After Pulling IPO, OpTel Eyes Crunch

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After pulling its initial public offering a little more
than a month ago, OpTel Inc., a big private-cable company, is experiencing a cash crunch,
and it said it only has enough money to fund operations for 90 days.

Dallas-based OpTel -- the largest provider of cable
services to multiple-dwelling units in the country -- has run into trouble in the middle
of an aggressive $600 million expansion plan.

And although revenue from cable operations increased by 22
percent during the most recent quarter, and by 40 percent over the nine-month period, the
company has been awash in red ink as it attempts to significantly increase its size.

Since its inception six years ago, OpTel has accumulated
losses of about $85 million.

OpTel said in a press release that it is currently
negotiating with its parent company -- Montreal-based Le Groupe Vidéotron Itée, the
second-largest MSO in Canada -- for additional funding. Although the Canadian conglomerate
has deep pockets, it might be reluctant to continue to pump money into a losing

Standard & Poor's Corp. put OpTel's debt ratings on
credit watch last week with negative implications. Senior unsecured-debt securities of
$425 million are affected.

Vidéotron has contributed about $250 million to OpTel
since its inception.

"Vidéotron is a huge company with interests all over
the place," Paul Kagan Associates Inc. private-cable analyst John Mansell said,
"but they just sold their wireless [cable] assets. It makes you wonder if they are
re-evaluating their interest in OpTel."

Vidéotron agreed to sell its U.S-based wireless
subsidiary, Videotron USA, to Sprint Corp. last month for $180 million.

Vidéotron declined to comment other than to confirm that
it is in preliminary negotiations to fund a portion of OpTel's financial requirements for
the next 12 months.

Mansell added that although OpTel has increased revenue in
its cable operations, it has been spending a lot of money on telephony.

OpTel had planned to finance a large portion of its
telephony rollout with a $100 million IPO. But the company pulled the plug on the offering
in May, citing adverse market conditions.

Part of OpTel's problem is that it is already highly
leveraged. The company has about $450 million in outstanding high-interest debt, and its
interest payments balloon to $50 million annually next year. In addition, prior financial
commitments prohibit the company from borrowing more than $50 million.

And it appears that OpTel will need a lot more than $50
million to solve its problems.

According to its financial statement, the company had $35.5
million in cash and short-term investments as of May 31, down from $99.7 million in the
same period last year.

This means that it has been burning through at least $16
million in cash each quarter, and it will likely need a lot more as the capital
requirements for its telephony rollout accelerate.

OpTel has been building out its own switched telephony
network, collocating its own telephone switches in the central offices of incumbent
local-exchange carriers. So far, according to its financial statement, the company has
three switches in the Houston area, and it plans to add another 12 switches in that market
and eight more in the Dallas area.

According to its financial statements, OpTel's cable
revenue was $22.1 million in the fiscal third quarter ended May 31, a 22 percent increase
over the same period last year. In addition, revenue from telephony services doubled
during the quarter to $2.2 million from $1.1 million in the same period last year.

Cash-flow losses for the period quadrupled to $4.4 million,
down from negative cash flow of $1.1 million in the third quarter of last year.

The company attributed the increased losses to the
accelerated rollout of telephony CO switches; the deployment of switch-collocation access
and Internet-access services; direct-marketing efforts; and staff increases to further
improve service quality.

In addition, withdrawing its IPO resulted in a write-off of
about $1 million in costs.

OpTel has about 217,000 subscribers in such major
metropolitan areas as Los Angeles; San Diego; San Francisco; Phoenix; Denver; Houston and
Dallas-Fort Worth, Texas; Chicago; Indianapolis; Atlanta; and Miami-Fort Lauderdale and
Orlando-Tampa, Fla.