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UNITED STATES
SECURITIES AND EXCHANGE COMMISISION
Washington, D.C. 20549
_____________________________
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended August 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 (Name, address, (I.R.S. Employer
jurisdiction of including Zip code Identification No.)
incorporation or of principal executive offices)
organization)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days
Yes...X.. No.......
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
contained by reference in Part lll of this Form 10-K or any amendment to this
Form 10-K.
Yes...X.. No.......
COMMON STOCK AS OF OCTOBER 30, 1997
Common Stock Authorized Issued and Outstanding
Class A common stock, $.01 par 8,000,000 -
VALUE
Class B common stock, $.01 par 6,000,000 2,353,498
value
Class C common stock, $.01 par 300,000 225,000
value
DOCUMENTS INCORPORATED BY REFERENCE
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The following documents are incorporated into this Form 10-K by reference:
None
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PART I.......................................................................4
Item 1: Business.............................................................4
Overview...................................................................4
Recent Developments - Consummation of Phonoscope Acquisition; Launch of
Houston Central Office Switch; Change in minor Shareholder; Bank Financing
Commitment.................................................................5
Industry...................................................................6
Markets....................................................................6
Strategy...................................................................9
Sales, Marketing and Customer Service......................................9
Networks..................................................................10
Services..................................................................12
Competition...............................................................15
Regulation................................................................18
Item 2: Properties..........................................................27
Item 3: Legal Proceedings...................................................28
Item 4: Submission of Matters to a Vote of Security Holders.................28
Item 4a: Executive Officers of Registrant...................................28
PART II.....................................................................31
Item 5: Market for the Registrant's Common Equity and Related Stockholder
Matters...................................................................31
Item 6: Selected Financial Data.............................................31
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations.....................................................33
Fiscal year ended August 31, 1997 compared to fiscal year ended August 31,
1996......................................................................35
Fiscal year ended August 31, 1996 compared with eight months ended August
31, 1995..................................................................37
Eight Months Ended August 31, 1995........................................38
Liquidity and Capital Resources...........................................38
Recently Issued Accounting Principles.....................................40
Private Litigation Securities Reform Act of 1995..........................41
Item 8: Financial Statements and Supplementary Data.........................41
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................................41
Item 10: Directors and Executive Officers of the Registrant.................41
Item 11: Executive Compensation.............................................41
(1) Prior to Fiscal 1997, there were no other options granted.............43
Item 12: Security Ownership of Certain Beneficial Owners and Management.....43
Item 13: Certain Relationships and Related Transactions.....................44
PART IV.....................................................................49
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K....49
SIGNATURES..................................................................53
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PART I
ITEM 1: BUSINESS
OVERVIEW
OpTel, Inc, together with its subsidaries, ("OpTel" or "the Company") is the
largest provider of private cable television services to residents of multiple
dwelling unit developments ("MDUs") in the United States and is expanding the
telecommunications services it offers to MDU residents. The Company 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 Company'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 Company's cable television Rights of
Entry was approximately eight years as of August 31, 1997. The Company 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 Company also provides
telecommunications services in Houston, Dallas-Fort Worth, Austin, Chicago,
Denver and Miami-Ft. Lauderdale. As of August 31, 1997, the Company had 132,556
cable television subscribers and 6,825 telecommunications subscribers with 8,190
telephone lines.
For regulatory purposes, the Company 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 television operators are not required
to obtain cable television franchises and are subject to significantly 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 Company 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. In certain other
markets, such as Houston, the Company delivers cable television services
pursuant to franchises the terms of which are significantly more relaxed than
traditional cable television franchises.
The Company offers a full range of multichannel video programming (including
basic and premium services) which the Company believes is competitive in both
content and pricing with the programming packages offered by its major
competitors. The Company currently provides its telecommunications services as a
shared tenant services ("STS") operator through private branch exchange ("PBX")
switches. The Company offers customers access to services comparable in scope
and price to those provided by the incumbent local exchange carrier ("LEC") and
long distance carrier. The Company's telecommunications strategy includes
replacing its PBX switches with networked central office switches.
The Company invests in networks because it believes that networks provide the
optimal mechanism for delivering bundled cable television and telecommunications
services. The Company's networks use technologies that are capable of bi-
directional transmission. The Company provides its video programming to MDUs
through 18-Gigahertz microwave ("18GHz") and fiber optic networks and non-
networked satellite master antenna television ("SMATV") systems. As of August
31, 1997, approximately 165,000 of the 254,032 units passed for cable television
are served by the Company's networks. These networks generally provide up to 72
channels of video programming. The Company's networks will also facilitate
delivery of voice signal from each MDU to the central office switches to be
deployed or leased by the Company in its markets.
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The Company 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. The Company intends to
convert substantially all of its SMATV systems to 18GHz or fiber optic networks
by the end of fiscal 1999 and PBX switches to central office switches by the end
of fiscal 2002. The Company believes that there are several benefits to
converting its SMATV systems to cable networks and PBX switches to central
office switches. These include lower per unit maintenance costs, increased
system reliability through better monitoring and redundancy, greater channel
capacity, the opportunity to bundle services, integration of video, voice and
data and improved operating margins.
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 Company's
principal offices are located at 1111 W. Mockingbird Lane, Dallas, Texas 75247,
and its telephone number is (214) 634-3800.
RECENT DEVELOPMENTS - CONSUMMATION OF PHONOSCOPE ACQUISITION; LAUNCH OF HOUSTON
CENTRAL OFFICE SWITCH; CHANGE IN MINORITY SHAREHOLDER; BANK FINANCING COMMITMENT
On October 27, 1997 the Company acquired the Phonoscope residential cable
television and associated fiber optic network in the greater Houston
metropolitan area for $36.5 million. Phonoscope provides its services over a
fiber optic and coaxial cable distribution system. The Company will use its
existing franchise with the City of Houston to serve Phonoscope subscribers
within the City of Houston, and has received or will seek assignment of the
appropriate municipal franchises to service MDUs in other municipalities. The
acquired Phonoscope Rights of Entry or subscriber agreements cover approximately
60,000 units (principally at MDUs, but including certain single family units
within the footprint of its network) and approximately 34,000 subscribers and
the weighted average unexpired term of the acquired Rights of Entry was
approximately 5 years.
Phonoscope's network and the Company's existing Houston network are in close
proximity with each other, but do not overlap in any material respect. The
Company intends to expand the acquired fiber optic network and, over time,
interconnect the acquired network with the Company's existing Houston network.
The Company recently commenced operating a central office telephone switch in
Houston through which it provides local and long distance services as a
Competitive Local Exchange Carrier ("CLEC"). The Company intends to migrate its
properties currently served through PBX switches in Houston to the central
office switch over the coming months.
In August 1997 Capital Communications CDPQ Inc ("CDPQ"), a direct subsidiary
of Caisse de depot et Placement du Quebec ("Caisse"), a Quebec financial
institution and shareholder of the Company's majority shareholder, Le Groupe
Videotron Ltee ("GVL") purchased the minority interest in the Company from
Vanguard Communications LLP ("Vanguard"). Vanguard also transferred to CDPQ an
existing option to purchase additional shares in the Company which CDPQ promptly
exercised. As of August 31, 1997 GVL held, indirectly, 74.6% of the common
equity of the Company, 16.7% was held by CDPQ and 8.7% by various purchasers of
the Company's Senior Discount Notes due 2005, or their transferees.
In October 1997, the Company received a commitment from a bank to provide a
$150 million senior secured credit facility (the "Senior Facility") which will
be used to provide capital to fund future development. The Senior Facility will
consist of a term loan and a revolving credit commitment both of which will bear
interest at interest rates customary for this type of transaction and the credit
position of the Company. The Senior Facility will be secured by a first fixed
and floating lien on substantially all of the assets of the Company.
Availability under the Senior Facility will be subject to the Company meeting
certain performance criteria. Management expects that funds will become
available under the Senior Facility in December 1997. The commitment to close
the Senior Facility is subject to conditions and terminates December 15, 1997,
if not closed.
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INDUSTRY
The private cable television industry has undergone significant changes and
consolidation in recent years as a result of changes in cable television and
telecommunications laws and regulations.
Until February 1991, the primary technology available to private cable
television operators was SMATV, whereby the operator received and processed
satellite signals directly at an MDU or other private property with an on-site
headend facility consisting of receivers, processors and modulators, and
distributed the programming to individual units through an internal hard-wire
system in the building. SMATV operators spread the relatively high fixed costs
of operations (headend equipment, management, customer service, billing,
installation and maintenance) over a small subscriber base (frequently the
residents of a single MDU). This high cost structure reduced the incentives for
SMATV operators to invest in technology and overhead, resulting in inferior
channel capacity (usually 33 to 45 channels) and a lesser resource commitment to
customer service, which produced lower penetration rates. In February 1991,
regulatory changes made 18GHz technology, which had been in use for more than 25
years in commercial and military applications, available for use by private
cable television operators for the point-to-point delivery of video programming
services.
The present structure of the U.S. telecommunications market resulted largely
from the break-up of the "Bell System" in 1984 which created two distinct
telecommunications industries: local exchange and interexchange or "long
distance". The long distance industry was immediately opened to direct
competition; however, until recently, the local exchange industry has been
virtually closed to competition. Efforts to open the local exchange market to
competition began in the late 1980's on a state by state basis when competitive
access providers ("CAPs") began offering dedicated private line transmission and
access services which account for less than 10% of the local exchange market. In
the summer of 1995, several states began opening their markets to local exchange
competition. In February 1996, the Telecommunications Act was signed into law.
The Telecommunications Act provides a framework by which all states must allow
competition for local exchange services. Specifically, the Telecommunications
Act (i) requires the incumbent LEC to (a) allow competitors to interconnect to
the LEC's network at any technically feasible point and (b) allow competitors
access to components of the LECs network selectively and (ii) establishes a
framework for reciprocal compensation between the LEC and a CLEC for use of each
other's network.
MARKETS
MDUs comprise a wide variety of high density residential complexes, including
high- and low-rise apartment buildings, condominiums, cooperatives, townhouses
and mobile home communities. According to 1990 U.S. Census Bureau data, there
are more than 13.2 million MDU units in MDUs with greater than 10 MDU units in
the United States, of which approximately 4.0 million are within the Company's
existing geographic markets. The Company estimates that approximately 2.5
million of the MDU units within its existing markets are within MDUs which meet
the Company's preference for MDUs of 150 or more units. Industry sources
estimate that in 1995 the total revenues for cable television in the United
States were $25 billion and total revenues from telecommunications services in
the United States were $168 billion, of which approximately $96 billion
represented revenues from local exchange services.
The Company selected its current markets based upon their growth
characteristics, competitive conditions, MDU concentrations, topographical and
climatic conditions, favorable demographics and, to a lesser extent, favorable
regulatory environments.
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OpTel operated in the following geographic markets as of August 31, 1997:
<TABLE>
<CAPTION>
Units passed for
Units passed for cable Cable television telecommunications Telecommunications lines
LOCATION (1) subscribers (1)
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Houston 77,387 31,356 5,270 1,985
Dallas/Fort Worth 34,933 17,787 6,296 2,070
Southern California (Los
Angeles, San Diego) 32,842 20,139 768 199
Phoenix 24,047 9,374 - -
Chicago 28,796 17,006 110 23
Denver 15,178 7,997 1,069 358
San Francisco 23,016 16,069 - -
Miami 14,305 10,969 338 105
Other markets (Austin &
Tampa) 3,528 1,860 2,721 3,450
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Total 254,032 132,556 16,572 8,190
</TABLE>
(1) Units passed represents the number of units with respect to which the
Company has connected and activated its cable television and
telecommunication systems, respectively.
The Company's strategy has been to enter markets either through the
acquisition of a private cable television operator serving the target market or
by entering into Rights of Entry with a major MDU owner in the market. The
Company has entered substantially all of its markets through acquisitions. Upon
acquisition of an operator, the Company historically has begun the process of
upgrading the acquired systems by converting MDUs from SMATV technology to the
Company's 18GHz or, in Houston, fiber optic networks, adding additional
programming and improving customer service. In addition, the Company has been
able to achieve cost efficiencies by consolidating acquired operations into its
existing organization. As acquired operations generally have not offered
telecommunications services, the Company is in the process of adding such
services to its acquired systems.
HOUSTON
The Company entered the Houston market in January 1995 through an acquisition.
The Houston market includes the Company's operations in Bryan/College Station.
The Company has a cable franchise for the Houston market and utilizes a fiber
optic/coaxial cable network to service approximately 83% of its units passed for
cable television with the remainder serviced via SMATV systems. The Company
installed its first central office switch in the Houston market in October 1997.
DALLAS-FORT WORTH
The Company entered the Dallas-Fort Worth market in September 1994 by entering
into Rights of Entry with a significant property owner. Since that date the
Company has increased its market share by acquisition and by entering into
additional Rights of Entry. The Company's corporate headquarters and
centralized customer call center for all of its markets is located in Dallas-
Fort Worth. The Company intends to install a central office switch in the
Dallas-Fort Worth market in the early part of calendar year 1998.
CHICAGO
The Company entered the Chicago market in August 1995 through the acquisition
of a private cable operator whose properties were mainly in Chicago's suburbs.
The Company intends to commence full scale marketing of a competitive local
exchange carrier ("CLEC") telecommunications service in the Chicago market by
the end of fiscal 1999 using its own telecommunication switch, or sooner if
suitable switching capacity can be leased from a CLEC. In March 1997, the
Company consummated an acquisition of a small private cable operator in the
downtown Chicago market.
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PHOENIX
The Company entered the Phoenix market in December 1994 through an
acquisition. Since that date the Company has increased its market share by
entering into additional Rights of Entry. The Company intends to commence full
scale marketing of CLEC based telecommunications service in the Phoenix market
by the end of fiscal 1999 using its own telecommunication switch, or sooner if
suitable switching capacity can be leased from a CLEC.
SAN DIEGO/LOS ANGELES
The Company entered the San Diego market in December 1994 through an
acquisition. The San Diego market includes parts of Orange County, San
Bernadino County, Riverside County and North County. Since that date, the
Company has increased its market share by entering into additional Rights of
Entry.
The Company entered the Los Angeles market in May 1994 by entering into
certain Rights of Entry. Since that date the Company has increased its market
share by entering into additional Rights of Entry.
The Company operates its systems in San Diego and Los Angeles under one
General Manager and intends to share switching capacity between the two cities.
The Company intends to commence full scale marketing of a CLEC based
telecommunications service in the Southern California market by the end of
fiscal 1999 using its own telecommunication switch, or sooner if suitable
switching capacity can be leased from a CLEC.
SAN FRANCISCO
The Company entered the San Francisco market in August 1996 through an
acquisition and completed another acquisition in November 1996. In the San
Francisco market, the Company currently services all of its units passed for
cable television via SMATV systems but intends to convert substantially all of
these SMATV systems to 18GHz networks by the end of fiscal 1999. The Company
intends to commence full scale marketing of a CLEC based telecommunications
service in the San Francisco market by the end of fiscal 1999 using its own
telecommunication switch, or sooner if suitable switching capacity can be leased
from a CLEC.
DENVER
The Company entered the Denver market in July 1995 through an acquisition.
Since that date the Company has increased its market share by entering into
additional Rights of Entry. The Company intends to commence full scale
marketing of a CLEC based telecommunications service in the Denver market by the
end of fiscal 1999 using its own telecommunication switch, or sooner if suitable
switching capacity can be leased from a CLEC.
MIAMI - FORT LAUDERDALE
The Company entered the Miami-Fort Lauderdale market in June 1995 through an
acquisition. Since that date the Company has increased its market share by
entering into additional Rights of Entry. The Company intends to commence full
scale marketing of a CLEC based telecommunications service in the Miami-Fort
Lauderdale market by the end of fiscal 1999 using its own telecommunication
switch, or sooner if suitable switching capacity can be leased from a CLEC.
TAMPA
The Company entered the Tampa market in August 1996 through an acquisition.
The Company currently services all of its units passed for cable television in
the Tampa market via either SMATV or coaxial cable systems. The Company intends
to dispose of its operations in Tampa during the course of fiscal 1998, either
through a sale of the system or by exchanging these properties for private cable
networks in its other existing markets.
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AUSTIN
The Company entered the Austin market in July 1994 by entering into certain
Rights of Entry. Since that date the Company has increased its market share by
entering into additional Rights of Entry. The Company currently services all of
its units passed for cable television in the Austin market via SMATV systems.
The Company intends to dispose of its operations in Austin during the course of
fiscal 1998, either through a sale of the system or by exchanging these
properties for private cable networks in its other existing markets.
STRATEGY
The Company intends to grow its business and increase its market concentration
by attracting MDUs currently served by other providers, providing services to
newly-constructed MDUs and, as appropriate, acquiring existing private cable
operators and entering new markets. A critical aspect of the Company's growth
strategy is the development of strategic relationships with owners of portfolios
of MDUs. These relationships encourage the MDU owner to promote and sell the
Company's cable television and telecommunications services to MDU residents.
Many Rights of Entry provide incentives to the MDU owner, principally long-
term revenue sharing, and, in certain cases, payment of "key money" on Rights of
Entry execution. In addition, the Company believes that its ability to deliver
special services tailored to MDU owners and residents enhances the MDU owners
marketing of unit rentals and sales.
The Company's goal is to distinguish itself from its competitors by becoming a
leading provider of a comprehensive set of both cable television and
telecommunications services to MDUs.
The Company's customer marketing strategy is to offer a complete package of
cable television and telecommunications services backed by a high level of
customer service. The Company believes that, given comparable level of product
offerings, MDU residents prefer the simplicity and pricing benefits of dealing
with one supplier for all of their cable television and telecommunications
services. The Company also believes that prompt response to service requests and
customer inquiries is important to MDU residents. The Company affords customers
the opportunity to subscribe for Company services at the time the unit lease is
signed and believes that this added convenience is important to its marketing
efforts. The Company also plans to supplement its cable television and
telecommunications services by providing customers with access to additional
services, including Internet access, intrusion alarm, utility monitoring, and
PCS, cellular and paging services.
The Company is expanding the telecommunications component of its business both
by increasing the number of MDUs to which it provides telecommunications
services and by expanding the number of services offered. As part of its
ongoing telecommunications roll out and coincident with the conversion of its
SMATV systems to networks, the Company intends to replace its PBX switches
located at MDUs with networked central office switches. The Company deployed its
first central office switch in the Houston market in October 1997 and intends to
install central office switches in substantially all of its markets by the end
of fiscal 2002.
SALES, MARKETING AND CUSTOMER SERVICE
Consistent with its business strategy, the Company's marketing goals are to
(i) increase market share in existing markets by entering into additional Rights
of Entry, (ii) increase penetration at each MDU served by the Company, (iii) add
telephone services to existing cable-only properties and (iv) market additional
services, such as premium cable services, Pay-Per-View, Internet access,
intrusion alarm, utility monitoring and PCS, cellular and paging services, to
its subscribers. The Company focuses its marketing efforts on large MDUs located
in clusters within its markets and then attempts to obtain Rights of Entry for
additional MDUs within the coverage of its existing networks.
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The Company tailors its marketing efforts to two different constituencies: (i)
owners of MDUs who may enter into Rights of Entry and (ii) actual and potential
cable television and telecommunications subscribers at MDUs for which the
Company has entered into Rights of Entry. Each constituency is served by
separate sales and marketing teams that promote the Company's advantages over
its competitors in the marketplace.
The Company is committed to providing excellent customer service to MDU owners
and subscribers in the home, in the field and on the telephone. The Company
believes the most effective means of attracting and retaining MDU owners and
subscribers is by providing high quality subscriber service, including: (i) 24-
hour-a-day, seven-day-a-week subscriber telephone support; (ii) direct lines to
facilitate rapid response to calls initiated by MDU owners and managers; (iii)
computerized tracking of all incoming calls to minimize waiting times; (iv)
service calls generally made the same day the subscriber indicates a service
problem; (v) flexible, seven-day-a-week installation and service appointments;
(vi) follow-up calls and on-site inspections to verify subscriber satisfaction;
and (vii) 80% of installations completed within 3 business days of receiving the
initial installation request, often within 24 hours. The Company also uses focus
groups and subscriber surveys to monitor subscriber satisfaction.
NETWORKS
CABLE TELEVISION ARCHITECTURE
An integral part of the Company's strategy is to link properties to master
headends through microwave and fiber optic networks, to the maximum extent
practicable. In substantially all markets except Houston, the Company transports
video programming to MDUs in one of two ways: (i) by transmitting video
programming from a master earth station and headend to the MDU using point-to-
point microwave conveyance, generally in the 18GHz frequency range; or (ii) by
receiving video programming at a self-contained SMATV headend located at the
MDU. In Houston, video programming reaches a majority of the MDUs served by the
Company through a fiber optic network that the Company operates pursuant to a
franchise from the City of Houston. In certain limited geographic areas, video
programming reaches MDUs through a combination of coaxial cable and microwave
transmission. 18GHz microwave conveyance requires the operator to install small
microwave dishes at each MDU. These dishes receive video programming from a
centrally located master headend which must be within the line of sight of the
receiving dish. The FCC licenses paths between two points at specific frequency
ranges. The video programming may, within limits, be retransmitted at repeater
sites. To insure a high quality picture, the Company generally limits the number
of repeater sites. For the same reason, the Company generally limits the radius
of each microwave link to between three and eight miles, depending on
topographic and climatic conditions.
The Company intends to convert substantially all of its SMATV systems to 18GHz
or fiber optic networks by the end of fiscal 1999. As of August 31, 1997, the
Company had 35 18GHz networks and one fiber optic network in service in 11
metropolitan areas and, on average, 54% of the units passed by the Company were
served by such networks.
Within the MDUs it serves the Company distributes video programming via
conventional coaxial cable. In markets where it offers Pay-Per-View channels,
the Company uses a combination of traps (electronic filtering devices) and
addressable decoder-converter boxes. Where it does not offer Pay-Per-View, the
Company uses traps.
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The Company has recently completed field testing interdiction devices and has
begun deploying them in several of its current systems. Interdiction devices
will permit the Company to activate and deactivate services or specific channels
by remote command from its central office. When implemented, these devices will
afford quicker activation and disconnection, eliminate or significantly reduce
the need for traps and for decoder-converter boxes in the home, eliminate or
significantly reduce service calls and provide better picture quality. The
Company believes that these devices will also result in better collection
experience, higher levels of penetration and premium service buy-in and greater
customer satisfaction.
TELECOMMUNICATIONS ARCHITECTURE
In metropolitan areas where the Company currently offers telecommunications
services, the Company uses conventional twisted copper wire pairs to distribute
telephone services within an MDU. A PBX switch is installed at the MDU and local
traffic from the MDU is transported via leased trunk lines to the LEC central
office. From the LEC's central office, local calls are routed through the LEC's
network. Long distance traffic is routed via leased trunk lines from the PBX
switch to the Company's chosen long distance carrier (currently AT&T). The
regulations under which the Company's PBX-based services are provided generally
prohibit the aggregation of local telephone traffic between noncontiguous MDUs,
and in certain states there are limits or prohibitions on resale of intrastate
long distance and local service at a profit. These restrictions adversely effect
the profitability of the Company's STS operations. The Company intends to seek
certification as a CLEC in each of the states in which it operates. As a CLEC,
the Company will be relieved of these limits and prohibitions. The Company has
already been granted CLEC certification in Texas, Florida, Illinois and
California and has applications pending in Arizona and Colorado. The Company
believes CLEC certification will be available in a timely manner in these
markets. However, if certification were not granted the Company would be
restricted to providing STS services in that market.
The Company plans to interconnect MDUs to an owned or leased central office
switch using its owned fiber optic network and microwave networks and the
network facilities of other service providers. The Company intends to
interconnect its central office switch to several long distance carriers'
points-of-presence and to the public switched telephone network via the LEC's
network.
The implementation of the Company's telecommunications roll out plans will
depend in some measure on the speed and manner in which states implement (i) the
liberalized competition provisions of the Telecommunications Act and (ii) the
establishment of the interconnection and tariff requirements that the
Telecommunications Act imposes on the incumbent LEC.
The Company intends to contract for other ancillary elements of service from
the incumbent LEC in each market or from other available carriers. These
ancillary services include (i) operator service, (ii) directory listings, (iii)
emergency 911 service, and (iv) conveyance where the Company does not have a
network.
The Company intends to modify its existing networks (currently used to provide
video programming) to accommodate two-way digital telecommunications traffic so
as to connect the MDUs to its planned central office switches in each of its
markets. The Company intends to use its existing network configuration if
feasible and to supplement its microwave plant if necessary, including through
the use of other available radio spectrum for telecommunications services.
However, other than in Dallas, the Company has not yet commenced frequency
coordination and there can be no assurance that the Company will be able to
obtain licenses for these frequencies on the paths it desires.
It is also possible that the Company will augment its microwave networks in
many markets with fiber optic links between microwave hubs and from hubs to its
central switch locations. Particular network architecture in any market will be
dependent on, among other factors, bandwith requirements and equipment costs,
which are not yet determinable.
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The Company will use its networks to aggregate MDU long distance and local
traffic at its or its selected partners' telecommunications switch. From there,
traffic will be delivered to the point of presence of the connecting carrier
either through the Company's microwave or fiber networks, or where appropriate,
other available means of transport, including those of the interconnecting
carriers.
SERVICES
CABLE TELEVISION SERVICES
OpTel offers its subscribers a full range of popular cable television
programming at competitive prices. The Company's 18GHz networks are capable of
delivering up to 72 uncompressed analog channels of programming at each MDU. In
addition, the programming selections available at an MDU can be tailored to the
demographics of each MDU and, unlike franchise cable television operators which
may be required to carry all local broadcast channels and public access
channels, the Company can utilize all of its available channels to provide
popular entertainment, news and information programming.
The Company offers various programming packages to its cable television
subscribers. The Company's basic programming package offered to MDUs served by
its 18GHz and fiber optic networks typically includes 60-72 channels and is
generally priced below the rate charged by the incumbent franchise cable
television operator for a comparable package. The Company also offers premium
television services. These often feature uninterrupted, full-length motion
pictures, sporting events, concerts and other entertainment programming.
Premium services are offered individually or in discounted packages with basic
or other services. Certain of the Company's systems are capable of offering
movies, sporting events, concerts and other special events on a Pay-Per-View
basis.
The Company purchases copyrighted programming from program suppliers, pursuant
to private, negotiated multi-year license agreements. The average term of such
contracts is four years and such contracts are typically renewed upon
expiration. Generally, the Company pays its programming suppliers a fixed
monthly fee per subscriber, subject to volume discounts and reduced rates for
MDUs where the Company's services are supplied to all units on a bulk basis.
The programming fees average 31% of basic cable revenue and between 60% and 70%
of premium and pay per view revenue. The Company is not subject to any material
minimum subscriber requirements under its programming license agreements.
The video programming broadcast on local television broadcast stations is
subject to compulsory copyright license requirements from the copyright owners.
The Company is required to obtain retransmission consents from off-air
broadcasters but has had little difficulty in obtaining retransmission consent
agreements. Non-broadcast programming, often referred to as cable programming,
is not subject to the compulsory copyright license. However, federal
regulations prohibit (i) cable television operators, satellite cable programming
vendors in which a cable television operator has an attributable interest, and
satellite broadcast programming vendors from charging unfair, unreasonable or
discriminatory prices for programming and (ii) most exclusive dealing
arrangements whereby cable systems have procured programming that is unavailable
to their competition. The prohibition on exclusive distribution arrangements is
scheduled to expire on October 5, 2002, unless the FCC finds, during a
proceeding to be conducted in 2001, that the prohibition continues to be
necessary.
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An integral part of the Company's strategy is to link properties to master
headends through microwave and fiber optic networks, to the maximum extent
practicable. In substantially all markets except Houston, the Company
transports video programming to MDUs in one of two ways: (i) by transmitting
video programming from a master earth station and headend to the MDU using
point-to-point microwave conveyance, generally in the 18GHz frequency range; or
(ii) by receiving video programming at a self-contained SMATV headend located at
the MDU. In Houston, video programming reaches a majority of the MDUs served by
the Company through a fiber optic network that the Company operates pursuant to
a franchise from the City of Houston. In certain limited geographic areas,
video programming reaches MDUs through a combination of coaxial cable and
microwave transmission.
18GHz microwave conveyance requires the operator to install microwave dishes
at each MDU. These dishes receive video programming from a centrally located
master headend which must be within the line of sight of the receiving dish. The
FCC licenses paths between two points at specific frequency ranges. The video
programming may, within limits, be retransmitted at repeater sites. To insure a
high quality picture, the Company generally limits the number of repeater sites.
For the same reason, the Company generally limits the radius of each microwave
link to between three and eight miles, depending on the topographic and climatic
conditions of the market.
The Company intends to convert substantially all of its SMATV systems to 18GHz
or fiber optic networks by the end of 1999. As of August 31, 1997, the Company
operated 18GHz networks in each of its 9 major metropolitan areas except Houston
which is served by a fiber-optic network and San Francisco which is served by
SMATV systems and is currently in the process of being converted to an 18GHz
networks. On average, 60% of the units passed by the Company are currently
served by networks (approximately 67% pro forma for the Phonoscope acquisition).
OpTel's network design is digital capable and many of its components are
hybrid digital-analog. This will facilitate upgrading to digital compression
when economical and required by the marketplace. The use of networks
facilitates the upgrade to digital because networked systems have fewer headends
to upgrade than SMATV systems where it would not be economically viable to
update headends serving individual properties.
The Company's cable contracts include MDUs which subscribe on a "retail"
basis, where each resident of an MDU can independently opt to be a cable
subscriber and is separately billed, and MDUs which are under "bulk" contracts,
in which the property owner buys cable services from OpTel for 100% of the
apartments in the complex and includes basic cable in the services offered to
building residents. Residents of MDUs served under bulk contracts contract
separately with OpTel for premium services. Currently, approximately two-thirds
of OpTel's contracts are retail contracts. While bulk contracts have lower
revenues per customer than retail arrangements and generally have a lower gross
margin, the increase in penetration helps to offset this and certain program
providers grant discounts for bulk subscribers. In addition, bulk contracts
have lower servicing costs (billing, bad debt) than retail contracts. The
Company will sign bulk contracts where required but generally anticipates that
bulk contracts will decrease as a proportion of the total contract base over the
next few years as a greater proportion of new contracts are being signed for
the provision of retail service. An increase in the number of retail contracts
as a proportion of the total contract base is expected to contribute to an
increase in revenue per customer.
TELECOMMUNICATIONS SERVICES
The Company currently provides telephone service under two regulatory
frameworks. In Houston, Dallas, Miami, Chicago, San Diego and Denver, it
operates as an STS provider. To date, OpTel has restrained the growth of STS
telephony because of the marginal economics of that business. In Houston, it
also operates as a CLEC. The Company intends to convert to CLEC operation in
all of its markets over the next two to three years.
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OpTel's telephone contracts provide that OpTel will be the exclusive provider
of local telephone services to MDU residents, subject to the legal rights of the
incumbent local exchange carrier ("ILEC") and other providers to offer service.
Pursuant to the telephone ROE contracts, the building owners receive revenue
sharing payments and may receive an initial payment. In return building owners
are required to promote OpTel's service and refrain from promoting other
telecommunications providers' service to MDU residents.
While the telephone product currently provides only minor revenue streams for
OpTel, Management believes it represents an attractive and potentially lucrative
business opportunity for several reasons. First, OpTel has already achieved
penetration (in terms of lines) of approximately 48% in those properties which
it currently offers telephone services as an STS provider. Even allowing for the
distortion of the Austin market where telephone penetration is very high, this
figure is above 34%. This penetration level has been achieved with virtually no
marketing effort. Secondly, OpTel will be serving as an MDU residential-oriented
CLEC, and should benefit from the recognized demand for CLEC services in the
residential sector. Management knows of no other CLEC with as directed a
residential strategy as OpTel. Thirdly, the revenue sharing structure, together
with the "one stop shopping" aspects of cable and telephony ROE contracts,
should create incentives for property owners to promote the telephone product.
In metropolitan areas where the Company currently offers telecommunications
services, the Company uses conventional twisted copper wire pairs to distribute
telephone services within an MDU. Under the STS model, a PBX switch is
installed at the MDU and local traffic from the MDU is transported using the
ILEC's commercial transport either to the ILEC central office switch or to the
central office switch of an long distance operator ("IXC"). From the ILEC's
central office, local calls and long distance calls are routed through the
ILEC's network or using the IXC's long distance network if the PBX is also
interconnected with the IXC's switch. Where there is no such direct
interconnection, long distance traffic is routed from the ILEC's switch to the
Company's chosen long distance carrier (currently AT&T). Using its own central
office switches the Company believes it will have much greater control over
quality of its product offering and interconnect relationships (and hence
price). As a result, the Company intends to seek certification as a CLEC in
each of the states in which it operates and currently has CLEC status in Texas,
California, Florida and Illinois.
The Company is currently in the process of converting to the CLEC telephone
model of operation. This involves interconnecting MDUs to an owned central
office switch or leased capacity on the central office switch of another CLEC
using OpTel's own fiber optic network and microwave networks and the network
facilities of other service providers. Local traffic is then routed from the
OpTel switch to the ILEC switch using dedicated transport. OpTel intends to
interconnect its central office switch to several long distance carriers'
points-of-presence and to the public switched telephone network via the ILEC's
network. The switch in Houston is now fully operational and direct
interconnection with a preferred long distance provider is expected to be
completed in the near future.
OpTel plans to contract for other ancillary services from the ILEC and other
service providers. These services include operator service, directory listings
and emergency 911 service and, in certain markets, transport.
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The Company intends to modify portions of the existing networks, currently
used to provide video programming, to accommodate two-way digital
telecommunications traffic. The Company expects to use 23GHz as its principal
frequency to carry telecommunications traffic. The Company believes that using
23GHz will enable it to utilize proven equipment manufactured by several
vendors. The Company will transmit and receive 23 GHz signals generally using
certain modifications to its existing 18GHz dishes and has achieved satisfactory
results in technology field trials. The Company will use its networks to
aggregate MDU long distance and local traffic at its telecommunication switch.
In certain markets the Company is currently exploring the possibility of
initially leasing telecommunication switch capacity from other CLECs in order to
speed up the roll out of telephone services. From these switches, traffic will
be delivered to the point of presence of the connecting carrier either through
the Company's microwave or fiber networks, or where appropriate, other available
means of transport, including those of interconnecting carriers.
Competition
The multichannel television and telecommunications industries are highly
competitive. The Company presently competes with companies that specialize in
the provision of multichannel television or telecommunication services and,
increasingly, with companies that offer bundled multichannel television and
telecommunications services. Many of these competitors are larger companies with
greater access to capital, technology and other competitive resources. The
Company's private cable television service competes with traditional franchise
cable television operators as well as wireless cable television operators, other
private cable television operators, direct broadcast satellite ("DBS")
operators, stand-alone satellite service providers and, to a lesser extent, off-
air broadcasters. The Company's telecommunications services compete with other
STS providers, LECs, CLECs and CAPs and will compete with long distance
telephone companies and franchise cable television operators as they begin to
enter the local telephone business. The Company's long distance service competes
with established interexchange carriers and resellers. In addition, recent
telecommunications offerings, including PCS, and future offerings may increase
competition in the telecommunications industry. Recent and future legislative,
regulatory and technological developments will likely result in additional
competition, as telecommunications companies enter the cable television market
and as franchise cable television operators and interexchange carriers begin to
enter the local telephone market. Similarly, mergers, joint ventures and
alliances among franchise, wireless or private cable television operators and
Regional Bell Operating Companies ("RBOCs") may result in providers capable of
offering bundled cable television and telecommunications services in direct
competition with the Company.
The Company competes with multichannel television operators and
telecommunications service providers to obtain Rights of Entry. In most markets
serviced by the Company, franchise cable television operators now offer revenue
sharing and access fee arrangements to MDU owners. There can be no assurance
that these payments will not increase in the future as competition increases for
access to the higher quality MDUs. Another basis of competition is the breadth
of programming and range of services offered. Although the Company as a matter
of course investigates new sources of programming and technologies that may
increase its range of services, other larger and more diversified competitors
may attract the targeted MDUs based on their increased menu of services.
Consequently, the Company may be compelled to reduce its prices and improve its
range of services under its existing Rights of Entry which generally require the
Company to remain competitive with the market in general. At present, the
Company believes that its existing Rights of Entry give it a competitive
advantage within its present markets; however, these advantages may deteriorate
with changes in regulations, the types of competitors and with technological
advances. There can be no assurance that the Company will be able to compete
successfully with existing competitors or new entrants in the market for such
services. Competition may also be enhanced by technological developments that
allow competitors of the Company to bypass property owners altogether and market
their services directly to the tenants of MDUs. Although the Company's Rights of
Entry prohibit tenants from installing receiving equipment on the exterior of
the building, these provisions are not always enforced. The Rights of Entry do
not prevent a resident from
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using cellular telephone service, for example, offered by another provider.
While the Company believes that the exclusivity provisions of its Rights of
Entry provide it with competitive advantages, such advantages may be
significantly diminished by technological and other developments beyond the
control of the Company. Such developments may impact the Company's strategies
and may require it to expend funds beyond the levels currently contemplated.
Certain of the Company's current and potential competitors are described
below.
Traditional Franchise Cable Systems. The Company's major competition for
Rights of Entry in each market comes from the traditional franchise cable
television operator. The Company competes with such operators by (i) focusing
exclusively on MDUs, (ii) sharing profits with MDU owners, (iii) offering
customized programming, and (iv) charging lower rates to subscribers.
Multipoint Multichannel Distribution Systems. MMDS systems are similar to the
Company's 18GHz networks in that they use microwave transmitting and receiving
equipment. MMDS differs from 18GHz in that (i) it "broadcasts" its video
programming direct to individual subscribers and generally not to an MDU's
receiver and (ii) its systems transmit in an omni-directional manner, while
18GHz systems are point-to-point. As a result, MMDS wireless cable can provide
service to all households within a wireless operator's "line-of-sight." The
2.5GHz spectrum utilized by MMDS wireless cable was initially allocated by the
FCC to applicants other than MMDS operators within a given market, with 20 of
the available channels generally allocated to educational institutions. As a
result, MMDS wireless operators have had difficulty acquiring or leasing the
critical mass of channels required to offer a diverse programming lineup.
Moreover, absent digital compression technology, channel capacity is limited to
33 analog channels.
Local Multipoint Distribution Service. The FCC has recently issued rules
reallocating the 28GHz band to create a new video programming delivery service
referred to as local multipoint distribution service ("LMDS"). The FCC also has
issued a license for the New York City market for one operator that is
developing a system to utilize the 28GHz frequency for pay television. As
currently proposed, LMDS would provide a single licensee up to 1000 MHz of
spectrum for the distribution of programming in each prescribed geographic area.
LMDS systems, like MMDS, will use point-to-multipoint microwave distribution for
wireless cable services. Unlike MMDS, however, LMDS systems, using the proposed
allocation in the 28 GHz band will be able to provide channel capacity equal or
greater to that of most cable systems, including the Company's. In addition,
LMDS systems that would allow subscriber-to-hub transmissions to facilitate the
provision of interactive services and telecommunications have been proposed.
SMATV Systems. The largest number of private cable companies are operators of
SMATV systems. Like the Company, these systems offer a multichannel television
service pursuant to rights of entry with MDU owners. Where the Company has
introduced or will introduce 18GHz systems, the Company competes with SMATV
systems on the basis of (i) larger channel offerings (typically SMATV offers 33
to 45 channels), (ii) the quality of its video programming delivery, (iii)
customer service, and (iv) the perceived high price of SMATV relative to the
programming package provided. The Company may acquire additional SMATV
operations with a view to converting them, where feasible, to 18GHz technology,
adding channels and upgrading customer and field service.
Direct Broadcast Satellite. DBS systems involve the transmission of encoded
video programming direct from a satellite to the home user without any
intermediate processing or retransmission by a terrestrial operator. Although
prices have been decreasing, DBS service typically requires the purchase of
equipment and installation fees which are a significant cost to the subscriber.
In addition, subscribers generally pay a monthly programming fee to receive DBS
service. Some of these fees are lower than those charged by the Company before
consideration of the equipment costs. However, the Company believes that it can
effectively compete with DBS systems in the MDU marketplace for the following
reasons. First, DBS line-of-sight problems are significant (unless an entire
MDU is connected to the service) because a DBS antenna must be pointed in the
proper direction to receive video programming from the satellite. In
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addition, most MDU owners prohibit the placement of individual antennas on their
property by MDU residents. Perhaps more importantly, other than in so-called
"white areas" of the country (generally rural locations without either cable
television service or good reception of over-the-air broadcast programming), DBS
operators are presently not permitted to retransmit network or local
broadcasting programming. Certain DBS operators have announced "MDU programs"
which generally consist of either (i) paying commissions to a local satellite
dish dealer who has, at its own expense, overbuilt an MDU or (ii) billing MDU
owners for the service on a bulk basis. The Company's Rights of Entry currently
prohibit an MDU owner from allowing a DBS system to be installed at the MDU.
OpTel does not view DBS as a major threat as, because of the frequencies that
they use, they are generally not amenable to MDU installation in properties of
over 100 units. However, OpTel would consider offering this service, using its
own technology, to supplement its channel lineup if there was overwhelming
demand for the product and it was a commercially viable source of programming.
Telephone Companies. The Telecommunications Act repealed the
telecommunications-cable television cross-ownership restriction, which
prohibited telecommunications companies from providing video programming
directly to subscribers in their telecommunications service areas. Several of
the RBOCs have acquired MMDS or other private cable television operators in an
effort to begin providing cable television services and several other LECs have
indicated their intent to enter the cable television market. Similarly, the
Telecommunications Act will in all likelihood result in a significant increase
in the number of companies, including CLECs, long distance carriers and wireless
telephone operators, offering local telephone service.
Many of the Company's telecommunications services compete directly with
services offered by the ILECs which currently dominate their local
telecommunications markets. These companies all have long-standing relationships
with their subscribers and have financial, personnel and technical resources
substantially greater than the Company. The Company expects to compete in this
market by (i) establishing strategic relationships with MDU owners so as to
allow the Company to market effectively to MDU residents, (ii) providing value
added, enhanced services to MDU residents, (iii) bundling its telecommunications
and cable television services, (iv) providing a high level of customer service
and responsiveness, and (v) competitively pricing its products.
Wireless Telecommunications. The Company's telecommunications services will
also compete with current and future wireless telecommunications offerings,
including those of cellular and PCS providers. Wireless telecommunications can
be sold to MDU residents without violating the Company's Rights of Entry since
wireless telecommunications do not require the use of the Company's network or
the MDUs internal wiring. The Company intends to offer all or certain of these
services, on a resale basis, directly to its subscribers and to bundle wireless
communications with the Company's other offerings.
Video Stores. Retail stores rent video cassette recorders ("VCRs") and/or
video tapes, and are a major participant in the entertainment video program
delivery industry. Videocassette rentals do not compete with cable television
operators' news, information, education and public affairs programming. Although
management does not believe that video rentals and sales have a material
competitive impact on the basic services provided by franchise, private or
wireless cable systems, the availability of movies and other programming on
videocassette has a competitive impact on the penetration rates for the
Company's premium channels and Pay-Per-View programming. The Pay-Per-View window
(i.e., the time period after which a theatrical film is released in the Pay-Per-
View market) is generally later than the corresponding home video window.
Management believes that until this Pay-Per-View window is shortened to coincide
with or precede the home video window, any rise in Pay-Per-View penetration
rates would be unlikely to come for studio produced feature films. Rather, it
would more likely come from sporting events, concerts and cable-exclusive movies
not released through theaters.
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Off-Air Local Broadcasts. Off-air local broadcasts (e.g., ABC, NBC, CBS, Fox
and PBS affiliates and independent local stations) provide a free programming
alternative to the public. This programming generally offers MDU residents less
variety and does not include the specialized entertainment and news programming
available only on cable television. Customers who choose it over cable
television usually do so on the basis of cost. The Company currently retransmits
off-air local broadcasts to its private cable television subscribers, but its
ability to do so in the future is generally dependent upon receipt of
retransmission consents.
REGULATION
The multichannel television and telecommunication industries are subject to
extensive regulation at the federal, state and local levels. The following
summary does not purport to describe all present and proposed federal, state and
local regulations and legislation relating to the multichannel television and
telecommunications industry. Legislative and regulatory proposals under
consideration from time to time by Congress and various federal agencies, as
well as state and local franchise requirements, have in the past, and may in the
future, materially affect the Company and the multichannel television and
telecommunications industries. Additionally, many aspects of regulation at the
federal, state and local levels currently are subject to judicial review or are
the subject of administrative or legislative proposals to modify, repeal or
adopt new laws and administrative regulations and policies. Neither the outcome
of these proceedings nor their impact on the Company can be predicted at this
time. The Company believes that it is in compliance in all material respects
with all federal, state and local regulations applicable to it. In some
instances, the Company has acquired businesses that do not comply with all
regulations applicable to them and it undertakes to remediate such matters as
soon as practicable and in a manner that does not materially adversely impact
it.
TELECOMMUNICATIONS ACT OF 1996
On February 8, 1996, the President signed into law the Telecommunications Act
of 1996, (the "Telecommunications Act") which amended the Communications Act of
1934 (the "Communications Act"). The Telecommunications Act has altered, and
will continue to alter, federal, state and local laws and regulations regarding
telecommunications providers and services. The law is intended, in part, to
promote substantial competition in the marketplace for local telephone service
and in the delivery of video and other services. Although the Company believes
that certain provisions of the Telecommunications Act will help the Company
compete with ILECs, it is premature to predict the effect of the
Telecommunications Act on the multichannel television and telecommunications
industries in general or the Company in particular. In large part, the impact
of the Telecommunications Act will depend upon the outcome of various FCC rule
making proceedings to interpret and implement the Telecommunications Act,
including the FCC's First Report and Order regarding the interconnection
obligations of telecommunications carriers and litigation concerning the FCC's
implementation of the Telecommunications Act.
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REGULATION OF CABLE TELEVISION
Certain of the Company's networks are, for regulatory purposes, deemed to be
"Cable Systems". To constitute a Cable System, a multichannel television system
must use hard-wire or fiber optic cable that makes a tangible physical crossing
or use of a public right-of-way. As a result, all Cable Systems are required to
obtain a local franchise and are subject to state and local regulation as well
as federal Cable System regulation. The Company's 18GHz networks and SMATV
systems are not considered Cable Systems and thus are not subject to local
franchising requirements and are free from most Cable System regulation. The
Company's Houston, Texas system, a portion of its Fort Worth, Texas system and
certain other small systems are regulated as Cable Systems. However, the
Company's Houston, Fort Worth and other small franchise cable television systems
are exempt from federal rate regulation and the universal service obligation,
even though they are Cable Systems, because they are subject to "effective
competition" as discussed in greater detail below.
Set forth below is a discussion of the principal laws and regulations
governing the Company's private and franchise cable television operations.
Federal Cable System Regulation
-------------------------------
The Communications Act, as amended, governs the regulation of Cable Systems.
The regulations imposed on Cable Systems include requirements to (i) obtain a
local franchise (which may require the franchisee to pay franchise fees to local
governments of up to 5% of yearly gross revenues), (ii) delete certain programs
from cablecasts, (iii) comply with certain customer service standards, (iv)
retransmit certain broadcast television programming, (v) in most circumstances,
conform subscriber service and equipment rates to applicable federal
regulations, (vi) comply with FCC equal employment opportunity ("EEO") rules and
policies, (vii) make available channels for leased-access programmers at rates
that are to be calculated on a formula established by the FCC, and (viii) offer
customer service to all buildings passed by its network. In addition, rates for
basic cable service on Cable Systems not subject to "effective competition" are
regulated by local franchising authorities. Rates for upper tier or "cable
programming services" on such systems are regulated by the FCC. The
Telecommunications Act eliminates cable programming service tier rate regulation
effective March 31, 1999, for all Cable System operators. The Company's
networks that are Cable Systems are subject to these requirements, which impose
regulatory costs and reduce the speed and flexibility with which the Company and
its Cable System competitors can respond to competitive challenges from other
video distribution technologies. The Company's Cable Systems, however, are
exempt from rate regulation because they are, the Company believes, subject to
"effective competition."
Prior to the enactment of the Telecommunications Act, Cable Systems were
deemed to be subject to "effective competition" if either: (1) fewer than 30% of
the households in the franchise area subscribe to the service of the Cable
System; (2) the area is served by at least two unaffiliated multichannel
television operators, both of which are able to provide service to at least 50%
of the households in the franchise area, and the number of households actually
subscribing to all but the largest multichannel television operator exceeds 15%;
or (3) the local franchising authority itself offers multichannel television to
at least 50% of the households in the franchise area. The Telecommunications
Act expanded the definition of "effective competition" to include situations in
which a LEC or its affiliate offers multichannel television directly to
subscribers by any means (other than direct-to-home satellite services) in the
franchise area. It is expected that this change will provide franchise cable
television operators with increased pricing flexibility as LECs begin to provide
multichannel television services. No assurance can be given that the Company
does not, or will not in the future, constitute "effective competition" to any
franchise cable television operator with which it competes.
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Copyright Licensing. Cable Systems and private cable television systems are
entitled to federal compulsory copyright licensing privileges. In order to
obtain a compulsory copyright, such systems must make semi-annual payments to a
copyright royalty pool administered by the Library of Congress. A compulsory
copyright provides a blanket license to retransmit the programming carried on
television broadcast stations. Non-broadcast programming, often referred to as
cable channel programming, is not subject to the compulsory copyright license.
The Company purchases this copyrighted programming from program suppliers (e.g.,
ESPN), which in turn obtain rights to the programming directly from the program
copyright owner pursuant to a private negotiated agreement. Bills have been
introduced in Congress over the past several years that would eliminate or
modify the cable compulsory license. The need to negotiate with the copyright
owners for each program carried on each broadcast station in the channel lineup
could increase the cost of carrying broadcast signals or could impair the
Company's ability to obtain programming.
Must-Carry and Retransmission Consent. The Communications Act grants local
television stations the right to elect to either force local Cable Systems to
"carry" the television station free of charge (a "must carry" right) or to
prohibit Cable Systems and private cable television systems from carrying the
local television station (a "retransmission consent" right). Under the must-
carry rules, a Cable System, subject to certain restrictions, generally must
carry, upon request by the station and depending on the number of usable
activated channels on the system, all commercial television stations with
adequate signals that are licensed to the same market as the Cable System. Under
the retransmission consent rules, Cable Systems and private cable television
systems are precluded from carrying commercial broadcast stations that choose
not to exercise their must-carry rights, all "distant" commercial broadcast
stations (except for "superstations", i.e., commercial satellite-delivered
independent stations such as WTBS), commercial radio stations and certain low-
powered television stations, without obtaining those stations' explicit written
consent for the retransmission of their programming. Retransmission consent
agreements do not obviate a copyright license for the programming carried on the
broadcaster's signal. However, Cable Systems and private cable television
systems may obtain a compulsory copyright license for broadcast programming as
described above. To date, the "must carry/retransmission consent" regulations
have not had a significant impact on either the operations or profitability of
the Company. The Company has had little difficulty obtaining retransmission
consent agreements with local broadcasters. Nonetheless, there can be no
assurance that broadcasters, in some circumstances, will not withhold
retransmission consent, require excessive compensation for that consent or
impose onerous conditions thereon. Recent changes in federal law and regulation
will likely affect the conduct of the Company's private and franchise cable
television business.
Changes in the Definition of a "Cable System." Formerly, to avoid being
classified as a Cable System, private cable television systems were limited to
linking with hard wire only commonly owned or managed MDUs without crossing a
public right-of-way. The Telecommunications Act amended the definition of Cable
System such that systems which make no use of public streets or public rights-
of-way no longer are deemed to be Cable Systems, regardless of the type or
ownership of properties served by the system. Thus, for example, the Company's
private cable television systems now may serve mobile home parks and private
communities without a local franchise and free of most federal Cable System
regulations.
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Elimination of the Telco-Cable Cross-Ownership Restriction. The
Telecommunications Act repealed the LEC cable television cross-ownership
restriction, which prohibited LECs from providing multichannel television
directly to subscribers in their telephone service areas. This change may
increase the level of competition in the multichannel television market. LECs
now have several options for entering and competing in the multichannel
television marketplace. LECs now may: (i) provide video programming to
subscribers through radio communications under Title III of the Communications
Act; (ii) provide transmission of video programming on a common carrier basis
under Title II of the Communications Act (i.e., provide a common carrier video
platform); (iii) provide video programming as a Cable System under Title VI of
the Communications Act (franchise cable); or (iv) provide video programming by
means of an "open video system." Open video systems are not required to comply
with the full panoply of federal Cable System regulation, but they are subject
to certain additional programming selection limitations. It is unclear at this
time the extent to which any of these market entry options will be used by LECs.
Rate Relief for Small Cable Operators. The Telecommunications Act
deregulated the rates charged for cable programming services in any Cable System
operated by a "small cable operator" that serves 50,000 or fewer subscribers.
The law defines a "small cable operator" as one which, in the aggregate, serves
fewer than one percent of all subscribers in the United States and which is not
affiliated with any entity with gross annual revenues in excess of $250 million.
This provision may provide increased pricing flexibility for certain of the
Company's competitors who qualify as "small cable operators."
The Uniform Rate Requirement. Prior to enactment of the Telecommunications
Act, the Communications Act generally provided that Cable Systems were required
to have a rate structure for the provision of cable service that was uniform
throughout its geographic area. The Telecommunications Act provides that this
requirement is applicable only where "effective competition" is absent. Further
the Telecommunications Act exempts from the uniform rate requirement non-
predatory bulk discounts offered to MDUs. Consequently, the franchise cable
television operators with which the Company competes now have increased pricing
flexibility with respect to MDU bulk discounts.
Program Access. The program access provisions of the Communications Act were
intended to eliminate unfair competitive practices and facilitate competition by
providing competitive access to certain defined categories of programming.
Generally, these restrictions are applicable to Cable System operators,
satellite cable programming vendors in which a Cable System operator has an
attributable interest and satellite broadcast programming vendors. The
programming access provisions prohibit these entities from charging unfair,
unreasonable or discriminatory prices for programming. Further, the programming
access provisions prohibit most exclusive dealing arrangements pursuant to which
Cable Systems obtain the exclusive right to distribute the subject programming
within their franchise areas. Such exclusive distribution arrangements have been
found to inhibit the ability of new entrants to compete in the multichannel
television market. The prohibition on exclusive contracts, however, is scheduled
to expire on October 5, 2002 unless the FCC determines, during a proceeding that
is to be conducted in 2001, that the prohibition continues to be necessary to
promote competition in the multichannel television market. The
Telecommunications Act amended the program access provisions by adding that the
provisions shall also apply to common carriers and their affiliates. Thus,
telecommunications companies entering the market will find it more difficult to
limit their competitors' access to programming.
21
<PAGE>
Subscriber Access. The FCC has initiated a review of the rights of various
multichannel television service providers to obtain access to MDUs and other
private property. The FCC has indicated that it seeks to ensure a level
competitive playing field in the emerging multichannel television market. One
possibility raised by the FCC is the establishment of a federal mandatory access
requirement or a limit on the duration of exclusive service agreements between
MDU owners and video programming providers. In another proceeding, the FCC is
contemplating an order preempting state, local and private restrictions on over-
the-air reception antennas placed on rental properties or properties not within
the exclusive control of the viewer. Although it is open to question whether
the FCC has statutory and constitutional authority to compel mandatory access,
restrict exclusive agreements or preempt private restrictions on antennas
located on property owned or controlled by others, there can be no assurance
that it will not attempt to do so. Either such action would tend to undermine
the exclusivity provisions of the Company's Rights of Entry with MDU owners.
State and Local Cable System Regulation
---------------------------------------
Because Cable Systems use public rights-of-way, they are subject to state and
local regulation, typically imposed through the franchising process. State
and/or local officials often are involved in the franchisee selection, system
design and construction, safety, consumer relations, billing, and community-
related programming and services among other matters. Cable Systems generally
are operated pursuant to nonexclusive franchises, permits, or licenses granted
by a municipality or other state or local government entity. Franchises
generally are granted for fixed terms and in many cases are terminable if the
franchise operator fails to comply with material provisions of the franchise.
Franchising authorities are immune from monetary damage awards arising out of
regulation of Cable Systems or decisions made on franchise grants, renewals,
transfers and amendments.
Cable franchises typically contain provisions governing fees to be paid to
the franchising authority, length of the franchise term, renewal, sale or
transfer of the franchise, territory of the franchise, design and technical
performance of the system, use and occupancy of public rights-of-way and types
of cable services provided.
Although federal law contains certain procedural safeguards to protect
incumbent Cable Systems from arbitrary denials of franchise renewal, the renewal
of a cable franchise cannot be assured unless the franchisee has met certain
statutory standards. Moreover, even if a franchise is renewed, a franchising
authority may impose new requirements, such as the upgrading of facilities and
equipment or higher franchise fees. At least two states, Massachusetts and
Connecticut, have adopted legislation subjecting Cable Systems to regulation by
a centralized state government agency. There can be no assurance that other
states will not similarly adopt state level regulation.
The Company's Houston cable television franchise and its other limited cable
television franchises are subject to state and local franchise laws. Moreover,
although 18GHz private cable systems are not subject to local franchise laws,
state and local property tax and environmental laws are applicable to the
Company's business. For example, the Company has to comply with local zoning
laws and applicable covenants, conditions and restrictions when installing its
antennae and other microwave equipment.
In addition, a number of states have enacted mandatory access laws. Although
such laws differ in some respects from state to state, state mandatory access
laws generally require that, in exchange for just compensation (typically set by
statute or regulation to be as low as $1.00), the owners of rental apartments
(and, in some instances, the owners of condominiums and manufactured housing
parks) must allow the local franchise cable television operator to have access
to the property to install its equipment and provide cable service to residents
of the MDU. Such state mandatory access laws effectively eliminate the ability
of the property owner to enter into an exclusive Rights of Entry agreement with
a provider of cable or other video programming services. To the best of the
Company's knowledge, states that have enacted cable mandatory access statutes in
some form are: Connecticut, Delaware, Illinois, Kansas, Maine, Minnesota,
22
<PAGE>
Nevada, New Jersey, New York, Pennsylvania, Rhode Island and Wisconsin. The
District of Columbia and the cities of Scottsdale and Glendale, Arizona, and
Lewisville, Texas also have adopted municipal ordinances requiring mandatory
access. However, the Company believes that the enforceability of such ordinances
is doubtful under existing judicial precedent. Florida currently has a mandatory
access statute for condominiums, but the validity of that statute has been
called into question because an identical provision of Florida law that applied
to rental properties has been held to be unconstitutional. Virginia has an anti-
compensation statute that forbids an owner of an MDU from accepting compensation
from whomever the owner permits to provide cable or other video programming
services to the property. Such a statute severely limits the ability of a cable
or other video programming provider to enter into an exclusive Right of Entry
agreement with an owner of an MDU because an owner usually is induced to enter
an exclusive agreement through financial incentives. These statutes have been
and are being challenged on constitutional grounds in various states.
The Company does not operate in any mandatory access state other than Florida
(with respect to condominiums) and Illinois. The Company has recently entered
into Rights of Entry in Nevada which is also a mandatory access state. When
operating in Illinois, the Company generally enters into bulk sales agreements
with MDU owners, whereby the MDU owner agrees to purchase cable television, at a
discount, for each unit in the MDU and provides the service to the MDU resident
as one of the amenities included in their rent.
18GHz and Private Cable Regulation
----------------------------------
In February of 1991, the FCC made 18GHz frequencies available for the point-
to-point delivery of multichannel television. The FCC exercises jurisdiction
over 18GHz microwave and other transport technologies using the radio frequency
spectrum pursuant to Title III of the Communications Act, which vests authority
in the FCC to regulate radio transmissions and to issue licenses for radio
stations. The scope, content, and meaning of existing laws, rules and
regulations governing 18GHz technology are subject to legislative, judicial and
administrative changes.
The Company's 18GHz networks must comply with the FCC's licensing procedures
and rules governing a licensee's operations. Application to use 18GHz microwave
"paths" and frequencies is made to the FCC and is subject to certain technical
requirements and eligibility qualifications. After 18GHz paths are licensed to
an applicant, the facilities must be constructed and fully operational within 18
months of the grant. The facilities must be built in strict accordance with the
terms of the granted application. Most of the Company's licenses are valid for a
period of five years from the grant date, however, new licenses are valid for
ten years from the date of grant, after which the licensee must apply to the FCC
for license renewal. License renewal is not an automatic right, although it is
routinely granted if the licensee is in substantial compliance with the FCC
rules.
Licensing procedures include (i) obtaining an engineering report confirming
that the proposed path does not interfere with existing paths and (ii) filing
FCC Form 402 which includes a statement of eligibility and use, a system diagram
and a statement regarding compliance with the frequency coordination
requirement. The entire licensing procedure requires approximately 120 days.
23
<PAGE>
The Company does not "own" the paths and frequencies granted by the FCC.
Rather, the Company is merely licensed or permitted to "use" the frequencies.
Moreover, the rights granted to the Company to use 18GHz frequencies are not to
the complete exclusion of other potential licensees. First, the Company's rights
only extend to the 18GHz paths identified in its application as connecting the
various points in its video distribution system. Other 18GHz microwave users are
permitted to file applications and serve the same buildings as the Company (in
so far as the 18GHz licensing is concerned), but they may not interfere with an
incumbent user's licensed microwave paths. Second, the Company has no right to
the airspace over which the programming is transmitted. Obstructions could be
constructed in the line-of-sight of the microwave paths, precluding connection
of the satellite earth station with the various reception points to be served.
The 18GHz band also is authorized for use by other kinds of users, including
non-video, point-to-point microwave, mobile communications and satellite down-
link transmissions. Although sharing these frequencies is technically feasible,
it is possible that the Company will be unable to obtain licenses for these
frequencies on the paths it desires, or that it will be able to use only a
portion of the frequencies at certain locations because of pre-existing users.
Although private cable television operators are not subject to the full range
of regulation applicable to Cable Systems, they are subject to the following
federal regulations. First, private cable television operators are entitled to
the compulsory copyright license described above. Second, private cable
television operators benefit from the federal laws and regulations that require
certain programming providers to make cable programming available to all
multichannel video programming distributors on fair, reasonable and
nondiscriminatory terms. Third, as noted above, private cable television
operators are required to obtain retransmission consent from local broadcasters
in order to retransmit their signals. Finally, private cable television systems
are required to comply with the FCC's EEO rules and policies. The FCC's EEO
rules and policies require multichannel television operators to establish and
disseminate an EEO program that includes the use of recruiting sources that
serve minorities and women, and to evaluate its hiring and promotion practices
in comparison to the local labor pool. In addition, the FCC requires systems
with six or more full time employees to file an annual EEO report detailing the
system's EEO performance.
Because they are subject to minimal federal regulation, 18GHz private cable
television operators have significantly more competitive flexibility than do the
franchised Cable Systems with which they compete. 18GHz private cable television
operators have fewer programming restrictions, greater pricing freedom, and they
are not required to serve any customer whom they do not choose to serve. In
addition, with the exception of local zoning laws and regulations, state and
local authorities generally have no jurisdiction over private cable television
operators. The Company believes that these advantages help to make its private
cable television systems competitive with larger franchised Cable Systems.
23GHz Microwave Regulation
--------------------------
The Company anticipates that in the future it will use 23GHz microwave
frequencies, which are available for both private or common carrier
communications, to provide bi-directional telecommunications services. The
application and licensing procedures for authorizations to use the 23GHz
frequencies are substantially the same as those applicable at 18GHz. Although
the Company expects that 23GHz frequencies will be available on its current
paths and to meet its future needs, the Company has not commenced frequency
coordination and there can be no assurance that the Company will be able to
obtain licenses for these frequencies on the paths it desires.
24
<PAGE>
TELECOMMUNICATIONS REGULATION
The telecommunications services provided by the Company are subject to
regulation by federal, state and local government agencies. As the Company
implements its telecommunications strategy, which includes replacing many of its
current PBX switches with networked central office switches, the Company will
increasingly become regulated as a CLEC. The FCC has jurisdiction over
interstate services, and state regulatory commissions exercise jurisdiction over
intrastate services. Additionally, local authorities may regulate limited
aspects of the Company's business, such as the use of public rights-of-way. The
following subsections summarize the local, state and federal regulations that
pertain to the Company's current and projected telecommunications services.
Shared Tenant Services
----------------------
The Company currently offers telecommunications services as an STS operator
to subscribers in Houston, Dallas-Ft. Worth, Austin, Denver and Miami-Ft.
Lauderdale. The Company offers STS services to residents of MDUs using
conventional twisted copper wire pairs to distribute telephone services within
an MDU. A PBX switch is installed at the MDU and traffic from the MDU is
transported via leased trunk lines to the LEC central office. From the LEC's
central office, local calls are routed through the LEC's network and long
distance traffic is routed to the Company's chosen long distance carrier
(currently AT&T). By providing MDU tenants with interconnection in this manner,
the STS provider (rather than the tenant) subscribes to local exchange service
from the telecommunications company, then "resells" service to the MDU tenant.
The resale of STS is subject to the terms and conditions in the tariffs of the
telecommunications company whose services it resells and to regulation by the
states in which the Company resells such services. Historically, virtually all
such telecommunications company tariffs flatly prohibited resale of local
exchange service. However, in recent years several state legislatures and Public
Utility Commissions ("PUCs") determined that resale of local exchange service is
in the public interest and have directed telecommunications companies within
their jurisdictions to allow for resale of local exchange service, opening the
way for STS operations. Moreover, the Telecommunications Act requires such
resale pursuant to interconnection agreements with the incumbent LEC. In some
states, PUCs have issued detailed regulations governing the provision of STS and
other resale services. In other jurisdictions where no formal requirements have
been adopted, most telecommunications companies have nonetheless modified their
tariffs to provide for resale of local exchange services.
The precise terms and conditions under which such resale services may be
provided varies from state to state, and from LEC to LEC, and may include
significant restrictions and limitations. These include: (i) a requirement to be
certified by the state PUC; (ii) restrictions with respect to the location and
ownership of MDUs to which STS service may be provided and the crossing of
public rights-of-way by STS operator facilities; (iii) regulations allowing
telecommunications companies to apply different local service rate structures
(e.g., measured use vs. flat rate) to STS providers and other subscribers, in
some cases lessening or even eliminating efficiencies which might otherwise be
realized through the use of the LECs' trunking facilities; (iv) regulations
providing for LEC access or rights-of-way to directly service individual
customers within an MDU; and (v) in certain states, limits or prohibitions on
resale of intrastate long distance and local service at a profit.
Of the six states in which the Company operates, none has adopted regulations
governing the provision of STS services. The California PUC has, however,
adopted informal STS "guidelines." In addition, Florida requires providers of
STS services to be certified to resell local exchange services. The Company has
applied for such certification. Other than the California "guidelines" and
Florida's certification requirement, the Company may provide STS services in
each of these six states, subject only to individual telecommunications company
tariff provisions. The tariffs of all major LECs serving these jurisdictions
provide for resale of local exchange service pursuant to varying terms and
conditions. Provision of STS service in these states in the future will be
subject to any regulations that ultimately may be adopted by state authorities,
and to changes in telephone company tariffs.
25
<PAGE>
Competitive Local Exchange Carrier Regulation
---------------------------------------------
Recent and impending changes in federal law and regulation likely will affect
the conduct of the Company's telecommunication service business. The FCC
historically has left the regulation of the intrastate aspects of local exchange
service to the states. It has, however, exercised its jurisdiction over
interstate matters and jurisdictionally mixed matters respecting local telephone
service. The Telecommunications Act expands the FCC's authority to regulate
local exchange service and there can be no assurance that the FCC will not
exercise this authority aggressively.
State regulation of local exchange service traditionally has favored the
ILECs (principally the RBOCs and GTE). The state laws have, with the exception
of STS, generally prohibited competition in the local exchange. The
Telecommunications Act expressly preempts such prohibitions. The
Telecommunication Act declares that no state or local laws or regulations may
prohibit or have the effect of prohibiting the ability of any entity to provide
any interstate or intrastate telecommunications service. States may, however,
impose "competitively neutral" requirements regarding universal service, public
safety and welfare, service quality and consumer protection. Local authorities
may also require reasonable, competitively neutral compensation for use of the
public rights-of-way.
The Company currently offers telecommunications services in Houston as a
CLEC, but has not yet converted many of its telephone properties from STS to
CLEC services. The Company anticipates that it will, in the future,
increasingly compete in other telecommunications markets as a CLEC. For purposes
of the Telecommunications Act, CLECs and ILECs are subject to the same basic set
of requirements. However, certain additional obligations are imposed on ILECs,
but not on CLECs. Although the Company does not believe that the regulatory
burdens applicable to CLECs will have a material effect on its business, no
assurance can be given at this time regarding the extent or impact of such
regulation.
The Telecommunications Act requires all carriers, both CLECs and ILECs, to
interconnect, resell their services, provide number portability, provide dialing
parity, afford access to their poles, ducts, conduits and rights-of-way, and to
establish reciprocal compensation for the transport and termination of other
LECs' telephone traffic. All providers of telecommunications services are also
subject to the Act's requirements that they contribute to state and federal
universal service funds. ILECs are subject to certain additional requirements,
such as a duty to negotiate interconnection agreements in good faith, to
unbundle elements of their networks, to provide non-discriminatory
interconnection with their networks, to comply with specific resale obligations,
to provide notice of changes to their networks and to allow collocation of other
carriers' equipment on their premises. The Company is not, however, considered
an ILEC in any state, and is instead only subject to the obligations imposed on
CLECs.
The FCC and various state PUCs are in the process of defining the precise
contours of the requirements that will govern local exchange service in the
future. Although the Telecommunications Act sets forth certain standards, it
also authorizes the states to adopt additional regulations provided that such
regulations do not conflict with the federal standards. It is unclear at this
time how the states will respond to the new federal legislation, and what
additional regulations they may adopt. Moreover, the United States Court of
Appeals for the Eighth Circuit overturned portions of the FCC's First Report and
Order that had set forth pricing methodologies for unbundling, resale and
interconnection, and that had also set forth certain technical requirements,
such as obligations relating to quality of service and combination of unbundled
network elements. The FCC has stated that it intends to seek review of this
decision in the Supreme Court, but has not yet done so. It is not possible for
the Company to predict the outcome of these or any other proceedings relating to
the Telecommunications Act. Nonetheless, at this time it is clear that an
increasing number of service providers will be seeking to compete as CLECs in
the local exchange markets and that state and federal regulations will, to some
extent, allow for such market entry. Although
26
<PAGE>
jurisdictional lines of authority and basic implementation issues are being
determined by the FCC and the federal courts in accordance with the statutory
provisions outlined above, several states already have begun the process of
opening the local exchange market to competition.
Most states require companies seeking to compete in intrastate
telecommunications services to be certified to provide such services. These
certifications generally require a showing that the carrier has the financial,
managerial and technical resources to offer the proposed services consistent
with the public interest. State regulation of telecommunications services may
impose upon the Company additional regulatory burdens, including quality of
service obligations and universal service contributions.
Long Distance Resale Regulation
-------------------------------
Non-dominant interexchange carriers, such as the Company, are subject to
limited federal regulation. Nonetheless, carriers are required by statute to
offer their services under rates, terms and conditions that are just, reasonable
and not unreasonably discriminatory, and to file tariffs for their international
and interexchange services. The Telecommunications Act grants the FCC explicit
authority to forbear from regulating any telecommunications service provider if
the agency determines that it would be in the public interest to do so. Pursuant
to this authority, the FCC previously determined that it would forbear from
requiring that non-dominant interexchange carriers file tariffs for their
domestic services. The U.S. Court of Appeals for the District of Columbia
Circuit, however, has stayed that decision pending court review.
As a non-dominant carrier, the Company is permitted to make tariff filings on
a single day's notice and without cost support to justify specific rates. The
FCC generally does not exercise direct oversight over cost justification and the
level of charges for service of non-dominant carriers, although it has the
statutory power to do so. The FCC has jurisdiction to act upon complaints
brought by third parties, or on the FCC's own motion, against a carrier for
failure to comply with its statutory obligations.
Foreign Ownership Restrictions
------------------------------
Section 310(b) of the Communications Act prohibits foreign controlled
companies from holding common carrier radio licenses. To allow the Company to
provide common carrier telecommunications services using its networks, in the
event that the Company decides it desires to provide such services, the Company
has assigned substantially all of its frequency licenses (the "Assigned
Licenses") to Transmission Holdings, Inc ("THI"), an entity controlled by United
States citizens. To establish the terms of the Company's continued and
unencumbered use of the Assigned Licenses, the Company has entered into a
license and services agreement pursuant to which THI has agreed to provide to
the Company all the transmission capacity it requires or may in the future
require and the Company has granted THI a non-exclusive license to use all of
the Company's facilities and related equipment, such as microwave transmitting
and receiving equipment, required to provide transmission capacity. The Company
has also obtained an option to acquire the assets or equity of THI, subject to
FCC approval.
ITEM 2: PROPERTIES
The Company's national call center and its executive, administrative and sales
offices are located in Dallas, Texas. The premises lease has a ten year term
expiring November 30, 2005, and, as of August 31, 1997, requires monthly rental
payments of approximately $50,000. The Company, by exercising an option, can
lease additional space at its current location at comparable rates. The Company
leases additional space in the cities in which it operates for its regional
offices and warehouse operations.
In October 1997, the Company purchased a building proximate to its executive
offices in Dallas, Texas. The Company intends to relocate certain
administrative functions and to install a central office switch at the building.
27
<PAGE>
The Company owns substantially all of the cable television and
telecommunications equipment essential to its operations. The Company's major
fixed assets are cable television headends, microwave transmitters and
receivers, SMATV receivers, PBX switches and coaxial fiber optic cable. Such
properties do not lend themselves to description by character and location of
principal units. Substantially all of this equipment (other than fiber optic
cable laid under public rights of way) resides on or under the MDUs served by
the Company or in leased facilities in various locations throughout the
metropolitan areas served by the Company.
ITEM 3: LEGAL PROCEEDINGS
Except as set forth below, the Company is not a party to any pending material
legal proceedings except for those arising in the ordinary course of business.
The Company does not believe that these will have a material adverse impact on
the Company's financial condition or results of operations. The Company is
engaged in an administrative proceeding before the United States Patent and
Trademark Office ("PTO") relative to registration of the "OpTel" trademark. The
PTO found the Company's application to be allowable; however, a proceeding in
the PTO was commenced by Octel Communications Corp. ("Octel Communications") on
November 7, 1995 seeking to prevent the Company from registering the "OpTel"
trademark on the grounds that the Company's trademark is confusingly similar to
the mark used by Octel Communications in a related field and claiming that the
Company's application has procedural deficiencies. The PTO proceeding is related
solely to the Company's right to register the mark and does not have a direct
bearing on the Company's continued use of the OpTel trademark. The PTO
proceeding is in its relatively early stages and the Company is vigorously
pursuing its right to register the OpTel trademark. However, there can be no
assurance as to the outcome of the PTO proceeding. In addition, there can be no
assurance that Octel Communications or another third party will not commence an
infringement action against the Company under applicable federal or state law.
Although the Company does not believe that its use of the name "OpTel" infringes
on the trademark rights of any other person, there can be no assurance as to the
outcome of any future infringement action or that any such outcome would not
materially adversely affect the Company.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A: EXECUTIVE OFFICERS OF REGISTRANT
The following table sets forth certain information regarding the directors and
executive officers of the Company at August 31, 1997:
BOARD OF DIRECTORS
<TABLE>
<CAPTION>
POSITION Age
-------- ---
<S> <C> <C>
Claude Chagnon Chairman of the Board and Director 42
Louis Brunel Director; President and CEO 56
Christian Chagnon Director 41
Pierre Fortier Director 42
Alain Michel Vice Chairman of the Board and Director 48
</TABLE>
28
<PAGE>
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
POSITION Age Previous Experience
-------- --- -------------------
<S> <C> <C> <C>
Louis Brunel President, CEO and Director 56 GVL, VHP
Bertrand Blanchette CFO 40 GVL, VHP
John Czapko VP, Sales 56 Metrocel Cellular
Telephone
Stephen Dube VP, Marketing and Corporate 41 GVL; Laurentian
Development Financial Inc.
Michael E. Katzenstein VP, Legal Affairs and General 38 Kronish, Lieb,
Counsel Weiner and Hellman
LLP
William Shepherd VP, New Business and Product 44 Great Lakes
Development Telecommunications
Thomas Watson VP, Engineering & Information 41 GTE Telephone
Services
Lynn Zera VP, Human Resources 50 Keystone Consulting
</TABLE>
Claude Chagnon has served as a Director since August 1996. Since October 1996,
he has been the President and Chief Operating Officer of GVL. From January 1994
to October 1996, Mr. Chagnon was Vice Chairman of GVL. Prior to 1994, Mr.
Chagnon has held various positions at GVL and its subsidiaries including, from
May 1988 to January 1994, President of Videotron Ltee, a Canadian cable
television company and wholly-owned subsidiary of GVL. Mr. Chagnon also serves
as a Director of GVL, Tele-Metropole Inc., a Canadian broadcaster and subsidiary
of GVL, and Provigo Inc., a Canadian food retailer.
Louis Brunel has served as a Director since March 1995 and as President and
Chief Executive Officer since April 1996. Since 1988, Mr. Brunel has held
various positions at GVL and its subsidiaries, including, immediately prior to
joining OpTel, Vice-Chairman and Chief Executive Officer of Videotron Holdings
Plc ("VHP"), a recently divested UK based cable and telephone subsidiary of GVL.
While at VHP, Mr. Brunel was the chief architect of VHP's cable
television/telecommunications business. From 1988 to 1990, he served as Vice
President-Corporate Development of GVL. In addition, he served as President of
Videotron International Ltee ("VIL"), from September 1994 through December 1996.
Christian Chagnon has served as a Director since March 1997 and has been
Senior Vice President, Strategic Planning and Technology of GVL since September
1993. Prior to August 1994, Mr. Chagnon was also President of Videotron
Services Informatiques Lte. Mr. Chagnon also serves as a Director of GVL.
Pierre Fortier has served as a director of OpTel since November 1997. Mr.
Fortier was appointed a director of OpTel, as CDPQ's nominee, pursuant to a
Stockholders Agreement dated as of August 15, 1997, between VPC, the Company and
CDPQ. Since August 1997, Mr. Fortier has served as a vice president of CDPQ.
From 1990 to August 1997, Mr. Fortier served as a Vice President of Capital
d'American, a subsidiary of Caisse, and from 1990 until November 1995 as a Vice
President of Special Projects at Caisse.
Alain Michel has served as a director of OpTel since April 1997. Since July
1992, Mr. Michel has held various management positions at GVL, most recently,
since July 1994, he has been GVL's Senior Vice President and Chief Financial
Officer. Mr. Michel is also a director of Groupe Goyette Inc., a Canadian
public company which provides transportation and storage services.
Bertrand Blanchette was appointed Chief Financial Officer in September 1996.
From September 1995 to December 1996, Mr. Blanchette served as Chief Financial
Officer of VHP. From June 1994 to December 1995, he was Vice President Control
of GVL. From October 1986 to June 1994, Mr. Blanchette was Vice President
Finance of Heroux, Inc., a public manufacturer of airplane parts.
John Czapko was appointed Vice President Sales in March 1997. From September
1993 to February 1997, Mr. Czapko was Director of Indirect Distribution of
Metrocel Cellular Telephone Company ("Metrocel"). From June 1991 to September
1993, he was Director of Direct Distribution of Metrocel. Prior to that, Mr.
Czapko was Director of Spectrum Management of Primeco Personal Communications
where he helped develop and launch their new wireless PCS networks.
29
<PAGE>
Stephen Dube served as Vice President Acquisitions and Strategic Planning for
OpTel from July 1995 to May 1997 and since that date as Vice President Marketing
and Corporate Development for OpTel. From July 1995 to March 1997, Mr. Dube
served as a Director of OpTel. From January 1992 to April 1995, Mr. Dube was
Senior Vice President of Laurentian Financial Inc., a financial services
company. From June 1986 to January 1992, he was Vice President of Alexis Nihon
Group, a real estate and venture capital company.
Michael E. Katzenstein was appointed Vice President Legal Affairs, General
Counsel and Secretary in November 1995. Prior to joining OpTel, Mr. Katzenstein
was a partner (and, prior to January 1993, an associate) at Kronish, Lieb,
Weiner and Hellman LLP. Mr. Katzenstein received his J.D. from Boston
University School of Law in 1985.
William Shepherd has been Vice President New Business and Product Development
since June 1996. From September 1994 to December 1995 Mr. Shepherd was Vice
President, Sales and marketing of Great Lakes Telecommunications Corporation
("Great Lakes") and from December 1995 until February 1996 was Chief Operating
Officer of that Company. From January 1992 to September 1994 Mr. Shepherd was
President of Continental Communications Corporation, a provider of
communications consulting and international transmission resale.
Thomas Watson was appointed Vice President Information Services in September
1996. In August 1997 he also assumed the role of Vice President of Engineering.
From January 1992 to September 1996, Mr. Watson held various positions at GTE
Telephone Operations, an ILEC, including, Group Product Manager, Group Manager
Engineering and Senior Program Manager. From June 1990 to January 1992, he was
Group Engineer Manager for GTE Government Systems Corporation, a software
developer.
Lynn Zera was appointed Vice President Human Resources in November 1995. From
July 1994 to October 1995 Ms. Zera was Executive Director of Keystone
Consulting. From July 1993 to July 1994, she was Executive Director of Human
Resources of Intellicall, Inc., a telecommunications company. From March 1978
to January 1993, she held various management and marketing positions with Oryx
Energy, a company involved with the production and exploration of oil and gas.
30
<PAGE>
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
OpTel's common equity is privately held, 74.6% by VPC Corporation, an
indirect, wholly owned subsidiary of GVL, 16.7% by CDPQ and 8.7% by various
purchasers of the Company's Senior Discount Notes due 2005, or their
transferees.
The Company's capital stock is not registered or listed on any exchange and
there is no established market for these securities. The Company has not
declared any dividend on its capital stock and does not intend to do so in the
foreseeable future. The terms of the Indenture governing the Senior Discount
Notes prohibit the payment or declaration of dividends in cash. It is expected
that any future working capital financing will also contain similar
restrictions.
ITEM 6: SELECTED FINANCIAL DATA
The selected consolidated financial data presented below as of and for the
periods ended December 31, 1993 and 1994 and August 31, 1995, 1996 and 1997 have
been derived from the consolidated financial statements of the Company, which
consolidated financial statements have been audited by Deloitte & Touche LLP,
independent auditors. In 1995, the Company changed its fiscal year end to
August 31 to match that of its majority stockholder. As a result of the change
in fiscal year and the Company's history of growth through acquisitions the
Company's historical financial results are not directly comparable from period
to period, nor are they indicative of future results of operations in many
respects. The following information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and the Consolidated Financial Statements of the Company
and the notes thereto, appearing elsewhere in this Report on Form 10-K.
31
<PAGE>
Consolidated Statements of Operations Data:
<TABLE>
<CAPTION>
Period From
April 20, 1993 Period From
(Date of January 1,
Inception) To Year Ended 1995 To August Year Ended Year Ended
December 31, December 31, 1994 31, 1995 August 31, August 31,
1993 1996 1997
($ thousands)
Revenues:
<S> <C> <C> <C> <C> <C>
Cable Television $ 12 $ 240 $ 8,782 $ 25,893 $ 36,915
Telecommunications - 202 788 1,712 2,921
Total Revenues 12 442 9,570 27,605 39,837
Operating Expenses:
Cost of services 6 470 4,557 11,868 19,202
Customer support, general 304 7,733 12,055 19,636 28,925
and administrative
Depreciation and 8 117 2,420 8,676 14,505
amortization
Total Operating Expenses 318 8,320 19,032 40,181 62,633
Loss From Operations (306) (7,878) (9,462) (12,576) (22,796)
Other Income (Expense):
Interest expense on
stockholder note (1) - - (919) (5,342) (15,204)
Other interest expense (1) (1) (76) (349) (657) (16,210)
Interest and other income - 10 100 145 5,675
Loss Before Income Taxes (307) (7,944) (10,630) (18,430) (48,535)
Income Tax Benefit (2) - - 469 - -
Net Loss (307) (7,944) (10,161) (18,430) (48,535)
Loss per share (3) (6.89) (8.30) (19.98)
Cash dividend declared - - - - -
FINANCIAL DATA:
Net cash flows used in
operating activities (183) (3,332) (3,494) (452) (15,935)
Net cash flows used in
investing activities (517) (10,576) (72,144) (72,037) (143,126)
Net cash flows provided by
financing activities 741 18,886 72,655 72,131 244,688
EBITDA (4) (298) (7,761) (7,042) (3,899) (8,291)
Capital Expenditures (5) 517 9,278 22,170 62,121 71,506
</TABLE>
(1) Interest expense is reported net of interest capitalized in property, plant
and equipment.
(2) The Company had no taxable income for the periods reported. The Company
reported an income tax benefit in the eight months ended August 31, 1995 due to
the reduction of a deferred tax liability established as the result of an
acquisition.
(3) Loss per share is not presented for the periods the Company was organized
as a partnership.
(4) EBITDA represents earnings before interest expense, income tax benefits,
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. 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 the industry.
(5) Capital expenditures include expenditures on property, plant and equipment
together with intangible assets excluding acquisitions.
32
<PAGE>
Operating and Other Data:
-------------------------
<TABLE>
<CAPTION>
AUGUST 31,
-------------------------------------------------------------
1995 1996 1997
------------------- ------------------- -------------------
<S> <C> <C> <C>
Cable
Units under contract (1) 173,324 241,496 295,149
Units passed (2) 170,336 225,433 254,032
Subscribers 75,944 114,163 132,556
Penetration (3) 44.6% 50.6% 52.2%
Pay to Basic ratio (4)
Avg. Monthly Revenue/Subscriber (5) $ 22.8 $ 22.7 $ 24.9
Telephone
Units under contract (1) 10,322 20,945 39,831
Units Passed (2) 9,116 12,364 16,572
Subscribers 2,207 4,080 6,825
Lines (6)
Penetration (7) 24.2% 33.0% 41.2%
Avg. Monthly Revenue/Subscriber (5) -- $ 45.4 $ 44.7
</TABLE>
1. Units under contract represent 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 substantially 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. The difference between units under contract and units passed
represents units for which Rights of Entry have been entered into, but which
are not yet connected and activated for cable television and
telecommunications services, 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. Pay-to-basic ratio is calculated by dividing the total number of premium
units subscribed for by the total number of basic subscribers.
5. Represents revenues per average monthly subscriber for the fiscal periods
ended as of the date shown. Information with respect to the
telecommunications business for the period ended August 31, 1995 is not
available.
6. Lines represent the number of telephone lines currently being provided to
telecommunications subscribers. A telecommunications subscriber can subscribe
for more than one line.
7. Penetration is calculated by dividing the total number of telecommunications
subscribers at such date by the total number of units passed.
33
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Set forth below is a discussion of the financial condition and results of
operations of the Company for the eight month period ended August 31, 1995 and
for the fiscal years ended August 31, 1996 and 1997. This discussion should be
read in conjunction with the Consolidated Financial Statements and notes thereto
appearing elsewhere in this Form 10-K.
Overview
The Company was founded in April 1993 to build, acquire and operate private
cable television systems. Since inception, the Company has experienced
substantial growth. This growth has been achieved through acquisitions of other
operators, many of which were SMATV systems, and the negotiation by the Company
of new Rights of Entry. Since inception, the number of units under contract for
cable television increased to 295,149 at August 31, 1997. In general, the
conduct of the acquired operations prior to acquisition was materially different
than following acquisition. Among the changes made in many of the businesses
after acquisition were (i) the commencement of conversion of SMATV systems to
18GHz or fiber optic networks; (ii) providing 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; and (v) in some cases, offering telephone services. Substantially
all of the SMATV systems acquired by the Company are being converted to 18GHz or
fiber optic networks, a process which is expected to be substantially complete
by the end of fiscal 1999. Currently the Company's networks provide cable
television services to over 150,000 units representing approximately 60% of the
units passed for cable television. In addition, the Company is rolling out
telecommunications offerings in its markets and expects to offer
telecommunications services in substantially all of its markets by the end of
calendar 1999. In 1995, the Company changed its fiscal year end to August 31 to
match that of its majority stockholder. As a result, 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. All of the
Company's acquisitions have been accounted for by the purchase method of
accounting.
The Company earns substantially all of its cable television revenues from
monthly customer fees for basic, premium and ancillary services. Substantially
all of its telecommunications revenues are earned from monthly fees for line
rental and toll usage.
Through August 31, 1997, the Company had invested approximately $258 million
primarily in its cable television and telecommunications systems. The Company's
revenues have grown from $0.4 million for the year ended December 31, 1994 to
$39.8 million for fiscal 1997. Results of operations for fiscal 1997 include
negative EBITDA of $(8.3) million as compared with $(3.9) fiscal 1996. EBITDA
represents earnings before interest expense, income tax benefits, 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. 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
the industry.
34
<PAGE>
While pursuing its investment and development strategy, the Company incurred
and continues to incur substantial up-front operating expenses for sales
(including obtaining Rights of Entry), 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 $22.8 million, $12.6 million, and $9.5 million for
fiscal 1997, fiscal 1996, and the eight months ended August 31, 1995
respectively, as its cable television and telecommunications customer base has
grown. The Company reported negative EBITDA of $(8.3) million, $(3.9) million,
and $(7.0) million for fiscal 1997, fiscal 1996 and the eight months ended
August 31, respectively. The Company expects that the significant expenses to
be incurred as it implements its telecommunications roll out strategy will
adversely effect EBITDA for a significant period of time. Once the buildout of
the telecommunications networks and conversion of SMATV systems is completed,
the Company expects that the incremental costs associated with the addition of
new customers in its existing markets will be principally limited to marketing
and, to a lesser extent, to customer service, and, therefore, that its EBITDA
will improve significantly. Although the Company believes that its investment in
networks will result in operating efficiencies, the Company has accumulated
insufficient post-network conversion operating data to meaningfully compare
pre-and post-conversion costs. There can be no assurance that the Company will
generate positive EBITDA in the future.
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, (iv) the prices that it
charges its subscribers, (v) normal operating expenses, which in the cable
television business comprise principally programming expenses and in the
telecommunications business comprise principally fees paid to long distance
carriers, the cost of trunking services and other LEC charges, as well as, in
each case, billing and collection costs, technical service and maintenance
expenses and customer support services, and (vi) capital expenditures as the
Company implements its telecommunication roll out strategy and completes its
conversion of SMATV systems. The Company's results of operations may also be
impacted by future acquisitions. The Company has typically acquired businesses
that are private companies owned by entrepreneurs and without the same
regulatory compliance practices and internal accounting controls and procedures
of the Company. Accordingly, the Company frequently is required to take remedial
actions, which may include the expenditure of funds and may take extensive time
to implement. In general, the Company factors the costs associated with these
matters into the terms of its acquisitions, including, where practicable through
indemnification rights. However, there can be no assurance that the Company's
results of operations or liquidity would not be affected by these or other
matters arising from past or future acquisitions.
The Company anticipates that it will continue to have higher churn than is
typical of a franchise cable television operator due to the frequent turnover of
MDU tenants. This churn generally does not result in a reduction in overall
penetration rates since the outgoing subscriber is often quickly replaced by a
new tenant in his or her unit. This may result in average installation revenue
per subscriber 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. Accordingly, the
Company does not believe that churn is as significant an operating statistic as
would be the case for franchise cable television operators.
35
<PAGE>
FISCAL YEAR ENDED AUGUST 31, 1997 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1996
TOTAL REVENUES. Total revenues for the fiscal year ended August 31, 1997
("fiscal 1997") increased by $12.2 million or 44% to $39.8 million compared to
revenues of $27.6 million for the fiscal year ended August 31, 1996 ("fiscal
1996").
CABLE TELEVISION. Compared to fiscal 1996 cable television revenues increased
by $11.0 million, or 42%, to $36.9 million from $25.9 million, reflecting both a
16% increase in the number of customers and a 10% increase in the average
monthly revenue per customer which rose from $22.7 in fiscal 1996 to $24.9 in
fiscal 1997. The increase in revenue per customer resulted from a combination
of rate increases following property upgrades and increased premium revenues as
the Company's pay to basic ratio improved from 53% to 64% over the course of the
year. The Company continued to grow basic penetration which increased by 1.6
percentage points over the year.
TELECOMMUNICATIONS. The Company's strategy is to roll out a residential CLEC
service in each of the major markets in which it operates. Until recently the
Company served certain properties as an STS provider, reselling telephone
service using PBXs situated at the MDU properties. The Company has not
historically promoted such STS service because it was not in line with its
strategy to offer a central office facility to its customers. Despite not
promoting telecommunications services during the year, telecommunications
contributed $2.9 million of revenue compared to $1.7 million in the preceding
year, mainly as a result of an increase in customers (from improved penetration
which rose from 33% to 41% over the year) and a 34% increase in the number of
units where telephone service is offered from 12,364 to 16,572. Average monthly
revenues per customer declined over the period from $45.4 in fiscal 1996 to
$44.7 in fiscal 1997. The decline is largely due to aggressive pricing in the
last quarter of the fiscal year in order to coincide with the launch of its
Houston switch. This aggressive pricing includes certain limited discounted
local calling plans which are intended to be offered for a short time period
only. Accordingly, the Company does not consider the current level of revenue
per customer to be indicative of the level of revenue per customer it expects to
earn following the introduction of its own switches which are rich in enhanced
features and permit much more sophisticated call billing.
COST OF SERVICES. Overall, gross margins decreased over the year from 57.0% to
51.8%, largely due to costs associated with the increase in the number of
customers served by PBX telephone service, to the increase in premium cable
penetration which has lower associated margins and an increase in the proportion
of the Company's portfolio under revenue sharing arrangements with property
owners. The PBX costs represent the costs of interconnecting individual
properties with the switch of the incumbent ILEC and will be removed once the
Company is able to utilize its own networks in order to pass telephone traffic
to its central office switches. Consequently the Company expects gross profit
margins to improve once its central office switches are employed to serve
telephone customers.
EXPENSES. Expenses (customer support, selling, general and administrative
expenses) were $28.9 million for the year compared to $17.3 million in fiscal
1996. The increase in expenses was in line with the Company's budget and was
largely due to an increase in personnel associated with the expansion of the
Company's operations and recruitment for the roll out of the Company's
telecommunications services in advance of the expected revenues. In addition
the Company incurred a one time reorganization charge of $1.4 million associated
with the restructuring of certain senior management positions during the year
which was included in customer support, selling, general and administration
expense in fiscal 1997.
36
<PAGE>
EBITDA. The Company's negative EBITDA increased from $(3.9) million to $(8.3)
million over the year, largely due to the reduced gross margins and the
expansion of the Company's operations in anticipation of the roll out of
telecommunications services. The increase in negative EBITDA was largely within
expectations given that the Company increased its personnel in the middle of
fiscal 1997 in anticipation of two significant events that eventually occurred
after the end of the fiscal year due to matters beyond the control of the
Company's management - the launch of the Houston central office switch and the
consummation of the Phonoscope transaction in Houston.
FINANCING. Interest expense (net of interest income and amounts capitalized)
was $(25.7) million for fiscal 1997, an increase of $19.9 million over net
interest expense of $(5.8) million in fiscal 1996, reflecting the increase in
the Company's debt incurred principally to fund the build out of its network.
Notes payable and long-term obligations and convertible notes to shareholders
amounted to $351.2 million at August 31, 1997 compared to $91.9 million at
August 31, 1996.
FISCAL YEAR ENDED AUGUST 31, 1996 COMPARED WITH EIGHT MONTHS ENDED AUGUST 31,
1995
TOTAL REVENUES. Revenues were $27.6 million for fiscal 1996, an increase of
188% over revenues of $9.6 million for the eight months ended August 31, 1995.
Of the revenues generated in fiscal 1996, 93.8% and 6.2% represented revenues
from cable television and telecommunications, respectively, compared to 91.8%
and 8.2%, respectively, for the eight months ended August 31, 1995.
CABLE TELEVISION. Cable television revenues were $25.9 million for fiscal
1996, an increase of 194%, over cable television revenues of $8.8 million for
the eight months ended August 31, 1995. The growth was attributable in part to
an increase in the average number of cable television subscribers, which
accounted for approximately $15.6 million of the increase. Cable television
revenues also grew in part from an increase in the retail price of the Company's
cable television services which accounted for approximately $1.5 million of the
increase.
TELECOMMUNICATIONS. Telecommunications revenues were $1.7 million for fiscal
1996, an increase of 113%, over the eight months ended August 31, 1995. This
growth was largely due to an increase in the average number of
telecommunications subscribers.
COST OF SERVICES. Cost of services were $11.9 million for fiscal 1996, an
increase of 159%, from $4.6 million for the eight months ended August 31, 1995.
The increases in costs were primarily attributable to the growth in the number
of cable television subscribers and telecommunications lines. Gross margins
increased from 52.4% for the eight months ended August 31, 1995 to 57.0% for
fiscal 1996.
EXPENSES. Expenses (customer support, selling, general and administrative
expenses) increased to $17.3 million from $8.2 million, or 111%, over the eight
months ended August 31, 1995. The increase was largely due to an increase in
personnel associated with the expansion of the Company's operations and the
rapid growth in the size of the cable television and telecommunications networks
and the number of subscribers.
The Company incurred $2.3 million for fiscal 1996 and $3.8 million for the
eight months ended August 31, 1995, related to the costs of assimilating the
acquisitions made by the Company and include severance, relocation and
recruitment costs.
EBITDA. Negative EBITDA increased to $(3.9) million for fiscal 1996. The
improvement in negative EBITDA represents an increase of $3.1 million over
negative EBITDA of $(7.0) million for eight months ended August 31, 1995.
Negative EBITDA represented (14.1)% of total revenues for fiscal 1996 compared
to (73.6)% of total revenues for the eight months ended August 31, 1995.
37
<PAGE>
EIGHT MONTHS ENDED AUGUST 31, 1995
TOTAL REVENUES. Revenues were $9.6 million for the eight months ended August
31, 1995, an increase of $9.2 million over revenue of $0.4 million for the year
ended December 31, 1994. Of the revenues generated in the eight months ended
August 31, 1995, 91.8% and 8.2% represented revenues from cable television and
telecommunications, respectively, compared to 54.3% and 45.7% respectively, for
the year ended December 31, 1994.
CABLE TELEVISION. Cable television growth was primarily attributable to an
increase in the average number of cable television subscribers.
TELECOMMUNICATIONS. Telecommunications revenue growth was primarily due to an
increase in the average number of telecommunications subscribers.
COST OF SERVICES. Cost of services were $4.6 million for the eight months
ended August 31, 1995, an increase of $4.1 million from $0.5 million for the
year ended December 31, 1994. These expenses represent variable costs of the
Company, including programming, interconnection costs and revenue sharing with
property owners. Their increase was primarily attributable to the growth in the
number of cable television subscribers and telecommunications lines. Gross
margins increased from negative (6.4)% for the year ended December 31, 1994 to
52.4% for the eight months ended August 31, 1995.
EXPENSES. Customer support, selling, general and administrative expenses were
$8.2 million for the eight months ended August 31, 1995, an increase of 6.5%
over the year ended December 31, 1994. The increase was largely due to an
increase in personnel associated with the expansion of the Company's operations
generated primarily by the acquisition of private cable companies in five
markets and the rapid growth in the size of the Company's cable television and
telecommunications networks and the number of subscribers.
The Company incurred reorganization costs of $3.8 million for the eight month
period ended August 31, 1995, related to the costs of assimilating the
acquisitions made by the Company and include severance, relocation and
recruitment costs.
EBITDA. Negative EBITDA increased to ($7.0) million for the eight months
ended August 31, 1995. The improvement in negative EBITDA represents an
increase of $.8 million over negative EBITDA of $(7.8) million for the year
ended December 31, 1994. Negative EBITDA represented (73.6)% of total revenues
for the eight months ended August 31, 1995.
The Company recorded an income tax benefit of $0.5 million for the eight
months ended August 31, 1995 which was the result of the reduction of a deferred
tax liability no longer required due to increased tax losses being available. No
income tax expense was recorded for the year ended December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has generated net losses since its inception, resulting in an
accumulated deficit of $77.3 million as of August 31, 1997. 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 acquisitions and
capital expenditures was $72.1million during the period ended August 31, 1995,
$72.0 million in fiscal 1996 and $78.2 million in fiscal 1997.
38
<PAGE>
Since inception, the Company has relied primarily on investments from its
principal stockholder in the form of equity and convertible notes to fund its
expenditures. The Company received net funding from its principal stockholder of
$23.7 million in fiscal 1997, $73.4 million during fiscal 1996, $79.5 million
during the eight months ended August 31, 1995 and $15.0 million during the year
ended December 31, 1994. None of the Company's stockholders or affiliates are
under any contractual obligation to provide additional financing to the Company.
In February 1997 the Company issued $225 million of 13% Senior Notes due 2005
(the "Senior Notes"). Interest on the Senior Notes is payable bi-annually in
February and August of each year. Approximately $79.6 million of the net
proceeds under the Senior Notes was placed into escrow to cover interest
payments for the first six periods. The Senior Notes are unsecured liabilities
of the Company and may be prepaid early subject to early redemption penalties
customary for such offerings. In addition, the Indenture governing the Senior
Notes contains certain customary covenants which, amongst other things, limit
the ability of the Company to raise additional unsecured debt before certain
performance related criteria are achieved and prevent the declaration or
distribution of cash dividends.
In connection with the issuance of the Senior Notes VPC agreed (i) to extend
the maturity of their Convertible Notes until six months following the maturity
or indefeasible payment in full of the Senior Notes and (ii) to subordinate the
Convertible Notes in right of payment to the Senior Notes in the event of a
liquidation, dissolution, reorganization, receivership or winding-up of the
Company and in the event of a Default or Event of Default (each as defined under
the indenture) or when the maturity of the Notes has been accelerated.
On October 13, 1997, the Company received a commitment from a bank to provide
a $150 million senior secured credit facility (the "Senior Facility") which will
be used to provide capital to fund future development. The Senior Facility will
consist of a term loan and a revolving credit commitment both of which will bear
interest at interest rates customary for this type of transaction and the credit
position of the Company. The Senior Facility will be secured by a first fixed
and floating lien on substantially all of the assets of the Company.
Availability under the Senior Facility will be subject to the Company meeting
certain performance criteria. Management expects that funds will become
available under the Senior Facility in December 1997. The funding of the Senior
Facility is subject to customary no material adverse changes clauses and
terminates December 15, 1997, if not closed. Management expect that the Senior
Facility will include customary covenants that will include, amongst others,
limitations on additional indebtedness, limitations on certain payments,
investments and distributions and limitations on liens and certain asset sales.
The Company's future results of operations will be materially impacted by its
ability to finance its planned business strategies. In addition to the Senior
Facility the Company expects it will need an additional $235 million in
financing over the next five years in order to maximize its potential within its
targeted markets in the United States. A considerable proportion of OpTel's
capital expenditure requirements is scaleable dependent upon the number of ROE
contracts that the Company signs. The capital expenditure requirements will be
larger or smaller depending whether OpTel is able to achieve its expected market
share amongst the potential MDUs in its markets. The Company plans to raise
future financings from additional subordinated debt, a public equity offering
and/or private equity infusions. The foregoing estimates are based on certain
assumptions, including the timing of the signing of Rights of Entry, the
conversion of MDUs currently served by SMATV systems to the networks and the
telecommunications roll out, each of which may vary significantly from the
Company's plan. There can be no assurance that the Company will be successful
in obtaining any necessary financing on reasonable terms or at all.
39
<PAGE>
In addition, both GVL and Caisse have 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. 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 since a significant proportion
of the costs comprises the internal wiring 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 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 headends, computer hardware and software and
capitalized construction costs. The Company can to some degree control the
timing of the infrastructure capital expenditures by controlling the timing of
the telecommunications roll out and the scope of its expansion.
In order to accelerate the achievement of the Company's strategic goals, the
Company has from time to time held, and continues to hold, preliminary
discussions relating to possible acquisitions by the Company and possible
investments in the Company by strategic investors.
RECENTLY ISSUED ACCOUNTING PRINCIPLES
Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. SFAS No. 121 also requires that long-lived assets and
certain identifiable intangibles to be disposed of be reported at the lower of
carrying amount or fair value less cost to sell. The Company adopted SFAS No.
121 effective September 1, 1996, and the impact of such adoption was not
significant to its financial condition and results of operations.
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
"Accounting for Stock-Based Compensation," issued by the Financial Accounting
Standards Board ("FASB"), requires that an employer's financial statements
include certain disclosures about stock-based employee compensation arrangements
regardless of the method used to account for them. The Company will measure
compensation costs using Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and will therefore include pro forma disclosures
in the notes to the financial statements for all awards granted after December
31, 1994. The Company was disclosed the pro forma net income and pro forma
earnings per share as if the fair value based accounting methods in SFAS No. 123
had been used to account for stock-based compensation cost in future financial
statement presentations.
40
<PAGE>
Statement of Financial Accounting Standards No. 128 ("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. Management does not believe the impact
of the adoption of SFAS No. 128 will have a material impact on the Company's
earnings per share computations.
The FASB issued, in February 1997, SFAS No. 129, "Disclosure of Information
about Capital Structure," which establishes standards for disclosing information
about an entity's capital structure and is effective for financial statements
for periods ending after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and display of comprehensive income
and its components in the financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997.
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 periods beginning after December 15, 1997.
PRIVATE LITIGATION SECURITIES REFORM ACT OF 1995
This report contains forward-looking statements based on current
expectations that involve a number of risks and uncertainties. The forward-
looking statements are made pursuant to safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. The factors that could cause actual
results to differ materially include the following: industry conditions and
competition, interest rates, business mix, availability of additional financing,
and the risks described from time to time in the Company's reports to the
Securities and Exchange Commission.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is set forth on pages F-1 through F-21 of
this Form 10-K. The Company is not required to provide the supplementary
financial information required by Item 302 of Regulation S-K.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to the directors and executive officers of the
Company is included as Item 4A of Part I of this form 10-K as permitted by
Instruction 3 to Item 401(b) of Regulation S-K.
41
<PAGE>
ITEM 11: EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
awarded to or paid to the Company's Chief Executive Officer and the four most
highly compensated executive officers for the fiscal year ended August 31, 1997,
1996 and the period ended August 31, 1995.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
----------------------------------------------------
Name and principal position Other Annual All other
Year/Period Salary Bonus Compensation Compensation(17)
<S> <C> <C> <C> <C> <C>
Louis Brunel 1997 $269,623(1) $ 39,790(6) $ 26,272(11) $ --
President and Chief 1996 $ 35,095(1) $ -- $ -- $ --
Executive Officer 1995 $ -- $ -- $ -- $ --
Rory Cole (2) 1997 $163,654 $ 43,750 $ 11,240(12) $ 3,629
Vice President and Chief 1996 $175,000 $ 37,505(7) $ 18,389(13) $ 4,750
Operating Officer 1995 $102,980(2) $ 22,405(6) $ -- $ --
Michael Katzenstein 1997 $175,000 $ 57,500 $ 65,196(14) $ 2,820
Vice President Legal 1996 $135,346(3) $133,706(8) $ 10,050(15) $ 3,334
Affairs and General Counsel 1995 $ -- $ -- $ -- $ --
Bertrand Blanchette 1997 $129,702(4) $ 34,161(9) $ 4,800(15) $ --
Vice President and Chief 1996 $ -- $ -- $ -- $ --
Financial Officer 1995 $ -- $ -- $ -- $ --
Stephen Dube 1997 $119,139(5) $ 69,288(10) $ 9,226(16) $ 2,844
Vice President Marketing 1996 $ 36,542(5) $ -- $ -- $ --
and Corporate Development 1995 $ -- $ -- $ -- $ --
William Shepherd 1997 $140,000 $ -- $ -- $ 888
Vice President 1996 $ 35,000 $ -- $ -- $ --
New Product and Business 1995 $ -- $ -- $ -- $ --
Development
</TABLE>
1. During fiscal 1996, Mr. Brunel was paid primarily by GVL. Beginning June 1,
1996, a portion of Mr. Brunel's salary was allocated to the Company. Effective
November 1, 1996, Mr. Brunel accepted the position of President and Chief
Executive Officer on a full-time basis at an annual salary of $275,000.
2. Mr. Cole commenced employment with the Company in February 1995, at an
annual salary of $175,000. Mr. Cole is no longer employed by the Company.
3. Mr. Katzenstein commenced employment with the Company in November 1995, at
an annual salary of $170,000.
4. Mr. Bertrand Blanchette commenced employment with the Company as Chief
Financial Officer in September 1996. During the period September 1996 through
December 1996, Mr. Blanchette continued to act as Chief Financial Officer of
Videotron Holdings Plc. ("VHP"), a subsidiary of GVL which was divested in
December 1996. During such period, Mr. Blanchette's salary was paid by VHP and a
portion of such salary was allocated to the Company. Mr. Blanchette commenced
full-time employment with the Company effective January 1, 1997, at an annual
salary of $150,000.
5. During fiscal 1996, Mr. Dube was paid primarily by GVL. Beginning June 1,
1996, a portion of Mr. Dube's salary was allocated to the Company. Effective
January 1, 1997, Mr. Dube accepted the position of Vice President Acquisitions
and Strategic Planning on a full-time basis at an annual salary of $145,000. He
assumed the position of Vice President Marketing and Corporate Development in
June 1997.
6. The entire amount represents relocation payments.
7. $1,005 represents relocation payments.
8. $93,706 represents relocation payments and the remainder represents a
signing bonus.
9. $29,161 represents relocation payments.
42
<PAGE>
10. $54,288 represents relocation payments.
11. $21,680 represents an automobile allowance and the remainder represents
reimbursement of benefits paid by GVL. See 1 above.
12. $9,851 represents an automobile allowance and the remainder represents tax
reimbursements resulting from relocation.
13. $10,076 represents an automobile allowance and $8,313 represents tax
reimbursements resulting from relocation.
14. $49,823 represents tax reimbursements resulting from relocation, $10,573
represents an automobile allowance, and $4,800 represents reimbursements under
COBRA.
15. The entire amount represents an automobile allowance.
16. $5,980 represents an automobile allowance and the remainder represents
reimbursement of benefits paid by GVL. See 5 above.
17. Represents 401(k) matching funds.
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year (1)
- - -------------------------------------------------------------------------------------------------------------------------
Potential Realized Value at Assumed Annual
Individual Grants Rates of Stock Price Appreciation for
Option Term
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
% of
Total
Number of Options
Securities Granted to
Underlying Options Employees
Granted in Fiscal Exercise Expiration
Name Year Price Date 5% 10%
- - -------------------------------------------------------------------------------------------------------------------------
Louis Brunel 16,034.79 18.40% $85.75 November, 2006 $758,067 $1,867,155
Bertrand
Blanchette 4,373.12 5.02% $85.75 November, 2006 $206,745 $ 509,224
Michael
Katzenstein 9,137.61 10.49% $74.42 November, 2006 $535,522 $1,167,549
Stephen Dube 3,381.88 3.88% $85.75 November, 2006 $159,883 $ 393,800
William Shepherd
3,265.27 3.75% $85.75 November, 2006 $154,370 $ 380,221
</TABLE>
(1) Prior to Fiscal 1997, there were no other options granted.
43
<PAGE>
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of August 31, 1997
regarding the beneficial ownership of OpTel's Common Stock by the owners of 5%
or more of the Common Stock and by all directors and executive officers of the
Company as a group. As of August 31, 1997, securities convertible into, or
exercisable for, approximately 1,891,404 shares of Common Stock were
outstanding, of which 1,801,367 were underlying the Convertible Notes (assuming
the conversion of the Convertible Notes on April 30, 1999 at a formula provided
in the terms of the Convertible Notes if no initial public offering of Common
Stock were to occur by such date).
<TABLE>
<CAPTION>
Name and Address of Beneficial Owner Equity Voting
Number of Shares Percentage Percentage
<S> <C> <C> <C>
Le Groupe Videotron ltee 1,923,977 74.6 81.75
300 Avenue Viger Avenue East
Montreal, Quebec, H2X3W4 (1)
Capital Communications CDPQ Inc. 429,521 16.7 18.25
1981, avenue McGill College
Montreal, Quebec, H3A 3C7
Louis Brunel (2) 4,009 0.2 0
1111 W Mockingbird Lane,
Dallas, 75247, Texas
Michael E. Katzenstein (2) 2,284 0.1 0
1111 W Mockingbird Lane,
Dallas, 75247, Texas
Stephen Dube (2) 845 0.0 0
1111 W Mockingbird Lane,
Dallas, 75247, Texas
All directors and officers as a group (12
persons) (2) 7,779 0.3 0
</TABLE>
1. Such shares are owned by VPC, an indirect wholly-owned subsidiary of GVL.
VPC has agreed to certain restrictions on its abilities to transfer or otherwise
dispose of such shares. Andre Chagnon, the founder of GVL, indirectly controls
approximately 68% of GVL's outstanding voting rights. Pursuant to the terms of
the Stockholders Agreement between VPC, the Company and CDPQ, Caisse will have
certain rights with respect to the Company. Pursuant to a shareholders
agreement between GVL and Caisse, Caisse will have certain rights with respect
to the Company effective upon termination of the Stockholders Agreement between
VPC and CDPQ and for so long as GVL controls the Company.
2. Represents Class A Common Stock issuable upon exercise of options.
44
<PAGE>
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONVERTIBLE NOTES
The Company has financed a large portion of its capital needs by borrowing
from its majority stockholder, VPC. The Company borrowed approximately $17.8
million, $73.4 million and $23.7 million from VPC in the form of convertible
notes during the eight month period ended August 31, 1995, fiscal 1996 and
fiscal 1997, respectively (collectively, the "Convertible Notes"). As of August
31, 1997, the Company had outstanding $129.6 million of Convertible Notes
(including accrued interest). The Convertible Notes bear interest at a rate of
15% per annum, payable concurrently with the payment of principal. Interest gets
added to principal on an annual basis. In connection with the issuance of the
Senior Notes, the maturity of the Convertible Notes was extended to six months
after the final maturity of the Senior Notes and the Convertible Notes were
subordinated in right of payment to the Senior Notes.
The principal of and interest on the Convertible Notes may be converted, in
whole but not in part, at the election of VPC, into shares of Class B Common,
during the period of (i) 180 days commencing on the IPO Date and (ii) if such
180-day period shall not previously have commenced and expired, the period of 90
days commencing on April 30, 1999 (the "Conversion Date"). Subject to customary
anti-dilution adjustments, the conversion price of the Convertible Notes will be
(1) the price at which Common Stock is first sold to the public in a public
offering, provided that the product of such price and the number of shares of
Common Stock outstanding, on a fully-diluted basis (excluding shares sold in the
offering and shares issuable upon conversion of outstanding Convertible Notes)
equals or exceeds $225.0 million, or (2) if no such sale of Common Stock has
taken place on or before the Conversion Date, a price equal to the quotient of
$225.0 million divided by the number of shares of Common Stock outstanding on
that date, on a fully diluted basis (excluding shares issuable upon conversion
of outstanding Convertible Notes).
The Convertible Notes are not subject to prepayment without the consent of
VPC. Subject to the terms of the Indenture for the Senior Notes, the Convertible
Notes must be prepaid out of proceeds of any sale of debt or equity securities
of OpTel to the extent that VPC, in its sole discretion, shall require.
In the event of a liquidation, dissolution, reorganization, receivership or
winding-up of the Company, the holders of the Notes and the Trustee will be
entitled to the prior payment in full of all obligations owing under the
Indenture for the Senior Notes and the Notes before any payment whatsoever is
made on account of the Convertible Notes. In addition, no payment on account of
the Convertible Notes may be made at a time when (x) any Default or Event of
Default (each as defined under the Indenture for the Senior Notes) has occurred
or is continuing or will occur as a result of such action or (y) the maturity of
the Notes has been accelerated. Accordingly, the prepayment of the Convertible
Notes and the payment of any interest on account of the Convertible Notes will
at all times be subject to the covenants of the Indenture for the Senior Notes.
RICHEY WARRANT
In connection with the acquisition by the Company (as the assignee of
Vanguard) of certain subsidiaries of International Richey Pacific Cablevision,
Ltd. ("Richey"), Vanguard granted to Richey a warrant (the "Richey Warrant") to
purchase certain limited partnership interests in Vanguard at an exercise price
of $1.25 million, subject to adjustment. The Richey Warrant is exercisable, in
whole or in part, at any time prior to December 28, 1997. If the Richey Warrant
is not exercised, Richey may, during the 90 day period commencing on December
28, 1997, require the Company to purchase the Richey Warrant for $1.0 million,
subject to reduction (the "Put Price"). Vanguard may, at its option, repurchase
the Richey Warrant for $4.0 million, subject to adjustment. The Company has
agreed to pay Vanguard, in the event that the Richey Warrant is exercised, or
Richey, in the event that Vanguard opts to repurchase the Richey Warrant, the
Put Price.
45
<PAGE>
VANGUARD-RELATED TRANSACTIONS
In August 1996, in connection with a negotiated settlement of certain disputes
between the Company's principal stockholders, the Company granted Vanguard a
non-transferable option (the "Vanguard Option") to purchase 48,937 shares of
Class B Common at an exercise price of $53.55 per share, subject to adjustment.
In August 1997, Vanguard sold the option to Capital Communications CDPQ who
exercised the option at the same time as acquiring the minority interest in the
Company previously held by Vanguard.
In September 1996, the Company entered into a consulting agreement with James
A. Kofalt, a former director of the Company and a limited partner of Vanguard,
pursuant to which the Company agreed to compensate Mr. Kofalt with a one time
payment of $70,000 and a per diem consulting fee of $3,500 (if such consulting
services are requested by the Company). In connection therewith, the Company
also granted Mr. Kofalt a warrant (the "Kofalt Warrant") to purchase up to
24,992 shares of Class A Common at an exercise price of $53.55 per share,
subject to adjustment. The Kofalt Warrant is presently exercisable and expires
on August 31, 1999. In the event that the Kofalt Warrant is exercised prior to
the IPO Date, the shares of Class A Common held by Mr. Kofalt will become
subject to transfer restrictions, rights of first refusal and drag along.
STOCKHOLDERS' AGREEMENT
On August 15, 1997, in connection with the sale by Vanguard of its minority
stock position in the Company to CDPQ, the Company, VPC and CDPQ entered into a
Stockholders' Agreement (the "Stockholders' Agreement"), and the Company and
CDPQ entered into a related Registration Rights Agreement (the "Registration
Rights Agreement"), under which CDPQ has certain rights and obligations relating
to the Company and VPC. CDPQ is a subsidiary of Caisse, which is a significant
minority stockholder of GVL and a party to the GVL Stockholders Agreement
described below.
Designation of Directors. Under the Stockholders' Agreement, VPC and the
Company are required while CDPQ holds at least 5% of the Company's voting stock
to take action so that CDPQ will designate a number of Directors of the Company
and each of its subsidiaries, and each committee of the Board of Directors of
the Company and each of its subsidiaries, which is proportionate (in relation
to the total number of Directors or committee members) to CDPQ's percentage
ownership of the Company's voting stock, but in no event less than one Director
and one committee member. This agreement supersedes the rights to designate a
Director of the Company previously held by Caisse pursuant to the GVL
Stockholders' Agreement, which are subject to reinstatement in the event CDPQ
ceases to be a stockholder of the Company. The following is a summary of
certain provisions of the Stockholders' Agreement and the Registration Rights
Agreement.
Approval of Certain Actions by CDPQ. Pursuant to the Stockholders' Agreement,
until the consummation of a public offering of the Company's voting Common
Stock, CDPQ has the right to approve (i) any amendment to the certificate of
incorporation or bylaws of the Company or any subsidiary; (ii) any change in the
capital stock of the Company or any subsidiary; (iii) the acquisition or
disposition by the Company or any subsidiary of assets or securities in excess
of $10 million in any single transaction or $40 million in the aggregate in any
fiscal year; (iv) the incurrence by the Company or certain subsidiaries of
indebtedness not permitted under the Indenture for the Company's Senior Notes,
including, after indebtedness under the Indenture has been satisfied, the
maintenance of other indebtedness that would violate certain financial covenants
contained in the Indenture.
46
<PAGE>
Rights in Connection with Other Financings. Pursuant to the Stockholders'
Agreement, until the consummation of a public offering of the Company's voting
Common Stock (or earlier in certain events), VPC is obligated to cause the
Company to afford CDPQ rights equivalent to those afforded other purchasers of
the Company's capital stock to the extent they are more advantageous than the
rights held by CDPQ. Subject to certain exceptions and to termination at VPC's
request in connection with certain events, the Company is obligated to afford
CDPQ preemptive rights to purchase equity securities which the Company proposes
to sell, in ratio to CDPQ's ownership of the total outstanding equity securities
of the Company prior to the sale.
Tag Along, First Offer and Put Rights. Pursuant to the Stockholders'
Agreement, CDPQ has certain tag along rights in connection with sales by VPC of
outstanding shares of the Company's voting stock. Further, each of VPC and CDPQ
is obligated to afford the other a right of first purchase of any equity
securities of the Company which either of them proposes to sell prior to
consummation of a public offering of the Company's voting Common Stock. If a
public offering of the Company's voting Common Stock has not been consummated
prior to August 15, 2002, CDPQ has the right to sell to VPC all of the Company's
shares then owned by CDPQ, at a price equal to the fair market value of the
shares to be sold.
Registration Rights. Pursuant to the Registration Rights Agreement, after the
consummation of a public offering of the Company's voting Common Stock, CDPQ has
the right, on two occasions, subject to certain conditions, to require the
Company, at its expense, to register under the Securities Act of 1993, as
amended, shares of Common Stock held by CDPQ to permit the public offering of
such shares. In addition, CDPQ has unlimited piggyback rights to include Common
Stock held by it in registration statements filed by the Company for the sale of
its equity securities for cash, subject to certain conditions, including
customary allocation and holdback provisions.
GVL SHAREHOLDERS' AGREEMENT
Caisse, CDPQ, Sojecci Ltee and Sojecci (1995) Ltee, the principal shareholders
of GVL, and Andre Chagnon (the founder of GVL) are parties to the GVL
Shareholders' Agreement, which provides, among other things, that for so long as
GVL controls the Issuer, Caisse will be allowed to select one of GVL's nominees
to the Board of Directors of the Issuer and to have one representative on the
Audit Committee of the Issuer, subject to any prior commitments made by GVL to
other stockholders of the Issuer and certain other conditions. In addition, the
principal shareholders of GVL have agreed they shall not allow the Company to
take certain actions without the consent of Caisse, including the incurrence of
additional indebtedness or any acquisition or merger, each outside the normal
course of business, or the issuance of additional capital stock of the Issuer.
MANAGEMENT FEES
In connection with a negotiated settlement of certain disputes between the
Company's principal stockholders, in August 1996, VPC and Vanguard agreed to
provide, at the specific request of the Board, such reasonable consultant,
advisory and management services as the Company may reasonably require. The
Company is unable to determine if the aggregate fees paid to VPC and Vanguard in
connection with such services are greater than or less than the fees the Company
would be required to pay if it obtained such services from an unaffiliated third
party. The Company accrued a liability of $29,167 payable to each of VPC and
Vanguard for general consulting services, during fiscal 1996. Vanguard was paid
such amounts during fiscal 1997. In fiscal 1997, the Company accrued and paid
Vanguard $350,000 per annum (plus travel expenses) for such services and accrued
$350,000 to VPC for similar services. All such amounts have not yet been paid
to VPC. These arrangements were terminated as of August 15, 1997, the date of
the sale of the minority interest in the Company to CDPQ.
47
<PAGE>
LICENSE HOLDING COMPANY
The Company has assigned substantially all of its frequency licenses to THI in
exchange for a $1.0 million principal amount (subject to adjustment as described
below) 8% secured promissory note due on February 14, 2007 (the "License Note").
The License Note contains covenants which restrict THI from, among other things,
incurring indebtedness other than to the Company or in the ordinary course of
business, and merging or consolidating with another entity.
The Communications Act prohibits any corporation of which more than one-fifth
of the capital stock is owned or voted by non-U.S. citizens, or any corporation
directly or indirectly controlled by any other corporation of which more than
one-fourth of the capital stock is owned or voted by non-U.S. citizens, from
holding a common carrier radio station license. GVL, the Company's principal
stockholder, is a Canadian corporation. Consequently, THI was created to permit
the Company to use the Assigned Licenses, modified as necessary, to provide
"common carrier" telecommunications services in the event that the Company
should desire to do so in the future. Russell S. Berman, Henry Goldberg and
Thomas Watson, each U.S. citizens, each own one-third of the outstanding equity
interests in THI. Mr. Watson is the Vice President of Engineering and
Information Services of OpTel. Russell S. Berman is a partner at Kronish, Lieb,
Weiner & Hellman LLP which represents both the Company and THI with respect to
various legal matters. Henry Goldberg is a partner at Goldberg, Godles, Weiner &
Wright which represents both the Company and THI with respect to certain federal
regulatory matters.
To establish the terms of the Company's continued and unencumbered use of the
Assigned Licenses, the Company and THI entered into a license and services
agreement (the "THI Agreement") pursuant to which THI has agreed to provide to
the Company all the transmission capacity it requires or may in the future
require and the Company has granted THI a non-exclusive license to use all of
the Company's facilities and related equipment, such as microwave transmitting
and receiving equipment, required to provide such transmission capacity. THI
will secure future licenses necessary to provide the Company with the
transmission capacity it requires. The THI Agreement provides for payments from
the Company to THI which are expected to approximate the monthly interest due on
the License Note plus an allowance for the anticipated expenses of THI. The
Company may also advance funds to THI to the extent necessary to enable THI to
fulfill its obligations under the THI Agreement. All amounts of such advances
will be added to the principal amount of the License Note. It is not expected
that payments made by the Company to THI will have a material impact on the
Company's cash flows or results of operations.
In connection with the above described transaction, the Company has received
an option from THI (the "THI Option") to purchase all or, in certain
circumstances, some of the assets of THI and a separate option from each
stockholder of THI (each, an "Individual Option") to purchase all of such
person's shares of capital stock of THI. The exercise price of the THI Option is
equal to the current principal amount of, plus the accrued interest on, the
License Note on the closing date, which amount may be paid by tendering the
License Note to THI plus an amount equal to the lesser of (i) book value of the
assets being purchased or (ii) the initial capitalization of THI plus 10%
premium compounded annually. The exercise price of each Individual Option is
equal to the lesser of (x) the book value of the shares being purchased and (y)
the price paid for such shares plus 10% premium compounded annually. The THI
Option and the Individual Options are exercisable at any time prior to February
14, 2007, subject to FCC approval.
48
<PAGE>
ACQUISITION OF CERTAIN ASSETS
Effective as of July 31, 1996, the Company purchased certain assets of certain
subsidiaries of Wireless Holdings, Inc. and Videotron (Bay Area) Inc., both of
which are affiliates of VPC for an aggregate purchase price of approximately
$3.9 million. The assets represented approximately 23,000 units passed. The
operations of the acquired assets are located in the San Francisco, California
and Tampa, Florida areas. The amounts paid represented the sellers' historical
costs. At the time of the purchase, the Board of Directors of the Company
received a valuation report which estimated the fair market value of such assets
to be approximately equal to their historical cost.
INSURANCE
The Company purchases certain insurance coverage through GVL, including
directors and officers liability insurance. The Company paid an aggregate of
approximately $478,000 and $434,000 to GVL for this insurance coverage in fiscal
1996 and 1997, respectively.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements. The following consolidated financial statements of
the Company and the report of the independent auditors thereon, are
included in this Form 10-K on pages F-1 through F-18:
Independent Auditor's Report
Consolidated Balance Sheets at August 31, 1997 and 1996
Consolidated Statements of Operations for the years ended August 31,
1997 and 1996, the period from January 1, 1995 to August 31, 1995 and
the year ended December 31, 1994,
Consolidated Statements of Stockholders' Equity for the years ended
August 31, 1997 and 1996, the period from January 1, 1995 to August
31, 1995 and the year ended December 31, 1994,
Consolidated Statements of Cash Flows for the years ended August 31,
1997 and 1996, the period from January 1, 1995 to August 31, 1995 and
the year ended December 31, 1994, Notes to the Consolidated Financial
Statements
49
<PAGE>
3. Exhibits
--------
3.1 Restated Certificate of Incorporation of the Registrant, together with
all amendments thereto.*
3.2 Bylaws of the Registrant.*
3.3 Certificate of Amendment to the Restated Certificate of Incorporation
of the Registrant
4.1 Indenture, dated as of February 14, 1997, between the Registrant and
U.S. Trust Company of Texas, N.A., as Trustee.*
4.2 Form of Senior Note (included in Exhibit 4.1).*
4.3 Escrow Agreement, dated as of February 14, 1997, between the Registrant
and U.S. Trust Company of Texas, N.A., as Trustee and as Escrow Agent.
4.4 Registration Agreement, dated as of February 14, 1997, between the
Registrant, Salomon Brothers Inc. and Merrill Lynch, Pierce, Fenner &
Smith.*
4.5 Common Stock Registration Rights Agreement, dated as of February 14,
1997, between the Registrant, VPC, GVL, Salomon Brothers Inc. and
Merrill Lynch, Pierce, Fenner & Smith.*
4.6 Registration Rights Agreement, dated as of August 15, 1997, between the
Registrant and Capital Communications CDPQ Inc.
4.7 Warrant Agreement, dated as of July 11, 1997, between the Registrant
and Rory O. Cole
10.1 Stockholders' Agreement, dated as of December 22, 1994, between VPC,
Vanguard Communications, L.P. ("Vanguard"), Vanguard Communications,
Inc. ("General Partner") and the Registrant.*
10.2 Registration Rights Agreement, dated as of December 22, 1994, between
the Registrant and Vanguard.*
10.3 Settlement Agreement, dated as of August 1, 1996, between Vanguard, the
General Partner, Pacific Capital Group, Inc. ("Pacific"), VPC, the
Registrant and GVL.*
10.4 Amendment, dated as of February 17, 1997, between Vanguard, the
General Partner, Pacific, VPC, GVL and the Registrant.*
10.5 Form of Convertible Note (included as Exhibit B to the Amendment
referenced as Exhibit 10.4 hereto) and a list of the issue dates and
principal amounts of all outstanding Convertible Notes (included as
Schedule 1 to the Amendment referenced as Exhibit 10.4 hereto).*
10.6 Warrant, dated as of December 29, 1994, between International Richey
Pacific Capital Corporation and Vanguard.*
10.7 Lease Agreement dated July 25, 1995 between Space Center Dallas, Inc.
and the Registrant.*
10.8 First Amendment to Lease Agreement dated August 8, 1996 between Space
Center Dallas, Inc. and the Registrant.*
10.9 Restated Incentive Stock Plan of the Registrant.*
10.10 Annual Bonus Plan of the Registrant.*
10.11 Medium Term Performance Plan of the Registrant.*
10.12 Employment Agreement between Louis Brunel and the Registrant dated
November 15, 1996.*
10.13 Employment Agreement between Rory Cole and the Registrant dated
January 3, 1997.*
10.14 Employment Agreement between Michael Katzenstein and the Registrant
dated September 18, 1995.*
50
<PAGE>
3. Exhibits (continued)
-------------------
10.15 Separation and Consulting Agreement, dated as of September 1, 1996,
between the Registrant and James A. Kofalt.*
10.16 Warrant Agreement, dated as of September 1, 1997, between the
Registrant and James A. Kofalt.*
10.17 Assignment Agreement, dated as of February 14, 1997, among TVMAX
Telecommunications, Inc. ("TVMAX"), Sunshine Television
Entertainment, Inc., Richey Pacific Cablevision, Inc., IRPC Arizona,
Inc. and Transmissions Holdings, Inc. ("THI").*
10.18 Equipment License and Services Agreement, dated as of February 14,
1997, between TVMAX and THI.*
10.19 Form of Shareholders Option Agreement, dated as of February 14, 1997,
between TVMAX and each of the shareholders of THI, together with a
list of the shareholders of THI.*
10.20 Option Agreement, dated as of February 14, 1997, between TVMAX and
THI.*
10.21 City of Houston, Texas, Ordinance No. 97-285 dated March 19, 1997,
granting TVMAX Communications (Texas), Inc. a temporary permit to
operate a Telecommunications Network.*
10.22 City of Houston, Texas, Ordinance No. 89-338 dated March 29, 1989
granting to PrimeTime Cable Partners I, Ltd. the right to operate for
15 years a Community Antenna Television System, and subsequent
ordinances consenting to assignment of rights to Eaglevision and to
TVMAX Communications (Texas), Inc.*
10.23 City of Houston, Texas, Ordinance No. 97-1088 dated September 3 1997,
extending the TVMAX Communications (Texas), Inc. temporary permit to
operate a Telecommunications Network (originally granted under
Ordinance 97-285).
10.24 Purchase Agreement, dated as of July 23, 1997 among the Registrant,
Phonoscope, Ltd., Phonoscope Management L.C., Lee Cook, Alton Cook
and Lee Cook Family Trust.
10.25 Amendment Number 001 to the Videotron/Lucent Agreement, dated August
28, 1997, among Videotron Telecom Ltee and Lucent Technologies Canada
Inc. and TVMAX Telecommunications Inc and Lucent Technologies Inc.
10.26 Summary of Terms and Conditions of Senior Secured Facilities between
Registrant and Goldman Sachs Credit Partners L.P.
10.27 Interconnection Agreement under Sections 251 and 252 of the
Telecommunications Act of 1996 by and between Southwestern Bell
Telephone Company and OpTel (Texas) Telecom, Inc.
11. Computation of Per Share Earnings
* Filed as an exhibit to the Registrant's registration statement on
Form S-4 filed with Securities and Exchange Commission on April 10, 1997.
(b) Reports on Form 8-K
- - ---- -------------------
A report on Form 8-K related to an event on August 14 has been filed during the
last quarter of the period covered by this report.
51
<PAGE>
2. Financial Statements Schedules. The following financial statements schedule
of the Company for the period xx and the years ended August 31, 1996 and
1997 is included in this Form 10-K on page S-1
SCHEDULE NO. DESCRIPTION PAGE NO
----------- ----------- -------
Schedule II Valuation and Qualifying Accounts S-1
All other financial statement schedules have been omitted because they are
inapplicable or the required information is included or incorporated by
reference elsewhere herein.
3. Exhibits. The Company will furnish to any eligible stockholder, upon
written request of such stockholder, a copy of an exhibit listed below upon
payment of a reasonable fee equal to the Company's expenses in furnishing
such exhibit.
52
<PAGE>
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: November 23, 1997
53
<PAGE>
DELOITTE &
TOUCHE LLP
- - ----------- LOGO [LETTERHEAD OF DELOITTE & TOUCHE LLP]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
OpTel, Inc.:
We have audited the accompanying consolidated balance sheets of OpTel, Inc. and
subsidiaries (the "Company") as of August 31, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended August 31, 1997 and 1996, the period from January 1, 1995 to
August 31, 1995, and the year ended December 31, 1994. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of OpTel, Inc. and subsidiaries as of
August 31, 1997 and 1996 and the results of their operations and their cash
flows for the years ended August 31, 1997 and 1996, the period from January 1,
1995 to August 31, 1995, and the year ended December 31, 1994, in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
October 14, 1997
<PAGE>
OPTEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------------------------
AUGUST 31,
------------------------------
ASSETS 1997 1996
------------- -------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 87,305,069 $ 1,677,332
RESTRICTED INVESTMENTS (Notes 6 and 12) 67,206,227 -
ACCOUNTS RECEIVABLE (Net of allowance for doubtful accounts of $1,125,223 and
$542,134, respectively) 4,044,145 3,063,719
PREPAID EXPENSES, DEPOSITS AND OTHER ASSETS 1,835,503 1,561,641
PROPERTY AND EQUIPMENT, NET (Note 4) 160,441,887 103,799,650
INTANGIBLE ASSETS, NET (Note 5) 82,583,272 65,876,003
------------ ------------
TOTAL $403,416,103 $175,978,345
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
ACCOUNTS PAYABLE $ 7,926,879 $ 5,647,024
ACCRUED EXPENSES AND OTHER LIABILITIES 13,969,444 10,506,586
DEFERRED REVENUES AND CUSTOMER DEPOSITS 2,977,872 2,167,253
CONVERTIBLE NOTES PAYABLE TO STOCKHOLDER (Notes 6 and 9) 129,603,875 89,414,364
NOTES PAYABLE AND LONG-TERM OBLIGATIONS (Note 6) 221,652,973 2,443,341
DEFERRED ACQUISITION LIABILITIES (Notes 3 and 6) 6,919,914 6,520,022
------------ ------------
Total liabilities 383,050,957 116,698,590
COMMITMENTS AND CONTINGENCIES (Notes 3 and 7)
STOCKHOLDERS' EQUITY (Notes 9,10 and 13):
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none issued and outstanding - -
Class A common stock, $.01 par value; 8,000,000 shares
authorized; none issued and outstanding - -
Class B common stock, $.01 par value; 6,000,000 shares
authorized; 2,353,498 and 2,304,561 issued and outstanding, respectively 23,535 23,046
Class C common stock, $.01 par value; 300,000 shares 2,250 -
authorized; 225,000 issued and outstanding
Additional paid-in capital 97,683,458 88,065,805
Accumulated deficit (77,344,097) (28,809,096)
------------ ------------
Total stockholders' equity 20,365,146 59,279,755
------------ ------------
TOTAL $403,416,103 $175,978,345
============ ============
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE>
OPTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------------------
PERIOD FROM
JANUARY 1, 1995 YEAR ENDED
YEAR ENDED YEAR ENDED TO AUGUST 31, DECEMBER 31,
AUGUST 31, 1997 AUGUST 31, 1996 1995 1994
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Cable television $ 36,915,504 $ 25,893,401 $ 8,782,610 $ 240,193
Telecommunications 2,921,816 1,711,446 787,788 201,467
------------- ------------- ------------ -----------
Total revenues 39,837,320 27,604,847 9,570,398 441,660
OPERATING EXPENSES:
Cost of services 19,202,306 11,867,960 4,557,609 469,952
Customer support, general and administrative 28,925,629 19,636,273 12,054,671 7,732,610
Depreciation and amortization 14,505,383 8,676,262 2,420,397 117,020
------------- ------------- ------------ -----------
Total operating expenses 62,633,318 40,180,495 19,032,677 8,319,582
------------- ------------- ------------ -----------
LOSS FROM OPERATIONS (22,795,998) (12,575,648) (9,462,279) (7,877,922)
OTHER INCOME (EXPENSE):
Interest expense on convertible notes payable
to stockholder (Notes 4 and 9) (15,204,416) (5,342,208) (918,501) -
Other interest expense (16,209,932) (656,925) (349,297) (76,367)
Interest and other income 5,675,345 144,997 99,936 10,112
------------- ------------- ------------ -----------
LOSS BEFORE INCOME TAXES (48,535,001) (18,429,784) (10,630,141) (7,944,177)
INCOME TAX BENEFIT (Note 8) - - 469,502 -
------------- ------------- ------------ -----------
NET LOSS $(48,535,001) $(18,429,784) $(10,160,639) $(7,944,177)
============= ============= ============ ===========
NET LOSS PER COMMON SHARE (Notes 2 and 10) $(19.98) $(8.30) $(6.89)
============= ============= ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING (Notes 2 and 10) 2,429,511 2,219,770 1,474,554
============= ============= ============
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
OPTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------------
CLASS B CLASS C
COMMON STOCK COMMON STOCK
----------------------------------------------------
PARTNERSHIP SHARES PAR SHARES PAR
CAPITAL OUTSTANDING VALUE OUTSTANDING VALUE
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 $ 688,582 - $ - - $ -
Contributions 10,375,012 - - - -
Net Loss of Partnership - - - - -
Reorganization from partnership (11,063,594) 716,695 7,167 - -
Net loss - - - - -
------------ --------- ------- ------------ ------
BALANCE, DECEMBER 31, 1994 - 716,695 7,167 - -
Issuance of stock upon debt
conversion, net of transaction costs - 1,120,985 11,210 - -
Sale and issuance of stock - 311,652 3,116 - -
Net loss - - - - -
------------ --------- ------- ------------ ------
BALANCE, AUGUST 31, 1995 - 2,149,332 21,493 - -
Issuance of stock upon debt conversion - 171,162 1,712 - -
Contribution and cancellation of shares - (15,933) (159) - -
Net loss - - - - -
------------ --------- ------- ------------ ------
BALANCE, AUGUST 31, 1996 - 2,304,561 23,046 - -
Issuance of stock with senior notes offering - - - 225,000 2,250
Stock options exercised - 48,937 489 - -
Net loss - - - - -
------------ --------- ------- ------------ ------
BALANCE, AUGUST 31, 1997 $ - 2,353,498 $23,535 225,000 $2,250
============ =========== ======= ============= ======
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT
----------------------------
<S> <C> <C>
BALANCE, JANUARY 1, 1994 $ - $ (306,844)
Contributions - -
Net Loss of Partnership - (7,725,504)
Reorganization from partnership 3,024,079 8,032,348
Net loss - (218,673)
----------- ------------
BALANCE, DECEMBER 31, 1994 3,024,079 (218,673)
Issuance of stock upon debt
conversion, net of transaction costs 59,193,763 -
Sale and issuance of stock 16,684,540 -
Net loss - (10,160,639)
----------- ------------
BALANCE, AUGUST 31, 1995 78,902,382 (10,379,312)
Issuance of stock upon debt conversion 9,163,264 -
Contribution and cancellation of shares 159 -
Net loss - (18,429,784)
----------- ------------
BALANCE, AUGUST 31, 1996 88,065,805 (28,809,096)
Issuance of stock with senior notes offering 6,997,750 -
Stock options exercised 2,619,903 -
Net loss - (48,535,001)
----------- ------------
BALANCE, AUGUST 31, 1997 $97,683,458 $(77,344,097)
=========== ============
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
OPTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
PERIOD FROM
JANUARY 1, 1995
YEAR ENDED YEAR ENDED TO AUGUST 31, YEAR ENDED
AUGUST 31, 1997 AUGUST 31, 1996 1995 DECEMBER 31, 1994
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (48,535,001) $(18,429,784) $(10,160,639) $ (7,944,177)
Adjustments to reconcile net loss to net
cash flow used in operating activities:
Depreciation and amortization 14,505,383 8,676,262 2,420,397 117,020
Deferred tax benefit - - (488,402) -
Noncash interest expense 15,106,854 5,661,026 1,146,713 -
Noncash interest earned on restricted investments (2,303,258) - - -
Increase(decrease) in cash from changes in
operating assets and liabilities, net of effect
of business combinations:
Accounts receivable (754,403) (1,369,646) (1,004,576) (58,300)
Prepaid expenses, deposits and other assets (785,519) (126,370) 180,363 (1,007,641)
Deferred revenue and other liabilities 640,398 906,413 894,993 164,106
Accounts payable and accrued expenses 6,190,494 4,229,678 3,517,250 5,397,128
------------- ------------ ------------ ------------
Net cash flows used in operating activities (15,935,052) (452,421) (3,493,901) (3,331,864)
------------- ------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of businesses (6,716,849) (9,916,038) (49,974,397) (1,297,818)
Acquisition of intangible assets (10,112,233) (7,903,979) (608,345) (3,210,994)
Purchases and construction of property and equipment (61,393,547) (54,217,352) (21,561,505) (6,067,215)
Purchases of restricted investments (79,609,219) - - -
Proceeds from maturity of restricted investments 14,706,250 - - -
------------- ------------ ------------ ------------
Net cash flows used in investing activities (143,125,598) (72,037,369) (72,144,247) (10,576,027)
------------- ------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from convertible notes payable 33,700,000 73,437,817 62,823,304 15,000,000
Repayments on convertible notes payable (10,000,000) - - -
Proceeds from senior notes payable 218,000,000 - - -
Financing costs of senior notes payable (5,737,641) - - -
Proceeds from issuance of common stock 9,620,393 84 16,687,656 -
Payment on notes payable and long term obligations (894,365) (1,306,759) (6,855,767) (6,488,888)
Contributions received from partners - - - 10,375,012
------------- ------------ ------------ ------------
Net cash flows provided by
financing activities 244,688,387 72,131,142 72,655,193 18,886,124
------------- ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 85,627,737 (358,648) (2,982,955) 4,978,233
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,677,332 2,035,980 5,018,935 40,702
------------- ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 87,305,069 $ 1,677,332 $ 2,035,980 $ 5,018,935
============= ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION (Notes 3 and 9)
Cash paid during the period for:
Interest $ 15,059,205 $ 289,509 $ 119,725 $ 38,836
============ ============ ============ ============
Taxes $ 2,450 $ - $ 18,900 $ -
============ ============ ============ =============
Increase in capital lease obligations $ 1,630,045 $ 878,988 $ - $ -
============ ============ ============ =============
Convertible debt issued for accrued interest $ 16,489,511 $ 6,436,131 $ - $ -
============ ============ ============ =============
Conversion of convertible debt and
partnership capital to common stock:
Partnership capital $ - $ - $ - $ (3,031,246)
============ ============ ============ =============
Convertible debt and accrued interest $ - $ (9,165,805) $(60,792,115) $ -
============ ============ ============ =============
Common stock $ - $ 1,712 $ 11,210 $ 7,167
============ ============ ============ =============
Additional paid-in capital, net of
transaction costs $ - $ 9,163,264 $ 59,193,763 $ 3,024,079
============ ============ ============ =============
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE>
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
OpTel, Inc., a Delaware corporation, and subsidiaries (the "Company" or
"OpTel") is the successor of the cable television operations of Vanguard
Communications, L.P. ("Vanguard"). Vanguard commenced operations in April
1993. On December 20, 1994, Vanguard contributed its cable television
operations to its wholly owned subsidiary, OpTel. The contribution to OpTel
was recorded at Vanguard's historical cost.
OpTel is a developer, operator and owner of private cable television and
telecommunications systems that utilize advanced technologies to deliver
cable television and telecommunications service to customers in multiple
dwelling units ("MDU"). The Company negotiates long-term, generally
exclusive cable television service agreements and nonexclusive
telecommunications service agreements with owners and managers of MDUs,
generally for terms of up to 15 years. The company's primary markets are
major metropolitan areas in Arizona, California, Colorado, Florida, Illinois
and Texas.
During the period from April 20, 1993 (date of inception) to March 31, 1995,
the Company was wholly owned by Vanguard. On March 31, 1995, VPC Corporation
("VPC") (a wholly owned subsidiary of Le Groupe Videotron Ltee ("Videotron")
- a Quebec corporation), acquired a 66.75% interest in the Company. At August
31, 1997, VPC's interest in the Company was 74.62% (see Note 9).
In 1995, the Company elected to change its year-end to August 31 from
December 31 to conform to that of its new majority stockholder.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of OpTel and its wholly owned and majority-owned subsidiaries
and limited partnerships. All significant intercompany accounts and
transactions have been eliminated. Amounts due to minority limited partners
are included in notes payable and long-term obligations.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents of the Company are
composed of demand deposits with banks and short-term investments with
maturities of three months or less when purchased.
RESTRICTED INVESTMENTS - Restricted investments of the Company are composed
of U.S. Treasury securities restricted for payment of interest on the
Company's Senior Notes. These investments are classified as held to maturity
and are carried at amortized cost.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost, which
includes amounts for construction materials, direct labor and overhead, and
capitalized interest. When assets are disposed of, the costs and related
accumulated depreciation are removed, and any resulting gain or loss is
reflected in income for the period. Cost of maintenance and repairs is
charged to operations as incurred; significant renewals and betterments are
capitalized. Depreciation is calculated using the straight-line method over
the estimated useful lives of the various classes of property and equipment
as follows:
-6-
<PAGE>
Headends 15 years
Telephone switches 10 years
Distribution systems and enhancements 15 years
Computer software and equipment 4 years
Other 5 to 10 years
Management routinely evaluates its recorded investments for impairment based
on projected undiscounted cash flows and other methods and believes the
investments to be recoverable.
INTANGIBLE ASSETS - Costs associated with licensing fees, commissions and
other direct costs incurred in connection with the execution of rights-of-
entry agreements to provide cable television and telecommunications service
to MDUs, the excess of purchase price over the fair value of tangible assets
acquired and other intangible assets are amortized using the straight-line
method over the following estimated useful lives:
Goodwill 20 years
Licensing fees and rights-of entry costs Life of contract
Deferred financing costs Terms of indebtedness
Other 1 to 5 years
Management routinely evaluates its recorded investments for impairment based
on projected undiscounted cash flows and other methods and believes the
investments to be recoverable.
FEDERAL AND STATE INCOME TAXES - Prior to August 2, 1996 the Company and its
corporate subsidiaries filed a consolidated federal income tax return.
Beginning August 2, 1996, in connection with VPC acquiring additional stock
from Vanguard, the Company was included in VPC's consolidated federal income
tax return. Effective February 14, 1997, as the result of issuing Class C
common stock (see Notes 6 and 9) the Company will again be required to file a
separate consolidated federal income tax return. During the period in which
the Company was consolidated with VPC, for purposes of financial reporting,
the Company has recorded federal and state income tax as if it were filing a
separate return. Deferred tax assets and liabilities are recorded based on
the difference between the tax bases of assets and liabilities and their
carrying amounts for financial reporting purposes, referred to as temporary
differences. Provision is made or benefit recognized for deferred taxes
relating to temporary differences in the recognition of expense and income
for financial reporting purposes. To the extent a deferred tax asset does not
meet the criterion of "more likely than not" for realization, a valuation
allowance is recorded.
REVENUE RECOGNITION AND DEFERRED REVENUE - The Company recognizes revenue
upon delivery of cable television programming and telecommunications service
to subscribers. OpTel typically bills customers in advance for monthly cable
television services, which results in the deferral of revenue until those
services are provided.
COST OF SERVICES - System operating costs include programming,
telecommunications service costs, revenue sharing with owners of MDUs for
which OpTel provides cable television and/or telecommunications service, and
franchise fees.
NET LOSS PER COMMON SHARE - The computation of net loss per common share is
based on the weighted average number of common shares outstanding during the
period (see Note 10). No loss per share information is presented for the
period the Company was organized as a partnership.
-7-
<PAGE>
The net loss per common share, assuming full dilution, is considered to be
the same as primary since the effect of the convertible notes payable to
stockholder and common stock equivalents outstanding for each period
presented would be antidilutive.
ACQUISITIONS - Acquisitions accounted for using the purchase method of
accounting include results of operations of the acquired businesses in the
accompanying consolidated financial statements from the dates of acquisition.
Identifiable tangible and intangible assets acquired and liabilities assumed
are recorded at their estimated fair value at the date of acquisition. The
excess of the purchase price over the net assets acquired is recorded as
goodwill.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect reporting amounts of certain assets,
liabilities, revenues and expenses. Actual results may differ from such
estimates. The Company is in the initial stages of entering new markets and
acquiring or constructing the infrastructure necessary to deliver cable
television and telephony services. The Company's network upgrades and
investment in centrally switched telephony require significant investment, a
portion of which will not be recovered unless the Company's customer base
increases from current levels, as to which there can be no assurance because
of possible changes due to competition, regulatory changes, technology
changes, the ability to finance future expenditures or other unforeseen
factors. The carrying value of property, equipment, and intangible assets
will be subject to ongoing assessment.
NEW ACCOUNTING PRONOUNCEMENTS - On September 1, 1996, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", which did not have a significant impact on the Company's results of
operations or financial position.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings per Share," which establishes new standards for
computing and presenting earnings per share and is effective for financial
statements issued for periods ending after December 15, 1997, including
interim periods; earlier application is not permitted. The Company does not
expect the adoption of SFAS No. 128 to have a significant impact upon the
Company's reported earnings per share.
The FASB issued, in February 1997, SFAS No. 129, "Disclosure of Information
about Capital Structure," which establishes standards for disclosing
information about an entity's capital structure and is effective for
financial statements for periods ending after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and display of comprehensive income
and its components in the financial statements. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997.
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 periods beginning after December 15,
1997.
-8-
<PAGE>
RECLASSIFICATIONS - Certain reclassifications of prior year amounts have been
made to conform to the current year presentation.
3. ACQUISITIONS
On December 28, 1994, the Company acquired the stock of the operating
subsidiaries of International Richey Pacific Cablevision, Ltd. ("IRPC") by
assuming approximately $15,500,000 of liabilities, issuance of a note for
$1,000,000, payment of approximately $1,300,000 in cash and issuance of a
warrant for the right to purchase an ownership interest in Vanguard. IRPC
may exercise the warrant through December 28, 1997, at a price of $1,250,000.
Upon IRPC exercising the warrant, OpTel would be required to pay Vanguard
$1,000,000. Within the exercise period, Vanguard may call the warrant at a
price of $4,000,000. Upon Vanguard calling the warrant, OpTel would be
required to pay IRPC $1,000,000. If the warrant is neither exercised by IRPC
nor called by Vanguard, within 90 days of the expiration of the exercise
period, IRPC may put the warrant to OpTel at a price of $1,000,000. The
warrant is recorded by OpTel at its obligation under either situation of
$1,000,000 at August 31, 1997. The $1,000,000 secured note payable was due
to IRPC one year after closing and was subject to adjustment based on the
actual amount of assumed liabilities. No adjustments to the recorded note
payable have been agreed to with IRPC and the note has not been paid as of
August 31, 1997. The combined amounts due to IRPC are included on the
accompanying consolidated balance sheets in deferred acquisition liabilities.
The Company, as a result of the acquisition from IRPC, is a general partner
in limited partnership investments (the "Partnerships"). The operations of
these Partnerships have been consolidated with those of the Company. The
Company has the option to purchase the interest of each limited partner at
defined amounts ranging from 110% to 140% of each limited partner's initial
capital contribution for the first four years of the partnership agreements
and is required to purchase the interests at the end of the fifth year at
150% of the initial capital contribution. From the date of initial capital
contribution until the date the Company purchases the interest of a limited
partner, each limited partner receives a guaranteed return equal to 10% per
annum of their initial capital contribution paid quarterly. During the
periods ended August 31, 1997, 1996 and 1995 OpTel paid $0, $392,403 and
$2,114,431, respectively, to repurchase certain partnership obligations (see
Note 6). The operations of the acquired subsidiaries and the partnerships are
located in the San Diego, California, and Phoenix, Arizona areas.
On January 11, 1995, the Company purchased the assets of EagleVision, a
division of Nationwide Communications, Inc. ("NCI"). The purchase price
consisted of $15,200,000 in cash, the assumption of approximately $110,000 of
liabilities and a deferred payment due to NCI of not less than $6,000,000 and
not more than $10,000,000 based on the profitability of OpTel's assets in the
Houston, Texas market with certain adjustments. This deferred payment shall
be payable at NCI's option, either (a) following the sale of all or
substantially all of the EagleVision assets or the sale of a majority of the
outstanding voting capital of the OpTel subsidiary which acquired EagleVision
assets to a third party who is not an affiliate or (b) at the conclusion of
the fifth or sixth year following the acquisition. This deferred payment is
carried on the accompanying consolidated balance sheets in deferred
acquisition liabilities at the net present value of the estimated final
payment with an accretion of interest recorded to operations. As of the date
of acquisition and as of August 31, 1997, the estimated payment due was
$6,000,000 with a net present value at August 31, 1997 and 1996 of
$4,902,662 and $4,502,770, respectively. EagleVision's operations are
located in the Houston, Texas, area.
-9-
<PAGE>
On June 30, 1995, the Company purchased the stock of Sunshine Television
Entertainment, Inc. ("Sunshine") for $5,500,000 in cash and the assumption of
approximately $350,000 of liabilities. Sunshine's operations are located in
the Miami, Florida, area.
On July 31, 1995, the Company purchased the assets of Interface
Communications Group, Inc. and certain related entities ("Interface") for
$8,900,000 in cash and the assumption of approximately $30,000 of
liabilities. The operations of Interface are located in the Denver,
Colorado, area.
On August 31, 1995, the Company purchased the general and limited partnership
interests of Triax Associates V, L.P. ("Triax"), for $15,200,000 in cash and
the assumption of approximately $100,000 of liabilities. The operations of
Triax are located in the Chicago, Illinois, area.
On January 30, 1996, the Company purchased the assets of Telecom Master L.P.
and Telecom Satellite Systems Corporation ("Telecom") for approximately
$5,700,000 in cash and the assumption of $100,000 of liabilities. The
operations of Telecom are located in the Dallas, Texas, area.
On August 2, 1996, the Company purchased certain assets of certain
subsidiaries of Wireless Holdings, Inc., and Videotron (Bay Area), Inc.,
companies that are 50% and 80% owned and controlled by Videotron,
respectively, for approximately $3,880,000. The amount paid represents the
sellers' historical cost which also approximates the acquired assets'
estimated fair market value. The operations of the acquired assets are
located in the San Francisco, California, and Tampa, Florida, areas.
On November 12, 1996, the Company purchased the assets of Malvey Cable
Company ("Nor-Cal") for approximately $2,500,000 in cash. The operations of
Nor-Cal are located in the San Francisco, California area.
On March 14, 1997, the Company purchased the stock of Tara Communication
Systems, Inc. ("Tara") for $2,450,000 in cash and the assumption of
approximately $65,000 of liabilities. The operations of Tara are located in
the Chicago, Illinois, area.
On August 1, 1997, the Company purchased certain assets of Northgate
Communications, Inc. ("Northgate") for approximately $1,700,000 in cash. The
operations of Northgate are located in the Los Angeles and San Diego,
California, areas.
The purchase price of certain of the above acquisitions are subject to final
adjustments for such items as actual liabilities assumed and number of
customers.
The pro forma effect of the 1997 and 1996 acquisitions would have an
insignificant impact on the consolidated results of operations of the Company
for the years ended August 31, 1997 and 1996.
-10-
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
AUGUST 31
------------------------------------------------------
1997 1996
---- ----
<S> <C> <C>
Headends $ 53,087,587 $ 32,115,973
Telephone switches 9,347,147 4,976,699
Distribution systems and enhancements 68,537,677 36,372,848
Computer software and equipment 9,511,685 4,957,123
Other 8,761,635 5,813,345
Construction in progress 26,177,788 25,434,861
------------ ------------
175,423,519 109,670,849
Less accumulated depreciation (14,981,632) (5,871,199)
------------ ------------
$160,441,887 $103,799,650
============ ============
</TABLE>
Interest expense of $2,256,503 and $1,849,541 was capitalized during 1997
and 1996 respectively.
5. INTANGIBLE ASSETS
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
AUGUST 31
-------------------------------------------------
1997 1996
---- ----
<S> <C> <C>
Goodwill $ 53,081,308 $47,344,322
Licensing fees and rights-of-entry costs 30,833,231 22,173,500
Deferred Financing costs 5,783,519 -
Other 3,243,433 1,649,989
------------ -----------
92,941,491 71,167,811
Less accumulated amortization (10,358,219) (5,291,808)
------------ -----------
$ 82,583,272 $65,876,003
============ ===========
</TABLE>
-11-
<PAGE>
6. NOTES PAYABLE AND LONG-TERM OBLIGATIONS
Notes payable and long-term obligations consisted of the following:
<TABLE>
<CAPTION>
AUGUST 31
-------------------------------------------------------------------
1997 1996
---- ----
<S> <C> <C>
13% Senior Notes Due 2005, Series B
Net of unamortized discount of $6,526,042 $218,473,958 $ -
Installment notes payable bearing interest at rates
ranging from 7.75% to 13% per annum, substantially
all collateralized by certain transportation equipment
or private cable television systems 280,059 511,145
Limited partner obligations (see Note 3) 714,333 633,134
Obligations under capital leases, net of amounts
representing interest of $581,490 and $355,236 for
1997 and 1996, respectively 2,184,623 1,299,062
------------ ----------
$221,652,973 $2,443,341
============ ==========
</TABLE>
On February 14, 1997, the Company issued $225.0 million of 13% Senior Notes
Due 2005 ("Senior Notes"). The Senior Notes require semiannual interest
payments due on August 15 and February 15 of each year until their maturity
on February 15, 2005. The Senior Notes are redeemable at the option of the
Company generally at a premium at any time after February 15, 2002 and can
be redeemed, in part, also at a premium, earlier upon the occurrence of
certain defined events. The Senior Notes are unsecured.
In connection with the issuance of the Senior Notes, the Company issued
225,000 shares of Class C Stock. The portion of the net proceeds allocated
to the Class C stock is $7 million. Such amount has been recorded as
stockholders' equity and as a discount to the Senior Notes. As a result of
issuing the Class C stock, the Company will no longer be included in VPC's
consolidated federal income tax return.
Concurrent with the issuance of the Senior Notes, the Company was required
to deposit in an escrow account $79.6 million in cash that, together with
the proceeds from such investment, will be sufficient to pay when due the
first six interest payments on the Senior Notes. Such amount is reflected as
restricted investments on the accompanying consolidated balance sheet.
-12-
<PAGE>
Aggregate maturities of the Company's indebtedness are as follows as of
August 31, 1997:
<TABLE>
<CAPTION>
NOTES PAYABLE CONVERTIBLE DEFERRED
AND NOTES PAYABLE ACQUISITION
LONG-TERM TO STOCKHOLDER LIABILITIES
OBLIGATIONS (NOTE 9) (NOTE 3) TOTAL
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal year
ending:
1998 $ 1,586,966 $ - $2,017,252 $ 3,604,218
1999 810,836 - - 810,836
2000 530,213 - 4,902,662 5,432,875
2001 249,090 - - 249,090
2002 1,910 - - 1,910
Thereafter 218,473,958 129,603,875 - 348,077,833
------------ ------------ ---------- ------------
Totals $221,652,973 $129,603,875 $6,919,914 $358,176,762
============ ============ ========== ============
</TABLE>
The Company leases office space and certain equipment under operating and
capital leases. The leases generally have initial terms of 3 to 20 years.
Equipment acquired under capital leases consists of the following:
<TABLE>
<CAPTION>
AUGUST 31
-------------------------------------------
1997 1996
---- ----
<S> <C> <C>
Amount of equipment under capital leases $3,068,876 $1,717,161
Less accumulated amortization (470,124) (297,548)
---------- ----------
$2,598,752 $1,419,613
========== ==========
</TABLE>
Minimum future obligations on operating leases at August 31, 1997, consist of
the following:
Fiscal year ending:
1998 $ 2,474,431
1999 2,284,813
2000 1,880,236
2001 1,546,499
2002 1,217,934
Thereafter 3,646,401
-----------
Total minimum lease payments $13,050,314
===========
Rental expense under operating leases for the periods ending August 31, 1997,
1996 and 1995 was $2,763,000, $2,158,000 and $616,000, respectively. The
company's rental expense under operating leases includes facility rentals as
well as rental of roof top space for distribution purposes.
-13-
<PAGE>
7. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AND CONSULTING AGREEMENTS - Employment agreements with certain
executive employees provide for separation payments ranging from 3 to 24
months of the employee's annual salary if employment is terminated due to
change of control or without cause. However, stipulations for termination
payment and payment terms vary. The Company paid or accrued approximately
$277,500, $297,000 and $1,590,000 in severance during 1997, 1996 and 1995,
respectively, related to such employment agreements.
LEGAL - The Company is a defendant in certain lawsuits incurred in the
ordinary course of business. It is the opinion of the Company's management
that the outcome of the suits now pending will not have a material, adverse
effect on the operations, cash flows or the consolidated financial position
of the Company.
8. INCOME TAXES
The cumulative losses of Vanguard incurred prior to the transfer of its
assets to the Company on December 20, 1994, have been reported in the
individual income tax returns of Vanguard's partners. Upon transfer, the
Company recorded deferred taxes for the difference between the tax and book
basis of the assets, which was not material. Upon acquisition of the stock
of the IRPC subsidiaries, a deferred tax liability of $488,402 was recorded
to recognize the excess of the basis in the assets for financial reporting
purposes over the tax basis of the net assets acquired. During the period
from January 1, 1995, to August 31, 1995, the Company accumulated losses
sufficient to offset these deferred liabilities; accordingly, a tax benefit
was recorded in the statement of operations. Additionally, during the period
ended August 31, 1995, the Company incurred $18,900 of federal and state
income tax expense.
Income tax expense (benefit) consists of the following for the years ended
August 31, 1997 and 1996 and the period from January 1, 1995 to August 31,
1995:
<TABLE>
<S> <C> <C> <C>
Current:
Federal $ - $ - $ -
State - - 18,900
------------ ----------- -----------
Total current tax expense - - 18,900
Deferred tax expense (benefit) (13,212,890) (4,470,008) (3,451,805)
Change in deferred tax valuation allowance 13,212,890 4,470,008 2,963,343
------------ ----------- -----------
Total income tax expense (benefit) $ - $ - $ (469,562)
============ =========== ===========
</TABLE>
-14-
<PAGE>
A reconciliation of income taxes on reported pretax loss at statutory rates
to actual income tax expense (benefit) for the years ended August 31, 1997
and 1996 and the period from January 1, 1995 to August 31, 1995, is as
follows:
<TABLE>
<CAPTION>
1997 RATE 1996 RATE 1995 RATE
-------------- ----- ------------- ----- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Income tax at statutory rates $(16,501,900) 34% $(6,266,127) 34% $(3,614,248) 34%
State income taxes, net of
federal tax benefit 8,502 0 (833) 0 12,474 0
Valuation allowance 13,212,890 27 4,470,008 24 2,963,343 28
Expenses (dedectible) not deductible
for tax purposes (842,204) (2) 1,796,952 10 168,869 2
Utilization of current loss by
parent company in
consolidated return 4,122,712 9 - - - -
------------ ----------- -----------
Total income tax benefit $ - 0% $ - 0% $ (469,562) (4)%
============ =========== ===========
</TABLE>
The net deferred tax assets consist of the tax effects of temporary differences
related to the following:
<TABLE>
<CAPTION>
AUGUST 31
---------------------------------------------
1997 1996
---- ----
<S> <C> <C>
Allowance for uncollectible accounts receivable $ 380,665 $ 184,326
Equipment, furniture and fixtures (10,694,096) (4,539,736)
Intangible assets 420,888 105,249
Accrued employee compensation 213,535 182,676
Net operating loss carryforwards 31,120,828 12,371,690
IRPC deferred tax liability (480,402) (488,402)
Other 58,841 (16,434)
------------ -----------
Deferred tax asset before valuation allowance 21,012,259 7,799,369
Valuation allowance (21,012,259) (7,799,369)
------------ -----------
Net deferred tax asset $ - $ -
============ ===========
</TABLE>
Realization of deferred tax assets is dependent on generating sufficient
taxable income prior to expiration of the loss carryforwards. The Company is
unable to determine whether these accumulated losses will be utilized;
accordingly, a valuation allowance has been provided.
-15-
<PAGE>
The following are the expiration dates and the approximate net operating loss
carryforwards at August 31, 1997:
Expiration Dates
Through:
2010 $ 1,346,252
2011 11,521,202
2012 26,160,832
2013 52,503,562
Certain of the Company's net operating losses were utilized by VPC while the
Company was included in VPC's consolidated tax return. Such losses will not
be available for future use by the Company, and, accordingly, the deferred
tax benefit and valuation allowance were reduced. In connection with the
revised shareholder agreement (see Note 9), subsequent to august 31, 1997,
the Company will be reimbursed for any tax benefit generated by the company
and utilized by VPC.
9. CONVERTIBLE NOTES PAYABLE TO STOCKHOLDER, STOCK ISSUANCE AND OTHER
TRANSACTIONS WITH STOCKHOLDERS
From December 22, 1994 through March 31, 1995, the Company borrowed
$60,000,000 from VPC under a Senior Secured Convertible Note Agreement. The
note, with an original maturity of June 30, 1996, and the accrued interest of
$792,115 for the period from December 22, 1994 until conversion on March 31,
1995, was converted to 1,120,985 shares of common stock of OpTel on March
31, 1995. Concurrently, VPC purchased 105,667 shares of OpTel's common stock
from Vanguard. Additionally, the Company incurred $1,587,142 of costs
related to this conversion of debt which was charged to additional paid-in
capital.
On July 26, 1995, VPC invested $24,999,504 in the Company, of which
$16,687,656 represented VPC's purchase of an additional 311,652 shares of
OpTel common stock, and $8,311,848 represented a convertible note payable
that bore interest at 15% and was convertible to 155,229 shares of common
stock at the option of VPC on November 15, 1995 (extended to January 29,
1996). In connection with the July 26, 1995, equity call, Vanguard had the
option to fund its portion to maintain its ownership interest at 33.25% by
November 15, 1995 (extended to January 29, 1996). The Company was required
to use the proceeds from any Vanguard contribution to repay the convertible
note. On January 29, 1996, Vanguard elected to let the option expire without
funding its portion of the equity call. On April 1, 1996, VPC converted the
$8,311,848 note and accrued interest of $853,957 into 155,229 shares of
common stock.
From August 1995 through August 1997, the Company issued a total of
$131,400,000 in convertible notes to VPC, all of which bear interest at 15%,
generally with principal and interest due on demand. Under the terms of the
notes, any accrued interest on which there is no demand for payment as of
each August 31, automatically converts to additional principal payable. As
of August 31, 1997, $106,678,233 was advanced to OpTel under these notes and
a total of $22,925,642 of interest on the notes has been converted to
principal to date.
The principal and interest on convertible notes may be converted, subject to
anti-dilution adjustments and other terms, into Class B Common Stock (see
Note 10) at the price at which common stock is first sold to the public in a
public offering ("IPO Date") or, after April 30, 1999, at
-16-
<PAGE>
a price equal to the quotient of $225 million divided by the number of shares
of common stock outstanding at the conversion date.
In August 1997, in connection with a revised shareholder agreement, Capital
Communication C.D.P.Q., Inc. ("CDPQ"), a minority stockholder of Videotron,
acquired all of Vanguard's interest in OpTel, including an option to purchase
48,937 shares of Class B Common Stock at an exercise price of $53.55 per
share, subject to adjustment, that had been granted to Vanguard in August
1996. The option was exercised by CDPQ on August 15, 1997, resulting in the
Company receiving $2,620,392 in cash.
In September 1996, the Company entered into a consulting agreement with a
former director of the Company who is a limited partner of Vanguard. In
connection therewith, the Company granted him a warrant to purchase up to
24,992 shares of Class A Common Stock at an exercise price of $53.55 per
share, subject to adjustment, that is presently exercisable and expires on
August 31, 1999.
VPC and an affiliate of Vanguard had each agreed to provide consultant,
advisory and management services for $350,000 per annum (plus travel
expenses) per party. This arrangement terminated in August 1997 with the
sale of Vanguard's interest in the Company.
10. STOCKHOLDERS' EQUITY
At August 31, 1997, the Class A Common Stock ("Class A stock"), Class B
Common Stock ("Class B stock") and Class C Common Stock ("Class C stock") of
the Company are identical in all respects and have equal powers, preferences,
rights and privileges except that each holder of Class A stock is entitled to
one vote for each share of Class A stock held, each holder of Class B stock
is entitled to ten votes for each share of Class B stock held, and each
holder of Class C stock does not possess any voting privileges. VPC and CDPQ
(and their affiliates) are the only permitted holders of Class B stock. Any
Class B stock that is either sold or transferred to any party other than the
permitted holders automatically converts to a like number of shares of Class
A stock.
On February 7, 1997 the Company approved a stock split effected in the form
of a stock dividend. Each share of outstanding Class B stock received
17.3768 additional shares. The number of authorized shares of Class A stock
and Class B stock was increased to 8,000,000 and 6,000,000, respectively.
The financial statements have been restated to reflect the stock split as if
it had occurred on December 20, 1994, the date the Company reorganized as a
corporation. Additionally, the Company authorized the issuance of 300,000
shares of Class C Non-Voting Common Stock.
11. EMPLOYEE BENEFIT PLAN
401(K) PLAN - The OpTel 401(k) Plan (the "Plan"), established January 1,
1995, conforms to the provisions of the Employee Retirement Income Security
Act of 1974. It is a contributory tax deferred 401(k) plan. All employees
are eligible and may enter the Plan on the first day of the first full month
of employment, provided that they have attained the age of 21.
Each participant my elect to defer up to 15% of annual compensation up to the
annual contribution limit of the Internal Revenue Code. The Company matching
contribution is a discretionary amount to be annually determined by the Board
of Directors of the Company. The Company determined that, for the plan years
ended December 31, 1997, 1996 and 1995, it would match 50% of its employees'
elective contribution (to a maximum Company contribution of 3% of the
employees'
-17-
<PAGE>
compensation). For the periods ended August 31, 1997, 1996 and 1995, the
Company's match of its employees' elective contributions was $288,731,
$187,577 and $80,886, respectively.
12. RESTRICTED INVESTMENTS
Concurrent with the issuance of the Senior Notes, the Company was required to
deposit in an escrow account $79.6 million in cash that was subsequently
invested in treasury securities. The securities are classified as held-to-
maturity and, at August 31, 1997, have an amortized cost basis of
$67,206,227, and aggregate fair value of $67,232,880, and gross unrealized
holding gains of $26,653. The contractual maturity of the securities
correspond to the semi-annual interest payments required under the Senior
Notes through February 15, 2000.
13. EMPLOYEE STOCK OPTIONS AND WARRANTS
During the year ended August 31, 1997 the Company adopted a stock option and
award plan for the benefit of officers and key employees. The plan is
administered by a committee of the Board of Directors. The plan authorizes
the Board to issue incentive stock options, as defined in Section 422A(b) of
the Internal Revenue Code of 1986, as amended (the "Code"), and stock options
which do not conform to the requirements of that Code section. The Board has
discretionary authority to determine the types of options to be granted, the
persons to whom options shall be granted, the number of shares to be subject
to each option granted and the terms of the stock option agreements. Unless
otherwise specifically provided in the option agreement, (i) the exercise
price of an option will not be less than the fair market value , as
determined by the Board, of the Class A stock on the date of grant and (ii)
the options vest in equal installments on each of the second, third, fourth
and fifth anniversaries of the date of grant. The options issued as of
August 31, 1997, expire ten years from the date of grant. In the event of a
"change in control," all options shall vest and become immediately
exercisable. The Board has authorized 95,137 shares to be issued under the
plan. Stock option activity under the plan and warrants issued (see Note 9)
for the year ended August 31, 1997, was as follows:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Price Per Share Price Per Share
- - --------------------------------------------------------------------------------------------------------------
Options and warrants outstanding at August 31, 1996 -- -- --
<S> <C> <C> <C>
Granted 112,115 $53.55 to $85.75 $76.70
Exercised -- -- --
Forfeited 22,078 $53.55 to $85.75 $80.92
- - --------------------------------------------------------------------------------------------------------------
Options and warrants outstanding at August 31, 1997 90,037 $53.55 to $85.75 $75.66
- - --------------------------------------------------------------------------------------------------------------
Options and warrants exercisable at August 31, 1997 27,095 $53.55 to $85.75 $56.05
Options available for grant at August 31, 1997 30,092
</TABLE>
-18-
<PAGE>
The weighted average remaining contractual life of the stock options
outstanding at August 31, 1997 is nine years.
At August 31, 1997, the Company has reserved a total of 65,045 shares of
Class A stock for exercise of stock options. The Company has also granted
stock warrants in connection with an agreement to provide consulting services
(see Note 9).
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" in accounting for its stock option and award plan and the stock
warrants. During 1997, the exercise price of each option granted was greater
than or equal to the market price of the Company's stock on the date of
grant. Accordingly, no compensation expense has been recognized under this
plan. For the year ended August 31, 1997, the difference between actual net
loss and loss per share and net loss and loss per share on a proforma basis
as if the Company had utilized the accounting methodology prescribed by SFAS
No. 123, "Accounting for Stock-Based Compensation," would have been $44,000
and $.02, respectively.
The estimated weighted average grant date fair value of options and warrants
granted during 1997 was $1.10 per share. For purposes of determining fair
value of each option, the Company used the minimum value method using the
following assumptions:
Risk-free interest rate 6.18% - 6.88%
Expected life 3 to 10 years
14. FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirement of SFAS No. 107, "Disclosure About
Fair Value of Financial Instruments." The estimated fair value amounts have
been determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgment is
necessarily required to interpret market data to develop estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
-19-
<PAGE>
<TABLE>
<CAPTION>
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------------- ------------------ --------------- ----------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 87,305,069 $ 87,305,069 $ 1,677,332 $ 1,677,332
Restricted investments 67,206,227 67,232,880 - -
Accounts receivable 4,044,145 4,044,145 3,063,719 3,063,719
Liabilities:
Accounts payable 7,926,879 7,926,879 5,647,024 5,647,024
Customer deposits and
deferred revenue 2,977,872 2,977,872 2,167,253 2,167,253
Convertible notes payable
to stockholder 129,603,875 129,605,000 89,414,364 89,415,000
Notes payable and long-term
obligations 221,652,973 228,650,000 2,443,341 2,445,000
Deferred acquisition liabilities 6,919,914 6,920,000 6,520,022 6,525,000
</TABLE>
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and customer deposits and deferred revenue approximates fair
value. The fair values of convertible notes payable to stockholder, certain
notes payable and long-term obligations and deferred acquisition liabilities
are estimated based on present values using applicable market discount rates
or rates that approximate what the Company could obtain from the open market.
The fair value of restricted investments and the Senior Notes are based on
quoted market prices. The fair value estimates presented herein are based on
pertinent information available to management as of August 31, 1997 and 1996.
Although management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since the
date presented, and therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
-20-
<PAGE>
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended August 31, 1997
--------------------------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 9,075,777 $ 9,545,940 $ 10,495,305 $ 10,720,298
Operating $12,692,826 $14,095,546 $ 17,003,399 $ 18,841,497
expenses
Other expense $ 3,277,015 $ 4,848,631 $ 8,867,448 $ 8,745,909
Net income $(6,894,064) $(9,398,237) $(15,375,542) $(16,867,108)
(loss)
Net loss per common share $ (2.99) $ (4.01) $ (6.08) $ (6.65)
Weighted average number
of shares outstanding 2,304,561 2,342,061 2,529,561 2,538,072
<CAPTION>
Year Ended August 31, 1996
--------------------------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 5,824,590 $ 6,463,522 $ 7,320,192 $ 7,996,543
Operating $ 7,999,598 $ 9,395,143 $ 10,320,214 $ 12,465,540
Expenses
Other Expense $ 613,789 $ 1,521,748 $ 1,572,981 $ 2,145,618
Net Income $(2,788,797) $(4,453,369) $ (4,573,003) $ (6,614,615)
(Loss)
Net loss per common share $ (1.30) $ (2.07) $ (2.02) $ (2.86)
Weighted average number
of shares outstanding 2,149,332 2,149,332 2,262,820 2,315,125
</TABLE>
16. SUBSEQUENT EVENTS
On October 13, 1997, the Company received a commitment from a bank to provide
a $150 million senior secured credit facility (the "Senior Facility") which
will be used to provide capital to fund future development. The Senior
Facility will consist of a term loan and a revolving credit commitment both
of which will bear interest at interest rates customary for this type of
transaction and the credit position of the Company. The Senior Facility will
be secured by a first fixed and floating lien on substantially all of the
assets of the Company. Availability under the Senior Facility will be
subject to the Company meeting certain performance criteria. Management
expects that funds will become available under the Senior Facility in
December 1997. The funding of the Senior Facility is subject to customary no
material adverse changes clauses and terminates December 15, 1997, if not
closed.
* * * * * *
-21-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
OpTel, Inc.:
We have audited the financial statements of OpTel, Inc. and subsidiaries as of
August 31, 1997 and 1996, and for each of the years ended August 31, 1997 and
1996, the period from January 1, 1995 to August 31, 1995, and the year ended
December 31, 1994; such financial statements and report are included herein. Our
audits also included the financial statement schedule of OpTel, Inc. listed in
Item 14. This financial statement schedule is the responsibility of the
Corporation's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Dallas, Texas
October 14, 1997
-22-
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
- - ----------------------------------------------------------------------------------------------------------------------
Balance at Charged to costs Deductions - Balance at end of
beginning of and expenses write-offs and Period
period recoveries
- - ----------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<S> <C> <C> <C> <C>
Year ended August 31, 1997 $542,134 $1,787,709 $(1,204,620) $1,125,223
Year ended August 31, 1996 $473,218 $1,376,835 $(1,307,191) $ 542,134
Period ended August 31, 1995 $147,853 $ 372,339 $ (46,974) $ 473,218
Year ended December 31, 1994 $ 238 $ 147,615 $ (0) $ 147,853
</TABLE>
<PAGE>
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT
TO THE
RESTATED CERTIFICATE OF INCORPORATION
OF
OPTEL, INC.
Under Section 242 of the Delaware General
Corporation Law
Pursuant to the provisions of Section 242 of the General
Corporation Law of the State of Delaware (the "GCL"), the undersigned, being
the Vice President and General Counsel and the Chief Financial Officer of
OpTel, Inc., do hereby certify that:
FIRST: The name of the corporation is OpTel, Inc. (hereinafter
referred to as the "Corporation").
SECOND: The Certificate of Incorporation of the Corporation was
filed with the Office of the Secretary of State of the State of Delaware on
July 1, 1994. A Restated Certificate of Incorporation of the Corporation
(the "Restated Certificate of Incorporation") was filed with the Secretary of
State of the State of Delaware on December 19, 1994.
THIRD: The Restated Certificate of Incorporation of the
Corporation is hereby amended by deleting Article FOUR, Sections A.4 through
and including Section A.8 in their entirety and replacing them with the
following:
"4. Any purported transfer of issued and outstanding shares of
class B Common Stock other than to a Permitted Transferee (as defined herein)
shall result in the automatic conversion of the shares of Class B Common
Stock being transferred into the like number of shares of Class A Common
Stock. No purported transfer of shares of Class B Common Stock shall be
effective unless and until the transferor has surrendered to the
Corporation, at its office or agency maintained for that purpose, the
certificates representing the shares of Class B Common Stock to be
transferred, which certificates shall be duly endorsed or accompanied by
executed stock powers, with the signatures appropriately guaranteed. All
such certificates shall be accompanied by written notice of the holder's
intention to transfer the shares, including a statement of the number of
shares of Class B Common Stock to be transferred and converted and the name
or name(s) and addresses in which the certificate or certificates for shares
of Class A Common Stock issuable upon such conversion shall be issued and, if
required,
<PAGE>
funds for the payment of any applicable transfer taxes. The Corporation
will, as soon as practicable thereafter, deliver at said office to the
transferee of converted shares of Class B Common Stock, or to any nominee or
designee of such transferee, a certificate. or certificates for the number of
full shares of Class A Common Stock issuable upon such conversion and, in the
event that the transferor is transferring less than the aggregate number of
shares represented by the certificates surrendered, a certificate or
certificates for the number of full shares of Class B Common Stock not being
transferred. Shares of Class B Common Stock shall be deemed to have been
converted as of the date of the surrender of the shares for transfer and
conversion as hereinbefore provided, and the person or persons in whose name
Class A Common Stock is issuable upon such conversion shall be treated for
all purposes as the record holder or holders of such Class A Common Stock on
such date. Shares of Class B Common Stock so converted shall be returned to
the status of authorized and unissued shares of Class B Common Stock. The
Corporation shall at all times reserve for issuance a number of shares of
Class A Common Stock (which may include Class A Common Stock held by the
Corporation as treasury stock) which shall be sufficient for issuance upon
conversion of all of the then outstanding Class B Common Stock pursuant to
this Section 4 or otherwise. The Corporation, may as a condition to the
transfer or the registration of transfer of shares of Class B Common Stock to
a purported Permitted Transferee, require the furnishing of such affidavits
or other proof as it reasonably deems necessary to establish that such
transferee is a Permitted Transferee. For purposes hereof (1) "Permitted
Transferee" shall mean a Person who acquires shares of Class B Common Stock
otherwise than in a transaction (a) on a securities exchange or public
quotation system, whether or not registered as such under the Securities
Exchange Act of 1934, as amended (or any successor statute) (the "Exchange
Act"), (b) effected to or through a Person acting as a broker or dealer
(whether or not registered as such under the Exchange Act or any foreign
system of registration or regulation), (c) pursuant to a registration
statement under the Securities Act of 1933, as amended (or any successor
statute) (the "Securities Act"), (d) as a result of which the shares of Class
B Common Stock cease to be "restricted securities" within the meaning of Rule
144 under the Securities Act (or any successor or similar rule), or (e) that
is (or if it occurred in the United States, would be) required to be
registered under the Securities Act, (2) "Affiliate" shall mean, with respect
to any Person, another Person directly or indirectly controlling, controlled
by, or under direct or indirect common control with, such Person, provided,
---------
however, that no employee of the Corporation or any of its subsidiaries shall
-------
be deemed to be an Affiliate solely by reason of his or her capacity as an
employee, or by reason of any employment agreement, and (3) "Person" shall
mean and include an individual, a partnership, a limited liability company, a
joint venture, a corporation, a trust, an
2
<PAGE>
unincorporated organization and a government or any department or agency
thereof. All certificates evidencing shares of Class B Common Stock shall be
endorsed with a legend making appropriate reference to the foregoing
provisions regarding automatic conversion.
5. Each holder of Class B Common Stock issued and outstanding shall
be entitled, at such holder's option, to convert each share of Class B Common
Stock standing on the books of the Corporation in such holder's name into one
share of Class A Common Stock. If VPC and its Affiliates shall at any time
elect to convert all of the shares of Class B Common Stock then issued and
outstanding and held by them into shares of Class A Common Stock, whether by
transfer pursuant to Section 4 or by conversion pursuant to this Section 5,
all of the other shares of Class B Common Stock issued and outstanding as of
the date of such conversion shall be automatically converted into shares of
Class A Common Stock on a share for share basis and shall otherwise cease to
be outstanding, effective as of the date of such transfer and/or conversion
by VPC and its affiliates. All Persons registered as holders of shares of
Class B Common Stock on the date of such conversion shall be treated for all
purposes as the record holders of an equal number of shares of Class A Common
Stock on such date. The Corporation will, as soon as practicable thereafter,
deliver to each of the holders of the shares of Class B Common Stock
converted into shares of Class A Common Stock a certificate or certificates
for the Class A Common Stock against receipt from such holder of the
certificate theretofore representing an equal number of shares of Class B
Common Stock. Shares of Class B Common Stock so converted shall be
returned to the status of authorized and unissued shares of Class B Common
Stock. Pending delivery of certificates for shares of Class A Common Stock
after such conversion, certificates for shares of Class B Common Stock so
converted shall be deemed to be certificates for an equal number of shares of
Class A' Stock.
6. Upon any sale of Common Stock of the Corporation pursuant to a
registration statement under the Securities Act or any registration of Common
Stock of the Corporation pursuant to the Exchange Act, the shares of
Class C Common Stock will automatically be converted into an equal
number of shares of Class A Common Stock or such other class of common
equity securities of the Corporation that is registered with the Securities
and Exchange Commission or is listed on a national securities exchange or
otherwise subject to registration under the Exchange Act (the "Conversion
Shares"), provided the terms thereof are no less favorable to holders thereof
than were the shares of Class C Common Stock. The Corporation shall at all
times reserve for issuance sufficient shares of Class A Common Stock (which
may include Class A Common Stock held by the Corporation as treasury stock)
or such other common equity
3
<PAGE>
securities, for issuance upon conversion of the Class C Common Stock. The
Corporation will as soon as practicable thereafter, deliver to the holder of
the Class C Common Stock converted into the Conversion Shares a certificate
or certificates for the Conversion Shares against receipt from such holder of
the certificate theretofore representing an equal number of shares of Class
C Common Stock. Shares of Class C Common Stock so converted shall be returned
to the status of authorized and unissued shares of Class C Common Stock.
7. Dividends may be paid to the holders of the Class A Common
Stock, Class B Common Stock and Class C Common Stock, as and when declared by
the Board of Directors, out of any funds of the Corporation legally
available for the payment of such dividends. If and when dividends on the
Class A Common Stock, Class B Common Stock and Class C Common Stock are
declared from time to time by the Board of Directors, whether payable in
cash, in property or in shares of stock of the Corporation, the holders of
the Class A Common Stock, Class B Common Stock and Class C Common Stock shall
be entitled to share equally, on a per share basis, in such dividends. If
shares of Class B Common Stock are paid on Class B Common Stock and shares of
Class A Common Stock are paid on Class A Common Stock and shares of Class C
Common Stock are paid on Class C Common Stock, in an equal amount per share
of Class B Common Stock and Class A Common Stock and Class C Common Stock in
proportionate amounts, such payment will be deemed to be a like dividend or
other distribution.
8. Subject to the provisions of any series of Preferred Stock at
the time outstanding, upon liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the net assets of the
Corporation shall be distributed pro rata to the holders of the Class A
Common Stock, Class B Common Stock and Class C Common Stock, without regard
to class.
9. If the Corporation shall in any manner split, subdivide, combine
or reclassify any outstanding shares of a class of Common Stock, the
outstanding shares of the other classes of Common Stock shall be
proportionately split, subdivided, combined or reclassified in the same
manner and on the same basis as the outstanding shares of the class of Common
Stock that have been split, subdivided, combined or reclassified, unless a
different basis has been consented to by the holders of a majority of the
outstanding shares of the Class A Common Stock or Class B Common Stock, as
applicable, or two-thirds of the outstanding shares of Class C Common
Stock, to the extent any such class would be adversely affected by such
action.
Subject to the conversion rights of holders of Class C Common
Stock, in the event of any corporate merger, consolidation, purchase or
acquisition of property or stock or
4
<PAGE>
other reorganization in which any consideration is to be received by the
holders of Class B Common Stock or the holders of Class A Common Stock, the
holders of Class C Common Stock will receive the same consideration on a per
share basis, except that, if such consideration shall consist in any part of
voting securities (or of options or warrants to purchase voting securities,
or of securities convertible into or exchangeable for voting securities), (i)
the holders of Class B Common Stock may receive, on a per share basis, voting
securities with ten times the number of votes per share as those voting
securities to be received by the holders of Class A Common Stock (or options
or warrants to purchase, or securities convertible into or exchangeable for
voting securities with ten times the number of votes per share as those
voting securities issuable upon the exercise of the options or warrants, or
into which the convertible or exchangeable securities may be converted or
exchanged, received by the holders of Class A Common Stock) and (ii) the
holders of the Class C Common Stock may receive, on a per share basis, non-
voting securities (or options or warrants to purchase non-voting securities
or securities convertible into or exchangeable for non-voting securities)."
FOURTH: This Amendment to the Restated Certificate of
Incorporation or the Corporation was duly adopted by the unanimous written
consent of the Board of Directors of the Corporation in accordance with the
provisions of Section 141(f) of the GCL and the written consent of the
stockholders of the Corporation entitled to vote thereon in accordance with
the provisions of Section 228 of the GCL.
IN WITNESS WHEREOF, the undersigned have executed this Certificate
of Amendment as of August 15, 1997 and affirmed under penalties of perjury
that this Certificate of Amendment is the act and deed of the Corporation and
that the facts set forth herein are true.
/s/ Michael E. Katzenstein
-------------------------------------
Michael E. Katzenstein
Vice President and General Counsel
/s/ Bertrand Blanchette
-------------------------------------
Bertrand Blanchette
Chief Financial Officer
5
<PAGE>
EXHIBIT 4.6
EXECUTION COPY
REGISTRATION RIGHTS AGREEMENT
-----------------------------
THIS REGISTRATION RiGHTS AGREEMENT (this "Agreement"), dated as of August
---------
15, 1997, is made by and between OpTel, Inc., a Delaware corporation (the
"Corporation" and Capital Communications CDPQ Inc., a Quebec company ("CDPO"),
----------- ----
WITNESSETH:
WHEREAS, as of June 27, 1997, Vanguard Communications, L.P., a California
limited partnership ("Vanguard"), and CDPQ entered into a Stock Purchase
--------
Agreement (the "Stock Purchase Agreement"), pursuant to which CDPQ is today
------------------------
purchasing all of Vanguard's equity interests in the Corporation (to "Vanguard
--------
Shares");
- - ------
WHEREAS, upon consummation of the transactions contemplated by the Stock
Purchase Agreement the Corporation will be relieved of certain existing
obligations to register the Vanguard Shares under the Securities Act, including
the potentially onerous obligation to effect registration of a public offering
of the Vanguard Shares at Vanguards request at an early date, which could be
expected to occur prior to an initial public offering of Common Stock by the
Corporation for its own account and would be contrary to the Corporation's
equity financing plans and strategies (such existing obligations to register the
Vanguard Shares, the "Vanguard Priority Obligations");
-----------------------------
WHEREAS, it is a condition precedent to CDPQ's consummation of the
transactions contemplated by the Stock Purchase Agreement that the parties
hereto enter into this Agreement and a Stockholders Agreement of even date
herewith (the "Stockholders Agreement") to which VPC Corporation, a Delaware
---------------------
corporation and the controlling stockholder of the Corporation ("VPC"), is also
a party;
WHEREAS, the Corporation and CDPQ desire to enter into this Agreement for
the purposes, among others, of facilitating the consummation of the
transactions contemplated by the Stock Purchase Agreement, thereby terminating
the Vanguard Priority Obligations, and providing to CDPQ various registration
rights in place of all registration rights formerly held by Vanguard; and
WHEREAS, the Corporation has previously granted registration rights with
respect to shares of its Common Stock under that certain Common Stock
Registration Rights Agreement (the "February 1997 Registration Rights
Agreement") dated as of February 14, 1997 to which the Corporation, VPC, Le
Groups Videotron Ltee Salomon Brothers Inc, Merrill, Lynch, Pierce Fenner &
Smith, Incorporated, and U.S. Trust Company of Texas, N.A. are parties and that
certain Warrant Agreement dated as of September 1,1996 between the Corporation
and James A Kofalt, and the registration rights afforded to CDPQ hereunder are
intended to be, and shall be, in all respects subject to the registration rights
afforded to the Corporation's securityholders under those agreements;
<PAGE>
NOW, THEREFORE, in consideration of the, foregoing recitals, The mutual
agreements contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Demand Registrations.
--------------------
(a) Requests for Registration. Subject to the provisions of the
-------------------------
following subparagraphs of this Paragraph 1 at any time more than nine months
after the IPO Date, CDPQ may request that the Corporation effect the
registration under the Securities Act of an underwritten public offering of all
or part of the Registrable Securities then owned by CDPQ or its Affiliates, Each
such request for registration pursuant to this subparagraph 1(a) (a "Demand
------
Registration") shall be effected by written notice (a "Demand Notice") delivered
- - ------------ -------------
to the Corporation and, if one or more direct or indirect subsidiaries of Le
Groupe Videotron Ltee, a Quebec corporation, then hold securities of the
Corporation representing a Voting Ratio (as defined in the Stockholders
Agreement) of at least 50%, to VPC. Each such Demand Notice shall specify the
number of Registrable Securities requested to be registered pursuant thereto.
(b) Number of Demand Registrations. The Corporation will be required
------------------------------
to use its best efforts to effect not more than two Demand Registrations
pursuant to Demand Notices by CDPQ. The Corporation will promptly pay all
Registration Expenses for the first Demand Registration that becomes effective
and for any other Demand Registration that is requested and does not become
effective, unless such other Demand Registration does not become effective
because it is withdrawn or terminated at the request of CDPQ. For all purposes
of this Paragraph 1, the determination whether any registration is "effective"
shall be made in accordance with subparagraph 1(g). CDPQ will promptly pay all
Registration Expenses for the second Demand Registration and any requested
Demand Registration that does not become effective because the offering of
Registrable Securities pursuant thereto is terminated at the request of CDPQ
(including a termination as a result of the decision by CDPQ to withdraw or
terminate the offering due to market conditions, pricing terms or other
circumstances which in CDPQ's discretion make it inadvisable to proceed with the
offering).
(c) Registration Statement Form. Any requested first Demand
---------------------------
Registration shall be on such registration form of the Commission as shall be
selected by the Corporation (except a form exclusively for the sale or
distribution of securities by the Corporation or to employees of the Corporation
and its subsidiaries or for use exclusively with respect to a business
combination). Any requested second Demand Registration shall be on such
registration form of the Commission as shall be selected by CDPQ (except a form
exclusively for the sale or distribution of securities by the Corporation or to
employees of the Corporation and its subsidiaries or for use exclusively with
respect to a business combination).
(d) Priority on Demand Registrations. If the managing underwriters
--------------------------------
advise the Corporation in writing that in their opinion the number of
Registrable Securities and other securities requested to be included in the
offering to be conducted pursuant to a Demand Registration exceeds the number of
Registrable Securities and other securities, if any, which can be sold therein
without adversely affecting the marketability of the offering, then the
Corporation will include in such registration prior to the inclusion of any
securities which are not Registrable Securities the number
-2-
<PAGE>
of Registrable Securities requested to be included which in the opinion of.such
underwriters can be sold without adversely affecting the marketability of the
offering.
(e) Selection of Underwriters. The Corporation will have the right to
-------------------------
select a nationally recognized firm of investment bankers to act as the managing
underwriter(s) to administer any offering pursuant to a Demand Registration.
(f) VPC Purchase Option.
-------------------
(i) If CDPQ delivers a Demand Notice to VPC pursuant to
subparagraph 1 (a), then at VPC's option, exercisable by written notice to
CDPQ within 10 days after VPC's receipt of such Demand Notice, VPC or its
designee may purchase all of CDPQ's and its Affiliates' Registrable
Securities then proposed to be offered, at a price equal to the average of
the last sale prices of securities of the same class as the Registrable
Securities proposed to be offered on each of the five trading days
following VPC's receipt of such Demand Notice.
(ii) The closing of a purchase and sale of Registrable Securities
pursuant to this subparagraph 1(f) shall be held at the principal office of
the Corporation at a date and time specified in the notice of exercise of
such right given by VPC to CDPQ, but in any event not more than seven (7)
days after the date on which such notice of exercise is given. At such
closing, (i) VPC shall deliver to CDPQ, as payment for the Registrable
Securities to be purchased, the purchase price for such Registrable
Securities by wire transfer of immediately available funds to an account
designated by CDPQ, and (ii) CDPQ shall deliver to the purchaser the
certificates representing the Registrable Securities to be sold together
with such instruments as the purchaser shall reasonably request to effect
the transfer of such Registrable Securities to the purchaser of record,
free and clear of all liens and encumbrances. Such purchase shall be deemed
to constitute an effective Demand Registration.
(g) Effective Registration. For purposes of this Agreement, a
----------------------
Demand Registration shall not be deemed to have been effective (i) unless a
registration statement with respect thereto has become effective under the
Securities Act covering the lesser of 75% of the Registrable Securities
requested to be included therein or 10% of the Registrable Securities then
outstanding, or (ii) if after it has become effective, such registration
statement either (A) does not continue in effect during the Effectiveness Period
or (B) is interfered with by stop order, injunction or other order or
requirement of the Commission or other governmental agency or court for any
reason not the fault of CDPQ, is not reinstated for the balance of the
Effectiveness Period and at least 75% of the Registrable Securities covered
thereby have not been sold, or (iii) if the conditions to closing specified in
the underwriting agreement entered into in connection with such registration are
not satisfied by the parties thereto other than CDPQ.
-3-
<PAGE>
2. Piggyback Registrations.
------------------------
(a) Right to Piggyback. Whenever the Corporation proposes to
------------------
register under the Securities Act any offering of its equity securities for
cash (other than pursuant to a Demand Registration, a registration for purposes
of an offering to be made principally or exclusively to holders of the Company's
securities, or a registration on Form S-4 or S-8 or any successor or similar
forms), whether or not for sale for its own account, and the registration form
to be used may be used for the registration of an offering of Registrable
Securities, the Corporation will at such time, unless three registrations of
Registrable Securities have become effective pursuant to this Paragraph 2 (as
determined in accordance with subparagraph 2(f)), give prompt written notice (a
"Registration Notice") to CDPQ of the Corporation's intention to effect such a
-------------------
registration (a "Piggyback Registration"). Subject to subparagraphs 2(c)
----------------------
and 2(d), CDPQ will have the right, exercisable by delivery of a written request
(which request shall specify the quantity of Registrable Securities proposed to
be disposed of by CDPQ and its Affiliates) to the Corporation within 30 days
after CDPQ receives the applicable Registration Notice, to request that some or
all of the Registrable Securities then owned by CDPQ and its Affiliates (but not
less than the lesser of (x) 20% of the number of Registrable Securities then
owned by CDPQ and its Affiliates and (y), in the case of an IPO, the IPO
Permitted Registrable Securities, as determined in accordance with subparagraph
2(c)) be included in such Piggyback Registration. If the Piggyback Registration
is to include an offering of equity securities to or through underwriters, the
Corporation will use its best efforts to effect the inclusion in the
underwritten offering of all Registrable Securities which the Corporation has
been so requested to include by CDPQ, on the same terms as all other shares of
the same class as the Registrable Securities to be included in the underwritten
offering, and to include such Registrable Securities in such Piggyback
Registration for such purpose; provided, however, that if, at any time after
-----------------
giving written notice of its intention to register any securities and prior to
the effective date of the registration statement filed in connection with such
registration, the Corporation shall determine for any reason or for no reason
not to register or to delay registration of such securities, the Corporation
shall so notify CDPQ and (i) in the case of a determination not to register,
shall be relieved of its obligation to register any Registrable Securities in
connection with such registration (but not from its obligation to pay the
Registration Expenses in connection therewith), without prejudice, however, to
the rights, if any, of CDPQ to request that such registration be effected as a
Demand Registration, and (ii) in the case of a determination to delay
registering, shall be permitted to delay registering any Registrable Securities
for the same period as the delay in registering the other securities proposed to
be included in such registration. No registration effected under this
subparagraph 2(a) shall relieve the Corporation of its obligation to effect any
Demand Registration.
(b) Piggyback Expenses. The Registration Expenses of CDPQ will be
------------------
paid by the Corporation in all Piggyback Registrations.
(c) Right to include Registrable Securities in Initial Public
---------------------------------------------------------
Offering. If the Corporation at any time proposes to register under the
- - --------
Securities Act any of its equity securities for purposes of a Public Offering
(as defined in the Stockholders Agreement) to or through underwriters at a time
when shares of its Common Stock are not listed or traded on a national
securities exchange or the NASDAQ National Market System (such a Public
Offering, an "IPO"), the Corporation will at such time give prompt written
---
notice to CDPQ (the "IPO Notice") of its intention to register such equity
----------
securities in connection with an IPO and of CDPQ's rights, if any, under
subparagraph 2(a)
-4-
<PAGE>
and this subparagraph 2(c) with respect to such registration (the "IPO
---
Registration"). Prior to the filing of the IPO Registration with the Commission,
- - ------------
the investment banker designated by the Corporation to act as managing
underwriter for the IPO (the "IPO Underwriter") may advise the Corporation in
---------------
writing (with a copy to CDPQ) (the "Underwriter Notice") that, in its opinion,
------------------
the IPO would be adversely affected (as to the price or quantity of securities
to be sold for the account of the Corporation) by the inclusion in the IPO of
more than a certain number (which may be zero) of shares of Common Stock held by
all stockholders of the Corporation (such amount the "IPO Permitted Registrable
-------------------------
Securities"). Thereafter, if an Underwriter Notice has bent sent, the IPO
- - ----------
Permitted Registrable Securities shall only be amended or changed if the IPO
Underwriter sends an amended Underwriter Notice to the Corporation in writing
(wit a copy to CDPQ). Notwithstanding subparagraph 2(a), CDPQ shall not be
entitled to include an amount of Registrable Securities in the IPO Registration
in excess of the IPO Permitted Registrable Securities, if any. The Corporation
shall not permit the inclusion in the IPO Registration of an amount of shares of
Common Stock held by stockholders of the Corporation at the time of the IPO in
excess of the IPO Permitted Registrable Securities, in any. If, as a result of
the preceding sentences of this subparagraph 2(c), less than all of the shares
of Common Stock requested to be included in the IPO by stockholders of the
Corporation, including CDPQ, may be so included in the IPO, then the number of
shares to be so included for the account of each such stockholder shall be
determined in accordance with subparagraph 2(d). The IPO Notice shall specify
the quantity of IPO Permitted Registrable Securities, to the extent then known.
Subject to the foregoing, CDPQ shall have the right exercisable by written
notice to the Corporation within 30 days after receipt of the IPO Notice to
require that not less than 20% of the number of shares of Registrable Securities
then outstanding (or such lesser number as constitutes all of the IPO Permitted
Registrable Securities) be included in the IPO Registration and as part of the
IPO on the same terms as all other shares of the same class as the securities to
be included in the IPO for the account of the Corporation. Subject to the
proviso in the last sentence of subparagraph 2(a), the Corporation will use its
best efforts to effect the registration under the Securities Act of the
Registrable Securities which the Corporation has been so requested to register
by CDPQ, up to the number of IPO Permitted Registrable Securities, to permit the
disposition of such securities in the IPO
(d) Apportionment in Piggyback Registrations. Without limitation of
----------------------------------------
the restrictions set forth in subparagraph 2(c), if (i) a Piggyback Registration
covers an offering of the securities of the Corporation to be distributed by or
through one or more underwriters, whether or not for sale for the account of the
Corporation, under underwriting terms appropriate for such a transaction, and
(ii) the managing underwriter(s) of such underwritten offering shall determine
to limit the number of securities to be sold in such offering for the account of
stockholders or shall inform the Corporation by letter (of which a copy shall be
provided to CDPQ) of its belief that the number of securities requested to be
included in such registration exceeds the number which can be sold in (or during
to time of) such offering or that to inclusion of such number of securities
therein would materially adversely affect the marketing of securities to be sold
by the Corporation or any Initiating Stockholders pursuant to whose demand such
Piggyback Registration is to be effected, then the Corporation may include all
securities proposed by the Corporation to be sold for its own account and by the
Initiating Stockholders to be sold for their accounts and may decrease the
number of Registrable Securities and equity securities of other stockholders of
the Corporation so proposed to be sold and so requested to be included in such
registration (pro rata on the basis of the number of Registrable Securities held
--------
by CDPQ and the number of shares of Common Stock held
-5-
<PAGE>
by such other stockholders (excluding VPC and its Affiliates) to the extent
necessary to reduce the number of securities to be included in the registration
to the level recommended by the managing underwriter). Notwithstanding the
foregoing, CDPQ shall have priority over the Corporation (but shall be
subordinated to securities held by any Initiating Stockholders) with respect to
the inclusion of Registrable Securities in the registration for purposes of the
exercise by the underwriters of any "greenshoe" or overallotment option with
respect to the offering, to the extent, but only to the extent, that
Registrable Securities were excluded from the firm portion of the offering and,
in the case of an IPO such excluded Registrable Securities were IPO Permitted
Registrable Securities. In no event shall VPC or any of its Affiliates be
entitled to include securities in any such registration for sale for its own
account unless all securities requested to be included in such registration for
sale for the account of CDPQ are included in such registration.
(e) Selection of Underwriters. The Corporation will have the right to
-------------------------
select a firm of investment bankers to act as the managing underwriter(s) to
administer any offering of Registerable Securities pursuant to a Piggyback
Registration.
(f) Effective Registration. A Piggyback Registration shall not be
----------------------
deemed to have become effective (i) unless a registration statement with respect
thereto has become effective under the Securities Act and the Registrable
Securities covered thereby (either in the firm or "greenshoe" portion) include
the lesser of (A) 10% of the number of Registrable Securities then owned by
CDPQ and its Affiliates or (B), in the case of an IPO, 75% of the IPO Permitted
Registrable Securities, or (ii) if after it has become effective, such
registration statement (A) does not continue in effect during the Effectiveness
Period or (B) is interfered with by stop order, injunction or other order or
requirement of the Commission or other governmental agency or court for any
reason not the fault of CDPQ, is not reinstated for the balance of the
Effectiveness Period and at least 75% of the Registrable Securities covered
thereby have not been sold, or (iii) if the conditions to closing specified in
any underwriting agreement entered into in connection with such registration are
not satisfied by the parties thereto other than CDPQ.
3. Delays in Demand Registration. The Corporation may delay the
------------------------------
filing of any registration statement for a Demand Registration for up to 90 days
(or such longer period as may be required by law or any rule, regulation or
policy of the Commission) if at the time of a request under this Agreement:
(a) the Corporation or any subsidiary of the Corporation is,
directly or indirectly, a participant in a transaction involving the
purchase or bid to purchase securities of the Corporation (other than a
transaction which is specifically permitted pursuant to Rule 102 of
Registration M promulgated by the Commission under the Securities Exchange
Act);
(b) there is material undisclosed information concerning the
Corporation or any subsidiary of the Corporation which has not been
disclosed for business reasons;
(c) financial statements required to be included or incorporated
in the registration statement have not been prepared or are not otherwise
available at the time (provided that the Corporation shall promptly and
diligently prepare such financial statements or cause such financial
statements to be prepared); or
-6-
<PAGE>
(d) the Corporation is conducting an offering of securities of
the Corporation or any subsidiary of the Corporation (an "Other Offering")
and either (i) the investment banker for the Corporation shall advise the
Corporation in writing (with a copy to CDPQ) that, in its opinion, such
Other Offering would be materially and adversely affected by the sale of
Registrable Securities pursuant to such request, or (ii) the filing of a
registration statement pursuant to such request while such Other Offering
is being conducted or within a specified period of time after the
completion, termination or abandonment of such Other Offering would be
contrary to law or any rule, regulation or policy of the Commission;
provided, however, that the Corporation shall in all events have priority
--------- -------
to complete any such Other Offering prior to filing any registration
statement for a Demand Registration.
4. Holdback Agreements.
-------- ----------
(a) By CDPQ. CDPQ, if so required by the managing underwriter, if
-------
any, with respect to an IPO, any Demand Registration or any Piggyback
Registration in which Registrable Securities are included, shall enter into an
agreement not to effect any sale or distribution of any equity securities of the
Corporation during the seven days prior to and up to a 180-day period beginning
on the effective date of the related registration statement (except as part of
the underwritten offering to be conducted under and in accordance with such
registration statement, to the extent of the Registrable Securities to be
included in such registration statement pursuant to this Agreement). The
obligation of CDPQ to enter into such an agreement shall be conditioned upon
VPC's concurrent entry into a similar agreement on terms at least as restrictive
as those contained in the agreement entered into by CDPQ.
(b) By the Corporation. The Corporation agrees (i) not to effect any
------------------
sale or distribution of its equity securities, or any securities convertible
into or exchangeable or exercisable for such securities, during the seven days
prior to and during the 90-day period beginning on the effective date of any
underwritten registration pursuant to Paragraph 1 or 2 (except as part of such
underwritten registration or pursuant to a private placement made pursuant to an
exemption under the Securities Act), and (ii) to use its reasonable best efforts
to cause each holder of at least 5% (on a fully diluted basis) of its equity
securities or any securities convertible into or exchangeable or exercisable for
such securities, purchased from the Corporation at any time after the date of
this Agreement (other than in a registered offering) to agree not to effect any
sale or distribution of any such securities during the 180-day period beginning
on the effective date of any underwritten registration pursuant to Paragraph 1
or 2 (except as part of such underwritten registration).
5. Registration Procedures. If and whenever the Corporation is
-----------------------
required to use its best efforts to effect the registration of Registrable
Securities under the Securities Act as provided in Paragraphs 1 and 2 the
Corporation will as expeditiously as possible (subject to the rights of the
Corporation under subparagraphs 2(a) and 2(c):
(a) prepare and as promptly as practicable thereafter file with
the Commission a registration statement with respect to such Registrable
Securities and thereafter use its best efforts to cause such registration
statement to become effective (provided that before filing a registration
statement or prospectus or any amendments or supplements thereto, the
-7-
<PAGE>
Corporation will furnish to the counsel selected by CDPQ copies of all such
documents proposed to be filed, which documents will be subject to review
of such counsel);
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities Act
with respect to the disposition of all securities covered by such
registration statement until such time as all of such securities have been
disposed of in accordance with the intended methods of disposition by the
seller or sellers thereof set forth in such registration statement;
(c) furnish to CDPQ or the managing underwriter, if any, such
number of copies of such registration statement, each amendment and
supplement thereto, the prospectus included in such registration statement
(including each preliminary prospectus) and such other documents as such
underwriter may reasonably request in order to facilitate the disposition
of such Registrable Securities;
(d) use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such
jurisdictions as CDPQ or the managing underwriter, if any, reasonably
requests and do any and all other acts and things which may be reasonably
necessary or advisable to enable CDPQ or the underwriters to consummate the
disposition in such jurisdictions of such Registrable Securities (provided
that the Corporation will not be required to (i) qualify generally to do
business in any jurisdiction where it would not otherwise be required to
qualify but for this subparagraph, (ii) subject itself to taxation in any
such jurisdiction or (iii) consent to general service of process in any
such jurisdiction);
(e) notify CDPQ and the managing underwriter, if any, at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, upon discovery that, or upon the discovery of the happening
of any event as a result of which, the prospectus included in such
registration statement contains an untrue statement of a material fact or
omits any fact necessary to make the statements therein not misleading in
the light of the circumstances under which they were made, and, at the
request of CDPQ or the managing underwriter, if any, the Corporation will
prepare and finnish to CDPQ or the managing underwriter, if any, a
reasonable number of copies of a supplement or amendment to such prospectus
so that, as thereafter delivered to the purchasers of such Registrable
Securities, such prospectus will not contain an untrue statement of a
material fact or omit to state any fact necessary to make the statements
therein not misleading in the light of the circumstances under which they
were made;
(f) use its best efforts to cause all such Registrable Securities
to be listed on each securities exchange on which similar securities issued
by the Corporation are then listed and, if not so listed, to be quoted on
the NASDAQ National Market System;
(g) provide a transfer agent and registrar for all such
Registrable Securities not later than the effective date of such
registration statement;
-8-
<PAGE>
(h) make available for inspection by CDPQ, any underwriter
participating in any disposition pursuant to such registration statement
and any attorney, accountant or other agent retained by CDPQ or any
underwriter, all financial and other records, pertinent corporate documents
and properties of the Corporation, and cause the Corporation officers,
directors, employees and independent accountants to supply all information
reasonably requested by CDPQ or any such underwriter, attorney, accountant
or agent in connection with such registration statement;
(i) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its security
holders, as soon as reasonably practicable, an earnings statement covering
the period of at least twelve months beginning with the first day of the
Corporation's first full calendar quarter after the effective date of the
registration statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Securities Act and Rule 158 thereunder;
(j) in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the
qualification of any securities included in such registration statement for
sale in any jurisdiction, the Corporation will use its reasonable best
efforts promptly to obtain the withdrawal of such order; and
(k) furnish to CDPQ a signed counterpart, addressed to CDPQ and
the underwriters of
(i) an opinion of counsel for the Corporation, dated the date
of the closing under the underwriting agreement, and
(ii) a "comfort" letter, dated the date of the closing under the
underwriting agreement, signed by the independent public
accountants who have certified the Corporation's financial
statements included in such registration statement,
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of the
accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in legal opinions and
accountants' letters delivered to the underwriters in underwritten public
offerings of securities and, in the case of the accountant's letter such
other financial matters and, in the case of the legal opinion, such other
legal matters, as the managing underwriters, if any, (or if there are no
underwriters, CDPQ) may reasonably request;
6. Underwritten Offerings.
----------------------
(a) Requested Underwritten Offerings. If requested by the
--------------------------------
underwriters or a qualified independent underwriter for any offering by CDPQ
pursuant to a Demand Registration, the Corporation will enter into an
underwriting agreement with such underwriters, or an agreement with such
qualified independent underwriter, for such offering, such agreement to be
satisfactory in substance and form to the Corporation and CDPQ and the
underwriters and to contain such
-9-
<PAGE>
representations and warranties by the Corporation and such other terms as are
generally prevailing in agreements of such type, including without limitation,
indemnities to the effect and to the extent provided in Paragraph 8. CDPQ will
cooperate with the Corporation in the negotiation of the underwriting agreement,
provided that nothing herein contained shall diminish the foregoing obligations
of the Corporation. CDPQ shall be a party to such underwriting agreement and
may, at its option, require that any or all of the representations and
warranties by, and other agreements on the part of the Corporation to and for
the benefit of such underwriters shall also be made to and for the benefit of
CDPQ and that any or all of the conditions precedent to the obligations of such
underwriters under such underwriting agreement be conditions precedent to the
obligations of CDPQ, CDPQ shall not be required to make any representations or
warranties to or agreements with. the Corporation or the underwriters other than
representations, warranties or agreements regarding CDPQ, CDPQ's registerable
Securities and CDPQ's intended method of distribution, any other information
supplied in writing by the CDPQ to the Corporation specifically for use in the
registration statement and any other representation required by law.
(b) Incidental Underwritten Offerings. If the Corporation at
---------------------------------
any time proposes to register any of its securities under the Securities Act as
contemplated by Paragraph 2, then if CDPQ is entitled to include Registrable
Securities in such registration, the Corporation will, if requested by CDPQ, in
accordance with and subject to subparagraphs 2(b) and 2(c), arrange for such
underwriters to include all the Registrable Securities to be offered and sold by
CDPQ among the securities to be distributed by such underwriters. CDPQ shall be
a party to the underwriting agreement between the Corporation and such
underwriters and may, at its option, require that any or all of the
representations and warranties by, and the other agreements on the part of, the
Corporation to and for the benefit of such underwriters shall also be made to
and for the benefit of CDPQ and that any or all of the conditions precedent to
the obligations of such underwriters under such underwriting agreement be
conditions precedent to the obligations of CDPQ. CDPQ shall not be required to
make any representations or warranties to or agreements with the Corporation or
the underwriters other than representations, warranties, or agreements regarding
CDPQ, CDPQ's Registrable Securities and CDPQ's intended method of distribution,
any other information supplied in writing by CDPQ to the Corporation
specifically for use in the Registration Statement and any other representation
required by law.
7. Registration Expenses.
---------------------
(a) All expenses incident to the Corporation's performance of or
compliance with this Agreement, including, without limitation, all registration
and filing fees fees and expenses of compliance with securities or blue sky
laws, printing expenses, messenger and delivery expenses, and fees and
disbursements of counsel for the Corporation and all independent certified
public accountants, underwriters (excluding discounts and commissions) and other
Persons retained by the Corporation (all such expenses being herein called
"Registration Expenses"), will be borne as provided in this Agreement, except
- - ----------------------
that the Corporation will, in any event, pay its internal expenses (including,
without limitation, all salaries and expenses of its officers and employees
performing Legal or accounting duties), the expense of any annual audit or
quarterly review, the expense of any liability insurance and the expenses and
fees for listing the securities to be registered on each securities exchange
(including NASDAQ) on which similar securities issued by the Corporation are
then listed or quoted.
-10-
<PAGE>
(b) In connection with each Demand Registration (other than a Demand
Registration for which CDPQ is required to pay Registration Expenses
pursuant hereto) and each Piggyback Registration, the Corporation will
reimburse CDPQ if requesting registration of Registrable Securities for the
reasonable fees and disbursements of one counsel chosen by CDPQ to
represent CDPQ in connection with such registration
8. Indemnification.
--------------
(a) By the Corporation. The Corporation agrees to indemnify, to the
----------- -------
extent permitted by law, CDPQ, its officers, directors, employees and
stockholders and each Person who controls CDPQ (within the meaning of the
Securities Act) against all losses, claims, damages, liabilities and
expenses arising out of or based upon any untrue or alleged untrue
statement of material fact contained in any registration statement,
prospectus or preliminary prospectus or any amendment thereof or supplement
thereto or any omission or alleged omission of a material fact required to
be stated therein or necessary to make the statements therein not
misleading, and shall reimburse CDPQ or such officer, director, employee,
stockholder or controlling Person for any legal or other expenses
reasonably incurred by CDPQ or such officer, director, employee,
stockholder or controlling Person in connection with the investigation or
defense of such loss, claim, damage, liability or expenses, except insofar
as the same arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission in any such registration
statement, any such prospectus or preliminary prospectus, amendment or
supplement in reliance upon and in conformity with written information
furnished by CDPQ to the Corporation through an instrument duly executed on
behalf of CDPQ specifically stating that such information is intended for
use in the preparation of such registration statement, prospectus,
prelimanary prospectus, amendment or supplement (and all information
furnished by CDPQ for such purpose will be furnished through such an
instrument); provided, that the Corporation shall not be liable to any
--------
Person who participates as an underwriter, in the offering or sale of
Registrable Securities or any other Person, if any, who controls such
underwriter within the meaning of the Securities Act, in any such case to
the extent that any such loss, claim, damage, liability (or action or
proceeding in respect thereof) or expense arises out of such Person's
failure to send or give a copy of the final prospectus, as the same may be
then supplemented or amended, to the Person asserting an untrue statement
or alleged untrue statement or omission at or prior to the written
confirmation of the sale of Registrable Securities to such Person if such
statement or omission was corrected in such final prospectus.
(b) By Sellers. The Corporation may require, as a condition to
----------
including any Registrable Securities in any registration statement filed
pursuant to Paragraph 1 or 2, that the Corporation shall have received an
undertaking satisfactory to it from the prospective seller of such
securities, to indemnify and hold harmless (in the same manner and to the
same extent as set forth in subparagraph 8(a)) the Corporation, its
directors, officers, employees, agents and affiliates and each other
Person, if any, who controls the Corporation within the meaning of the
Securities Act, with respect to any statement or alleged statement in or
omission or alleged omission from such registration statement, any
prospectus or preliminary prospectus contained therein, or any amendment
thereof or supplement thereto, if such statement or alleged statement or
omission or alleged omission was made in reliance upon and in conformity
with written information furnished by CDPQ to the Corporation through an
instrument duly executed on behalf of CDPQ specifically
-11-
<PAGE>
stating that such information is intended for use in the preparation of
such registration statement, prospectus, preliminary prospectus, amendment
or supplement.
(c) Notice of Claim. Promptly after receipt by an indemnified party
---------------
of notice of the commencement of any action or proceeding involving a claim
referred to in the preceding subparagraphs of this Paragraph 8, such
indemnified party will, if a claim in respect thereof is to be made against
an indemnifying party, give written notice to the latter of the
commencement of such action; provided, however, that the failure of any
-------- -------
indemnified party to give notice as provided herein shall not relieve the
indemnifying party of its obligations under the preceding subparagraphs of
this Paragraph 8, except to the extent that the indemnifying party is
actually prejudiced by such failure to give notice. In case any such action
is brought against an indemnified party, unless in the opinion of counsel
to such indemnified party a conflict of interest between such indemnified
party and indemnifying parties may exist in respect of such claim, the
indemnifying party shall be entitled to participate in and to assume the
defense thereof, jointly with any other indemnifying party similarly
notified to the extent that it may wish, with counsel reasonably
satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party shall not be liable to such
indemnified party for any legal or other expenses subsequently incurred by
the latter in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall, without the consent of
the indemnified party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such indemnified party of a release
from all liability in respect to such claim or litigation.
(d) Contribution. If the indemnification provided for in this
------------
Agreement shall for any reason be unavailable or insufficient to an
indemnified party under subparagraph 8(a) or 8(b) in respect to any loss,
claim, damage or liability, or any action in respect thereof, or referred
to therein, then each indemnifying party shall, in lieu of indemnifying
such party, contribute to the amount paid or payable by such indemnified
party as a result of such loss, claim damage or liability, or action in
respect thereof, in such proportion as shall be appropriate to reflect (i)
the relative benefits received by the Corporation on the one hand and CDPQ
on the other hand, from the offering of the Registrable Securities, and
(ii) the relative fault of the Corporation on the one hand and CDPQ on the
other, with respect to the statements or alleged statements or omissions or
alleged omissions which resulted in such loss, claim, damage or liability,
or action in respect thereof, as well as any other relevant equitable
considerations. The relative benefits received by the Corporation on the
one hand and CDPQ on the other hand shall be deemed to be in the same
proportion as the sum of the total net proceeds from the offering of the
securities (before deducting expenses) received by the Corporation bears to
the total net proceeds from the offering of the securities (before
deducting expenses) received by CDPQ with respect to such offering, and in
each case the net proceeds received from such offering shall be determined
as set forth on the table on the cover page of the prospectus. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied
by the Corporation or CDPQ, the intent of the parties and their respective
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Corporation and CDPQ agree that it would not be
just and equitable if contribution pursuant to this subparagraph 8(d) were
to be determined by pro rate allocation or by any other method of
allocation which does not take into account the equitable considerations
-12-
<PAGE>
referred to herein. The amount paid or payable by an indemnified party as a
result of the loss, claim, damage or liability, or action in respect thereof,
referred to in this Paragraph 8 shall be deemed to include, for purposes of this
Paragraph 8, any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
9. Current Public Information. At all times after the Corporation
--------------------------
has filed a registration statement with the Commission pursuant to the
requirements of either the Securities Act or the Securities Exchange Act, the
Corporation will timely file all reports required to be filed by it under the
Securities Act and the Securities Exchange Act and the rules and regulations
adopted by the Commission thereunder, and will take such further action as CDPQ
may reasonably request, all to the extent required to enable CDPQ to sell
Registrable Securities pursuant to Rule 144 adopted by the Commission under the
Securities Act (as such rule may be amended from time to time) or any similar
rule or regulation hereafter adopted by the Commission. Upon the request of
CDPQ, the Corporation will deliver to CDPQ a written statement as to whether it
has complied with such requirements.
10. Definitions.
-----------
"Affiliate" has the meaning set forth in Rule 12b-2 of the
---------
regulations promulgated under the Securities Exchange Act.
"Class A Stock" means the Class A Common Stock, par value $.O1
-------------
per share, of the Corporation.
"Class B Stock" means the Class B Common Stock, par value $.0l
-------------
per share, of the Corporation.
"Class C Stock" means the Class C Common Stock, par value $.O1
-------------
per share, of the Corporation.
"Common Stock" means the Class A Stock, the Class B Stock and
------------
the Class C Stock or other common stock of the Corporation.
"Commission" means the United States Securities and Exchange
----------
Commission and includes any governmental body or agency succeeding to the
functions thereof.
"Effectiveness Period" means, with respect to any registration
--------------------
statement filed in a Demand Registration or a Piggyback Registration, a period
after the effective date of the registration statement that is the shorter of
(i) 120 days (increased by a number of days equal to the number of days, if any,
during which the effectiveness of the registration statement or the ability to
deliver a prospectus pursuant thereto has been suspended) and (ii) the number of
days that have elapsed when all Registrable Securities included in the
registration statement have been sold.
-13-
<PAGE>
"Initiating Stockholders" means, with respect to the filing by the
-----------------------
Corporation of any registration that is a Piggyback Registration under this
Agreement, the Persons (other than the Corporation or VPC or any of its
Affiliates), if any, at whose request such registration was initiated pursuant
to the February 1997 Registration Rights Agreement as in effect on the date
hereof or pursuant to a registration right granted by the Corporation in
connection with the first to occur of a Strategic Investment or an Alternative
Strategic Investment (as such terms are defined in the Stockholders Agreement).
"IPO Date" means the first date on which the Corporation receives the
--------
proceeds of a Public Offering
"Non-Participating Securities" means equity securities which do not
----------------------------
participate in the residual equity of the Corporation. "Person" means an
individual, a partnership, a JOINT venture, a corn corporation on, a trust, an
unincorporated organization and a government or any department or agency
thereof.
"Piggyback Registration" has the meaning assigned to that term in
----------------------
subparagraph 2(a).
"Public Offering" means any sale of shares of Voting Common Stock to the
---------------
public pursuant to an offering registered under the Securities Act, if
immediately thereafter such Voting Common Stock is listed on a national
securities exchange or quoted on the NASDAQ National Market System.
"Registrable Securities" means (i) any shares of Common Stock acquired by
----------------------
CDPQ from Vanguard pursuant to the Stock Purchase Agreement, (ii) any shares of
Common Stock acquired by CDPQ or any of its Affiliates from any party to the
Stockholders Agreement (including the Corporation) pursuant to rights arising
thereunder or any shares of Common Stock issued to CDPQ or any of its Affiliates
pursuant to the exercise of purchase, conversion or other rights acquired by
CDPQ or any of its Affiliates from any party to the Stockholders Agreement
(including the Corporation) pursuant to rights arising thereunder, and (iii) any
other equity securities of the Corporation issued or issuable directly or
indirectly with respect to shares of Common Stock referred to in clause (i) or
(ii) or with respect to other equity securities referred to in this clause
(iii), by way of conversion, stock dividend or stock split or in connection with
a combination of shares, recapitalization, merger, consolidation or other
reorganization; provided, however, that in the event that pursuant to such
--------- -------
recapitalization or exchange Non-Participating Securities are issued, such Non-
Participating Securities will not be Registrable Securities. As to any
particular shares constituting Registrable Securities, such shares will cease to
be Registrable Securities when they have (x) been registered under the
Securities Act and disposed of in accordance with the registration statement
covering them (y) been sold to the public pursuant to Rule 144 under the
Securities Act (or any similar provision then in force),or (z) ceased to be
outstanding. For purposes of this Agreement, a Person will be deemed to be a
holder of Registrable Securities whenever such Person has the right to acquire
directly or indirectly such Registrable Securities (upon conversion or exercise
in connection with a transfer of securities or otherwise), whether or not such
acquisition has actually been effected Notwithstanding anything contained herein
to the contrary, shares of Class B Stock shall not be considered "Registrable
Securities" unless (i) Class B Stock is listed on a
national
-14-
<PAGE>
securities exchange or quoted on the NASDAQ National Market System or (ii) CDPQ
receives a Registration Notice regarding the registration of Class B Stock and
such registration has not been abandoned by the Corporation prior to the time
the registration statement filed or planned to be filed with the Commission in
connection with such registration becomes effective under the Securities Act.
"Securities Act" means to Securities Act of 1933, as amended, or any similar
--------------
federal law then in force.
"Securities Exchange" Act means the Securities Exchange Act of 1934, as
-------------------
amended, or any similar federal law then in force.
"Voting Common Stock" means the Class A Stock and the Class B Stock.
-------------------
"VPC" means VP'C Corporation, a Delaware corporation.
---
11. Miscellaneous.
-------------
(a) No Inconsistent Agreements. The Corporation will not hereafter enter
-------------------------
into any agreement with respect to its securities which is inconsistent with or
violates the rights granted to CDPQ in this Agreement.
(b) Amendment and Waiver. Except as otherwise provided herein, the
--------------------
provisions of this Agreement may be amended or waived only upon the prior
written consent of the Corporation and CDPQ. The failure of any party to enforce
any of the provisions of this Agreement shall in no way be construed as a waiver
of such provisions and shall not affect the right of such party thereafter to
enforce each and every provision of this Agreement in accordance with its terms.
(c) Assignment. This Agreement shall be binding upon and inure to the
-----------
benefit of and be enforceable by the parties hereto and their respective
successors and assigns, provided that the rights of CDPQ hereunder may not be
assigned except to a Person which accepts and adopts this Agreement by execution
of an appropriate instrument in form satisfactory to the Corporation in the
reasonable exercise of its discretion. In addition, whether or not any express
assignment shall have been made, the provisions of this Agreement which are for
the benefit of purchasers or holders of Registrable Securities (or any portion
thereof) are also for the benefit of and enforceable by any subsequent holder of
any Registrable Securities (or of such portion thereof) who acquires such
Registrable Securities in accordance with the provisions of the Stockholders
Agreement, subject in each case to compliance by each such holder with the
corresponding obligations applicable to CDPQ hereunder. No such assignment or
enforcement shall have the effect of increasing the obligations of the
Corporation hereunder, including such obligations as to the number of
registrations required to be effected or the quantity of Registrable Securities
to be included in any registration,
(d) Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be
invalid, illegal or unenforceable in any respect under any applicable law
or rule in any jurisdiction, such invalidity, illegality or unenforceability
shall not affect any other
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<PAGE>
provision or the effectiveness or validity of any provision in any other
jurisdiction, and this Agreement shall be reformed, construed and enforced in
such jurisdiction as if such invalid, illegal or unenforceable provision had
never been contained herein.
(e) Counterparts. This Agreement may be executed simultaneously in
------------
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together will constitute
one and the same Agreement.
(f) Descriptive Headings. The descriptive headings of this Agreement
--------------------
are inserted for convenience only and do not constitute a part of this
Agreement.
(g) Notices. All notices, demands or other communications to be given
-------
or delivered under or by reason of the provisions of this Agreement will be in
writing and will be deemed to have been given when delivered personally, mailed
by certified or registered mail, return receipt requested and postage prepaid,
or sent via a nationally recognized overnight courier, or sent via facsimile to
the recipient. Such notices, demands and other communications will be sent to
the address indicated below:
If to the Corporation:
OpTel, Inc.
1111 W. Mockingbird Lane
Dallas, Texas 75247
Attention: Michael E. Katzenstein, Esq.
Vice President & General Counsel
Telecopier: (214) 634-3889
With a copy to each of:
Le Groupe Videotron Ltee
300 Viger Avenue East
Montreal, Quebec H2X 3W4
Attention: Me Suzanne Renault
Senior Vice President-Legal Affairs
Telecopier: (514) 985-8515
Kronish, Lieb, Weiner & Hellman LLP
1114 Avenue of the Americas
New York, NY 10036-7798
Attention: Russell S. Berman, Esq.
Telecopier: (212) 997-3525
If to CDPQ:
Capital Communications CDPQ Inc.
1981 McGill College Avenue
-16-
<PAGE>
9th Floor
Montreal, Quebec
H3A 3c7
Attention: President, Lynn McDonald and Robert Cote', Esq.
Telecopier: (514)847-2493 and (514) 281-5212
With a copy to each of
Kirkland & Ellis
153 East 53rd Street
New York, New York 10022
Attention: Luc A. Despins, Esq.
Telecopier: (212) 446-4900
and
Martineau Walker
Stock Exchange Tower, Suite 3400
P.O. Box 242
800 Place Victoria
Montreal, Quebec
H4Z 1E9
Attention: Bernard Bussieres6res
Telecopier: (514) 397B7600
12. GOVERNING LAW. THE CORPORATE LAW OF DELAWARE WILL GOVERN ALL ISSUES
-------------
CONCERNING THE RELATIVE RIGHTS OF THE CORPORATION AND ITS STOCKHOLDERS. ALL
OTHER ISSUES CONCERNING THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ANY
CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE~~(WHETHER OF THE STATE OF NEW
YORK OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAW OF
ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK SUBJECT TO PARAGRAPH 13, EACH
PARTY HERETO HEREBY SUBMITS TO THE CO-EXCLUSIVE JURISDICTION OF THE UNITED
STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, AND OF ANY NEW YORK
STATE COURT SITTING IN NEW YORK CITY, OVER ANY LAWSUIT UNDER THIS AGREEMENT AND
WAIVES ANY OBJECTION BASED ON VENUE OR FORUM NON CONVENIENS WITH RESPECT TO ANY
ACTION INSTITUTED THEREIN. EACH PARTY HERETO HEREBY WAIVES THE NECESSITY FOR
PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT AND CONSENTS THAT ALL SUCH
SERVICE OF PROCESS IN ANY SUCH ACTION MAY BE MADE BY REGISTERED OR CERTIFIED
MAIL (RETURN RECEIPT REQUESTED), WITH A COPY ALSO BEING SENT BY FACSIMILE (WITH
RECEIPT CONFIRMED), IN EACH CASE DIRECTED TO SUCH PARTY AT ITS ADDRESS SET FORTH
IN, AND WITH COPIES SENT AS REQUIRED BY, SUBPARAGRAPH 11(F) ABOVE, AND SERVICE
SO
-17-
<PAGE>
MADE SHALL BE DEEMED TO HE COMPLETED ON THE DATE OF ACTUAL RECEIPT. EACH PARTY
HEREBY TO HEREBY CONSENTS TO SERVICE OF PROCESS AS AFORESAID. NOTHING IN THIS
PARAGRAPH 12 WILL PROHIBIT PERSONAL SERVICE IN LIEU OF THE SERVICE BY MAIL
CONTEMPLATED HEREIN.
13. Arbitration,
-----------
(a) Subject to the rights granted in subparagraph 13(b) and Paragraph
14, any controversy, claim or dispute arising out of or relating to this
Agreement or the breach, termination, enforceability or validity thereto
including without limitation the determination of the scope or. applicability of
this Agreement to arbitrate, shall be determined exclusively by binding
arbitration in New York City before tree arbitrators. The &Arbitration shall be
governed by the American Arbitration Association ("AAA") under its Commercial
Arbitration Rules and its Supplementary Procedures for large, Complex Disputes,
provided that persons eligible to be selected as arbitrators shall be limited to
attorneys-at Law who (i) are on the AAA's Large, Complex Case Panel or a Center
for Public Resources ("CPR") Panel of Distinguished Neutrals, or who have
professional credentials similar to the attorneys listed on such AM and CPR
Panels, and (ii) who practiced law for at least 15 years as an attorney in New
York specializing in either general commercial litigation or general corporate
and commercial matters.
(b) No provision at nor the exercise of any rights under,
subparagraph 13(a) shall limit the right of any party to request and obtain from
a court having jurisdiction before, during or after the pendency of any
arbitration, provision or ancillary remedies and relief including, but not
limited to, injunctive or mandatory relief or the appointment of a receiver, The
institution and maintenance of an action or judicial proceeding for, or pursuit
to provisional or ancillary remedies or exercise of self-help remedies shall not
constitute a waiver of the right of any party hereto, even if such party is the
plaintiff, to submit the dispute to arbitration if such party would otherwise
have such right.
(c) In any such arbitration proceeding, the arbitrator shall not have
the power or authority to award punitive damages to any party. Judgment upon
the award rendered may be entered in any court having jurisdiction (which
shall not be restricted by Paragraph 12).
(d) Each of the parties shall, subject to the award of the
arbitrators, pay an equal share of the arbitrators' fees, The arbitrators
shall have the power to award recovery of all costs and fees (including
attorneys' fees, administrative fees, arbitrators' fees, and court costs) to
the prevailing party.
14. Equitable Relief. Since any of the parties may sustain irreparable
----------------
harm in the event there is a breach of the covenants provided in this Agreement
in addition to any other rights or remedies which the parties may have under
this Agreement or otherwise, each of the parties shall be entitled to obtain
specific performance or injunctive relief against the breaching or defaulting
party hereto in any court of competent jurisdiction for the purposes of
restraining such breaching or defaulting party from any actual or threatened
breach of such covenants or to compel such breaching or defaulting party to
perform such covenants, without the necessity of proving irreparable injury or
the inadequacy of remedies at law or posting bond or other security.
-18-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Registration
Rights Agreements as of the date first above written.
OPTEL, INC.
By: ____________________
Name:
Title:
By: ____________________
Name:
Title:
CAPITAL COMMUNICATIONS CDPQ INC.
BY: Lynn C. McDonald
-------------------
Name:
Title:
By: Lynn C. McDonald
-------------------
Name:
Title:
Effective on the date of the foregoing Registration
Rights Agreement, the undersigned consents thereto
and agrees to be bound by the provisions thereof
that make specific reference to the undersigned.
VPC CORPORATION
BY: _________________
Name:
Title:
IN WiTNESS WHEREOF, the parties hereto have executed this Registration
Rights Agreement as of the date first above written
OPTEL, INC.
By: Louis Brunel
-------------------
Name:Louis Brunel
Title: President & CEO
BY: Michael E. Katzenstein
----------------------
Name:Michael E. Katzenstein
Title:VP AND GC
CAPITAL COMMUNICATIONS CDPQ INC.
BY: _____________________
Name:
Title:
BY: _____________________
Name:
Title:
Effective on the date of the foregoing Registration
Rights Agreement, the undersigned consents thereto
and agrees to be bound by the provisions thereof
that make specific reference to the undersigned.
VPC CORPORATION
By: ________________
Name:
Title:
IN WITNESS WHEREOF, the parties hereto have executed this Registration
Rights Agreement as of the date first above written
OPTEL, INC.
By: ____________________
Name:
Title:
BY: _____________________
Name:
Title:VP AND GC
CAPITAL COMMUNICATIONS CDPQ INC.
BY: _____________________
Name:
Title:
BY: Lynn C. McDonald
_____________________
Name:
Title:
Effective on the date of the foregoing Registration
Rights Agreement, the undersigned consents thereto
and agrees to be bound by the provisions thereof
that make specific reference to the undersigned.
VPC CORPORATION
By: /s/ Suzanne Renault
-------------------
Name: Suzanne Renault
Title:Vice President Legal Affairs
and Secretary
<PAGE>
EXHIBIT 4.7
WARRANT AGREEMENT
THIS WARRANT AGREEMENT (the "Agreement"), dated as of July 11, 1997,
is made and entered into by and among Optel, Inc., a Delaware corporation (the
"Company"), and Rory O. Cole (the "Warrantholder"). This Agreement is being
executed in connection with the Separation Agreement of even date herewith by
and between the Company and the Warrantholder (the "Separation Agreement").
The Company agrees, in consideration of the Warrantholder's entering
into the Separation Agreement, to issue and sell, and the Warrantholder, by
entering into the Separation Agreement, will receive warrants, as hereinafter
described (the "Warrants"), to purchase up to 9,406.36 shares (the "Shares"), of
the Company's Class A Common Stock, par value $.01 per share (the "Common
Stock"). The Purchase and sale of the Warrants shall occur contemporaneous with,
and is subject to the closing of the Separation Agreement.
In consideration of the foregoing and for the purpose of defining the
terms and provisions of the Warrants and the respective rights and obligations
thereunder, the Company and the Warrantholder, for value received, hereby agree
as follows:
Section 1. Transferability and Form of Warrants.
------------------------------------
1.1. Registration. The Warrants shall be numbered and shall
------------
be registered on the books of the Company when issued.
1.2. Certain Limitations on Transfer. The Warrants and the
-------------------------------
Shares shall not be sold, assigned, transferred or pledged except upon the
conditions specified in this Agreement. The Warrants may not be transferred
voluntarily and may only be transferred upon death, either by will or
intestacy law, or otherwise by operation of law and only then if such
transfer is made in accordance with the terms of this Agreement. The
Warrantholder will cause any proposed purchaser, assignee, transferee or
pledgee of the Warrants or the Shares, except for transferees in
dispositions of Shares that are pursuant to an effective registration
statement under the Act (as defined herein) or transferees in dispositions
of Shares occurring after an IPO (as defined herein) pursuant to Rule 144
under the Securities Act of 1933, as amended (the "Act"), to agree to take
and hold such securities subject to the provisions and upon the conditions
specified in this Agreement. The Warrants may be divided or combined, upon
request to the Company by the Warrantholder into a certificate or
certificates representing the right to purchase the same aggregate number
of Shares. Unless the context indicates otherwise, the term "Warrantholder"
shall include any transferee or transferees of the Warrants or the Shares
that is required to be bound by the terms hereof, and the term "Warrants"
shall include any and all warrants outstanding pursuant to this Agreement,
including those evidenced by a certificate or certificates issued upon
division,
<PAGE>
exchange, transfer or substitution pursuant to this Agreement. The Company
may refuse to effect the transfer of the Warrants until the transferee of
the Warrants executes a counterpart to this Agreement and it shall be a
condition to any transfer that the transferee execute and deliver to the
Company a separate certificate that contains the representations and
covenants in Section 11 hereof. The Warrantholder, by his receipt of a
Warrant Certificate, agrees to be bound by and to comply with the terms of
this Agreement. The Warrantholder represents and agrees that the Warrant
(and Shares if the Warrant is exercised) is purchased only for investment,
for the Warrantholder's own account and without any present intention to
sell, or with a view to distribution ot the Warrant or Shares.
1.3. Form of Warrants. The text of the Warrants and of the
----------------
form of election to purchase Shares shall be substantially as set forth in
Exhibit A attached hereto. The number of Shares issuable upon exercise of
the Warrants is subject to adjustment upon the occurrence of certain
events, all as hereinafter provided. The Warrants shall be executed on
behalf of the Company by its President or by a Vice President, attested to
by its Secretary or an Assistant Secretary. A Warrant bearing the signature
of an individual who was at any time the proper officer of the Company
shall bind the Company, notwithstanding that such individual shall have
ceased to hold such office prior to the delivery of such Warrant or did not
hold such office on the date of this Agreement.
The Warrants shall be dated as of the date of signature
thereof by the Company either upon initial issuance or upon division,
exchange, transfer or substitution.
1.4. Legend on Warrants. Each Warrant Certificate shall bear
------------------
the following legend:
(a) "THE WARRANTS REPRESENTED BY THIS CERTIFICATE HAVE
BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER
THE SECRRITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES
LAW. SUCH WARRANTS MAY NOT BE SOLD OR TRANSFERRED UNLESS
REGISTERED OR QUALIFIED UNDER SAID ACT AND APPLICABLE STATE
SECURITIES LAWS AND UNLESS THE COMPANY RECEIVES AN OPINION OF
COUNSEL FOR THE HOLDER REASONABLY ACCEPTABLE TO THE COMPANY
STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT.
COPIES OF THE WARRANT AGREEMENT COVERING THE PURCHASE OF THESE
WARRANTS AND IMPOSING VARIOUS REQUIREMENTS, INCLUDING WITHOUT
LIMITATION PROVISIONS RESTRICTING THEIR TRANSFER, MAY BE OBTAINED
AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF
THIS CERTIFICATE TO THE SECRETARY OF THE CORPORATION AT THE
PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION."; and
-2-
<PAGE>
(b) any legend required by applicable state securities
law.
Any certificate issued at any time in exchange or substitution
for any Warrant certificate bearing such legends shall also bear the above
legends unless, in the opinion of the Company's counsel, the securities
represented thereby need no longer be subject to such restrictions. The
Warrantholder consents to the Company's making a notation on his records
and giving instructions to any registrar or transfer agent of the Warrants
in order to implement the restrictions on transfer established in this
Agreement.
Section 2. Exchange of Warrant Certificate. Any Warrant
-------------------------------
certificate may be exchanged for another certificate or certificates entitling
the Warrantholder to purchase a like aggregate number of Shares as the
certificate or certificates surrendered then entitled such Warrantholder to
purchase. Any Warrantholder desiring to exchange a Warrant certificate shall
make such request in wriring delivered to the Company, and shall surrender,
properly endorsed, with signatures guaranteed, the certificate evidencing the
Warrant to be so exchanged. Thereupon, the Company shall execute and deliver to
the person entitled thereto a new Warrant certificate or certificates as so
requested.
Section 3. Term of Warrants: Exercise of Warrants.
--------------------------------------
(a) Subject to the terms of this Agreement, the
Warrantholder shall have the right, at any time and from time to time
during the period commencing on the Waiver Effective Date (as such
term is defined in the Separation Agreement), and ending at 5:00 p.m.
Dallas, Texas time, on July 11, 2002 (the "Termination Date"), to
purchase from the Company up to the number of fully paid and
nonassessable Shares to which the Warrantholder may at the time be
entitled tS purchase pursuant to this Agreement, upon surrender to the
Company, at its principal office, of the certificate evidencing the
Warrants to be exercised, together with the purchase form on the
reverse thereof duly filled in and signed, with signatures guaranteed,
and upon payment to the Company of the Warrant Price (as defined in
and determined in accordance with the provisions of this Section 3 and
Sections 7 and 8 hereof), but in no event for less than 1,000 Shares
(subject to appropriate adjustment for any stock split,
recapitalization or similar event) for any Warrantholder (unless less
than an aggregate of 1,000 Shares (subject to appropriate adjustment
for any stock split, recapitalization or similar event) are then
purchasable under all outstanding Warrants held by a Warrantholder.
The Warrants shall be exercisable, at the election of the
Warrantholder, either in full or from time to time (subject to the
other provisions in this Section) in part and, in the event of a
certificate evidencing the Warrants is exercised in respect of less
than all of the Shares specified therein at any time prior to the
Termination Date, a new certificate evidencing the remaining portion
of the Warrants held by the Warrantholder will be issued by the
Company. It shall be a condition to exercise that the Warrantholder
-3-
<PAGE>
execute and deliver a certificate to the Company containing the
representations and covenants set forth in Section 11 hereof which
certificate must state that such representations and warranties are
true and correct. If the Waiver Effective Date does not occur, then
this Agreement will be terminated without further obligation by
either parry.
(b) Payment by each Warrantholder of the aggregate
Warrant Price due from him shall be made
(i) in cash or by immediately available funds,
check, or any combination thereof; or
(ii) by means of a "Cashless Exercise". In the
event of a Cashless Exercise, the Warrantholder shall exchange
its Warrant for such number of shares of Common Stock determined
by multiplying the number of Shares by a fraction, the numerator
of which shall be the difference between the then-current market
price per share of Common Stock and the Warrant Price, and the
denominator of which shall be the then-current market price per
share of Common Stock. For purposes of this Section the "then
current market price per share of Common Stock" at any date shall
be deemed to be (a) if the Common Stock is not traded on an
established securities market, the fair market value of the
Common Stock as determined in good faith by the Board of
Directors of the Company, which determination shall be conclusive
and binding on the Warrantholder, and (b) if the Common Stock is
traded on an established securities market, the average of the
daily closing prices for 20 consecutive trading days commencing
30 trading days before such date. The closing price for each day
shall be the last sales price regular way or, in case no such
reported sales take place on such day, the average of the last
reported bid and asked prices regular way, in either case on the
principal national securities exchange on which the Common Stock
is admitted to trading or listed or, if not listed or admitted to
trading on any such exchange, on NASDAQ, or if closing prices are
not quoted on NASDAQ, the representative closing bid price as
reported by NASDAQ or by another similar organization if NASDAQ
is no longer reporting such information.
(c) Upon such surrender of the Warrants and payment of
such Warrant Price as aforesaid, the Company shall issue and cause to
be delivered to or upon the written order of the exercising
Warrantholder and in such name or names as the exercising
Warrantholder may designate (which in no way shall limit the transfer
restrictions hereunder) a certificate or certificates for the number
of full Shares so purchased upon the exercise of his Warrant, together
with cash, as provided
-4-
<PAGE>
in Section 9 hereot, in respect of any fractional Shares otherwise
issuable upon such surrender. Such certificate or certificates shall
be deemed to have been issued and any person so designated to be named
therein shall be deemed to have become a holder of record of such
securities as of the date of surrender of the Warrants and payment of
the Warrant Price, as aforesaid, notwithstanding that the certificate
or certificates representing such securities shall not actually have
been delivered or that the stock transfer books of the Company shall
then be closed.
Section 4. Payment of Taxes. The Company will pay all documentary
----------------
stamp taxes, if any, attributable to the initial issuance of the Warrants or the
securities comprising the Shares; provided, however, the Company shall not be
required to pay any tax which may be payable in respect of any secondary
transfer of the Warrants or of the securities comprising the Shares.
Section 5. Mutilated or Missing Warrants. In case the certificate
-----------------------------
or certificates evidencing the Warrants shall be mutilated, lost, stolen or
destroyed, the Company shall, at the request of the Warrantholder, issue and
deliver in exchange and substitution for and upon cancellation of the mutilated
certificate or certificates, or in lieu of and substitution for the certificate
or certificates lost, stolen or destroyed, a new Warrant certificate or
certificates of like tenor and representing an equivalent right or interest, but
only upon receipt of evidence satisfactory to the Company of such loss, theft or
destruction of such Warrant and a bond of indemnity, if requested, also
satisfactory in form and amount at the applicant's cost. Applicants for such
substitute Warrant certificate shall also comply with such other reasonable
regulations and pay such other reasonable charges as the Company may prescribe.
Section 6. Reservation of Shares. There has been reserved, and the
---------------------
Company shall at all times keep reserved so long as the Warrants remain
outstanding, out of its authorized Common Stock, such number of shares of Common
Stock as shall be subject to purchase under the Warrants.
Section 7. Warrant Price. The price per Share at which Shares
-------------
shall be purchasable upon the exercise of the Warrants (the "Warrant Price")
shall be $74.42, subject to adjustment as provided in this Agreement.
Section 8. Adjustment of Number of Shares and Warrant Price. The
------------------------------------------------
number and kind of securities purchasable upon the exercise of the Warrants and
the Warrant Price shall be subject to adjustment from time to time upon the
happening of certain events, as follows:
8.1. Adjustments. The number of Shares purchasable upon the
-----------
exercise of the Warrants shall be subject to adjustment as follows:
(a) In case the Company shall (i) pay a dividend in
Common Stock or make a distribution in Common Stock, (ii) subdivide
its outstanding Common Stock, (iii) combine its outstanding Common
Stock into a smaller number
-5-
<PAGE>
of shares of Common Stock or (iv) issue by reclassification of its
Common Stock other securities of the Company, the number of Shares
purchasable upon exercise of the Warrants immediately prior thereto
shall be adjusted so that the Warrantholder shall be entitled to
receive the kind and number of Shares or other securities of the
Company which it would have owned or would have been entitled to
receive immediately after the happening of any of the events described
above had the Warrants been exercised immediately prior to the
happening of such event or any record date with respect thereto. Any
adjustment made pursuant to this subsection 8.1(a) shall become
effective immediately after the effective date of such event
retroactive to the record date, if any, for such event.
(b) No adjustment in the number of Shares purchasable
pursuant to the Warrants shall be required unless such adjustment
would require an increase or decrease of at least five percent in the
number of Shares then purchasable upon the exercise of the Warrants;
provided, however, that any adjustments which by reason of this
subsection 8.l(b) are not required to be made immediately shall be
carried forward and taken into account in any subsequent adjustment.
(c) Whenever the number of Shares purchasable upon the
exercise of the Warrant is adjusted, as herein provided, the Warrant
Price payable upon exercise of the Warrant shall be adjusted by
multiplying such Warrant Price immediately prior to such adjustment by
a fraction, of which the numerator shall be the number of Shares
purchasable upon the exercise of the Warrant immediately prior to such
adjustment and of which the denominator shall be the number of Shares
so purchasable immediately thereafter.
(d) Whenever the number of Shares purchasable upon the
exercise of the Warrants is adjusted as herein provided, the Company
shall cause to be promptly mailed to the Warrantholder by first class
mail, postage prepaid, notice of such adjustment and a certificate of
the chief financial officer of the Company setting forth the number of
Shares purchasable upon the exercise of the Warrants after such
adjustment, a brief statement of the facts requiring such adjustment
and the computation by which such adjustment was made.
(e) For the purpose of this Section 8.1, the term
"Common Stock" shall mean (i) the class of stock designated as the
Class A Common Stock of the Company at the date of this Agreement or
(ii) any other class of stock resulting from successive change or
reclassifications of such Common Stock consisting solely of changes in
par value, or from par value to no par value, or from no par value to
par value. In the event that at any time, as a result of an adjustment
made pursuant to this Section 8, the Warrantholder shall become
entitled to purchase any securities of the Company other than Common
Stock, thereafter the number of such other securities so purchasable
upon exercise of the Warrants shall be subject to adjustment
-6-
<PAGE>
from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Shares contained in
this Section 8.
8.2. No Adjustment for Certain Matters. During the term of
---------------------------------
the Warrants or upon the exercise of the Warrants, no adjustment shall be
made (i) in respect of any dividends or distributions, except as
specifically provided in subsection 8.1(a) or (ii) in respect of the
consummation of any dissolution, liquidation or winding up of the Company
or a consolidation, merger, share exchange or similar business combination
or sale of its property, assets and business as an entirety or
substantially as an entirety. Without limiting the generality of the
foregoing, the Company shall have no obligation to cause any purchaser or
successor by merger, sale of assets or similar business combination to
assume the obligations under this Agreement. If, however, at any time prior
to the expiration of the Warrants and prior to their exercise, a merger or
similar business combination shall be proposed, and the purchaser shall not
have agreed to assume the obligations under this Agreement, then the
Company shall give notice in writing of such event to the Warrantholder, as
provided in Section 12 hereof, promptly prior to the date fixed as a record
date or the date of closing the transfer books for the determination of the
stockholders entitled to vote on such proposed merger or business
combination in order to provide the Warrantholder an opportunity to
exercise the Warrant. Without limiting any claim for damages that a
Warrantholder might have for breach by the Company of its obligations under
the immediately preceding sentence, failure to mail or receive such notice
or any defect therein shall not affect the validity of any action taken
with respect to the merger or business combination.
8.3. Statement on Warrant Certificates. Irrespective of any
---------------------------------
adjustments in the number of securities issuable upon exercise of Warrants,
Warrant certificates theretofore or thereafter issued may continue to
express the same number of securities as are stated in the similar Warrant
certificates initially issuable pursuant to this Agreement. However, the
Company may, at any time in its sole discretion (which shall be
conclusive), make any change in the form of Warrant certificate that it may
deem appropriate and that does not affect the substance thereof; and any
Warrant certificate thereafter issued, whether upon registration or
transfer of, or in exchange or substitution for, an outstanding Warrant
certificate, may be in the form so changed.
Section 9. Fractional Interests: Fair Value. The Company shall not be
--------------------------------
required to issue fractional Shares on the exercise of the Warrants. If any
fraction of a Share would, except for the provisions of this Section 9, be
issuable on the exercise of the Warrants (or specified portion thereof), the
Company shall pay an amount in cash equal to the then Fair Value of the Common
Stock multiplied by such fraction. As used herein, the term "Fair Value" of the
Common Stock or other Securities or other property shall mean the fair value as
determined in good faith by the Company's Board of Directors, which
determination shall be binding upon the Warrantholder; provided, however, that
after the closing date of an initial public offering of Common Stock pursuant to
a registration statement filed with and declared effective by the SEC (an
"IP0"), Fair Value of the
-7-
<PAGE>
Common Stock for any day shall mean the last sales price, regular way, on such
day or, in case no such sale takes place on such day, the average of the closing
bid and asked prices, regular way, on such day, in either case as reported in
the principal transaction reporting system with respect to securities listed or
admitted to trading on the principal national securities exchange on which such
security is listed or admitted to trading, or, if such security is not listed or
admitted to trading on any national securities exchange but sales price
information is reported for such security, as reported by The Nasdaq Stock
Market ("Nasdaq") National Market or such other self-regulatory organization or
registered securities information processor (as such terms are used under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) that then
reports information concerning such security, or, if sales price information is
not so reported, the average of the high bid and low asked prices in the over-
the-counter market on such day, as reported by Nasdaq or such other entity, or,
if on such day such security is not quoted by any such entity, the average of
the closing bid and asked prices as furnished by a professional market maker
making a market in such security selected by the Board of Directors of the
Company. If on such day no market maker is making a market in such security, the
fair value of such security on such day as determined in good faith by the Board
of Directors of the Company shall be used and such determination shall be
conclusive and binding on the Warrantholder and his transferees.
Section 10. No Right as Stockholder: No Notices to Warrantholder.
----------------------------------------------------
Nothing contained in this Agreement or in the Warrants shall be construed as
conferring upon the Warrantholder or his transferees any rights as a stockholder
of the Company, including the right to vote, receive dividends, call meetings,
consent or receive notices as a stockholder in respect of any meeting of
stockholders for the election of directors of the Company or any other matter or
imposing any fiduciary or other duty on the Company, its officers or directors,
in favor of the Warrantholder, all of which rights and duties are expressly
disclaimed and waived by the Warrantholder.
Section 11. Securities Laws: Restrictions on Transfer of Shares:
----------------------------------------------------
Registration Rights.
- - -------------------
11.1.
(a) Compliance with Securities Act. The Warrantholder
------------------------------
agrees that this Warrant and the related Shares (each of the Warrant
and the Shares being referred to herein as a "Security" and together,
"Securities") are being acquired for investment and that such
Warrantholder will not purchase, offer, sell or otherwise dispose of
any of the Securities except under circumstances which will not result
in a violation of the Act. in order to exercise this Warrant, the
Warrantholder must be able to confirm and shall confirm in writing, by
executing a certificate to be supplied by the Company, all of the
representations and other covenants contained in this Agreement,
including that the Securities so purchased are being acquired for
investment and not with a view toward distribution or resale. The
Securities (unless registered under the Act) shall be stamped or
imprinted with, in addition to any other appropriate or required
legend, a legend in substantially the following form:
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<PAGE>
"THE SECURITIES EVIDENCED HEREBY HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY STATE SECURITIES
LAWS. SUCH SECURITIES MAY NOT BE SOLD OR
TRANSFERRED UNLESS REGISTERED OR QUALIFIED
UNDER SAID ACT AND APPLICABLE STATE
SECURITIES LAWS OR UNLESS THE CORPORATION
RECEIVES AN OPINION OF COUNSEL FOR THE
HOLDER, REASONABLY SATISFACTORY TO THE
CORPORATION, STATING THAT SUCH SALE OR
TRANSFER IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SAID
ACT. COPIES OF THE AGREEMENT COVERING THE
PURCHASE OF THESE SECURITIES THAT RESTRICT
THEIR TRANSFER AND PROVIDE, FOR CERTAIN
VOTING AGREEMENTS AND RIGHTS OF FIRST
REFUSAL MAY BE OBTAINED AT NO COST BY
WRITTEN REQUEST MADE BY THE HOLDER OF RECORD
OF THIS CERTIFICATE TO THE SECRETARY OF THE
CORPORATION AT THE PRINCIPAL EXECUTIVE
OFFICES OF THE CORPORATION."
Any certificate for Shares issued at any time in exchange
or substitution for any certificate bearing such legends (except a new
certificate issued to a transferee upon completion of a public
distribution pursuant to a registration statement under the Act or
upon completion of a sale occurring after an IP0 under Rule 144 under
the Act of the securities represented thereby) shall also bear the
above legends unless, in the opinion of the Company's counsel, the
securities represented thereby need no longer be subject to such
restrictions. The Warrantholder consents to the Company making a
notation on his records and giving instructions to any registrar or
transfer agent of the Common Stock in order to implement the
restrictions on transfer established in this Agreement.
In addition, the Warrantholder specifically represents to
the Company both at the time of initial purchase of the Warrant and at
those future times as specified herein:
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<PAGE>
(i) Prior to entering into the Separation Agreement,
the original Warrantholder was the Chief Operating Officer of
the Company. The Warrantholder has experience in analyzing and
investing in companies like the Company and is capable of
evaluating the merits and risks of an investment in the Company
and has the capacity to protect his own interests. The
Warrantholder is an "Accredited Investor" as that term is
defined in Rule 501(a) promulgated under the Act. The
Warrantholder is aware of the Company's business affairs and
financial condition, and has acquired information about the
Company sufficient to reach an informed and knowledgeable
decision to acquire the Securities. The Warrantholder is
acquiring the Securities for his own account for investment
purposes only not as a nominee or agent and not with a view to,
or for the resale in connection with, any "distribution" thereof
for purposes of the Act. The Warrantholder is acquiring the
Securities for investment for his own account, not as a nominee
or agent, and not with a view to, or for resale in connection
with, any distribution thereof. The Warrantholder acknowledges
the Company has no obligation to include the Shares in any
registration statements, the effectiveness of which registration
statements may be required for the resale of the Shares. Without
limiting the generality of the preceding sentences of this
Section, the Warrantholder has not offered or sold any portion
of the Securities to be acquired by such Warrantholder and has
no present intention of reselling or otherwise disposing of any
portion of such Securities either currently or after the passage
of a fixed or determinable period of time or upon the occurrence
or nonoccurrence of any predetermined event or circumstance. The
Warrantholder understands that investment in the Securities is
subject to a high degree of risk. The Warrantholder can bear the
economic risk of his investment, including the full loss of his
investment, and by reason of his business or financial
experience or the business or financial experience of his
professional advisors has the capacity to evaluate the merits
and risks of his investment and protect his own interest in
connection with the purchase of the Securities. The
Warrantholder represents that he does not have any contract,
undertaking, agreement or arrangement with any person to sell,
transfer or grant participation to such person or to any third
person, with respect to any of the Securities. If other than an
individual, the Warrantholder also represents he has not been
organized for the purpose of acquiring the Securities. The
Warrantholder's purchase is not and will not be part of a plan
or scheme to evade the registration requirements of the Act.
(ii) The Warrantholder understands that the Securities
have not been and will not be registered under the Act or any
applicable state securities law in reliance upon a specific
exemption therefrom, which exemption depends upon, among other
things, the bona fide nature of the Warrantholder's investment
intent as expressed herein and the accuracy of the
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<PAGE>
Warrantholder's representations as expressed herein and the
Warrantholder will furnish the Company with such additional
information as is reasonably requested by the Company in
connection with such exemption.
(iii) The Warrantholder further understands that the
Securities must be held indefinitely unless subsequently
registered under the Act and any applicable state securities
laws, or unless exemptions from registration are otherwise
available. Moreover, the Warrantholder understands that the
Company is under no obligation to and does not expect to
register the Securities.
(iv) The Warrantholder is aware of the provisions of
Rule 144, promulgated under the Act, which, in substance, permit
limited public resale of "restricted securities" acquired,
directly or indirectly, from the issuer thereof (or from an
affiliate of such issuer), subject to the satisfaction of
certain conditions, if applicable, including, among other
things: the availability of certain public information about the
Company; the resale occurring not less than one year after the
party has purchased and paid for the securities to be sold; the
sale being made through a broker in an unsolicited "broker's
transaction" or in transactions directly with a market maker (as
said term is defined under the Exchange Act); and the amount of
securities being sold during any three-month period not
exceeding the specified limitations stated therein.
(v) The Warrantholder further understands that at the
time he wishes to sell the Securities, it is possible that there
will be no public market upon which to make such a sale, and
that, even if such a public market then exists, the Company may
not be satisfying the current public information requirements of
Rule 144, and that, in such event, the Warrantholder may be
precluded from selling the Securities under Rule 144 even if the
minimum holding period had been satisfied.
(vi) The Warrantholder further understands that in the
event all of the requirements of Rule 144 are not satisfied,
registration under the Act or compliance with registration
exemption will be required; and that, notwithstanding the fact
that Rule 144 is not exclusive, the Staff of the SEC has
expressed its opinion that persons proposing to sell private
placement securities other than in a registered offering and
otherwise than pursuant to Rule 144 will have a substantial
burden of proof in establishing that an exemption from
registration is available for such offers or sales, and that
such persons and their respective brokers who participate in
such actions do so at their own risk.
-11-
<PAGE>
(vii) The Warrantholder has had a reasonable
opportunity to ask questions relating to the Company's business,
management and financial affairs with the Company's management,
customers and other parties, and the Warrantholder has received
satisfactory responses to the Warrantholder's inquiries. The
Warrantholder is not, and has not been within the ninety (90)
days prior to the closing date of the purchase of the
Securities, a broker or dealer of securities. To the best of his
knowledge, (i) the Warrantholder was contacted regarding the
sale of the Securities by a person or entity with whom the
Warrantholder had a prior relationship and (ii) no securities
were offered or sold to him by means of any form of general
solicitation or general advertising, and in connection therewith
the Warrantholder: did not (A) receive or review any
advertisement, article, notice or other communication published
in a newspaper or magazine or similar media or broadcast over
television or radio, whether closed circuit or generally
available; or (B) attend any seminar, meeting or industry
investor conference whose attendees were invited by any general
solicitation or general advertising.
11.2 Disposition of Securities. There shall be no transfer of
-------------------------
Warrants except for transfer at death as set forth in Section 1.2. The
transferee any Warrants must give notice to the Company of such transfer. With
respect to any offer, sale or other disposition of any Securities that are not
registered under the Act, the Warrantholder hereof agrees to give written notice
to the Company prior thereto, describing briefly the manner thereof together
with a written opinion of such Warrantholder's counsel to the effect that such
offer, sale or other disposition may be effected without registration or
qualification (under the Act as then in effect or any federal or state law then
in effect) of such Securities and indicating whether or not under the Act,
certificates for the Securities in question to be sold or otherwise disposed of
require any restrictive legend as to applicable restrictions on transferability
in order to ensure compliance with such law. Such opinion and such counsel must
be satisfactory to the Company in its reasonable judgment and such opinion
shall state that it may be relied upon by counsel to the Company, and any stock
exchange or transfer agent. Promptly upon receiving such written notice and
satisfactory opinion, if so requested, the Company shall notify such
Warrantholder that such Warrantholder may sell or otherwise dispose of such
Securities, all in accordance with the terms of the notice delivered to the
Company. If a determination has been made pursuant to this subsection (b) that
the opinion of counsel for the Warrantholder is not satisfactory to the Company,
the Company shall so notify the Warrantholder promptly after such determination
has been made and shall specify in detail the legal analysis supporting any such
conclusion. Each certificate representing the Securities thus transferred
(except a transfer registered under the Act or a transfer of Shares, occurring
after an IP0, pursuant to Rule 144) shall bear a legend as to the applicable
restrictions on transferability in order to ensure compliance with such laws,
unless in the aforesaid opinion of counsel for the Warrantholder, such legend is
not required in order to ensure compliance with such laws. The Company may issue
stop transfer instructions to its transfer agent in connection with such
restrictions. Notwithstanding the
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<PAGE>
foregoing provisions of this Section 11.2, the Warrantholder agrees that
transfers may further be subject to Section 11.3 and Appendix I.
11.3 Restrictions on Transfer and Repurchase and Sale Rights. The
-------------------------------------------------------
Warrantholder agrees that, in the event the Warrant is exercised prior to an
IPO, the Warrantholder will be subject to the terms and provisions of Appendix I
attached hereto and made a part hereof, which imposes restrictions on the
transfer of the Shares acquired upon exercise of the Warrant. The Warrantholder
further agrees that, in the event the Warrant is exercised prior to the
occurrence of an IPO, the Company may require as a condition to the exercise of
the Warrant that the Warrantholder furnish the Company with the written consent
of the Warrantholder's spouse (if any), or that any transferee of the Warrant
pursuant to Section 1.2 furnish written consent, to be bound by the terms and
conditions of Appendix I attached hereto, and such consent shall be furnished on
such form as the Company shall prescribe. Certificates representing the Shares
issued pursuant to the exercise of the Warrant will bear all legends required by
law and necessary to effectuate the revisions of this Agreement. The Company may
place a "stop transfer" order against the Shares issued pursuant to the exercise
of this Warrant until all restrictions and conditions set forth in Appendix I
attached hereto and the legends referred to in this Section 11.3 have been
complied with.
11.4 No Registration Rights. The Warrantholder is not entitled to
----------------------
any registration rights with respect to the transfer of the Warrants or with
respect to Shares acquired upon exercise of the Warrants.
Section 12. Notices. Any notice pursuant to this Agreement by the
-------
Company or by the Warrantholder or a Holder of Shares shall be in writing and
shall be deemed to have been duly given if delivered or mailed led by certified
or registered first class mail, return receipt requested and postage prepaid:
(a) If to the Warrantholder or a Holder of Shares,
addressed to Roy O. Cole, 4339 Beverly Drive, Dallas, Texas 75205.
(b) If to the Company, addressed to it at Optel, Inc.,
1111 West Mockingbird Lane, Dallas, Texas 75247, Attention: Chief
Executive Officer (with a copy to the General Counsel of the Company
at the same address).
Each party may from time to time change the address to which notices to it are
to be delivered or mailed hereunder by notice in accordance herewith to the
other parry.
Section 13. Successors. All the covenants and provisions of this
----------
Agreement by or for the benefit of the Company, the Warrantholder or the Holder
of Shares shall bind and inure to the benefit of their respective successors and
assigns hereunder.
Section 14. Applicable Law. This Agreement shall be deemed to be a
--------------
contract made under the laws of the State of Texas and for all purposes shall be
construed in
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<PAGE>
accordance with the laws of said State applicable to contracts made and to be
performed entirely within such state.
Section 15. Benefits of this Agreement. Nothing in this Agreement
--------------------------
shall be construed to give to any person or corporation other than the Company,
the Warrantholder and the Holders of Shares any legal or equitable right, remedy
or claim under this Agreement. This Agreement shall be for the sole and
exclusive benefit of the Company, the Warrantholder and the Holders of Shares.
Section 16. Counterparts. This Agreement may be executed in any
------------
number of counterparts each of which shall be deemed an original, but all of
which shall constitute one and the same instrument.
Section 17. Amendment. Except as expressly provided herein, neither
---------
this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought;
provided, however, that any provisions hereof may be amended, waived, discharged
or terminated upon the written consent of the Company and the Warrantholder
having the right to acquire by virtue of holding the Warrants at least 50% of
the Shares which are then issuable upon exercise of the then outstanding
Warrants.
Section 18. Termination of Company Obligations. Notwithstanding any
----------------------------------
other provision of this Agreement, all rights (but not the obligations) of any
Warrantholder (including without limitation, both any successor to the original
Warrantholder and any Holder of Shares) shall terminate and all obligations (but
not all rights) of the Company shall terminate upon the first date that Mr. Rory
0. Cole violates the terms of the Separation Agreement.
Section 19. Gender. The gender of words used in this Agreement shall
------
be construed to include whichever may be appropriate under any particular
circumstances of the masculine, feminine or neuter genders.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, all as of the day and year first above written.
OPTEL, INC.
By: /s/ Michael Katzenstein
--------------------------------
Name: Michael Katzenstein
Title: VP and General Counsel
----------------------------
RORY O. COLE
/s/ Rory O. Cole
-----------------------------------
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<PAGE>
Exhibit A
---------
THE WARRANTS REPRESENTED BY THIS CERTIFICATE HAVE
BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAW. SUCH WARRANTS
MAY NOT BE SOLD OR TRANSFERRED UNLESS REGISTERED OR
QUALIFIED UNDER SAID ACT AND APPLICABLE SATE
SECURITIES LAWS OR UNLESS THE COMPANY RECEIVES AN
OPINION OF COUNSEL FOR THE HOLDER, REASONABLY
ACCEPTABLE TO THE COMPANY STATING, THAT SUCH SALE OR
TRANSFER IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT. COPIES
OF THE WARRANT AGREEMENT COVERING THE PURCHASE OF
THESE WARRANTS AND VARIOUS REQUIREMENTS, INCLUDING
WITHOUT LIMITATION PROVISIONS PROHIBITING THEIR
TRANSFER, MAY BE OBTAINED AT NO COST BY WRITTEN
REQUEST MADE BY THE HOLDER OF RECORD OF THIS
CERTIFICATE TO THE SECRETARY OF THE CORPORATION AT THE
PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION.
Warrant Certificate No.3
WARRANTS TO PURCHASE
9,406.36 SHARES OF CLASS A COMMON STOCK
OPTEL, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
This certifies that, for value received, Rory 0. Cole, the registered
holder hereof (the "Warrantholder"), is entitled to purchase from OPTEL, INC.
(the "Company"), at any time during the period commencing the Waiver Effective
Date (as such term is defined in the Separation Agreement described below) and
ending at 5:00 p.m., Dallas, Texas time on July 11, 2002, at a purchase price
per share of $74.42, the number of shares of Class A Common Stock of the Company
set forth above (the "Shares"). The number of shares of Class A Common Stock of
the Company purchasable upon exercise of each Warrant evidenced hereby shall be
subject to adjustment from time to time as set forth in the Warrant Agreement.
-1-
<PAGE>
The Warrants evidenced hereby may be exercised in whole or in part as
provided in the Warrant Agreement, by presentation of this Warrant Certificate
with the Purchase Form attached hereto duly executed (with at a signature
guarantee as provided thereon) and simultaneous payment of the Warrant Price at
the principal office of the Company. Payment of such price shall be made as set
forth in the Warrant Agreement.
The Warrants evidenced hereby represent the right to purchase Shares
and are issued under and in accordance with at a Warrant Agreement, dated as of
July 11, 1997 (the "Warrant Agreement"), between the Company and the
Warrantholder and are subject to the terms and provisions contained in the
Warrant Agreement, to all of which the Warrantholder by acceptance hereof
consents. The Warrant is being issued in connection with a Separation Agreement
between the Company and Rory 0. Cole.
Upon any partial exercise of the Warrants evidence hereby, there shall
be signed and issued to the Warrantholder a new Warrant Certificate in respect
of the Shares as to which the Warrants evidenced hereby shall not have been
exercised. These Warrants may be exchanged at the office of the Company by
surrender of this Warrant Certificate properly endorsed for one or more new
Warrants of the same aggregate number of Shares as here evidenced by the Warrant
or Warrants exchanged. No fractional shares of Class A Common Stock will be
issued upon the exercise of rights to purchase hereunder, but the Company shall
pay the cash value of any fraction upon the exercise of one or more Warrants.
These Warrants are not transferable and any attempted transfer shall be void.
This Warrant Certificate does not entitle any Warrantholder to any of
the rights of a stockholder of the Company.
OPTEL, INC.
By: /s/ Michael Katzenstein
--------------------------------
VP and General Consel
Dated: October 30, 1997
ATTEST:
Scott V. Williams
- - --------------------------
Assistant Secretary
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<PAGE>
OPTEL, INC.
PURCHASE FORM
OPTEL, INC.
[ADDRESS]
THE UNDERSIGNED HEREBY IRREVOCABLY ELECTS TO EXERCISE THE RIGHT OF PURCHASE
REPRESENTED BY THE WITHIN WARRANT CERTIFICATE FOR, AND TO PURCHASE THEREUNDER,
_____ SHARES OF CLASS A COMMON STOCK (THE "SHARES") PROVIDED FOR THEREIN, AND
REQUESTS THAT CERTIFICATES FOR THE SHARES BE ISSUED IN THE NAME OF:
_______________________________________________
(PLEASE PRINT OR TYPE NAME, ADDRESS AND SOCIAL SECURITY NUMBER)
_______________________________________________
_______________________________________________
AND, IF SAID NUMBER OF SHARES SHALL NOT BE ALL THE SHARES PURCHASABLE HEREUNDER,
THAT AT A NEW WARRANT CERTIFICATE FOR THE BALANCE OF THE SHARES PURCHASABLE
UNDER THE WITHIN WARRANT CERTIFICATE BE REGISTERED IN THE NAME OF THE
UNDERSIGNED WARRANTHOLDER OR HIS ASSIGNEE AS BELOW INDICATED AND DELIVERED TO
THE ADDRESS STATED BELOW. THE UNDERSIGNED HAS ALSO SUBMITTED TO THE COMPANY AT A
CERTIFICATE IN WHICH IT HAS MADE THE REPRESENTATIONS AND COVENANTS REQUIRED IN
SECTION 11 OF THE WARRANT AGREEMENT.
DATED:_________________
NAME OF WANANTHOLDER
OR ASSIGNEE:__________________________
(PLEASE PRINT)
ADDRESS: _____________________________
_____________________________
SIGNATURE:____________________________
NOTE: THE ABOVE SIGNATURE MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE
OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER, UNLESS THESE WARRANTS HAVE BEEN ASSIGNED.
SIGNATURE GUARANTEED: ________________
(SIGNATURE MUST BE GUARANTEED BY AT A BANK OR TRUST COMPANY HAVING AN OFFICE OR
CORRESPONDENT IN THE UNITED STATES OR BY AT A MEMBER FIRM OF AT A REGISTERED
SECURITIES EXCHANGE OR THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.)
<PAGE>
APPENDIX I
RESTRICTIONS ON TRANSFER OF SHARES AND PURCHASE AND SALE RIGHTS
Shares subject to the foregoing Warrant Agreement (the "Agreement")
acquired upon exercise of the Warrant may be Transferred (as defined below) only
after compliance with the specific limitations on the Transfer of Shares set
forth in the Agreement and in this Appendix I, including those with respect to
certain rights of first refusal granted to the Company (Paragraphs 4 and 5
below), restrictions upon Transfer imposed by applicable state or federal
securities laws, and certain required undertakings of the transferee (Paragraph
3 below). All Transfers of Shares not meeting the conditions set forth in this
Appendix I are expressly prohibited; provided, however, that the provisions of
this Appendix I will terminate upon the earlier of (i) the occurrence of an IPO,
or (ii) September 30, 2002. This Appendix I constitutes a part of the Agreement.
1. DEFINITIONS: All capitalized terms herein shall have the meanings
ascribed to them in the Agreement unless otherwise defined herein:
(a) "FAIR MARKET VALUE" means the fair market value of the Shares as
determined in good faith by the Board of Directors of the Company. The
determination of the Board of Directors shall be conclusive and binding on
all persons.
(b) "INVOLUNTARY TRANSFER" means a Transfer that occurs pursuant to
any of the following: an assignment of Shares for the benefit of creditors
of the Warrantholder; a Transfer by operation of law, including, without
limitation, a Transfer by will or under the laws of descent and
distribution; an execution of judgment against Shares or the acquisition of
record or beneficial ownership of Shares by a lender or creditor; a
Transfer pursuant to any decree of divorce, dissolution, or separate
maintenance, any property settlement, any separation agreement, or any
other agreement with a spouse under which a part or all of any Shares is
Transferred or awarded to the spouse of the Warrantholder or is required to
be sold; or a Transfer resulting from the filing of the Warrantholder of a
petition for relief or the filing of an involuntary petition against the
Warrantholder, under the bankruptcy laws of the United States or of any
other nation.
(c) "OFFERED PRICE" has the meaning ascribed thereto in Paragraph
4(b).
(d) "OFFEROR" has the meaning ascribed thereto in Paragraph 4(a).
(e) "SHAREHOLDER NOTICE OF OFFER" has the meaning ascribed thereto in
Paragraph 4(b).
<PAGE>
(f) "SHAREHOLDER NOTICE OF TRANSFER" has the meaning ascribed thereto
in Paragraph 5(b).
(g) "TRANSFER," with respect to Shares, includes, without limitation,
a voluntary or involuntary sale, assignment, transfer, conveyance, pledge,
hypothecation, encumbrance, disposal, loan, gift, attachment, or levy of
such Shares.
(h) "TRANSFEREE NOTICE" has the meaning ascribed thereto in Paragraph
5(b).
(i) "VOLUNTARY TRANSFER" means any Transfer other than an Involuntary
Transfer.
2. EFFECT OR PROHIBITED TRANSFER: Any prohibited Transfer of Shares,
whether a Voluntary Transfer or an Involuntary Transfer, is void and of no
effect. Should such a Transfer purport to occur, the Company may refuse to carry
out the Transfer on its books, attempt to set aside the Transfer, enforce any
undertaking or right under the Agreement or this Appendix I, or exercise any
other legal or equitable remedy.
3. REQUIRED UNDERTAKINGS: Any Transfer that would otherwise be
permitted under the terms of the Agreement or this Appendix I is prohibited
unless the transferee executes such documents as the Company may reasonably
require to ensure that the Company's rights are adequately protected with
respect to the Shares so transferred. Such agreements may include, without
limitation, the transferee's agreement to be bound by all of the terms of the
Agreement or this Appendix I, as if he or she or it were the original
Warrantholder. Without limiting the generality of any other provision contained
herein, it is the intent of this paragraph that the Company's rights if waived
or otherwise not exercised in respect of a Transfer to a transferee shall
nonetheless continue with respect to any subsequent Transfers by such
transferee.
4. COMPANY'S RIGHT OF FIRST REFUSAL RELATED TO THIRD PARTY OFFER:
(a) SCOPE OF RIGHT: If Shares are Transferred or are proposed to be
--------------
Transferred incident to a bona fide offer from a third party (the
"Offeror"), the Company will have the right (but not the obligation) to
purchase Shares on the terms and conditions set out in this Paragraph 4.
This right does not extend to a Third Party Offer made if the Warrantholder
has no intention of transferring the Shares. The Company's rights under
this Paragraph 4 are assignable by the Company and will terminate upon the
earlier of (i) the occurrence of an IPO, or (ii) September 30, 2002,
whether or not previously assigned. The right of first refusal under this
Paragraph 4 will be exercisable in whole or in part as to any particular
Transfer or proposed Transfer of Shares.
(b) Mechanics and Notice: The transferor of any Shares subject to this
--------------------
Paragraph 4 will provide to the Company a notice of proposed Transfer (the
"Shareholder Notice of Offer") stating: the number of Shares that the
transferor
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<PAGE>
proposes to Transfer and the transferor's bona fide intention to Transfer
such Shares; the name and address of the transferor, the Offeror, and the
original Warrantholder of the Shares (if other than the transferor); the
manner and the date of such proposed Transfer; and the bona fide cash price
and/or other consideration (and the fair market value thereof as estimated
in good faith by the transferor) per share of Shares, if any, that the
Offeror offered to pay for such Shares (the "Offered Price").
The Company (or its assignee) may exercise its right of first
refusal under this Paragraph 4 at any time not more than 60 days after the
Company has received the Shareholder Notice of Offer with respect to such
Shares. The Company (or its assignee) will exercise its right, if at all,
by informing the transferor and Offeror in writing of the Company's (or its
assignee's) intention to do so, in a notice that specifies a closing date
that is no more than 30 days (or such later date as the Offeror may have
offered) after the later of (i) receipt of the Shareholder Notice of Offer
or (ii) determination of fair market value of the Shares. Additionally, if
the Company disagrees with the transferor's estimate of the fair market
value of any noncash consideration, the Board of Directors shall determine
the Fair Market Value, and the Offered Price will be adjusted accordingly.
(c) EXERCISE PRICE: In exercising its repurchase rights under this
--------------
Paragraph 4, the Company (or its assignee) will pay in cash upon repurchase
a price equal to the Offered Price, subject to an appropriate adjustment as
determined by the Board of Directors to take into account the risk of
nonpayment or deferral of any installment payments that may have been
contained in the Offeror's offer.
5. COMPANY'S RIGHT OF FIRST REFUSAL UNRELATED TO THIRD PARTY OFFER:
(a) SCOPE OF RIGHT: If Shares are Transferred or are proposed to be
--------------
Transferred other than incident to a bona fide third parry offer or other
than as expressly permitted under the Agreement, the Company will have the
right (but not the obligation) to purchase Shares on the terms and
conditions set forth in this Paragraph 5. The Company's rights under this
Paragraph 5 will apply to any proposed or actual Voluntary Transfer or
Involuntary Transfer other than those subject to Paragraph 4. The Company's
rights under this Paragraph 5 are assignable by the Company and will
terminate upon the earlier of (i) the occurrence of an IPO, or (ii)
September 30, 2002, whether or not previously assigned. The right of first
refusal under this Paragraph 5 will be exercisable in whole or in part as
to any particular Transfer or proposed Transfer of Shares.
(b) MECHANICS AND NOTICE: The transferor of any Shares subject to
--------------------
this Paragraph 5 will (whether such Transfer is a Voluntary Transfer or an
Involuntary Transfer) provide to the Company a notice of proposed Transfer
(the "Shareholder Notice of Transfer") stating: the number of Shares that
the transferor proposes to Transfer; the names and addresses of the
transferor, the transferee or proposed transferee, and the original
Warrantholder of the Shares (if other than the transferor);
-3-
<PAGE>
and the circumstances, manner and date of such proposed Transfer (including
information concerning the consideration involved). In the event of an
Involuntary Transfer, the person obtaining the Shares promptly will notify
the Secretary of the Company of such Involuntary Transfer and provide the
information required in the Shareholder Notice of Transfer (the "Transferee
Notice").
The Company (or its assignee) may exercise its right of first refusal
under this Paragraph 5 at any time during the 60-day period after (i) the
Company has received either the Shareholder Notice of Transfer or the
Transferee Notice with respect to such Shares or, if later (ii) the date
that is 9 months after the death of the Warrantholder (if the Transfer was
an Involuntary Transfer due to death). The Company (or its assignee) will
exercise its right, if at all, by informing the transferor and transferee
in writing of the Company's (or its assignee's) intention to do so, in a
notice that specifies a closing date that is no more than 30 days after the
later of (i) receipt of the Shareholder Notice of Transfer or the
Transferee Notice, whichever is applicable, or (ii) the determination of
Fair Market Value of the Shares, or (iii) one year after the death of the
Warrantholder (if the Transfer was an Involuntary Transfer due to death).
(c) EXERCISE PRICE: In exercising its repurchase rights under this
--------------
Paragraph 5, the Company (or its assignee) will pay in cash upon repurchase
a price equal to the Fair Market Value of the Shares that are Transferred
or are proposed to be Transferred, as of the date of the Shareholder Notice
of Transfer or the Transferee Notice.
6. OPTION TO PURCHASE AND SELL THE SHARES:
(a) SCOPE OF RIGHT: If on July 11, 2002 the Company has not
--------------
consummated an IPO, (i) the Company will have the right but not the
obligation) to purchase all of the Shares (the "Company's Call Right"), and
(ii) the Warrantholder will have the right but not the obligation) to sell
all of the Shares to the Company (the "Warrantholder's Put Right"). The
rights under this Paragraph 6 are assignable in whole or in part by the
Company and the Warrantholder and will terminate on September 30, 2002, if
not earlier terminated due to the occurrence of an IPO. The purchase option
under this Paragraph 6 will be exercisable on an all-or-nothing basis as to
any particular holder of Shares.
(b) MECHANICS AND NOTICE:
--------------------
(i) The Company's Call Right Mechanics. The Company (or its
----------------------------------
assignee) will provide to any holder of Shares a notice of proposed
purchase (the "Company's Purchase Notice") stating that it wishes to
exercise its option to purchase all of the Shares owned by that
holder; the Fair Market Value per Share and aggregate purchase price
based thereon; and the proposed closing date of such purchase
-4-
<PAGE>
which must be at least 30 but not more than 90 days from the date the
Company's Purchase Notice was delivered to the holder of Shares. The
Shares will be purchased on that date.
(ii) The Warrantholder's Put Right Mechanics. The Warrantholder
---------------------------------------
(or his assignee) will provide to the Company (or its assignee) a
notice of intent to sell (the "Put Notice"), stating that the
Warrantholder wishes to exercise the option to sell the Shares, and
upon receipt of the Put Notice the Company will furnish the
Warrantholder (or his assignee) a notice of the Fair Market Value per
Share and the aggregate purchase price based thereon; and the proposed
closing date of such purchase which must be at least 30 but not more
than 90 days from the date the Company's notice was delivered to the
Warrantholder (or his assignee). The Shares will be purchased on that
date if the Warrantholder furnishes the Company with a written
acceptance at least 10 days before the proposed closing date.
Notwithstanding the foregoing, however, if any repurchase due to a Put
Notice requires the consent of the Company's lenders or investors and
such consent is not given or if the repurchase would otherwise violate
any covenant by which the Company is bound, then the repurchase shall
occur at such later date as approved by the lenders or investors or as
would not violate such covenant at a price determined pursuant to
clause (c) below.
(c) EXERCISE PRICE: Upon a sale of the Shares under this Paragraph 6,
--------------
the Company (or its assignee) will pay in immediately available funds upon
purchase the aggregate cash price equal to the Fair Market Value of the
Shares purchased. In the event the repurchase due to a Put Notice has been
delayed due to the failure to obtain the required consent of the Company's
lenders or investors or due to the restrictions imposed by any covenant,
then the purchase price for the Shares purchased shall be the Fair Market
Value of the Shares on the date of the Put Notice plus interest accrued
from the date of the Put Notice at an annual rate equal to the "prime rate"
as reported in the Money Rates section of The Wall Street Journal on the
first day reported after the date of the Put Notice.
7. MATTERS OF GENERAL APPLICABILITY: All closings shall take place at
the Company's (or its assignees) principal executive offices. If the consent or
approval of any governmental entity is necessary for the purchase of Shares
under the Agreement or if the expiration of any waiting period following the
giving of any notice to a governmental entity is required before such purchase
may be effected, the date of closing shall be extended to such date not more
than 10 days after the date on which such consent or approval is obtained or
notice period expired. At such closing the transferor of the Shares shall
assign, or cause to be assigned to the extent any of its rights in its Shares is
then held by another person, to the Company (or its assignee) all right, title
and interest in and to the Shares, free and clear of all liens. The transferor
of the Shares shall also, at the request of the Company (or its assignee),
execute all other documents and take such other actions
-5-
<PAGE>
as may be reasonably necessary or desirable to effectuate the transfer of the
Shares and to carry out the purposes of this Appendix I. The transferor of the
Shares shall deliver to the Company (or its assignee) certificates representing
the Shares with a blank stock power executed by such transferor attached
thereto. The parties shall use their best efforts to obtain all consents,
approvals, releases and authorizations of all governmental entities and other
persons necessary or advisable to effect the transfer of Shares as provided
herein and otherwise permit the transfer and sale of such Shares as provided
herein. Without limiting the generality of any other provision hereof the
Company (or its assignee) may delay the closing and shall not be obligated to
make any payment in respect of the Shares unless he receives all releases
reasonably requested by him from parties that could assert an interest in the
Shares or proceeds therefrom. Notwithstanding any provisions to the contrary
contained herein, the Company's obligations to pay or complete payment for any
Shares to be purchased by it under this Appendix I is subject to it being
legally permitted to do so under applicable corporate law.
8. ESCROW: For purposes of facilitating the enforcement of the
restrictions on Transfer set forth in the Agreement and this Appendix I, the
Board of Directors may, at its discretion, require any holder of Shares to
deliver the certificate(s) for such Shares with a stock power executed by him or
her and by his or her spouse (if required for Transfer), in blank, to the
Secretary of the Company or his or her designee, to hold said certificate(s) and
stock power(s) in escrow and to take all such actions and to effectuate all such
Transfers and/or releases as are in accordance with the terms of the Agreement
and this Appendix I. The certificates may be held in escrow so long as the
Shares are subject to a right of first refusal under the Agreement and this
Appendix I. The escrow holder will not be liable to the Warrantholder (or to any
other party) for any actions or omissions unless the escrow holder is grossly
negligent relative thereto. The escrow holder may rely upon any letter, notice,
or other document executed by any signature purported to be genuine.
-6-
<PAGE>
EXHIBIT 10.23
CITY OF HOUSTON, TEXAS, ORDINANCE NO. 97-1088
AN ORDINANCE AMENDING CITY OF HOUSTON, TEXAS, ORDINANCE NO. 97-285 TO
EXTEND THE TERM OF THE TEMPORARY PERMIT GRANTED TO TVMAX COMMUNICATIONS (TEXAS),
INC., TO ENCROACH UPON AND USE THE PUBLIC WAY OF THE CITY OF HOUSTON, TEXAS, FOR
THE PURPOSE OF LAYING, CONSTRUCTING, LEASING, MAINTAINING, REPAIRING, REPLACING,
REMOVING, USING, AND OPERATING THEREIN, A TELECOMMUNICATIONS NETWORK FOR
PROVIDING AUTHORIZED TELECOMMUNICATIONS SERVICES; AND DECLARING AN EMERGENCY.
* * * * *
BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF HOUSTON, TEXAS:
SECTION 1. City of Houston, Texas, Ordinance No. 97-285, Section 2.02(a)
is hereby amended to delete the date "September 1, 1997" from the first sentence
thereof, and to substitute "January 31, 1998" therefor. In all other respects,
the terms of the ordinance remain in full force and effect.
SECTION 2. If any provision, section, subsection, sentence, clause, or
phrase of this ordinance, or the application of same to any person or set of
circumstances is for any reason held to be unconstitutional, void or invalid,
the validity of the remaining portions of this ordinance or their application to
other persons or sets of circumstances shall not be affected thereby, it being
the intent of the City Council in adopting this ordinance that no portion hereof
or provision or regulation contained herein shall become inoperative or fail by
reason of any unconstitutionality, voidness or invalidity of any other portion
hereof, and all provisions of this ordinance are declared to be severable for
that purpose.
SECTION 3. The City Council officially finds, determines, recites and
declares that a sufficient written notice of the date, hour, place and subject
of this meeting of the City Council was posted at a place convenient to the
public at the City Hall of the City for the time required by law preceding this
meeting, as required by the Open Meetings Law, Tex. Gov't Code Arm., ch. 551
(Vernon Supp, 1997); and that this meeting was open to the public as required by
law at all times during which this ordinance and the subject matter thereof was
discussed, considered and formally acted upon. The City Council further
ratifies, approves and confirms such written notice and the contents and posting
thereof.
SECTION 4. A public emergency exists requiring that this ordinance be
passed finally on the date of its introduction as requested in writing by the
Mayor; therefore, this ordinance shall take effect immediately upon its passage
and approval by the Mayor; provided that if the
<PAGE>
Mayor fails to sign this ordinance within five days after its passage and
adoption, it shall take effect in accordance with HOUSTON, TEX., CITY CHARTER,
art. VI, (S)6.
PASSED AND ADOPTED, this 3rd day of Sept., 1997.
APPROVED, this ____ day of ______, 1997.
____________________________
Mayor of the City of Houston
Pursuant to HOUSTON, TEX., CITY CHARTER, art. VI, (S)6, the effective date of
the foregoing ordinance is SEP 09 1997.
[SIGNATURE ILLEGIBLE]
--------------------------
City Secretary
(Prepared by Legal Department [SIGNATURE ILLEGIBLE]
----------------------
(TA 8-5-97)
(Requested by Richard Lewis, Director, Department of Finance & Administration)
(I.D File No. 349621601)
STAMP APPEARS HERE
-2-
<PAGE>
EXHIBIT 10.24
================================================================================
___________________________
PURCHASE AGREEMENT
___________________________
among
OPTEL, INC.,
PHONOSCOPE, LTD.,
PHONOSCOPE MANAGEMENT L.C.,
LEE COOK,
ALTON COOK
and
LEE COOK FAMILY TRUST
Dated as of July 23, 1997
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
<S> <C>
1. SALE AND PURCHASE; PURCHASE PRICE; ADJUSTMENTS........................ 1
1.1 The Purchase..................................................... 1
1.2 The Purchase Price............................................... 2
1.3 Adjustments to the Purchase Price................................ 2
1.4 Resolution of Disputes........................................... 5
2. PAYMENT OF PURCHASE PRICE; ESCROW ARRANGEMENTS........................ 6
2.1 Payment of Purchase Price........................................ 6
2.2 Good Faith Deposit; Second Deposit............................... 7
2.3 General Escrow and Indemnity Escrow.............................. 7
2.4 Consent Escrow................................................... 8
2.5 Network Separation Escrow........................................ 9
3. CLOSING; TERMINATION.................................................. 9
3.1 Date of Closing.................................................. 9
3.2 Closing.......................................................... 9
3.3 Termination...................................................... 10
4. CONDITIONS OF CLOSING................................................. 11
4.1 Conditions to Each Party......................................... 11
4.2 Buyer's Conditions to Closing.................................... 12
4.2.1 Opinions of Counsel to the Sellers..................... 12
4.2.2 Representations and Warranties; Covenants.............. 12
4.2.3 Secretary's Certificates; Organization Documents....... 12
4.2.4 Ownership of Shares.................................... 13
4.2.5 Proceedings............................................ 13
4.2.6 No Adverse Legislation................................. 13
4.2.7 Changes................................................ 13
4.2.8 Resignations........................................... 13
4.2.9 Approval and Consents.................................. 13
4.2.10 Other Agreements....................................... 14
4.2.11 Bank Release........................................... 15
4.3 Sellers' Conditions to Closing................................... 15
4.3.1 Representations and Warranties; Covenants.............. 15
4.3.2 Secretary's Certificate................................ 15
4.3.3 Other Agreements....................................... 15
5. EMPLOYEE MATTERS...................................................... 16
</TABLE>
<PAGE>
<TABLE>
<S> <C>
6. COVENANTS.............................................................. 17
6.1 Maintain Existence and Obtain Approvals.......................... 17
6.2 Access to Information............................................ 17
6.3 Certain Payments................................................. 18
6.4 Maintenance of Properties; Insurance; Books and Records;
Compliance with Law; Relationships............................... 18
6.5 Deliveries....................................................... 19
6.6 Filings; Approvals............................................... 20
6.7 Conduct of the Business.......................................... 20
6.8 Right of First Offer/Negotiation................................. 22
6.9 Network Separation; Common Strand Segments....................... 23
6.10 Bulk Sales Compliance............................................ 24
6.11 Assignment of Certain Rights..................................... 24
6.12 Use of Name...................................................... 25
6.13 Transfer Taxes................................................... 25
6.14 Certain Tax Matters.............................................. 25
6.15 Pole Attachment Rights........................................... 25
6.16 Best Efforts..................................................... 26
6.17 Transfer of Franchises, Permits, etc............................. 26
7. REPRESENTATIONS AND WARRANTIES OF THE SELLERS.......................... 26
7.1 Authority; Organization and Qualification; Capitalization........ 26
7.2 Actions Pending.................................................. 28
7.3 Outstanding Debt; Defaults....................................... 28
7.4 Material Liabilities; Financial Statements....................... 28
7.5 Assets........................................................... 29
7.6 Taxes............................................................ 30
7.7 No Conflicts..................................................... 30
7.8 Broker's or Finder's Commissions................................. 31
7.9 Applicable Environmental Regulations............................. 31
7.10 Compliance with Other Laws....................................... 31
7.11 ERISA; Labor Aggreements......................................... 31
7.12 Possession of Franchises, Licenses, etc.......................... 31
7.13 Intellectual Property............................................ 32
7.14 Governmental Consents............................................ 32
7.15 Insurance Coverage............................................... 33
7.16 Disclosure....................................................... 33
7.17 Subscribers, Rights of Entry..................................... 33
7.18 Cable Systems.................................................... 34
7.19 FCC Licenses..................................................... 34
7.20 FCC Applications................................................. 35
7.21 FCC Compliance................................................... 35
7.22 Zoning, Aviation, etc. Compliance................................ 35
</TABLE>
<PAGE>
<TABLE>
<S> <C>
7.23 Compliance with the Copyright Act............................. 35
7.24 Must-Carry and Retransmission Consent......................... 36
7.25 Petitions for Special Relief.................................. 36
7.26 Conduct in the Ordinary Course................................ 36
7.27 Solvency...................................................... 36
7.28 Program Audits................................................ 37
7.29 Effective Competition......................................... 37
8. REPRESENTATIONS AND WARRANTIES OF BUYER............................. 37
8.1 Organization.................................................. 37
8.2 Authority..................................................... 37
8.3 No Conflicts.................................................. 38
8.4 Actions Pending............................................... 38
8.5 Solvency...................................................... 38
8.6 Broker's or Finder's Commissions.............................. 38
9. DEFINITIONS......................................................... 38
10. MISCELLANEOUS....................................................... 51
10.1 Indemnification............................................... 51
10.2 Indemnification Procedures, Determination of Damages,
Limitations and Related Matters........................... 52
10.3 Amendments.................................................... 54
10.4 Survival of Representations and Warranties.................... 54
10.5 Successors and Assigns........................................ 54
10.6 Notices; Sellers' Representative.............................. 55
10.7 Descriptive Headings.......................................... 56
10.8 Governing Law................................................. 56
10.9 Submission to Jurisdiction; Venue............................. 57
10.10 Entire Agreement.............................................. 57
10.11 Severability.................................................. 57
10.12 Public Announcement........................................... 57
10.13 Expenses...................................................... 57
10.14 Confidentiality............................................... 58
10.15 No Consequential Damages...................................... 58
10.16 Counterparts.................................................. 59
10.17 No Solicitation or Negotiation................................ 59
10.18 Further Action................................................ 59
</TABLE>
<PAGE>
PURCHASE AGREEMENT, dated as of July 23, 1997 (the "Agreement"), among
OPTEL, INC., a Delaware corporation ("OpTel"), or OpTel's designee (which shall
be a wholly-owned subsidiary of OpTel; OpTel and such designee being
collectively referred to as "Buyer"), PHONOSCOPE, LTD., a Texas limited
partnership ("Phonoscope"), PHONOSCOPE MANAGEMENT L.C., a Texas limited
liability company (the "General Partner"), Lee Cook ("Cook"), Alton Cook and the
LEE COOK FAMILY TRUST (the "Trust") (together with Cook, the "Stockholders"),
(Phonoscope and the Stockholders, collectively the "Sellers").
R E C I T A L S:
- - - - - - - -
Phonoscope Nevada, Inc. (wholly-owned by Cook) owns all of the issued
and outstanding limited partnership interests of Phonoscope, and the General
Partner, the sole manager of which is Cook, is the sole general partner of
Phonoscope.
The Stockholders in the aggregate own, free and clear of all Liens,
100,000 issued and outstanding shares of common stock, par value $0.10 per share
(the "Entertainment Shares"), of Phonoscope Entertainment, Inc.
("Entertainment"), 100 issued and outstanding shares of common stock, par value
$1.00 per share (the "Bay Area Shares"), of Bay Area Cable Television, Inc.
("Bay Area"), and 100,000 issued and outstanding shares of common stock, par
value $0.10 per share (the "Village Shares", and together with the Entertainment
Shares and the Bay Area Shares, the "Shares"), of Phonoscope Village Cable, Inc.
("Village", and together with Entertainment and Bay Area, the "Companies").
Phonoscope owns, or holds for use in the Business, the Purchased
Assets.
The Sellers desire to sell to Buyer, and Buyer desires to purchase
from the Sellers, all of the Sellers' interest in the Business, consisting of
the Shares and the Purchased Assets, upon the terms and subject to the
conditions set forth herein.
In consideration of the recitals and the mutual agreements and
covenants hereinafter set forth, Buyer and the Sellers hereby agree as follows:
<PAGE>
1. SALE AND PURCHASE; PURCHASE PRICE; ADJUSTMENTS.
----------------------------------------------
1.1 The Purchase. Upon the terms, and subject to the conditions of
------------
this Agreement, and in reliance upon the representations and warranties
contained herein, at the Closing,
(a) the Stockholders shall sell to Buyer, and Buyer shall
purchase from the Stockholders, all of the Shares; and
(b) Phonoscope shall sell, convey, transfer, assign and deliver
to Buyer and Buyer shall purchase from Phonoscope all of
Phonoscope's right, title and interest in and to the Purchased
Assets.
1.2 The Purchase Price. (a) The purchase price for the Shares and
------------------
the Purchased Assets (the "Purchase Price") shall be $35,300,000, plus
assumption (as of the Closing) of the Assumed Liabilities, as provided in
Section 1.2(b), subject to the adjustments set forth in Section 1.3. The
Purchase Price shall be payable as provided in Section 2.1.
(b) As of the Closing, Buyer shall assume and thereafter pay,
perform and discharge when due, only those Liabilities of Phonoscope that become
due or are to be performed from and after the Closing (and without regard to any
default of Phonoscope existing, or obligations of Phonoscope accrued, as of the
Closing) that are set forth in Schedule 1.2(b) (the "Assumed Liabilities"). The
Assumed Liabilities specifically exclude all past due amounts and all other
payments (including, without limitation, any amounts payable as a result of a
breach) with respect to any agreement or license described in such Schedule
arising from any action or omission prior to the Closing. Phonoscope shall
retain, and shall be responsible for paying, performing and discharging when
due, and Buyer shall not assume or have any responsibility for, any and all
Liabilities of Phonoscope or any of the other Sellers, including, without
limitation, any Indemnified Taxes, other than the Assumed Liabilities (the
"Excluded Liabilities").
1.3 Adjustments to the Purchase Price. The Purchase Price shall be
---------------------------------
subject to the following adjustments:
<PAGE>
(a) Adjustments Relating to Liabilities. Two Business Days
-----------------------------------
prior to the Closing, the Sellers shall deliver to Buyer a statement signed by
the chief executive officers of Phonoscope and each of the Companies (the
"Closing Statement") certifying (i) such persons' best good faith estimate as of
the Closing Date of (x) the amounts of all Liabilities of the Companies, and (y)
the amounts of all Assumed Liabilities, (ii) the amount of all prepaid expenses
of Phonoscope and the Companies of the types described on Schedule 1.3(a) (the
"Prepaids"), and (iii) all bona fide accounts receivable payable to Phonoscope
---- ----
and the Companies in the ordinary course which are not past due other than such
receivables that relate to services to be performed or rendered on or after the
Closing Date (the "ARs"). The estimates of Liabilities of the Companies and
Assumed Liabilities shall be based upon, and prepared in accordance with, GAAP
for all Liabilities that would be reflected on a balance sheet of the Business
prepared in accordance with GAAP, and for all other Liabilities, based upon a
good faith estimate of the present value of such Liabilities. The amounts of
Prepaids and ARs shall be prepared and computed in accordance with GAAP. The
Purchase Price payable to the Sellers on the Closing Date, except as set forth
below, shall be decreased by an amount equal to the sum of all Liabilities of
the Companies and the Assumed Liabilities (as computed in accordance with clause
(i)) as set forth on the Closing Statement less the sum of the Prepaids and ARs.
If such amount is a negative number, the Purchase Price shall be increased by
the absolute value of such number. At the Closing, Buyer shall have the right to
direct the Sellers to use the proceeds received by the Sellers from Buyer to
satisfy the types of liabilities set forth in Schedule 1.3(a) (x) rather than
have such Liability included in the computation described in this Section
1.3(a). In such event, the Sellers shall cause such Liability to be satisfied by
a payment in cash or check from the proceeds received by the Sellers and for all
material liabilities so satisfied, Sellers shall provide to Buyer evidence of
payment by cash or check reasonably satisfactory to Buyer, of such Liability
from the creditor of such Liability. In the case of any outstanding indebtedness
of Phonoscope and any of the Companies to their primary senior lender (the
"Primary Lender"), at the Closing Buyer shall pay all amounts of such
indebtedness directly to the Primary Lender on behalf of Phonoscope and the
Companies, and such amount paid shall be credited as paid to the Sellers as part
of the Purchase Price (and in such case such indebtedness shall not be deemed to
be a
3
<PAGE>
Liability for purposes of the computation described in this Section 1.3 (a)).
(b) MDU Adjustments. Schedule 1.3(b) (i) sets forth a list of
---------------
the standard labor and materials costs ("Standard Costs") to be used by Buyer
and the Sellers to estimate the cost of wiring and other upgrades required to
enable each MDU property (other than the properties listed in Schedule 1.3(b)
(ii)) to meet the "550 MHz Performance Standard" described in Schedule 1.3(b)
(i) (the "Upgrade") and Schedule 1.3(b) (iii) sets forth a list of all MDU
locations relating to the Business as of the date hereof. Between the date
hereof and five Business Days prior to the Closing Date, Buyer and the Sellers
shall cooperate, pursuant to the costing procedures described in Schedule 1.3(b)
(i), to estimate the costs of the Upgrade for the 100 MDU locations indicated on
Schedule 1.3(b) (iv) by an asterisk to be "costed" (the "Costed Locations"),
based upon the Standard Costs. The aggregate cost so estimated shall be divided
by the number of units in the Costed Locations to determine the "Per Unit
Adjustment." The Purchase Price shall be reduced by an amount equal to the Per
Unit Adjustment multiplied by the total number of all MDU locations relating to
the Business (other than the locations listed in Schedule 1.3(b) (ii)).
(c) Subscriber Adjustments. (i) The Closing Statement shall
----------------------
also certify the number of EBUs as of three Business Days prior to the Closing
Date for all the systems of Phonoscope and the Companies used or held for use in
the Business. If there are less than an aggregate of 23,200 of such EBUs at the
Closing, the Purchase Price payable to the Sellers at Closing shall be decreased
by an amount equal to the product of (A) $1,522 multiplied by (B) the difference
between the aggregate number of EBUs and 23,200. If there are more than an
aggregate of 23,200 of such EBU's at the Closing, the Purchase Price payable to
the Sellers at Closing shall be increased by an amount equal to the product of
(A) $1,522 multiplied by (B) the difference between the aggregate number of
EBU's and 23,200, provided, that the maximum increase in the Purchase Price
--------
pursuant to this Section 1.3(c) shall be no more than $1,522,000.
(ii) If (x) there is a Purchase Price adjustment pursuant to Section
-
1.3(c) (i), and (y) subscribers and revenue relating to properties served by
-
Phonoscope and the Companies have been excluded from the definition of EBUs
(pursuant to
4
<PAGE>
clause (f) of such definition) because such properties had previously received
cable services from Buyer or its Affiliates ("Excluded Properties"), then the
Purchase Price payable to the Sellers shall be increased by an amount equal to
Phonoscope's and the Companies' reasonable, direct out-of-pocket costs
(including sales commissions paid to employees and outside sales persons and the
fees of outside legal counsel, but excluding overhead, administration costs and
profit) of obtaining Rights of Entry ("Direct Right of Entry Costs") to Excluded
Properties up to a number of Excluded Properties that, had such properties been
included in the definition of EBUs, there would not have been any Purchase Price
adjustment pursuant to Section 1.3(c) (i), provided, that such adjustment shall
--------
be made only to the extent such expenses are reasonably documented and such
documentation is delivered to Buyer not less than two Business Days prior to the
Closing.
(iii) If (x) as of the EBU Evaluation Date there are subscribers and
-
revenue relating to properties served by Buyer (or its Affiliates) that were
(pursuant to clause (g) of the definition of EBUs) deemed to be those of
Phonoscope and the Companies ("Duplicate Properties"), and (y) had the
subscribers and revenue relating to such Duplicate Properties been excluded from
the definition of EBUs the adjustment calculated pursuant to Section 1.3(c) (i)
would have been different than as actually calculated pursuant to such section,
then the amount of the Purchase Price payable to the Sellers shall be decreased
by an amount equal to Buyer's and its Affiliates' Direct Right of Entry Costs
relating to such Duplicate Properties, up to a number of Duplicate Properties
that, had such properties been excluded from the definition of EBUs, there would
have been a Purchase Price adjustment pursuant to Section 1.3(c) (i), provided,
--------
that such adjustment shall be made only to the extent such expenses are
reasonably documented and such documentation is delivered to the Sellers not
less than one Business Day prior to the Closing.
(d) MDUs Under Contract. Two Business Days prior to the Closing
-------------------
Date, the Sellers shall deliver to Buyer a list of all agreements by Phonoscope
to serve MDU locations and single family residential areas whose units are not
included in the definition of EBU because such locations are under development
or contract for development and, as a result, are not at such time receiving
service and do not have any EBU's associated with them. At the Closing, Buyer
may elect to acquire any or all of such
5
<PAGE>
agreements by paying, as an addition to the Purchase Price, an amount equal to
Phonoscope's actual out-of-pocket costs (as set forth in reasonable detail on
such list) with respect to obtaining such agreements and assuming any
liabilities under such agreements from and after the Closing Date, provided that
--------
such liabilities shall be excluded from the definition of Liabilities for
purposes of Section 1.3(a). If Buyer does not elect to acquire any such
agreement, Phonoscope shall retain it and, notwithstanding anything in this
Agreement to the contrary, it shall be excluded from the definition of Purchased
Assets and Phonoscope's retention of such agreement and service to such
customers thereunder shall not be deemed to violate the Non-Competition
Agreement.
1.4 Resolution of Disputes. The Closing Statement delivered by the
----------------------
Sellers shall be final, binding and conclusive on the parties unless Buyer
submits to the Sellers a written notice of any dispute (setting forth in
reasonable detail the basis for such dispute) within 90 days after the Closing.
If Buyer delivers a timely notice of dispute, the Sellers' Accountants and the
Buyer's Accountants shall confer to determine the nature and scope of any
disagreement among the parties and shall submit such issues to the parties for
resolution. If Buyer and the Sellers are unable to reach a resolution within 30
days after the receipt by the Sellers of Buyer's written notice of dispute, then
Buyer may exercise any and all rights under this Agreement or otherwise
available to it to resolve such dispute, including, but not limited to, making a
claim for indemnification under Section 10.1. Within five days after the final
resolution of all disputes relating to the Closing Statement, Buyer and the
Sellers shall readjust the Purchase Price in the same manner as provided in
Section 1.3. If the payments at Closing by Buyer were greater than the amount
that should have been paid as finally determined by this Section 1.4, the
Sellers shall immediately refund such amount (less any amount that may have been
paid to Buyer from the General and Indemnity Escrow relating to such dispute) to
Buyer, together with interest on such amount from the Closing Date to the date
of such payment at the rate of ten percent per annum, in cash, by wire transfer
of immediately available funds to an account specified by Buyer or by certified
check. If the payments at Closing by Buyer were less than the amount that should
have been paid as finally determined by this Section 1.4, Buyer shall
immediately pay such amount to the Sellers, together with interest on such
amount from the Closing
6
<PAGE>
Date to the date of such payment at the rate of ten percent per annum, in cash,
by wire transfer of immediately available funds to an account specified by the
Sellers or by certified check.
1.5 Recent Subscriber Adjustments. Immediately prior to the Closing,
-----------------------------
the Sellers shall deliver to Buyer a schedule of Basic Subscribers that were
included in the EBU calculation set forth in the Closing Statement, but which,
as of the Closing Date, had not been Basic Subscribers for longer than 30
continuous days ("Recent Subscribers") together with a list of all customers
that ceased to be Basic Subscribers of the Business during the 120 day period
prior to the Closing Date ("Ex-Subscribers"). Within 60 days following the
Closing Date, Buyer shall deliver to the Sellers a schedule (the "Buyer's
Subscriber Schedule") setting forth all Recent Subscribers (whether or not set
forth on the schedule delivered by the Sellers) that failed to remain as Basic
Subscribers of the Business as of 30 days following the Closing Date
("Excludable Recent Subscribers") together with a list of Ex-Subscribers which
again became Basic Subscribers during the 30 days following the Closing Date
("Return Subscribers"). The Sellers shall pay to Buyer (or Buyer shall pay to
the Sellers, if such number is a negative number) as promptly as practicable
after delivery of the Buyer's Subscriber Schedule, by wire transfer of
immediately available funds to an account specified by Buyer or the Sellers, as
the case may be, as an adjustment to the Purchase Price, an amount equal to (a)
$1,522 multiplied by (b) (i) the number of Return Subscribers, minus (ii) the
number of Excludable Recent Subscribers. The obligation of the Sellers under
this Section 1.5 shall be joint and several.
2. PAYMENT OF PURCHASE PRICE; ESCROW ARRANGEMENTS.
----------------------------------------------
2.1 Payment of Purchase Price. (a) At the Closing, Buyer shall
-------------------------
pay to the Sellers the Purchase Price (as adjusted to reflect the adjustments
specified in Section 1.3) (but subject to post-Closing adjustment in the event
of a dispute as to the Closing Statement, as provided in Section 1.4), less the
amount of the Good Faith Deposit, the Second Deposit, the General Escrow Amount,
the Indemnity Escrow Amount, the Network Separation Escrow Amount, and the
Consent Escrow Amount and the Sellers shall retain the Good Faith Deposit and
shall be entitled to the full amount of the Second Deposit at the time of the
Closing, each of which shall be credited against the Purchase
7
<PAGE>
Price. The parties hereto acknowledge that the Second Deposit is being held in
escrow by Compass Bank and shall be disbursed only in accordance with an escrow
agreement, dated the date hereof, among the Sellers, Buyer and Compass Bank (the
"Second Deposit Escrow Agreement"), this Section 2.1(a) or, if this Agreement is
terminated prior to Closing, Section 3.3.
(b) Payments pursuant to this Section 2.1 shall be made by a
single wire transfer of immediately available funds to an account designated by
the Sellers at least five Business Days prior to the Closing Date. Each party
hereto agrees and confirms that there shall be no specific allocation of the
Purchase Price in this Agreement among the Entertainment Shares, the Bay Area
Shares, the Village Shares and the Purchased Assets. The Sellers shall be solely
responsible for allocating and distributing amounts of the Purchase Price among
themselves and for allocating among themselves any adjustment to (or amounts
withheld from) the Purchase Price pursuant to this Agreement or any amounts
released to the Sellers from any escrow agreement contemplated by this
Agreement, and each Seller hereby agrees that Buyer's sole responsibility for
payment of the Purchase Price shall be to wire such funds to such account as
provided in this Section 2.1(b). Each of the Sellers hereby irrevocably waives
any rights it may have against Buyer relating to the allocation of the Purchase
Price (whether among the Sellers or among the Entertainment Shares, the Bay Area
Shares, the Village Shares and the Purchased Assets) or the distribution thereof
(other than as provided in this Section 2.1(b)) and shall indemnify, defend and
hold harmless Buyer from and against any Losses that Buyer may suffer arising
from claims by any of the Sellers (or any Person as assignee, heir, devisee,
transferee or otherwise making a claim by, through or on behalf of any of the
Sellers or any such assignee, heir, devisee or transferee) resulting from such
allocation or the distribution of the Purchase Price among the Sellers.
2.2 Good Faith Deposit; Second Deposit. The Sellers hereby
----------------------------------
acknowledge Buyer has (a) paid to the Sellers $125,000 in cash as a non-
-
refundable deposit, creditable against the Purchase Price as provided in Section
2.1 (the "Good Faith Deposit") and (b) concurrently with the execution of this
Agreement, deposited with Compass Bank a deposit of $875,000 in cash, which
shall be held in escrow, in accordance with the Second Deposit Escrow Agreement
(the aggregate amount of all cash held in escrow by
8
<PAGE>
Compass Bank, including all interest and income earned thereon, is herein
referred to as the "Second Deposit").
2.3 General Escrow and Indemnity Escrow. (a) At the Closing, Buyer
-----------------------------------
and the Sellers shall execute and deliver an escrow agreement substantially in
the form of Exhibit A hereto (the "General and Indemnity Escrow Agreement")
under which a Person mutually satisfactory to Buyer and the Sellers shall act as
escrow agent (the "General and Indemnity Escrow Agent") with respect to two
separate escrow funds. Buyer shall deposit with the Indemnity Escrow Agent
$1,000,000 (the "General Escrow Amount") and $2,000,000 (the "Indemnity Escrow
Amount"), each of which shall be withheld from the Purchase Price payable to the
Sellers at the Closing as provided in Section 2.1.
(b) Subject to the provisions of this Section 2.3 and the
General and Indemnity Escrow Agreement, the General Escrow Amount shall be paid
to the Sellers as follows: (i) one-half of the General Escrow Amount less the
amount of all asserted claims for indemnification under Section 10.1 as of such
date shall be paid to the Sellers on the 90th day after the Closing Date and
(ii) the balance of all amounts remaining of the General Escrow Amount (after
making the payments in accordance with clause (i)) less the amount of all
asserted claims for indemnification under Section 10.1 as of such date shall be
paid to the Sellers on the 180th day after the Closing Date.
(c) Subject to the provisions of this Section 2.3 and the
General and Indemnity Escrow Agreement, the Indemnity Escrow Amount shall be
paid to the Sellers as follows: (i) one-half of the Indemnity Escrow Amount less
the amount of all asserted claims for indemnification under Section 10.1 arising
out of or relating to claims by Persons other than the parties hereto ("Third
Party Claims") shall be paid to the Sellers on the 270th day after the Closing
Date and (ii) the balance of all-amounts remaining to the Indemnity Escrow
Amount (after making the payments in accordance with clause (i)) less the amount
of all asserted claims for indemnification under Section 10.1 arising out of or
relating to Third Party Claims as of such date shall be paid to the Sellers on
the 540th day after the Closing Date.
(d) Without limiting any other remedies under this Agreement or
otherwise available to Buyer, both the General
9
<PAGE>
Escrow Amount and the Indemnity Escrow Amount shall be available to satisfy
claims for indemnification under Section 10.1 arising out of or relating to
Third Party Claims, but the Indemnity Escrow Amount shall not be available to
satisfy other claims for indemnification under Section 10.1.
(e) After the final resolution of all claims against the Sellers
for indemnification pursuant to Section 10.1, all unclaimed portions of the
General Escrow Amount and the Indemnity Escrow Amount shall be released promptly
to the Sellers pursuant to the terms of the Indemnity Escrow Agreement.
2.4 Consent Escrow. (a) At the Closing, Buyer and the Sellers shall
--------------
execute and deliver an escrow agreement substantially in the form of Exhibit B
hereto (the "Consent Escrow Agreement") under which a Person mutually
satisfactory to Buyer and the Sellers shall act as escrow agent (the "Consent
Escrow Agent"). Buyer shall deposit with the Consent Escrow Agent an amount
equal to the amount described in Section 4.2.9, if any (the "Consent Escrow
Amount") which shall be withheld from the Purchase Price payable to the Sellers
at the Closing as provided in Section 2.1.
(b) Subject to the provisions of this Section 2.4 and the
Consent Escrow Agreement, the Consent Escrow Amount shall be paid to the Sellers
from time to time as Required Consents are obtained by the Sellers in amounts
proportionate to the number of EBUs at the Closing Date that relate to such
consents obtained, provided, that 180 days after the Closing Date, all remaining
--------
amounts of the Consent Escrow Amount shall be released to Buyer and all
agreements to service EBUs for which consents have not been received shall
remain owned by the Sellers. From and after the Closing, Buyer and the Sellers
shall enter into such mutually satisfactory arrangements necessary so that the
Sellers will be in a position to service EBUs for which consents have not yet
been received.
2.5 Network Separation Escrow. (a) At the Closing, Buyer and the
-------------------------
Sellers shall execute and deliver an escrow agreement substantially in the form
of Exhibit C hereto (the "Network Separation Escrow Agreement") under which a
Person mutually satisfactory to Buyer and the Sellers shall act as escrow agent
(the "Network Separation Escrow"). Buyer shall deposit with the Network
Separation Escrow Agent $500,000 (the
10
<PAGE>
"Network Separation Amount") which shall be withheld from the Purchase Price
payable to the Sellers at the Closing pursuant to Section 2.1.
(b) Subject to the provisions of this Section 2.5 and the Network
Separation Escrow Agreement, the Network Separation Amount shall be released 20
Business Days after delivery to Buyer of a certificate, executed by the Sellers
and the Sellers' engineer, certifying that such separation is complete, provided
--------
that Buyer has not objected to the accuracy of such certificate by delivery of a
written notice to that effect within such 20 Business Day period (in which case
the parties hereto shall consult in good faith to resolve any disagreement among
them and upon such resolution, the Network Separation Amount shall be released
to the Sellers), provided, further, that if the Network Separation is not
-----------------
completed by the first anniversary of the Closing Date, the Network Separation
Amount shall be released to Buyer, and the Sellers shall be released from any
further obligation to perform the Network Separation described in Section 6.9.
3. CLOSING; TERMINATION.
--------------------
3.1 Date of Closing. Subject to the terms and conditions of this
---------------
Agreement, the sale and purchase of the Shares and the Purchased Assets
contemplated by this Agreement shall take place at a closing (the "Closing") to
be held at the offices of Barlow, Todd, Jordan & Oliver, LLP, 17225 El Camino
Real, Suite 400, Houston, Texas 77058 (or at such other place as the parties may
agree in writing) at 10:00 A.M. Houston time on September 30, 1997, or, if
earlier, on a date mutually designated by the Sellers and Buyer, but in no event
later than five Business Days after the date when each of the conditions
specified in Article 4 has been fulfilled (or waived by the party entitled to
waive that condition). (The date on which the Closing is held is referred to
herein as the "Closing Date".)
3.2 Closing. (a) At the Closing the following shall occur
-------
simultaneously, and none shall be deemed to occur without the occurrence of all
of the others:
(i) Phonoscope shall deliver to Buyer bills of sale,
assignments, endorsements, releases and such other documents and
instruments (collectively,
11
<PAGE>
"Transfer Documentation") as may be necessary or appropriate to convey
and vest in Buyer, good and marketable title in and to the Purchased
Assets that are tangible assets, and all of Phonoscope's right, title
and interest to the Purchased Assets that are intangible assets, free
and clear of all Liens other than Permitted Liens;
(ii) the Stockholders shall deliver to Buyer, free and clear of
all Liens, certificates representing the Shares, duly endorsed in
blank or accompanied by stock powers or other instruments of transfer
duly endorsed in blank, and bearing or accompanied by all requisite
stock transfer stamps;
(iii) Buyer shall deliver to Phonoscope an assumption agreement
and such other documents and instruments as may be necessary or
appropriate for Buyer to assume the Assumed Liabilities;
(iv) Buyer shall deliver the Purchase Price in the manner set
forth in Section 2.
(b) From time to time, pursuant to the reasonable request of
Buyer delivered to the Sellers after the Closing Date, the Sellers, at the
Sellers' reasonable expense and without any further consideration, will execute
and deliver to Buyer such instruments and documents of conveyance and transfer,
and do and cause to be done such acts or things, as Buyer may reasonably request
at reasonable expense in order to more effectively sell, convey, transfer and
assign to Buyer, or to perfect or record Buyer's interest in or title to, or to
enable Buyer to use, any and all of the Purchased Assets, or otherwise to carry
out the purposes and intent of this Agreement. From and after the Closing, each
of Buyer and Phonoscope shall have the right and authority to endorse the
other's name on any check or other instrument received by it on account of any
accounts receivable title to which such party shall have after the Closing
pursuant to this Agreement. Phonoscope shall deliver promptly any and all
payments of accounts receivable of Phonoscope included in the Purchased Assets
received by Phonoscope after the Closing Date to Buyer, and Buyer shall deliver
promptly any and all payments of accounts receivable of Phonoscope not included
in the Purchased Assets received by it after the Closing Date to Phonoscope.
12
<PAGE>
3.3 Termination. (a) This Agreement may be terminated at any time
-----------
prior to the Closing:
(i) by written agreement executed by the Sellers and Buyer;
(ii) by Buyer or the Sellers if the Closing has not occurred on
or before September 30, 1997, provided that the non-occurrence of the
--------
Closing is not attributable to a breach of the terms hereof by the
party seeking termination; or
(iii) by Buyer or the Sellers if it has become impossible for any
condition to the terminating party's obligation to close under this
Agreement to be satisfied, provided that such condition has become
--------
impossible of satisfaction other than as a result of the failure of
such party to perform its obligations under this Agreement.
(b) Upon any termination of this Agreement other than solely as
a result of Buyer's failure to perform its obligations hereunder, pursuant to
the Second Deposit Escrow Agreement the Second Deposit shall be delivered
immediately to Buyer. If this Agreement is terminated solely as a result of
Buyer's failure to perform its obligations hereunder, notwithstanding any other
provision of this Agreement the Sellers' sole remedy under this Agreement shall
be to retain the Good Faith Deposit and be paid the Second Deposit as liquidated
damages. Upon any termination of this Agreement pursuant to Section 3.3(a), this
Agreement shall become void and have no effect, without any liability on the
part of any party hereto or its directors, officers or stockholders in respect
of this Agreement, except (i) the provisions of Sections 2.2, 3.3, 10.1, 10.2,
-
10.3 10.5, 10.6, 10.8, 10.9, 10.11, 10.15, 10.16 and Article 9, shall survive
such termination, and (ii) that nothing herein shall limit the right of Buyer to
--
seek damages from the Sellers for breach of this Agreement (subject to the
provisions of Section 10.15).
13
<PAGE>
4. CONDITIONS OF CLOSING.
---------------------
4.1 Conditions to Each Party. The obligations of each party to
------------------------
consummate the transactions contemplated by this Agreement at the Closing shall
be subject to the satisfaction, at or prior to the Closing, of the following
conditions:
(a) All notifications required pursuant to the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), to carry out
the transactions contemplated by this Agreement shall have been made, and the
applicable waiting period and any extensions thereof shall have expired or been
terminated, without the imposition of any material burden or condition on any
party hereto.
(b) No order of any Governmental Body (including a court order)
shall have been entered that enjoins, restrains or prohibits consummation of the
transactions contemplated by this Agreement, or puts in doubt the validity of
this Agreement of any document contemplated herein in any material respect. No
proceeding before any Governmental Body shall be pending or threatened that (i)
restrains, prohibits, prevents or materially changes, or presents a substantial
possibility of restraining, prohibiting, preventing or materially changing, the
terms of the transactions contemplated by this Agreement or (ii) presents a
substantial possibility of resulting in material Losses to any party hereto or
to the Companies in each case arising from the transactions contemplated by this
Agreement.
(c) The parties have completed the MDU costing process on the
100 MDU locations pursuant to Section 1.3(b).
4.2 Buyer's Conditions to Closing. The obligation of Buyer to
-----------------------------
consummate the transactions contemplated by this Agreement at the Closing shall
be subject to the satisfaction; at or prior to the Closing, of the following
conditions:
4.2.1 Opinions of Counsel to the Sellers. Buyer shall have
----------------------------------
received from Barlow, Todd, Jordan & Oliver, LLP a legal opinion addressed to
Buyer and dated the Closing Date, the material provisions of which are set forth
on Exhibit D.
4.2.2 Representations and Warranties; Covenants. The
-----------------------------------------
representations and warranties contained in Section 7 shall
14
<PAGE>
be true and correct in all material respects when made and as of the Closing
Date; each of the Sellers shall have duly performed and complied in all material
respects with all agreements and conditions required by this Agreement to be
performed or complied with by it prior to the Closing Date; and each of the
Sellers shall have delivered to Buyer an Officer's Certificate, dated the
Closing Date to the foregoing effect. The Closing Statement shall be true,
correct and complete in all respects.
4.2.3 Secretary's Certificates; Organization Documents. (a)
------------------------------------------------
Buyer shall have received a certificate, dated the Closing Date, of the
Secretary of Phonoscope to which are attached resolutions of the Managers of
Phonoscope Management and all partnership proceedings of Phonoscope authorizing
the execution and delivery of this Agreement by Phonoscope, the agreements and
instruments contemplated herein, and the consummation of the transactions
contemplated hereby. Such Secretary's certificate shall also certify the names
and offices of the officers of Phonoscope and Phonoscope Management authorized
to execute this Agreement and the other documents to be delivered hereunder on
behalf of Phonoscope.
(b) Buyer shall have received certificates, dated the Closing
Date, of the Secretary of each of the Companies to which are attached (i) true
and complete copies of the articles of incorporation of each of the Companies,
as then amended and in force, (ii) true and complete copies of the bylaws of
each of the Companies, as then in force, (iii) certificates of good standing,
dated within five Business Days of Closing, of the secretary of state of the
state of organization for each of the Companies, and (iv) true and complete
original versions of the minutes books of each of the Companies relating to
meetings of the boards of directors, any committee thereof and the stockholders
of the Companies and of the stock registers of the Companies.
4.2.4 Ownership of Shares. On the Closing Date the Sellers
-------------------
shall own all of the Shares free and clear of all Liens subject only to the
Liens of the Primary Lender, which Liens shall be released at the Closing as
provided in Sections 1.3(a) and 4.2.11.
4.2.5 Proceedings. All required corporate and other
-----------
proceedings taken or required to be taken in connection with the transactions
contemplated hereby and all documents
15
<PAGE>
incident thereto shall be reasonably satisfactory in form and substance to Buyer
and its counsel, and Buyer and its counsel shall have received all such
counterpart originals or certified or other copies of such documents as each of
them may reasonably request.
4.2.6 No Adverse Legislation. No legislation, order, rule,
----------------------
ruling or regulation shall have been enacted, promulgated or made by or on
behalf of any Governmental Body nor shall any decision of any court of competent
jurisdiction within the United States have been rendered which, in Buyer's
reasonable judgment, could materially and adversely affect (a) the validity or
enforceability of this Agreement or any of the transactions contemplated hereby
or (b) the Shares, the Purchased Assets or the Business or Buyer's rights
thereto or use thereof.
4.2.7 Changes. From the date hereof to and including the
-------
Closing Date, there shall not have been any changes in or effects on the
Business, the Purchased Assets or the Companies, any of which could,
individually or in the aggregate, have a Material Adverse Effect on the Business
or any of the Companies, nor shall there have been any development or discovery
or any material contingency or other Liability which could have such effect.
4.2.8 Resignations. Buyer shall have received the resignations,
------------
effective as of the Closing, of such of the directors and officers of the
Companies as shall be requested by Buyer.
4.2.9 Approval and Consents. (a) Each of the Sellers and Buyer
---------------------
shall have duly received all authorizations, consents, approvals, licenses,
franchises, permits and certificates by or of all federal, state and local
governmental authorities and of all third Persons which (i) are reasonably
necessary for the execution and delivery of this Agreement or (ii) the failure
of which to obtain would be reasonably likely to materially interfere with
Buyer's (or any of the Companies') use and enjoyment of any of the Purchased
Assets or ability to service the customers included in the EBU's to be acquired
directly or indirectly by Buyer or would otherwise materially and adversely
affect the Business or the consummation of the transactions contemplated hereby
(the "Required Consents"), and all Required Consents shall be in full force and
effect at the
16
<PAGE>
time of the Closing. Without limiting the foregoing, SWB Communications Inc.
("SWB"), Houston Light and Power Inc. ("HLP") and each other owner of poles from
which Phonoscope or one of the Companies has pole attachment rights (together
with SWB and HLP, the "Pole Owners") each shall have granted to Buyer or its
affiliates pole attachment rights on all poles used or held for use by
Phonoscope or the Companies related to the Business and upon terms and
conditions as a whole no less favorable than those relating to pole attachment
rights of Phonoscope and the Companies with Pole Owners on the date hereof.
Buyer shall have received such certificates or other evidence as Buyer may
reasonably request to establish compliance with these conditions.
Notwithstanding the aforesaid, with respect to consents from property owners,
franchisors and licensors, this condition shall be deemed satisfied if the
aggregate of the EBU's of the properties and residences for which such consents
are received equals or exceeds 95% of the aggregate EBU's of all properties or
residences in the Business, provided that (i) a portion of the Purchase Price
-------- -
equal to $1,522.00 times the number of EBU's affected by the Consents that have
not been obtained shall be paid into the Consent Escrow, as provided in Section
2.4 and shall be released pursuant to such Section, and (ii) after the Closing
--
each of the Sellers shall use its best efforts to obtain such consents as
promptly as practicable.
(b) Buyer shall have received the evidence of payment by cash or
check of Liabilities described in Section 1.3(a) with funds received from Buyer
from Buyer's payment of the Purchase Price.
(c) Buyer shall have received written consents from each external
accountant of Phonoscope and the Companies permitting access to the financial
statements and work papers, and the right to use such financial statements, work
papers and the information contained therein, in each case in the manner
described in Section 6.5(a)
4.2.10 Other Agreements. Each party other than Buyer shall have
----------------
duly executed and delivered each of the documents and instruments described in
Section 3.2 to be executed and delivered by it and each of the following
agreements:
17
<PAGE>
(a) the Second Deposit Escrow Agreement;
(b) the General and Indemnity Escrow Agreement;
(c) the Consent Escrow Agreement (if required by Section
2.4);
(d) the Network Separation Escrow Agreement;
(e) the Sublease;
(f) the Services and Cooperation Agreement; and
(g) the Non-Competition Agreement.
4.2.11 Bank Release. Buyer shall have received a release, in
------------
form and substance reasonably satisfactory to it, from the Primary Lender,
releasing upon consummation of the transactions contemplated to occur at the
Closing all Liens on any of the Purchased Assets or any assets of the Companies
and the Primary Lender, the Sellers and the Companies shall have executed and
delivered to Buyer all financing statements and other documents necessary to
release all such Liens in form and substance reasonably satisfactory to Buyer.
4.2.12 Condition of Physical Assets. Buyer shall be reasonably
----------------------------
satisfied with the condition of all the physical assets that are part of the
Purchased Assets or Assets of the Companies.
4.3 Sellers' Conditions to Closing. The obligation of the Sellers to
------------------------------
consummate the transactions contemplated by this Agreement at the Closing shall
be subject to the satisfaction at or prior to the Closing, of the following
conditions:
4.3.1 Representations and Warranties; Covenants. The
-----------------------------------------
representations and warranties contained in Section 8 shall be true and correct
in all material respects when made and as of the Closing Date; Buyer shall have
duly performed and complied in all material respects with all agreements and
conditions required by this Agreement to be performed or complied with by it
prior to the Closing Date; and Buyer shall have delivered to the Sellers
18
<PAGE>
an Officer's Certificate, dated the Closing Date, to the foregoing effect.
4.3.2 Secretary's Certificate. The Sellers shall have received
-----------------------
a certificate, dated the Closing Date, of the Secretary of Buyer to which are
attached resolutions of the board of directors of Buyer authorizing the
execution and delivery of this Agreement, the agreements and documents
contemplated herein and the consummation of the transactions contemplated
hereby. Such Secretary's certificates shall also certify the names and
signatures of the officers of Buyer authorized to sign this Agreement and the
other documents to be delivered hereunder.
4.3.3 Other Agreements. Each party other than the Sellers shall
----------------
have duly executed and delivered each of the documents and instruments described
in Section 3.2 to be executed and delivered by it and each of the following
agreements:
(a) the Second Deposit Escrow Agreement;
(b) the General and Indemnity Escrow Agreement;
(c) the Consent Escrow Agreement (if required by
Section 2.4);
(d) the Network Separation Escrow Agreement;
(e) the Sublease;
(f) the Services and Cooperation Agreement; and
(g) the Non-Competition Agreement.
5. EMPLOYEE MATTERS. (a) From and after the Closing neither Buyer nor any
----------------
of the Companies shall be obligated to hire or retain any employee engaged in
the Business. Each of the Sellers and Buyer acknowledge and agree that Buyer
shall have no Liability or obligation whatsoever to the employees engaged in the
Business (including, without limitation, any obligation to hire or retain any
such employees for any period of time following the Closing or any Liability or
obligation relating to any period prior to the Closing whether asserted at any
time before, on or after the Closing Date) and the Sellers shall pay
19
<PAGE>
and discharge any and all such Liabilities and obligations (including, without
limitation, any severance or similar liabilities arising from Buyer's failure to
hire, or the Companies' dismissal, of any such employees at any time on or
within six months after the Closing and any liability of Buyer or any of the
Companies under the WARN Act arising from the transactions contemplated by this
Agreement) (collectively, "Employee Liabilities"). The Sellers shall
indemnify and hold each of the Companies and Buyer harmless from any and all
Losses not reflected as Liabilities on the Closing Statement based upon,
attributable to or resulting from or arising out of any Employee Liability
including, but not limited to severance costs or accrued benefits, any costs
associated with compliance with COBRA and any liability under the WARN Act.
Notwithstanding any other provision of this Agreement, the obligation of the
Sellers under this Section 5 shall survive the Closing until the applicable
statute of limitations shall have expired.
(b) At least ten Business Days prior to the Closing Date,
Buyer shall deliver to the Sellers a written list (the "Employee List") of all
those employees (subject to Section 5(e), below) to whom Buyer shall offer
temporary employment agreements, or, in the case of employees of any of the
Companies, to whom Buyer shall continue to employ temporarily pursuant to
agreements after the Closing. Buyer may offer employment, either temporary or
permanent, (or offer to continue employment, as the case may be) to employees of
the Business upon terms and conditions solely within its absolute discretion.
Offers of employment (or continuing employment) to employees engaged in the
Business may be made orally or in writing, at Buyer's sole discretion. Buyer
and the Sellers shall agree upon the text of the initial announcement to
employees of the Business with respect to this Agreement and employment
opportunities following the Closing, which announcement shall be made as
promptly as practicable after the date hereof. The Sellers and the Companies
shall make no other communications with employees engaged in the Business
relating to the transactions contemplated by this Agreement or the status of any
employees without the prior consent of Buyer, which consent shall not be
unreasonably withheld or delayed. Prior to the 60th day after the Closing, Buyer
will deliver to Phonoscope a list of employees to whom Buyer will offer
permanent employment.
20
<PAGE>
(c) Buyer and the Companies shall have no obligation to credit
any employees for pre-Closing service for any purpose, including eligibility,
vesting or determining the amount of any benefit or payment due to any employee.
(d) Phonoscope shall retain responsibility for and continue to
pay all dental, medical, life insurance and disability expenses and benefits for
all employees engaged in the Business at the Closing and their covered
dependents with respect to claims incurred on or prior to the Closing Date and
shall comply with all requirements of COBRA following the Closing. For employees
of any of the Companies, the Sellers shall indemnify the Companies from and
against all such Liabilities to the extent not reflected as Liabilities in the
Closing Statement.
(e) Schedule 5(e) sets forth a list of certain of Phonoscope's
and the Company's employees (the "Protected List"), and with respect to the
employees on the Protected List Buyer agrees that for a period of one year from
the Closing Date, Buyer will not directly or indirectly solicit to hire any of
the employees on the Protected List, or induce any employees on the Protected
List to leave the employment of Sellers or their affiliates. Breach and
enforceability of this provision shall be governed by paragraphs 7(a)-(d) of the
Non-Competition Agreement.
6. COVENANTS.
---------
6.1 Maintain Existence and Obtain Approvals. Until the Closing
---------------------------------------
Phonoscope shall, and the Stockholders shall cause each of the Companies to, do
all things necessary to maintain its limited partnership or corporate existence,
as the case may be. Each of the Sellers shall, and shall cause each of the
Companies to, diligently and in good faith use all reasonable efforts to procure
all Required Consents.
6.2 Access to Information. Phonoscope shall, and each of the
---------------------
Stockholders shall cause each of the Companies to, provide to Buyer and its
authorized agents and representatives (including its auditors and legal counsel)
full and free access to the books, records, properties and proceedings relating
to Phonoscope (as the same may be related to the Purchased Assets) , the
Companies and the Business. The Sellers shall deliver to Buyer copies of all
FCC licenses, franchise agreements, pole attachment agreements, access
agreements, right-of-way agreements, right of
21
<PAGE>
entry agreements, subscriber agreements, programming agreements, leases and
other agreements of Phonoscope (relating to the Business) and the Companies as
promptly as practicable. The Sellers shall promptly give notice to Buyer of any
occurrence or event, including the commencement of any litigation, investigation
or proceeding, which, in either case, if not cured or if adversely determined
could have a Material Adverse Effect. Without limiting the aforesaid (a) if any
party hereto receives a notice of any order or proceeding described in Section
4. 1 (b) such party shall deliver, as promptly as practicable, notice of such
order or proceeding, together with all pleadings and correspondence received in
connection therewith, to the other parties hereto and (b) if any party hereto
becomes aware of any matter described in Section 4.2.6, such party shall notify
the other parties of such matter as promptly as practicable.
6.3 Certain Payments. Until the Closing, Phonoscope shall, and each
----------------
of the Stockholders shall cause each of the Companies to, pay or discharge or
cause to be paid or discharged, before the same shall become delinquent, (i) all
Taxes, fees, assessments and governmental charges levied or imposed upon or
collectible by the Sellers or any of the Companies and (ii) all lawful claims
for labor, materials and supplies which, if unpaid, might by law become a Lien
upon the Purchased Assets or any Assets of the Companies.
6.4 Maintenance of Properties: Insurance: Books and Records:
-------------------------------------------------------
Compliance with Law: Relationships. Until the Closing,
- - ----------------------------------
(a) Phonoscope shall, and each of the Stockholders shall cause
each of the Companies to, (i) maintain and keep the Purchased Assets and the
Assets of each of the Companies in their condition and state of repair and
working order that existed as of the date hereof, ordinary course wear and tear
excepted and (ii) do or cause to be done all things reasonably necessary or
appropriate to preserve and keep in full force all rights, licenses, franchises,
rights of entry, approvals, authorizations, consents, permits and other
authorizations necessary or desirable to enable Phonoscope and the Companies to
operate the Business as currently conducted;
(b) Phonoscope shall, and each of the Stockholders shall cause
each of the Companies to, maintain
22
<PAGE>
insurance with respect to the Assets of the Companies and the Purchased Assets
in accordance with past practices;
(c) Phonoscope shall, and each of the Stockholders shall cause
each of the Companies to, keep proper books of record and accounts, in which
full and correct entries shall be made of all (i) financial transactions, (ii)
the assets and (iii) the business of the Companies and the Business, in
accordance with GAAP consistent with past practices;
(d) Phonoscope shall, and each of the Stockholders shall cause
each of the Companies to, (i) conduct the Business in the usual, regular and
ordinary manner consistent with past practices and (ii) comply in all material
respects, and conduct the Business in material compliance, with all statutes,
laws, ordinances, or rules and regulations and orders of Governmental Bodies to
which the Sellers, any of the Companies or any of their respective assets and
properties or the Business is subject; and
(e) Phonoscope shall, and each of the Stockholders shall cause
each of the Companies to, use commercially reasonable efforts to (i) keep
available for Buyer and the Companies the services of the employees of the
Companies and Phonoscope which are engaged in the Business and (ii) preserve
Phonoscope's and each of the Companies' current relationships with its customers
and other Persons with whom it has a significant business relationship.
6.5 Deliveries. (a) Until the Closing, each of the Sellers shall
----------
deliver to Buyer promptly such periodic financial and/or operating data with
respect to the Companies and the Business as Buyer may reasonably request,
including, without limitation, any audited financial statements that may have
been prepared, provided that nothing herein shall require Phonoscope or the
--------
Companies to prepare audited financial statements. Without limiting the
foregoing, both before and after the Closing, the Sellers shall provide Buyer
with access to all audited financial statements and workpapers of its internal
and external accountants and shall procure from all such external accountants
all consents necessary for such access and otherwise necessary for Buyer to
comply with any reporting requirements that Buyer, in its sole discretion,
determines that it may have under the Securities Exchange Act of 1934, as
amended, and the
23
<PAGE>
rules and regulations promulgated thereunder or under the terms of any
indenture or other instrument of Buyer and its affiliates, provided that Buyer
--------
shall pay all fees and expenses of such accountants reasonably incurred in
complying with this Section 6.5(a).
(b) Buyer is hereby authorized to deliver a copy of any
financial statement or certificate delivered pursuant to this Section 6.5 to any
Governmental Body having jurisdiction over it or any financing source that
requests such information; provided, however, that Buyer shall take any and all
--------- -------
steps as may be reasonable to maintain the confidentiality of such information
and material in keeping with their obligations to maintain information in
confidence under the terms hereof and all prior agreements still in force and
effect.
(c) Each of the Sellers shall also deliver to Buyer, promptly
upon receipt by it or any of the Companies, any other reports or other copies of
any reports from Phonoscope's or any of the Companies' auditors, copies of any
correspondence to or from or filings with the FCC or any other Governmental Body
relating to the Business.
6.6 Filings: Approvals (a) The Sellers and Buyer, as promptly as
------------------
practicable, each shall file or supply, or cause to be filed or supplied, all
applications, notifications and information required to be filed or supplied by
any of them, by any Governmental Body in connection with this Agreement or the
consummation of the transactions contemplated hereby, including but not limited
to any filings pursuant to the HSR Act. The Sellers and Buyer each, as promptly
as practicable, shall use all reasonable efforts to obtain or make, or cause to
be obtained or made, all Required Consents necessary to be obtained or made by
it, in order for each of them so to consummate such sale and transfer and such
transactions. Buyer shall bear all out-of-pocket costs and expenses incurred
by the Sellers in connection with any filings pursuant to the HSR Act and any
filings required to be made with the FCC, up to an aggregate of all filing fees
actually paid by the Sellers plus $15,000. Such reimbursement shall be made by
Buyer promptly after delivery to Buyer of statements and receipts reasonably
satisfactory to Buyer evidencing such out-of-pocket costs and expenses.
(b) Each of the Sellers and Buyer will coordinate
24
<PAGE>
and cooperate with each other in exchanging such information and supplying such
reasonable assistance as may be reasonably requested by the other in connection
with the filings and other actions contemplated by this Section 6.6.
6.7 Conduct of the Business. Prior to the Closing, without the prior
-----------------------
written consent of Buyer (which consent shall not be unreasonably withheld as to
6.7(a) (iv), below), Phonoscope (with respect to the Purchased Assets) shall
not, and the Stockholders shall cause each of the Companies not to:
(a) enter into or modify, or waive any material term or
condition of, any agreement (i) except in the ordinary and customary course of
the Business consistent with past practice (and with prior notification to
Buyer) relating to the delivery of video programming, (ii) having a term
exceeding six months which is not cancelable by Buyer or the Companies after
Closing at will and without any liability therefor, (iii) providing for the
retention of any agent, contractor or consultant by any of the Companies or the
rendering of services by any of the Companies as such agent, contractor or
consultant which is not cancelable by Buyer or the Companies after the Closing
at will and without any liability therefor, (iv) requiring capital expenditure
by any of the Companies of any sum in excess of $10,000 or (v) not otherwise
incidental to the conduct of the operations of the Business in the ordinary and
customary course consistent with past practices;
(b) incur any Indebtedness other than (i) in the ordinary course
of business, or (ii) pursuant to a restructuring of current indebtedness with
the Primary Lender not to exceed $7,000,000, except for Indebtedness to~trade
creditors and professionals on customary terms and Purchase Money Debt;
(c) declare, set aside or pay any non-cash dividend or
distribution to any stockholder of the Sellers or any of the Companies;
(d) create, incur, assume or suffer to exist any Liens of any
kind against or upon any of its property or assets, or any proceeds therefrom,
other than Permitted Liens which Permitted Liens shall be extinguished at or
prior to Closing;
25
<PAGE>
(e) conduct any business or enter into any transaction with or
for the benefit of any Affiliate of any of the Sellers or any agreements among
any of the Sellers and any of the Companies (in each case other than any
transaction contemplated hereby);
(f) directly or indirectly, issue, redeem or purchase any
capital stock or any other security, provided, that Phonoscope may acquire
--------
capital stock or other securities of entities unrelated to the Business and
provided further, that this provision shall not preclude Cook from acquiring the
- - -------- -------
stock of any of the Companies from Alton Cook or the Trust provided the he
assumes all obligations of Alton Cook or the Trust, as the case may be;
(g) enter into any new oral or written employment agreements,
promises, or compensation arrangements or commitments to officers, directors,
employees or consultants (including, but not limited to, any commitment to pay
retirement or other benefits) or modify, extend or terminate any existing
agreements, arrangements or commitments or enter into any plan, arrangement, or
labor or collective bargaining agreement in any case which is not cancelable by
Buyer or the Companies after the Closing at will and without any liability
therefor;
(h) create any Subsidiary or make any investment other than in
certificates of deposit, short-term U.S. Treasury obligations, and other cash
equivalents or lend any money or assets to any Person, or assume, guarantee or
in any other manner become liable with respect to any Indebtedness, or guaranty
any obligation, of any Person, or pay, discharge or satisfy any Indebtedness
liability or obligation, except in the ordinary course of the Business
consistent with past practices;
(i) make any change in or amendment to its articles of
incorporation or bylaws, or, in the case of Phonoscope, its agreement of limited
partnership or certificate of limited partnership;
(j) enter into any leases of real or personal property or any
sale-leaseback transaction;
(k) engage in any business other than the Business and
activities related thereto (or, in the case of
26
<PAGE>
Sellers, any business other than the Business and the Retained Businesses); or
(1) agree to do any of the foregoing.
6.8 Right of First Offer/Negotiation. If any of the Sellers or any
--------------------------------
of their respective Affiliates (for purposes of this Section, the "Transferor")
proposes, desires or intends to sell, transfer or convey all of its stock
interest in any cable television, video, data or voice telecommunications
business owned by any of them on the date hereof (and any additional businesses
or related assets that are later combined or integrated with such businesses)
("Subject Businesses") or substantially all of the assets of a Subject Business
(a "Disposition Transaction") other than (i) a transfer pursuant to a
reorganization or transfer as part of tax or estate planning by Phonoscope and
its stockholders or the Stockholders in which no Person other than such
stockholders and members of their immediate families is a party or (ii) a
transfer to a Person (including a joint venture) that is, or upon such transfer
would be, a Subsidiary of such Transferor, prior to any notice or other
communication to any third party relating to a Disposition Transaction (or the
provision to any third party of any information relating thereto) such
Transferor shall first deliver written notice (a "Sale Notice") to Buyer stating
that such Transferor proposes to effect such Disposition Transaction, such
notice to describe in reasonable detail (x) the assets and businesses proposed
-
to be included in such Disposition Transaction (the "Subject Business"), (y) a
-
price (the "Proposed Price") and (z) other material terms of such Disposition
-
Transaction (the "Proposed Terms") . Upon receipt of the Sale Notice, Buyer
shall have the right either (A) to purchase all, but not less than all, of the
-
Subject Business at the Proposed Price, and in accordance with the Proposed
Terms or (B) to cause the Transferor to negotiate exclusively with Buyer in good
-
faith for the acquisition by Buyer of the Subject Business (an "Exclusive
Transaction") for a 30 day period (an "Exclusive Period") . The Sale Notice
shall constitute an offer to Buyer, which is irrevocable during a period of
seven Business Days (the "Offer Notice Period") , to sell to Buyer such Subject
Business upon the terms set forth in this Section 6.8 and the Sale Notice or to
commence such exclusive negotiations. Buyer may exercise either right at any
time during the Offer Notice Period by delivering to the Transferor a written
notice setting forth
27
<PAGE>
either (A) its irrevocable commitment to purchase such Subject Business at the
-
Proposed Price in accordance with the Proposed Terms subject to receipt of any
required material third party approvals or governmental approvals (the same to
be specified in reasonable detail in such notice), compliance with applicable
law and the absence of any injunction or similar order preventing such
transaction or (B) its election to undertake negotiations with the Transferor
-
for an Exclusive Transaction and commence an Exclusive Period (such Exclusive
Period to commence upon delivery of such notice from Buyer). During any
Exclusive Period, the Transferor and the Buyer shall negotiate in good faith the
definitive terms of such Exclusive Transaction and the Transferor neither shall
negotiate with, nor shall provide any notice or communication to, any third
party with respect to such Exclusive Transaction or the Subject Business. If
Buyer fails to timely exercise either of the rights provided in this Section
6.8, or if exercised, either (I) Buyer does not close the purchase of the
-
Subject Business within the applicable time period provided in Section 6.8(b) or
(II) in the case of an Exclusive Transaction, Buyer and the Transferor
--
notwithstanding their good faith efforts are unable to agree upon definitive
terms within the Exclusive Period, then such Transferor may sell the Subject
Business to a Person other than Buyer. For purposes of clarification, once the
Sellers have complied with the terms of this Section with respect to a Subject
Business and Buyer has not agreed to purchase such Subject Business or Buyer and
the Transferor have not been able to agree upon the definitive terms of such a
purchase within the Exclusive Period, than such Subject Business will no longer
be subject to this Section 6.8. Notwithstanding anything in this Section 6.8 to
the contrary, this Section 6.8 is not intended to, and does not create, a right
of first refusal in favor of Buyer, and shall have no application in the event a
third party makes an unsolicited offer to buy all of the Sellers' stock interest
in any Subject Business or substantially all of the assets of a Subject Business
that any of the Sellers now or hereafter have provided, that as soon as possible
--------
after execution of a definitive agreement with respect to any such unsolicited
offer, Cook and the Seller selling such Subject Business shall each certify, in
a written certification delivered to Buyer, that the initial contact and offer
to acquire such Subject Business was unsolicited.
6.9 Network Separation: Common Strand Segments. (a) Following the
------------------------------------------
Closing, at the Sellers' sole cost and expense, the
28
<PAGE>
Sellers shall use their best efforts to complete the Network Separation (as
described below). For purposes of this Agreement, "Network Separation" shall
mean the supply, construction and installation by Phonoscope, at Phonoscope's
expense, of fiber optic and/or coaxial cable network segments that will (a) be
-
located on the Category II Segment routes (which are described in Schedule 9.1
and set forth on the map in Schedule 9.1), (b) permit Phonoscope, in the
-
operation of the Retained Business, to cease transmitting its signal along the
fibers in the Category II Segments, and (c) comply with the provisions of
-
Section 6.9(b) and of the Services and Cooperation Agreement. In completing the
Network Separation, Phonoscope shall not in any significant respect disturb,
remove, interfere with the operation of or relocate any fiber, cable, electronic
equipment or other item of the Purchased Assets (or, following the Closing, any
assets of Buyer) or any assets of the Companies and if such removal or
relocation is necessary, the last fiber installed will be removed and relocated
to the new attachment. The Sellers acknowledge that, pursuant to the Services
and Cooperation Agreement, from and after the first anniversary of the Closing
Date, the Sellers shall have no rights to use any part of the Category 1 or
Category II Segments (other than such Common Strand Segment) that has not been
so separated.
(b) From and after the Closing, Phonoscope may overlash or otherwise
physically attach fiber or other cable to the strand (which strand is part of
the Purchased Assets) in the Common Strand Segment upon the terms and subject to
the conditions set forth in the Services and Cooperation Agreement. In
completing the Network Separation or otherwise, except as may be expressly
permitted by the Services and Cooperation Agreement, Phonoscope may not overlash
or otherwise physically attach its network to any other portion of the network
owned by Buyer or the Companies after the Closing. From and after the Closing,
Buyer and the Companies may overlash or otherwise physically attach fiber or
other cable to the strand owned by Phonoscope in the Category III Segment (which
is described in Schedule 9.1 and set forth on the maps in Schedule 9.1) up to a
corresponding number of miles that Buyer has permitted Phonoscope to attach in
the Category II Segment upon the terms and subject to the conditions set forth
in the Services and Cooperation Agreement. Except as may be expressly permitted
by the Services and Cooperation Agreement, Buyer and the Companies may not
overlash or otherwise physically attach its network to any other portion of the
network
29
<PAGE>
owned by Phonoscope after the Closing.
6.10 Bulk Sales Compliance. Buyer hereby waives compliance by
---------------------
Phonoscope with the provisions of the bulk sales law of any state, and
Phonoscope shall pay and discharge when due all claims of creditors that could
be asserted against Buyer or its Affiliates by reason of such non-compliance to
the extent that liabilities to such creditors are not specifically assumed by
Buyer under this Agreement. The Sellers shall indemnify, defend and hold
harmless Buyer from and against any Losses arising from Phonoscope's failure to
comply with any such bulk sales law.
6.11 Assignment of Certain Rights. Without limiting any rights Buyer
----------------------------
or the Companies may otherwise have pursuant to this Agreement or otherwise, at
the Closing, the Sellers shall provide Buyer and the Companies with all the
benefits of any confidentiality agreements to which any of the Sellers may be a
party or a beneficiary relating to the Purchased Assets or the Companies (to the
extent not otherwise transferred to Buyer as part of the Purchased Assets) by
either assigning all of the rights to enforce such agreements to Buyer (to the
extent such rights are assignable) or undertaking to enforce any such agreement,
for the benefit of Buyer and/or the Companies, upon Buyer's demand.
6.12 Use of Name In order to promote the orderly transition of the
-----------
ownership of the Business to Buyer as contemplated by this Agreement, subject to
the last sentence of this Section 6.12, Phonoscope hereby grants to Buyer (in
consideration of part of the Purchase Price payable by Buyer) and its
Affiliates, as of the Closing, a royalty free, nonexclusive license to use the
name "Phonoscope," any derivative thereof, and any trademark, service mark or
trade name used in the Business prior to the Closing (the "Names") for a period
of 180 days following the Closing solely in connection with the Business. The
Sellers shall cooperate with Buyer in any transition plan undertaken by Buyer
and the Companies after the Closing designed to implement an orderly change by
the Business from use of the Names to other trademarks, service marks and trade
names. If Buyer uses the Names in any manner differently than used in the
Business prior to the Closing that is harmful in any material respect to the
business reputation of Phonoscope or the goodwill of Phonoscope following the
Closing, and Buyer or its Affiliates
30
<PAGE>
refuses to discontinue or cease using the Names in such adverse manner within
five Business Days following the delivery to Buyer of written notice thereof
from the Sellers, Phonoscope may terminate the license granted hereunder by
delivery of a written notice to Buyer to that effect, in which event Buyer shall
have no further right to use the Names in any manner whatsoever.
6.13 Transfer Taxes. The Sellers shall pay or cause to be paid all
--------------
Taxes and other expenses of transferring the Purchased Assets and the Shares as
contemplated hereunder, including, without limitation, all sales, use, stock
transfer, real estate transfer, conveyance, gains, stamp, value added and other
similar taxes (including any interest, penalties and additions thereto.
6.14 Certain Tax Matters. Buyer shall prepare and file all Tax
-------------------
Returns with respect to the activities of the Companies for all tax years and
periods ending on or after the Closing Date. The Stockholders shall prepare and
file all Tax Returns with respect to the activities of the Companies for all
tax years and periods ending before the Closing Date.
6.15 Pole Attachment Rights. From and after the Closing, Phonoscope
----------------------
shall provide Buyer and its affiliates with a royalty free, perpetual license to
(a) attach cable, strand and fiber to the poles owned by Phonoscope to which any
-
of the Purchased Assets or Assets of the Companies are affixed on the Closing
Date and (b) to attach new strands (and to wrap fiber bundles around such
-
strands) to each and every pole owned by Phonoscope in the Category III Segment
(as described in the definition of Purchased Assets) (all such poles owned by
Phonoscope, "Phonoscope Poles"). Phonoscope shall not directly or indirectly
transfer any Phonoscope Poles (or any interest therein) to any Person unless
such Person executes an undertaking assuming Phonoscope's obligations under this
Section 6.15.
6.16 Best Efforts Upon the terms and subject to the conditions
------------
hereof, each of the parties hereto shall use its best efforts to take or cause
to be taken all actions and to do or cause to be done all things necessary to
satisfy, as promptly as practicable after the date hereof, and in any case on or
before September 30, 1997, the conditions to the Closing and to consummate the
transactions contemplated by this Agreement and the other agreements
contemplated herein. Without limitation,
31
<PAGE>
(a) each party shall use its best efforts to prepare all filings under the HSR
Act as promptly as practicable after the date hereof and to respond promptly to
any requests from the Federal Trade Commission and the Department of Justice
relating thereto, and (b) the Sellers shall be primarily responsible for
obtaining, and each Seller shall use its best efforts to obtain, all other
Required Consents. Periodically between the date hereof and the Closing Date,
and in no event less frequently than weekly, the Sellers shall provide Buyer
with a status report (which report may be oral) describing in reasonable detail
its efforts to obtain Required Consents and the results of such efforts.
6.17 Transfer of Franchises, Permits, etc. Prior to the Closing,
------------------------------------
Cook shall cause Phonoscope Communications, Inc. to transfer franchises,
licenses and permits relating to Hunters Creek Village, Bunker Hill Village and
Hedwig Village to one of the Companies designated by Buyer.
6.18 Purchase Price Allocation. Between the date hereof and the
-------------------------
Closing Date, the parties hereto shall use reasonable efforts to agree upon an
allocation of the Purchase Price among the Shares, the Purchased Assets and the
Non-Competition Agreement, provided that if no allocation is agreed upon by the
--------
parties, the parties shall be free to take whatever position they choose in
their own tax allocation.
7. REPRESENTATIONS AND WARRANTIES OF THE SELLERS. Each of the Sellers
---------------------------------------------
and the General Partner hereby jointly and severally represents and warrants to
Buyer as follows:
7.1 Authority; Organization and Qualification; Capitalization. (a)
---------------------------------------------------------
Each of the Sellers has all requisite power and authority and legal capacity to
enter into this Agreement and each agreement contemplated hereby, to carry out
its obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby. The execution, delivery and performance of this
Agreement and each of the agreements contemplated hereby to which Phonoscope or
the Trust is a party have been duly authorized by all required action on the
part of each of Phonoscope and the Trust (including, but not limited to, all
action by the General Partner and by Cook, as trustee of the Trust. This
Agreement has been, and upon its execution each of the other agreements
contemplated hereby will be, duly executed and delivered by each of the Sellers
and the General Partner and
32
<PAGE>
by Cook in his capacity as sole trustee of the Trust which are parties thereto,
and (assuming due authorization, execution and delivery by Buyer) this Agreement
constitutes, and upon their execution each of the other agreements contemplated
hereby will constitute, the legal, valid and binding obligation of each Seller
which is party thereto enforceable against each such Seller in accordance with
its respective terms. Cook is the sole trustee of the Trust and, pursuant to
the instruments governing the Trust has unrestricted authority over the Trust
and its corpus.
(b) Phonoscope is a limited partnership, each of the Companies is a
corporation, the General Partner is a Texas limited liability company, and the
Trust is a Texas trust, in each case duly organized, validly existing and in
good standing under the laws of the state of its organization. Each of
Phonoscope and each of the Companies is duly authorized to do business in each
jurisdiction in which the character of its properties or the nature of its
business makes such qualification necessary, except where the failure so to
qualify would not have a Material Adverse Effect. Each of Phonoscope and each of
the Companies has the power to own its properties and to carry on its business
as currently being conducted and as intended to be conducted. All corporate
actions taken by any of the Companies have been duly authorized and no Company
has taken any action that in any respect conflicts with, constitutes a default
under or results in a violation of any provision of its articles of
incorporation or bylaws. True and complete copies of the certificate of limited
partnership and partnership agreement of Phonoscope and the articles of
incorporation and bylaws of each of the Companies, each as in effect on the date
hereof, have been delivered by the Sellers to Buyer.
(c) The authorized capital stock of each of the Companies is as set
forth on Schedule 7.1. Such Schedule sets forth the number of shares of capital
stock that are issued and outstanding for each Company, all of which are validly
issued, fully paid and nonassessable, and the record owner of such shares set
forth on such Schedule. None of the issued and outstanding shares of capital
stock of any of the Companies was issued in violation of any preemptive rights.
There are no options, warrants, convertible securities or other rights,
agreements, arrangements or commitments of any character relating to the capital
stock of any of the Companies or obligating any Company
33
<PAGE>
to issue or sell any shares of capital stock of, or other interest in, any of
the Companies. There are no outstanding contractual obligations of any of the
Companies to repurchase, redeem or otherwise acquire any shares of common stock
of any of the Companies or to provide funds to, or make any investment (in the
form of a loan, capital contribution or otherwise) in, any other Person. The
Shares, in the aggregate, constitute all the issued and outstanding capital
stock of the Companies. The Stockholders collectively own all the Shares
beneficially and of record, free and clear of all Liens except for Liens in
favor of the Primary Lender, which Liens shall be released at the Closing. Upon
consummation of the transactions contemplated by this Agreement, Buyer will
acquire as of the Closing Date all the issued and outstanding capital stock of
the Companies free and clear of all Liens, except for Liens caused by or imposed
solely as a result of the acts or omissions of Buyer. There are no voting
trusts, stockholder agreements, proxies or other agreements or understandings in
effect with respect to the voting or transfer of any of the Shares. Cook owns
all of the outstanding equity interests of the General Partner.
(d) None of the Companies has any Subsidiaries.
7.2 Actions Pending. Except as set forth on Schedule 7.2, there is
---------------
no action, suit or proceeding, or to the best knowledge of each of the Sellers,
investigation, pending or, to the best knowledge of each of the Sellers,
threatened, against or affecting Phonoscope or the Companies or any of their
properties or rights, by or before any court, arbitrator or administrative
tribunal or Governmental Body.
7.3 Outstanding Debt; Defaults. Expect as set forth in Schedule 7.3,
--------------------------
Phonoscope and the Companies (i) have no outstanding Indebtedness (other than
Indebtedness relating solely to the Retained Businesses that does not impose or
support any Lien or any other restriction on any of the Purchased Assets or the
Assets of any of the Companies or the operation of the Business), and (ii) are
not in violation of or in default in any material respect under or with respect
to any lease, license, permit, contract or agreement (including oral and
informal arrangements) to which it is a party and each such lease, license,
permit, contract or agreement is in full force and effect. To the best
knowledge of each of the Sellers, no other party to any such lease, license,
contract or agreement is in
34
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default in any material respect. The Sellers have provided to Buyer a true and
complete copy of each such lease, license, permit, contract or agreement.
7.4 Material Liabilities; Financial Statements. (a) There are no
------------------------------------------
material Liabilities, accrued or contingent, of Phonoscope relating to the
Business or any of the Companies that are not disclosed in Schedule 7.4.
(b) Each of the Companies has furnished Buyer with a balance
sheet of it as of June 30, 1996 (applicable to the Companies) and Sellers shall
deliver within 30 days from the date hereof statements of income and cash flows
of the Business for the six months ended June 30, 1997. Such financial
statements (including any related schedules and/or notes) are true and correct
in all material respects, have been prepared in accordance with GAAP
consistently followed throughout the periods involved and show all liabilities,
direct and contingent, of each such entity required to be shown in accordance
with such principles. The balance sheets fairly present the condition of the
Companies as at the dates thereof, and the statements of income and cash flows
fairly present the results of the operations of the Business and its cash flows
for the periods indicated.
7.5 Assets. (a) Phonoscope and the Companies together own, lease or
------
have the legal right to use all the properties and assets used or intended to
be used in the conduct of the Business or otherwise owned, leased or used by any
of the Companies, and, with respect to contract rights, Phonoscope or a Company
is a party to and enjoys the right to the benefits of all contracts, agreements
and other arrangements used or intended to be used by Phonoscope or the
Companies in or relating to the conduct of the Business (collectively, the
"Assets"). Phonoscope or the Companies has good and marketable title to, or, in
the case of leased or subleased Assets, valid and subsisting leasehold interests
in, all its Assets, free and clear of all Liens, except Permitted Liens (which
Permitted Liens shall be extinguished as of the Closing). Phonoscope owns free
and clear of all Liens, each of the Phonoscope Poles and has valid and
enforceable rights from all third parties and Governmental entities to maintain
the Phonoscope Poles at their present locations in perpetuity.
35
<PAGE>
(b) The Assets constitute all the properties, assets and rights
forming a part of, used, held or intended to be used in, and all such
properties, assets and rights as are necessary in the conduct of, the Business.
Except for the physical condition of the fiber network (which, for purposes of
this Section 7.5(b), such term shall not include any head end equipment),
substantially all of the Assets are in good operating condition and repair and
are suitable for the purposes for which they are used and intended and are being
conveyed to Buyer "as is", with all faults, if any.
(c) Following the consummation of the transactions contemplated
by this Agreement to be consummated at the Closing, Buyer will be vested in
good, valid and marketable title to, or lease, under valid and subsisting
leases, the Purchased Assets and the Companies will continue to own, with good,
valid and marketable title, or lease, under valid and subsisting leases, the
Assets other than the Purchased Assets, in each case, free and clear of any
Liens other than Permitted Liens and without incurring any penalty or other
adverse consequence, including, without limitation, any increase in rentals,
royalties, or license or other fees imposed as a result of, or arising from, the
consummation of the transactions contemplated by this Agreement.
(d) Set forth on Schedule 7.5(d) is a true and complete list of
equipment, tools, supplies, furniture, fixtures, personalty, vehicles, rolling
stock and other tangible personal property (the "Personal Property") used in the
Business or otherwise owned or leased by any of the Companies. The Personal
Property constitutes all of the equipment, tools, supplies, furniture, fixtures,
personalty, vehicles, rolling stock and other tangible personal property as is
necessary to conduct the Business in the ordinary and customary course,
consistent with past practices. Phonoscope and the Companies have caused the
Personal Property to be maintained in accordance with good business practice and
such personal property is being conveyed to Buyer "as is" and with all faults,
if any.
(e) None of the Companies owns, nor has it ever owned, any real
property. Phonoscope owns no real property used in the Business.
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7.6 Taxes. Phonoscope and each of the Companies has filed all
-----
Federal, state and other income Tax returns or reports which are required to be
filed, all such Tax returns or reports are true, correct and complete in all
material respects and Phonoscope and each of the Companies has paid all Taxes as
shown on said returns and on all assessments received by it to the extent that
such Taxes have become due and are payable by Phonoscope or any of the
Companies, except as any of the foregoing are being contested in good faith by
appropriate proceedings for which adequate reserves on the financial statements
described in Section 7.4 (b) have been established in accordance with GAAP; and
no Tax lien has been filed and, to the best knowledge of each of the Sellers, no
claim is being asserted with respect to any Tax or other similar charge.
7.7 No Conflicts. Except as set forth in Schedule 7.7, neither the
------------
execution or delivery of this Agreement or any agreement contemplated hereby,
nor fulfillment of or compliance with the terms and provisions hereof and
thereof, nor the consummation of the transactions contemplated hereby and
thereby, will conflict with or result in a breach of the terms, conditions or
provisions of, or constitute a default under, or result in any violation of, or
result in the creation of any Lien upon any of the properties or assets of any
of the Sellers or any of the Companies pursuant to, or require any consent
under, or give to any third Person any rights of termination, amendment,
acceleration, suspension, revocation or cancellation of, (i) the articles of
incorporation or bylaws (or agreement of limited partnership, as the case may
be) of Phonoscope or any of the Companies, (ii) any award of any arbitrator or
any order, judgment, decree, statute, law, rule or regulation to which any of
the Sellers or any of the Companies or any material amount of their respective
properties, assets or business is subject or (iii) any note, bond, mortgage or
indenture, contract, agreement, lease, sublease, license, permit, franchise or
other instrument or arrangement to which any of the Sellers or any of the
Companies is a party or by which any of their assets or properties is bound or
affected, except, with respect to clause (iii), for conflicts which,
individually or in the aggregate, would not have a material adverse effect on
the Purchased Assets, the Companies or the ability of any of the Sellers to
consummate the transactions contemplated herein.
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7.8 Broker's or Finder's Commissions. No broker's or finder's fees
--------------------------------
or commission will be payable by any of the Sellers or any of the Companies with
respect to the transactions contemplated by this Agreement other than to
Communications Equity Associates ("CEA"), which fees shall be paid by Buyer.
7.9 Applicable Environmental Regulations. Except as would not,
------------------------------------
individually or in the aggregate, have a Material Adverse Effect, Phonoscope and
each of the Companies is in compliance with all applicable laws, rules,
regulations and other requirements of Governmental Bodies relating to health,
safety, hazardous materials, pollution or the environment ("Environmental Laws")
and with all such licenses, permits, authorizations, certificates, exemptions
and approvals required by such Environmental Laws. Except as would not,
individually or in the aggregate, have a Material Adverse Effect, Phonoscope and
each of the Companies has not performed or suffered any act or practice which
could reasonably be expected to give rise to, or has otherwise incurred,
Liability to any Person under any Environmental Laws.
7.10 Compliance with Other Laws. Phonoscope and each of the Companies
--------------------------
has conducted and continues to conduct the Business in compliance in all
material respects with all laws, rules and regulations and orders of
Governmental Bodies, and Phonoscope and each of the Companies is not in
violation in any material respect of any such law, rule, regulation or order of
a Governmental Body.
7.11 ERISA; Labor Agreements. Except as set forth in Schedule 7.11,
-----------------------
none of Phonoscope or any of the Companies currently has, or in the past has it
ever had, any plan, agreement or arrangement, written or otherwise, subject to
ERISA or any Liability to the PBGC. None of Phonoscope or any of the Companies
is currently, or in the past has it ever been, a party to (a) any collective
bargaining agreement or (b) any employment agreement (written or otherwise).
Schedule 7.11 sets forth a complete list of all employees of Phonoscope and the
Companies engaged in activities relating to the Business and their rates of
compensation.
7.12 Possession of Franchises, Licenses, etc. Except as would not,
---------------------------------------
individually or in the aggregate, have a Material Adverse Effect, Phonoscope and
the Companies possess all
38
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franchises, certificates, licenses, permits, approvals and other authorizations
from governmental political subdivisions or Governmental Bodies, including the
FCC, that are necessary for the ownership, maintenance and operation of its
properties and assets or for the conduct of the Business. Except as would not,
individually or in the aggregate, have a Material Adverse Effect, all such
franchises, certificates, licenses, permits, approvals and other authorizations
are in full force and effect, and none of Phonoscope or any of the Companies is
in violation of any thereof in any material respect. None of Phonoscope or any
of the Companies has received any notice from any Governmental Body (or from any
third party or other Person requesting such action) revoking, cancelling,
rescinding, modifying or refusing to renew, or threatening to take any such
action with respect to, any such franchise, certificate, license, permit,
approval or other authorization. Except as set forth on Schedule 7.12, all such
franchises, certificates, licenses, permits, approvals and authorizations held
by Phonoscope relating to the Business are freely transferable to Buyer.
Following consummation of the transaction contemplated to be consummated at the
Closing, Buyer will receive (or in the case of the Companies, will continue to
receive) the benefits (without any diminution) of all such franchises,
certificates, licenses, permits, approvals and authorizations.
7.13 Intellectual Property. Phonoscope and the Companies together own
---------------------
or possess adequate licenses or other valid rights to use all patents, patent
rights, trademarks, trademark rights, trade names, trade name rights,
copyrights, service marks, trade secrets, applications for trademarks and for
service marks, mask works, know-how and other proprietary rights and information
necessary for the conduct of the Business as currently conducted or as
contemplated to be conducted by Phonoscope and the Companies, and each of the
Sellers and the Companies is unaware of any assertion or claim, or any state of
facts that could give rise to a claim, challenging the validity of any of the
foregoing. The conduct of the Business as currently conducted and as
contemplated to be conducted does not and will not conflict in any material way
with any patent, patent right, license, trademark, trademark right, trade name,
trade name right, service mark, mask work or copyright of any third party. There
are no infringements of any proprietary rights owned by or licensed by or to
Phonoscope or any of the Companies which, individually or in the aggregate,
could have a Material
39
<PAGE>
Adverse Effect. None of the Sellers or any of the Companies has licensed or
otherwise permitted the use by any third party of any proprietary information on
terms or in a manner which, individually or in the aggregate, could have a
Material Adverse Effect.
7.14. Governmental Consents. Except as set forth on Schedule 7.14,
---------------------
and except as would not, individually or in the aggregate, have a Material
Adverse Effect, neither the nature of the Business or any of the Companies or
any of the businesses, assets or properties used in the Business, nor any
relationship between Phonoscope or any of the Companies and any other Person,
nor any circumstance in connection with the transactions contemplated by this
Agreement is such as to require on behalf of any of the Sellers or any of the
Companies, any consent, approval or other action by or any notice to or filing
with any court or administrative body or Governmental Body in connection with
the execution, delivery and performance of this Agreement, except for filings
under the HSR Act.
7.15. Insurance Coverage. The tangible assets and properties of
------------------
Phonoscope used in the Business or any of the Companies are insured for the
benefit of Phonoscope or one of the Companies, as the case may be in such
amounts and covering such risks as are deemed reasonably necessary by Phonoscope
and the Companies consistent with their customary practice. Schedule 7.15 sets
forth a complete and correct list of all insurance policies relating to the
Business.
7.16. Disclosure. The information relating to the Assets, the
----------
Business or any of the Companies provided to Buyer by the Sellers is complete
and accurate, does not contain a misstatement of a material fact and does not
omit to state any material fact necessary to make the information provided not
misleading. None of the Sellers is aware of any material facts pertaining to
Phonoscope, any of the Companies or the Business which may have a Material
Adverse Effect on Phonoscope, any of the Companies, the Business or any of the
Purchased Assets or Assets of the Companies or which are likely in the future to
have a Material Adverse Effect on Phonoscope, the Company, the Business or any
of the Purchased Assets or Assets of the Companies and which have not been
disclosed in this Agreement or to Buyer, its agents, representatives, auditors
or attorneys by the Sellers in writing.
40
<PAGE>
7.17 Subscribers, Rights of Entry. Schedule 7.17 is a complete and
----------------------------
correct list of all Rights of Entry relating to the Business and the minimum
number of units served pursuant to each such Right of Entry. True, accurate and
complete copies of all Rights of Entry listed in Schedule 7.17 have been
delivered by the Sellers to Buyer. Except as set forth in Schedule 7.17, all
Rights of Entry, including all amendments thereto, (a) are in writing and are
legal, valid, binding and enforceable in accordance with their terms, (b) if
held by Phonoscope, are freely transferable to Buyer and if held by any of the
Companies do not contain "change in control" or other provisions that may be
affected by the transactions contemplated by this Agreement and (c) the validity
and enforceability (including the rights of the Companies or Buyer to such
Rights of Entry following the Closing) of the same will not be adversely
affected by the consummation of any of the transactions contemplated by this
Agreement. Except as set forth in Schedule 7.17, no material default of any
Person exists under any of the Rights of Entry, and the parties thereto other
than Phonoscope or the Companies have no offsets or defenses to the enforcement
thereof. Schedule 7.17 accurately sets forth the MDUs to which Phonoscope and
the Companies provide service in the conduct of the Business, the locations of
such MDUs, the number of units to such services at each of such locations, the
date of the Rights of Entry relating to each MDU and the expiration of such
Right of Entry.
7.18 Cable Systems. Schedule 7.18 hereto lists the "cable systems," as
-------------
defined by the Act and FCC Rules, operated by the Seller (collectively, "Cable
Systems"), the name of the franchise authority ("Franchisor"), if any, the date
on which the franchise was awarded and the date on which the franchise is
scheduled to expire (if not renewed). Except as set forth on Schedule 7.18 with
respect to each such Cable System, Phonoscope and the Companies (i) have timely
filed all required registration statements with the FCC pursuant to FCC Rule
76.12, (ii) have timely filed all required equal employment opportunity reports
with the FCC pursuant to FCC Rule 76.77, such reports are true and accurate, and
the FCC has certified compliance in response to each such report, (iii) have
complied with the network non-duplication and syndicated exclusivity provisions
of FCC Rules 76.92-76.96 and 76.151-76.156, (iv) are in compliance with all FCC
programming requirements, including the political programming
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provisions of FCC Rule 76.205, the lottery information transmission provisions
of FCC Rule 76.213, and the children's programming provisions of FCC Rule
76.225, (v) have timely filed all reports, including those required by FCC Rule
76.403, and is in compliance with the record-keeping and inspection requirements
of FCC Rules 76.305, 76.307 and 76.601, (vi) have not received any notice of
non-compliance from any franchisor pursuant to FCC Rule 76.309 and meet or
exceed the customer service provisions set forth in that rule, (vii) have timely
met the performance testing requirements of FCC Rule 76.601, with such
measurements having been conducted pursuant to FCC Rule 76.609, and are in
compliance with the applicable technical standards of FCC Rule 76.605, and
(viii) are in compliance with the aeronautical interference provisions of FCC
Rules 76.610-76.615.
7.19 FCC Licenses. Schedule 7.19 correctly sets forth all of the FCC
------------
licenses, permits, approvals and authorizations (collectively, "FCC Licenses")
used or planned to be used by Phonoscope and the Companies in connection with
the Business and correctly sets forth the entity holding such FCC License, the
call sign or file number and expiration date of each such FCC License.
Phonoscope and the Companies are not required to hold any other FCC License to
conduct the Business. Each such FCC License has been duly and validly issued or
assigned to the Sellers or one of the Companies by or with the consent of the
FFC pursuant to procedures which comply with all requirements of applicable law,
is in full force and effect, and is unimpaired, and Phonoscope or one of the
Companies has the right to use all FCC Licenses in the ordinary course of
business for the operation of the Business. Phonoscope and each of the Companies
is in compliance in all material respects with the FCC Licenses and FCC Rules,
and there is no known conflict with the valid rights of others which could
adversely affect the FCC Licenses, the Business or any of the Companies. There
is no complaint or proceeding pending before the FCC, or to the best knowledge
of any of the Sellers or the Companies threatened, or other event that has
occurred, which could result in the forfeiture, revocation, impairment, non-
renewal or adverse modification, of any such FCC License, or the imposition of a
financial or other penalty upon Phonoscope or any of the Companies. All
facilities authorized pursuant to the FCC Licenses were timely constructed and
properly certified in accordance with such FCC License and FCC rulings and are
operating in compliance therewith and all provisions of the Communications Act
of 1934, as amended (the
42
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"Act") and the rules promulgated and policies adopted under the Act
(collectively, "FCC Rules").
7.20 FCC Applications. Schedule 7.20 sets forth all applications
----------------
(collectively, "FCC Applications") that are pending before the FCC with respect
to the Business, the file number of each such application and the date on which
it was accepted for filing by the FCC. Each of the FCC Applications complies in
all material respects with FCC Rules and policies. There are no petitions,
protests, objections, or other proceedings, formal or informal, pending or
threatened, before the FCC requesting dismissal, denial, reconsideration or
reinstatement which, if granted, could result in the denial, dismissal, return,
or non-grant of any FCC Application, the issuance of a cease and desist order,
or the imposition of any administrative or judicial sanction.
7.21 FCC Compliance. Phonoscope and each of the Companies has timely
--------------
filed with the FCC all reports and filings (collectively, "Reports") which are
required to be filed by it under the Act and FCC Rules, including, without
limitation, FCC Rules relating to equal employment opportunity. Each Report
filed with respect to the FCC Licenses is true, correct, and complete in all
material respects.
7.22 Zoning, Aviation, etc. Compliance. Except as set forth in
---------------------------------
Schedule 7.22 and except as would not have a Material Adverse Effect on Buyer's
or any of the Companies' operations of the Business following the Closing, none
of the facilities used in the Business violates in any material respect the
provisions of any applicable federal, state, or local aviation regulation
(including FCC and Federal Aviation Administrative tower markings and lighting
requirements), building restriction, zoning or other similar governmental
ordinance or regulation, and each such facility is zoned, if required, so as to
permit the commercial uses intended by the owner or occupier thereof, and there
are no outstanding variances or special use permits materially affecting any of
such facilities or the uses thereof.
7.23 Compliance with the Copyright Act. Since July 1, 1996, Phonoscope
---------------------------------
and each of the Companies has (a) duly filed in a timely manner all registration
statements, statements of account and other filings relating to the operation of
the Business which are required to be filed under the Copyright Act
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and under any local laws and rules, (b) has conducted the Business, in all
material respects, in compliance with the Copyright Act and the rules and
regulations of the Copyright Office, and (c) with only immaterial exceptions,
timely remitted all required payments and royalty fees. None of Phonoscope or
any of the Companies is liable to any Person for copyright infringement under
the Copyright Act or trademark infringement under the applicable federal and
state statutes and regulations as a result of its business operations, its
conduct of the Business or otherwise.
7.24 Must-Carry and Retransmission Consent. Schedule 7.24 lists each
-------------------------------------
Broadcast Station (as defined below) which is carried on each Cable System
pursuant to the must-carry provisions of FCC Rules 76.51-76.62, and the channel
on which it is carried. Schedule 7.24 also separately lists each Broadcast
Station carried pursuant to a retransmission consent agreement, and the channel
on which it is carried. Except as set forth on Schedule 7.24 there is no dispute
pending or threatened with respect to the carriage of any Broadcast Station on
the Cable Systems. Except as set forth on Schedule 7.24, the Seller has complied
with all Broadcast Station notification provisions of FCC Rule 76.58 and the
must-carry record-keeping provisions of FCC Rule 76.302 with respect to each
Cable System, and with all other FCC Rules regarding must-carry and
retransmission consent. Each Broadcast Station signal carried by the Cable
Systems is carried either pursuant to the must-carry obligations of the Cable
Systems or pursuant to a valid and binding agreement between the Seller and the
Broadcast Station authorizing the retransmission of the Broadcast Station
signal. For purposes of this Section 7.24, the term "Broadcast Station" means,
in connection with signals retransmitted, a qualified television broadcast
station, or a qualified television translator station, a qualified low power
television station, a qualified educational television broadcasting station, but
does not include a "superstation" as defined by FCC Rule 76.64 (c) (2).
7.25 Petitions for Special Relief. Neither Phonoscope nor any of the
----------------------------
Companies has received or has knowledge of any petition for special relief or
document so styled filed against or with respect to Phonoscope or any of the
Companies concerning any matters which under FCC Rules can be raised in a
petition for special relief.
44
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7.26 Conduct in the Ordinary Course. Since December 31, 1996,
------------------------------
Phonoscope and the Companies have has conducted the Business only in the usual,
regular and ordinary manner consistent with past practices.
7.27 Solvency. Each Seller is, and immediately after the consummation
--------
of the transactions contemplated hereby will be, Solvent.
7.28 Program Audits. Other than a routine audit scheduled for August
--------------
1997 by the Basic Program Consortium, none of Phonoscope or any of the Companies
(a) is currently undergoing any program provider audit and (b) has received any
- -
notice of a pending program provider audit and, to the best knowledge of the
Sellers and the Companies, no such audit has been threatened by any program
provider. The Sellers shall cooperate with such audit and shall indemnify and
defend the Companies and Buyer from and against any Losses arising from or
relating in any way to such audit, including, but not limited to, conducting any
defense, paying all costs of defense and paying all awards or settlements
relating thereto.
7.29 Effective Competition. The Cable Systems of the Business are
---------------------
either exempt from rate regulation or are subject to "effective competition" as
defined in FCC Rule 76.905(b) because the Cable Systems serve fewer than 30% of
the households in the franchised area. No franchisor has certified to the FCC as
a pre-condition to rate regulation.
8. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer represents and warrants
---------------------------------------
to the Sellers as follows:
8.1 Organization. Buyer is a corporation duly organized, validly
------------
existing and in good standing under the laws of the State of Delaware.
8.2 Authority. Buyer has all requisite power and authority to enter
---------
into this Agreement and each agreement contemplated hereby to which it is to be
a party, to carry out its obligations hereunder and thereunder and to
consummate the transactions contemplated hereby and thereby. The execution,
delivery and performance of this Agreement and each of the agreements
contemplated hereby to which it is a party have been duly authorized by all
required corporate action on the part of
45
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Buyer. This Agreement has been, and upon their execution each of the agreements
contemplated hereby will be, duly executed and delivered by Buyer, and (assuming
due authorization, execution and delivery by each of the Sellers) this Agreement
constitutes, and upon their execution by Buyer, each of the agreements
contemplated hereby will constitute, legal, valid and binding obligations of
Buyer enforceable against Buyer in accordance with their respective terms.
8.3 No Conflicts. Neither the execution or delivery of this Agreement
------------
or any agreement contemplated hereby, nor fulfillment of or compliance with the
terms and provisions hereof and thereof, nor the consummation of the
transactions contemplated hereby and thereby, will conflict with or result in a
breach of the terms, conditions or provisions, of or constitute a default under,
or result in any violation of, or result in the creation of any Lien upon any of
the properties or assets of Buyer pursuant to, or require any consent under, or
give to any third Person any rights of termination, amendment, acceleration,
suspension, revocation or cancellation of, (i) the certificate of incorporation
or bylaws of Buyer, (ii) any award of any arbitrator or any order judgment,
decree, statute, law, rule or regulation to which Buyer is subject, or (iii) any
note, bond mortgage or indenture contract, agreement lease, sublease, license,
permit, franchise or other instrument or arrangement to which Buyer is a party
or by which any of Buyer's assets or properties are bound or affected, except
for filings under the HSR Act.
8.4 Actions Pending. There is no action, suit, investigation or
---------------
proceeding pending or, to the best knowledge of Buyer, threatened, against or
affecting Buyer or any of its properties or rights, by or before any court,
arbitrator, administrative tribunal or governmental body that is reasonably
likely to materially impair Buyer's ability to the transactions contemplated by
this Agreement.
8.5 Solvency. Buyer is, and immediately after the consummation of the
--------
transactions contemplated hereby will be, Solvent.
8.6 Broker's or Finder's Commissions. No broker's or finder's fee or
--------------------------------
commission will be payable by Buyer with respect to the transactions
contemplated by this Agreement other than the
46
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fees of CEA as representative of the Sellers, which fees shall be paid by Buyer.
9. DEFINITIONS.
-----------
As used herein, the following terms shall have the following meanings:
Act: means 47 U.S.C. (S) 522.
---
Affiliate: means with respect to any Person, another Person directly
---------
or indirectly controlling, controlled by, or under direct or indirect common
control with, such Person.
Assets: has the meaning specified in Section 7.5 (which, without
------
limitation, shall include the Purchased Assets).
Assumed Liabilities: has the meaning specified in Section 1.2.
-------------------
Basic Subscriber: means an individual or household in a property
----------------
currently served pursuant to an Eligible Right of Entry, and an individual or
household in a property to which the provisions of the Camden Subscriber
Equivalent apply that, as of the Closing, is an active direct subscriber to the
Standard Cable Package offered by the Seller or one of the Companies, whose
account is not more than 60 days past due provided, that for subscribers who
--------
subscribe to the Seller's or one of the Companies' Broadcast Basic Packages
("BBP") pursuant to which such subscribers pay $9.95 per month and in respect of
which Seller has no programming cost, each BBP subscriber shall count as .60
Basic Subscriber.
Broadcast Station: has the meaning specified in Section 7.24.
-----------------
Bulk Basic Subscriber: means each household at the Closing receiving
---------------------
the Standard Cable Package offered by Phonoscope or any of the Companies
purchased for it by a bulk purchaser under a Bulk Contract which contains an
Eligible Right of Entry and the account for which is not more than 90 days past
due.
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Bulk Contract: means a contract with a property owner or owners'
-------------
association or a hotel to provide a Standard Cable Package to all dwelling units
in a property for a bulk service fee the account for which is not more than 90
days past due.
Bulk Revenue: means the monthly basic service revenue and monthly
------------
revenue derived from securing bulk arrangements for premium services (excluding
installation fees, service call fees, additional outlet fees, decoder rentals,
late fees, returned check fees and fees for premium or "pay" services other than
premium services that are incorporated in the regular, monthly programming
purchased by the property owner or owners' association for all units in the
property), received from a property owner or owners' association or a hotel
under a Bulk Contract.
Business: means the residential cable television and
--------
telecommunications business of Phonoscope and its Subsidiaries other than the
Retained Business including the business described in the information memorandum
dated April 17, 1996 prepared by CEA (except for changes in the ordinary course
of business since such time).
Business Day: means any day which is not a Saturday or Sunday or other
------------
day on which banks are required or authorized by law to close in the State of
Texas.
Buyer: has the meaning specified in the introduction.
-----
Buyer's Accountants: means the accounting firm of Deloitte & Touche,
-------------------
LLP.
Camden Subscriber Equivalents: means the number of subscriber
-----------------------------
equivalents computed by dividing (a) the aggregate dollar amount paid or
required to be paid to, or owned by, Cable Leasing, Inc. or any affiliate, in
respect of each relevant Eligible Right of Entry at a Camden-owned property
("Camden Property") for the period of calculation by (b) $22.95 or $19.95, as
applicable, based upon whether the Camden Property is serviced by Phonoscope,
Ltd., Phonoscope Entertainment, Inc. or Bay Area Cable Television, Inc. By way
of example, the Camden Subscriber Equivalents would be computed as follows if
$28,000 is the amount paid to Cable Leasing, Inc.:
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(a) aggregate dollar amount paid
to, required to be paid to, or
owned by, Cable Leasing, Inc.
or any affiliate $28,000.00
divided by: (b) $22.95 assuming Phonoscope serves
this Camden Property 22.95
----------
equals: Camden Subscriber Equivalents to be
subtracted from EBU calculation 1220
It is expressly understood that all Camden subscribers are included on the EBU
calculation prior to the subtraction of Camden Subscriber Equivalents (as
provided in the definition of EBU).
Capitalized Lease Obligations: means all rental obligations which,
-----------------------------
under GAAP in effect on the day incurred, are required to be capitalized on the
books of any of Phonoscope or the Companies, in each case to the extent of the
amount thereof accounted for as indebtedness (net of interest expense) in
accordance with GAAP.
CEA: means Communication Equity Association, Inc.
---
Claim: has the meaning specified in Section 10.2.
-----
Closing: has the meaning specified in Section 3.1.
-------
Closing Date: has the meaning specified in Section 3.1.
------------
Closing Statement: has the meaning specified in Section 1.3 (a).
-----------------
COBRA: means Consolidated Omnibus Budget Reconciliation Act of 1985,
-----
as amended.
Common Strand Segment: means the segment of 39 fiber miles indicated
---------------------
on Schedule 6.9 plus up to six additional fiber miles contiguous to such
indicated segment, as designated by the Sellers by written notice to Buyer
delivered not less than ten Business Days prior to the Closing.
Companies: has the meaning specified in the Recitals.
---------
49
<PAGE>
Conveyed Network: means the portions of the network described in
----------------
Schedule 9.1 (and in the maps in Schedule 9.1) to be owned by Buyer and the
Companies following the Closing plus all lines from such network to customer
properties (to the extent owned by Phonoscope or any of the Companies).
Costed Locations: has the meaning specified in Section 1.3(b)
----------------
Direct Right of Entry Costs: has the meaning specified in Section
---------------------------
1.3(c).
Duplicate Properties: has the meaning specified in Section 1.3(c).
--------------------
Eligible Right of Entry: means (i) a valid, lawful, binding and
-----------------------
enforceable written agreement in favor of Phonoscope or one of the Companies to
provide video programming delivery service to one or more MDUs on an exclusive
basis; (ii) contracts that previously qualified under clause (i) that have
expired without termination of service, notice of termination or nonrenewal or
commencement of service at such property by any other video services provider
and to which service is then being provided at Closing; (iii) current subscriber
agreements (including terms and conditions contained in work orders) with
residents of single family subdivisions; (iv) current subscriber agreements
(including terms and conditions contained in work orders) with restaurants; (v)
up to three contracts representing not more than 500 units entered into prior to
January 1, 1997 that would qualify under clause (i) except that they are not
exclusive; and (vi) a Bulk Contract for the provision of service to the
Glenchester Hotel or the Super 8 Motel.
Employee Liabilities: has the meaning specified in Section 5(a).
--------------------
Employee List: has the meaning specified in Section 5(b).
-------------
Environmental Laws: has the meaning specified in Section 7.9.
------------------
50
<PAGE>
Equivalent Basic Unit and EBU: means:
-----------------------------
(a) the number of Basic Subscribers
plus: (b) a number of subscriber equivalents computed by dividing the
Bulk Revenue from Bulk Contracts for the 30-day period
ending three (3) business days prior to the date of
computation.
(i) in the case of Bulk Revenue from Bulk Contracts of
Phonoscope, Ltd., and Phonoscope Entertainment, Inc. by
$22.95; or
(ii) in the case of Bulk Revenue from Bulk Contracts of Bay
Area Cable Television, Inc., by $19.95;
plus: (c) a number of subscriber equivalents computed by dividing
Restaurant Revenue for the 30-day period ending three (3)
business days prior to the date of computation by $22.95.
less: (d) the Camden Subscriber Equivalents.
(e) For the purposes of computing the number of EBU, with
respect to all subscribers, the video programming services shall have
been installed at the subscriber's property not less than three (3)
business days prior to Closing. Additionally, all such subscribers
shall have paid or in the case of a subscription received not more
than forty-five (45) days prior to Closing, be obligated to pay the
Company's standard deposit and installation fees, if any, for such
services, (in accordance with the Company's ordinary business
practices, it being understood that Company runs promotional specials
from time to time, consistent with industry practice, in which
installation fees are sometimes waived and other one-time special
benefits offered).
(f) There shall be excluded from the calculation of EBU the
subscribers and bulk revenues under
51
<PAGE>
contracts otherwise satisfying the provisions of the definition
provided for herein that were signed by Phonoscope or one of the
Companies after January 1, 1997 with property owners and subscribers
in properties that were receiving cable services from Buyer or any of
its affiliates on or after October 1, 1996.
(g) There shall be included in the calculation of EBU the
subscribers and Bulk Revenues from contracts otherwise satisfying the
provisions of the definitions provided for herein that were signed by
Buyer or any of its affiliates after January 1, 1997 with property
owners and subscribers in properties that were receiving cable
services from Phonoscope or one of the Companies on or after October
1, 1996 under an Eligible Right of Entry and (i) are no longer so
receiving such services (other than those which service was
disconnected due to a default by Phonescope or one of the Companies)
and (ii) which are receiving cable services from Buyer at Closing.
ERISA: means the Employee Retirement Income Security Act of 1974, as
-----
amended.
Excluded Properties: has the meaning specified in Section 1.3(c).
-------------------
Exclusive Transaction: has the meaning specified in Section 6.8.
---------------------
Expanded Basic Revenue: means the additional gross programming
----------------------
revenues received from those Bulk Basic Subscribers who additionally subscribe
directly from Phonoscope or any of the Companies for an expanded tier of
programming service (other than a "pay" or "premium" programming service) in
respect of the monthly programming fees (excluding installation fees, service
call fees, decoder rentals, late fees and fees for "par" or "premium" services)
for such expanded tier, and for which the accounts are not more than 60 days
past due and for which the standard deposit and installation fees for such
services (in accordance with the ordinary practices of the Business) have been
paid for at least one full month prior to the Closing.
52
<PAGE>
Expenses: has the meaning specified in Section 10.1(a).
--------
Ex-Subscribers: has the meaning specified in Section 1.5.
--------------
FCC: means the Federal Communications Commission or any successor
---
thereto.
FCC Applications: has the meaning specified in Section 7.20.
----------------
FCC Licenses: has the meaning specified in Section 7.19.
------------
General and Indemnity Escrow Aqent: has the meaning specified in
----------------------------------
Section 2.3.
General and Indemnity Escrow Agreement: has the meaning specified in
--------------------------------------
Section 2.3.
GAAP: means United States generally accepted accounting principles
----
consistently applied throughout the period or periods in question.
Governmental Body: means any government or any political subdivision
-----------------
thereof, whether federal, state, local or foreign, any agency, instrumentality
or authority thereof (including, without limitation, the FCC), and any court or
arbitrator (public or private).
Indebtedness: means, with respect to any Person, (a) all indebtedness
------------
of such Person, whether or not contingent, for borrowed money, (b) all
obligations of such Person evidenced by notes, bonds, debentures or other
similar instruments, (c) all obligations of such Person as lessee under leases
that have been or should be, in accordance with GAAP, recorded as capital
leases, (d) all obligations, contingent or otherwise, of such Person under
acceptance, letter of credit or similar facilities, (e) all Indebtedness of
others referred to in clauses (a) through (d) above guaranteed directly or
indirectly in any manner by such Person, or in effect guaranteed directly or
indirectly by such Person through any agreement or arrangement, and (f) all
Indebtedness referred to in clauses (a) through (d) above secured
53
<PAGE>
by any Lien on property owned by such Person, even though such Person has not
assumed or become liable for the payment of such Indebtedness.
Indemnified Taxes: means any Taxes paid or payable by Buyer or any
-----------------
person with whom Buyer pays Taxes on a consolidated, combined, or similar basis
with respect to any taxable year or period of the Companies or predecessor
entities of the Companies which ends on or before the Closing Date, including
any tax liability of the Companies or the Sellers which arises as a result of
the transactions contemplated by this Agreement. Indemnified Taxes also includes
any Taxes paid or payable by Buyer or any person with whom Buyer pays Taxes on a
consolidated, combined, or similar basis with respect to any taxable year or
period of the Companies which begins before and ends after the Closing Date, to
the extent such Taxes are attributable to the activities of the Companies or the
Sellers on or before the Closing Date, including any tax liability of the
Companies or the Sellers which arises as a result of the transactions
contemplated by this Agreement but only to the extent such liability is not
reflected as a liability on the Closing Statement.
Internal Revenue Code: means the Internal Revenue Code of 1986, as
---------------------
amended, and the rules and regulations promulgated thereunder.
Liabilities: means any and all debts, liabilities and obligations,
-----------
whether accrued or fixed, absolute or contingent, matured or unmatured or
determined or undetermined, including, without limitation, those arising under
any law, rule or regulation of any Governmental Body (including, without
limitation, Indemnified Taxes), those arising under any contract, agreement,
arrangement, commitment or undertaking or those to or in respect of employees or
leased employees of the Company and includes, without limitation, the Assumed
Liabilities and the Excluded Liabilities.
Liabilities for Programming Fees: means all amounts which are clearly
--------------------------------
and manifestly owing to a program provider and which are (i) amounts evidenced
by invoices from programming providers, (ii) all amounts due to program
providers as shown on the program provider's books and records, (iii) all
amounts arising from properties in which service has been activated (whether or
not the program provider shall have received notice
54
<PAGE>
of such activation) and not yet paid to program providers, (iv) all amounts
calculable with respect to a property by reference to the Company's subscriber
reports to program providers for which the program provider's invoice shall not
have been issued or for which the program provider's invoice shall have been
issued but shall not have been paid or (v) all amounts arising from a claim by a
program provider or from a program provider audit.
Lien: means any mortgage, pledge, security interest, encumbrance,
----
lien or charge of any kind, including any agreement to give any of the
foregoing, any conditional sale or other title retention agreement, any lease in
the nature thereof, and the filing of or agreement to give any financing
statement under the Uniform Commercial Code of any jurisdiction.
Losses: has the meaning specified in Section 10.1(a).
------
Material Adverse Effect: means any circumstance, change in, or effect
-----------------------
on, the Business, any of the Companies or the Assets (including the Purchased
Assets) that, individually or in the aggregate with any other circumstances,
changes in, or effects on, the Business, any of the Companies or the Assets
(including the Purchased Assets): (a) is, or could be, materially adverse to
the business, operations, assets or Liabilities (including, without limitation,
contingent Liabilities), employee relationships, customer or supplier
relationships, prospects, results of operations or the condition (financial or
otherwise) of the Business or the Assets (including the Purchased Assets) or (b)
could materially adversely affect the ability of Buyer or the Companies to
operate or conduct the Business in the manner in which it is currently operated
or conducted by the Sellers and the Companies.
MDUs: means, collectively, multiple dwelling units (comprising high-
----
rise and low-rise apartment, condominium and cooperative complexes, town-house
developments, mobile home parks and congregate care and other similar
facilities, which contain 25 or more dwelling units in a single structure).
Network Separation Escrow Agreement: means the agreement to be
-----------------------------------
entered into at the Closing by Buyer and Sellers in the form attached hereto as
Exhibit C.
55
<PAGE>
Network Separation Escrow Amount: has the meaning specified in
--------------------------------
Section 2.5(a).
Non-Competition Agreement: means the agreement to be entered into at
-------------------------
the Closing by Buyer and each of the Sellers in the form attached as Exhibit E.
Notice: has the meaning specified in Section 10.6.
------
Officer's Certificate: means as to any Person, a certificate of its
---------------------
president, vice president, chief financial officer, treasurer or controller or,
in the case of a partnership or limited liability company, an equivalent officer
of a general partner or manager or an individual general partner or manager, or
in the case of an individual, such Person himself.
OpTel: has the meaning specified in the introduction.
-----
OpTel Indemnified Parties: has the meaning specified in Section
-------------------------
10.1(a).
PBGC: means the Pension Benefit Guaranty Corporation established
----
pursuant to Section 4002 of ERISA, or any successor entity thereto.
Permitted Liens: means Purchase Money Security Interests, landlord's
---------------
liens, mechanics' liens, repairmen's liens and other similar liens, if any, that
do not materially detract from the value of the property subject thereto or
materially interfere with the manner in which it is currently being used in the
Business, or materially impair the operations of the Business, and Taxes,
general and special assessments not in default without penalty or interest and
Liens to secure Capitalized Lease Obligations to the extent they exist on the
date hereof.
Person: means an individual, partnership, joint venture, corporation,
------
limited liability company, trust or other entity or any Governmental Body or
subdivision, agency, commission or authority thereof.
Pole Owners: has the meaning specified in Section 4.2.9.
-----------
56
<PAGE>
Purchase Money Debt: means debt of Phonoscope or any of the Companies
-------------------
incurred to finance an acquisition of assets which is secured by a Purchase
Money Security Interest.
Purchase Money Security Interest: means a purchase money security
--------------------------------
interest within the meaning of Section 9-107 of the Uniform Commercial Code, as
in effect on the date hereof.
Purchase Price: has the meaning specified in Section 1.1.
--------------
Purchased Assets: means all the assets, business and operations of
----------------
the Business held by Phonoscope, including; without limitation:
(i) the assets and operations referred to in the information
memorandum dated April 17, 1996 prepared by CEA (except for
changes in the ordinary course of business since such time);
(ii) all franchises, licenses, permits, real property rights and
assessments held or pending, except for the Phonoscope
Houston franchise;
(iii) all MDU and single-family residential right of entry and
customer contracts including, without limitation, those
listed in Schedule 9.1;
(iv) the Phonoscope and Bay Area Cable Television head ends, the
material components of which are described on Schedule
7.5(d);
(v) all vehicles, and inventory of spare parts described in
Schedule 9.1, technical and test equipment, receivables and
other current assets (other than cash), systems, computers,
office equipment, books and records related to the Business;
(vi) the Phonoscope "Entertainment Business" fiber network
("Conveyed Network"), a fiber optic network having a
backbone mileage of not less
57
<PAGE>
than 1,100 fiber miles, the main backbone of which is
outlined on the map included in Schedule 9.1 and otherwise
is described in Schedule 9.1, and which consists of (without
limitation)
(a) all fiber, coaxial cable and other cable and wiring,
electronic equipment, strand, pole and other
attachments, amplifiers, optical receivers, active and
passive devices on the Category I Segments and Category
II Segments (as such segments are identified on the map
included in Schedule 9.1 and including fiber, cable,
strand and wiring from the segments on such maps to the
residential buildings and customers to the extent owned
by Phonoscope);
(b) the particular fibers enumerated in Schedule 9.1 in
fiber sheathes (bundles) retained by Phonoscope on the
Category III Segments, together with the right to use,
in common with Phonoscope, all electronic equipment,
all strand, pole and other attachments, amplifiers,
optical receivers, active and passive devices; and
(c) all fiber, coaxial cable and other cable and wiring,
electronic equipment, strand, pole and other
attachments, amplifiers, optical receivers, active and
passive devices (including Sellers interest in wiring
and other assets located at MDU locations) that link
the network assets listed in clauses (a) and (b) above
to properties and customers serviced by the Business;
(vii) hotel, motel and restaurant CATV contracts and customers in
suburban areas of greater Houston (not including CATV
contracts and customers in office buildings in greater
58
<PAGE>
Houston and not including the Lancaster Hotel);
(viii) all strands and pole attachment rights in the Common Strand
Segment.
Notwithstanding the aforesaid, the Purchased Assets shall not include any assets
or customer relationships described in Schedule 9.2 hereto.
Recent Subscribers: has the meaning specified in Section 1.5.
------------------
Relevant Program Provider: means any programming provider that is or
-------------------------
shall have at any time during the past three years provided programming to
Phonoscope or any of the Companies.
Reports: has the meaning specified in Section 7.21.
-------
Required Consents: has the meaning specified in Section 4.2.9.
-----------------
Restaurant Revenue: means the monthly basic service revenue and the
------------------
monthly revenue derived from recurring bulk arrangements for premium services
(excluding installation fees, service call fees, additional outlet fees,
decoder rentals, late fees, returned check fees and fees for premium or "pay"
services other than premium services that are incorporated in the regular,
monthly programming purchased by a Restaurant Subscriber), received from
Restaurant Subscribers.
Restaurant Subscriber: means a restaurant currently served pursuant
---------------------
to an Eligible Right of Entry that, as of the date of determintion, is an
active subscriber to not less than Standard Cable Package offered by Phonoscope
or one of the Companies, whose account is not more than 60 days past due.
Retained Businesses: means (i) Phonoscope's residential and
-------------------
commercial Internet access, videoconferencing or "Phonoscope" videophone
business; (ii) Phonoscope's businesses of providing switched or unswitched data
and voice transmission services to business; (iii) Phonoscope's business of
providing cable television services to hospitals, businesses at locations in
office buildings and the Lancester Hotel in Houston; or (iv)
59
<PAGE>
the right to use the "Phonoscope" name.
Rights of Entry: means valid, lawful, binding and enforceable written
---------------
agreements in favor of Phonoscope's or any of the Companies to provide exclusive
video programming delivery service to one or more MDUs.
Seller: has the meaning specified in the introduction.
------
Seller Indemnified Parties: has the meaning specified in Section
--------------------------
10.1(b).
Sellers' Accountants: means the accounting firm of Nelson & Nelson.
--------------------
Services and Cooperation Agreement: means the agreement to be entered
----------------------------------
into at the Closing by Buyer and Phonoscope in the form attached hereto as
Exhibit G.
Shares: has the meaning specified in the Recitals.
------
Solvent: means, with respect to any Person on a particular date, that
-------
on such date (a) the fair value of the property of such Person is greater than
the total amount of Liabilities, including, without limitation, contingent
Liabilities, of such Person, (b) the present fair salable value of the assets of
such Person is not less than the amount that will be required to pay the
probable Liability of such Person on its debts as they become absolute and
matured, (c) such Person does not intend to, and does not believe that it will,
incur debts or Liabilities beyond such Person's ability to pay as such debts and
Liabilities mature and (d) such Person is not engaged in business or a
transaction, and is not about to engage in business or a transaction, for which
such Person's property would constitute an unreasonably small capital.
Standard Cable Package: means the services sold by Phonoscope or any
----------------------
of the Companies for basic cable channels and/or services and equipment, but
excluding premium channels, deposits, installation fees or premium discounts.
The Standard Cable Package for the customers of Phonoscope includes the
programming listed in Exhibit H attached hereto made a part hereof for all
purposes, and the Standard Cable Package for Customers of each of the Companies
includes the programming
60
<PAGE>
listed in Exhibit I hereto.
Standard Costs: has the meaning specified in Section 1.3(b).
--------------
Sublease: means the sublease to be entered into at the Closing by
--------
Buyer and Phonoscope in the form attached hereto as Exhibit J.
Subsidiary: means, as to any Person, a corporation or other Person of
----------
which shares or similar securities having voting power to elect a majority of
the board of directors or other managers are at the time owned, directly or
indirectly, through one or more intermediaries, by such Person.
Tax or Taxes: means any and all taxes, fees, levies, duties, tariffs,
--- -----
imposts, and other charges of any kind (together with any and all interest,
penalties, additions to tax and additional amounts imposed with respect thereto)
imposed by any government or taxing authority, including, without limitation:
taxes or other charges on or with respect to income, capital, gains, capital
gains, franchises, windfall or other profits, gross receipts, property, sales,
use, capital stock, payroll, employment, social security, workers' compensation,
unemployment compensation, or net worth and alternative minimum taxes; taxes or
other charges in the nature of excise, withholding, ad valorem, stamp, transfer,
value added, or gains taxes; license, registration and documentation fees; and
customs' duties, tariffs, and similar charges.
Tax Authority: means any federal, state, local or foreign taxing
-------------
authority, court, or tax administrative body.
Tax Proceeding: means an examination, investigation, audit, hearing,
--------------
or other proceeding conducted by a Tax Authority regarding a Tax Return. A Tax
Proceeding also includes a proceeding in federal Tax Court and a state or local
administrative proceeding.
Tax Return: means any tax return or other tax reporting document
----------
filed or required to be filed by or on behalf of the Companies with a Tax
Authority which relates to Indemnified Taxes.
61
<PAGE>
Upgrade: has the meaning specified in Section 1.3(b).
-------
WARN: Worker Adjustment and Retraining Notification Act of 1988, as
----
amended.
10. MISCELLANEOUS
-------------
10.1 Indemnification. (a) The Sellers jointly and severally shall
---------------
indemnify and hold Buyer, each of the Companies and their respective directors,
officers, employees, affiliates, agents, successors and assigns (collectively,
the "OpTel Indemnified Parties") harmless from and against any and all losses,
liabilities, obligations, damages, claims, deficiencies, costs and expenses
("Losses") based upon, attributable to or resulting from or arising out of:
(i) the Excluded Liabilities; (ii) any misrepresentation or breach of
representation or warranty made by the Sellers herein; (iii) breach or non
fulfillment of any agreement or covenant on the part of the Sellers under this
Agreement or any of the agreements contemplated hereby (which shall include, but
not be limited to, any dispute as to the accuracy of the Closing Statement
described in Section 1.4); (iv) all Indemnified Taxes, (v) any and all Losses
arising from or relating to any violations of the Copyright Act prior to the
Closing and (vi) any and all notices, actions, suits, proceedings, demands,
assessments, judgments, costs, penalties and expenses, including attorneys' and
other professionals' fees (including, without limitation, reasonable attorneys'
and other professionals' fees and expenses incurred in any action or proceeding
between the parties hereto or between any party hereto (if such party is the
prevailing party) and a third party, if such matter is subject to the
indemnification provisions of this Article 10) and charges incurred in
connection with the investigation, defending or preparing to defend the
foregoing (collectively, "Expenses").
(b) Buyer shall indemnify and hold the Sellers and their
respective directors, officers, shareholders, employees, heirs, executors,
administrators, affiliates, agents, successors and assigns (collectively, the
"Sellers Indemnified Parties") harmless from and against any and all Losses
based upon, attributable to or resulting from (i) any misrepresentation, breach
of representation or warranty made by Buyer herein, (ii) any breach or non-
fulfillment of any covenant or agreement on the part of Buyer under this
Agreement or any of
62
<PAGE>
the agreements contemplated hereby, (iii) any Assumed Liabilities and (iv) any
and all Expenses incident to the foregoing.
(c) Except as set forth below, an indemnifying party may be
liable for Losses arising under Section 10.1(a) (ii) or 10.1(b) (i) only if
written notice of a claim for indemnity in respect of such subject matter is
given to the indemnifying parties on or prior to the second anniversary of the
Closing Date (except that (i) such day shall be the day of expiration of the
applicable statute of limitations in respect of breaches of the representations
and warranties in Section 7.6, (ii) such day shall be the later of the second
anniversary of the Closing Date or 180 days after the indemnified party has
discovered facts or circumstances that indicate a reasonable likelihood that a
breach of the representations and warranties set forth in Sections 7.1, 7.5, 8.1
and 8.2 has occurred and (iii) other than the time limits for accrual of a cause
of action under applicable law, there shall be no time limit on the ability of
any party to bring a claim for any loss arising from intentional
misrepresentation or fraud).
10.2 Indemnification Procedures, Determination of Damages,
-----------------------------------------------------
Limitations and Related Matters. (a) In the event that any legal proceedings,
- - -------------------------------
including, without limitation, any Tax Proceeding, shall be instituted or that
any claim or demand ("Claim") shall be asserted by any Person in respect of
which indemnity may be sought under Section 10.1(a) or Section 10.1(b), the
indemnified party shall reasonably and promptly cause written notice of the
assertion of any Claim of which it has knowledge which is subject to such
indemnity to be forwarded to the indemnifying party; provided, however, that the
-------- -------
failure to notify the indemnifying party shall not affect the indemnifying
party's obligation hereunder except to the extent of actual prejudice. The
indemnifying party shall have the right, at its sole option and expense, to be
represented by counsel of its choice, which shall be satisfactory to the
indemnified party in the reasonable exercise of its discretion. In the event
the indemnifying party is any or all of the Sellers and he (or they)
acknowledges in writing his obligation to indemnify the OpTel Indemnified
Parties against any Losses that may result from such Claim, and if such Claim is
for monetary damages only and the defense of such Claim by such Seller or
Sellers will not, in the judgment of Buyer, otherwise materially adversely
impact the Business, the Company or any OpTel Indemnified Party in any manner
whatsoever, then
63
<PAGE>
(and under no other circumstances) such Seller or Sellers shall have the right
to defend against, negotiate, settle or otherwise deal with any Claim which
relates to any Losses indemnified against hereunder; provided, however,
-------- -------
that no settlement shall be made without the prior written consent of Buyer,
which shall not unreasonably withhold or delay its consent. In the event the
indemnifying party is Buyer and Buyer acknowledges in writing its obligation to
indemnify the Sellers Indemnified Parties against any Losses that may result
from such Claim, and if such Claim is for monetary damages only and the defense
of such Claim by the Buyer will not, in the judgment of the Sellers, otherwise
materially adversely impact any Sellers Indemnified Party in any manner
whatsoever, then (and under no other circumstances) Buyer shall have the right
to defend against, negotiate, settle or otherwise deal with any Claim which
relates to any Losses indemnified against hereunder; provided, however, that no
-------- -------
settlement shall be made without the prior written consent of the Sellers, which
shall not unreasonably withhold or delay their consent. If the indemnifying
party elects to defend against, negotiate, settle or otherwise deal with any
Claim which relates to any Losses subject to indemnity hereunder, it shall
within 15 Business Days (or sooner, if the nature of the Claim so requires)
notify the indemnified party of its intent to do so. If the indemnifying party
shall not be entitled to, or elects not to, defend against, negotiate, settle or
otherwise deal with any Claim which relates to any Losses subject to indemnity
hereunder, fails to notify the indemnified party of its election as herein
provided or contests its obligation to provide indemnity hereunder, the
indemnified party may defend against, negotiate, settle or otherwise deal
with such Claim. If the indemnified party defends any Claim, then the
indemnifying party shall periodically reimburse the indemnified party for the
expenses of defending such Claim promptly following submission of invoices
therefor. The indemnified party may not settle any Claim without the prior
written consent of the indemnifying party, which shall not unreasonably withhold
or delay its consent. If the indemnifying party shall assume the defense of any
Claim, the indemnified party may participate, at its own expense, in the defense
of such Claim; provided, however, that the indemnified party shall be entitled
-------- -------
to participate in any such defense with separate counsel, at the expense of the
indemnifying party, if (i) requested by the indemnifying party so to participate
or (ii) in the reasonable opinion of counsel to the indemnified party a conflict
or potential conflict exists between the
64
<PAGE>
indemnified party and the indemnifying party that would make such separate
representation advisable; and provided, further, that the indemnifying party
-------- -------
shall not be required to pay for more than one such counsel for all indemnified
parties in connection with any Claim. The parties agree to cooperate fully with
each other in connection with the defense, negotiation or settlement of any such
Claim.
(b) After any final judgment or award shall have been rendered
by a court, arbitration panel or administrative agency of competent jurisdiction
and the expiration of the time in which to appeal therefrom, or a settlement
shall have been consummated, or any indemnified party shall have paid or
experienced Losses for which an indemnified party shall be entitled to
indemnification under Section 10.1(a) or Section 10.1(b) or the indemnified
party and the indemnifying party shall have arrived at a mutually binding
agreement with respect to a Claim, the indemnified party shall forward to the
indemnifying party notice of any sums due and owing by the indemnifying party
pursuant hereto with respect to such matter and the indemnifying party shall be
required to pay all of the sums so due and owing to the indemnified party as
described below.
(c) The OpTel Indemnified Parties shall not be deemed to have
notice of any Claim by virtue of knowledge acquired on or prior to the Closing
Date by an employee of either the Sellers or any of the Companies.
(d) Except as described in clause (e) below, indemnity payments
for Losses due to an indemnified party under this Section 10.2 shall be made by
wire transfer of immediately available funds to an account designated by the
indemnified party, within five business days after the date of the notice
referred to in Section 10.2(b).
(e) If, pursuant to Section 2.3 and the General and Indemnity
Escrow Agreement, the Indemnity Escrow Amount and/or the General Escrow Amount
is available to Buyer to satisfy any claim for indemnification hereunder, and
(i) the Sellers shall not have objected to the amount claimed by the OpTel
Indemnified Parties for indemnification with respect to any Loss in accordance
with the procedures set forth in the General and Indemnity Escrow Agreement or
(ii) the Sellers shall have delivered notice of its disagreement as to the
amount of any
65
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indemnification requested by the OpTel Indemnified Parties and either (A) the
Sellers and Buyer shall have, subsequent to the giving of such notice, mutually
agreed that the Sellers is obligated to indemnify the OpTel Indemnified Parties
for a specified amount and shall have so jointly notified the General and
Indemnity Escrow Agent or (B) a final, nonappealable order of a court pursuant
to Section 10.9 by the OpTel Indemnified Parties for indemnification from the
Sellers and the General and Indemnity Escrow Agent shall have received, in the
case of clause (A) above, written instructions from the Sellers and Buyer or, in
the case of clause (B) above, a copy of the final nonappealable judgment of the
court, then the General and Indemnity Escrow Agent shall deliver to the OpTel
Indemnified Parties from the Indemnity Escrow Amount or the General Escrow
Amount, as the case may be, any amount determined to be owed to the OpTel
Indemnified Parties under this Section 10.2 in accordance with the General and
Indemnity Escrow Agreement and upon depletion of the Indemnity Escrow Amount or
the General Escrow Amount, as the case may be, the provisions of Section 10.2(d)
shall apply to any additional amounts due Buyer under Section 10.1 and 10.2. The
lack of availability of the Indemnity Escrow Amount or the General Escrow
Amount, or Buyer's decision not to make a claim against either or both of the
Indemnity Escrow Amount or the General Escrow Amount, shall not limit any claims
for indemnification by Buyer under this Agreement.
10.3 Amendments. This Agreement may not be amended except in a
----------
writing signed by, or on behalf of, all parties hereto.
10.4 Survival of Representations and Warranties. All representations
------------------------------------------
and warranties contained herein or made in writing by or on behalf of any party
hereto in connection herewith shall survive the Closing for the periods
specified in Section 10.1(c) regardless of any investigation made by Buyer or on
its behalf.
10.5 Successors and Assigns. All covenants and agreements in this
----------------------
Agreement contained by or on behalf of the parties hereto shall bind and inure
to the benefit of the respective successors and assigns of the parties, whether
so expressed or not. This Agreement shall not be assignable by any party hereto
without the prior consent of the other party, provided, however, that OpTel
-------- -------
may assign any part or all of its
66
<PAGE>
interest under this Agreement to any wholly-owned Subsidiary, in which case,
both OpTel and such Subsidiary shall be jointly and severally liable for all
obligations so assigned.
10.6 Notices; Sellers' Representative (a) All notices, consents,
--------------------------------
instructions and other communications required or permitted under this Agreement
(collectively, "Notice") shall be effective only if given in writing and shall
be considered to have been duly given when (i) delivered by hand, (ii) sent by
telecopier (with receipt confirmed), provided that a copy is mailed (on the same
date) by certified or registered mail, return receipt requested, postage
prepaid, or (iii) received by the addressee, if sent by Express Mail, Federal
Express or other reputable express delivery service (receipt requested), or by
first class certified or registered mail, return receipt requested, postage
prepaid. Notice shall be sent in each case to the appropriate addresses or
telecopier numbers set forth below (or to such other addresses and telecopier
numbers as a party may from time to time designate as to itself by notice
similarly given to the other parties in accordance herewith, which shall not be
deemed given until received by the addressee). Notice shall be given:
(1) to Buyer at:
OpTel, Inc.
1111 West Mockingbird Lane
Dallas, Texas 75247
Attn: General Counsel
Telecopier: (214) 634-3889
copy to: Kronish, Lieb, Weiner & Hellman LLP
1114 Avenue of the Americas
New York, New York 10036-7798
Attn: Eric Simonson, Esq.
Telecopier: (212) 479-6275
(2) to the Sellers (or any of them) at:
Phonoscope, Ltd.
6105 Westline Drive
Houston, Texas 77036
Attn: Lee Cook
Telecopier: (713) 271-4334
67
<PAGE>
copy to: Barlow, Todd, Jordan & Oliver, LLP
17225 El Camino Real
Suite 400
Houston, Texas 77058
Attn: Bill A. Todd, Jr.
Telecopier: (214) 488-6832
(b) Each Seller and the General Partner hereby irrevocably
constitutes and appoints Cook as its true and lawful agent and attorney-in-fact
with full power and authority to act, including full power of substitution, in
its name and on its behalf with respect to all matters arising from or in any
way relating to this Agreement or the transactions contemplated hereby,
including, without limitation, to do all things and to perform all acts required
or deemed advisable, in his sole discretion, in connection with the transactions
contemplated by this agreement as fully as each Seller or the General Partner
could if then personally present and acting alone. Without limitation, (i) any
Notice or other delivery (including any delivery of any portion of the Purchase
Price) validly delivered to Cook shall be deemed to have been validly delivered
to each of the Sellers and the General Partner, (ii) any waiver of any provision
of this Agreement or consent, or compromise of any claim arising from or
relating to this Agreement, by Cook shall be binding upon each and every Seller
and the General Partner, and (iii) Cook is hereby authorized to execute for and
on behalf of each Seller and the General Partner (x) any amendment to this
Agreement or (y) any agreement contemplated hereby. Buyer shall be entitled to
rely (without investigation) on any action taken by Cook as being taken by Cook
for himself and on behalf of each of the Sellers and the General Partner, and
fully authorized by each of the Sellers and the General Partner. This
appointment of agency and this power of attorney is coupled with an interest and
shall be irrevocable and shall not be terminated by any Seller or the General
Partner or by operation of law, whether by the death or incapacity of any Seller
that is a natural person, the termination of any trust or estate, the
dissolution, liquidation or bankruptcy of any corporation, partnership or other
entity or the occurrence of any other event, and any action taken by Lee Cook
shall be as valid as if such death, incapacity, termination, dissolution,
liquidation, bankruptcy or other event had not occurred, regardless of whether
or not Cook shall have received any notice thereof. Except as otherwise
expressly provided in
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<PAGE>
this Agreement the Sellers shall be jointly and severally liable for all
obligations of the Sellers (or any of them) under this Agreement. Cook shall
indemnify, defend and hold harmless the OpTel Indemnified Parties from and
against all Losses arising out of or relating to any dispute among the Sellers
and the General Partner or any challenge by any Seller other than Cook or the
General Partner to the validity, propriety or enforceability of any action taken
by Cook pursuant to the powers granted to Cook by this Section 10.6(b).
10.7 Descriptive Headings. The descriptive headings of the several
--------------------
Sections and paragraphs of this Agreement are inserted for convenience only and
do not constitute a part of this Agreement.
10.8 GOVERNING LAW. THIS AGREEMENT IS BEING DELIVERED AND IS
-------------
INTENDED TO BE PERFORMED IN THE STATE OF TEXAS, AND SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY
THE LAW OF SUCH STATE APPLICABLE TO CONTRACTS ENTERED INTO AND TO BE PERFORMED
WHOLLY WITHIN SUCH STATE.
10.9 SUBMISSION TO JURISDICTION; VENUE. EACH PARTY HERETO
---------------------------------
IRREVOCABLY CONSENTS AND AGREES THAT ANY LEGAL ACTION, SUIT OR PROCEEDING
AGAINST IT WITH RESPECT TO ITS OBLIGATIONS OR LIABILITIES UNDER OR ARISING OUT
OF OR IN CONNECTION WITH THIS AGREEMENT SHALL BE BROUGHT BY SUCH PARTY ONLY IN
THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS SITTING IN
THE CITY OF HOUSTON OR, IN THE EVENT (BUT ONLY IN THE EVENT) SUCH COURT DOES NOT
HAVE JURISDICTION OVER SUCH ACTION, SUIT OR PROCEEDING, IN THE COURTS OF THE
STATE OF TEXAS SITTING IN THE CITY OF HOUSTON, AND EACH PARTY HEREBY IRREVOCABLY
ACCEPTS AND SUBMITS TO THE JURISDICTION OF EACH OF THE AFORESAID COURTS IN
PERSONAM, WITH RESPECT TO ANY SUCH ACTION, SUIT OR PROCEEDING (INCLUDING,
-------
WITHOUT LIMITATION, CLAIMS FOR INTERIM RELIEF, COUNTERCLAIMS, ACTIONS WITH
MULTIPLE DEFENDANTS AND ACTIONS IN WHICH SUCH PARTY IS IMPLED). EACH PARTY
IRREVOCABLY WAIVES ANY RIGHT THAT IT MAY HAVE TO A JURY TRIAL IN ANY LEGAL
ACTION, SUIT OR PROCEEDING WITH RESPECT TO, OR ARISING OUT OF OR IN CONNECTION
WITH THIS AGREEMENT.
10.10 Entire Agreement. This Agreement and the other writings
----------------
referred to herein or delivered pursuant hereto contain the entire agreement
among the parties with respect to the
69
<PAGE>
subject matter hereof and supersede all prior and contemporaneous arrangements
or understandings with respect thereto including, without limitation, the
Summary of Terms dated January 15, 1997, the letter agreement, dated April 21,
1995 between CEA and buyer (other than the provisions regarding payment of fees
to CEA, which shall survive) and the Confidentiality Agreement, dated May 6,
1994, between CEA and Vanguard Communications, Inc. Nothing in this Agreement is
intended to confer any rights or remedies under or by reason of this Agreement
on any Persons other than the Sellers and the Buyer and their respective
successors and permitted assigns.
10.11 Severability. Any provision of this Agreement that is
------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
10.12 Public Announcement. Neither Buyer on the one hand, nor any of
-------------------
the Sellers or the Companies on the other hand, nor any of their respective
officers, directors or advisors shall make any public announcement or report
with respect to this Agreement or its subject matter, without the prior written
consent of Buyer and the Sellers unless (and only to the extent) such
announcement or report is necessary to comply with legal requirements or to
bring about the consummation of the Closing.
10.13 Expenses. Except as expressly provided in this Agreement, each
--------
party hereto agrees to pay its cash expenses, including the fees and
disbursements of its own advisors and counsel.
10.14 Confidentiality. Each of the Sellers and the General Partner
---------------
agrees to, and shall cause its agents, representatives, Affiliates and employees
to: (i) treat and hold as confidential (and not disclose or provide access to
any Person to) all information relating to trade secrets, processes,
intellectual property applications, product development, price, customer and
supplier lists, pricing and marketing plans, policies and strategies, details of
client, customer, subscriber and consultant contracts and agreements, operations
methods, product development techniques, business acquisition plans, new
70
<PAGE>
personnel acquisition plans and all other confidential information with respect
to the Business and the Companies, (ii) in the event that any of the Sellers or
any such agent, representative, Affiliate or employee becomes legally compelled
to disclose any such information, provide Buyer with prompt written notice of
such requirement so that Buyer may seek a protective order or other remedy or
waive compliance with this Section 10.14, (iii) in the event that such
protective order or other remedy is not obtained, or Buyer waives compliance
with this Section 10.14, furnish only that portion of such confidential
information which is legally required to be provided and exercise its best
efforts to obtain assurances that confidential treatment will be accorded such
information, and (iv) promptly furnish (prior to, at, or as soon as practicable
following, the Closing) to Buyer any and all copies (in whatever form or medium)
of all such confidential information then in the possession of the Sellers or
any of their respective agents, representatives, Affiliates or employees, and
destroy any and all additional copies then in the possession of the Sellers or
the General Partner or any of their respective agents, representatives,
Affiliates or employees of such information and of any analyses, compilations,
studies or other documents prepared, in whole or in part, on the basis thereof;
provided, however, that this sentence shall not apply to any information that,
- - -------- -------
at the time of disclosure, is available publicly and was not disclosed in breach
of this Agreement by any of the Sellers or the General Partner, their respective
agents, representatives, Affiliates or employees. Each Seller and the General
Partner agrees and acknowledges that remedies at law for any breach of its
obligations under this Section 10.14 are inadequate and that in addition thereto
Buyer shall be entitled to seek equitable relief, including injunction and
specific performance, in the event of any such breach.
10.15 No Consequential Damages. In no event shall any party to this
------------------------
Agreement be liable to any other party for any consequential, punitive or
speculative damages (including but not limited to damages for lost profits).
10.16 Counterparts. This Agreement may be executed in multiple
------------
counterparts, each of which shall be deemed an original, and it shall not be
necessary in making proof of this Agreement to produce or account for more than
one such counterpart.
71
<PAGE>
10.17 No Solicitation or Negotiation. Each Seller and the General
------------------------------
Partner agrees that between the date of this Agreement and the earlier of (i)
the Closing and (ii) the termination of this Agreement, none of the Sellers, the
General Partner, any of the Companies or any of their respective Affiliates,
officers, directors, representatives or agents will (a) solicit, initiate,
consider, encourage or accept any other proposals or offers from any Person (i)
relating to any acquisition or purchase of all or any portion of the capital
stock or other equity interests of any of the Companies or assets of any of the
Companies or any of the Purchased Assets, (ii) to enter into any business
combination or (iii) to enter into any other extraordinary business transaction
involving or otherwise relating to the Business or the Assets or (b) participate
in any discussions, conversations, negotiations or other communications
regarding, or furnish to any other Person any information with respect to, or
otherwise cooperate in any way, assist or participate in facilitate or encourage
any effort or attempt by any other Person to seek to do any of the foregoing.
The Sellers immediately shall, and shall cause each of the Companies to, cease
and cause to be terminated all existing discussions, conversations, negotiations
and other communications with any Persons conducted heretofore with respect to
any of the foregoing. The Sellers and the General Partner shall notify Buyer
promptly if any such proposal or offer, or any inquiry or other contact with any
Person with respect thereto, is made and shall, in any such notice to Buyer,
indicate in reasonable detail the identity of the Person making such proposal,
offer, inquiry or contact and the terms and conditions of such proposal, offer,
inquiry or other contact. Each Seller and the General Partner agrees not to, and
agrees to cause each of the Companies not to, without the prior written consent
of Buyer, release any Person from, or waive any provisions of, any
confidentiality or standstill agreement to which any Seller or any of the
Companies is a party.
10.18 Further Action. Each of the parties hereto shall use all
--------------
reasonable efforts to take, or cause to be taken, all appropriate action, do or
cause to be done all things necessary, proper or advisable under applicable
laws, and execute and deliver such documents and other papers, as may be
required to carry out the provisions of this Agreement and consummate and make
effective the transactions contemplated by this Agreement.
72
<PAGE>
IN WITNESS WHEREOF, the parties have executed, or caused to be
executed, this Agreement as of the date first above written.
OPTEL, INC.
By:__________________________
Name:
Title:
PHONOSCOPE, LTD.
By:__________________________
Name:
Title:
PHONOSCOPE MANAGEMENT L.C.
By:__________________________
Name:
Title:
_____________________________
Lee Cook
LEE COOK FAMILY TRUST
By:__________________________
Lee Cook
Sole Trustee
73
<PAGE>
_____________________________
Alton Cook
COMMUNICATIONS EQUITY ASSOCIATES
(for purposes of Section 10.10 only)
By:__________________________
Name:
Title:
74
<PAGE>
Exhibit 10.25
AMENDMENT NUMBER 001 TO THE VIDEOTRON/LUCENT AGREEMENT
------------------------------------------------------
This Amendment Number 001 to the Videotron/Lucent Agreement ("Amendment") is
made as of the 28th day of August, 1997.
AMONG:
VIDEOTRON TELECOM LTEE
2155 PIE 1X
MONTREAL, QUEBEC
H1V 2E4
(HEREINAFTER REFERRED TO AS "VIDEOTRON")
- AND -
LUCENT TECHNOLOGIES CANADA INC.
3650 VICTORIA PARK AVENUE
WILLOWDALE, ONTARIO
M2H 3P7
(HEREINAFTER REFERRED TO AS "LUCENT CANADA")
- AND -
TVMAX TELECOMMUNICATIONS INC.
1111 WEST MOCKING BIRD LANE, SUITE 1000
DALLAS, TEXAS 75247, U.S.A.
( HEREINAFTER REFERRED TO AS "TVMAX")
- AND -
LUCENT TECHNOLOGIES INC.
600 MOUNTAIN AVENUE
MURRAY HILL, NEW JERSEY 07974, U.S.A.
(HEREINAFTER REFERRED TO AS "LUCENT U.S.")
WHEREAS Videotron and Lucent Canada entered into an Agreement on December 11,
1996 for the supply of Products, Licensed Materials and Services (the
"Agreement"); and
<PAGE>
-2-
WHEREAS the parties wish to amend the Agreement to (i) alter certain of the
terms and conditions upon which Lucent Canada will supply Products, Licensed
Materials and Services under the Agreement and (ii) provide for the supply by
Lucent U.S. to TVMAX of Products, Licensed Materials and Services on certain
terms and conditions under the Agreement.
NOW THEREFORE, in consideration of the sum of One Dollar ($1.00)now paid by each
of the parties hereto to each of the other parties hereto and other good and
valuable consideration (the receipt and sufficiency of which is hereby
acknowledged), the parties hereto hereby agree as follows:
ARTICLE 1
---------
GENERAL PROVISIONS
------------------
1.1 Notwithstanding anything contained in the Agreement to the contrary, the
parties acknowledge and agree that, except for transactions between Lucent U.S.
and TVMAX and its wholly-owned United States Affiliates for the supply and
deployment of Products, Licensed Materials and Services in the United States
(which transactions shall be governed by the Agreement as modified by Article
III of this Amendment), Seller shall have no obligation to supply Products,
Licensed Materials, or Services under the Agreement to any party or entity other
than Videotron and its wholly-owned Canadian Affiliates and only to the extent
that Videotron and its wholly-owned Canadian Affiliates deploy and use such
Products, Licensed Materials and Services in Canada.
1.2 The parties acknowledge and agree that:
(i) any disputes with respect to transactions between Lucent Canada and
Videotron under the Agreement as modified by Article II of this Amendment
shall involve Lucent Canada and Videotron (and not Lucent U.S. and TVMAX)
and that Lucent Canada and Videotron (and not Lucent U.S. and TVMAX) will
be responsible for their respective breaches of any of the terms and
conditions of such transactions; and
(ii) any disputes with respect to transactions between Lucent U.S. and
TVMAX under the Agreement as modified by Article III of this
<PAGE>
-3-
Amendment shall involve Lucent U.S. and TVMAX (and not Lucent Canada and
Videotron) and that Lucent U.S. and TVMAX (and not Lucent Canada and
Videotron) will be responsible for their respective breaches of any of the
terms and conditions of any such transactions.
1.3 Except as expressly defined in this Amendment, all capitalized terms
contained in this Amendment shall have the meaning ascribed to them in the
Agreement.
1.4 In the event of a conflict between the terms and conditions of this
Amendment and the terms and conditions of the Agreement, the term and conditions
of this Amendment shall supersede and prevail.
1.5 Except as modified or amended by this Amendment, all terms and conditions
contained in the Agreement shall remain in full force and effect as stated
therein.
ARTICLE II
----------
CANADIAN PROVISIONS
-------------------
The parties agree that the provisions contained in Article II of this
Amendment shall apply only to transactions conducted under the Agreement between
Videotron and Lucent Canada. For all purposes of this Article II, references to
the term "Seller" shall mean "Lucent Canada" and references to the term
"Customer" shall mean "Videotron."
2.1 AMENDMENT OF ARTICLE 1.18 OF THE AGREEMENT
------------------------------------------
The two references to "North America" contained in Article 1.18 of the
Agreement are hereby deleted and replaced with "Canada."
2.2 AMENDMENT OF ARTICLE 1.25 OF THE AGREEMENT
------------------------------------------
The second paragraph of Article 1.25 of the Agreement is hereby deleted in
its entirety and the following is substituted therefor:
"Notwithstanding anything contained in this Agreement to the contrary,
<PAGE>
-4-
Seller and Customer agree that Customer's wholly-owned Canadian Affiliates
may purchase Products, Licensed Materials, and Services for use in Canada
from Seller on the same terms and conditions as Customer hereunder; it
being the understanding and agreement between the parties that, except for
transactions between Lucent U.S. and TVMAX and its wholly-owned United
States Affiliates involving the supply and deployment of Products, Licensed
Materials and Services in the 48 contiguous states of the United States
(which shall be governed by this Agreement as modified by Article III of
Amendment Number 001 to this Agreement), Seller shall have no obligation to
supply Products, Licensed Materials, or Services under this Agreement to
any party or entity other than Videotron and its wholly-owned Canadian
Affiliates and only to the extent that Videotron and its wholly-owned
Canadian Affiliates deploy and use such Products, Licensed Materials and
Services in Canada. In such event, Customer's wholly-owned Canadian
Affiliates shall also be a "Customer" hereunder."
2.3 AMENDMENT OF ARTICLE 2.04 OF THE AGREEMENT
------------------------------------------
The second paragraph of Article 2.04 of the Agreement is hereby deleted in
its entirety and the following is substituted therefor:
"Risk of loss in the Licensed Materials or any part thereof and any copies
of Documentation or any part thereof passes to Customer upon delivery to
the Location as indicated on Customer's order."
ARTICLE III
-----------
UNITED STATES PROVISIONS
------------------------
The parties agree that the provisions contained in Article III of this
Amendment shall apply only to transactions conducted under the Agreement between
Lucent U.S. and TVMAX. For all purposes of this Article III, references to the
term "Seller" shall mean Lucent U.S. (and not Lucent Canada) and references to
the term "Customer" shall mean TVMAX (and not Videotron).
<PAGE>
-5-
3.1 LUCENT U.S. TO SUPPLY TO TVMAX
------------------------------
Notwithstanding anything contained in the Agreement to the contrary, Lucent
U.S. hereby agrees to supply to TVMAX, and TVMAX hereby agrees to procure from
Lucent U.S., Products, Licensed Materials, and Services for deployment and use
in the 48 contiguous states of the United States on the same terms and
conditions as are set out in the Agreement, except as set forth in this Article
III. The execution and delivery of this Amendment by TVMAX shall not, in and of
itself, obligate TVMAX to purchase any Products, Licensed materials and Services
from Lucent US.
NOTWITHSTANDING ANYTHING CONTAINED IN THIS AMENDMENT TO THE CONTRARY,
LUCENT U.S. AND TVMAX AGREE THAT TVMAX'S WHOLLY-OWNED UNITED STATES AFFILIATES
MAY PURCHASE PRODUCTS, LICENSED MATERIALS, AND SERVICES FOR USE IN THE 48
CONTIGUOUS STATES OF THE UNITED STATES FROM LUCENT U.S. ON THE SAME TERMS AND
CONDITIONS AS TVMAX UNDER THIS ARTICLE III; IT BEING THE UNDERSTANDING AND
AGREEMENT BETWEEN THE PARTIES THAT, EXCEPT FOR TRANSACTIONS BETWEEN LUCENT
CANADA AND VIDEOTRON AND ITS WHOLLY-OWNED CANADIAN AFFILIATES, LUCENT U.S. SHALL
HAVE NO OBLIGATION TO SUPPLY PRODUCTS, LICENSED MATERIALS OR SERVICES UNDER THIS
AGREEMENT TO ANY PARTY OR ENTITY OTHER THAN TVMAX AND ITS WHOLLY-OWNED UNITED
STATES AFFILIATES AND ONLY TO THE EXTENT THAT TVMAX AND ITS WHOLLY-OWNED UNITED
STATES AFFILIATES DEPLOY AND USE SUCH PRODUCTS, LICENSED MATERIALS AND SERVICES
IN THE 48 CONTIGUOUS STATES OF THE UNITED STATES. IN SUCH EVENT, TVMAX'S WHOLLY-
OWNED UNITED STATES AFFILIATES SHALL ALSO BE A "CUSTOMER" UNDER THIS ARTICLE
III.
3.2 Article 1.10 INVOICE AND TERMS OF PAYMENT
----------------------------
Delete in its entirety and replace with the following:
INVOICES AND TERMS OF PAYMENT
-----------------------------
Products and Licensed Materials (including transportation charges and
taxes, if applicable) will be billed by Seller when shipped, or as soon
thereafter as practicable. Engineering Services, to the extent such Engineering
Services are performed by the Seller, will be billed upon main shipment of
Products. Installation Services will be billed as performed or as soon
thereafter as
<PAGE>
-6-
practical. Customer shall pay such invoiced amounts, less any disputed items,
for receipt by Seller within thirty (30) days of the invoice date. Delinquent
payments are subject to a late payment charge at the rate of one percent (1%)
per month, or portion thereof, of the amount due (but not to exceed the maximum
lawful rate). Customer shall use its best efforts to notify Seller of any
disputed invoice within ten (10) days from the date of the invoice. Any failure
to notify Seller of any disputed invoice within such ten (10) day period shall
not preclude Customer from thereafter disputing such invoice, provided that
Customer notifies Seller of such disputed invoice within thirty (30) days of the
invoice. If the Seller does not accept the Customer's claim, then the item will
be due for payment based upon the original invoice date. Seller may apply any
credit which remains outstanding in favor of Customer to the oldest undisputed
invoice which remains in Customer's portfolio. Customer agrees to pay Seller's
attorneys' fees and other costs incurred by Seller in the collection of any
amounts invoiced hereunder.
Early Payment Discount:
Provided that Customer makes payment by Electronic Funds Transfer (EFT) as set
forth below, Customer may pay all invoiced amounts, less an additional two
percent (2%) discount, if full payment is received by the Seller within ten (10)
days of the invoice date. Such additional discount shall be applied against the
net invoiced amount (i.e., after all applicable discounts and credits have been
applied).
Electronic Funds Transfer (EFT) Payments:
All EFT payments by Customer shall be made to the following account of Seller or
such other account as is hereafter designated in writing by Seller:
Lucent Technologies Inc.
do Chase Manhattan Bank
New York, New York
Lucent Domestic CARMS Acct# 9101449099
ABA Routing Number 021000021
Customer shall, concurrently with the EFT payment, either mechanically
<PAGE>
-7-
transmit a remittance file to Seller's banking institution identified above or
fax to the Seller the related EFT payment remittance advice such that Seller may
apply EFT payments to the proper invoices paid. Remittance advice's shall be
faxed to the following addresses of Seller or such other address as is hereafter
designated in writing by Seller:
Lucent Technologies Inc.
Financial Operations Center
900 North Point Parkway
Alpharetta, Ga. 30202
Attn: Cash Applications Manager
Fax: (770) 750-4288
with fax copy to:
Lucent Technologies Inc.
2000 Northeast Expressway
Norcross, Georgia 30071
Attn: James Stevens
Network Systems Wireless Asset Management Group
Fax: (770) 798-2167
Payments By Check Non-EFT):
Non-EFT payments and related remittance advice's shall be mailed to the address
identified on Seller's invoice."
3.3 ARTICLE 1.12 TAXES
-----
Delete in its entirety and replace with the following:
TAXES
-----
Customer shall be liable for and shall reimburse Seller for all taxes and
related charges, however designated, (excluding taxes on Seller's net income)
imposed upon or based upon the provision, sale, license or use of Products,
Licensed Materials or Services (if applicable). Such taxes shall be separately
listed on the invoice. Seller shall not collect the otherwise applicable state
sales
<PAGE>
-8-
tax if the front of Customer's order indicates that the purchase or license is
exempt from Seller's collection of such tax and a valid tax exemption
certificate is furnished by Customer to Seller. Seller's failure to collect
taxes in accordance herewith shall not be deemed to be an authorization to
resell Products or Services or sublicense Licensed Materials."
3.4 ARTICLES 1.11 AND 1.27 COMPLIANCE WITH LAWS AND APPLICABLE LAW
---------------------------------------
Delete in their entirety and replace with the following:
COMPLIANCE WITH LAWS/APPLICABLE LAW
-----------------------------------
The construction and interpretation of, and the rights and obligations of
the parties pursuant to this Agreement, shall be governed by the laws of the
State of New York, U.S.A., without regard to its conflicts of laws provisions."
3.5 ARTICLE 1.17 DISPUTES
--------
Delete in its entirety and replace with the following:
DISPUTES
--------
If a dispute arises out of or relates to this Agreement, or its breach, the
parties agree to mediate such dispute through executive management intervention.
Executive Management for this shall be defined as the CLEC Vice President of
Seller and the President of Customer. In the event the parties are unable to
mediate the dispute within thirty (30) days from notice, the parties agree to
submit the dispute to a sole mediator selected by the parties or, at any time at
the option of a party, to mediation by the American Arbitration Association
("AAA"). If not thus resolved, it shall be referred to a sole arbitrator
selected by the parties within thirty (30) days of the mediation or, in the
absence of such selection, to AAA arbitration which shall be governed by the
United States Arbitration Act, and judgment on the award may be entered in any
court having jurisdiction. The arbitrator may determine issues of arbitrability,
but may not award punitive damages or limit, expand or otherwise modify the
terms of this Agreement. The parties, their representatives, other
<PAGE>
-9-
participants and the mediator and arbitrator shall hold the existence, content
and result of mediation and arbitration in confidence."
3.6 ARTICLE 1.18 EXPORT CONTROL
--------------
The two references to "North America" contained in Article 1.18 of the
Agreement are hereby deleted and replaced with "the 48 contiguous states of the
United States of America."
3.7 ARTICLE 1.20 NOTICES
-------
Delete in its entirety (with the exception of the last sentence) and replace
with the following:
NOTICES
-------
All notices under this Agreement shall be in writing (except where
otherwise stated) and shall be addressed to the addresses set forth at the
beginning of this Agreement or to such other address as either party may
designate by notice pursuant hereto. Such notices shall be deemed to have been
given when received. In the case of Customer, such notices shall be addressed to
the Vice President Engineering and to the Vice President Legal and General
Counsel. In the case of Seller, such notices shall be addressed to:
Lucent Technologies Inc.
Global Commercial Markets
6701 Roswell Road
Building D - 3rd Floor
Atlanta, GA 30328
All purchase orders shall be forwarded by Customer to the following address of
Seller or such other address as is hereafter designated by Seller in writing:
Lucent Technologies Inc.
6701 Roswell Road
Building D - 3rd Floor
Atlanta, GA 30328
Fax: 404-573-6562
<PAGE>
-10-
3.8 ARTICLE 2.04 TITLE AND RISK OF LOSS
----------------------
Second paragraph: first line - Delete the words "the Licensed Materials and/or
Software or any part thereof and".
3.9 ARTICLES 3.03 AND 3.04 GENERAL WARRANTY AND PRODUCT WARRANTY
-------------------------------------
Delete in their entirety and replace with the following:
PRODUCT WARRANTY
----------------
Seller warrants to Customer only, that during the Warranty Period defined
below (i) Products manufactured by Seller or purchased by Seller pursuant to its
procurement specifications (exclusive of Software) ("Manufactured Products")
will be free from defects in material and workmanship and will conform to
Seller's Specifications for such Products; (ii) Software developed by Seller
will be free from those defects which materially affect performance in
accordance with Seller's Specifications; and (iii) Services will be performed in
a workmanlike manner and in accordance with good usage and accepted practices in
the community in which Services are provided. With respect to Products or
Software or partial assembly of Products furnished by Seller but neither
manufactured by Seller nor purchased by Seller pursuant to its procurement
specifications ("Vendor Items"), Seller, to the extent permitted, does hereby
assign to Customer the warranties given to Seller by its vendor(s) of such
Vendor Items.
The term "Warranty Period" means the period of time listed below which,
unless otherwise stated, commences on date of shipment or, if installed by
Seller, on acceptance by Customer or thirty (30) days from the date Seller
submits its notice of completion of its installation, whichever is sooner. The
Warranty Period for Products ordered for use in Systems is that of the initial
Systems or equipment except as may be otherwise noted. The Warranty Period for a
Product or part thereof repaired or replaced under this Warranty is the period
listed or the unexpired term of the new Product Warranty Period, whichever is
longer.
<PAGE>
-11-
SELLER'S MANUFACTURED PRODUCTS AND SOFTWARE
WARRANTY PERIOD
<TABLE>
<CAPTION>
Base Repaired
---- --------
Period Product or
------ ----------
New Part
--- ----
Product
-------
<S> <C> <C>
Switching Systems Products 60 Months 6 Months
Central Office Power Equipment 60 Months 6 Months
Operations Systems Products (excluding 12 Months 3 Months
Processors)
Processors Other than in Switching Systems 3 Months 2 Months
Network Cable Systems Products 12 Months 3 Months
All Other Products 2 Months 2 Months
Switching System Software 24 Months 6 Months
Operations Systems Software 3 Months 1 Month
All Other Software 3 Months 1 Month
</TABLE>
If, under normal and proper use, a defect or non-conformity appears in Seller's
Manufactured Products or Software during the applicable Warranty Period and
Customer promptly notifies Seller in writing of such defect or nonconformance
and follows Seller's instructions regarding return of defective or non
conforming Product or Software, Seller, at its option, will either repair,
replace or correct the same without charge at its manufacturing or repair
facility or provide a refund or credit based on the original purchase price or
license fee. If engineering or installation Services prove not to be performed
as warranted within a six (6) month period commencing on the date of completion
of the Services, Seller, at its option, either will correct the defect or
non-conforming Services or render a full or pro-rated refund or credit based on
the original charges for the Services. No Product or Software will be accepted
for repair or replacement without the written authorization of and in accordance
with instructions of Seller. Removal and reinstallation expenses as well as
transportation expenses associated with
<PAGE>
-12-
returning such Product or Software to Seller shall be borne by Customer. Seller
shall pay the costs of transportation of the repaired or replacing Product or
Software to the destination designated by Customer (within the 48 contiguous
states of the United States of America). If Seller determines that returned
Product or Software is not defective, Customer shall pay Seller's costs of
handling, inspecting, testing and transportation and, if applicable, travel and
related expenses. In repairing or replacing any Product, part of Product, or
Software medium under this warranty, Seller may use either new, remanufactured,
reconditioned, refurbished or functionally equivalent Products or parts.
Replaced Products or parts shall become Seller's property.
With respect to Seller's Manufactured Products which Seller has ascertained are
not readily returnable for repair, Seller, at its option, may elect to repair or
replace the Products at Customer's site. Customer, at its expense, shall make
the Products accessible for repair or replacement and restore the site after
Seller has completed its repairs or replacement.
Seller makes no warranty with respect to defective conditions or nonconformities
resulting from the following: Customer's modifications, misuse, neglect,
accident or abuse; improper wiring, repairing, splicing, alteration,
installation, storage or maintenance; use in a manner not in accordance with
Seller's or its vendor's Specifications, or operating instructions or failure of
Customer to apply previously applicable Seller's modifications or corrections.
In addition, Seller makes no warranty with respect to Products which have had
their serial numbers or month and year of manufacture removed, altered and with
respect to expendable items, including, without limitation, fuses, light bulbs,
motor brushes and the like. No guarantee is made that Software will run
uninterrupted or error free, and in addition Seller makes no warranty with
respect to defects related to Customer's data base errors.
THE FOREGOING WARRANTIES ARE EXCLUSIVE AND ARE IN LIEU OF ALL OTHER EXPRESS AND
IMPLIED WARRANTIES, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY
AND FITNESS FOR A PARTICULAR PURPOSE. CUSTOMER'S SOLE AND EXCLUSIVE REMEDY SHALL
BE SELLER'S OBLIGATION TO REPAIR, REPLACE, CREDIT, OR REFUND AS SET FORTH ABOVE
IN THIS WARRANTY."
<PAGE>
-13-
3.10 ARTICLE 3.09 PRODUCT CHANGES
---------------
Delete in its entirety and replace with the following:
PRODUCT CHANGES
---------------
Prior to shipment, Seller may at any time make changes in Products or
modify the drawings and Specifications relating thereto or substitute Products
of later design, provided the changes, modifications or substitutions under
normal and proper use do not impact upon Form, Fit, or Function of an ordered
Product as provided in Seller's Specifications. With respect to changes,
modifications, and substitutions which do affect the Form, Fit, or Function of
an ordered Product, Seller shall notify Customer in writing thirty (30) days
prior to their effective dates. In the event any such change is not desired by
Customer, Customer shall notify Seller within thirty (30) days from the date of
notice and Seller shall not furnish any such changed Products to Customer on any
orders in process at the time Seller is so notified."
3.11 ARTICLE 6.08 CHARGES AND PAYMENT
-------------------
Delete subparagraphs (i) and (ii) in their entirety and replace with the
following:
"(i) ninety percent (90%) of invoice for Products and engineering Services
thirty (30) days after shipment;
(ii) ten percent (10%) of invoice for Products and engineering Services
thirty (30) days after ATP.
3.12 ARTICLE VI PROVISIONS APPLICABLE TO ENGINEERING, INSTALLATION AND OTHER
------------------------------------------------------------
SERVICES
--------
Delete in its entirety and replace with the following:
<PAGE>
-14-
PROVISIONS APPLICABLE TO ENGINEERING,
-------------------------------------
INSTALLATION AND OTHER SERVICES
-------------------------------
GENERAL: The provisions of this Article VI shall apply to the Services ordered
by Customer and furnished by Seller under this Agreement in the 48 contiguous
states of the United States of America.
VI.1 SITE REQUIREMENTS
(a) Customer is solely responsible for ensuring that the installation site is
compliant with any site requirements identified by Seller for the installation
and/or operation of any Products, Licensed Materials, or Services furnished by
Seller under this Agreement. Such site requirements shall include, without
limitation, those site requirements set forth in this Section VI. 1 below.
Seller agrees to cooperate with Customer to ensure compliance with all site
requirements, provided that such cooperation shall not require Seller to incur
any out-of-pocket costs unless the parties expressly agree otherwise in writing.
(b) Customer shall be solely responsible for ensuring that the installation
site complies with all applicable laws, orders, and regulations of federal,
state and local governmental entities including, without limitation, those
relating to environmental conditions.
(c) Notwithstanding anything contained in this Agreement to the contrary,
Seller shall have no liability to Customer, its employees, agents, and customers
for any delay by Seller in completion of any installation or other Service to be
provided by Seller under this Agreement if such delay is attributable to the
failure by Customer to comply with any site requirements or to provide any other
items which are the responsibility of Customer under this Article VI.
(d) The site requirements which are solely the Customer's responsibility shall
include but are not limited to the following:
(i) Participate in a joint site survey with Seller
(ii) Interior Space - Clears ten feet (10') from floor to bottom of lowest
obstruction
(iii) Floor Loading (minimum requirements)
<PAGE>
-15-
(iv) Structural Analysis always required
(v) Power Room 150 lb. per sq. ft
(vi) Switch Room 100 lb. per sq. ft.
(vii) Floor Thickness: In accordance with local seismic requirements for the
equipment
(viii) Conduit access to all floors in building
(ix) Local exchange carrier cable available
(x) Commercial electrical current
(XI) Existing building grounding is 5 ohm or less metered
(XII) Battery room ventilation in accordance with local requirements
(XIII) Fire suppression system
(xiv) Freight access for a 48' trailer off loading equipment.
VI.2 ADDITIONAL ITEMS TO BE PROVIDED BY CUSTOMER
(a) Customer will also be responsible for furnishing the items described in
this Section VI.2 (as required by the conditions of the particular installation
or other on-site Service at no cost to Seller and such items are not included in
Seller's price for the Services. Seller shall provide written notice to Customer
of the items in this Section IV.2 which Customer fails to provide and shall have
the right to invoice Customer for any costs or expenses incurred by Seller as a
result of Customer's failure to provide any of such items. All such invoices
shall be paid by Customer in accordance with this Agreement.
(i) Access to Building and Work Site Customer shall provide employees of
--------------------------------
Seller and its subcontractors free access to premises and facilities at all
hours during the scheduled Service or at such other times as are requested by
Seller and consented to by Customer (such consent not to be unreasonably
withheld or unduly delayed). Customer shall obtain for Seller's employees and
its subcontractors' employees any identification and clearance credentials which
are necessary to enable Seller and its subcontractors to have access to the work
site.
(ii) Site Coordination At Seller's request Customer shall coordinate with
-----------------
Customer's subcontractors, property managers, Regional Bell Operating
Company, Local Exchange Carrier and any other parties and tenants having
<PAGE>
-16-
rights to the work site or whose participation is necessary in order for Seller
to perform the applicable Services.
(iii) Environmental Conditions Prior to the Services start date, Customer
------------------------
shall ensure that the premises will be dry and free from dust and Hazardous
Materials, including but not limited to asbestos, and that the premises are in
such condition as not to be injurious to Seller's or its subcontractors'
employees or to the Products and Licensed Materials to be installed. Prior to
Services start date and during the performance of the Services, Customer shall,
if requested by Seller, provide Seller with sufficient data to assist Seller and
its subcontractors in evaluating the environmental conditions at the work site
(including without limitation, the presence of Hazardous Materials). The price
quoted by Seller for Services does not include the cost of removal or disposal
of the Hazardous Materials from the work site. Customer is responsible for the
removal and disposal in accordance with applicable laws, rules and regulation of
the Hazardous Materials, including but not limited to asbestos, prior to
commencement of Services. Seller shall be responsible for the removal or
disposal of such materials from the work site should such materials have been
placed at the work site by Seller.
(iv) Sensitive Equipment Prior to the Services start date, Customer shall
-------------------
inform Seller of the presence of any sensitive equipment at the work site (e.g.,
equipment sensitive to static electricity or light).
(v) Repairs to Buildings Prior to the Services start date, Customer shall
--------------------
make such alterations and repairs to the work site as are necessary for proper
installation of Products and Licensed Materials.
(vi) Building Readiness Prior to the Services start date, Customer shall
------------------
provide extraordinary hauling and hoisting services such as, rigging or crane
services, if applicable, and shall arrange for traffic control, if necessary for
the delivery of Products.
(vii) Openings in Buildings - Customer shall furnish suitable openings in work
---------------------
site buildings, including, without limitation, elevators and windows as needed
to allow Products to be placed in position, and shall provide necessary openings
and ducts for cable and conductors in floors and walls as designated on
engineering drawings furnished by Seller. Customer shall fireproof (with
<PAGE>
-17-
steel covers and as otherwise required by applicable laws, rules, regulations,
and codes) all unopened paths throughout such buildings.
(viii) Surveys Prior to the Services start date, Customer shall provide to
-------
Seller (and, if requested by Seller, to Seller's subcontractors) site surveys
(describing the physical characteristics, legal limitations, and utility
locations for the work site) and a legal description of the site.
(ix) Electrical Current, Heat, Light, and Water Customer shall, in amounts no
------------------------------------------
less than that ordinarily furnished for similar purposes in a working office,
provide electric power and run all leads to Seller's power board; provide
temperature control and general illumination (regular and emergency) in rooms in
which Services are to be performed or Products stored, provide exit lights; and
provide water and other necessary utilities for the proper execution of
Services.
(x) Building Evacuation Prior to the Services start date, Customer shall
-------------------
provide building evacuation plans in case of a fire or other emergency.
(xi) Material Furnished by Customer Unless expressly stated to the contrary,
------------------------------
Seller's prices do not include costs for any Customer furnished material nor do
they include any Seller charges for engineering, installation, modification, or
repair Services to Customer furnished material. New or used material furnished
by Customer shall be in such condition that it requires no repair and no
adjustment or test effort in excess of that normal for new equipment. Customer
assumes all responsibility for the proper functioning of such material. Customer
shall also provide the necessary technical assistance and information for Seller
to properly install such material.
(xii) Floor Space and Storage Facilities Customer shall provide, for the
----------------------------------
duration of Services, suitable and easily accessible floor space and storage
facilities to permit storing of Products and other material, tools and other
property of Seller and its subcontractors in close proximity to where they will
be used. Where the Services are to be performed outside of a building or in a
building under construction, Customer shall, in addition to the above
requirements, permit or secure any necessary permission for Seller and its
subcontractors to maintain at the work site, storage facilities for Products,
material, tools, and equipment needed to complete the Services. As appropriate
<PAGE>
-18-
Customer shall provide Seller's and its subcontractors' personnel access to
toilet facilities.
(xiii) Easements, Permits, and Rights of Way Customer shall secure prior to the
------------------------------------
Services start date and shall maintain for the duration of the Services all
rights-of-way, easements, licenses, and permits and such other rights and
approvals as are necessary to enable Seller to perform the Services including,
without limitation, all construction and building permits for work to be
performed at the work site and other areas ancillary to the work site such as
sidewalks, streets, alleys, and highways.
(xiv) Security Service Customer shall provide such levels of security as are
----------------
necessary to prevent admission of unauthorized persons to building and other
areas where installation Services are performed and to prevent unauthorized
removal of the Products and other materials. Seller will inform Customer as to
which storage facilities at the work site Seller will keep locked. Such storage
facilities will remain closed to Customer's building surveillance.
(xv) Access to Existing Equipment Customer shall permit Seller reasonable use
---------------------------
of and access to any existing equipment which Seller deems necessary for the
proper completion of tests performed in connection with the Services and as
required to coordinate the Products and/or Licensed Materials with such existing
equipment. Such use shall not interfere with the Customer's normal maintenance
of such existing equipment.
(xvi) Grounds Customer shall provide access to suitable and isolated building
-------
ground as required for Seller's standard grounding of equipment. Where
installation is performed outside or in a building under construction, Customer
shall also furnish lightning protection ground.
(xvii) Requirements for Customer Designed Circuits Customer shall furnish
-------------------------------------------
information covering the proper test and readjust requirements for apparatus and
shall furnish requirements for circuit performance associated with circuits
designed by Customer or standard circuits modified by Customer's drawings such
as alarm and/or environmental circuits.
<PAGE>
-19-
(xviii) Cross-Connecting Main Distributing Frames and Installing Heat Coils
-------------------------------------------------------------------
Customer shall install such cross-connections and heat coils as are necessary in
connection with the Services.
(xix) Clearing Equipment for Modifications Customer shall remove cross-
------------------------------------
connections, transfer service on trunks and sundry working equipment, and make
other arrangements required to permit Seller to modify existing equipment.
(b) In the event the joint site survey conducted by the parties pursuant to
Section VI.3.2(a) that it is mutually determined based upon that the necessary
requirements are not met at the commencement of the installation of the Products
and the Customer needs to arrange for alterations and/or repairs, the order
will be placed on hold until such time as requirements are met. During such
interval, Seller reserves the right to determine any schedule and price impacts,
to treat such product as Bill and Hold, or to cancel such order. Customer shall
be responsible for and agrees to pay the applicable cancellation fee if such
order is canceled by Seller.
VI.3 ITEMS TO BE FURNISHED BY SELLER
V1.3.1 ENGINEERING
(a) General Review: Seller will review the following items as Seller deems
--------------
appropriate; switching equipment (Products and Software); transmission equipment
(Products and Software); power/energy equipment hardware; engineering drawings;
site survey; grounding of the switch; appliance outlets; front and rear aisle
lighting as required; timing cables; distributing frame engineering and
equipment; cable rack and hardware; stanchions; end guards auxiliary framing;
existing cable holes; fiber cable protection systems.
(b) Needs Analysis: Seller will perform a needs analysis of the Telephone
--------------
Equipment Order (TEO) and Customer's specified requirements to determine the
equipment solution that meets those requirements.
<PAGE>
-20-
(c) Records: Seller will update records to reflect changes throughout the
-------
project. Such records include but are not limited to wiring lists, front
equipment drawings, assignment drawings, and interface schematics.
VI.3.2 INSTALLATION
(a) Site Survey Prior to the commencement of installation Services, Seller
-----------
and Customer will perform a joint site survey to determine whether the
installation site meets the site requirements referenced in Section VI.3.1 and
whether Customer has provided the items in Section VI.3.2 Should Seller
reasonably determine that the site does not comply with such site requirements
or that Customer has not provided any item required under Section VI.3.2, Seller
shall specify such deficiencies to Customer in writing. Seller and Customer,
acting reasonably, shall jointly agree on a course of action to correct such
deficiencies prior to the start of installation Services. During the joint site
survey, Seller and Customer shall also jointly agree upon the layouts and
arrangements for the Products and Licensed Materials to be installed. Upon the
start of installation all changes shall be subject to additional charges.
(b) Method of Procedure - Seller shall prepare a detailed Method of Procedure
-------------------
("MOP") and review with Customer before starting work. Customer shall review the
MOP prepared by Seller and shall give Seller written acceptance of the MOP by
signing a copy thereof prior to the Services start date. Any changes to the MOP
requested by Customer shall be agreed upon subject to the change order process.
The MOP shall contain the following details:
(i) A concise statement that covers the installation Services to be performed
including the equipment that will be affected and the hours that such
Services is to be performed;
(ii) Specific responsibilities of Seller and Customer;
(iii) Service protection procedures that include, general service protection
rules and special service precautions for the specific project;
(iv) A time and release schedule of the work operations involving working
equipment and/or circuits in service and;
(v) A method of identifying equipment and cabling to ensure that the
circuits are "cleared" before start of work;
<PAGE>
-21-
(vi) A detailed account of the work operations that the installer will follow
(vii) The methodology to be used to halt installation Services if trouble
occurs and a general procedure to correct/resume work operations;
(viii) Provide environmental safety concerns, if applicable;
(ix) Obtain Customer signature.
(c) Warehousing, Delivery, Receipt & On-site Storage of Equipment, and
------------------------------------------------------------------
General Cleaning
- - ----------------
Seller will stage the delivery of Products. Seller's personnel will be on-site,
accompanied by Customer's personnel, as appropriate, at the time the Products
are delivered. Such personnel will accept the Products, unpack for inventory
purposes and inspect such Products for damage. Seller will resolve all shipping
errors inventory discrepancies and damage issues. This function shall be
performed in an area previously designated for the storage and unpacking of
equipment and Product(s). Such area will be selected based on a location that
minimizes movement of material and personnel through the work site. In the event
storage is limited or inadequate, as determined by Seller, temporary storage
facilities such as trailers or containers may be required. Any fees associated
with the procurement of temporary storage facilities are not included in
Seller's prices and shall be solely the responsibility of the Customer.
Materials such as plywood or masonite will be utilized as necessary, to prevent
cable reels, iron work and other heavy objects from damaging floors, walls and
doors. Seller shall perform general cleaning of the equipment and storage areas
( e.g. clearing floors of debris, packing material, etc.) on a regular basis
throughout the installation period. Rubbish shall be disposed of at Seller's
expense and in compliance with local requirements.
(d) Hardware Assembly Hardware assemblies and overhead cable rack, iron work
-----------------
and conduit (collectively "Components") will be delivered for specific bays and
cabinets as identified in the firm price quote provided. Additions of these
components to provide access to other locations (i.e. power rooms, computer
rooms, distributing frames not located with equipment, or equipment located on
separate floors) will be specifically excluded from the installation Services.
Such additions will only be included in the installation Services for an
additional charge.
<PAGE>
-22-
Seller will place and secure all ordered equipment in the location specified in
the engineering specifications. Such activity includes but is not limited to:
(i) Mark and drill floors
(ii) Assemble and place floor mounted equipment
(iii) Assemble distribution frames
(iv) Erect frames
(v) Align and junction frames
(vi) Install end guards and covers
(vii) Assemble and install fiber protection ductwork
(viii) Mount units and apparatus
(ix) Place batteries
Seller will also erect supporting hardware compatible with purchased equipment.
Such activity includes but is not limited to:
(i) Fabricate and install cable racks, bars, rod or stations as identified
in order
(ii) Erect ladder rack and ladders
(iii) Open and close existing cable holes and slots. Any new cable to
facilitate equipment design is the responsibility of the Customer
(iv) Fabricate and install framing aisle lighting conduit and fittings
In addition, Seller will place and designate connecting appliances (MDF terminal
blocks, DSX panels, etc.) provided with order, such as but not limited to:
(i) Stamping and/or affixing aisle, shelf and unit designations
(ii) Mounting and stenciling terminal strips
Seller will also extend lighting, A/C circuits and grounding to include added
equipment if equipment is ordered in job specification. Such activities include
but are not limited to:
(i) Assembling and installing lighting fixtures
(ii) Installing switches and receptacles
<PAGE>
-23-
(e) Cable and Wire For cable and wire to be installed by Seller, Seller
--------------
will run, tag, and secure metallic and fiber optic cables in an unobstructed
environment a maximum of one hundred (100) feet and power cables a maximum of
fifty (50) feet for the equipment and apparatus (this specifically excludes
primary power cables, except on power equipment orders) indentified in the
Product order. Seller will wire, attach, terminate and affix all cable and wire
including fiber optic cables supplied with purchased equipment. This may include
but is not limited to mechanical wire wrapping, soldering, crimping, plugging in
of pre-terminated cables or polishing of fiber optics for purchased Product.
This may include, but is not limited to, mechanical wire wrapping, soldering,
crimping, plugging of pre-terminated cables or polishing of fiber optics for
purchased Products. Seller will run alarm cabling, terminate and test for the
identified equipment including Customer provided environmental scan points of
fire detection and door entry which are less than fifty (50) feet away and pre-
terminated. Seller will verify all copper wiring placed by the Seller for
continuity to detect and analyze opens, shorts, reversals, and incorrect wiring.
Where pairs, quads or groupings are indicated, the grouping will be verified.
Seller will "dress" all cabling and wiring and provide physical protection.
Seller will properly protect cables at all "break-off" locations, such as the
vertical turns from the overhead cable rack to bay frame work.
(f) Testing Specific test procedures are dependent upon the type of Product
-------
installed and are identified in the installation guide for the particular
product. To ensure that technical design and performance criteria is being met
testing shall be performed by Seller to obtain and evaluation of the functional,
operational, electrical and mechanical integrity of all Products installed by
Seller. In general the following tests are required for all Product types
furnished and installed by Seller:
Seller's activities associated with testing will include, but not be limited to
the following:
(i) Turn on and verify power to installed equipment
(ii) Load product software and default parameters required to conduct local
unit loop-back testing to demarcation points
(iii) Run and connect test specific cross-connects. Remove upon completion of
test(s)
<PAGE>
-24-
(iv) Perform all unit and system-level tests to ensure equipment passes
system and technician evoked diagnostics
(v) Test functionality of circuit packs required by job, at time of
original installation, within the installed unit. Testing of spares is
specifically excluded and will be included only for an additional
charge
(vi) Test functionality and integrity of Seller installed local alarms
(vii) Resolve troubles encountered with equipment purchased on order. Refer
to Customer any trouble found in Customer provided equipment
(viii) Maintain test logs and trouble reports and turn over to Customer
(viiii) Perform Power Outage Test
Qualified Customer personnel may be present during Seller's activities
associated with testing.
(g) Seller will perform the following Turnover procedures for all
installation Services provided by Seller:
(i) Inform Customer of completion of installation cycle
(ii) Provide Customer with all drawings, invoices, logs and test results
per the contract.
(iii) Remove from Customer premises all tools and scrap generated from
installation effort.
(iv) Issue job completion notice to Customer in accordance with Section
VI.3.4.
VI.3.4 NOTICE OF ACCEPTANCE
All installation Services shall be considered complete and ready for
acceptance by Customer on Turnover. Upon completion of the installation, Seller
will submit to Customer a notice of completion or, if Customer has elected
advance-turnover of subsystems, a notice of completion of advance-turnover.
Customer shall promptly make its final inspection of substantial
conformance with the Specifications and take all reasonable actions necessary to
expedite acceptance of the job. Seller will promptly correct any defects for
which it is responsible. All work will be considered as fully accepted unless
<PAGE>
-25-
Seller receives notification to the contrary within thirty (30) days after
submitting its notice of completion. Notwithstanding the foregoing, Customer
shall be deemed to have accepted any Products and Licensed Materials upon the
placement of the same into service.
VI.3.5 WORK OR SERVICES PERFORMANCE BY OTHERS
Work or Services performed at the site by Customer or its other vendors or
contractors shall not unreasonably interfere with Seller's performance of
Services. Seller shall have no responsibility or liability with respect to such
work or Services performed by others. If Customer or its other vendors or
contractors fail to timely complete the site readiness or if Customer's or its
other vendors' or contractors' work unreasonably interferes with Seller's
performance, the scheduled completion date of Seller's Services under this
Agreement shall be extended as necessary to compensate for such delay or
interference.
3.13 SCHEDULE S-12 - PRICING STRUCTURE
-------------------------------
ARTICLE 12.02 - 5ESS(R) - 2000 SWITCH GENERAL PRICING NOTES
-----------------------------------------------------------
(a) Delete the last line of the first paragraph of Article 12.02(g) of Schedule
S12 in its entirety and replace with the following:
"agreed $92.00 U.S. per line charge;"
(b) Delete the last line of the second paragraph of Article 12.02(g) of
Schedule S12 in its entirety and replace with the following:
"$92.00 U.S. per line charge".
(c) Add the following subparagraphs at the end of Article 12.02 of Schedule
S12:
"(m) All Software, which (i) is ordered at the same time as a Switch is
ordered and (ii) is to be used solely on that Switch, will receive an
eighty-six percent (86%) discount off the global list price.
(n) No line commitment will be applied for the TVMAX switches.
<PAGE>
-26-
(o) NRC monitoring for the Dallas and Houston switches will be provided
at no charge to Customer for a one year period which period starts at
the time of ATP completion.
(p) New switch orders will have a minimum configuration of 2000 lines and
500 trunks."
3.14 Side Agreement
Lucent U.S. and TVMAX expressly acknowledge, for the purposes of greater
certainty, that the one page agreement which Lucent Canada and Videotron
entered into on December 11, 1996 with respect to "comparable prices" does not
apply to transactions between Lucent U.S. and TVMAX.
3.15 ADDITIONAL DEFINITIONS
----------------------
The following terms, as used in this Article 3, have the meanings set
forth below:
(i) "Fit" means physical size or mounting arrangement (e.g., electrical or
mechanical connections);
(ii) "Form" means physical shape;
(iii) "Function" means product features;
(iv) "Hazardous Materials" means material designated as a "hazardous chemical
substance or mixture" pursuant to Section 6 of the Toxic Substance Control
Act, a "hazardous material" as defined in the Hazardous Materials
Transportation Act (49 U.S.C. 1801, et seq.), or a "hazardous substance"
as defined in the Occupational Safety and Health Act Hazard Communication
Standard (29 CFR 1910.1200);
(v) "Specifications" means Seller's or its vendor's technical specifications
for particular Products or Software furnished hereunder; and
<PAGE>
-27-
(vi) "Turnover" means, with respect to Products and Software to be installed by
Seller, the point at which Seller has completed the installation and
notifies Customer that the installation is complete and that Seller has
confirmed that the installed Product and/or Software comply with Seller's
Specifications.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment Number 001
as of the date first written above.
VIDEOTRON TELECOM LTEE LUCENT TECHNOLOGIES
CANADA INC.
By: Eugene Marquis By: James Schram
Signature /s/ Eugene Marquis Signature: /s/ James Schram
-------------------- -------------------
Title: Executive Vice President Title: President & CEO
TVMAX LUCENT TECHNOLOGIES
TELECOMMUNICATIONS INC. INC.
By: Louis Brunel By: Bill Plunkett
Signature /s/ Louis Brunel Signature /s/ Bill Plunkett
-------------------- ---------------------
Title President and CEO Title: Vice President/CLEC
<PAGE>
EXHIBIT 10.26
ANNEX B
-------
GOLDMAN SACHS CREDIT PARTNERS L.P.
OPTEL, INC.
SUMMARY OF TERMS AND CONDITIONS OF SENIOR SECURED FACILITIES
BORROWER: A subsidiary or subsidiaries of OpTel, Inc. (each
- - --------
individually and collectively, the "BORROWER").
GUARANTORS: OpTel, Inc. (the "COMPANY") and each of the Company's
- - ----------
present and future subsidiaries other than the Borrower
(the "GUARANTORS") shall guaranty (the "GUARANTEES")
all obligations of the Borrower under the Facilities
(as defined below).
PURPOSE/USE OF To finance capital expenditures and permitted
- - --------------
PROCEEDS: acquisitions, to provide working capital and for other
- - --------
general corporate purposes (including the payment of
interest expense and "key money" amounts for new or
renewed service contracts) of the Borrower and any
other subsidiaries of the Company which are Guarantors.
SOLE ARRANGING,
- - ---------------
SYNDICATION, AND
- - ----------------
DOCUMENTATION
- - -------------
AGENT: Goldman Sachs Credit Partners L.P. ("GSCP").
- - -----
ADMINISTRATIVE A Lender to be identified by GSCP and reasonably
- - --------------
AGENT: acceptable to the Company.
- - -----
LENDERS: GSCP and/or other financial institutions selected by
- - -------
GSCP in consultation with the Company.
AMOUNT AND Up to $150 million senior secured credit facilities
- - ----------
AVAILABILITY OF SENIOR (the "FACILITIES") to include:
- - ----------------------
FACILITIES:
- - ----------
Annex B-1
<PAGE>
(i) a senior term loan (the "TERM FACILITY"); and
(ii) a senior revolving credit facility (the
"REVOLVING FACILITY").
The respective amounts of the Term Facility and the
Revolving Facility shall be determined by GSCP in its
discretion; provided that unless otherwise agreed to by
--------
GSCP not less than $125 million of the Facilities shall
be funded on the Closing Date. Amounts borrowed and
repaid under the Term Facility may not be reborrowed.
Amounts borrowed and repaid under the Revolving
Facility may be reborrowed until November 30, 2000 (the
"CONVERSION DATE"), at which time the Revolving
Facility shall convert from a revolving facility into a
term facility (the "CONVERTED TERM FACILITY") which
shall amortize as described below. Amounts repaid on
the Converted Term Facility may not be reborrowed.
MATURITY: May 31, 2004 (6 1/2 years).
- - --------
CLOSING DATE: The date on or before December 15, 1997, on which the
- - ------------
definitive loan documents for the Facilities are
executed and delivered.
AMORTIZATION: Amortization equal to (i) 10% of the Term Facility and
- - ------------
Converted Term Facility during the 12-month period
ended November 30, 2001, (ii) 15% of the Term Facility
and the Converted Term Facility during the 12-month
period ended November 30, 2002, (iii) 20% of the Term
Facility and the Converted Term Facility during the 12-
month period ended November 30, 2003, and (iv) 55% of
the Term Facility and the Converted Term Facility
during the 6-month period ended May 31, 2004. The
amortization payments due during each of the 12-month
periods referenced in clauses (i), (ii), and (iii)
shall be made in equal quarterly installments. The
amortization payment referenced in clause (iv) shall be
payable in two quarterly installments of 6.25% and
48.75%, respectively. All unpaid principal and accrued
interest thereon shall be due and payable in full on
the maturity date.
Annex B-2
<PAGE>
LETTERS OF CREDIT: At the Borrower's option, prior to the Conversion Date,
- - -----------------
a portion of the Revolving Facility not to exceed $10
million shall be available for issuance of Letters of
Credit ("LETTERS OF CREDIT").
INTEREST RATE: All amounts outstanding under the Facilities shall bear
- - -------------
interest, at the Borrower's option, as follows:
(i) at the Base Rate plus 2.50% per annum; or
(ii) at the reserve adjusted Eurodollar Rate plus
3.50% per annum.
As used herein, the terms "Base Rate" and "reserve
adjusted Eurodollar Rate" shall have meanings customary
and appropriate for financing of this type, and the
basis for calculating accrued interest and the interest
periods for loans bearing interest at the reserve
adjusted Eurodollar Rate shall be customary and
appropriate for financing of this type. Interest on
outstanding amounts following an event of default shall
accrue at a rate equal to the rate on loans bearing
interest at the rate determined by reference to the
Base Rate plus an additional two percentage points
(2.00%) per annum and shall be payable on demand.
The Borrower shall be eligible for a 0.25% reduction in
the applicable interest rates 18 months after the
Closing Date based on a performance test to be agreed
upon.
INTEREST RATE Within 90 days for the Closing Date, the Borrower will
- - -------------
PROTECTION: obtain interest rate protection through interest rate
- - ----------
swaps, caps or other agreements satisfactory to the
Arranging Agent and the Administrative Agent against
increases in the interest rates with respect to a
nominal amount equal to not less than 50% of the
amounts outstanding under the Facilities from time to
time and will use its best efforts to obtain such
protection for a period of not less than three years
but in any event for a period of not less than two
years.
INTEREST PAYMENTS: Quarterly for loans bearing interest with reference to
- - -----------------
the Base Rate; on the last day of selected interest
periods (which shall be one, two, three and six months)
for loans bearing interest with
Annex B-3
<PAGE>
reference to the reserve adjusted Eurodollar Rate (and
at the end of every three months, in the case of
interest periods of longer than three months); and upon
prepayment, in each case payable in arrears and
computed on the basis of a 360-day year.
LETTERS OF CREDIT A fee equal to the applicable Eurodollar Rate margin on
- - -----------------
FEES: the Facilities from time to time per annum on the
- - ----
maximum amount which may be drawn thereunder shall be
payable quarterly with respect to each Letter of
Credit. A fronting fee of 0.25% of the maximum amount
which may be drawn under each Letter of Credit shall be
payable to the issuer of the Letter of Credit. In
addition, certain customary fees assessed by the
issuing lender shall be payable.
COMMITMENT FEES: Commitment fees equal to 0.50% per annum times the
- - ---------------
daily average unused portion of the Revolving Facility
(reduced, if applicable, by the amount of letters of
credit issued and outstanding) shall accrue from the
Closing Date through the Conversion Date and shall be
payable quarterly in arrears on the unused portion of
the Revolving Facility.
VOLUNTARY Amounts outstanding under the Facilities may be prepaid
- - ---------
PREPAYMENTS AND without premium or penalty (except for the prepayment
- - ---------------
COMMITMENT fees set forth below) at any time prior to maturity at
- - ----------
REDUCTIONS: the election of the Borrower; provided that loans
- - ---------- --------
bearing interest with reference to the reserve adjusted
Eurodollar Rate shall be prepayable only on the last
day of the related interest period unless the Borrower
pays any applicable breakage costs. Any undrawn
commitments under the Facilities may be cancelled or
reduced subject to satisfaction of customary notice and
minimum amount requirements. Voluntary prepayments
shall be applied between the Term Facility and
Revolving Facility or Converted Term Facility, as
applicable, as directed by the Borrower and to
scheduled amortization payments on a pro rata basis.
MANDATORY The Borrower shall make the following mandatory
- - ---------
PREPAYMENTS: prepayments and reductions of the Facilities (subject
- - -----------
to certain basket amounts to be negotiated in the
definitive loan documents):
1. Asset Sales - prepayments in the amount of 100% of
-----------
the net after tax cash proceeds of the sale or
other disposi-
Annex B-4
<PAGE>
tion of any property or assets of the Company or
its subsidiaries, other than net cash proceeds of
sales or other dispositions in the ordinary course
of business and subject to a carve out for certain
amounts expected to be reinvested in equipment or
other productive assets within 180 days, payable
no later than the first business day following the
date of receipt;
2. Excess Cash Flow - beginning in fiscal year 2000,
----------------
prepayments in an amount equal to 75% of excess
cash flow (to be defined as EBITDA less cash
interest expense, cash tax payments, cash capital
expenditures and principal repayments on the
Facilities and other indebtedness if the
commitments thereunder are correspondingly
reduced) for each fiscal year, payable within 100
days of the fiscal year-end;
3. Insurance/Condemnation Proceeds - prepayments in
-------------------------------
the amount of all net cash proceeds received from
insurance or condemnation awards, payable no later
than the first business day following the date of
receipt unless no event of default has occurred
and is continuing and such proceeds are expected
to be used to repair, restore or replace the
assets in respect of which such proceeds were
received or are otherwise reinvested in equipment
or other productive telecommunication assets
within 180 days of receipt thereof; and
4. Pension Plan Reversions - prepayments in the
-----------------------
amount of all proceeds received from any pension
plan reversion, payable upon receipt, subject to a
basket of $500,000.
All such prepayments shall be applied without penalty
or premium (except for breakage costs, if any) to
prepay amounts outstanding under the Facilities.
Mandatory prepayments shall be applied pro rata between
amounts outstanding under the Term Facility and the
Revolving Facility or Converted Term Facility, as
applicable, and to the extent applied to the Revolving
Facility, to correspondingly reduce the commitments
under the Revolving Facility. Mandatory prepayments
shall be applied to scheduled amortization payments in
inverse order of maturity.
Annex B-5
<PAGE>
PREPAYMENT FEES: If any outstanding loans under the Term Facility are
- - ---------------
prepaid on or prior to the first anniversary of the
Closing Date, the Borrower shall pay a prepayment fee
equal to 1% of the amount of such prepayment.
SECURITY: The Facilities and each Guarantee shall be secured by
- - --------
first priority security interests in all assets,
including without limitation, all personal, real and
mixed property of the Borrower and the Guarantors. In
addition, the Facilities shall be secured by a first
priority security interest in 100% of the stock of each
subsidiary of the Company and all intercompany debt.
The Lenders shall receive a negative pledge against any
liens or other encumbrances on any of the stock of the
Company owned by Caisses des Depots and Groupe
Videotron Ltee ("VIDEOTRON") and the Convertible Notes
(as defined below) owned by Videotron. All security
arrangements shall be in form and substance
satisfactory to the Arranging Agent and the
Administrative Agent.
REPRESENTATIONS AND Customary and appropriate including, without
- - -------------------
WARRANTIES: limitation, due organization and authorization,
- - ----------
execution, delivery and enforceability of the loan
documents, financial condition, no material adverse
change, title to properties, liens, litigation, payment
of taxes, no material adverse agreements, compliance
with laws, environmental and ERISA matters, consents
and approvals and full disclosure.
COVENANTS: Customary and appropriate affirmative and negative
- - ---------
covenants to be negotiated in good faith, including,
without limitation, the following financial covenants:
1. Cash Capital Expenditures. Total cash capital
-------------------------
expenditures (capital expenditures, capitalized
interest and costs of acquisition of licenses) of
the Company and its subsidiaries shall be limited
in each year to amounts to be determined (subject
to carryforwards of a portion to be agreed upon of
any unutilized amount to the next fiscal year).
2. Financial and Operating Covenants.
---------------------------------
(1) Minimum EBITDA;
Annex B-6
<PAGE>
(2) Minimum net cable revenue (gross cable
revenue less programming fees);
(3) Minimum fixed charge coverage (defined as the
ratio, as of any date of determination, of
(i) the sum of the trailing EBITDA for the
six months ended on such date, availability
under the Facilities, cash balances in excess
of a to be determined amount and the
estimated net proceeds to be received from
the issuance of subordinated debt or equity
over the next succeeding six months to (ii)
the sum of net cash interest expense,
principal repayments on debt, cash capital
expenditures, cash taxes and increases in
working capital, in each case for the six-
month period ended on such date);
(4) Prior to fiscal year end 2000, maximum senior
bank debt to adjusted subscribers (the sum of
retail equivalent (to be defined) cable
subscribers and telephony subscribers);
(5) After fiscal year end 2000, maximum senior
bank debt to EBITDA;
(6) Minimum cable subscriber penetration (to be
calculated either on the basis of total
penetration or retail penetration to be
determined);
(7) Minimum telephony subscribers; and
(8) Minimum average life of remaining contracts
exceeding remaining life of the Facilities.
3. Indebtedness Covenant. Company and its
---------------------
subsidiaries will not be permitted to incur or
remain liable with respect to any additional
indebtedness, except the Company may incur or
remain liable with respect to (i) the 13% Senior
Notes due 2005 (the "SENIOR NOTES"), (ii) the 15%
convertible notes issued to Videotron (the
"CONVERTIBLE NOTES"), (iii) additional notes or
other unsecured borrowings of the Company in an
aggregate amount up to $150 million (plus an
additional amount equal to any proceeds thereof
put in escrow to make interest payments on such
notes) with terms no less
Annex B-7
<PAGE>
favorable to the Company than the Senior Notes
(including without limitation no interest payments
for the first three years after the date of
issuance except out of escrowed proceeds of such
notes) and with no mandatory payments due until
the date which is 18 months after the maturity of
the Facilities; (iv) indebtedness existing on the
Closing Date of approximately $8.2 million; (v)
indebtedness with respect to earn-out payments not
to exceed $10 million; (vi) indebtedness with
respect to purchase money or capital lease
obligations, the proceeds of which are used within
90 days to acquire equipment in the ordinary
course of business, provided that (a) at least 75%
--------
of the purchase price of such equipment is
provided by the proceeds of such indebtedness, (b)
such indebtedness is secured only by the equipment
purchased with the proceeds thereof and (c) the
aggregate amount of such indebtedness does not
exceed $15 million; and (vii) indebtedness
approved by Requisite Lenders.
Other covenants will include, without limitation,
maximum contract cancellations or loss of exclusivity
(subject to the right of the Company to negotiate the
termination of contracts which it in good faith
believes are not profitable for reasons which may
include low penetration), a negative pledge and
limitations on liens, investments, guarantees,
restricted junior payments (dividends, redemptions and
payments on subordinated debt), mergers and
acquisitions (other than Permitted Acquisitions as
defined below), sales of assets, leases (no more than
$10 million in annual rental payments), conduct of
business (including limiting the activities of the
Company to those of a holding company), transactions
with affiliates, including in each case exceptions and
baskets to be mutually agreed upon in good faith. Such
covenants will be subject to review by the Company's
and the Arranging Agent's counsel to ensure that there
are no contraventions of the terms of the Senior Notes.
The Company and its Subsidiaries shall be permitted to
make acquisitions ("PERMITTED ACQUISITIONS") subject to
the following conditions:
(i) the person or business acquired shall be in
the same line of business as the Company;
Annex B-8
<PAGE>
(ii) after giving effect to the acquisition, the
Company shall be in pro forma compliance
with all covenants;
(iii) any person acquired shall be required to
become a Guarantor and all of the security
interests required under the heading
"Security" shall be granted to secure such
Guaranty and the Facilities (including a
pledge of the stock of such person); and
(iv) the aggregate consideration paid in any
single acquisition shall not exceed $10
million and the aggregate consideration paid
for all such acquisitions shall not exceed
$25 million without Requisite Lenders'
consent, provided that if Requisite Lenders
--------
consent to an acquisition after the
consummation of such acquisition, the
consideration paid in such acquisition shall
not be taken into account for purposes of
determining compliance with the $10 million
and $25 million limitations set forth in
this clause (iv).
EVENTS OF DEFAULT: Customary and appropriate including, without
- - -----------------
limitation, failure to make payments when due, defaults
under other agreements or instruments of indebtedness
(including the Senior Notes), noncompliance with
covenants, breaches of representations and warranties,
bankruptcy, judgments in excess of specified amounts,
ERISA, impairment of security interests in collateral,
and invalidity of guarantees and "changes in control"
(to be defined as Videotron ceasing to own at least 51%
of the voting stock and economic interests in the
Company or Videotron selling any of its shares of
common stock of the Company or Convertible Notes unless
such sales have been approved by Requisite Lenders).
CONDITIONS PRECEDENT 1. Satisfactory Documentation. The definitive
- - -------------------- --------------------------
TO CLOSING: documents evidencing the Facilities shall be
- - ----------
prepared by counsel to the Arranging Agent and
shall be in form and substance reasonably
satisfactory to the Arranging Agent,
Administrative Agent, the Lenders and the Company.
Annex B-9
<PAGE>
2. Discharge of Existing Debt. Concurrently with the
--------------------------
closing of the Facilities, all existing
indebtedness of the Company (other than the
Senior Notes, the Convertible Notes and certain
indebtedness existing on the Closing Date of
approximately $8.2 million) and all indebtedness
of its subsidiaries shall have been repaid in
full, all commitments relating thereto shall have
been terminated, and all liens or security
interests related thereto shall have been
terminated or released, in each case on terms
reasonably satisfactory to the Arranging Agent.
3. Organizational Documents and Material Agreements.
------------------------------------------------
The organizational documents of the Company and
its subsidiaries, employment contracts of key
employees and executives, management agreements,
agreements with affiliates, and all other material
contracts (including without limitation ROE
contracts), licenses, permits, franchises,
insurance policies and other intangible rights
shall be reasonably satisfactory to the Arranging
Agent. Arranging Agent shall be satisfied that the
amount of the Facilities is permitted to be
incurred under the Indenture governing the Senior
Notes and shall be satisfied with the terms of the
Convertible Notes (including without limitation,
the maturity date and subordination terms).
4. Security. The Administrative Agent, for the
--------
benefit of the Lenders, shall have been granted
perfected first priority security interests in all
assets to the extent described above under the
heading "Security" in form and substance
reasonably satisfactory to the Arranging Agent and
the Administrative Agent. In addition, credit
support and security arrangements with respect to
Transmissions Holding, Inc. shall have been agreed
upon and shall be reasonably satisfactory to
Arranging Agent and Administrative Agent.
5. Environmental Matters. The Lenders shall have
---------------------
received information in form, scope and substance
reasonably satisfactory to the Arranging Agent,
Administrative Agent and the Lenders concerning
any environmental liabilities.
6. Appraisals and Title Insurance. The Administrative
------------------------------
Agent shall have received appraisals and ALTA
title
Annex B-10
<PAGE>
insurance policies insuring the interest of the
Lenders with respect to all real property securing
the Facilities, in form and substance satisfactory
to the Arranging Agent and the Administrative
Agent.
7. No Material Adverse Change. Since the date of the
--------------------------
most recent audited financial statements, there
shall not have been any adverse change, or any
development involving a prospective adverse
change, in or affecting the general affairs,
management, financial position, shareholders'
equity or results of operations of the Company and
its subsidiaries, which the Arranging Agent and
the Administrative Agent, in their reasonable
judgment, deem material.
8. Financial Statements. The Lenders shall have
--------------------
received the audited consolidated financial
statements for the Company and its subsidiaries
for the period ended on the date of the most
recent audited financials and the unaudited
consolidated financial statements for all quarters
ended subsequent to the date of the audited
financials and prior to the Closing Date and for
the most recently ended monthly period prior to
the Closing Date.
9. Consents and Approvals. All necessary governmental
----------------------
and third party approvals in connection with the
Facilities, the transactions contemplated by the
Facilities, and otherwise referred to herein shall
have been obtained and remain in effect.
10. Payments of Amounts Due. All costs, fees, expenses
-----------------------
(including, without limitation, legal fees and
expenses, title premiums, survey charges and
recording taxes and fees) and other compensation
contemplated hereby to the extent due.
11. Customary Closing Documents. All documents
---------------------------
required to be delivered under the definitive
financing documents, including customary legal
opinions, corporate records and documents from
public officials and officers' certificates,
shall have been delivered.
CONDITIONS TO ALL The conditions to all borrowings will include
- - -----------------
BORROWINGS: requirements relating to prior written notice of
- - ----------
borrowing, the accuracy of
Annex B-11
<PAGE>
representations and warranties, and the absence of any
default or any event which upon notice and lapse of
time would become an event of default, and will
otherwise be customary and appropriate for financing of
this type.
ASSIGNMENTS AND The Lenders may assign all or, in an amount of not less
- - ---------------
PARTICIPATIONS: than $5 million, any part of their share of the
- - --------------
Facilities to affiliates or one or more banks,
financial institutions or other entities that are
eligible assignees (to be described in the loan
documents but to specifically exclude competitors of
the Company) which, in the case of assignments made by
Lenders other than GSCP, are acceptable to the
Administrative Agent and are subject to reasonable
consultation with the Borrower, such consent not to be
unreasonably withheld, and upon such assignment, such
affiliate, bank, financial institution or entity shall
become a Lender for all purposes of the loan
documentation; provided that assignments made to
--------
affiliates and other Lenders shall not be subject to
the $5 million minimum assignment requirement. The
Lenders will have the right to sell participations,
subject to customary limitations on voting rights, in
their share of the Facilities.
REQUISITE LENDERS: Requisite Lenders shall mean Lenders holding in the
- - -----------------
aggregate more than 50% of the commitments and loans
outstanding under the Facilities; provided that certain
--------
customary matters specified in the Loan Documents may
require the approval of 100% of the Lenders.
TAXES AND FUNDING All payments are to be made free and clear of any taxes
- - -----------------
PROTECTION: (other than franchise taxes and taxes on overall net
- - ----------
income), imposts, assessments, withholdings or other
deductions whatsoever. Foreign Lenders shall furnish to
Administrative Agent appropriate certificates or other
evidence of exemption from U.S. federal tax
withholding.
The Company will provide customary funding protection
and indemnities for breakage costs, compensation for
increase costs and compliance with capital adequacy and
other regulatory restrictions.
Annex B-12
<PAGE>
INDEMNITY: In the event that GSCP, the Administrative Agent or any
- - ---------
of the Lenders becomes involved in any capacity in any
action, proceeding or investigation brought by or
against any person, including stockholders of the
Borrower or its subsidiaries, in connection with or as
a result of either this arrangement or any matter
referred to herein, the Borrower periodically will
reimburse GSCP, the Administrative Agent or such Lender
for its reasonable legal and other expenses (including
the cost of any investigation and preparation) incurred
in connection therewith. The Borrower also will
indemnify and hold GSCP, the Administrative Agent and
such Lender harmless against any and all losses,
claims, damages or liabilities to any such person in
connection with or as a result of either this
arrangement or any matter referred to herein, except to
the extent that any such loss, claim, damage or
liability results from the gross negligence or bad
faith of GSCP, the Administrative Agent or such Lender
in performing the services that are the subject hereof;
provided, however, that if it is found in any such
action, proceeding or investigation that any loss,
claim, damage or liability of GSCP, the Administrative
Agent or such Lender has resulted from the gross
negligence or bad faith of GSCP, the Administrative
Agent or such Lender in performing the services that
are the subject hereof, GSCP, the Administrative Agent
or such Lender, as applicable, shall repay such portion
of the reimbursed amounts that is attributable to
expenses incurred in relation to the act or omission of
GSCP, the Administrative Agent or such Lender which is
the subject of such finding. If for any reason the
foregoing indemnification is unavailable to GSCP, the
Administrative Agent or such Lender or insufficient to
hold it harmless, then the Borrower shall contribute to
the amount paid or payable by GSCP, the Administrative
Agent or such Lender as a result of such loss, claim,
damage or liability in such proportion as is
appropriate to reflect the relative economic interests
of the Borrower and its stockholders on the one hand
and GSCP, the Administrative Agent or such Lender on
the other hand in the matters contemplated hereby as
well as the relative fault of the Borrower and GSCP,
the Administrative Agent or such Lender with respect to
such loss, claim, damage or liability and any other
relevant equitable considerations. The reimbursement,
indemnity and contribution obligations of the Borrower
under this paragraph shall be in addition to any
liability which the Borrower may otherwise have, shall
extend upon the same terms and conditions to any
affiliate of GSCP, the Administrative Agent or such
Lender and the partners, directors, agents, employees
and controlling
Annex B-13
<PAGE>
persons (if any), as the case may be, of GSCP, the
Administrative Agent and such Lender and any such
affiliate, and shall be binding upon and inure to the
benefit of any successors, assigns, heirs and personal
representatives of the Borrower, GSCP, the
Administrative Agent and such Lender, any such
affiliate and any such person. The Borrower also agrees
that neither GSCP, the Administrative Agent or such
Lender nor any of such affiliates, partners, directors,
agents, employees or controlling persons shall have any
liability to the Borrower, any person asserting claims
on behalf of or in right of the Borrower or any other
person in connection with or as a result of either this
arrangement or any matter referred to herein except to
the extent that any losses, claims, damages,
liabilities or expenses incurred by the Borrower result
from the gross negligence or bad faith of GSCP, the
Administrative Agent or such Lender in performing the
services that are the subject hereof.
GOVERNING LAW AND The Borrower and Guarantors will submit to the non-
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JURISDICTION: exclusive jurisdiction and venue of the federal and
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state courts of the State of New York and shall waive
any right to trial by jury. New York law shall govern
the Loan Documents.
The foregoing is intended to summarize certain basic terms of the Facilities. It
is not intended to be a definitive list of all of the requirements of the
Lenders in connection with the Facilities.
Annex B-14
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EXHIBIT 10.27
INTERCONNECTION AGREEMENT UNDER SECTIONS 251 AND 252 OF
THE TELECOMMUNICATIONS ACT OF 1996
BY AND BETWEEN
SOUTHWESTERN BELL TELEPHONE COMPANY
AND
OPTEL (TEXAS) TELECOM, INC.
---------------------------
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
SWBT/OPTEL AGREEMENT TAB 1
APPENDICES
800 TAB 2
911 - TEXAS TAB 3
AIN TAB 4
BCR TAB 5
CH TAB 6
CNAM TAB 7
DA TAB 8
DCO TAB 9
FGA TAB 10
HOST TAB 11
ITR TAB 12
LIDB-AS TAB 13
LIDB-V TAB 14
OS TAB 15
OSS TAB 16
PORT TAB 17
TP TAB 18
RECORD TAB 19
RESALE TAB 20
UNE TAB 21
WIRELESS TAB 22
SS7 TAB 23
MAP TAB 24
WP TAB 25
</TABLE>
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TABLE OF CONTENTS
<TABLE>
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<S> <C>
1.0 DEFINITIONS Page 5
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2.0 INTERPRETATION & CONSTRUCTION Page 8
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3.0 IMPLEMENTATION SCHEDULE & INTERCONNECTION
ACTIVATION DATES Page 8
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4.0 INTERCONNECTION PURSUANT TO SECTION 251(c)(2) Page 8
4.1 Scope Page 8
4.2 Interconnection Coverage Page 9
4.3 Methods for Interconnection Page 10
4.4 Physical Architecture Page 15
4.5 Technical Specifications Page 16
4.6 Interconnection in Additional Metropolitan Exchange Areas Page 16
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5.0 TRANSMISSION & ROUTING OF TELEPHONE EXCHANGE SERVICE
TRAFFIC PURSUANT TO SECTION 251(c)(2) Page 17
5.1 Scope Page 17
5.2 Responsibilities of the Parties Page 17
5.3 Reciprocal Compensation for Termination of Local Traffic Page 18
5.4 Reciprocal Compensation for Transit Traffic Page 19
5.5 Reciprocal Compensation for Termination of IntraLATA
Interexchange Traffic Page 20
5.6 Compensation for Origination and Termination of Switched
Access Service Traffic to or From an IXC Page 21
5.7 Billing Arrangements for Compensation for Termination of
IntraLATA, Local, Transit & Optional Calling Area Traffic Page 22
5.8 Compensation for "Porting" Optional Calling Area Numbers Page 24
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6.0 TRANSMISSION & ROUTING OF EXCHANGE ACCESS TRAFFIC Page 24
6.1 Scope of Traffic Page 24
6.2 Trunk Group Architecture & Traffic Routing Page 24
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7.0 TRANSPORT & TERMINATION OF OTHER TYPES OF TRAFFIC Page 24
7.1 Information Services Traffic Page 24
7.2 Line Status Verification/Busy Line Interrupt Traffic Page 24
7.3 Wireless Traffic Page 25
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</TABLE>
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<TABLE>
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<S> <C>
8.0 SIGNALING Page 26
9.0 NUMBERING Page 26
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10.0 RESALE Page 28
10.1 Availability of SWBT Retail Telecommunications
Services for Resale Page 28
10.2 Availability of Optel Retail Telecommunications
Services for Resale Page 28
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11.0 UNBUNDLED NETWORK ELEMENTS Page 28
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12.0 NOTICE OF CHANGES Page 28
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13.0 COLLOCATION Page 29
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14.0 NUMBER PORTABILITY Page 29
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15.0 DIALING PARITY Page 29
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16.0 ACCESS TO RIGHTS-OF-WAY Page 29
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17.0 DATABASE ACCESS Page 30
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18.0 INTERCEPT REFERRAL ANNOUNCEMENTS Page 30
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19.0 COORDINATED REPAIR CALLS Page 30
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20.0 OTHER SERVICES Page 31
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21.0 GENERAL RESPONSIBILITIES OF THE PARTIES Page 32
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22.0 EFFECTIVE DATE, TERM & TERMINATION Page 33
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23.0 DISCLAIMER OF REPRESENTATIONS & WARRANTIES Page 34
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24.0 CHANGES IN END USER LOCAL EXCHANGE SERVICE
PROVIDER SELECTION Page 35
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</TABLE>
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<TABLE>
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<S> <C>
25.0 SEVERABILITY Page 35
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26.0 INDEMNIFICATION Page 35
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27.0 LIMITATION OF LIABILITY Page 36
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28.0 LIQUIDATED DAMAGES FOR SPECIFIED ACTIVITIES Page 37
28.1 Certain Definitions Page 37
28.2 Specified Performance Breach Page 38
28.3 Liquidated Damages Page 38
28.4 Limitations Page 39
28.5 Sole Remedy Page 39
28.6 Records Page 39
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29.0 REGULATORY APPROVAL Page 39
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30.0 MISCELLANEOUS Page 40
30.1 Authorization Page 40
30.2 Compliance & Certification Page 40
30.3 Law Enforcement Page 40
30.4 Independent Contractor Page 41
30.5 Force Majeure Page 41
30.6 Confidentiality Page 42
30.7 Governing Law Page 43
30.8 Taxes Page 43
30.9 Non-Assignment Page 45
30.10 Non-Waiver Page 45
30.11 Audits Page 45
30.12 Disputed Amounts Page 46
30.13 Disputed Resolution Page 46
30.14 Notices Page 47
30.15 Publicity & Use of Trademarks or Service Marks Page 47
30.16 Section 252(i) Obligations Page 48
30.17 Joint Work Product Page 48
30.18 Interim Rates Page 48
30.19 Intervening Law Page 49
30.20 No Third Party Beneficiaries; Disclaimer of Agency Page 49
30.21 No License Page 49
30.22 Survival Page 49
30.23 Scope of Agreement Page 50
30.24 Entire Agreement Page 50
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</TABLE>
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INTERCONNECTION AGREEMENT
This Interconnection Agreement ("Agreement") is made under Sections 251 and
252 of the Telecommunications Act of 1996 and the Texas Public Utility
Regulatory Act of 1995, by and between Southwestern Bell Telephone Company, a
Missouri Corporation ("SWBT"), and Optel (Texas) Telecom, Inc., a Delaware
Corporation (Optel).
WHEREAS, the Parties want to interconnect their networks at mutually agreed
upon points of interconnection to provide, directly or indirectly, Telephone
Exchange Services and Exchange Access to residential and business end users
predominantly over their respective telephone exchange service facilities in
Texas.
WHEREAS, the Parties are entering into this Agreement to set forth the
respective obligations of the Parties and the terms and conditions under which
the Parties will interconnect their networks and provide other services as
required by the Telecommunications Act of 1996 ("the Act") and additional
services as set forth herein; and
WHEREAS, for purposes of this Agreement, the Parties intend to operate
where SWBT is the incumbent local exchange carrier and Optel, a competitive
local exchange carrier, is certified by the Public Utility Commission of Texas,
as required.
NOW, THEREFORE, Optel and SWBT hereby agree as follows:
1.0 DEFINITIONS
1.1 "Act" means the Communications Act of 1934 [47 U.S.C. 153(R)], as
amended by the Telecommunications Act of 1996.
1.2 "Affiliate" is as defined in the Act.
1.3 "Automatic Number Identification" or "ANI" is a switching system
feature that forwards the telephone number of the calling party and is used for
screening, routing and billing purposes.
1.4 "Busy Line Interrupt" or "BLI" is performed when one Party's operator
bureau interrupts a telephone call in progress after Line Status Verification
has occurred. The operator bureau will interrupt the busy line and inform the
called party that there is a call waiting.
1.5 "Calling Party Number" or "CPN" is a feature of signaling system 7
(SS7) protocol whereby the ten (10) digit number of the calling party is
forwarded from the end office.
1.6 "Central Office Switch" means a single switching system within the
public switched telecommunications network, including the following:
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(i) "End Office Switches" which are switches where end
user Telephone Exchange Services are directly connected
and offered; and
(ii) "Tandem Office Switches" or "Tandems" which are
switches used to connect and switch trunk circuits
between Central Office Switches.
Central Office Switches may be employed as combination End Office/Tandem Office
switches.
1.7 "CLASS Features" mean certain CCS-based features available to end
users including, but not limited to: Automatic Call Back; Call Trace; Caller
Identification and related blocking features; Distinctive Ringing/Call Waiting;
Selective Call Forward; and Selective Call Rejection.
1.8 "Collocation" means an arrangement whereby one Party's (the
"Collocating Party") facilities are terminated in its equipment necessary for
Interconnection or for access to Network Elements on an unbundled basis which
has been installed and maintained at the premises of a second Party (the
"Housing Party"). Collocation may be "physical" or "virtual." In "Physical
Collocation," the Collocating Party installs and maintains its own equipment in
the Housing Party's premises. In "Virtual Collocation," the Housing Party
installs and maintains the collocated equipment in the Housing Party's premises.
Collocation may include microwave transmission equipment.
1.9 "Commission" means the Public Utility Commission of Texas.
1.10 "Common Channel Signaling" or "CCS" is a special network, fully
separate from the transmission path of the public switched network, that
digitally transmits call set-up and network control data. Unless otherwise
agreed by the Parties, the CCS used by the Parties shall be SS7.
1.11 "Cross Connect" means the unbundled network element which is used to
provide connection between: i) the SWBT distribution frame and an unbundled
network element component, or ii) two unbundled network element components, or
iii) the SWBT distribution frame and the tie cable termination point for
collocation.
1.12 "Dialing Parity" is as defined in the Act. As used in this Agreement,
Dialing Parity refers to both Local Dialing Parity and Toll Dialing Parity.
1.13 "Digital Signal Level" means one of several transmission rates in the
time-division multiplex hierarchy.
1.14 "Digital Signal Level 0" or "DS0" means the 64 Kbps zero-level signal
in the time-division multiplex hierarchy.
1.15 "Digital Signal Level 1" or "DS1" means the 1.544 Mbps first-level
signal in the time-division multiplex hierarchy.
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1.16 "Digital Signal Level 3" or "DS3" means the 44.736 Mbps third-level
in the time-division multiplex hierarchy.
1.17 "End User" means a third-party residence or business, that subscribes
to Telecommunications Services provided by either of the Parties, or by another
telecommunications service provider.
1.18 "Exchange Access" is as defined in the Act.
1.19 "Exchange Message Record" or "EMR" means the standard used for
exchange of Telecommunications message information among Telecommunications
Carriers for billable, non-billable, sample, settlement and study data. EMR
format is contained in Bellcore Practice BR-010-200-010 CRIS Exchange Message
Record.
1.20 "Fiber-Meet" means an Interconnection architecture method whereby the
Parties physically interconnect their networks via an optical fiber interface
(as opposed to an electrical interface) at a mutually agreed upon location.
1.21 "Interconnection" is as described in the Act and refers to the
connection of separate pieces of equipment, facilities, or platforms between or
within networks for the purpose of transmission and routing of Telephone
Exchange Service traffic and Exchange Access traffic.
1.22 "Interconnection Activation Date" is the date that the construction
of the joint facility Interconnection arrangement has been completed, trunk
groups have been established, and joint trunk testing is completed.
1.23 "Interexchange Carrier" or "IXC" means a carrier that provides the
interexchange portion of interLATA or intraLATA Toll Services. For purposes of
Section 6.0 of this Agreement, the term "IXC" includes any entity which
purchases FGB or FGD Switched Exchange Access Service from SWBT.
1.24 "Line Status Verification" or "LSV" or "Busy Line Verify" or "BLV" is
performed when one Party's end user requests assistance from the operator bureau
to determine if the called line of the other Party is in use.
1.25 "Local Traffic," is as defined in section 5.1.2.
1.26 "Losses" means any and all losses, costs (including court costs),
claims, damages (including fines, penalties, and criminal or civil judgments and
settlements), injuries, liabilities and expenses (including attorneys' fees).
1.27 "MECAB" refers to the Multiple Exchange Carrier Access Billing
(MECAB) document prepared by the Billing Committee of the Ordering and Billing
Forum (OBF), which functions under the auspices of the Carrier Liaison Committee
(CLC) of the Alliance for
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Telecommunications Industry Solutions (ATIS). The MECAB document, published by
Bellcore as Special Report SR-BDS-000983, contains the recommended guidelines
for the billing of access services provided to an IXC by two or more LECs, or by
one LEC in two or more states within a single LATA. The latest release is issue
No. 5, dated June 1994.
1.28 "MECOD" refers to the Multiple Exchange Carriers Ordering and Design
(MECOD) Guidelines for Access Services - Industry Support Interface, a document
developed by the Ordering/Provisioning Committee of the Ordering and Billing
Forum (OBF), which functions under the auspices of the Carrier Liaison
Committee (CLC) of the Alliance for Telecommunications Industry" Solutions
(ATIS). The MECOD document, published by Bellcore as Special Report SR STS-
002643, establishes methods for processing orders for access service which is to
be provided to an IXC by two or more telecommunications providers. The latest
release is issue No. 3, dated February 1996.
1.29 "Meet-Point Billing" or "MPB" refers to a billing arrangement whereby
two or more Telecommunications Carriers jointly provide for switched access
service to an IXC, with each LEC receiving an appropriate share of its switched
access revenues as defined by its effective access tariffs.
1.30 "Metropolitan Exchange Area" means a geographical area defined in
SWBT current tariffs effective as a metropolitan exchange local calling area.
For example, Dallas, Ft. Worth, Houston, Little Rock, Oklahoma City, St. Louis,
Austin and would be examples of Metropolitan Exchange Areas.
1.31 "Network Element Bona Fide Request" means the process described in
Appendix UNE that is attached hereto and incorporated herein that prescribes the
terms and conditions relating to a Party's request that the other Party provide
a Network Element.
1.32 "Routing point" means a location which SWBT or Optel has designated
on its own network as the homing (routing) point for traffic in bound for one or
more of its NPA-NXX codes. The Routing Point is also used to calculate mileage
measurements for the distance-sensitive transport element charges.
1.33 "Switched Exchange Access Service" means the offering of transmission
or switching services to Telecommunications Carriers for the purpose of the
origination or termination of Telephone Toll Service. Switched Exchange Access
Services include, but are not necessarily limited to: Feature Group A, Feature
Group B, Feature Group D, 800/888 access, and 900 access and their successors or
similar Switched Exchange Access services.
1.34 "Synchronous Optical Network" or "SONET" means an optical interface
standard that allows inter-networking of transmission products from multiple
vendors. The base rate is 51.84 Mbps (OC-1/STS-1) and higher rates are direct
multiples of the base rate, up to 13.22 Gbps.
1.35 "Telephone Exchange Service "is as defined in the Act.
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1.36 "Wire Center" means an occupied structure or portion thereof which
serves as a Routing Point for Telephone Exchange and Exchange Access Service.
2.0 INTERPRETATION AND CONSTRUCTION
In the event of any amendment of the Act or any legislative, regulatory,
judicial order, rule or regulations, or other legal action that revises or
reverses the Act, the FCC's Orders in FCC Docket Nos. 96-98 and 95-185 or any
applicable order or arbitration award purporting to apply the provisions of the
federal Act, the Parties reserve all of their rights and remedies.
3.0 IMPLEMENTATION SCHEDULE AND INTERCONNECTION ACTIVATION DATES
Subject to the terms and conditions of this Agreement, Interconnection of
the Parties' facilities and equipment pursuant to Sections 4.0, 5.0 and 6.0 for
the transmission and routing of Telephone Exchange Service traffic and Exchange
Access traffic shall be established on or before the corresponding
"Interconnection Activation Date" shown for each such Metropolitan Exchange Area
on Appendix DCO attached hereto and incorporated by reference. Appendix DCO may
be revised and supplemented from time to time upon the mutual agreement of the
Parties to reflect the Interconnection of additional Metropolitan Exchange Areas
pursuant to Section 4.6.
4.0 INTERCONNECTION PURSUANT TO SECTION 251(C)(2)
4.1 SCOPE
This Section 4.0 describes the physical architecture for Interconnection of
the Parties' facilities and equipment for the transmission and routing of
Telephone Exchange Service traffic and Exchange Access traffic pursuant to
Section 251(c)(2) of the Act. Such Interconnections shall be equal in quality
to that provided by the Parties to themselves or to any subsidiary, affiliate or
third party. Appendix ITR attached hereto and incorporated by reference
prescribes the specific trunk groups (and traffic routing parameters) which will
be configured over the physical connections described in this Section 4.0 to
provide the facilities for the transmission and routing of Telephone Exchange
Service traffic (as described in Section 5.0), Exchange Access traffic (as
described in Section 6.0), LSV/BLI traffic (as described in Section 7.2),
E911/911 traffic (as described in Appendix 911). Use of this physical connection
shall be limited to the trunk groups described in Appendix ITR.
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4.2 INTERCONNECTION COVERAGE
The Parties shall provide for interoperation of their networks and shall
interconnect their facilities as stated below:
4.2.1. Optel shall interconnect with SWBT's facilities as follows:
a. In each SWBT exchange area in which Optel chooses to offer
local exchange service, Optel, at a minimum, will
interconnect its network facilities to: (a) each SWBT access
tandem(s), and (b) to either each SWBT local tandem(s) or
each SWBT end office(s) ("EO") subtending that local
tandem(s). SWBT EOs and tandems through which Optel will
terminate its traffic will be called SWBT Interconnection
Wire Centers and are identified in Appendix DCO. As Optel
initiates Exchange Service operations in additional SWBT
exchange areas, SWBT and Optel shall agree upon additional
SWBT Interconnection Wire Centers in each new exchange area.
Optel agrees that if SWBT establishes additional local
tandems in an exchange area within which Optel offers local
exchange service, Optel will establish new trunk groups on
its existing interconnection facilities so that SWBT may
interconnect Optel trunks to the additional local tandem(s).
b. Interconnection to a SWBT local tandem(s) will provide Optel
local access to the SWBT end offices and NXXs which subtend
that tandem(s), and to other Local Exchange Carriers
("LECs") (subject to Section 5.4) which are connected to
that tandem(s). Interconnection to SWBT EO(s) will provide
Optel access only to the NXXs served by that individual
EO(s) to which Optel interconnects.
c. Interconnection to a SWBT access tandem will provide Optel
interexchange access to SWBT, IXCs, LECs and CMRS providers
(subject to Section 7.3) which are connected to that tandem.
Where an access tandem also provides local tandem
functions, interconnection to a SWBT access tandem serving
that exchange will also provide Optel access to SWBT's EOs
with the same functionality described in (b) above.
d. Where Optel requires ancillary services (e.g., Directory
Assistance, Operator Assistance, 911/E911) additional
interconnection to SWBT's Interconnection Wire Center(s) or
special trunking will be required for interconnection to
such ancillary services.
4.2.2. SWBT shall interconnect with Optel's facilities under terms and
conditions no less favorable to Optel than those identified in Section 4.2.1
above.
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4.3 METHODS FOR INTERCONNECTION
Where the Parties interconnect, for the purpose of exchanging traffic
between networks, the Parties may use the following interconnection methods of
each Tandem and End Office identified in Appendix DCO making use of facilities
they own or lease from a third party.
4.3.1 Physical Collocation Interconnection ("PCI") - Where Optel
provides fiber cable and connects to its equipment located in the SWBT Wire
Center. Optel owns and maintains Optel's equipment.
4.3.2 Virtual Collocation Interconnection ("VCI") - Where Optel
provides fiber cable to SWBT for connection to Optel-designated basic
transmission equipment dedicated solely for Optel's use, located in the SWBT
Interconnection Wire Center. SWBT owns and maintains the basic transmission
equipment at the SWBT Interconnection Wire Center. This option shall be
consistent with the terms of SWBT's virtual collocation tariff.
4.3.3 SONET-Based Interconnection ("SBI") - Where Optel provides
fiber cable to SWBT for connection to SWBT-designated basic transmission
equipment located at the SWBT Interconnection Wire Center (SIWC) and dedicated
solely for Optel's use. SWBT owns and maintains the basic transmission
equipment. This option shall be consistent with SWBT's SBI tariff.
4.3.4 Leased Facility Interconnection ("LFI") - Where facilities
exist, either Party may lease facilities from the other Party.
4.3.5 Mid-span Fiber Interconnection ("MSFI") - Where the Parties
agree to interconnect through SONET technology, a Fujitsu originating line
terminating multiplexer fiber optic terminal ("FOT") shall be used. Mid-Span
Fiber Interconnection (MSFI) between Southwestern Bell Telephone (SWBT) and LSP
can occur at any mutually agreeable, economically and technically feasible point
between LSP's premises and a SWBT tandem or end office. This interconnection
will be on a point-to-point SONET system over single mode fiber optic cable.
4.3.5.1 MSFI may be used to provide interconnection trunking
as defined in Attachment ITR.
4.3.5.2 There are two basic mid-span interconnection designs:
a. Design One: LSP's fiber cable and SWBT's fiber
cable are connected at an economically and
technically feasible point between the LSP
location and the last entrance manhole at the SWBT
central office.
The Parties may agree to a location with access to
an existing SWBT fiber termination panel. In these
cases, the network interconnection point (POI)
shall be designated outside of the
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SWBT building, even though the LSP fiber may be
physically terminated on a fiber termination panel
inside of a SWBT building. In this instance, LSP
will not incur fiber termination charges and SWBT
will be responsible for connecting the cable to
the SWBT facility.
The Parties may agree to a location with access to
an existing LSP fiber termination panel. In these
cases, the network interconnection point POI)
shall be designated outside of the LSP building,
even though the SWBT fiber may be physically
terminated on a fiber termination panel inside of
an LSP building. In this instance, SWBT will not
incur fiber termination charges and LSP will be
responsible for connecting the cable to the LSP
facility.
If a suitable location with an existing fiber
termination panel cannot be agreed upon, LSP and
SWBT shall mutually determine provision of a fiber
termination panel housed in an outside, above
ground, cabinet placed at the physical POI.
Ownership and the cost of provisioning the panel
will be negotiated between the two parties.
b. Design Two: LSP will provide fiber cable to the
last entrance manhole at the SWBT tandem or end
office switch with which LSP wishes to
interconnect. LSP will provide a sufficient length
of fiber optic cable for SWBT to pull the fiber
cable to the SWBT cable vault for termination on
the SWBT fiber distribution frame (FDF). In this
case the POI shall be at the manhole location. In
this instance, LSP will not incur fiber
termination charges and SWBT will be responsible
for connecting the cable to the SWBT facility.
Each Party is responsible for designing,
provisioning, ownership and maintenance of all
equipment and facilities on its side of the POI.
Each Party is free to select the manufacturer of
its Fiber Optic Terminal (FOT). Neither Party will
be allowed to access the Data Communication
Channel (DCC) of the other Party's FOT. The
Parties will work cooperatively to achieve
equipment compatibility.
4.3.5.3 The Parties will mutually agree upon the precise terms of
each mid-span interconnection facility. These terms will cover the technical
details of the interconnection as well as other network interconnection,
provisioning and maintenance issues.
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4.3.5.4 The LSP location includes FOTs, multiplexing and fiber
required to take the optical signal handoff from SWBT for interconnection
trunking as outlined in Appendix ITR.
4.3.5.5 The fiber connection point may occur at several locations:
a. a location with an existing SWBT fiber termination
panel. In this situation, the POI shall be outside the
SWBT building which houses the fiber termination panel;
b. a location with access to an existing LSP fiber
termination panel. In these cases, the network
interconnection point (POI) shall be designated outside
of the LSP building, even though the SWBT fiber may be
physically terminated on a fiber termination panel
inside a LSP building;
c. a location with no existing SWBT fiber termination
panel. In this situation, SWBT and LSP will negotiate
provisioning, maintenance and ownership of a fiber
termination panel and above ground outside cabinet as a
POI and for connection of the fiber cables;
d. a manhole outside of the SWBT central office. In this
situation, LSP will provide sufficient fiber optic
cable for SWBT to pull the cable into the SWBT cable
vault for termination on the SWBT FDF. The POI will be
at the manhole and SWBT will assume maintenance
responsibility for the fiber cabling from the manhole
to the FDF.
4.3.5.6 The SWBT tandem or end office switch includes all SWBT
FOT, multiplexing and fiber required to take the optical signal hand-off
provided from LSP for interconnection trunking as outlined in Appendix ITR.
This location is SWBT's responsibility to provision and maintain.
4.3.5.7. In both designs, LSP and SWBT will mutually agree on the
capacity of the FOT(s) to be utilized. The capacity will be based on equivalent
DS1s that contain trunks and interLATA traffic. Each Party will also agree upon
the optical frequency and wavelength necessary to implement the interconnection.
The Parties will develop and agree upon methods for the capacity planning and
management for these facilities, terms and conditions for over provisioning
facilities, and the necessary processes to implement facilities as indicated
below. These methods will meet quality standards as mutually agreed to by LSP
and SWBT.
4.3.5.8 AVOIDANCE OF OVER PROVISIONING - Underutilization is the
------------------------------
inefficient deployment and use of the network due to forecasting a need for more
capacity than actual usage requires, and results in unnecessary costs for SONET
systems. To avoid over provisioning, the Parties will agree to joint facility
growth planning as detailed below.
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4.5.3.9 JOINT FACILITY GROWTH PLANNING - The initial fiber optic
------------------------------
system deployed for each interconnection shall be the smallest standard
available. For SONET this is an OC-3 system. The following list the criteria and
processes needed to satisfy additional capacity requirements beyond the initial
system.
a. Criteria:
- Investment is to be minimized;
- Facilities are to be deployed in a "just in time"
fashion.
b. Processes
- discussions to provide relief to existing
facilities will be triggered when either Party
recognizes that the overall system facility
(DS1s) is at 90% capacity;
- both Parties will perform a joint validation to
ensure current trunks have not been over-
provisioned. If any trunk groups are over-
provisioned, trunks will be turned down as
appropriate. If any trunk resizing lowers the fill
level of the system below 90%, the growth planning
process will be suspended and will not be
reinitiated until a 90% fill level is achieved.
Trunk design blocking criteria described in
Appendix ITR will be used in determining trunk
group sizing requirements and forecasts;
- if based on the forecasted equivalent DS1 growth,
the existing fiber optic system is not projected
to exhaust within one year, the Parties will
suspend further relief planning on this
interconnection until a date one year prior to the
projected exhaust date. If growth patterns change
during the suspension period, either Party may re-
initiate the joint planning process;
- if the placement of a minimum size FOT will not
provide adequate augmentation capacity for the
joint forecast over a two year period, and the
forecast appears reasonable based upon history,
the next larger system may be deployed. In the
case of a SONET system, the OC-3 system could be
upgraded to an OC-12. If the forecast does not
justify a move to the next larger system, another
minimal size system (such as on OC-3) could be
placed. This criteria assumes both Parties have
adequate fibers for either scenario. If adequate
fibers do not exist, both Parties would negotiate
placement of additional fibers;
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- both Parties will negotiate a project service date
and corresponding work schedule to construct
relief facilities in an effort to achieve "just in
time" deployment;
- the joint planning process/negotiations should be
completed within two months of identification of
90% fill.
4.3.6 Wireless Interconnection - Where the Parties agree that either
Party may utilize a wireless technology, including 18 GHz, 11 GHz, 36 GHz or
other microwave transmission equipment, to provide its portion of the
interconnection transmission facility. Should Optel seek this interconnection
method, the Parties shall mutually determine how such interconnection shall be
accomplished.
4.3.7 The Parties may agree to utilize other Interconnection Methods.
4.4 PHYSICAL ARCHITECTURE. Using one or more of the Interconnection
Methods described in Section 4.3 above, the Parties will agree on a physical
architecture plan. This plan will be documented within Appendix DCO. The Parties
agree to deploy one physical architecture plan per Metropolitan Serving Area.
The two architecture arrangements, End Point Meet and Mid-Point Meet, are
discussed below. Additional physical architectures, as yet undefined, may evolve
during the term of this Agreement. These future as yet undefined architectures
can be deployed if mutually agreed upon.
4.4.1 End Point Meet. Using the "End Point Meet" architecture, the
Parties will establish transport facilities from their own Central Office(s) to
the other party's Central Office(s) utilizing any method of interconnection
described in Section 4.3. Unless otherwise mutually agreed upon, each Party will
use its own transport facilities to provide its trunking as set forth in
Appendix ITR. Each Party will be responsible for the appropriate sizing,
operation, and maintenance of its own transport facilities. If initially
deployed as an End Point Architecture, the deployment architecture may be
migrated or groomed, upon mutual agreement, to a Mid-Point Meet architecture.
4.4.2 Mid-Point Meet. Using the Mid-Point Meet architecture, the
Parties will agree upon a Network Interconnection Point (NIP). The NIP functions
as a demarcation point for each Party. Each Party is responsible to transport
all trunking to its side of the NIP utilizing any method of interconnection
described in Section 4.3 above. Each Party is responsible for the appropriate
sizing, operation, and maintenance of the transport facility and trunking to the
NIP.
4.4.2.1 A second NIP can be established to eliminate a
"single point of failure" when mutually agreed upon. The establishment of the
second NIP should not require additional or increased trunking or facilities of
either Party. Trunking from the initial NIP will be groomed or augmented to the
second NIP upon mutual agreement.
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4.4.2.2 When required, based on guidelines established
pursuant to Appendix ITR, either Party may trunk directly to the other Party's
EO. If the Party is virtually or physically collocated to the EO, then that
collocation will be designated a NIP. This collocation will be used for the
transport of direct EO trunking, in addition to other uses. The collocated Party
is responsible for the appropriate sizing, operation, and maintenance of the
transport facility. In the instance where the Party is not collocated, the EO
trunk group will be handed off at the original NIP and both Parties will be
responsible for the transport facility on their side of that NIP.
4.4.2.3 Unless otherwise mutually agreed upon, when Mid-
Point Meet architecture has been deployed, it will remain as the architecture of
choice during the term of this Agreement.
4.5 TECHNICAL SPECIFICATIONS
4.5.1 Optel and SWBT shall work cooperatively to install and maintain
a reliable network. Optel and SWBT shall exchange appropriate information (e.g.,
maintenance contact numbers, network information, information required to comply
with law enforcement and other security agencies of the Government and such
other information as the Parties shall mutually agree) to achieve this desired
reliability.
4.5.2 Optel and SWBT shall work cooperatively to apply sound network
management principles by invoking network management controls to alleviate or to
prevent congestion.
4.5.3 Technical Publications that describes the practices,
procedures, specifications and interfaces generally utilized by SWBT, are listed
in Appendix TP attached hereto. Appendix TP will assist the Parties in meeting
their respective Interconnection responsibilities. Copies of the publications
listed in Appendix TP have been or shall be provided to Optel by SWBT.
4.6 INTERCONNECTION IN ADDITIONAL METROPOLITAN EXCHANGE AREAS
4.6.1 If Optel decides to offer Telephone Exchange Services in any
other Metropolitan Exchange Areas in which SWBT also offers Telephone Exchange
Services, Optel shall provide written notice to SWBT of the need to establish
Interconnection in such Metropolitan Exchange Areas pursuant to this Agreement.
4.6.2 The notice provided in Section 4.6.1 shall include: (i) the
initial Routing Point Optel has designated in the Metropolitan Exchange Area;
(ii) Optel's requested Interconnection Activation Date; and (iii) a non-binding
forecast of Optel's trunking requirements.
4.6.3 Unless otherwise agreed by the Parties, the Parties shall
designate the Wire Center that Optel has identified as its initial Routing Point
in the Metropolitan Exchange Area as Optel Interconnection Wire Center ("IWC")
in that Metropolitan Exchange Area and shall designate the SWBT Tandem Office
Wire Center within the Metropolitan Exchange Area nearest to the IWC
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(as measured in airline miles utilizing the V&H coordinates method) as the SWBT
Interconnection Wire Center (SIWC) in that Metropolitan Exchange Area.
4.6.4 Unless otherwise agreed by the Parties, the Interconnection
Activation Date in each new Metropolitan Exchange Area shall be as soon as
reasonably possible, but no later than the one-hundred and fiftieth (150th) day
following the date on which Optel delivered notice to SWBT of the need to
establish Interconnection pursuant to Section 4.6.1. Within ten (10) business
days of SWBT's receipt of Optel's notice, SWBT and Optel shall confirm their
respective Wire Centers to be Interconnected and the Interconnection Activation
Date for the new Metropolitan Exchange Area by attaching a supplementary
schedule to Appendix DCO.
5.0 TRANSMISSION AND ROUTING OF TELEPHONE EXCHANGE SERVICE TRAFFIC PURSUANT TO
SECTION 251(C)(2)
5.1 SCOPE OF TRAFFIC
This Section 5.0 prescribes parameters for Traffic Exchange trunk groups
the Parties shall establish over the Interconnections specified in Section 4.0.
The Parties shall employ the Traffic Exchange trunk groups specified in this
Section 5.0 and in Appendix ITR for the transmission and routing of traffic
between the Parties' respective end users.
5.1.1 For purposes of compensation under this Agreement, the
telecommunications traffic traded between Optel and SWBT will be classified as
either Local Traffic, Transit Traffic, Optional Calling Area Traffic, IntraLATA
Interexchange Traffic, InterLATA Interexchange Traffic, or FGA Traffic. The
compensation arrangement for the joint provision of Feature Group A (FGA)
Services is covered in Appendix FGA, attached hereto and incorporated herein by
reference. The Parties agree that, notwithstanding the classification of
traffic under this Agreement, either Party is free to define its own "local"
calling area(s) for purposes of its provision of Telecommunications Services to
its end users.
5.1.2 Calls originated by one Party's end user and terminated to the
other Party's end user will be classified as "Local Traffic" under this
Agreement if the call: (i) originates and terminates in the same SWBT exchange
area; or (ii) originates and terminates within different SWBT Exchanges that
share a common mandatory local calling area, e.g., mandatory Extended Area
Service (EAS), mandatory Extended Local Calling Service (ELCS), or other like
types of mandatory expanded local calling scopes. In no event shall the area in
which the Parties exchange Local Traffic be reduced in geographic scope during
the term of this Agreement.
5.2 RESPONSIBILITIES OF THE PARTIES
5.2.1 Each Party to this Agreement will be responsible for the
accuracy and quality of its data as submitted to the respective Parties
involved.
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5.2.2 Each Party will include in the information transmitted to the
other for each call being terminated on the other's network (where available),
the originating Calling Party Number (CPN).
5.2.3 If the percentage of calls passed with CPN is greater than
ninety percent (90%), all calls exchanged without CPN information will be billed
as either local traffic or intraLATA interexchange traffic in direct proportion
to the minutes of use (MOU) of calls exchanged with CPN information. If the
percentage of calls passed with CPN is less than ninety percent (90%), all calls
passed without CPN will be billed as if the traffic were intraLATA interexchange
traffic.
5.2.4 The type of originating calling number transmitted depends on
the protocol of the trunk signaling used for interconnection. Traditional toll
protocol will be used with Multi-Frequency (MF) signaling, and ANI will be sent
from the originating Party's end office switch to the terminating Party's tandem
or end office switch.
5.2.5 Where one Party is passing CPN but the other party is not
properly receiving information, the Parties will cooperate to rate the traffic
correctly.
5.3 RECIPROCAL COMPENSATION FOR TERMINATION OF LOCAL TRAFFIC
5.3.1 The Compensation set forth below will apply to all Local
Traffic as defined in Section 5.1.2 of this Agreement on an interim basis as
provided in Section 30.18.
5.3.2 Applicability of Rates
i) The rates, terms, conditions in this Section 5.3 apply
only to the termination of Local Traffic, except as
explicitly noted.
ii) The Parties agree to compensate each other for the
termination of Local Traffic on a minute of use (MOU)
basis.
5.3.3 RATE ELEMENTS
5.3.3.1 A Tandem Served rate element is applicable to
Tandem Routed Local Traffic on a terminating local MOU basis and includes
compensation for the following sub-elements.
i) Tandem Switching - compensation for the use
of tandem switching functions.
ii) Tandem Transport - compensation for the
transmission facilities between the local tandem
and the end offices subtending that tandem.
iii) End Office Switching - compensation for the
local EO
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office switching and line termination functions
necessary to complete the transmission.
5.3.3.2 An End Office Served rate element applies to
direct-routed Local Traffic on a terminating local MOU basis and includes
compensation for End Office Switching. This includes direct-routed Local Traffic
that terminates to offices that have combined tandem and End Office functions.
5.3.4 LOCAL TRAFFIC INTERCONNECTION RATES
PRICES
TANDEM SWITCHING $.002453* / MOU*
TANDEM TRANSPORT $.000474* / MOU (ZONES A OR B)
$.000693* (ZONE C)
END OFFICE SWITCHING $.002903* / MOU
ZONE A SWBT RATE GROUPS 7,8/1/
ZONE B SWBT RATE GROUPS 4,5,6/1/
ZONE C SWBT RATE GROUPS 1,2,3/1/
* Interim rates in accordance with Section 30.18. The applicable Tandem rate
shall be determined by the Zone in which the terminating company end office is
located.
THE APPLICABLE TANDEM TRANSPORT RATES SHALL BE DETERMINED BY THE ZONE IN WHICH
THE TERMINATING END OFFICE IS LOCATED.
5.3.4.1 Bill and Keep will be the reciprocal compensation
arrangement for the first nine (9) months after the date upon which the first
commercial call is terminated between SWBT and Optel in Texas. The reciprocal
compensation rates as adopted herein apply to calls that originate and terminate
within the mandatory single or multiexchange local calling area of SWBT
including the mandatory EAS areas served by SWBT. Bill and Keep applies only to
Local Traffic and does not include Transit nor Optional Calling Area Traffic.
5.4 RECIPROCAL COMPENSATION FOR TRANSIT TRAFFIC
5.4. Transit Traffic allows one Party to send traffic to a third
party network through the other Party's tandem. A Transit Traffic rate element
applies to all traffic between a Party and a
_________________
/1/ These rate groups are the ones identified in SWBT's General Exchange
Tariff.
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third party network that transits the other Party's tandem switch and fits the
circumstances described in subparagraphs (i) or (ii). The originating Party is
responsible for payment of the appropriate rates unless otherwise specified. The
Transit Traffic rate element is only applicable when calls do not originate with
(or terminate to) the transit Party's end user. The two categories of Transit
Traffic are i) Local, and ii) Optional Area. The following details when each
element applies:
i) The Local Transit Traffic rate element applies when both the
originating and terminating end users are within SWBT local and
mandatory exchanges.
ii) The Optional Area Transit Traffic rate element applies when one
end user is in a SWBT optional exchange which is listed in
Appendix Map and the other end user is within the SWBT local or
mandatory exchanges. The Parties agree also to apply the
Optional Area Transit rate to traffic terminating to end users
in third party LECs exchange areas that share a common
mandatory local calling area with all SWBT exchanges included
in a specific metropolitan exchange area. ILEC mandatory
exchanges are listed in Appendix Map.
5.4.1.1 The Parties acknowledge that traffic originated in
third party incumbent LEC mandatory exchange areas as listed in Appendix
Map may traverse the SWBT tandem and terminate in other third party LEC
mandatory exchange areas. Although direct connections could be used for
this traffic, SWBT agrees to transit this traffic for the rate of $O.006
per MOU if the other LEC exchanges share a common mandatory local calling
area with all SWBT exchanges included in a specific exchange area.
--------------------------------------------
Type of Transit Traffic Prices Per MOU
--------------------------------------------
Local Transit $O.0031*
--------------------------------------------
Optional Area Transit $O.0040
--------------------------------------------
5.4.2 All other traffic which transits a tandem shall be compensated
in accordance with paragraphs 5.5, 5.6 or 7.3.
5.4.3 Each Party represents that it shall not send Local Traffic
to the other Party that is destined for the network of a third party unless and
until such Party has the authority to exchange traffic with the third party.
* Interim in accordance with Section 30.18. This rate is composed of Tandem
Transport added to Zone C End Office Switching rounded to the nearest one
thousandth of a dollar.
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5.5 RECIPROCAL COMPENSATION FOR TERMINATION OF INTRALATA
INTEREXCHANGE TRAFFIC
5.5.1 Optional Calling Area Compensation (OCA) - For the SWBT
optional calling areas listed in Appendix Map, the compensation for termination
of intercompany traffic will be at a rate of $0.0183 per MOU. This terminating
compensation rate applies to all traffic to and from the exchange(s) listed in
Appendix Map, attached hereto and incorporated by reference, and the associated
metropolitan area and is independent of any retail service arrangement
established by either Optel or SWBT. When cost based interconnection rates for
EAS are established by the Commission in Docket 16226 (cost phase of mega-
arbitration), Optel traffic in SWBT's EAS areas shall be subject to the lesser
of the cost-based interconnection rates in such proceeding or the
interconnection rates in effect between SWBT and other incumbent LECs for such
traffic.
5.5.2 SWB also agrees to apply the OCA compensation rate of $0.0183
per MOU for traffic terminating to Optel end users in other incumbent LEC
exchanges that share a common mandatory local calling area with all SWBT
exchanges that are included in the metropolitan exchange area. Appendix Map
lists the shared mandatory local calling areas.
5.5.3 For intrastate intraLATA interexchange service traffic,
compensation for termination of intercompany traffic will be at terminating
access rates for Message Telephone Service (MTS) and originating access rates
for 800 Service, including the Carrier Common Line (CCL) charge, as set forth in
each party's Intrastate Access Service Tariff. For interstate intraLATA
intercompany service traffic, compensation for termination of intercompany
traffic will be at terminating access rates for MTS and originating access rates
for 800 Service including the CCL charge, as set forth in each Party's
interstate Access Service Tariff.
5.6 COMPENSATION FOR ORIGINATION AND TERMINATION OF SWITCHED ACCESS
SERVICE TRAFFIC TO OR FROM AN IXC (MEET-POINT BILLING (MPB)
ARRANGEMENTS)
5.6.1 For interstate, interLATA traffic, terminating compensation
will be at access rates as set forth in each Party's own applicable access
tariffs.
5.6.2 The Parties will establish MPB arrangements in order to provide
Switched Access Services to IXCs via SWBT's access tandem switch in accordance
with the MPB guidelines adopted by and contained in the Ordering and Billing
Forum's MECOD and MECAB documents. Optel's Meet Points with SWBT shall be those
identified in Appendix DCO and any supplements thereto.
5.6.3 Billing to IXCs for the Switched Exchange Access Services
jointly provided by the Parties via Meet-Point Billing arrangement shall be
according to the multiple bill/single tariff method. As described in the MECAB
document, each Party will render a bill in accordance with its own tariff for
that portion of the service it provides. For the purpose of this Agreement,
Optel is the Initial Billing Company (IBC) and SWBT is the Subsequent Billing
Company (SBC). The assignment of revenues, by rate element, and the Meet-Point
Billing percentages applicable to this
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Agreement are set forth in the Meet Point Billing Arrangement Revenue Assignment
Schedule. The actual rate values for each element shall be the rates contained
in that Party's own applicable access tariffs.
5.6.4 The Parties will maintain provisions in their respective
federal and state access tariffs, or provisions within the National Exchange
Carrier Association (NECA) Tariff No. 4, or any successor tariff, sufficient to
reflect this MPB arrangement, including MPB percentages.
5.6.5 As detailed in the MECAB document, the Parties will, in
accordance with accepted time intervals, exchange all information necessary to
accurately, reliably and promptly bill third Parties for Switched Access
Services traffic jointly handled by the Parties via the Meet Point Arrangement.
Each Party reserves the right to charge the other Party for the
recording/processing functions it performs pursuant to the terms and conditions
of Appendix Recording attached hereto and incorporated by reference. Information
shall be exchanged in Exchange Message Record (EMR) format, on magnetic tape or
via a mutually acceptable electronic file transfer protocol.
5.6.6 Initially, billing to IXCs for the Switched Access Services
jointly provided by the parties via the MPB arrangement will be according to the
multiple bill single tariff method, as described in the MECAB document. Each
Party will render a bill to the IXC in accordance with its own tariff for that
portion of the service it provides. Each Party will bill its own network access
service rates to the IXC. The residual interconnection charge (RIC), if any,
will be billed by the Party providing the End Office function.
5.6.7 Meet-Point Billing shall also apply to all jointly provided MOU
traffic bearing the 900, 800, and 888 NPAs or any other non-geographic NPAs
which may likewise be designated for such traffic in the future where the
responsible party is an IXC. When SWBT performs 800 database queries, SWBT will
charge the provider of the Signaling Service Point for the database query in
accordance with standard industry practices.
5.6.8 Each Party shall coordinate and exchange the billing account
reference ("BAR") and billing account cross reference ("BACR") numbers for the
Meet Point Billing service. Each Party shall notify the other if the level of
billing or other BAR/BACR elements change, resulting in a new BAI/BACR number.
5.6.9 Each Party will provide the other with the Exchange Access
detailed usage data within thirty (30) days of the end of the billing period.
SWBT will perform assembly and editing, messages processing and provision of
Access Usage Records in accordance with Appendix Recording. Each Party will
provide to the other the Exchange Access summary usage data within ten (10)
working days after the date that a bill is rendered to the IXC by the initial
Party. To the extent Optel provides SWBT with Access Usage Records, SWBT will
compensate Optel on the same terms as Optel compensates SWBT per Appendix
Recording. SWBT acknowledges that currently there is no charge for Summary Usage
Data Records but that such a charge may be appropriate. At Optel's request, SWBT
will negotiate a mutual and reciprocal charge for provision of Summary Usage
Data Records.
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5.6.10 Errors may be discovered by Optel, the IXC or SWBT. Both SWBT
and Optel agree to provide the other Party with notification of any discovered
errors within two (2) business days of the discovery.
5.6.11 In the event of a loss of data, both Parties shall cooperate
to reconstruct the lost data within sixty (60) days of notification and if such
reconstruction is not possible, shall accept a reasonable estimate of the lost
data, based upon no more than three (3) to twelve (12) months of prior usage
data, if available.
5.7 BILLING ARRANGEMENTS FOR COMPENSATION FOR TERMINATION OF INTRALATA,
LOCAL, TRANSIT, AND OPTIONAL CALLING AREA TRAFFIC
5.7.1 Other than for traffic described in Section 5.6 above, each
Party shall deliver monthly settlement statements for terminating the other
Party's traffic based on the following:
5.7.1.1 Each Party shall, unless otherwise agreed, adhere to
the detailed technical descriptions and requirements for the recording, record
exchange, and billing of traffic using the guidelines as set forth in the
Technical Exhibit Settlement Procedures (TESP), previously provided by SWBT to
Optel. Reference to this technical publication is included in Appendix TP.
(a) Where Optel has direct/high usage trunks to a SWBT
end office with overflow trunking through a SWBT
tandem, billing for the Tandem Traffic will be
calculated as follows:
Total Originating MOUs Recorded By Optel Less Direct
-----------
End Office Terminating MOUs Recorded By SWBT Equals
--------------------------------------------
Total MOUs To Be Compensated As Tandem Traffic;
(b) Where Optel has direct/high usage trunks to a third
party with overflow trunking through a SWBT tandem,
Optel must differentiate the originating MOU records
for the Parties to ascertain how many MOUs should be
compensated as Transit Traffic. If Optel is unable to
so differentiate the originating MOU records, the
Parties shall mutually agree upon a surrogate method
for calculating Transit Traffic charges owed to SWBT.
5.7.1.2 On a monthly basis, each Party will record its
originating MOU including identification of the originating and terminating NXX
for all intercompany calls.
5.7.1.3 Each Party will transmit the summarized
originating MOU from Section 5.7.1.1 above to the transiting and/or terminating
Party for subsequent monthly intercompany settlement billing.
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5.7.1.4 Bills rendered by either Party will be paid within
thirty (30) days of receipt subject to subsequent audit verification.
5.7.1.5 MOUs for the rates contained herein will be measured
in seconds by call type, and accumulated each billing period into one (1) minute
increments for billing purposes in accordance with industry rounding standards.
5.7.1.6 Each Party will multiply the tandem routed and end
office routed terminating MOUs by the appropriate rate contained in this Section
to determine the total monthly billing to each Party.
5.8 COMPENSATION FOR "PORTING" OPTIONAL CALLING AREA NUMBERS
In those instances where an Optel end user is using a SWBT Optional Calling
Area telephone number which SWBT is "porting" to Optel, Optel will compensate
SWBT $6.25 monthly, per ported number. To the extent that Optel should create
premium NXX's by assigning such NXXs exclusively to an optional two-way expanded
local calling scope authorized or approved by the Commission (to the extent such
authorization or approval is required), this compensation arrangement shall be
reciprocal.
6.0 TRANSMISSION AND ROUTING OF EXCHANGE ACCESS TRAFFIC PURSUANT TO 251(C)(2)
6.1 SCOPE OF TRAFFIC
Section 6.0 prescribes parameters for certain trunk groups ("Access Toll
Connecting Trunks") to be established over the Interconnections specified in
Section 4.0 for the transmission and routing of Exchange Access traffic between
Optel Telephone Exchange Service end users and IXCs via a SWBT access tandem.
6.2 TRUNK GROUP ARCHITECTURE AND TRAFFIC ROUTING
6.2.1 The Parties shall jointly establish Access Toll Connecting
Trunks as described in Appendix ITR, by which they will jointly provide tandem-
transported Switched Exchange Access Services to IXCs connected to SWBT's access
tandems, to enable Optel's end users to originate and terminate traffic to and
from such IXCs. Nothing in this Section 6, however, shall be construed to
require Optel to route all of its end users' IXC carried traffic through SWBT.
6.2.2 Access Toll Connecting Trunks shall be used solely for the
transmission and routing of Switched Exchange Access to allow Optel end users to
originate and terminate traffic to/from any IXC which is connected to a SWBT
Access Tandem. In addition, the trunks shall be used to allow Optel's end users
to connect to, or be connected to, the 800 Services of any Telecommunications
Carrier connected to the SWBT Access Tandem.
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7.0 TRANSPORT AND TERMINATION OF OTHER TYPES OF TRAFFIC
7.1 INFORMATION SERVICES TRAFFIC
7.1.1 At such time as the Parties agree to route intraLATA
Information Services Traffic (i.e., 900 and 976 traffic) to one another, they
shall agree to exchange rating and billing information to effectively allow the
Parties to bill their end users and to charge reciprocal rates.
7.2 LINE STATUS VERIFICATION (LSV)/BUSY LINE INTERRUPT (BLI) TRAFFIC
7.2.1 Each Party's operator bureau shall accept LSV and BLI inquiries
from the operator bureau of the other Party in order to allow transparent
provision of LSV/BLI Traffic between the Parties' networks. Only one LSV attempt
will be made per end user operator bureau call, and the applicable charge shall
apply whether or not the line is busy at the time of verification or if the
called party agrees to release the line. Only one BLI attempt will be made per
end user operator telephone call, and the applicable charge shall apply whether
or not the line is in use at the time of interrupt or the called party releases
the line.
7.2.2 Each Party shall route LSV/BLI Traffic inquiries between the
Parties' respective operator bureaus over trunks described in Appendix ITR.
7.2.3 Each Party shall compensate the other Party for LSV/BLI Traffic
as set forth in Appendix Price attached hereto and incorporated by reference.
7.3 WIRELESS TRAFFIC
7.3.1 Appendix Wireless, attached hereto and incorporated by
reference sets forth the terms and conditions under which the Parties will
distribute revenue from their joint provision of Wireless Interconnection
Service for mobile to landline traffic terminating through the Parties'
respective wireline switching networks within a LATA. Appendix Wireless,
however, applies only to the division of revenue received pursuant to SWBT's
currently existing Wireless Interconnection Tariff. If one Party enters into an
interconnection agreement with a CMRS provider, Appendix Wireless shall no
longer be applicable between the Parties with respect to traffic involving such
CMRS provider, and the other Party shall make arrangements with such CMRS
provider as it deems appropriate for the termination of that CMRS provider's
traffic. Similarly, should SWBT substantively change its existing Wireless
Interconnection Tariff, or should Optel adopt a generally applicable Wireless
Interconnection Tariff, the parties agree to re-establish appropriate means for
the division of revenue, if any, under the new or changed tariff.
7.3.2 InterMTA traffic shall be handled in accordance with Section
5.6.
7.3.2.1 Optel shall pay the Local Transit Traffic rate to SWBT
for calls that originate on Optel's network and are sent to SWBT for termination
to a CMRS Provider's network.
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SWBT shall pay the Local Transit Traffic rate to Optel for calls that originate
on SWBT's network and are sent through Optel for termination on a CMRS
Provider's network. With respect to traffic not covered by either Party's
Wireless Interconnection Tariff, each Party shall be responsible for
interconnection agreements with CMRS providers for terminating compensation
regarding traffic originating on the Party's network and terminating on the CMRS
provider's network. The originating Party shall be solely responsible for the
payment of terminating compensation, if any, to the CMRS provider (when the call
terminates to a third party).
7.3.3 All InterMTA traffic which transits a tandem shall be treated
as intraLATA traffic as described in Section 5.5.3 or as Meet-Point Billing
Traffic as described in Section 5.6 below, unless otherwise agreed.
8.0 SIGNALING
8.1 The SWBT signaling publications that describe the practices,
procedures and specifications generally utilized by SWBT for signaling purposes
and are listed in Appendix TP which is attached hereto and incorporated herein.
A copy of these publications have been provided to Optel.
8.2 The Parties will cooperate on the exchange of Transactional
Capabilities Application Part (TCAP) messages to facilitate interoperability of
CCS-based features between their respective networks, including all CLASS
features and functions, to the extent each Party offers such features and
functions to its end users. All CCS signaling parameters will be provided
including, without limitation, calling party number (CPN), originating line
information (OLI), calling party category and charge number.
9.0 NUMBERING
9.1 Nothing in this Agreement shall be construed to limit or otherwise
adversely impact in any manner either Party's right to employ or to request and
be assigned any North American numbering Plan (NANP) number resources
including, but not limited to, central office (NXX) codes pursuant to the
Central Office Code Assignment Guidelines/2/, or to establish, by tariff or
otherwise, Exchanges and Rating Points corresponding to such NXX codes. Each
Party is responsible for administering the NXX codes it is assigned.
___________________
/2/ Last published by the Industry Numbering Committee ("INC") as INC
95-0407-008, Revision 4/7/95, formerly ICCF 93-0729-010.
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9.2 At a minimum, in those Metropolitan Exchange Areas where Optel
intends to provide local exchange service, Optel shall obtain a separate NXX
code for each SWBT exchange or group of exchanges that share a common mandatory
calling scope as defined in SWBT tariffs. This will enable Optel and SWBT to
identify the jurisdictional nature of traffic for intercompany compensation
until such time as both Parties have implemented billing and routing
capabilities to determine traffic jurisdiction on a basis other than NXX codes.
9.3 Each Party agrees to make available to the other, up-to-date listings
of its own assigned NPA-NXX codes, along with associated Rating Points and
Exchanges.
9.4 To the extent SWBT serves as Central Office Code Administrator for a
given region, SWBT commits to treat Optel requests for assignment of central
office code(s) in a neutral and nondiscriminatory manner, consistent with
regulatory requirements, and (NXX) Central Office Code Assignment Guidelines.
9.5 Each Party is responsible to program and update its own switches and
network systems to recognize and route traffic to the other Party's assigned NXX
codes at all times. Neither Party shall impose fees or charges on the other
Party for such required programming and updating activities.
9.6 Each Party is responsible to input required data into the Routing Data
Base Systems (RDBS) and into the Bellcore Rating Administrative Data Systems
(BRADS) or other appropriate system(s) necessary to update the Local Exchange
Routing Guide (LERG), unless negotiated otherwise.
9.7 Neither Party is responsible for notifying the other Parties' end
users of any changes in dialing arrangements, including those due to NPA
exhaust, unless otherwise ordered by the Commission, the FCC, or a court.
9.8 NXX MIGRATION. Where either Party has activated an entire NXX for a
single end user, or activated more than half of an NXX for a single end user
with the remaining numbers in that NXX either reserved for future use or
otherwise unused, if such end user chooses to receive service from the other
Party, the first Party shall cooperate with the second Party to have the entire
NXX reassigned in the LERG (and associated industry databases, routing tables,
etc.) to an End Office operated by the second Party. Such transfer will require
development of a transition process to minimize impact on the Network and on the
end user(s)' service and will be subject to appropriate industry lead times
(currently forty-five (45) days) for movements of NXXs from one switch to
another. The Party to whom the NXX is migrated will pay NXX migration charges of
$10,000.00 per NXX.
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10.0 RESALE - SECTION 251(b)(1); 251(c)(4); 252(d)(3); and 271(c)(2)(B)(xiv);
10.1 Availability of SWBT Retail Telecommunications Services for Resale
SWBT shall offer to Optel for resale at wholesale rates its
Telecommunications Services, as described in Section 251(c)(4) of the Act,
pursuant to the terms and conditions of Appendix Resale attached hereto and
incorporated herein by this reference.
10.2 Availability of Optel Retail Telecommunication Services for Resale
Optel shall make available its Telecommunications Services for resale at
wholesale rates to SWBT in accordance with Section 251(b)(1) of the Act.
11.0 UNBUNDLED NETWORK ELEMENTS - SECTIONS 251(c)(3), 271(c)(2)(B) (ii),(iv),
(v),(vi),(x)
11.1 SWBT shall provide Optel access to unbundled network elements for
the provision of a telecommunication service as described in Section 251(c)(3)
and 271(c)(2)(B) of the Act, pursuant to the terms and conditions of Appendix
UNE attached hereto and incorporated herein by this reference.
11.2 Optel shall make available access to its Unbundled Network elements
in accordance with Section 251(c)(3) of the Act.
12.0 NOTICE OF CHANGES - SECTION 251(c)(5)
Nothing in this Agreement shall limit either Party's ability to upgrade
its network through the incorporation of new equipment, new software or
otherwise. If a Party makes a change in its network which it believes will
materially affect the interoperability of its network with the other Party, the
Party making the change shall provide at least ninety (90) days advance written
notice of such change to the other Party. Notwithstanding the foregoing, if
either Party establishes additional tandems in an exchange area in which the
other Party offers local exchange service, that Party will provide the other
Party with not less than one-hundred eighty (180) days' advance notification of
same, and with greater notification when practicable. Both Parties agree to
coordinate interconnection matters consistent with the requirements of the
Americans with Disabilities Act (42 U.S.C. 12101) and with Sections 255 and 256
of the Act. In addition, the Parties will comply with the Network Disclosure
rules adopted by the FCC in CC Docket No. 96-98, Second Report and Order, as may
be amended from time to time. The Party upgrading its network shall be solely
responsible for the cost and effort of accommodating such changes in its own
network.
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13.0 COLLOCATION - SECTION 251(c)(6)
13.1 SWBT shall provide to Optel Physical Collocation space necessary
for Interconnection (pursuant to Section 4.0 of this Agreement) or access to
Network Elements on an unbundled basis except that SWBT may provide for Virtual
Collocation if SWBT demonstrates to the Commission that Physical Collocation is
not practical for technical reasons or because of space limitations, as provided
in Section 25l(c)(6) of the Act. SWBT shall provide such Collocation for the
purpose of Interconnection or access to Network Elements on an unbundled basis,
except as otherwise mutually agreed to in writing by the Parties or as required
by the FCC or the appropriate Commission, subject to applicable federal and
state tariffs.
13.2 Except as otherwise ordered by the Commission or the FCC, or as
mutually agreed to by Optel and SWBT, Physical Collocation shall be available at
a Central Office Switch location classified as an end office location, a serving
wire center, a tandem office location, or a remote node that serves as a rating
point for special access or switched access transport.
14.0 NUMBER PORTABILITY - SECTIONS 251(b)(2) and 271(c)(2)(B)(xi)
14.1 The Parties shall provide to each other Interim Number Portability
(INP) on a reciprocal basis. Pursuant to the provisions in the Act, and in
accordance with the terms and conditions outlined in Appendix PORT, which is
attached hereto and incorporated herein, SWBT will provide Optel Interim Number
Portability through Remote Call Forwarding and Direct Inward Dialing technology
until Permanent Number Portability is implemented.
14.2 Once Permanent Number Portability is implemented, either Party may
withdraw, at any time and at its sole discretion, its INP offerings, subject to
thirty (30) day's advance notice to the other Party to allow the seamless and
transparent conversion of INP end user numbers to Permanent Number Portability.
15.0 DIALING PARITY - SECTION 251(b)(3); 271(c)(2)(B)(xii); and 271(e)(2)
15.1 The Parties shall provide Dialing Parity to each other as required
under Section 251(b)(3) of the Act.
15.2 SWBT shall provide IntraLATA Dialing Parity in accordance with
Section 271(e)(2) of the Act.
16.0 ACCESS TO RIGHTS-OF-WAY - SECTION 251(b)(4) and 271(c)(2)(B)(iii)
Each Party shall provide the other Party access to its poles, ducts,
rights-of-way and conduits it owns or controls in accordance with Section 224 of
the Act on terms, conditions and prices comparable to those offered to any other
entity pursuant to each Party's applicable tariffs, contracts, or standard
agreements. In addition, even though roof space and riser capacity
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is not governed by the Section 25l(b)(4), the Parties agree that if either Party
provides access to roof space or riser capacity in a particular building it owns
or controls to another entity for provision of microwave-based communications
services, the Party will provide access to roof space or riser capacity that it
owns or controls on a first-come, first-served basis; subject in all cases to
the providing Party's normal request processes based on the evaluation of
operational issues, including, but not limited to capacity, potential
interference, roof loading, power requirements, and protection grounding, which
approval shall not be unreasonably withheld.
17.0 DATABASE ACCESS - SECTION 271(c)(2)(B)(x)
In accordance with Section 27(c)(2)(B)(x) of the Act, SWBT shall provide
Optel with nondiscriminatory access to databases and associated signaling
necessary for call routing and completion. When requesting access to databases
not otherwise provided for in this Agreement, or appropriate interfaces,
regardless of whether they constitute unbundled Network Elements, Optel will use
the Network Element Bona Fide Request process.
18.0 INTERCEPT REFERRAL ANNOUNCEMENTS
18.1 The Party formerly providing service to an end user shall provide a
Basic Referral announcement, reciprocally and free of charge on the abandoned
telephone number. The announcement states that the called number has been
disconnected or changed and provides the end user's new telephone number to the
extent that it is listed.
(a) Basic Intercept Referral Announcements are to be provided on
residential numbers for a minimum of thirty (30) days where
facilities exist and the threat of telephone number
exhaustion is not imminent.
(b) Basic Intercept Referral Announcements for a single line
business end user and the primary listed telephone number
for DID and "Centrex-type" end users, shall be available for
a minimum of thirty (30) days or the life of the White Pages
directory, whichever is greater. If the threat of telephone
number exhaustion becomes imminent for a particular Central
Office, the service provider may reissue a disconnected
number prior to the expiration of the directory, but no
earlier than thirty (30) days after the disconnection of the
business telephone number.
19.0 COORDINATED REPAIR CALLS
19.1 To avoid and minimize the potential for end user confusion, each
Party shall inform their respective end users of their respective repair bureau
telephone number(s) to access such bureaus. In the event that either Party
receives a misdirected repair call, the Parties agree to employ the following
procedures for handling such calls:
(a) To the extent the correct provider can be determined,
misdirected repair
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calls will be referred to the proper provider of local exchange
service in a courteous manner, at no charge, and the end user
will be provided the correct contact telephone number.
(b) In responding to repair calls, neither Party shall make
disparaging remarks about each other, nor shall they use these
repair calls as the basis for internal referrals or to solicit
customers or to market services, nor shall they initiate
extraneous communications beyond the direct referral to the
correct repair telephone number.
20.0 OTHER SERVICES 271(c)(B)(2)(vii) AND 271(c)(2)(B)(viii)
20.1 WHITE PAGES. In accordance with Section 271(c)(2)(B)(viii) of the
Act, SWBT will make nondiscriminatory access to White Pages service available
under the terms and conditions of Appendix WP, attached hereto and incorporated
by reference.
20.2 CALLING NAME INFORMATION. The Parties shall provide, on mutually
agreeable and reciprocal terms, each other with access to Calling Name
information of their respective end users whenever one Party initiates a query
from a Signaling System Point for such information associated with a call
terminating to an end user who subscribes to a calling name service. SWBT will
provide Calling Name Information in accordance with and under the terms and
conditions of Appendix CNAM, attached hereto and incorporated by reference.
20.3 BILLING/COLLECTING/REMITTING. The Parties will jointly agree to
terms and conditions for Billing, Collecting and Remitting for alternately
billed local messages as described in Appendix BCR, attached hereto and
incorporated by reference.
20.4 911 AND E911 SERVICES. Pursuant to Section 271(c)(2)(B)(vii) of the
Act, SWBT will make nondiscriminatory access to 911 and E911 services
available under the terms and conditions of Appendix 911, attached hereto and
incorporated by reference.
20.5 DIRECTORY ASSISTANCE (DA). Pursuant to Section
271(c)(2)(B)(vii)(II) of the Act, SWBT will provide nondiscriminatory access to
DA services under the terms and conditions identified in Appendix DA, attached
hereto and incorporated by reference.
20.6 DIRECT ACCESS (DIRECT). Pursuant to Section 271(c)(2)(B)(ii) of the
Act, SWBT will provide nondiscriminatory access to subscriber listing
information contained in SWBT's Directory Assistance database under the terms
and conditions identified in Appendix DIRECT, attached hereto and incorporated
by reference.
20.7 OPERATOR SERVICES. Pursuant to Section 271(c)(2)(B)(vii)(III) of
the Act, SWBT shall provide nondiscriminatory access to Operator Services under
the terms and conditions identified in Appendix OS, attached hereto and
incorporated by reference.
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20.8 CLEARINGHOUSE SERVICES. To the extent requested by Optel, SWBT
shall provide for the tracking of message revenues from certain messages to
facilitate the transfer of revenues between the billing company the earning
company through the Clearinghouse Services provided by SWBT pursuant to the
terms and conditions in Appendix CH, attached hereto and incorporated by
reference.
20.9 HOSTING. At Optel's request, SWBT shall perform hosting
responsibilities for the provision of billable message data and/or access usage
data received from an Optel for distribution to the appropriate billing and/or
processing location or for delivery to an Optel of such data via SWBT's internal
network or the nationwide CMDS network pursuant tO Appendix HOST, attached
hereto and incorporated by reference
20.10 SIGNALING SYSTEM 7 INTERCONNECTION. At Optel's request, SWBT shall
perform SS7 interconnection services for Optel pursuant to Appendix SS7,
attached hereto and incorporated by reference.
21.0 GENERAL RESPONSIBILITIES OF THE PARTIES
21.1 SWBT and Optel shall each use their best efforts to meet the
Interconnection Activation Dates.
21.2 Each Party is individually responsible to provide facilities within
its network that are necessary for routing, transporting, measuring, and billing
traffic from the other Party's network and for delivering such traffic to the
other Party's network in the standard format compatible with SWBT's network as
referenced in Bellcore's BOC Notes on LEC Networks Practice No. SR-TSV-002275,
and to terminate the traffic it receives in that standard format to the proper
address on its network. The Parties are each solely responsible for
participation in and compliance with national network plans, including the
National Network Security Plan and the Emergency Preparedness Plan.
21.3 Neither Party shall use any service related to or use any of the
services or elements provided in this Agreement in any manner that interferes
with other persons in the use of their service, prevents other persons from
using their service, or otherwise impairs the quality of service to other
carriers or to either Party's end users, and either Party may discontinue or
refuse service, but only for so long as the other Party is violating this
provision. Upon such violation, either Party shall provide the other Party
notice of the violation at the earliest practicable time.
21.4 Each Party is solely responsible for the services it provides to
its end users and to other Telecommunications Carriers.
21.5 The Parties shall work cooperatively to minimize fraud associated
with third-number billed calls, calling card calls, and any other services
related to this Agreement.
21.6 At all times during the term of this Agreement, each Party shall
keep and maintain in force at each Party's expense all insurance required by law
(e.g. workers' compensation insurance) as
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well as general liability insurance for personal injury or death to any one
person, property damage resulting from any one incident, automobile liability
with coverage for bodily injury for property damage. Upon request from the other
Party, each Party shall provide to the other Party evidence of such insurance
(which may be provided through a program of self insurance).
21.7 In addition to its indemnity obligations under Section 25.0, each
Party shall provide, in its tariffs and contracts with its end users that relate
to any Telecommunications Service provided or contemplated under this Agreement,
that in no case shall such Party or any of its agents, contractors or others
retained by such parties be liable to any end user or third party for (i) any
Loss relating to or arising out of this Agreement, whether in contract or tort,
that exceeds the amount such Party would have charged the applicable end user
for the service(s) or function(s) that gave rise to such Loss, and (ii) any
Consequential Damages.
21.8 Unless otherwise stated, each Party will render a monthly bill to
the other for service(s) provided hereunder. Remittance in full will be due
within thirty (30) days of that billing date. Interest shall apply on overdue
amounts (other than disputed amounts which are subject to Section 30.12) at the
rate specified in Section 30.12, unless otherwise specified in an applicable
tariff Each Party reserves the right to net delinquent amounts against amounts
otherwise due the other.
21.9 SWBT is participating with the industry to develop standardized
methods through the OBF and shall implement ordering and billing
formats/processes consistent with industry guidelines as capabilities are
deployed. Where such guidelines are not available or SWBT decides not to fully
utilize industry guidelines, SWBT will provide Optel with information on its
ordering and billing format/process and requirements at the earliest practicable
time.
22.0 EFFECTIVE DATE, TERM, AND TERMINATION
22.1 This Agreement shall be effective upon execution by both Parties
("Effective Date"). Promptly following the Effective Date, the Parties shall
take all actions required to physically and operationally interconnect as
contemplated by this Agreement. The Parties shall not pass live traffic until
expressly authorized to do so by the Commission.
22.2 The initial term of this Agreement shall be one (1) year (the
"Term") which shall commence on the Date of Execution. Absent the receipt by one
Party of written notice from the other Party at least sixty (60) days prior to
the expiration of the Term to the effect that such Party does not intend to
extend the Term of this Agreement, this Agreement shall automatically renew and
remain in full force and effect on and after the expiration of the Term until
terminated by either Party pursuant to Section 22.3.
22.3 Either Party may terminate this Agreement in the event that the
other Party fails to perform a material obligation that disrupts the operation
of either Party's network and/or end user service and fails to cure such
material nonperformance within forty-five (45) days after written notice
thereof.
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22.4 If pursuant to Section 22.2 this Agreement continues in full force
and effect after the expiration of the Term, either Party may terminate this
Agreement ninety (90) days after delivering written notice to the other Party of
its intention to terminate this Agreement, subject to Section 22.5. Neither
Party shall have any liability to the other Party for termination of this
Agreement pursuant to this Section 22.4 other than its obligations under Section
22.5.
22.5 Upon termination or expiration of this Agreement in accordance with
this Section 22.0
(a) each Party shall comply immediately with its obligations set
forth in Section 30.6; and
(b) each Party shall promptly pay all amounts (including any late
payment charges) owed under this Agreement; and
(c) each Party's indemnification obligations shall survive.
22.6 If upon expiration or termination, the Parties are negotiating a
successor agreement; during such period, each Party shall continue to perform
its obligations and provide the services described herein that are to be
included in the successor agreement until such time as the latter agreement
becomes effective; provided however, that if the Parties are unable to reach
agreement within six (6) months after termination or expiration of this
Agreement, either Party has the right to submit this matter to the Commission
for resolution. Until a survivor agreement is reached or the Commission resolves
the matter, whichever is sooner, the terms, conditions, rates, and charges
stated herein will continue to apply, subject to a true-up based on the
Commission action, if any.
22.7 Except as set forth in Section 28.5, no remedy set forth in this
Agreement is intended to be exclusive and each and every remedy shall be
cumulative and in addition to any other rights or remedies now or hereafter
existing under applicable law or otherwise.
23.0 DISCLAIMER OF REPRESENTATIONS AND WARRANTIES
EXCEPT AS EXPRESSLY PROVIDED UNDER THIS AGREEMENT, NO PARTY MAKES OR
RECEIVES ANY WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE SERVICES,
FUNCTIONS AND PRODUCTS IT PROVIDES UNDER OR CONTEMPLATED BY THIS AGREEMENT AND
THE PARTIES DISCLAIM THE IMPLIED WARRANTIES OF MERCHANTABILITY OR OF FITNESS FOR
A PARTICULAR PURPOSE. ADDITIONALLY, NEITHER SWBT NOR Optel ASSUMES
RESPONSIBILITY WITH REGARD TO THE CORRECTNESS OF DATA OR INFORMATION SUPPLIED BY
THE OTHER WHEN THIS DATA OR INFORMATION IS ACCESSED AND USED BY A THIRD PARTY.
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24.0 CHANGES IN END USER LOCAL EXCHANGE SERVICE PROVIDER SELECTION
Each Party will abide by applicable state or federal laws and regulations
in obtaining end user authorization prior to changing end user's local
service provider to itself and in assuming responsibility for any applicable
charges as specified in Section 258 (b) of the Telecommunications Act of
1996. Either Party shall make available to the other Party a copy of such end
user authorization upon request and at no charge. Only an end user can
initiate a challenge to a change in its local exchange service provider. If
an end user notifies SWBT or Optel that the end user requests local exchange
service, the Party receiving such request shall be free to immediately
provide service to such end user. When an end user changes or withdraws
authorization, each Party shall release customer-specific facilities in
accordance with the end user's direction or that of the end user's authorized
agent. Further, when an end user abandons the premise, either Party is free
to reclaim the unbundled network element facilities it owns for use by
another customer and is free to issue service orders required to reclaim such
facilities.
25.0 SEVERABILITY
25.1 The Parties negotiated the services, arrangements, Interconnection,
terms and conditions of this Agreement by the Parties as a total arrangement and
are intended to be nonseverable, subject only to Section 30.16 of this
Agreement.
25.2 In the event the Commission, the FCC, or a court rejects any portion
or determines that any provision of this Agreement is contrary to law, or is
invalid or unenforceable for any reason, the Parties shall continue to be bound
by the terms of this Agreement, insofar as possible, except for the portion
rejected or determined to be unlawful, invalid, or unenforceable. In such event,
the Parties shall negotiate in good faith to replace the rejected, unlawful,
invalid, or unenforceable provision and shall not discontinue service to the
other party during such period if to do so would disrupt existing service being
provided to an end user. Nothing in this Agreement shall be construed as
requiring or permitting either Party to contravene any mandatory requirement of
federal or state law, or any regulations or orders adopted pursuant to such law.
26.0 INDEMNIFICATION
26.1 Each Party shall be responsible only for service(s) and
facility(ies) which are provided by that Party, its authorized agents,
subcontractors, or others retained by such parties, and neither Party shall bear
any responsibility for the services and facilities provided by the other Party,
its agents, subcontractors, or others retained by such parties.
26.2 Except as otherwise provided in this Section 26.0 and Section 27.1,
and to the extent not prohibited by law and not otherwise controlled by tariff,
each Party (the "Indemnifying Party") shall defend and indemnify the other Party
(the "Indemnified Party") and hold such Indemnified Party harmless against any
Loss to a third party arising out of the negligence or willful misconduct by
such Indemnifying Party, its agents, its end user, contractors, or others
retained by such parties, in
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connection with its provision of services or functions under this Agreement.
26.3 In the case of any Loss alleged or made by an end user of either
Party, the Party ("Indemnifying Party") whose end user alleged or made such Loss
shall defend and indemnity the other Party (the "Indemnified Party") and hold
such Indemnified Party harmless against any or all of such Loss alleged by each
and every end user. Optel agrees to indemnity, defend and hold harmless SWBT
from any Loss arising out of SWBT's provision of 911 services or out of Optel's
end users' use of the 911 service, whether suffered, made, instituted or
asserted by Optel or its end users, including for any personal injury or death
of any person or persons, except for Loss which is the direct result of SWBT's
own negligence or willful misconduct.
26.4 The Indemnified Party shall be indemnified, defended and held
harmless by the Indemnifying Party against any Loss arising from such
Indemnifying Party's use of services offered under this Agreement, involving
tort claims, including claims for libel, slander, invasion of privacy, or
infringement of copyright arising from the Indemnifying Party's own
communications or the communications of such Indemnifying Party's end users; or
26.5 The Indemnifying Party agrees to defend any suit brought against the
Indemnified Party for any Loss identified in this Section 26.0. The Indemnified
Party agrees to notify the Indemnifying Party promptly in writing of any written
claims, lawsuits, or demand for which such Indemnifying Party is or may be
responsible and of which the Indemnified Party has knowledge and to cooperate in
every reasonable way to facilitate defense or settlement of claims. The
Indemnifying Party shall have the exclusive right to control and conduct the
defense and settlement of any such actions or claims subject to consultation
with the Indemnified Party. The Indemnifying Party shall not be liable for any
settlement by the Indemnified Party unless such Indemnified Party has approved
such settlement in advance and agrees to be bound by the agreement incorporating
such settlement.
27.0 LIMITATION OF LIABILITY
27.1 Except for Losses alleged or made by an end user of either Party, in
the case of any Loss alleged or made by a third party arising from the
negligence or willful misconduct of both Parties, each Party shall bear, and
its obligations under this Section 27.0 shall be limited to, that portion (as
mutually agreed to by the Parties) of the resulting expense caused by its
(including that of its agents, servants, contractors or others acting in aid or
concert with it) negligence or willful misconduct.
27.2 Except for indemnity obligations under this Agreement, each Party's
liability to the other Party for any Loss relating to or arising out of any
negligent act or omission in its performance of this Agreement, whether in
contract or in tort, shall not exceed in total the amount SWBT or Optel has or
would have charged to the other Party for the affected service(s) or
function(s) for the time period during which the service(s) or function(s)
were not performed or were otherwise improperly performed.
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27.3 In no event shall either Party have any liability whatsoever to the
other Party for any indirect, special, consequential, incidental or punitive
damages, including but not limited to, loss of anticipated profits or revenue or
other economic loss in connection with or arising from anything said, omitted or
done hereunder (collectively, "Consequential Damages"), even if the other Party
has been advised of the possibility of such damages; provided, that the
foregoing shall not limit a Party's obligation under this Agreement to
indemnifying, defend and hold the other Party harmless against any amounts
payable to a third party, including any losses, costs, fines, penalties,
criminal or civil judgments or settlements, expenses (including attorneys' fees)
and Consequential Damages of such third party.
28.0 LIQUIDATED DAMAGES FOR SPECIFIED ACTIVITIES
28.1 CERTAIN DEFINITIONS. When used in this Section 28.0, the following
terms shall have the meanings indicated:
28.1.1 "SPECIFIED PERFORMANCE BREACH" means the failure by SWBT to
meet the Performance Criteria for any Specified Activity for a period of three
(3) consecutive calendar months.
28.1.2 "Specified Activity" means any of the following activities:
(i) the installation by SWBT of unbundled elements
associated with Optel end user Lines;
(ii) SWBT's provision of Interim Number Portability; or
(iii) the repair of out of service problems for Optel
("Out of Service Repairs").
28.1.3 "Performance Criteria" means, with respect to each calendar
month during the term of this Agreement, the performance by SWBT during such
month of each Specified Activity shown below within the time interval shown in
at least eighty percent (80%) of the covered instances:
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<TABLE>
<CAPTION>
==============================================================================
SPECIFIED ACTIVITY PERFORMANCE INTERVAL DATE
<S> <C>
(i) Optel End User Lines
--------------------
------------------------------------------------------------------------------
1-10 Lines per Service Order five (5) business days from SWBT's
Receipt of valid Service Order
------------------------------------------------------------------------------
11-20 Lines per Service Order ten (10) business days from SWBT's
Receipt of valid Service Order
------------------------------------------------------------------------------
21+ Lines per Service Order To Be Negotiated
------------------------------------------------------------------------------
(ii) Interim Number Portability
--------------------------
------------------------------------------------------------------------------
1-10 Numbers per Service Order five (5) business days from SWBT's
Receipt of valid Service Order
------------------------------------------------------------------------------
11-20 Numbers per Service Order ten (10) business days from SWBT's
Receipt of valid Service Order
------------------------------------------------------------------------------
21+ Numbers per Service Order To be Negotiated
------------------------------------------------------------------------------
(iii) Out-of-Service Repairs Less than twenty-four (24) hours from
----------------------
SWBT's Receipt of Notification of
Out-of-Service Condition
==============================================================================
</TABLE>
28.2 SPECIFIED PERFORMANCE BREACH. In recognition of the: (1) loss of end
user opportunities, revenues and goodwill which Optel might sustain in the event
of a Specified Performance Breach; (2) the uncertainty, in the event of such a
Specified Performance Breach, of Optel having available to it customer
opportunities similar to those opportunities currently available to Optel; and
(3) the difficulty of accurately ascertaining the amount of damages Optel would
sustain in the event of such a Specified Performance Breach, SWBT agrees to pay
Optel, subject to Section 28.4 below, damages as set forth in Section 28.3 below
in the event of the occurrence of a Specified Performance Breach.
28.3 LIQUIDATED DAMAGES. The damages payable by SWBT to Optel as a result
of a Specified Performance Breach shall be $75,000 for each Specified
Performance Breach (collectively, the "Liquidated Damages"). Optel and SWBT
agree and acknowledge that (a) the Liquidated Damages are not a penalty and have
been determined based upon the facts and circumstances of Optel and SWBT at the
time of the negotiation and entering into of this Agreement, with due regard
given to the performance expectations of each Party; (b) the Liquidated Damages
constitute a reasonable approximation of the damages Optel would sustain if its
damages were readily ascertainable; and (c) Optel shall not be required to
provide any proof of the Liquidated Damages.
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28.4 LIMITATIONS. In no event shall SWBT be liable to pay the Liquidated
Damages if SWBT's failure to meet or exceed any of the Performance Criteria is
caused, directly or indirectly, by a Delaying Event. A "Delaying Event" means
(a) a failure by Optel to perform any of its obligations set forth in this
Agreement (including, without limitation, the Implementation Schedule and the
Joint Implementation Process), (b) any delay, act or failure to act by an end
user, agent or subcontractor of Optel, (c) any Force Majeure Event, or (d) for
INP, where memory limitations in the switch in the SWBT serving office cannot
accommodate the request. If a Delaying Event (i) prevents SWBT from performing a
Specified Activity, then such Specified Activity shall be excluded from the
calculation of SWBT's compliance with the Performance Criteria, or (ii) only
suspends SWBT's ability to timely perform the Specified Activity, the applicable
time frame in which SWBT's compliance with the Performance Criteria is measured
shall be extended on an hour-for-hour or day-for-day basis, as applicable, equal
to the duration of the Delaying Event.
28.5 SOLE REMEDY. The Liquidated Damages shall be the sole and exclusive
remedy of Optel for SWBT's breach of the Performance Criteria or a Specified
Performance Breach as described in this Section 28.0 and shall be in lieu of any
other damages or credit Optel might otherwise seek for such breach of the
Performance Criteria or a Specified Performance Breach through any claim or suit
brought under any contract or tariff.
28.6 RECORDS. SWBT shall maintain complete and accurate records, on a
monthly basis, of its performance under this Agreement of each Specified
Activity and its compliance with the Performance Criteria. SWBT shall provide to
Optel such records in a self-reporting format on a monthly basis.
Notwithstanding Section 30.6.1, the Parties agree that such records shall be
deemed "Proprietary Information" under Section 30.6.
29.0 REGULATORY APPROVAL
29.1 The Parties understand and agree that this Agreement will be filed
with the Commission and may thereafter be filed with the FCC. The Parties
believe in good faith and agree that the services to be provided under this
Agreement satisfy the specifically mentioned sections of the Act and are in the
public interest. Each Party covenants and agrees to fully support approval of
this Agreement by the Commission or the FCC under Section 252 of the Act without
modification.
29.2 The Parties agree that the performance of the terms of this
Agreement will satisfy SWBT's obligation to provide Interconnection under
Section 251 of the Act, and the requirements of the Competitive Checklist, under
Section 271 of the Act. Optel represents that it is, or intends to become, a
provider of Telephone Exchange Service to residential and business subscribers
offered exclusively over its own Telephone Exchange Service facilities or
predominantly over its own Telephone Exchange Service facilities in combination
with the use of unbundled Network Elements purchased from another entity and the
resale of the Telecommunications Services of other carriers.
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30.0 MISCELLANEOUS
30.1 AUTHORIZATION.
(a) SWBT is a corporation duly organized, validly existing and
in good standing under the laws of the State of Missouri and
has full power and authority to execute and deliver this
Agreement and to perform the obligations hereunder.
(b) Optel is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware and
has full power and authority to execute and deliver this
Agreement and to perform its obligations hereunder.
30.2 COMPLIANCE AND CERTIFICATION.
30.2.1 Each Party shall comply with all federal, state, and local
laws, rules, and regulations applicable to its performance under this Agreement.
30.2.2 Each Party warrants that it has obtained all necessary state
certification required in those states in which it has ordered services from the
other Party pursuant to this Agreement. Upon request by any state governmental
entity, each Party shall provide proof of certification.
30.2.3 Each Party represents and warrants that any equipment,
facilities or services provided to the other Party under this Agreement comply
with the Communications Law Enforcement Act ("CALEA"). Each Party shall
indemnify and hold the other Party harmless from any and all penalties imposed
upon the other Party for such noncompliance and shall at the non-compliant
Party's sole cost and expense, modify or replace any equipment, facilities or
services provided to the other Party under this Agreement to ensure that such
equipment, facilities and services fully comply with CALEA
30.3 LAW ENFORCEMENT.
30.3.1 SWBT and Optel shall handle law enforcement requests as
follows:
(a) Intercept Devices: Local and federal law enforcement
agencies periodically request information or assistance
from local telephone service providers. When either
Party receives a request associated with an end user of
the other Party, it shall refer such request to the
Party that serves such end user, unless the request
directs the receiving Party to attach a pen register,
trap-and-trace or form of intercept on the Party's
facilities, in which case that Party shall comply with
any valid request.
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(b) Subpoenas: If a Party receives a subpoena for
information concerning an end user the Party knows to
be an end user of the other Party, it shall refer the
subpoena to the requesting party with an indication
that the other Party is the responsible company, unless
the subpoena requests records for a period of time
during which the Party was the end use's service
provider, in which case the Party will respond to any
valid request.
(c) Emergencies: If a Party receives a request from a law
enforcement agency for temporary number change,
temporary disconnect, or one-way denial of outbound
calls for an end user of the other Party by the
receiving Party's switch, that Party will comply with
an valid emergency request. However, neither Party
shall be held liable for any claims or damages arising
from compliance with such requests on behalf of the
other Party's end user and the Party serving such end
user agrees to indemnify and hold the other Party
harmless against any and all such claims.
30.4 INDEPENDENT CONTRACTOR. Each Party and each Party's contractor shall
be solely responsible for the withholding or payment of all applicable federal,
state and local income taxes, social security taxes and other payroll taxes with
respect to its employees, as well as any taxes, contributions or other
obligations imposed by applicable state unemployment or workers' compensation
acts. Each Party has sole authority and responsibility to hire, fire and
otherwise control its employees.
30.5 FORCE MAJEURE. Neither Party shall be liable for any delay or
failure in performance of any part of this Agreement from any cause beyond its
control and without its fault or negligence including, without limitation, acts
of nature, acts of civil or military authority, government regulations,
embargoes, epidemics, terrorist acts, riots, insurrections, fires, explosions,
earthquakes, nuclear accidents, floods, work stoppages, equipment failure, cable
cuts, power blackouts, volcanic action, other major environmental disturbances,
unusually severe weather conditions, inability to secure products or services of
other persons or transportation facilities or acts or omissions of
transportation carriers In such event, the Party affected shall, upon giving
prompt notice to the other Party, be excused from such performance on a day-to-
day basis to the extent of such interference (and the other Party shall likewise
be excused from performance of its obligations on a day-for-day basis to the
extent such Party's obligations related to the performance so interfered with).
The affected Party shall use its best efforts to avoid or remove the cause of
nonperformance and both Parties shall proceed to perform with dispatch once the
causes are removed or cease.
30.6 CONFIDENTIALITY.
30.6.1 All information, including but not limited to
specifications, microfilm, photocopies, magnetic disks, magnetic tapes,
drawings, sketches, models, samples, tools, technical
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information, data, employee records, maps, financial reports, and market data,
(i) furnished by one Party (the "Disclosing Party") to the other Party (the
"Receiving Party") dealing with customer-specific, facility-specific, or
usage-specific information, other than customer information communicated for
the purpose of publication or directory database inclusion, 911, call
processing, billing or settlement or as otherwise mutually agreed upon, or (ii)
in written, graphic, electromagnetic, or other tangible form and marked at the
time of delivery as "Confidential" or "Proprietary," or (iii) communicated
orally and declared to the Receiving Party at the time of delivery, or by
written notice given to the Receiving Party within ten (10) days after
declaration to be "Confidential" or "Proprietary" (collectively referred to as
"Proprietary Information"), shall remain the property of the Disclosing Party.
30.6.2 Upon request by the Disclosing Party, the Receiving Party
shall return all tangible copies of Proprietary Information, whether written,
graphic, or otherwise. In the event of the expiration or termination of this
Agreement for any reason whatsoever, each Party shall return to the other Party
or destroy all Proprietary Information and other documents, work papers and
other material (including all copies thereof) obtained from the other Party in
connection with this Agreement.
30.6.3 Each Party shall keep all the other Party's Proprietary
Information confidential in the same manner in which it keeps its own
Proprietary Information confidential, and shall use the other Party's
Proprietary Information only for performing the covenants contained in the
Agreement and shall disclose such Proprietary Information only to those
employees, contractors, agents or Affiliates who have a need to know. Neither
Party shall use the other Party's Proprietary Information for any other purpose
except upon such terms and conditions as may be agreed upon between the Parties
in writing.
30.6.4 Unless otherwise agreed, the obligations of confidentiality
and nonuse set forth in the Agreement do not apply to such Proprietary
Information that:
(a) was at the time of receipt, already known to the Receiving
Party, free of any obligation to keep confidential and
evidenced by written records prepared prior to delivery by
the Disclosing Party;
(b) is, or becomes publicly known through no wrongful act of
the receiving Party;
(c) is rightfully received from a third person having no direct
or indirect secrecy or confidentiality obligation to the
Disclosing Party with respect to such information;
(d) is independently developed by an employee, agent, or
contractor of the Receiving Party which individual is not
involved in any manner with the provision of services
pursuant to the Agreement and does not have any direct or
indirect access to the Proprietary Information;
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(e) is disclosed to a third person by the Disclosing Party
without similar restrictions on such third person's rights;
(f) is approved for release by written authorization of the
Disclosing Party
(g) is required to be made public by the Receiving Party
pursuant to applicable law or regulation provided that the
Receiving party shall provide the Disclosing Party with
written notice of such requirement as soon as possible and
prior to such disclosure. The Disclosing Party may then
either seek appropriate protective relief from all or part
of such requirement or, if it fails to successfully do so,
it shall be deemed to have waived the Receiving Party's
compliance with Section 30.6 with respect to all or part of
such requirement. The Receiving Party shall use all
commercially reasonable efforts to cooperate with the
Disclosing Party in attempting to obtain any protective
relief which such Disclosing Party chooses to obtain.
Notwithstanding the foregoing, SWBT shall be entitled to
disclose confidential information on a confidential basis to
regulatory agencies upon request for information as to
SWBT's activities under the Act.
30.6.5 Notwithstanding any other provision of this Agreement,
the Proprietary Information provisions of this Agreement shall apply to all
information furnished by either Party to the other in furtherance of the
purpose of this Agreement, even if furnished before the date of this Agreement.
30.6.6 Pursuant to Section 222(b) of the Act, both parties agree
to limit their use of Proprietary Information received from the other to the
permitted purposed identified in the Act.
30.7 GOVERNING LAW. For all claims under this Agreement that are based
upon issues within the jurisdiction (primary or otherwise) of the FCC, the
exclusive jurisdiction and remedy for all such claims shall be as provided for
by the FCC and the Act. For all claims under this Agreement that are based upon
issues within the jurisdiction (primary or otherwise) of the Commission, the
exclusive jurisdiction for all such claims shall be with such Commission, and
the exclusive remedy for such claims shall be as provided for by such
Commission. In all other respects, this Agreement shall be governed by the
domestic laws of Texas without reference to conflict of law provisions.
30.8 TAXES.
30.8.1 Each Party purchasing services hereunder shall pay or
otherwise be responsible for all federal, state, or local sales, use, excise,
gross receipts, transaction or similar taxes, fees, or surcharges (hereinafter
"Tax") levied against or upon such purchasing party (or the providing Party when
such providing Party is permitted by applicable law to pass along to the
purchasing party such taxes, fees, or surcharges), except for any Tax on either
party's corporate existence, status, or income. Whenever possible, these amounts
shall be billed as a separate item on the invoice. To the extent a sale is
claimed to be for resale tax exemption, the purchasing
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party shall furnish the providing party a proper resale tax exemption
certificate as authorized or required by statute or regulation by the
jurisdiction providing said resale tax exemption. Failure to timely provide said
resale tax exemption certificate will result in no exemption being available to
the purchasing Party until such time as the purchasing Party presents a valid
certification. Failure to timely provide said resale tax exemption certificate
will result in no exemption being available to the purchasing Party until such
time as the purchasing Party presents a valid certificate.
30.8.2 With respect to any purchase of services, facilities or
other arrangements, if any Tax is required or permitted by applicable law to be
collected from the purchasing party by the providing party, then (i) the
providing party shall bill the purchasing party for such Tax, (ii) the
purchasing party shall remit such Tax to the providing party and (iii) the
providing party shall remit such collected Tax to the applicable taxing
authority.
30.8.3 With respect to any purchase hereunder of services,
facilities or arrangements that are resold to a third party, if any Tax is
imposed by applicable law on the end user in connection with any such purchase,
then (i) the purchasing party shall be required to impose and/or collect such
Tax from the end user and (ii) the purchasing party shall remit such Tax to the
applicable taxing authority. The purchasing party agrees to indemnify and hold
harmless the providing party on an after-tax basis for any costs incurred by the
providing party as a result of actions taken by the applicable taxing authority
to collect the Tax from the providing party due to the failure of the purchasing
party to pay or collect and remit such tax to such authority.
30.8.4 If the providing party fails to collect any Tax as required
herein, then, as between the providing party and the purchasing party, (i) the
purchasing party shall remain liable for such uncollected Tax and (ii) the
providing party shall be liable for any penalty and interest assessed with
respect to such uncollected Tax by such authority. However, if the purchasing
party fails to pay any taxes properly billed, then, as between the providing
party and the purchasing party, the purchasing party will be solely responsible
for payment of the taxes, penalty and interest.
30.8.5 If the purchasing party fails to impose and/or collect any
Tax from end users as required herein, then, as between the providing party and
the purchasing party, the purchasing party shall remain liable for such
uncollected Tax and any interest and penalty assessed thereon with respect to
the uncollected Tax by the applicable taxing authority. With respect to any Tax
that the purchasing party has agreed to pay or impose on and/or collect from end
users, the purchasing party agrees to indemnify and hold harmless the providing
party on an after-tax basis for any costs incurred by the providing party as a
result of actions taken by the applicable taxing authority to collect the Tax
from the providing Party due to the failure of the purchasing party to pay or
collect and remit such Tax to such authority.
30.9 NON-ASSIGNMENT. This Agreement shall be binding upon every
subsidiary and Affiliate of either Party that is engaged in providing Telephone
Exchange and Exchange Access
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services in any territory within which SWBT is an Incumbent Local Exchange
Carrier as of the date of this Agreement (the "SWBT Territory") and shall
continue to be binding upon all such entities regardless of any subsequent
change in their ownership. Each Party covenants that, if it sells or otherwise
transfers to a third party its Telephone Exchange and Exchange Access network
facilities within the SWBT Territory, or any portion thereof, to a third party,
it will require as a condition of such transfer that the transferee agree to be
bound by this Agreement with respect to services provided over the transferred
facilities. Except as provided in this paragraph, neither Party may assign or
transfer (whether by operation of law or otherwise) this Agreement (or any
rights or obligations hereunder) to a third party without the prior written
consent of the other Party; provided that each Party may assign this Agreement
to a corporate Affiliate or an entity under its common control or an entity
acquiring all or substantially all of its assets or equity by providing prompt
written notice to the other Party of such assignment or transfer. Any attempted
assignment or transfer that is not permitted is void ab initio. Without limiting
the generality of the foregoing, this Agreement shall be binding upon and shall
inure to the benefit of the Parties' respective successors and assigns.
30.10 NON-WAIVER. Failure of either Party to insist on performance of any
term or condition of this Agreement or to exercise any right or privilege
hereunder shall not be construed as a continuing or future waiver of such term,
condition, right or privilege.
30.11 AUDITS. Each Party to this Agreement will be responsible for the
accuracy and quality of its data as submitted to the respective Parties
involved.
30.11.1 Upon reasonable written notice and at its own expense,
each Party or its authorized representative (providing such authorized
representative does not have a conflict of interest related to other matters
before one of the Parties) shall have the right to conduct an audit of the other
Party to give assurances of compliance with the provisions of this Agreement;
provided, that neither Party may request more than two (2) such audits within
any twelve (12) month period. This includes on-site audits at the other Party's
or the Party's vendor locations. Each Party, whether or not in connection with
an audit, shall maintain reasonable records for a minimum of twenty-four (24)
months and provide the other Party with reasonable access to such information as
is necessary to determine amounts receivable or payable under this Agreement.
Each Party's right to access information for audit purposes is limited to data
not in excess of twenty-four (24) months in age.
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30.12 DISPUTED AMOUNTS.
30.12.1 No claims, under this Agreement or its Appendices, shall
be brought for disputed amounts more than twenty-four (24) months from the date
of occurrence which gives rise to the dispute. Under this Section 30 12, if any
portion of an amount due to a Party (the "Billing Party") under this Agreement
is subject to a bona fide dispute between the Parties, the Party billed (the
"Non-Paying Party") shall within sixty (60) days of its receipt of the invoice
containing such disputed amount give notice to the Billing Party of the amounts
it disputes ("Disputed Amounts") and include in such notice the specific details
and reasons for disputing each item. The Non-Paying Party shall pay when due:
(i) all undisputed amounts to the Billing Party: and (ii) all Disputed Amounts
to Billing Party.
30.12.2 If the Parties are unable to resolve the issues related
to the Disputed Amounts in the normal course of business within sixty (60) days
after delivery to the Billing Party of notice of the Disputed Amounts, each of
the Parties shall appoint a designated representative who has authority to
settle the dispute and who is at a higher level of management than the persons
with direct responsibility for administration of this Agreement. The designated
representatives shall meet as often as they reasonably deem necessary in order
to discuss the dispute and negotiate in good faith in an effort to resolve such
dispute.
30.12.3 If the Parties are unable to resolve issues related to
the Disputed Amounts within forty-five (45) days after the Parties' appointment
of designated representatives pursuant to Section 30.12.2, then either Party may
file a complaint with the Commission to resolve such issues or proceed with any
other remedy pursuant to law or equity.
30.12.4 The Parties agree that all negotiations pursuant to this
Section 30.12 shall remain confidential and shall be treated as compromise and
settlement negotiations for purposes of the Federal Rules of Evidence and state
rules of evidence.
30.12.5 Any undisputed amounts not paid when due shall accrue
interest from the date such amounts were due at the lesser of: (i) one and one-
half percent (1-1/2%) per month; or (ii) the highest rate of interest that may
be charged under applicable law.
30.13 DISPUTE RESOLUTION.
30.13.1 No claims shall be brought for disputes arising under this
Agreement or its Appendices more than twenty-four (24) months from the date of
occurrence which gives rise to the dispute.
30.13.2 For disputes other than disputed amounts under this
Agreement or its Appendices, each Party shall appoint a designated
representative as set forth in Section 30.12.2 and if unable to resolve the
dispute, proceed as set forth in Section 30.12.3.
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30.14 NOTICES. Any notice to a Party required or permitted under this
Agreement shall be in writing and shall be deemed to have been received on the
date of service if served personally; on the date receipt is acknowledged in
writing by the recipient if delivered by regular mail; or on the date stated on
the receipt if delivered by certified or registered mail or by a courier service
that obtains a written receipt. Notice may also be provided by facsimile, which
shall be effective on the next Business Day following the date of transmission
as reflected in the facsimile confirmation sheet. "Business Day" shall mean
Monday through Friday, SWBT/Optel holidays excepted. Any notice shall be
delivered using one of the alternatives mentioned in this section and shall be
directed to the applicable address indicated below or such address as the Party
to be notified has designated by giving notice in compliance with this section,
except that notices to a Party's twenty-four (24) hour contact number shall be
by telephone and/or facsimile and shall be deemed to have been received on the
date transmitted.
<TABLE>
<CAPTION>
============================================================================================
NOTICE CONTACT Optel CONTACT SWBT CONTACT
- - --------------------------------------------------------------------------------------------
<S> <C> <C>
NAME/TITLE VP-Engineering and General Manager-
Construction Competitive Provider
VP & General Account Team
Counsel
- - --------------------------------------------------------------------------------------------
STREET ADDRESS 1111 West Southwestern Bell
Mockingbird Lane Telephone Company
One Bell Plaza, Room 525
- - --------------------------------------------------------------------------------------------
CITY, STATE, ZIP CODE Dallas, TX 75247 Dallas, TX 75202
- - --------------------------------------------------------------------------------------------
TELEPHONE NUMBER
- - --------------------------------------------------------------------------------------------
FAX NUMBER 214-634-3842 214-464-1486
- - --------------------------------------------------------------------------------------------
<CAPTION>
- - --------------------------------------------------------------------------------------------
24-HOUR NETWORK MGMT CONTACT Optel CONTACT SWBT CONTACT
- - --------------------------------------------------------------------------------------------
NAME/TITLE NSMC Control
- - --------------------------------------------------------------------------------------------
TELEPHONE NUMBER 1-800-792-2662
- - --------------------------------------------------------------------------------------------
FAX NUMBER
- - --------------------------------------------------------------------------------------------
</TABLE>
30.15 Publicity and Use of Trademarks or Service Marks.
30.15.1 The Parties agree not to use in any advertising or sales
promotion, press releases, or other publicity matters any endorsements, direct
or indirect quotes, or pictures implying endorsement by the other Party or any
of its employees without such Party's prior written approval. The Parties will
submit to each other for written approval, prior to publication, all publicity
matters that mention or display one another's name and/or marks or contain
language from which a connection to said name and/or marks may be inferred or
implied; the Party to whom a request is directed shall respond promptly. Nothing
herein, however, shall be construed as preventing either Party from publicly
stating the fact that it has executed this Agreement with the other Party.
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30.15.2 Nothing in this Agreement shall grant, suggest, or imply
any authority for one Party to use the name, trademarks, service marks, or trade
names of the other for commercial purposes without prior written approval.
30.16 SECTION 252(i) OBLIGATIONS. If either Party enters into an
agreement (the "Other Agreement") approved by the Commission or FCC pursuant to
Section 252 of the Act (regardless of whether the approved agreement was
negotiated or arbitrated) which provides for the provision of arrangements
covered in this Agreement to another requesting Telecommunications Carrier,
including an Affiliate, such Party shall make available to the other party such
arrangements upon the same rates, terms and conditions as those provided in the
Other Agreement. At its sole option, the other Party may avail itself of either
(i) the Other Agreement in its entirety or (ii) the prices, terms and conditions
of the Other Agreement that directly relate to any of the following duties as a
whole:
(a) Interconnection - Section 251(c)(2) of the Act; or
(b) Exchange Access - Section 251(c)(2) of the Act; or
(c) Unbundling - Section 251(c)(3) of the Act; or
(d) Resale - Section 251(c)(4) of the Act; or
(e) Collocation - Section 251(c)(6) of the Act; or
(f) Number Portability - Section 251(b)(2) of the Act; or
(g) Database Access - Section 271(c)(2)(B)(x) of the Act; or
(h) Access to Rights of Way - Section 251(b)(4) of the Act; or
(i) Operator Services - Section 271(c)(2)(B)(vii)(III); or
(j) Directory Assistance - Section 271(c)(2)(B)(vii)(II).
30.17 JOINT WORK PRODUCT. This Agreement is the joint work product of the
Parties and has been negotiated by the Parties and their respective counsel and
shall be fairly interpreted in accordance with its terms and, in the event of
any ambiguities, no inferences shall be drawn against either Party.
30.18 INTERIM RATES. Some rates contained in this Agreement have been
derived from the mega-arbitration docket (AT&T et. al. Arbitration Docket No.
16189) and designated by the Commission as interim. Such interim rates are to be
replaced by subsequent rates determined by the Commission in the cost phase of
the mega-arbitration docket when such subsequent rates have been included in an
arbitrated Agreement approved by the Commission in a final order. The subsequent
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rates shall apply to this Agreement on a prospective basis only. As indicated in
this Agreement, the arbitrated rates in the following sections and appendices
are interim: Reciprocal Compensation for Transport and Termination of Local
Traffic; 800, BCR, CH, HOST, Recording, OS, DA, LIDB-V, LIDB-AS, CNAM, WP, UNE,
SS7, and the Manual Conversion Order Charges as identified in the Appendix
Resale.
30.19 INTERVENING LAW. This Agreement is entered into as a result of both
private negotiation between the Parties and the incorporation of some of the
results of arbitration by the Public Utility Commission of Texas in Docket Nos.
16189, et al. (the Arbitration Award). If the actions of Texas or federal
legislative bodies, courts, or regulatory agencies of competent jurisdiction
invalidate, modify, or stay the enforcement of laws or regulations that were the
basis for a provision of the contract which is reflective of the Arbitration
Award approved by the Commission, the affected provision shall be invalidated,
modified, or stayed, consistent with the action of the legislative body, court,
or regulatory agency. In such event, the Parties shall expend diligent efforts
to arrive at an agreement respecting the modifications to the Agreement. If
negotiations fall, disputes between the Parties concerning the interpretation of
the actions required or provisions affected by such governmental actions shall
be resolved pursuant to the dispute resolution process provided for in this
Agreement. The invalidation, stay, or modification of the pricing provisions of
the FCC's First Report and Order in CC Docket No.96-98 (August 8, 1996) and the
FCC's Order on Reconsideration (September 27, 1996) shall not be considered an
invalidation, stay, or modification requiring changes to provisions of the
Agreement required by the Commission Arbitration Award, in that the FCC's
pricing provisions are not the basis for the costing and pricing provisions of
the Commission's Arbitration Award.
30.20 NO THIRD PARTY BENEFICIARIES; DISCLAIMER OF AGENCY. This Agreement
is for the sole benefit of the Parties and their permitted assigns, and nothing
herein express or implied shall create or be construed to create any third-party
beneficiary rights hereunder. Except for provisions herein expressly authorizing
a Party to act for another, nothing in this Agreement shall constitute a Party
as a legal representative or agent of the other Party, nor shall a Party have
the right or authority to assume, create or incur any liability or any
obligation of any kind, express or implied, against or in the name or on behalf
of the other Party unless otherwise expressly permitted by such other Party.
Except as otherwise expressly provided in this Agreement, no Party undertakes to
perform any obligation of the other Party, whether regulatory or contractual, or
to assume any responsibility for the management of the other Party's business.
30.21 NO LICENSE. No license under patents, copyrights or any other
intellectual property right (other than the limited license to use consistent
with the terms, conditions and restrictions of this Agreement) is granted by
either Party or shall be implied or arise by estoppel with respect to any
transactions contemplated under this Agreement.
30.22 SURVIVAL. The Parties' obligations under this Agreement which by
their nature are intended to continue beyond the termination or expiration of
this Agreement shall survive the termination or expiration of this Agreement.
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30.23 SCOPE OF AGREEMENT. This Agreement is intended to describe and
enable specific Interconnection and compensation arrangements between the
Parties. This Agreement does not obligate either Party to provide arrangements
not specifically provided herein.
30.24 ENTIRE AGREEMENT. The terms contained in this Agreement and any
Schedules, Exhibits, Appendices, tariffs and other documents or instruments
referred to herein, which are incorporated into this Agreement by this
reference, constitute the entire agreement between the Parties with respect to
the subject matter hereof, superseding all prior understandings, proposals and
other communications, oral or written. Neither Party shall be bound by any
preprinted terms additional to or different from those in this Agreement that
may appear subsequently in the other Party's form documents, purchase orders,
quotations, acknowledgments, invoices or other communications. This Agreement
may only be modified by a writing signed by an officer of each Party.
<PAGE>
GENERAL TERMS AND CONDITIONS
PAGE 51 OF 52
SWBT/Optel
J130
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed
as of this 28th day of April, 1997.
OPTEL (TEXAS) TELECOM, INC. SOUTHWESTERN BELL TELEPHONE COMPANY
Signature: /s/ Rory Cole Signature: /s/ Dennis B. Eidson
--------------------- ----------------------------------
Name: Rory Cole Name: Dennis B. Eidson
-------------------------- ---------------------------------------
(Print or Type) (Print or Type)
Title: COO Title: General Manager Local Interconnection
------------------------- --------------------------------------
(Print or Type) (Print or Type)
<PAGE>
GENERAL TERMS AND CONDITIONS
PAGE 52 OF 52
SWBT/Optel
J130
APPENDICES INCORPORATED INTO THIS AGREEMENT
BCR (Billing, Collecting and Remitting
Wireless (Intercompany Compensation Requirements)
CH (Clearinghouse)
DCO (Designated Connecting Office)
EGA (Feature Group A)
ITR (Interconnection Trunking Requirements)
OSS (Operating Support Systems)
RECORDING (Recording)
TP (Technical Publications)
911Texas
UNE (Unbundled Network Elements Terms & Conditions)
AIN (Unbundled Advanced Intelligent Network)
CNAM (Customer Name)
DA (Directory Assistance Service)
DIRECT (Direct Access)
HOST (Hosting)
PORT (Interim Number Portability)
LIDB-AS (Line Information Data Base Administration and Storage)
LIDB-V (Line Information Data Base Validation)
MAP List of Optional Calling Area Exchanges)
OS (Operator Services)
RESALE
SS7 (Signaling System 7 Interconnection)
WP (White Pages)
800
<PAGE>
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
EIGHT MONTH
PERIOD ENDED YEAR ENDED YEAR ENDED
AUGUST 31, AUGUST 31, AUGUST 31,
-----------------------------------------------
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Primary:
Net Loss $(10,160,639) $(18,429,784) $(48,535,001)
============ ============ ============
Weighted average number of
common shares outstanding (1,474,554) (2,219,770) (2,429,511)
============ ============ ============
Net loss per common share $ (6.89) $ (8.30) $ (19.98)
============ ============ ============
Fully diluted:
Net loss $(10,160,639) $(18,429,784) $(48,535,001)
Interest expense related to convertible
notes, net of income tax expense 918,501 5,342,208 15,204,416
------------ ------------ ------------
Adjusted net loss $ (9,242,138) $(13,087,575) $(33,330,585)
============ ============ ============
Weighted average number of
common shares outstanding,
assuming conversion of convertible
notes at beginning of relevant period (1,671,890) (3,202,778) (3,854,356)
============ ============ ============
Net loss per common share $ (5.53) $ (4.09) $ (8.65)
============ ============ ============
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE OPTEL,
INC. YEAR ENDED AUGUST 31, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<CASH> 87,305
<SECURITIES> 0
<RECEIVABLES> 5,169
<ALLOWANCES> (1,125)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 160,442
<DEPRECIATION> 0
<TOTAL-ASSETS> 403,416
<CURRENT-LIABILITIES> 0
<BONDS> 358,177
0
0
<COMMON> 25
<OTHER-SE> 20,365
<TOTAL-LIABILITY-AND-EQUITY> 403,416
<SALES> 0
<TOTAL-REVENUES> 39,837
<CGS> 0
<TOTAL-COSTS> 19,202
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,739
<INCOME-PRETAX> (48,535)
<INCOME-TAX> 0
<INCOME-CONTINUING> (48,535)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (48,535)
<EPS-PRIMARY> (19.98)
<EPS-DILUTED> (8.65)
</TABLE>
