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EX-21 - TELETOUCH COMMUNICATIONS INC | v195515_ex21.htm |
EX-31.1 - TELETOUCH COMMUNICATIONS INC | v195515_ex31-1.htm |
EX-32.2 - TELETOUCH COMMUNICATIONS INC | v195515_ex32-2.htm |
EX-31.2 - TELETOUCH COMMUNICATIONS INC | v195515_ex31-2.htm |
EX-32.1 - TELETOUCH COMMUNICATIONS INC | v195515_ex32-1.htm |
EX-23.1 - TELETOUCH COMMUNICATIONS INC | v195515_ex23-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
FOR THE
FISCAL YEAR ENDED: MAY
31, 2010
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
File No. 1-13436
TELETOUCH
COMMUNICATIONS, INC.
(Name of
registrant in its charter)
Delaware
|
75-2556090
|
(State
or other jurisdiction
|
(IRS
Employer Identification Number)
|
of
incorporation or organization)
|
|
5718
Airport Freeway, Fort Worth, Texas 76117 (800)
232-3888
(Address
and telephone number of principal executive offices)
Securities
registered pursuant to Section 12(b) of the Exchange Act:
Common
Stock, $0.001 par value, listed on the OTC Market.
Securities
registered pursuant to Section 12(g) of the Exchange Act:
None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ¨ No
x
Indicate
by check mark whether the registrant has (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes ¨ No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a smaller reporting company. See definition of
“large accelerated filer”, “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨ Smaller reporting
company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No
x
As of November 30, 2009, the aggregate market value of the voting stock held by
non-affiliates of the registrant, based on the closing price on that date, was
approximately
$479,107 based on the
closing stock price of $0.12 on November 30, 2009. As of August 24, 2010, the latest practical date prior to the
filing of this annual report, the registrant had outstanding 48,739,002 shares of common stock.
DOCUMENTS INCORPORATED BY
REFERENCE
Portions of the registrant’s Proxy Statement for the registrant’s 2010 Annual Meeting of Shareholders to
be filed within 120 days of
the end of the fiscal year ended May 31, 2010, pursuant to Regulation 14A under
the Securities and Exchange Act of 1934, as amended, are incorporated by reference into Part
III
hereof.
INDEX
TO FORM 10-K
of
TELETOUCH
COMMUNICATIONS, INC.
PAGE NO.
|
|||
PART
I
|
1
|
||
Item
1.
|
Business
|
1
|
|
Item
1A.
|
Risk
Factors
|
6
|
|
Item
1B.
|
Unresolved
Staff Comments
|
9
|
|
Item
2.
|
Properties
|
9
|
|
Item
3.
|
Legal
Proceedings
|
9
|
|
Item
4.
|
Removed
and Reserved
|
10
|
|
PART
II
|
11
|
||
Item
5.
|
Market
for Registrant’s Common Equity and Related Shareholder Matters and Issuer
Purchases of Equity Securities
|
11
|
|
Item
6.
|
Selected
Financial Data
|
12
|
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
13
|
|
Item
7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
32
|
|
Item
8.
|
Financial
Statements and Supplementary Data
|
33
|
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
69
|
|
Item
9A(T).
|
Controls
and Procedures
|
69
|
|
Item
9B.
|
Other
Information
|
70
|
|
PART
III
|
71
|
||
Item
10.
|
Directors,
Executive Officers and Corporate Governance
|
71
|
|
Item
11.
|
Executive
Compensation
|
71
|
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters
|
71
|
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
71
|
|
Item
14.
|
Principal
Accountant Fees and Services
|
71
|
|
PART
IV
|
72
|
||
Item
15.
|
Exhibits
and Financial Statement Schedules
|
72
|
This Annual Report on Form 10-K
(referred to herein as the
“Form 10-K” or the “Report”) is for the year ending May 31, 2010. The Securities and Exchange Commission
(“SEC”) allows us to incorporate by
reference information that we file with it, which means that we only can disclose important information to
you by referring you directly to those documents. Information specifically incorporated by reference is considered
to be part of this Form
10-K.
Forward-Looking
Statements
This Annual Report on Form 10-K contains
forward-looking statements and information relating to Teletouch Communications,
Inc. and its subsidiaries that are based on management’s beliefs as well as
assumptions made by and information currently available to management. These
statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Statements that are predictive in
nature, that depend upon or refer to future events or conditions, or that
include words such as “anticipate,” “believe,” “estimate,” “expect,” “intend”
and similar expressions, as they relate to Teletouch Communications, Inc. or its
management, are forward-looking statements. Although these statements are based
upon assumptions management considers reasonable, they are subject to certain
risks, uncertainties and assumptions, including, but not limited to, those
factors set forth below under the captions “Business,” “Risk Factors” and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations.” Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results or outcomes may
vary materially from those described herein as anticipated, believed, estimated,
expected or intended. Investors are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their respective dates.
We undertake no obligation to update or revise any forward-looking statements.
All subsequent written or oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
discussion included in this report.
PART
I
Item
1. Business
Teletouch
Communications, Inc. is a premier U.S. wireless services and consumer
electronics provider, focused on delivering a broad range of products and
services through its retail, direct and wholesale distribution channels to
individual consumers, businesses and government agencies. While its wireless
telecommunications and related services are provided primarily in Texas, the
Company sells automotive and cellular products nationally and
worldwide.
Throughout this Form 10-K, Teletouch
Communications, Inc. and
its subsidiaries are referred to as “Teletouch,” “the Company,” “we,” “our” or
“us,” or are referred to in their individual subsidiary or brand
names.
Teletouch
is a Delaware corporation and was incorporated in 1994. Our headquarters and
principal executive offices are located at 5718 Airport Freeway, Fort Worth,
Texas 76117. Our telephone number is (800) 232-3888 and our corporate website is
www.teletouch.com. We
do not intend for information contained on our website to be part of this Form
10-K. We file annual, quarterly and current reports, proxy statements and other
information with the SEC. The SEC also maintains an Internet site that contains
annual, quarterly and current reports, proxy and information statements and
other information that we (together with other issuers) file electronically. The
SEC’s Internet site is www.sec.gov. We make available free of charge on or
through our website our annual, quarterly and current reports and amendments to
those reports as soon as reasonably practicable after we electronically file
such material with or furnish it to the SEC. Additionally, we will voluntarily
provide electronic or paper copies of our filings free of charge upon request.
Currently, the Company’s common stock is quoted on the OTC Markets electronic
exchange under the symbol “TLLE.”
General
Overview
For over
46 years, Teletouch has offered
a comprehensive suite of wireless telecommunications solutions, including
cellular, two-way radio, GPS-telemetry and wireless messaging. Teletouch is the
largest Authorized Provider and billing agent of AT&T (NYSE: T)
products and services (voice, data and entertainment) to consumers, businesses
and government agencies, as well as an operator of its own two-way radio network
and Logic Trunked Radio (“LTR”) systems in Texas. Recently, we entered into
national agency and distribution agreements with Sprint (NYSE: S) and
Clearwire
(NASDAQ: CLWR), providers of advanced 4G cellular network services. The Company
operates a chain of 24 retail and agent stores under the “Teletouch” and “Hawk
Electronics” brands, in conjunction with its direct sales force, call centers
and various retail eCommerce websites including: www.hawkelectronics.com,
www.hawkwireless.com
and www.hawkexpress.com.
Through our wholly-owned subsidiary, Progressive Concepts, Inc., we also operate
a wholesale distribution business, PCI Wholesale, primarily serving large
cellular carrier agents and rural carriers, as well as auto dealers, smaller
consumer electronics retailers and distributors nationally and internationally.
Wholesale distribution product sales and support are available through our
direct sales personnel and the Internet at sites including www.pciwholesale.com
and www.pcidropship.com,
among other B2B oriented websites.
Business
Segments & Operations
The
Company has three primary business operations, which are reported within this
Report as operating segments as defined by generally accepted accounting
principles (“GAAP”). These operating segments and their respective products and
markets are discussed below.
1
Cellular
Operations
The
Company’s cellular business represents its core business, which has been
acquiring, billing, and supporting cellular subscribers under a revenue sharing
relationship with AT&T and its predecessor companies for over 26 years. The
Company currently serves approximately 61,000 cellular customers in the Dallas /
Fort Worth, Texas Metropolitan Statistical Area (“MSA”), San Antonio, Texas MSA,
Austin, Texas MSA, Houston, Texas MSA, East Texas Regional MSA and Arkansas,
including primarily the Little Rock, Arkansas MSA. The consumer services and
retail business within the cellular business is operated primarily under the
Hawk Electronics brand name, with additional business and government sales
provided by a direct sales group operating throughout all of the Company’s
markets. As a master distributor for AT&T wireless services, the Company
controls the entire customer experience, including initiating and maintaining
the cellular service agreements, rating the cellular plans, providing complete
customer care, underwriting new account acquisitions and providing multi-service
billing, collections, and account maintenance. In addition, the
Company is a reseller and agent of Sprint and Clearwire branded products and
services in the Dallas / Fort Worth area and those operations are also included
in the Company’s cellular business. Product sales from the Company’s cellular
business are comprised primarily of cellular telephones and accessories sold
through PCI’s retail stores, the Internet, outside salespeople and
agents.
Wholesale Distribution Operations
The
Company operates a national consumer electronics and cellular equipment
wholesale distribution and trading business, which serves major carrier agents,
rural cellular carriers, smaller consumer and electronic retailers and
automotive dealers throughout the United States. The Company also maintains
certain international customer relationships, primarily in Asia, Europe and
Latin America for its cellular related equipment sales business. The wholesale
group acquires, sells and supports virtually all types of cellular telephones
(handsets), related accessories, telemetry, car audio and car security products
under numerous direct distribution agreements with manufacturers.
Two-Way
Radio Operations
The
Company operates a two-way radio business and network, with spectrum and service
operations covering the North Texas (Dallas / Fort Worth “DFW”) to East Texas
MSAs (Metropolitan Statistical Areas) and smaller adjacent market areas. Radio
communication services are provided on the Company’s Logic Trunked Radio (“LTR”)
and Passport systems, with related radio equipment sales and installation
services provided by Teleouch branded locations in the market areas. The Company
also sells and services radio equipment for customers operating their own
two-way radio systems. Additional services provided by the two-way operations
include fixed and mobile installations, with full maintenance and repair of
radio equipment and accessories. The two-way radio segment also includes safety
and emergency response vehicle product sales and installation
services.
Sources
of System Equipment and Inventory
The
Company does not manufacture any of its products. All inventory that is
purchased to support the business are finished goods that are shipped in
appropriate packaging and ready to sell to the end-user customer. Inventory used
to support the Company’s business units can be purchased from a variety of
manufacturers and other competing sources. To date there have not been any
significant issues in locating and purchasing an adequate supply of inventory to
service the Company’s cellular subscriber base, with the exception of the iPhone
which AT&T continues to refuse to make available to the Company (see Part
II, Item 3. Legal Proceedings for discussion of the action brought against
AT&T related to the iPhone and other matters). PCI purchases cellular phones
and accessories from several competing sources, but AT&T is the primary
source for the cellular phones it sells to the Company’s cellular subscribers.
Equipment sourced through AT&T comes with certain assurances that the phones
purchased are certified to function properly on AT&T’s cellular network. The
Company has the express right, however, to acquire handsets and equipment from
any vendor or manufacturer it chooses.
2
Cellular
phones and consumer electronics to support PCI’s wholesale distribution business
are purchased from a variety of sources, including manufacturers and a variety
of brokers. The Company formerly maintained direct purchasing relationships with
many manufacturers and is again currently pursuing direct distribution
agreements with several manufacturers of cellular handsets to supply its
wholesale brokerage business.
The
Company purchases two-way radios primarily from Motorola, Kenwood USA, Vertex
and Icom America.
Teletouch
does not manufacture any of its network equipment used to provide two-way radio
services, including but not limited to antennas and transmitters. This equipment
is available for purchase from multiple sources, and the Company anticipates
that such equipment will continue to be available in the foreseeable future.
Most of the emergency vehicle products sold are obtained under a Master
Distributer Agreement with Whelen Engineering Company, Inc.; however, competing
products are available from multiple sources.
Competition
Substantial and increasing competition
exists within the wireless communications industry. Cellular providers may
operate in the same geographic area, along with any number of other resellers
that buy bulk wireless services from one of the wireless providers and resell it
to their customers. The Company currently distributes AT&T,
Sprint and Clearwire wireless service. The Company competes against AT&T for
cellular subscribers in the DFW, San Antonio, Houston, Austin, East Texas and
Arkansas market areas and competes against other Sprint and Clearwire wireless
service resellers and agents in the DFW MSA. The Company’s primary competition
is AT&T, which offers various products and services denied to the Company,
on both a stand-alone and bundled basis, often at discounted pricing, many of
which cause and have caused increasing difficulties for the Company. A number of
these products and services that have been denied to the Company for sale to its
customers are the subject of our ongoing legal action against AT&T
(see Item 3. Legal Proceedings for discussion of the action brought
against AT&T related to the iPhone and other matters). Without these additional product and
services, it is increasingly hard to attract new customers and retain existing
ones in the market areas where the Company can compete with
AT&T. Due to the expiration of the initial
term of its largest distribution agreement with AT&T at the end of August
2009, the Company is unable to offer AT&T services to new Subscribers in the
DFW MSA. While the Company has the undisputed right to support its current
Subscribers in perpetuity, the Company has been prohibited from selling the
iPhone or servicing its own subscribers desiring an iPhone since the iPhone’s
inception in June 2007, which has given AT&T and others authorized to sell
the iPhone a competitive advantage over us. Our ability to compete for
cellular customers in certain markets and retain the existing DFW customer base
is limited to our ability to provide additional services the customer cannot
receive from the carrier itself. We offer to our customers, identical
cellular equipment and service rate plans to those offered by AT&T, with the
exception of the iPhone and its related service plans, so our competitive
pressures are very similar to those faced by any other carrier competitor to
AT&T, which include the types of services and features offered, call
quality, customer service, network coverage and price. Pricing
competition has led to the introduction of lower price service plans, unlimited
calling plans, plans that allow customers to add additional units at attractive
rates, plans that offer a higher number of bundled minutes for a flat monthly
fee or a combination of these features. The Company remains
competitive by capitalizing on its position as a provider of superior,
personalized customer service, as well as a provider of customizable billing
solutions for its enterprise and government customers. Teletouch’s ability to
compete successfully for cellular service customers in the future will depend
upon the Company’s ability to improve upon the current level of customer service
and to develop creative and value added solutions for customers in order to
attract new customers.
3
There is significant competition within
the wholesale cellular phone and electronics distribution industry in the United
States. Most of the Company’s sales from its wholesale business include small
quantities of items sold to a large number of customers at relatively low profit
margins (to its wireless businesses). During fiscal year 2010, the Company
expanded its wholesale brokerage business to sell larger quantities of cellular
phones to various dealers and distributors around the world, creating service
and rebate plans to effectively differentiate itself from its competition,
resulting in significantly improved revenues and profits in its wholesale
distribution business. The Company’s wholesale business competes with other
wholesale distributors of cellular phones and car audio equipment across the
United States. In addition, the wholesale business competes with other regional
wholesale distributors for exclusive geographic product sales agreements from
various manufacturers, which change from time to time. During fiscal year 2010,
the Company was notified from Sony and JVC that its exclusive product sales
agreement for the DFW market would not be renewed. While those exclusive product
agreements made it possible for the Company to attain a higher profit margin on
the sales of Sony and JVC products, the Company still maintains active sales in
those brands through various alternative wholesale supplier
relationships.
There is active competition related to
the Company’s two-way radio operations. This business unit has operated in its
primary East Texas markets for over 46 years, which is generally much longer
than the majority of its competition in these markets. Most of the Company’s
two-way radio product sales are generated from local government entities and
business customers, some of which also subscribe to the Company’s LTR network
system. Geographically, the Company’s two-way radio business has greater
competition in the DFW area compared to the East Texas area, as the Company has
a very long standing presence with its East Texas customers. There is
substantial competition related to the Company’s emergency vehicle product line,
which is included in the Company’s two-way operations, due to the number of
competing products offered by a number of larger distributors offering
competitive pricing.
Patents
and Trademarks
In fiscal
year 2004, Teletouch registered and was granted the trademark for its GeoFleet®
software, a product that compiles reports and maps the data provided from any
telemetry device. In fiscal year 2004, Teletouch also registered
trademarks for its LifeGuard™ and VisionTrax™ products. LifeGuard™ is
a wireless telemetry system that tracks and monitors personnel assets using
satellite communication technology. VisionTrax™ is a self-powered
wireless telemetry device that tracks and monitors mobile or remote assets using
satellite communication technology. The Company considers these registered
trademarks to be beneficial and will consider registering trademarks or service
marks for future services or products it may develop.
In
November 2004, Teletouch received a copyright on its GeoFleet software code,
which was effective September 2004. In June 2006, it received a
separate copyright on the database structure used by its Geofleet software even
though Teletouch believes this database structure was covered under the initial
GeoFleet copyright.
Although
the Company exited its telemetry business in fiscal year 2006, the Company
continues to explore opportunities to re-enter this business. The
Company believes that some of its previously developed software as well as the
name recognition of certain trademarks may have future value if it is to
re-enter the telemetry business.
4
In
addition, the Company acquired a hotspot network communication patent on July
24, 2009, after foreclosing on the assets of Air-bank, Inc. (see Note 4 -
“Air-bank Note” for further discussion on the foreclosure on the Air-bank
assets). This form of communication allows a mobile unit (e.g. phone)
to switch from the unit’s conventional cellular transmissions to wireless
fidelity (“Wi-Fi”) transmissions upon detection of the Wi-Fi signals. The
hotspot network communication patent number is US 7,099,309 B2 and was filed on
August 29, 2006. At May 31, 2010,
the patent is recorded
as a current asset held for
sale on the Company’s consolidated balance sheet.
In May 2010, Progressive Concepts, Inc.,
entered in a certain Mutual Release and Settlement Agreement (the “Agreement”)
with Hawk Electronics, Inc. (“Hawk”). The settlement followed a litigation
matter styled Progressive
Concepts, Inc. d/b/a Hawk Electronics v. Hawk Electronics, Inc . Case No. 4-08CV-438-Y, by the Company
against Hawk in the US District Court for the Northern District of Texas which
alleged, among other things, infringement on the trade name Hawk
Electronics, as well as
counterclaims by Hawk against the Company of, among other things, trademark
infringement and dilution. Under terms of the Agreement, the Company
agreed to, among other things, the purchase of a perpetual license from Hawk to
use the trademark “Hawk Electronics” for $900,000 payable in annual installments
through July 2013.
Regulation
None of
the Company’s principal products or services requires government approval to
sell or distribute; however, the Company does operate a two-way radio network
that is regulated by the Federal Communication Commission (“FCC”). The FCC
regulates Teletouch’s two-way radio operations under the Communications Act of
1934, as amended (the “Communications Act”), by granting the Company licenses to
use radio frequencies. These licenses also set forth the technical parameters,
such as location, maximum power, and antenna height under which the Company is
permitted to use those frequencies.
The FCC
grants radio licenses for varying terms of up to 10 years, and the FCC must
approve renewal applications. Although there can be no assurance the FCC will
approve or act upon Teletouch’s future applications in a timely manner, the
Company believes that such applications will continue to be approved with
minimal difficulties.
The
foregoing description of certain regulatory factors does not purport to be a
complete summary of all the present and proposed legislation and regulations
pertaining to the Company’s operations.
Employees
As of May
31, 2010, Teletouch employed 202 people, of which 199 were employed full-time
and 3 were employed on a part-time or temporary basis. Of this total,
157 full time employees and 1 part-time employee are employed by
PCI. Most of these employees perform sales, operations support and
clerical roles. The Company considers its relationships with its
employees to be satisfactory and is not a party to any collective bargaining
agreement.
5
Executive
Officers
Our executive officers are appointed by
and serve at the discretion of our Board of Directors. Information regarding our
executive officers as of May 31, 2010, is provided below.
Name
|
Age
|
Title
|
|
Robert M.
McMurrey
|
64
|
Chairman of the Board of Directors
and Chief Executive Officer
|
|
Thomas A. "Kip" Hyde,
Jr.
|
48
|
President and Chief Operating
Officer
|
|
Douglas E.
Sloan
|
42
|
Chief Financial Officer, Treasurer
and Corporate Secretary
|
Robert M. McMurrey, Chairman of the Board of Directors
and Chief Executive Officer, has been a director of Teletouch since 1984.
He served as Chief Executive Officer until February 2000 and was re-appointed to
this position in November 2006.
Thomas A. “Kip” Hyde, Jr., Director,
President and Chief Operating Officer, joined Teletouch in October 2004
and served as Chief Executive Officer through November
2006. Subsequent to Teletouch’s acquisition and consolidation of
Progressive Concepts, Inc. (“PCI”) in August 2006, Mr. Hyde was named President
and Chief Operating Officer of Teletouch, and President and Chief Executive
Officer of PCI. In March 2009, Mr. Hyde was appointed to Teletouch’s
Board of Directors to fill a vacant Board position.
Douglas E. Sloan, Chief Financial
Officer, joined Teletouch as a Senior Financial Analyst in August
1998. In May 2001, he was promoted to Controller and Corporate
Secretary. In December 2005, he was promoted to the office of Interim
Chief Financial Officer in addition to his other duties. In
November 2006, Mr. Sloan was promoted to Chief Financial Officer and Treasurer
in addition to his other duties.
Item
1A. Risk Factors
Amounts
due under the Company’s revolving credit facility with its senior lender could
accelerate as a result of a continued decline in the Company’s cellular
subscriber base and the related assets that have been borrowed against which
could result in an operating cash deficiency and an inability to
continue servicing the debt obligation.
The
Company historically relied upon Thermo Credit, LLC (“Thermo”) to provide cash
availability under its revolving credit facility to fund its working capital
needs including purchasing inventory when vendor credit terms are not available
and for financing sales made by the Company on extended credit terms. This
facility was designed to provide sufficient cash availability for the Company in
times when the underlying assets pledged as collateral were
growing. The primary asset pledged as collateral is the Company’s
customer accounts receivable. The launch of the iPhone in June 2007
and AT&T’s refusal to allow the Company to sell the iPhone has resulted in a
steady decline in the Company’s subscriber base, the related billings and
accounts receivable. This decline in the subscriber base and related
billings was accelerated as a result of the expiration of the Company’s primary
DFW distribution agreement with AT&T in August 2009, which ended the
Company’s ability to add new Subscribers and further prevented the Company from
allowing any AT&T subscribers in the DFW market desiring to change their
billing services to the Company from transferring their cellular service to the
Company. Prior to August 2009, transfers of customers from AT&T
had partially offset some of the losses of customers leaving to purchase the
iPhone elsewhere. This decline in cellular billings and accounts
receivable has directly reduced the borrowings available against accounts
receivable under the credit facility and has had the indirect effect of reducing
the borrowings available against other assets, including inventory, intangibles,
property and equipment, because borrowings on non-accounts receivable assets are
limited to a fixed percentage of the total borrowings
outstanding. The losses of cellular subscribers coupled with periodic
declines in accounts receivable in the wholesale distribution business has
resulted in the Company’s being periodically over-advanced on its facility. The
Company had previously borrowed the maximum amount available against its assets
for certain debt restructuring transactions in addition to its working capital
needs so a portion of the borrowed funds are not held in cash or other short
term assets for servicing any potential accelerated repayment obligations it may
encounter. To date, Thermo has allowed the Company to remain
over-advanced on the facility from time-to-time, extended certain repayment
terms, modified scheduled debt amortization and has continued to allow the
inclusion of certain assets in the computation of its borrowing base, which in
turn has allowed the Company to meet its obligations under the facility. If
Thermo were to have difficulty with the terms of the existing facility or
exclude or modify certain advances allowed against assets currently included in
the borrowing, the Company could potentially experience operating cash
deficiencies up to and including being unable to meet its obligations under this
revolving credit facility. In addition, if Thermo does not renew the Company’s
debt agreement in January 2012, the Company would have to secure new financing
to re-finance its current obligation due to Thermo and meet its ongoing cash
needs. Assuming the Company were able to find a new senior lender, it can
provide no assurance the terms of the new financing would be as favorable as
these provided by Thermo or that a new lender would be as accommodating to the
varying cash needs of the Company during the term of the loan. We can
provide no assurance that Thermo will renew the current facility, but do note
that the initial loans with Thermo from August 2006, have been modified,
expanded and extended on several occasions to date. To the extent that the
Company was unable to refinance this debt, it would likely not have the means to
fully repay Thermo from the cash on hand or generated from operations resulting
in the possibility of a foreclosure on all of the assets of the
Company.
6
An
accelerated reduction in our cellular subscriber base could have a material
adverse effect on our business.
The
launch of the iPhone in June 2007 and AT&T’s refusal to allow the Company to
sell the iPhone has resulted in a steady decline in the Company’s subscriber
base (see Item 3. Legal Proceedings for discussion of the action brought against
AT&T related to the iPhone and other matters). This decline in the Company’s
customer base was accelerated as a result of the expiration of the Company’s
primary DFW distribution agreement with AT&T in August 2009. The Company
continues to battle the losses of Subscribers to AT&T and is currently
seeking relief through a binding arbitration process that it initiated in
September 2009. As AT&T continues to release new products or services that
are not made available to the Company, losses of cellular Subscribers will
continue. If any of these products or services become in extraordinary demand or
are required by consumers or businesses, the result could be an acceleration of
cellular subscriber losses to AT&T. Although the Company does
maintain contracts varying from one to two years with its current customer base
for cellular service, the customer may voluntarily elect to transfer to another
carrier, including AT&T, at any time and incur a penalty fee. If expenses
related to the Company’s cellular operations are not adjusted accordingly due to
a declining Subscriber base, the Company will rely upon its other business units
to replace the revenue and income loss from its cellular operations. We can
provide no assurance that any of our other existing business units could
generate enough revenue in a timely manner to cover the losses sustained from a
rapidly declining cellular subscriber base. We also can provide no assurance
that our customers will continue to purchase products or services from us or
that their purchases will be at the same or greater levels than in prior
periods.
7
Teletouch
may be unsuccessful in the arbitration with AT&T and could incur a
significant obligation from the outcome of the arbitration or an unfavorable
outcome from the arbitration could have a material adverse effect on the
Company’s business.
Since
July 2007, the Company has attempted to negotiate with AT&T for the purpose
of obviating the need for legal action. However, such attempts have failed.
Therefore, on September 30, 2009, the Company, through the legal entity
Progressive Concepts, Inc. commenced an arbitration proceeding against New
Cingular Wireless PCS, LLC and AT&T Mobility Texas LLC (collectively,
“AT&T”) seeking at least $100 million in damages. The binding arbitration
was commenced to seek relief for damages incurred as AT&T has prevented PCI
from selling the popular iPhone and other “AT&T exclusive” products and
services that PCI is and has been contractually entitled to provide to its
customers under distribution agreements between PCI and AT&T. In response to
PCI’s initiating its legal action, AT&T filed certain counterclaims in the
arbitration, including seeking monetary damages for equipment transactions
between the parties and certain alleged breaches of the distribution agreement
by the Company. If the Company does not prevail in its claim against AT&T,
then the expected result is that the Company would continue to service its
Subscribers under the distribution agreement and would not be awarded any
monetary damages. While the Company believes that the counterclaims are
baseless, if AT&T prevails in its counterclaims during the arbitration, the
Company could potentially be held liable for certain payments to AT&T or it
could be ruled that the Company had defaulted on certain terms and conditions of
the distribution agreement as a result of actions alleged in these
counterclaims. We can provide no assurance that the Company will prevail in its
arbitration against AT&T or be able to defend against the counterclaims
raised by AT&T or pay any obligations due to AT&T in the event they were
to prevail in any of their counterclaims.
Teletouch’s
parent company may be unable to meet its future financial
obligations.
Prior to
the acquisition of PCI in August 2006, TLLP, Teletouch’s parent company, assumed
all of the remaining institutional debt of PCI, whereby the senior debt
obligations formerly at PCI were transferred to TLLP as senior debt obligations
and the subordinated debt obligations of PCI were partially settled by the
issuance of Teletouch’s common stock owned by TLLP with the balance converted to
redeemable Series A preferred units of TLLP. To secure the senior debt
obligation, TLLP pledged all of its assets, which consist primarily of its
holding of approximately 80% of the outstanding common stock of Teletouch. When
the senior debt originally matured in August 11, 2007, TLLP did not have
sufficient cash or other means to repay this debt and was successful in
negotiating an initial extension of the maturity date through October 11,
2007. Subsequent extensions were granted by the senior debt holder to TLLP
extending the maturity date through December 15, 2010. TLLP is a holding company
with no operations with a minimal amount of cash on hand and may be dependent
upon selling a sufficient number of shares it owns in Teletouch common stock or
upon the cash flows of Teletouch through the receipt of future cash dividends to
service its outstanding debt obligations. The Company has no current
agreements with TLLP to fund cash obligations nor does it have any current plans
to declare dividends in order to allow TLLP to meet the debt obligations. TLLP’s
management has represented to the Company that it is working to refinance this
debt to allow additional time for the value of its Teletouch common stock to
appreciate in order for it to be able to sell a sufficient number of shares to
repay its debt obligations. If TLLP is unsuccessful in repaying its obligations
and its lenders foreclose on Teletouch’s common stock owned by TLLP and become
the majority shareholders of Teletouch, then there is a risk that these lenders
could vote through matters that may not be in the best interest of the
shareholders of Teletouch as a whole.
8
Item
1B. Unresolved Staff Comments
There are
no unresolved written comments that were received from the Securities and
Exchange Commission’s staff 180 days or more before the end of our fiscal year
relating to our periodic or current reports filed under the Securities Exchange
Act of 1934, as amended.
Item
2. Properties
Teletouch
owns an office building and warehouse distribution facility in Fort Worth, Texas
and an office building and two-way radio service center in Tyler,
Texas. In addition the Company operates 16 combined retail and
customer service locations under the “Hawk Electronics” brand. Fourteen (14) of
the combined retail and customer service locations are located in the DFW MSA,
and two (2) are located in San Antonio. All of these locations are
leased with the exception of one retail store which is a part of the Fort Worth,
Texas office building owned by the Company.
Teletouch
leases three (3) two-way shops and leases transmitter sites on commercial
towers, buildings and other fixed structures in approximately 30 different
locations related to its two-way radio business.
Teletouch
also leases a suite at the Dallas Cowboys football stadium in Arlington,
Texas.
The
Company’s leases are for various terms and provide for monthly rental payments
at various rates. Teletouch made total lease payments of
approximately $1,459,000 during fiscal year 2010 and is expected to make
approximately $1,384,000 in lease payments during fiscal year 2011 related to
its contractual leases and leases with month-to-month terms.
The
Company believes its facilities are adequate for its current needs and that it
will be able to obtain additional space as needed at reasonable
cost.
Item
3. Legal Proceedings
Teletouch
is a party to various legal proceedings arising in the ordinary course of
business. Except as set forth below, the Company believes there is no
proceeding, either threatened or pending, against it that will result in a
material adverse effect on its results of operations or financial
condition.
Claim Asserted Against Use of Hawk
Electronics’ Name: On May 4, 2010, Progressive Concepts, Inc. entered in
a Mutual Release and Settlement Agreement (the “Agreement”) with Hawk
Electronics, Inc. (“Hawk”). The settlement followed a litigation matter
styled Progressive Concepts,
Inc. d/b/a Hawk Electronics v. Hawk Electronics, Inc. Case No.
4-08CV-438-Y, by the Company against Hawk in the US District Court for the
Northern District of Texas which alleged, among other things, infringement on
the trade name Hawk
Electronics, as well as counterclaims by Hawk against the Company of,
among other things, trademark infringement and dilution.
Under
terms of the Agreement, the parties executed mutual releases of claims against
each other and agreed to file a stipulation of dismissal in connection with the
pending litigation matter. Under the Agreement, the Company agreed
to, among other things, (i) purchase a perpetual license from Hawk to use the
trademark “Hawk Electronics” for $900,000 payable in installments through July
2013, and (ii) assign to Hawk the right and interest in the domain name
www.hawkelectronics.com. In exchange, Hawk agreed to, among other
things, allow the Company to continue using the domain name
www.hawkelectronics.com in exchange for a monthly royalty payable to Hawk
beginning August 2013.
9
AT&T Binding Arbitration:
In late June 2007, Apple, Inc. introduced the iPhone to the United States in an
exclusive distribution and wireless services partnership with AT&T. AT&T
was at the time, and remains today, the only authorized carrier provider for the
iPhone. Since that time, AT&T has refused to allow the Company to sell the
iPhone as well as other products and services, despite AT&T’s contractual
obligation to do so under its previously executed distribution agreements
between AT&T and the Company. Furthermore, the Company asserts that AT&T
has continued to make direct contact with Company customers and aggressively
markets, advertises and promotes the iPhone and other AT&T exclusive
products and services to Company customers in an attempt to induce them to
switch to AT&T.
In June
2007, the Company serviced approximately 83,000 cellular subscribers. As of May
31, 2010, more than 18,700 subscribers have transferred their accounts to
AT&T, with a significant percentage of these solely due to the exclusive
availability of the iPhone through AT&T and Apple designated retail outlets
only.
Since
July 2007, the Company had attempted to negotiate with AT&T for the purpose
of obviating the need for legal action. However, such attempts failed.
Therefore, on September 30, 2009, the Company, through the legal entity
Progressive Concepts, Inc. (“PCI”), commenced an arbitration proceeding against
New Cingular Wireless PCS, LLC and AT&T Mobility Texas LLC (collectively,
“AT&T”) seeking a minimum $100 million in damages. The binding arbitration
was commenced to seek relief for damages incurred as AT&T has prevented PCI
from selling the popular iPhone and other AT&T exclusive products and
services that PCI is and has been contractually entitled to provide to its
customers under distribution agreements between PCI and AT&T. The action
further asserts that AT&T violated the longstanding non-solicitation
provisions of the DFW market distribution agreement by and between the companies
by actively inducing customers to leave PCI for AT&T. PCI is represented in
the matter by the Company’s legal counsel, Bracewell & Giuliani,
LLP.
On
February 28, 2010, Teletouch and its wholly-owned subsidiary, PCI, as Claimant
and AT&T as Respondent received the Agreed Scheduling Order from the
Judicial Arbitration and Mediation Services, Inc. (“JAMS”) Arbitrator assigned
to the binding arbitration. Among other matters, including the provision of the
Rules and Law governing the arbitration, the Agreed Scheduling Order set out the
proposed completion dates for Discovery, Depositions, Dispositive Motions and
Briefing Deadlines, culminating in an Arbitration hearing period scheduled for
November 8, 2010 through November 12, 2010.
On August
10, 2010, the Agreed Scheduling Order was amended by the JAMS Arbitrator after
being petitioned by AT&T for additional time to prepare for the
hearing. As a result, all interim completion dates to prepare for the
hearing have been extended with the Arbitration hearing period re-scheduled for
March 21, 2011 through March 25, 2011.
For a
more detailed description of the Company’s legal proceedings and legal action
Notice and Initial Statement of Claim, please refer to the related Form 8-K,
filed October 1, 2009 (available at the Company’s website: www.teletouch.com and
on EDGAR at www.sec.gov).
Item
4. Removed and Reserved
10
PART
II
Item
5.
|
Market
for Registrant’s Common Equity and Related Shareholder Matters and Issuer
Purchases of Equity Securities
|
Prior to
its January 2007 delisting, Teletouch’s common stock was traded on the American
Stock Exchange (the “AMEX”) under the symbol “TLL.” Currently the Company’s
securities are quoted on the OTC Markets electronic exchange under the symbol “TLLE.” The Company has recently had filed on
its behalf by a sponsoring broker-dealer a Form 15c2-11 to secure a new listing
on the OTC Bulletin Board marketplace.
The
following table lists the reported high and low closing prices for Teletouch’s
common stock for the periods indicated, which correspond to its quarterly fiscal
periods for financial reporting purposes.
Common
Stock
|
||||||||
High
|
Low
|
|||||||
Fiscal Year
2010
|
||||||||
1st Quarter
|
$ | 0.14 | $ | 0.08 | ||||
2nd Quarter
|
0.12 | 0.08 | ||||||
3rd Quarter
|
0.23 | 0.08 | ||||||
4th Quarter
|
0.40 | 0.10 | ||||||
Fiscal Year
2009
|
||||||||
1st Quarter
|
$ | 0.21 | $ | 0.06 | ||||
2nd Quarter
|
0.29 | 0.06 | ||||||
3rd Quarter
|
0.46 | 0.07 | ||||||
4th Quarter
|
0.16 | 0.06 |
As of
August 19, 2010, 49,916,189 shares of common stock were issued, and 48,739,002
shares of common stock were outstanding. As of that same date, 5,506,483 options
to purchase common stock were issued and outstanding. On June 2, 2008, the
Company retired all of the 6,000,000 outstanding redeemable common stock
warrants by paying $1,500,000 in cash and issuing promissory notes totaling
$1,500,000 for the balance of the redemption payment. The common stock is the
only class of stock that has voting rights or that is traded
publicly. As of August 19, 2010, there were 52 holders of record of
the Company’s common stock based upon information furnished by Continental Stock
Transfer & Trust Company, New York, New York, the Company’s transfer
agent. The number of holders of record does not reflect the number of
beneficial holders, which are in excess of 800, of Teletouch’s common stock for
whom shares are held by banks, brokerage firms and other entities.
Teletouch
has never paid any cash dividends nor does it anticipate paying any cash
dividends from cash generated by its operations in the foreseeable future.
However, if and to the extent the Company prevails in its litigation against
AT&T, the Board of Directors of the Company, in the exercise of its sole
discretion with respect to this matter, may consider a cash dividend on its
common stock, timing and the extent of which (if any), among other things, will
also be determined by the Board.
Issuer Purchases of Equity
Securities
During the fourth quarter of fiscal year
ended May 31, 2010, there were no repurchases made by us or on our behalf, or by
any “affiliated purchaser,” of shares of our common stock, nor were there any
sales of the Company’s unregistered securities during the same fiscal
period.
11
In June
2009, Glaubman, Rosenburg & Robotti Fund, L.P., a non-affiliated New York
limited partnership and holder of 312,978 shares of Teletouch’s common stock,
(the “Shareholder”) notified the Company of its intent to sell all of its shares
of Teletouch’s common stock and offered these shares to Teletouch at a discount
from market. On June 15, 2009, the Company entered into a Securities
Purchase Agreement with the Shareholder to purchase the 312,978 shares of
Teletouch common stock it held at $0.10 per share. Teletouch’s
purchase price of $0.10 per share represented a 13% discount from the $0.115
average of the 10 day closing price on Teletouch’s common stock prior to the
effective date of this agreement. The purchase of the shares was completed on
July 16, 2009 following the payment of $31,298 to the Shareholder and after the
surrender of the 312,978 shares of stock. These shares are held by the Company
in treasury.
Item
6. Selected Financial Data
(in thousands, except per share
data)
(4)
|
(4)
|
|||||||||||||||||||
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||
Service, rent, and maintenance
revenue
|
$ | 25,943 | $ | 27,210 | $ | 28,902 | $ | 27,548 | $ | 27,350 | ||||||||||
Product sales
revenue
|
26,016 | 18,647 | 25,621 | 28,696 | 32,293 | |||||||||||||||
Total operating
revenues
|
51,959 | 45,857 | 54,523 | 56,244 | 59,643 | |||||||||||||||
Operating expenses
(1)
|
47,981 | 45,185 | 51,539 | 61,507 | 66,450 | |||||||||||||||
Operating income (loss) from
continuing operations
|
$ | 3,978 | $ | 672 | $ | 2,984 | $ | (5,263 | ) | $ | (6,807 | ) | ||||||||
Debt termination fee
(2)
|
- | - | (2,000 | ) | - | - | ||||||||||||||
Interest expense,
net
|
(2,261 | ) | (2,330 | ) | (3,895 | ) | (3,733 | ) | (5,051 | ) | ||||||||||
Other
|
167 | - | - | - | - | |||||||||||||||
Income (loss) from continuing
operations before income tax expense (benefit)
(1)(2)
|
1,884 | (1,658 | ) | (2,911 | ) | (8,996 | ) | (11,858 | ) | |||||||||||
Income tax expense
(benefit)
|
284 | 264 | 164 | 114 | (1,323 | ) | ||||||||||||||
Income (loss) from continuing
operations applicable to common shareholders (1)(2)
|
1,600 | (1,922 | ) | (3,075 | ) | (9,110 | ) | (10,535 | ) | |||||||||||
Income from discontinued
operations applicable to common shareholders, net of
tax
|
$ | - | $ | - | $ | - | $ | 1,031 | $ | 2,418 | ||||||||||
Net income
(loss)
|
$ | 1,600 | $ | (1,922 | ) | $ | (3,075 | ) | $ | (8,079 | ) | $ | (8,117 | ) | ||||||
Basic income (loss) per share of
common stock
|
||||||||||||||||||||
Income (loss) from continuing
operations applicable to common shareholders (1)(2)
|
$ | 0.03 | $ | (0.04 | ) | $ | (0.06 | ) | $ | (0.19 | ) | $ | (0.35 | ) | ||||||
Income from discontinued
operations applicable to common shareholders
|
$ | - | $ | - | $ | - | $ | 0.02 | $ | 0.08 | ||||||||||
Total
|
$ | 0.03 | $ | (0.04 | ) | $ | (0.06 | ) | $ | (0.17 | ) | $ | (0.27 | ) | ||||||
Diluted income (loss) per share of
common stock
|
||||||||||||||||||||
Income (loss) from continuing
operations applicable to common shareholders (1)(2)
|
$ | 0.03 | $ | (0.04 | ) | $ | (0.06 | ) | $ | (0.19 | ) | $ | (0.35 | ) | ||||||
Income (loss) from discontinued
operations applicable to common shareholders
|
$ | - | $ | - | $ | - | $ | 0.02 | $ | 0.08 | ||||||||||
Total
|
$ | 0.03 | $ | (0.04 | ) | $ | (0.06 | ) | $ | (0.17 | ) | $ | (0.27 | ) | ||||||
Total
assets
|
$ | 21,684 | $ | 24,356 | $ | 28,569 | $ | 32,302 | $ | 34,560 | ||||||||||
Redeemable equity securities and
long-term debt (3)
|
$ | 14,837 | $ | 15,103 | $ | 10,429 | $ | 6,220 | $ | 4,130 |
(1)
|
In
June 2007, the Company recognized a one-time, non-cash gain of
approximately $3,824,000 from the forgiveness of certain trade payable
obligations to AT&T after reaching a settlement over disputed roaming
charges.
|
12
(2)
|
In
May 2008, the Company was successful in negotiating the termination of the
Transaction Party Agreement with Fortress Credit Corporation, PCI's former
senior lender, for a $2,000,000
payment.
|
(3)
|
Included
are the Company's obligations under outstanding redeemable common stock
warrants (see Note 8 - "Long-Term Debt" for more information on the common
stock warrants).
|
(4)
|
The
acquisition of PCI was completed on August 11, 2006 through the
contribution of the stock of PCI to Teletouch by TLL Partners, LLC
("TLLP"). This transaction was considered a reorganization of entities
under common control since both PCI and Teletouch were under common
control of TLLP prior to the reorganization. As a result of this
reorganization and because PCI was consolidated with Teletouch, PCI's
fiscal year end was changed from a calendar year ending December 31 to a
fiscal year ending May 31 for financial reporting purposes. In
fiscal year 2006, PCI's financials were consolidated with Teletouch in a
manner similar to a pooling of
interests.
|
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
The
following discussion and analysis of the results of operations and financial
condition of the Company should be read in conjunction with the consolidated
financial statements and the related notes and the discussions under “Critical
Accounting Estimates,” which describes key estimates and assumptions we make in
the preparation of our financial statements.
Overview
For over
46 years, Teletouch has offered a comprehensive suite of telecommunications
products and services, including cellular, two-way radio, GPS-telemetry,
wireless messaging and public safety/emergency response products and services.
Teletouch operates 24 cellular retail and agent locations, under the “Teletouch”
and “Hawk Electronics” brand names.
Teletouch’s
core-business is acquiring, billing and supporting cellular subscribers under a
long-term recurring revenue relationship with AT&T. The distribution
agreements with AT&T and its predecessor companies have been in place for
over 26 years. Through its subsidiary, Progressive Concepts Inc., (“PCI”), the
Company provides AT&T cellular services (voice, data and entertainment), as
well as other mobile, portable and personal electronics products and services to
individuals, businesses and government agencies. PCI operates a chain of retail
stores and sells cellular and other products and services under the “Hawk
Electronics” brand, through Hawk-branded sub-agents, its own direct sales force,
call center and the Internet. As a master distributor and Authorized Services
Provider for AT&T, the Company controls the entire customer relationship,
including initiating and maintaining the cellular service agreements, rating the
cellular plans, providing complete customer care, underwriting new account
acquisitions and providing multi-service billing, collections and account
maintenance. PCI also operates a national wholesale distribution business, known
as PCI Wholesale that serves major carrier agents, rural cellular carriers,
smaller consumer and electronic retailers and automotive dealers throughout the
United States. The Company also maintains certain international customer
relationships, primarily in Asia, Europe and Latin America for its cellular
related wholesale equipment sales business. Teletouch’s original business is
maintained as an integral component of the Company’s wireless solutions, by
providing two-way radio products and services on its own network in North and
East Texas. In its first attempt at expanding the Company’s cellular related
business, in January 2009, Teletouch entered into an Exclusive Retailer
Agreement with T-Mobile USA, Inc. (“T-Mobile”) for markets outside its AT&T
exclusive territories. The initial agreement provided for Teletouch to open,
operate and manage mall locations, with the Company's first locations opening in
major markets in Oklahoma in February 2009. After opening five (5) new mall
locations under the T-Mobile brand banner, the Company found that long-term
customer traffic for T-Mobile products and services to be inadequate and the
Company closed its last two Oklahoma retail locations in October 2009.
Subsequent to these closings, in January 2010, the T-Mobile agreement was
cancelled. In late 2007, Teletouch began selling safety and emergency response
vehicle products and services under the brand Teletouch EVP (“Emergency Vehicle
Products”). The EVP business is a complementary offering to the Company’s
two-way radio business, and the Company has expanded its product lines to
include light bars, sirens and other accessories used in or on emergency
response vehicles through a number of distribution agreements with manufacturers
of these products. On January 19, 2010, the Company signed a new two-year,
national distribution agreement with Clearwire Communications (NASDAQ: CLWR) to
sell its 4G service called CLEAR. On January 26, 2010, the Company announced
that it had also entered into a two-year, Authorized Representative Agreement
with Sprint (NYSE:S) subsidiary, Sprint Solutions, Inc.
13
For
fiscal year 2011, Teletouch will focus its efforts on resolving its dispute with
AT&T, maximizing profitability in its existing cellular and other business
units and pursuing new business acquisitions. In September 2009, PCI commenced
an arbitration proceeding against AT&T to seek relief for damages the
Company incurred because it was prohibited to sell the iPhone as well as other
“AT&T exclusive” products and services (see Item 3. Legal Proceedings for
discussion of the action brought against AT&T related to the iPhone and
other matters). The Arbitration hearing is currently scheduled for
March 2011. Until the arbitration is complete, the Company will focus on
retaining and preserving its existing subscriber base in the DFW and San Antonio
markets while expanding its cellular subscriber base in available markets
covered by the Company’s various other AT&T distribution agreements. In
fiscal year 2011, the Company will continue to promote cross-training of all
products lines sold within the Company and leverage its existing customer
relationships from each of its business units to sell multiple product lines to
existing and new customers. During fiscal year 2011, the Company will also focus
on finding one or more direct relationships with cellular handset manufacturers
in an effort to grow its wholesale cellular distribution business. The Company
was successful in significantly increasing sales from its cellular phone
brokerage business during fiscal year 2010 and is anticipating that sales will
continue to grow once more reliable suppliers are found. Although the Company
believes it can maintain a profitable, but declining cellular business in the
future with its existing Subscriber base, organic growth in its other business
units or new business acquisitions will be necessary to offset expected losses
of revenue and profits from its legacy cellular business. There is no assurance
that any of the acquisitions will be concluded or the AT&T arbitration will
be resolved quickly.
Discussion
of Business Strategy by Operating Segment
Most of
the Company’s efforts from August 2006 through fiscal year 2009 were focused on
the complex integration issues related to the acquisition of PCI, its subsequent
reorganization activities, as well as on securing financing to complete one or
more acquisitions to provide new avenues of revenue growth for the Company. In
fiscal year 2010, the Company completed and filed all of its required previously
delinquent quarterly financial reports, which brought the Company into
compliance with its reporting requirements as determined by the SEC. Now that
the Company has completed the integration of PCI and is current in all of its
financial reporting and regulatory requirements, it will focus on expanding its
different business units to increase profitability. During fiscal year 2010, the
Company was successful in initiating new national and international wholesale
distribution channels, increasing the Company’s product sales by over 40% when
compared to fiscal year 2009. This additional sales volume, in addition to
ongoing management of operating expenses, contributed to the Company’s achieving
net income in fiscal year 2010 for the first time in many years. Throughout
fiscal year 2010, Teletouch better positioned itself for future growth by
optimizing the efficiency of its operations by re-allocating resources to
business units capable of achieving meaningful growth for the Company versus
supporting many of the Company’s prior smaller businesses and product lines with
limited potential for growth. Key to this strategy in fiscal year 2011 will be
to focus on leveraging the Company’s various customer relationships, including
PCI’s approximately 61,000 cellular subscribers, and previous customers which
are generally comprised of individuals and businesses of higher than average
credit worthiness (due to PCI’s stringent credit standards).
14
The
Company’s primary business for over 26 years has been distributing cellular
services under several exclusive master distributor agreements with AT&T and
its predecessor companies. During fiscal year 2010, certain changes to the
Company’s relationship with AT&T have occurred, including the expiration of
the initial term of its primary DFW distribution agreement and the commencement
of legal action against AT&T by the Company. Following the August
2009 expiration of the DFW distribution agreement, the Company maintains the
right to continue servicing its cellular subscriber base in perpetuity, i.e.,
until the last subscriber terminates service. Since the launch of the
iPhone in June 2007 and following AT&T’s refusal to allow the Company to
offer the iPhone to its subscriber base, the Company has experienced higher
rates of attrition in its cellular subscriber base due to subscribers
transferring their service to AT&T to purchase an iPhone. The iPhone
and certain other products and services withheld from the Company by AT&T
were the primary reasons the Company commenced the legal action against AT&T
in September 2009. Following expiration of the DFW agreement and the
commencement of the legal action, the Company has experienced a predicted
decline in cellular subscribers and cellular revenues due to AT&T
subscribers no longer being allowed to transfer their service to PCI. Subscriber
attrition rates have remained flat following the August 2009 expiration of the
DFW agreement, but the inability to replace these subscribers has resulted in a
declining subscriber base and declining cellular service revenues. The Company
is currently negotiating new cellular carrier distribution relationships and
began offering cellular services with Sprint and Clearwire in the later part of
fiscal year 2010 with the intent of offsetting some of the losses of its
AT&T cellular service revenues.
In fiscal
year 2009, macro-economic issues attributed to lower cellular and electronics
sales in the Company’s wholesale business and budgetary constraints imposed on
many governmental entities and commercial enterprises resulted in lower sales in
the Company’s two-way radio business. During fiscal year 2010, the Company was
successful in improving its operating results through aggressive cost management
and improved product sales from its wholesale and two-way
businesses. During fiscal year 2011, the Company will continue to
manage its costs closely and will focus on developing new sources of revenue for
its wholesale distribution and its two-way radio business units and on retaining
its recurring cellular subscriber base. These new revenue sources are
expected from several product distribution agreements and, potentially, the
acquisition of one or more complementary businesses. There is no assurance that
any new distribution agreements or any of the acquisitions will be
finalized.
Certain
non-recurring expenses are expected to be incurred in fiscal year 2011 related
to the arbitration proceeding against AT&T and the startup and expansion
costs related to the new products and services. The Company believes
that these non-recurring expenses will be manageable and will not materially
impair its operating results during fiscal year 2011. In addition, on July 21,
2010, the Dodd-Frank Wall Street
Reform and Consumer Protection Act was signed into law and a permanent
delay of the implementation of section 404(b) of the Sarbanes Oxley Act of 2002
(“SOX”) for companies with non-affiliated public float under $75,000,000
(“non-accelerated filer”). Section 404(b) under SOX is the requirement to have
an independent accounting firm audit and attest to the effectiveness of a
Company’s internal controls. As Teletouch currently qualifies as a
non-accelerated filer under the SEC rules and expects to remain one for fiscal
year 2011, there are no additional costs anticipated for complying with Section
404(b) under SOX. This law gave the Company the right to delay the requirement
of having its independent auditors attest to the effectiveness of its internal
controls which results in a further reduction of costs anticipated during fiscal
year 2011. Under former guidance from SOX, Teletouch would have been required to
have an independent audit of its internal controls for its fiscal year ended May
31, 2011.
15
Cellular
Operations
In August
2009, the initial term of the primary distribution agreement between Teletouch’s
subsidiary, PCI and AT&T expired. Under this agreement, PCI
distributes AT&T cellular services and serves as billing agent for AT&T
in the DFW market. With the expiration of this agreement, the Company
is no longer exclusive to AT&T in DFW, which allows the Company to expand it
cellular service offerings in this market for the first time in over 26
years. The expiration of the DFW distribution agreement also
restricts PCI from growing its subscriber base in DFW by limiting new
activations and prohibiting AT&T subscribers from moving their service to
PCI, but the majority of the provisions of the agreement remained in tact at the
option of PCI, including the right for PCI to continue servicing its existing
DFW subscribers until there are no more subscribers remaining as customers of
PCI. Based on its current subscriber attrition rates, the Company
estimates that it will maintain Subscribers in DFW for at least the next five
years. The Company has historically had five distribution agreements with
AT&T in addition to the distribution agreement covering the DFW market
discussed above. Under these other distribution agreements, the Company is
allowed to distribute AT&T wireless services, on an exclusive basis, in
certain major markets in Texas and Arkansas, including the San Antonio, Texas
Metropolitan Statistical Area (“MSA”), Austin, Texas MSA, Houston, Texas MSA,
East Texas Regional MSA and Arkansas, including primarily the Little Rock,
Arkansas MSA. These distribution agreements have varying terms with the longest
extending through October 2013.
In August
2009, the Company received notice from AT&T of its intent not to renew the
Houston distribution agreement, but let it naturally expire in February 2010,
which would allow the Company to continue servicing its small subscriber base in
the Houston area through February 2011. In September 2009, the Company received
notice from AT&T of its intent to terminate the Arkansas distribution
agreement substantially on the grounds the Company did not maintain a sufficient
number of retail outlets in that market. The Arkansas agreement would otherwise
expire in July 2012. Additionally, AT&T has claimed the San Antonio
distribution agreement should have been previously conformed to an agreement
similar to the Houston agreement in accordance with a related agreement reached
between the parties in connection with a settlement agreement completed in June
2007. In January 2008, the Company elected to renew its legacy San Antonio
distribution agreement with AT&T through August 2009, which provided rights
to the Company to enter into a reseller agreement with AT&T and purchase the
subscriber base at the expiration of the agreement. To date, neither AT&T
nor the Company have been able to agree on the value for the subscriber base and
the next steps following the August 2009 expiration of the San Antonio
agreement, so the Company has continued to service this customer base and
operates under the terms of the legacy agreement. The Company is aggressively
disputing the contract matters with AT&T and expects that these matters will
all be resolved through the arbitration in process over matters related to its
DFW distribution agreement (see discussion below). With the exception
of the San Antonio and DFW distribution agreements, none of the other
distribution agreements are deemed material to the current operations of the
Company. The Company cannot provide any assurance that it will be successful in
maintaining its Houston, Arkansas or San Antonio distribution agreements beyond
their contractual expiration dates.
On
September 30, 2009, the Company commenced an arbitration proceeding against
AT&T seeking at least $100 million in damages. The binding arbitration was
commenced to seek relief for damages incurred as AT&T has prevented the
Company from selling the popular iPhone and other “AT&T exclusive” products
and services that PCI is and has been contractually entitled to provide to its
customers under the distribution agreements. While PCI has attempted to
negotiate with AT&T for the purpose of obviating the need for legal action,
such attempts have failed. Accordingly, PCI has initiated this
arbitration. The Company expects this arbitration process to take
ten months before a final outcome is determined unless this matter is able to be
settled sooner with AT&T outside of this venue.
16
With
PCI’s exclusivity to AT&T in the DFW market lifted in August 2009 and after
being unable to reach an alternate form of agreement with AT&T, the Company
began actively negotiating final terms under a variety of new cellular carriers,
WiFi, WiMax and related wireless communications relationships. The Company began
launching these new cellular carrier services and products in the later part of
fiscal year 2010. On January 19, 2010, the Company signed a new two-year,
national distribution agreement with Clearwire Communications (NASDAQ: CLWR) to
sell its 4G service called CLEAR. On January 26, 2010, the Company
announced that it had entered into a two-year, Authorized Representative
Agreement with Sprint (NYSE:S) subsidiary, Sprint Solutions, Inc.
In fiscal
year 2011, the Company will focus on the retention of its approximately 61,000
cellular subscribers, which primarily reside in the DFW and San Antonio markets
in Texas. In addition, the Company will focus on developing the other
markets covered by its existing AT&T distribution agreements, starting with
the East Texas market where Teletouch currently has personnel and existing
infrastructure in place. Through new carrier relationships, the Company will
offer its customers a choice in services and additional products which it
expects will help in its efforts to retain its cellular customers in DFW and San
Antonio.
Wholesale Business
During
fiscal year 2010, the Company’s focus in the wholesale business was managing
credit exposure on sales, pricing methodology, improving margins and increasing
inventory turnover. The extensive re-evaluation of the wholesale business in
2009 resulted in certain sustainable operating changes to the business,
including office staff reductions, new sales hiring, re-pricing of new and
non-current inventory, as well as identified the necessity to grow market share
and focus on more exclusive product offerings. In October 2009, the Company
materially increased its cellular handset brokerage business selling to volume
buyers both domestically and internationally. Initially the Company
primarily brokered phones manufactured by Research In Motion, better known as
the manufacturer of Blackberry® cellular handsets. This brokerage business
contributed to the increase in product sales for the Company’s wholesale
business during the second and third quarter of fiscal year 2010, which
correspond to the traditional holiday selling season. The Company’s handset
brokerage business declined throughout the remainder of fiscal year 2010 because
the Company has been unsuccessful to date in locating a stable volume supplier
of cellular handsets following the purchasing restrictions imposed on the
Company by AT&T in December 2009. The Company is pursuing new suppliers of
cellular handsets to support the wholesale brokerage business and anticipates it
will ramp up this business quickly once a supplier agreement is in place. Based
on its current negotiations with cellular handset manufacturers, the Company
expects it will have at least one material new supplier agreement in place by
mid-2011. The Company will continue to focus on expanding its distributor
relationships and expand its product line with a focus on products that it can
offer exclusively for wholesale distribution in fiscal year 2011.
Two-Way
Radio Operations
In fiscal
year 2010, the Company’s two way division secured a contract in support of the
re-banding efforts undertaken nationally to migrate public safety communications
to frequencies that will not experience interference from certain radio channels
operated by Sprint/Nextel. This project covers the East Texas market
and generated approximately $406,000 in installation revenues during fiscal year
2010. The Company expects to generate at least an additional $200,000 in
installation revenues in fiscal year 2011 from the re-banding
project. Teletouch’s long-term relationships and reputation with the
various governmental entities over its roughly 46 year presence in
East Texas has allowed the Company to procure this business to date. In fiscal
year 2011, the Company believes it will be successful in expanding its two-way
business in different markets by focusing on government entities and business
customers in the DFW area that are long-term cellular customers of
PCI. During the last quarter of fiscal year 2010, PCI’s direct
business cellular salespeople began promoting two-way products to new and
existing business customers in an effort to offer a wider range of wireless
products to fit their customer’s needs.
17
As a
complement to and embedded in its two-way radio segment, the Company began
selling emergency vehicle products in late 2007 under several master distributor
agreements with its suppliers. The product lines include various
aftermarket accessories that are added to vehicles in the public safety
industry, but primarily includes light bars, sirens and computer equipment
supports mounted in-vehicle. During fiscal year 2011, the Company will be
focusing on expanding the distribution of these product lines to other markets
by cross-training of existing sales personnel in those other markets as well as
by opening new distribution points in those markets. In addition, the
Company is working with its manufacturers to secure approval to sell these
products into other protected markets and to potentially acquire other existing
distribution in these markets. The Company is currently in the process of
applying to have its emergency vehicle products listed and sold through the
United States General Services Administration (“GSA”). If successful in
its efforts to get approved and listed by GSA, the Company would become an
approved vendor able to sell to all Federal agencies and many state and local
entities by passing the traditional, lengthy bidding process.
Results
of Operations for the fiscal years ended May 31, 2010 and 2009
Overview of Operating
Results for fiscal years 2010 and 2009
The
consolidated operating results for the fiscal years ended May 31, 2010 and 2009
are as follows:
(dollars in thousands)
|
Year Ended May 31,
|
2010 vs 2009
|
||||||||||||||
2010
|
2009
|
$ Change
|
% Change
|
|||||||||||||
Operating
results
|
||||||||||||||||
Service,
rent and maintenance revenue
|
$ | 25,943 | $ | 27,210 | $ | (1,267 | ) | -5 | % | |||||||
Product
sales revenue
|
26,016 | 18,647 | 7,369 | 40 | % | |||||||||||
Total
operating revenues
|
51,959 | 45,857 | 6,102 | 13 | % | |||||||||||
Cost
of service, rent and maintenance (exclusive of depreciation and
amortization)
|
7,196 | 8,784 | (1,588 | ) | -18 | % | ||||||||||
Cost
of products sold
|
23,028 | 17,332 | 5,696 | 33 | % | |||||||||||
Other
operating expenses
|
17,757 | 19,069 | (1,312 | ) | -7 | % | ||||||||||
Operating
income
|
$ | 3,978 | $ | 672 | $ | 3,306 | 492 | % | ||||||||
- | ||||||||||||||||
Net
income (loss)
|
$ | 1,600 | $ | (1,922 | ) | $ | 3,522 | 183 | % |
The
$3,522,000 increase in net income for fiscal year 2010 compared to fiscal year
2009 is partially attributable to the Company’s wholesale cellular handset
distribution business. These high volume and relatively low margin brokerage
sales generated approximately $12,000,000 incremental revenue and approximately
$900,000 in incremental gross profit for the Company during fiscal year
2010. There were no similar occurring sales transactions in fiscal year
2009. In addition, the Company’s continuing efforts to automate back-office
operational processes, reduce selling and general and administrative costs also
contributed to the increase in net income in fiscal year 2010 compared to fiscal
year 2009. The Company monitors its monthly overhead expenses to identify
excess costs in all of its business units and at its corporate level, which
resulted in a decrease in selling and general and administrative costs during
fiscal year 2010 of approximately $1,200,000, primarily due to reduced payroll
and marketing costs year over year. Although the Company’s cellular service
revenue decreased in fiscal year 2010 compared to fiscal year 2009 due to a
declining cellular subscriber base, the Company was able to improve profit
margins on service revenues through cost reduction initiatives within its
cellular business and improvements from more profitable cellular features
provided by PCI. The cellular service revenues generated by PCI (as reported on
a GAAP basis) are not a part of the revenue sharing with AT&T. Furthermore,
in fiscal year 2010, the Company’s two-way business generated approximately
$406,000 in additional service revenues due to the East Texas re-banding project
to migrate public safety communications to frequencies that will not experience
interference from certain radio channels operated by Sprint/Nextel. The Company
was able to generate these revenues with no incremental costs in fiscal year
2010.
18
Significant Components of
Operating Revenues and Expenses
Operating
revenues are primarily generated from the Company’s cellular, wholesale and
two-way radio operations and are comprised of a mix of service, rent and
maintenance revenues as well as product revenues. Service, rent and
maintenance revenues are generated primarily from the Company’s cellular and
two-way radio operations. Within the cellular operations, the primary
service revenues are generated by PCI from the sale of recurring cellular
subscription services under several master distributor agreements with AT&T.
Since 1984, the Company’s subsidiary, PCI, has held agreements with AT&T and
its predecessor companies, which allowed PCI to offer cellular service and
customer service to AT&T customers in exchange for certain compensation and
fees. PCI is responsible for the billing and collection of cellular
charges from these customers and remits a percentage of the cellular billings
generated to AT&T. Within the two-way radio operations, service revenues are
generated by the sale of subscription radio services on the Company’s own radio
network as well as from the sale of maintenance services on customer owned radio
equipment. The Company’s wholesale business generates service revenues
from its car dealer expediter operations.
The
majority of the Company’s product sales are generated by PCI’s wholesale
operations and are comprised of cellular telephones, cellular accessories and
12-volt (automotive) mobile electronics, which are sold to smaller dealers and
carriers throughout the United States. In addition, the wholesale business
includes product sales from its car dealer expeditor business, which primarily
consists of vehicle parts and accessories. Within the cellular operations of the
Company, product sales are comprised primarily of cellular telephones and
accessories sold through PCI’s retail stores, outside salespeople and agents to
generate recurring cellular subscription revenues. The two-way radio operations’
products are comprised of radios and service parts for radio communication
systems and safety and emergency response vehicle products.
Cost of
providing service, rent and maintenance consists primarily of costs related to
supporting PCI’s cellular subscriber base under the master distributor agreement
with AT&T including:
|
§
|
Costs
of recurring revenue features that are added to the cellular subscribers’
accounts by PCI which are not subject to the revenue sharing arrangement
with AT&T; such features include roadside and emergency assistance
program, handset and accessory warranty programs and certain custom
billing services.
|
|
§
|
Cost
of third-party roaming charges that are passed through to PCI by
AT&T. Roaming charges are incurred when a cellular subscriber
leaves the designated calling area and utilizes a carrier, other than
AT&T, to complete the cellular call. PCI is charged by AT&T
for 100% of these “off-network” roaming charges incurred by its customer
base.
|
|
§
|
Costs
to operate and maintain PCI’s customer service department to provide
billing support and facilitate account changes for cellular service
subscribers. These costs primarily include the related payroll and
benefits costs as well as telecommunication charges for inbound toll-free
numbers and outbound long
distance.
|
19
|
§
|
Costs
of the Company’s retail stores including personnel, rents and
utilities.
|
|
§
|
Costs
of bad debt related to the cellular service
billings.
|
Cost of
products sold consists of the net book value of items sold from the Company’s
operating segments, which are cellular telephones, accessories, two-way radio,
safety and emergency response products and 12-volt mobile electronics and their
related accessories as well as the expenses and write-downs of equipment and
accessory inventory for shrinkage and obsolescence. We recognize cost of
products sold, other than costs related to write-downs of equipment and
accessory inventory for shrinkage and obsolescence, when title passes to the
customer. In PCI’s wholesale operations, products and accessories are sold
to customers at pricing above PCI’s cost. However, PCI will generally sell
cellular telephones below cost to new and existing cellular service customers as
an inducement to enter into one-year and two-year subscription contracts, to
upgrade service and extend existing subscription contracts or in connection with
other promotions. The resulting equipment subsidy to the majority of PCI’s
cellular customers is consistent with the cellular industry and is treated as an
acquisition cost of the related recurring cellular subscription revenues.
This acquisition cost is expensed by the Company when the cellular equipment is
sold with the expectation that the subsidy will be recovered through margins on
the cellular subscription revenues over the contract term with the
customer.
Selling
and general and administrative costs primarily consist of customer acquisition
costs, including the costs of our retail stores, sales commissions paid to
internal salespeople and agents, payroll costs associated with our retail and
direct sales force, marketing expenses, billing costs, information technology
operations, bad debt expense and back office support activities, including
customer retention, legal, finance, marketing, human resources, strategic
planning and technology and product development, along with the related payroll
and facilities costs. Also included in selling and general and
administrative costs are the ongoing costs of maintaining Teletouch as a public
company, which include audit, legal, other professional and regulatory
fees.
Service, Rent and
Maintenance Revenue for fiscal years ended May 31, 2010 and
2009
The
service, rent and maintenance revenues shown below have been grouped and are
discussed by the Company’s reportable operating segments as defined under GAAP.
The corporate category includes the service revenues that are not generated by
the business operations of the Company that meet the quantitative requirements
for segment reporting under GAAP. The corporate service revenues primarily
consist of revenues earned from a mineral rights lease the Company executed with
Chesapeake Exploration, LLC, in June 2008.
(dollars in thousands)
|
Year Ended May 31,
|
2010 vs 2009
|
||||||||||||||
2010
|
2009
|
$ Change
|
% Change
|
|||||||||||||
Service,
rent, and maintenance revenue
|
||||||||||||||||
Cellular
operations
|
||||||||||||||||
Gross
cellular subscription billings
|
$ | 51,364 | $ | 59,503 | $ | (8,139 | ) | -14 | % | |||||||
Net
revenue adjustment (revenue share due to AT&T)
|
(27,483 | ) | (34,150 | ) | 6,667 | -20 | % | |||||||||
Net
revenue reported from cellular subscription billings
|
23,881 | 25,353 | (1,472 | ) | -6 | % | ||||||||||
Two-way
radio operations
|
1,881 | 1,652 | 229 | 14 | % | |||||||||||
Wholesale
operations
|
83 | 82 | 1 | 1 | % | |||||||||||
Corporate
operations
|
98 | 123 | (25 | ) | -20 | % | ||||||||||
Service,
rent and maintenance revenue
|
$ | 25,943 | $ | 27,210 | $ | (1,267 | ) | -5 | % |
Gross cellular subscription
billings are measured as the total recurring monthly cellular service
charges invoiced to PCI’s wireless subscribers for which a fixed percentage of
the dollars invoiced are retained by PCI as compensation for the services it
provides to these subscribers and for which PCI takes full (100%) accounts
receivable risk before deducting certain revenue sharing amounts that are
payable to AT&T under PCI’s master distributor agreements with AT&T. The
Company uses the calculation of gross cellular subscription billings to measure
the overall growth of its cellular business and to project its future cash
receipts from the subscriber base.
20
The 14%
decrease in the cellular operations gross cellular subscription billings for the
twelve months ended May 31, 2010 compared to the same period in the prior year
resulted primarily from a decrease in monthly access charges of approximately
$6,621,000. In addition, the cellular operations segment experienced a
decrease in billings for roamer and toll charges of approximately $1,222,000 for
the twelve months ended May 31, 2010 compared to the same period in the prior
fiscal year. The reduction in cellular service revenues is due to a
decline in the Company’s cellular subscriber base, which is primarily a result
of the Company’s inability to offer the iPhone to its cellular customers,
resulting in the Company’s cellular subscribers transferring their service to
AT&T in order to purchase the iPhone. During fiscal year 2010, the
Company experienced a loss of approximately 8,000 cellular subscribers to
AT&T. The decrease in cellular service revenue is also related to the
termination of the Company’s Dallas / Fort Worth distribution agreement with
AT&T on August 31, 2009. Subsequent to that date, the Company was prohibited
from adding new customers to its Dallas / Fort Worth subscriber base. The
Company had 60,672 subscribers as of May 31, 2010 compared to 72,523 subscribers
as of May 31, 2009.
The 14%
increase in the two-way radio operations service, rent and maintenance revenue
for the twelve months ended May 31, 2010 compared to the same period in the
prior year is primarily due to the East Texas re-banding project to migrate
public safety communications to frequencies that will not experience
interference from certain radio channels operated by Sprint/Nextel. The
re-banding project added approximately $406,000 in service revenue for the
two-way operations year over year. The increase in service revenues were
partially offset by a decrease in maintenance and logic trunked radio (“LTR”)
service revenues of approximately $130,000 and $58,000, respectively, year over
year due to a declining subscriber base on the Company’s LTR
network.
Cost of Service, Rent and
Maintenance for fiscal years ended May 31, 2010 and 2009
Cost of
service, rent and maintenance expense consists of the following significant
expense items:
(dollars in thousands)
|
Year Ended May 31,
|
2010 vs 2009
|
||||||||||||||
2010
|
2009
|
$ Change
|
% Change
|
|||||||||||||
Cost
of service, rent and maintenance
|
||||||||||||||||
Cellular
operations
|
$ | 5,557 | $ | 6,922 | $ | (1,365 | ) | -20 | % | |||||||
Two-way
operations
|
1,573 | 1,733 | (160 | ) | -9 | % | ||||||||||
Wholesale
operations
|
66 | 129 | (63 | ) | -49 | % | ||||||||||
Total
cost of service, rent and maintenance
|
$ | 7,196 | $ | 8,784 | $ | (1,588 | ) | -18 | % |
The 20%
decrease in cost of service, rent and maintenance related to the Company’s
cellular operations for the twelve months ended May 31, 2010 compared to the
same period in the prior fiscal year is directly related to the corresponding
decrease in cellular service revenues as a result of the declining cellular
subscriber base. Roamer costs and costs related to the Company’s extended
phone warranty program decreased by approximately $352,000 and $345,000,
respectively, year over year. In addition, employee compensation costs from the
Company’s cellular operations decreased by approximately $521,000 for the twelve
months ended May 31, 2010 compared to the same period in the prior fiscal year
due to a reduction in personnel. The cellular customer service department
had 52 employees as of May 31, 2010 compared to 61 employees as of May 31,
2009.
21
The 9%
decrease in service, rent and maintenance costs related to the Company’s two-way
operations for the twelve months ended May 31, 2010 compared to the same period
in the prior fiscal year is attributable to a reduction in personnel at the
Garland two-way location. Salaries and other personnel benefits related to
Garland personnel decreased by approximately $92,000 year over year. In
addition, repair expenses related to the LTR network and travel expenses
decreased by approximately $27,000 and $17,000, respectively, year over
year. During fiscal year 2010, the Company closed its Nacogdoches, Texas
two-way location, which resulted in a decrease of service, rent and maintenance
costs of approximately $25,000 year over year.
Sales Revenue and Cost of
Products Sold for fiscal years ended May 31, 2010 and 2009
The sales
revenues and related cost of products sold shown below have been grouped and are
discussed by the Company’s reportable operating segments as defined under GAAP.
The corporate category includes the product sales revenues that are not
generated by the business operations of the Company that meet the quantitative
requirements for segment reporting under GAAP.
(dollars in thousands)
|
Year Ended May 31,
|
2010 vs 2009
|
||||||||||||||
2010
|
2009
|
$ Change
|
% Change
|
|||||||||||||
Product
Sales Revenue
|
||||||||||||||||
Cellular
operations
|
$ | 4,281 | $ | 7,002 | $ | (2,721 | ) | -39 | % | |||||||
Two-way
radio operations
|
2,986 | 2,559 | 427 | 17 | % | |||||||||||
Wholesale
operations
|
18,742 | 9,070 | 9,672 | 107 | % | |||||||||||
Corporate
operations
|
7 | 16 | (9 | ) | -56 | % | ||||||||||
Total
product sales revenue
|
$ | 26,016 | $ | 18,647 | $ | 7,369 | 40 | % | ||||||||
Cost
of products sold
|
||||||||||||||||
Cellular
operations
|
4,593 | 7,561 | (2,968 | ) | -39 | % | ||||||||||
Two-way
radio operations
|
2,340 | 1,922 | 418 | 22 | % | |||||||||||
Wholesale
operations
|
16,116 | 7,845 | 8,271 | 105 | % | |||||||||||
Corporate
operations
|
(21 | ) | 4 | (25 | ) | -625 | % | |||||||||
Cost
of products sold
|
$ | 23,028 | $ | 17,332 | $ | 5,696 | 33 | % |
Product sales revenue:
The 39% decrease in product sales related to the Company’s cellular operations
for the twelve months ended May 31, 2010 compared to the same period in the
prior fiscal year is primarily due to a decrease in cellular phone activations
and upgrades. The Company activated 5,291 phones during fiscal year 2010
compared to 10,899 cellular phone activations during fiscal year 2009, which
contributed to the decrease of cellular product sales revenue of approximately
$1,400,000, year over year. In addition, the Company had 5,568 fewer
cellular phone upgrade transactions in fiscal year 2010 compared to fiscal year
2009, which attributed to a decrease of cellular product sales revenue of
approximately $879,000, year over year. The decrease in revenue is the result of
the Company’s continuing to subsidize the sale of cellular handsets to compete
with the pricing of other cellular carriers for certain higher end cellular
accessories than in prior years due to the Company’s tightening up its credit
requirements on its popular “Bill-to-Mobile” program, which allows customers to
charge products to their cell phone bill and pay for them over time with no
interest charges.
22
The 17%
increase in product sales related to the Company’s two-way radio operations for
the twelve months ended May 31, 2010 compared to the same period in the prior
fiscal year is primarily related to an increase in emergency vehicle product
(“EVP”) sales. Sales from the EVP business increased by $432,000, year
over year due to an expanding customer base with municipalities and car dealer
businesses.
The 107%
increase in product sales related to the Company’s wholesale operations for the
twelve months ended May 31, 2010 compared to the same period in the prior fiscal
year is related to brokering large quantities of cellular handsets to certain
domestic and international cellular distributors. These high volume and
relatively low margin brokerage sales generated approximately $12,000,000 in
additional product sales and approximately $900,000 in gross profit year over
year. The increase in revenues generated from the wholesale unit’s
distribution business was offset by a decrease in traditional wholesale sales of
cellular products and car audio equipment of approximately $1,663,000 and
$543,000, respectively, year over year. The Company experienced a weak
demand for cellular and aftermarket car audio products due to a saturated market
and fewer small to mid-size electronic retailers. In addition, the Company
experienced certain supply issues in fiscal year 2010 with its car audio
equipment suppliers as a result of the end of its direct distribution agreements
with Sony and JVC. As a result, the Company is now purchasing these products
from other master distributors, which resulted in a slight deterioration in
margins on these sales. The Company is actively pursuing direct
distribution from several car audio equipment manufacturers and targets having
these agreements in place during the second half of fiscal year
2011.
Cost of products sold:
The 33% increase in total cost of products sold for thse twelve months ended May
31, 2010, compared to the same period in the prior fiscal year is primarily due
to the increase in product sales from the Company’s wholesale cellular
handset brokerage business. The increase in cost of products sold is offset by a
decrease in product costs from the Company’s cellular operations, which is a
direct result of fewer cellular product sales due to the Company’s declining
cellular subscriber base. Due to the pricing established across the cellular
industry, cellular equipment sold in conjunction with a new service activation
or the renewal of a service contract results in the Company subsidizing a
substantial portion of the cost of the handset. In periods where there are fewer
subscriber activations or contract renewals, like during fiscal year 2010, the
Company’s equipment margins increase (as a result of lower product sales at a
negative profit margin), but its cellular service revenues generally decline as
a result of not replacing cellular subscribers that disconnect service (churn)
during the same period.
Selling and General and
Administrative Expenses for fiscal years ended May 31, 2010 and
2009
Selling
and general and administrative expenses consist of the following significant
expense items:
(dollars in thousands)
|
Year Ended May 31,
|
2010 vs 2009
|
||||||||||||||
2010
|
2009
|
$ Change
|
% Change
|
|||||||||||||
Selling
and general and administrative expenses
|
||||||||||||||||
Salaries
and other personnel expenses
|
$ | 10,478 | $ | 11,267 | $ | (789 | ) | -7 | % | |||||||
Office
expense
|
1,872 | 1,969 | (97 | ) | -5 | % | ||||||||||
Advertising
expense
|
582 | 727 | (145 | ) | -20 | % | ||||||||||
Professional
fees
|
1,631 | 1,817 | (186 | ) | -10 | % | ||||||||||
Taxes
and licenses fees
|
164 | 244 | (80 | ) | -33 | % | ||||||||||
Stock-based
compensation expense
|
239 | 223 | 16 | 7 | % | |||||||||||
Other
expenses
|
1,521 | 1,429 | 92 | 6 | % | |||||||||||
Total
selling and general and administrative expenses
|
$ | 16,487 | $ | 17,676 | $ | (1,189 | ) | -7 | % |
23
The 7%
decrease in salaries and other personnel expenses for the twelve months ended
May 31, 2010, compared to the same period in the prior fiscal year is primarily
related to a decrease in contract labor and employee benefits expense. The
decrease in contract labor expense of approximately $500,000 year over year is
primarily due to the Company’s terminating its computer services contract with a
group of IT contractors in the later part of fiscal year 2009. Employee benefits
expense decreased by approximately $243,000 in fiscal year 2010 compared to
fiscal year 2009 due primarily to approximately $195,000 of forfeitures in the
Company’s 401(k) plan of unvested employer matched funds. These forfeitures were
used to offset current year matching contributions to the 401(k)
plan.
The 5%
decrease in office expense for the twelve months ended May 31, 2010, compared to
the same period in the prior fiscal year is primarily due to a reduction in
telecommunication expenses. During fiscal year 2010, the Company
consolidated its corporate phone lines, which contributed to the reduction of
telephone expenses of approximately $141,000 year over year. The
decrease in total office expense was partially offset by an increase in office
lease expense for a suite at the Dallas Cowboys Stadium in Arlington,
Texas.
A 20%
decrease in advertising expense for the twelve months ended May 31, 2010,
compared to the same period in the prior fiscal year is primarily related to
advertising reimbursements the Company received from certain vendors for
achieving sales based objectives. Advertising reimbursements increased by
approximately $192,000 year over year. In addition, the Company reduced expenses
related to billboard advertising by approximately $81,000 in fiscal year 2010
compared to fiscal year 2009. The reduction in total advertising expenses
was partially offset by an increase in sponsorship and print media expenses of
approximately $113,000 and $14,000, respectively, year over year.
The 10%
decrease in professional fees for the twelve months ended May 31, 2010, compared
to the same period in the prior fiscal year is primarily due to a decrease in
accounting fees and consulting fees of approximately $209,000 and $97,000,
respectively, year over year. The decrease in accounting fees is attributable to
decreased auditing fees and the reversal of fees accrued for the Company’s
fiscal year 2007 quarterly reviews because the SEC granted the Company a waiver
on filing its quarterly reports for this period negating the need to incur these
accrued fees. Consulting fees decreased year over year due to fewer
expenses related to the Company’s internal controls assessments required under
Section 404 of the Sarbanes-Oxley Act of 2002. In addition, expenses
related to investor relations and director fees decreased by approximately
$38,000 and $52,000, respectively, in fiscal year 2010 compared to fiscal year
2009. The total decrease in professional fees was partially offset by an
increase in legal fees of approximately $245,000, primarily related to the legal
costs associated with defending the Company in the trademark infringement
litigation related to the Hawk Electronics trade name as well as legal fees
attributable to the arbitration with AT&T.
The 33%
decrease in taxes and license fees for the twelve months ended May 31, 2010,
compared to the same period in the prior fiscal year is primarily due to taxes
recorded in fiscal year 2009 of approximately $34,000 related to a Texas sales
and use tax audit. In addition, the Company experienced lower property tax
expense in fiscal year 2010 compared to fiscal year 2009 due to changes in
retail store locations, lower inventory levels and fewer fixed
assets.
The 6%
increase in other expenses for the twelve months ended May 31, 2010, compared to
the same period in the prior fiscal year is primarily related to an increase in
travel expenses of approximately $115,000 year over year.
24
Other Operating Expenses
(Income) for fiscal years ended May 31, 2010 and 2009
(dollars in thousands)
|
Year Ended May 31,
|
2010 vs 2009
|
||||||||||||||
2010
|
2009
|
$ Change
|
% Change
|
|||||||||||||
Other
Operating Expenses (Income)
|
||||||||||||||||
Depreciation
and amortization
|
$ | 1,253 | $ | 1,406 | $ | (153 | ) | -11 | % | |||||||
Loss
(gain) on disposal of assets
|
17 | (13 | ) | 30 | -231 | % | ||||||||||
Total
other operating expenses
|
$ | 1,270 | $ | 1,393 | $ | (123 | ) | -9 | % |
Depreciation and
amortization: Depreciation and amortization expenses as reported
are comprised of the following:
(dollars in thousands)
|
Year Ended May 31,
|
2010 vs 2009
|
||||||||||||||
2010
|
2009
|
$ Change
|
% Change
|
|||||||||||||
Other
Operating Expenses
|
||||||||||||||||
Depreciation
|
$ | 365 | $ | 484 | $ | (119 | ) | -25 | % | |||||||
Amortization
|
888 | 922 | (34 | ) | -4 | % | ||||||||||
Total
other operating expenses
|
$ | 1,253 | $ | 1,406 | $ | (153 | ) | -11 | % |
The
decrease in depreciation expense for the twelve months ended May 31, 2010,
compared to the same period in the prior fiscal year is attributable to the
Company’s minimal purchases of fixed assets for its corporate offices and retail
locations. In addition, the age of certain existing capital assets also
contributed to the decrease in depreciation expense in fiscal year 2010 compared
to fiscal year 2009. The decrease in amortization expense year over year
is due to certain intangibles that were fully amortized in the third quarter of
fiscal year 2009. These intangibles were associated with the Company’s
two-way segment due to the purchase of the assets of Delta Communications and
Electronics, Inc. in January 2004. The loss on the disposal of assets in fiscal
year 2010 was primarily the result of a fixed asset physical inventory that
occurred in the fourth quarter of fiscal year 2010 resulting in the write off of
approximately $16,000 previously disposed of or unusable assets, the majority of
which had been fully depreciated.
Other Income (Expense) for
fiscal years ended May 31, 2010 and 2009
(dollars in thousands)
|
Year Ended May 31,
|
2010 vs 2009
|
||||||||||||||
2010
|
2009
|
$ Change
|
% Change
|
|||||||||||||
Other
Income (Expense)
|
||||||||||||||||
Interest
expense, net
|
$ | (2,261 | ) | $ | (2,330 | ) | $ | (69 | ) | -3 | % | |||||
Other
|
167 | - | (167 | ) | 100 | % | ||||||||||
Total
other expenses
|
$ | (2,094 | ) | $ | (2,330 | ) | $ | (236 | ) | -10 | % |
Other: In April 2010,
PCI executed an easement and right-of-way agreement with Texas Midstream Gas
Services, LLC in order for a sub-surface pipeline to be installed on land owned
by the Company in Fort Worth, Texas. The Company recorded the $167,000 proceeds
received as other income in the Company’s consolidated statement of
operations.
25
Interest Expense, Net of
Interest Income for fiscal years ended May 31, 2010 and 2009
(dollars in thousands)
|
Year Ended May 31,
|
2010 vs 2009
|
||||||||||||||
2010
|
2009
|
$ Change
|
% Change
|
|||||||||||||
Interest
Expense (Income)
|
||||||||||||||||
Thermo
factoring debt
|
$ | 306 | $ | 1,427 | $ | (1,121 | ) | -79 | % | |||||||
Thermo
revolving credit facility
|
1,680 | 592 | 1,088 | 184 | % | |||||||||||
Mortgage
debt
|
156 | 184 | (28 | ) | -15 | % | ||||||||||
Warrant
redemption notes payable
|
130 | 163 | (33 | ) | -20 | % | ||||||||||
Other
|
(11 | ) | (36 | ) | 25 | -69 | % | |||||||||
Total
interest expense, net
|
$ | 2,261 | $ | 2,330 | $ | (69 | ) | -3 | % |
In August
2009, the Company combined the Thermo factoring debt facility and the Thermo
revolving credit facility into a single debt facility by expanding the revolving
credit facility to allow the Company to retire the Thermo factoring debt.
The debt restructure included a change in the calculation of interest related to
the Company’s debt balance with Thermo (see Note 8 – “Long-Term Debt” for
additional information).
Income Tax Provision for
fiscal years ended May 31, 2010 and 2009
The
majority of the income tax expense recorded in fiscal years 2010 and 2009 is
related to the Texas margin tax, which was initially implemented by the state
effective January 1, 2008. The margin tax is calculated by using the
Company’s gross receipts from business conducted in Texas each fiscal year less
a cost of goods sold deduction. The margin tax is due and payable to the
State of Texas each year in May. In fiscal year 2010, the Company recorded a
federal alternative minimum tax (“AMT”) liability of approximately $40,000 due
to the income generated in fiscal year 2010 that is not allowed to be offset by
prior net operating losses due to the AMT rules.
Financial
Condition as of May 31, 2010
(dollars in thousands)
|
Year Ended May 31,
|
2010 vs 2009
|
||||||||||||||
2010
|
2009
|
$ Change
|
% Change
|
|||||||||||||
Cash
provided by operating activities
|
$ | 884 | $ | 4,217 | $ | (3,333 | ) | 79 | % | |||||||
Cash
provided by (used in) investing activities
|
198 | (564 | ) | 762 | 135 | % | ||||||||||
Cash
used in financing activities
|
(792 | ) | (3,740 | ) | 2,948 | -79 | % | |||||||||
Net
increase (decrease) in cash
|
$ | 290 | $ | (87 | ) | $ | 377 | 433 | % |
Liquidity
and Capital Resources
As of May
31, 2010, the Company had approximately $4,900,000 cash on hand. During fiscal
year 2010, the Company improved its operating results and was able to reduce its
accounts payable by 29% and its accrued liabilities by 19% as compared to May
31, 2009. In addition, the Company was able to prepay over $600,000 in
legal costs related to the arbitration with AT&T during fiscal year 2010 and
still improved its cash on hand year over year by almost $300,000. Due to
the operating results of fiscal year 2010, the Company improved its working
capital deficit from approximately $2,800,000 as of May 31, 2009 to
approximately $1,200,000 as of May 31, 2010.
26
For
fiscal year 2011, the Company expects its wholesale and two-way operations to
continue to improve and believes that it can maintain a profitable cellular
business although its cellular subscriber base continues to decline. In fiscal
year 2011, the Company will continue to focus on providing superior customer
service to its existing cellular subscriber base while maximizing revenues
through the cellular services offered by PCI and adding additional subscribers
in the markets where permitted by AT&T. In addition, the Company is actively
pursuing business acquisitions and believes those businesses, once acquired,
will add additional revenue and profits to the Company’s existing
operations. The Company believes it has sufficient cash and cash
availability under its current financing facilities to meet its obligations
during the upcoming 12 months. Historically, the Company has
demonstrated its ability to manage expenses to drive material results to the
Company. For fiscal year 2011, the Company anticipates seeking further
cost reduction initiatives for selling and general and administrative expenses
as it continues to maximize profitability in all its business units by
closely monitoring overhead expenses. For fiscal year 2011, the total debt
service obligations for the Company are approximately $3,500,000.
Considering the cash on hand, cash availability under the Thermo loan facility
to fund the expansion of the business, cash generated on a monthly basis from
the billable subscriber base under the continuing portion of the AT&T
distribution agreements and the payment terms available for obligations owing to
AT&T, the Company believes it will have sufficient cash to meet its
obligations for at least the 12 months following the date of this
Report.
Operating
Activities
The
decrease in cash provided by operations during fiscal year 2010 compared to
fiscal year 2009 is primarily attributable to additional payments made against
the Company’s accounts payable and accrued liabilities of approximately
$3,200,000 and $1,100,000, respectively. At the end of fiscal 2009, the Company
deferred payment of some of its accounts payable invoices for additional review
and the majority of these invoices were paid in June 2009. In addition, the
Company paid approximately $1,200,000 of accrued fiscal 2009 bonus payments to
employees between the months June 2009 and December 2009 (fiscal year
2010). Furthermore, the Company had additional cash pre-payments of
approximately $636,000 in fiscal year 2010 compared to fiscal year 2009,
primarily for legal retainer fess related to the arbitration with AT&T. The
operating cash decreases were partially offset by net income of $1,600,000 in
fiscal year 2010 compared to a net loss of $1,922,000 in fiscal year
2009.
Investing
Activities
The
decrease in cash used by investing activities during fiscal year 2010 compared
to fiscal year 2009 is due to cash receipts received against the Mobui Note and
Air-bank Note of $415,000 and $177,000, respectively (see Note 4 - “Notes
Receivable” for additional information). The decrease in cash used by investing
activities was partially offset by a cash paid to purchase a perpetual
trademark license agreement in May 2010 (see Note 6- “Goodwill and Other
Intangible Assets” for additional discussion).
Financing
Activities
The
decrease in cash used by financing activities during fiscal year 2010 compared
to fiscal year 2009 is primarily attributable to a $1,500,000 cash payment to
the 12 holders of the GM Warrants on June 2, 2008 (fiscal 2009) in accordance
with the Warrant Redemption Payment Agreements (see Warrant Redemption Note
Payable section of Note 8 – “Long-Term Debt” for additional information).
In addition, the Company received approximately $1,400,000 in cash proceeds
during fiscal year 2010 compared to approximately $250,000 in cash proceeds
during fiscal year 2009. In fiscal year 2010, the proceeds came from a
draw on the Company’s revolving credit line with Thermo in November 2009.
The proceeds were primarily used to purchase inventory related to the Company’s
wholesale brokerage business.
27
Obligations
and Commitments
As of May
31, 2010, the Company’s future contractual obligations and commitments are as
follows (in thousands):
Payments Due By Period
|
||||||||||||||||||||||||
(in thousands)
|
||||||||||||||||||||||||
Significant Contractual Obligations
|
Total
|
2011
|
2012
|
2013
|
2014
|
Thereafter
|
||||||||||||||||||
Debt
obligations, including interest (a)
|
$ | 19,338 | $ | 3,522 | $ | 15,816 | $ | - | $ | - | $ | - | ||||||||||||
Operating
leases (b)
|
5,351 | 805 | 488 | 370 | 333 | 3,355 | ||||||||||||||||||
Employee
compensation obligations (c)
|
1,620 | 1,620 | - | - | - | - | ||||||||||||||||||
Trademark
purchase obligation (d)
|
546 | 150 | 150 | 100 | 120 | 26 | ||||||||||||||||||
Total
significant contractual obligations
|
$ | 26,855 | $ | 6,097 | $ | 16,454 | $ | 470 | $ | 453 | $ | 3,381 |
(a)
|
See
Note 8 – “Long-Term Debt” for additional information on the Company’s
debt
|
(b)
|
See
Note 11 – “Commitments and Contingencies” for additional information on
the Company’s operating
leases
|
(c)
|
On
December 31, 2008, the Board of Directors (the “Board”) of Teletouch
Communications, Inc., approved an executive employment agreement with
Robert M. McMurrey, the Company’s Chairman and Chief executive Officer and
Thomas A. “Kip” Hyde, Jr., the Company’s President and Chief Operating
Officer, with an effective date of June 1, 2008 for an initial term ending
on May 31, 2011. In addition, on December 17, 2009, the Board
approved a fiscal year 2010 bonus performance criteria plan for the
Company’s two executives previously mentioned and the Company’s Chief
Financial Officer, Douglas E. Sloan. The bonuses are payable in fiscal
year 2011 and have been fully accrued as of May 31,
2010.
|
(d)
|
On
May 4, 2010, Progressive Concepts, Inc., entered in a certain Mutual
Release and Settlement Agreement (the “Agreement”) with Hawk Electronics,
Inc. (“Hawk”). Under the terms of the Agreement the Company agreed to,
among other things, the purchase of a perpetual license from Hawk to use
the mark “Hawk Electronics” for $900,000, of which $500,000 is due and
payable subsequent to May 31, 2010. In addition, beginning in August
2013, Hawk agreed to let the Company continue to use the domain name
www.hawkelectronics.com in exchange for a monthly royalty
payment.
|
Impact
of Inflation
We
believe that inflation has not had a material impact on our results of
operations.
Critical
Accounting Estimates
The
preceding discussion and analysis of financial condition and results of
operations are based upon Teletouch's consolidated financial statements, which
have been prepared in conformity with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, expenses and related disclosures. On an on-going
basis, Teletouch evaluates its estimates and assumptions, including but not
limited to those related to the impairment of long-lived assets, reserves for
doubtful accounts, provision for income taxes, revenue recognition and certain
accrued liabilities. Teletouch bases its estimates on historical experience and
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
28
Allowance
for Doubtful Accounts: The Company performs periodic credit evaluations
of its customer base and extends credit to virtually all of its customers on an
uncollateralized basis.
In
determining the adequacy of the allowance for doubtful accounts, management
considers a number of factors including historical collections experience, aging
of the receivable portfolio, financial condition of the customer and industry
conditions. The Company considers an account receivable past due when
customers exceed the terms of payment granted to them by the Company. The
Company writes off its fully reserved accounts receivable when it has exhausted
all collection efforts, which is typically 90 days following the last payment
received from the customer.
Accounts
receivable are presented net of an allowance for doubtful accounts of $407,000
and $486,000 at May 31, 2010 and May 31, 2009, respectively. Based on the
information available to the Company, management believes the allowance for
doubtful accounts as of those periods are adequate. However, actual
write-offs may exceed the recorded allowance.
The
Company evaluates its write-offs on a monthly basis. The Company
determines which accounts are uncollectible, and those balances are written-off
against the Company’s allowance for doubtful accounts balance.
Reserve
for Inventory Obsolescence: Inventories are stated
at the lower of cost (primarily on a moving average basis), which approximates
actual cost determined on a first-in, first-out (“FIFO”) basis, or fair market
value and are comprised of finished goods. In determining the adequacy of the
reserve for inventory obsolescence, management considers a number of factors,
including recent sales trends, industry market conditions and economic
conditions. In assessing the reserve, management also considers price protection
credits the Company expects to recover from its vendors when the vendor cost on
certain inventory items is reduced shortly after purchase of the inventory by
the Company. In addition, management establishes specific valuation
allowances for discontinued inventory based on its prior experience of
liquidating this type of inventory. Through the Company’s wholesale and
Internet distribution channels, it is successful in liquidating the majority of
any inventory that becomes obsolete. The Company has many different
electronics suppliers, all of which provide reasonable notification of model
changes, which allows the Company to minimize its level of discontinued or
obsolete inventory. Actual results could differ from those estimates.
Inventories are stated on the Company’s consolidated balance sheet net of a
reserve for obsolescence of $232,000 and $242,000 at May 31, 2010 and May 31,
2009, respectively.
Impairment
of Long-Lived Assets: In accordance with ASC
360, Property, Plant and
Equipment, (“ASC 360”), the Company evaluates the recoverability of the
carrying value of its long-lived assets based on estimated undiscounted cash
flows to be generated from such assets. If the undiscounted cash flows indicate
an impairment, then the carrying value of the assets being evaluated is
written-down to the estimated fair value of those assets. In assessing the
recoverability of these assets, the Company must project estimated cash flows,
which are based on various operating assumptions, such as average revenue per
unit in service, disconnect rates, sales productivity ratios and expenses.
Management develops these cash flow projections on a periodic basis and reviews
the projections based on actual operating trends. The projections assume that
general economic conditions will continue unchanged throughout the projection
period and that their potential impact on capital spending and revenues will not
fluctuate. Projected revenues are based on the Company's estimate of units in
service and average revenue per unit as well as revenue from various new product
initiatives. Projected revenues assume a continued decline in cellular service
revenue while projected operating expenses are based upon historic experience
and expected market conditions adjusted to reflect an expected decrease in
expenses resulting from cost saving initiatives.
29
The
Company’s review of the carrying value of its tangible long-lived assets at May
31, 2010 indicated the carrying value of these assets were recoverable through
estimated future cash flows. Because of the sustained losses the Company
has incurred during the past several years, the Company also reviewed the market
values of these assets. The review indicated the market value exceeded the
carrying value at May 31, 2010. However, if the cash flow estimates or the
significant operating assumptions upon which they are based change in the
future, Teletouch may be required to record impairment charges related to its
long-lived assets.
The most
significant long-lived tangible asset owned by the Company is the Fort Worth,
Texas corporate office building and the associated land. The Company has
received periodic appraisals of the fair value of this property. In each
instance, the appraised value exceeded the carrying value of the
property.
In
accordance with ASC 360, Teletouch evaluates the recoverability of the carrying
value of its long-lived assets and certain intangible assets based on estimated
undiscounted cash flows to be generated from such assets.
The
evaluation of the Company’s long-lived intangible assets is discussed in Note 2
under “Intangible Assets.” Under the same premise as the long-lived tangible
assets, their market values were also evaluated at May 31, 2010, and the Company
determined that based primarily on the market value and supported by the
Company’s cash flow projections, there was no impairment of these assets. If the
cash flow estimates or the significant operating assumptions upon which they are
based change in the future, Teletouch may be required to record impairment
charges related to its long-lived assets.
Provision
for Income Taxes: The Company accounts for income taxes in accordance
with ASC 740, Income
Taxes, (“ASC 740”) using the asset and liability approach, which requires
recognition of deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
basis of such assets and liabilities. This method utilizes enacted statutory tax
rates in effect for the year in which the temporary differences are expected to
reverse and gives immediate effect to changes in income tax rates upon
enactment. Deferred tax assets are recognized, net of any valuation allowance,
for temporary differences and net operating loss and tax credit carry forwards.
Deferred income tax expense represents the change in net deferred assets and
liability balances. Deferred income taxes result from temporary differences
between the basis of assets and liabilities recognized for differences between
the financial statement and tax basis thereon and for the expected future tax
benefits to be derived from net operating losses and tax credit carry forwards.
A valuation allowance is recorded when it is more likely than not that deferred
tax assets will be unrealizable in future periods. On November 1, 2005,
the Company became a member of the consolidated tax group of Progressive
Concepts Communications, Inc. (“PCCI”) as a result of PCCI’s gaining control of
over 80% of the outstanding common stock of Teletouch on that date. PCCI
gained control of Teletouch’s common stock through the conversion by TLL
Partners, LLC (“TLLP”), PCCI’s wholly-owned subsidiary, of all of its shares of
the Company’s outstanding Series C Preferred Stock into 43,500,000 shares of
common stock on November 1, 2005. As of November 1, 2005, TLLP was a
disregarded entity for federal tax purposes since it was at that time a single
member limited liability company (“LLC”). Therefore, the parent company of
Teletouch for federal tax purposes was deemed to be PCCI. The
Company continued to account for its taxes under ASC 740 and record its deferred
taxes on a stand-alone basis while part of PCCI’s consolidated tax group.
In August 2006 as a result certain debt restructuring activities involving TLLP,
Teletouch’s direct parent and PCCI’s wholly-owned subsidiary, the Company broke
from the PCCI tax group due to new TLLP shares that were issued as part of this
restructuring, which resulted in TLLP no longer being disregarded for tax
purposes. Beginning in August 2006, TLLP is taxed as a partnership, and
the Company is again separately liable for its federal income
taxes.
30
Goodwill:
Goodwill represents the excess of costs over fair value of assets of businesses
acquired. Goodwill and intangible assets acquired in a business
combination and determined to have an indefinite useful life are not amortized
but instead are tested for impairment at least annually in accordance with the
provisions of ASC 350, Intangibles-Goodwill and
Other, (“ASC 350”). Teletouch’s goodwill was recorded in January 2004 as
part of the purchase of the two-way radio assets of Delta Communications,
Inc. The Company decided to test this goodwill annually on March 1st, the
first day of its fourth fiscal quarter, of each year unless an event occurs that
would cause the Company to believe the value is impaired at an interim
date.
At March
1, 2010, the Company evaluated the carrying value of its goodwill associated
with its two-way business and concluded that no impairment of its goodwill was
required in fiscal year 2010. The Company estimates the fair value of its
two-way business using a discounted cash flow method. The Company continually
evaluates whether events and circumstances have occurred that indicate the
remaining balance of goodwill may not be recoverable. In evaluating impairment
the Company estimates the sum of the expected future cash flows derived from
such goodwill. Such evaluations for impairment are significantly impacted by
estimates of future revenues, costs and expenses and other factors. A
significant change in cash flows in the future could result in an additional
impairment of goodwill. No changes occurred in the two-way business during the
current quarter that warranted an impairment to goodwill.
Revenue
Recognition: Teletouch recognizes
revenue over the period the service is performed in accordance with SEC Staff
Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements" and
ASC 605, Revenue
Recognition, (“ASC 605”). In general, ASC 605 requires that four basic
criteria must be met before revenue can be recognized: (1) persuasive evidence
of an arrangement exists, (2) delivery has occurred or services rendered, (3)
the fee is fixed and determinable, and (4) collectability is reasonably assured.
Teletouch believes, relative to sales of products, that all of these conditions
are met; therefore, product revenue is recognized at the time of
shipment.
The
Company primarily generates revenues by providing and billing recurring cellular
services and product sales. Cellular services include cellular airtime and
other recurring services provided through a master distributor agreement with
AT&T. Product sales include sales of cellular telephones, accessories,
car and home audio products and services and two-way radio equipment through the
Company’s retail, wholesale and two-way radio operations.
Cellular
and other service revenues and related costs are recognized during the period in
which the service is rendered. Associated subscriber acquisition costs are
expensed as incurred. Product sales revenue is recognized when delivery
occurs, the customer takes title and assumes risk of loss, terms are fixed and
determinable and collectability is reasonably assured. The Company does
not generally grant rights of return. However, PCI offers customers a 30
day return/exchange program for new cellular subscribers in order to match
programs in place by most of the other cellular carriers. During the 30
days, a customer may return all cellular equipment and cancel service with no
penalty. Reserves for returns, price discounts and rebates are estimated
using historical averages, open return requests, recent product sell-through
activity and market conditions. No reserves have been recorded for the 30
day cellular return program since only a very small number of customers utilize
this return program and many fail to meet all of the requirements of the
program, which include returning the phone equipment in new condition with no
visible damage. In addition, it is typical to incur losses on the sale of
the cellular phone equipment related to signing up customers under a cellular
airtime contract; therefore, any reserves recorded for customer returns would be
an accrual of gains via reversing the losses incurred on the original cellular
phone sale transaction. The Company does not believe accruing for the
potential gains would be in accordance with GAAP but rather records this gain in
the period that it is actually realized.
31
Since
1984, Teletouch’s subsidiary, PCI, has held agreements with AT&T or one of
its predecessor companies, which allowed PCI to offer cellular service and
customer service to its subscribers. PCI is responsible for the billing
and collection of cellular charges from these customers and remits a percentage
of the cellular billings generated to AT&T. Based on PCI’s
relationship with AT&T, the Company has evaluated its reporting of revenues,
under ASC 605-45, Revenue
Recognition, Principal Agent Considerations, (“ASC 605-45”) associated
with its services attached to the AT&T agreements.
Based on
its assessment of the indicators listed in ASC 605-45, the Company has concluded
that the AT&T services provided by PCI should be reported on a net
basis. Also in accordance with ASC 605-45, sales tax amounts invoiced to
our customers have been recorded on a net basis and have no impact on our
consolidated financial statements.
Deferred
revenue represents prepaid monthly service fees billed to customers, primarily
monthly access charges for cellular services that are billed in advance by the
Company.
Stock-Based
Compensation: We
account for stock-based awards to employees in accordance with ASC 718, Compensation-Stock
Compensation, (“ASC 718”) and for stock based awards to non-employees in
accordance with ASC 505-50, Equity, Equity-Based Payments to
Non-Employees (“ASC 505-50”). Under both ASC 718 and ASC 505-50, we use a
fair value based method to determine compensation for all arrangements where
shares of stock or equity instruments are issued for compensation. For share
option instruments issued, compensation cost is recognized ratably using the
straight-line method over the expected vesting period. The Company estimates the
fair value of employee stock options on the date of grant using the
Black-Scholes model. The determination of fair value of stock-based payment
awards on the date of grant using an option-pricing model is affected by our
stock price as well as assumptions regarding a number of highly complex and
subjective variables. These variables include, but are not limited to the
expected stock price volatility over the term of the awards and the actual and
projected employee stock option exercise behaviors. The Company has elected to
estimate the expected life of an award based on the SEC approved “simplified
method”. We calculated our expected volatility assumption required in the
Black-Scholes model based on the historical volatility of our stock. We will
update these assumptions on at least an annual basis and on an interim basis if
significant changes to the assumptions are warranted.
Recent
Accounting Pronouncements and Accounting Changes
For a
description of accounting changes and recent accounting pronouncements,
including the expected dates of adoption and estimated effects, if any, on our
consolidated financial statements, see Note – 2 “Summary of Significant
Accounting Policies” in Part II, Item 8 of this Form 10-K.
Item
7A. Quantitative and Qualitative Disclosures about Market
Risk
We did
not have any foreign currency hedges or other derivative financial instruments
as of May 31, 2010. We did not enter into financial instruments for
trading or speculative purposes and do not currently utilize derivative
financial instruments. Our operations are conducted in the United States
and are not subject to material foreign currency exchange rate
risk.
32
Item
8. Financial Statements and Supplementary Data
Index
to Consolidated Financial Statements
Report
of Independent Registered Public Accounting Firm
|
34
|
Consolidated
Balance Sheets
|
35
|
Consolidated
Statements of Operations
|
37
|
Consolidated
Statements of Cash Flows
|
38
|
Consolidated
Statements of Shareholders’ Deficit
|
39
|
Notes
to Consolidated Financial Statements
|
40
|
33
Report
of Independent Registered Public Accounting Firm
Board of
Directors
Teletouch
Communications, Inc.
Fort
Worth, Texas
We have
audited the accompanying consolidated balance sheets of Teletouch
Communications, Inc. as of May 31, 2010 and 2009 and the related
consolidated statements of operations, shareholders’ deficit, and cash flows for
each of the years then ended. These consolidated 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 standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Teletouch Communications,
Inc., at May 31, 2010 and 2009, and the results of its operations and its
cash flows for each of the years then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/ BDO
USA, LLP
Houston,
Texas
August
30, 2010
34
TELETOUCH
COMMUNICATIONS, INC.
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except share data)
ASSETS
May 31,
|
||||||||
2010
|
2009
|
|||||||
CURRENT
ASSETS:
|
||||||||
Cash
|
$ | 4,932 | $ | 4,642 | ||||
Certificates
of deposit-restricted
|
150 | 300 | ||||||
Accounts
receivable, net of allowance of $407 at May 31, 2010 and $486 at May 31,
2009
|
3,967 | 5,853 | ||||||
Unbilled
accounts receivable
|
2,592 | 3,002 | ||||||
Inventories,
net of reserve of $232 at May 31, 2010 and $242 at May 31,
2009
|
1,049 | 1,547 | ||||||
Notes
receivable
|
15 | 903 | ||||||
Prepaid
expenses and other current assets
|
1,288 | 652 | ||||||
Patent
held for sale
|
257 | - | ||||||
Total
Current Assets
|
14,250 | 16,899 | ||||||
PROPERTY
AND EQUIPMENT, net of accumulated depreciation and amortization of $6,039
at May 31, 2010 and $7,118 at May 31, 2009
|
2,749 | 2,949 | ||||||
GOODWILL
|
343 | 343 | ||||||
INTANGIBLE
ASSETS, net of accumulated amortization of $8,964 at May 31, 2010 and
$7,996 at May 31, 2009
|
4,342 | 4,165 | ||||||
TOTAL
ASSETS
|
$ | 21,684 | $ | 24,356 |
See
Accompanying Notes to Consolidated Financial Statements
35
TELETOUCH
COMMUNICATIONS, INC.
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except share data)
LIABILITIES
AND SHAREHOLDERS’ DEFICIT
May 31,
|
||||||||
2010
|
2009
|
|||||||
CURRENT LIABILITIES:
|
||||||||
Accounts
payable
|
$ | 7,964 | $ | 11,167 | ||||
Accounts
payable-related party
|
111 | 95 | ||||||
Accrued
expenses and other current liabilities
|
5,517 | 6,790 | ||||||
Current
portion of long-term debt
|
1,412 | 1,313 | ||||||
Current
portion of trademark purchase obligation
|
150 | - | ||||||
Deferred
revenue
|
336 | 339 | ||||||
Total
Current Liabilities
|
15,490 | 19,704 | ||||||
LONG-TERM
LIABILITIES:
|
||||||||
Long-term
debt, net of current portion
|
14,487 | 15,103 | ||||||
Long-term
trademark purchase obligation, net of current portion
|
350 | - | ||||||
Total
Long-Term Liabilities
|
14,837 | 15,103 | ||||||
TOTAL
LIABILITIES
|
30,327 | 34,807 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
SHAREHOLDERS'
DEFICIT:
|
||||||||
Common
stock, $.001 par value, 70,000,000 shares authorized, 49,916,189 shares
issued at May 31, 2010 and 2009 and 48,739,002 and 49,051,980 shares
outstanding at May 31, 2010 and 2009, respectively
|
50 | 50 | ||||||
Additional
paid-in capital
|
51,186 | 50,947 | ||||||
Treasury
stock, 1,177,187 shares held at May 31, 2010 and 864,209 shares held at
May 31, 2009
|
(216 | ) | (185 | ) | ||||
Accumulated
deficit
|
(59,663 | ) | (61,263 | ) | ||||
Total
Shareholders' Deficit
|
(8,643 | ) | (10,451 | ) | ||||
TOTAL
LIABILITIES AND SHAREHOLDERS' DEFICIT
|
$ | 21,684 | $ | 24,356 |
See
Accompanying Notes to Consolidated Financial Statements
36
TELETOUCH
COMMUNICATIONS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except shares and per share amounts)
Year Ended May 31,
|
||||||||
2010
|
2009
|
|||||||
Operating
revenues:
|
||||||||
Service,
rent, and maintenance revenue
|
$ | 25,943 | $ | 27,210 | ||||
Product
sales revenue
|
26,016 | 18,647 | ||||||
Total
operating revenues
|
51,959 | 45,857 | ||||||
Operating
expenses:
|
||||||||
Cost
of service, rent and maintenance (exclusive of depreciation and
amortization included below)
|
7,196 | 8,784 | ||||||
Cost
of products sold
|
23,028 | 17,332 | ||||||
Selling
and general and administrative
|
16,487 | 17,676 | ||||||
Depreciation
and amortization
|
1,253 | 1,406 | ||||||
Loss
(gain) on disposal of assets
|
17 | (13 | ) | |||||
Total
operating expenses
|
47,981 | 45,185 | ||||||
Income
from operations
|
3,978 | 672 | ||||||
Other
income (expense):
|
||||||||
Interest
expense, net
|
(2,261 | ) | (2,330 | ) | ||||
Other
|
167 | - | ||||||
Income
(loss) before income tax expense
|
1,884 | (1,658 | ) | |||||
Income
tax expense
|
284 | 264 | ||||||
Net
income (loss)
|
$ | 1,600 | $ | (1,922 | ) | |||
Basic
income (loss) per share applicable to common shareholders
|
$ | 0.03 | $ | (0.04 | ) | |||
Diluted
income (loss) per share applicable to common shareholders
|
$ | 0.03 | $ | (0.04 | ) | |||
Weighted
average shares outstanding:
|
||||||||
Basic
|
48,778,446 | 49,051,980 | ||||||
Diluted
|
48,930,621 | 49,051,980 |
See Accompanying
Notes to Consolidated Financial Statements
37
TELETOUCH
COMMUNICATIONS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
Year Ended May 31,
|
||||||||
2010
|
2009
|
|||||||
Operating
Activities:
|
||||||||
Net
income (loss)
|
$ | 1,600 | $ | (1,922 | ) | |||
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
1,253 | 1,406 | ||||||
Non-cash
compensation expense
|
239 | 223 | ||||||
Non-cash
interest expense (income)
|
80 | (45 | ) | |||||
Provision
for losses on accounts receivable
|
876 | 735 | ||||||
Provision
for inventory obsolescence
|
112 | 267 | ||||||
Loss
(gain) on disposal of assets
|
17 | (13 | ) | |||||
Changes
in operating assets and liabilities:
|
||||||||
acquisitions:
|
||||||||
Accounts
receivable, net
|
1,420 | 1,635 | ||||||
Inventories
|
386 | 512 | ||||||
Notes
receivable
|
- | 16 | ||||||
Prepaid
expenses and other current assets
|
(636 | ) | 177 | |||||
Accounts
payable
|
(3,187 | ) | 1,044 | |||||
Accrued
expenses and other current liabilities
|
(1,273 | ) | 243 | |||||
Deferred
revenue
|
(3 | ) | (61 | ) | ||||
Net
cash provided by operating activities
|
884 | 4,217 | ||||||
Investing
Activities:
|
||||||||
Purchases
of property and equipment
|
(160 | ) | (229 | ) | ||||
Redemption
of certificates of deposit
|
150 | 100 | ||||||
Purchase
of trademark license
|
(400 | ) | - | |||||
Net
proceeds from sale of assets
|
2 | 18 | ||||||
Receipts
from (issuance of) notes receivable
|
606 | (453 | ) | |||||
Net
cash provided by (used in) investing activities
|
198 | (564 | ) | |||||
Financing
Activities:
|
||||||||
Proceeds
from long-term debt
|
1,373 | 250 | ||||||
Payments
on long-term debt
|
(2,134 | ) | (2,490 | ) | ||||
Payments
on redeemable common stock purchase warrants
|
- | (1,500 | ) | |||||
Purchase
of treasury stock
|
(31 | ) | - | |||||
Net
cash used in financing activities
|
(792 | ) | (3,740 | ) | ||||
Net
increase (decrease) in cash
|
290 | (87 | ) | |||||
Cash
at beginning of year
|
4,642 | 4,729 | ||||||
Cash
at end of year
|
$ | 4,932 | $ | 4,642 | ||||
Supplemental
Cash Flow Data:
|
||||||||
Cash
payments for interest
|
$ | 2,193 | $ | 2,388 | ||||
Cash
payments for income taxes
|
$ | 515 | $ | 246 | ||||
Non-Cash
Transactions:
|
||||||||
Trademark
license
|
$ | 500 | $ | - | ||||
Transfer
of long-term receivable-related party to notes receivable
|
$ | - | $ | 421 | ||||
Transfer
of redeemable common stock purchase warrants to long-term
debt
|
$ | - | $ | 1,500 | ||||
Capitalization
of loan origination fees
|
$ | 244 | $ | - | ||||
Intangible
asset received for payment of notes receivable
|
$ | 257 | $ | - | ||||
Fixed
assets received for payment of notes receivable
|
$ | 25 | $ | - |
See
Accompanying Notes to Consolidated Financial Statements
38
TELETOUCH
COMMUNICATIONS, INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' DEFICIT
(In
Thousands Except Number of Shares)
Preferred
Stock
|
Additional
|
Total
|
||||||||||||||||||||||||||||||||||||||||||||||||||
Series
A
|
Series
B
|
Series
C
|
Common
Stock
|
Paid-In
|
Treasury
Stock
|
Accumulated
|
Shareholders'
|
|||||||||||||||||||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Shares
|
Amount
|
(Deficit)
|
(Deficit)
|
||||||||||||||||||||||||||||||||||||||||
Balance
at May 31, 2008
|
- | $ | - | - | $ | - | - | $ | - | 49,916,189 | $ | 50 | $ | 50,724 | 864,209 | $ | (185 | ) | $ | (59,341 | ) | $ | (8,752 | ) | ||||||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | - | - | - | - | - | - | (1,922 | ) | (1,922 | ) | |||||||||||||||||||||||||||||||||||||
Compensation
earned under employee stock option plan
|
- | - | - | - | - | - | - | - | 223 | - | - | - | 223 | |||||||||||||||||||||||||||||||||||||||
Balance
at May 31, 2009
|
- | $ | - | - | $ | - | - | $ | - | 49,916,189 | $ | 50 | $ | 50,947 | 864,209 | $ | (185 | ) | $ | (61,263 | ) | $ | (10,451 | ) | ||||||||||||||||||||||||||||
Net
income
|
- | - | - | - | - | - | - | - | - | - | - | 1,600 | 1,600 | |||||||||||||||||||||||||||||||||||||||
Repurchase
of common stock
|
- | - | - | - | - | - | - | - | - | 312,978 | (31 | ) | - | (31 | ) | |||||||||||||||||||||||||||||||||||||
Compensation
earned under employee stock option plan
|
- | - | - | - | - | - | - | - | 239 | - | - | - | 239 | |||||||||||||||||||||||||||||||||||||||
Balance
at May 31, 2010
|
- | $ | - | - | $ | - | - | $ | - | 49,916,189 | $ | 50 | $ | 51,186 | 1,177,187 | $ | (216 | ) | $ | (59,663 | ) | $ | (8,643 | ) |
See
Accompanying Notes to Consolidated Financial Statements
39
TELETOUCH
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – BASIS OF PRESENTATION AND NATURE OF BUSINESS
Nature of Business: Teletouch
Communications, Inc. was incorporated under the laws of the State of Delaware on
July 19, 1994 and its corporate headquarters are in Fort Worth, Texas.
References to Teletouch or the Company as used throughout this document mean
Teletouch Communications, Inc. or Teletouch Communications, Inc. and its
subsidiaries, as the context requires.
For over
46 years, Teletouch together with its predecessors has offered a comprehensive
suite of telecommunications products and services including cellular, two-way
radio, GPS-telemetry, wireless messaging and public safety/emergency response
products and services. Teletouch operates 24 retail and agent locations in
Texas. Locations include both “Teletouch” and “Hawk Electronics” branded in-line
and free-standing stores and service centers. The Teletouch branded locations
offer the Company’s two-way radio products and services to state, city and local
entities as well as commercial business. Teletouch’s wholly-owned subsidiary,
Progressive Concepts, Inc. (“PCI”) is a Master Distributor and Authorized
Provider of cellular voice, data and entertainment services though AT&T
Mobility (“AT&T”) to consumers, businesses and government agencies and
markets these services under the Hawk Electronics brand name. For over 26 years,
PCI has offered various communication services on a direct bill basis and today
services approximately 61,000 cellular subscribers. PCI sells consumer
electronics products and cellular services through its stores, its own network
of Hawk-branded sub-agents stores, its own direct sales force and on the
Internet at various sites, including its primary consumer-facing sites: www.hawkelectronics.com,
www.hawkwireless.com. and
www.hawkexpress.com.
The Company handles all aspects of the wireless customer relationship,
including:
|
•
|
Initiating
and maintaining all subscribers’ cellular, two-way radio and other service
agreements;
|
|
•
|
Determining
credit scoring standards and underwriting new account
acquisitions;
|
|
•
|
Handling
all billing, collections, and related credit risk through its own
proprietary billing systems;
|
|
•
|
Providing
all facets of real-time customer support, using a proprietary, fully
integrated Customer Relationship Management (CRM) system through its own
24x7x365 capable call centers and the
Internet.
|
In
addition, PCI operates a national wholesale distribution business, “PCI
Wholesale,” which serves major carrier agents, rural cellular carriers, smaller
consumer electronics and automotive retailers and auto dealers throughout the
country and internationally, with ongoing product and sales support through its
direct sales representatives, call center, and the Internet through www.pciwholesale.com
and www.pcidropship.com,
among other sites. Teletouch also sells safety and emergency response vehicle
products and services under the brand “Teletouch EVP” (Emergency Vehicle
Products) directly and through www.teletouchevp.com.
.
Basis of Presentation: In
June 2009, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Codification 105 (“ASC 105”), Generally Accepted
Accounting Principles, which became the single source of authoritative
nongovernmental U.S. generally accepted accounting principles (“GAAP”),
superseding existing FASB, American Institute of Certified Public Accountants
(“AICPA”), Emerging Issues Task Force (“EITF”), and related accounting
literature. This pronouncement reorganizes the thousands of GAAP pronouncements
into roughly 90 accounting topics and displays them using a consistent
structure. Also included is relevant Securities and Exchange Commission guidance
organized using the same topical structure in separate sections and will be
effective for financial statements issued for reporting periods that end after
September 15, 2009. The Company adopted ASC 105 and conformed all
references to authoritative accounting literature beginning with its Quarterly
Report on Form 10-Q for its second fiscal quarter ended November 30,
2009.
40
The
consolidated financial statements include the consolidated accounts of Teletouch
Communications, Inc. and our wholly-owned subsidiaries (collectively, the
“Company” or “Teletouch”). Teletouch Communications, Inc. owns all of the shares
of Progressive Concepts, Inc., a Texas corporation (“PCI”), Teletouch Licenses,
Inc., a Delaware corporation (“TLI”), Visao Systems, Inc., a Delaware
corporation (“Visao”) and TLL Georgia, Inc., a Delaware corporation (“TLLG”).
PCI is the primary operating business of Teletouch. TLI is a company formed for
the express purpose of owning all of the FCC licenses utilized by Teletouch to
operate its two-way radio network. Visao is a company formed to develop and
distribute the Company’s telemetry products, which as of the date of this Report
are no longer being sold. Currently Visao is maintained as a shell
company with no operations. TLLG was formed for the express purpose of entering
into an asset purchase agreement with Preferred Networks, Inc. in May 2004 and
ceased operations following the sale of the Company’s paging business in August
2006. TLLG is currently a shell company. All significant intercompany
accounts and transactions have been eliminated in consolidation.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates: The
consolidated financial statements have been prepared using the accrual basis of
accounting in accordance with GAAP. Preparing financial statements in
conformity with GAAP requires management to make estimates and
assumptions. Those assumptions affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual
results could materially differ from those estimates.
Cash: We deposit
our cash with high credit quality institutions. Periodically, such
balances may exceed applicable FDIC insurance limits. Management has
assessed the financial condition of these institutions and believes the
possibility of credit loss is minimal.
Certificates of
Deposit-Restricted: From time to time, the Company is required
to issue standby letters of credit to it suppliers to secure purchases made
under the credit terms provided by these suppliers. The Company deposits funds
into a certificate of deposit and instructs that bank to issue the standby
letter of credit to the supplier’s benefit. All such funds are reported as
restricted funds until such time as the supplier releases the letter of credit
requirement. As of May 31, 2010 and May 31, 2009, the Company had $150,000 and
$300,000, respectively, of cash certificates of deposit securing standby letters
of credit with its suppliers.
Allowance for Doubtful
Accounts: The Company performs periodic credit evaluations of its
customer base and the credit it extends to its customers is on an unsecured
basis.
In
determining the adequacy of the allowance for doubtful accounts, management
considers a number of factors, including historical collections experience,
aging of the receivable portfolio, financial condition of the customer and
industry conditions. The Company considers account receivables past
due when customers exceed the terms of payment granted to them by the
Company. The Company writes-off its fully reserved accounts
receivable when it has exhausted all collection efforts which is generally
within 90 days following the last payment received on the
account.
41
Accounts
receivable are presented net of an allowance for doubtful accounts of $407,000
and $486,000 at May 31, 2010 and May 31, 2009, respectively. Based on
the information available to the Company, management believes the allowance for
doubtful accounts as of those periods are adequate. However, actual
write-offs may exceed the recorded allowance.
The
Company evaluates its write-offs on a monthly basis. The Company determines
which accounts are uncollectible, and those balances are written-off against the
Company’s allowance for doubtful accounts.
Reserve for Inventory
Obsolescence: Inventories are stated at the lower of cost
(primarily on a moving average basis), which approximates actual cost determined
on a first-in, first-out (“FIFO”) basis, or fair market value and are comprised
of finished goods. In determining the adequacy of the reserve for inventory
obsolescence, management considers a number of factors including recent sales
trends, industry market conditions and economic conditions. In assessing the
reserve, management also considers price protection credits the Company expects
to recover from its vendors when the vendor cost on certain inventory items is
reduced shortly after the purchase of the inventory by the Company. In addition,
management establishes specific valuation allowances for discontinued inventory
based on its prior experience liquidating this type of
inventory. Through the Company’s wholesale and internet distribution
channel, it is successful in liquidating the majority of any inventory that
becomes obsolete. The Company has many different cellular handset,
radio and other electronics suppliers, all of which provide reasonable
notification of model changes, which allows the Company to minimize its level of
discontinued or obsolete inventory. Inventories are presented net of a reserve
for obsolescence of $232,000 and $242,000 at May 31, 2010 and May 31, 2009,
respectively. Actual results could differ from those estimates.
The
following table lists the cost basis of inventory by major product category and
the related reserves for inventory obsolescence at May 31, 2010 and May 31, 2009
(in thousands):
May 31, 2010
|
May 31, 2009
|
|||||||||||||||||||||||
Cost
|
Reserve
|
Net Value
|
Cost
|
Reserve
|
Net Value
|
|||||||||||||||||||
Phones
and related accessories
|
$ | 557 | $ | (69 | ) | $ | 488 | $ | 726 | $ | (65 | ) | $ | 661 | ||||||||||
Automotive
products
|
284 | (42 | ) | 242 | 501 | (56 | ) | 445 | ||||||||||||||||
Satellite
products
|
18 | (4 | ) | 14 | 20 | (4 | ) | 16 | ||||||||||||||||
Two-way
products
|
418 | (115 | ) | 303 | 527 | (111 | ) | 416 | ||||||||||||||||
Other
|
4 | (2 | ) | 2 | 15 | (6 | ) | 9 | ||||||||||||||||
Total
inventory and reserves
|
$ | 1,281 | $ | (232 | ) | $ | 1,049 | $ | 1,789 | $ | (242 | ) | $ | 1,547 |
Property and
Equipment: Property and equipment is recorded at cost.
Depreciation is computed using the straight-line method. Expenditures for major
renewals and betterments that extend the useful lives of property and equipment
are capitalized. Expenditures for maintenance and repairs are charged to expense
as incurred. Upon the sale or abandonment of an asset, the cost and related
accumulated depreciation are removed from the Company’s balance sheet, and any
gains or losses on those assets are reflected in the accompanying consolidated
statement of operations of the respective period. The straight-line method with
estimated useful lives is as follows:
Buildings
and improvements
|
5-30
years
|
|
Two-way
network infrastructure
|
5-15
years
|
|
Office
and computer equipment
|
3-
5 years
|
|
Signs
and displays
|
5-10
years
|
|
Other
equipment
|
3-5
years
|
|
Leasehold
improvements
|
Shorter
of estimated useful
|
|
|
life
or term of
lease
|
42
Intangible
Assets: The Company’s intangible assets are comprised of
certain definite lived assets as well as two indefinite lived assets. Indefinite
lived intangible assets are not amortized but evaluated annually (or more
frequently) for impairment under ASC 350, Intangibles-Goodwill and
Other, (“ASC 350”). Definite lived intangible assets,
including capitalized loan origination costs, the purchase and development of
key distribution agreements, purchased subscriber bases and FCC license
acquisition costs, are amortized over the estimated useful life of the asset and
reviewed for impairment upon any triggering event that gives rise to any
question as to the assets’ ultimate recoverability as prescribed under ASC 360,
Property, Plant and
Equipment, (“ASC 360”).
Indefinite
Lived Intangible Assets: The Company has two indefinite lived intangible
assets, goodwill and a purchases perpetual trademark license. Goodwill acquired
in a business combination and intangible assets determined to have an indefinite
useful life are not amortized but instead tested for impairment at least
annually in accordance with the provisions of ASC 350. The ASC 350
goodwill impairment model is a two-step process. The first step compares the
fair value of a reporting unit that has goodwill assigned to its carrying value.
The fair value of a reporting unit using discounted cash flow analysis is
estimated. If the fair value of the reporting unit is determined to be less than
its carrying value, a second step is performed to compute the amount of goodwill
impairment, if any. Step two allocates the fair value of the reporting unit to
the reporting unit’s net assets other than goodwill. The excess of the reporting
unit’s fair value over the amounts assigned to its net assets other than
goodwill is considered the implied fair value of the reporting unit’s goodwill.
The implied fair value of the reporting unit’s goodwill is then compared to the
carrying value of its goodwill. Any shortfall represents the amount of goodwill
impairment. The goodwill recorded in the Company’s consolidated balance sheet
was acquired in January 2004 as part of the purchase of the two-way radio assets
of Delta Communications, Inc. The Company tests this goodwill annually on March
1st,
the first day of its fourth fiscal quarter, of each year unless an event occurs
that would cause the Company to believe the value is impaired at an interim
date.
For the
years ended May 31, 2010 and 2009, the Company evaluated the carrying value of
its goodwill associated with its two-way business and has concluded that no
impairment of its goodwill is required these years. The Company
estimates the fair value of its two-way business using a discounted cash flow
method. No changes have occurred in the two-way business during
fiscal years 2010 or 2009 that indicated any impairment of the
goodwill. The Company continually evaluates whether events and
circumstances have occurred that indicate the remaining balance of goodwill may
not be recoverable. In evaluating impairment we estimate the sum of the expected
future cash flows derived from such goodwill. Such evaluations for impairment
are significantly impacted by estimates of future revenues, costs and expenses
and other factors. A significant change in cash flows in the future could result
in an additional impairment of goodwill.
In May
2010, Progressive Concepts, Inc., purchased a perpetual trademark license to use
the trademark “Hawk Electronics” (see Note – 6 “Goodwill and Other Intangible
Assets” for additional discussion). In accordance with ASC 350, an entity shall
evaluate the remaining useful life of an intangible asset that is not being
amortized each reporting period to determine whether events and circumstances
continue to support an indefinite useful life. As mentioned above, the guidance
under ASC 350 also states an intangible asset that is not subject to
amortization shall be tested for impairment annually or more frequently if
events or changes in circumstances indicate the asset might be
impaired. The impairment test shall consist of a comparison of the
fair value of an intangible asset with its carrying amount. If the carrying
amount of an intangible asset exceeds its fair value, an impairment loss shall
be recognized in an amount equal to the excess.
43
The
Company evaluated PCI’s perpetual trademark license asset at May 31, 2010, and
determined the fair value of the license exceeded its carrying value; therefore,
no impairment was recorded. The fair value of the perpetual trademark license
was based upon the discounted estimated future cash flows of the Company’s
cellular business. The Company will continually evaluate whether events and
circumstances occur that would no longer support an indefinite life for its
perpetual trademark license.
Definite
Lived Intangible Assets: Definite lived
intangible assets consist of the capitalized cost associated with acquiring the
cellular distribution agreements with AT&T, purchased subscriber bases, FCC
licenses, internally developed software and loan origination
costs. The Company does not capitalize customer acquisition costs in
the normal course of business but would capitalize the purchase costs of
acquiring customers from a third party. Intangible assets are carried at cost
less accumulated amortization. Amortization on the wireless contracts is
computed using the straight-line method over the contract’s expected
life. The estimated useful lives for the intangible assets are as
follows:
AT&T
distribution agreements and subscriber bases
|
1-13
years
|
|
FCC
licenses
|
9
years
|
|
Internally
developed software
|
3
years
|
The
Company defers certain direct costs in obtaining loans and amortizes such
amounts using the straight-line method over the expected life of the loan, which
approximates the effective interest method as follows:
Loan
origination costs
|
2-5
years
|
As of May
31, 2010, the most significant intangible assets remaining that continue to be
amortized are the AT&T distribution agreements and subscriber
bases. The DFW and San Antonio AT&T cellular distribution
agreements will continue to be amortized through August 31, 2014 and December
31, 2013, respectively, or for approximately 4.3 and 3.6 years,
respectively.
The
wireless contract intangible assets represent certain cellular distribution
contracts that the Company has with AT&T, under which the Company is allowed
to provide cellular services to its customers. Although the Company has
sustained losses in recent years, management has evaluated this asset in light
of the fair value of each of the cellular subscribers that the Company
services. Included in the provisions of the primary contract with
AT&T (DFW market) is a liquidated damages provision, which defines a value
of $1,000 per Subscriber (number) to be paid to the Company if AT&T were to
solicit or take any or all of the cellular subscribers from PCI. Under the terms
of the DFW market distribution agreement with AT&T, which expired on August
31, 2009, AT&T must continue to provide airtime to the Company as long as
the subscribers choose to remain on service, or at AT&T’s option, AT&T
could “buy-back” the subscribers from the Company for the $1,000 liquidated
damages per subscriber line provided for by the agreement. The total value of
the cellular subscriber base provided for by the liquidated damages provision
contained in the contract exceeds the carrying value of the asset at all periods
presented herein. The Company regularly forecasts the expected cash
flows to be derived from this cellular subscriber base and as of the date of
this Report those expected cash flows exceed the carrying value of the
asset.
Amortization
of the distribution agreements, subscriber bases, FCC licenses and internally
developed software is considered an operating expense and included in
“Depreciation and Amortization” in the accompanying consolidated statements of
operations. The Company periodically reviews the estimated useful
lives of its identifiable intangible assets, taking into consideration any
events or circumstances that might result in a lack of recoverability or revised
useful life.
44
Impairment of Long-lived
Assets: In accordance with ASC 360, the Company evaluates the
recoverability of the carrying value of its long-lived assets based on estimated
undiscounted cash flows to be generated from such assets. If the undiscounted
cash flows indicate an impairment, then the carrying value of the assets
evaluated is written-down to the estimated fair value of those assets. In
assessing the recoverability of these assets, the Company must project estimated
cash flows, which are based on various operating assumptions, such as average
revenue per unit in service, disconnect rates, sales productivity ratios and
expenses. Management develops these cash flow projections on a periodic basis
and reviews the projections based on actual operating trends. The
projections assume that general economic conditions will continue unchanged
throughout the projection period and that their potential impact on capital
spending and revenues will not fluctuate. Projected revenues are based on the
Company’s estimate of units in service and average revenue per unit as well as
revenue from various new product initiatives. Projected revenues assume a
declining cellular service revenue while projected operating expenses are based
upon historic experience and expected market conditions adjusted to reflect an
expected decrease in expenses resulting from cost saving
initiatives.
The most
significant tangible long-lived asset owned by the Company is the Fort Worth,
Texas corporate office building and the associated land. The Company has
received periodic appraisals of the fair value of this property, and in each
instance the appraised value exceeds the carrying value of the
property.
The
Company’s review of the carrying value of its tangible long-lived assets at May
31, 2010 and May 31, 2009 indicates the carrying value of these assets will be
recoverable through estimated future cash flows. Because of the losses the
Company has incurred during the past several years prior to fiscal year 2010,
the Company also reviewed the market value of the assets. In support of the cash
flows approach to this evaluation, the market value review also indicates that
the carrying value at each period presented herein is not impaired. If the cash
flow estimates, or the significant operating assumptions upon which they are
based change in the future, the Company may be required to record impairment
charges related to its long-lived assets.
Patent Held for Sale: In
accordance with ASC 360, the Company will reclassify certain long-lived assets
as a current asset held for sale
on the Company’s consolidated balance sheets if certain requirements are
met. In order for an asset to be held for sale under the provisions
of ASC 360, management must determine the asset is
to be held for sale in its current condition, an active plan to complete the
sale of the asset has been initiated and the sale of the asset is probable
within one year. The Company evaluated the hotspot network patent it acquired
during the public auction
of Air-bank,
Inc.’s assets in July
2009 and has determined this asset met all the
criteria for an asset held for sale under ASC 360. At May 31, 2010, the patent
is recorded as a current asset held for sale on the
Company’s consolidated balance sheet for approximately $257,000 as the Company is actively pursuing the
sale of this patent through a broker. The Company has received no formal offers
to purchase the patent from potential buyers but has received several
expressions of interest from qualified buyers who have indicated the market
value of the patent exceeds the carrying value as of May 31, 2010. The Company
is attempting to sell the patent by the end of the second quarter in fiscal year
2011.
45
Provision for Income
Taxes:
The Company accounts for income taxes in accordance with ASC 740, Income Taxes, (“ASC 740”)
using the asset and liability approach, which requires recognition of deferred
tax liabilities and assets for the expected future tax consequences of temporary
differences between the carrying amounts and the tax basis of such assets and
liabilities. This method utilizes enacted statutory tax rates in effect for the
year in which the temporary differences are expected to reverse and gives
immediate effect to changes in income tax rates upon enactment. Deferred tax
assets are recognized, net of any valuation allowance, for temporary
differences, net operating loss and tax credit carry forwards. Deferred income
tax expense represents the change in net deferred assets and liability balances.
Deferred income taxes result from temporary differences between the basis of
assets and liabilities recognized for differences between the financial
statement and tax basis thereon and for the expected future tax benefits to be
derived from net operating losses and tax credit carry forwards. A valuation
allowance is recorded when it is more likely than not that deferred tax assets
will be unrealizable in future periods. As of May 31, 2010 and May 31, 2009, the Company has recorded a valuation
allowance against the full amount of its net deferred tax assets. Although the Company had taxable income for fiscal year
2010, it is currently unable to reasonably forecast taxable
income beyond fiscal year 2010. The inability to foresee
taxable income in future years makes it more likely than not that the Company
will not realize its recorded deferred tax assets in future
periods.
When the Company is charged interest or
penalties related to income tax matters, the Company records such interest and
penalties as interest expense in the consolidated statement of
operations. As of May 31, 2010, the Company had an immaterial amount
of interest and penalties recognized and accrued.
Revenue Recognition: Teletouch
recognizes revenue over the period the service is performed in accordance with
SEC Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial
Statements” and ASC 605, Revenue Recognition, (“ASC
605”). In general, ASC 605 requires that four basic criteria must be met before
revenue can be recognized: (1) persuasive evidence of an arrangement exists, (2)
delivery has occurred or services rendered, (3) the fee is fixed and
determinable and (4) collectability is reasonably assured. Teletouch believes,
relative to sales of products, that all of these conditions are met; therefore,
product revenue is recognized at the time of shipment.
The
Company primarily generates revenues by providing recurring cellular services
and through product sales. Cellular services include cellular airtime
and other recurring services provided through a master distributor agreement
with AT&T. Product sales include sales of cellular telephones,
accessories, car and home audio products and other services and two-way radio
equipment through the Company’s retail, wholesale and two-way
operations.
Cellular
and other service revenues and related costs are recognized during the period in
which the service is rendered. Associated subscriber acquisition
costs are expensed as incurred. Product sales revenue is recognized at the time
of shipment, when the customer takes title and assumes risk of loss, when terms
are fixed and determinable and collectability is reasonably
assured. The Company does not generally grant rights of
return. However, PCI offers customers a 30 day return/ exchange
program for new cellular subscribers in order to match programs put in place by
most of the other cellular carriers. During the 30 days, a customer
may return all cellular equipment and cancel service with no
penalty. Reserves for returns, price discounts and rebates are
estimated using historical averages, open return requests, recent product
sell-through activity and market conditions. No reserves have been
recorded for the 30 day cellular return program since only a very small number
of customers utilize this return program and many fail to meet all of the
requirements of the program, which include returning the phone equipment in new
condition with no visible damage.
46
Since
1984, Teletouch’s subsidiary, PCI, has held agreements with AT&T or one of
its predecessor companies, which allowed PCI to offer cellular service and
provide the billing and customer services to its subscribers. PCI is compensated
for the services it provides based upon sharing a portion of the monthly
billings revenues with AT&T. PCI is responsible for the billing
and collection of cellular charges from these customers and remits a percentage
of the cellular billings generated to AT&T. Based on its
relationship with AT&T, the Company has evaluated its reporting of revenues
under ASC 605-45, Revenue
Recognition, Principal Agent Considerations (“ASC 605-45”) associated
with its services attached to the AT&T agreements. Included in
ASC 605-45 are eight indicators that must be evaluated to support reporting
gross revenue. These indicators are (i) the entity is the primary
obligor in the arrangement, (ii) the entity has general inventory risk before
customer order is placed or upon customer return, (iii) the entity has latitude
in establishing price, (iv) the entity changes the product or performs part of
the service, (v) the entity has discretion in supplier selection, (vi) the
entity is involved in the determination of product or service specifications,
(vii) the entity has physical loss inventory risk after customer order or during
shipment and (viii) the entity has credit risk. In addition, ASC
605-45 includes three additional indicators that support reporting net
revenue. These indicators are (i) the entity’s supplier is the
primary obligor in the arrangement, (ii) the amount the entity earns is fixed
and (iii) the supplier has credit risk. Based on its assessment of the
indicators listed in ASC 605-45, the Company has concluded that the AT&T
services provided by PCI should be reported on a net basis. Also in accordance
with ASC 605-45, sales tax amounts invoiced to our customers have been recorded
on a net basis and have no impact on our consolidated financial
statements.
Deferred
revenue represents monthly service fees primarily access charges for cellular
services that are billed in advance by the Company.
Concentration of Credit
Risk: Teletouch provides cellular and other wireless
telecommunications services to a diversified customer base of small to mid-size
businesses and individual consumers, primarily in the DFW and San Antonio
markets in Texas. In addition, the Company sells cellular equipment
and consumer electronics products to large base of small to mid-size cellular
carriers, agents and resellers as well as a large group of smaller electronics
and car audio dealers throughout the United States. As a result, no
significant concentration of credit risk exists. The Company performs
periodic credit evaluations of its customers to determine individual customer
credit risks and promptly terminates services or ceases shipping products for
nonpayment.
Financial
Instruments: The Company’s financial instruments consists of
certificates of deposit-restricted, accounts receivable, accounts payable and
debt. Management believes the carrying value of its financial instruments
approximates fair value due to the short maturity of the current assets and
liability and the reasonableness of the interest rates on the Company’s
debt.
Advertising and Pre-opening
Costs: Labor costs, costs of hiring and training personnel and
certain other costs relating to the opening of new retail locations are expensed
as incurred. Additionally, advertising costs are expensed as incurred and are
partially reimbursed based on various vendor agreements. Advertising
and promotion costs were $582,000 and $727,000 for the years ended May 31, 2010
and 2009, respectively. Advertising reimbursements are accrued when earned and
committed to by the Company’s vendor and are recorded as a reduction to
advertising cost in that period.
Stock-based
Compensation: At May 31,
2010, the Company had two
stock-based compensation plans for employees and non-employee directors, which authorize the granting of various
equity-based incentives including stock options and stock appreciation
rights.
The Company accounts for stock-based
awards to employees in accordance with ASC 718, Compensation-Stock
Compensation, (“ASC 718”) and for stock based awards
to non-employees in accordance with ASC 505-50, Equity, Equity-Based
Payments to Non-Employees
(“ASC 505-50”). Under both ASC 718 and ASC 505-50, we
use a fair value based method to determine compensation for all arrangements
where shares of stock or equity instruments are issued for
compensation. For share
option instruments issued, compensation cost is recognized ratably using the
straight-line method over the expected vesting period.
47
Cash flows resulting from excess tax
benefits are classified as a financing activity.
Excess tax benefits are realized from tax deductions for exercised options in
excess of the deferred tax asset attributable to stock compensation costs for
such options. The Company did not record any excess tax benefits as a result of
any exercises of stock
options in fiscal years 2010 and 2009 because the Company provided for a full
valuation allowance against
all accrued future tax
benefits for all periods presented until its operations improve and the Company is
able to forecast taxable income in the future sufficient to utilize its deferred
tax assets.
For the 12 months ended May 31, 2010 and May 31,
2009, the Company has
elected to use the Black-Scholes option-pricing model, which incorporates
various assumptions including volatility, expected life and interest rates. The Company is
required to make various assumptions in the application of the Black-Scholes
option pricing model. The Company has determined that the best
measure of expected volatility is based on the historical daily volatility of
the Company’s common stock. Historical volatility factors utilized
in the Company’s Black-Scholes computations for options issued in fiscal year 2010 was 240.4 %
and ranged from 172.6% to
173.7% for the options
issued in fiscal year 2009. The Company has elected to estimate the
expected life of an award based upon the SEC approved “simplified method” noted under the provisions
of Staff Accounting
Bulletin No. 107 with the continued use of this method extended under the
provisions of Staff Accounting Bulletin No. 110. Under this formula, the
expected term is equal to: ((weighted-average vesting term + original
contractual term)/2). The
expected term used by the Company as computed by this method for options issued
in fiscal year 2010 was 5.0 years and ranged from 5.0 years to 6.0 years for the options issued in fiscal year
2009. The interest rate
used is the risk free interest rate and is based upon U.S. Treasury rates
appropriate for the expected term. Interest rates used in the Company’s
Black-Scholes calculations for options issued in fiscal year 2010 was 2.55% and
ranged from 3.39% to 3.54% for the
options issued in fiscal year 2009. Dividend yield is zero for
these options as the Company does not expect
to declare any dividends on its common shares in the foreseeable
future.
In
addition to the key assumptions used in the Black-Scholes model, the estimated
forfeiture rate at the time of valuation is a critical assumption. The
Company has estimated an annualized forfeiture rate of 0.0% for the stock
options granted to senior management and the Company’s directors in fiscal years
2010 and 2009. The Company reviews the expected forfeiture rate
annually to determine if that percent is still reasonable based on historical
experience.
Options
exercisable at May 31, 2010 and 2009 totaled 3,054,545 and 1,424,326,
respectively. The weighted-average exercise price per share of
options exercisable at May 31, 2010 and 2009 was $0.27 and $0.38, respectively,
with remaining weighted-average contractual terms of approximately 7.0 years and
6.2 years, respectively.
The weighted-average grant date fair
value of options granted during the 12 months ended May 31, 2010 was
$0.12.
At May 31, 2010, the total remaining unrecognized
compensation cost related to unvested stock options amounted to approximately $162,000, which will be amortized over the weighted-average
remaining requisite service
period of 1.2 years.
Income (loss) Per
Share: In accordance with ASC 260, Earnings Per Share, basic income (loss) per
share (“EPS”) is calculated by dividing net income (loss) by the weighted
average number of common shares outstanding. Diluted EPS is
calculated by dividing net income available to common shareholders by the
weighted average number of common shares outstanding including any dilutive
securities outstanding. At May 31, 2010, the Company’s outstanding
common stock options totaled 4,563,316. For the twelve months ended May 31,
2010, 517,083 common stock options were deemed dilutive securities and were
included in the diluted earnings per share calculation due to the Company’s
market price of its common stock at May 31, 2010 exceeding the options’ exercise
price. The Company’s outstanding common stock options totaled 3,910,815 at May
31, 2009 and were not included in the computation of diluted earnings per share
due to their antidilutive effect as a result of the net loss incurred during the
twelve months ended May 31, 2009.
48
Recently
Adopted Accounting Standards:
In February 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2010-09, Subsequent Events:
Amendments to Certain Recognition and Disclosure Requirements, (“ASU 2010-09”) which amends Accounting Standards Codification Topic 855 (“ASC 855”) to address certain implementation
issues related to an entity's requirement to perform and disclose subsequent
events procedures. The amendments in ASU 2010-09 remove the requirement
for an SEC filer to disclose a date through which subsequent events have been
evaluated in both issued and revised financial statements. The new guidance became effective for
the Company on February 24,
2010 and did not have an impact on the Company’s consolidated financial statements or results of
operations.
In
August 2009, FASB issued ASU No. 2009-05, Measuring Liabilities at Fair
Value, (“ASU 2009-05”). ASU 2009-05 amends FASB ASC Topic 820, Fair Value Measurements
(“ASC 820”). Specifically, ASU 2009-05 provides clarification that in
circumstances in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
using one or more of the following methods: 1) a valuation technique that uses
a) the quoted market price of the identical liability when trades as an asset or
b) quoted prices for similar liabilities or similar liabilities when trades as
assets and/or 2) a valuation technique that is consistent with the principles of
ASC 820. ASU 2009-05 also clarifies that when estimating the fair value of a
liability, a reporting entity is not required to adjust inputs relating to the
existence of transfer restrictions on that liability. The adoption of this
standard did not have an impact on our financial position or results of
operations; however, this standard may impact us in future periods.
In June
2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No.
168, “FASB Accounting Standards Codification”, (“SFAS 168”) (“ASC” or “the
Codification”) as the single source of authoritative U.S. generally accepted
accounting principles for all non-governmental entities. FASB then issued
Accounting Standards Update (“ASU”) 2009-01, Topic 105-Generally Accepted
Accounting Principles amendments based on Statement of Financial Accounting
Standards No. 168-The FASB Accounting Standards Codification and the Hierarchy
of Generally Accepted Accounting Principles, which amended the
Codification for the issuance of FAS 168. The Codification, which
launched July 1, 2009, changes the referencing and organization of
accounting guidance. The Codification became effective for the Company beginning
September 1, 2009. The issuance of FASB Codification did not change GAAP
and therefore the adoption has only affected how specific references to GAAP
literature are disclosed in the notes to our consolidated financial
statements.
In May
2009, the FASB issued SFAS No 165, “Subsequent Events”, which has been
incorporated into ASC 855, which establishes general standards of accounting and
disclosure for events that occur after the balance sheet date but before
financial statements are issued. This guidance became effective for the Company
beginning June 1, 2009. The adoption of this guidance did not have an
impact on the Company’s consolidated financial position or results of
operations.
49
Recently
Issued Accounting Standards:
In
January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements (“ASU 2010-06”). This update requires additional disclosures
about (1) the different classes of assets and liabilities measured at fair
value, (2) the valuation techniques and inputs used, (3) the activity in Level 3
fair value measurements, and (4) the transfers between Levels 1, 2, and 3. This
guidance is effective for the Company’s interim and annual reporting periods
beginning after December 15, 2009. The Company does not expect the adoption of
this guidance to have a material impact on its consolidated financial positions
or results of operations.
In
January 2010, the FASB issued ASU No. 2010-01, Equity (Topic 505): Accounting for
Distributions to Shareholders with Components of Stock and Cash (“ASU
2010-01”). ASU 2010-01 clarifies that the stock portion of a distribution to
shareholders that allows them to elect to receive cash or stock with a potential
limitation on the total amount of cash that all shareholders can elect to
receive in the aggregate is considered a share issuance that is reflected in
earnings per share prospectively and is not a stock dividend. This ASU codifies
the consensus reached by the Emerging Issues Task Force in Issue No. 09-E,
"Accounting for Stock Dividends, Including Distributions to Shareholders with
Components of Stock and Cash." This guidance is effective for the Company
beginning June 1, 2010. The Company does not expect the adoption of this
guidance to have a material impact on its consolidated financial positions or
results of operations.
In
December 2009, the FASB issued ASU 2009-17, Consolidations (Topic
810)-Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities, (“ASU 2009-17”). ASU 2009-17 amends the ASC for
the issuance of FASB Statement No. 167, Amendments to FASB Interpretation
No. 46(R). The amendments in ASU 2009-17 replace the quantitative-based
risks and rewards calculation for determining which reporting entity, if any,
has a controlling financial interest in a variable interest entity with an
approach focused on identifying which reporting entity has the power to direct
the activities of a variable interest entity that most significantly impact the
entity’s economic performance and (1) the obligation to absorb losses of the
entity or (2) the right to receive benefits from the entity. An approach that is
expected to be primarily qualitative will be more effective for identifying
which reporting entity has a controlling financial interest in a variable
interest entity. The amendments in this update also require additional
disclosures about an reporting entity’s involvement in variable interest
entities, which will enhance the information provided to users of financial
statements. This guidance is effective for the Company beginning
June 1, 2010. The Company does not expect the adoption of this guidance to
have a material impact on its consolidated financial positions or results of
operations.
In
October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605) –
Multiple-Deliverable Revenue Arrangements, (“ASU
2009-13”). ASU 2009-13 impacts the determination of when the
individual deliverables included in a multiple-element arrangement may be
treated as separate units of accounting. Additionally, these new standards
modify the manner in which the transaction consideration is allocated across the
separately identified deliverables by no longer permitting the residual method
of allocating arrangement consideration. These new standards are effective for
the Company beginning June 1, 2011. The Company does not expect the adoption of
this guidance to have a material impact on its consolidated financial positions
or results of operations.
50
NOTE 3 – RELATIONSHIP WITH CELLULAR
CARRIER
The
Company has historically had six distribution agreements with AT&T which
provide for the Company to distribute AT&T wireless services, on an
exclusive basis, in major markets in Texas and Arkansas, including the
Dallas-Fort Worth, Texas Metropolitan Statistical Area (“MSA”), San Antonio,
Texas MSA, Austin, Texas MSA, Houston, Texas MSA, East Texas Regional MSA and
Arkansas, including primarily the Little Rock, Arkansas MSA. During fiscal year
2010 and following the Company’s commencement of an arbitration proceeding
against AT&T (discussed further below), AT&T notified the Company it is
cancelling or not renewing three of the six distribution agreements including
those agreements that cover the Austin, Texas MSA, Houston, Texas MSA and
Arkansas. The Company is disputing these cancellations and is
attempting to have these matters included and resolved in the arbitration
hearing related to the DFW Agreement. The distribution agreements permit the
Company to offer AT&T cellular phone service with identical pricing
characteristics to AT&T and provide billing customer services to its
customers on behalf of AT&T in exchange for certain predetermined
compensation and fees, which are primarily in the form of a revenue sharing of
the core wireless services the Company bills on behalf of AT&T. In addition,
the Company bills the same subscribers several additional features and products
that it offers and retains all revenues and gross margins related to those
certain services and products.
The
Company is responsible for all of the billing and collection of cellular charges
from its customers and remains liable to AT&T for pre-set percentages of all
AT&T related cellular service customer billings. Because of the volume of
business transacted with AT&T, as well as the revenue generated from
AT&T services, there is a significant concentration of credit and business
risk involved with having AT&T as a primary vendor. The Company’s largest
distribution agreement with AT&T for the Dallas / Fort Worth, Texas MSA was
amended effective September 1, 1999 with an initial term of 10 years (the
“DFW Agreement”). The DFW Agreement provided for two 5-year extensions unless
either party provides written notice to the other party at least six months
prior to the expiration of the initial term or the additional renewal term.
Specifically, under the terms of its distribution agreement with AT&T, the
Company is allowed to continue to service its existing subscribers (each
telephone number assigned to a customer is deemed to be a separate subscriber)
at the time of expiration until the subscribers, of their own free will,
independently and without any form of encouragement or inducement from AT&T,
have their services terminated with the Company. The initial term of the DFW
Agreement expired on August 31, 2009, and the Company received the required six
month notice from AT&T in February 2009 stating it would not extend the DFW
Agreement. As a result of the expiration of the initial term of the DFW
Agreement, the exclusivity requirements under this agreement terminated in
August 2009, which allows the Company to expand its cellular offerings in the
previously AT&T exclusive areas, under new agreements with one or more
carriers.
On
September 30, 2009, Teletouch’s subsidiary, PCI, commenced an arbitration
proceeding against AT&T seeking at least $100 million in damages. The
binding arbitration was commenced to seek relief for damages incurred as
AT&T has prevented the Company from selling the popular iPhone and other
“AT&T exclusive” products and services that PCI believes it is contractually
entitled to provide to its customers. In addition, the Company’s
initial statement of claim alleges, among other things, that AT&T has
violated the longstanding non-solicitation provisions under the DFW Agreement by
and between the companies by actively inducing customers to leave PCI for
AT&T. While PCI has attempted to negotiate with AT&T for the purpose of
obviating the need for legal action, such attempts have failed. Accordingly, PCI
has initiated this arbitration.
51
The
Company reports its revenues related to the AT&T services on a net basis in
accordance with ASC 605-45 as follows (in thousands):
Twelve Months Ended
|
||||||||
May 31,
|
||||||||
2010
|
2009
|
|||||||
Gross
service, rent and maintenance billings
|
$ | 53,426 | $ | 61,360 | ||||
Net
revenue adjustment (revenue share due to AT&T)
|
(27,483 | ) | (34,150 | ) | ||||
Net
service, rent and maintenance revenue
|
$ | 25,943 | $ | 27,210 |
Gross service, rent and
maintenance billings include gross cellular subscription
billings, which are measured as the total recurring monthly
cellular service charges invoiced to PCI’s wireless subscribers for which a fixed
percentage of the dollars invoiced are retained by PCI as compensation for the services it
provides to these subscribers and for which PCI takes full (100%) accounts
receivable risk before deducting certain revenue sharing amounts that are payable to
AT&T under PCI’s current billing and customer service
agreements with
AT&T.
NOTE
4 – NOTES RECEIVABLE
Notes
receivable at May 31, 2010 and 2009 consisted of the following (in
thousands):
May 31, 2010
|
May 31, 2009
|
|||||||
Mobui
Note
|
$ | - | $ | 441 | ||||
Air-bank
Note
|
- | 439 | ||||||
Other
|
15 | 23 | ||||||
$ | 15 | $ | 903 |
Mobui Note: In October 2008,
Teletouch agreed to provide certain financing to Mobui Corporation, a privately
held Washington corporation (“Mobui”), in exchange for a minority equity
position in the company. Mobui was founded in July 2008 and was an advanced
mobile applications development and content delivery company.
On
October 3, 2008, Teletouch loaned to Mobui $60,000 in return for a promissory
note payable bearing an annual interest rate of 14% with all principal and
accrued interest payable due upon demand of Teletouch anytime after November 2,
2008 (the “Mobui Note”). The Note was secured by substantially all of
the assets of Mobui, excluding certain intellectual property, and by personal
guarantee from the founder of Mobui.
The
Company agreed to amend the Mobui Note on 6 different occasions due to
additional financing requests by Mobui during fiscal year 2009. On
January 15, 2009, Teletouch amended the Mobui Note for a final time to reflect
an additional funding of $60,000 to Mobui. The sixth amended Mobui
Note revised the total Mobui Note amount to $415,000 and provided for the
repayment of $165,000 in principal and any unpaid accrued interest by July 15,
2009. The remaining principal and interest was due on December 22,
2009. Since Teletouch agreed to enter into a sixth amended Mobui Note, Mobui
issued additional shares of its common stock to the Company, which increased
Teletouch’s minority equity position in Mobui.
On August
6, 2009, the Company notified Mobui of its payment default and various other
defaults under the Note and demanded payment in full. On August 17,
2009, the Company received a $415,000 payment from Mobui which was applied
against the Note’s principal balance leaving a balance on the Note of
approximately $37,000 related to unpaid accrued interest. On October
29, 2009, the total unpaid accrued interest due under the Mobui Note was paid in
full and the Company released all liens related to the
Note.
52
Air-bank Note: In 2006, the
Company loaned $250,000 to PCCI for the purpose of allowing PCCI to enter into
an agreement with Air-bank, Inc., a non-affiliated prepaid cellular technology
company (“Air-bank”). The $250,000 was to be used to secure a
management and option agreement with Air-bank providing PCCI the option to
acquire up to 55% interest in Air-bank. Beginning in June 2006 and
through fiscal year 2009, the Company also provided certain leased office space
to Air-bank. In January 2009, PCCI contributed the receivable due
from Air-bank to Teletouch, which assigned all claims to the receivable to the
Company to retire all of its intercompany obligations due to the
Company. In addition Air-bank owed the Company other balances due to
certain operating expenses paid by the Company on its behalf. In
January 2009, the Company converted all amounts due from Air-bank into a single
promissory note with an annual interest rate of 15% and secured by all of the
assets of Air-bank (the “Air-bank Note”). The initial maturity date
of the Air-bank Note was March 31, 2009 with a $250,000 principal payment due at
that date with any remaining principal balance and all unpaid accrued interest
due on June 30, 2009.
In April
2009, the Company initiated foreclosure proceedings on the assets of Air-bank
since they could not make the principal and accrued interest payments within the
terms set forth in the promissory note. On July 24, 2009, the assets
of Air-bank were sold in a public auction to the Company in exchange for
$460,000 of the balance due under the Air-bank Note. The assets the
Company obtained in the foreclosure proceedings included a hotspot network
communication patent valued at approximately $257,000, a certificate of deposit
for approximately $178,000 and various telecommunication and computer equipment
for approximately $25,000.
NOTE
5 – PROPERTY AND EQUIPMENT
Property
and equipment at May 31, 2010 and 2009 consisted of the following (in
thousands):
May 31, 2010
|
May 31, 2009
|
|||||||
Land
|
$ | 774 | $ | 774 | ||||
Buildings
and leasehold improvements
|
3,056 | 3,151 | ||||||
Two-way
network infrastructure
|
1,055 | 1,177 | ||||||
Office
and computer equipment
|
2,716 | 3,207 | ||||||
Signs
and displays
|
790 | 1,385 | ||||||
Other
|
397 | 373 | ||||||
$ | 8,788 | $ | 10,067 | |||||
Less:
|
||||||||
Accumulated
depreciation and amortization
|
(6,039 | ) | (7,118 | ) | ||||
Total
property and equipment
|
$ | 2,749 | $ | 2,949 |
Depreciation
and amortization expense related to property and equipment was $366,000 and
$484,000 in fiscal years 2010 and 2009, respectively.
53
The
following table contains the property and equipment by estimated useful life,
net of accumulated depreciation as of May 31, 2010 (in thousands):
Less than
|
3 to 4
|
5 to 9
|
10 to 14
|
15 to 19
|
20 years
|
Total Net
|
||||||||||||||||||||||
3 years
|
years
|
years
|
years
|
years
|
and greater
|
Value
|
||||||||||||||||||||||
Buildings
and leasehold improvements
|
$ | 16 | $ | 70 | $ | 73 | $ | - | $ | 10 | $ | 1,203 | $ | 1,372 | ||||||||||||||
Two-way
network infrastructure
|
127 | 91 | 19 | - | - | - | 237 | |||||||||||||||||||||
Office
and computer equipment
|
12 | 127 | 125 | - | - | - | 264 | |||||||||||||||||||||
Signs
and displays
|
52 | 10 | 8 | - | - | - | 70 | |||||||||||||||||||||
Other
|
25 | - | 7 | - | - | - | 32 | |||||||||||||||||||||
Land
|
- | - | - | - | - | 774 | 774 | |||||||||||||||||||||
$ | 232 | $ | 298 | $ | 232 | $ | - | $ | 10 | $ | 1,977 | $ | 2,749 |
NOTE
6 – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill: The reported goodwill of the
Company at May 31, 2010 and 2009 relates entirely to the two-way radio segment
and was purchased in the acquisition of the assets of DCAE, Inc., which was
completed in January 2004. The Company reported goodwill of $343,000
on its consolidated balance sheet at May 31, 2010 and 2009.
Other intangible
assets: The following
is a summary of the Company’s intangible assets as of May 31, 2010 and 2009,
excluding goodwill (in thousands):
May 31, 2010
|
May 31, 2009
|
|||||||||||||||||||||||
Gross
|
Net
|
Gross
|
Net
|
|||||||||||||||||||||
Carrying
|
Accumulated
|
Carrying
|
Carrying
|
Accumulated
|
Carrying
|
|||||||||||||||||||
Amount
|
Amortization
|
Value
|
Amount
|
Amortization
|
Value
|
|||||||||||||||||||
Definite
lived intangible assets:
|
||||||||||||||||||||||||
Wireless
contracts and subscriber bases
|
$ | 10,258 | $ | (7,091 | ) | $ | 3,167 | $ | 10,258 | $ | (6,326 | ) | $ | 3,932 | ||||||||||
FCC
licenses
|
104 | (73 | ) | 31 | 104 | (62 | ) | 42 | ||||||||||||||||
PCI
marketing list
|
1,235 | (1,235 | ) | - | 1,235 | (1,235 | ) | - | ||||||||||||||||
Loan
origination fees
|
639 | (395 | ) | 244 | 394 | (203 | ) | 191 | ||||||||||||||||
Internally
developed software
|
170 | (170 | ) | - | 170 | (170 | ) | - | ||||||||||||||||
Total
amortizable intangible assets
|
12,406 | (8,964 | ) | 3,442 | 12,161 | (7,996 | ) | 4,165 | ||||||||||||||||
Indefinite
lived intangible assets:
|
||||||||||||||||||||||||
Perpetual
trademark license agreement
|
900 | - | 900 | - | - | - | ||||||||||||||||||
Total
intangible assets
|
$ | 13,306 | $ | (8,964 | ) | $ | 4,342 | $ | 12,161 | $ | (7,996 | ) | $ | 4,165 |
Amortization
is computed using the straight-line method based on the following estimated
useful lives:
Wireless
contracts and subscriber bases
|
1-13
years
|
FCC
licenses
|
9
years
|
Loan
origination fees
|
2-5
years
|
Internally-developed
software
|
3
years
|
Total amortization expense for the years
ended May 31, 2010, and 2009 was approximately $888,000 and $922,000,
respectively.
Estimated annual amortization expense is
as follows (in thousands):
Year Ending May 31,
|
||||||||||||||||||||||||
2011
|
2012
|
2013
|
2014
|
2015
|
Thereafter
|
|||||||||||||||||||
Annual
amortization expense
|
$ | 915 | $ | 883 | $ | 774 | $ | 748 | $ | 121 | $ | - |
54
NOTE
7 - ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued
expenses and other current liabilities consist of (in thousands):
May
31,
|
May
31,
|
|||||||
2010
|
2009
|
|||||||
Accrued
payroll and other personnel expense
|
$ | 1,957 | $ | 1,882 | ||||
Accrued
state and local taxes
|
527 | 885 | ||||||
Unvouchered
accounts payable
|
1,953 | 2,826 | ||||||
Customer
deposits payable
|
427 | 585 | ||||||
Other
|
653 | 612 | ||||||
Total
|
$ | 5,517 | $ | 6,790 |
NOTE
8 - LONG-TERM DEBT
Long-term
debt at May 31, 2010 and 2009 consists of the following (in
thousands):
May 31,
|
May 31,
|
|||||||
2010
|
2009
|
|||||||
Thermo
revolving credit facility
|
$ | 12,189 | $ | 12,117 | ||||
East
West Bank (formerly United Commercial Bank)
|
2,361 | 2,463 | ||||||
Jardine
Capital Corporation bank debt
|
585 | 635 | ||||||
Warrant
redemption notes payable
|
764 | 1,200 | ||||||
Other
notes
|
- | 1 | ||||||
Total
long-term debt
|
15,899 | 16,416 | ||||||
Less:
Current portion
|
(1,412 | ) | (1,313 | ) | ||||
Long-term
debt, net
|
$ | 14,487 | $ | 15,103 |
Current
portion of long-term debt at May 31, 2010 and 2009 consists of the following (in
thousands):
May 31,
|
May 31,
|
|||||||
2010
|
2009
|
|||||||
Thermo
revolving credit facility
|
$ | 1,016 | $ | - | ||||
East
West Bank (formerly United Commercial Bank)
|
105 | 102 | ||||||
Jardine
Capital Corporation bank debt
|
16 | 10 | ||||||
Warrant
redemption notes payable
|
275 | 1,200 | ||||||
Other
notes
|
- | 1 | ||||||
Total
current portion of long-term debt
|
$ | 1,412 | $ | 1,313 |
55
The
following table shows the net interest expense recorded against the long-term
debt for the fiscal years ended May 31, 2010 and 2009:
(dollars in thousands)
|
Year Ended May 31,
|
2010 vs 2009
|
||||||||||||||
2010
|
2009
|
$ Change
|
% Change
|
|||||||||||||
Interest
expense (income)
|
||||||||||||||||
Thermo
revolving credit facility
|
$ | 1,680 | $ | 592 | $ | 1,088 | 184 | % | ||||||||
Thermo
factoring debt
|
306 | 1,427 | (1,121 | ) | -79 | % | ||||||||||
Mortgage
debt
|
156 | 184 | (28 | ) | -15 | % | ||||||||||
Warrant
redemption notes payable
|
130 | 163 | (33 | ) | -20 | % | ||||||||||
Other
|
(11 | ) | (36 | ) | 25 | -69 | % | |||||||||
Total
interest expense, net
|
$ | 2,261 | $ | 2,330 | $ | (69 | ) | -3 | % |
As of May
31, 2009, the Company had two debt facilities with Thermo Credit, LLC
(“Thermo”), which included a factoring debt facility (the “Thermo Factoring
Debt”) and a revolving credit facility (the “Thermo Revolver”). Effective August
1, 2009, Teletouch amended its revolving credit facility with Thermo to include
increased borrowing capabilities under the Thermo Revolver as well as extending
the Revolver’s maturity date (see discussion below under “Thermo Revolving
Credit Facility” for additional information). The purpose of amending the Thermo
Revolver was to combine the Thermo Factoring Debt facility and the Thermo
Revolver into a single credit facility by expanding the revolving credit
facility to allow the Company to retire the Thermo Factoring
Debt. Simultaneous with closing the amended Thermo Revolver, the
Thermo Factoring Debt was retired and the pledge of all of PCI’s accounts
receivable and future contractual billings was transferred to the amended Thermo
Revolver.
Thermo Factoring Debt: As part
of the August 2006 debt restructuring, PCI entered into a financing facility
with Thermo Credit, LLC secured by PCI’s accounts receivable, which provided up
to approximately $10,000,000 of available borrowing against PCI’s accounts
receivable. The advance rate was initially set at 70% of the accounts
receivable pledged against the facility but at Thermo’s discretion was increased
to 85% of the pledged accounts receivable. The Thermo Factoring Debt provided
for an initial discount fee of 1.0% (with additional discount fees computed as
the accounts receivable aged) and a 5% contingency
reserve. Additionally, PCI was required to repurchase receivables
that were not collected within 120 days or that were otherwise rejected under
the agreement. On May 18, 2007, the Company and Thermo amended the Thermo
Factoring Debt to increase the overall borrowing limit to $13,000,000, set a
fixed discount fee on receivables pledged at 1.45%, extended the termination
date of the agreement to August 2009 and allowed for certain advances on
“in-process billings.” Under the terms of the first amended factoring agreement,
the Company created a “pseudo billing” file for the following month’s recurring
billing, and Thermo advanced against the in-process billings at an initial
advance rate of 80% with the advance rate scheduled to step down quarterly
through June 2008 to an advance rate at that date of 60% against these
in-process billings. The discount fee charged against in-process
billings was fixed at 1% under this amendment. On February 26, 2008,
Teletouch entered into a second amendment to the factoring facility to provide
for, among other items, (i) an increase to the gross amount of pledged
accounts receivable to $15,000,000 with a continuance of the cash advance rate
of 85%; (ii) a one time 1.05% discount fee on the gross amount of pledged
receivables; (iii) a 0.95% monthly discount fee on the outstanding gross
value of in-process billings that have been advanced against and (iv) the
extension of the termination date to February 26, 2010 (the “Second Amended
Factoring Agreement”).
The
Thermo Factoring Debt was constructed by Thermo to be a factoring facility under
which PCI would sell its accounts receivable to Thermo at a specified discount
rate, subject to certain reserves to be held by Thermo. Upon review
of ASC 860, Transfers and
Servicing, the Company concluded that all of the
required criteria to treat this transaction as a sale of assets were not met by
the agreement entered into with Thermo, primarily the criteria that requires
that assets must be placed out of the reach of the creditors of the Company to
be deemed a sale. Therefore, this financing facility was recorded as debt obligation of the
Company with the discount fees paid against batches of receivables pledged
against the facility recorded in the period pledged as interest
expense.
56
In prior years, the Company’s factoring debt obligation with Thermo was presented as a current liability on the
Company’s consolidated
balance sheet, in
accordance with ASC 470,
Debt, (“ASC 470”) because the factoring agreement
requires a lockbox agreement under which customer payments on accounts are
directed to a lockbox controlled by Thermo and because certain subjective
acceleration rights are retained by Thermo under the agreement. The
stated maturity date of the
factoring debt was February
2010. As a result of the August 1, 2009 restructuring of its
credit facilities with Thermo under which the factoring debt was retired through
additional borrowings under an amended revolving credit facility with
Thermo, the Company
reclassified the $7,493,000
current liability under the Thermo Factoring
Debt to a long-term liability under the Thermo Revolving Credit Facility
as of May 31, 2009 in accordance with ASC 470.
Thermo Revolving Credit
Facility: On August 28, 2009, Teletouch finalized amending,
effective August 1, 2009, the terms of its $5,250,000 revolving credit facility
with Thermo Credit, LLC, resulting in, among other changes, the availability
under the revolving credit facility being increased from $5,250,000 to
$18,000,000 and the maturity of the revolver being extended from April 30, 2010
to January 31, 2012 (the “Second Amended Thermo Revolver”).
The
Second Amended Thermo Revolver provides for the Company to obtain revolving
credit loans from Thermo from time to time up to approximately
$18,000,000. Borrowings against the Second Amended Thermo Revolver
are limited to specific advance rates against the aggregate fair value of the
Company’s assets, as defined in the amendment, including real estate, equipment,
infrastructure assets, inventory, accounts receivable, intangible assets and
notes receivable (collectively, the “Borrowing Base”). The Company is allowed to
borrow the lesser of the borrowing base amount or the initial commitment amount
of $18,000,000, less a monthly step down amount. If the Company were to maximize
its credit line, beginning in December 31, 2009, the availability under the
Second Amended Thermo Revolver would be reduced monthly by an amount equal to
the average principal balance of loans outstanding against the non-accounts
receivable assets in the Borrowing Base for that month divided by sixty
(60) (the “Monthly Step Down”). The loans outstanding on the accounts
receivable component of the Borrowing Base will be increased or decreased
through periodic reporting of the Borrowing Base to Thermo. The balance of all
principal and interest outstanding under the Second Amended Thermo Revolver is
due January 31, 2012. The annual interest rate on the Second Amended
Thermo Revolver is the lesser of: (a) the maximum non-usurious rate of
interest per annum permitted by applicable Louisiana law or (b) the greater
of (i) the prime rate plus 8% or (ii) fourteen percent (14%). Under the terms of
the Second Amended Thermo Revolver, the Company must maintain certain financial
covenants including a net worth of at least $5,000,000, computed on a fair value
basis, at each fiscal quarter, a debt service coverage ratio that ranges between
1.10 and 1.20 over the remaining life of the revolver and an operating income no
less than zero at any fiscal quarter. The purpose of the Second Amended Thermo
Revolver was to retire the former factoring debt facility with Thermo and to
provide additional availability to the Company for its ongoing working capital
needs. As of May 31,
2010, the Company has
a current repayment
liability under the Second Amended Thermo Revolver related to a loan commitment
fee obligation of approximately $135,000.
57
Under the
previous Thermo Factoring Debt, the Company had adequate credit availability
under the facility but was limited in its ability to borrow additional funds due
to declining levels of accounts receivable. With the Second Amended
Thermo Revolver, the Company can finance other non-accounts receivable asset
purchases by including them in the Borrowing Base. Borrowings by the
Company against non-accounts receivable assets are limited to 33.3% of the total
amount of loans outstanding under the terms of the Second Amended Thermo
Revolver. As of May 31, 2010, the Company had a maximum availability of
$5,922,000 against non-accounts receivable assets and $11,845,000 against
accounts receivable for a total maximum availability of $17,767,000.
Additionally, the Company had approximately $12,189,000 in loans outstanding
under the Second Amended Thermo Revolver as of May 31, 2010 which included an
obligation of approximately $203,000 related to loan commitment fees under the
Second Amended Thermo Revolver. A portion of the loan commitment fee
obligation is due and payable on August 1, 2010 with the remaining balance due
on August 1, 2011. As of May 31, 2010, $7,444,000 was advanced
against accounts receivable and $4,745,000 was advanced against non-accounts
receivable assets. The availability to the Company as of May 31, 2010 under the
Second Amended Thermo Revolver is approximately $4,401,000 to be borrowed
against future accounts receivable and $1,177,000 to be borrowed against
non-accounts receivable asset future purchases.
In
February 2010, the Company began making principal payments on the Second Amended
Thermo Revolver due to the Company’s having borrowings outstanding against the
non-accounts receivable assets in excess of the 33.3% limit on such borrowings
as measured against the total borrowings outstanding. This situation resulted
due to a decline in the Company’s accounts receivable and its related borrowings
against these receivables in 2010. In March 2010, Thermo agreed to let the
Company begin making monthly principal payments of approximately $53,000 through
the remainder of the term of the loan to reduce the outstanding loan balance
against the non-accounts receivable assets. The monthly principal
payments reduce the commitment amount under the revolver and as of May 31, 2010,
the maximum potential borrowings available under the revolver are
$17,767,000.
The lien
and security interest in substantially all of the Company’s assets, properties,
accounts, inventory, goods and the like granted to Thermo under the Thermo
Revolver and all other provisions remain the same under the Second Amended
Thermo Revolver.
In
November 2009, the Company made a draw of approximately $1,400,000 against the
Second Amended Thermo Revolver primarily for the use of purchasing inventory for
its wholesale business.
East West
Bank
Debt
(formerly United Commercial Bank): Effective May 3, 2007, the Company entered into a
loan agreement with United Commercial Bank, which was
subsequently acquired by East West Bank, (the “East West Debt”) to refinance
previous debt in the amount
of $2,850,000 at May 31,
2007. As of
May 31, 2010, $2,650,000 continued to be funded under the agreement with
East West Bank, and $2,361,000 was outstanding. The East West Debt requires monthly payments of $15,131
and bears interest at
the prime rate as published
in the Wall Street Journal and adjusted from time to time (3.25% at May 31, 2010). The East
West Debt matures in May 2012. The East West Debt is collateralized by a first lien on a building and land in Fort Worth, Texas
owned by the Company.
Jardine Bank
Debt: Effective
May 3, 2007, the Company
entered into a loan
agreement with Jardine
Capital Corp. (the “Jardine Bank Debt”) to refinance previous debt in the amount of
$650,000. The Jardine Bank Debt requires monthly payments of
$7,705, bears interest at
13% and matures in May
2012. The Jardine Bank Debt is collateralized by
a second lien on
a building and land in Fort
Worth, Texas owned by the Company. In May 2010, the
Company made a $40,000 principal payment against the Jardine Bank Debt due to
the conveyance of an easement and right-of-way for a sub-surface gas pipeline on
the collateralized land in Fort Worth, Texas. As of May 31, 2010, a total of
$585,000 was outstanding under this agreement.
58
Warrant Redemption Notes
Payable: In November 2002, the Company issued 6,000,000 redeemable common
stock purchase warrants as part of a debt restructuring transaction completed in
fiscal year 2003 (the “GM Warrants”). The GM Warrants were
exercisable beginning in December of 2005 and terminating in December of
2010. In December of 2007 or earlier upon specific events, the holder
of the GM Warrants may require the Company to redeem the warrants at $0.50 per
warrant. Because of this mandatory redemption feature, the Company
initially recorded the estimated fair value of the GM Warrants as a long-term
liability on its consolidated balance sheet and adjusted the amount to reflect
changes in the fair value of the warrants, including accretion in value due to
the passage of time, with such changes charged or credited to interest expense
through the exercise date of the warrants.
As of
December 12, 2007, the 12 holders of the collective 6,000,000 outstanding
GM Warrants (collectively, the “GM Warrant Holders”) had the right to redeem
these warrants for an aggregate amount of $3,000,000 in cash or to convert these
warrants into an aggregate amount of 6,000,000 shares of Teletouch’s common
stock under the terms of their respective warrant agreements. In December 2007,
the Company received redemption notices from all of the holders of the GM
Warrants. On May 23, 2008, definitive agreements were executed
with each of the 12 holders of the GM Warrants (the “Warrant Redemption
Payment Agreements”). The Warrant Redemption Payment provided for (i) an
initial payment in the total amount of $1,500,000 payable on or before
June 2, 2008, (ii) additional 17 equal monthly payments in the amount
of $25,000 each, together with interest on the outstanding principal balance at
an annual interest rate of 12% beginning July 1, 2008 and (iii) a
final single payment in the amount of $1,075,000 due on or before
December 10, 2009 (such payments collectively referred to as the
“Payments”). The Payments will be divided among each of the GM Warrant Holders
based on their proportionate ownership of the previously outstanding GM
Warrants. Teletouch’s obligations to make such payments are evidenced by
individual promissory notes (the “GM Promissory Notes”) to each of the GM
Warrant Holders. In addition, Teletouch will be required to make accelerated
payments to the GM Warrant Holders in the event of (i) a sale of
Teletouch’s assets not in the ordinary course of its business or (ii) a
change of control. The negotiated agreement also contains certain events of
default, mutual releases, covenants and other provisions, which are customary
for agreements of this nature.
Effective
November 1, 2009, the GM Promissory Notes were amended to extend maturity dates
to June 10, 2011. The terms of the amendments provided for (i) a one
time principal payment of $161,250 payable on or before December 10, 2009, (ii)
a continuance of 17 equal monthly payments in the amount of $25,000 each,
together with interest on the outstanding principal balance beginning January
10, 2010, (iii) a final single payment in the amount of $488,750 due on or
before June 10, 2011 and (iv) the annual interest rate on the outstanding
principal balance is increased to 14%, effective November 1, 2009
(such payments collectively referred to as the “Amended
Payments”). The Amended Payments will be divided among each of the GM
Warrant Holders based on the proportionate outstanding principal balance under
the GM Promissory Notes. All other terms of the GM Promissory
Notes remain unchanged. As of May
31, 2010, a total of $764,000 was outstanding under the
notes.
Maturities: Scheduled
maturities of long-term debt outstanding (excluding interest payable) are as
follows (in thousands):
Year Ended May 31,
|
||||||||||||
TOTAL
|
2011
|
2012
|
||||||||||
Thermo
revolving credit facility
|
$ | 12,189 | $ | 1,016 | $ | 11,173 | ||||||
East
West Bank debt
|
2,361 | 105 | 2,256 | |||||||||
Jardine
Capital Corporation bank debt
|
585 | 16 | 569 | |||||||||
Warrant
redemption notes payable
|
764 | 275 | 489 | |||||||||
$ | 15,899 | $ | 1,412 | $ | 14,487 |
59
NOTE
9 – TRADEMARK PURCHASE OBLIGATION
On May 4, 2010, Progressive Concepts,
Inc., entered in a certain Mutual Release and Settlement Agreement (the
“Agreement”) with Hawk Electronics, Inc. (“Hawk”). The settlement followed a
litigation matter styled Progressive
Concepts, Inc. d/b/a Hawk Electronics v. Hawk Electronics, Inc. Case No. 4-08CV-438-Y, by the Company
against Hawk in the US District Court for the Northern District of Texas which
alleged, among other things, infringement on the trade name Hawk
Electronics, as well as
counterclaims by Hawk against the Company of, among other things, trademark
infringement and dilution.
Under
terms of the Agreement, the parties executed mutual releases of claims against
each other and agreed to file a stipulation of dismissal in connection with the
pending litigation matter. The Company agreed to, among other things,
the purchase a perpetual license from Hawk to use the trademark “Hawk
Electronics” for $900,000. Under the terms of the license agreement, the Company
paid $400,000 by May 31, 2010 and is obligated to pay $150,000 by July 1, 2010,
$150,000 by July 1, 2011, $100,000 by July 1, 2012 and $100,000 by July 1,
2013.
As of May
31, 2010, the Company has recorded $150,000 as current portion of trademark
purchase obligation (July 1, 2010 payment) as a current liability and has
recorded $350,000 (payments due thereafter) under long-term trademark purchase
obligation as a long-term liability.
NOTE
10 - INCOME TAXES
The
components of the Company’s total provision for income taxes for the following
two fiscal years are (in thousands):
May 31,
|
||||||||
2010
|
2009
|
|||||||
Current
income tax expense
|
||||||||
Federal
|
$ | 40 | $ | - | ||||
State
|
244 | 264 | ||||||
Total
current provision
|
284 | 264 | ||||||
Deferred
income tax expense
|
- | - | ||||||
Total
provision for income taxes
|
$ | 284 | $ | 264 |
The
Company’s effective tax rate differed from the federal statutory income tax rate
as follows (in thousands):
May 31,
|
||||||||
2010
|
2009
|
|||||||
Income
tax provision (benefit) at the federal statutory rate
|
$ | 641 | $ | (564 | ) | |||
Effect
of valuation allowance
|
(1,545 | ) | 655 | |||||
Permanent
differences
|
28 | 12 | ||||||
State
income taxes, net of federal benefit
|
162 | 174 | ||||||
Overaccrual
of prior year NOL carryforwards
|
996 | - | ||||||
Other
|
2 | (13 | ) | |||||
Provision
for income taxes
|
$ | 284 | $ | 264 |
Teletouch
uses the liability method to account for income taxes. Under this method,
deferred income tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates that are expected to be in effect when the
differences reverse.
60
Significant
components of the Company’s deferred taxes as of May 31, 2010 and May 31, 2009
are as follows (in thousands):
May
31,
|
||||||||
2010
|
2009
|
|||||||
Deferred
Tax Assets:
|
||||||||
Current
deferred tax assets:
|
||||||||
Accrued
liabilities
|
$ | 826 | $ | 748 | ||||
Deferred
revenue
|
55 | 32 | ||||||
Inventories
|
83 | 88 | ||||||
Allowance
for doubtful accounts
|
138 | 165 | ||||||
1,102 | 1,033 | |||||||
Valuation
allowance
|
(1,102 | ) | (1,033 | ) | ||||
Current
deferred tax assets, net of valuation allowance
|
- | - | ||||||
Non-current
deferred tax assets:
|
||||||||
Net
operating loss
|
9,769 | 11,447 | ||||||
Intangible
assets
|
228 | 193 | ||||||
Fixed
assets
|
174 | 187 | ||||||
Licenses
|
15 | 18 | ||||||
Other
|
47 | 2 | ||||||
10,233 | 11,847 | |||||||
Valuation
allowance
|
(10,233 | ) | (11,847 | ) | ||||
Non-current
deferred tax assets, net of valuation allowance
|
- | - |
The
Company has approximately $28,732,000 of net operating losses at May 31, 2010,
which are available to reduce the Company’s future taxable income and will
expire in the years 2025 through 2030. The utilization of some of
these losses may be limited under the applicable provisions of the Internal
Revenue Code.
The
current Company policy classifies any interest recognized on an underpayment of
income taxes and any statutory penalties recognized on a tax position taken as
interest expense in its consolidated statements of operations. There
was an insignificant amount of interest and penalties recognized and accrued as
of May 31, 2010. The Company has not taken a tax position that, if challenged,
would have a material effect on the financial statements or the effective tax
rate for fiscal year ended May 31, 2010. The Company is currently subject to a
three year statute of limitations by major tax jurisdictions.
NOTE
11 - COMMITMENTS AND CONTINGENCIES
Teletouch
leases buildings, transmission towers, and equipment under non-cancelable
operating leases ranging from one to twenty years. These leases
contain various renewal terms and restrictions as to use of the
property. Some of the leases contain provisions for future rent
increases. The total amount of rental payments due over the lease
terms is charged to rent expense on the straight-line method over the term of
the leases. The difference between rent expense recorded and the
amount paid is recorded as deferred rental expense, which is included in accrued
expenses and other liabilities in the accompanying consolidated balance
sheets. Rent expense was $1,459,000, and $1,506,000 in fiscal years
2010 and 2009, respectively. Future minimum rental commitments under
non-cancelable leases are as follows (in thousands):
Operating
Lease Payments Due By Period
(in
thousands)
Total
|
2011
|
2012
|
2013
|
2014
|
Thereafter
|
|||||||||||||||||||
Operating
leases
|
$ | 5,351 | $ | 805 | $ | 488 | $ | 370 | $ | 333 | $ | 3,355 |
61
Teletouch
is party to various legal proceedings arising in the ordinary course of
business. The Company believes there is no proceeding, either threatened or
pending, against it that will result in a material adverse effect on its results
of operations or financial condition.
NOTE
12 - SHAREHOLDERS’ EQUITY
Capital
Structure: Teletouch’s authorized capital structure allows for
the issuance of 70,000,000 shares of common stock with a $0.001 par value and
5,000,000 shares of preferred stock with a $0.001 par value.
Series C Preferred
Stock: At May 31, 2010, no shares of Series C Preferred Stock
with a par value of $0.001 are issued and outstanding.
Registration Rights Agreement:
In conjunction with the August 2006 acquisition of PCI and the related
exchange of certain subordinated debt at PCI for 4,350,000 shares of Teletouch’s
common stock owned by TLLP and Series A Preferred membership units of TLLP,
Teletouch, Stratford and RRCG (Stratford and RRGC collectively, the “Series A
Holders”) entered into a certain Registration Rights Agreement (the “RRA”). In
connection with this exchange, Teletouch agreed to grant to the Series A Holders
certain registration rights under the federal securities laws with respect to
the securities received by the Series A Holders pursuant to the foregoing
arrangement. Namely, the Series A Holders were granted piggy-back registration
rights to participate in any underwritten offering and registration of
Teletouch’s equity securities under the Securities Act of 1933, as amended (the
“Securities Act”), including a shelf registration statement pursuant to Rule 415
under the Securities Act, through August 10, 2010. The RRA excludes a
number of different types of registration statements from the piggy-back
registration rights provided by the RRA, including but not limited to, any
registration statement (i) on Form S-8 or any similar successor form, (ii) filed
in connection with the acquisition of or combination with another entity, (iii)
required pursuant to an agreement executed between Teletouch, TLLP or Fortress
with a purchaser in a so-called “PIPE” private placement transaction for the
resale by the investors in the PIPE of securities of the Registrant (a “PIPE
Agreement”), to the extent such PIPE Agreement does not provide for the Series A
Holders to have registration rights, or (iv) relating to securities offered for
the account of Teletouch that is filed prior to August 10, 2008, provided that
at least 50% of the securities registered are offered for the account of
Teletouch.
The
Series A Holders also agreed not to affect any public sale or private offer or
distribution of any equity securities of Teletouch during the 10 business days
prior to the effectiveness under the Securities Act of any underwritten
registration with respect to any of Teletouch’s equity securities or any
securities convertible into or exercisable or exchangeable for such equity
securities and during such time period after the effectiveness under the
Securities Act of any underwritten registration (not to exceed 180 days) as
Teletouch and the managing underwriter may agree. To evidence these obligations,
each Investor (or its future transferee) agreed to execute and deliver to
Teletouch and the underwriters in an underwriting offering such lock-up
agreements as may be required.
In May
2008, Teletouch and the Series A Holders amended the RRA in conjunction with
entering into a stock lockup agreement with the Series A Holders (see discussion
below under “Stock Lockup Agreement”). Under this First Amendment to the
Registration Rights Agreement dated as of May 16, 2008 (the “RRA
Amendment”), Teletouch and the Series A Holders agreed, among other things,
(i) to remove limitations on the Series A Holders’ rights to participate in
any so-called “PIPE” private placement transaction for the sale of securities of
and by Teletouch by extending them “piggy-back” registration rights in
connection with such transactions and (ii) to extend the termination date
of the RRA to August 11, 2012. The RRA Amendment contained additional terms
and provisions customary for agreements of this nature.
62
Stock Lockup Agreement: Since
the Series A Holders collectively own 4,350,000 shares of Teletouch’s common
stock, the Board and management of Teletouch deemed it not to be in the best
interests of Teletouch or its other shareholders to permit the sale of such a
large block of its common stock in May 2008 or dates thereafter. Teletouch and
the Series A Holders executed a Lockup Agreement dated as of May 16, 2008
(the “Lockup Agreement”) in exchange for a $270,000 cash payment. The Lockup
Agreement restricted the Series A Holders’ from selling or otherwise
transferring their securities of Teletouch for a period of 18 months
following the effective date of the Lockup Agreement; however, sales of these
securities under the terms of the RRA are exempt from the terms of the Lockup
Agreement. The Lockup Agreement expired on November 15, 2009 and the Company has
no current plans to renew or extend the agreement.
Common stock reserved: The
following represents the shares of common stock to be issued on an
“if-converted” basis at May 31, 2010.
Common
Stock Equivalents
|
||||
1994
Stock Option and Stock Appreciation Rights Plan
|
39,995 | |||
2002
Stock Option and Stock Appreciation Rights Plan
|
4,523,321 | |||
4,563,316 |
Treasury Stock
Transaction: In June 2009, Glaubman, Rosenburg & Robotti
Fund, L.P., a non-affiliated New York limited partnership and holder of 312,978
shares of Teletouch’s common stock, (the “Shareholder”) notified the Company of
its intent to sell all of its shares of Teletouch’s common stock and offered
these shares to Teletouch at a discount from market. On June 15,
2009, the Company entered into a Securities Purchase Agreement with the
Shareholder to purchase the 312,978 shares of Teletouch common stock it held at
$0.10 per share. Teletouch’s purchase price of $0.10 per
share represented a 13% discount from the $0.115 average of the 10
day closing price on Teletouch’s common stock prior to the effective date of
this agreement. The purchase of the shares was completed on
July 16, 2009 following the payment of $31,298 to the Shareholder and after the
surrender of the 312,978 shares of stock. These shares will be held
by the Company in treasury.
NOTE
13 - STOCK OPTIONS
Teletouch’s
1994 Stock Option and Stock Appreciation Rights Plan (the “1994 Plan”) was
adopted in July 1994 and provides for the granting of incentive and
non-incentive stock options and stock appreciation rights to officers,
directors, employees and consultants to purchase not more than an aggregate of
1,000,000 shares of common stock. The Compensation Committee or the Board of
Directors administers the 1994 Plan and has authority to determine the optionees
to whom awards will be made, the terms of vesting and forfeiture, the amount of
the awards and other terms. Under the terms of the 1994 Plan, the
option price approved by the Board of Directors shall not be less than the fair
market value of the common stock at date of grant. Exercise
prices in the following table have been adjusted to give effect to the repricing
that took effect in December 1999 and November 2001 (discussed
below).
63
On
November 7, 2002, the Company’s common shareholders voted to adopt and ratify
the Teletouch 2002 Stock Option and Appreciation Rights Plan (the “2002
Plan”). Under the 2002 Plan, Teletouch may issue options, which will
result in the issuance of up to an aggregate of 10,000,000 shares of Teletouch’s
common stock. The 2002 Plan provides for options, which qualify as incentive
stock options (Incentive Options) under Section 422 of the Code, as well as the
issuance of non-qualified options (Non-Qualified Options). The shares issued by
Teletouch under the 2002 Plan may be either treasury shares or authorized but
unissued shares as Teletouch’s Board of Directors may determine from time to
time. Pursuant to the terms of the 2002 Plan, Teletouch may grant
Non-Qualified Options and Stock Appreciation Rights (SARs) only to officers,
directors, employees and consultants of Teletouch or any of Teletouch’s
subsidiaries as selected by the Board of Directors or the Compensation
Committee. The 2002 Plan also provides that the Incentive Options
shall be available only to officers or employees of Teletouch or any of
Teletouch’s subsidiaries as selected by the Board of Directors or Compensation
Committee. The price at which shares of common stock covered by the option can
be purchased is determined by Teletouch’s Compensation Committee or Board of
Directors; however, in all instances the exercise price is never less than the
fair market value of Teletouch’s common stock on the date the option is
granted. To the extent that an Incentive Option or Non-Qualified
Option is not exercised within the period in which it may be exercised in
accordance with the terms and provisions of the 2002 Plan described above, the
Incentive Option or Non-Qualified Option will expire as to the then unexercised
portion. In addition, employees that cease their services with the
Company and hold vested options will have the ability to exercise their vested
options for a period three months after their termination date with the
Company.
As of May
31, 2010, approximately 27,995 Non-Qualified Options and 12,000 Incentive
Options are outstanding under the 1994 Plan, and approximately 376,998
Non-Qualified Options and 4,146,323 Incentive Options are outstanding under the
2002 Plan.
Stock
option activity has been as follows:
Number of Shares
|
Exercise Price per
Share
|
Weighted Average
Exercise Price per
Share
|
|||||||||
Options
outstanding at May 31, 2008
|
1,565,323 |
$0.18
- $0.89
|
$ | 0.40 | |||||||
Options
granted to officers and management
|
2,263,156 |
$0.19
|
$ | 0.19 | |||||||
Options
granted to directors
|
135,000 |
$0.16
|
$ | 0.16 | |||||||
Options
exercised
|
- |
$0.00
|
$ | 0.00 | |||||||
Options
forfeited
|
(52,664 | ) |
$0.24
- $0.89
|
$ | 0.41 | ||||||
Options
outstanding at May 31, 2009
|
3,910,815 |
$0.16
- $0.89
|
$ | 0.27 | |||||||
Options
granted to officers and management
|
573,167 |
$0.12
|
$ | 0.12 | |||||||
Options
granted to directors
|
120,000 |
$0.12
|
$ | 0.12 | |||||||
Options
exercised
|
- |
$0.00
|
$ | 0.00 | |||||||
Options
forfeited
|
(40,666 | ) |
$0.24
|
$ | 0.24 | ||||||
Options
outstanding at May 31, 2010
|
4,563,316 |
$0.12
- $0.89
|
$ | 0.25 | |||||||
Exercisable
at May 31, 2010
|
3,054,545 | $ | 0.27 | ||||||||
Exercisable
at May 31, 2009
|
1,424,326 | $ | 0.38 |
Range of Exercise
Price
|
Number of Shares
Outstanding
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining
Contractual Life
|
Number of Shares
Exercisable
|
Weighted Average
Exercise Price
|
|||||||||||||||
$0.12
- $0.30
|
3,187,322 | $ | 0.17 | 8.26 | 1,678,551 | $ | 0.16 | |||||||||||||
$0.31
- $0.39
|
1,171,998 | $ | 0.39 | 5.47 | 1,171,998 | $ | 0.39 | |||||||||||||
$0.40
- $0.55
|
170,000 | $ | 0.52 | 4.26 | 170,000 | $ | 0.52 | |||||||||||||
$0.56
- $0.89
|
33,996 | $ | 0.73 | 4.36 | 33,996 | $ | 0.73 | |||||||||||||
4,563,316 | $ | 0.25 | 7.36 | 3,054,545 | $ | 0.27 |
A summary
of option activity for the fiscal year ended May 31, 2010 is as
follows:
64
Weighted
|
||||||||||||||||
Weighted
|
Average
|
|||||||||||||||
Average
|
Remaining
|
Aggregate
|
||||||||||||||
Exercise
|
Contractual
|
Intrinsic
|
||||||||||||||
Shares
|
Price
|
Term
|
Value
|
|||||||||||||
Outstanding
at June 1, 2009
|
3,910,815 | $ | 0.27 | 7.99 | ||||||||||||
Granted
|
693,167 | 0.12 | - | |||||||||||||
Exercised
|
- | - | - | |||||||||||||
Forfeited
|
(40,666 | ) | 0.24 | - | ||||||||||||
Outstanding
at May 31, 2010
|
4,563,316 | 0.25 | 7.36 | $ | 401,150 | |||||||||||
Options
exercisable at May 31, 2010
|
3,054,545 | $ | 0.27 | 6.96 | $ | 235,185 |
The
following table summarizes the status of the Company’s non-vested stock options
since June 1, 2009:
Non-vested Options
|
||||||||
Weighted-
|
||||||||
Number of
|
Average Fair
|
|||||||
Shares
|
Value
|
|||||||
Non-vested
at June 1, 2009
|
2,486,489 | $ | 0.20 | |||||
Granted
|
693,167 | 0.11 | ||||||
Vested
|
(1,670,885 | ) | 0.18 | |||||
Forfeited
|
- | - | ||||||
Non-vested
at May 31, 2010
|
1,508,771 | $ | 0.18 |
The
Company estimates the fair value of employee stock options on the date of grant
using the Black-Scholes model. The determination of fair value of stock-based
payment awards on the date of grant using an option-pricing model is affected by
the stock price as well as assumptions regarding a number of highly complex and
subjective variables. These variables include, but are not limited to the
expected stock price volatility over the term of the awards and the actual and
projected employee stock option exercise behaviors. The Company has elected to
estimate the expected life of an award based on the SEC approved “simplified
method.” The Company calculated its expected volatility assumption required
in the Black-Scholes model based on the historical volatility of its
stock. The Company recorded approximately $239,000 and $223,000 in
stock based compensation expense in the consolidated financial statements for
the twelve months ended May 31, 2010 and 2009, respectively.
NOTE
14 - RETIREMENT PLAN
Effective
October 1995, Teletouch began sponsoring a defined contribution retirement plan
covering substantially all of its Teletouch employees (the “Teletouch
Plan”). Employees who were at least 21 years of age were eligible to
participate. Eligible employees could contribute up to a maximum of 16% of their
earnings. The Company paid the administrative fees of the plan and
began matching 75% of the first 6% of employees’ contributions in October
1998. On January 1, 2005, the Company changed to a Safe Harbor
Matching Contribution Plan. The employee eligibility requirements
remained unchanged. Under the Safe Harbor Matching Contribution Plan,
the Company matched 100% of the employees’ contribution up to 3% of the
employees’ compensation plus 50% of the employees’ contribution that is in
excess of the 3% of the employees’ compensation but not in excess of 5% of the
employees’ compensation.
In August
2006, with the acquisition of PCI, the Company assumed a defined contribution
retirement plan for the benefit of eligible employees at its subsidiary, PCI
(the “PCI Plan”). PCI employees who were at least 21 years of age and had
completed six months of service were considered eligible for the plan. Employees
could contribute up to 16% of their compensation on a pre-tax basis. The Company
could elect, at its discretion, to match 50% of the employees’ contributions up
to 8% of their compensation.
65
Effective
January 1, 2008, the Company merged the PCI Plan into the Teletouch Plan with
certain modifications. Employees who are at least 21 years of age and
have completed three months of service are now eligible to participate in the
Safe Harbor Matching Contribution Plan. Under the revised Plan, the
Company matches 100% of the first 1% of the employees’ contribution and 60% of
the employees’ contribution in excess of the first 1% that does not exceed 6% of
the employees’ total contribution.
The
amounts included in operating expense in connection with the Company’s
contributions to both the Teletouch Plan and the PCI Plan is approximately
$40,000 and $252,000 for the years ended May 31, 2010 and 2009, respectively. In
fiscal year 2010, the Company had approximately $195,000 of forfeitures in the
Company’s 401(k) plan of unvested employer matched funds. These forfeitures were
used to offset current year matching contributions to the 401(k)
plan.
NOTE
15 – RELATED PARTY TRANSACTIONS
The
commonly controlled companies owning or affiliated with Teletouch are as
follows:
Progressive
Concepts Communications, Inc., a Delaware corporation (“PCCI”) – PCCI has
no operations and is a holding company formed to acquire the stock of PCI
(Teletouch’s subsidiary as of August 2006) in 2001. Robert McMurrey,
Chairman and Chief Executive Officer of Teletouch, controls approximately 94% of
the stock of PCCI. In 2004, PCCI acquired 100% of the outstanding common units
of TLL Partners, LLC (see below).
TLL
Partners, LLC, a Delaware LLC (“TLLP”) – TLLP has no operations and is a
holding company formed in 2001 to acquire certain outstanding Series A Preferred
stock and subordinated debt obligations of Teletouch. The purchased
subordinated debt obligations were forgiven, and in November 2002, all of the
outstanding Series A Preferred stock was redeemed by Teletouch by the issuance
of 1,000,000 shares of Teletouch’s convertible Series C Preferred
stock. In November 2005, TLLP converted all of its shares of Series C
Preferred stock into 44,000,000 shares of Teletouch’s common stock gaining
approximately 80% ownership of Teletouch’s outstanding common
stock.
The
Company entered into certain related party transactions during the fiscal years
ended May 31, 2010 and 2009 with PCCI and TLLP, both companies controlled by
Robert McMurrey, Chairman and Chief Executive Officer of Teletouch, as
follows:
In June
2006, the Company loaned $250,000 to PCCI for the purpose of allowing PCCI to
enter into an option agreement with Air-bank, Inc. The $250,000 was
to be used to secure a management and option agreement with Air-bank providing
PCCI the option to acquire up to 55% interest in Air-bank. Beginning
in June 2006 and through fiscal year 2009, the Company also provided certain
leased office space to Air-bank. In January 2009, PCCI contributed the
receivable due from Air-bank to Teletouch, which assigned all claims to the
receivable to the Company to retire all of its intercompany obligations due to
the Company.
In August
2006, TLLP paid certain legal fees on behalf of the Company related to the debt
restructuring and the reorganization of its commonly controlled companies. The
Company recorded these expenses of approximately $63,000 in fiscal year 2007 as
well as the related party payable to TLLP for the same amount. In
addition, the Company received certain dividend payments from
investments belonging to TLLP in fiscal years 2009 and 2010. As of
May 31, 2010, the total related party payable to TLLP increased to
$111,000.
66
NOTE
16 – SEGMENT INFORMATION
ASC 280,
Segment Reporting,
establishes standards for reporting information about operating
segments. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
regularly evaluated by the chief operating decision maker, or decision making
group, in deciding how to allocate resources and in assessing
performance.
Using
this criteria, the Company's three reportable segments are cellular services,
wholesale distribution and two-way radio services.
The
Company’s cellular business segment represents its core business, which has been
acquiring, billing, and supporting cellular subscribers under a revenue sharing
relationship with AT&T and its predecessor companies for over 25 years. The
consumer services and retail business within the cellular segment is operated
primarily under the Hawk Electronics brand name, with additional business and
government sales provided by a direct sales group operating throughout all of
the Company’s markets. As a master distributor for AT&T wireless services,
the Company controls the entire customer experience, including initiating and
maintaining the cellular service agreements, rating the cellular plans,
providing complete customer care, underwriting new account acquisitions and
providing multi-service billing, collections, and account
maintenance. Furthermore, in January 2009, Teletouch entered into a
new distribution agreement with T-Mobile USA, Inc. (“T-Mobile”). The Company
closed its last two Oklahoma retail locations selling T-Mobile branded cellular
services and products in October 2009. Subsequent to these closings, in January
2010, the T-Mobile agreement was cancelled.
On
January 19, 2010, the Company signed a new two-year, national distribution
agreement with Clearwire Communications (NASDAQ: CLWR) to sell its 4G service
called CLEAR. On January 26, 2010, the Company announced that it had
recently entered into a two-year, Authorized Representative Agreement with
Sprint (NYSE:S) subsidiary, Sprint Solutions, Inc.
The
Company’s wholesale business segment represents its distribution of cellular
telephones, accessories, car audio and car security products to major carrier
agents, rural cellular carriers, smaller consumer electronics and automotive
retailers and auto dealers throughout the United States.
The
two-way business segment includes radio services provided on the Company’s Logic
Trunked Radio (“LTR”) system and the related radio equipment sales as well as
radio equipment sales to customers operating their own two-way radio
system. Safety and emergency response vehicle product sales and
services are also included in the two-way business segment.
Corporate
overhead is reported separate from the Company’s identified
segments. The Corporate overhead costs include expenses for the
Company’s accounting, information technology, human resources, marketing and
executive management functions.
As of May
31, 2010, the Company combined its other segment operations with its wholesale
segment operations for segment presentation purposes. As of May 31, 2009, the
Company presented its other segment operations on a stand alone basis;
therefore, the segment information presented as of May 31, 2009 in this Report
has been conformed to be comparable the current year’s segment
information.
The
following tables summarize the Company’s operating financial information by each
segment for the fiscal years ended May 31, 2010 and 2009 (in
thousands):
67
Year
Ended May 31, 2010
|
||||||||||||||||||||
Segments
|
||||||||||||||||||||
Cellular
|
Two-way
|
Wholesale
|
Corporate
|
Total
|
||||||||||||||||
Operating
revenues:
|
||||||||||||||||||||
Service,
rent, and maintenance revenue
|
$ | 23,881 | $ | 1,881 | $ | 83 | $ | 98 | $ | 25,943 | ||||||||||
Product
sales revenue
|
4,281 | 2,986 | 18,742 | 7 | 26,016 | |||||||||||||||
Total
operating revenues
|
28,162 | 4,867 | 18,825 | 105 | 51,959 | |||||||||||||||
Operating
expenses:
|
||||||||||||||||||||
Cost
of service, rent and maintenance (exclusive of depreciation and
amortization included below)
|
5,557 | 1,573 | 66 | - | 7,196 | |||||||||||||||
Cost
of products sold
|
4,593 | 2,340 | 16,116 | (21 | ) | 23,028 | ||||||||||||||
Selling
and general and administrative
|
4,346 | 557 | 1,840 | 9,744 | 16,487 | |||||||||||||||
Depreciation
and amortization
|
2 | 119 | - | 1,132 | 1,253 | |||||||||||||||
Loss
on disposal of assets
|
- | - | - | 17 | 17 | |||||||||||||||
Total
operating expenses
|
14,498 | 4,589 | 18,022 | 10,872 | 47,981 | |||||||||||||||
Income
(loss) from operations
|
13,664 | 278 | 803 | (10,767 | ) | 3,978 | ||||||||||||||
Other
income (expenses):
|
||||||||||||||||||||
Interest
expense, net
|
- | - | - | (2,261 | ) | (2,261 | ) | |||||||||||||
Other
|
- | - | - | 167 | 167 | |||||||||||||||
Income
(loss) before income tax expense
|
13,664 | 278 | 803 | (12,861 | ) | 1,884 | ||||||||||||||
Income
tax expense
|
- | - | - | 284 | 284 | |||||||||||||||
Income
(loss) from operations
|
$ | 13,664 | $ | 278 | $ | 803 | $ | (13,145 | ) | $ | 1,600 |
Year
Ended May 31, 2009
|
||||||||||||||||||||
Segments
|
||||||||||||||||||||
Cellular
|
Two-way
|
Wholesale
|
Corporate
|
Total
|
||||||||||||||||
Operating
revenues:
|
||||||||||||||||||||
Service,
rent, and maintenance revenue
|
$ | 25,353 | $ | 1,652 | $ | 82 | $ | 123 | $ | 27,210 | ||||||||||
Product
sales revenue
|
7,002 | 2,559 | 9,070 | 16 | 18,647 | |||||||||||||||
Total
operating revenues
|
32,355 | 4,211 | 9,152 | 139 | 45,857 | |||||||||||||||
Operating
expenses:
|
||||||||||||||||||||
Cost
of service, rent and maintenance (exclusive of depreciation and
amortization included below)
|
6,922 | 1,733 | 129 | - | 8,784 | |||||||||||||||
Cost
of products sold
|
7,561 | 1,922 | 7,845 | 4 | 17,332 | |||||||||||||||
Selling
and general and administrative
|
5,468 | 528 | 1,749 | 9,931 | 17,676 | |||||||||||||||
Depreciation
and amortization
|
1 | 191 | - | 1,214 | 1,406 | |||||||||||||||
Gain
on disposal of assets
|
- | - | - | (13 | ) | (13 | ) | |||||||||||||
Total
operating expenses
|
19,952 | 4,374 | 9,723 | 11,136 | 45,185 | |||||||||||||||
Income
(loss) from operations
|
12,403 | (163 | ) | (571 | ) | (10,997 | ) | 672 | ||||||||||||
Other
expenses:
|
||||||||||||||||||||
Interest
expense, net
|
- | - | - | (2,330 | ) | (2,330 | ) | |||||||||||||
Income
(loss) before income tax expense
|
12,403 | (163 | ) | (571 | ) | (13,327 | ) | (1,658 | ) | |||||||||||
Income
tax expense
|
- | - | - | 264 | 264 | |||||||||||||||
Income
(loss) from operations
|
$ | 12,403 | $ | (163 | ) | $ | (571 | ) | $ | (13,591 | ) | $ | (1,922 | ) |
The
Company identifies its assets by segment. Significant assets of the Company’s
corporate offices include cash, property and equipment, loan origination costs
and the patent held for sale. The Company’s assets by segment as of
May 31, 2010 and May 31, 2009 are as follows:
68
Year Ended May 31, 2010
|
Year Ended May 31, 2009
|
|||||||||||||||||||||||
Total Assets
|
Property and
Equipment, net
|
Goodwill and
Intangible Assets,
net
|
Total Assets
|
Property and
Equipment, net
|
Goodwill and
Intangible Assets,
net
|
|||||||||||||||||||
Segment
|
||||||||||||||||||||||||
Cellular
|
$ | 10,362 | $ | 124 | $ | 4,068 | $ | 12,751 | $ | 195 | $ | 3,932 | ||||||||||||
Two-way
|
1,599 | 401 | 373 | 1,806 | 467 | 385 | ||||||||||||||||||
Wholesale
|
837 | 2 | - | 1,160 | 3 | - | ||||||||||||||||||
Corporate
|
8,886 | 2,222 | 244 | 8,639 | 2,284 | 191 | ||||||||||||||||||
Totals
|
$ | 21,684 | $ | 2,749 | $ | 4,685 | $ | 24,356 | $ | 2,949 | $ | 4,508 |
During
fiscal year 2010, the Company did not have a single customer that represented
more than 10% of total segment revenues.
Item
9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item
9A(T). Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
As of the
end of the period covered by this Report, the Company conducted an evaluation,
under the supervision and with the participation of our management, including
the Chief Executive Officer, President and Chief Operating Officer and Chief
Financial Officer (the “Certifying Officers”) of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act).
Based on this evaluation, the Certifying Officers concluded that, as of May 31,
2010, our disclosure controls and procedures were effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Commission’s rules and forms and to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Exchange Act is accumulated and communicated to us, including
our principal executive and principal financial officers, as appropriate to
allow timely decisions regarding required disclosure.
Management’s
Report on Internal Control over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f). Under the supervision and with the participation of its
management, including the Certifying Officers, the Company conducted an
evaluation of the effectiveness of its internal control over financial reporting
based on the framework in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
69
The
Company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles in the United States of America.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Based on
this evaluation under the framework in Internal Control — Integrated Framework,
management concluded that the Company’s internal control over financial
reporting was effective as of May 31, 2010.
This
Annual Report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting. As of May 31, 2010, management’s internal controls over
financial reporting were not subject to attestation by the Company’s independent
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the company to provide only management’s
report in this Annual Report.
Changes
in Internal Control
There
were no changes in our internal control over financial reporting during our most
recently completed fiscal quarter that have materially affected or are
reasonably likely to materially affect our internal control over financial
reporting.
Item
9B. Other Information
None.
70
PART
III
Item
10. Directors, Executive Officers and Corporate
Governance
The
information required by this Item 10 will be included in the Company’s Proxy
Statement for the 2010 Annual Meeting of Stockholders which will be filed with
the Securities and Exchange Commission within 120 days of the fiscal year end
and is incorporated into this Item 10 by reference.
Information
regarding executive officers of the Company has been included in Part I of this
Annual Report under the caption “Executive Officers.”
Code of Ethics. We have
adopted a written code of ethics that applies to our principal executive
officer, principal financial officer, principal accounting officer or controller
and any persons performing similar functions. The code of ethics is on our
website at www.fibrocellscience.com. We intend to disclose any future amendments
to, or waivers from, the code of ethics within four business days of the waiver
or amendment through a website posting or by filing a Current Report on Form 8-K
with the SEC.
Item
11. Executive Compensation
The
information required by this Item 11 will be included in the Company’s Proxy
Statement for the 2010 Annual Meeting of Stockholders which will be filed with
the Securities and Exchange Commission within 120 days of the fiscal year end
and is incorporated into this Item 11 by reference.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The
information required by this Item 12 will be included in the Company’s Proxy
Statement for the 2010 Annual Meeting of Stockholders which will be filed with
the Securities and Exchange Commission within 120 days of the fiscal year end
and is incorporated into this Item 12 by reference.
Item
13. Certain Relationships and Related Transactions, and Director
Independence
The
information required by this Item 13 will be included in the Company’s Proxy
Statement for the 2010 Annual Meeting of Stockholders which will be filed with
the Securities and Exchange Commission within 120 days of the fiscal year end
and is incorporated into this Item 13 by reference.
Item
14. Principal Accountant Fees and Services
The
information required by this Item 14 will be included in the Company’s Proxy
Statement for the 2010 Annual Meeting of Stockholders which will be filed with
the Securities and Exchange Commission within 120 days of the fiscal year end
and is incorporated into this Item 14 by reference.
71
PART
IV
Item
15. Exhibits and Financial Statement Schedules
(a)
(1)
Financial
Statements (See Part II, Item 8 of this Form 10-K).
Report of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheets as of May 31, 2010 and 2009
Consolidated
Statements of Operations for Each of the Two Years in the Period Ended May 31,
2010
Consolidated
Statements of Cash Flows for Each of the Two Years in the Period Ended May 31,
2010
Consolidated
Statements of Shareholders’ Deficit for Each of the Two Years in the Period
Ended May 31, 2010
Notes to
Consolidated Financial Statements
(a) (2)
Financial Statement Schedules.
Schedules,
other than those referred to above, have been omitted because they are not
required or are not applicable or because the information required to be set
forth therein either is not material or is included in the financial statements
or notes thereto.
(a) (3)
Exhibits.
See
Item 15(b) below.
(b) Exhibits
The
exhibits listed in the following index to exhibits are filed as part of this
annual report on Form 10-K.
Index of
Exhibits
Exhibit
No.
|
Description
of Exhibit
|
Footnote
|
||
3.1
|
Restated
Certificate of Incorporation of the Company
|
2
|
||
3.2
|
Bylaws
of Teletouch Communications, Inc., as amended July 31,
1995
|
1
|
||
10.1
|
Restructuring
Agreement dated as of May 17, 2002 by and among the Company, TLL Partners
and GM Holdings
|
3
|
||
10.2
|
Amended
and Restated Operating Agreement dated as of May 17, 2002 by and between
the Company and Teletouch Licenses, Inc.
|
3
|
||
10.3
|
|
Amendment
Agreement dated June 17, 2002 by and among the Company, TLL Partners and
GM Holdings (amending the Restructuring Agreement dated as of May 17,
2002)
|
|
4
|
72
Exhibit
No.
|
Description of Exhibit
|
Footnote
|
||
10.4
|
1994
Stock Option and Appreciation Rights Plan*
|
5
|
||
10.5
|
2002
Stock Option and Appreciation Rights Plan*
|
6
|
||
10.6
|
Asset
Purchase Agreement between the Company and DCAE, Inc.
|
7
|
||
10.7
|
Registration
Rights Agreement dated August 11, 2006 between the Company and Stratford
Capital Partners, L.P. and Retail and Restaurant Growth Capital,
L.P.
|
9
|
||
10.8
|
Loan
and Security Agreement dated April 30, 2008 between the Company and Thermo
Credit, LLC ($5.0 million revolving credit facility)
|
10
|
||
10.9
|
Promissory
Note dated April 30, 3008 between the Company and Thermo Credit,
LLC
|
10
|
||
10.10
|
Escrow
Agreement dated April 30, 2008 between the Company and Thermo Credit,
LLC
|
10
|
||
10.11
|
Factoring
and Security Agreement dated August 11, 2006 between the Company and
Thermo Credit, LLC ($10.0 million revolving credit line secured by
accounts receivable)
|
10
|
||
10.12
|
First
Amendment to the Factoring and Security Agreement dated May 18, 2007
between the Company and Thermo Credit, LLC (increase of credit line to
$13.0 million among other modifications)
|
10
|
||
10.13
|
Second
Amendment to the Factoring and Security Agreement dated February 26, 2008
between the Company and Thermo Credit, LLC (increase of credit line to
$15.0 million among other modifications)
|
10
|
||
10.14
|
Lockup
Agreement dated May 16, 2008 by and between the Company, Stratford Capital
Partners, LP and Restaurant & Retail Growth Capital,
LP
|
10
|
||
10.15
|
First
Amendment to the Registration Rights Agreement dated May 16, 2008 by and
between the Company, Stratford Capital Partners, LP and Restaurant &
Retail Growth, LP.
|
10
|
||
10.16
|
Form
of Warrant Redemption Payment Agreement dated June 2, 2008 between the
Company and each of the individual holders of certain 6,000,000 redeemable
common stock purchase warrants (the “GM Warrants”).
|
10
|
||
10.17
|
Form
of Promissory Note dated June 2, 2008 between the Company and each of the
individual holders of certain 6,000,000 redeemable common stock purchase
warrants (GM Warrants).
|
10
|
||
10.18
|
Thomas
A. “Kip” Hyde, Jr. Employment Agreement*
|
11
|
||
10.19
|
Robert
M. McMurrey Employment Agreement*
|
12
|
||
10.20
|
Second
Amendment to Loan and Security Agreement and Modification of Promissory
Note between the Company and Thermo Credit, LLC, effective August 1, 2009
(increase April 30, 2008 revolving credit facility to $18.0 million and
purchase of all outstanding factored accounts receivable and termination
of the August 11, 2006 factoring agreement with
Thermo Credit, LLC)
|
13
|
||
10.21
|
Notice
and Initial Statement of Claims filed by the Company on September 30, 2009
commencing an arbitration proceeding against New Cingular Wireless PCI,
LLC and AT&T Mobility Texas, LLC (collectively
“AT&T”)
|
14
|
||
14
|
Code
of Ethics
|
8
|
||
21
|
Subsidiaries
of the Company
|
15
|
73
Exhibit
No.
|
Description of Exhibit
|
Footnote
|
||
23.1
|
Consent
of BDO USA, LLP
|
15
|
||
31.1
|
Certification
pursuant to Rule 13a-14(a) and Rule 15d-14(a)
|
15
|
||
31.2
|
Certification
pursuant to Rule 13a-14(a) and Rule 15d-14(a)
|
15
|
||
32.1
|
Certification
pursuant to 1350, Chapter 63, Title 18 of the U.S. Code
|
15
|
||
32.2
|
Certification
pursuant to 1350, Chapter 63, Title 18 of the U.S. Code
|
15
|
Footnotes
|
||
*
|
Indicates
a management contract or compensatory plan or
arrangement.
|
|
1
|
Filed
as an exhibit to the Company’s Current Report on Form 8-K filed on August
18, 1995 and incorporated herein by reference.
|
|
2
|
Filed
as an exhibit to the Company’s Form 10-Q for the quarter ended February
28, 2002 and incorporated herein by reference.
|
|
3
|
Filed
as an exhibit to the Company’s Form 8-K filed with the Commission on June
3, 2002 and incorporated herein by reference.
|
|
4
|
Filed
as an exhibit to the Company’s Form 8-K/A filed with the Commission on
June 17, 2002 and incorporated herein by reference.
|
|
5
|
Filed
as an exhibit to the Company’s Form S-8 registration statement on
September 19, 2003 (No. 333-108946) and incorporated herein by
reference.
|
|
6
|
Filed
as an exhibit to the Company’s Form S-8 registration statement on
September 19, 2003 (No. 333-108945) and incorporated herein by
reference.
|
|
7
|
Filed
as an exhibit to the Company’s Form 10-Q for the quarter ended February
28, 2004 (File No. 1-13436) and incorporated herein by
reference.
|
|
8
|
Filed
as an exhibit to the Company’s Form 10-K/A Amendment No. 2 for the fiscal
year ended May 31, 2004 (File No. 1-13436) and incorporated herein by
reference.
|
|
9
|
Filed
as an exhibit to the Company’s Form 10-K for the fiscal year ended May 31,
2006 (File No. 1-13436), filed with the Commission on September 13, 2006
and incorporated herein by reference.
|
|
10
|
Filed
as an exhibit to the Company’s Form 8-K filed with the Commission on May
27, 2008 (File No. 1-13436) and incorporated herein by
reference.
|
|
11
|
Filed
as an exhibit to the Company’s Form 8-K filed with the Commission on
January 7, 2009 (File No. 1-13436) and incorporated herein by
reference.
|
|
12
|
Filed
as an exhibit to the Company’s Form 8-K filed with the Commission on
January 7, 2009 (File No. 1-13436) and incorporated herein by
reference.
|
|
13
|
Filed
as an exhibit to the Company’s Form 10-K for the fiscal year ended May 31,
2009 (File No. 1-13436), filed with the Commission on August 31, 2009 and
incorporated herein by reference.
|
|
14
|
Filed
as an exhibit to the Company’s Form 8-K filed with the Commission on
September 30, 2009 (File No. 1-13436) and incorporated herein by
reference.
|
|
15
|
Filed
herewith.
|
74
SIGNATURES
In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on August 30, 2010.
TELETOUCH
COMMUNICATIONS, INC.
|
|
By:
|
/s/ Robert M. McMurrey
|
Robert
M. McMurrey, Chief Executive Officer
|
|
(Principal
Executive
Officer)
|
In
accordance with the Securities Exchange Act of 1934, this report has been signed
by the following persons on behalf of the Registrant, in the capacities and on
the dates indicated.
Signature
|
Title
|
Date
|
||
/s/
Thomas A. “Kip” Hyde, Jr.
|
President,
Chief Operating Officer
|
August
30, 2010
|
||
Thomas
A. “Kip” Hyde, Jr.
|
||||
/s/
Douglas E. Sloan
|
Chief
Financial Officer
|
August
30, 2010
|
||
Douglas
E. Sloan
|
(Principal
Financial and Accounting Officer)
|
|||
/s/
Clifford E. McFarland
|
Director
|
August
30, 2010
|
||
Clifford
E. McFarland
|
||||
/s/
Henry Y.L. Toh
|
Director
|
August
30, 2010
|
||
Henry
Y.L. Toh
|
||||
/s/
Marshall G. Webb
|
Director
|
August
30, 2010
|
||
Marshall
G. Webb
|
|
|
75