SecProbe.io

CORRESP
1
filename1.htm

Response Letter

                         1913 Deerbrook Drive

                         Tyler, Texas 75703

                         (903) 595-8834

                         August 10, 2005

 Larry M. Spirgel, Assistant Director

 Joseph
Kempf, Senior Staff Accountant

 Adam Washecka, Staff Accountant

 Division of Corporation Finance

 U.S. Securities and Exchange Commission

 100 F Street, NE

 Washington, DC 20549

 Gentlemen:

 This letter is being submitted by Teletouch Communications, Inc. (“Teletouch” or “the Company”) pursuant to the request made by the
members of the staff at the conclusion of our June 9, 2005 telephone conversation with you. At the conclusion of that conversation you asked us to prepare a submission that discussed two questions related to the November, 2002 transaction in which
the Company issued shares of its Series C Preferred Stock, and redeemable common stock warrants, in exchange for outstanding shares of its Series A and Series B Preferred Stock, warrants for the purchase of shares of Series B Preferred Stock, common
stock warrants and shares of its common stock (the “Exchange Transaction”).

 Those questions, and the two possible accounting treatments on each issue, are as follows:

 Question 1: Should the $36.3 million difference (referred to as the “gain” in this and prior letters) between the recorded fair
value of the securities issued to TLL Partners (“TLLP”) and GM Holdings (“GM”) and (ii) the carrying amount of Series A and Series B Preferred Stock, and the fair value of the common stock and common stock warrants, returned to
the Company by TLLP and GM in the Exchange Transaction, be included on the face of the income statement and in the computation of net income applicable to common stockholders and the resulting earnings per share?

 View A: No. Although EITF D-42 indicates that such gains
should be included in the computation of net income applicable to common stockholders and earnings per share, there are facts and circumstances specific to the Exchange Transaction, including the related party/principal stockholder nature of the
transaction, the lack of any substantial change in the relative positions of the stockholder groups, and the intent of the exchanging investor in entering into the transaction, that indicate that the gain should not be included in net income
applicable to common stockholders but instead should be treated as a capital contribution.

 Larry M. Spirgel, Joseph Kempf and Adam Washecka,

Page 2 of 8

U.S. Securities and Exchange Commission

August 10, 2005

 View B:
Yes. The $36.3 million gain is the type of gain addressed in the announcement in EITF D-42, and the fourth paragraph of that announcement states that an excess of the carrying amount of preferred stock over the fair value of the consideration
transferred to the holders of the preferred stock would be added to net earnings to arrive at net earnings available to common stockholders.

 Question 2: How should the gain be considered in determining whether and to what extent the issuance of the Series C Preferred Stock
resulted in a “beneficial conversion feature” (“BCF”) that must be accounted for under EITF Issues 98-5 and 00-27?

 View A: The $36.3 million gain represents capital the company originally obtained, and the investors originally invested, in the securities
that subsequently were exchanged for the Series C Preferred Stock, and therefore should be included in calculating the effective per share capital the company obtained in exchange for issuing the Series C Preferred Stock securities that included an
embedded right to 44 million shares of common stock.

 View B: The $36.3 million gain should not be included, and the “proceeds” for the purposes of the computations required under EITF 98-5 should be limited to the amount recorded as the fair value of the Series C
Preferred Stock.

 In simple terms, for both Question 1 and
Question 2, the accounting proposed under View A reflects our belief that the Exchange Transaction includes either unique facts and circumstances, or facts and circumstances that were not considered when the applicable literature was debated and
issued, and those facts and circumstances make the accounting set forth in View A, as to both issues, a more appropriate presentation in the financial statements of the substance of the Exchange Transaction than would be achieved by the accounting
under View B for both issues, which might be considered to reflect a “strict” application of the applicable accounting literature as written.

 When we talked with you on June 9, we believed that the treatments set forth as View A for both Question 1 and Question 2 would result in better financial
reporting in the circumstances. You and we agreed that the issues were complex, and that the preparation of an analysis such as this would be helpful to both you and us in sorting through the various considerations to arrive at what would be the
“best” accounting in the circumstances.

 Larry M. Spirgel, Joseph Kempf and Adam Washecka,

Page 3 of 8

U.S. Securities and Exchange Commission

August 10, 2005

 We continue to believe
that the accounting under View A as to both issues is more appropriate, as we continue to believe that the Exchange Transaction does include either unique facts and circumstances, or facts and circumstances that were not considered when the
applicable literature was debated and issued, and thus presents arguments for applying the literature in the manners described in View A. We acknowledge, as discussed below, that there are “counter” arguments that support accounting for
the transaction strictly in accordance with the literature as we have described in View B. However, we believe that these arguments are not sufficiently or overwhelmingly persuasive enough to negate the unique facts and circumstances related to the
Exchange Transaction, therefore we believe the accounting described in View A would produce better financial reporting.

 As a result, we continue to propose the Company remove the $36.3 million gain from the computation of net income applicable to common stockholders in
Fiscal 2003 and be of the view that the “proceeds” as defined in EITF 98-5 would include the value of the securities surrendered which would result in an effective conversion price related to the Series C conversion rights of $0.77 per
share which when compared to a market price of the Company’s common stock at that date of $0.33 causes us to conclude that no BCF was present nor needed any accounting consideration. The Company proposes filing an Amended Form 10-K/A for the
year ended May 31, 2003 to reflect the accounting as discussed above.

 The following sets forth our discussion of the arguments supporting the View A treatments to each of Question 1 and Question 2, together with the countering arguments that in our opinion make the arguments in favor of View B not
sufficiently overwhelmingly persuasive enough to negate the unique facts and circumstances that cause the accounting proposed under View A to produce better financial reporting.

 Question 1.

 The arguments in favor of treating the $36.3 million gain as a capital contribution, and excluding it from net income applicable to common
stockholders, are that:

•

the Exchange Transaction was between the Company and its principle stockholder (TLLP1), and thus (i) cannot be presumed to have been negotiated at arm’s length and (ii) has elements that make it likely that the motivation for TLLP’s entering in to the Exchange Transaction was
to enhance the value of Mr. McMurrey’s other investments in Teletouch by virtue of the benefit to Teletouch’s financial position the Exchange Transaction would produce, and thus resembles the transactions discussed in Topic 5T of the Staff
Accounting Bulletins.

1
TLL Partners is a Delaware limited liability company of which Robert M. McMurrey is the sole officer. Mr. McMurrey is the founder and the Chairman of the Board of
Teletouch.

 Larry M. Spirgel, Joseph Kempf and Adam Washecka,

Page 4 of 8

U.S. Securities and Exchange Commission

August 10, 2005

•

The Exchange Transaction did not substantively alter the ownership positions of the affected stockholder groups2, on a fully converted basis, and this lack of change raised a question of the level of economic substance in the transaction.

•

The recognition of the gain in the computation of EPS is contrary to both the exchanging investor, and to rational investor behavior. As discussed in our prior letters to you, at
the time of the Exchange Transaction the Company was in very poor financial condition, and without the Exchange Transaction there was substantial doubt that the Company would be able to continue without filing for bankruptcy. In addition, the value
of the Series C Preferred Stock not only was less than the carrying amount of the securities surrendered to the Company in the Exchange Transaction, it was also less than the fair value of those securities. It would be irrational investor behavior
to surrender one set of securities in exchange for a new security having a lower fair value unless the investor was motivated by the belief that such an exchange would be the only way to maintain or potentially increase the value of the investors
aggregate holdings. This was the intent of Mr. McMurrey, and accounting for the Exchange Transaction as described in View A reflects this intent.

•

Finally, as discussed in our prior letters to you, the valuation of the Series C Preferred Stock was done using a method not common to the valuation of convertible securities, in
part because the Company and its valuation advisor believed that more traditional valuation methods could yield unrealistic results due to the fact that the Company had an “overhang” (e.g., a number of common shares issuable upon the
conversion of convertible securities) of approximately 112 million shares compared to approximately 4 million common shares actually outstanding, which represented a level of overhang not found in comparable companies in the market. However, while
the Company continues to believe that its valuation was within the acceptable range, it also recognizes the high level of imprecision in valuing a convertible security in these circumstances. The accounting described under View A, which eliminated
the gain from the computation of EPS, also eliminates the effect that subjective exercise had on EPS.

 The facts underlying the first argument above are laid out in our prior letters to you, and we do not believe that any arguments others than those
presented in those letters exist. We are not repeating those discussions here.

2
For the purposes of analyzing the Exchange Transaction, there are three stockholder groups; TLLP, GM, and the other stockholders.

 Larry M. Spirgel, Joseph Kempf and Adam Washecka,

Page 5 of 8

U.S. Securities and Exchange Commission

August 10, 2005

 With respect to the
second argument above, the following table sets forth the stock ownership positions, on both an “as issued” and “fully diluted” basis, of the stockholder groups3 before and after the transaction:

Prior to Exchange Transaction

After Exchange Transaction

Common
shares
outstanding /
issuable

 Percentage
ownership
fully

 diluted

Common
shares
outstanding /
issuable

Percentage
ownership
fully
diluted

 TLLP (2)

 Common shares owned

295,649

—

 Common shares underlying:

 Common stock warrants

2,660,840

—

 Series A Preferred Stock (1)

102,011,384

—

 Series B Preferred Stock

216,114

—

 Warrants to buy Series B Pfd Stock (3)

1,945,038

—

 Series C Preferred Stock

—

44,000,000

 Redeemable common stock warrants

—

—

107,129,025

85.1
%

44,000,000

80.7
%

 GM Holdings:

 Common shares owned

405,276

405,276

 Common shares underlying:

 Common stock warrants

—

—

 Series A Preferred Stock (1)

13,910,643

—

 Series B Preferred Stock

296,250

—

 Warrants to buy Series B Pfd Stock (3)

—

—

 Series C Preferred Stock

—

—

 Redeemable common stock warrants

—

6,000,000

14,612,169

11.6
%

6,405,276

11.8
%

 Other stockholders

4,091,725

3.3
%

4,091,725

7.5
%

 Total

125,832,919

100.0
%

54,497,001

100.0
%

 (1)    Principal and interest accrued at 5/20/05 - Series A Preferred Stock

$
38,254,269

 Teletouch stock price - 11/7/02

$
0.33

 Equivalent number of common shares to retire Series A

115,922,027

(2)
After TLLP purchases of securities from CIVC

(3)
Represents shares issuable upon conversion of Series B Preferred Stock issuable upon exercise of warrants to purchase such shares

 However, as stated earlier, our analysis has also indicated that there are
arguments to indicate that the language of EITF D-42 should be followed.

 With respect to the related party/principle stockholder nature of the transaction, those counter arguments are:

•

Although the Exchange Transaction was with a related party, SFAS No. 57 states a general presumption that related party transactions should be accounted for in the same manner as
similar transactions with third parties, subject to the disclosures required by SFAS No. 57.

3
See footnote 2.

 Larry M. Spirgel, Joseph Kempf and Adam Washecka,

Page 6 of 8

U.S. Securities and Exchange Commission

August 10, 2005

 However, we would note
that this presumption existed when SAB Topic 5T was issued, and the conclusion that capital transaction accounting should be used was reached in SAB Topic 5T notwithstanding.

•

Because TLLP had acquired all of the securities it transferred to the Company in the Exchange Transaction in a preceding transaction with CIVC, a third party, with the intent of
subsequently transferring those to the Company, TLLP could be viewed as a “conduit” through which the Company acquired those securities from CIVC. Taking such a view, the $800,000 TLLP paid to CIVC to acquire the CIVC securities would be
viewed as having been (a) paid directly by the Company to CIVC to purchase the CIVC securities and (b) obtained by the Company in return for the issuance to TLLP of the Series C Preferred Stock. That view of the substance of the Exchange Transaction
would produce the same $36.3 million gain currently reflected.

 However, this view of the Exchange Transaction fails to consider two facts that we believe are important, and make viewing the Exchange transaction in this manner unwise. First, although TLLP acquired the CIVC
securities with the intent of subsequently transferring them to the Company, the terms of that subsequent transfer (i.e., the Exchange Transaction) had not at that time been negotiated, and thus it is presumptuous to view the $800,000 TLLP paid to
CIVC to acquire the CIVC securities as having been paid directly by the Company to CIVC to purchase the CIVC securities and obtained by the Company in return for the issuance to TLLP of the Series C Preferred Stock. Second, at the time CIVC offered
the CIVC securities to TLLP for $800,000, the Company would not have been in a position to repurchase the securities itself for that price, as it did not have the funds, and Mr. McMurrey and TLLP were under no obligation to offer that opportunity to
the Company or make such funds available to the Company.

•

Although the Exchange Transaction involved negotiations between the Company and TLLP, the terms also had to satisfy GM Holdings, and thus it also reflected negotiations between the
Company and a third party.

 In the aggregate we
do not believe the arguments in favor of strictly following EITF D-42 are persuasive enough to cause us to believe that this transaction was more than a capital contribution by its principal stockholder which resulted in no real economic gain to the
Company or its shareholders nor would we now believe that such a transaction would require accounting presentation though earnings.

 Larry M. Spirgel, Joseph Kempf and Adam Washecka,

Page 7 of 8

U.S. Securities and Exchange Commission

August