<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ..................to............................
333-24881
(Commission file number)
----------------------------
OPTEL, INC.
(Exact name of Registrant as specified in its charter)
-----------------------------
<TABLE>
<S> <C> <C>
DELAWARE OPTEL, INC. 95 - 4495524
1111 W. MOCKINGBIRD LANE
DALLAS, TEXAS 75247
(214) 634-3800
(State or other jurisdiction of (Name, address, including Zip (I.R.S. Employer Identification No.)
incorporation or organization) code of principal executive
offices)
</TABLE>
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
Yes [X] No[ ]
COMMON STOCK AS OF JUNE 30, 1998
<TABLE>
<CAPTION>
Common Stock Authorized Issued and Outstanding
<S> <C> <C>
CLASS A COMMON STOCK, $.01 PAR VALUE 8,000,000 164,272
CLASS B COMMON STOCK, $.01 PAR VALUE 6,000,000 2,353,498
CLASS C COMMON STOCK, $.01 PAR VALUE 300,000 225,000
</TABLE>
<PAGE> 2
OPTEL, INC.
QUARTERLY PERIOD ENDED MAY 31, 1998
CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION ............................................ 1
ITEM 1. FINANCIAL STATEMENTS .............................................. 1
UNAUDITED CONSOLIDATED BALANCE SHEETS ............................. 1
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS ................... 2
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS ................... 3
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY .......... 5
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS .......... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ..................................................... 8
BUSINESS .......................................................... 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ............................................. 10
PART II - OTHER INFORMATION ............................................... 14
ITEM 1. LEGAL PROCEEDINGS ......................................... 14
ITEM 2. CHANGES IN SECURITIES ..................................... 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ........................... 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ....... 14
ITEM 5. OTHER INFORMATION ......................................... 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .......................... 15
SIGNATURES ................................................................ 16
</TABLE>
<PAGE> 3
OPTEL, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31, August 31,
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 12,197 $ 87,305
Short term investments 87,507 --
Restricted investments 55,294 67,206
Accounts receivable, net 7,249 4,044
Prepaid expenses, deposits and other assets 2,272 1,836
Property and equipment, net 251,324 160,442
Intangible assets, net 160,255 82,583
--------- ---------
TOTAL $ 576,098 $ 403,416
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 4,773 $ 7,927
Accrued expenses and other liabilities 26,304 13,969
Deferred revenue and customer deposits 4,293 2,978
Convertible notes payable to stockholder -- 129,604
Notes payable and long-term obligations 348,633 221,653
Deferred acquisition liabilities 5,153 6,920
Dividends Payable 4,068 --
--------- ---------
Total liabilities 393,224 383,051
Commitments and Contingencies -- --
Stockholders' Equity (Deficit):
Preferred stock, $.01 par value; 1,000,000 shares authorized; none
issued and outstanding -- --
Series A preferred stock, $.01 par value; 10,000 shares authorized;
6,962 issued and outstanding 139,244 --
Series B preferred stock, $.01 par value; 2,000 shares authorized;
991 issued and outstanding 59,466 --
Class A common stock, $.01 par value; 8,000,000 shares authorized;
164,272 issued and outstanding 2 --
Class B common stock, $.01 par value; 6,000,000 shares authorized;
2,353,498 issued and outstanding 24 24
Class C common stock, $.01 par value; 300,000 shares authorized;
225,000 issued and outstanding 2 2
Additional paid-in capital 113,780 97,683
Accumulated deficit (129,644) (77,344)
--------- ---------
Total stockholders' equity 182,874 20,365
--------- ---------
TOTAL $ 576,098 $ 403,416
========= =========
</TABLE>
See notes to the Unaudited Consolidated Financial Statements
1
<PAGE> 4
OPTEL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Nine months ended
May 31, May 31, May 31, May 31,
1998 1997 1998 1997
-------- -------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
REVENUES:
Cable television $ 16,948 $ 9,706 $ 42,195 $ 26,915
Telecommunications 1,077 789 2,721 2,202
Total revenues 18,025 10,495 44,916 29,117
OPERATING EXPENSES:
Cost of services 7,794 5,315 20,213 14,016
Customer support, general and administrative 9,189 7,575 25,044 19,842
Depreciation and amortization 7,673 4,113 18,432 9,934
-------- -------- -------- --------
Total operating expenses 24,656 17,003 63,689 43,792
-------- -------- -------- --------
LOSS FROM OPERATIONS (6,631) (6,508) (18,773) (14,675)
OTHER (EXPENSE) INCOME
Interest expense on convertible notes payable to
Stockholder -- (3,763) (9,640) (10,671)
Other interest expense (9,890) (4,615) (26,276) (6,309)
Interest and other income, net 2,316 (489) 6,457 (13)
-------- -------- -------- --------
NET LOSS (14,205) (15,375) (48,232) (31,668)
Dividends on preferred stock (4,068) -- (4,068) --
-------- -------- -------- --------
NET LOSS ATTRIBUTABLE TO COMMON EQUITY $(18,273) $(15,375) $(52,300) $(31,668)
======== ======== ======== ========
BASIC AND DILUTED LOSS PER COMMON SHARE $ (6.84) $ (6.08) $ (20.04) $ (13.23)
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 2,673 2,530 2,610 2,393
======== ======== ======== ========
</TABLE>
See notes to the Unaudited Consolidated Financial Statements
2
<PAGE> 5
OPTEL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended Nine months ended
May 31, May 31, May 31, May 31,
1998 1997 1998 1997
--------- --------- --------- ---------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (14,205) $ (15,375) $ (48,232) $ (31,668)
Adjustments to reconcile net loss to net cash flow used
in operating activities:
Depreciation and amortization 7,673 4,113 18,432 9,934
Non cash interest expense 292 3,864 10,583 10,968
Non cash interest earned on restricted investments (786) (972) (2,713) (1,167)
Increase (decrease) in cash from changes in operating
assets and liabilities, net of effect of business
combinations:
Accounts receivable (1,735) (1,048) (3,228) (1,613)
Prepaid expenses, deposits and other assets (170) (188) (52) (742)
Deferred revenue and other liabilities 235 387 888 656
Accounts payable and accrued expenses 8,760 9,839 9,171 11,009
--------- --------- --------- ---------
Net cash flows provided by (used in) operating activities 64 620 (15,151) (2,623)
--------- --------- --------- ---------
INVESTING ACTIVITIES:
Purchases of businesses (4,267) (2,548) (41,285) (5,048)
Purchases of short-term investments (1,353) -- (127,507) --
Proceeds from sale of short-term investments 40,000 -- --
25,000
Proceeds from maturity of restricted investments -- -- 14,625 --
Purchases of restricted investments -- -- -- (79,609)
Acquisition of intangible assets (1,949) (2,879) (6,223) (7,710)
Purchases and construction of property and equipment (22,166) (16,665) (55,792) (36,760)
--------- --------- --------- ---------
Net cash flows used in investing activities (4,735) (22,092) (176,182) (129,127)
--------- --------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from bank financing, net of transaction costs (471) -- 119,381 --
Proceeds from convertible notes -- -- -- 33,700
Repayment of convertible notes -- -- -- (10,000)
Proceeds from issuance of senior notes payable and
common stock -- -- -- 220,224
Payments on notes payable and long-term obligations (1,049) (46) (3,156) (354)
--------- --------- --------- ---------
Net cash flows provided by (used in) financing activities (1,520) (46) 116,225 243,570
--------- --------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (6,191) (21,518) (75,108) 111,820
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 18,388 135,015 87,305 1,677
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,197 $ 113,497 $ 12,197 $ 113,497
========= ========= ========= =========
</TABLE>
3
<PAGE> 6
OPTEL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 2,992 $ 18,989 $ 249 $ 95
========== ========== ========== ==========
Increase in capital lease obligations $ 328 $ 1,634 $ 942 $ 462
========== ========== ========== ==========
Debt Converted to Preferred Stock $ 139,244 $ 139,244 -- --
========== ========== ========== ==========
Preferred stock issued for purchase of business $ 59,466 $ 59,466 -- --
========== ========== ========== ==========
Common stock issued for purchase of business $ 16,099 $ 16,099 -- --
========== ========== ========== ==========
Increase in dividends payable $ 4,068 $ 4,068 -- --
========== ========== ========== ==========
</TABLE>
See notes to the Unaudited Consolidated Financial Statements
4
<PAGE> 7
OPTEL, INC.
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Class A Common Class B Common Class C Common
Stock Stock Stock
----------------------- ----------------------- ----------------------- ----------
Additional
Shares Par Shares Par Shares Par Paid-In
Outstanding Value Outstanding Value Outstanding Value Capital
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at Sept. 1, 1997 -- $ -- 2,353,498 $ 24 225,000 $ 2 $ 97,683
Issuance of stock upon
debt conversion
Issuance of stock to
acquire the ICS operations 164,272 2 16,007
Net loss
Dividends accrued
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at May 31, 1998 164,272 $ 2 2,353,498 $ 24 225,000 $ 2 $ 113,780
========== ========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Class A Preferred Stock Class B Preferred Stock
Shares Liquidation Shares Liquidation Accumulated
Outstanding Value Outstanding Value Deficit
<S> <C> <C> <C> <C> <C>
Balance at Sept. 1, 1997 -- $ -- -- $ -- $ (77,344)
Issuance of stock upon
debt conversion 6,962 139,244
Issuance of stock to acquire
the ICS operations 991 59,466
Net loss (48,232)
Dividends accrued (4,068)
---------- ---------- ---------- ---------- ----------
Balance at May 31, 1998 6,962 $ 139,244 991 $ 59,466 $ (129,644)
========== ========== ========== ========== ==========
</TABLE>
See notes to the Unaudited Consolidated Financial Statements
5
<PAGE> 8
OPTEL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PREPARATION
The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10 - Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, the unaudited consolidated financial statements
contain all adjustments, consisting solely of adjustments of a normal
recurring nature, necessary to present fairly the financial position,
results of operations and cash flows for the periods presented. Operating
results for the three and nine month periods ended May 31, 1998 are not
necessarily indicative of the results that may be expected for the entire
fiscal year or any other interim period.
2. NET LOSS PER COMMON SHARE
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share", which is effective for periods ending after December 15,
1997, requires that companies disclose basic earnings per share using
only the weighted average number of common shares outstanding during a
period. Currently common stock equivalents are included in the
computation if they are material. Fully diluted earnings per share will
continue to be calculated in a manner similar to the current calculation.
The Company adopted SFAS No. 128 during the three month period ended
February 28, 1998 and there was no significant impact on the Company's
earnings per share.
3. ACQUISITION OF PHONOSCOPE
On October 27, 1997, the Company purchased the residential cable
television and associated fiber optic network assets of Phonoscope Ltd.
and the stock of several affiliated entities (collectively "Phonoscope").
The operations of Phonoscope are in Houston, Texas. The purchase price
consisted of $36.5 million in cash and was recorded as a purchase
acquisition.
4. CONVERTIBLE NOTE CONVERSION
Effective March 1, 1998, the Company's majority stockholder exchanged
$139.2 million of the Company's 15% Convertible Notes (including accrued
interest), constituting all of the outstanding 15% Convertible Notes, for
approximately 6,962 shares of Series A Preferred Stock. Such stock earns
dividends at the annual rate of 9.75%, payable in additional shares, and
is convertible under certain circumstances and at certain prices at the
option of the holder of the shares into shares of Class B Common Stock.
5. ACQUISITION OF CERTAIN ASSETS OF ICS
On April 13, 1998, the Company closed the initial phase of the
acquisition of the private cable television and telecommunications
service agreements and related assets of Interactive Cable Systems, Inc.
("ICS") in Houston, Dallas-Fort Worth, Los Angeles, San Diego, Miami-Fort
Lauderdale, Phoenix, Denver, San Francisco, Chicago, Atlanta,
Orlando-Tampa, Indianapolis, Austin and greater Washington D.C. As of May
31, 1998, the Company had acquired approximately 66,000 cable television
and telecommunications units under contract (or approximately 72% of the
approximately 90,000 units under contract to be acquired). A
corresponding percentage of the aggregate $80.8 million purchase price
remains in escrow subject to release upon fulfilment of closing
conditions. The Company expects the acquisition of the remaining units to
be completed over the next several months. The $80.8 million purchase
price is comprised of approximately $4.5 million in cash, approximately
$16.1 million in share of Class A Common Stock, approximately $59.4
million in shares of Series
6
<PAGE> 9
OPTEL, INC.
B Preferred Stock plus assumed liabilities of $.8 million. The Series B
Preferred Stock earns dividends at an annual rate of 8%, payable in
additional shares.
The acquisition of the ICS was accounted for using the purchase method of
accounting. The aggregate purchase price is allocated to the tangible and
intangible assets and liabilities acquired based upon their respective
fair values. The allocation of the aggregate purchase price reflected in
the financial statements and in the pro forma financial information is
preliminary, the final allocation of the purchase price is contingent
upon the final valuation of the acquired assets and the revision of other
estimates; however the allocation is not expected to differ materially
from the preliminary allocation.
The pro forma results presented below have been prepared to illustrate
the effects of the acquisition as if it had occurred on the first day of
the periods presented. The unaudited pro forma adjustments are based upon
available information and certain assumptions that the Company believes
are reasonable. The following pro forma financial information is not
necessarily indicative of either future results of operations or the
results that might have been achieved if such transactions had been
consummated on the indicated dates.
<TABLE>
<CAPTION>
Nine Months Ended
May 31, 1998 May 31, 1997
(in thousands, except per share data)
<S> <C> <C>
Total Revenues $ 55,618 $ 41,287
Loss from Operations (24,202) (23,171)
Net Loss (53,748) (40,223)
Basic and Diluted Loss per common Share $ (22.14) $ (17.13)
</TABLE>
5. SUBSEQUENT EVENTS
On June 5, 1998 the Company, filed a registration statement on Form S-1
with the SEC with respect to a proposed initial public offering of $100
million of its Class A Common Stock, par value $.01 per share.
On July 8, 1998, the Company completed a private placement of $200
million of its 11.5% Senior Notes due 2008 (the "1998 Senior Notes"). The
proceeds from the offering were used to repay and retire the Company's
senior secured credit facility ("Senior Facility") and will be used for
capital expenditures related to the purchase and installation of
communications equipment and for general corporate purposes, including
working capital related to its expansion into new markets.
7
<PAGE> 10
OPTEL, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS
OpTel is a leading network based provider of integrated communications
services, including local and long distance telephone and cable television
services, to residents of multiple dwelling units ("MDUs") in the United States.
As a rapidly growing integrated communications provider, OpTel continues to
build upon its position as the largest provider of private cable television
services to MDUs in the United States. In each market that it serves, OpTel
seeks to become the principal competitor in the MDU marketplace to the incumbent
local exchange carrier ("ILEC") and the incumbent franchise cable television
operator by providing a package of voice, video and Internet access services at
competitive prices. OpTel believes its contractual relationships with MDU owners
and associations and its ability to deliver an integrated service offering to
MDU residents over its own networks provide it with a competitive advantage.
MDUs comprise a wide variety of high-density residential complexes,
including high- and low-rise apartment buildings, condominiums, cooperatives,
town houses and mobile home communities. According to 1990 U.S. Census Bureau
data, there are more than 13.2 million dwelling units in MDUs with greater than
10 dwelling units in the United States. Within the MDU market, the Company
focuses on MDUs of 150 or more dwelling units ("Large MDUs"). Based on industry
sources, the Company believes that, within its existing markets, as of March 25,
1998, there were approximately 3.0 million dwelling units within these Large
MDUs.
The Company is currently building telecommunications infrastructure in
its serviced markets and expects, by the end of calendar 1999, to be in a
position to offer facilities based telecommunications services in each of its
major markets. The Company presently offers services where it has a right of
entry agreement ("Right of Entry") with an MDU owner to provide its cable
television and/or telecommunications services. The Company classifies a unit as
"passed" if it is within an MDU for which the Company has a Right of Entry and
the Company has connected and activated the equipment necessary to provide
services. As of May 31, 1998, the Company had 397,281 units passed for cable
television services (including 27,313 units for which owner consents have yet to
be delivered by ICS). At that date, OpTel had 217,106 cable television
subscribers and 7,700 telecommunication lines in service (including 14,751 cable
television customers and 654 telecommunication lines for which owner consents
have to be delivered by ICS).
OpTel began operations in April 1993 with a strategy of consolidating
the then fragmented "private cable" television, or non-franchise cable
television, industry serving MDUs. Securing long-term Rights of Entry has been
an integral element of this strategy. The Company's Rights of Entry typically
have original terms of 10 to 15 years (five years for Rights of Entry with
condominium associations). The weighted average unexpired term of the Company's
Rights of Entry was approximately eight years as of May 31, 1998 (assuming the
Company's exercise of available renewal options). Rights of Entry generally
provide financial incentives to the property owners to promote and sell the
Company's cable television and telecommunications services to MDU residents. The
Company provides video programming to MDUs primarily under exclusive Rights of
Entry. The Company initially offered shared tenant telecommunications services
("STS") to MDUs services under telephone Rights of Entry utilizing remote
private branch exchange ("PBX") switches. In accordance with its communications
strategy, the Company has begun the process of migrating its STS traffic to its
own central office switches and its own network facilities. The Company intends
to grow its business by negotiating additional Rights of Entry to serve MDUs
currently served by other providers and newly-constructed MDUs, by acquiring
other existing operators that serve MDUs, as appropriate, and by providing MDUs
it currently serves for cable television with additional services, such as
telephone and Internet access.
The Company currently provides cable television and telecommunications
services in several metropolitan areas including Houston, Dallas-Fort Worth, Los
Angeles, San Diego, Miami-Ft. Lauderdale, Phoenix, Denver, San Francisco,
Chicago, Atlanta and Orlando-Tampa. The Company has commenced offering central
office switched local exchange services in Houston and Dallas-Fort Worth and is
licensed as a competitive local exchange carrier ("CLEC")
8
<PAGE> 11
OPTEL, INC.
in each of its other major markets. The Company selected its current markets
based upon their growth, characteristics, competitive conditions, MDU
concentrations, favorable demographics and regulatory environment.
Since April 1995, OpTel has been indirectly majority owned by Le Groupe
Videotron Ltee ("GVL"), which also owns the second largest cable television
operator in Canada (based on number of subscribers). GVL has invested
approximately $250 million in OpTel in the form of equity capital and
subordinated convertible notes (including accrued interest). These invested
amounts have been critical to OpTel's growth. In addition, key members of the
Company's management team gained experience in the competitive offering of
telecommunications and cable television to residential markets while serving as
executives of a GVL affiliate in the United Kingdom. OpTel management's
extensive operating experience in both the telecommunications and cable
television industries, including the construction and design of networks and
sales and customer support, provides OpTel with significant expertise in
managing and developing an infrastructure to support voice, video and Internet
access operations.
OpTel was incorporated in Delaware in July 1994 as the successor to a
California limited partnership that was organized in April 1993. The Company's
principal offices are located at 1111 W. Mockingbird Lane, Dallas, Texas 75247,
and its telephone number is (214) 634-3800.
9
<PAGE> 12
OPTEL, INC.
INTRODUCTION
Set forth below is a discussion of the financial condition and results
of operations of the Registrant for the three and nine months ended May 31, 1998
(the "third quarter of fiscal 1998" and the "first nine months of fiscal 1998",
respectively). This discussion should be read in conjunction with the Unaudited
Consolidated Financial Statements and notes thereto for the three and nine
months ended May 31, 1998 included herein and the Registrant's Form 10-K for the
fiscal year ended August 31, 1997. References to fiscal years are to OpTel's
fiscal years which end on August 31 of each calendar year.
On April 13, 1998, the Company closed the initial phase of the
acquisition of the private cable television and telecommunications service
agreements and related assets of Interactive Cable Systems, Inc. ("ICS") in
Houston, Dallas-Fort Worth, Los Angeles, San Diego, Miami-Fort Lauderdale,
Phoenix, Denver, San Francisco, Chicago, Atlanta, Orlando-Tampa, Indianapolis,
Austin and greater Washington D.C. As of May 31, 1998, the Company had acquired
approximately 66,000 cable television and telecommunications units under
contract (or approximately 72% of the approximately 90,000 units under contract
to be acquired). A corresponding percentage of the aggregate $80.8 million
purchase price remains in escrow subject to release upon fulfilment of closing
conditions. The Company expects the acquisition of the remaining units to be
completed over the next several months. The $80.8 million purchase price is
comprised of approximately $4.5 million in cash, approximately $16.1 million in
share of Class A Common Stock, approximately $59.4 million in shares of Series B
Preferred Stock plus assumed liabilities of $.8 million. The Series B Preferred
Stock earns dividends at an annual rate of 8%, payable in additional shares.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
unaudited information derived from the Registrant's Unaudited Consolidated
Statements of Operations, included herein, expressed as a percentage of total
revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31 MAY 31 MAY 31 MAY 31
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES:
Cable television 94.0% 92.5% 93.9% 92.4%
Telecommunications 6.0 7.5 6.1 7.6
-------- -------- -------- --------
Total revenues 100.0 100.0 100.0 100.0
OPERATING EXPENSES:
Cost of services 43.2 50.6 45.0 48.1
Customer support, general and administrative 51.0 72.2 55.8 68.2
Depreciation and amortization 42.6 39.2 41.0 34.1
-------- -------- -------- --------
Total operating expenses 136.8 162.0 141.8 150.4
-------- -------- -------- --------
Loss from operations (36.8) (62.0) (41.8) (50.4)
Interest Expense, net (42.0) (84.5) (65.6) (58.4)
-------- -------- -------- --------
Net loss (78.8)% (145.5)% (107.4)% (108.8)%
======== ======== ======== ========
OTHER DATA:
EBITDA 5.8% (22.8)% (.8)% (16.3)%
======== ======== ======== ========
</TABLE>
10
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OPTEL, INC.
EBITDA represents income (loss) from operations before interest, income taxes,
and depreciation and amortization.
THREE MONTHS ENDED MAY 31, 1998 COMPARED WITH THREE MONTHS ENDED MAY 31, 1997
TOTAL REVENUES. Total revenues for the third quarter of fiscal 1998 increased by
$7.5 million or 71.7% to $18.0 million compared to revenues of $10.5 million for
the third quarter of fiscal 1997. Compared to the preceding quarter, total
revenues increased by 23.1% from $14.6 million.
CABLE TELEVISION. Cable television revenues in the third quarter of fiscal 1998
increased by $7.2 million, or 74.6%, to $16.9 million from $9.7 million in the
comparable period in fiscal 1997, reflecting both a 61.8% increase in the number
of customers and a 11.0% increase in the average monthly revenue per customer
which rose from $25.00 in the third quarter of fiscal 1997 to $27.74 in the
third quarter of fiscal 1998. Compared to the previous quarter revenue per
customer increased by .6% from $27.57. These increases result from a combination
of rate increases, a change in the mix of customers from bulk to retail, a shift
in mix to the cities with higher revenues per customer and, over the last year,
increased premium revenues as the Company's pay to basic ratio improved from
69.9% to 86.7%. The Company also continued to grow basic penetration, which
increased by 1.5% percentage points compared to the third quarter of fiscal
1997.
TELECOMMUNICATIONS. Telecommunications revenues in the third quarter of fiscal
1998 increased by 36.5% to $1.1 million, from $.8 million in the comparable
period in the preceding year, reflecting a 42.5% increase in the number of
lines. In Houston, the Company is in the final stages of converting properties
previously served by PBX to the Company's central office switch. In addition,
the Company recently launched its central office switch in Dallas. The Company
is also reviewing a series of alternatives for rapid switch deployment in other
markets.
COST OF SERVICES. Cost of services (programming, telecommunications service
costs and revenue sharing with owners of MDUs) increased by 46.6% to $7.8
million from $5.3 million because of an increase in subscribers mostly due to
the ICS acquisition.
EXPENSES. Expenses (customer support, general and administrative expenses) were
$9.2 million for the third quarter of fiscal 1998 compared to $7.6 million in
the third quarter of fiscal 1997. As a percent of revenues, SG&A expenses
declined from 72.2% to 51.0%. The increase in overall customer support, general
and administrative expenses was in line with the Company's budget and was
largely due to an increase in personnel associated with the expansion of the
Company's operations and for the planned roll out of the Company's
telecommunications services.
EBITDA. The Company's EBITDA for the quarter amounted to $1.0 million, compared
to negative EBITDA of $2.4 million in the preceding fiscal year. On a sequential
basis, EBITDA increased $.9 million from the previous quarter. The Company's net
cash flows provided by operating activities were $0.1 million, compared to $0.6
million in the preceding fiscal year. The Company's net cash flows used in
investing activities were $4.7 million, compared to $22.1 million in the
preceding fiscal year. The Company's net cash flows used in financing activities
were $1.5 million, compared to $0.1 million in the preceding fiscal year.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $7.7 million
for the third quarter of fiscal 1998 compared to $4.1 million in the third
quarter of fiscal 1997. The increase is primarily attributable to an increase in
cable and telephone systems and intangible assets resulting from continued
purchases and construction of such systems and from acquisitions of businesses.
11
<PAGE> 14
OPTEL, INC.
INTEREST EXPENSE, NET. Interest expense (net of interest income and amounts
capitalized) was $7.6 million for the third quarter of fiscal 1998, a decrease
of $1.3 million over net interest expense of $8.9 million for the third quarter
of fiscal 1997, reflecting the conversion of the convertible notes payable to
GVL into preferred stock at the beginning of the quarter.
NINE MONTHS ENDED MAY 31, 1998 COMPARED WITH NINE MONTHS ENDED MAY 31, 1997
TOTAL REVENUES. Total revenues for the nine months ended May 31, 1998 increased
by $15.8 million or 54.3% to $44.9 million compared to revenues of $29.1 million
for the nine months ended May 31, 1997.
CABLE TELEVISION. Cable television revenues for the nine months ended May 31,
1998 increased by $15.3 million, or 56.8%, to $42.2 million from $26.9 million
in the comparable period of 1997, reflecting both a 61.8% increase in the number
of customers and a 11.0% increase in the average monthly revenue per customer.
These increases result from a combination of rate increases, a change in the mix
of customers from bulk to retail, a shift in mix to the cities with higher
revenues per customer and increased premium revenues as the Company's pay to
basic ratio improved from 69.9% to 86.7%. The Company also continued to grow
basic penetration, which increased by 1.5% compared to the third quarter of
fiscal 1997.
TELECOMMUNICATIONS. Telecommunications revenues for the nine months ended May
31, 1998 increased by 23.6% to $2.7 million, from $2.2 million in the comparable
period in of 1997, reflecting a 42.5% increase in the number of lines. In
Houston, the Company is in the final stages of converting properties previously
served by PBX to the Company's central office switch. In addition, the Company
recently launched its central office switch in Dallas. The Company is also
reviewing a series of alternatives for rapid switch deployment in other markets.
COST OF SERVICES. Cost of services (programming, telecommunication service costs
and revenue sharing with owners of MDUs) increased by 44.2% to $20.2 million
from $14.0 million because of an increase in subscribers mostly due to the
Phonescape and ICS acquisitions.
EXPENSES. Expenses (customer support, general and administrative expenses) were
$25.0 million for the nine months ended May 31, 1998 compared to $19.8 million
in the comparable period of last year. As a percent of revenues, SG&A expenses
declined from 68.1% to 55.8%. The increase in overall customer support, general
and administrative expenses was in line with the Company's budget and was
largely due to an increase in personnel associated with the expansion of the
Company's operations and the planned roll out of the Company's
telecommunications services.
EBITDA. The Company's EBITDA for the nine months ended May 31, 1998 were
negative $.3 million, compared to negative $4.7 million in the comparable period
of last year. The Company's net cash flows used in operating activities were
$15.2 million, compared to $2.6 million in the preceding fiscal year. The
Company's net cash flows used in investing activities were $176.2 million,
compared to $129.1 million in the preceding fiscal year. The Company's net cash
flows provided by financing activities were $116.2 million, compared to $243.6
million in the preceding fiscal year.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $18.4 million
for the third quarter of fiscal 1998 compared to $9.9 million in the third
quarter of fiscal 1997. The increase is primarily attributable to an increase in
cable and telephone systems and intangible assets resulting from continued
purchases and construction of such systems and from acquisitions of businesses.
12
<PAGE> 15
OPTEL, INC.
INTEREST EXPENSE, NET. Interest expense (net of interest income and amounts
capitalized) was $29.5 million for the nine months ended May 31, 1998, an
increase of $12.5 million over net interest expense of $17.0 million in the
comparable period of last year. This increase reflects the increase in the
Company's debt associated with the convertible notes and the Senior Credit
Facility, which was not in place in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Registrant has generated net losses since its inception, resulting
in an accumulated deficit of $129.6 million as of May 31, 1998. During the past
year, the Registrant has required external funds to finance capital expenditures
associated with the completion of acquisitions in strategic markets, expansion
of its networks and operating activities. Net cash used in building the
Registrant's cable television and telecommunications networks and related
business activities was $103.3 million for the first nine months of fiscal 1998
(including $41.3 million for the acquisition of Phonoscope and ICS) compared to
$ 49.5 million for the first nine months of fiscal 1997.
From inception and until the issuance of the Senior Notes due 2005
("Senior Notes), the Registrant relied primarily on investments from GVL, its
principal stockholder, in the form of equity and convertible notes (the
"Convertible Notes') to fund its operations. Convertible Notes due to GVL
(including accrued interest) amounted to $139.2 million at February 28, 1998.
None of the Registrant's stockholders or affiliates are under any contractual
obligation to provide additional financing to the Registrant. As of March 1,
1998, GVL converted the Convertible Notes, including accrued interest, into a
like amount of Series A Preferred Stock. Such stock earns dividends at the
annual rate of 9.75%, payable in additional shares, and is convertible under
certain circumstances and at certain prices at the option of the holder of the
shares into shares of Class B Common Stock.
In February 1997, the Registrant issued the Senior Notes along with
225,000 shares of non-voting Class C Common Stock for aggregate net proceeds of
$219.2 million. Of this amount approximately $79.8 million was placed in an
escrow account in order to cover the first six semi - annual interest coupons on
the Senior Notes and of which $55.3 million remained at May 31, 1998.
In December 1997 the Registrant secured the Senior Facility which was
used to provide capital to fund development. The Senior Facility consisted of a
$125 million term loan bearing interest at LIBOR plus 3.5% and a $25 million
revolving credit commitment. The Senior Facility was repaid on July 7, 1998 in
conjunction with the Company's issuance of the 1998 Senior Notes.
In July 1998, the Registrant issued the 1998 Senior Notes to qualified
institutional buyers as defined in Rule 144A under the Securities Act of 1933,
as amended, for aggregate net proceeds of $194.5 million. Of this amount
approximately $21.8 million was placed in an escrow account in order to cover
the first two semi - annual interest coupons on the 1998 Senior Notes.
The Registrant's future results of operations will be materially
impacted by its ability to finance its planned business strategies. In addition
to the existing sources of capital the Registrant expects it will need
approximately an additional $200 million in financing over the next five years
in order to maximize its potential within its targeted markets in the United
States. A considerable portion of OpTel's capital expenditure requirements is
scaleable dependent upon the number of ROE contracts that the Registrant signs.
The foregoing estimates are based on certain assumptions, including the timing
of the signing of Rights of Entry, the conversion of MDUs currently served by
SMATV systems to the networks and the telecommunications roll out, each of which
may vary significantly from the Registrant's plan. The capital expenditure
requirements will be larger or smaller depending whether OpTel is able to
achieve its expected market share amongst the potential MDUs in its markets. The
Registrant plans to raise future financings from additional subordinated debt, a
public equity offering and/or private equity infusions. On June 5, 1998 the
Company, filed a registration statement covering the proposed initial public
offering of $100 million of its Class A Common Stock. There can be no assurance
that the offering will be consummated, or will be done on terms deemed
reasonable by the Company. There can be no assurance that the Registrant will be
successful in obtaining any necessary financing on reasonable terms or at all.
THE FOREGOING INCLUDES CERTAIN FORWARD LOOKING STATEMENTS THAT ARE
IDENTIFIED BY WORDS SUCH AS "EXPECT" AND SIMILAR EXPRESSIONS. ACHIEVEMENT OF
SUCH EXPECTATIONS IS SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING,
AMONG OTHERS, THE AVAILABILITY OF ADDITIONAL FINANCING ON A TIMELY BASIS AND ON
REASONABLE TERMS, OBTAINING VARIOUS REGULATORY APPROVALS AND SUCCESSFUL
MANAGEMENT OF THE REGISTRANT'S EXPANSION PLANS.
13
<PAGE> 16
OPTEL, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as set forth below, the Company is not a party to any legal
proceedings except for those arising in the ordinary course of business. The
Company does not believe that any legal proceeding to which it is a party will
have a material adverse impact on the Company's financial condition or results
of operations.
On April 27, 1998, the Civil Action was commenced against the Company in
the United States District Court for the Northern District of California by
Octel, charging the Company with trademark infringement, trade name
infringement, trademark dilution, and unfair competition based on its use of the
name "OpTel" and seeking to enjoin the Company from using the name "OpTel." The
Civil Action follows a now-suspended administrative proceeding in the PTO
relating to registration of the "OpTel" mark by the Company. The PTO found the
Company's application for registration to be allowable; however, Octel commenced
the PTO proceeding claiming that the Company's mark is confusingly similar to
the "Octel" mark used by that party in a related field, and claiming that the
Company's application had procedural deficiencies. During the course of the PTO
proceeding, the Company acquired rights to the marks "OpTel" and "OpTel
Communications" in the telecommunications field which are believed to predate
the rights of Octel to its trademark, and the Company commenced two further
proceedings against Octel in the PTO seeking cancellation of two of the
trademark registrations owned by Octel. The various proceedings in the PTO
between the Company and Octel were consolidated and thereafter suspended on May
15, 1998, in view of the commencement of the Civil Action. The Company believes
it has meritorious counterclaims in the Civil Action and intends to vigorously
defend against Octel's claims. The answer and counterclaims must be filed by the
Company in mid-June. Although the Company does not believe that its use of the
name "OpTel" infringes on the trademark or trade name rights of Octel or any
other person, there can be no assurance as to the outcome of the Civil Action or
that the Company will not be enjoined from the use of the name and trademark
"OpTel" or the proceedings in the PTO (if reinstated) or of any other action
that may be brought by any other party or that any such outcome would not
materially adversely affect the Company. See "Risk Factors - Use of the Name
OpTel."
On April 9, 1998, a purposed class action complaint was filed in the
district Court of Harris County, Texas by Gavin Stewart Clarkson, individually
and on behalf of all cable subscribers in the U.S. that have paid late fees to
either Phonoscope or the Company. The plaintiff, who formerly subscribed to
cable television services provided by Phonoscope, alleges that Phonoscope's
charging pre-established late fees for delinquent payments of cable subscription
charges constitutes an illegal collection of a penalty and that cable service
providers should only be entitled to their actual collection costs. The
plaintiff seeks to enjoin Phonoscope and OpTel from collecting, or attempting to
collect, such late fees. The case is in its very early stages and the Company
has not yet been served with process of the summons and complaint. No assurance
can be given as to its ultimate outcome or that any such outcome will not
materially adversely affect the Company. OpTel believes that it will have
meritorious factual and legal defenses, and intends to defend vigorously against
these claims.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
14
<PAGE> 17
OPTEL, INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
March 12, 1998 - Press release announcing agreement to purchase
Interactive Cable Systems, Inc.
April 1, 1998 - Press release announcing OpTel's second quarter
financial results.
April 17, 1998 - Press release announcing initial closing of the
purchase of assets from Interactive Cable Systems, Inc.
15
<PAGE> 18
OPTEL, INC.
SIGNATURES
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.
OPTEL, INC.
By: /s/ Bertrand Blanchette
--------------------------------------
(Signature)
BERTRAND BLANCHETTE
Chief Financial Officer
(Duly authorized officer and principal
financial officer of the Registrant)
Date: July 14, 1998
16
<PAGE> 19
OPTEL, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ -------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE OPTEL,
INC SIX MONTH PERIOD ENDED MAY 31, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAY-31-1998
<CASH> 12,197
<SECURITIES> 87,507
<RECEIVABLES> 5,726
<ALLOWANCES> (1,523)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 251,324
<DEPRECIATION> (26,908)
<TOTAL-ASSETS> 576,098
<CURRENT-LIABILITIES> 0
<BONDS> 348,633
198,710
0
<COMMON> 28
<OTHER-SE> (15,864)
<TOTAL-LIABILITY-AND-EQUITY> 576,098
<SALES> 0
<TOTAL-REVENUES> 44,916
<CGS> 0
<TOTAL-COSTS> 20,213
<OTHER-EXPENSES> 25,044
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,459
<INCOME-PRETAX> (48,232)
<INCOME-TAX> 0
<INCOME-CONTINUING> (48,232)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (48,232)
<EPS-PRIMARY> (20.04)
<EPS-DILUTED> (20.04)
</TABLE>
