========
Average revenue per unit ("ARPU")............... $ 9.33 $ 10.02 $ 13.56 $ 14.35 $ 17.05
======== ======== ======== ======== ========
Total assets.................................... $ 87,194 $ 92,173 $ 83,962 $32,252 $ 2,381
======== ======== ======== ======== ========
Long-term debt.................................. $ 74,487 $ 79,824 $ 60,115 $19,879 $ 796
======== ======== ======== ======== ========
- ----------------------------
(1) EBITDA represents earnings before other income (expense), taxes,
depreciation and amortization (and certain non-recurring charges). EBITDA
is a standard measure of financial performance in the paging industry.
However, EBITDA is not a measure defined in generally accepted accounting
principles ("GAAP") and should not be construed as an alternative to
operating income or cash flows from operating activities as determined in
accordance with GAAP. EBITDA is, however, one of the primary financial
measures by which the Company's covenants are calculated under the
agreements governing the Company's indebtedness.
(2) As discussed below, in July 1996 the Company and ProNet, Inc. mutually
agreed to terminate a previously announced agreement to merge the Company
with a subsidiary of ProNet. The actual EBITDA shown above excludes
$527,000 of non-recurring costs associated with the ProNet agreement for
fiscal 1997.
(3) As also discussed below, in May 1998 the Company and Premier Paging, Inc.
("Premier") reached a settlement with regards to the termination of the
proposed acquisition of Premier. The actual EBITDA shown above excludes
$837,000 of non-recurring costs associated with this settlement. EBITDA
for fiscal year 1998 excludes the gain on sale of assets.
ITEM 8. FINANCIAL STATEMENTS
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
There have been no changes in or disagreements with accountants on accounting,
financial disclosure or other matters which would require disclosure herein.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Information regarding directors, executive officers, promoters and control
persons, compliance with section 16(a) of the Exchange Act are incorporated by
reference from the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held November 11, 1998.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by reference from
the Company's Proxy Statement for the Annual Meeting of Shareholders to be held
November 11, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
14
Information regarding security ownership of certain beneficial owners and
management is incorporated by reference from the Company's Proxy Statement for
the Annual Meeting of Shareholders to be held November 11, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions is
incorporated by reference from the Company's Proxy Statement for the Annual
Meeting of Shareholders to be held November 11, 1998.
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Title of Exhibit
- ------ ----------------
21 Subsidiaries
27 Financial Data Schedule
(b) Reports on Form 8-K
The company did not file a Form 8-K during the fourth quarter of Fiscal
1998.
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.. 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, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended May 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended May 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Dallas, Texas
August 5,1998
F-2
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
May 31, 1998 May 31, 1997
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................. $ 4,567 $ 3,371
Accounts receivable, net of allowance of $131 in 1998 and
$353 in 1997............................................... 1,631 1,571
Inventory.................................................. 3,347 2,450
Deferred income tax assets................................. 44 138
Note receivable............................................ 1,107 0
Prepaid expenses and other current assets.................. 494 384
------------- ------------
11,190 7,914
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation of $9,134 in 1998 and $7,843 in
1997....................................................... 20,221 21,334
GOODWILL, INTANGIBLES AND OTHER ASSETS:
Goodwill................................................... 24,786 25,059
Subscriber bases........................................... 28,225 28,225
FCC licenses............................................... 21,720 20,736
Non-compete agreements..................................... 700 700
Debt issue costs........................................... 4,124 3,599
Other...................................................... 50 149
Accumulated amortization................................... (23,822) (15,543)
------------- ------------
55,783 62,925
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY $ 87,194 $ 92,173
============= ============
CURRENT LIABILITIES:
Accounts payable and accrued expenses...................... $ 4,765 $ 4,360
Current portion of long-term debt.......................... -- 5,710
Current portion of unearned sale/leaseback profit.......... 405 --
Deferred revenue........................................... 1,177 792
------------- ------------
6,347 10,862
LONG-TERM LIABILITIES:
Long term debt............................................. 74,487 74,114
Deferred profit on sale-leaseback.......................... 3,507 --
------------- ------------
77,994 74,114
COMMITMENTS AND CONTINGENCIES -- --
DEFERRED INCOME TAXES 1,030 1,161
SHAREHOLDERS' EQUITY:
Series A cumulative convertible preferred stock, $.001 par
value, 15,000 shares authorized, issued, and
outstanding in 1998 and 1997............................... -- --
Series B convertible preferred stock, $.001 par value,
411,459 shares authorized, 87,287 shares issued and
outstanding in 1998 and 1997............................... -- --
Common stock, $.001 par value, 25,000,000 shares
authorized, 4,235,611 and 4,231,611 shares issued and
outstanding in 1998 and 1997, respectively................. 4 6
Additional paid-in capital................................. 24,761 24,756
Accumulated deficit........................................ (22,942) (18,726)
------------- ------------
1,823 6,036
------------- ------------
$ 87,194 $ 92,173
============= ============
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,
----------------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
Service, rent and maintenance revenue............ $ 38,831 $ 35,478 $ 26,854
Product sales revenue............................ 6,328 5,911 4,871
------------ ------------ ------------
Total revenue............................... 45,159 41,389 31,725
Net book value of products sold.................. (6,634) (6,506) (5,165)
------------ ------------ ------------
38,525 34,883 26,560
Costs and expenses:
Operating................................... 11,016 9,663 7,246
Selling..................................... 4,190 4,417 3,569
General and administrative.................. 9,003 8,401 6,408
Depreciation and amortization............... 13,283 13,204 9,310
Merger termination charges.................. 837 527 627
------------ ------------ ------------
Total costs and expenses......................... 38,329 36,212 27,160
------------ ------------ ------------
Operating income/(loss).......................... 196 (1,329) (600)
Gain on sale of assets........................... 4,171 -- --
Interest expense, net............................ (8,535) (8,177) (6,421)
------------ ------------ ------------
Loss before income taxes and
extraordinary item.......................... (4,168) (9,506) (7,021)
Income tax expense/(benefit) 48 (476) (2,201)
------------ ------------ ------------
Loss before extraordinary item................... (4,216) (9,030) (4,820)
Extraordinary item, early debt retirement
net of income tax benefit of $179........... -- (3,389) --
------------ ------------ ------------
Net loss......................................... (4,216) (12,419) (4,820)
Preferred stock dividends........................ (2,824) (2,470) (1,837)
------------ ------------ ------------
Loss applicable to common stock.................. $ (7,040) $ (14,889) $ (6,657)
============ ============ ============
Loss per share:
Loss before extraordinary item $(1.66) $(2.72) $(1.72)
Extraordinary item -- $(0.80) --
------------ ------------ ------------
$(1.66) $(3.52) $(1.72)
============ ============ ============
Weighted Average Shares Outstanding-Basic........ 4,235,611 4,231,611 3,860,348
============ ============ ============
See Accompanying Notes to Financial Statements
F-4
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended May 31,
-------------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
OPERATING ACTIVITIES:
Net loss......................................... $(4,216) $(12,419) $ (4,820)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Loss on early retirement of debt................. -- 3,389 --
Depreciation and amortization.................... 13,283 13,204 9,310
Non cash interest expense........................ 2,738 2,557 1,999
Gain on sale of assets........................... (4,171) -- --
Amortization of deferred profit on
sale/leaseback transaction....................... (135) -- --
Deferred income taxes............................ (37) (476) (2,201)
Changes in operating assets and liabilities:
Accounts receivable, net..................... (60) 304 (328)
Inventories.................................. (117) 435 (1,759)
Prepaid expenses and other assets............ 353 (32) (150)
Accounts payable and accrued expenses........ 405 212 1,147
Deferred revenue............................. 385 (254) 105
----------------- ----------------- -----------------
Net cash provided by operating activities 8,428 6,920 3,303
INVESTING ACTIVITIES:
Capital expenditures, including pagers........... (5,821) (5,836) (3,124)
Acquisitions, net of cash acquired............... (900) (12,622) (51,801)
Deferred costs associated with acquisitions...... -- 251 (157)
Net proceeds from sale of assets................. 7,511 10 --
----------------- ----------------- -----------------
Net cash provided by (used for) investing activities 790 (18,197) (55,082)
FINANCING ACTIVITIES:
Debt incurred in connection with acquisitions.... -- 12,622 38,029
Proceeds from new debt........................... -- 56,578 1,200
Payments on long-term debt....................... (7,500) (52,400) (404)
Payments to related parties...................... -- -- (7)
Debt issue costs................................. (525) (3,064) (2,758)
Other............................................ -- (109) --
Net proceeds from stock subscriptions receivable -- -- 52
Net proceeds from preferred stock and
common stock warrants........................ 3 -- 15,973
----------------- ----------------- -----------------
Net cash (used for) provided by financing activities.. (8,022) 13,627 52,085
----------------- ----------------- -----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS............ 1,196 2,350 306
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,371 1,021 715
----------------- ----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............ $ 4,567 $ 3,371 $ 1,021
================= ================= =================
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
---------------
Series A Series B
-------- --------
Shares Amount Shares Amount
------ ------ ------- ------
Balance at May 31, 1995 -- -- -- --
Net Loss........................ -- -- -- --
Payment of stock subscription
receivable.................... -- -- -- --
Issuance of Preferred Stock
and warrants in connection
with Dial Acquisition, net.... 15,000 -- -- --
Exercise of warrants............ -- -- 130,930 --
------ ------ ------- ------
Balance at May 31, 1996......... 15,000 -- 130,930 --
Net Loss........................ -- -- -- --
Other........................... -- -- -- --
------ ------ ------- ------
Balance at May 31, 1997............ 15,000 -- 130,930 --
Net Loss........................ -- -- -- --
Exercise of warrants............
Reverse stock split (2 for 3)... -- -- (43,643) --
------ ------ ------- ------
Balance at May 31, 1998............ 15,000 $ -- 87,287 $ --
====== ====== ======= ======
Common Stock Additional Accumulated Stock
---------------------- Paid-In Earnings Subscription
Shares Amount Capital (Deficit) Receivable
----------- ------- ----------- ------------ -------------
Balance at May 31, 1995 5,272,725 5 8,893 (1,487) (52)
Net Loss........................ -- -- -- (4,820) --
Payment of stock subscription
receivable.................... -- -- -- -- 52
Issuance of Preferred Stock
and warrants in connection
with Dial Acquisition, net.... -- -- 15,961 -- --
Exercise of warrants............ 1,074,691 1 11 -- --
----------- ------- ----------- ------------ -------------
Balance at May 31, 1996......... 6,347,416 6 24,865 (6,307) --
Net Loss........................ -- -- -- (12,419) --
Other........................... -- -- (109) -- --
----------- ------- ----------- ------------ -------------
Balance at May 31, 1997............ 6,347,416 6 24,756 (18,726) --
Net Loss........................ -- -- -- (4,216) --
Exercise of warrants............ 6,000 -- 3 --
Reverse stock split (2 for 3)... (2,117,805) (2) 2 -- --
----------- ------- ----------- ------------ -------------
Balance at May 31, 1998............ 4,235,611 $ 4 $ 24,761 $ (22,942) $ --
=========== ======= =========== ============ =============
See Accompanying Notes to Financial Statements
F-6
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNT)
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of Teletouch Communications, Inc. and its wholly-owned subsidiaries
(together, "the Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
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 having 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 and consist of pagers and two-way radios held for
sale and spare parts held for resale.
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............... 5-20 years
Building and improvements........... 10-20 years
Other equipment..................... 5-10 years
INTANGIBLE ASSETS: Goodwill is recorded at cost and amortized over 25 years
using the straight-line method. Except for debt issue costs, other intangibles
are recorded at cost and amortized over periods ranging from 5 to 25 years,
computed on the straight-line method. The Company defers costs incurred in
obtaining debt and amortizes, as additional interest expense, these costs 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.
REVENUE RECOGNITION: Revenue is recognized as services are provided or the
product is delivered to customers. Billings to customers for services in
advance of providing such services are deferred and recognized as revenue as
services are provided.
ADVERTISING COSTS: All advertising costs are expensed when paid. Advertising
costs were $0.7 million, $0.8 million and $0.7 million in fiscal 1998, 1997 and
1996, respectively.
F-7
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNT)
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOSS PER SHARE: The computation of earnings/loss per share is based upon the
weighted average number of common shares outstanding during the period. Common
stock equivalents and other dilutive securities are excluded from the
computation of weighted average shares outstanding in periods when an operating
loss is reported as the effect is anti-dilutive.
SOURCES OF SUPPLY OF EQUIPMENT AND PAGERS: The Company does not manufacture
any of the transmitting, computer equipment or pagers used in providing its
paging services, but instead purchases such equipment and pagers from multiple
sources. The Company anticipates that such equipment and pagers will continue
to be available in the foreseeable future, subject to normal manufacturing and
delivery lead times. Because of the high degree of compatibility among
different models of transmitters, computers and other paging equipment
manufactured by multiple suppliers, the Company is able to design its systems
without depending upon any single source of equipment. The Company continuously
evaluates new developments in paging technology in connection with the design
and enhancement of its paging systems and the selection of products and services
to be offered to its subscribers.
CONCENTRATION OF CREDIT RISK: The Company provides paging services to
businesses and individual consumers, primarily in non-metropolitan areas and
communities in the southeast United States. The Company's diversified customer
base does not result in any significant concentration of credit risk. The
Company performs periodic credit evaluations of its customers to determine
individual customer credit risks and has the ability to terminate 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 items in the 1996 and 1997 financial statements
have been reclassified to conform with the 1998 presentation.
NEW ACCOUNTING ANNOUNCEMENTS: In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement No. 130, "Reporting Comprehensive
Income, " which establishes standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains and losses) as part of a
full set of financial statements, and Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Statement No. 131
establishes standards for reporting information about a company's operating
segments and related disclosures about its products, services, geographic areas
of operations and major customers. Both statements will be adopted by the
Company in fiscal 1999. The adoption of these statements will not impact the
Company's results of operations, cash flows or financial position.
F-8
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNT)
NOTE B - ACQUISITIONS
On December 31, 1997, the Company concluded its purchase of certain FCC
licenses from GTE with the payment of $0.9 million. An initial payment of $0.1
million was made in fiscal year 1997.
During fiscal 1997, the Company completed the acquisition of all the stock of
Russell's Communication, Inc., d.b.a. laPageco ("laPageco") and AACS
Communications, Inc. ("AACS") for cash consideration of approximately $2.3
million and $1.9 million, respectively. In addition, the Company acquired
substantially all the assets of Warren Communications, Inc. ("Warren") for cash
consideration of approximately $5.1 million, Dave Fant Company, d.b.a. Oklahoma
Radio Systems ("ORS") for cash consideration of approximately $2.1 million and
Cimarron Towers Inc. ("Cimarron") for cash consideration of approximately $0.4
million. Additional consideration for Cimarron was calculated at $1.4 million
based on actual performance for the four month period from September 1996
through December 1996. This additional consideration was payable over a six
month period which began March 1997. The consideration paid for these
acquisitions was obtained from available capacity under the Company's existing
credit facility. Collectively, the acquisitions made in fiscal year 1997 are
referred to as "the Fiscal Year 1997 Acquisitions".
Each of these Fiscal Year 1997 Acquisitions have been accounted for using the
purchase method of accounting. Of the total purchase price for these
acquisitions, for financial accounting purposes, the allocation was
approximately $0.8 million to property, plant and equipment, $0.2 million to
accounts receivable, $0.1 million to inventory and other assets, $4.8 million to
FCC Licenses, $4.2 million to subscriber bases, $0.4 million to non-compete
agreements, with the remaining amount allocated to goodwill.
In August 1995, the Company acquired substantially all of the non-cash assets
and assumed selected liabilities of Dial-A-Page, Inc. ("Dial") for a cash
purchase price of approximately $49.4 million (the "Dial Acquisition"). To
complete the Dial Acquisition, and to provide additional working capital, the
Company completed the private placement of $25 million of debt and equity
securities with Continental Illinois Venture Corporation ("CIVC") and certain
other parties both related and unrelated to CIVC (together with CIVC, the "CIVC
Investors"), see Note D and Note G, and $35 million in additional senior
financing from its former senior lender, FINOVA Capital Corporation ("FINOVA"),
see Note D. The Company incurred financing costs and professional fees incident
to the Dial Acquisition, and the related financings, of approximately $5.5
million. Of the total purchase price, for financial reporting purposes,
approximately $14.2 million has been allocated to property, plant and equipment,
$0.5 million to accounts receivable, $15.5 million to FCC license, $13.8 million
to subscriber bases, $0.1 million to non-compete, $1.2 million to current
liabilities, and $0.1 million to other current assets, with the remaining amount
allocated to goodwill.
Each of the acquisitions was accounted for using the purchase method of
accounting and the results of their operations are included in the statements of
operations since the respective acquisition date.
F-9
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNT)
NOTE C - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following :
1998 1997
--------- ---------
Land........................................ $ 2 $ 254
Leased Pagers............................... 7,794 7,503
Paging Infrastructure....................... 17,283 17,325
Buildings and improvements.................. 560 619
Other equipment............................. 3,716 3,476
------- -------
29,355 29,177
Accumulated depreciation.................... (9,134) (7,843)
------- -------
$20,221 $21,334
======= =======
Depreciation expense was $5.6 million, $5.8 million and $3.6 million in fiscal
1998, 1997, and 1996, respectively.
NOTE D - LONG-TERM DEBT
Long-term debt consists of the following :
1998 1997
------- -------
Notes Payable............................... $61,000 $67,800
Junior Subordinated Notes................... 13,487 11,324
Other....................................... -- 700
------- -------
74,487 79,824
Less current portion........................ -- 5,710
------- -------
$74,487 $74,114
======= =======
NOTES PAYABLE: In January, 1998, the Company amended its original
agreement (the "Credit Facility") with a group of lenders, led by Chase
Manhattan Bank. The new amended and restated credit agreement (the "Credit
Agreement") provides for loans in an amount not to exceed $70 million, as
opposed to the $95 million provided for in the original Credit Facility. As of
May 31, 1998, $61 million of the Credit Agreement had been funded, and $9
million is available for future funding. In addition, the Company paid
approximately $0.5 million in amendment fees in order to complete the Credit
Agreement. These fees have been deferred and are being amortized, using the
effective interest method, over the term of the existing loans.
The funding from the original Credit Facility was used to repay the FINOVA
Loan and provide the financing necessary to complete the Fiscal Year 1997
Acquisitions and to provide additional working capital. As a result of the
repayment of the FINOVA Loan, the Company paid a $1 million prepayment penalty
to FINOVA. The prepayment penalty of $1 million and the unamortized deferred
loan costs associated with the FINOVA Loan of approximately $2.6 million were
recorded as an extraordinary expense item in fiscal year 1997. Direct costs
incurred in connection with obtaining the original Credit Facility of
approximately $3.6 million were deferred and are being amortized, using the
effective interest rate method, over the term of the existing loans.
F-10
NOTE D - LONG-TERM DEBT (CONTINUED)
The Credit Agreement bears interest, at the Company's designation, at a
floating rate of either the prime rate plus 1% to 2% or LIBOR plus 2% to 3%
depending on the leverage ratio of the Company and is secured by substantially
all of the assets of the Company and its subsidiaries. Borrowings under the
Credit Agreement require that the principal be repaid in escalating quarterly
installments beginning in August 2000 and ending in fiscal year 2006. In
conjunction with the funding from the original Credit Facility and the Credit
Agreement, the Company entered into interest rate protection agreements which
protect $50 million, $60 million and $47.5 million of the commitments against
future prime rate or LIBOR rate increases above 7.625%, 7.5% and 9.5% for
periods August 1996 through July 1997, August 1997 through July 1998 and August
1998 through July 1999, respectively. In addition, the terms require the
maintenance of certain specified financial and operating covenants, provide for
restrictions on capital expenditures and future acquisitions, prohibit any
payments on the Junior Subordinated Notes or the payment of dividends.
JUNIOR SUBORDINATED NOTES: In August 1995, in connection with the Dial
Acquisition, the Company borrowed $10 million of 14% Junior Subordinated Notes
("the Subordinated Notes") due in fiscal year 2003 from the CIVC Investors. The
Subordinated Notes were initially recorded, for financial reporting purposes, at
approximately $8 million. The terms of the Subordinated Notes require the
maintenance of certain specified financial and operating covenants and provide
for restrictions on capital expenditures and future acquisitions. The effective
interest rate on the subordinate notes during fiscal 1998 was 17.4%. Included
in the note balance is accrued interest of $4.8 million and $2.9 million at May
31, 1998 and May 31, 1997, respectively. Also see Note G below.
MATURITIES: Maturities of debt outstanding at May 31, 1998 are as follows:
1999 - $0 million; 2000 - $0 million; 2001 - $6.5 million; 2002 - $8.0 million;
2003 - $23.0 million.
INTEREST: Cash paid for interest, including interest to related parties,
during 1998, 1997 and 1996 was approximately $6.5 million, $5.6 million, and
$4.2 million, respectively.
NOTE E - INCOME TAXES
The liability method is used in accounting for income taxes. Under this
method, deferred income tax assets and liabilities are determined based on
differences between the financial reporting and tax basis 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 cash payments of $85,000 for federal income taxes during the
year ended May 31, 1998 and none for the years ended May 31, 1997 and 1996.
In fiscal 1998, the Company utilized approximately $2.5 million of its
operating loss carryforward to offset current taxable income. The Company has a
net operating loss carryforward of approximately $13.1 million which is
available to reduce future taxable income and will expire beginning in 2011.
The decrease in the Company's effective tax benefit rate in 1997 from 1996 is
due to the recording of a valuation allowance against deferred tax assets which
are not likely to be realized in the near term. Specifically, the Company's
carryforwards expire at specific future dates and utilization of certain
carryforwards is limited to specific amounts each year. However, due to the
uncertain nature of their ultimate realization the Company has established a
significant valuation allowance against these carryforward benefits and will
recognize benefits only as reassessment demonstrates they are realizable.
Realization is entirely dependent upon future earnings in specific tax
jurisdictions. While the need for this valuation allowance is subject to
periodic review, if the allowance is reduced, the tax benefits of the
carryforwards will be recorded in future operations as a reduction of the
Company's income tax expense.
F-11
Significant components of the Company's deferred income tax liabilities and
assets as of May 31, 1998 and 1997 follow:
1998 1997
---- ----
Deferred income tax liabilities:
Depreciation and amortization methods............. $ 1,913 $ 2,768
Other............................................. 100 100
------- -------
Total deferred income tax liabilities............... $ 2,013 $ 2,868
Deferred income tax assets
Allowance for doubtful accounts................... 44 119
Inventory reserve................................. -- 19
Unrecognized gain................................. 1,330 --
Alternative minimum tax credit carryforward....... 85 --
Net operating loss carryforward................... 4,442 5,310
Valuation allowance............................... (4,874) (3,603)
------- -------
Total deferred income tax assets.................... 1,027 1,845
------- -------
Net deferred income tax liability................... $ 986 $ 1,023
======= =======
A reconciliation from the federal statutory income tax rate to the effective
income tax rate for the years 1998, 1997, and 1996 follows:
1998 1997 1996
---- ---- ----
Statutory income tax rate (benefit)..................... (34.0)% (34.0)% (34.0)%
Change in valuation allowance........................... 29.0 % 27.6 % --
Expenses not deductible for tax purposes, primarily
amortization of intangible assets..................... 5.1 % 1.4 % 2.3 %
Alternative minimum tax................................. 2.3 % -- --
Other................................................... (1.2)% -- 0.4 %
------ ------ -------
Effective income tax rate (benefit)..................... 1.2 % ( 5.0)% (31.3)%
====== ====== =======
Significant components of the provisions for income taxes are as follows:
1998 1997 1996
---- ---- ----
Current................................................. $ 85,000 $ -- $ --
Deferred................................................ (37,000) (476,000) (2,201,000)
-------- --------- -----------
$ 48,000 $(476,000) $(2,201,000)
======== ========= ===========
F-12
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNT)
NOTE F - COMMITMENTS AND CONTINGENCIES
The Company leases buildings, transmission towers and equipment under
noncancelable operating leases. Rent expense was $2,531, $2,104, and $1,501 in
1998, 1997, and 1996, respectively. Future minimum rental commitments under
noncancelable leases are as follows:
1999........................................... $1,683
2000........................................... 973
2001........................................... 577
2002........................................... 347
2003........................................... 191
2004 and thereafter............................ 415
------
$4,186
======
The Company is party to various legal proceedings arising in the ordinary
course of business. The Company believes that there is no proceeding, either
threatening or pending, against the Company that could result in a material
adverse effect on the results of operations or financial condition of the
Company.
NOTE G - SHAREHOLDERS' EQUITY
SUBSEQUENT EVENT: In June, 1998, the Company announced a two-for-three
reverse stock split of its common shares distributable to shareholders of record
on June 25, 1998, the effective date of the reverse split. Teletouch
shareholders received two shares of stock and cash resulting from any fractional
share, in exchange for each three currently outstanding shares. All outstanding
shares and per share amounts have been adjusted for all periods presented as a
result of the two for three reverse split.
CAPITAL STRUCTURE: The Company'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.
The Company issued 1,533,333 Class A Warrants in connection with its
initial public offering. Each Class A Warrant carries the right to purchase a
share of common stock for $6.75 and may be redeemed by the Company at $0.15 per
warrant if the closing bid price of the common stock has been at least $8.44 for
15 consecutive trading days. As of May 31, 1998, all 1,533,333 Class A Warrants
remain outstanding. The Company issued to certain Underwriters, for nominal
consideration, the Underwriters' Warrants to purchase an aggregate of 133,333
shares of Common Stock at an exercise price of $8.40 per share and warrants to
purchase, at a price of $0.15 per warrant, 133,333 warrants, each of which
entitles the holder to purchase one share of Common Stock on the same terms and
conditions as the Class A Warrants, except that the exercise price shall be
$9.45 per share. The Underwriters' Warrants are exercisable through December,
1999. The Company has issued to certain consultants the Consultant Warrants to
purchase 262,666 shares of common stock at an exercise price of $0.75 per share.
The Consultant Warrants expire in January 2004.
F-13
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNT)
NOTE G - STOCKHOLDERS' EQUITY (Continued)
DIAL ACQUISITION: In connection with the Dial Acquisition, see Note B, the
Company designated 15,000 shares of authorized preferred stock as "Series A 14%
Cumulative Preferred Stock" and 411,459 shares as "Series B Preferred Stock".
The CIVC Investors purchased 15,000 shares, with an initial liquidation value of
$15 million ($22.1 million at May 31, 1998), of the Series A 14% Cumulative
Preferred Stock (the "Series A Preferred Stock") and the Subordinated Notes, see
Note D. Dividends on the Series A Preferred Stock accrue at the rate of 14% per
annum. 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 Series
A Preferred Shareholder, based on a stated formula. As of May 31, 1998, the
conversion of Series A Preferred Stock would result in an estimated issuance of
2.9 million shares of common stock (4.2 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 411,459 shares
of Series B Preferred Stock (the "Series B Preferred Stock Purchase Warrants").
Each share of Series B Preferred Stock will become convertible into six shares
of Common Stock after two years or earlier upon the occurrence of an event of
default as specified by the purchase agreement. CIVC will have the right, after
two years, to require that its securities be registered for public sale.
During fiscal year 1996, the holders exercised an aggregate of 716,461
Common Stock Purchase Warrants and 87,287 Series B Preferred Stock Purchase
Warrants. The Series 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 D, the Amended and Restated Credit Agreement prohibits
the payment of dividends on the Series A Preferred Stock. At May 31, 1998,
approximately $7.1 million of dividends ($475.35 per share) were in arrears (or
1.3 million shares of common stock if paid "in kind".) Dividends earned per
share in fiscal year 1998, 1997, and 1996 were $188.24, $164.63,and $122.48,
respectively.
COMMON STOCK RESERVED: Approximately 12.5 million shares of common stock are
reserved for future issuance at May 31, 1998, as follows:
Conversion of Series A Preferred Stock 4,215
Common Stock Purchase Warrants 2,661
Conversion of Series B Preferred Stock 2,469
Class A Warrants 1,533
Underwriters' Warrants 267
Consultant Warrants 263
1994 Stock Option and Stock Appreciation Rights Plan 1,000
Other options 117
------
12,525
======
F-14
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNT)
NOTE H - STOCK OPTIONS
The Company's 1994 Stock Option and Stock Appreciation Rights Plan (the "1994
Plan") was adopted in July 1994 by the Company, 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 Company's 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, 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.
Stock option activity has been as follows:
Weighted
Average
Number of Exercise Price Exercise Price
Shares Per Share Per Share
------------ -------------------- ---------------
Options outstanding at May 31, 1995 120,000 $4.50 - $6.75 $4.59
Options granted to officers and management 80,000 $5.07 - $6.00 $5.36
Options granted to directors 13,334 $5.25 $5.25
Options forfeited (6,667) $4.50 $4.50
------- ------------- -----
Options outstanding at May 31, 1996................... 206,667 $4.50 - $6.75 $5.03
Options granted to officers and management.......... 36,666 $2.45 - $4.50 $3.53
Options granted to others........................... 6,667 $2.67 - $2.85 $2.76
Options forfeited................................... (46,667) $4.50 - $5.63 $5.06
------- ------------- -----
Options outstanding at May 31, 1997.................. 203,333 $2.45 - $6.00 $4.68
------- ------------- -----
Options granted to officers and management......... 373,332 $2.72 - $3.56 $2.81
Options granted to directors....................... 13,332 $3.38 - $3.56 $3.47
Options granted to others.......................... 43,332 $2.46 - $3.38 $3.21
Options forfeited.................................. (6,667) $4.32 $4.32
------- ------------- -----
Options outstanding at May 31, 1998.................. 626,662 $ 2.44 - 6.75 $3.44
======= ------------- =====
Exercisable at May 31, 1998.......................... 198,274 4.41
------- -----
Exercisable at May 31, 1997.......................... 123,333 $4.53
------- -----
Exercisable at May 31, 1996.......................... 61,267 $4.50
------- -----
Weighted-average fair value of options
granted during 1998........................ $ 1.48
-------
Weighted-average fair value of options
granted during 1997........................ $ 1.80
-------
Weighted-average fair value of options
granted during 1996........................ $ 3.42
-------
Weighted-average remaining
contractual life.......................... 4.7 years
F-15
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNT)
NOTE H - STOCK OPTIONS (CONTINUED)
Pro forma information regarding net income and earnings/loss per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its stock options under 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 1998, 1997,
and 1996, respectively: risk-free interest rates of 6.25%, 6.5% and 6.1%;
dividend yields of 0% for all years; volatility factors of the expected market
price of the Company's common stock of .53 in 1998, .57 in 1997 and 1996, 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 the
Company'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 1998, 1997, and 1996 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:
1998 1997 1996
---- ---- ----
Pro forma net loss
applicable to common stock ($7,214) ($14,958) ($6,717)
Pro forma loss per share (1.70) (3.54) (1.74)
Under the terms of a contractual agreement, the Company has 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.
F-16
NOTE I - RETIREMENT PLAN
Effective October 1995, the Company 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 may choose to contribute; however, the
Company is not obligated to make any contributions. No contributions were made
in fiscal year 1998 or 1997.
NOTE J - SALE - LEASEBACK TRANSACTION
On January 28, 1998, the Company sold substantially all of its communications
towers for approximately $8.7 million. The proceeds from the sale were used to
reduce the outstanding debt under the Credit Facility. Concurrent with the sale,
the Company leased back space on the towers sold for a period of ten years for
approximately $.6 million per year. The Company recognized a $4.1 million gain
related to the sale of the towers in fiscal 1998 and deferred the remaining $4.0
million gain to be amortized into income on a straight-line basis over the
period of the lease.
F-17
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on August 25, 1998.
TELETOUCH COMMUNICATIONS, INC.
By: /s Robert M. McMurrey
----------------------
Robert M. McMurrey
Chairman and Chief Executive Officer
In accordance with the Exchange Act, 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 and Chief Executive August 25, 1998
- ----------------------------- Officer
Robert M. McMurrey
/s J. Richard Carlson President, Chief Operating August 25, 1998
- ----------------------------- Officer
J. Richard Carlson
/s Thomas R. McLemore Executive Vice President, August 25, 1998
- ----------------------------- Chief Financial Officer
Thomas R. McLemore Chief Accounting Officer
/s Charles C. Green III Director August 25, 1998
- -----------------------------
Charles C. Green III
/s Clifford E. McFarland Director August 25, 1998
- -----------------------------
Clifford E. McFarland
/s Marcus D. Wedner Director August 25, 1998
- -----------------------------
Marcus D. Wedner
/s Thomas E. Van Pelt, Jr. Director August 25, 1998
- -----------------------------
Thomas E. Van Pelt, Jr.
/s Thomas E. Gage Director August 25, 1998
- -----------------------------
Thomas E. Gage