<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISISION
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 February 28, 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)
____________________________
Delaware OPTEL, INC. 95 - 4495524
1111 W. Mockingbird Lane
Dallas, Texas 75247
(214) 634-3800
(State or other (Name, address, including Zip code of (I.R.S. Employer
jurisdiction of principal executive offices) Identification No.)
incorporation
or organization)
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 MARCH 31, 1998
Common Stock Authorized Issued and Outstanding
CLASS A COMMON STOCK, $.01 PAR VALUE 8,000,000 -
CLASS B COMMON STOCK, $.01 PAR VALUE 6,000,000 2,353,498
CLASS C COMMON STOCK, $.01 PAR VALUE 300,000 225,000
<PAGE>
OPTEL, INC.
QUARTERLY PERIOD ENDED FEBRUARY 28, 1998
CONTENTS
Page
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..................4
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS..................5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................................6
BUSINESS..................................................................6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.....................................................7
PART II - OTHER INFORMATION...................................................11
ITEM 1. LEGAL PROCEEDINGS...............................................11
ITEM 2. CHANGES IN SECURITIES...........................................11
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............11
ITEM 5. OTHER INFORMATION...............................................11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................11
SIGNATURES....................................................................11
<PAGE>
OPTEL, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28, AUGUST 31,
1998 1997
------------ ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 18,388 $ 87,305
Short term investments 111,154 -
Restricted investments 54,509 67,206
Accounts receivable, net 5,440 4,044
Prepaid expenses, deposits and other assets 1,852 1,836
Property and equipment, net 203,778 160,442
Intangible assets, net 110,050 82,583
--------- --------
TOTAL $ 505,171 $403,416
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 6,042 $ 7,927
Accrued expenses and other liabilities 16,120 13,969
Deferred revenue and customer deposits 4,004 2,978
Convertible notes payable to stockholder 139,244 129,604
Notes payable and long-term obligations 347,767 221,653
Deferred acquisition liabilities 5,656 6,920
--------- --------
Total liabilities 518,833 383,051
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 1,000,000
shares authorized; none issued and
outstanding - -
Class A common stock, $.01 par value;
8,000,000 shares authorized; none issued
and outstanding - -
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 97,683 97,683
Accumulated deficit (111,371) (77,344)
--------- --------
Total stockholders' equity (13,662) 20,365
--------- --------
TOTAL $ 505,171 $403,416
========= ========
</TABLE>
See notes to the Unaudited Consolidated Financial Statements
1
<PAGE>
OPTEL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1998 1997 1998 1997
------------ ------------ ------------ ------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES:
Cable television $ 13,774 $ 8,834 $ 25,247 $ 17,208
Telecommunications 865 712 1,644 1,414
------------ ------------ ------------ ------------
Total revenues 14,639 9,546 26,891 18,622
OPERATING EXPENSES:
Cost of services 6,654 4,437 12,419 8,702
Customer support, general and administrative 7,878 6,599 15,855 12,267
Depreciation and amortization 5,753 3,060 10,759 5,820
------------ ------------ ------------ ------------
Total operating expenses 20,285 14,096 39,033 26,789
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (5,646) (4,550) (12,142) (8,167)
OTHER (EXPENSE) INCOME
Interest expense on convertible notes payable to
stockholder (4,794) (3,806) (9,640) (6,907)
Other interest expense (9,489) (1,516) (16,386) (1,694)
Interest income 2,171 473 4,141 476
------------ ------------ ------------ ------------
NET LOSS $(17,758) $(9,399) $(34,027) $(16,292)
============ ============ ============ ============
NET LOSS PER COMMON SHARE $ (6.89) $ (4.01) $ (13.20) $ (7.01)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
2,578 2,342 2,578 2,323
============ ============ ============ ============
</TABLE>
See notes to the Unaudited Consolidated Financial Statements
2
<PAGE>
OPTEL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1998 1997 1998 1997
------------ ------------ ------------ ------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (17,757) $ (9,398) $ (34,027) $ (16,292)
Adjustments to reconcile net loss to net cash
Flow used in operating activities:
Depreciation and amortization 5,753 3,061 10,759 5,820
Non cash interest expense 5,120 3,905 10,291 7,104
Non cash interest earned on restricted investments (947) - (1,927) -
Increase (decrease) in cash from changes in operating
assets and liabilities, net of effect of business
combinations:
Accounts receivable (886) (105) (1,493) (566)
Prepaid expenses, deposits and other assets 326 99 118 (554)
Deferred revenue and other liabilities 806 188 653 268
Accounts payable and accrued expenses (5,573) 1,594 411 1,172
------------ ------------ ------------ ------------
Net cash flows used in operating activities (13,158) (656) (15,215) (3,048)
------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of businesses (1,193) - (37,018) (2,500)
Purchases of short-term investments (126,154) - (126,154) -
Proceeds from sale of short-term investments 15,000 - 15,000 -
Proceeds from maturity of restricted investments 14,625 - 14,625 -
Purchases of restricted investments - (79,804) - (79,804)
Acquisition of intangible assets (336) (2,293) (4,274) (4,830)
Purchases and construction of property and equipment (18,651) (13,369) (33,626) (20,095)
------------ ------------ ------------ ------------
Net cash flows used in investing activities (116,709) (95,466) (171,447) (107,229)
------------ ------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from convertible notes - 7,700 - 23,700
Proceeds from bank financing, net of transaction costs 119,852 - 119,852 -
Payment of deferred acquisition liabilities (1,477) - (1,477) -
Proceeds from issuance of senior notes payable and
common stock - 220,224 - 220,224
Payments on notes payable and long-term obligations (351) (170) (630) (309)
------------ ------------ ------------ ------------
Net cash flows provided by financing activities 118,024 227,754 117,745 243,615
------------ ------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (11,843) 131,632 (68,917) 133,338
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 30,231 3,383 87,305 1,677
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,388 $135,015 $ 18,388 $ 135,015
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 15,885 $ 80 $ 15,997 $ 162
============ ============ ============ ============
Increase in capital lease obligations $ 500 $ 84 $ 1,306 $ 480
============ ============ ============ ============
</TABLE>
See notes to the Unaudited Consolidated Financial Statements
3
<PAGE>
OPTEL, INC.
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(IN THOUSANDS)
CLASS B COMMON STOCK CLASS C COMMON STOCK
----------------------- -----------------------
ADDITIONAL
SHARES PAR SHARES PAR PAID-IN ACCUMULATED
OUTSTANDING VALUE OUTSTANDING VALUE CAPITAL DEFICIT
<S> <C> <C> <C> <C> <C> <C>
Balance at September 1, 1997 2,353 $24 225 $2 $97,683 $ (77,344)
Net loss - - - - - (34,027)
----------- ----- ----------- ----- ---------- -----------
Balance at February 28, 1998 2,353 $24 225 $2 $97,683 $(111,371)
=========== ===== =========== ===== ========== ===========
</TABLE>
See notes to the Unaudited Consolidated Financial Statements
4
<PAGE>
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 six month
periods ended February 28, 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. At February 28,
1998, the allocation of the purchase price is recorded on a preliminary
basis and is subject to adjustment.
4. SUBSEQUENT EVENTS
As of March 1, 1998, the Company's majority stockholder converted its 15%
convertible notes payable, including accrued interest, of $139.2 million
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.
On March 3, 1998, the Company entered into a definitive purchase agreement
to acquire certain cable television and telephone assets, including service
agreements and customers, of Interactive Cable Systems, Inc. ("ICS"). The
total purchase price is approximately $80.2 million and is comprised of $4
million of cash, Series B Preferred Stock with a liquidation preference of
$60 million, and 165,746 shares of Class A Common Stock having an agreed
value of $98 per share. On April 13, 1998, the Company entered into an
amendment to the purchase agreement and simultaneously completed an initial
closing representing approximately 60% of the assets which are the subject
of the aggregate acquisition. The Company expects the balance of the
acquisition to be completed over the next few months as ICS meets certain
conditions to the purchase of these remaining assets. Up to approximately
$35 million of the total purchase price is contingent upon ICS meeting these
conditions. The assets being acquired are located 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.
5
<PAGE>
OPTEL, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Business
OpTel, Inc. ("OpTel" or the "Registrant" or the "Company") is the largest
provider of private cable television services to residents of multiple dwelling
unit developments ("MDUs") in the United States and is expanding the
telecommunications services it offers to MDU residents. The Registrant provides
cable television and, where currently offered, telecommunications services to
MDU residents principally under long term contracts ("Rights of Entry") with
owners of MDUs. The Registrant's Rights of Entry are generally for a term of ten
to fifteen years (five years for Rights of Entry with condominium associations).
The weighted average unexpired term of the Registrant's cable television Rights
of Entry was approximately seven years as of February 28, 1998. The Registrant
currently provides cable television services in the metropolitan areas of
Houston, Dallas - Fort Worth, San Diego, Phoenix, Chicago, Denver, San
Francisco, Los Angeles, Miami - Ft Lauderdale, Tampa and Austin. The Registrant
will be expanding these services to Atlanta, Orlando, Indianapolis, and greater
Washington, D.C. as a result of the ICS acquisition described under Note 4,
"Subsequent Events", to the unaudited, consolidated financial statements
presented elsewhere in this report. The Registrant also provides
telecommunications services as a residential competitive local exchange carrier
("CLEC") in Houston and as a shared tenant services ("STS") reseller in Houston,
Dallas - Fort Worth, Austin, Denver, Los Angeles and Miami-Ft. Lauderdale. The
Registrant will be expanding these services to Atlanta, Orlando, Indianapolis,
and greater Washington, D.C. as a result of the ICS acquisition.
For regulatory purposes the Registrant is considered to be a private cable
television operator in most of the markets it serves. Private cable television
operators deliver video services to consumers without hard-wire crossings of
public rights of way. Consequently, private cable operators are not required to
obtain cable television franchises and are subject to considerably less
regulatory oversight than are traditional franchise cable television operators.
As a result, they have significant latitude in terms of system coverage, pricing
and customized delivery of services to selected properties. The Registrant has
limited universal service obligations and generally does not incur capital costs
to build its networks until it has entered into Rights of Entry from which it
reasonably expects to build an appropriate customer base.
The Registrant offers a full range of multichannel video programming
(including basic and premium services) which the Registrant believes is
competitive in both content and pricing with the programming packages offered by
its major competitors. The Registrant currently provides its telecommunications
services as a residential CLEC in Houston using its own class 5 central office
telephone switch and in other markets as an STS operator through private branch
exchange ("PBX") switches. The Registrant offers customers access to telephone
services comparable in scope and price to those provided by the incumbent local
exchange carrier and long distance carrier. The Registrant's telecommunications
strategy includes replacing its PBX switches with its own networked central
office switches.
The Registrant invests in networks because it believes that networks
provide the optimal mechanism for delivering bundled cable television and
telecommunications services. The Registrant's networks use technologies that are
capable of bi-directional transmission. The Registrant provides its video
programming to MDUs principally through 18-Gigahertz microwave ("18GHz"), 12-
Gigahertz microwave ("12GHz") where appropriate and fiber optic networks and
non-networked programming through Satellite Master Antenna Television ("SMATV")
systems. As of February 28, 1998, approximately 69% of the 320,288 units passed
for cable television are served by the Registrant's networks. These networks
generally provide up to 72 channels of video programming. The Registrant intends
to convert substantially all of its SMATV systems to microwave or fiber optic
networks by the end of fiscal 2000. The Registrant's networks will also
facilitate delivery of voice signal from each MDU to the central office switches
intended to be deployed by the Registrant in its major markets. The Registrant
intends to license additional spectrum, which it currently anticipates
principally will be in the 23-Gigahertz ("23GHz") band, which it will use to
provide bi-directional voice transmission.
OpTel was incorporated in the State of Delaware in July 1994, as the
successor to a Delaware corporation that was founded in April 1993. The
Registrant's principal offices are located at 1111 W. Mockingbird Lane, Dallas,
Texas 75247, and its telephone number is (214) 634-3800.
OpTel is majority owned by Le Groupe Videotron Ltee ("GVL"), owners of the
second largest cable television operator in Canada. Key members of the
Registrant's management team gained considerable experience in developing and
operating cable television and combined cable television/telecommunications
businesses while serving as executives of GVL and its affiliates in Canada and
GVL's former affiliates in the United Kingdom.
6
<PAGE>
OPTEL, INC.
INTRODUCTION
Set forth below is a discussion of the financial condition and results of
operations of the Registrant for the three and six months ended February 28,
1998 (the "second quarter of fiscal 1998" and the "first six 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
six months ended February 28, 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.
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 SIX MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 FEBRUARY 28 FEBRUARY 28
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES:
Cable television 94.1% 92.6% 93.9% 92.4%
Telecommunications 5.9 7.4 6.1 7.6
----------- ----------- ----------- -----------
Total revenues 100.0 100.0 100.0 100.0
OPERATING EXPENSES:
Cost of services 45.5 46.5 46.2 46.7
Customer support, general and administrative 53.8 69.1 59.0 65.9
Depreciation and amortization 39.3 32.1 40.0 31.3
----------- ----------- ----------- -----------
Total operating expenses 138.6 147.7 145.2 143.9
=========== =========== =========== ===========
Loss from operations (38.6) (47.7) (45.2) (43.9)
Interest Expense, net (82.7) (50.8) (81.4) (43.6)
----------- ----------- ----------- -----------
Net loss (121.3)% (98.5)% (126.6)% (87.5)%
=========== =========== =========== ===========
OTHER DATA:
EBITDA .7% (15.60)% (5.1)% (12.6)%
=========== =========== =========== ===========
</TABLE>
EBITDA represents income (loss) from operations before interest, income taxes,
and depreciation and amortization.
THREE MONTHS ENDED FEBRUARY 28, 1998 COMPARED WITH THREE MONTHS ENDED FEBRUARY
28, 1997
TOTAL REVENUES. Total revenues for the second quarter of fiscal 1998 increased
by $5.1 million or 53% to $14.6 million compared to revenues of $9.5 million for
the first quarter of fiscal 1997.
CABLE TELEVISION. Cable television revenues in the second quarter of fiscal 1998
increased by $5.0 million, or 56%, to $13.8 million from $8.8 million in the
comparable period in fiscal 1997, reflecting both a 38% increase in the number
of
7
<PAGE>
OPTEL, INC.
customers and a 15% increase in the average monthly revenue per customer which
rose from $23.90 in the second quarter of fiscal 1997 to $27.50 in the second
quarter of fiscal 1998. This increase results from a combination of rate
increases, a change in mix of customers to favor the cities with higher revenues
per customer and, increased premium revenues as the Company's pay to basic ratio
improved substantially from 68.5% to 83.9%. The Company also continued to grow
basic penetration which increased by 1.7 percentage points compared to the
second quarter of fiscal 1997.
TELECOMMUNICATIONS. Telecommunications revenues in the second quarter of fiscal
1998 increased by 21% to $0.9 million, from $0.7 million in the comparable
period in the preceding year. The Company's telecommunication lines penetration
over the comparable period rose 5.5 percentage points to 47.3%. In Houston, the
Company has substantially completed its conversion of properties previously
served by PBXs to the central office switch. In addition, the Company is
currently testing a further central office switch in Dallas and commercial
launch is expected in May 1998. The Company is also reviewing a series of
alternatives for rapid switch deployment in other markets.
The reduction in average monthly telephone revenue per subscriber to $41.60 in
the second quarter of fiscal 1998 from $51.30 in the second quarter of the
preceding year is largely due to an increase in the proportion of total
telephone lines supplied to student accommodation (from 25% of total lines to
35%) where usage is substantially lower than average and has been decreasing. As
the number of telephone lines is increased, management expects the influence of
the lower usage contracts to be substantially reduced. Despite having made
substantial rate reductions in fiscal 1997 which were in line with general
market trends, after adjusting for these lower usage contracts the average
monthly revenue per customer increased over the prior period to $56.40.
COST OF SERVICES. Gross margins improved by 1.1 percentage points over the same
period last year, reflecting an increase in basic cable margins, an improvement
of telecommunications margins with respect to customers served by the Houston
central office switch, partially offset by an increase in the penetration of
lower margin premium services.
EXPENSES. Expenses (customer support, general and administrative expenses) were
$7.9 million for the second quarter of fiscal 1998 compared to $6.6 million in
the second quarter of fiscal 1997. The increase in customer support, general and
administrative expenses were 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 recruitment for the roll out of the Company's telecommunications
services.
EBITDA. The Company's EBITDA for the quarter amounted to $107,000, compared to
negative EBITDA of $1.5 million in the comparable quarter of the preceding year.
INTEREST EXPENSE, NET. Interest expense (net of interest income and amounts
capitalized) was $12.1 million for the second quarter of fiscal 1998, an
increase of $7.3 million over net interest expense of $4.8 million for the
second quarter of fiscal 1997, reflecting the increase in the Company's debt
incurred principally to fund the build out of its network (see Liquidity and
Capital Resources).
8
<PAGE>
OPTEL, INC.
SIX MONTHS ENDED FEBRUARY 28, 1998 COMPARED WITH SIX MONTHS ENDED FEBRUARY 28,
1997
TOTAL REVENUES. Total revenues for the first six months of fiscal 1998 increased
by $8.3 million or 45% to $26.9 million compared to revenues of $18.6 million
for the first six months of fiscal 1997.
CABLE TELEVISION. Cable television revenues in the first six months of fiscal
1998 increased by $8.0 million, or 47%, to $25.2 million from $17.2 million in
the comparable period in fiscal 1997, reflecting both a 38% increase in the
number of customers and a 12% increase in the average monthly revenue per
customer which rose from $24.02 for the first six months of fiscal 1997 to
$26.88 in the first six months fiscal 1998. This increase results from a
combination of rate increases, a change in mix of customers to favor the cities
with higher revenues per customer and, increased premium revenues as the
Company's pay to basic ratio improved substantially from 68.5% to 83.9%. The
Company also continued to grow basic penetration which increased by 1.7
percentage points compared to the first six months of fiscal 1997.
TELECOMMUNICATIONS. Telecommunications revenues for the first six months of
fiscal 1998 increased by 14% to $1.6 million, from $1.4 million in the
comparable period in the preceding year. The Company's telecommunication lines
penetration over the comparable period rose 5.5 percentage points to 47.3. In
Houston, the Company has substantially completed its conversion of properties
previously served by PBXs to the central office switch. In addition, the Company
is currently testing a further central office switch in Dallas and commercial
launch is expected in May 1998. The Company is also reviewing a series of
alternatives for rapid switch deployment in other markets.
The reduction in average monthly telephone revenue per subscriber to $39.61 in
the first six months of fiscal 1998 from $50.61 in the first six months of the
preceding year is largely due to an increase in the proportion of total
telephone lines supplied to student accommodation (from 25% of total lines to
35%) where usage is substantially lower than average and has been decreasing. As
the number of telephone lines is increased, management expects the influence of
the lower usage contracts to be substantially reduced.
COST OF SERVICES. Gross margins improved by 0.5 percentage points over the same
period last year, reflecting an increase in basic cable margins, an improvement
of telecommunications margins with respect to customers served by the Houston
central office switch, partially offset by an increase in the penetration of
lower margin premium services.
EXPENSES. Expenses (customer support, general and administrative expenses) were
$15.9 million for the first six months of fiscal 1998 compared to $12.2 million
in the first six months of fiscal 1997. The increase in customer support,
general and administrative expenses were 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 recruitment for the roll out of the Company's
telecommunications services.
EBITDA. The Company's EBITDA for the first six months of fiscal 1998 amounted to
a negative $1.4 million compared to negative EBITDA of $2.3 million in the
comparable period in the preceding year.
INTEREST EXPENSE, NET. Interest expense (net of interest income and amounts
capitalized) was $21.9 million for the first six months of fiscal 1998, an
increase of $13.8 million over net interest expense of $8.1 million for the
second quarter of fiscal 1997, reflecting the increase in the Company's debt
incurred principally to fund the build out of its network (see Liquidity and
Capital Resources).
9
<PAGE>
OPTEL, INC.
LIQUIDITY AND CAPITAL RESOURCES
The Registrant has generated net losses since its inception, resulting in
an accumulated deficit of $111.3 million as of February 28, 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 $74.9 million for the first six months of fiscal
1998 (including $36 million for the acquisition of Phonoscope) compared to $
27.4 million for the first six months of fiscal 1997.
From inception and until the issuance of the Senior Notes, 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. However, 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 $220.2
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 $54.5 million remained at February 28, 1998. In July
1997 the Registrant successfully completed an exchange offer where 100% of the
Senior Notes were exchanged for 13% Senior Notes due 2005, Series B. The terms
of the Notes are substantially identical in all material respects (including
interest rate and maturity) to the Senior Notes except that the Series B Senior
Notes do not contain certain transfer restrictions and registration rights
relating to the Senior Notes.
In December 1997 the Registrant executed an agreement with group of
financial institutions for a $150 million senior secured credit facility (the
"Senior Facility") which is being used to provide capital to fund future
development. The Senior Facility consists of a $125 million term loan bearing
interest at LIBOR plus 3.5% and a $25 million revolving credit commitment. The
Senior Facility is secured by a first fixed and floating lien on substantially
all of the assets of the Registrant and its subsidiaries. The proceeds of the
term loan have been funded although availability under the Senior Facility will
be subject to the Registrant meeting certain performance criteria and the
Registrant is subject to customary covenants that include, among others,
limitations on additional indebtedness, limitations on certain payments,
investments and distributions and limitations on liens and certain asset sales.
The Company was in compliance or obtained waivers for all covenants as of
February 28, 1998. The Company is required to maintain in effect one or more
interest rate agreements with respect to the loans of not less than 50% of the
aggregate principal amount of the debt outstanding. Accordingly, in March 1998,
the Company entered into an interest swap agreement covering approximately $75
million of the Senior Facility.
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 an additional
$235 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 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. 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. 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.
10
<PAGE>
OPTEL, INC.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------------
11. Statement of computation of per share earnings.
10.1* Credit Agreement dated as of December 19, 1997 among TVMAX
Telecommunications, Inc. as Borrower, the Registrant, the lenders
listed therein, as Lenders, Goldman Sachs Credit Partners, L.P. as
Arranger and Syndication Agent, Canadian Imperial Bank of Commerce,
as Administrative Agent and General Electric Capital Corporation, as
Documentation Agent.
10.2* Purchase Agreement dated as March 4, 1998 among the Registrant,
Interactive Cable Systems, Inc. and ICS Licenses, Inc.
10.3* Stockholders' Agreement among the Registrant, Nomura Holding
American, Inc., MCI Telecommunications Corporation, VPC Corporation,
LeGroupe Videotron Ltee and Interactive Cable Systems, Inc.
* - to be filed by amendment.
(b) Reports on Form 8-K
-------------------------
January 26, 1998 Press release dated January 14, 1998 announcing
Registrant's first quarter fiscal 1998 results.
February 6, 1998 Press release dated February 2, 1998 announcing the
execution of a Senior Secured Credit Facility.
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: April 14, 1998
11
<PAGE>
OPTEL, INC.
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
FEBRUARY 28 FEBRUARY 28 FEBRUARY 28 FEBRUARY 28
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic:
Net loss $(17,758) $(9,399) $(34,027) $(16,293)
======== ======= ======== ========
Weighted average number of common
shares outstanding 2,578 2,342 2,578 2,323
======== ======= ======== ========
Net loss per common share $ (6.89) $ (4.01) $ (13.20) $ (7.01)
======== ======= ======== ========
Assuming Dilution:
Net loss $(17,758) $(9,399) $(34,027) $(16,293)
Interest expense related to convertible
notes, net of income tax expense 4,794 3,809 9,640 6,908
-------- ------- -------- --------
Adjusted net loss $(12,964) $(5,590) $(24,387) $ (9,385)
======== ======= ======== ========
Weighted average number of common
shares outstanding, assuming conversion
of convertible notes at beginning of
relevant period 4,234 3,826 4,196 3,640
======== ======= ======== ========
Net loss per common share $ (3.06) $ (1.46) $ (5.81) $ (2.58)
======== ======= ======== ========
</TABLE>
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE OPTEL,
INC. SIX MONTH PERIOD ENDED FEBRUARY 28, 1998 FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> FEB-28-1998
<CASH> 18,388
<SECURITIES> 111,154
<RECEIVABLES> 6,742
<ALLOWANCES> (1,302)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 203,778
<DEPRECIATION> (22,053)
<TOTAL-ASSETS> 505,171
<CURRENT-LIABILITIES> 0
<BONDS> 487,011
0
0
<COMMON> 26
<OTHER-SE> (13,688)
<TOTAL-LIABILITY-AND-EQUITY> 505,171
<SALES> 0
<TOTAL-REVENUES> 26,891
<CGS> 0
<TOTAL-COSTS> 12,419
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,026
<INCOME-PRETAX> (34,027)
<INCOME-TAX> 0
<INCOME-CONTINUING> (34,027)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34,027)
<EPS-PRIMARY> (13.20)
<EPS-DILUTED> (5.81)
</TABLE>
