<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 February 28, 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)
-----------------------------
<TABLE>
<S> <C> <C>
DELAWARE OPTEL, INC. 95 - 4495524
1111 W. MOCKINGBIRD LANE
DALLAS, TEXAS 75247
(214) 634-3800
(State or other jurisdiction of (Name, address, including Zip (I.R.S. Employer Identification No.)
incorporation or organization) code of principal executive
offices)
</TABLE>
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
Yes [X] No[ ]
COMMON STOCK AS OF MARCH 15, 1999
<TABLE>
<CAPTION>
Common Stock Authorized Issued and Outstanding
<S> <C> <C>
CLASS A COMMON STOCK, $.01 PAR VALUE 8,000,000 164,272
CLASS B COMMON STOCK, $.01 PAR VALUE 6,000,000 2,353,498
CLASS C COMMON STOCK, $.01 PAR VALUE 300,000 225,000
</TABLE>
<PAGE> 2
OPTEL, INC.
QUARTERLY PERIOD ENDED FEBRUARY 28, 1998
CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION ............................................ 1
ITEM 1. FINANCIAL STATEMENTS .............................................. 1
UNAUDITED CONSOLIDATED BALANCE SHEETS ............................. 1
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS ................... 2
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS ................... 3
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY .......... 5
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS .......... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ..................................................... 7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ........ 20
PART II - OTHER INFORMATION ............................................... 21
ITEM 1. LEGAL PROCEEDINGS ......................................... 21
ITEM 2. CHANGES IN SECURITIES ..................................... 21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ........................... 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ....... 21
ITEM 5. OTHER INFORMATION ......................................... 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .......................... 22
SIGNATURES ................................................................ 23
</TABLE>
<PAGE> 3
OPTEL, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28, AUGUST 31,
1999 1998
--------- ---------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents.................................. $ 60,032 $ 123,774
Restricted investments .................................... 38,645 63,207
Accounts receivable, net................................... 12,845 9,458
Prepaid expenses, deposits and other assets................ 2,593 2,317
Property and equipment, net ............................... 308,289 268,044
Intangible assets, net .................................... 159,055 160,370
--------- ---------
TOTAL............................................ $ 581,459 $ 627,170
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and other liabilities... $ 30,759 $ 31,842
Deferred revenue and customer deposits..................... 5,685 5,274
Convertible notes payable to stockholder .................. -- --
Notes payable and long-term obligations ................... 428,853 429,278
--------- ---------
Total liabilities................................ 465,297 466,394
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........... 153,341 146,115
Series B preferred stock, $.01 par value; 2,000 shares
authorized; 1,042 and 991 issued and outstanding...... 63,827 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........................................ (214,814) (160,490)
--------- ---------
Total stockholders' equity....................... 116,162 160,776
--------- ---------
TOTAL............................................ $ 581,459 $ 627,170
========= =========
</TABLE>
See notes to the Unaudited Consolidated Financial Statements
1
<PAGE> 4
OPTEL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
February 26, February 26, February 28, February 28,
1999 1998 1999 1998
------------ ------------ ------------ ------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
REVENUES:
Cable television $ 18,912 $ 13,774 $ 38,095 $ 25,247
Telecommunications 1,513 865 2,870 1,644
------------ ------------ ------------ ------------
Total revenues 20,425 14,639 40,965 26,891
OPERATING EXPENSES:
Programming, access fees and
revenue sharing 9,301 6,654 18,689 12,419
Customer support, general and administrative 13,794 7,878 26,335 15,855
Depreciation and amortization 9,288 5,753 17,997 10,759
------------ ------------ ------------ ------------
Total operating expenses 32,383 20,285 63,021 39,033
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (11,958) (5,646) (22,056) (12,142)
OTHER (EXPENSE) INCOME
Interest expense on convertible notes payable to
Stockholder -- (4,794) -- (9,640)
Other interest expense (12,878) (9,489) (25,837) (16,386)
Interest and other income, net 1,241 2,171 3,279 4,141
------------ ------------ ------------ ------------
NET LOSS (23,595) (17,758) (44,614) (34,027)
Earnings attributable to preferred stock (4,923) -- (9,709) --
------------ ------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON EQUITY $ (28,518) $ (17,758) $ (54,323) $ (34,027)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (10.40) $ (6.89) $ (19.81) $ (13.20)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 2,743 2,578 2,743 2,578
============ ============ ============ ============
</TABLE>
See notes to the Unaudited Consolidated Financial Statements
2
<PAGE> 5
OPTEL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
February 28 February 28 February 28 February 28
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (23,595) $ (17,757) $ (44,614) $ (34,027)
Adjustments to reconcile net loss to net cash flow used
in operating activities:
Depreciation and amortization 9,288 5,753 17,997 10,759
Non cash interest expense 358 5,120 691 10,291
Non cash interest earned on restricted investments (591) (947) (1,180) (1,927)
Increase (decrease) in cash from changes in operating
assets and liabilities, net of effect of business
combinations:
Accounts receivable (1,240) (886) (3,387) (1,493)
Prepaid expenses, deposits and other assets 1,301 326 (276) 118
Deferred revenue and other liabilities 266 806 411 653
Accounts payable and accrued expenses (11,678) (5,573) (1,083) 411
--------- --------- --------- ---------
Net cash flows provided by (used in) operating activities (25,891) (13,158) (31,441) (15,215)
INVESTING ACTIVITIES:
Purchases of businesses -- (1,193) -- (37,018)
Proceeds from maturity of restricted investments 25,742 14,625 25,742 14,625
Purchases of restricted investments -- -- -- --
Acquisition of intangible assets (1,980) (336) (4,553) (4,274)
Purchases and construction of property and equipment (29,503) (18,651) (52,375) (33,626)
--------- --------- --------- ---------
Net cash flows used in investing activities (5,741) (5,555) (31,186) (60,293)
FINANCING ACTIVITIES:
Proceeds from bank financing, net of transaction costs -- 119,852 -- 119,852
Payments on notes payable and long-term obligations (523) (1,828) (1,115) (2,107)
--------- --------- --------- ---------
Net cash flows provided by (used in) financing activities (523) 118,024 (1,115) 117,745
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (32,155) 99,311 (63,742) 42,237
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 92,187 30,231 123,774 87,305
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 60,032 $ 129,542 $ 60,032 $ 129,542
========= ========= ========= =========
</TABLE>
3
<PAGE> 6
OPTEL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 26,135 $ 15,885 $ 26,492 $ 15,997
========== ========== ========== ==========
Increase in capital lease obligations $ -- $ 500 $ -- $ 1,306
========== ========== ========== ==========
Convertible debt issued for accrued interest $ -- $ -- -- 9,640
========== ========== ========== ==========
Earnings attributable to preferred stock $ 4,924 $ -- 9,710 --
========== ========== ========== ==========
</TABLE>
See notes to the Unaudited Consolidated Financial Statements
4
<PAGE> 7
OPTEL, INC.
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Class A Common Class B Common Class C Common
Stock Stock Stock
----------------------- ----------------------- ----------------------- ----------
Additional
Shares Par Shares Par Shares Par Paid-In
Outstanding Value Outstanding Value Outstanding Value Capital
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at Sept. 1, 1998 164,272 $ 2 2,353,498 $ 24 225,000 $ 2 $ 113,780
Dividends declared
Net loss
Earnings attributable to
preferred stock
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at February 28, 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 Sept. 1, 1998 6,962 $ 146,115 991 $ 61,343 $ (160,490)
Dividends declared 340 52
Net loss (44,614)
Earnings attributable to
preferred stock 7,226 2,484 (9,710)
---------- ---------- ---------- ---------- ----------
Balance at February 28, 1999 7,302 $ 153,341 1,043 $ 63,827 $ (214,814)
========== ========== ========== ========== ==========
</TABLE>
See notes to the Unaudited Consolidated Financial Statements
5
<PAGE> 8
OPTEL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PREPARATION
The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10 - Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, the unaudited consolidated financial statements
contain all adjustments, consisting solely of adjustments of a normal
recurring nature, necessary to present fairly the financial position,
results of operations and cash flows for the periods presented. Operating
results for the three and six month periods ended February 28, 1999 are
not necessarily indicative of the results that may be expected for the
entire fiscal year or any other interim period.
<PAGE> 9
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 and Dallas-Fort Worth 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.
Since inception, the Company has experienced substantial growth. This
growth 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"). In general, the conduct of the acquired operations prior to
acquisition was materially different from the conduct of operations following
acquisition. Among the changes made in many of the businesses after acquisition
were (i) commencing conversion of SMATV systems to 18GHz or fiber optic
networks, (ii) delivering customer service from a more advanced national call
center in Dallas, (iii) increasing the number of programming channels, (iv)
improving technical and field service and system reliability, (v) improving
regulatory and financial controls and (vi) initiating telecommunications
services offerings.
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 February 28, 1999, the Company had 435,738 and 107,109 units under
contract for cable television and telecommunications, respectively, and 401,600
and 47,462 units passed for cable television and telecommunications,
respectively. As of such date, OpTel had 218,023 cable television subscribers
and 13,229 telecommunication lines in service.
OpTel believes that by utilizing an advanced proprietary network
infrastructure it can market a competitive integrated package of voice, video
and Internet access services in its serviced markets. As of February 28, 1999,
approximately 270,736 units representing approximately 67% 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.
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
<PAGE> 10
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.
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 February 28, 1999, the Company had invested approximately $526
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 $41.0 million for the six months ended
February 28, 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 $22.1 million,
$28.2 million, $22.8 million and $12.6 million for the six months ended February
28, 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 six months ended February
28, 1999, the Company reported negative EBITDA of $4.1 million. The decline in
EBITDA is primarily the result of the increased costs associated with the roll
out of telecommunications services in the Company's major markets and the
deployment of switch collocation access and Internet access services. 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 six months ended February 28, 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 is
reorganizing marketing and sales management, has launched direct sales
activities and will introduce other direct marketing initiative, in the third
quarter.
<PAGE> 11
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 ("LEC") 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. Other initiatives aim at creating new revenue
sources by offering related services including a range of Internet access and
direct broadcast satellite ("DBS") services.
The Company anticipates that it will continue to have higher churn 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 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 is generally 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.
<PAGE> 12
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 FEBRUARY 28,
--------------------------- -------------------
1996 1997 1998 1998 1999
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATING DATA
CABLE TELEVISION
Units under contract(1)...................... 241,496 295,149 432,955 372,138 435,738
Units passed(2).............................. 225,433 254,032 399,210 320,286 401,600
Basic subscribers............................ 114,163 132,556 216,249 172,643 218,023
Basic penetration(3)......................... 50.6% 52.2% 54.2% 53.9% 54.3%
Average monthly revenue per basic
subscriber(4).............................. $22.70 $24.94 $27.95 $27.57 $29.20
TELECOMMUNICATIONS
Units under contract(1)...................... 20,945 39,831 94,338 61,082 107,109
Units passed(2).............................. 12,364 16,572 35,671 17,551 47,462
Lines(5)..................................... 4,126 6,185 9,244 6,375 13,229
Line penetration(6).......................... 33.4% 37.3% 25.9% 36.3% 27.9%
Average monthly revenue per line(7).......... $42.10 $47.23 $46.62 $43.64 $44.50
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED AUGUST 31, FEBRUARY 28,
-------------------------------- -------------------
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 $ 25,247 $ 38,095
Telecommunications................. 1,711 2,922 3,882 1,644 2,870
-------- --------- --------- -------- --------
Total revenues............. $ 27,604 $ 39,837 $ 64,963 $ 26,891 $ 40,965
EBITDA(8)............................ $ (3,900) $ (8,291) $ 291 $ (1,383) $ (4,059)
Net cash flows used in operating
activities......................... $ (453) $ (15,935) $ (26,268) $(15,215) $(31,441)
Net cash flows used in investing
activities......................... (72,037) (143,125) (121,532) (60,293) (31,186)
Net cash flows provided by (used in)
financing activities............... 72,131 244,688 184,269 117,745 (1,115)
Net loss............................. (18,430) (48,535) (74,398) (34,027) (44,614)
</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. At this time the
majority of all units under contract for telecommunications are also under
contract for cable television.
(2) Units passed represents the number of units with respect to which the
Company has connected its cable television and telecommunications systems,
respectively.
(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.
<PAGE> 13
Three months ended February 28, 1999 compared with three months ended
February 28, 1998.
TOTAL REVENUES. Total revenues for the second quarter of fiscal 1999
increased by $5.8 million, or 40%, to $20.4 million compared to revenues of
$14.6 million for the second quarter of fiscal 1998. The increase in total
revenue is principally the result of the acquisition of ICS in April 1998.
CABLE TELEVISION. Cable television revenues for the second quarter of
fiscal 1999 increased by $5.1 million, or 37%, to $18.9 million from $13.8
million for the comparable period in fiscal 1998. This reflected a 26 % increase
in the number of basic subscribers and a 5% increase in the average monthly
revenue per basic subscribers. The average monthly revenue per basic subscriber
increased from $27.57 for the second quarter of fiscal 1998 to $28.98 for the
second quarter of fiscal 1999. The increase in average monthly revenue per basic
subscribers mainly resulted from annual rate increases, rate increases following
property upgrades, and a shift in the mix of basic subscribers to favor cities
with higher revenues per basic subscribers. The Company maintained basic
penetration at 54%.
TELECOMMUNICATIONS. Telecommunications revenues for the second quarter of
fiscal 1999 increased by 75% to $1.5 million, up from $0.9 million for the
comparable period of the preceding year, reflecting a 108 % increase in the
number of lines compared to the second quarter of fiscal 1998 offset by a slight
decline in the average monthly revenue per line which decreased from $43.64 to
$43.07. 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 $6.7 million for the second quarter of fiscal
1998 to $9.3 million for the second 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 $13.8 million for the second quarter of fiscal 1999
compared to $7.9 million for the second quarter of fiscal 1998. The increase in
customer support, general and administrative expenses was largely due to an
increase in personnel associated with the expansion of the Company's operations
and the roll-out of telephone and Internet services. In connection with
reorganizing the management of certain departments, the Company has incurred
costs in excess of $0.6 million.
EBITDA. The Company's EBITDA (earnings before interest, income taxes, and
depreciation and amortization) for the second quarter of fiscal 1999 was
negative $2.7 million compared to $0.1 million for the second 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 $9.3
million for the second quarter of fiscal 1999 compared to $5.8 million for the
second 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.
INTEREST EXPENSE. Interest expense (net of amounts capitalized) was $12.9
million for the second quarter of fiscal 1999, a $1.4 million decrease from
interest expense of $14.3 million for the second quarter of fiscal 1998. This
decrease is attributable to the elimination of interest expense associated with
the convertible notes payable to stockholder which were converted to preferred
stock in march 1998.
INTEREST AND OTHER INCOME. For the second quarter of fiscal 1999, interest
and other income was $1.2 million, compared to $2.2 million for the second
quarter of fiscal 1998 reflecting a decrease of $0.9 million. This is primarily
the result of the Company having a smaller average balance of invested cash
during the second 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.
Six months ended February 28, 1999 compared to six months ended February 28,
1998
TOTAL REVENUES. Total revenues for the first six months of fiscal 1999
increased by $14.1 million, or 52%, to $41.0 million compared to revenues of
$26.9 million for the first six months of fiscal 1998. The increase in total
revenue is principally the result of the acquisition of ICS in April 1998 and
the inclusion of the operating results of Phonoscope, which was acquired in
October 1997, for the full six month period.
CABLE TELEVISION. Cable television revenues for the first six months of
fiscal 1999 increased by $12.8 million, or 51%, to $38.1 million from $25.2
million for the comparable period in fiscal 1998. This reflected a 26% increase
in the number of basic subscribers and a 6% increase in the average monthly
revenue per basic subscriber. The average monthly revenue per basic subscriber
increased from $27.57 for the first six months of fiscal 1998 to $29.20 for the
first six months of fiscal 1999. The increase in average monthly revenue per
basic subscriber mainly resulted from annual rate increases, rate increases
following property upgrades and a shift in the mix of basic subscribers to favor
cities with higher average monthly revenue per basic subscriber. The Company
maintained basic penetration at 54%.
TELECOMMUNICATIONS. Telecommunications revenues for the first six months of
fiscal 1999 increased by 75% to $2.9 million, up from $1.6 million for the
comparable period of the preceding year, reflecting both a 108% increase in the
number of lines compared to the first six months of fiscal 1998 and a 2%
increase in the average monthly revenue per line, which rose from $43.64 to
$44.50. 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. Although the average monthly revenue per line for the
six months ended February 28, 1999 increased from the six months ended February
28, 1998, it decreased from the year ended August 31, 1998. This decrease
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 $12.4 million for the first six months of fiscal
1998 to $18.7 million for the first six 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 $26.3 million for the first six months of fiscal
1999 compared to $15.9 million for the first six months of fiscal 1998. The
increase in customer support, general and administrative expenses was largely
due to an increase in personnel associated with the expansion of the Company's
operations and the roll-out of telephone and Internet services.
EBITDA. The Company's EBITDA (earnings (loss) before interest, income
taxes, and depreciation and amortization) for the first six months of fiscal
1999 was negative $4.1 million compared to negative $1.4 million for the first
six 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 $18.0
million for the first six months of fiscal 1999 compared to $10.8 million for
the first six 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.
INTEREST EXPENSE. Interest expense (net of amounts capitalized) was $25.8
million for the first six months of fiscal 1999, a small decrease from interest
expense of $26.0 million for the first six months of fiscal 1998. This decrease
is attributable to the elimination of interest expense associated with the
convertible notes payable to stockholders in March 1998 with the conversion of
these notes to preferred stock.
<PAGE> 14
INTEREST AND OTHER INCOME. For the first six months of fiscal 1999,
interest and other income was $3.3 million, compared to $4.1 million for the
first six months of fiscal 1998, reflecting a decrease of $0.9 million. This is
primarily the result of the Company having a smaller average balance of invested
cash during the first six 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.
<PAGE> 15
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 $22.1 million, $28.2
million, $22.8 million and $12.6 million for the six months ended February 28,
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 $44.6 million for the six months ended February 28, 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 earns
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
February 28, 1999, approximately
<PAGE> 16
$28.0 million remained in such escrow account. 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 February 28, 1999, approximately $10.7 million
remained in such escrow account.
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 $56.9 million
for the first six 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 $38.7
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 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.
Under the terms of the more restrictive of the Company's indentures, the
Company can only incur approximately $50 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 may 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 November 30, 1998, GVL was able to incur approximately Cdn.
$446 million (approximately $293 million based on an exchange rate of $1.00 =
Cdn. $1.5211 as reported by the Wall Street Journal on March 18, 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, cable television head ends, computer hardware and
software and capitalized construction costs. The
<PAGE> 17
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 nor does
management believe that any thereof is necessary to achieve its strategic goals.
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
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 disbursed 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 March 15, 1999, the Company estimated that
this phase was 95% 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
March 15, 1999, its planning for achieving Year 2000 compliance was 75%
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 conversion of the
Company's current customer management system to a vendor certified compliant
platform and the upgrade of
<PAGE> 18
PBX switches that the Company does not currently plan to replace with central
office switches prior to December 31, 1999.
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 networks and information
processing systems for Year 2000 compliance. The Company is currently scheduling
the installation of other necessary upgrades to Date Sensitive Technology.
Although the Company intends to conduct tests to ensure its 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 operating
systems. 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 mission critical systems. As of March 15, 1999, the Company
estimated that its remediation efforts were approximately 25% 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 $4.1 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 $7.6 million, of which
$3.6 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.
<PAGE> 19
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 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.
<PAGE> 20
RECENTLY ISSUED ACCOUNTING PRINCIPLES
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," is effective for earnings per share calculations and disclosures for
periods ending after December 15, 1997, including interim periods, and requires
restatement of all prior period earnings per share data that is presented. SFAS
No. 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings Per
Share," and provides reporting standards for calculating "Basic" and "Diluted"
earnings per share. The Company has adopted SFAS No. 128, which did not have a
significant impact upon the Company's reported earnings per share, and its
earnings per share computations have been restated for all prior periods.
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, 1999; 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 February 28, 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.
<PAGE> 21
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."
Although the Company does not believe that its use of the name "OpTel" infringes
on the trademark rights or trade name rights of Octel or any other person, there
can be no assurance as to the outcome of the Civil Action or related
administrative proceedings, if either go forward, or that any such outcome would
not materially adversely affect the Company.
Shortly after the filing of the Civil Action, the parties commenced
settlement discussions and the Company's time to answer the complaint and assert
counterclaims has been continuously extended by agreement of the parties. The
parties have reached an agreement in principle, subject to definitive agreement
(the "Proposed Settlement), that would resolve all issues between the parties
and settle the Civil Action and related administrative proceedings. Under the
Proposed 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 Proposed 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, if consummated, is not
expected to have a material financial or other impact on the Company.
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.
<PAGE> 22
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
January 14, 1999 - Press release announcing financial results for the
first quarter of fiscal year ended August 31, 1999.
January 20, 1999 - Press release announcing the launch of high speed
broadband Internet access services with I3s.
<PAGE> 23
OPTEL, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
OPTEL, INC.
By: /s/ Bertrand Blanchette
--------------------------------------
(Signature)
BERTRAND BLANCHETTE
Chief Financial Officer
(Duly authorized officer and principal
financial officer of the Registrant)
Date: March 30, 1999
<PAGE> 24
OPTEL, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ -------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE OPTEL,
INC SIX MONTH PERIOD ENDED February 28, 1999 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-31-1999
<PERIOD-END> FEB-28-1999
<CASH> 60,032
<SECURITIES> 38,645
<RECEIVABLES> 15,204
<ALLOWANCES> (2,359)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 354,401
<DEPRECIATION> (46,112)
<TOTAL-ASSETS> 581,459
<CURRENT-LIABILITIES> 0
<BONDS> 419,786
217,168
0
<COMMON> 28
<OTHER-SE> (101,034)
<TOTAL-LIABILITY-AND-EQUITY> 581,459
<SALES> 0
<TOTAL-REVENUES> 40,965
<CGS> 0
<TOTAL-COSTS> 18,689
<OTHER-EXPENSES> 26,335
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,337
<INCOME-PRETAX> (44,614)
<INCOME-TAX> 0
<INCOME-CONTINUING> (44,614)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (44,614)
<EPS-PRIMARY> (19.81)
<EPS-DILUTED> (19.81)
</TABLE>
