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, 1997
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 jurisdiction of (Name, address, including Zip code of (I.R.S. Employer Identification No.)
incorporation or organization) principal executive offices)
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, 1997
Common Stock Authorized Issued and Outstanding
Class A common stock, $.01 par value 8,000,000 -
Class B common stock, $.01 par value 6,000,000 2,304,561
Class C common stock, $.01 par value 300,000 225,000
OPTEL, INC.
QUARTERLY PERIOD ENDED MAY 31, 1997
CONTENTS
Page
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
BUSINESS..............................................................................................................8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................9
PART II - OTHER INFORMATION..........................................................................................14
ITEM 1. LEGAL PROCEEDINGS...........................................................................................14
ITEM 2. CHANGES IN SECURITIES.......................................................................................14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.............................................................................14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........................................................14
ITEM 5. OTHER INFORMATION...........................................................................................14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................................................14
SIGNATURES...........................................................................................................14
OPTEL, INC.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
UNAUDITED CONSOLIDATED BALANCE SHEETS
May 31, August 31,
1997 1996
------------- -------------
(in thousands)
(unaudited) (audited)
ASSETS
Cash and cash equivalents $ 113,497 $ 1,677
Restricted investments 80,776 -
Accounts receivable (net of allowance for doubtful accounts of $914
and $542, respectively) 4,699 3,064
Prepaid expenses, deposits and other assets 1,762 1,020
Amounts due from stockholder, net - 541
Property and equipment, net 137,198 103,800
Intangible assets, net 79,271 65,876
------------- ------------
TOTAL $ 417,203 $ 175,978
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 5,415 $ 5,647
Accrued expenses and other liabilities 21,204 10,507
Deferred revenue and customer deposits 2,824 2,167
Convertible notes payable to stockholder 125,299 89,414
Notes payable and long-term obligations 221,032 2,443
Deferred acquisition liabilities 6,817 6,520
------------- ------------
Total liabilities 382,591 116,698
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued and
outstanding - -
Class A common stock, $.01 par value; 8,000,000 shares authorized; none issued
and outstanding - -
Class B common stock, $.01 par value; 6,000,000 shares authorized; 2,304,561
and 2,304,561 issued and outstanding 23 23
Class C common stock, $.01 par value; 300,000 shares authorized; 225,000
and none issued and outstanding 2 -
Additional paid-in capital 95,064 88,066
Accumulated deficit (60,477) (28,809)
------------- ------------
Total stockholders' equity 34,612 59,280
------------- ------------
TOTAL $ 417,203 $ 175,978
============= ============
See notes to the Unaudited Consolidated Financial Statements
3
OPTEL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Nine months ended
May 31, May 31, May 31, May 31,
1997 1996 1997 1996
------- ------- ------- -------
(in thousands, except per share data)
REVENUES:
Cable television $ 9,706 $ 6,863 $ 26,915 $ 18,433
Telecommunications 789 457 2,202 1,175
------- ------- ------- -------
Total revenues 10,495 7,320 29,117 19,608
OPERATING EXPENSES:
Cost of services 5,315 3,127 14,016 8,393
Customer support, general and administrative 7,576 4,664 19,842 12,163
Depreciation and amortization 4,113 2,270 9,934 6,074
Non-recurring reorganization costs - 259 - 1,085
------- ------- ------- -------
Total operating expenses 17,004 10,320 43,792 27,715
------- ------- ------- -------
LOSS FROM OPERATIONS (6,509) (3,000) (14,675) (8,107)
OTHER (EXPENSE) INCOME
Interest expense on convertible notes payable to
stockholder (3,771) (1,459) (10,679) (3,349)
Other interest expense (7,996) (169) (9,448) (486)
Interest income 2,900 55 3,134 126
------- ------- ------- -------
NET LOSS $(15,376) $ (4,573) $(31,668) $(11,816)
======= ======= ======= =======
NET LOSS PER COMMON SHARE $ (6.08) $ (2.02) $ (13.23) $ (5.40)
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 2,530 2,263 2,393 2,188
======= ======= ======= =======
See notes to the Unaudited Consolidated Financial Statements
4
OPTEL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended Nine months ended
May 31, May 31, May 31, May 31,
1997 1996 1997 1996
-------- -------- -------- --------
(in thousands)
OPERATING ACTIVITIES:
Net loss $ (15,376) $ (4,573) $ (31,668) $(11,816)
Adjustments to reconcile net loss to net cash flow used in
operating activities:
Depreciation and amortization 4,113 2,270 9,934 6,074
Non cash interest expense 3,864 825 10,968 2,894
Return on Restricted Investments (972) - (1,167) -
Return on non invested net proceeds of Senior Notes (2,892) - (3,092) -
Increase (decrease) in cash from changes in operating assets
and liabilities, net of effect of business combinations:
Accounts receivable (1,047) 127 (1,613) (511)
Prepaid expenses, deposits and other assets (net) (188) 336 (742) (33)
Deferred revenue and other liabilities 387 139 656 705
Accounts payable and accrued expenses 9,793 1,225 11,009 (1,325)
-------- -------- -------- -------
Net cash flows provided by (used in) operating activities (2,318) 349 (5,715) (4,012)
-------- -------- -------- -------
INVESTING ACTIVITIES:
Purchases of businesses (2,548) - (5,048) (5,793)
Acquisitions of intangible assets (2,879) (2,543) (7,710) (6,537)
Purchases and construction of property and equipment (16,665) (16,183) (36,760) (35,312)
-------- -------- -------- -------
Net cash flows used in investing activities (22,092) (18,726) (49,518) (47,642)
-------- -------- -------- -------
FINANCING ACTIVITIES:
Proceeds from convertible notes - 18,601 33,700 51,125
Repayments on convertible notes - - (10,000) -
Purchases of Restricted Investments - - (79,609) -
Proceeds from issuance of Senior Notes - - 225,000 -
Offering costs related to issuance of Senior Notes - - (4,776) -
Return on non invested net proceeds of Senior Notes 2,892 - 3,092 -
Payments on notes payable and long-term obligations - (607) (354) (1,071)
-------- -------- -------- -------
Net cash flows provided by financing activities 2,892 17,994 167,053 50,054
-------- -------- -------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (21,518) (383) 111,820 (1,600)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 135,015 819 1,677 2,036
-------- -------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD NET OF RESTRICTED
INVESTMENTS 113,497 436 113,497 436
======== ======== ======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest 249 183 95 48
======== ======== ======== =======
Increase in capital lease obligations 462 356 942 642
======== ======== ======== =======
See notes to the Unaudited Consolidated Financial Statements
5
OPTEL, INC.
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Class B Common Stock Class C Common Stock
---------------------- ----------------------
(in thousands)
Additional
Shares Par Shares Par Paid-In Accumulated
Outstanding Value Outstanding Value Capital Deficit
Balance at September 1, 1996 2,305 $ 23 - - $ 88,066 $ (28,809)
Issuance of stock - - 225 $ 2 $ 6,998 -
Net loss - - - - - $ (31,668)
------ ---- ---- --- -------- ---------
Balance at May 31, 1997 2,305 $ 23 225 $ 2 $ 95,064 $ (60,477)
====== ==== ==== ==== ======== =========
See notes to the Unaudited Consolidated Financial Statements
6
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, 1997 are not necessarily indicative of the results
that may be expected for the entire fiscal year or any other interim
period.
2. NET LOSS PER COMMON SHARE
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share", which is effective for periods ending after December 15, 1997,
requires that companies disclose basic earnings per share using only the
weighted average number of common shares outstanding during a period.
Currently common stock equivalents are included in the computation if they
are material. Fully diluted earnings per share will continue to be
calculated in a manner similar to the current calculation. Compliance with
SFAS No. 128 will require no change to the Registrant's earnings per share
for the periods presented.
7
OPTEL, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Business
OpTel, Inc. ("OpTel" or the "Registrant") is the largest provider of
private cable television services to residents of multiple dwelling unit
developments ("MDUs") in the United States and is expanding the
telecommunications services it offers to MDU residents. The Registrant provides
cable television and, where currently offered, telecommunications services to
MDU residents principally under long term contracts ("Rights of Entry") with
owners of MDUs. The Registrant's Rights of Entry are generally for a term of ten
to fifteen years (five years for Rights of Entry with condominium associations).
The weighted average unexpired term of the Registrant's cable television Rights
of Entry was approximately seven years as of May 31, 1997. The Registrant
currently provides cable television services in the metropolitan areas of
Houston, Dallas - Fort Worth, San Diego, Phoenix, Chicago, Denver, San
Francisco, Los Angeles, Miami - Ft Lauderdale, Tampa and Austin. The Registrant
also provides telecommunications services in Houston, Dallas - Fort Worth,
Austin, Denver and Miami - Ft. Lauderdale.
For regulatory purposes the Registrant is considered to be a private
cable television operator in most of the markets it serves. Private cable
television operators deliver services to consumers without hard-wire crossings
of public rights of way. Consequently, private cable operators are not required
to obtain cable television franchises and are subject to considerably less
regulatory oversight than are traditional franchise cable television operators.
As a result, they have significant latitude in terms of system coverage, pricing
and customized delivery of services to selected properties. The Registrant has
no universal service obligations and generally does not incur capital costs to
build its networks until it has entered into Rights of Entry from which it
reasonably expects to build an appropriate customer base.
The Registrant offers a full rage of multichannel video programming
(including basic and premium services) which the Registrant believes is
competitive in both content and pricing with the programming packages offered by
its major competitors. The Registrant currently provides its telecommunications
services as a shared tenant services operator through private branch exchange
("PBX") switches. The Registrant offers customers access to services comparable
in scope and price to those provided by the incumbent local exchange carrier and
long distance carrier. The Registrant's telecommunications strategy includes
replacing its PBX switches with its own networked Central Office switches ("C.O.
switches").
The Registrant invests in networks because it believes that networks
provide the optimal mechanism for delivering bundled cable television and
telecommunications services. The Registrant's networks use technologies that are
capable of bi-directional transmission. The Registrant provides its networked
video programming to MDUs through 18-Gigahertz microwave ("18GHz") and fiber
optic networks and non-networked programming through Satellite Master Antenna
Television ("SMATV") systems. As of May 31, 1997, approximately 60% of the
252,481 units passed for cable television are served by the Registrant's
networks. These networks generally provide up to 72 channels of video
programming. The Registrant intends to convert substantially all of its SMATV
systems to 18GHz or fiber optic networks by the end of fiscal 2000. The
Registrant's networks will also facilitate delivery of voice signal from each
MDU to the C.O. switches to be deployed by the Registrant in its major markets.
The Registrant intends to license additional spectrum, which it currently
anticipates principally will be in the 23-Gigahertz ("23GHz") band, which it
will use to provide bi-directional voice transmission.
OpTel was incorporated in the State of Delaware in July 1994, as the
successor to a Delaware corporation that was founded in April 1993. The
Registrant's principal offices are located at 1111 W. Mockingbird Lane, Dallas,
Texas 75247, and its telephone number is (214) 634-3800.
OpTel is majority owned by Le Groupe Videotron Ltee ("GVL"), owners of
the second largest cable television operator in Canada. Key members of the
Registrant's management team gained considerable experience in developing and
operating cable television and combined cable television/telecommunications
businesses while serving as executives of GVL and its affiliates in Canada and
the United Kingdom.
8
OPTEL, INC.
Introduction
Set forth below is a discussion of the financial condition and results
of operations of the Registrant for the three and nine months ended May 31, 1997
(the "third quarter of fiscal 1997" and "the first nine months of fiscal 1997",
respectively). This discussion should be read in conjunction with the Unaudited
Consolidated Financial Statements and notes thereto for the three and nine
months ended May 31, 1997 included herein. References to fiscal years are to
OpTel's fiscal years which end on August 31 of each calendar year.
Results of Operations
The following table sets forth, for the periods indicated, certain
unaudited information derived from the Registrant's Unaudited Consolidated
Statements of Operations, included herein, expressed as a percentage of total
revenues:
Three months ended Nine months ended
May 31 May 31 May 31 May 31
1997 1996 1997 1996
------ ------ ------ ------
Statement of Operations Data:
Revenues:
Cable television 92.5% 93.8% 92.5% 94.0%
Telecommunications 7.5 6.2 7.5 6.0
------ ------ ------ ------
Total revenues 100.0 100.0 100.0 100.0
Operating expenses:
Cost of services 50.6 42.7 48.1 42.8
Customer support, general and administrative 72.2 63.7 68.2 62.0
Depreciation and amortization 39.2 31.0 34.1 31.0
Non recurring reorganization costs 5.5
------ ------ ------ ------
Total operating expenses 162.0 140.9 150.4 141.3
------ ------ ------ ------
Loss from operations (62.0) (40.9) (50.4) (41.3)
Interest Expense, net (84.5) (21.5) (58.3) (18.9)
------ ------ ------ ------
Net loss (146.5)% (62.4)% (108.7)% (60.2)%
====== ====== ====== ======
Other Data:
EBITDA (22.8)% (6.4)% (16.3)% (4.8)%
====== ====== ====== ======
EBITDA represents loss from operations before depreciation, amortization and non
recurring reorganization costs.
Three months ended May 31, 1997 compared with three months ended May 31, 1996
Total revenues. Total revenues for the third quarter of fiscal 1997
increased by $3.2 million or 43% to $10.5 million compared to revenues of $7.3
million for the third quarter of fiscal 1996.
9
OPTEL, INC.
Cable television. Cable television revenues in the third quarter of
fiscal 1997 increased by $2.8 million, or 41%, to $9.7 million from $6.9 million
in the comparable period in fiscal 1996, reflecting both a 23% increase in the
number of customers and a 9% increase in the average monthly revenue per
customer which rose from $22.90 in the third quarter of fiscal 1996 to $25.00 in
the third quarter of fiscal 1997. The increase in revenue per customer resulted
from a combination of rate increases following increased channel capacity as
existing SMATV properties are added to the Registrant's networks (such increased
channel capacity also brings an increase in associated programming costs) and
increased premium revenues as the Registrant's pay to basic ratio improved from
41.8% to 61.3%. The Registrant also continued to grow basic penetration which
increased by 2.4 percentage points to 53.1% compared to 50.7% in the third
quarter of fiscal 1996 and by almost 1 percentage point over 52.2% the preceding
quarter.
Telecommunications. Telecommunications contributed $0.8 million of
revenue for the third quarter of fiscal 1997, an increase of $0.3 million or 73%
over the third quarter of fiscal 1996 and an increase of 11% over the preceding
quarter. The increase reflects a 104% increase in the number of customers on the
same date in the previous year, and an increase in the number of lines per
customer, partially offset by a decrease in average revenue per customer over
the period. This decrease is due to the timing of recognition of certain revenue
items in the third quarter of fiscal 1996 (being the retrospective billing of
certain charges to LECs). If the effect of this adjustment was removed average
revenue per customer remained flat over the period at approximately $53.00.
Penetration of telecommunications services, which are currently provided through
PBX networks, increased from 22.6% at the end of the third quarter of fiscal
1996 to 33.3% at the end of the third quarter of fiscal 1997.
Operating Expenses and Margins. Gross margins, which represent total
revenues less cost of services, decreased over the period from 57.3% to 49.4%.
After adjusting for the impact of the retrospective billing discussed above the
gross margin for the third quarter of fiscal 1996 was 56%. The decrease is
largely attributable to a decision by the Registrant to delay planned price
increases to June, 1997 in order to stimulate premium penetration, despite
incurring increased programming cost on upgraded properties, and the consequent
increase in premium penetration which has lower associated margins. In addition
the gross margin was adversely impacted by the increase in the number of
properties connected for telephone services. Prior to the launch of its C.O.
switches the Registrant has generated significantly lower gross margins on its
telecommunications services than on cable television services. The Registrant
expects gross margins to improve once the planned price rises are implemented
and once C.O. switches are employed to serve telephone customers.
Customer support, selling, general and administrative expenses were
$7.6 million for the third quarter of fiscal 1997 compared to $4.7 million in
the third quarter of fiscal 1996. The increase in customer support, selling,
general and administrative expenses was in line with the Registrant's budget and
was largely due to an increase in personnel associated with the expansion of the
Registrant's operations and recruitment for the roll out of the Registrant's
C.O. switches in advance of the expected revenues.
Depreciation and Amortization. Depreciation and amortization expense
was $4.1 million for the third quarter of fiscal 1997, an increase of $1.8
million over depreciation and amortization expense of $2.3 million for the third
quarter of fiscal 1996. The increase is proportional to the increased capital
expenditures for the continuing construction of the Registrant's cable
television and telecommunications networks.
Loss from operations and EBITDA. Loss from operations increased from
$3.0 million in the third quarter of fiscal 1996 to $6.5 million in the third
quarter of fiscal 1997. The Registrant's negative EBITDA increased from $(0.5)
million to $(2.4) million over the period, largely due to the reduced gross
margins and the expansion of the Registrant's operations in anticipation of the
roll out of telecommunications services. Negative EBITDA represented (22.8)% of
total revenues for the quarter ended May 31, 1997 compared to (6.4)% of total
revenues for the quarter ended May 31, 1996.
Interest and Income Taxes. Interest expense (net of interest income and
amounts capitalized) was $8.9 million for the third quarter of fiscal 1997, an
increase of $7.3 million over net interest expense of $1.6 million for the third
quarter of fiscal 1996, reflecting the increase in the Registrant's net debt
incurred principally to fund the build out of its network. Debt, net of cash and
amounts held in escrow under the terms of $225 million of 13% Senior Notes due
2005 issued in February 1997 ("the Senior Notes"), amounted to $158.9 million at
May 31, 1997.
10
OPTEL, INC.
The Registrant recorded no income tax expense for the third quarter of
fiscal 1997. The Registrant has significant tax loss carryforwards which can be
carried forward for up to fifteen years and does not anticipate paying any
income taxes for the next several years. Deferred tax assets are fully reserved
because realization is uncertain.
Nine months ended May 31, 1997 compared with Nine months ended May 31, 1996
Revenues. Revenues were $29.1 million for the nine month period ended
May 31, 1997, an increase of $9.5 million or 48% over revenues of $19.6 million
for the nine month period ended May 31, 1996. Of the revenues generated in the
nine month period ended May 31, 1997, 92.5% and 7.5% represented revenues from
cable television and telecommunications, respectively, compared to 94.0% and
6.0%, respectively, for the nine month period ended May 31, 1996.
Cable Television. Cable television revenues were $26.9 million for the
nine month period ended May 31, 1997, an increase of $8.5 million, or 46%, over
cable television revenues of $18.4 million for the nine month period ended May
31, 1996. The growth in cable television revenues was principally attributable
to an increase in the average number of cable television subscribers and an
increase in the average revenue per cable customer.
Telecommunications. Telecommunications revenues were $2.2 million for
the nine month period ended May 31, 1997, an increase of $1.0 million, or 87%
over the nine month period ended May 31, 1996. This growth was largely due to an
increase in the average number of telecommunications customers.
Operating Expenses and Margins. Operating expenses (excluding
depreciation and amortization and non recurring reorganization costs) were $33.9
million for the nine month period ended May 31, 1997, an increase of $13.3
million, or 64%, over operating expenses of $20.6 million for the nine month
period ended May 31, 1996. As a percentage of revenues, operating expenses
increased to 116% for the nine month period ended May 31, 1997 from 104.8% for
the nine month period ended May 31, 1996 as a result of the expansion of the
Registrant's operations.
Cost of services were $14.0 million for the nine month period ended May
31, 1997, an increase of $5.6 million, or 67%, from $8.4 million for the nine
month period ended May 31, 1996. These expenses represent variable costs of the
Registrant, including programming, interconnection costs and revenue sharing
with property owners, and these increases in cost were primarily attributable to
the growth in the number of cable television subscribers and telecommunications
lines. Gross margins decreased from 57.2% for the nine month period ended May
31, 1996 to 51.8% for the nine month period ended May 31, 1997. The decrease in
gross margins is partly attributable to increases in programming fees resulting
from expanded channel line ups as properties are converted from SMATV services
to 18GHz or fiber networks in advance of price increases to customers and
increased premium channel penetration, which have lower gross margins. Gross
margins also decreased as a result of higher revenue sharing payments to
property owners due to properties being added to the Registrant's systems with
revenue sharing arrangements.
Customer support, selling, general and administrative expenses were
$19.8 million for the nine month period ended May 31, 1997, an increase of $7.6
million, or 63%, over customer support, general and administrative expenses of
$12.2 million for the nine month period ended May 31, 1996. The increase in
customer support, general and administrative expenses was largely due to an
increase in personnel associated with the expansion of the Registrant's
operations, the telecommunications roll out and the rapid growth in the size of
the cable television and telecommunications networks and the number of
subscribers.
Depreciation and Amortization. Depreciation and amortization expenses
were $9.9 million for the nine month period ended May 31, 1997, an increase of
$3.9 million, or 65%, over depreciation and amortization expenses of $6.0
million for the nine month period ended May 31, 1996. This increase was due
primarily to increased depreciation expenses associated with capital
expenditures for the continuing construction of the Registrant's cable
television and telecommunications networks.
Non Recurring Reorganization Costs. Non recurring reorganization
costs of $1.0 million were incurred for the nine month period ended May 31,
1996. These costs represent the costs of assimilating the acquisitions made by
the Registrant and include severance, relocation and recruitment costs. Since
the Registrant has substantially completed the reorganization of its operations
and plans only to make acquisitions on a limited basis for strategic purposes in
the future, these costs are not expected to be significant in future periods.
11
OPTEL, INC.
Loss from Operations and EBITDA. For the reasons discussed above, loss
from operations was $14.7 million for the nine month period ended May 31, 1997,
an increase of $6.6 million, or 81%, over loss from operations of $8.1 million
for the nine month period ended May 31, 1996. Negative EBITDA increased to
$(4.7) million for the nine month period ended May 31, 1997 from $(0.9) million
for the nine month period ended May 31, 1996. The increase in negative EBITDA is
the result of higher programming fees and revenue sharing, and the expansion of
the Registrant's operations in anticipation of the roll out of
telecommunications services. Negative EBITDA represented (16.3)% of total
revenues for the nine month period ended May 31, 1997 compared to (4.8)% of
total revenues for the nine month period ended May 31, 1996.
Interest and Income Taxes. Total net interest expense was $17.0 million
for the nine month period ended May 31, 1997, an increase of $13.3 million over
total net interest expense of $3.7 million for the nine month period ended May
31, 1996. This increase was primarily attributable to interest on additional
loans from GVL and interest on the Senior Notes.
The Registrant recorded no income tax expense for the nine month period
ended May 31, 1997. The Registrant has significant tax loss carryforwards which
can be carried forward for up to fifteen years and does not anticipate paying
any income taxes for the next several years. Deferred tax assets are fully
reserved because realization is uncertain.
Liquidity and Capital Resources
The Registrant has generated net losses since its inception, resulting
in an accumulated deficit of $60.5 million as of May 31, 1997. During the past
year, the Registrant has required external funds to finance capital expenditures
associated with the completion of acquisitions in strategic markets, expansion
of its networks and operating activities. Net cash used in building the
Registrant's cable television and telecommunications networks and related
business activities was $55.8 million for the first nine months of fiscal 1997
and $ 51.7 million for the first nine months of fiscal 1996.
Since inception and until the issuance of the Senior Notes, Registrant
relied primarily on investments from GVL, its principal stockholder, in the form
of equity and convertible notes (the "Convertible Notes') to fund its
expenditures. Convertible Notes due to GVL amounted to $125.3 million at May 31,
1997. None of the Registrant's stockholders or affiliates are under any
contractual obligation to provide additional financing to the Registrant. In
February, 1997, the Registrant issued the Senior Notes along with 225,000 Shares
of Non - voting Class C Common Stock to qualified institutional buyers as
defined in Rule 144A under the Securities Act of 1933, as amended, for aggregate
net proceeds of $220.2 million. Of this amount approximately $80.0 million has
been placed in an escrow account in order to cover the first six semi - annual
interest coupons on the Senior Notes. The Convertible Notes mature nine months
following the maturity or indefeasible payment in full of the Senior Notes and
are subordinated in right of payment to the Senior Notes under certain
circumstances.
On July 11, 1997, Registrant announced that it had successfully
completed an exchange offer where 100% of the Senior Notes were exchanged for
13% Senior Notes due 2005, Series B. The terms of the Series B Senior Notes are
substantially identical in all material respects (including interest rate and
maturity) to the Senior Notes except that the Series B Senior Notes do not
contain certain transfer restrictions and registration rights relating to the
Senior Notes.
The Registrant's future results of operations will be materially
impacted by its ability to finance its planned business strategies. The
Registrant anticipates that it will require approximately $250 million in
capital expenditures in fiscal 1997 and fiscal 1998 of which approximately $47
million had been expended as of May 31, 1997. The key elements of the
Registrant's business strategies requiring financing include the roll out of its
telecommunications networks including C.O. switches, the conversion of SMATV
systems to networks, the connection of additional properties to the networks and
the implementation of addressable interdiction devices in substantially all of
the MDUs served. The Registrant believes that the net proceeds from the issuance
of the Senior Notes (excluding the $80 million held in escrow) will be
sufficient to finance the Registrant's capital requirements through February
1998. The foregoing estimates are based on certain assumptions, including the
timing of the signing of Rights of Entry, the conversion of MDUs currently
served by SMATV systems to the networks and the telecommunications roll out,
each of which may vary significantly from the Registrant's plan. After utilizing
the net proceeds of the Senior Notes, the Registrant expects to fund its capital
requirements through the end of fiscal 1998 through a combination of cash
available from operations, bank or vendor financing or other available debt or
equity financing. As of the date hereof, the Registrant has no agreement or
agreement in principle with any bank, vendor or other person to provide any such
debt or equity financing.
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OPTEL, INC.
There can be no assurance that the Registrant will be successful in obtaining
any necessary financing or reasonable terms or at all.
Following fiscal 1998, the Registrant expects to continue to require
significant capital investment and additional financing. Such additional
financing may be obtained through additional equity or debt financing, including
senior bank credit facilities at one or more subsidiaries of the Registrant and
further securities offerings. To the extent that the Registrant determines to
pursue further acquisitions or negative cash flow from operations continues,
substantial additional funds may be required. To the extent that these or any
other funds are not obtained on a timely basis, it may be necessary for the
Registrant to delay the implementation of portions of its networks and to delay
pursuit of its telecommunications strategy. There can be no assurance that the
Registrant will be successful in obtaining the requisite debt and/or equity
financing on reasonable terms or at all.
The foregoing includes certain forward looking statements that are identified by
words such as "expect" and similar expressions. Achievement of such expectations
is subject to various risks and uncertainties, including, among others, the
availability of additional financing on a timely basis and on reasonable terms,
obtaining various regulatory approvals and successful management of the
Registrant's expansion plans.
13
OPTEL, INC.
PART Il - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
---------------
11. Statement of computation of per share earnings.
(b) Reports on Form 8-K
-------------------------
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
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 15, 1997
14