Teletouch Reports Third Quarter 2011 Fiscal Year Results

FORT WORTH, Texas--(BUSINESS WIRE)--Teletouch Communications, Inc. (OTCBB: TLLE), a leading U.S. wireless services, cellular, consumer electronics and public safety equipment provider, reported its consolidated results on Form 10-Q and announced financial results for its third fiscal quarter ended February 28, 2011.

Quarterly Highlights – Financial

• Total operating revenues of $9.36 million (4.6% increase from 2nd quarter)
• Loss from operations of $0.34 million
• Adjusted EBITDA of $0.70 million
• Net loss of $0.94 million
• Adjusted net loss of $0.18 million (net loss adjusted for non-cash stock compensation and significant litigation and restructuring costs, including AT&T litigation expenses of $0.44 million and period restructuring charges of $0.28 million)

Year to Date Highlights – Financial

• Total operating revenues of $27.28 million
• Loss from operations of $0.05 million
• Adjusted EBITDA of $2.22 million
• Net loss of $1.88 million
• Adjusted net loss of $0.45 million (net loss adjusted for non-cash stock compensation and significant litigation and restructuring costs, including AT&T litigation expenses of $0.79 million and period restructuring charges of $0.29 million)
• Reduced current and long-term liabilities by $3.00 million from prior year end

Other Quarterly & Recent Events Highlights

• Reduced operating expenses by approximately $0.17 million per month (restructuring completed mid-February 2011; charge taken late 3^rd quarter with operating results realized beginning fourth quarter)
• Submitted application and subsequently approved in March 2011 to include two-way radio and emergency vehicle products on BuyBoard®, a website operated by the Local Government Purchasing Cooperative, an administrative agency for the State of Texas tasked with identifying and approving qualified vendors, products and services for purchase by all cities, counties and schools in the State
• Completed bid process and have been notified that Company is in the final stages of an award with the State of Texas to be awarded a Texas Multiple Awards Schedule (TXMAS), which provides for approved Company products to be sold to all State agencies and local public entities
• Expert damages report filed with Judge Willcutts’ office (the arbitrator assigned to the AT&T litigation) in March 2011; report was prepared by Company’s independent (outside) experts which now formally computes Company’s damages at up to $86.8 million (see additional detail below and in the Company’s recently filed 10-Q)
• Received damages report filed by AT&T’s expert in March 2011, computing AT&T’s counter-claim damages as ranging from $7.6 million to $9.9 million (see additional detail below and in the Company’s recently filed 10-Q)

“Our third quarter revenue increased approximately 5% from the second quarter of the current fiscal year 2011, primarily due to growth in our wholesale distribution business. The increase contributed to earnings, as previously forecast. However, we incurred certain significant costs during the quarter, largely as a result of the increased legal activity as we come to a close in our litigation against AT&T. This combined with restructuring expenses related to the ongoing downsizing of our cellular related retail locations and workforce offset the incremental benefits from our increased revenue, resulting in slightly increased losses when compared to the prior quarter. However, with the benefit of lower operating costs and sustained performance in our wholesale distribution business, we anticipate that we will return to profitability during the fourth quarter,” stated T. A. "Kip" Hyde, Jr., President, Chief Operating Officer and Director of Teletouch.

Hyde added, “We continue to work with major handset manufacturers in an effort to enter into direct distribution agreements that will solidify our supply chain and support the ongoing demand from our customers for cellular handsets and accessories, both domestically and overseas. Negotiating these agreements has taken longer than we originally expected, but we are hopeful to have at least one agreement in place prior to the end of the fiscal year. Regardless, we will continue to source products through all of our current indirect channels, until such time as we have the necessary direct agreements in place. We will continue to develop and grow this business through the fourth quarter.”

Hyde continued, “Further, we have been in discussions with an acquisition target that is complementary to our existing business operations, is in a growth mode and can immediately replace all of the revenues associated with the Company’s current cellular business. We have engaged an advisory firm to assist us in securing financing for the transaction. As of today, the Company has received term sheets from several financing sources, and is in the process of selecting a provider. We have informally agreed to purchase terms with the acquisition target, but we will not issue a formal letter of intent until our financing partner(s) selection process has been completed. Assuming the financing for this acquisition is secured, the Company will enter into a non-binding letter of intent with the acquisition target, while we and our financial partners complete formal due diligence. There is no assurance of, and the Company does not expect to complete this acquisition by the end of fiscal year 2011. However, the Company will provide progress updates as appropriate over subsequent periods.”

Hyde concluded, “In spite of our recent and significant cost reductions, we will continue to aggressively manage costs through the remainder of fiscal 2011, as we head toward the conclusion of our litigation against AT&T this summer. We will also continue to commit many of our resources to supporting our wholesale business. By developing new and existing supplier relationships, this area has proven to be among the more immediate and effective opportunities for us to significantly improve revenues and earnings. Efforts in our two-way radio / public safety equipment division are focused on continuing to secure relationships with the various and numerous purchasing cooperatives responsible for procuring products and services for federal, state and local entities. With our litigation against AT&T nearing an end, and with the expected benefits from our recent restructuring and growth initiatives, we believe we are heading in a direction that will have positive impact on the Company’s earnings well into the future.”

The net loss for the three months ended February 28, 2011, is primarily attributable to a $977,000 reduction in earnings from the Company’s cellular segment and an $849,000 reduction in earnings from the Company’s wholesale distribution operating segment, as compared to the same quarter last year. Also contributing to the net loss were severance costs of $282,000 related to layoffs completed during the quarter and legal costs of $445,000 related to the ongoing litigation against AT&T.

Of particular note, while nearly 14,000 cellular Subscribers churned from our base over the last 12 months, approximately 8,300 of those Subscribers were lost to AT&T, and of these, a minimum of 4,600 Subscribers that transferred to AT&T to purchase or use the iPhone. These significant losses of cellular Subscribers to AT&T are the basis for our ongoing litigation against AT&T. Plus, with the recent introduction of the iPhone by Verizon, we believe that a number of our customers who are unwilling to go to AT&T, have now turned to Verizon to activate new iPhones. Finally, the losses in the wholesale distribution segment as compared to the same quarter last year are directly related to AT&T’s actions which limited the supply of handsets made available to the Company beginning January 2010.

EARNINGS CONFERENCE CALL:

On April 20, 2011 at 4:15 p.m. EDT (3:15 p.m. CDT), Teletouch will hold the Company’s third quarter fiscal year 2011 earnings conference call. To join, participants will call 866.939.3921 or 678.302.3550. Callers will be asked to provide their first and last names, with their company or financial institution name, as applicable. Participants are advised to dial in approximately 10-15 minutes before the conference is scheduled to begin. After their information is given to an operator, participants will be placed on music-hold prior to the start of the conference.

UPDATE ON ARBITRATION PROCEEDING AGAINST AT&T:

As initially reported on September 30, 2009, Teletouch’s subsidiary, PCI d/b/a Hawk Electronics, the largest remaining Master Distributor and Authorized Services Provider for AT&T cellular products and services in the U.S., initiated legal action against AT&T seeking at least $100 million in damages (see updated damages claim information below). The process of binding arbitration was commenced to seek relief for damages incurred when AT&T prevented, and continues to prevent the company from selling Apple, Inc.'s (NASDAQ: AAPL) popular iPhone and other "AT&T exclusive" products and services that PCI contends it is entitled by contract to provide to its customers. The action further asserts that AT&T has violated the longstanding non-solicitation agreements between the companies, by actively inducing customers to leave PCI for AT&T and employing anti-competitive and predatory business practices. While PCI attempted to negotiate with AT&T for the purpose of obviating the need for legal action, such attempts failed. Accordingly, PCI initiated this arbitration. AT&T subsequently filed certain counterclaims with the arbitrator seeking an unspecified amount of damages from PCI and claiming that PCI was operating in violation of certain provisions of the distribution agreements and such agreements should therefore be cancellable by AT&T (see additional detail below and in the Company’s recently filed 10-Q).

On December 23, 2010, in response to a request from AT&T, we reported that the arbitration hearing start date was extended from March 21-25, 2011 to June 13-17, 2011.

In late March, 2011, both the Company’s and AT&T’s independent valuation experts filed formal initial damages claims and computations with the arbitrator, valuing each party’s respective damages as a result of the other party’s actions. The Company’s expert provided damages computations under various scenarios, including damages solely limited to the liquidated damages provision included in the distribution agreement(s) and several alternate computations of lost profits, depending on various factors including the timing for which it is determined that PCI should have been allowed to sell the iPhone, among others. Under the liquidated damages limitation, PCI’s damages are estimated to be $48.9 million. Under the lost profits computations, PCI’s damages are estimated to be as high as $35.0 million due to lost profits on Subscribers transferred to AT&T, plus those Subscribers that PCI did not activate due to being denied the ability to sell and/or service iPhone Subscribers. Additionally, if it is determined that PCI should also be compensated for the fair value of its Subscriber base as of August 31, 2009 (the date of the expiration of the initial term of the DFW and San Antonio distribution agreements), damages would be increased by approximately $51.8 million, resulting in total damages and compensation due to PCI totaling $86.8 million.

Subsequent to the Company initiating this legal action, AT&T introduced certain counter-claims against PCI. The damages report received from AT&T’s outside expert computed such damages in a range of $7.6 million to $9.9 million, most of which is primarily dependent on the arbitrator’s interpretation of the San Antonio distribution agreement. While the Company believes that AT&T’s counterclaims are baseless, and will vigorously defend such claims, the Company also noted a number of data and computation errors in AT&T’s expert report, all of which will be reviewed with the arbitrator in due course. We can provide no assurance that we will prevail in the arbitration against AT&T or be able to defend against the counterclaims raised by AT&T, but we expect that all such matters will be concluded as a result of the arbitration.

PCI is being represented in this matter by the Company's long-time counsel at the national law firm of Bracewell & Giuliani LLP. For a more detailed description of the Company's legal action Notice and detailed Initial Statement of Claim, please refer to the related Form 8-K, filed October 1, 2009 (also available at the Company's website: www.teletouch.com and on EDGAR at www.sec.gov).

For the quarter ended February 28, 2011, 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 February 28, 2011 filed on April 14, 2011 for complete financials and additional information]:

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 terms “EBITDA”, “Adjusted EBITDA” 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. Adjusted EBITDA is defined by us as EBITDA excluding non-cash stock compensation expense and significant litigation or restructuring costs, as described in each case. Adjusted net income (loss) is defined by us as Net income (loss) excluding non-cash stock compensation expense and extraordinary or other one-time costs, as described in each case. EBITDA, Adjusted EBITDA and Adjusted net income (loss) 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. Also, EBITDA, Adjusted EBITDA or Adjusted net income (loss) should not be considered as a measure of liquidity. Moreover, since EBITDA, Adjusted EBITDA and Adjusted net income (loss) are not measurements determined in accordance with GAAP, and thus are susceptible to varying interpretations and calculations, EBITDA, Adjusted EBITDA or Adjusted net income (loss), as presented, may not be comparable to similarly titled measures presented by other companies.

About Teletouch Communications

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 a leading direct Authorized Service Provider and billing agent of AT&T (NYSE: T) products and services to consumers, businesses and government agencies, as well as an operator of its own two-way radio network and LTR systems in Texas. Teletouch also maintains a distribution agreement with Clearwire (NASDAQ: CLWR), as a provider of advanced 4G and WiMax wireless network services. Teletouch operates a chain of 20 retail and authorized agent stores under the “Teletouch” and “Hawk Electronics” brands, 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 large cellular carrier agents 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.