<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, 1999
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 (I.R.S. Employer
jurisdiction of Zip code of principal executive Identification No.)
incorporation or offices)
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 JUNE 30, 1999
COMMON STOCK AUTHORIZED ISSUED AND OUTSTANDING
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
<PAGE> 2
OPTEL, INC.
QUARTERLY PERIOD ENDED MAY 31, 1999
<TABLE>
<CAPTION>
CONTENTS
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION......................................... 3
ITEM 1. FINANCIAL STATEMENTS........................................... 3
UNAUDITED CONSOLIDATED BALANCE SHEETS.......................... 3
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS................ 4
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS................ 5
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY....... 6
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS....... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.............................................. 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .... 17
PART II - OTHER INFORMATION............................................ 18
ITEM 1. LEGAL PROCEEDINGS...................................... 18
ITEM 2. CHANGES IN SECURITIES.................................. 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ....................... 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ... 18
ITEM 5. OTHER INFORMATION...................................... 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................... 19
SIGNATURES............................................................. 19
</TABLE>
2
<PAGE> 3
OPTEL, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31, AUGUST 31,
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents ..................................... $ 35,507 $ 123,774
Restricted investments ........................................ 39,235 63,207
Accounts receivable, net ...................................... 13,539 9,458
Prepaid expenses, deposits and other assets ................... 2,476 2,317
Property and equipment, net ................................... 326,045 268,044
Intangible assets, net ........................................ 157,932 160,370
--------- ---------
TOTAL $ 574,734 $ 627,170
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and other liabilities $ 48,824 $ 31,842
Deferred revenue and customer deposits ........................ 5,899 5,274
Notes payable and long-term obligations ....................... 428,631 429,278
--------- ---------
Total liabilities ................................... 483,354 466,394
Commitments and contingencies
Stockholders' equity: ......................................... -- --
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; 7,302 and 6,962 and outstanding .............. 156,794 146,115
Series B preferred stock, $.01 par value; 2,000 shares
Authorized; 1,043 and 991 issued and outstanding ......... 65,096 61,343
Class A common stock, $.01 par value; 8,000,000 shares
Authorized; 164,272 issued and
Outstanding .............................................. 2 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 .................................... 113,780 113,780
Accumulated deficit ........................................... (244,318) (160,490)
--------- ---------
Total stockholders' equity .......................... 91,380 160,776
--------- ---------
TOTAL ............................................... $ 574,734 $ 627,170
========= =========
</TABLE>
See notes to the Unaudited Consolidated Financial Statements
3
<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,
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
REVENUES:
Cable television $ 19,823 $ 16,948 $ 57,918 $ 42,195
Telecommunications 2,236 1,077 5,106 2,721
-------- -------- -------- --------
Total revenues 22,059 18,025 63,024 44,916
OPERATING EXPENSES:
Programming, access fees and revenue sharing 10,534 7,794 29,223 20,213
Customer support, general and administrative 15,918 9,189 42,253 25,044
Depreciation and amortization 8,736 7,673 26,733 18,432
-------- -------- -------- --------
Total operating expenses 35,188 24,656 98,209 63,689
-------- -------- -------- --------
LOSS FROM OPERATIONS (13,129) (6,631) (35,185) (18,773)
OTHER (EXPENSE) INCOME
Interest expense on convertible notes payable to
Stockholder -- -- -- (9,640)
Other interest expense (12,824) (9,890) (38,661) (26,276)
Interest and other income, net 1,171 2,316 4,450 6,457
-------- -------- -------- --------
NET LOSS (24,782) (14,205) (69,396) (48,232)
Earnings attributable to preferred stock (4,723) (4,068) (14,432) (4,068)
-------- -------- -------- --------
NET LOSS ATTRIBUTABLE TO COMMON EQUITY $(29,505) $(18,273) $(83,828) $(52,300)
======== ======== ======== ========
BASIC AND DILUTED LOSS PER COMMON SHARE $ (10.76) $ (6.84) $ (30.56) $ (20.04)
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
2,743 2,673 2,743 2,610
======== ======== ======== ========
</TABLE>
See notes to the Unaudited Consolidated Financial Statements
4
<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,
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (24,782) $ (14,205) $ (69,396) $ (48,232)
Adjustments to reconcile net loss to net cash flow used
in operating activities:
Depreciation and amortization 8,736 7,673 26,733 18,432
Non cash interest expense 338 292 1,029 10,583
Non cash interest earned on restricted investments (590) (786) (1,770) (2,713)
Increase (decrease) in cash from changes in operating
Assets and liabilities, net of effect of business
Combinations:
Accounts receivable (694) (1,735) (4,081) (3,228)
Prepaid expenses, deposits and other assets 117 (170) (159) (52)
Deferred revenue and other liabilities 215 235 626 888
Accounts payable and accrued expenses 18,065 8,760 16,982 9,171
--------- --------- --------- ---------
Net cash flows provided by (used in) operating activities 1,405 64 (30,036) (15,151)
INVESTING ACTIVITIES:
Purchases of businesses -- (4,267) -- (41,285)
Proceeds from maturity of restricted investments -- -- 25,742 14,625
Acquisition of intangible assets (1,848) (1,949) (6,401) (6,223)
Purchases and construction of property and equipment (23,521) (22,166) (75,896) (55,792)
--------- --------- --------- ---------
Net cash flows used in investing activities (25,369) (28,832) (56,555) (88,675)
FINANCING ACTIVITIES:
Proceeds from bank financing, net of transaction costs -- (471) -- 119,381
Payments on notes payable and long-term obligations (561) (1,049) (1,676) (3,156)
--------- --------- --------- ---------
Net cash flows provided by (used in) financing activities (561) (1,520) (1,676) 116,225
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (24,525) (29,838) (88,267) 12,399
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 60,032 129,542 123,774 87,305
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 35,507 $ 99,704 $ 35,507 $ 99,704
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 364 $ 2,992 $ 26,856 $ 18,989
========= ========= ========= =========
Increase in capital lease obligations $ -- $ 328 $ -- $ 1,634
========= ========= ========= =========
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
========= ========= ========= =========
Earnings attributable to preferred stock $ (4,723) $ (4,068) $ (14,432) $ (4,068)
========= ========= ========= =========
</TABLE>
See notes to the Unaudited Consolidated Financial Statements
5
<PAGE> 6
OPTEL, INC.
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A COMMON STOCK CLASS B COMMON STOCK CLASS C COMMON 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 September 1, 1998 164,272 $ 2 2,353,498 $ 24 225,000 $ 2 $ 113,780
Dividends declared
Net loss
Earnings attributable to
preferred stock
------- --- --------- ---- ------- --- ---------
Balance at May 31, 1999 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 September 1, 1998 6,962 $146,115 991 $ 61,343 $(160,490)
Dividends declared 340 52
Net loss (69,396)
Earnings attributable to
preferred stock 10,679 3,754 (14,432)
----- -------- ----- -------- ---------
Balance at May 31, 1999 7,302 $156,794 1,043 $ 65,097 $(244,318)
===== ======== ===== ======== =========
</TABLE>
See notes to the Unaudited Consolidated Financial Statements
6
<PAGE> 7
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, 1999 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
The computation of basic and diluted loss per common share is based on the
weighted average number of common shares outstanding during the period.
Common stock equivalents are included in the computation if they are
dilutive. For the three months and nine months ended May 31, 1998, the
convertible notes payable to stockholder, the Series A and Series B
preferred stock, and all outstanding stock options and warrants are
excluded from the diluted earnings per share calculation because of their
antidilutive effect. For the three months and nine months ended May 31,
1999, the Series A and Series B preferred stock and all outstanding stock
options and warrants are excluded from the diluted earnings per share
calculation because of their antidilutive effect. As a result, diluted loss
per common share for the three months and nine months ended May 31, 1998
and 1999 is considered to be the same as basic.
7
<PAGE> 8
OPTEL, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
OpTel, Inc. ("OpTel" or the "Company") is a leading network based provider
of integrated communications services, including local and long distance
telephone, cable television and high speed Internet access services, to
residents of multiple dwelling units ("MDUs") in the United States. The Company
was organized in April 1993 to build, acquire and operate private cable
television and telecommunications systems. The Company seeks to become the
principal competitor in the MDU market to the incumbent local exchange carrier
("ILEC") and the incumbent franchise cable television operator. The Company
currently provides cable television and telecommunications services in a number
of metropolitan areas including Houston, Dallas-Fort Worth, Los Angeles, San
Diego, Miami-Ft. Lauderdale, Phoenix, Denver, San Francisco, Chicago, Atlanta,
Orlando-Tampa, and Indianapolis. The Company has commenced offering central
office switched telecommunications services in Houston, Dallas-Fort Worth and
Phoenix and expects to offer such services in substantially all of its major
markets by the end of calendar 2000. In addition, the Company recently
commenced offering high speed Internet access at select MDUs in several of its
markets and intends to introduce its high speed Internet access services in all
of its major markets over the next 12 months.
The Company's growth to date has been achieved through a combination of
acquisitions of other operators, many of which operated satellite master
antenna television ("SMATV") systems, and the negotiation of new long-term
rights of entry agreements ("Rights of Entry").
OpTel believes that by utilizing a network infrastructure it can market a
competitive integrated package of voice, video and Internet access services in
its serviced markets. As of May 31, 1999, approximately 260,846 units
representing approximately 66% of the Company's units passed for cable
television were passed by the Company's networks. OpTel expects to connect a
majority of the MDUs currently served by SMATV systems to 18GHz or fiber optic
networks by the end of calendar 2000. Once an MDU is brought onto the Company's
networks, gross profit per subscriber at the MDU generally increases. In
addition, networks provide OpTel with the infrastructure necessary to deliver
an integrated package of communications services to subscribers at the MDU.
On April 13, 1998, OpTel completed the acquisition of the private cable
television and telecommunications services and related agreements of
Interactive Cable Systems, Inc. ("ICS"), representing approximately 90,000
cable television and telecommunication units under contract. 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") representing approximately
56,000 units under contract for cable television.
As of May 31, 1999, the Company had 436,487 and 115,460 units under
contract for cable television and telecommunications, respectively, and 397,476
and 49,507 units passed for cable television and telecommunications,
respectively. As of such date, OpTel had 217,750 cable television subscribers
and 16,560 telecommunication lines in service.
The Company's telecommunications revenue is comprised of monthly recurring
charges, usage charges and installation charges. Monthly recurring charges
include fees paid by subscribers for line rental and additional features. Usage
charges consist of fees paid by end users for long distance, fees paid by the
ILEC for terminating traffic within local access and transport areas
("intraLATA") to the Company's network and access charges paid by carriers for
long distance traffic originated and terminated to and from local customers.
The Company's cable television revenue is comprised of monthly recurring
charges paid by subscribers, monthly recurring charges paid by MDU owners for
bulk services and fees paid by subscribers for premium services and some
non-recurring charges. The Company offers its cable services under either
retail or bulk agreements. Under retail agreements, the Company contracts
directly with MDU residents. Under bulk agreements, the Company contracts
directly with MDU owners for basic cable to be provided to all units in a
particular MDU, but generally at lower rates per unit than under retail
agreements. The effect of this lower per unit rate on revenue is generally
offset by the 100% penetration achieved by bulk agreements. Premium services
are contracted for directly by subscribers under both types of agreements and
include fees paid for premium channels and pay-per-view. The Company
anticipates that its overall revenue per subscriber will increase as the number
of bulk contracts declines as a percentage of the Company's Rights of Entry.
Additionally, the Company believes that its revenue per subscriber will
increase as it migrates its SMATV properties onto the Company's networks.
8
<PAGE> 9
The line item programming, access fees and revenue sharing with respect to
the Company's telecommunications services consists of leased transport
facilities, terminating access charges from ILECs, fees paid to interexchange
carriers ("IXCs") for long distance and revenue sharing. Leased transport
facility costs may include the rental of T-1s to connect the MDUs to the ILEC
and may include costs associated with connecting the Company's network hubs to
each other and to its central office switch. Terminating access charges are
fees paid to the ILEC for intraLATA calls which are originated by OpTel's
subscribers and terminated on the ILECs network. Fees paid to IXCs for long
distance include costs associated with terminating toll calls initiated by
OpTel's subscribers. Revenue sharing costs represent certain fees paid to
owners of MDUs pursuant to the terms of Rights of Entry.
The line item programming, access fees and revenue sharing with respect to
the Company's cable television services consists of programming costs,
franchise fees and revenue sharing. Programming costs include those fees paid
to obtain the rights to broadcast certain video programming. Revenue sharing
costs represent certain fees paid to owners of MDUs pursuant to the terms of
Rights of Entry.
The Company's customer support, general and administrative expenses include
selling and marketing costs, customer service, engineering, facilities and
corporate and regional administration.
Through May 31, 1999, the Company had invested approximately $551 million
primarily in its cable television and telecommunications assets. The Company's
revenues have grown from $0.4 million for the year ended December 31, 1994 to
$65.0 million for fiscal 1998 and $63.0 million for the nine months ended May
31, 1999. While pursuing its investment and development strategy, the Company
has incurred substantial up-front operating expenses for marketing, customer
operations, administration and maintenance of facilities, general and
administrative expenses and depreciation and amortization in order to solicit
and service customers in advance of generating significant revenues. As a
result of these factors, the Company has generated operating losses of $35.2
million, $28.2 million, $22.8 million and $12.6 million for the nine months
ended May 31, 1999 and the years ended August 31, 1998, 1997, 1996,
respectively, as its cable television and telecommunications customer base has
grown. The Company reported positive EBITDA of $0.3 million for the year ended
August 31, 1998 as compared with negative EBITDA of $8.3 million and $3.9
million for the years ended August 31, 1997 and 1996, respectively. For the
nine months ended May 31, 1999, the Company reported negative EBITDA of $8.5
million. The decline in EBITDA is primarily the result of the increased costs
associated with the roll out of telecommunications services through central
office switches in the Company's major markets, the deployment of switch
collocation access and Internet access services, direct marketing efforts, and
staff increases to further improve service quality. In addition, the Company
incurred approximately $1 million in IPO related costs that were written off in
the period reported after the Company withdrew its proposed offering. EBITDA
represents income (loss) from operations before interest (net of interest
income and amounts capitalized), income taxes and depreciation and
amortization. EBITDA is not intended to represent cash flow from operations or
an alternative to net loss, each as defined by generally accepted accounting
principles. There can be no assurance that the Company will generate operating
profits or achieve positive EBITDA in the future.
For the nine months ended May 31, 1999, telephone passings, revenues and
line growth have been gaining momentum, however, cable passings, revenues and
subscribers remained flat. To address the situation, the Company has
reorganized marketing and sales management, has launched direct sales
activities and will introduce other direct marketing initiative in the future.
FACTORS AFFECTING FUTURE OPERATIONS
The principal operating factors affecting the Company's future results of
operations are expected to include (i) changes in the number of MDUs under
Rights of Entry, (ii) penetration rates for its services, (iii) the terms of
its arrangements with MDU owners, including revenue sharing and length of
contract, (iv) the prices that it charges its subscribers, (v) normal operating
expenses, which in the cable television business principally consist of
programming expenses and in the telecommunications business principally consist
of fees paid to long distance carriers, the cost of trunking services and other
local exchange carrier charges, as well as, in each case, billing and
collection costs, technical service and maintenance expenses and customer
support services, (vi) financing costs, and (vii) capital expenditures as the
Company commences offering central office switched telecommunication services
in additional markets and completes its conversion of SMATV systems. The
Company's results of operations may also be impacted by future acquisitions, as
well as by various initiatives to broaden the Company's service offering and
addressable market. The first of such initiatives is to collocate network
facilities for telecommunication services in selected ILEC end offices in
certain of its markets. The Company will select the ILEC end offices in which
it will collocate based upon MDU concentration. Through collocation, the
Company will lease the ILEC's transport network on an unbundled basis to
initially reach a subscriber. The Company believes collocation will decrease
the time required to provide telephone services to a subscriber, increase the
Company's addressable market by providing a cost effective means of servicing
smaller MDUs and, over time, promote new Rights of Entry. During the third
quarter of fiscal 1999, the Company activated three collocation sites in
Houston with an addressable MDU market of approximately 29,000 units. The
Company has filed
9
<PAGE> 10
with respective ILECs, and received confirmation, to similarly collocate at
twelve additional end offices in Houston and eight in Dallas. The Company
intends to employ direct marketing efforts to secure customers at properties
that can be served through collocation even without Rights of Entry.
The Company anticipates that it will continue to have higher churn for its
video services than is typical of an incumbent franchise cable television
operator due to the frequent turnover of MDU tenants. The Company does not
believe that churn is as significant an operating statistic for these services
as it is for franchise cable television operators. This churn generally does
not result in a reduction in overall penetration rates since the outgoing
subscriber has generally been quickly replaced by a new tenant in the unit.
This may result in installation revenue per unit that is higher than for a
franchise cable television operator. Although this may also require higher
installation expenses per subscriber, because of the layout of MDUs and the
Company's ability to obtain "permission to enter" from the MDU owner,
installations can often be completed when the subscriber is not home, limiting
the expense of installation. With respect to the Company's telecommunications
services, the Company believes that its best opportunity for a sale arises when
a subscriber first signs a lease and takes occupancy in an MDU. Accordingly,
the Company believes that during the early stages of the roll out of its
central office switched telecommunications services in a market it benefits
from the high rate of MDU resident turnover.
RESULTS OF OPERATIONS
All of the Company's acquisitions have been accounted for by the purchase
method of accounting. As a result of the Company's growth through acquisitions
and the change in fiscal year, the Company's historical financial results are
not directly comparable from period to period, nor are they indicative of
future results of operations in many respects.
The following table sets forth, for the periods indicated, certain
operating and financial information relating to the Company.
<TABLE>
<CAPTION>
AS OF AUGUST 31, AS OF MAY 31,
------------------------------------ --------------------
1996 1997 1998 1998 1999
----------- ---------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING DATA
CABLE TELEVISION
Units under contract(1) ................ 241,496 295,149 426,444 424,876 436,487
Units passed(2) ........................ 225,433 254,032 392,699 390,770 397,476
Basic subscribers ...................... 114,163 132,556 213,046 213,903 217,750
Basic penetration(3) ................... 50.6% 52.2% 54.3% 54.7% 54.8%
Average monthly revenue per basic
Subscriber(4) ........................ $ 22.70 $ 24.94 $ 29.05 $ 24.74 $ 29.50
TELECOMMUNICATIONS
Units under contract(1) ................ 20,945 39,831 93,562 88,955 115,460
Units passed(2) ........................ 12,364 16,572 34,895 32,355 49,507
Lines(5) ............................... 4,126 6,185 8,990 7,446 16,560
Line penetration(6) .................... 33.4% 37.3% 25.8% 23.0% 33.4%
Average monthly revenue per line(7) .... $ 42.10 $ 47.23 $ 46.09 $ 50.63 $ 47.28
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED AUGUST 31, MAY 31,
--------------------------------------- ------------------------
1996 1997 1998 1998 1999
------------ ------------ ------------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FINANCIAL DATA
Revenues:
Cable television ...................... $ 25,893 $ 36,915 $ 61,081 $ 42,195 $ 57,918
Telecommunications .................... 1,711 2,922 3,882 2,721 5,106
--------- --------- --------- --------- ---------
Total revenues ................ $ 27,604 $ 39,837 $ 64,963 $ 44,916 $ 63,024
EBITDA(8) ............................... $ (3,900) $ (8,291) $ 291 $ (341) $ (8,452)
Net cash flows used in operating
activities ............................ $ (453) $ (15,935) $ (26,268) $ (15,151) $ (30,036)
Net cash flows used in investing
activities ............................ (72,037) (143,125) (121,532) (176,182) (56,555)
Net cash flows provided by (used in)
financing activities .................. 72,131 244,688 184,269 116,225 (1,676)
Net loss ................................ (18,430) (48,535) (74,398) (48,232) (69,396)
</TABLE>
- ------------
(1) Units under contract represents the number of units currently passed and
additional units with respect to which the Company has entered into Rights
of Entry for the provision of cable television and telecommunications
services, respectively, but which the Company has not yet passed and which
the Company expects to pass within the next five years. In April 1998,
OpTel closed the ICS acquisition the terms of which required ICS to obtain
transfer consents for certain properties, the absence of which would permit
the return to ICS of these properties. During the three months ended May
31, 1999, OpTel returned properties representing an aggregate 7,287 units
(6,511 cable and 776 telephone) to ICS. The operating data as of August 31,
1998 and May 31, 1998 has been restated to reflect the return of these
units, which also represent 3,203 cable customers and 254 telephone lines.
(2) Units passed represents the number of units with respect to which the
Company has connected its cable television and telecommunications systems,
respectively.
10
<PAGE> 11
(3) Basic penetration is calculated by dividing the total number of basic
subscribers at such date by the total number of units passed.
(4) Represents average monthly revenue divided by the average number of basic
subscribers for the fiscal periods ended as of the date shown.
(5) Lines represent the number of telephone lines currently being provided to
telecommunications subscribers. A telecommunications subscriber can
subscribe for more than one line. The Company has revised its method of
reporting lines to reflect only one line in service where multiple
customers share a single line. The Company has restated the number of lines
previously reported to reflect this change.
(6) Line penetration is calculated by dividing the total number of
telecommunications lines at such date by the total number of units passed.
(7) Represents average monthly revenue divided by the average number of lines
for the fiscal period ended as of the date shown.
(8) EBITDA represents income (loss) from operations before interest (net of
interest income and amounts capitalized), income taxes and depreciation and
amortization. EBITDA is not intended to represent cash flow from operations
or an alternative to net loss, each as defined by generally accepted
accounting principles. In addition, the measure of EBITDA presented herein
may not be comparable to other similarly titled measures by other
companies. The Company believes that EBITDA is a standard measure commonly
reported and widely used by analysts, investors and other interested
parties in the cable television and telecommunications industries.
Accordingly, this information has been disclosed herein to permit a more
complete comparative analysis of the Company's operating performance
relative to other companies in its industry.
Three months ended May 31, 1999 compared with three months ended May 31, 1998.
TOTAL REVENUES. Total revenues for the third quarter of fiscal 1999
increased by $4.0 million, or 22%, to $22.1 million compared to revenues of
$18.0 million for the third quarter of fiscal 1998.
CABLE TELEVISION. Cable television revenues for the third quarter of fiscal
1999 increased by $2.9 million, or 17%, to $19.8 million from $16.9 million for
the comparable period in fiscal 1998. This reflected a 12% increase in the
average quarterly number of basic subscribers and an 8.5% increase in the
average monthly revenue per basic subscribers. The average monthly revenue per
basic subscriber increased from $27.74 for the third quarter of fiscal 1998 to
$30.10 for the third quarter of fiscal 1999. The increase in average monthly
revenue per basic subscribers mainly resulted from annual rate increases and
rate increases following property upgrades. The Company increased basic
penetration from 54.7% to 54.8% year-over-year.
TELECOMMUNICATIONS. Telecommunications revenues for the third quarter of
fiscal 1999 increased by 108% to $2.2 million, up from $1.1 million for the
comparable period of the preceding year, reflecting a 122% increase in the
number of lines compared to the third quarter of fiscal 1998 and an increase in
the average monthly revenue per line from $50.63 to $51.40. Since launching
central office switches in Houston and Dallas during fiscal 1998, the Company
has increased its efforts to market its telephone product in these markets.
PROGRAMMING, ACCESS FEES AND REVENUE SHARING. Programming, access fees and
revenue sharing increased from $7.8 million for the third quarter of fiscal
1998 to $10.5 million for the third quarter of fiscal 1999. The increased cost
is primarily attributed to the subscriber growth mentioned above and to
increases in rates charged by programming suppliers.
CUSTOMER SUPPORT, GENERAL AND ADMINISTRATIVE. Customer support, general and
administrative expenses were $15.9 million for the third quarter of fiscal 1999
compared to $9.2 million for the third quarter of fiscal 1998. The increase in
customer support, general and administrative expenses was largely due to the
accelerated roll-out of telephony central office switches, the deployment of
switch collocation access and Internet access services, direct marketing
efforts, and staff increases to further improve service quality. The third
quarter expenses also include approximately $1 million in costs associated with
the withdrawn initial public offering of the Company's common stock.
EBITDA. The Company's EBITDA (earnings before interest, income taxes, and
depreciation and amortization) for the third quarter of fiscal 1999 was
negative $4.4 million compared to positive $1.0 million for the third quarter
of fiscal 1998. EBITDA is not intended to represent cash flow from operations
or an alternative to net loss, each as defined by generally accepted accounting
principles.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $8.7
million for the third quarter of fiscal 1999 compared to $7.7 million for the
third quarter of fiscal 1998. This 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.
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INTEREST EXPENSE. Interest expense (net of amounts capitalized) was $12.8
million for the third quarter of fiscal 1999, a $2.9 million increase from
interest expense of $9.9 million for the third quarter of fiscal 1998. The
increase is attributable to higher debt levels and higher interest rates on the
11.5% Senior Notes which replaced a bank facility with lower rates.
INTEREST AND OTHER INCOME. For the third quarter of fiscal 1999, interest
and other income was $1.2 million, compared to $2.3 million for the third
quarter of fiscal 1998 reflecting a decrease of $1.1 million. This is primarily
the result of the Company having a smaller average balance of invested cash
during the third quarter of fiscal 1999 than fiscal 1998. The Company invests
its cash in money market funds and other short-term, high grade instruments
according to its investment policy and certain restrictions of its
indebtedness.
Nine months ended May 31, 1999 compared to nine months ended May 31, 1998
TOTAL REVENUES. Total revenues for the first nine months of fiscal 1999
increased by $18.1 million, or 40%, to $63.0 million compared to revenues of
$44.9 million for the first nine months of fiscal 1998. The increase in total
revenue is principally the result of the acquisitions of ICS in April 1998 and
Phonoscope in October 1997, and the inclusion of the revenues from those
acquisitions for the full nine month period.
CABLE TELEVISION. Cable television revenues for the first nine months of
fiscal 1999 increased by $15.7 million, or 37%, to $57.9 million from $42.2
million for the comparable period in fiscal 1998. This reflected a 26% increase
in the average number of basic subscribers and a 9% increase in the average
monthly revenue per basic subscriber. The average monthly revenue per basic
subscriber increased from $27.74 for the first nine months of fiscal 1998 to
$29.50 for the first nine months of fiscal 1999. The increase in average monthly
revenue per basic subscriber mainly resulted from annual rate increases and rate
increases following property upgrades. The Company increased basic penetration
to 55%.
TELECOMMUNICATIONS. Telecommunications revenues for the first nine months
of fiscal 1999 increased by 88% to $5.1 million, up from $2.7 million for the
comparable period of the preceding year, reflecting a 50% increase in the
average number of lines compared to the first nine months of fiscal 1998 and a
7% decrease in the average monthly revenue per line, which fell from $50.63 to
$47.28. Since launching central office switches in Houston and Dallas during
fiscal 1998, the Company has increased its efforts to market its telephone
product in these markets. The decrease in average monthly revenue reflects a
combination of (i) seasonal variations in long distance usage; (ii) the impact
of incentives offered by the Company to subscribers as part of the initial
marketing of its central office switched services in Dallas; and (iii) the
impact of changes in call volumes. The Company does not believe the changes in
call volumes are reflective of a trend. However, because of the relatively
small number of lines serviced by the Company, changes in the number or length
of calls made by a small group of individual subscribers can have a noticeable
impact on the average revenue per line.
PROGRAMMING, ACCESS FEES AND REVENUE SHARING. Programming, access fees and
revenue sharing increased from $20.2 million for the first nine months of
fiscal 1998 to $29.2 million for the first nine months of fiscal 1999. The
increased cost is primarily attributed to the subscriber growth mentioned above
and to increases in rates charged by programming suppliers.
CUSTOMER SUPPORT, GENERAL AND ADMINISTRATIVE. Customer support, general and
administrative expenses were $42.3 million for the first nine months of fiscal
1999 compared to $25.0 million for the first nine months of fiscal 1998. The
increase in customer support, general and administrative expenses was largely
due to the accelerated roll-out of telephony central office switches, the
deployment of switch collocation access and Internet access services, direct
marketing efforts, staff increases to further improve service quality, and an
increase in personnel associated with the ICS and Phonoscope acquisitions. The
fiscal 1999 expenses also include approximately $1 million in costs associated
with the withdrawn initial public offering of the Company's common stock and
$.6 million associated with the reorganization of the management of certain
departments.
EBITDA. The Company's EBITDA (earnings before interest, income taxes, and
depreciation and amortization) for the first nine months of fiscal 1999 was
negative $8.5 million compared to negative $0.3 million for the first nine
months of fiscal 1998. EBITDA is not intended to represent cash flow from
operations or an alternative to net loss, each as defined by generally accepted
accounting principles.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $26.7
million for the first nine months of fiscal 1999 compared to $18.4 million for
the first nine months of fiscal 1998. This 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.
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INTEREST EXPENSE. Interest expense (net of amounts capitalized) was $38.7
million for the first nine months of fiscal 1999, an increase from interest
expense of $35.9 million for the first nine months of fiscal 1998. This
increase is attributable to higher debt levels and higher interest rates on the
11.5% Senior Notes which replaced a bank facility with lower rates offset by
the elimination of interest expense associated with the convertible notes
payable to stockholders in March 1998 as a result of the conversion of these
notes to preferred stock.
INTEREST AND OTHER INCOME. For the first nine months of fiscal 1999,
interest and other income was $4.4 million, compared to $6.5 million for the
first nine months of fiscal 1998, reflecting a decrease of $2.1 million. This
is primarily the result of the Company having a smaller average balance of
invested cash during the first nine months of fiscal 1999 than fiscal 1998. The
Company invests its cash in money market funds and other short-term, high grade
instruments according to its investment policy and certain restrictions of its
indebtedness.
LIQUIDITY AND CAPITAL RESOURCES
The development of OpTel's business and the expansion of its network have
required substantial capital, operational and administrative expenditures, a
significant portion of which have been incurred before the realization of
revenues. These expenditures will continue to result in negative cash flow
until an adequate customer base is established and revenues are realized.
Although its revenues have increased in each of the last three years, OpTel has
incurred substantial up-front operating expenses for marketing, customer
operations, administration and maintenance of facilities, general and
administrative expenses and depreciation and amortization in order to solicit
and service customers in advance of generating significant revenues. As a
result of these factors, the Company has generated operating losses of $35.2
million, $28.2 million, $22.8 million and $12.6 million for the nine months
ended May 31, 1999 and for the years ended August 31, 1998, 1997, and 1996,
respectively, as its cable television and telecommunications customer base has
grown. The Company reported net losses of $69.4 million for the nine months
ended May 31, 1999 as compared with net losses of $74.4 million, $48.5 million
and $18.4 million for the years ended August 31, 1998, 1997 and 1996,
respectively.
From inception and until February 1997, the Company relied primarily on
investments from Le Groupe Videotron Ltee ("GVL"), its principal stockholder,
in the form of equity and convertible notes to fund its operations. Effective
March 1, 1998, GVL converted all of the outstanding GVL notes, including
accrued interest, into shares of Series A Preferred with an aggregate
liquidation preference of approximately $139.2 million. The Series A Preferred
Shares earn dividends at the annual rate of 9.75%, initially payable in
additional shares. None of the Company's stockholders or affiliates is under
any contractual obligation to provide additional financing to the Company.
In February 1997, the Company issued $225 million principal amount at
maturity of 13% Senior Notes Due 2007 (the "1997 Notes") along with 225,000
shares of Class C Common for aggregate net proceeds of $219.2 million. Of this
amount, approximately $79.6 million was placed in an escrow account in order to
cover the first six semi-annual interest payments due on the 1997 Notes. At May
31, 1999, approximately $28.5 million remained in such escrow account
representing the interest payments that will be due through February 2000. On
July 7, 1998, the Company issued $200 million principal amount of 11.5% Senior
Notes due 2008 (the "1998 Notes"). The aggregate net proceeds of the 1998 Notes
were approximately $193.5 million. Of this amount, approximately $126.3 million
was used to repay all outstanding amounts under a then existing credit facility
and to pay other costs associated with terminating the credit facility and
approximately $22.0 million was placed in an escrow account to fund the first
two semi-annual interest payments on the 1998 Notes. At May 31, 1999,
approximately $10.7 million remained in such escrow account representing the
interest payment that was paid on July 1, 1999.
During the past year, the Company 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 the acquisition and construction of the Company's cable television and
telecommunications networks and related business activities was $82.3 million
for the first nine months of fiscal 1999 compared to $129.0 million for fiscal
1998 and $78.2 million for fiscal 1997.
The Company's future results of operations will be materially impacted by
its ability to finance its planned business strategies. The Company expects
that it will spend approximately $650 million on capital expenditures over the
next five years. The Company expects it will need approximately $650 million in
financing over the next five years in order to achieve its business strategy
within its targeted markets. The Company will incur approximately $260 million
in cash interest expense on its outstanding indebtedness, including the $39.2
million currently held in escrow, over the next five years. A considerable
portion of the Company's capital expenditure requirements is scaleable
dependent upon the number of Rights of Entry that the Company signs. The
foregoing estimates
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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 networks
and the telecommunications roll out, each of which may vary significantly from
the Company's plan. The capital expenditure requirements will be larger or
smaller depending upon whether the Company is able to achieve its expected
market share among the potential MDUs in its markets. The Company plans to
finance its future capital requirements through additional public or private
equity or debt offerings. There can be no assurance that the Company will be
successful in obtaining any necessary financing on reasonable terms or at all.
Having withdrawn its proposed initial public offering in May 1999, the
Company is exploring financing alternatives to fund its operations for the
following twelve months. The Company is in preliminary negotiations with GVL
for a portion of the required financing for this period. There can be no
assurance that the Company will be successful in obtaining any necessary
financing on reasonable terms or at all. Moreover, required financing may be
conditioned on third party consents and waivers, including, as discussed below,
by holders of the Company's Notes. The Company currently has cash on hand that
it expects will be sufficient to fund its operations for approximately 80 days.
Under the terms of the more restrictive of the Company's indentures
governing its outstanding Notes, the Company can only incur approximately $38
million of additional indebtedness. The aggregate amount of indebtedness which
can be incurred by the Company under its more restrictive indenture is directly
related to the number of cable television subscribers served by the Company. As
a result, growth of the Company's telecommunications business, where the
Company has focused significant management attention and resources, will not
increase the Company's ability to incur indebtedness under the terms of the
more restrictive indenture. The Company expects that it will need to incur
indebtedness in excess of its current capacity.
In addition, GVL has the power to prevent the Company from obtaining
additional debt or equity financing. GVL is party to an indenture which limits
the aggregate amount of indebtedness which can be incurred by GVL and its
subsidiaries, including the Company, taken as a whole (based upon a ratio of
total consolidated indebtedness to consolidated operating cash flow). As a
result, GVL's strategies and the operating results of its subsidiaries other
than the Company may affect the ability of the Company to incur additional
indebtedness. As of May 31, 1999, GVL was able to incur approximately Cdn. $640
million (approximately $435 million based on an exchange rate of $1.00 = Cdn.
$1.4712 as reported by the Wall Street Journal on July 9, 1999) of indebtedness
under its indenture. There can be no assurance that this number may not
decrease substantially in the future. There can be no assurance that GVL will
not restrain the Company's growth or limit the indebtedness incurred by the
Company so as to ensure GVL's compliance with the terms of its debt
instruments.
The Company benefits from the fact that it does not require a substantial
capital investment in its cable television and telecommunications networks in
advance of connecting subscribers to its networks. A significant portion of the
capital investment required to connect subscribers consists of costs associated
with establishing a minimum point of entry, the costs of internal wiring and
distribution equipment and the erection of microwave transmitting and receiving
equipment specific to the MDU. These expenditures are, to a large extent,
"success-based" and will only be incurred when new properties are brought into
service or when existing properties serviced by SMATV or private branch
exchange ("PBX") systems are connected to the networks. When a new Right of
Entry is signed, it takes approximately four months of construction work to
activate signal at the property. Once the property is activated, penetration
rates increase rapidly. The balance of the budgeted capital expenditures is for
infrastructure assets not related to individual MDUs. These assets include
central office switches, collocation switch termination equipment, cable
television head ends, computer hardware and software and capitalized
construction costs. The Company, can to some degree, control the timing of the
infrastructure capital expenditures by controlling the timing of the
telecommunications roll out and the scope of its expansion.
In order to accelerate the achievement of the Company's strategic goals,
the Company is currently evaluating and often engages in discussions regarding
various acquisition opportunities. The Company also engages from time to time
in preliminary discussions relating to possible investments in the Company by
strategic investors. There can be no assurance that any agreement with any
potential acquisition target or strategic investor will be reached.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer-controlled systems using two
digits rather than four to define the applicable year. For example, computer
programs that have time-sensitive software may recognize a date ending in "00"
as the year 1900 rather than the year 2000. This could result in system failure
or miscalculations causing disruptions of operations including, among other
things, a temporary inability to provide services to subscribers, process
transactions, send invoices, or engage in similar normal business activities.
To ensure that its subscriber serving cable and telecommunications equipment
and its critical computer systems, applications and other technology
(collectively "Date Sensitive Technology") will function properly beyond 1999,
the Company has
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implemented a Year 2000 program.
PROJECT AND STATE OF READINESS
The Company has developed a three-phase plan that is designed to assess the
impact of the Year 2000 issue on its Date Sensitive Technology.
Due to the fact that it is not always necessary to complete one phase prior
to commencing the next, some projects within a given phase have been started,
while there may be outstanding tasks associated with prior phases. Priority is
always placed on mission critical systems affecting large numbers of customers
or the Company's ability to take and process service orders and bill for its
services.
Phase I -- Problem Determination
In this phase the Company performed an inventory and assessment to
determine which portions of its Date Sensitive Technology would have to be
replaced or modified in order for its networks, office equipment and
information management systems to function properly after December 31, 1999.
While the Company believes its inventory is substantially complete, the
equipment utilized by OpTel is dispensed throughout the markets that the
Company serves, and there can be no assurances that mission critical equipment
has not been overlooked. The Company also conducted a risk assessment to
identify those systems whose failure would be expected to result in the
greatest risk to the Company's business. The Company's risk assessment and
determinations as to the need for remediation were based in part on
representations made by hardware and software vendors as to the Year 2000
compliance of systems and equipment utilized by the Company and in part on the
results of Year 2000 equipment testing done by GVL. There can be no assurances
that any vendor representations received and relied upon by the Company were
accurate or complete or that the results of GVL's Year 2000 equipment tests are
a reliable indicator of the Year 2000 compatability of the Company's equipment.
In addition, OpTel has not yet received responses from all of its equipment
vendors, and there can be no assurance that OpTel will receive responses from
all of its vendors in a timely manner or that responses will be accurate or
complete. As of May 31, 1999, the Company estimated that this phase was
approximately 99% complete.
Phase II -- Plan for Remediation of Mission Critical Known Non-Compliant
Date Sensitive Technology
During Phase II, the Company designed a plan to make the necessary
modifications to and/or replace Date Sensitive Technology that is mission
critical and known to be non-compliant. While the Company believes that as of
May 31, 1999, its planning for achieving Year 2000 compliance was approximately
90% complete, the discovery of additional Date Sensitive Technology requiring
remediation could adversely impact the current plan and increase the resources
required to implement the plan. The plan includes the upgrade of the Company's
current cable customer management system to the vendor's certified compliant
release level, the upgrade of PBX switches that the Company does not currently
plan to replace with central office switches prior to December 31, 1999, and
the replacement of others with compliant PBX switches.
Phase III -- Operational Sustainability
The Company has begun the process of remediating its non-compliant Date
Sensitive Technology and plans to use both internal and external resources to
reprogram or replace and test certain components of its uses, and networks and
information processing systems for Year 2000 compliance. The Company has
upgraded certain components of its Date Sensitive Technology and is currently
scheduling the installation of other necessary upgrades to Date Sensitive
Technology. The Company has tested certain computing, telecommunications and
video equipment and has found it to be compliant. Although the Company intends
to conduct tests to ensure that other equipment is Year 2000 compliant, it will
focus primarily on those systems whose failure would pose the greatest risks to
the Company's operations. The Company will endeavor to test all mission
critical equipment but will likely not test all of its equipment that is not
deemed mission critical. The Company will rely upon vendor representations, if
received, or on the results of Year 2000 equipment testing done by GVL, where
tests are not conducted. There can be no assurance that any vendor
representations received and relied upon will be accurate or complete or that
the results of GVL's Year 2000 equipment tests will be a reliable indicator of
the Year 2000 compatibility of the Company's equipment or that the Company will
have recourse against any vendors whose representations or certifications as to
the Year 2000 compliance of their products prove misleading.
The Company is striving to achieve operational sustainability no later than
September 30, 1999, which is prior to any anticipated impact on its operations.
Though the majority of the work will be completed by that date, certain
elements will not be completed until the fourth quarter of calendar 1999,
primarily due to limited availability of compliant software and hardware and
prioritization of
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mission critical systems. As of May 31, 1999, the Company estimated that its
remediation efforts were approximately 50% complete.
Successful completion of the Year 2000 conversion program is substantially
dependent upon successful implementation of the Company's new customer
management information system which is dependent upon a third party vendor
meeting an implementation schedule and delivering a system that is Year 2000
compliant. As a contingency plan, the Company will be upgrading its existing
cable subscriber billing system to a version represented by the vendor to be
Year 2000 compliant. There can be no assurance that (i) the new customer
management information system will be implemented on schedule, (ii) the Company
will successfully implement all of the other necessary hardware and software
upgrades or (iii) other components of the Year 2000 conversion program will be
completed in a timely manner.
COSTS
The Company estimates the cost of its Year 2000 program will be $4.2
million, of which $3.0 million remains to be incurred. Remediation costs and
costs to replace non-compliant systems are expensed as incurred. Additionally,
the Company has incurred and will incur costs related to the purchase and
implementation of its new accounting system and customer management information
systems. The estimated total cost of these systems is $8.1 million, of which
$4.2 million remains to be incurred. The foregoing estimates will likely be
revised and there can be no assurance that the revisions will not be
significant.
The estimated costs of the project and the date which the Company has
established to complete the Year 2000 modifications are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third party
modification plans, the cost of third party hardware, software and services,
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area,
the ability to locate and correct all relevant computer codes, unanticipated
mergers and acquisitions and similar uncertainties. The failure of the Company
to become Year 2000 compliant on a timely basis could have a material adverse
effect on the Company's business, financial condition, cash flows and results
of operations.
RISKS AND CONTINGENCY PLAN
While the Company is working to test its own mission-critical systems for
Year 2000 compliance, the Company does not control the systems of its service
or content providers. The Company has taken an inventory of its third party
service or content providers and believes that its inventory is complete.
However, there can be no assurance that mission critical providers have not
been overlooked. Based on this inventory, the Company is currently seeking
assurances from its suppliers and strategic business partners regarding the
Year 2000 readiness of their systems. Many of the Company's third party
providers have indicated that they are, or will be, Year 2000 compliant. The
Company, however, has not undertaken an in-depth evaluation of such providers
in relation to the Year 2000 issue and the ability of third parties with which
OpTel transacts business to adequately address their Year 2000 issues is
outside of OpTel's control. The Company has not obtained and will not obtain
Year 2000 certifications from video programming suppliers, ILECs, competitive
local exchange carriers ("CLECs") and IXCs with whom it does business. There is
risk that the interaction of the Company's systems and those of its suppliers
or business partners may be impacted by the Year 2000 change. In addition, in
light of the vast interconnection and interoperability of telecommunications
networks worldwide and the reliance of cable television systems on satellite
distribution of programming, the ability of any cable television or
telecommunications provider, including the Company, to provide services to its
customers (e.g., to complete calls and deliver programming and to bill for such
services) is dependent, to some extent, on the networks and systems of other
parties. To the extent the networks and systems of those parties are adversely
impacted by Year 2000 problems, the ability of the Company to service its
customers may be adversely impacted as well. There can be no assurance that the
failure of OpTel or such third parties to adequately address their respective
Year 2000 issues will not have a material adverse effect on OpTel's business,
financial condition, cash flows and results of operations.
In a recent release regarding Year 2000 disclosure, the Securities and
Exchange Commission stated that public companies must disclose the most
reasonably likely worst case Year 2000 scenario. Although it is not possible to
assess the likelihood of any of the following events, each must be included in
a consideration of worst case scenarios: widespread failure of electrical, gas,
and similar supplies serving the Company; widespread disruption of the services
provided by common communications carriers and satellites that transmit video
programming; similar disruption to the means and modes of transportation for
the Company and its employees, contractors, suppliers, and customers;
significant disruption to the Company's ability to gain access to, and remain
working in, office buildings and other facilities; failure of controllers
contained in the cable television system headends and of the Company's video
distribution network; failure of the Company's switches, telephone network and
telephone traffic distribution system; failure in customer service networks
and/or automated voice response systems; and failure of substantial numbers of
the Company's critical
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computer hardware and software systems, including both internal business
systems and systems controlling operational facilities such as electrical
generation, transmission, and distribution systems; and the failure of outside
entities' systems, including systems related to billing, banking and finance.
The financial impact of any or all of the above worst-case scenarios has
not been and cannot be estimated by the Company due to the numerous
uncertainties and variables associated with such scenarios. Such failures could
materially and adversely affect the Company's results of operations, liquidity
and financial condition. Due to the general uncertainty inherent in the Year
2000 problem, resulting in part from the uncertainty of the Year 2000 readiness
of third party providers, the Company is unable to determine at this time
whether the consequences of Year 2000 failures will have a material impact on
the Company's results of operations, liquidity or financial condition. The
Company believes that, with the implementation of new business systems and
completion of the Year 2000 project as scheduled, the possibility of
significant interruptions of normal operations should be reduced. In addition,
the Company is currently developing appropriate contingency plans to address
situations in which various systems of the Company, or of third party
providers, are not Year 2000 compliant. The Company also intends to participate
in industry wide efforts to address Year 2000 issues, the goal of which is to
develop contingency plans which address not only the Company's issues but those
of the industry as a whole.
RECENTLY ISSUED ACCOUNTING PRINCIPLES
Effective September 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which established standards for the reporting and
display of comprehensive income and its components in the financial statements.
The Company has no items of other comprehensive income to report in the periods
presented.
The FASB also issued, in June 1997, SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes standards
for the way public companies disclose information about operating segments,
products and services, geographic areas and major customers. SFAS No. 131 is
effective for financial statements for fiscal years beginning after December
15, 1997. The Company is currently evaluating the applicability of the
requirements of SFAS No. 131. Depending on the outcome of the Company's
evaluation, additional disclosure may be required for fiscal 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes standards for accounting
and reporting for derivative instruments. SFAS No. 133 is effective for fiscal
years beginning after June 15, 2000, as amended; however, earlier application
is permitted. Management is currently not planning on early adoption of this
statement and has not completed an evaluation of the impact of the provisions
of this statement on the Company's consolidated financial statement.
INFLATION
The Company does not believe that inflation has had a material effect on
its results of operations to date. However, there can be no assurance that the
Company's business will not be adversely affected by inflation in the future.
The information set forth in "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" includes forward-looking statements that
involve numerous risks and uncertainties. Forward-looking statements can be
identified by use of forward-looking terminology such as "estimates,"
"projects," "anticipates," "expects," "intends," "believes," or the negative
thereof or other variations thereon or comparable terminology or by discussions
of strategy that involve risks and uncertainties. The Company's actual results
could differ materially from those anticipated in such forward-looking
statements as a result of certain factors, including those set forth in the
section entitled "Risk Factors" in the Company's Annual Report on Form 10-K for
the year ended August 31, 1998.
Item 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At May 31, 1999, the Company had no derivative financial instruments.
Furthermore, substantially all of the Company's indebtedness bears a fixed
interest rate. Therefore, the Company is not sensitive to changes in market
interest rates.
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OPTEL, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings except for those
described below and 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, results of
operations or cash flows.
On April 27, 1998, an action was commenced against the Company in the
United States District Court for the Northern District of California by Octel
Communications Corp. ("Octel"), charging the Company with trademark
infringement, trade name infringement, trademark dilution, and unfair
competition (the "Civil Action") based on its use of the name "OpTel" and
seeking to enjoin the Company from using the name and trademark "OpTel."
On June 18, 1999 the parties entered into a settlement agreement
("Settlement"), resolving all issues between the parties and settling the Civil
Action and related administrative proceedings. Under the Settlement, the
Company will change the name under which it conducts business from OPTEL to
OPTELNET, or such other name or names as determined by the Company. The change
of business name will occur over time, enabling the Company to transition
signage over a nearly three year period, change markings on vehicles as they
are phased out of service and use existing supplies of printed materials. The
Company will retain the right to use "Optel, Inc." as its corporate name and as
a service mark in conjunction with certain services and the Company will
receive trademark registrations for OPTEL for which it has previously applied.
Under the Settlement, Octel will assign to the Company its common law rights in
the name OCTELNET and will discontinue use of that name over an agreed time
period. The Settlement is not expected to have a material financial or other
impact on the Company.
On April 12, 1999, a purported class action complaint was filed in the
District Court of Harris County, Texas against the company by Marc H. Levy,
individually and on behalf of all cable subscribers that have paid late fees to
the Company. The plaintiff, who is currently a cable television subscriber of a
subsidiary of the company, alleges that a five dollar late fee for delinquent
payments of cable subscription charges is an illegal penalty. The plaintiff
seeks unspecified damages and possibly other relief. The case is in its very
early stages, and 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 has 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.
18
<PAGE> 19
OPTEL, INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Restated Certificate of Incorporation of OpTel, together with all
amendments thereto. (1)
3.2 Bylaws of OpTel. (2)
- ------
(1) Filed as an exhibit to OpTel's registration statement on Form S-4 filed
with the Securities and Exchange Commission (the "Commission") on
September 4, 1998 and incorporated herein by reference.
(2) Filed as an exhibit to OpTel's registration statement on Form S-4 filed
with the Commission on April 10, 1997 and incorporated herein by
reference.
(b) Reports on Form 8-K
March 25, 1999 - Press release announcing financial results for the second
quarter of fiscal year ended August 31, 1999.
May 21, 1999 - Press release announcing the withdrawal of an initial public
offering.
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, 1999
19
<PAGE> 20
OPTEL, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE OPTEL,
INC. NINE MONTH PERIOD ENDED MAY 31, 1999 FINANCIAL STATEMENTS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. (amounts in
thousands)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-END> MAY-31-1999
<CASH> 35,507
<SECURITIES> 39,235
<RECEIVABLES> 15,974
<ALLOWANCES> (2,435)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 377,930
<DEPRECIATION> (51,885)
<TOTAL-ASSETS> 574,734
<CURRENT-LIABILITIES> 0
<BONDS> 420,005
221,890
0
<COMMON> 28
<OTHER-SE> (130,539)
<TOTAL-LIABILITY-AND-EQUITY> 574,734
<SALES> 0
<TOTAL-REVENUES> 63,024
<CGS> 0
<TOTAL-COSTS> 29,223
<OTHER-EXPENSES> 42,253
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,661
<INCOME-PRETAX> (69,396)
<INCOME-TAX> 0
<INCOME-CONTINUING> (69,396)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (69,396)
<EPS-BASIC> (30.56)
<EPS-DILUTED> (30.56)
</TABLE>
