<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549
-----------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
-----------------------
Date of Report (Date of
Earliest event reported): April 13, 1998
OPTEL, INC.
-----------
(Exact name of registrant as specified in its charter)
Delaware 95-4495524
- ----------------------------------- -------------------------------
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
333-24881
------------------------
(Commission File Number)
1111 West Mockingbird Lane, Suite 1000, Dallas, Texas 75247
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 634-3800
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
------------------------------------
On April 13, 1998, the Registrant completed the initial closing of its
acquisition of the private cable and telephone operations of Interactive Cable
Systems, Inc. ("ICS") in Houston, Dallas/Fort Worth, San Diego, Phoenix,
Chicago, Denver, San Francisco, Los Angeles, Miami/Ft. Lauderdale, Tampa,
Atlanta, Orlando, Indianapolis, and greater Washington, D.C. area. The initial
closing represented approximately 60% of the 90,000 cable and phone units under
contract comprising the overall purchase. The consummation of the acquisition
was reported under Form 8-K filed on April 17, 1998. This report on Form 8-K is
being filed to supplement and complete the information required to be filed
under Form 8-K.
The aggregate $80.8 million consideration in the acquisition consisted of
approximately $4.5 million in cash, approximately $59.4 million in shares of
Series B Preferred Stock, approximately $16.1 million in shares of Class A
Common Stock, plus the assumption of approximately $.8 million of liabilities.
The physical assets included in the acquisition consist principally of
plant used to receive and distribute multichannel video programming and, to a
lesser extent, equipment to provide telephone services. The Registrant intends
to use the acquired equipment in substantially the same manner as used by the
seller.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
---------------------------------
The undersigned Registrant hereby submits the Financial Statements for the
ICS operations acquired referred to in Section 2.
a. Financial Statements
Statements of Assets and Liabilities acquired as of December 31, 1997
and March 31, 1998 (unaudited), Statements of Revenues and Direct
Expenses for the year ended December 31, 1997 and the three months
ended March 31, 1998 (unaudited), notes to financial statements, and
the report of Deloitte & Touche LLP are presented on pages 2
through 7.
<PAGE> 3
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
OpTel, Inc.
We have audited the accompanying statement of assets and liabilities of ICS
Communications, LLC acquired by OpTel, Inc. ("OpTel") as of December 31,
1997, and the statement of revenues and direct expenses of such assets and
liabilities for the year then ended. These financial statements are the
responsibility of OpTel's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the assets and liabilities of ICS Communications, LLC
acquired by OpTel, Inc. at December 31, 1997 and the related revenues and
direct expenses for the year ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
May 15, 1998
Dallas, Texas
<PAGE> 4
ASSETS AND LIABILITIES OF ICS COMMUNICATIONS, LLC
ACQUIRED BY OPTEL, INC.
STATEMENTS OF ASSETS AND LIABILITIES ACQUIRED
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 31, 1998
----------------- ---------------
(UNAUDITED)
<S> <C> <C>
Accounts receivable (Net of allowance for doubtful accounts
of $737,000 and $333,000)................................. $ 1,181,677 $ 1,332,000
Prepaid expenses, deposits and other assets................. 295,639 290,233
Property and equipment, net (Note 2)........................ 21,824,123 21,084,342
Intangible assets, net (Note 3)............................. 9,241,488 8,166,744
----------- -----------
Total assets...................................... 32,542,927 30,873,319
----------- -----------
LIABILITIES
Deferred revenues and customer deposits..................... 758,109 841,620
Capital lease obligations (Note 4).......................... 825,056 807,047
----------- -----------
Total liabilities................................. 1,583,165 1,648,667
----------- -----------
Net assets acquired............................... $30,959,762 $29,224,652
=========== ===========
</TABLE>
See notes to financial statements.
<PAGE> 5
ASSETS AND LIABILITIES OF ICS COMMUNICATIONS, LLC
ACQUIRED BY OPTEL, INC.
STATEMENTS OF REVENUES AND DIRECT EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------- --------------
(UNAUDITED)
<S> <C> <C>
REVENUES:
Cable television.......................................... $14,559,625 $4,028,128
Telecommunications........................................ 2,127,310 354,587
----------- ----------
Total revenues.................................... 16,686,935 4,382,715
OPERATING EXPENSES:
Cost of services.......................................... 8,747,441 1,909,037
Customer support, general and administrative.............. 5,371,633 1,215,493
Depreciation and amortization............................. 8,088,727 1,988,608
----------- ----------
Total operating expenses.......................... 22,207,802 5,113,138
----------- ----------
LOSS FROM OPERATIONS........................................ (5,520,867) (730,423)
INTEREST EXPENSE............................................ (141,504) (35,376)
----------- ----------
NET LOSS.................................................... $(5,662,371) $ (765,799)
=========== ==========
</TABLE>
See notes to financial statements.
<PAGE> 6
ASSETS AND LIABILITIES OF ICS COMMUNICATIONS, LLC
ACQUIRED BY OPTEL, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements include the accounts of ICS
Communications, LLC (the "Company") only as they relate to the assets acquired
and liabilities assumed by OpTel, Inc. ("OpTel") on April 9, 1998. The statement
of revenues and direct expenses include only the results of operations for the
assets acquired and liabilities assumed and do not include any amounts
representing corporate overhead of the Company or interest incurred on
liabilities not assumed by OpTel. In preparation of the statement of revenues
and direct expenses, certain regional overhead costs were allocated to the
assets acquired. Such allocations were based upon subscriber counts, cable
passings or other criteria as considered appropriate.
The Company's operations are in a single business segment, the providing of
cable television and local and long distance telephone services to the high
density residential market, including apartment complexes, condominiums and
other multi-family residential properties (collectively "MDUs"). The Company
provides these services generally under exclusive, long-term contracts with
owners and managers of MDUs.
The assets acquired include long-term contracts to provide cable television
and telephone services to MDU properties, the property and equipment comprising
the cable television and telephone delivery systems for each of the contracts,
other prepaid assets specifically identified at the date of the purchase
(generally prepaid rent on delivery equipment) and customer receivables. In
connection with the purchase, certain liabilities were assumed, generally
capital lease obligations related to the property and equipment used in
telephone delivery systems.
The primary markets of the assets acquired are major metropolitan areas in
Arizona, California, Colorado, Florida, Georgia, Illinois, Indiana, Texas, and
the greater Washington D.C. area.
Interim Financial Information -- The accompanying unaudited consolidated
financial statements of the Company have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial information. In
the opinion of management, all adjustments (consisting only of normal recurring
entries) considered necessary for a fair presentation have been included.
Operating results for the three month periods ended March 31, 1998, are not
necessarily indicative of the results that may be expected for the entire fiscal
year or any other interim period.
Property and Equipment -- Property and equipment, including equipment under
capital leases, is stated at cost, which includes amounts for construction
materials, direct labor and overhead and capitalized interest. Cost of
maintenance and repairs is charged to operations as incurred. Depreciation is
calculated using the straight-line method over the estimated useful lives of the
various classes of property and equipment as follows:
<TABLE>
<S> <C>
Installed cable and headend equipment............ 5-10 years
Telephone switches and equipment................. 5-10 years
</TABLE>
Intangible Assets -- Intangible assets includes costs associated with
licensing fees, commissions and other direct costs incurred in connection with
the execution of rights-of-entry agreements to provide cable television and
telecommunications service to MDUs. Intangible assets are amortized using the
straight-line method over the lesser of the term of the right-of-entry agreement
or 5 years.
Revenue Recognition -- Cable subscriber fees for basic monthly services and
premium channels are billed in advance and recorded as revenue in the month the
service is provided. Telecommunication service billings include residential
service fees billed in advance plus amounts based on minutes of use billed in
arrears. Telecommunications service revenues are recognized in the month the
service is provided.
<PAGE> 7
ASSETS AND LIABILITIES OF ICS COMMUNICATIONS, LLC
ACQUIRED BY OPTEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Cost of Services -- System operating costs include programming,
telecommunications service costs, revenue sharing with owners of MDUs and
franchise fees.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires estimates and assumptions
that affect the reported amounts of assets and liabilities and 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.
Significant estimates included in the accompanying financial statements include
the allowance for doubtful accounts, the recoverability of the carrying value of
property and equipment and intangible assets and the allocation of regional
overhead as it relates to the assets acquired. Actual results could differ from
those estimates.
2. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997, including assets under capital
lease, consist of the following:
<TABLE>
<S> <C>
Installed cable and headend equipment.......... $ 30,051,718
Telephone switches and equipment............... 2,020,330
------------
Sub-total............................ 32,072,048
Less accumulated depreciation................ (10,247,925)
------------
Property and equipment, net.......... $ 21,824,123
============
</TABLE>
Telephone switches and equipment at December 31, 1997 include $1,238,273 in
net assets under capital lease.
3. INTANGIBLE ASSETS
Intangible assets at December 31, 1997 consist of the following:
<TABLE>
<S> <C>
Rights-of-entry costs.......................... $ 21,979,856
Less accumulated amortization................ (12,738,368)
------------
Intangible assets, net............... $ 9,241,488
============
</TABLE>
4. CAPITAL LEASE OBLIGATIONS
During 1995 and 1996 the Company entered into capital leases for telephone
equipment with five year terms. The leases are payable in monthly installments
ranging from $1,267 to $2,121 bearing interest at rates ranging from 10.4% to
13.0%. Scheduled maturities on capital lease obligations are as follows:
<TABLE>
<S> <C>
Year ending:
1998........................................... $ 379,980
1999........................................... 379,980
2000........................................... 243,440
Thereafter..................................... --
----------
Total payments......................... 1,003,400
Less amounts representing interest............. (178,344)
----------
Capital lease obligation............... $ 825,056
==========
</TABLE>
<PAGE> 8
ASSETS AND LIABILITIES OF ICS COMMUNICATIONS, LLC
ACQUIRED BY OPTEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. RELATED PARTY TRANSACTIONS
The Company's largest shareholder is MCI Telecommunications Corporation
("MCI"). In the ordinary course of the Company's local and long distance
telephone services, the Company purchases certain services from MCI under terms
and rates that management believes are no more favorable to the Company than
those arranged with other parties.
<PAGE> 9
b. Pro Forma Financial Information
The following February 28, 1998 unaudited Pro Forma Balance Sheet of
the Registrant reflects the February 28, 1998 Consolidated Balance
Sheet adjusted for (1) the acquisition of the ICS operations acquired
on April 13, 1998, and (2) the estimated cash disbursements and stock
issuance necessary to finance the acquisition.
The following unaudited Pro Forma Statements of Operations for the
year ended August 31, 1997 and the six months ended February 28, 1998
were prepared from the consolidated financial statements of the
Registrant by adjusting for the acquisition of the ICS operations
acquired on April 13, 1998, including the related cash disbursements
and stock issuance necessary to finance the acquisition, as if all of
these transactions had occurred on September 1, 1996 and 1997,
respectively. This is not necessarily indicative of what the
performance would have been had the Registrant actually acquired the
ICS operations on those dates, nor does it purport to represent future
results of operations of the Registrant.
<PAGE> 10
OPTEL, INC. AND SUBSIDIARIES
PRO FORMA BALANCE SHEET
AS OF FEBRUARY 28, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
HISTORICAL
----------------------
ICS PRO FORMA COMPANY
COMPANY OPERATIONS ADJUSTMENTS PRO FORMA
--------- ---------- ----------- ---------
(A) (B)
<S> <C> <C> <C> <C>
Cash and cash equivalents........................ $ 18,388 $ $(4,544)(D) $ 13,844
Restricted investments........................... 54,509 54,509
Short-term investments........................... 111,154 111,154
Accounts receivable.............................. 5,440 1,332 6,772
Prepaid expenses, deposits and other assets...... 1,851 290 (41)(C) 2,100
Property and equipment, net...................... 203,778 21,084 716(C) 225,578
Intangible assets, net........................... 110,051 8,167 51,526(C) 169,744
--------- ------- ------- ---------
TOTAL.................................. $ 505,171 $30,873 $47,657 $ 583,701
========= ======= ======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable................................. $ 6,042 $ $ $ 6,042
Accrued expenses and other liabilities........... 16,120 1,330(E) 17,450
Deferred revenue and customer deposits........... 4,004 842 4,846
Convertible notes payable to Stockholder......... 139,244 139,244
Notes payable and long-term obligations.......... 347,767 807 (14)(C) 348,560
Deferred acquisition liabilities................. 5,656 5,656
--------- ------- ------- ---------
Total liabilities...................... 518,833 1,649 1,316 521,798
Stockholders' equity(deficit)
Series B Preferred stock, 8.0%................. 59,466(F) 59,466
Class A Common................................. 2(G) 2
Class B Common................................. 24 24
Class C Common................................. 2 2
Additional paid-in-capital..................... 97,683 16,097(G) 113,780
Accumulated deficit............................ (111,371) (111,371)
--------- ------- ------- ---------
Total stockholders' equity (deficit)... (13,662) 75,565 61,903
--------- ------- ------- ---------
TOTAL.................................. $ 505,171 $ 1,649 $76,881 $ 583,701
========= ======= ======= =========
</TABLE>
See notes to unaudited pro forma financial information.
<PAGE> 11
OPTEL, INC. AND SUBSIDIARIES
PRO FORMA STATEMENT OF OPERATIONS -- YEAR ENDED AUGUST 31, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------- PRO FORMA COMPANY
COMPANY ICS OPERATIONS ADJUSTMENTS PRO FORMA
--------------- ----------------- ----------- ---------
(H) (I)
<S> <C> <C> <C> <C>
REVENUES:
Cable television.......................................... $ 36,915 $14,419 $ $ 51,334
Telecommunications........................................ 2,922 2,209 5,131
-------- ------- ------- --------
Total revenues..................................... 39,837 16,628 56,465
OPERATING EXPENSES:
Cost of services.......................................... 19,202 8,947 28,149
Customer support, general and administrative.............. 28,926 5,518 1,086(K) 35,530
Depreciation and amortization............................. 14,505 8,089 3,358(L) 25,952
-------- ------- ------- --------
Total operating expenses........................... 62,633 22,554 4,444 89,631
LOSS FROM OPERATIONS........................................ (22,796) (5,926) (4,444) (33,166)
Interest expense on -- Convertible Notes.................... (15,204) (15,204)
Other interest expense...................................... (16,210) (142) (16,352)
Interest and other income................................... 5,675 5,675
-------- ------- ------- --------
LOSS BEFORE INCOME TAXES.................................... (48,535) (6,068) (4,444) (59,047)
INCOME TAXES................................................
-------- ------- ------- --------
NET LOSS.................................................... $(48,535) $(6,068) $(4,444) $(59,047)
-------- ------- ------- --------
DIVIDENDS ON PREFERRED SHARES:
Series B Preferred Stock 8.0%............................. $ (4,757)(M)
-------- --------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS.................... $(48,535) $(63,804)
======== ========
BASIC AND DILUTED LOSS PER SHARE............................ $ (19.98) $ (24.60)
======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING......................... 2,430 2,594(G)
======== ========
</TABLE>
- ---------------
See notes to unaudited pro forma financial information.
<PAGE> 12
OPTEL, INC. AND SUBSIDIARIES
PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 28, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------- PRO FORMA COMPANY
COMPANY ICS OPERATIONS ADJUSTMENTS PRO FORMA
----------------- ----------------- ----------- ---------
(H) (J)
<S> <C> <C> <C> <C>
REVENUES:
Cable television.......................................... $ 25,247 $ 7,606 $ $ 32,853
Telecommunications........................................ 1,644 917 2,561
-------- ------- ------- --------
Total revenues..................................... 26,891 8,523 35,414
OPERATING EXPENSES:
Cost of services.......................................... 12,419 3,854 16,273
Customer support, general and administrative.............. 15,855 2,426 555(K) 18,836
Depreciation and amortization............................. 10,759 4,044 1,679(L) 16,482
-------- ------- ------- --------
Total operating expenses........................... 39,033 10,324 2,234 51,591
LOSS FROM OPERATIONS........................................ (12,142) (1,801) (2,234) (16,177)
Interest expense on Convertible Notes....................... (9,640) (9,640)
Other interest expense...................................... (16,386) (71) (16,457)
Interest and other income................................... 4,141 4,141
-------- ------- ------- --------
LOSS BEFORE INCOME TAXES.................................... (34,027) (1,872) (2,234) (38,133)
INCOME TAXES................................................
-------- ------- ------- --------
NET LOSS.................................................... $(34,027) $(1,872) $(2,234) $(38,133)
-------- ------- ------- --------
DIVIDENDS ON PREFERRED SHARES:
Dividends -- Series B Preferred, 8.0%..................... $ (2,379)(M)
-------- --------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS.................... $(34,027) $(40,512)
BASIC AND DILUTED LOSS PER SHARE............................ $ (13.20) $ (14.77)
======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING......................... 2,578 2,742(G)
======== ========
</TABLE>
See notes to unaudited pro forma financial information.
<PAGE> 13
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS)
(UNAUDITED)
(A) Represents the historical unaudited consolidated balance sheet of the
Company as of February 28, 1998.
(B) Represents the historical unaudited statement of assets and liabilities
acquired of ICS Communications, LLC ("ICS Operations") as of March 31,
1998 acquired by the Company.
(C) Reflects the adjustment to the assets purchased and liabilities assumed to
record them at their estimated fair value and the recording of goodwill for
the excess of the aggregate purchase price over the fair value of the
tangible and identifiable intangible assets acquired. The preliminary
allocation of the purchase price is as follows:
<TABLE>
<CAPTION>
ALLOCATION OF CARRYING PRO FORMA
PURCHASE PRICE VALUE ADJUSTMENTS
-------------- -------- -----------
<S> <C> <C> <C>
Accounts receivable, net.................................. $ 1,332 $ 1,332 $
Prepaid expenses and other................................ 249 290 (41)
Property and equipment, net............................... 21,800 21,084 716
Intangible assets, net.................................... 59,693 8,167 51,526
Accrued acquisition costs................................. (1,330) -- (1,330)
Deferred revenue and customer deposits.................... (842) (842) --
Notes payable and long-term obligations................... (793) (807) 14
-------
Total .......................................... $80,109
=======
</TABLE>
(D) Represents the cash payment to purchase the ICS Operations.
(E) Represents the estimated costs of the acquisition including professional
fees.
(F) Represents the issuance of 991.1 shares (representing liquidation
preference of $59,466) of Series B Preferred to purchase the ICS
Operations.
(G) Represents the issuance of 164,272 shares of Class A Common, $.01 par value
at an estimated price per share of $98 and total fair value of $16,099 to
purchase the ICS Operations.
(H) Represents the historical consolidated statement of operations of the
Company for the period indicated.
(I) Represents the unaudited statement of revenues and direct expenses of the
ICS Operations for the year ended November 30, 1997. Such presentation is
made to conform to the Company's quarter ended November 30, 1997 and were
derived from the financial records of ICS using the audited December 31,
1997, statement of revenues and direct expenses adjusted for the exclusion
of the December 1997 results and inclusion of the December 1996 results.
The amounts include amounts representing allocated regional overhead
attributable to the acquired operations. The statement of revenues and
direct expenses include only the results of operations for the assets
acquired and liabilities assumed and do not include any amounts
representing corporate overhead of ICS or interest incurred on liabilities
not assumed by the Company.
(J) Represents the unaudited statement of revenues and direct expenses of the
acquired ICS Operations for the six months ended February 28, 1998 and were
derived from the financial records of ICS. The statement of revenues and
direct expenses include only the results of operations for the assets
acquired and liabilities assumed and do not include any amounts
representing corporate overhead of ICS or interest incurred on liabilities
not assumed by the Company. The amounts do include amounts representing
allocated regional overhead attributable to the acquired operations.
(K) Represents incremental customer support, corporate and administrative
expenses not included in the historical financial statements of the
acquired ICS Operations. The amounts have been estimated based upon the
Company's average historical cost per subscriber for the appropriate period
applied to the expected number of subscribers added as part of the
acquisition.
(L) Represents an adjustment to depreciation expense for acquired property and
equipment and to record amortization expense for the acquired intangible
assets over 5 to 15 years.
(M) Represents adjustment to reflect cumulative dividend accrued during the
period presented, assuming issuance on the first day of the period
presented, for the $59,466 of the Company's Series B Preferred issued to
acquire the ICS Operations. The adjustment reflects the Series B Preferred
dividend accrual rate of 8.0%.
<PAGE> 14
SIGNATURE
Pursuant to the requirements 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.
Date: June 5, 1998
OpTel, Inc.
-----------
(Registrant)
By: /s/ Bertrand Blanchette
--------------------------------------
Name: Bertrand Blanchette
Title: Chief Financial Officer
