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Teletouch Reports Second Quarter 2013 Fiscal Year Results

Teletouch Communications, Inc. (OTCBB: TLLE), a leading U.S. cellular services provider and consumer electronics distributor, reported audited consolidated results on Form 10-Q and announced financial results for its second fiscal quarter ended November 30, 2012.

2nd Quarter Results – Financial

  • Total operating revenues of $5.00 million
  • Income from continuing operations of $0.06 million
  • EBITDA from continuing operations of $0.28 million
  • Net loss from continuing operations of $0.38 million

Year-to-Date Highlights – Financial (as reported)

  • Total operating revenues of $10.22 million
  • Income from continuing operations of $0.43 million
  • EBITDA from continuing operations of $0.88 million
  • Net loss from continuing operations of $0.49 million
  • Reduced total liabilities by $2.47 million

Material Subsequent Event - Settlement of Texas Sales Tax Obligation

  • On January 7, 2013, the Company entered into a settlement agreement with the State of Texas (“State”) related to the prior reported sales tax obligation of its wholly owned subsidiary, Progressive Concepts, Inc. (”PCI”), assessed following an audit of tax periods from January 2006 through October 2009;
  • The settlement reduced PCI’s total sales tax obligation from approximately $1.91 million to $1.41 million as of the settlement date, i.e., approximately $0.50 million in penalties and interest will be waived by the State once the tax obligation is paid pursuant to the terms of the settlement, as further described below;
  • Terms of settlement:
    • Settlement obligation to State - $1,413,888 (actual tax assessed from audit);
    • $625,000 down payment ($150,000 was prior paid voluntarily through December 1, 2012, with the remaining $475,000 paid January 10, 2013);
    • Beginning February 15, 2013, PCI shall make 35 payments of $22,000 each month, with a final payment of $18,888 due January 15, 2016 (total of $788,888);
    • Total settlement obligation amount due is interest free;
    • All penalties and interest will be waived by the State after the settlement obligation is paid in full;
  • As the settlement and related current obligation was agreed to (and financed at zero interest) by the State prior to the Company’s 2nd quarter financials being released, $1.1 million of the total obligation has been reclassified as a long term obligation on the Consolidated Balance Sheet as of November 30, 2012.

“This year’s quarter is not easily compared to last year’s same period, as we settled the AT&T litigation in late November 2011,” stated T. A. "Kip" Hyde, Jr., President, Chief Operating Officer and Director of Teletouch. “For a more comparable view, adjusted EBITDA for the second quarter was $0.29 million versus an adjusted EBITDA of $0.36 million for the same period last year. Adjusted Operating Income increased to $0.07 million from an adjusted Operating Income of $0.03 million last year. Our adjusted net loss from continuing operations decreased to $0.37 million from $0.59 million in the prior year’s quarter. While all-in-all, we maintained a reasonably comparable quarter, we are still not where we need to be to drive solid top and bottom-line growth.”

Hyde continued, “Although we expected to close our new senior credit facility during the quarter, a requirement by our prospective new lender to resolve the State of Texas sales tax obligation, and related ongoing negotiations with our current lender, Thermo Credit on payment and inter-creditor terms, have caused unexpected delays. We reached favorable terms with the State in mid-December and completed the settlement agreement in early January, but the negotiations with Thermo Credit continue. At this point, Thermo must agree to terms acceptable to our new lender for the new financing to move forward. We are optimistic that both lenders will reach agreement shortly and our new financing will be completed. However, at this point, we can just watch and wait.”

“Meanwhile, our operations suffer each day that we do not have a new credit facility in place to finance needed inventory purchases, expand wholesale partnership opportunities, and support our cellular operations. While we have faced some early challenges in executing on our wholesale business growth plan, we remain committed to the distribution business as the long-term growth engine for the Company. We are working to focus this business unit on fewer key product lines and generating larger customer relationships, in the expectation that these activities will provide substantial growth, especially by leveraging our expected new financing options.”

Hyde added, “Until then, the cellular business remains the key income driver of our operations. The rate of cellular subscriber attrition remains within our expectations, but the ongoing subsidies required for cellular phones used for subscriber contract renewals are straining our liquidity. Of particular note, during the quarter, not only was the iPhone 5 launched, but also the price of the iPhone 4 was significantly reduced, which combined with the start of the holiday season, resulted in substantially increased demand from our cellular subscribers for new cellular handsets, increasing the negative impact on our cash and earnings. Although the net present value of the required two-year services contract renewal and related transfer value at the end of our AT&T contract far exceeds the up-front subsidy on each handset, the subsidized amount is recognized immediately, which negatively impacts current earnings and cash. Until our new credit facility is in place, we are actively monitoring subscriber upgrade activity and may have to curtail certain subsidies and services over time.”

Hyde concluded, “The delays in completing the new financing have clearly impacted all areas of our business. We see many opportunities to grow, but need the additional liquidity that a new credit facility will provide in order to act upon them. At this point, it is clear that the timing of an agreement between our new lender and Thermo Credit is not within our control. Until then, we will continue to review all of our corporate expense structures and look for available ways to improve our overall profitability. However, we remain optimistic that a new facility will be implemented in the relatively near future, and once put in place, we expect to drive new sales growth through the back half of the fiscal year.”

EARNINGS CONFERENCE CALL:

The Company’s fiscal second quarter 2013 earnings conference call is scheduled on January 30, 2013, at 4:15 p.m. Eastern (3:15 p.m. Central). To join, participants will call 866-901-2585 or 404-835-7099. Callers will be asked to provide their first and last names, email address, company and/or financial institution name, as applicable. Participants are advised to dial in approximately 10-15 minutes before the conference call is scheduled to begin. After information is given to the operator, participants will be placed on music-hold prior to the start of the call, then all added to call at start. After the speakers conclude their prepared remarks, the moderator will provide instructions to all calling participants on how to queue up their questions.

For its second fiscal quarter ended November 30, 2012, the Company announced the following results [the Tables below present selected financial data, including certain non-GAAP measures; see Teletouch’s Form 10-Q for its quarter ended November 30, 2012, filed on January 22, 2013 for complete financials and additional information]:

Teletouch Communications, Inc.
(in thousands, except shares and per share amounts)
       
Three Months Ended
November 30 November 30    
2012 2011

$ Change

% Change
Summary Operating Results:
Service revenue $ 3,411 $ 3,853 $ (442 ) -11.5 %
Product sales revenue   1,592     2,422     (830 ) -34.3 %
Total operating revenues 5,003 6,275 (1,272 ) -20.3 %
 
Cost of service (671 ) (941 ) 270 -28.7 %
Cost of products sold   (1,675 )   (2,395 )   720   -30.1 %
 
Gross margin on service revenue 2,740 2,912 (172 ) -5.9 %
Gross margin on product sales revenue   (83 )   27     (110 ) (G)
Gross margin on total revenue   2,657     2,939     (282 ) -9.6 %
 
Operating income from continuing operations 59 8,440 (8,381 ) -99.3 %
 
Net income (loss) from continuing operations (376 ) 7,817 (8,193 ) (G)
 
Net loss from discontinued operations (F) (48 ) (29 ) (19 ) 65.5 %
 
Net income (loss) $ (424 ) $ 7,788 $ (8,212 ) (G)
 
Basic income (loss) per share of common stock from continuing operations $ (0.01 ) $ 0.16 $ (0.17 ) (G)
 
Diluted income (loss) per share of common stock from continuing operations $ (0.01 ) $ 0.15 $ (0.16 ) (G)
 
Weighted average shares outstanding:
Basic 48,742,335 48,739,368 2,967 0.0 %
 
Diluted 48,742,335 52,147,924 (3,405,589 ) -6.5 %
 
EBITDA, Adjusted EBITDA, Operating Income and Net Income (Loss) from Continuing Operations Reconciliation:
Net income (loss) from continuing operations $ (376 ) $ 7,817 $ (8,193 ) (G)
Add back:
Depreciation and amortization 222 332 (110 ) -33.1 %
Interest expense 374 523 (149 ) -28.5 %
Income tax expense   61     100     (39 ) -39.0 %
EBITDA from continuing operations (A) 281 8,772 (8,491 ) -96.8 %
Adjustments:
Non-cash stock compensation expense 6 40 (34 ) -85.0 %
Severance costs 4 - 4 100.0 %
Litigation costs (AT&T arbitration) (C) - 149 (149 ) -100.0 %
Gain on settlement with AT&T (D) - (10,000 ) 10,000 -100.0 %
Management bonuses related to settlement with AT&T (E)   -     1,400     (1,400 ) -100.0 %
Total adjustments   10     (8,411 )   8,421   (G)
Adjusted EBITDA from continuing operations (B) 291 361 (70 ) -19.4 %
 
Adjusted Operating Income from Continuing Operations Reconcilation:
Operating income from continuing operations $ 59 $ 8,440 $ (8,381 ) -99.3 %
Total adjustments   10     (8,411 )   8,421   (G)
Adjusted operating income from operations (B) 69 29 40 137.9 %
 
Adjusted Net Income (Loss) from Continuing Operations Reconciliation:
Net income (loss) from continuing operations $ (376 ) $ 7,817 $ (8,193 ) (G)
Total adjustments   10     (8,411 )   8,421   (G)
Adjusted net loss from continuing operations (B) (366 ) (594 ) 228 (G)
 
Notes:
(A) Teletouch's EBITDA means Net income (loss) from continuing operations before depreciation and amortization, interest expense and income tax expense. EBITDA is non-GAAP measure that the Company believes allows for a more complete analysis of our results.
 

(B) Teletouch's Adjusted EBITDA, Adjusted operating income and Adjusted net income (loss) from continuing operations means EBITDA, Operating income and Net income (loss) from Continuing Operations before non-cash stock compensation expense and significant items that do not occur on a routine basis. These adjusted measurements are non-GAAP measures that the Company believes allows for a more comparative analysis of our results to other periods.

 
(C) The Company’s subsidiary, PCI, commenced binding arbitration against AT&T on September 30, 2009. PCI commenced the binding arbitration to seek relief for damages PCI had incurred as AT&T had prevented PCI from selling the iPhone and other AT&T exclusive products and services that PCI had been contractually entitled to provide to its customers under its distribution agreements with AT&T. The litigation against AT&T was settled on November 23, 2011.
 

(D) As a result of the settlement and release agreement that was executed with AT&T on November 23, 2011, the Company recorded the initial consideration of $10,000,000 as a gain, which was included in the operating income on the Company's consolidated statement of operations for the three and six months ended November 30, 2011. The initial consideration was comprised of a $5,000,000 cash payment and $5,000,000 credit against PCI's outstanding accounts payable to AT&T.

 
(E) The Compensation Committee of the Company's Board of Directors approved a bonus for executive and management personnel due to the successful settlement of the litigation against AT&T in November 2011 and in light of the fact that no bonuses were awarded during fiscal year 2011 due primarily to a decrease in earnings caused by delays in this litigation outside of the Company's control.
 

(F) On August 11, 2012, Teletouch and DFW Communications, Inc. entered into an Asset Purchase Agreement (the "APA") to sell substantially all of the assets of the Company associated with the two-way radio and public safety equipment business. The sale of the business was approved by the Company's Board of Directors on August 10, 2012, and the Company received approximately $1,169,000 of cash consideration for the sale of the assets of the two-way radio and public safety equipment business.

 
(G) Percent change is not provided if either the latest period or the year-ago period contains a loss.
 
 
Teletouch Communications, Inc.
(in thousands, except shares and per share amounts)
     
Six Months Ended
November 30 November 30    
2012 2011

$ Change

% Change
Summary Operating Results:
Service revenue $ 7,134 $ 7,979 $ (845 ) -10.6 %
Product sales revenue   3,089     5,782     (2,693 ) -46.6 %
Total operating revenues 10,223 13,761 (3,538 ) -25.7 %
 
Cost of service (1,340 ) (1,945 ) 605 -31.1 %
Cost of products sold   (3,154 )   (5,767 )   2,613   -45.3 %
 
Gross margin on service revenue 5,794 6,034 (240 ) -4.0 %
Gross margin on product sales revenue   (65 )   15     (80 ) (G)
Gross margin on total revenue   5,729     6,049     (320 ) -5.3 %
 
Operating income from continuing operations 434 8,286 (7,852 ) -94.8 %
 
Net income (loss) from continuing operations (487 ) 7,102 (7,589 ) (G)
 
Net loss from discontinued operations (F) (145 ) (86 ) (59 ) (G)
 
Net income (loss) $ (632 ) $ 7,016 $ (7,648 ) (G)
 
Basic income (loss) per share of common stock from continuing operations $ (0.01 ) $ 0.14 $ (0.16 ) (G)
 
Diluted income (loss) per share of common stock from continuing operations $ (0.01 ) $ 0.14 $ (0.15 ) (G)
 
Weighted average shares outstanding:
Basic 48,742,335 48,739,184 3,151 0.0 %
 
Diluted 48,742,335 51,967,097 (3,224,762 ) -6.2 %
 
EBITDA, Adjusted EBITDA, Operating Income and Net Income (Loss) from Continuing Operations Reconciliation:
Net income (loss) from continuing operations $ (487 ) $ 7,102 $ (7,589 ) (G)
Add back:
Depreciation and amortization 446 612 (166 ) -27.1 %
Interest expense 778 1,050 (272 ) -25.9 %
Income tax expense   143     134     9   6.7 %
EBITDA from continuing operations (A) 880 8,898 (8,018 ) -90.1 %
Adjustments:
Non-cash stock compensation expense 167 291 (124 ) -42.6 %
Severance costs 24 1 23 2300.0 %
Litigation costs (AT&T arbitration) (C) - 315 (315 ) -100.0 %
Gain on settlement with AT&T (D) - (10,000 ) 10,000 -100.0 %
Management bonuses related to settlement with AT&T (E)   -     1,400     (1,400 ) -100.0 %
Total adjustments   191     (7,993 )   8,184   (G)
Adjusted EBITDA from continuing operations (B) 1,071 905 166 18.3 %
 
Adjusted Operating Income from Continuing Operations Reconcilation:
Operating income from continuing operations $ 434 $ 8,286 $ (7,852 ) -94.8 %
Total adjustments   191     (7,993 )   8,184   (G)
Adjusted operating income from operations (B) 625 293 332 113.3 %
 
Adjusted Net Income (Loss) from Continuing Operations Reconciliation:
Net income (loss) from continuing operations $ (487 ) $ 7,102 $ (7,589 ) (G)
Total adjustments   191     (7,993 )   8,184   (G)
Adjusted net loss from continuing operations (B) (296 ) (891 ) 595 (G)
 
Notes:
(A) Teletouch's EBITDA means Net income (loss) from continuing operations before depreciation and amortization, interest expense and income tax expense. EBITDA is non-GAAP measure that the Company believes allows for a more complete analysis of our results.
 

(B) Teletouch's Adjusted EBITDA, Adjusted operating income and Adjusted net income (loss) from continuing operations means EBITDA, Operating income and Net income (loss) from Continuing Operations before non-cash stock compensation expense and significant items that do not occur on a routine basis. These adjusted measurements are non-GAAP measures that the Company believes allows for a more comparative analysis of our results to other periods.

 
(C) The Company’s subsidiary, PCI, commenced binding arbitration against AT&T on September 30, 2009. PCI commenced the binding arbitration to seek relief for damages PCI had incurred as AT&T had prevented PCI from selling the iPhone and other AT&T exclusive products and services that PCI had been contractually entitled to provide to its customers under its distribution agreements with AT&T. The litigation against AT&T was settled on November 23, 2011.
 
(D) As a result of the settlement and release agreement that was executed with AT&T on November 23, 2011, the Company recorded the initial consideration of $10,000,000 as a gain, which was included in the operating income on the Company's considated statement of operations for the three and six months ended November 30, 2011. The initial consideration was comprised of a $5,000,000 cash payment and $5,000,000 credit against PCI's outstanding accounts payable to AT&T.
 
(E) The Compensation Committee of the Company's Board of Directors approved a bonus for executive and management personnel due to the successful settlement of the litigation against AT&T in November 2011 and in light of the fact that no bonuses were awarded during fiscal year 2011 due primarily to a decrease in earnings caused by delays in this litigation outside of the Company's control.
 

(F) On August 11, 2012, Teletouch and DFW Communications, Inc. entered into an Asset Purchase Agreement (the "APA") to sell substantially all of the assets of the Company associated with the two-way radio and public safety equipment business. The sale of the business was approved by the Company's Board of Directors on August 10, 2012, and the Company received approximately $1,169,000 of cash consideration for the sale of the assets of the two-way radio and public safety equipment business.

 
(G) Percent change is not provided if either the latest period or the year-ago period contains a loss.
 
 
Selected Balance Sheet Highlights
(in thousands)
       

November 30,

May 31,
2012 2012 $ Change % Change
Cash $ 1,257 $ 1,973 $ (716 ) -36.3 %
Current portion of Texas sales and use tax obligation 695 - 695 100.0 %
Current debt obligation 9,655 10,932 (1,277 ) -11.7 %
Long-term Texas sales and use tax obligation, net of current portion 1,062 - 1,062 100.0 %
 
Total liabilities 18,109 20,576 (2,467 ) -12.0 %
 
Current Assets 6,808 8,814 (2,006 ) -22.8 %
Current Liabilities   17,047     20,476     (3,429 ) -16.7 %
Working Capital (10,239 ) (11,662 ) 1,423 12.2 %
 
 

Disclosure of Non-GAAP Financial Measures

We report our financial results in accordance with generally accepted accounting principles (“GAAP”). However, management believes the presentation of certain non-GAAP financial measures provides useful information to management and investors regarding financial and business trends relating to the Company’s financial condition and results of operations, and that when GAAP financial measures are viewed in conjunction with the non-GAAP financial measures, investors are provided with a more meaningful understanding of the Company’s ongoing operating performance. In addition, these non-GAAP financial measures are among the primary indicators management uses as a basis for evaluating performance. For all non-GAAP financial measures in this release, we have provided corresponding GAAP financial measures for comparative purposes.

We refer to the term EBITDA, Adjusted EBITDA, Adjusted income/(loss) from operations and “Adjusted net income (loss)” in various places of our financial discussion. EBITDA is defined by us as net income/(loss) before interest expense, income tax expense, and depreciation and amortization expense. The Company identifies its non-cash, significant and one-time charges each period, including non-cash stock compensation expense and significant litigation or restructuring costs and excludes these charges to compute certain non-GAAP adjusted operating measurements. EBITDA, Income/(loss) from operations, and Net income/(loss) are each adjusted by excluding the total non-cash, significant and one-time charges identified by the Company to compute Adjusted EBITDA, Adjusted income/(loss) from operations and Adjusted net income/(loss), respectively (the “Non-GAAP Financial Measures”). The Non-GAAP Financial Measures are not measures of operating performance under GAAP and therefore should not be considered in isolation nor construed as an alternative to operating profit, net income/(loss) or cash flows from operating, investing or financing activities, each as determined in accordance with GAAP nor should they be considered as a measure of liquidity. Moreover, since the Non-GAAP Financial Measures are not measurements determined in accordance with GAAP, and thus are susceptible to varying interpretations and calculations, the Non-GAAP Financial Measures, as presented, may not be comparable to similarly titled measures presented by other companies.

About Teletouch Communications

For over 48 years, Teletouch has offered a comprehensive suite of wireless telecommunications solutions, including cellular, two-way radio, GPS-telemetry and wireless messaging. Today, Teletouch is a leading Authorized Service Provider and billing agent of AT&T (NYSE: T) products and services to consumers, businesses and government agencies, operating a chain of retail and authorized agent stores in North and Central Texas under its “Hawk Electronics” brand, in conjunction with its direct sales force, call center operations and various retail eCommerce websites, including: www.hawkelectronics.com, www.hawkwireless.com and www.hawkexpress.com.

Through its wholly owned subsidiary, Progressive Concepts, Inc., Teletouch operates a national distribution business, PCI Wholesale, primarily serving Tier 1 (AT&T, T-Mobile, Verizon, Sprint) cellular carrier agents, Tier 2, Tier 3 and rural carriers, as well as auto dealers and smaller consumer electronics retailers, with product sales and support available through www.pciwholesale.com and www.pcidropship.com, among other B2B oriented websites.

Teletouch's common stock is traded Over-The-Counter under stock symbol: TLLE. Additional information about the Teletouch family of companies can be found at www.teletouch.com.

All statements from Teletouch Communications, Inc. in this news release that are not based on historical fact are "forward-looking statements" within the meaning of the PSLRA of 1995 and the provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. While the Company’s management has based any forward-looking statements contained herein on its current expectations, the information on which such expectations were based may change. These forward-looking statements rely on a number of assumptions concerning future events and are subject to a number of risks, uncertainties, and other factors, many of which are outside of our control, that could cause actual results to materially differ from such statements. Such risks, uncertainties, and other factors include, but are not necessarily limited to, those set forth under the caption “Risk Factors” in the Company’s most recent Form 10-K and 10-Q filings, and amendments thereto, as well as other public filings with the SEC since such date. The Company operates in a rapidly changing and competitive environment, and new risks may arise. Accordingly, investors should not place any reliance on forward-looking statements as a prediction of actual results. The Company disclaims any intention to, and undertakes no obligation to, update or revise any forward-looking statement.

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