| TELETOUCH COMMUNICATIONS INC Item 1A Risk Factors Teletouch may be unable to complete it future regulatory filings in a timely manner As a result of the acquisition of Progressive Concepts, Inc, on August 11, 2006, Teletouch may not be successful in integrating the financial systems in a timely manner which could result in the Company being unable to meet its upcoming deadlines for it periodic reports with the Securities and Exchange Commission (“SEC”) |
| PCI was a privately held company and although it’s parent company had been previously audited, PCI itself had never been carved out and audited on a stand-alone basis |
| This auditing process is currently underway but certain financial reporting challenges have been encountered which are delaying the progress on these audits |
| Due to the size of PCI, Teletouch must file 3 consecutive years of audited financial statements with the SEC within 75 days of the completion of this transaction |
| The latest date that these financials can be filed to be considered a timely filer is October 27, 2006 |
| If the Company becomes a late filer with the SEC, then it will be subject to more comprehensive requirements related to future registration statements |
| These additional requirements to register its securities for sale could directly impact its ability to raise the necessary capital to grow the business |
| The Company believes that it will cost an additional dlra0dtta3 to dlra0dtta5 million in professional fees if it is required to meet these additional registration requirements |
| Further, if the Company becomes a late filer with the SEC, it would again be in violation of the American Stock Exchange’s (the “AMEX”) Continued Listing Standards and could have its securities de-listed |
| Teletouch may be unsuccessful in integrating the operations of Progressive Concepts, Inc |
| On August, 11, 2006, Teletouch acquired all of the stock of Progressive Concepts, Inc |
| (“PCI”), an affiliated Texas Corporation |
| PCI was a privately held company based in Fort Worth, Texas |
| Teletouch’s legacy businesses were headquartered in Tyler, Texas |
| The Company expects certain challenges integrating the two businesses and transitioning many of its functions to the Fort Worth, Texas facility |
| If the Company is unsuccessful in this integration then it could experience difficulties meeting its financial reporting obligations, complying with certain regulatory agencies and could interrupt the operations of certain aspects of its businesses |
| Teletouch’s parent company may be unable to meet its upcoming financial obligations Prior to the acquisition of PCI, TLL Partners, LLC (“TLLP”), Teletouch’s parent, assumed all of the remaining institutional debt of PCI As part of this assumption, TLLP, pledged all of its assets, which are primarily its holding of approximately 80prca of the outstanding common stock of Teletouch, against this debt |
| If TLLP, is unsuccessful in repaying these obligations which begin to mature in August 2007, then the ownership of Teletouch could substantially change in the future |
| If the lenders become significant shareholders of Teletouch, then there is a risk that these lenders could swing votes on matters which may not be in the best interest of the shareholders as a whole |
| Teletouch may be unable to secure the financing needed for future acquisitions Teletouch may be unable to secure financing or only be presented with financing options that contain unfavorable terms to finance future acquisitions |
| If financing is unavailable to the Company, Teletouch will be unable to complete future acquisitions and would then be forced to grow its revenues from its existing businesses, which to-date has proved difficult without adequate capital funding |
| 19 ______________________________________________________________________ [46]Table of Contents Any type of systems failure could reduce sales, increase costs or result in claims of liability |
| Despite the Company’s implementation of preventive safety measures, Teletouch’s technology is vulnerable to system failure due to such things as computer viruses, unauthorized access, energy blackouts, natural disasters, and telecommunications failures |
| Any system failure, accident or security breach could cause significant interruptions in our operations |
| In addition, we could be subject to liability for any loss or damage to our customers’ data or applications or inappropriate disclosure of customers’ confidential information |
| The cost to remedy a system failure, accident or security breach could have a significant effect on our financial condition |
| Any disruption from our satellite feeds or backup landline feeds could result in delays in our subscribers’ ability to receive information |
| We cannot be sure that our systems will operate appropriately if we experience a hardware or software failure or if there is an earthquake, fire or other natural disaster, a power or telecommunications failure, intentional disruptions of service by third parties, an act of God or an act of war |
| A failure in our systems could cause delays in transmitting data, and as a result we may lose customers or face litigation that could involve material costs and distract management from operating our business Any defects in Teletouch’s products or in those provided to us by our suppliers could expose the Company to liability, damage our reputation and customer relations, and adversely affect the development and release of future products |
| Teletouch’s products are inherently complex; therefore, it is possible that any defects contained therein may only be detectable once the product is in use |
| Given the critical services our products provide, these defects could have a serious adverse impact on our customers, which could damage our reputation, harm customer relations and expose us to liability |
| Furthermore, any product defects could require significant recalls, which may not be covered by vendor warranties |
| Resolving product defects could consume significant financial and engineering resources, which could adversely affect the development and release of future products |
| Any product defect could result in shipment delays and a decreased demand for our products, which could reduce our revenues and adversely affect our level of profitability |
| A reduction or interruption in component supply or a significant increase in component prices could have a material adverse effect on our profitability |
| Our ability to meet our obligations to our customers partially depends on the timely delivery of parts and components from our suppliers and our internal capacity to install these products |
| Supply shortages could adversely affect our ability to satisfy our customers’ demands, which could damage our reputation and customer relations, in turn reducing demand for our products |
| Such delays or decreases in demand could reduce our revenues and adversely affect our level of profitability |
| Although we target smaller metropolitan areas where we believe there is less industry competition, demand for our products may be adversely affected by the presence of our competitors in these markets |
| Although Teletouch focuses on smaller metropolitan markets, where we believe there is less competition and more opportunity for internal growth, demand for our products may be adversely affected by industry competitors |
| Teletouch currently faces competition in these markets and expects that competition to 20 ______________________________________________________________________ [47]Table of Contents increase |
| Some of our competitors have more extensive engineering, manufacturing and marketing capabilities and greater financial, technical and personnel resources than we do |
| Furthermore, Teletouch’s competitors may have greater brand recognition, broader product lines, and more established customer relations |
| Our success depends on the introduction and acceptance of new products |
| The telecommunications market is constantly changing due, in part, to technological advances, evolving industry standards and the development of new products |
| Teletouch’s future success will depend on our ability to keep up with these changes by developing new products with a high market demand |
| If we fail to identify such products in response to market demands, we could fail to obtain an adequate return on our investments and could lose market share to our competitors |
| We face risks inherent in new product and service offerings as well as new markets |
| From time to time we introduce new products and services or expand our previous product and service offerings to our existing and target markets |
| Our products must therefore be considered in light of the risks, expenses, problems and delays inherent in establishing new lines of business in a rapidly changing industry |
| Although we believe we can successfully differentiate our product and service offerings from others in the marketplace, we must be able to compete against other companies who may already be established in the marketplace and have greater resources |
| There can be no assurance we will be successful in adding products or services or expanding into new markets or that our administrative, operational, infrastructure and financial resources and systems will be adequate to accommodate such offerings or expansion |
| Teletouch may be unsuccessful in obtaining and enforcing intellectual property protection for its technology |
| The Company’s ability to compete with industry competitors depends in part on its ability to enforce its intellectual property rights such as trademarks and to obtain and enforce future intellectual property protection, including patents, trademarks, copyrights and trade secrets |
| If we determine that our intellectual property rights have been infringed or if we are notified that we are infringing upon certain intellectual property rights, the Company may become involved in litigation |
| Such litigation or claims could result in substantial costs and diversion of resources |
| Furthermore, an adverse result in an action against the Company may require that we pay substantial damages, cease sales of the infringing product or technology and expend significant resources to either license the infringing technology or develop a non-infringing product or technology |
| We cannot give any assurance that such technology would be available to us on reasonable terms or that we would be able to develop similar non-infringing technology or products |
| In May 2005, the Company became aware that a clone of its internally developed software that supports the back-end data for all of its telemetry products was being marketed by another company |
| The software engineer that developed the package left the Company in April 2005 and started a company that is marketing substantially the same product that was developed by Teletouch over the span of 3 years |
| Additionally, the Company has become aware that one of its product suppliers has now gained access to this similar software package from the ex-employee and is currently marketing this software to its customers |
| 21 ______________________________________________________________________ [48]Table of Contents The Company has taken legal action against the ex-employee and his company to seek damages and cease immediately the sale or development of this software by other parties |
| If the Company is unsuccessful in defending its rights to this software, its competitive position will be harmed and substantial software development costs will likely be unable to be recovered |
| Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses and delisting of our common stock |
| Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and AMEX rules, have required most public companies, including our Company, to devote additional internal and external resources to various governance and compliance matters |
| Because we have a relatively small corporate staff, we rely heavily on outside professional advisers to assist us with these efforts |
| As a result, we incurred additional operating expenses in 2006 and will incur further expenses in the future |
| These future costs will include increased accounting related fees associated with preparing the attestation report on our internal controls over financial reporting as required under Section 404 of the Sarbanes-Oxley Act of 2002 |
| In addition, these new or changed laws, regulations and standards are subject to varying interpretations, as well as modifications by the government and AMEX The way in which they are applied and implemented may change over time, which could result in even higher costs to address and implement revisions to compliance (including disclosure) and governance practices |
| Our failure to meet these corporate governance requirements may result in delisting of our common stock from AMEX Our products are subject to government regulation |
| Radio communications are subject to regulation by the government |
| Teletouch’s products and technology must conform to domestic rules and regulations established to avoid interference among users and facilitate interconnection of telecommunications systems |
| It is our opinion that our products and technology are in compliance with all currently existing government rules and regulations |
| However, new rules or regulations could adversely affect our business by requiring that current products or technology be modified to comply with such rules or regulations or by rendering current products or technology obsolete |
| Furthermore, Teletouch cannot predict if and when new rules or regulations will come into effect |
| Regulatory changes could adversely affect our business by restricting our development of our products and increasing the opportunity for additional competition |
| The Federal Communications Commission (the “FCC”) must approve renewal applications for Teletouch’s radio licenses |
| The FCC grants radio licenses for varying terms of up to 10 years, and the FCC must approve renewal applications |
| In the past, the FCC renewal applications have been more or less routinely granted |
| However, there can be no assurance that the FCC will approve or act upon Teletouch’s future applications in a timely manner |
| Delays in or denial of our renewal applications could adversely affect our business operations, which could reduce our revenues and decrease our level of profitability |
| 22 ______________________________________________________________________ [49]Table of Contents Future applications by Teletouch for additional transmitter sites to expand our coverage on existing frequencies must be approved by the FCC Teletouch regularly applies to the FCC to use additional frequencies and to add additional transmitter sites to expand coverage on existing frequencies |
| Under current FCC guidelines, we can expand our coverage and add additional sites only on frequencies formerly classified as PCP frequencies below 929 MHz |
| All other frequencies below 929 MHz on which Teletouch holds licenses are frozen in a status quo condition pending the final announcement and implementation of geographic area licensing auctions |
| In addition, FCC approval is required for the Company’s acquisitions of radio licenses held by other companies, as well as transfers of controlling interests of any entities that hold radio licenses |
| Teletouch cannot be sure that the FCC will approve or act upon the Company’s future applications in a timely manner |
| Denial or delayed approval by the FCC could affect our business operations, which could reduce our revenues and adversely affect our level of profitability |
| Also, all major modification and expansion applications are subject to competitive bidding procedures |
| Teletouch cannot predict the impact that these procedures will have on its licensing practices |
| The telecommunications market is volatile |
| During the last several years, the telecommunications industry has been very volatile as a result of overcapacity, which has led to price erosion and bankruptcies |
| If the Company cannot control subscriber and customer attrition through maintaining competitive services and pricing, revenue could decrease significantly |
| Terrorist attacks or acts of war may seriously harm our business |
| Terrorist attacks or acts of war may cause damage or disruption to our operations, our employees, our facilities and our customers, which could significantly impact our revenues, costs and expenses, and financial condition |
| The terrorist attacks that took place in the United States on September 11, 2001 were unprecedented events that have created many economic and political uncertainties, some of which may materially adversely affect our business, results of operations, and financial condition |
| The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts of war or hostility have created many economic and political uncertainties, which could materially adversely affect our business, results of operations, and financial condition in ways that management currently cannot predict |